<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998
REGISTRATION NO. 333-63649
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JAMES HARDIE N.V.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
THE NETHERLANDS 3272 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
TRIPOLIS 300
BURGERWEESHUISPAD 301
P.O. BOX 75084
1070 AB AMSTERDAM
THE NETHERLANDS
31 20 577 1771
(ADDRESS AND TELEPHONE NUMBER OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER SHAFRON, ESQ., GENERAL COUNSEL
26300 LA ALAMEDA, SUITE 100
MISSION VIEJO, CALIFORNIA 92691
(949) 348-1800
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
MARK W. SHURTLEFF, ESQ. DEANNA L. KIRKPATRICK, ESQ.
GIBSON, DUNN & CRUTCHER LLP DAVIS POLK & WARDWELL
JAMBOREE CENTER, 4 PARK PLAZA 450 LEXINGTON AVENUE
IRVINE, CA 92614 NEW YORK, NY 10017
(949) 451-3800 (212) 450-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent offering outside the United
States and Canada (the "International Prospectus"). The two prospectuses are
identical in all respects except for (i) the pages labeled as "Alternate Page
for International Prospectus" which will be included in the International
Prospectus to replace the corresponding pages in the U.S. Prospectus and (ii)
the exclusion of the "Notice to Canadian Residents" section from the
International Prospectus. Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS Subject to Completion, Dated October 15, 1998
- --------------------------------------------------------------------------------
Shares
JH LOGO
JAMES HARDIE N.V.
Common Stock
- --------------------------------------------------------------------------------
All of the shares of common stock, nominal value NLG per share
(the "Common Stock"), of James Hardie N.V. ("James Hardie") offered hereby are
being sold by a wholly owned indirect subsidiary (the "Selling Shareholder") of
James Hardie Industries Limited, a public company organized under the laws of
Australia and listed on the Australian Stock Exchange ("JHIL"), in concurrent
offerings in the United States and Canada and outside the United States and
Canada (collectively, the "Offerings"). Of such shares, are initially
being offered in the United States and Canada by the U.S. Underwriters (the
"United States Offering") and are initially being offered outside the
United States and Canada by the International Underwriters (the "International
Offering"). The per share price to the public and per share underwriting
discounts and commissions in each of the Offerings will be identical. See
"Underwriting." James Hardie will not receive any of the proceeds from the sale
of the shares offered hereby. The Offerings are contingent on the completion of
the other steps of the Reorganization (as defined herein).
James Hardie is a wholly owned indirect subsidiary of JHIL. Following
consummation of the Offerings, JHIL will beneficially own approximately 85% of
the outstanding shares of Common Stock (or approximately 83% of the outstanding
shares of Common Stock if the U.S. Underwriters' over-allotment option is
exercised in full).
Prior to the Offerings, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price per share will
be between $ and $ . See "Underwriting" for the factors to be considered in
determining the initial public offering price. The shares of Common Stock have
been approved for listing (subject to official notice of issuance) on the New
York Stock Exchange (the "NYSE") under the symbol "JHX."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" COMMENCING ON PAGE 11.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds
Price to Discounts and to Selling
Public Commissions(1) Shareholder(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per Share $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3) $ $ $
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</TABLE>
(1) James Hardie, the Selling Shareholder and JHIL have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by JHIL estimated to be
$ .
(3) The Selling Shareholder has granted the U.S. Underwriters a 30-day option to
purchase up to additional shares of Common Stock on the same terms per
share solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public will be $ , the total
Underwriting Discounts and Commissions will be $ and the total
Proceeds to the Selling Shareholder will be $ . See "Underwriting."
The shares of Common Stock are being offered by the Underwriters as set forth
under "Underwriting" herein. It is expected that delivery of the certificates
therefor will be made at the offices of Warburg Dillon Read LLC, New York, New
York, or through the facilities of The Depository Trust Company, on or about
, 1998.
WARBURG DILLON READ LLC
The date of this Prospectus is , 1998.
<PAGE> 4
[GRAPHICS
TO BE FILED
BY AMENDMENT]
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK AND THE IMPOSITION OF A PENALTY BID DURING AND AFTER THE OFFERINGS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the Consolidated Financial Statements and the related notes thereto, included
elsewhere in this Prospectus. James Hardie Industries Limited ("JHIL"), a
company organized under the laws of Australia and listed on the Australian Stock
Exchange, operates a number of businesses in the building products industry (the
"James Hardie Businesses"). In connection with the Reorganization (as more fully
described below), JHIL will transfer the "Transferred Businesses" (as defined
herein) to James Hardie N.V., a company incorporated under the laws of The
Netherlands ("James Hardie" and, collectively with all of its subsidiaries,
unless the context otherwise requires, the "Company") and will retain certain
assets and liabilities and the related income and expenses (the "Retained Assets
and Liabilities"). Unless the context otherwise requires, all historical
financial information discussed in this Prospectus relates to the James Hardie
Businesses which include the Retained Assets and Liabilities. Such information,
therefore, may not be indicative of the Company's future financial performance.
Financial information with respect to the Transferred Businesses is presented in
this Prospectus, together with certain other adjustments, in "Unaudited Pro
Forma Consolidated Financial Data." References in the Prospectus to the
Company's historical operations refer to the operations of the Transferred
Businesses. Unless the context otherwise requires, all references in this
Prospectus to JHIL shall refer to JHIL and its subsidiaries that are not being
transferred to the Company (including the Selling Shareholder). Except as
otherwise indicated, all information in this Prospectus assumes (i) that the
Reorganization has been completed and (ii) that the U.S. Underwriters'
over-allotment option is not exercised. As used in this Prospectus, the term
"fiscal year" refers to the Company's fiscal year ended March 31 of such year,
the term "dollars" or "$" refers to U.S. dollars, the term "AUD" refers to
Australian dollars, the term "NZD" refers to New Zealand dollars, the term "msf"
refers to thousands of square feet and the term "mmsf" refers to millions of
square feet.
THE COMPANY
GENERAL
The Company is the largest manufacturer of fiber cement products and
systems for internal and external building construction applications in the
United States, Australia and New Zealand. Fiber cement is one of the fastest
growing segments of the U.S. building products industry. Total U.S. industry
shipments of fiber cement were estimated by the Company to be approximately 500
mmsf during fiscal year 1998, up 35% from approximately 370 mmsf in fiscal year
1997. The Company markets its fiber cement products and systems under various
"Hardi" brand names. The Company believes that, in certain applications, its
fiber cement products and systems provide a combination of distinctive
performance, design and cost advantages when compared to other fiber cement
products and alternative products and systems using solid wood, engineered wood,
vinyl, brick, stucco and gypsum wallboard. The Company estimates that fiber
cement could grow from approximately 7% of the U.S. external siding market in
1998 to 16% by 2002.
In addition, the Company is the fourth largest producer of gypsum wallboard
in the United States. The sale of fiber cement products and gypsum wallboard
accounted for 46.9% and 24.4%, respectively, of the Company's total net sales in
fiscal year 1998. In addition to its fiber cement and gypsum wallboard
businesses, the Company, through its building systems division, is the
Australian and New Zealand market leader in the manufacture and sale of modular
relocatable buildings in the mining resources market and insulated panel
products in the commercial market. The Company also manufactures windows and
window systems for residential and commercial applications in Australia.
The Company pioneered the successful development of cellulose reinforced
fiber cement in the early 1980s with its proprietary product formulation and
process technology. The Company has continued to develop and enhance its fiber
cement technology, deriving significant cost and efficiency benefits and
establishing itself as a leader in this product category. The Company's fiber
cement products are utilized in various markets including new residential
construction, manufactured housing, repair and remodeling and a variety of
commercial and industrial applications. The Company manufactures numerous types
of fiber cement products with a variety of patterned profiles and surface
finishes for a range of applications including external siding, roofing,
internal linings, facades, fencing, and floor and tile underlayments. In
contrast to some other building materials, fiber cement provides durability
attributes such as strong resistance to moisture, fire,
3
<PAGE> 6
impact and termites, requires relatively little maintenance and can be used as a
substrate to create a wide variety of architectural effects with textured and
colored finishes. During fiscal year 1998, management believes, based on its
analysis of competitors' sales, that the Company sold approximately 83% of the
fiber cement sold in the United States, 84% of the fiber cement sold in
Australia and 93% of the fiber cement sold in New Zealand.
During fiscal year 1998, the Company's U.S. Fiber Cement business accounted
for $181.1 million of net sales, Gypsum accounted for $200.5 million of net
sales, Australia/New Zealand Fiber Cement accounted for $211.6 million of net
sales, Building Systems accounted for $147.9 million of net sales and Other
products (which includes windows and fiber cement operations in the Philippines)
accounted for $81.2 million of net sales. In fiscal year 1998, operating profit
from U.S. operations (U.S. Fiber Cement and Gypsum) as a percentage of total
operating profit before expenses in connection with the Sydney-based research
and development center and certain general corporate costs which benefit all
segments was 72.4%. See "Selected Financial and Operating Data."
James Hardie's principal executive offices are located at Tripolis 300,
Burgerweeshuispad 301, P.O. Box 75084, 1070 AB Amsterdam, The Netherlands, and
its telephone number is 31 20 577 1771. The Company's principal operational
offices are located at 26300 La Alameda, Suite 100, Mission Viejo, California
92691, and its telephone number is (949) 348-1800.
BUSINESS STRATEGY
The Company's strategic objective is to increase shareholder value by
expanding its leadership position in the manufacturing and marketing of fiber
cement and capitalizing on this position to build related businesses in the
building and construction industries worldwide. The Company seeks to maintain
its competitive advantage in fiber cement through the continued development of
differentiated products and improved process technology. In the Company's gypsum
wallboard business, management believes the Company's cost position will enable
it to maintain high levels of capacity utilization through industry downturns.
Combined, these global strategies are intended to mitigate the Company's
susceptibility to construction cycles. The international nature of the Company's
business also reduces exposure to regional construction cycles. More
specifically, the Company's strategies include the following:
Increase Demand for Fiber Cement Products
The Company plans to increase demand for fiber cement products in the
United States, Australia, New Zealand and selected Asian markets through the
continued displacement of more traditional building materials. The Company is
investing significant effort into educating builders, contractors and consumers
with respect to the performance, design and cost advantages of new and existing
fiber cement products over competing products. In the United States, management
estimates that fiber cement comprised approximately 10% of the new residential
construction segment of the external siding market in fiscal year 1998 and
approximately 6% and 1%, respectively, of the manufactured housing and
repair/remodel segments. Research commissioned by the Company indicates that its
products are generally preferred by homeowners over alternative siding products,
once they have been made aware of the features of the Company's products. As a
result of this research, in 1998, the Company began a regional U.S. marketing
campaign to raise awareness of the Company's siding products among consumers. In
Australia, management estimates that approximately 80% of new residential
construction utilized masonry as the external siding material in 1997. The
Company is marketing its products as a substitute to masonry and is highlighting
the cost, architectural and aesthetic advantages over brick.
Defend Current Position in Fiber Cement
Competition in the fiber cement business continues to increase. Management
believes that the Company has superior products, a broad product range, current
leading position in fiber cement and low cost manufacturing facilities which
leave it well positioned to defend against this increasing competition. To
continue to protect its position, the Company intends to further expand its
product line by launching new products and applications for fiber cement.
Additionally, the Company seeks to maintain excess capacity in its fiber cement
manufacturing facilities to allow it the flexibility to meet surges in customer
demand and to minimize the business that is lost through an inability to produce
its fiber cement products. Consequently, its first manufacturing plant in
California has been expanded twice and three new plants have been constructed in
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<PAGE> 7
Florida, Texas and Washington, at an aggregate cost of approximately $200
million over four years. Concurrently with increasing capacity in the United
States, the Company has been upgrading and consolidating its capacity in
Australia and New Zealand. In Australia, a three year, AUD 40 million upgrade
program has been implemented that management believes will result in reduced
manufacturing costs primarily through increased automation. In New Zealand,
upgrading of the factory and warehouse facilities has resulted in increased
production capacity and lower costs. See "Business -- Manufacturing Facilities."
Continue to Develop New and Differentiated Fiber Cement Products
The Company intends to continue to focus on developing new and
differentiated products specifically targeted for its primary geographic markets
by capitalizing on its research and development facilities in the United States
and Australia. In light of increasing competition, management believes product
differentiation is key to maintaining and enhancing the Company's position and
permitting value added pricing. The Company has various new products and systems
in development, such as products for external trim applications that contain
significant elements of proprietary technology which the Company believes will
preclude easy duplication by competitors.
Expand into New Geographic Markets for Fiber Cement Products
The Company plans to continue to expand into new geographic markets for
fiber cement products. Sales of fiber cement outside the United States,
Australia and New Zealand accounted for approximately 5% of fiscal year 1998
fiber cement revenues. The Company began exporting fiber cement products into
the Philippines in the early 1980s as a plywood replacement and commenced
construction in 1997 of a manufacturing facility in Cubayao (near Manila) to
meet local demand for its products. This new facility is currently scheduled to
be commissioned in October 1998. In addition, the Company has been exporting
products to Taiwan, Thailand, Singapore, Japan, the Middle East, Korea and
Indonesia and is exploring, over the long term, the possibility of constructing
manufacturing facilities in several of these locations. The Company has also
conducted detailed assessments of market opportunities in certain other regions
around the world. The continued geographic expansion of the Company into
additional markets diversifies the Company's customer base and reduces its
exposure to seasonality and the cyclicality of the construction industry in any
one particular market.
Maintain a Strong Niche Position in the U.S. Gypsum Wallboard Industry
The Company plans to continue to maintain its strong niche position in the
U.S. gypsum wallboard industry by offering a full line of products in the large
regional markets in which it operates. The Company has low-cost facilities that
currently operate at high levels of capacity utilization. The Company intends to
maintain this focus while continuing to improve operating efficiencies.
Following the expansion of its Seattle, Washington and Las Vegas, Nevada
facilities, the Company has begun work on doubling the capacity of its gypsum
wallboard plant in Nashville, Arkansas. The Nashville plant, when completed,
will be one of the largest gypsum wallboard plants in the world with
approximately 1.4 billion square feet of capacity per annum and will expand the
Company's share of U.S. industry capacity from approximately 7% to approximately
9%. At that time, the Company's wallboard plants will on average have the
capacity to produce 2.6 times more gypsum wallboard per plant than the industry
average. The Company believes that its competitive strengths leave it
comparatively well positioned throughout market cycles. The Company also plans
to continue to review opportunities to invest in strategically located assets
which strengthen its niche position in the U.S. gypsum wallboard industry and
which complement its international fiber cement business.
THE REORGANIZATION
JHIL commenced operations in Australia in 1888, was incorporated in 1920
and has been listed on the Australian Stock Exchange Limited since 1951. Over
the last three years, JHIL has significantly reshaped its business through a
series of divestitures of non-core businesses, the proceeds of which were used
in part to fund the expansion of its U.S. fiber cement and gypsum wallboard
businesses. As a result of the increasing significance of its U.S. operations
(U.S. Fiber Cement and Gypsum), which comprised 72.4% of total operating profits
(before expenses in connection with the Sydney-based research and development
center and certain general corporate costs which benefit all segments) in fiscal
year 1998, JHIL announced a plan of reorganization and capital restructuring
(the "Reorganization"). The Reorganization is intended to address the increasing
structural imbalance and resulting operational, financial and commercial issues
created by the
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<PAGE> 8
predominance of JHIL's U.S. operations and the location of corporate management
and JHIL's shareholder base in Australia. The primary components of the
Reorganization are:
- The formation of James Hardie, a wholly owned indirect subsidiary of
JHIL, which was incorporated in The Netherlands in August 1998;
- The transfer pursuant to various contribution and purchase agreements
(the "Purchase Agreements") to the Company of JHIL's fiber cement
businesses, its U.S. gypsum wallboard business, its Australian and New
Zealand building systems business and its Australian windows business
(collectively, the "Transferred Businesses") and the retention by JHIL
and its non-transferring subsidiaries of the Retained Assets and
Liabilities;
- The issuance of the Notes and the arrangement of a new Bank Facility (as
such terms are defined herein) by the Company (the "Debt Financing");
- The sale by the Selling Shareholder, through the Offerings, of
approximately 15% of the outstanding shares of Common Stock of James
Hardie; and
- The relocation of certain senior executives and managers to the Company's
U.S. operational headquarters.
ACQUISITION OF THE TRANSFERRED BUSINESSES
Prior to the consummation of the Offerings, the Company and JHIL will enter
into the Purchase Agreements which provide that the Company will acquire the
Transferred Businesses from JHIL and its non-transferring subsidiaries. The
Transferred Businesses will be acquired by James Hardie in consideration of 100%
of its outstanding Common Stock and $340 million, which will be paid from the
proceeds of the sale of Notes and borrowings under the term loan that is part of
the Debt Financing which is more fully described below. The $340 million payment
represents the settlement of liabilities to JHIL which arise in connection with
the Reorganization. In addition to the Retained Assets and Liabilities, JHIL and
its non-transferring subsidiaries are also retaining existing and potential
liabilities in relation to the manufacture prior to 1987 of products containing
asbestos, which are not included in the James Hardie Businesses. JHIL and its
non-transferring subsidiaries will also retain the ownership of the
manufacturing sites in Australia and New Zealand on which asbestos products were
manufactured. The Company will lease and continue to manufacture from these
sites. As part of the Purchase Agreements, JHIL and certain of its
non-transferring subsidiaries will agree to indemnify the Company for any such
liabilities relating to these sites.
DEBT FINANCING
Concurrently with the consummation of the Offerings, a financing subsidiary
of the Company incorporated under the laws of The Netherlands (the "Finance
Subsidiary") will complete the sale of certain debt securities and arrange a new
bank credit facility. The Finance Subsidiary intends to issue approximately $225
million aggregate principal amount of senior unsecured notes with a mix of
maturities ranging from 6 to 15 years with a ten-year average maturity and a
maximum of $63 million maturing in any one year (the "Notes") to certain
identified U.S. institutional investors. In addition, the Finance Subsidiary
intends to arrange a new bank credit facility (the "Bank Facility") including a
term loan of approximately $115 million with a term of three years, which will
be fully drawn at the consummation of the Offerings, and a revolving credit
facility of approximately $80 million, which will be used by the Company for
working capital purposes and is not expected to be drawn at the consummation of
the Offerings. The Bank Facility will be unsecured and will be placed with a
wholly owned Australian subsidiary of the Company. The Notes and indebtedness
incurred under the Bank Facility by the Company's subsidiaries will be
unconditionally guaranteed by James Hardie on an unsecured basis.
The Notes will have a fixed interest rate. The Bank Facility will have a
floating interest rate equal to a fixed margin over LIBOR or an equivalent swap
rate. It is anticipated that the Debt Financing arrangements will have customary
covenants including the maintenance of certain financial ratios and limitations
on payment of dividends and the incurrence of additional indebtedness. It is
proposed that, to the extent possible, the Notes and Bank Facility will be
subject to the same key covenants.
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<PAGE> 9
THE OFFERINGS
The Offerings will require the approval of the shareholders of JHIL. This
approval will be sought at an extraordinary general meeting of JHIL's
shareholders to be held in October 1998 in Sydney, Australia ("Shareholder
Approval"). The Offerings are contingent on the consummation of the other steps
of the Reorganization. JHIL has informed the Company that it intends to consider
a further selldown of its interest in the Company or a distribution of its
interest to the JHIL shareholders within 12 to 24 months. However, the timing
and precise mechanisms of such a selldown or distribution will depend on market
conditions and other relevant considerations.
THE OFFERINGS
Common Stock being offered by the Selling Shareholder in the Offerings:
United States
Offering........................ shares(1)
International
Offering........................ shares
Total....... shares(1)
Common Stock to be outstanding
after the Offerings: shares(2)
Use of Proceeds................. The Company will not receive any proceeds
from the sale of the shares of Common Stock
offered hereby.
NYSE symbol..................... JHX
Risk Factors.................... Investment in the Common Stock offered hereby
involves certain risks. Each prospective
investor should carefully consider all
of the matters described herein under "Risk
Factors."
- ---------------
(1) Assumes that the U.S. Underwriters' over-allotment option is not exercised.
(2) Excludes shares of Common Stock reserved for issuance under the
Company's 1998 Equity Incentive Plan (the "Equity Incentive Plan"), under
which options to purchase shares are expected to be granted upon
consummation of the Offerings at the initial public offering price. See
"Management -- 1998 Equity Incentive Plan." Also excludes shares of
Common Stock reserved for issuance under the Company's Independent Directors
Deferred Compensation Plan.
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<PAGE> 10
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary consolidated historical and pro forma
financial data for the periods indicated and is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements and
the related notes thereto, the "Unaudited Pro Forma Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein. The historical financial data presented
below reflects the historical data of the James Hardie Businesses, which
includes the Transferred Businesses prior to their transfer to the Company and
the Retained Assets and Liabilities which will not be transferred to the Company
in the Reorganization. See "The Reorganization." Consequently, such historical
financial information is not necessarily indicative of future results of the
Company. The pro forma information contained herein gives effect to certain
transactions that are part of the Reorganization. See "Unaudited Pro Forma
Consolidated Financial Data."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------------------
PRO FORMA(1) PRO FORMA(1)
1996 1997 1998 1998 1997 1998 1998
------- -------- -------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT VOLUME AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales
U.S. Fiber Cement(2).......... $ 100.7 $ 148.7 $ 181.1 $ 181.1 $ 43.1 $ 58.8 $ 58.8
Gypsum(3)..................... 77.0 103.8 200.5 200.5 48.4 59.9 59.9
Australia/New Zealand Fiber
Cement...................... 264.6 262.1 211.6 211.6 61.3 43.2 43.2
Building Systems.............. 118.2 133.8 147.9 147.9 43.2 27.9 27.9
Other(4)...................... 64.4 65.0 81.2 81.2 22.2 16.4 16.4
------- -------- -------- -------- ------- ------- --------
Total net sales................... 624.9 713.4 822.3 822.3 218.2 206.2 206.2
Cost of goods sold................ (429.9) (508.7) (592.3) (596.5) (153.5) (147.7) (148.6)
------- -------- -------- -------- ------- ------- --------
Gross profit...................... 195.0 204.7 230.0 225.8 64.7 58.5 57.6
Selling, general and
administrative(5)............... (134.1) (150.3) (142.7) (142.7) (40.9) (35.1) (35.1)
Restructuring and other operating
expenses(6)..................... -- (38.8) (5.1) (5.1) -- (0.5) (0.5)
------- -------- -------- -------- ------- ------- --------
Operating profit.................. 60.9 15.6 82.2 78.0 23.8 22.9 22.0
Net interest expense(7)........... (32.9) (25.7) (20.6) (22.9) (6.1) (3.9) (5.7)
Equity income -- RCI(8)........... 7.9 9.2 6.2 -- 2.9 -- --
Other nonoperating expenses,
net(9).......................... (15.0) (14.6) (12.1) (0.2) (2.1) -- --
------- -------- -------- -------- ------- ------- --------
Income (loss) from continuing
operations before income tax.... 20.9 (15.5) 55.7 54.9 18.5 19.0 16.3
Income tax (expense) benefit(7)... (2.8) 3.0 (25.0) (10.8) (5.6) (6.6) (2.6)
------- -------- -------- -------- ------- ------- --------
Income (loss) from continuing
operations(10).................. $ 18.1 $ (12.5) $ 30.7 $ 44.1 $ 12.9 $ 12.4 $ 13.7
======= ======== ======== ======== ======= ======= ========
Pro forma earnings per share...... $ $
======== ========
CONSOLIDATED CASH FLOW
INFORMATION:
Cash flows provided by (used in)
operating activities............ $ 80.2 $ 82.8 $ 109.1 -- $ 19.8 $ (44.5)(15) --
Cash flows provided by (used in)
investing activities............ (39.5) 118.4 (46.7) -- (24.9) (46.1) --
Cash flows provided by (used in)
financing activities............ (87.9) 14.6 (63.9) -- (57.5) (35.5) --
OTHER DATA:
Depreciation and
amortization(11)................ $ 28.0 $ 35.6 $ 38.5 $ 37.6 $ 11.2 $ 9.6 $ 9.4
Adjusted EBITDA(12)............... 88.9 86.0 120.7 115.6 35.0 32.5 31.4
Capital expenditures(11).......... 64.7 172.1 154.8 -- 35.8 30.9 --
Research and development(5)....... 12.1 15.0 18.0 -- 4.5 3.5 --
Volume(mmsf)(13)
U.S. Fiber Cement............. 220.0 317.0 416.1 416.1 97.5 139.3 139.3
Gypsum........................ 680.3 862.3 1,554.5 1,554.5 361.2 448.3 448.3
Australia/New Zealand Fiber
Cement(14).................. 347.5 318.4 299.2 299.2 77.6 71.9 71.9
Average sales price per unit (per msf)
U.S. Fiber Cement............. $ 458 $ 469 $ 435 $ 435 $ 442 $ 422 $ 422
Gypsum........................ 113 120 129 129 134 134 134
Australia/New Zealand Fiber
Cement(14).................. 684 744 643 643 728 553 553
- ---------------------------------
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------------------------- --------------------------
PRO FORMA
1996 1997 1998 1998 1998(16)
----------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net current assets................ $ 393.2 $ 425.3 $ 354.8 $ 270.7 $110.4
Total assets...................... 1,366.1 1,534.0 1,241.7 1,077.0 752.3
Long-term debt.................... 416.5 470.2 496.3 481.9 340.0
Long-term related party
borrowings...................... 202.8 202.8 -- -- --
Equity............................ 460.4 544.8 465.8 419.8 303.9(17)
</TABLE>
- ---------------
(1) Pro forma 1998 for the Unaudited Pro Forma Consolidated Statement of Income
for the fiscal year ended March 31, 1998 and the three months ended June
30, 1998 gives accounting effect to the following, as if each had occurred
on April 1, 1997 and April 1, 1998, respectively: (i) the transfer of the
Transferred Businesses to the Company and the retention of the Retained
Assets and Liabilities by JHIL and its non-transferring subsidiaries,
including any related income and expenses, (ii) the completion of the Debt
Financing, and (iii) certain tax consequences of the Reorganization. See
"Unaudited Pro Forma Consolidated Financial Data."
(2) In January 1996, the first production line at the Plant City, Florida fiber
cement plant was expanded and a second line was commissioned in March 1996.
During fiscal year 1997, a third production line was commissioned at Plant
City, Florida, a new fiber cement plant was constructed and the first line
commissioned in Cleburne, Texas, and the capacity of the Fontana,
California fiber cement plant was expanded.
(3) The capacity of the Las Vegas, Nevada gypsum plant was expanded in fiscal
year 1996. The Nashville, Arkansas gypsum plant was acquired in fiscal year
1997. The Las Vegas, Nevada gypsum plant and the Seattle, Washington gypsum
plant were further expanded in fiscal year 1998.
(4) Includes fiber cement sales in the Philippines and window sales in
Australia.
(5) Includes research and development expenses.
(6) Includes (i) for fiscal year 1997, asset write-downs, environmental costs
and employee termination costs of $17.8 million associated with the
restructuring and upgrade of the fiber cement business in Australia, and a
windows goodwill write-off of $21.0 million, and (ii) for fiscal year 1998,
$5.1 million of employee termination costs associated with the
restructuring and upgrade of the fiber cement business in Australia.
(7) Interest and income tax expenses are the historical interest and income
taxes applicable to the James Hardie Businesses prior to the
Reorganization. As a result of the Reorganization, the interest and income
tax expenses of the Company will change. See "Unaudited Pro Forma
Consolidated Financial Data."
(8) Represents equity interest earned on the investment in RCI Corporation
which was sold in fiscal year 1998. See "Unaudited Pro Forma Consolidated
Financial Data."
(9) Consists primarily of losses of $17.9 million, $14.7 million and $12.2
million in fiscal years 1996, 1997 and 1998, respectively, incurred by JHIL
under a transaction entered into with Firmandale Investments Limited
("Firmandale"), which is part of the Retained Assets and Liabilities not
being transferred to the Company in connection with the Reorganization.
(10) Constitutes net income (loss) before income (loss) from discontinued
operations and gains (losses) on the disposal of discontinued operations.
(11) Information for depreciation and amortization and capital expenditures is
for continuing businesses only.
9
<PAGE> 12
(12) Represents earnings from continuing operations before interest income,
interest expense, income taxes, other nonoperating expenses, net,
depreciation and amortization charges, and certain other property, goodwill
and equipment impairment charges as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
-------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1996 1997 1998 1998 1997 1998 1998
("ADJUSTED EBITDA") ----- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations........... $18.1 $(12.5) $ 30.7 $ 44.1 $ 12.9 $ 12.4 $ 13.7
Income tax expense
(benefit)............ 2.8 (3.0) 25.0 10.8 5.6 6.6 2.6
Net interest expense... 32.9 25.7 20.6 22.9 6.1 3.9 5.7
Equity income -- RCI... (7.9) (9.2) (6.2) -- (2.9) -- --
Other nonoperating
expenses, net........ 15.0 14.6 12.1 0.2 2.1 -- --
Depreciation and
amortization......... 28.0 35.6 38.5 37.6 11.2 9.6 9.4
Impairment of
property............. -- 2.4 -- -- -- -- --
Goodwill write-off..... -- 21.0 -- -- -- -- --
Obsolete equipment
write-down........... -- 11.4 -- -- -- -- --
----- ------ ------ ------ ------ ------ ------
Adjusted EBITDA........ $88.9 $ 86.0 $120.7 $115.6 $ 35.0 $ 32.5 $ 31.4
===== ====== ====== ====== ====== ====== ======
</TABLE>
Adjusted EBITDA is not a measure of financial performance under U.S.
generally accepted accounting principles ("GAAP") and should not be
considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
the James Hardie Businesses profitability or liquidity. All registrants do
not calculate Adjusted EBITDA in the same manner and, accordingly,
Adjusted EBITDA may not be comparable with other registrants. The Company
has included information concerning Adjusted EBITDA herein because it
believes that such data is commonly used by certain investors to evaluate
the ability of a company's earnings from its core business operations to
satisfy its debt, capital expenditure and working capital requirements. To
permit evaluation of this data on a consistent basis from period to
period, EBITDA has been adjusted for noncash charges such as goodwill and
asset impairment charges, as well as nonoperating income and expense
items. See the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for further information to assist in identifying and evaluating trends in
Adjusted EBITDA.
(13) Fiber cement volume is measured in 5/16" standard feet and gypsum volume
is measured in surface feet.
(14) Australia/New Zealand Fiber Cement includes all fiber cement produced or
sold worldwide, excluding the United States and the Philippines, and also
includes sales from Building Systems in New Zealand.
(15) Includes a $57.4 million cash payment in connection with the settlement of
the Firmandale litigation.
(16) Gives accounting effect to the following, as if each had occurred on June
30, 1998: (i) the transfer of the Transferred Businesses to the Company and
the retention of the Retained Assets and Liabilities by JHIL and (ii) the
completion of the Debt Financing.
(17) Total equity at the date of the Offerings may differ significantly from
that disclosed in the Unaudited Pro Forma Consolidated Balance Sheet as a
result of movements in foreign exchange rates that impact the balance of
the foreign currency translation adjustment account, earnings, capital
expenditure and other cash flows impacting cash balances in the period from
June 30, 1998 to the date of the Offerings.
10
<PAGE> 13
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective purchasers of the Common Stock offered hereby should carefully
consider the following factors before making an investment in the Common Stock.
This Prospectus contains forward-looking statements. These forward-looking
statements reflect the Company's views with respect to future events and
financial performance based on assumptions made by and information currently
available to management. Actual results could differ materially from those
projected in the forward-looking statements as a result of many factors,
including the risk factors set forth below. The words "believe," "expect,"
"intend," "estimate," "plan," "anticipate" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
COMPETITION AND PRICING
The markets for the Company's products are highly competitive. Competition
is based largely on price and, to a lesser extent, quality and service. The
Company's fiber cement products compete with other manufacturers' fiber cement
products as well as alternative products manufactured from natural and
engineered wood, vinyl, stucco, masonry and gypsum. Certain of the Company's
competitors may have greater financial and other resources than the Company and,
among other factors, may be less affected by reductions in margins resulting
from price competition. Fiber cement prices in the United States, Australia and
New Zealand have been declining for a number of years due to market entry by new
producers and competition from alternative products, among other reasons.
Because of the maturity of the Australian and New Zealand markets, the Company
believes that prices in those markets may continue to decline and that sales
volumes may not increase significantly or may decline. Historically, the
Company's U.S. fiber cement products increased sales volumes and improved
operating efficiencies have more than offset the decrease in pricing in the
United States. There can be no assurance, however, that there will not be any
future price decreases or that the Company will be able to offset such decreases
with increased volume. There is over-capacity in the overall siding market in
the United States at the current time. Some of the Company's competitors have
lowered prices of their fiber cement products to compete for sales and the
Company is aware of three competitors that are currently building fiber cement
manufacturing facilities in the United States. The Company's competitors can
also be expected to continue to expand their manufacturing capacities, to
improve the design and performance of their products and to introduce new
products with competitive price and performance characteristics. Increased
competition by existing or future competitors could accelerate the decline of
fiber cement prices, as well as require increased investment by the Company in
product development, productivity improvements and customer service and support
in order to compete in its markets. In addition to being subject to pressure
from competitors, prices are often subject to material changes in response to
relatively minor fluctuations in supply and demand, general economic conditions,
less favorable exchange rates and other market conditions beyond the Company's
control. Although gypsum wallboard prices have increased in the past few years,
such prices have historically been subject to volatility, due primarily to
over-capacity in periods of lower demand. The U.S. gypsum wallboard market is
concentrated with the three largest producers accounting for approximately 75%
of industry sales and is subject to price volatility due to construction cycles
and expanding capacity in the industry. Several of the Company's competitors
have announced plans to add additional gypsum wallboard capacity over the next
two years. Although the Company's strategy is to offset any declines in gypsum
wallboard prices by increased volumes, there can be no assurance that future
declines in the prices or demand for the products sold by the Company as a
result of competition, over-capacity or other factors will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON CONSTRUCTION MARKETS; SEASONALITY AND CYCLICALITY
Demand for the Company's products depends in large part on residential
construction markets and, to a lesser extent, on commercial construction
markets. The level of activity in residential construction markets depends on
new housing starts and residential remodeling projects, which are a function of
many factors not
11
<PAGE> 14
within the Company's control, including general economic conditions, mortgage
and other interest rates, inflation, unemployment, demographic trends, gross
domestic product growth and consumer confidence in each of the countries in
which the Company operates. Historically, in periods of economic decline, both
new housing starts and residential remodeling decline. The level of activity in
the commercial construction market depends largely on vacancy rates and general
economic conditions. Because residential and commercial construction markets are
sensitive to cyclical changes in the economy, downturns in the economy or lack
of substantial improvement in the economy of any of the Company's geographic
markets could negatively affect operating results. Because of these and other
factors, there may be substantial fluctuations in the Company's operating
results and the results for any prior period may not be indicative of results
for any future period.
The Company's operations are concentrated in various regional and local
markets. A large proportion of the Company's U.S. fiber cement products are sold
in three regions: the Southeast, the Southcentral and the Pacific Northwest.
Gypsum wallboard is also sold by the Company principally in regional markets,
although the Company has the ability to ship wallboard by rail throughout most
of the United States. Regional and local building products markets are highly
cyclical, experiencing peaks and valleys corresponding to regional and local
construction cycles. While the impact on the Company of regional or local
downturns may be mitigated to some degree by the geographic diversification of
the Company, profitability may be significantly affected by such construction
cycles. In addition, demand for building products is seasonal because
construction activity diminishes during the winter season. As a result, the
Company has historically experienced its lowest levels of revenue and operating
income during the third and fourth quarters of its fiscal year.
SUPPLY AND COST OF RAW MATERIALS
The Company's fiber cement and gypsum wallboard businesses may, from time
to time, experience fluctuating prices and supplies of raw materials.
Fiber Cement
Cellulose fiber, silica, cement and water are the principal raw materials
utilized in the production of fiber cement. While cellulose fiber has been
subject to fluctuating prices, all of the raw materials required in the
manufacture of the Company's fiber cement building products are available from a
number of sources and the Company has not experienced any shortages that have
materially affected its operations. There can be no assurance, however, that
price fluctuations or material delays will not occur in the future due to lack
of raw materials or suppliers. The Company's silica and cement supplier
relationships are typically non-exclusive, and generally terminable by either
party on short notice. The loss or deterioration of the Company's relationship
with a major supplier, an increase in demand by third parties for a particular
supplier's products or materials or delays in obtaining materials could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Gypsum
Gypsum rock and gypsum paperboard are the principal raw materials utilized
in the production of gypsum wallboard. The Company's gypsum wallboard
manufacturing facilities located in Nashville, Arkansas and Las Vegas, Nevada
have access to long term reserves of gypsum rock which is mined at or adjacent
to the sites where the plants are located. However, the sole source of gypsum
rock for the Company's Seattle, Washington gypsum wallboard manufacturing
facility is a gypsum mine located in Santa Rosalia, Mexico. The mine and related
real and personal property are owned by Compania Minera Caopas S.A. de C.V. and
several of its affiliates (collectively, "Caopas"). Caopas is currently
operating under a form of Mexican bankruptcy protection. In addition, the
Company has not been able to verify the status of certain licenses or permits
issued by agencies of the Mexican government and necessary for the operation of
the mine. Therefore, there can be no assurance that shipments from the Caopas
mine will continue. Because the Company's Seattle facility is capable of only
storing approximately a 35-day supply of gypsum rock, any significant
interruption of the supply of gypsum rock would require the Company to shut down
operations at the Seattle facility until an alternative supply of gypsum rock
could be located. There are limited alternative supplies of gypsum rock
12
<PAGE> 15
available to the northwestern part of the United States and there can be no
assurance that the Company would be able to obtain the necessary supply of
gypsum rock on reasonable terms. As a result, a cessation of shipments from the
Caopas mine would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business -- Raw
Materials -- Gypsum."
The Company entered into a long term contract with Republic Group, Inc. and
its wholly owned subsidiary, Republic Paperboard Company (collectively,
"Republic"), to supply the Company with its requirements for paper at all three
of its gypsum wallboard manufacturing facilities. Republic is scheduled to begin
supplying the Company with paper from a new facility in Lawton, Oklahoma
beginning no later than March 2000. Construction of the Lawton plant began in
July 1998. However, there can be no assurance that the Republic paper plant will
be completed on schedule or that the Company will be able to obtain necessary
paper supply on reasonable terms. The failure of the Company to obtain necessary
paper supply on reasonable terms would have a material adverse effect on the
Company's business, results of operations and financial condition.
CHANGE IN CONSUMER PREFERENCE
There can be no assurance that the recent growth in demand for the
Company's fiber cement products will be sustained. The continued development of
builder and consumer preference for the Company's fiber cement products over
competitive products will be critical to sustaining and expanding demand for the
Company's products. Therefore, the failure to maintain and increase builder and
consumer acceptance of the Company's fiber cement products would have a material
adverse effect on the Company's growth strategy as well as its business, results
of operations and financial condition.
RELIANCE ON DISTRIBUTORS OF FIBER CEMENT PRODUCTS
The distribution channels for the Company's fiber cement products are
concentrated, with the top two U.S. distributors and the top ten U.S.
distributors accounting for approximately 57% and 87%, respectively, of the
Company's total volume of U.S. shipments in fiscal year 1998 and the top ten
distributors in Australia and New Zealand accounting for approximately 55% of
the Company's total volume of Australian and New Zealand shipments in fiscal
year 1998. If the Company were to lose one or more of these distributors due to
aggressive competitive pricing or otherwise, there can be no assurance that the
Company would be able to replace such distributors. This risk is more severe in
Australia and New Zealand where the exclusive nature of some
distributor/retailer relationships could amplify any material adverse effect
resulting from the loss of a distributor. Therefore, the loss of one or more
distributors could have a material adverse effect on the Company's business,
results of operations and financial condition.
ENVIRONMENTAL, LEGAL AND OTHER MATTERS
The Company is subject to U.S. federal, state and local and foreign
environmental protection and health and safety laws and regulations governing,
among other matters, its operations and the use, handling, disposal and
remediation of hazardous substances currently or formerly used by the Company,
JHIL or any of its affiliates. Under certain environmental laws including but
not limited to the United States Comprehensive Environmental Response,
Compensation & Liability Act, the Resource Conservation and Recovery Act, the
Occupational Safety and Health Act, the Clean Water Act, the Clean Air Act and
the Clean Air Amendments of 1990, the Safe Drinking Water Act, the Surface
Mining Control and Reclamation Act, the Toxic Substances Control Act, the
California Safe Drinking Water and Toxic Enforcement Act, and all relevant state
and foreign analogs for the above-referenced U.S. federal statutes, the Company
or its subsidiaries could be held jointly and severally responsible for the
remediation of any hazardous substance contamination at its or its predecessors'
past or present facilities and at third party waste disposal sites and could
also be held liable for any consequences arising out of human exposure to such
substances or other environmental damage. There can be no assurance that the
costs of complying with environmental and health and safety laws relating to its
operations, or the liabilities arising from past or future releases of, or
exposure to, hazardous substances or from product liability matters, will not
result in future expenditures by the Company that could have a material adverse
effect on the Company's business, results of operations and financial
13
<PAGE> 16
condition. In addition, the Company may, from time to time, be involved in
various legal proceedings. See "Business -- Legal Proceedings."
DESIGN DEFECTS, WARRANTY CLAIMS AND PRODUCT LIABILITY
The Company's business is based on sales of certain manufactured products,
with an emphasis on fiber cement products. Although the Company has marketed and
sold fiber cement products since the early 1980s, such products have not been
manufactured, sold and used on a widespread, long-term basis compared to
traditional competing products such as solid wood, brick, stucco and gypsum
wallboard. As a result, there can be no assurance that fiber cement products
will perform in accordance with the Company's expectations or that there are no
serious design defects in such products. Because sales of fiber cement products
are expected to constitute a substantial portion of the Company's revenues, if
the Company's fiber cement technology fails to perform as expected or a related
product is discovered to have design defects, such failure or defects and any
resulting publicity could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company offers varying warranties on its products, including a 50-year
limited warranty on certain of its fiber cement siding products in the United
States. Therefore, the existence of defects in any of the Company's products
could subject the Company to significant warranty claims. Although the Company
maintains reserves for such claims that it believes to be adequate, there can be
no assurance that warranty expense levels will not exceed the Company's
reserves. A large number of warranty claims resulting from unforeseen defects
and exceeding the Company's warranty reserves could have a material adverse
effect on the Company's business, results of operations and financial condition.
The actual or alleged existence of defects in any of the Company's products
could also subject the Company to significant product liability claims. Although
the Company has in place product liability insurance coverage that it believes
to be adequate and intends to maintain insurance coverage in the future, there
can be no assurance that such coverage will be sufficient to cover all future
product liability claims or that insurance coverage will be available at
reasonable rates in the future. Successful assertion against the Company of one
or more claims exceeding the Company's insurance coverage could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RISKS OF INTERNATIONAL BUSINESS
The Company operates globally with approximately 54% of its net sales for
fiscal year 1998 originating from product sales outside of the United States.
Because the Company manufactures and sells its products internationally, its
activities are subject to certain political, economic and other uncertainties
including, among other factors, changing political and economic conditions,
changing laws and policies affecting trade, investment and taxation and the
general hazards associated with the assertion of sovereignty over certain areas
in which the Company conducts its business. Additionally, various jurisdictions
have laws limiting the right and ability of subsidiaries and joint ventures to
pay dividends and remit earnings to affiliated companies, unless specified
conditions are met.
Although the Company seeks to take applicable laws, regulations and
conditions into account in structuring its business on a global basis, changes
in the laws, regulations, policies or conditions of any jurisdiction in which
the Company conducts its business could result in, among other matters, the loss
of the Company's assets in such jurisdiction, the elimination of certain rights
that are critical to the operation of the Company's business in such
jurisdiction, the imposition of additional taxes or other costs or a decrease in
revenues. Therefore, any change in laws, regulations, policies or conditions of
a jurisdiction could have a material adverse effect on the Company's business,
results of operations and financial condition.
RECENT VOLATILITY IN ASIAN ECONOMIES AND FINANCIAL AND CURRENCY MARKETS
During fiscal year 1998, approximately 3% of the Company's revenue was
generated from product sales in Asia and the Company views continued expansion
in Asia as a potential opportunity for future growth. Continued volatility in
the Asian economies and financial and currency markets may have a material
adverse
14
<PAGE> 17
effect on the Company's expansion plans and current operations in this region.
In the event of a prolonged economic crisis, the construction industry in which
the Company operates could be disproportionately affected. As a result, the
Company does not currently have any plans to establish manufacturing facilities
in Asia other than in the Philippines where a plant is currently under
construction and is scheduled to be commissioned in October 1998. However, the
Company continues to evaluate opportunities in the region and remains of the
view at this time that Asia offers growth prospects for the Company's products
in the long-term.
The recent economic volatility in Asia has also had a negative effect on
the Australian and New Zealand economies in general and the Company is beginning
to recognize these effects on its operations. For example, until the commission
of the Philippines manufacturing facility later this year, the Company is
supplying that market by exporting products manufactured in Australia and New
Zealand. For the three months ended June 30, 1998, sales of fiber cement
products in the Philippines declined by 41.9% in local currency terms from the
same period in the previous year. This decline is due to the contraction of the
Philippines building and construction market which is likely a result of Asian
economic conditions. Continued contraction in this market will result in a
slower start-up and potentially lower than expected capacity utilization for the
new Philippines manufacturing facility. In addition, there can be no assurance
that exports to other Asian markets will not continue to decline. Currency
devaluation in Asian countries has resulted and may continue to result in
increased sales of lower priced imports by certain of the Company's competitors
in Australia and New Zealand and decreased levels of exports by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's Building Systems business has also been negatively impacted
by the Asian economic crisis. Activity in the Australian mining and resources
industry, a market serviced by the Building Systems business, has declined due
to concerns about falling demand from Asia for minerals and other natural
resources and a general decrease in commodity prices which has deterred
investment in Australian mining and resource projects. The continuation of
limited activity in this industry could have a material adverse effect on the
results of operations and financial condition of the Building Systems business.
FOREIGN EXCHANGE RISKS
As the Company's functional currency is the U.S. dollar, its non-U.S.
operations face the additional risks of fluctuating currency values and exchange
rates. Such operations may also face hard currency shortages and controls on
currency exchange. Approximately 54% of the Company's revenues in fiscal year
1998 were derived from sales outside the United States. Consequently, changes in
the value of foreign currencies (principally Australian dollars, New Zealand
dollars and Philippine pesos) could significantly affect the Company's business,
results of operations and financial condition. The Company generally attempts to
mitigate foreign exchange risk by (1) entering into contracts providing for
payment in U.S. dollars instead of the local currency where possible, (2)
matching anticipated non-U.S. currency receipts with disbursements and (3)
hedging through forward exchange contracts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview." There
can be no assurance that the Company will be successful in these mitigation
strategies, or that fluctuations in foreign currencies and other foreign
exchange risks will not have a material adverse effect on the Company's
business, financial condition and results of operations.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. There can be no assurance that an active public market for the Common
Stock will develop or, if such market develops, that it will continue. The
initial public offering price of the Common Stock will be determined through
negotiations among JHIL, the U.S. Managing Underwriter and the International
Managing Underwriter, and may not be indicative of the market price for the
Common Stock after consummation of the Offerings. The stock market in general
and the stock prices of new public companies in particular have experienced
extreme price fluctuations, sometimes without regard to the operating
performance of the particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in or failure to meet earnings
estimates by analysts, market conditions in the industry, regulatory actions and
general political and economic
15
<PAGE> 18
conditions may have a significant effect on the market price of the Common
Stock. Following periods of volatility in the market price of a company's
securities, securities class action litigation has often resulted. There can be
no assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a significant
diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTROL BY JHIL
The entire net proceeds of the Offerings will ultimately be received by
JHIL. See "Use of Proceeds." Following consummation of the Offerings, JHIL will
beneficially own approximately 85% of the outstanding shares of Common Stock (or
approximately 83% of the outstanding shares of Common Stock if the U.S.
Underwriters' over-allotment option is exercised in full). As a result, JHIL
will have the ability to nominate and elect all of the directors of the Company
(although JHIL currently intends to utilize its voting power such that at least
two of the members of each of the Company's Board of Directors and Supervisory
Board, as such terms are defined herein, are independent of JHIL and the
Company). In addition, JHIL will have the ability to determine the outcome of
all other matters submitted to a vote of the Company's shareholders (without the
consent of the Company's other shareholders), will have the ability to prevent a
change of control of the Company and could cause the Company to take other
actions that might be favorable to JHIL at the expense of minority shareholders
(subject to certain requirements of reasonableness and fairness which apply
under Dutch law). Control by JHIL may discourage certain types of transactions
involving an actual or potential change of control of the Company.
The relationship between the Company and JHIL may give rise to conflicts of
interest between the two companies with respect to, among other matters, the
issuance of additional shares of the Company's securities or the declaration and
payment of dividends by the Company. Conflicts of interest also may arise in
connection with certain current or future agreements or transactions between the
Company and JHIL or JHIL's affiliates. See "Certain Relationships and Related
Transactions." Although the Company intends that the terms of any future
agreements or transactions between the Company and JHIL or JHIL's affiliates
will be at least as favorable to the Company as could be obtained from third
parties, there can be no assurance that this will be the case. Any such future
transactions that are material to the Company and are not in the ordinary course
of business will require the review and approval of a majority of the Company's
independent directors.
Subsequent to the Offerings, Dr. Keith Barton, President, Chief Executive
Officer and Chairman of the Company's Board of Directors and the Managing Board,
will continue to serve as Managing Director of JHIL. In addition, Mr. Phillip
Morley, Chief Financial Officer and a Member of the Company's Board of Directors
and the Managing Board, will continue to serve as Chief Financial Officer of
JHIL. Several of the Company's other directors and executive officers will also
continue in their current capacities with JHIL. While JHIL will reimburse the
Company for the allocated portion of the salary and benefits of such officers
(except Dr. Barton who will be compensated directly by JHIL for his duties as a
director and officer of JHIL), these dual responsibilities may create or appear
to create potential conflicts of interest. Material matters that are the subject
of potential or actual conflicts of interest must be approved by a majority of
the independent directors. See "Management -- Compensation of Directors and
Officers."
In connection with the Reorganization, the Company and JHIL are entering
into agreements providing certain rights in favor of JHIL including (i) the
right to require the Company to register for public offering the Common Stock
offered hereby as well as all or a portion of the Common Stock held by JHIL
following consummation of the Offerings, and (ii) certain indemnification rights
with respect to the offering or sale of securities of the Company (including,
without limitation, liabilities under the federal securities laws in connection
with the Offerings). See "Certain Relationships and Related Transactions" and
"The Reorganization."
16
<PAGE> 19
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offerings, JHIL will beneficially own
shares or approximately 85% ( shares, or approximately 83%, if the U.S.
Underwriters exercise their over-allotment option in full) of the outstanding
shares of Common Stock of the Company. No prediction can be made as to the
effect, if any, that future sales of Common Stock, or the availability of Common
Stock for future sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock or
the perception that sales may occur could adversely affect prevailing market
prices for the Common Stock. The Company and JHIL have agreed, subject to
certain limited exceptions, not to offer, sell, agree or contract to sell, grant
any option to sell or otherwise dispose of, directly or indirectly, any shares
of Common Stock (or securities convertible into or exercisable or exchangeable
for Common Stock or any warrants or other rights to purchase or acquire Common
Stock) for a period of 180 days after the date of this Prospectus, without the
prior written consent of Warburg Dillon Read LLC. The Company understands that
any such consent will be granted based on Warburg Dillon Read LLC's evaluation
of the effect of such sale on the market price of the Common Stock. Following
such time period, the shares of Common Stock owned by JHIL may be sold (i) in
accordance with Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), (ii) in private offerings or (iii) upon
registration under the Securities Act without regard to the volume limitations
of Rule 144. The Company and JHIL have entered into an agreement that provides
JHIL with certain rights to have the shares of Common Stock owned by it after
the Offerings registered by the Company under the Securities Act in order to
permit the public sale of such shares. See "Certain Relationships and Related
Transactions." Although the Board of Directors of JHIL has informed the Company
that it intends to consider a selldown of its shares of Common Stock held by it
after the Offerings or a distribution of such shares to the JHIL shareholders
within 12 to 24 months, the timing and precise mechanisms of such a selldown or
distribution would depend on market conditions and other relevant
considerations. See "Shares Eligible For Future Sale." In addition, JHIL is
retaining certain liabilities including liabilities in connection with the
Reorganization. See "The Reorganization." In the event that JHIL is unable to
satisfy those liabilities with cash reserves or other resources (a situation
which JHIL has informed the Company that it does not currently expect), it is
possible that JHIL would be required to sell some or all of its remaining assets
which will consist primarily of the Common Stock of James Hardie. The sale of a
substantial amount of the Common Stock of James Hardie could have a material
adverse effect on the price of the Common Stock.
DILUTION
The initial public offering price per share of Common Stock exceeds the net
tangible book value per share of Common Stock. Accordingly, purchasers of the
Common Stock offered hereby will incur immediate and substantial dilution. See
"Dilution."
CERTAIN ANTI-TAKEOVER EFFECTS
The Company's Articles of Association contain several provisions that could
have the effect of delaying or preventing a change of control of the Company in
a transaction not approved by the Company's Board of Directors. Accordingly,
shareholders of the Company could be prevented from realizing a premium on their
shares in a transaction not approved by the Company's Board of Directors. See
"Description of Capital Stock."
POTENTIAL DIFFICULTIES IN PROTECTING SHAREHOLDER RIGHTS AND ENFORCING CIVIL
LIABILITIES
The Company's corporate affairs are governed by its Articles of Association
and Dutch law. Under the Company's Articles of Association, adoption of the
Company's annual accounts by the shareholders discharges the directors from
liability in respect of the exercise of their duties during the fiscal year
concerned, unless an explicit reservation is made by the shareholders and
subject to certain exceptions provided under Dutch law including exceptions
relating to the liability of directors upon bankruptcy of a company and general
principles of reasonableness and fairness. Under Dutch law, this discharge does
not extend to matters not disclosed to shareholders. See "Description of Capital
Stock."
17
<PAGE> 20
James Hardie is incorporated under the laws of The Netherlands and a
substantial portion of the assets of the Company are located outside the United
States. In addition, the Selling Shareholder, JHIL, certain of the directors and
executive officers of the Company and certain of the experts named herein are
residents of jurisdictions outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon such persons, or to enforce outside the United States judgments obtained
against such persons in U.S. courts, or to enforce in U.S. courts judgments
obtained against such persons in courts in jurisdictions outside the United
States, including actions predicated upon the civil liability provisions of the
U.S. securities laws. In addition, it may be difficult for investors to enforce,
in original actions brought in courts in jurisdictions located outside the
United States, rights predicated upon the U.S. securities laws. See "Enforcement
of Civil Liabilities."
The rights of shareholders and the responsibilities of directors under the
laws of The Netherlands are not as clearly established as under statutes or
judicial precedent in existence in certain U.S. jurisdictions. Therefore, the
public shareholders of the Company may have more difficulty in protecting their
interests in the face of actions by the management, directors or controlling
shareholders of the Company than they would as shareholders of a corporation
incorporated in the United States.
MATTERS RELATED TO COMPANIES INCORPORATED IN THE NETHERLANDS
As a Netherlands "naamloze vennootschap" ("N.V."), the Company will be
subject to certain requirements not generally applicable to corporations
organized in U.S. jurisdictions. Among other matters, the issuance of shares by
an N.V. must be approved by the shareholders, except to the extent the authority
to issue shares has been delegated by the shareholders to another corporate
body. Prior to the consummation of the Offerings, JHIL, as the Company's sole
shareholder, will irrevocably delegate to the Board of Directors, for a period
of five years from the date of such delegation, the authority to issue such
additional authorized but unissued shares of Common Stock and Preferred Stock
(as defined herein) as the Board of Directors shall determine.
In addition, the issuance of shares of Common Stock is generally subject to
pro rata shareholder preemptive rights, except to the extent that such
preemptive rights have been excluded or limited with respect to such issuance by
an action of the shareholders or by a corporate body empowered to do so by the
shareholders. Shareholders will not have preemptive rights with respect to
shares of Common Stock issued for consideration other than cash and shares of
Common Stock issued to employees of the Company or related companies. Prior to
the consummation of the Offerings, JHIL will irrevocably delegate to the Board
of Directors, for a period of five years from the date of such delegation, the
authority to limit or exclude shareholder preemptive rights with respect to any
issuances of shares of Common Stock during such period.
Under the law of The Netherlands, the delegations described above can only
be granted for a maximum period of five years and, thus, such delegations
(unless renewed) will expire approximately five years from the date of this
Prospectus. If renewals are not approved by the shareholders, then the
requirement to obtain shareholder approval prior to the future issuance of
shares and the existence of preemptive rights may adversely affect the Company's
ability to raise additional capital, complete future financings and offerings
and issue shares for acquisitions.
RISKS OF REORGANIZATION
As part of the Reorganization, several members of the Company's senior
management will relocate from Australia to the United States. This relocation
may be disruptive to the Company's business and operations and may result in,
either immediately or over time, the loss of certain employees who choose not to
work for a foreign-managed company. In addition, several of the Company's
executive officers will continue to be executive officers of JHIL. The Company
anticipates that such officers' duties to JHIL will occupy some portion of their
time. The dual responsibilities of the Company's executive officers may
interfere with their responsibilities to the Company and give rise to conflicts
of interest. Dr. Keith Barton's employment agreements with the Company and JHIL
each expire on October 31, 1999 and Dr. Keith Barton has informed the Company
that it is his current intention to retire at that time.
18
<PAGE> 21
As part of the Reorganization, the Company's wholly owned Finance
Subsidiary will complete the sale of certain Notes with an aggregate principal
amount of $225 million and arrange the Bank Facility which will consist of a
term loan of approximately $115 million and a revolving line of credit of
approximately $80 million. See "The Reorganization." The Notes and indebtedness
incurred under the Bank Facility will be unconditionally guaranteed by James
Hardie. In the event of a default under the terms of the Notes or the Bank
Facility, James Hardie would be directly liable for the obligations of the
Finance Subsidiary pursuant to the Notes and the Bank Facility.
LABOR RELATIONS
Approximately one-half of the Company's employees in Australia and New
Zealand and a quarter of the Company's employees in the United States are
currently represented by labor unions. The Company's unionized employees are
covered by two collective bargaining agreements in the United States and a range
of federal and state-based agreements in Australia. The Company's two U.S.
collective bargaining agreements were renewed in 1996 and will expire in 1999
and 2000. The Company's Australian agreements will expire at various times
between 1998 and 2000. Renewal negotiations, among other issues relating to the
Company's labor agreements, could result in strikes or work interruptions.
Although the Company has not recently experienced any strikes or work
interruptions in the United States, it has, in the past three years, experienced
occasional strikes and work interruptions lasting from one to six days in
Australia. In the event the Company experiences a prolonged labor dispute at any
of its facilities, any strikes or work interruptions associated with such
dispute could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Business -- Employees."
TAX RISKS ON INTERCOMPANY INTEREST AND DIVIDEND PAYMENTS
Interest and dividend payments from the Company's U.S. operating subsidiary
will be subject to a 30% U.S. withholding tax unless the U.S.-Netherlands Income
Tax Treaty (the "US-NL Treaty") applies. The US-NL Treaty applies in any taxable
year only if, among other conditions of eligibility for benefits which the
Company expects to satisfy, the aggregate number of shares of the Common Stock
traded on the applicable stock exchange during the previous taxable year is at
least 6% of the average number of shares of Common Stock outstanding during that
taxable year. Although the Company expects to satisfy this test for the relevant
periods and meet the other requirements for eligibility, the number of shares of
Common Stock that is traded is beyond the direct control of the Company and
therefore there can be no assurance in this regard.
TAX RISK TO SHAREHOLDERS RESULTING FROM CHANGES IN THE COMPANY'S TAX
CLASSIFICATION OR IN APPLICABLE TAX LAW
Shareholders could be subject to adverse U.S. federal income tax
consequences if, contrary to the Company's current expectations, the Company
were to be classified as a "passive foreign investment company" or as a "foreign
personal holding company" for U.S. federal income tax purposes. See "Taxation --
United States Taxation -- Passive Foreign Investment Company Status" and
"-- Foreign Personal Holding Company Status." In addition, shareholders could be
adversely affected by changes in the current tax laws, regulations and
interpretations thereof in the United States and The Netherlands, including
changes that could have retroactive effect. See "Taxation."
19
<PAGE> 22
THE REORGANIZATION
JHIL commenced operations in Australia in 1888, was incorporated in 1920
and has been listed on the Australian Stock Exchange Limited since 1951. Over
the last three years, JHIL has significantly reshaped its business through a
series of divestitures of non-core businesses, the proceeds of which were used
in part to fund the expansion of its U.S. fiber cement and gypsum wallboard
businesses. As a result of the increasing significance of its U.S. operations
(U.S. Fiber Cement and Gypsum), which comprised 72.4% of total operating profits
(before expenses in connection with the Sydney-based research and development
center and certain general corporate costs which benefit all segments) in fiscal
year 1998, JHIL announced the Reorganization. The Reorganization is intended to
address the increasing structural imbalance and resulting operational, financial
and commercial issues created by the predominance of JHIL's U.S. operations and
the location of corporate management and JHIL's shareholder base in Australia.
The primary components of the Reorganization are:
- The formation of James Hardie, a wholly owned indirect subsidiary of
JHIL, which was incorporated in The Netherlands in August 1998;
- The transfer to the Company, pursuant to the Purchase Agreements, of the
Transferred Businesses (consisting of JHIL's international fiber cement
businesses, its U.S. gypsum wallboard business, its Australian and New
Zealand building systems business and its Australian windows business)
and the retention by JHIL and its non-transferring subsidiaries of the
Retained Assets and Liabilities;
- The Debt Financing (consisting of the issuance of the Notes and the
arrangement of a new Bank Facility);
- The sale by the Selling Shareholder, through the Offerings, of
approximately 15% of the outstanding shares of Common Stock of James
Hardie; and
- The relocation of certain senior executives and managers to the Company's
U.S. operational headquarters.
ACQUISITION OF THE TRANSFERRED BUSINESSES
Prior to the consummation of the Offerings, the Company and JHIL will enter
into the Purchase Agreements which provide that the Company will acquire the
Transferred Businesses from JHIL and its non-transferring subsidiaries. The
Transferred Businesses will be acquired by James Hardie in consideration of 100%
of its outstanding Common Stock and $340 million, which will be paid from the
proceeds of the sale of Notes and borrowings under the term loan that is part of
the Debt Financing. The $340 million payment represents the settlement of
liabilities to JHIL which arise in connection with the Reorganization. In
addition to the Retained Assets and Liabilities, JHIL and its non-transferring
subsidiaries are also retaining existing and potential liabilities in relation
to the manufacture prior to 1987 of products containing asbestos, which are not
included in the James Hardie Businesses. JHIL and its non-transferring
subsidiaries will also retain the ownership of the manufacturing sites in
Australia and New Zealand on which asbestos products were manufactured. The
Company will lease and continue to manufacture from these sites. As part of the
Purchase Agreements, JHIL and certain of its non-transferring subsidiaries will
agree to indemnify the Company for any such liabilities relating to these sites.
DEBT FINANCING
Concurrently with the consummation of the Offerings, the Finance Subsidiary
(a financing subsidiary of the Company incorporated under the laws of The
Netherlands) will complete the sale of certain debt securities and arrange a new
bank credit facility. The Finance Subsidiary intends to issue the Notes
(consisting of approximately $225 million aggregate principal amount of senior
unsecured notes with a mix of maturities ranging from 6 to 15 years with a
ten-year average maturity and a maximum of $63 million maturing in any one year)
to certain identified U.S. institutional investors. In addition, the Finance
Subsidiary
20
<PAGE> 23
intends to arrange the Bank Facility (consisting of a term loan of approximately
$115 million with a term of three years, which will be fully drawn at the
consummation of the Offerings, and a revolving credit facility of approximately
$80 million, which will be used by the Company for working capital purposes and
is not expected to be drawn at the consummation of the Offerings). The Bank
Facility will be unsecured and will be placed with a wholly owned Australian
subsidiary of the Company. The Notes and indebtedness incurred under the Bank
Facility by the Company's subsidiaries will be unconditionally guaranteed by
James Hardie on an unsecured basis.
The Notes will have a fixed interest rate. The Bank Facility will have a
floating interest rate equal to a fixed margin over LIBOR or an equivalent swap
rate. It is anticipated that the Debt Financing arrangements will have customary
covenants including the maintenance of certain financial ratios and limitations
on payment of dividends and the incurrence of additional indebtedness. It is
proposed that, to the extent possible, the Notes and Bank Facility will be
subject to the same key covenants.
THE OFFERINGS
The Offerings will require Shareholder Approval. The Shareholder Approval
will be sought at an extraordinary general meeting of JHIL's shareholders to be
held in October 1998, in Sydney, Australia . The Offerings are contingent on the
consummation of the other steps of the Reorganization. JHIL has informed the
Company that it intends to consider a further selldown of its interest in the
Company or a distribution of its interest to the JHIL shareholders within 12 to
24 months. However, the timing and precise mechanisms of such a selldown or
distribution will depend on market conditions and other relevant considerations.
21
<PAGE> 24
USE OF PROCEEDS
The Company will not receive any of the net proceeds from the sale of
shares of Common Stock offered hereby, all of which will be received by the
Selling Shareholder. Such proceeds will be consolidated with JHIL's existing
cash deposits and other cash resulting from the Reorganization and will be used,
in part, to retire JHIL's retained indebtedness. To the extent that JHIL has
cash surplus to its ongoing requirements after the retirement of indebtedness,
such cash will be used to fund a return of capital to JHIL's shareholders.
DIVIDEND POLICY
The Company currently anticipates that most, if not all, of future earnings
will be reinvested in its business for the foreseeable future. Any determination
to pay cash dividends in the future will be at the discretion of the Board of
Directors, subject to the Articles of Association, Dutch law and contractual
restrictions, and after taking into account various factors, including the
Company's financial condition, results of operations, outstanding indebtedness,
current and anticipated cash needs, plans for expansion as well as commercial
restrictions and other factors.
James Hardie is a holding company that derives all of its cash flow from
its subsidiaries. Consequently, James Hardie's ability to pay dividends is also
dependent on the earnings of its subsidiaries and the receipt by James Hardie of
distributions or advances from such subsidiaries. The ability of certain
subsidiaries to make such payments to James Hardie may be subject to statutory
and other restrictions as well as withholding taxes. In addition the Bank
Facility limits, and any other credit arrangements which the Company may enter
into may limit, the ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "The Reorganization."
James Hardie's Articles of Association provide that future cash dividends,
if any, will be declared in U.S. dollars, unless the Board of Directors
determines otherwise. See "Description of Capital Stock -- Dividends."
There are no legislative or other legal provisions currently enforced in
The Netherlands or arising under James Hardie's Articles of Association
restricting the payment of dividends to holders of the shares of Common Stock
not resident in The Netherlands, except for regulations in compliance with
United Nations and European Union sanctions. Insofar as the law of The
Netherlands is concerned, cash dividends paid in any currency may be transferred
from The Netherlands and converted into any other convertible currency.
Dividends payable by James Hardie are subject to a Dutch withholding tax at the
current rate of 25%. The withholding tax on dividends paid to holders of the
shares of Common Stock who are not residents of The Netherlands may be reduced
by virtue of an applicable income tax convention in effect between The
Netherlands and the country of residence of the recipient of dividends. See
"Taxation -- Netherlands Taxes."
If James Hardie declares dividends in its first fiscal year after the
Offerings in excess of its current earnings and profits for such year, the
excess of the dividends paid over such earnings and profits will be treated for
U.S. federal income tax purposes as a return of capital to the extent of the
shareholder's basis in the shares, and a capital gain to the extent of any
amount of such excess distributed to the shareholder in excess of such basis.
22
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the James Hardie
Businesses as of June 30, 1998 and on a pro forma basis to give effect to the
Reorganization. The Unaudited Pro Forma Consolidated Balance Sheet gives
accounting effect to the following pro forma transactions that affect the James
Hardie Businesses' historical financials as if they occurred on June 30, 1998:
(1) the transfer of the Transferred Businesses to the Company and the retention
of the Retained Assets and Liabilities by JHIL and (2) the completion of the
Debt Financing. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Consolidated Financial Data" and the Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
ACTUAL PRO FORMA
------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Current portion of long-term debt........................... $ 31.4 $ --
====== ======
Long-term debt:
James Hardie Businesses
Existing notes......................................... 146.0 --
Revolving credit facility.............................. 290.0 --
Promissory notes....................................... 38.6 --
Convertible notes...................................... 7.3 --
The Company
Senior notes issued pursuant to the Debt Financing..... -- 225.0
Bank Facility.......................................... -- 115.0
------ ------
Total long-term debt.............................. $481.9 $340.0
====== ======
Shareholders' equity:
James Hardie Businesses -- Capital........................ 543.4 --
James Hardie N.V. Common Stock, nominal value NLG
per share, shares authorized,
shares issued and outstanding, actual,
shares issued and outstanding, as adjusted(1).......... --
Additional paid-in capital................................ -- 415.3
Cumulative translation adjustment and other............... (123.6) (111.4)
------ ------
Total shareholders' equity............................. 419.8 303.9(2)
------ ------
Total capitalization.............................. $933.1 $643.9
====== ======
</TABLE>
- ---------------
(1) Excludes shares of Common Stock reserved for issuance under the
Company's 1998 Equity Incentive Plan, under which options to purchase
shares are expected to be granted upon consummation of the
Offerings at the initial public offering price. See "Management -- 1998
Equity Incentive Plan." Also excludes shares of Common Stock
reserved for issuance under the Company's Independent Directors Deferred
Compensation Plan.
(2) Total equity at the date of the Reorganization and the Offerings may differ
significantly from that disclosed in the Unaudited Pro Forma Consolidated
Balance Sheet as a result of movements in foreign exchange rates that impact
the balance of the foreign currency translation adjustment amount, earnings,
capital expenditure and other cash flows impacting cash balances in the
period from June 30, 1998 to the date of the Reorganization and the
Offerings.
23
<PAGE> 26
DILUTION
The Company's pro forma net tangible book value of assets as of June 30,
1998 was $267.9 million, or $ per share of Common Stock. New investors
purchasing shares of Common Stock in the Offerings will experience immediate
dilution of $ per share, which is equal to the difference between the
assumed initial public offering price of $ (the mid-point of the range
set forth on the cover page of this Prospectus) and such pro forma net tangible
book value per share of Common Stock of $ .
The following table illustrates the calculation of the per share dilution
described above.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Pro forma net tangible book value per share............ $
Increase per share attributable to new investors....... $
Pro forma net tangible book value per share after the
Offerings................................................. $
Dilution per share to new investors......................... $
</TABLE>
24
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial statements of
income (the "Unaudited Pro Forma Consolidated Statements of Income") for the
year ended March 31, 1998 and the three months ended June 30, 1998 and the
unaudited pro forma consolidated balance sheet (the "Unaudited Pro Forma
Consolidated Balance Sheet") as of June 30, 1998 (collectively, the "Pro Forma
Statements") reflect adjustments to the audited Consolidated Financial
Statements of the James Hardie Businesses (consisting of both the assets and
liabilities of the Transferred Businesses and the Retained Assets and
Liabilities) appearing elsewhere in this Prospectus to give accounting impact to
certain transactions that will occur in connection with the Reorganization. The
pro forma adjustments to each Pro Forma Statement are described in the
accompanying footnotes to the Pro Forma Statements. The pro forma adjustments
are based on available information and certain assumptions management believes
are reasonable.
The Pro Forma Statements are for informational purposes only and should not
be construed to be indicative of the Company's consolidated financial position
or results of operations had the transactions been consummated on the dates
assumed and do not project the Company's consolidated financial position or
results of operations for any future date or period.
In accordance with U.S. GAAP, the transfers to the Company of the
Transferred Businesses will be accounted for in the Consolidated Financial
Statements of the Company at cost using the "as if" pooling method on the basis
that the transfers are under common control. The financial adjustments required
to eliminate the Retained Assets and Liabilities will be recorded as a deemed
transfer to JHIL in the Consolidated Financial Statements of the Company. All
pro forma adjustments have been recorded at historical cost in the Pro Forma
Statements.
The Pro Forma Statements should be read in conjunction with the
Consolidated Financial Statements of the James Hardie Businesses and the related
notes thereto, and other financial information pertaining to the Company and the
James Hardie Businesses included elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The Unaudited Pro Forma Consolidated Balance Sheet gives accounting effect
to the following pro forma transactions that affect the James Hardie Businesses'
historical financials as if they occurred on June 30, 1998: (1) the transfer of
the Transferred Businesses to the Company and the retention of the Retained
Assets and Liabilities by JHIL and (2) the completion of the Debt Financing.
The total shareholders' equity disclosed in the Unaudited Pro Forma
Consolidated Balance Sheet gives accounting effect to the adjustments noted as
if they occurred on June 30, 1998. Total equity at the date of the
Reorganization may differ significantly from that disclosed in the Unaudited Pro
Forma Consolidated Balance Sheet as a result of movements in foreign exchange
rates that impact the balance of the foreign currency translation adjustment
account, earnings, capital expenditure and other cash flows impacting cash
balances in the period June 30, 1998 to the date of the Offerings.
25
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------
JHIL
RETAINED
ASSETS
JAMES HARDIE AND REVISED DEBT
BUSINESSES LIABILITIES STRUCTURE PRO FORMA
------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 204.5 $(202.5)(1) $ 2.0
Accounts and notes receivable, net of
allowance for doubtful accounts............ 113.9 (8.5)(2) -- 105.4
Inventories.................................. 60.0 -- -- 60.0
Prepaid expenses and other current assets.... 14.2 (2.3)(2) -- 11.9
Deferred tax assets.......................... 24.9 (8.7)(3) -- 16.2
-------- ------
Total current assets............... 417.5 195.5
Long term receivables........................ 10.9 (7.3)(2) -- 3.6
Investments.................................. 20.4 (17.6)(2) -- 2.8
Property, plant and equipment, net........... 488.6 (26.2)(4) -- 462.4
Intangibles, net............................. 36.0 -- -- 36.0
Mineral reserves............................. 24.4 -- -- 24.4
Prepaid pension cost......................... 10.7 -- -- 10.7
Deferred tax assets.......................... 68.5 (51.6)(3) -- 16.9
-------- ------
Total assets....................... $1,077.0 $752.3
======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..... $ 84.0 $ (15.9)(2) -- $ 68.1
Bank overdraft............................... 2.7 (2.7)(1) --
Current portion of long term debt............ 31.4 (31.4)(1) -- --
Accrued compensation......................... 11.8 -- -- 11.8
Accrued product liabilities.................. 10.7 (5.5)(2) -- 5.2
Other liabilities............................ 6.2 (6.2)(2) -- --
-------- ------
Total current liabilities.......... 146.8 85.1
Long-term debt............................... 481.9 (481.9)(1) $ 340.0(7) 340.0
Deferred tax liability....................... 14.4 -- -- 14.4
Other noncurrent liabilities................. 14.1 (5.2)(2) -- 8.9
-------- ------
Total liabilities.................. $ 657.2 $448.4
-------- ------
Shareholders' equity:
Capital...................................... $ 543.4 $ 211.9(6) $(340.0)(7) $415.3
Unrealized gain(loss) on available securities
for sale................................... (1.8) 1.8(2) -- --
Cumulative translation adjustment............ (111.4) -- -- (111.4)
Employee loans............................... (10.4) 10.4(5) -- --
-------- ------
Total shareholders' equity......... 419.8 303.9(8)
-------- ------
Total liabilities and shareholders'
equity........................... $1,077.0 $752.3
======== ======
</TABLE>
26
<PAGE> 29
- ---------------
(1) Reflects the elimination of cash deposits and existing debt facilities of
JHIL which are to be retained by JHIL.
(2) Retained Assets and Liabilities of JHIL or its non-transferring
subsidiaries which will not be transferred to the Company are comprised of:
<TABLE>
<CAPTION>
$ MILLIONS
----------
<S> <C>
Accounts and notes receivable, net of allowance for doubtful
accounts:
Financing structures retained by JHIL..................... $ 8.5
=====
Prepaid expenses and other current assets:
Capitalized expenses...................................... $ 2.3
=====
Long term receivables:
Vendor finance............................................ $ 7.3
=====
Investments:
AEF portfolio............................................. $ 7.5
Other..................................................... 10.1
-----
$17.6
=====
Accounts payable and accrued liabilities:
Financing structures retained by JHIL..................... $15.4
Other..................................................... 0.5
-----
$15.9
=====
Accrued product liabilities:
JHIL or its non-transferring subsidiaries will retain
responsibility for certain specific product warranty
claims.................................................. $ 3.7
Environmental rectification............................... 1.8
-----
$ 5.5
=====
Other current liabilities................................... $ 6.2
=====
Other noncurrent liabilities
Surplus lease space....................................... $ 2.3
Product warranty (see note above)......................... $ 2.2
Other..................................................... $ 0.7
-----
$ 5.2
=====
Unrealized loss on securities available for sale............ $ 1.8
=====
</TABLE>
(3) Adjustment made to deferred tax assets associated with certain of the above
liabilities and residing in JHIL and certain subsidiaries which will not
form part of the Transferred Businesses amounting to $60.3 million.
(4) Reflects properties to be retained by JHIL or its non-transferring
subsidiaries and leased to the Company with a net book value of $26.2
million. The properties concerned comprise:
<TABLE>
<CAPTION>
NET
BOOK VALUE
$ MILLIONS
----------
<S> <C>
Fiber Cement Australia...................................... $19.6
Fiber Cement New Zealand.................................... 6.6
-----
$26.2
=====
</TABLE>
(5) Reflects the removal of employee loans related to executive share purchase
plan which will be retained by JHIL and will not transfer to or be assumed
by the Company.
(6) For accounting purposes, the retention by JHIL and its non-transferring
subsidiaries of the Retained Assets and Liabilities as set forth in
adjustments (1) to (5) above is recorded as a deemed contribution by JHIL to
the Company of $211.9 million.
27
<PAGE> 30
(7) Reflects adjustments which are required to facilitate the Debt Financing and
the related deemed dividend. The Finance Subsidiary will issue approximately
$225 million aggregate principal amount of Notes and arrange a Bank
Facility, including a $115 million term facility and a $80 million revolving
credit facility. At the time of the Offerings, the Company does not expect
to have drawn down the revolving credit facility. The Notes will be issued
with a mix of maturities ranging from 6 to 15 years. The Pro Forma
Consolidated Balance Sheet reflects the indebtedness under the Bank Facility
and the Notes of $340 million.
(8) The total shareholders' equity disclosed in the Unaudited Pro Forma
Consolidated Balance Sheet gives accounting effect to the adjustments noted
in (1) to (7) above as if they occurred on June 30, 1998. Total equity at
the date of the Offerings may differ significantly from that disclosed in
the Unaudited Pro Forma Consolidated Balance Sheet as a result of movements
in foreign exchange rates that impact the balance of the foreign currency
translation adjustment account, earnings, capital expenditure and other cash
flows impacting cash balances in the period from June 30, 1998 to the date
of the Offerings.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The Unaudited Pro Forma Consolidated Statements of Income for the fiscal
year ended March 31, 1998 and the three months ended June 30, 1998 give
accounting effect to the following transactions that affect the James Hardie
Businesses' historical financials as if they occurred on April 1, 1997 and April
1, 1998 respectively: (1) the transfer of the Transferred Businesses to the
Company and the retention of the Retained Assets and Liabilities by JHIL,
including any related income and expenses, (2) the completion of the Debt
Financing, and (3) certain tax consequences of the Reorganization.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1998
----------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS PRO FORMA PRO FORMA PRO FORMA
--------------------- WITHOUT ADJUSTMENT WITH
JAMES HARDIE JHIL DEBT INTERCOMPANY INTERCOMPANY INTERCOMPANY
BUSINESSES RETAINED FINANCING TAX BENEFIT TAX BENEFIT TAX BENEFIT
------------ -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 822.3 -- -- $ 822.3 -- $ 822.3
Cost of goods sold......... (592.3) $ (4.2)(1) -- (596.5) -- (596.5)
------- ------- -------
Gross profit............... 230.0 225.8 225.8
Selling, general and
administrative
expenses................. (142.7) -- -- (142.7) -- (142.7)(10)
Restructuring and other
operating expenses....... (5.1) -- -- (5.1) -- (5.1)
------- ------- -------
Operating profit........... 82.2 78.0 78.0
Interest expense........... (37.6) 37.6(2) $(22.9)(3) (22.9) -- (22.9)
Interest expense -- related
parties.................. (11.3) 11.3(2) -- -- -- --
Interest income............ 28.3 (28.3)(4) -- -- -- --
Equity earnings -- RCI..... 6.2 (6.2)(5) -- -- -- --
Other nonoperating
expenses, net............ (12.1) 11.9(6) -- (0.2) -- (0.2)
------- ------- -------
Income (loss) from
continuing operations
before income tax........ 55.7 -- -- 54.9 -- 54.9
Income tax (expense)
benefit.................. (25.0) (6.7)(7) 4.9(8) (26.8) $16.0(9) (10.8)
------- ------- -------
Income from continuing
operations............... $ 30.7 $ 28.1 $ 44.1
======= ======= =======
Pro forma earnings per
share.................... $ $
======= =======
</TABLE>
28
<PAGE> 31
- ---------------
(1) Reflects the difference between depreciation historically incurred by JHIL
on certain properties that it will retain in the Reorganization, and the
rental expense that the Company will incur to lease such properties from
JHIL. The adjustment is comprised of:
<TABLE>
<CAPTION>
$ MILLIONS
----------
<S> <C>
Depreciation on retained property........................... $ 0.9
Additional rental expense................................... (5.1)
-----
$(4.2)
=====
</TABLE>
The rental expense assumed by the Company for purposes of the Pro Forma
Consolidated Statement of Income is based on an assessment of the fair market
rental for the properties retained by JHIL and the terms of the leases the
Company will enter into with JHIL.
(2) Reflects the elimination of $37.6 million in interest expense relating to
the existing debt facilities of the James Hardie Businesses which will be
retained by JHIL and the elimination of $11.3 million in interest expense to
related parties which relates to RCI Corporation sold in fiscal year 1998.
(3) Pursuant to the Debt Financing, the Finance Subsidiary will issue
approximately $225 million aggregate principal amount of Notes and will
arrange a Bank Facility consisting of $115 million term loan and an $80
million revolving credit facility. At the time of the Offerings, the Company
does not expect to have drawn down on the revolving credit facility. The
Notes will be issued with a mix of maturities ranging from 6 to 15 years.
The blended interest rate on the Notes and the term loan is estimated by the
Company to be 6.7% or $22.9 million assuming outstanding indebtedness of
$340 million for the entire year ended March 31, 1998. The $340 million
payment represents the settlement of liabilities to JHIL which arise in
connection with the Reorganization. The effect on unaudited pro forma income
for the year ended March 31, 1998 of each 1/8% change in the blended
interest rate on the Notes and the term loan would be $0.4 million.
(4) Reflects the elimination of interest income earned on cash and cash
equivalents held by the James Hardie Businesses during fiscal year 1998
which are to be retained by JHIL.
(5) Reflects equity earnings of RCI Corporation sold in fiscal year 1998.
(6) The amount of $11.9 million primarily reflects the elimination of a $12.2
million accrual for losses relating to guarantees and other expenses
associated with the settlement of litigation relating to the 1987 Firmandale
transaction. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Ongoing obligations associated with
the Firmandale litigation will be retained by JHIL and will not be
transferred to or assumed by the Company. The remaining $0.3 million
reduction reflects the net expenses of previous tax franking credit
structures utilized by JHIL and dividend income, comprised of:
<TABLE>
<CAPTION>
$ MILLIONS
----------
<S> <C>
Tax franking credit......................................... $ 0.2
Dividends received.......................................... (0.5)
-----
$(0.3)
=====
</TABLE>
(7) Reflects the impact of additional taxes resulting from the following
adjustments referred to above, as follows:
<TABLE>
<CAPTION>
APPLICABLE
GROSS INCOME TAX
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
Depreciation on retained property........................... $ 0.9 $ --
Rental expense.............................................. (5.1) 1.8
Interest expense............................................ 37.6 (14.0)
Interest income............................................. (28.3) 10.2
Tax franking credit......................................... 0.2 --
Dividends received.......................................... (0.5) --
Interest expense -- related parties......................... 11.3 (4.0)
Equity earnings of RCI Corporation.......................... (6.2) --
Firmandale expense.......................................... 12.2 (0.7)
------
$ (6.7)
======
</TABLE>
29
<PAGE> 32
(8) Assumes that the term loan has been drawn down in Australia and the Notes
have been issued in The Netherlands. The tax expense has been calculated as
follows:
<TABLE>
<CAPTION>
TAX
PRINCIPAL INTEREST DEDUCTION
($ MILLIONS) ($ MILLIONS) TAX RATE ($ MILLIONS)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Notes................................. $225.0 $16.0 15% $2.4
Term loan............................. 115.0 6.9 36% 2.5
----- ----
$22.9 $4.9
===== ====
</TABLE>
(9) Reflects the deferred tax (expense) benefit of the intercompany debt
arrangements of an estimated $877.0 million established in connection with
the Reorganization, with the Finance Subsidiary assumed to be advancing to
its subsidiaries in the United States, Australia and New Zealand, $747.0
million, $97.0 million and $33.0 million, respectively. The adjustment has
been calculated as follows assuming an interest rate of 7.5% on
intercompany debt:
<TABLE>
<CAPTION>
DEFERRED TAX
PRINCIPAL INTEREST TAX (EXPENSE) BENEFIT
($ MILLIONS) ($ MILLIONS) RATE ($ MILLIONS)
------------ ------------ ---- -----------------
<S> <C> <C> <C> <C>
Interest income
The Netherlands......................... $877.0 $65.8 15% $(9.8)
======
Interest expense
United States........................... 747.0 56.0 40% 22.4
Australia............................... 97.0 7.2 36% 2.6
New Zealand............................. 33.0 2.5 33% 0.8
------ -----
$877.0 $16.0
====== =====
</TABLE>
The actual amount of the intercompany debt at the date of the
Reorganization will vary from that noted above due to foreign exchange
movements and other movements on intercompany account balances.
The tax impact of the Debt Financing represents certain tax benefits that
the Company expects to realize as a result of the new intercompany debt
financing between the Finance Subsidiary and James Hardie's U.S.
subsidiary. In calculating this amount, the following income tax rates have
been assumed:
<TABLE>
<S> <C>
United States (anticipated federal and state taxes)......... 40%
Australia................................................... 36%
New Zealand................................................. 33%
The Netherlands (Financial Risk Reserve Regime)............. 15%
</TABLE>
This calculation assumes that current tax laws of all relevant
jurisdictions were in effect during fiscal year 1998, and that any tax
rulings which relevant companies have obtained in connection with the
Reorganization were also applicable and in effect during such year.
The calculation further assumes that interest payable by the U.S.
subsidiary to the Finance Subsidiary will be taxed in The Netherlands at an
effective rate of 15% pursuant to a ruling issued by the Dutch tax
authorities applicable until 2008 based on certain conditions, including
that all of the group's treasury activities are conducted exclusively from
The Netherlands.
The calculation also assumes that the intercompany debt was in place
throughout fiscal year 1998, and further assumes that (i) interest payments
were fully deductible by the U.S. subsidiary in that year, and (ii) that
such payments were not subject to U.S. withholding tax pursuant to the
US-NL Treaty.
Interest paid by the U.S. subsidiary to the Finance Subsidiary should be
currently deductible for U.S. tax purposes in any year provided that such
interest is actually paid in that year and provided that the U.S.
subsidiary has sufficient earnings to avoid limitations on the
deductibility of interest resulting from the application of the U.S.
"earnings stripping" rules. The Company does not anticipate that the U.S.
subsidiary will make interest payments with respect to the related party
debt during fiscal year 1999 or fiscal year 2000. Accordingly, no current
U.S. tax deduction will be available for such years, although the
associated tax benefit will be treated as realized currently for financial
accounting purposes as the Company expects to ultimately realize the tax
benefit from such years in the future.
Interest paid by the U.S. subsidiary to the Finance Subsidiary would likely
not be subject to the US-NL Treaty and would be subject to a 30% U.S.
withholding tax in any year unless, among other conditions of eligibility
for benefits, the aggregate number of shares of the Common Stock traded on
the applicable exchange during the previous taxable
30
<PAGE> 33
year is at least 6% of the average number of shares outstanding during that
previous taxable year, in which case 0% withholding tax would apply under
the US-NL Treaty. See "Risk Factors -- Tax Risks on Intercompany Interest
Payments."
Deductions in Australia and New Zealand for interest paid to the Finance
Subsidiary are subject to thin capitalization rules, which disallow
interest on related party loans in excess of a prescribed multiple of the
equity of the borrower. Withholding tax in Australia and New Zealand of 10%
on interest paid to the Finance Subsidiary will be available as a credit
against Dutch tax payable by the Finance Subsidiary, subject to certain
limitations.
(10) Selling, general and administrative expenses include the current head
office expenses of the James Hardie Businesses. Management estimates that
head office expenses applicable to the Company will not vary significantly
from the current level of head office expenses incurred by the James Hardie
Businesses.
31
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30 1998
------------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS PRO FORMA PRO FORMA
----------------------- WITHOUT PRO FORMA WITH
JAMES HARDIE JHIL DEBT INTERCOMPANY INTERCOMPANY INTERCOMPANY
BUSINESSES RETAINED FINANCING TAX BENEFIT TAX BENEFIT TAX BENEFIT
------------ -------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 206.2 -- -- $ 206.2 -- $ 206.2
Cost of goods sold..................... (147.7) $(0.9)(1) -- (148.6) -- (148.6)
------- -------
Gross profit........................... 58.5 57.6 57.6
Selling, general and administrative
expenses............................. (35.1) -- -- (35.1) -- (35.1)
Restructuring and other operating
expenses............................. (0.5) -- -- (0.5) -- (0.5)
------- ------- -------
Operating profit....................... 22.9 22.0 22.0
Interest expense....................... (7.3) 7.3(2) $(5.7)(3) (5.7) -- (5.7)
Interest income........................ 3.4 (3.4)(4) -- -- -- --
------- ------- -------
Income (loss) from continuing
operations before income tax......... 19.0 -- -- 16.3 -- 16.3
Income tax (expense) benefit........... (6.6) (1.2)(5) 1.2(6) (6.6) $ 4.0(7) (2.6)
------- ------- -------
Income from continuing operations...... $ 12.4 $ 9.7 $ 13.7
======= ======= =======
Pro forma earnings per share........... $ $
======= =======
</TABLE>
- ---------------
(1) Reflects the difference between depreciation on buildings historically
incurred by JHIL on certain properties that it will retain in the
Reorganization, and the rental expense that the Company will incur to lease
such properties from JHIL. The adjustment is comprised of:
<TABLE>
<CAPTION>
$ MILLIONS
----------
<S> <C>
Depreciation on retained property........................... $ 0.2
Additional rental expense................................... (1.1)
-----
$(0.9)
=====
</TABLE>
The rental expense assumed by the Company for purposes of the Pro Forma
Consolidated Statement of Income is based on an assessment of the fair market
rental for the properties retained by JHIL and the terms of the leases the
Company will enter into with JHIL.
(2) Reflects the elimination of $7.3 million interest expense relating to the
existing debt facilities of the James Hardie Businesses which will be
retained by JHIL.
(3) Pursuant to the Debt Financing, the Finance Subsidiary will issue
approximately $225 million of aggregate principal amount Notes and will
arrange a Bank Facility, consisting of $115 million term loan and an $80
million revolving credit facility. At the time of the Offerings, the Company
does not expect to have drawn down on the revolving credit facility. The
Notes will be issued with a mix of maturities ranging from 6 to 15 years.
The blended interest rate on the Notes and the term loan is estimated by the
Company to be 6.7% or $5.7 million assuming outstanding indebtedness of $340
million for the whole of the three months ended June 30, 1998. The effect on
income of each 1/8% change in the blended interest rate on the Notes and the
term loan for a three month period would be $0.1 million.
(4) Reflects the elimination of interest income earned on cash and cash
equivalents held by the James Hardie Businesses which are to be retained by
JHIL.
32
<PAGE> 35
(5) Reflects the impact of additional taxes resulting from the following
adjustments referred to above, as follows:
<TABLE>
<CAPTION>
APPLICABLE
GROSS INCOME TAX
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
Depreciation on retained property........................... $ 0.2 $ --
Rental expense.............................................. (0.8) 0.3
Interest expense............................................ 7.3 (2.7)
Interest income............................................. (3.4) 1.2
-----
$(1.2)
=====
</TABLE>
(6) Assumes that the term loan has been drawn down in Australia and the Notes
have been issued in The Netherlands. The tax expense has been calculated as
follows:
<TABLE>
<CAPTION>
TAX
PRINCIPAL INTEREST DEDUCTION
($ MILLIONS) ($ MILLIONS) TAX RATE ($ MILLIONS)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Notes................................. $225.0 $4.0 15% $0.6
Term loan............................. 115.0 1.7 36% 0.6
---- ----
$5.7 $1.2
==== ====
</TABLE>
(7) Reflects the deferred tax (expense) benefit of the intercompany debt
arrangements of $877.0 million created in connection with the
Reorganization, with the Finance Subsidiary assumed to be advancing to its
subsidiaries in the United States, Australia and New Zealand, $747.0
million, $97.0 million and $33.0 million, respectively. The adjustment has
been calculated as follows assuming an interest rate of 7.5% on intercompany
debt:
<TABLE>
<CAPTION>
DEFERRED TAX
PRINCIPAL INTEREST TAX (EXPENSE) BENEFIT
($ MILLIONS) ($ MILLIONS) RATE ($ MILLIONS)
------------ ------------ ---- -----------------
<S> <C> <C> <C> <C>
Interest income
The Netherlands......................... $877.0 $16.4 15% $(2.4)
======
Interest expense
United States........................... 747.0 13.9 40% 5.6
Australia............................... 97.0 1.8 36% 0.6
New Zealand............................. 33.0 0.6 33% 0.2
------ -----
$877.0 $ 4.0
====== =====
</TABLE>
The actual amount of the intercompany debt at the date of the Reorganization
will vary from that noted above due to foreign exchange movements and other
movements on intercompany account balances.
The tax impact of the Debt Financing represents certain tax benefits that
the Company expects to realize as a result of the new intercompany debt
financing between the Finance Subsidiary and the Company's U.S. subsidiary.
In calculating this amount, the following income tax rates have been
assumed:
<TABLE>
<S> <C>
United States (anticipated federal and state taxes)......... 40%
Australia................................................... 36%
New Zealand................................................. 33%
The Netherlands (Financial Risk Reserve Regime)............. 15%
</TABLE>
This calculation assumes that current tax laws of all relevant jurisdictions
were in effect during the three months ended June 30, 1998, and that any tax
rulings which relevant companies have obtained in connection with the
Reorganization were also applicable and in effect during such quarter.
The calculation further assumes that interest payable by the U.S. subsidiary
to the Finance Subsidiary will be taxed in The Netherlands at a 15% rate
pursuant to a ruling issued by the Dutch tax authorities applicable until
2008 based on certain conditions, including that all of the group's treasury
activities are conducted exclusively from The Netherlands.
The calculation also assumes that the intercompany debt was in place
throughout the three months ended June 30, 1998, and further assumes that
(i) interest payments were fully deductible by the U.S. subsidiary in fiscal
year 1999, and (ii) that such payments were not subject to U.S. withholding
tax pursuant to the US-NL Treaty.
33
<PAGE> 36
Interest paid by the U.S. subsidiary to the Finance Subsidiary should be
currently deductible for U.S. tax purposes in any year provided that such
interest is actually paid in that year and provided that the U.S. subsidiary
has sufficient earnings to avoid limitations on the deductibility of
interest resulting from the application of the U.S. "earnings stripping"
rules. The Company does not anticipate that the U.S. subsidiary will make
interest payments with respect to the related party debt during fiscal year
1999 or fiscal year 2000. Accordingly, no current U.S. tax deduction will be
available for such years, although the associated tax benefit will be
treated as realized currently for financial accounting purposes as the
Company expects to ultimately realize the tax benefit from such years in the
future.
Interest paid by the U.S. subsidiary to the Finance Subsidiary would likely
not be subject to the US-NL Treaty and would be subject to a 30% U.S.
withholding tax in any year unless, among other conditions of eligibility
for benefits, the aggregate number of shares of Common Stock traded on the
applicable stock exchange during the previous taxable year is at least 6% of
the average number of shares outstanding during that previous taxable year,
in which case, 0% withholding tax would apply under the US-NL Treaty. See
"Risk Factors -- Tax Risks on Intercompany Interest Payments."
Deductions in Australia and New Zealand for interest paid to the Finance
Subsidiary are subject to thin capitalization rules, which disallow interest
on related party loans in excess of a prescribed multiple of the equity of
the borrower. Withholding tax in Australia and New Zealand of 10% on
interest paid to the Finance Subsidiary will be available as a credit
against Dutch tax payable by the Finance Subsidiary, subject to certain
limitations.
(8) Selling, general and administrative expenses include the current head office
expenses of the James Hardie Businesses. Management estimates that head
office expenses applicable to the Company would not vary significantly from
the current level of head office expenses incurred by the James Hardie
Businesses.
34
<PAGE> 37
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for the
periods indicated and is qualified by reference to, and should be read in
conjunction with, the Consolidated Financial Statements and the related notes
thereto, the "Unaudited Pro Forma Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein. The historical financial data presented below
reflects the historical data of the James Hardie Businesses, which includes the
Transferred Businesses prior to their transfer to the Company and includes the
Retained Assets and Liabilities which will not be transferred to the Company in
the Reorganization. See "The Reorganization." Consequently, such historical
financial information is not necessarily indicative of future results of the
Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED MARCH 31, JUNE 30,
-------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1997 1998
----------- ----------- ------- ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT VOLUME AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net sales
U.S. Fiber Cement(1)............... $ 34.3 $ 47.5 $ 100.7 $ 148.7 $ 181.1 $ 43.1 $ 58.8
Gypsum(2).......................... 58.4 73.8 77.0 103.8 200.5 48.4 59.9
Australia/New Zealand Fiber
Cement........................... 205.5 270.4 264.6 262.1 211.6 61.3 43.2
Building Systems................... 60.3 104.2 118.2 133.8 147.9 43.2 27.9
Other(3)........................... 7.4 17.1 64.4 65.0 81.2 22.2 16.4
------- ------- ------- ------- -------- ------- -------
Total net sales...................... 365.9 513.0 624.9 713.4 822.3 218.2 206.2
Cost of goods sold................... (242.4) (341.0) (429.9) (508.7) (592.3) (153.5) (147.7)
------- ------- ------- ------- -------- ------- -------
Gross profit......................... 123.5 172.0 195.0 204.7 230.0 64.7 58.5
Selling, general and
administrative(4).................. (99.8) (97.7) (134.1) (150.3) (142.7) (40.9) (35.1)
Restructuring and other operating
expenses(5)........................ -- -- -- (38.8) (5.1) -- (0.5)
------- ------- ------- ------- -------- ------- -------
Operating profit..................... 23.7 74.3 60.9 15.6 82.2 23.8 22.9
Interest expense(6).................. (22.7) (32.8) (48.7) (39.6) (37.6) (7.0) (7.3)
Interest expense - related
parties(6)......................... (13.2) (16.3) (17.3) (16.9) (11.3) (5.4) --
Interest income(6)................... 10.5 20.7 33.1 30.8 28.3 6.3 3.4
Equity income - RCI(7)............... 6.8 11.3 7.9 9.2 6.2 2.9 --
Other nonoperating expenses,
net(8)............................. 0.2 (13.7) (15.0) (14.6) (12.1) (2.1) --
------- ------- ------- ------- -------- ------- -------
Income (loss) from continuing
operations before income tax....... 5.3 43.5 20.9 (15.5) 55.7 18.5 19.0
Income tax (expense) benefit(6)...... 8.8 (4.4) (2.8) 3.0 (25.0) (5.6) (6.6)
------- ------- ------- ------- -------- ------- -------
Income (loss) from continuing
operations(9)...................... $ 14.1 $ 39.1 $ 18.1 $ (12.5) $ 30.7 $ 12.9 $ 12.4
======= ======= ======= ======= ======== ======= =======
CONSOLIDATED CASH FLOW INFORMATION:
Cash flows provided by (used in)
operating activities............... -- -- $ 80.2 $ 82.8 $ 109.1 $ 19.8 $ (44.5)(13)
Cash flows provided by (used in)
investing activities............... -- -- (39.5) 118.4 (46.7) (24.9) (46.1)
Cash flows provided by (used in)
financing activities............... -- -- (87.9) 14.6 (63.9) (57.5) (35.5)
OTHER DATA:
Depreciation and amortization(10).... $ 13.5 $ 20.8 $ 28.0 $ 35.6 $ 38.5 $ 11.2 $ 9.6
Adjusted EBITDA(11).................. 37.2 95.1 88.9 86.0 120.7 35.0 32.5
Capital expenditures(10)............. 71.4 47.1 64.7 172.1 154.8 35.8 30.9
Research and development(4).......... 7.9 11.4 12.1 15.0 18.0 4.5 3.5
Volume (mmsf)
U.S. Fiber Cement.................. 68.7 96.5 220.0 317.0 416.1 97.5 139.3
Gypsum............................. 603.2 642.0 680.3 862.3 1,554.5 361.2 448.3
Australia/New Zealand Fiber
Cement(12)....................... 338.2 386.5 347.5 318.4 299.2 77.6 71.9
Average sales price per unit (per
msf)
U.S. Fiber Cement.................. $ 499 $ 492 $ 458 $ 469 $ 435 $ 442 $ 422
Gypsum............................. 97 115 113 120 129 134 134
Australia/New Zealand Fiber
Cement(12)....................... 630 700 684 744 643 728 553
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
----------------------------------- -----------
1996 1997 1998 1998
----------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net current assets................................ $ 393.2 $ 425.3 $ 354.8 $ 270.7
Total assets...................................... 1,366.1 1,534.0 1,241.7 1,077.0
Long-term debt.................................... 416.5 470.2 496.3 481.9
Long-term related party borrowings................ 202.8 202.8 -- --
Equity............................................ 460.4 544.8 465.8 419.8
</TABLE>
- ---------------
(1) In January 1996, the first production line at the Plant City, Florida fiber
cement plant was expanded and a second line was commissioned in March 1996.
During fiscal year 1997, a third production line was commissioned at Plant
City, Florida, a new fiber cement plant was constructed and the first line
commissioned in Cleburne, Texas, and the capacity of the Fontana,
California fiber cement plant was expanded.
(2) The capacity of the Las Vegas, Nevada gypsum plant was expanded in fiscal
years 1995 and 1996. The Nashville, Arkansas gypsum plant was acquired in
fiscal year 1997. The Las Vegas, Nevada gypsum plant and the Seattle,
Washington gypsum plant were further expanded in fiscal year 1998.
(3) Includes the fiber cement sales in the Philippines and window sales in
Australia.
(4) Includes research and development expenses.
(5) Includes (i) for fiscal year 1997, asset write-downs, environmental costs
and employee termination costs of $17.8 million associated with the
restructuring and upgrade of the fiber cement business in Australia, and a
windows goodwill write-off of $21.0 million, and (ii) for fiscal year 1998,
$5.1 million of employee termination costs associated with the
restructuring and upgrade of the fiber cement business in Australia.
(6) Interest and income tax expenses are the historical interest and income
taxes applicable to the James Hardie Businesses prior to the
Reorganization. As a result of the Reorganization, the interest and income
tax expenses of the Company will change. See "Unaudited Pro Forma
Consolidated Financial Data."
(7) Reflects equity earnings of RCI Corporation sold in fiscal year 1998.
(8) Consists primarily of losses of $17.9 million, $14.7 million and $12.2
million in fiscal years 1996, 1997 and 1998, respectively, incurred by JHIL
under a transaction entered into with Firmandale which is part of the
Retained Assets and Liabilities not being transferred to the Company in the
Reorganization.
(9) Constitutes net income (loss) before income (loss) from discontinued
operations and gains (losses) on the disposal of discontinued operations.
(10) Information for depreciation and amortization and capital expenditures are
for continuing businesses only.
(11) Represents earnings from continuing operations before interest income,
interest expense, income taxes, other nonoperating expenses, net,
depreciation and amortization charges, and certain other property and
goodwill impairment charges as follows:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------ ---------------
1994 1995 1996 1997 1998 1997 1998
ADJUSTED EBITDA ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations...... $ 14.1 $ 39.1 $ 18.1 $(12.5) $ 30.7 $ 12.9 $ 12.4
Income tax expense (benefit)........... (8.8) 4.4 2.8 (3.0) 25.0 5.6 6.6
Interest income........................ (10.5) (20.7) (33.1) (30.8) (28.3) (6.3) (3.4)
Interest expense....................... 22.7 32.8 48.7 39.6 37.6 7.0 7.3
Interest expense - related parties..... 13.2 16.3 17.3 16.9 11.3 5.4 --
Equity income -- RCI................... (6.8) (11.3) (7.9) (9.2) (6.2) (2.9) --
Other nonoperating expenses, net....... (0.2) 13.7 15.0 14.6 12.1 2.1 --
Depreciation and amortization.......... 13.5 20.8 28.0 35.6 38.5 11.2 9.6
Impairment of property................. -- -- -- 2.4 -- -- --
Goodwill write-off..................... -- -- -- 21.0 -- -- --
Obsolete equipment write-down.......... -- -- -- 11.4 -- -- --
------ ------ ------ ------ ------ ------ ------
Adjusted EBITDA............... $ 37.2 $ 95.1 $ 88.9 $ 86.0 $120.7 $ 35.0 $ 32.5
====== ====== ====== ====== ====== ====== ======
</TABLE>
36
<PAGE> 39
Adjusted EBITDA is not a measure of financial performance under GAAP and
should not be considered an alternative to, or more meaningful than, income
from operations, net income or cash flows as defined by GAAP or as a
measure of the James Hardie Businesses profitability or liquidity. All
registrants do not calculate Adjusted EBITDA in the same manner and,
accordingly, Adjusted EBITDA may not be comparable with other registrants.
The Company has included information concerning Adjusted EBITDA herein
because it believes that such data is commonly used by certain investors to
evaluate the ability of a company's earnings from its core business
operations to satisfy its debt, capital expenditure and working capital
requirements. To permit evaluation of this data on a consistent basis from
period to period, EBITDA has been adjusted for noncash charges such as
goodwill and asset impairment charges, as well as nonoperating income and
expense items. See the Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for further information to assist in identifying and evaluating trends in
Adjusted EBITDA.
(12) Australia/New Zealand Fiber Cement includes all fiber cement produced or
sold worldwide, excluding the United States and the Philippines, and also
includes sales from Building Systems in New Zealand.
(13) Includes a cash payment of $57.4 million in connection with the settlement
of the Firmandale litigation.
37
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used herein, the term "the Company" refers to the James Hardie
Businesses which were owned by JHIL during the periods presented. The historical
financial results presented below are those of the James Hardie Businesses and
include the Retained Assets and Liabilities and the related income and expenses.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the audited Consolidated
Financial Statements of the James Hardie Businesses and the related notes
thereto and "Unaudited Pro Forma Consolidated Financial Data" included elsewhere
in this Prospectus.
OVERVIEW
The Company is the largest manufacturer of fiber cement products and
systems for internal and external building applications in the United States,
Australia and New Zealand and is the fourth largest manufacturer of gypsum
wallboard in the United States. The Company's operations are organized into the
following five segments: (1) U.S. Fiber Cement, which manufactures and sells
fiber cement products in the United States; (2) Gypsum, which manufactures and
sells gypsum wallboard products in the United States; (3) Australia/ New Zealand
Fiber Cement, which manufactures and sells fiber cement products in Australia,
New Zealand and Asian export markets (other than the Philippines) and Building
Systems in New Zealand; (4) Building Systems, which manufactures, sells, rents
and installs modular relocatable buildings in Australia, and also manufactures
and sells insulated panel systems in the Australian commercial market; and (5)
Other, which includes the Company's research and development center in Sydney,
Australia; the Company's Philippines fiber cement operations; and manufacture
and sales of windows in Australia. The term "U.S. Operations" refers to the
Company's U.S. Fiber Cement and Gypsum segments.
Sales are generally invoiced in the currency of the business unit making
the sale and are generally on 30 to 60 day credit terms. Sales are recognized
when goods have been dispatched to a customer following a sales order and the
associated risks of ownership have passed to the customer. Cost of sales
comprises manufacturing costs including raw materials and supplies, direct and
indirect labor costs, depreciation of production facilities, production
maintenance, property taxes, insurance and warranty costs. Selling, general and
administrative expenses primarily consist of officer and employee compensation
and related benefits, advertising and promotion costs, depreciation of
non-production fixed assets, warehouse expenses, administrative and information
systems costs, amortization of goodwill and research and development expenses.
The Company's gross profit margin in each of its segments is primarily
impacted by pricing levels, sales volumes and operating efficiencies. Since the
start of fiscal year 1997, sales prices for fiber cement have been declining in
the United States and, to a greater degree, in the Australian and New Zealand
markets due to increasing competition. The overall siding market in the United
States is operating with over-capacity. The Company's strategy is to maintain a
competitive advantage through continued development of differentiated products
and improved process technologies. Historically, in U.S. Fiber Cement, increased
sales volumes and improved operating efficiencies have more than offset the
effect of decreases in prices. Pricing declines in Australia/New Zealand Fiber
Cement have not historically been offset by increased sales volume due to
competition and the maturity of the market. Because of the maturity of the
Australian and New Zealand markets, the Company believes that prices in those
markets may continue to decline and that sales volume increases may not be
significant or may decline. See "Risk Factors -- Competition and Pricing." There
can be no assurance that there will not be any future declines in sales volume
or prices of the Company's fiber cement products.
In recent years, gypsum prices and sales volume have increased, resulting
in a higher gross profit margin for the Company's Gypsum segment. Although
gypsum prices have increased overall for the periods presented, gypsum pricing
has historically been cyclical, and several of the Company's competitors have
announced plans to add additional capacity over the next two years. Thus, there
can be no assurance that prices will not decline. See "Risk
Factors -- Competition and Pricing." Management believes that any future gypsum
price decreases may be offset, at least in part, by increased volumes available
for sale as a result of the
38
<PAGE> 41
Company's increased capacity and cost advantages compared to other gypsum
manufacturers. In addition, the Company's recently signed gypsum paper supply
agreement with Republic is expected to substantially reduce the Company's gypsum
paperboard costs beginning in the latter part of fiscal year 2000.
The Company maintains significant operations in foreign countries and, as a
result, is exposed to changes in exchange rates which affect its financial
position, results of operations and cash flow. For the three months ended June
30, 1998, the following currencies comprised the Company's net sales, cost of
goods sold, expenses and liabilities:
<TABLE>
<CAPTION>
USD AUD NZD OTHER
--- --- --- -----
<S> <C> <C> <C> <C>
Net sales.............................................. 58% 36% 5% 1%
Cost of goods sold..................................... 56% 37% 5% 2%
Expenses............................................... 34% 55% 6% 5%
Liabilities (excluding borrowings)..................... 50% 44% 3% 3%
</TABLE>
Management anticipates that sales outside the United States will continue
to be significant. The Company's results of operations, cash flows and financial
position were significantly exposed to the depreciation of the Australian dollar
against the U.S. dollar that occurred in fiscal year 1998. On translation into
U.S. dollars, the Company's consolidated financial position at March 31, 1998
consequently reported a translation loss of $89.6 million. Furthermore, the
results of operations and cash flows are impacted by the translation of foreign
earnings into U.S. dollars. Historically, the Company has hedged, from an
Australian dollar perspective, its net investment in its operations in the
United States and in New Zealand. Following the Reorganization, the Company
intends to hedge its investment in its operations outside of the United States
against the U.S. dollar. See "Risk Factors -- Foreign Exchange Risks" and Note
17 to the Notes to the Consolidated Financial Statements. The principal exchange
rate hedging instrument employed by the Company is a standard market forward
exchange contract. Under such contracts, the Company is obligated to buy or sell
a specified foreign currency in exchange for a specified local currency. Any
extension of these forward exchange contracts is undertaken on a market to
market basis with the appropriate cash settlement taking place at the time of
the extension. The Company does not trade any exchange rate hedging instruments
but holds them until maturity.
The recent economic volatility in Asia has had a negative effect on the
Australian and New Zealand economies in general and the Company is beginning to
recognize these effects on its operations. For example, until the commissioning
of the Philippines manufacturing facility later this year, the Company is
supplying that market by exporting products manufactured in Australia and New
Zealand. For the three months ended June 30, 1998, sales of fiber cement
products in the Philippines declined by 41.9% in local currency terms from the
same period in the previous year. This decline is due to the contraction of the
Philippines building and construction market which is likely a result of Asian
economic conditions. Continued contraction in this market will result in a
slower start-up and potentially lower than projected capacity utilization for
the new Philippines manufacturing facility. The Company's Building Systems
business has also been negatively impacted by the Asian economic crisis.
Activity in the Australian mining and resources industry, a market serviced by
the Building Systems business, has declined due to concerns about falling demand
from Asia for minerals and other natural resources and a general decrease in
commodity prices which has deterred investment in Australian mining and resource
projects. See "Risk Factors -- Recent Volatility in Asian Economies and
Financial and Currency Markets."
In fiscal year 1997, the Company commenced a major restructuring and
upgrade project of its Australian fiber cement manufacturing facilities. This
project involves the closure of the fiber cement manufacturing facility in
Brooklyn, Australia and the upgrade and modernization of three of the four
Australian manufacturing plants. The upgrade program includes the automation of
product finishing processes and is aimed at reducing direct costs, increasing
production yields and improving product quality. Restructuring costs associated
with the program, including employee termination expenses and the write-down of
long lived assets, of $17.8 million and $5.1 million were incurred in fiscal
year 1997 and fiscal year 1998, respectively. Further employee termination costs
of approximately $4.3 million are expected to be incurred during fiscal year
1999.
39
<PAGE> 42
Discontinued Operations
During fiscal years 1997 and 1998, JHIL divested a number of businesses
which were not related to the core James Hardie Businesses, as set out below:
<TABLE>
<CAPTION>
FISCAL YEAR
BUSINESS DIVESTED DESCRIPTION
-------- ----------- -----------
<S> <C> <C>
Building Services........... 1997 Supplier of fire protection, security monitoring, building
automation and mechanical services to the commercial and
industrial building sector in Australia and New Zealand
Irrigation.................. 1997 Irrigation products businesses based in the United States,
Australia and Europe
Bathroom Products........... 1997 Vitreous china, tapware and hot water systems businesses
in Australia and New Zealand
Pipelines................... 1998 Plastic pipeline and fittings business in Australia, New
Zealand, Singapore and Malaysia
</TABLE>
In the preparation of the historical Consolidated Financial Statements and
the Pro Forma Financial Statements, these businesses have been treated as
discontinued operations. The total cash proceeds from these divestitures were
$371.4 million.
The Reorganization
James Hardie was formed in connection with the Reorganization that was
announced by JHIL in July 1998. The Reorganization seeks to address the
increasing structural imbalance and resulting operational, financial and
commercial issues created by the predominance of JHIL's U.S. operations and the
location of corporate management and JHIL's shareholder base in Australia. The
divestiture program, the growth in U.S. demand for the Company's fiber cement
products and the investment in additional fiber cement and gypsum manufacturing
capacity in the United States have resulted in an increasing proportion of total
net sales and operating profit being generated from the United States. The U.S.
Operations increased from 28.4% of total net sales in fiscal year 1996 to 46.4%
in fiscal year 1998. Operating profit from U.S. Operations increased as a
percentage of total operating profit (before expenses in connection with the
Sydney-based research and development center and certain general corporate
costs) from 26.1% in fiscal year 1996 to 72.4% in fiscal year 1998.
The primary components of the Reorganization include the formation of James
Hardie; the transfer to the Company of the Transferred Businesses, which include
JHIL's fiber cement, gypsum, building systems and windows businesses and the
retention by JHIL of the Retained Assets and Liabilities; the Debt Financing;
the Offerings; and the relocation of certain senior executives and managers to
the Company's U.S. operational headquarters. See "The Reorganization."
As noted above, an element of the Reorganization is the Debt Financing. The
James Hardie Businesses were, on March 31, 1998, funded with a capital structure
comprised of $531.6 million of debt and with a cash balance of $286.2 million
(net of the bank overdraft and the Firmandale liability which was paid in April
1998). As a result of the Reorganization, it is anticipated that the Company
will be established with a more efficient capital structure, with a minimal
holding of cash reflecting working capital requirements and a lower net
effective interest rate. Interest income will be reduced significantly. Interest
expense will reflect the Debt Financing.
RESULTS OF OPERATIONS
In the fiscal years 1996 through 1998 and for the three months ended June
30, 1998, there was a significant increase in the net sales revenues and profits
generated from the Company's U.S. Operations. This increase is primarily due to
the growth in U.S. sales volume of the Company's fiber cement products,
principally siding; additional fiber cement manufacturing capacity and
improvements in manufacturing efficiencies as a result of $135 million of
capital investment during the fiscal years 1996 to 1998; and the availability of
additional gypsum capacity following the capital investment of $85.6 million,
primarily to
40
<PAGE> 43
expand plant capacity from 610 mmsf in fiscal year 1995 to 1,980 mmsf at the end
of fiscal year 1998, and the acquisition of the Nashville, Arkansas gypsum
facility in February 1997. Concurrently, increasing competition in both
Australia and New Zealand within the Australia/New Zealand Fiber Cement segment
has caused the Company's volumes and margins for this segment to decrease.
The following table sets forth selected financial and operating data for
the Company expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
------------------------------------------------------ ------------------------------------
1996 1997 1998 1997 1998
---------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales
U.S. Fiber Cement...... $ 100.7 16.1% $ 148.7 20.8% $ 181.1 22.0% $ 43.1 19.8% $ 58.8 28.5%
Gypsum................. 77.0 12.3 103.8 14.6 200.5 24.4 48.4 22.2 59.9 29.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
U.S. Operations.... 177.7 28.4 252.5 35.4 381.6 46.4 91.5 42.0 118.7 57.5
Australia/New Zealand
Fiber Cement......... 264.6 42.3 262.1 36.7 211.6 25.7 61.3 28.1 43.2 21.0
Building Systems....... 118.2 18.9 133.8 18.8 147.9 18.0 43.2 19.8 27.9 13.5
Other.................. 64.4 10.4 65.0 9.1 81.2 9.9 22.2 10.1 16.4 8.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total net sales.......... 624.9 100.0 713.4 100.0 822.3 100.0 218.2 100.0 206.2 100.0
Cost of goods sold....... (429.9) (68.8) (508.7) (71.3) (592.3) (72.0) (153.5) (70.3) (147.7) (71.6)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit............. 195.0 31.2 204.7 28.7 230.0 28.0 64.7 29.7 58.5 28.4
Selling, general and
administrative......... (134.1) (21.4) (150.3) (21.1) (142.7) (17.4) (40.9) (18.7) (35.1) (17.0)
Restructuring and other
expenses............... -- -- (38.8) (5.4) (5.1) (0.6) -- -- (0.5) (0.3)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating profit......... 60.9 9.8 15.6 2.2 82.2 10.0 23.8 11.0 22.9 11.1
Interest expense......... (48.7) (7.8) (39.6) (5.6) (37.6) (4.6) (7.0) (3.2) (7.3) (3.5)
Interest
expense -- related
parties................ (17.3) (2.7) (16.9) (2.3) (11.3) (1.4) (5.4) (2.5) -- --
Interest income.......... 33.1 5.3 30.8 4.3 28.3 3.4 6.3 2.9 3.4 1.6
Equity income -- RCI..... 7.9 1.2 9.2 1.2 6.2 0.7 2.9 1.3 -- --
Other nonoperating
expenses, net.......... (15.0) (2.4) (14.6) (2.0) (12.1) (1.4) (2.1) (0.9) -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
continuing operations
before income tax...... 20.9 3.4 (15.5) (2.2) 55.7 6.7 18.5 8.6 19.0 9.2
Income tax (expense)
benefit................ (2.8) (0.5) 3.0 0.4 (25.0) (3.0) (5.6) (2.6) (6.6) (3.2)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from
continuing
operations............. $ 18.1 2.9% $ (12.5) (1.8)% $ 30.7 3.7% $ 12.9 6.0% $ 12.4 6.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 ("FIRST QUARTER FISCAL 1999") COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997 ("FIRST QUARTER FISCAL 1998")
Total Net Sales. Total net sales decreased by $12.0 million or 5.5% from
$218.2 million in First Quarter Fiscal 1998 to $206.2 million in First Quarter
Fiscal 1999. Net sales from U.S. Operations increased by 29.7% with growth in
volume in both U.S. Fiber Cement and Gypsum, partially offset by decreases in
fiber cement prices. Offsetting the improved results from U.S. Operations was a
30.9% decrease in net sales from non-U.S. Operations, of which 15.6% was
attributable to lower sales and the remainder to the effect of changed foreign
exchange rates.
U.S. Fiber Cement Sales. U.S. Fiber Cement sales increased by $15.7
million or 36.4% from $43.1 million in First Quarter Fiscal 1998 to $58.8
million in First Quarter Fiscal 1999. The growth in sales was primarily due to a
41.8% increase in volume from 98 mmsf in First Quarter Fiscal 1998 to 139 mmsf
in First Quarter Fiscal 1999. This increase was primarily due to continued
penetration by the Company's fiber cement products against competing products,
primarily wood-based siding. The Tacoma, Washington plant,
41
<PAGE> 44
with 150 mmsf capacity, was commissioned during May 1998 and began commercial
production in June 1998. The increase in sales volume was partially offset by a
4.5% decrease in average product selling price from $442 to $422 per msf which
was a result of increased competition and over-capacity in most segments of the
siding industry.
Gypsum Sales. Gypsum sales increased $11.5 million or 23.8% from $48.4
million in First Quarter Fiscal 1998 to $59.9 million in First Quarter Fiscal
1999. The growth in sales was primarily due to a 24.2% increase in volume from
361 mmsf in First Quarter Fiscal 1998 to 448 mmsf in First Quarter Fiscal 1999,
mainly attributable to additional capacity at the Seattle, Washington and Las
Vegas, Nevada plants as a result of facility upgrades. Average sales prices were
0.3% lower in First Quarter Fiscal 1999, with sales price increases in the
Southeast and Southwest markets being offset by increased volumes and a price
decrease in the Northwest.
Australia/New Zealand Fiber Cement Sales. Australia/New Zealand Fiber
Cement sales decreased $18.1 million or 29.5% from $61.3 million in First
Quarter Fiscal 1998 to $43.2 million in First Quarter Fiscal 1999. In local
currency terms, the decline was 13.9%. The decrease in sales was due primarily
to a 7.7% decrease in sales volume from 78 mmsf in First Quarter Fiscal 1998 to
72 mmsf in First Quarter Fiscal 1999 and a 7.0% (in local currency terms)
reduction in average net selling prices caused by increased competition and
industry over-capacity. In Australia, the lower sales revenue was due primarily
to lower sales volumes and reduced average selling prices caused by increased
competition and industry over-capacity. In New Zealand, sales volumes and
pricing were negatively impacted by a reduction in residential construction
activity and an average 5% price reduction to counter increased import
competition. Additionally, in Australia, the fiber cement business experienced
severe and continuing problems commissioning new automated manufacturing
technology. Management anticipates that results in the second quarter of fiscal
year 1999 will also be affected by additional commissioning costs.
Building Systems Sales. Building Systems sales decreased by $15.3
million or 35.4% from $43.2 million in First Quarter Fiscal 1998 to $27.9
million in First Quarter Fiscal 1999. In local currency terms, the decline was
21.0%. This segment had a strong First Quarter Fiscal 1998, particularly due to
several large contracts for projects in the mining sector. This level of
activity did not continue in the First Quarter Fiscal 1999, primarily due to the
postponement of a number of mining projects in the wake of falling commodity
prices and the Asian financial crisis.
Other Sales. Sales by the Philippines operation and the windows
businesses decreased by $5.7 million or 26.5% from $21.5 million in First
Quarter Fiscal 1998 to $15.8 million in First Quarter Fiscal 1999. Sales by the
Company's Philippines operation (as part of a pre-production marketing campaign
using product primarily imported from Australia) fell by 41.9% in local currency
terms to $1.6 million due to the significant decrease in housing construction
and repair activity related to the region's economic conditions. Sales by the
windows operation decreased by $3.2 million or 18.4% from $17.4 million in First
Quarter Fiscal 1998 to $14.2 million in First Quarter Fiscal 1999. In local
currency terms, net sales increased by 0.4% primarily due to a 5% increase in
sales of wood windows in the value-added market segments, a product mix change
to higher value aluminum windows and an increase in general prices, which more
than offset a 0.8% decrease in sales volume of aluminum windows.
Gross Profit. Gross profit decreased by $6.2 million or 9.6% from $64.7
million in First Quarter Fiscal 1998 to $58.5 million in First Quarter Fiscal
1999. The Company's overall gross profit margin declined by 1.3 percentage
points from 29.7% in First Quarter Fiscal 1998 to 28.4% in First Quarter Fiscal
1999. U.S. Fiber Cement gross profit margin improved by 2.6 percentage points
with a 4.5% decline in selling prices more than offset by lowered manufacturing
costs. Gypsum gross profit margins declined by 4.0 percentage points, primarily
due to a 0.3% decrease in average sales prices, an increase in gypsum rock
prices for the Seattle, Washington plant, and start-up costs in commissioning
the additional production capacity at the Las Vegas, Nevada and Seattle,
Washington plants. In addition, the Las Vegas and Seattle plants yield lower
margins than Nashville, Arkansas. The increased sales volume for these plants
reduced average gross margins. Australia/New Zealand Fiber Cement gross profit
margin decreased by 8.7 percentage points. This was due to unanticipated and
continuing commissioning costs associated with upgrading Australian fiber cement
manufacturing facilities,
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reduced average net selling prices due to increased competition and a change in
product mix. Building Systems gross profit margin remained unchanged. Windows
gross profit margin improved by 0.5 percentage points, due to improved pricing,
sales mix and production efficiencies, offsetting increased aluminum and wood
prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $5.8 million or 14.2% from $40.9 million in
First Quarter Fiscal 1998 to $35.1 million in First Quarter Fiscal 1999.
Expressed as a percentage ratio of net sales, the ratio improved by 1.8
percentage points from 18.7% in First Quarter Fiscal 1998 to 16.9% in First
Quarter Fiscal 1999. The decrease was primarily due to savings in local currency
terms within Australian operations and corporate overhead and the favorable
impact of a weakening Australian dollar, partially offset by $3.5 million of
increased spending in U.S. Fiber Cement. Of the increase in spending in U.S.
Fiber Cement, $0.4 million was attributable to increased research and
development, and the remainder to increased staffing in marketing, information
services and customer service departments.
Selling, general and administrative expenses include research and
development costs which amounted to $3.5 million in First Quarter Fiscal 1999, a
reduction of $1.0 million compared to First Quarter Fiscal 1998. This reduction
was due to fewer personnel being employed within the Sydney-based research and
development center and the effect of the weakening Australian dollar, partially
offset by an increase of $0.4 million in spending at the Development Center in
Fontana, California.
Restructuring and Other Operating Expenses. The Company did not incur any
significant restructuring and other operating expenses in First Quarter Fiscal
1998. Restructuring and other operating expenses were $0.5 million in First
Quarter Fiscal 1999, resulting from employee terminations and other
restructuring costs associated with the Australian fiber cement manufacturing
restructuring and upgrade program.
Operating Profit. Operating profit decreased by $0.9 million from $23.8
million in First Quarter Fiscal 1998 to $22.9 million in First Quarter Fiscal
1999. As described above, improvements in gross profits within the U.S.
Operations and reduced general corporate costs were offset by reduced revenues
in the Australian and New Zealand operations and the adverse effect of foreign
exchange rates.
Interest Expense and Interest Income. Interest expense increased by $0.3
million from $7.0 million in First Quarter Fiscal 1998 to $7.3 million in First
Quarter Fiscal 1999. Interest income declined by $2.9 million from $6.3 million
in First Quarter Fiscal 1998 to $3.4 million in First Quarter Fiscal 1999,
primarily due to a decline in Australian interest rates and a reduction in the
average level of deposits following settlement of the Firmandale matter. As part
of the Reorganization, the Company will revise the debt funding structure and
will not have a substantial cash balance.
Equity Income -- RCI. Equity income from RCI Corporation ceased following
the sale of the investment in RCI in fiscal year 1998. In First Quarter Fiscal
1998 such equity income was $2.9 million.
Other Nonoperating Expenses, Net. The Company did not incur any significant
other nonoperating expenses, net in First Quarter Fiscal 1999. Other
nonoperating expenses, net were $2.1 million in First Quarter Fiscal 1998. This
expense represents losses incurred by JHIL under a transaction it entered into
with Firmandale in 1987. In March 1998, JHIL entered into a comprehensive
settlement of all litigation arising out of the Firmandale transaction. Any
ongoing obligations associated with the Firmandale transaction will remain with
JHIL and will not be transferred to or assumed by the Company as part of the
Reorganization. See Note 4 to the Consolidated Financial Statements
Income Taxes. Income tax expense increased by $1.0 million from $5.6
million in First Quarter Fiscal 1998 to $6.6 million in First Quarter Fiscal
1999. The Company's effective tax rate on income from continuing operations was
30.2% in First Quarter Fiscal 1998 compared to 34.7% in First Quarter Fiscal
1999.
Discontinued Operations. The Company did not have any net income from
discontinued operations in First Quarter Fiscal 1999. Net income from
discontinued operations amounted to $6.3 million in First Quarter Fiscal 1998.
During fiscal year 1998, JHIL completed its divestment program. The Company had
a
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$3.3 million gain on disposal of businesses in First Quarter Fiscal 1998,
primarily related to retirement plan settlement gains on the bathroom products
divestment consummated in March 1998.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
Total Net Sales. Total net sales increased by $108.9 million or 15.3% from
$713.4 million in fiscal year 1997 to $822.3 million in fiscal year 1998. The
growth in net sales was primarily attributable to increased volume in U.S. Fiber
Cement and Gypsum (which benefited from the first full-year of sales from the
Nashville, Arkansas gypsum operation acquired in February 1997), partially
offset by decreases in fiber cement prices in the United States, Australia and
New Zealand.
U.S. Fiber Cement Sales. U.S. Fiber Cement sales increased by $32.4
million or 21.8% from $148.7 million in fiscal year 1997 to $181.1 million in
fiscal year 1998. The growth in sales was primarily due to a 31.2% increase in
volume from 317 mmsf in fiscal year 1997 to 416 mmsf in fiscal year 1998
resulting from continued penetration of the Company's fiber cement products in
the siding market and strong growth in volumes in the Southcentral region.
Volume was also positively impacted by an increase in production capacity from
480 mmsf to 770 mmsf due to the addition of 290 mmsf of capacity at the
Company's Cleburne, Texas plant in April 1997. The increase in sales volume was
partially offset by a 7.2% decrease in average selling price from $469 to $435
per msf which was a result of increased competition and over-capacity in the
overall siding industry.
Gypsum Sales. Gypsum sales increased $96.7 million or 93.1% from $103.8
million in fiscal year 1997 to $200.5 million in fiscal year 1998. The growth in
sales was primarily due to a 80.3% increase in volume to 1,555 mmsf mainly
resulting from the first full-year of contribution from the Nashville, Arkansas
plant which was acquired in February 1997. The increase in sales was also
positively affected by a 7.3% improvement in average sales prices over fiscal
year 1997. The expansion in the capacity of the Seattle, Washington plant from
260 mmsf to 620 mmsf completed in the latter half of calendar 1997 had little
impact on the fiscal year 1998 results but is expected to further increase
volume in fiscal year 1999.
Australia/New Zealand Fiber Cement Sales. Australia/New Zealand Fiber
Cement sales declined $50.5 million or 19.2% from $262.1 million in fiscal year
1997 to $211.6 million in fiscal year 1998. In local currency terms, the decline
was 11.3%. The decrease in sales was due primarily to a 6.0% decrease in sales
volume from 318 mmsf in fiscal year 1997 to 299 mmsf in fiscal year 1998. The
reduction in sales volume was a result of increased competition in Australia
and, to a lesser extent, increased volumes of lower-priced imports from Asia in
both Australia and New Zealand. Sales were further negatively impacted by
increased competition which necessitated price reductions in New Zealand.
Building Systems Sales. Building Systems sales increased by $14.1
million or 10.5% from $133.8 million in fiscal year 1997 to $147.9 million in
fiscal year 1998. In local currency terms, the rise was 21.5%. The increase in
sales in this segment was primarily due to increased sales in the mining sector,
including the addition of three major contracts for mining camp and village
accommodation in fiscal year 1998.
Other Sales. Sales by the Philippines and Windows businesses increased
by $16.2 million or 24.9% from $65.0 million in fiscal year 1997 to $81.2
million in fiscal year 1998. In local currency terms, the rise was 37.1%. The
increase was primarily due to the commencement of sales by the Company's
Philippines operation as part of a pre-production marketing campaign using
product primarily imported from Australia. Sales by the Windows operation
increased by $5.5 million or 8.9% from $61.4 million in fiscal year 1997 to
$66.9 million in fiscal year 1998. In local currency terms, the rise was 19.8%.
Gross Profit. Gross profit increased by $25.3 million or 12.4% from $204.7
million in fiscal year 1997 to $230.0 million in fiscal year 1998. The Company's
overall gross profit margin declined from 28.7% in fiscal year 1997 to 28.0% in
fiscal year 1998. Sales of fiber cement imported from the Company's Australian
and New Zealand manufacturing operations by the Company's Philippines operation
started during fiscal year 1998 as part of a marketing campaign in advance of
commencement of local production. These sales were made at a loss due to import
tariffs and shipping costs. These imports will cease upon the commencement of
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local manufacturing in the Philippines which the Company anticipates will be in
October 1998. U.S. Fiber Cement gross profit margin improved by 3.5 percentage
points with a 7.2% decline in selling prices more than offset by a decrease in
pulp prices, an improvement in manufacturing efficiencies, the absence of
significant factory start-up costs and an approximately 10.0% decline in freight
costs due primarily to the opening of the Cleburne, Texas plant. Gypsum gross
profit margins improved by 0.8 percentage points, primarily due to a 7.1%
increase in sales prices, offset in part by an increase in fixed cost of sales
of $18 million, primarily as a result of the inclusion of a full year of the
Nashville operation and a one-time cost of $0.9 million associated with the
capacity expansion in Las Vegas. Australia/New Zealand Fiber Cement gross profit
margin increased by 1.6 percentage points in fiscal year 1998. Fiscal year 1997
was adversely affected by a $7.8 million warranty provision established with
respect to two specific products that were sold until fiscal year 1991 only in
Australia and New Zealand. One of the products was modified to avoid recurrence
of the problem and the other product has been discontinued. During fiscal year
1997, the Company initiated a restructuring and upgrade of its Australian fiber
cement manufacturing facilities, which is expected to result in total capital
costs of $28.0 million and total expenses of $17.5 million over fiscal years
1997, 1998 and 1999. The benefits of this program are expected to be realized
during fiscal year 1999 and subsequent years. Building Systems gross profit
margin decreased by 3.0 percentage points in fiscal year 1998, primarily due to
the discounting of sales prices to retain market share against increased
competition. Windows gross profit margin improved by 1.9 percentage points in
fiscal year 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $7.6 million or 5.1% from $150.3 million in
fiscal year 1997 to $142.7 million in fiscal year 1998. Expressed as a
percentage ratio of net sales, the ratio improved by 3.7 percentage points from
21.1% in fiscal year 1997 to 17.4% in fiscal year 1998. The decrease was
primarily due to a $10.1 million decrease resulting from the restructuring of
Australia/New Zealand Fiber Cement and the closure of the Brooklyn, Australia
fiber cement operations. The decrease was partially offset by a $7.1 million
increase within U.S. Fiber Cement due to additional staffing to provide the
sales and marketing infrastructure necessary to maintain volume growth,
increased marketing expenditure on fiber cement products, restructuring costs
associated with the consolidation of the customer service, finance, information
services and administration departments of the U.S. businesses to one location
and the commencement of goodwill amortization on the Nashville, Arkansas
acquisition. In addition, the decrease in selling, general and administrative
expenses was partially offset by a $4.5 million increase due to the continued
build up of the Philippines operations.
Selling, general and administrative costs include research and development
costs which amounted to $18.0 million in fiscal year 1998, an increase of $3.0
million over fiscal year 1997, primarily due to the opening in April 1997 of the
Company's new fiber cement Development Center in Fontana, California.
Restructuring and Other Operating Expenses. Restructuring and other
operating expenses were $5.1 million in fiscal year 1998 and $38.8 million in
fiscal year 1997. Asset write-offs, environmental costs, employee terminations
and other restructuring costs related to the Australian fiber cement
manufacturing restructuring and upgrade program amounted to $17.8 million in
fiscal year 1997 and $5.1 million in fiscal year 1998. As part of the
restructuring program, 97 employees were terminated, of which 86 were factory
employees and 11 were sales, marketing or administrative employees. In fiscal
year 1997, the Company incurred a $21.0 million write-off of all of the goodwill
related to the windows business as a result of continuing losses in that
business.
Operating Profit. Operating profit increased by $66.6 million from $15.6
million in fiscal year 1997 to $82.2 million in fiscal year 1998. As described
above, the fiscal year 1997 results were significantly impacted by non-recurring
charges related primarily to the Australian fiber cement manufacturing
rationalization and upgrade program and the windows goodwill write-off.
Excluding these non-recurring charges, the operating profit would have increased
by $32.9 million or 60.5% from $54.4 million in fiscal year 1997 to $87.3
million in fiscal year 1998. In addition, the fiscal year 1998 results benefited
from increased sales and gross profit margins in U.S. Fiber Cement and Gypsum
and reduced operating losses, excluding the goodwill write-off, in the windows
business of $5.0 million in fiscal year 1998 compared to losses of $7.8 million
in fiscal year 1997. This was offset in part by a reduction in revenues at
Australia/New Zealand Fiber Cement.
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Equity Income -- RCI. Equity income from RCI Corporation decreased from
$9.2 million in fiscal year 1997 to $6.2 million in fiscal year 1998. The
Company disposed of its investment in RCI Corporation in October 1997.
Interest Expense and Interest Income. Interest expense decreased by $2.0
million from $39.6 million in fiscal year 1997 to $37.6 million in fiscal year
1998. The decrease was primarily due to reductions in U.S. dollar and New
Zealand borrowing costs, as well as increased benefits from U.S. dollar interest
rate swaps, partially offset by an increase in average borrowings over the year.
Interest income declined by $2.5 million from $30.8 million in fiscal year 1997
to $28.3 million in fiscal year 1998. The decrease was primarily due to a
decline in AUD interest rates and a decline in interest income from currency
swaps due to narrowing interest differentials, which was offset by an increase
in the level of average AUD deposits held. As part of the Reorganization, the
Company will be established with a revised debt funding structure and will not
have a substantial cash balance.
Other Nonoperating Expenses, Net. Other nonoperating expenses, net were
$12.1 million in fiscal year 1998 and $14.6 million in fiscal year 1997. Of
these amounts, $12.2 million in fiscal year 1998 and $14.7 million in fiscal
year 1997 represents losses incurred by JHIL under a transaction it entered into
with Firmandale in 1987. In March 1998, JHIL entered into a comprehensive
settlement of all litigation arising out of the Firmandale transaction. Any
ongoing obligations associated with the Firmandale transaction will remain with
JHIL and will not be transferred to or assumed by the Company as part of the
Reorganization. See Note 11 to the Consolidated Financial Statements.
Income Taxes. Income tax expense increased by $28.0 million from a $3.0
million benefit in fiscal year 1997 to a $25.0 million expense in fiscal year
1998. The Company's effective tax rate on income from continuing operations was
44.9% in fiscal year 1998 compared to 19.4% in fiscal year 1997. The increase in
the effective tax rate was primarily due to an increase in expenses not
deductible in fiscal year 1998 partially offset by an increase in rebates on
dividends received. The significant increase in both expenses not deductible and
rebates on dividends received resulted primarily from the disposal of the RCI
Corporation investment and increases in provisions for Firmandale which are not
deductible expenses.
Discontinued Operations. During fiscal year 1998, JHIL completed its
divestment program with the sale of its pipeline business in September 1997. Net
income from discontinued operations amounted to $4.2 million in fiscal year 1998
and a loss of $18.1 million in fiscal year 1997. There was a $6.0 million gain
on disposal of businesses in fiscal year 1998 and a $121.4 million gain in
fiscal year 1997.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Total Net Sales. Total net sales increased by $88.5 million or 14.2% from
$624.9 million in fiscal year 1996 to $713.4 million in fiscal year 1997. The
growth in net sales was primarily attributable to increased volume in U.S. Fiber
Cement, following the addition of two new lines at the Company's Florida
facility. Net sales were also positively impacted by increased gypsum wallboard
capacity and an increase in the average selling price of gypsum wallboard.
U.S. Fiber Cement Sales. U.S. Fiber Cement sales increased by $48.0
million or 47.7% from $100.7 million in fiscal year 1996 to $148.7 million in
fiscal year 1997. The growth in revenue was primarily due to a 44.1% increase in
volume from 220 mmsf in fiscal year 1996 to 317 mmsf in fiscal year 1997
resulting from continued penetration into the siding market and the availability
of additional capacity from the addition of two new lines at the Company's
Florida facility. During the peak building season, the Company's U.S. fiber
cement manufacturing facilities operated at full capacity and for several months
demand exceeded the Company's U.S. manufacturing capacity. The average selling
price was stable compared to fiscal year 1996 levels.
Gypsum Sales. Gypsum sales increased by $26.8 million or 34.8% from
$77.0 million in fiscal year 1996 to $103.8 million in fiscal year 1997. The
growth in sales was primarily due to a 26.8% increase in sales volume from 680
mmsf in fiscal year 1996 to 862 mmsf in fiscal year 1997, of which 113 mmsf was
due to the acquisition of the Nashville, Arkansas operation in February 1997.
The increase in sales volumes can also be
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attributed to the capacity expansion in Las Vegas, Nevada completed in the
latter part of 1996. The increase in sales was also positively affected by a
5.5% improvement in average sales price over fiscal year 1996.
Australia/New Zealand Fiber Cement Sales. Australia/New Zealand Fiber
Cement sales declined by $2.5 million or 1% from $264.6 million in fiscal year
1996 to $262.1 million in fiscal year 1997. In local currency terms, the decline
was 6.7%. Volumes declined by 8.6% from 348 mmsf in fiscal year 1996 to 318 mmsf
in fiscal year 1997, reflecting the decline in home building activity over the
period and the effect of increased competition in Australia. Results were also
impacted by declining prices and the strengthening of the Australian dollar.
Building Systems Sales. Building Systems sales increased by $15.6
million or 13.2% from $118.2 million in fiscal year 1996 to $133.8 million in
fiscal year 1997. In local currency terms, the rise was 6.7%. The increase in
sales was primarily due to strong demand from the mining and resources sector
and also from the expansion of the modular buildings rental fleet.
Other Sales. Other sales were substantially unchanged and predominately
reflect the sales by the windows business, which were $61.4 million in fiscal
year 1997 and $58.5 million in fiscal year 1996.
Gross Profit. Gross profit increased by $9.7 million or 5.0% from $195.0
million in fiscal year 1996 to $204.7 million in fiscal year 1997. The Company's
overall gross profit margin declined from 31.2% in fiscal year 1996 to 28.7% in
fiscal year 1997. U.S. Fiber Cement gross profit margin declined by 1.5
percentage points primarily due to an increase of $10.2 million in fixed cost of
sales due to the commissioning of two additional lines at the Florida facility
and the construction of the Texas facility. Variable cost of sales were
consistent with fiscal year 1996. Gypsum profit margins improved by 8.5
percentage points primarily due to a 6.4% increase in average sales price.
Australia/New Zealand Fiber Cement gross margins in fiscal year 1997 declined
7.0 percentage points compared to fiscal year 1996, reflecting the effect of
competition and a non-recurring $7.8 million warranty provision. Building
Systems gross profit margin improved by 0.3 percentage points in fiscal year
1997. Gross profit margin in the Other segment declined 2.8 percentage points
compared to 1996 reflecting the competitive pressures within the windows
operations and additional costs as a result of an acquisition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $16.2 million or 12.1% from $134.1 million
in fiscal year 1996 to $150.3 million in fiscal year 1997. Expressed as a
percentage ratio of net sales, the ratio improved by 0.3 percentage points from
21.4% in fiscal year 1996 to 21.1% in fiscal year 1997. The increase in expenses
was primarily due to additional staffing within U.S. Fiber Cement to support
increased sales volumes and also the commencement of the Philippines operation.
The selling, general and administrative category includes research and
development costs which amounted to $15.0 million in fiscal year 1997, an
increase of $2.9 million over fiscal year 1996.
Restructuring and Other Operating Expenses. Restructuring and other
operating expenses amounted to $38.8 million in fiscal year 1997 (versus none in
fiscal year 1996) and had two components. The period costs of the restructuring
and upgrade of the Company's Australian fiber cement manufacturing facilities
and other restructuring costs related to Australia/New Zealand Fiber Cement
amounted to $17.8 million. Following the acquisition of Trend Windows in
December 1994, sales declined severely during fiscal year 1996 and 1997 as a
result of a slump in housing starts which was not foreseen at the time of
acquisition. In February and March 1997, a Board review of the windows business
plans for 1998 to 2000 and a full post-implementation review of the windows
acquisition revealed that the windows business would continue to incur future
operating losses due to changes in market and economic trends. These changes in
circumstances indicated that the recoverability of the carrying amount of the
windows business long-lived assets, including goodwill, should be assessed. The
James Hardie Businesses estimated the future cash flows (undiscounted and
without interest charges) expected to result from the use of the assets of the
windows business and their eventual disposition. As the sum of the expected
future cash flows was less than the carrying amount of the assets, the James
Hardie Businesses had to recognize an impairment loss, measured as the amount by
which the carrying amount exceeds the fair value of the assets. The James Hardie
Businesses determined the fair value of the assets using the present value of
estimated expected future cashflows. The carrying amount exceeded the fair value
of the assets by $21.0 million. In instances where goodwill is identified with
assets that are subject to an
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impairment loss, Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" requires the carrying amount of the identified goodwill to be
eliminated before reducing the carrying amount of impaired long-lived assets.
Accordingly, the James Hardie Businesses wrote-off $21.0 million in goodwill
related to the windows business during fiscal year 1997.
During fiscal year 1997, the James Hardie Businesses adopted a plan to
restructure and upgrade their fiber cement plants in Australia due to changes in
technology. The upgrade included a complete replacement of existing machinery
with new machinery designed to handle new technological innovations in fiber
cement. The existing machinery and equipment could not be used with the new
technology and did not have any alternate uses. These changes in circumstances
resulted in the James Hardie Businesses recognizing an impairment loss of $11.4
million to reduce the carrying amount of the assets to zero.
Operating Profit. Operating profit decreased by $45.3 million from $60.9
million in fiscal year 1996 to $15.6 million in fiscal year 1997. The decrease
was primarily due to the restructuring and other charges discussed above, and,
to a lesser extent, the negative effect of competition and one-time charges in
the Australia/New Zealand Fiber Cement segment. In addition, increased losses in
the windows business, excluding the goodwill write-off, of $7.8 million in
fiscal year 1997 compared to $2.9 million in fiscal year 1996, which was due to
the costs associated with restructuring and modernizing the business,
contributed to the decrease in operating profit. This was offset in part by
growth in both the U.S. Fiber Cement and Gypsum operations. Excluding these
non-recurring charges, the operating profit would have decreased by $6.5 million
or 10.7% from $60.9 million in fiscal year 1996 to $54.4 million in fiscal year
1997.
Equity Income -- RCI. Equity income from RCI Corporation increased from
$7.9 million in fiscal year 1996 to $9.2 million in fiscal year 1997, reflecting
the increased profitability of RCI Corporation due to a decrease in interest
rates.
Interest Expense and Interest Income. Net interest expense declined $9.1
million or 18.7% from $48.7 million in fiscal year 1996 to $39.6 million in
fiscal year 1997 primarily due to a decline in average gross borrowings over the
year as a result of the use of a portion of the proceeds from the divestiture
program to reduce debt. The average interest rate on borrowings also declined
slightly over the period, mainly due to declines in AUD and U.S. dollar short
term borrowing rates. Interest income declined by $2.3 million or 6.9% from
$33.1 million in fiscal year 1996 to $30.8 million in fiscal year 1997. The
reduction in AUD deposit rates, and to a lesser extent, U.S. dollar deposit
rates, contributed to the decline, despite the average level of deposits
remaining fairly stable between fiscal years 1996 and 1997.
Other Nonoperating Expenses, Net. Other non-operating expenses, net were
$15.0 million in fiscal year 1996 and $14.6 million in fiscal year 1997. Losses
incurred by JHIL related to the Firmandale transaction were $17.9 million in
fiscal year 1996 and $14.7 million in fiscal year 1997. Any ongoing obligations
associated with the Firmandale transaction will remain with JHIL as part of the
Retained Assets and Liabilities and will not be transferred to or assumed by the
Company as part of the Reorganization. See Note 11 to the Consolidated Financial
Statements.
Income Taxes. Income tax expense decreased from an expense of $2.8 million
in fiscal year 1996 to a benefit of $3.0 million in fiscal year 1997. The
Company's effective tax rate on income from continuing operations was 13.4% in
fiscal year 1996 compared to 19.4% in fiscal year 1997. The increase in the
effective tax rate was primarily due to a reduction in the research and
development incentive in 1997. The 1996 effective tax rate was also adversely
impacted by a tax rate change in 1996.
Discontinued Operations. During fiscal year 1997, the Company completed a
major part of the divestment program, with the sale of the Irrigation, Building
Services and Bathroom Products businesses. Net income from discontinued
operations amounted to loss of $5.8 million in fiscal year 1996 and a loss of
$18.1 million in fiscal year 1997. There was a $121.4 million gain on disposal
of businesses in fiscal year 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its working capital needs and capital
expenditure requirements through a combination of cash flow from operations,
proceeds from the divestiture of businesses, credit facilities, proceeds from
the sale of property, plant and equipment and proceeds from the redemption of
investments. Seasonal fluctuations in working capital generally have not had a
significant impact on the Company's short-term and long-term liquidity.
The Company had cash and cash equivalents of $204.5 million as of June 30,
1998. As of such date, the Company also had committed credit facilities totaling
$675.2 million of which $516.0 million was outstanding. Of the total credit
facilities, $517.2 million was provided by banks and $158.0 million by
purchasers of privately placed unsecured notes. Of the outstanding debt, $34.1
million is due and payable in fiscal year 1999. The $158.0 million of unsecured
notes is payable semi-annually from 1999 through 2007. The revolving portion of
the bank facilities can be repaid and redrawn until varying dates between 2000
and 2001. All of the Company's outstanding debt as of June 30, 1998 was
unsecured.
As part of the Reorganization, the cash and cash equivalent balances and
the debt facilities described above will be retained by JHIL. The Company
intends to consummate the Debt Financing concurrently with the consummation of
the Offerings. The Company intends to form the Finance Subsidiary prior to the
Offerings which is expected to issue approximately $225 million aggregate
principal amount of Notes and to arrange the Bank Facility. The Notes will be
senior unsecured obligations with a mix of maturities ranging from 6 to 15
years. The Bank Facility will include a term loan of approximately $115 million,
which will be fully drawn at the closing of the Bank Facility, and a revolving
loan of approximately $80 million, which will not be drawn at the closing. The
Notes and indebtedness incurred under the Bank Facility will be unconditionally
guaranteed by James Hardie. Substantially all of the proceeds from the Notes
offering and Bank Facility, together with existing cash and deposits, will be
used by JHIL to retire the existing debt facilities and instruments described
above. It is anticipated that the interest rate exposure on the Notes will be
fixed, while the interest on the Bank Facility will be floating at a margin to
LIBOR. The Company intends to enter into interest rate swaps to partially fix
its interest rate exposures. It is anticipated that these debt funding
arrangements will have customary covenants, including the maintenance of certain
financial ratios and limitations on the payment of dividends and the incurrence
of additional indebtedness.
CASH FLOW
Cash inflow from operating activities was $19.8 million in First Quarter
Fiscal 1998 compared to an outflow of $44.5 million in First Quarter Fiscal
1999. This decrease of $64.3 million includes $57.4 million paid in settlement
of the Firmandale litigation. The remaining decrease of $6.9 million is due to
the decline in net income as a result of the disposal of the discontinued
businesses. Cash flow from operating activities was $109.1 million in fiscal
year 1998 and was $82.8 million in fiscal year 1997. This increase of $26.3
million was primarily due to the increase in net income from continuing
operations.
Cash flow used in investing activities was $24.9 million in First Quarter
Fiscal 1998 compared to $46.1 million in First Quarter Fiscal 1999. Capital
expenditures were $35.8 million in First Quarter Fiscal 1998 and $30.9 million
in First Quarter Fiscal 1999. In First Quarter Fiscal 1999, a refund of $10.5
million due to the purchaser's overpayment at the closing of the sale of the
Company's irrigation business was paid out following mutual agreement on the
closing accounts used at settlement. Cash flow relating to investing activities
used $46.7 million in fiscal year 1998 and provided $118.4 million in fiscal
year 1997. Capital expenditures of $147.7 million in fiscal year 1998 were
partially offset by cash generated in the amount of $61.4 million from the
disposal of subsidiaries and businesses. Outlays of $94.7 million for the
acquisition of the Nashville, Arkansas facility and $159.4 million on capital
expenditures in fiscal year 1997 were offset by cash generated in the amount of
$375.7 million from the disposal of subsidiaries, businesses and investments.
Net cash used in financing activities was $57.5 million in First Quarter
Fiscal 1998 compared to $35.5 million in First Quarter Fiscal 1999. This
decrease was primarily due to the payment of a $19.1 million dividend in the
First Quarter Fiscal 1999 while the corresponding dividend payment for fiscal
year 1998 was paid in the second quarter of that fiscal year. Net cash flows
from borrowing and related hedging activities
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amounted to a $62.8 million outflow in First Quarter Fiscal 1998 and a $14.5
million outflow in First Quarter Fiscal 1999. Net cash used for financing
activities was $63.9 million in fiscal year 1998 as compared to $14.6 million of
net cash provided in fiscal year 1997. Dividend payments of $28.1 million were
made in fiscal year 1998 and $16.6 million in fiscal year 1997. Net cash flows
from borrowing and related hedging activities amounted to a $47.9 million
outflow in fiscal year 1998 and a $93.7 million inflow in fiscal year 1997. In
fiscal year 1997, a payment of $72.1 million was made to redeem shares held by a
minority interest.
While there can be no assurance, management believes that cash flow from
operations and funds from the proposed new credit facilities will be adequate to
meet the Company's cash flow requirements for the next eighteen months.
CAPITAL EXPENDITURES
The Company's total capital expenditures for continuing operations for
fiscal years 1997 and 1998 amounted to $159.4 million and $147.7 million,
respectively, and for First Quarter Fiscal 1999 amounted to $30.9 million. The
capital expenditures were primarily used to create additional low cost, high
volume manufacturing capacity to meet increased demand for the Company's fiber
cement and gypsum products and to reduce the cost of existing capacity.
Significant capital expenditures in First Quarter Fiscal 1999 included
continued construction of the Company's new fiber cement plants in Tacoma,
Washington which was completed in June 1998 and in the Philippines which the
Company believes will be completed by October 1998; and the expansion of the
Nashville, Arkansas gypsum facility. Significant capital expenditures in fiscal
year 1998 included the construction of the Company's fourth U.S. fiber cement
plant in Tacoma, Washington; the construction of the Company's Philippines fiber
cement plant; the expansions of the Seattle and Las Vegas gypsum facilities; the
major upgrade of the Company's Australian fiber cement manufacturing facilities,
which has now been largely completed; and the expansion of the Company's rental
fleet of modular buildings.
During fiscal year 1997, the Company commissioned two new production lines
at Plant City, Florida to bring its annual capacity to 300 mmsf, making it one
of the largest fiber cement plants in the world; commissioned the first line at
its new fiber cement plant in Cleburne, Texas; and commenced an expansion at the
Seattle, Washington gypsum facility.
The Company currently anticipates that its capital expenditures will be
approximately $125 million and $110 million in fiscal years 1999 and 2000,
respectively, primarily relating to expansion and maintenance capital
expenditures for the fiber cement business, primarily in the United States and
the Philippines, and the gypsum business. Capital expenditures have historically
been funded from operating activities and business divestitures.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's results of operations for the periods presented.
SEASONALITY AND QUARTERLY VARIABILITY
Earnings are seasonal and follow activity levels in the building and
construction industry. In the United States, the quarters ending December and
March reflect reduced levels of building activity depending on weather
conditions. In Australia, the quarter ended March is usually affected by a
slowdown due to summer vacations. In addition, general industry patterns can be
affected by weather, economic conditions, industrial disputes and other factors.
YEAR 2000 PROBLEM
The term "Year 2000 Problem" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computer systems and other machinery as the Year
2000 is approached and reached. These problems generally arise from the fact
that
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most computer hardware and software have historically used only two digits to
identify the year in a date, which frequently results in the failure to
distinguish dates in the 2000s from dates in the 1900s. As with many other
companies, the Year 2000 Problem creates risks of disrupting the Company's
business.
State of Readiness and Cost of the Year 2000 Problem
To assess the Year 2000 Problem, the Company has established a Year 2000
Steering Group charged with implementing the Company's comprehensive Year 2000
compliance program (the "Program"). The Program includes the following phases:
(a) identification; (b) risk assessment; (c) remediation; (d) testing; (e)
contingency planning; and (f) quality assurance. In addition, the Program
includes a business partner compliance program whereby the Company will seek to
ensure that its key suppliers, service providers and customers are addressing
any Year 2000 Problems that might disrupt the Company's operations. The total
cost of the Program is estimated to be approximately $1.4 million (excluding
internal staffing costs).
Because the Company believes that its highest risk areas are its central
business systems which support the Company's accounting, sales, inventory and
manufacturing systems, implementation of the Program for these systems was
scheduled to be completed first. With respect to such central business systems,
the Company has either received vendor assurances that such systems are Year
2000 compliant or completed the identification, risk assessment and remediation
phases of the Program. Management expects that testing of these systems will be
completed by December 1998.
The Company is currently in the process of implementing the Program with
respect to its embedded hardware and factory equipment. With respect to such
equipment, the Company has already completed the identification and risk
assessment phases and is currently proceeding with its remediation phase.
Management expects that remediation of its embedded equipment will be completed
by December 1998. All of the Company's systems are expected to be Year 2000
compliant by December 1999 or replaced by compliant solutions by mid-1999.
The Company is also in the process of implementing its business partner
compliance program. To date, nearly all of the Company's key business partners
who have initially responded have indicated that they have commenced Year 2000
compliance programs. The Company is continuing to assess the Year 2000 readiness
of its key business partners and expects to complete its assessment by December
1998.
Risks Presented by the Year 2000 Problem
Based on the phases of the Program that have already been completed,
management does not believe that there are any systems that present a material
risk of not being Year 2000 compliant or for which a suitable alternative cannot
be implemented. However, as the Program proceeds into subsequent phases, it is
possible that the Company may identify systems that do present a risk of a Year
2000-related disruption. It is also possible that such a disruption could have a
material adverse effect on the Company's business, results of operations and
financial condition. Furthermore, if a business partner who provides goods or
services that are critical to any of the Company's businesses fails to
appropriately address its Year 2000 Problem, the resulting disruption could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Contingency Plans
The Program calls for the development of contingency plans for all systems
which have been identified as having an extreme or high risk impact on a
business function. The Company has identified certain systems for which Year
2000-specific contingency plans are required and intends to develop such
contingency plans by mid-1999.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements.
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BUSINESS
GENERAL
The Company is the largest manufacturer of fiber cement products and
systems for internal and external building construction applications in the
United States, Australia and New Zealand. The Company markets its fiber cement
products and systems under various "Hardi" brand names. The Company believes
that, in certain applications, its fiber cement products and systems provide a
combination of distinctive performance, design and cost advantages when compared
to other fiber cement products and alternative products and systems using solid
wood, engineered wood, vinyl, brick, stucco and gypsum wallboard. In addition,
the Company is the fourth largest producer of gypsum wallboard in the United
States. The sale of fiber cement products and gypsum wallboard accounted for
46.9% and 24.4%, respectively, of the Company's total net sales in fiscal year
1998. In addition to its fiber cement and gypsum wallboard businesses, the
Company, through its building systems division, is the Australian and New
Zealand market leader in the manufacture and sale of modular relocatable
buildings in the mining resources market and insulated panel products in the
commercial market. The Company also manufactures windows and window systems for
residential and commercial applications in Australia.
The Company pioneered the successful development of cellulose reinforced
fiber cement in the early 1980s with its proprietary product formulation and
process technology. The Company has continued to develop and enhance its fiber
cement technology, deriving significant cost and efficiency benefits and
establishing itself as a leader in this product category. The Company's fiber
cement products are utilized in various markets including new residential
construction, manufactured housing, repair and remodeling and a variety of
commercial and industrial applications. The Company manufactures numerous types
of fiber cement products with a variety of patterned profiles and surface
finishes for a range of applications including external siding, roofing,
internal linings, facades, fencing and floor and tile underlayments. In contrast
to some other building materials, fiber cement provides durability attributes
such as strong resistance to moisture, fire, impact and termites, requires
relatively little maintenance and can be used as a substrate to create a wide
variety of architectural effects with textured and colored finishes. During
fiscal year 1998, management believes, based on its analysis of competitors'
sales, that the Company sold approximately 83% of the fiber cement sold in the
United States, 84% of the fiber cement sold in Australia and 93% of the fiber
cement sold in New Zealand. Management estimates that the Company had
approximately 7% of the U.S. external siding market in fiscal year 1998.
In the United States, the Company is seeking to capitalize on its
leadership position in fiber cement by building related businesses such as
gypsum wallboard. The fiber cement and gypsum wallboard businesses have similar
end users and together form a large part of the internal and external building
envelope, particularly for residential construction. In the repair and remodel
segment, the Company is able to utilize common distribution channels for its
fiber cement and gypsum wallboard products. The Company has been able to apply
many of the continuous production and plant operating methods from the mature
and efficient gypsum wallboard industry to its fiber cement operations. This has
assisted the Company in its efforts to rapidly improve the speed and efficiency
of its fiber cement operations.
During fiscal year 1998, the Company's U.S. Fiber Cement business accounted
for $181.1 million of net sales, gypsum wallboard accounted for $200.5 million
of net sales, Australia/New Zealand Fiber Cement accounted for $211.6 million of
net sales, Building Systems accounted for $147.9 million of net sales and Other
products (which includes windows and fiber cement operations in the Philippines)
accounted for $81.2 million of net sales. In fiscal year 1998, operating profit
from U.S. operations (U.S. Fiber Cement and Gypsum) as a percentage of total
operating profit before expenses in connection with the Sydney-based research
and development center and certain general corporate costs was 72.4%. See
"Selected Financial and Operating Data."
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COMPETITIVE STRENGTHS
The Company believes the following competitive strengths provide a strong
platform for growth:
International Leadership Position in Fiber Cement
The Company pioneered the successful development of cellulose reinforced
fiber cement in the early 1980s with its proprietary product formulation and
process technology. The Company's sales of fiber cement in the United States
have grown from $34.3 million in fiscal year 1994 to $181.1 million in fiscal
year 1998, displacing traditional building materials in the United States,
principally wood-based products. The Company has demonstrated a leadership
position in the fiber cement product category. Fiber cement competes in a range
of markets, typically on the basis of its durability, easy workability, cost and
aesthetic properties. In the United States, the Company has grown its share of
the external siding market from less than 1% in 1993 to approximately 7% in
1998. In Australia, during fiscal year 1998, the Company sold approximately 80%
of all of the external soffits, 8% of all of the external cladding and 52% of
all of the wet area internal linings used in residential construction.
Substantial research and development effort has been focused on the introduction
of new and improved fiber cement products and systems. As a result, management
believes that the Company has developed an international reputation for quality
and innovation in fiber cement.
Technological Leader in Fiber Cement Products and Process Innovation.
The Company has capitalized on its strong market positions to maintain
leadership in product research and development and process technology
enhancements. In fiscal year 1998, the Company invested approximately 4.6% of
fiber cement sales revenue ($18.0 million) in research and development. See
"-- Research and Development in Fiber Cement Technology." In previous years, the
Company's fiber cement research and development focus was aimed primarily at
enhancing process technology to improve operating efficiency while maintaining
quality. Management believes that efficiencies in the Company's processing
methods and proprietary formulations allow these products to be produced at a
lower cost relative to many of its fiber cement competitors. Unlike most of its
fiber cement competitors which process their products in batches that are then
pressed offline during the finishing processes, the Company produces its
products through a high speed continuous process. More recently, the Company has
focused its research efforts on developing new and differentiated products and
systems designed to deliver superior value for the Company's customers. The
Company believes that a focus on value creation for the customer ensures that
the development of differentiated products and systems is a coordinated effort
involving marketing, research and development and production personnel.
Low Cost Supplier of Fiber Cement
The Company has built high volume, low cost fiber cement manufacturing
plants based on its proprietary designs and specifications in the United States.
These plants have incorporated the latest production and process knowledge
gained from earlier plants and continued research and development efforts.
Management believes that the location of the Company's plants in Texas,
California, Florida and Washington positions the Company near high growth
markets in the United States while minimizing transportation costs in connection
with product distribution and raw material sourcing. Due to these cost
efficiencies, combined with volume growth and production improvements,
management believes the Company is one of the lowest cost suppliers of fiber
cement in each of the markets it serves. Over the past four years, the Company
has adopted an aggressive capital investment strategy aimed at expanding
capacity to meet growing market demand. This has also enabled the Company to
achieve increased economies of scale and improve operating efficiencies.
Strong Competitive Niche Position in Gypsum Wallboard
The Company has developed a strong, low cost niche position in the gypsum
wallboard industry and is now the fourth largest producer in the United States
with approximately a 7% share of industry capacity. Management believes that the
Company's manufacturing facilities in Arkansas (after the completion of the
current expansion project), Nevada and Washington are among the lowest cost
plants in their respective
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markets and service large regional areas which in the aggregate accounted for
approximately two-thirds of total U.S. demand during the Company's fiscal year
1998. A $158 million expansion program over the past three years has expanded
the Company's capacity by 368% and enhanced its competitive position, in large
part, by reducing the cost structure. During the last fiscal year, the Company
has more than doubled the capacity of its gypsum wallboard plant in Seattle and
increased capacity at the Las Vegas gypsum wallboard plant by 30%.
The Company serves as a low cost supplier in the Pacific Northwest through
its strong position in Washington where it is the larger of two U.S. producers.
This market purchases about 75% of its gypsum wallboard needs from producers in
the region. The Company's Las Vegas plant is located adjacent to one of the
westernmost commercially viable natural gypsum rock sources to the major
Southwest markets, enabling the Company to be a low cost supplier to these
markets. The Nashville, Arkansas plant, which is currently being expanded, is
located on one of the easternmost commercially viable natural gypsum rock
sources in the Southeast region, enabling the Company to be a low cost supplier
to its primary markets in this region. The Company believes that the combination
of the location of its plants, low production costs and low overhead base
provides a significant competitive advantage.
BUSINESS STRATEGY
The Company's strategic objective is to increase shareholder value by
expanding its leadership position in the manufacturing and marketing of fiber
cement and capitalizing on this position to build related businesses in the
building and construction industries worldwide. The Company seeks to maintain
its competitive advantage in fiber cement through the continued development of
differentiated products and improved process technology. In the gypsum wallboard
business, the Company believes that its cost position enables the maintenance of
production volume through industry downturns. Combined, these global strategies
are intended to mitigate the Company's susceptibility to construction cycles.
The international nature of the Company's business also reduces exposure to
regional construction cycles. More specifically, the Company's strategies
include the following:
Increase Demand for Fiber Cement Products
The Company plans to increase demand for fiber cement products in the
United States, Australia, New Zealand and selected Asian markets through the
continued displacement of more traditional building materials. The Company is
investing significant effort into educating builders, contractors and consumers
with respect to the performance, design and cost advantages of new and existing
fiber cement products over competing products. In the United States, management
estimates that fiber cement comprised approximately 10% of the new residential
construction segment of the external siding market in fiscal year 1998 and
approximately 6% and 1%, respectively, of the manufactured housing and
repair/remodel segments. Research commissioned by the Company indicates that its
products are generally preferred by homeowners over alternative siding products,
once they have been made aware of the features of the Company's products. As a
result of this research, in 1998 the Company began a regional U.S. marketing
campaign to raise awareness of the Company's siding products among consumers. In
Australia, management estimates that approximately 80% of new residential
construction utilized masonry as the external siding material in 1997. The
Company is marketing its products as a substitute to masonry and is highlighting
the cost, architectural and aesthetic advantages over brick.
Defend Current Position in Fiber Cement
Competition in the fiber cement business continues to increase. Management
believes that the Company has superior products, a broad product range, current
leading position in fiber cement and low cost manufacturing facilities which
leave it well positioned to defend against this increasing competition. To
continue to protect its position, the Company intends to further expand its
product line by launching new products and applications for fiber cement.
Additionally, the Company seeks to maintain excess capacity in its fiber cement
manufacturing facilities to allow it the flexibility to meet surges in customer
demand and to minimize the business that is lost through an inability to produce
its fiber cement products. Consequently, its
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first manufacturing plant in California has been expanded twice and three new
plants have been constructed in Florida, Texas and Washington, at an aggregate
cost of approximately $200 million over four years. Concurrently with increasing
capacity in the United States, the Company has been upgrading and consolidating
its capacity in Australia and New Zealand. In Australia, a three year, AUD 40
million upgrade program has been implemented that management believes will
result in reduced manufacturing costs primarily through increased automation. In
New Zealand, upgrading of the factory and warehouse facilities has resulted in
increased production levels and lower costs. See "-- Manufacturing Facilities."
Continue to Develop New and Differentiated Fiber Cement Products
The Company intends to continue to focus on developing new and
differentiated products specifically targeted for its primary geographic markets
by capitalizing on its research and development facilities in the United States
and Australia. In light of increasing competition, management believes product
differentiation is key to maintaining and enhancing the Company's position and
permitting value added pricing. The Company has various new products and systems
in development, such as products for external trim applications that contain
significant elements of proprietary technology which the Company believes will
preclude easy duplication by competitors.
Expand into New Geographic Markets for Fiber Cement Products
The Company plans to continue to expand into new geographic markets for
fiber cement products. Sales of fiber cement outside the United States,
Australia and New Zealand accounted for approximately 5% of fiscal year 1998
fiber cement revenues. The Company began exporting fiber cement products into
the Philippines in the early 1980s as a plywood replacement and commenced
construction in 1997 of a manufacturing facility in Cubayao (near Manila) to
meet local demand for its products. This new facility is currently scheduled to
be commissioned in October 1998. In addition, the Company has been exporting
products to Taiwan, Thailand, Singapore, Japan, the Middle East, Korea and
Indonesia and is exploring, over the long term, the possibility of constructing
manufacturing facilities in several of these locations. The Company has also
conducted detailed assessments of market opportunities in certain other regions
around the world. The continued geographic expansion of the Company into
additional markets diversifies the Company's customer base and reduces its
exposure to seasonality and the cyclicality of the construction industry in any
one particular market.
Maintain a Strong Niche Position in the U.S. Gypsum Wallboard Industry
The Company plans to continue to maintain its strong niche position in the
U.S. gypsum wallboard industry by offering a full line of products in the large
regional markets in which it operates. The Company has low-cost facilities that
currently operate at high levels of capacity utilization. The Company intends to
maintain this focus while continuing to improve operating efficiencies.
Following the expansion of its Seattle and Las Vegas facilities, the Company has
begun work on doubling the capacity of its gypsum wallboard plant in Nashville,
Arkansas. The Nashville plant, when completed, will be one of the largest gypsum
wallboard plants in the world with approximately 1.4 billion square feet of
capacity per annum and will expand the Company's share of U.S. industry capacity
from approximately 7% to approximately 9%. At that time, the Company's wallboard
plants will on average have the capacity to produce 2.6 times more gypsum
wallboard per plant than the industry average. The Company believes that its
competitive strengths leave it comparatively well positioned throughout market
cycles. The Company also plans to continue to review opportunities to invest in
strategically located assets which strengthen its niche position in the U.S.
gypsum wallboard industry and which complement its international fiber cement
business.
INDUSTRY OVERVIEW
U.S. Housing Industry and Fiber Cement
In the United States, fiber cement is principally used in the residential
building industry which fluctuates based on the level of new home construction
and the repair and remodeling of existing homes. The level of
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activity is generally a function of interest rates, inflation, unemployment
levels, demographic trends, gross domestic product growth and consumer
confidence. Demand for building products is also affected by residential housing
starts and existing home sales, the age and size of the housing stock and
overall home improvement expenditures. According to the U.S. Census Bureau,
domestic housing starts increased from approximately 1.0 million in 1991 to
approximately 1.5 million in 1994 and then remained relatively flat with little
change through 1997. Also according to the U.S. Census Bureau, residential
remodeling expenditures have increased from approximately $97 billion in 1991 to
$115 billion in 1994 and then remained relatively flat through 1997.
Fiber cement is one of the fastest growing segments of the building
products industry. Total industry shipments of fiber cement were estimated by
the Company to be approximately 500 mmsf during fiscal year 1998, up 35% from
approximately 370 mmsf in fiscal year 1997. The future growth of fiber cement
products will not only depend on overall demand for building products but also
the rate of penetration of fiber cement products against competing materials
such as wood, engineered wood (hardboard and oriented strand board), vinyl and
masonry. Fiber cement competition is expected to increase with three new fiber
cement manufacturing facilities expected to be commissioned in the United States
over the next 24 months by existing or new competitors.
In the United States, the largest application for fiber cement products is
in the external siding industry. Continued strength in residential construction
combined with gains in the repair and remodel market have resulted in strong
demand for external siding products. The Company estimates that the external
siding market was 6,700 mmsf in fiscal year 1998. The Company estimates that
fiber cement could grow from approximately 7% of the U.S. external siding market
in 1998 to 16% by 2002. Siding is a component of every building and it usually
occupies more square footage than other building components, such as windows and
doors. Choice of siding material is based on installed cost, durability,
aesthetic appeal, strength, weather resistance, maintenance requirements and
cost, insulating properties and other features. Different regions of the United
States show a decided preference among siding materials according to economic
conditions, weather, materials availability and local taste. The principal
siding materials are solid wood, engineered wood, fiber cement, vinyl, masonry
and stucco. Vinyl has the largest share of the siding market and fiber cement
has been gaining market share at the expense of wood and engineered wood
products due to durability concerns and the consequent higher maintenance
requirements.
International Fiber Cement Industry
In Australia and New Zealand, fiber cement building products are used in
both the residential and commercial building industries with applications in
external cladding, internal walls, ceilings, floors, soffits and fences. The
residential building industry represents the principal market for fiber cement
products, with the level of activity in this industry a function of interest
rates, inflation, unemployment levels, demographic trends, gross domestic
product growth and consumer confidence. Demand for fiber cement building
products in Australia is also affected by the level of new housing starts and
renovation activity. New housing starts in Australia grew strongly from 124,100
in fiscal year 1991 to 181,400 in fiscal year 1995 thereafter declining to a low
of 125,000 in fiscal year 1997. In fiscal year 1998, housing starts increased to
143,400. Renovation activity has increased steadily each year from fiscal year
1992 to fiscal year 1997 for a total increase (in local currency) over this
period of 35.6%.
Fiber cement products have gained broader acceptance across a range of
product applications in Australia and New Zealand than in the United States
primarily due to their earlier introduction. Fiber cement was developed in
Australia by the Company as a replacement for asbestos cement in the early
1980s. Competition has intensified over the past three years in the Australian
market with two Australian competitors establishing manufacturing facilities and
one import competitor entering the market. Import competition has also
intensified in New Zealand which has recently resulted in price reductions.
Management believes that fiber cement has strong growth potential in Asian
markets in the long-term as the benefits of framed construction over traditional
masonry construction are understood and accepted. In addition, the opportunity
to replace wood-based products such as plywood with the more durable fiber
cement
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is seen as attractive. The recent economic downturn and currency devaluations in
Asia adversely impacted demand for building products in the sector and increased
the cost of imported products relative to Asian-based manufacturers.
U.S. Gypsum Industry
In the United States, gypsum wallboard is principally used in the new
residential construction and repair and remodeling industries and, to a lesser
extent, in the non-residential construction industry. Historically, new housing
starts, particularly single-family starts, was the leading factor in the
consumption of gypsum wallboard. More recently, however, the repair and
remodeling market has become an increasingly large consumer of gypsum wallboard.
The Company believes that new residential construction and repair and remodeling
constituted approximately 45% and 35% of the gypsum wallboard market,
respectively, in 1997. The risks posed by the cyclical new residential
construction industry are somewhat mitigated by the increasing demand from the
less cyclical repair and remodeling market.
United States industry shipments of gypsum wallboard are estimated to have
increased from 20.6 billion square feet in 1987 to 25.5 billion square feet in
1997. In addition to the continued strength of the U.S. housing market, demand
for gypsum wallboard has been favorably impacted by a trend towards the
construction of larger single-family homes. According to the U.S. Census Bureau,
the median size of single-family homes in the United States has grown steadily
from approximately 1,755 square feet in 1987 to approximately 1,970 square feet
in 1997, representing an increase of approximately 12%.
Due to the commodity nature of the products, competition in the gypsum
wallboard industry is based principally on price and, to a lesser extent, on
product quality and customer service. Companies that manufacture locally can
offer more competitive pricing, benefiting from lower transportation cost. All
of the major gypsum wallboard producers, however, also sell to national
retailers and suppliers. Historically, the wallboard industry has been able to
sustain price increases when capacity utilization is above 90%. According to the
Gypsum Association, an industry trade group, total shipments of gypsum wallboard
in 1997 resulted in capacity utilization of over 95%, the fourth consecutive
year that capacity utilization has been above 90% and the fifth consecutive year
that wallboard prices have increased.
PRODUCTS
Fiber Cement
The Company offers the widest range of fiber cement products available in
the United States, Australia and New Zealand. Sales of fiber cement products
accounted for 46.9% of the Company's total net sales in fiscal year 1998. The
Company's total product offering is aimed at building and construction markets,
including new residential construction, manufactured housing, repair and
remodeling and a variety of commercial and industrial building applications. In
Australia, the Company's products were initially utilized for residential
applications. Over time, however, fiber cement has increasingly been used in
nonresidential construction. In fiscal year 1998, 12% of the Company's
Australian fiber cement sales revenue was derived from nonresidential
construction. In the United States, the Company to date has principally focused
on the new residential construction market. As a result, management believes
that additional expansion opportunities exist in the U.S. repair and remodel,
manufactured housing and nonresidential construction segments.
The Company offers a wide range of fiber cement products for both exterior
and interior applications, some of which have not yet been introduced into the
United States. In the United States and elsewhere, the Company's products are
typically sold as planks or flat sheets with a variety of patterned profiles and
finishes. Planks are used for external siding while flat sheets are used for
internal and external wall linings and floor underlay. Outside the United
States, the Company manufactures fiber cement products for use in these and
other applications such as building facades, lattice, fencing, decorative
columns and pipes.
Management believes that the Company's products provide distinctive
performance, design and cost advantages. The principal fiber cement attribute in
exterior applications is durability, particularly when compared to competing
wood and wood-based products, while offering comparable aesthetics. The
Company's
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fiber cement products exhibit superior resistance to the damaging effects of
moisture, fire, impact and termites. This has enabled the Company to capitalize
on the performance problems associated with certain competing products. In
particular, for external siding applications, wood and engineered wood can have
inferior durability performance to fiber cement products. A number of engineered
wood siding manufacturers have been subject to class action claims due to the
failure of their products, such as warping and rotting, and the Company has
enjoyed strong sales growth as a result of these competitive product failures.
Increasingly, the Company's siding products are specified by brand by
developers, architects and builders on new housing projects and are often
specified by the repair segment as a replacement for engineered wood product
siding. Vinyl siding products generally have better durability characteristics
than wood-based products, but typically cannot duplicate the superior aesthetics
of fiber cement and lack the characteristics necessary for effectively accepting
paint applications.
The Company's fiber cement products provide strength and the ability to
imprint simulated patterns which closely resemble patterns and profiles of
traditional materials such as wood and stucco. The surface properties provide a
superior paint-holding finish to wood and engineered wood products such that the
periods between necessary maintenance and repainting are longer. Compared to
masonry construction, the product is lightweight, physically flexible and can be
cut using readily available tools. This makes the product suitable for
lightweight construction across a range of architectural styles. The product is
especially well suited to timber or steel framed construction. The products have
a Class 1 fire rating in the United States which means they resist burning and
produce virtually no smoke when in contact with fire.
In ceramic tile underlayment applications, the Company's products provide
superior handling and installation characteristics compared to fiberglass mesh
cement boards. Compared to wood and wood-based products, the Company's products
provide the same advantages as apply to external applications. In addition, the
Company's fiber cement products provide reduced movement in response to exposure
to moisture than many alternative composition competing products, providing a
more consistent and durable substrate on which to install tiles. In internal
lining applications where exposure to moisture and impact damage are significant
concerns, the Company's products provide superior moisture resistance and impact
resistance to traditional gypsum wet area wallboard and other competing
products.
The Company emphasizes the performance attributes of its products and
continues to develop new products which, due to the materials used and the
process technology employed in their manufacture, may be difficult for
competitors to emulate. The Company believes that the proprietary nature of
these products, its ability to competitively source raw materials for these
products and the economies of scale which are derived from their manufacture
will reinforce the Company's leadership and low cost competitive position. See
"-- Research and Development in Fiber Cement Technology."
The Company expects to continue to expand and diversify its product range
in all markets where it operates, both as a domestic manufacturer and as an
exporter. As in the past, the Company believes this strategy will enable it to
access new markets for its products and to modify existing product lines to meet
changing customer needs. For example, the launch of a new tile backer board in
fiscal year 1998 has enabled the Company to increase sales of products to home
center retailers which access the building trade and home repair markets.
Additionally, in the past year the Company launched new "beaded lap" and
"shingle" style fiber cement siding products in the United States to capitalize
on demand for these styles of siding among home builders and homeowners. In
Australia and New Zealand, new products released over the past two years include
a premium line of milled lap siding products called Primeline(TM) and an
internal lining product with improved performance features called New
Villaboard(TM). In Asia, a new system called Hardiwall(TM) has been introduced
targeting masonry construction in commercial high rise internal wall
applications. During fiscal year 1999, the Company plans to release a new range
of facade systems in Australia and Asia aimed at the commercial market.
Gypsum
Sales of gypsum wallboard products accounted for 24.4% of the Company's
total net sales in fiscal year 1998. The Company produces a wide range of gypsum
wallboard products which are used as interior wall
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linings in residential, commercial and specialized (moisture and fire resistant)
applications at competitive prices. These products provide aesthetic as well as
sound and fire retardant features. The majority of these products are sold under
the Hardirock(TM), Hardikote(TM) and Hardiwall(TM) brand names. In addition, the
Company makes a wide range of gypsum plaster products for construction and
industrial applications together with specialty ground gypsum for agricultural
markets.
Building Systems
Sales of building systems products, which include modular relocatable
buildings and insulated panel products, accounted for 20.4% of the Company's
total net sales in fiscal year 1998 (including sales of building systems
products in New Zealand, which are included in the Australia/New Zealand Fiber
Cement segment for accounting purposes). The Company is the Australian market
leader in the manufacture, sale and lease of modular relocatable buildings. The
Company manufactures buildings for sale as well as for its rental fleet which is
the largest in Australia at more than 7,300 units. The Company's modular
buildings are aimed at end users in the mining and resources, building and
construction, commercial and industrial and institutional buildings markets. For
example, modular buildings are used as remote mining camp accommodations, as
extensions to public buildings, as portable offices on construction sites and as
temporary classrooms. The Company has been selected to provide approximately 950
temporary buildings as accommodations for the athletes' village as well as
buildings for the media village at the Sydney Olympic Games in the year 2000.
The Company is also the Australian market leader and only national manufacturer
of insulated panel products. These products have enhanced thermal insulation
properties and are typically used in commercial buildings as architectural
features which aid in energy efficiency as well as in cool storage applications
for industries requiring climate controlled facilities such as food processing
and distribution.
Windows
Sales of window products accounted for 8.3% of the Company's total net
sales in fiscal 1998. The Company manufactures wooden, aluminum and louvre
windows as well as conservatory style window systems for residential and
commercial applications in Australia where the Company believes it is the second
largest producer of windows. The Company is currently developing new wooden and
aluminum windows with the aim of increasing its market share of the low volume,
higher price segments of this highly fragmented industry. The Company also aims
to increase margins on the higher volume commodity segment by decreasing costs
through increased automation.
MANUFACTURING FACILITIES
Fiber Cement
United States. Over the past four years, the Company has adopted an
aggressive facility investment strategy in order to build excess production
capacity in an effort to ensure that it will be able to meet any increased
demand for its products and to improve operating efficiencies. Consequently, its
first manufacturing plant in California has been expanded twice and new plants
have been constructed in each of Florida, Texas and Washington, at an aggregate
total cost of approximately $200 million over four years. The Company now has
four of the largest and lowest cost fiber cement manufacturing plants in the
United States, which collectively accounted for approximately 85% of the total
U.S. fiber cement manufacturing capacity as of June 1998. The Company is
currently the only fiber cement manufacturer in the United States with multiple
manufacturing plants and management believes its plants have significantly
larger average capacity (approximately 2.5 times more) than those of its
competitors. Management also believes that the location of the Company's plants
in California, Texas, Florida and Washington positions the Company near high
growth markets in the United States while minimizing transportation costs in
connection with product distribution and raw material sourcing.
Australia and New Zealand. In Australia, three of the Company's four
manufacturing plants have been upgraded and modernized in the past year as part
of an AUD 40 million capital improvement program. This program, which includes
the automation of product finishing processes at all three upgraded plants, is
aimed at reducing direct costs, increasing production yields and improving
product quality. In New Zealand, the
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Company's fiber cement production line has been upgraded at a cost of NZD 4
million in the past year to increase output and to enable the closure of a
second smaller and less efficient line.
Plants and Process. The Company manufactures fiber cement in the United
States, Australia and New Zealand. A new plant is under construction in the
Philippines. The location of each of the Company's fiber cement plants and the
annual production capacity for such plants are set forth below:
<TABLE>
<CAPTION>
LOCATION ANNUAL PRODUCTION CAPACITY(1)
-------- -----------------------------
<S> <C>
USA
Fontana, California............................... 180 million square feet
Plant City, Florida............................... 300 million square feet
Cleburne, Texas................................... 290 million square feet
Tacoma, Washington................................ 150 million square feet
AUSTRALIA
Sydney, New South Wales(2)........................ 164 million square feet
Brisbane, Queensland(2)(3)........................ 106 million square feet
Perth, Western Australia(2)....................... 90 million square feet
NEW ZEALAND
Auckland(2)....................................... 52 million square feet
THE PHILIPPINES
Cabuyao (under construction)...................... 150 million square feet
</TABLE>
- ---------------
(1) Annual production capacity is calculated assuming the manufacture of 5/16"
thickness siding and determined by management based on historical experience
with the Company's production process and proprietary technology.
(2) The land on which each of these facilities are located is leased on a
long-term basis from JHIL. See "Certain Relationships and Related
Transactions."
(3) There are two manufacturing plants in Brisbane. One plant produces only flat
sheets and one plant produces only pipes and columns.
While the same basic process is used to manufacture fiber cement at each
facility, plants are designed to produce the appropriate mix of products to meet
each market's specific needs.
All of the Company's manufacturing facilities, except for the Brisbane pipe
and column plant, have been either newly constructed or substantially modernized
and upgraded in the past four years. The facilities were constructed so that
they can be efficiently expanded in response to consumer demand by either
increasing production capacity utilization and enhancing the economies of scale
or by adding additional lines to existing facilities. As at June 30, 1998,
capacity utilization for the Company's fiber cement plants by country was
approximately as follows:
<TABLE>
<CAPTION>
COUNTRY UTILIZATION OF CAPACITY(1)
------- --------------------------
<S> <C>
United States................................... 65%
Australia....................................... 76%
New Zealand..................................... 65%
</TABLE>
- ---------------
(1) Facility capacities are based on management estimates as no industry
standard exists for calculation of fiber cement manufacturing facility
capacities.
The capital cost per unit of production for new plants has significantly
declined since the Company opened its first U.S. plant in Fontana, California in
1989. This improvement is largely attributable to its utilization of proprietary
technology. Management believes that this capital cost per unit of capacity is
substantially lower than that of many competitive plants and is one factor in
improving the Company's cost position. In addition, the Company can now build
and commission new manufacturing plants significantly faster than when it built
its first production line in the United States. Management believes that the
speed and cost at which the Company can erect new plants relative to its
competitors enable the Company to respond
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rapidly to emerging regional demand for fiber cement and to gain the advantage
accorded to the first local producer in a market.
Gypsum
The Company has three gypsum wallboard manufacturing facilities in the
United States. The location of each of these facilities and their annual
production capacity is set forth below:
<TABLE>
<CAPTION>
LOCATION ANNUAL PRODUCTION CAPACITY(1)
-------- -----------------------------
<S> <C>
Seattle, Washington......................... 620 million square feet
Las Vegas, Nevada........................... 650 million square feet
Nashville, Arkansas......................... 710 million square feet
</TABLE>
- ---------------
(1) Annual production capacity is calculated assuming the manufacture of 1/2"
wallboard and Gypsum Association methodologies.
As of June 30, 1998, the average capacity utilization for the Company's
gypsum wallboard manufacturing facilities was approximately 97%. Capacity at the
Seattle plant was increased 125% in fiscal year 1998 at a cost of $28.4 million.
This project involved the construction of a second production line and an
upgrade and modernization of the first line. In addition, the Company recently
announced a $3 million upgrade project at the Seattle plant intended to increase
total plant capacity to approximately 700 million square feet. This upgrade is
scheduled to be completed in the Spring of 1999. At its Las Vegas plant, the
Company recently expanded capacity by approximately 30% at a cost of $8 million.
The Nashville plant, which was acquired in January 1997, is currently undergoing
a major refurbishment and upgrade at a cost of $60 million. This project will
almost double the annual production capacity of the plant to approximately 1.4
billion square feet by the second half of calendar year 1999, making it one of
the largest gypsum wallboard plants in the world and expanding the Company's
share of U.S. industry capacity to approximately 9%. At that time, each of the
Company's wallboard plants will have on average 2.5 times more production
capacity than the current industry average.
Each of the Company's gypsum manufacturing facilities has favorable
characteristics related to its location that confer significant competitive
advantages as described below:
Seattle. The Company has a strong position in the Pacific Northwest where
it is currently the larger of only two U.S. producers. It would be costly for
other competitors to establish manufacturing operations in this market due to
the need to build a plant with deep water access. There is no local source of
natural gypsum rock and raw materials are generally imported from Baja, Mexico.
Producers within the region currently meet about 75% of the region's demand for
gypsum wallboard. The balance of the necessary product is shipped into the
region from competing plants located near natural gypsum rock sources
significant distances from the Pacific Northwest and from Canada. The Company
believes that the combination of its location, low production costs and low
overhead base provides an important competitive advantage.
Las Vegas. The Company's Las Vegas plant is located adjacent to one of the
westernmost commercially viable natural gypsum rock sources in the United States
and supplies the major Southwest markets such as the Los Angeles basin and San
Diego in addition to Las Vegas itself. The combination of low cost gypsum rock,
proximity to large markets and a modern high speed plant enables the Las Vegas
facility to be a high quality and low cost supplier into its primary markets.
Nashville. The Nashville, Arkansas plant is located on one of the
easternmost commercially viable natural gypsum rock sources in the United States
and supplies the Southeast region. The plant is also located on an efficient
rail system that enables low cost distribution into its primary markets. The
facility is expected to reduce its per unit cost significantly once the current
expansion project is completed in 1999, enabling it to be one of the lowest cost
suppliers into its primary markets.
Building Systems
The Company manufactures modular buildings at five facilities in Australia
located in the cities of Townsville, Brisbane, Melbourne, Adelaide and Perth and
at one facility in New Zealand. Insulated panel
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products are manufactured at six facilities in Australia located in the cities
of Brisbane, Sydney, Melbourne, Launceston, Adelaide and Perth and at two
facilities in New Zealand.
Windows
The Company manufactures windows at eight facilities in Australia.
Manufacturing is labor intensive and many manufacturing practices have changed
little in the past 20 years. The Company's strategy is to automate certain
processes and consolidate manufacturing at fewer sites, thereby reducing
manufacturing costs and overhead while seeking to develop new products targeted
to the lower volume, higher value segments of the industry. The Company leases
four of these facilities and owns the remaining four facilities.
SALES, MARKETING AND DISTRIBUTION
Fiber Cement
The Company's principal markets for its fiber cement products are the
United States, Australia and New Zealand. In addition, the Company sells fiber
cement products in the Philippines, Taiwan, Thailand, Singapore, Japan, the
Middle East, Korea and Indonesia. The Company's "Hardi" brand name, customer
education in comparative product advantages, differentiated product range and
customer service, including technical advice and assistance, provide the basis
for the Company's marketing strategy. The Company offers its customers support
through a large specialized fiber cement sales force and customer service
infrastructure in the United States, Australia, New Zealand and the Philippines.
The customer service infrastructure includes inbound customer service support
coordinated nationally in each country, and is complemented by outbound
telemarketing capability. Within each regional market, the Company provides
sales and marketing support to building products dealers and lumber yards and
also provides support directly to the customers of these distribution channels,
principally home builders and building contractors.
In the U.S. new construction segment, there is a two-step distribution
process: the products are sold first to distributors, then to lumber yards. This
restricts the number of direct customers significantly such that, in 1998, the
Company's two and 10 largest U.S. customers accounted for 57% and 87% of its
U.S. fiber cement sales, respectively. The Company believes that its leadership
position has enabled it to establish distribution arrangements with a superior
selection of two-step distributors. Repair and remodel sales are typically sold
through the large home center retailers. In Australia and New Zealand, products
are generally sold directly to hardware stores and lumber yards rather than
through the two-step distribution process used in the United States. In the
Philippines, a network of thousands of small to medium size dealers sell to
consumers and builders while the Company sells product directly to real estate
developers. Physical distribution is primarily road transport in each country
with significant use of rail only in the United States.
The Company maintains dedicated regional sales management teams in the
major sales territories. The sales teams (including telemarketing staff) consist
of approximately 80 people in the United States, 135 people in Australia, 35
people in New Zealand and 35 people in the Philippines. Relationships with
national and other major accounts are maintained by national sales and national
account managers together with the regional sales managers and sales
representatives. The Company's sales force includes skilled tradespeople who
provide on-site technical advice and assistance. In certain cases, sales forces
manage specific product categories. For example, in the United States there are
separate sales forces for siding products, interior products and roofing
products. The interior products sales force provides in-store merchandising
support for home center retailers.
The Company also utilizes trade and consumer advertising and public
relations campaigns to generate demand for its products. These campaigns usually
explain the differentiating attributes of the Company's fiber cement products
and the suitability of its fiber cement products and systems for specific
applications. For example, a recent campaign in Australia highlighted the cost,
aesthetic and durability advantages of fiber cement as cladding for second story
house additions. In the United States, a consumer marketing campaign was
launched in 1998 which emphasizes the durability attributes of the Company's
products in climatic regions where competing products have suffered durability
problems and high failure rates.
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Despite the fact that distributors are the direct customers of the Company,
the Company also aims to increase primary demand for its products by marketing
its products directly to homeowners, architects and builders. This "pull
through" strategy, in turn, assists the Company in expanding sales for its
distribution network as distributors benefit from the increasing demand for the
Company's products. The Company also encourages architects and builders to
specify and install the Company's products based on the quality and
craftsmanship of its products.
Geographic expansion of the Company's fiber cement business has occurred in
markets where framed construction is prevalent for residential applications or
where there are opportunities to change building practices from masonry to
framed construction as in parts of Asia. Expansion is also possible where there
are direct substitution opportunities irrespective of the methods of
construction. The Company's recent entry into the Philippines is an example of
the ability to substitute fiber cement for an alternative product (in this case
plywood). With the exception of the Company's current major markets, Japan and
certain rural areas in Asia and Eastern Europe, most markets in the world
principally utilize masonry construction for external walls in residential
construction. Accordingly, further geographic expansion depends on the ability
of the Company to provide alternative solutions. The Company has launched a
"framed masonry" concept, using fiber cement as facing on either side of a steel
or timber frame, in an effort to penetrate new markets currently dominated by
masonry. Despite the economic volatility in Asia, this region remains an
important long-term growth market outside the United States.
The launch of products in the Philippines has been accompanied by
strategies to address the particular needs of local customers and the building
trade as fiber cement products are relatively new to this market and until
recently were not widely used. For example, the Company has established a
carpenter training and accreditation program whereby Filipino carpenters
unfamiliar with the Company's products are taught installation techniques. To
date, approximately 16,000 carpenters have attended training nights and
approximately 3,000 of them have been accredited under this program.
Additionally, the Company has a team of "Hardie Buddies" who work as in-store
merchandisers to help establish the products in retail outlets and explain their
attributes to customers, and "Hardie On-Site-Trainers" who visit building sites
to provide advice and technical assistance to building site workers.
Products manufactured in Australia and New Zealand are exported to a number
of markets in Asia and the Middle East by ship. A regional sales management team
based in Sydney is responsible for coordinating export sales into Asia and the
Middle East. This team is supported by sales offices and sales agents in seven
countries.
Gypsum
The Company's manufacturing facilities are located such that they can cost
effectively access approximately two-thirds of the current U.S. market for
gypsum wallboard. Physical distribution is by rail and road transport. Direct
customers are principally wallboard distributors. These distributors focus on
supplying all the products and accessories required by wallboard contractors
primarily in higher volume work such as new residential and commercial
construction. For the repair and remodel segment, the Company also supplies home
center retailers. The Company has its own gypsum field sales force of
approximately 20 people that operates on a regional basis, supporting the needs
of customers surrounding the plants. Sales regions (Pacific Northwest, Southwest
and Southeast) each have a regional sales team led by a regional sales manager
located in the territory. The three plants provide product into the same
distinct territories as are serviced by the regional sales teams.
Building Systems
The Company's Building Systems division has a designated sales force of
approximately 100 people and utilizes its own distribution and selling network
to bring its modular relocatable buildings to market. It sells and leases these
products directly to end users such as mining companies and construction
contractors. Buildings are transported by road. The division's insulated panels
and systems are sold to industrial and commercial customers by its own direct
sales force. Architectural systems, including Hardipanel
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Compressed(TM) fiber cement, are marketed to architects and specifiers. Physical
distribution of fiber cement panel products is carried out by the fiber cement
business.
Windows
Sales of the Company's window products are managed through a regional sales
management structure with sales staff seeking specification from builders and
then quoting on specific projects. This dedicated sales staff currently consists
of 140 people. The Company is in the process of training sales staff to sell
higher value windows and is using targeted brochure and magazine advertising
directed at consumers to promote the sale of higher value windows. This is a
directed strategy for the Australian industry where the quality of windows have
been a low priority with consumers and the average value of windows per home is
low compared to the United States and Europe. The Australian residential
building industry does not incorporate on a significant basis standardized
sizing for windows and therefore essentially all manufacturing is done for
specific orders. Windows are transported by road direct to building sites.
RESEARCH AND DEVELOPMENT IN FIBER CEMENT TECHNOLOGY
The Company pioneered the successful development of cellulose reinforced
fiber cement and during the 1980s progressively introduced its proprietary
product formulation and process technology. The Company has capitalized on its
strong market positions to maintain leadership in product research and
development and process technology enhancements. The Company's product
differentiation strategy, and its quest to maintain its position as one of the
low cost manufacturers of fiber cement, are supported by a significant
investment in research and development. In fiscal year 1998, the Company
invested $18.0 million or approximately 4.6% of fiber cement sales revenue
(approximately 2.2% of total net sales) in research and development. For fiscal
years 1997 and 1996, the Company invested $15.0 million and $12.1 million,
respectively, in research and development, representing 2.1% and 1.9% of total
net sales. Over the past five years, expenditure on research and development has
increased from $7.9 million to $18.0 million. Management believes that the
Company now has one of the largest and most advanced fiber cement research and
development capabilities in the world. In previous years, the Company's fiber
cement research and development focus was aimed primarily at enhancing the
process technology to improve operating efficiency while maintaining quality.
Unlike the Company's competitors, which mainly process their products in batches
which are then pressed offline during the finishing process, the Company's
products are produced through a high speed continuous process. More recently,
the Company has focused its research efforts on developing new and
differentiated products for the Company's key markets.
The Company's research and development activities are coordinated from a
Research and Development Unit in Sydney, Australia which employs approximately
110 full-time personnel. The specific objectives of this research and
development team are to develop (1) new and enhanced products with
differentiated attributes; (2) process technology improvements leading to
increased operational efficiency; (3) improved capital efficiency and speed of
plant construction; and (4) improved raw material cost savings. A new product
testing facility was built in Sydney in 1997 at a cost of $3 million. A new
research and development facility is currently under construction at the
Company's fiber cement plant in Sydney. The Company also opened a new research
and development center in Fontana, California in 1997 which was built at a cost
of $2 million. This facility employs approximately 25 people who work with the
Sydney-based research and development team to develop new products for the U.S.
market.
COMPETITION
Fiber Cement
The fiber cement business is highly competitive. In the United States there
are currently two other manufacturers, F.C.P., Inc. in Pennsylvania, and ABT
Building Products Corporation in North Carolina, which principally supply
markets in the Eastern, Southeastern and South Central regions. Mexalit, S.A., a
member of the Saint-Gobain Group, exports some fiber cement into the Southern
region of the United States from a plant in Mexico. In addition, three
competitors have announced intentions to build manufacturing
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facilities in the United States. Re-Con Building Products Inc. and Temple-Inland
Forest Products Corporation have formed a joint venture to build a facility in
Texas and have stated that the joint venture will commence production in 1998.
CertainTeed Corporation, a member of the Saint-Gobain Group, has \announced
plans to build a facility in Oregon and F.C.P., Inc. has announced its intention
to build a second manufacturing facility in South Carolina.
Some U.S. competitors have lowered prices of their fiber cement siding
products in order to compete for market share. See "Risk Factors -- Competition
and Pricing." The Company has responded by reducing its prices but has sustained
a premium between its selling prices and those of its competitors. To date,
these price reductions have been offset by cost savings arising from continuing
improvements in operating efficiencies and lower raw material costs.
Distribution costs have also continued to decline as the Company's network of
four plants has been completed.
In Australia, there are currently two other manufacturers of fiber cement.
CSR Limited, with a single manufacturing plant in Sydney, principally services
the eastern states markets of Queensland, New South Wales and Victoria. A
smaller competitor, BGC (Australia) Pty Ltd. in Western Australia, ships product
Australia-wide and also into New Zealand. In addition, Hume Cemboard Berhad,
based in Malaysia, ships product into Australia. The Company faces increasing
price pressure in Australia because of competition. In New Zealand, the Company
is currently the only domestic manufacturer. Competition is provided by product
imported principally from Hume Cemboard Berhad in Malaysia and from BGC in
Australia. CSR has announced that it will be importing fiber cement from
Australia and distributing directly to builders. There are currently no
competitive manufacturing facilities in the Philippines, although an asbestos
cement producer is competing for the plywood replacement market.
The Company also competes against manufacturers of exterior products such
as natural and engineered wood, vinyl, brick, stucco and masonry and interior
products based on cement, gypsum and fiberglass. These competitors include ABT
Building Products Corporation, CertainTeed Corporation, Georgia-Pacific
Corporation, Jannock Limited, Louisiana-Pacific Corporation, Masonite Building
System, Owens Corning, Temple-Inland Forest Products Corporation and United
States Gypsum Company in the United States. Boral Limited, CSR Limited and
Pioneer International Limited compete in brick and gypsum wallboard in
Australia. In New Zealand, Carter Holt Harvey Limited and Fletcher Challenge
Building Products produce competing products.
Gypsum
The U.S. gypsum wallboard industry is highly competitive and concentrated
with the three largest producers accounting for approximately 75% of industry
sales. Gypsum wallboard is a commodity product for which sales closely track
building and construction activity and the level of gross domestic product.
Competition is based principally on price. Prices, in turn, are affected by
transportation costs. As a result, profitability is principally determined by
operational efficiency and the strategic location of plants.
The Company is presently the fourth largest producer in the United States
with approximately a 7% share of industry capacity. The Company's major
competitors are United States Gypsum Company, National Gypsum Company and
Georgia-Pacific Corporation and several smaller, regional competitors. Upon
completion of the expansion of the Nashville, Arkansas plant, management
estimates the Company will have approximately 9% of total U.S. industry
capacity.
The Company believes it has a differentiated position from its competitors
in the gypsum industry. Management believes that the Company's manufacturing
facilities in Las Vegas, Nevada and Seattle, Washington are, and Nashville,
Arkansas will be, among the lowest cost plants in their respective markets and
such plants service large regional areas which accounted for approximately
two-thirds of total U.S. demand in 1998. At the same time, the Company's low
cost and relatively small market share enable it to run its plants at high
levels of utilization on a regular basis.
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Building Systems
Modular Relocatable Buildings. The Company services two principal markets
in Australia: the mining and resources market and the nonresidential market. The
competition in the mining and resources market sector is regional with Western
Portables Pty. Limited being the major competitor in Western Australia and
Campac Transportable Buildings being the major competitor in Queensland. The
nonresidential sector has two types of competitors: companies that lease
buildings and companies that manufacture buildings. There are two other national
participants in Australia in this segment, Wreckair (a division of Brambles
Industries Ltd.) and Coates Hire Operations Pty. Limited. There are also a
number of smaller regional competitors which operate in this sector.
Insulated Panels. The Company established this industry in Australia and is
the only national manufacturer. With the exception of the Company, the supply of
insulated panels in Australia and New Zealand is highly fragmented. Management
believes that the Company maintains a competitive advantage through the
introduction of new differentiated products and the maintenance of a national
distribution and manufacturing capability in Australia. In addition, the Company
has successfully developed a number of architectural products which are used in
facade and roofing applications for which no comparable competitive product
currently exists.
Windows
The Australian residential window and door industry is highly fragmented
with more than 1,500 manufacturers. The three major manufacturers (Boral
Limited, Stegbar and the Company) have a market share of approximately 45%. The
Company has a market share of approximately 12% of the windows sector.
RAW MATERIALS
Fiber Cement
The principal raw materials used in the manufacture of fiber cement are
cellulose fiber (wood-based pulp), silica (sand), portland cement and water.
Cellulose Fiber. Reliable access to specialized, consistent quality, low
cost pulp is critical to the production of fiber cement building materials.
Cellulose fiber is sourced from New Zealand and the United States and is
processed to the Company's specifications. It is subsequently further processed
using the Company's proprietary technology to provide the reinforcing material
in the cement matrix of fiber cement. The Company has developed a high level of
internal expertise in the production and use of wood-based pulps. This expertise
is shared with pulp producers, which have access to appropriate raw wood stocks,
in order to design superior reinforcing pulps. The resulting pulp designs are
typically proprietary and are the subject of confidentiality agreements between
the pulp producers and the Company. During fiscal year 1998, the Company
developed pulp supply alternatives in the United States which reduced the cost
of fiber cement production.
Silica. High purity silica is sourced locally by the various production
plants. In the majority of locations, the Company uses silica sand as its silica
source. In certain other locations, however, the Company processes quartz rock
and beneficates silica sand to ensure the quality and consistency of this key
raw material. In its Fontana, California and Tacoma, Washington plants, the
Company operates quartz mines as cost effective sources of sand are not
available.
Cement. Cement is acquired in bulk from local suppliers and is supplied on
a just in time basis to the Company's manufacturing facilities.
Water. The Company uses local water supplies and processes any waste water
to comply with environmental requirements.
Gypsum
The principal raw materials used in the production of gypsum wallboard are
gypsum rock and gypsum paperboard. The Nashville, Arkansas and Las Vegas, Nevada
facilities have access to Company owned and leased, long-term reserves of gypsum
rock which is mined at or adjacent to the plants. Based on current estimates,
the Nashville and Las Vegas mines have approximately 30 and 25 years of reserves
remaining,
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respectively. Gypsum rock for the Seattle plant is sourced from the Caopas mine
in Mexico and is shipped directly to the plant which has a deep water unloading
facility. See "Risk Factors -- Supply and Cost of Raw Materials -- Gypsum."
Based on current estimates, the Caopas mine has over 30 years of reserves
remaining. The supply contract with Oxbow Carbon & Minerals, Inc., the
distributor for the Caopas mine, will expire on December 31, 2006. The contract
provides that the parties may mutually agree to extend the term for another 10
years beyond 2006.
The other principal raw material requirement for gypsum wallboard is gypsum
paperboard. The Company currently has supply arrangements for paperboard with
two U.S.-based suppliers. The Company recently signed a 10-year agreement with
Republic to supply the majority of its paper needs from a new gypsum paperboard
mill that Republic is building in Oklahoma. The mill is due to be completed in
the second half of calendar year 1999 and is expected to begin supplying the
Company in 2000. Under the terms of the agreement with Republic, the Company's
gypsum paperboard costs will decline substantially from current levels.
Building Systems
The principal materials used in the manufacture of modular relocatable
buildings and insulated panel products are fiber cement, steel coil,
polystyrene, timber and plywood. Other inputs for the modular relocatable
buildings are finished products such as windows, plumbing and electrical
fittings. Fiber cement and windows are provided by the Company, and polystyrene
block is manufactured by the building systems division (in New Zealand) or
sourced externally in Australia. Other raw materials are readily available from
a number of competing suppliers.
Windows
The principal raw materials used in the manufacture of windows are wood
(cedar, meranti and pine), glass and aluminum. Cedar is sourced from Canada with
the price of this material determined by world supply and demand for cedar.
Meranti is sourced from Asia and pine is sourced from Australia. Glass is
sourced from Australia but competitive imports are available. Aluminum is
sourced as extrusions from Australia and China with the price determined by
world aluminum prices. Hardware, such as locks and hinges, is sourced from
Australian and New Zealand suppliers.
BACKLOG
In general, the Company does not produce against a backlog of firm orders.
Production is geared primarily to the level of incoming orders and to
projections of future demand. Inventories are maintained primarily to meet
delivery requirements of customers. The exceptions to this are modular
relocatable buildings, where the Company enters into contracts which require
stock to be built up and delivered according to a prearranged schedule, and
windows, which are produced against firm orders. At July 31, 1998 the backlog
for modular relocatable buildings was $14.4 million and amounted to $10.6
million, $28.2 million and $15.6 million at March 31, 1996, 1997 and 1998,
respectively.
EMPLOYEES
As of May 31, 1998, the Company had approximately 4,476 full time employees
worldwide of whom 1,244 were employed in North America, 2,757 in Australia, 312
in New Zealand and 163 in Asia. Of the total number of employees, 410 are
administrative employees, 661 are in sales, 3,175 are in manufacturing, 74 are
in marketing and 135 are in research and development. Approximately half of the
Company's employees are covered by labor agreements. The Company has two
collective bargaining agreements covering employees in the United States, one of
which expires in 1999 and the other of which expires in 2000. All of the non-
management workforce in Australia is unionized and is represented by a large
number of different unions. The Company has established processes in place for
improving productivity, negotiating wage and benefit reviews and handling
employee grievances. The Company has not experienced any strikes or work
interruptions in the United States during the last three years. The Company has,
however, experienced nine strikes over the past three years, affecting the
Company's Australian operations, lasting from one to six days. The Company
believes that it maintains generally favorable relations with its employees.
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ENVIRONMENTAL REGULATION
The Company's operations and properties are subject to extensive U.S.
federal, state and local and foreign environmental protection and health and
safety laws, regulations and ordinances which, among other matters, govern
activities and operations that may have adverse environmental effects, such as
discharges to air, soil and water, and establish standards for the handling of
hazardous and toxic substances and the handling and disposal of solid and
hazardous wastes ("Environmental Laws"). These Environmental Laws include, in
the United States, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Clean Air Act and
the Clean Air Amendments of 1990, the Occupational Safety and Health Act, the
Emergency Planning and Community Right to Know Act, the Clean Water Act, the
Surface Mining Control and Reclamation Act, the Toxic Substances Control Act and
analogous state and foreign statutes. Pursuant to certain Environmental Laws, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of environmental contamination on, under or in
such property. In addition, persons who arrange, or are deemed to have arranged,
for the disposal or treatment of hazardous substances may also be liable for the
costs of removal or remediation of environmental contamination at the disposal
or treatment site, regardless of whether the affected site is owned or operated
by such person. Environmental Laws often impose liability whether or not the
owner, operator or arranger knew of, or was responsible for, the presence of
such environmental contamination. Also, third parties may make claims against
owners or operators of properties for personal injuries and property damage
associated with releases of hazardous or toxic substances pursuant to
Environmental Laws as well as common law tort theories, including strict
liability. Environmental compliance costs in the future will depend on
regulatory developments that cannot be predicted. The Company does not currently
anticipate that any required expenditures or modifications will have a material
adverse effect on its business, financial condition or results of operations.
The Company's Seattle facility is listed on the Washington State Priority
List because groundwater underlying the facility is impacted with metals
emanating from an offsite source. The Company does not believe it is liable for,
and has not been requested to conduct, any investigation or remediation relating
to the metals in the groundwater. The Company believes that potential liability,
if any, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings and
administrative actions incident to the normal conduct of its business. Although
it is impossible to predict the outcome of any pending legal proceeding,
management believes that such proceedings and actions should not, individually
or in the aggregate, have a material adverse effect on its business, financial
condition or results of operations. The Reorganization has been structured so
that no existing or potential liabilities in relation to the manufacture by JHIL
and its non-transferring subsidiaries of products containing asbestos prior to
1987 are being assumed by the Company and the Company is indemnified by JHIL
with respect to any such liabilities. While it is impossible to predict the
incidence or outcome of future litigation, the Company believes that it is
unlikely that significant personal injury suits for damages for asbestos
exposure will be filed against the Company, or if filed, would have a material
adverse effect on the Company's business, results of operations or financial
condition. The Company's belief is based in part upon the advice of its
Australian legal advisers, Allen Allen & Hemsley, that there is no equivalent
under Australian law of the U.S. legal doctrine of "successor liability." Under
U.S. Law, this doctrine provides that an acquirer of the assets of a business
carried on by a corporation (as distinct from the acquirer of shares in that
corporation) can, in certain circumstances, be held responsible for liabilities
arising from the conduct of that business prior to the acquisition,
notwithstanding the absence of any contractual arrangement between the acquirer
and the selling corporation pursuant to which the acquirer agreed to assume such
liabilities. Allen Allen & Hemsley has advised the Company that the general
position under Australian law is that in the absence of a contractual agreement
to transfer specified liabilities of a business, such liabilities remain with
the corporation which previously carried on the business and are not passed on
to the acquirer of the assets. Specifically, in the case of the Company, based
on the information provided to Allen Allen & Hemsley, the transfer to it from
JHIL and certain non-transferring subsidiaries of business assets comprising
plant and equipment and inventory should not, in the opinion of Allen Allen &
Hemsley, give rise to the assumption by the Company or its subsidiaries of any
asbestos related liabilities (tortious or otherwise) which may have been
incurred during the period prior to the transfer of the assets when the business
was being carried on by JHIL and its non-transferring subsidiaries.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Upon the consummation of the Reorganization, the members of the Company's
Board of Directors, Supervisory Board and Managing Board and its executive
officers will be:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
SUPERVISORY BOARD
Alan McGregor................... 61 Member of the Board of Directors and the Supervisory Board
Peter Willcox................... 52 Member of the Board of Directors and the Supervisory Board
Michael Gillfillan*............. 49 Member of the Board of Directors and the Supervisory Board
Martin Koffel*.................. 58 Member of the Board of Directors and the Supervisory Board
Roger Siboni*................... 43 Member of the Board of Directors and the Supervisory Board
MANAGING BOARD
Keith Barton.................... 58 President, Chief Executive Officer and Chairman of the
Board of Directors and the Managing Board
Phillip Morley.................. 50 Chief Financial Officer and Member of the Board of
Directors and the Managing Board
Donald Cameron.................. 61 Treasurer and Member of the Managing Board
OTHER EXECUTIVE OFFICERS
Peter Macdonald................. 46 Chief Operating Officer
Louis Gries..................... 44 Executive Vice President -- Building Products, USA
Robert Rugg..................... 41 Executive Vice President -- Gypsum
Ken Boundy...................... 46 Executive Vice President -- International
John Moller..................... 39 Executive Vice President -- Building Systems
Robert Middendorp............... 45 Executive Vice President -- Building Products,
Australia/New Zealand
Noel Thompson................... 55 Senior Vice President -- Research and Development
Greg Baxter..................... 38 Senior Vice President -- Corporate Affairs
Brad Bridges.................... 39 Senior Vice President -- Planning, Human Resources and
Organizational Development
Peter Shafron................... 37 General Counsel and Secretary
</TABLE>
- ---------------
* Messrs. Gillfillan, Koffel and Siboni are expected to be elected to the
Company's Board of Directors and Supervisory Board shortly before or upon
completion of the Offerings.
Alan McGregor, AO, Member of the Board of Directors and the Supervisory
Board. Mr. McGregor will be a member of the Company's Board of Directors and
Supervisory Board. Mr. McGregor joined the Board of Directors of JHIL as a
non-executive director in March 1989 and has been Chairman of the Board since
December 1995. He is also Chairman of FH Faulding & Co. Ltd., Australian Wool
Testing Authority Ltd., Burns Philp & Company Ltd. and BresaGen Ltd., and a
board or committee member of the University of Adelaide, Memorial Trust of
Australia and The Center for Independent Studies Ltd. Mr. McGregor received an
M.A. in Economics and Law from Cambridge University in the United Kingdom and a
Bachelor of Laws from the University of Adelaide, Australia.
Peter Willcox, Member of the Board of Directors and the Supervisory
Board. Mr. Willcox will be a member of the Company's Board of Directors and
Supervisory Board. Mr. Willcox joined the Board of Directors of JHIL as a
non-executive director in May 1992. He is also deputy chairman and chairman
elect of Lend Lease Corporation Ltd., a director of Energy Developments Ltd., FH
Faulding & Co. Ltd., North Ltd. and Schroders Australia Holdings Ltd., Mr.
Willcox was previously Chief Executive Officer of BHP Petroleum and a director
of BHP Limited. Mr. Willcox received a B.A. and M.A. in Natural Sciences and
Physics from Cambridge University, United Kingdom.
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Keith Barton, President, Chief Executive Officer and Chairman of the Board
of Directors and the Managing Board. Dr. Barton will be the Company's President,
Chief Executive Officer and Chairman of the Board of Directors and the Managing
Board. Dr. Barton has been Managing Director of JHIL since his appointment in
April 1993. He is also the Chairman of a number of the Company's subsidiaries, a
director of Colonial Ltd., a councillor of the Royal Blind Society of New South
Wales, Australia and a member of the Business Council of Australia. Prior to
joining JHIL, Dr. Barton was an Executive Director of CSR Ltd. and managed CSR
Ltd.'s construction materials, chemical, timber and U.S. businesses between 1981
and 1993. Dr. Barton received a Bachelor of Science (Chemical Engineering) and a
Doctor of Philosophy from the University of New South Wales, Australia.
Phillip Morley, Chief Financial Officer and Member of the Board of
Directors and the Managing Board. Mr. Morley will be the Company's Chief
Financial Officer and a Member of the Board of Directors and the Managing Board.
Mr. Morley joined JHIL as Chief Accountant in October 1984 and served as
Financial Controller from 1988 until 1995 and Executive General Manager -- James
Hardie Building Services from 1995 until 1997. He was appointed Chief Financial
Officer of JHIL in 1997. He is also Chairman of James Hardie Securiplan Nominees
Pty. Ltd. Prior to joining JHIL, Mr. Morley held senior positions in finance and
management at Swift & Co. Ltd., Pfizer Corporation and Farley & Lewers Ltd. Mr.
Morley received a Bachelor of Economics in Economics and Accounting and an
M.B.A. from the University of Sydney, Australia.
Donald Cameron, Treasurer and Member of the Managing Board. Mr. Cameron
will be the Company's Treasurer and a Member of the Managing Board. Mr. Cameron
joined JHIL as General Manager, Finance -- James Hardie Pipelines in August 1991
and served as Company Secretary and Chief Accountant from April 1994 to October
1997. In October 1997 he was appointed Company Secretary and Treasurer. Prior to
joining JHIL, Mr. Cameron held a number of senior commercial and financial
positions with Southcorp Ltd. and Rheem Australia Ltd. Mr. Cameron received a
Bachelor of Economics from the University of Adelaide, Australia.
Peter Macdonald, Chief Operating Officer. Mr. Macdonald will be the
Company's Chief Operating Officer. Mr. Macdonald joined JHIL as General
Manager -- James Hardie Building Boards Australia in August 1993 and was
appointed President of James Hardie Industries (USA) Inc. in October 1994. Prior
to joining JHIL, Mr. Macdonald held senior management positions at Tyco
Laboratories and Metal Manufactures Ltd. where he was Group General Manager of
MM Cables. Mr. Macdonald received a Bachelor of Commerce and Administration from
Victoria University, New Zealand and an M.B.A. from Pepperdine University.
Louis Gries, Executive Vice President -- Building Products, USA. Mr. Gries
will be the Company's Executive Vice President -- Building Products, USA. Mr.
Gries joined JHIL as Manager of the Fontana plant for James Hardie Building
Products in February 1991 and was appointed General Manager -- James Hardie
Building Products (Fiber Cement) in January 1992 before being appointed
President of James Hardie Building Products (Fiber Cement) in December 1993.
Prior to joining JHIL, Mr. Gries held senior management positions with United
States Gypsum Company. Mr. Gries received a B.S. in Mathematics from the
University of Illinois and an M.B.A. from California State University, Long
Beach.
Robert Rugg, Executive Vice President -- Gypsum. Mr. Rugg will be the
Company's Executive Vice President -- Gypsum. Mr. Rugg joined JHIL as President
of James Hardie Gypsum in April 1998. Prior to joining JHIL, Mr. Rugg held a
number of senior positions with United States Gypsum Company, including General
Manager -- Industrial Gypsum and Director of Business Development -- Gypsum Wood
Fiber. Mr. Rugg received a B.S. in Finance from the University of Illinois and
an M.B.A. from St. Mary's College.
Ken Boundy, Executive Vice President -- International. Mr. Boundy will be
the Company's Executive Vice President -- International. Mr. Boundy joined JHIL
as Executive General Manager -- International in December 1994. Prior to joining
JHIL, Mr. Boundy was Chief Executive Officer of Goodman Fielder Asia Holdings
Ltd. from 1993 until 1994, Group Corporate Development Manager for Goodman
Fielder Ltd. from 1991 until 1993 and Marketing Manager for Mildara Wines, Ltd.
from 1986 until 1991. Mr. Boundy received a Bachelor and Master of Agricultural
Science from Melbourne University, Australia and an M.B.A. from Deakin
University, Australia.
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John Moller, Executive Vice President -- Building Systems. Mr. Moller will
be the Company's Executive Vice President -- Building Systems. Mr. Moller joined
JHIL as General Manager of Building Automation, which manufactured security
systems, in April 1992. He was Manager -- James Hardie Building Services from
September 1995 until it was sold in January 1997 and was appointed Executive
General Manager -- James Hardie Building Systems in January 1997. Prior to
joining JHIL, Mr. Moller held a variety of positions at Honeywell -- Australia.
Mr. Moller has a Bachelor of Engineering from the University of Adelaide,
Australia and a Graduate Diploma in Marketing from Macquarie University,
Australia.
Robert Middendorp, Executive Vice President -- Building Products,
Australia/New Zealand. Mr. Middendorp will be the Company's Executive Vice
President -- Building Products. Mr. Middendorp joined JHIL as General Manager,
Business Development -- James Hardie Building Services in August 1991 and served
as General Manager, Planning of JHIL before being appointed Executive General
Manager -- James Hardie Building Products in April 1996. Prior to joining JHIL,
Mr. Middendorp was a management consultant and held senior commercial management
positions with Repco Ltd., FH Faulding & Co. Ltd., Pirelli Ericsson Cables Ltd.
and ACI Ltd. Mr. Middendorp received a Bachelor of Economics in Accounting from
the University of Adelaide, Australia.
Noel Thompson, Senior Vice President -- Research and Development. Mr.
Thompson will be the Company's Vice President -- Research and Development. Mr.
Thompson joined JHIL as head of product development for James Hardie Building
Products in September 1993 and was appointed General Manager -- Research and
Development in January 1996. Prior to joining JHIL, Mr. Thompson held various
positions in research and development and manufacturing at BHP Steel. He has
also held various positions at the University of New South Wales, the Australian
Atomic Energy Commission and the University of Sydney. Mr. Thompson received a
B.S. in Physics from the University of Sydney, Australia and an M.S. in Nuclear
Science and Engineering from the University of Birmingham, United Kingdom.
Greg Baxter, Senior Vice President -- Corporate Affairs. Mr. Baxter will be
the Company's Vice President -- Corporate Affairs. Mr. Baxter joined JHIL as
General Manager -- Corporate Affairs in November 1996. Prior to joining JHIL,
Mr. Baxter was a partner principal of Balstrup Baxter Corporate Communication
from 1993 until 1996 and was General Manager -- Corporate Affairs for Goodman
Fielder Ltd. from 1990 until 1993.
Brad Bridges, Senior Vice President -- Planning, Human Resources and
Organizational Development. Mr. Bridges will be the Company's Vice
President -- Planning, Human Resources and Organizational Development. Mr.
Bridges joined JHIL as Manager, Logistics-James Hardie Pipelines (New Zealand)
in May 1989. He served as Manager, Divisional Planning & Logistics -- James
Hardie Pipelines from 1992 until May 1996 and General Manager, Planning of JHIL
from May 1996 until September 1997. He was appointed General Manager -- Human
Resources, Organizational Development and Planning in September 1997. He is also
a director of James Hardie Securiplan Nominees Pty. Ltd. Mr. Bridges received a
Bachelor of Technology in Industrial Technology from Massey University, New
Zealand.
Peter Shafron, General Counsel and Secretary. Mr. Shafron will be the
Company's General Counsel and Secretary. Mr. Shafron joined JHIL as Legal
Officer in August 1993 and served as Senior Company Solicitor from June 1995
before being appointed General Counsel of JHIL in March 1997. Mr. Shafron is
also a director of James Hardie Finance Ltd., a subsidiary of JHIL. Prior to
joining JHIL, Mr. Shafron was an associate with the Australian law firm of Allen
Allen & Hemsley. Mr. Shafron received a B.A. from the Australian National
University and a Bachelor of Laws and a Master of Laws from the University of
Sydney, Australia.
Shortly before or upon completion of the Offerings, the Company expects the
following persons will be elected to the Board of Directors and the Supervisory
Board:
Michael Gillfillan. Mr. Gillfillan is currently Vice Chairman and Chief
Credit Officer of Wells Fargo Bank, N.A., positions he has held since 1996 and
from 1992 to 1994. He has also served as Vice Chairman, Commercial and Corporate
Banking Groups of Wells Fargo Bank, N.A., from 1994 to 1996.
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Martin Koffel. Mr. Koffel is currently Chairman of the Board of Directors,
Chief Executive Officer and President of URS Corporation, an engineering
services company, positions he has held since 1989.
Roger Siboni. Mr. Siboni is currently President and Chief Executive Officer
of Epiphany, Inc., a provider of web-based enterprise relationship management
services, positions he has held since August 1998. Prior to that, he served as
Deputy Chairman and Chief Operating Officer of KPMG Peat Marwick LLP from
October 1996 to July 1998. Mr. Siboni also served as a national managing partner
of the information, communication and entertainment practice of KPMG Peat
Marwick LLP and a member of the firm's management committee from 1993 to 1996.
MANAGEMENT STRUCTURE
Upon consummation of the Reorganization the Company will have a
multi-tiered board structure. This structure will consist of a board of managing
directors (the "Managing Board"), a board of supervisory directors (the
"Supervisory Board"), and a board of directors (the "Board of Directors"). The
Managing Board, which will consist of a small number of executive officers of
the Company, is responsible for the day-to-day operations of the Company. The
Supervisory Board, which will consist exclusively of persons who are not
officers or employees of the Company, is responsible for advising and
supervising the Managing Board, taking into account the general interest of the
Company. The Board of Directors will consist of all of the members of the
Supervisory Board, the Chairman of the Managing Board and such members of the
Managing Board as the Chairman of the Managing Board shall determine (provided
that the number of Managing Directors on the Board of Directors at any given
time cannot exceed the number of Supervisory Directors then on the Board of
Directors). The Board of Directors oversees the general course of affairs of the
Company and its business. Pursuant to the Company's Articles of Association, the
Board of Directors may from time to time adopt written policies governing the
internal organization of the Managing Board, including directions to the
Managing Board concerning general financial, economic, personnel and social
policies of the Company. In addition, the Board of Directors may from time to
time specify by resolution certain actions of the Managing Board that require
the approval of the Board of Directors. The general meeting of shareholders of
the Company may also from time to time specify by written resolution certain
decisions of the Managing Board that require the approval of the general meeting
of shareholders of the Company.
Members of the Managing and Supervisory Boards are elected by the
shareholders of the Company. The Board of Directors has the power to make
"binding nominations" for the election of members of the Managing Board and the
Supervisory Board. The general meeting of shareholders of the Company may
resolve by a resolution passed with a two-thirds majority of the votes cast at
the meeting (provided such majority represents more than half of the outstanding
Common Stock), to overrule such binding nominations. See "Description of Capital
Stock." Members of the Managing Board and the Supervisory Board are elected for
a one-year term.
Each director holds office until the expiration of such director's term of
office or such director's resignation, retirement or removal. Supervisory
directors must retire no later than the day of the annual meeting of
shareholders held in the year in which such director reaches the age of 72. The
general meeting of shareholders may suspend or dismiss directors by a resolution
passed with a majority of the votes cast at the meeting, provided that such
majority also represents more than half of the issued share capital. If,
however, the Board of Directors has proposed such suspension or dismissal, such
a resolution may be adopted with a simple majority of the votes cast at the
meeting. In addition, the Supervisory Board may suspend members of the Managing
Board. Executive officers (other than members of the Managing Board) are
appointed by the Managing Board (with the approval of the Board of Directors),
and serve at the pleasure of the Managing Board.
Upon consummation of the Offerings, the Company's Articles of Association
will provide that the Managing Board shall consist of one or more persons and
that the Supervisory Board shall consist of two or more persons. The Board of
Directors shall therefore consist of three or more persons. The Articles of
Association will not provide for a maximum number of persons to sit on such
Boards and thus (subject to the foregoing minimums) the exact number of members
of the Managing Board and the exact number of
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members of the Supervisory Board will be set by the Board of Directors, while
the exact number of members of the Board of Directors will depend on the number
of supervisory directors then in office as well as the number of Managing
directors who are designated by the Chairman of the Managing Board to sit on the
Board of Directors provided that, as noted above, the number of managing
directors that are on the Board of Directors cannot exceed the number of
supervisory directors on the Board of Directors. Upon the consummation of the
Offerings, the Managing Board, the Supervisory Board and the Board of Directors
will consist of three, five and seven persons, respectively.
References in this Prospectus to directors shall, unless the context
indicates otherwise, refer to those persons who are members of one or more of
the Board of Directors, the Managing Board or the Supervisory Board.
The Board of Directors, the Managing Board and the Supervisory Board shall
each select a Chairman from their respective members. Under the laws of The
Netherlands, members of the Managing Board may not serve on the Supervisory
Board (but may serve on the Board of Directors).
The powers of the Board of Directors, the Managing Board and the
Supervisory Board can only be exercised by duly adopted resolutions. Resolutions
of any of the Board of Directors, the Managing Board and the Supervisory Board
may be adopted by a majority of the members of such board who are present or
represented at a duly constituted meeting at which a majority of the members of
such board is present or represented, provided however, that the due adoption of
resolutions by the Board of Directors requires that at least one of the
supervisory directors votes in favor of such resolution. In case of a deadlock
at a meeting of the Board of Directors, the Chairman of the Supervisory Board
shall decide. Each of the boards may adopt resolutions by unanimous written
consent. Pursuant to the Articles of Association, the Board of Directors has the
authority, by a resolution adopted unanimously by all members of the Board of
Directors, to terminate the existence of the Managing Directors, in which case
all of the authorities of the Board of Directors shall be vested in the
Supervisory Board.
The Chief Executive Officer of the Company acting individually or two
managing directors acting jointly will have the power to bind the Company,
provided that such persons have been duly authorized to do so by the Managing
Board. No other individuals will have the power to bind the Company unless such
person has been duly authorized to do so by the Managing Board (subject to the
approval of the Board of Directors) or such person has been granted a power of
attorney to do so.
BOARD COMMITTEES
Audit Committee
Promptly following the consummation of the Offerings, the Board of
Directors will create an Audit Committee which will consist of at least two
independent directors. The Audit Committee will be charged with reviewing and
assessing the adequacy of accounting polices, internal and external reporting
procedures, and the internal auditing and risk management control systems, and
meeting with the Company's independent accountants.
Compensation Committee
Promptly following the consummation of the Offerings, the Board of
Directors will create a Compensation Committee which will consist of at least
two independent directors. The Compensation Committee will advise the Board of
Directors on the compensation of directors and executive officers.
COMPENSATION OF DIRECTORS AND OFFICERS
It is anticipated that, following the consummation of the Offerings, the
Company will establish a customary compensation program for directors who are
not employees of the Company. All directors will be reimbursed for expenses
incurred to attend meetings.
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Several of the officers of the Company are also officers of JHIL. JHIL has
entered into employment agreements with many of these officers. Upon
consummation of the Offerings, JHIL intends to assign the benefits of these
employment agreements to the Company, subject to additional expatriate
provisions. The Company will directly pay all of the salary and benefits for
such officers. Under this arrangement, the Company intends to enter into a
reimbursement agreement (the "Reimbursement Agreement") with JHIL pursuant to
which JHIL will reimburse the Company for the amount of time spent by officers
of the Company performing work for JHIL and its subsidiaries. Dr. Barton,
however, will be paid directly by the Company and JHIL for the performance of
his duties for the Company and JHIL, respectively. The Company also has an
employment agreement directly with Mr. Macdonald. See "-- Employment
Agreements."
The Company did not pay any compensation to its directors or its officers
in fiscal year 1998 because it was not incorporated at that time.
The aggregate amount of compensation paid by JHIL in fiscal year 1998
(including base salaries and bonuses paid under JHIL's Economic Profit Incentive
Plan (as described herein)) to the above-listed members of the Board of
Directors, the Supervisory Board and the Managing Board of the Company and to
the executive officers of the Company as a group (15 persons), in their
capacities as members of the Board of Directors and/or corporate officers of
JHIL, was approximately $2.8 million. In addition, each of these directors and
officers (except Mr. Gries), in their capacities as members of the Board of
Directors and/or corporate officers of JHIL, participated in JHIL's Executive
Superannuation Plan, a defined benefit plan. JHIL, however, did not make any
payments to the trustee-managed superannuation fund on behalf of the directors
and officers in fiscal year 1998. While JHIL ordinarily would have been required
to make payments to the superannuation fund, the fund had a surplus in fiscal
year 1998 and, pursuant to the rules of that fund, a portion of that surplus was
allocated to the accounts of each of the directors and officers in lieu of a
payment by JHIL. Had the superannuation fund not been in surplus in fiscal year
1998, JHIL would have been required to make contributions of approximately
$410,000 on behalf of such directors and officers. Mr. Gries participated in the
James Hardie Industries (USA) Inc. Retirement and Profit Sharing Plan, a defined
contribution plan, in fiscal year 1998. JHIL contributed $10,000 on his behalf
to this plan in fiscal year 1998.
EMPLOYMENT AGREEMENTS
The following descriptions of the employment agreements between the Company
and each of Dr. Barton and Messrs. Macdonald, Morley, Cameron, Shafron, Baxter,
Bridges, Rugg, Boundy, Moller, Middendorp and Thompson (each an "Employment
Agreement") are intended only as a summary. Copies of Dr. Barton's and Mr.
Macdonald's Employment Agreements, have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. Each of the
Employment Agreements is or will become effective prior to the completion of
Offerings. Certain of the Employment Agreements are currently with JHIL, but
will be assigned to the Company, subject to additional expatriate provisions for
the officers relocating to the United States, which are included in the
description below.
Dr. Barton will serve as President, Chief Executive Officer and Chairman of
the Board of Directors and the Managing Board of the Company pursuant to the
terms of two employment agreements with the Company which continue in effect
until October 31, 1999. Under the terms of the employment agreement for his
duties as Chairman of the Board of Directors and the Managing Board, Dr. Barton
receives a salary of AUD 80,000 and is eligible to receive a bonus targeted at
100% of his annual salary upon the accomplishment of certain mutually agreed
upon objectives. Under the terms of the employment agreement for his duties as
President and Chief Executive Officer of the Company, Dr. Barton receives an
annual salary of AUD 575,000 and is eligible to receive a bonus targeted at 100%
of his annual salary upon the accomplishment of certain mutually agreed upon
objectives. In addition, under the terms of the employment agreement, Dr. Barton
is eligible to receive options and other rewards under the Company's Equity
Incentive Plan. Dr. Barton also has an employment agreement with JHIL for
services provided to JHIL. See "Certain Relationships and Related
Transactions -- Members of Boards and Executive Officers of the Company and
JHIL"
Mr. Macdonald has an employment agreement with the Company, which expires
on October 31, 1999, under which he will serve as Chief Operating Officer of the
Company. Under the terms of the employment
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agreement, Mr. Macdonald receives an annual salary of $350,000 and is eligible
to receive a bonus under the Company's Economic Profit Incentive Plan. His
salary will be reviewed on an annual basis. In addition, under the terms of the
employment agreement, Mr. Macdonald is eligible to receive options and other
rewards under the Company's Equity Incentive Plan and certain additional
benefits.
Mr. Rugg has an employment agreement with a U.S. subsidiary of the Company
which began in April 1998. Under the terms of the employment agreement, Mr. Rugg
receives an annual salary of $210,000, reviewed annually with a bonus under the
Company's Economic Profit Incentive Plan. In addition, Mr. Rugg is eligible to
receive options and other rewards under the Company's Equity Incentive Plan. Mr.
Rugg also received certain benefits for joining the subsidiary, including a
payment for options foregone of his previous employer and a grant of shadow
stock in JHIL. The agreement continues in effect until Mr. Rugg's termination or
separation from the Company's subsidiary. If the Company terminates without
cause or Mr. Rugg resigns for good reason, he is entitled to the equivalent of
between 12 to 24 months base compensation.
Messrs. Boundy, Moller, Middendorp and Thompson have employment agreements
with the Company. Under the terms of these agreements, each of Messrs. Boundy,
Moller, Middendorp and Thompson will receive annual base salaries of AUD
295,050, AUD 209,350, AUD 264,000 and AUD 200,000, respectively. Salaries will
be reviewed annually in July of each year. Messrs. Boundy, Moller, Middendorp
and Thompson are each entitled to receive a bonus under the Company's Economic
Profit Incentive Plan. In addition, under the terms of the employment
agreements, Messrs. Boundy, Moller, Middendorp and Thompson are eligible to
receive options and other rewards under the Company's Equity Incentive Plan.
Each of Messrs. Boundy, Moller, Middendorp and Thompson may terminate their
respective agreement upon 3-months' written notice to the Company. The Company
may terminate the agreements for cause (with one-months' notice or pay), for
incapacity (with 3-months' notice or pay) or at any time (with 6-months' notice
or pay, except for Mr. Boundy's agreement which provides for 12 months' notice
or pay). The agreements will remain in force until terminated in accordance with
the provisions set forth in the agreements.
Messrs. Morley, Cameron, Shafron, Baxter and Bridges also have employment
agreements with the Company that include expatriate packages. These employment
agreements provide for an annual base salary of $208,000, NLG 259,075, $170,500,
$198,500, and $198,500, respectively. Salaries will be reviewed annually in July
of each year. Messrs. Morley, Cameron, Shafron, Baxter and Bridges are each
entitled to receive a bonus under the Company's Economic Profit Incentive Plan.
In addition, under the terms of the employment agreements, Messrs. Morley,
Cameron, Shafron, Baxter and Bridges are eligible to receive options and other
rewards under the Company's Equity Incentive Plan. Messrs. Morley, Cameron,
Shafron, Baxter and Bridges also will receive relocation and other benefits.
Each employment agreement continues in effect for 3 years from the consummation
of the Reorganization. The employment agreements are terminable by the Company
with 12-months' written notice in the first year of the agreements, 9-months'
written notice in the first 6 months of the second year of the agreements,
6-months' written notice in the second half of the second year of the agreements
and 3-months' written notice in the third year of the agreements. The Company
may pay a terminated officer's salary for the notification period in lieu of
notification. Each officer may terminate his agreement with 3-months' written
notice. In addition, Mr. Morley has a separate employment agreement with the
Company for his duties as a member of the Managing Board of the Company.
Pursuant to such agreement, Mr. Morley receives a salary of $50,000.
ECONOMIC PROFIT INCENTIVE PLAN
JHIL currently maintains an Economic Profit Incentive Plan pursuant to
which it compensates certain of its directors and officers. In connection with
the Reorganization, the Company intends to adopt a similar plan. Under the
Company's Economic Profit Incentive Plan, designated directors and officers will
be entitled to receive bonus payments upon the accomplishment of Company profit
and certain other mutually agreed upon personal objectives. The Company's
Economic Profit Incentive Plan is a variable pay plan which links the Company's
economic profit to bonus payments to certain key individuals. The target bonus
is paid to the participant at the end of the year if the economic profit target
is met. If the economic profit target is exceeded, one-third of the excess bonus
is paid to the participant at the end of the year; the remaining two-thirds is
then
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deposited with a notional bank, and can be reduced in future years if the
economic profit target is not met. This arrangement distinguishes between
sustained performance and one-time performance and encourages participants to
have a long-term view.
1998 EQUITY INCENTIVE PLAN
Under the Company's 1998 Equity Incentive Plan (the "Equity Incentive
Plan"), designated directors, officers and employees, of the Company will be
eligible to receive awards in the form of stock options, performance awards,
restricted stock grants, stock appreciation rights, dividend equivalent rights,
phantom stock or other stock-based benefits. The Equity Incentive Plan is
intended to promote the long-term financial interests of the Company by
encouraging its management and other persons to acquire an ownership position in
the Company, to align their interests with those of the Company's shareholders
and to encourage and reward their performance. The Equity Incentive Plan, which
is expected to be approved by the Board of Directors, will be effective upon
consummation of the Offerings.
An aggregate of shares of Common Stock will be reserved for
issuance under the Equity Incentive Plan, provided that such number (and any
awards granted) will be subject to adjustment in the event of a stock split,
stock dividend or other change in the Common Stock, the capital structure or a
restructuring of the Company. No individual may be granted options or awards in
respect of more than shares as performance-based compensation in
any calendar year.
The Equity Incentive Plan will be administered by the Board of Directors or
the Compensation Committee thereof. Subject to the provisions of the Equity
Incentive Plan, the Board of Directors or the Compensation Committee will be
authorized to determine who may participate in the Equity Incentive Plan, the
number and types of awards made to each participant and the terms, and the
conditions and limitations applicable to each award. In addition, the Board of
Directors or the Compensation Committee will have the exclusive power to
interpret the Equity Incentive Plan and to adopt such rules and regulations as
it may deem necessary or appropriate for purposes of administering the Plan.
Subject to certain limitations, the Board of Directors will be authorized to
amend, modify or terminate the Equity Incentive Plan to meet any changes in
legal requirements or for any other purpose permitted by law.
The purchase or exercise price of any award granted under the Equity
Incentive Plan may be paid in cash or other consideration at the discretion of
the Board of Directors or the Compensation Committee. The Board of Directors or
the Compensation Committee, in its discretion, may allow cashless exercises of
awards or may provide Company assistance to purchase such options.
Stock Options. Under the Equity Incentive Plan, the Board of Directors or
the Compensation Committee is authorized to grant options to purchase shares of
Common Stock, including options qualifying as "incentive stock options" ("ISOs")
under Section 422 of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), and options that do not so qualify ("NSOs") to eligible persons as
additional compensation for their services to the Company. Options shall be
exercisable over such periods as may be determined by the Board of Directors or
the Compensation Committee, but no stock option may be exercised after 10 years
from the date of grant. Options may be exercisable in installments and upon such
other terms as determined by the Board of Directors or the Compensation
Committee. Options will be evidenced by notices of option grants sent by the
Board of Directors or the Compensation Committee. No option may be transferable
other than by will or by the laws of descent and distribution or pursuant to
certain domestic relations orders. The purchase price of shares of Common Stock
subject to an ISO shall not be less than 100% of the Fair Market Value (as
defined in the Equity Incentive Plan) of such shares of Common Stock on the date
of grant (or 110% in the case of an ISO granted to an individual holding more
than 10% of the Company's capital stock).
Performance Awards. The Board of Directors or the Compensation Committee in
its discretion may grant performance awards to an eligible person contingent on
the attainment of criteria specified by the Board of Directors or the
Compensation Committee. Performance awards will be paid in the form of cash,
shares of Common Stock or a combination of both. The Board of Directors or the
Compensation Committee will
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determine the total number of performance shares subject to an award, the terms
and the time at which the performance shares will be issued.
Restricted Stock Awards. Under the Equity Incentive Plan, the Board of
Directors or the Compensation Committee may grant restricted shares of Common
Stock, which are subject to forfeiture under such conditions and for such
periods of time as the Board of Directors or the Compensation Committee may
determine. Shares of such restricted stock may not be sold, transferred,
assigned, pledged or otherwise encumbered so long as such shares remain
restricted. The Board of Directors or the Compensation Committee shall determine
the conditions or restrictions of any restricted stock awards, which may include
restrictions on requirements of continued employment, individual performance or
the Company's financial performance.
Stock Appreciation Rights. Under the Equity Incentive Plan, the Board of
Directors or the Compensation Committee also may grant stock appreciation rights
either in tandem with an option or alone. Stock appreciation rights granted in
tandem with a stock option may be granted at the same time as the stock option
or at a later time. A stock appreciation right shall entitle the participant to
receive from the Company an amount payable in cash, in shares of Common Stock or
in a combination of cash and Common Stock, equal to the positive difference
between the fair market value of a share of Common Stock on the date of exercise
and the grant price, or such lesser amount as the Board of Directors or the
Compensation Committee may determine.
Dividend Equivalent Rights. Dividend equivalent rights, defined as a right
to receive all or some portion of the cash dividends that are or would be
payable with respect to shares of Common Stock, may be awarded in tandem with
stock options, stock appreciation rights or other awards under the Equity
Incentive Plan. The Board of Directors or the Compensation Committee will
determine the terms and conditions of these rights. The rights may be paid in
cash, shares of Common Stock or other awards.
Phantom Stock. Under the Equity Incentive Plan, the Board of Directors or
the Compensation Committee may grant awards of phantom stock to eligible
persons. Phantom stock is a cash payment measured by the fair market value of a
specified number of shares on a certain date, or measured by the excess of fair
market value over a specified minimum. Phantom stock awards may include the
dividends granted for such number of specified shares.
Other Stock-Based Benefits. The Board of Directors or the Compensation
Committee may award other stock-based benefits, including stock payments, stock
bonuses and stock sales.
Effect of Change in Control. The Equity Incentive Plan provides for the
automatic acceleration of certain benefits in the event of a "Change in Control"
of the Company. A Change in Control will be deemed to have occurred if either
(1) any person or group acquires beneficial ownership equivalent to 30% of the
voting securities of the Company, (2) individuals who are directors as of the
closing of the Offerings, or individuals who became directors after being
approved by a majority of such individuals (or, in the case of directors
nominated by a person, entity or group with 20% of the voting power of the
Company, by two-thirds of such individuals) cease to constitute at least a
majority of the members of the Board of Directors, or (3) there occurs the
consummation of certain mergers, the sale of substantially all of the assets of
the Company or a complete liquidation or dissolution of the Company.
JHIL AND THE SELLING SHAREHOLDER
JHIL beneficially owns (through the Selling Shareholder and another
indirect wholly owned subsidiary of JHIL) shares of the
Company's Common Stock representing 100% of the issued and outstanding Common
Stock prior to the Offerings. After giving effect to the sale of shares of
Common Stock to be sold in the Offerings by the Selling Shareholder, JHIL will
beneficially own approximately 85% of the outstanding shares of the Company's
Common Stock. If the U.S. Underwriters' over-allotment option is exercised in
full, JHIL will beneficially own shares of Common Stock,
representing approximately 83% of the outstanding shares of Common Stock.
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JHIL is a public company organized under the laws of Australia and listed
on the Australian Stock Exchange. JHIL's address is Level 9, 65 York Street,
Sydney NSW 2000, Australia. JHIL's Australian Company Number is 000 009 263.
The Selling Shareholder, RCI Netherlands Investments B.V., is a company
incorporated under the laws of The Netherlands and is a wholly owned indirect
subsidiary of JHIL. The address of the Selling Shareholder is
, and its corporate seat is in Amsterdam, The Netherlands.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon completion of the Offerings, JHIL will beneficially own approximately
85% of the outstanding shares of Common Stock (or approximately 83% of the
outstanding shares of Common Stock if the U.S. Underwriters' over-allotment
option is exercised in full). JHIL intends to cause three independent persons to
be added to the Board of Directors and the Supervisory Board of the Company upon
consummation of the Offerings. Although JHIL currently intends to utilize its
voting power to elect such number of independent members of the Board of
Directors and the Supervisory Board for so long as it is the majority
shareholder of the Company, the Articles of Association of the Company do not
restrict JHIL's power as the majority shareholder of the Company to nominate and
elect all of the directors of the Company. As a result, for so long as JHIL
remains the majority shareholder of the Company, JHIL will be in a position to
exercise effective control over the Company.
The Company intends to adopt conflict of interest policies that would
require the approval of a majority of the independent directors for any related
party transactions that are material to the Company and outside of the ordinary
course of business, including any future dealings with JHIL.
REGISTRATION RIGHTS AGREEMENT
The Company and JHIL entered into a registration rights agreement (the
"Registration Rights Agreement") which provides that, from time to time, and at
the request of JHIL, the Company will use its best efforts to effect
registration under the applicable U.S. federal and state securities laws of
shares of the Common Stock beneficially owned by JHIL for sale in accordance
with certain specified methods described in the Registration Rights Agreement,
and will take such other action necessary or appropriate to permit the sale
thereof in the United States (as well as any other jurisdiction if the Company
has previously taken action to permit the sale of its securities therein),
subject to certain limitations specified in the Registration Rights Agreement.
JHIL will also have the right to include shares of the Common Stock held by it
in certain other registrations of shares of Common Stock initiated by the
Company. JHIL shall bear the registration expenses incurred in connection with
the Offerings and its pro rata share of such expenses in connection with any
future registrations under the Registration Rights Agreement. Such registration
rights are subject to a "lock-up" agreement whereby JHIL has agreed not to sell
any shares of Common Stock without the prior consent of Warburg Dillon Read LLC
for a period of 180 days from the date of this Prospectus. See "Underwriting."
The Company has also agreed to indemnify JHIL against certain liabilities in
connection with any registration effected pursuant to the Registration Rights
Agreement, including liabilities under the Securities Act.
PURCHASE AGREEMENTS
In connection with the Reorganization, the Company has entered into the
Purchase Agreements to acquire the Transferred Businesses from JHIL. See "The
Reorganization." Pursuant to the Purchase Agreements, JHIL has agreed to
indemnify the Company and its affiliates from certain liabilities being retained
by JHIL and non-transferring subsidiaries. Pursuant to the Purchase Agreements,
subject to certain exceptions, JHIL and non-transferring subsidiaries will
assume or retain all known and unknown past, present and future claims and
liabilities of any nature, including without limitation claims and liabilities
relating to environmental, health, safety, personal injury, contractual and
product liability matters (collectively, "Liabilities") arising out of the
operations of JHIL and non-transferring subsidiaries or any other entities in
which they hold or held any ownership interest prior to the Reorganization.
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REIMBURSEMENT AGREEMENT
Several of the officers of the Company are also officers of JHIL. The
Company will pay all of the salaries and benefits of most of these officers.
Pursuant to the provisions of the Reimbursement Agreement, the Company will
track the time such officers spend in performing services for JHIL and JHIL will
reimburse the Company for the allocated portion of the salary and benefits of
such officers. Dr. Barton, however, will be paid directly by the Company and
JHIL for the time spent by Dr. Barton in performing his duties for the Company
and JHIL, respectively. In addition the Company and JHIL will each be reimbursed
for any services or facilities provided for the benefit of the other entity.
Expense reimbursements will be made quarterly.
LEASE AGREEMENTS
The Company will enter into lease agreements with JHIL immediately prior to
the Offerings whereby the Company will lease, on a long-term basis, an office
building in Australia and fiber cement manufacturing facilities in Australia and
New Zealand. Obligations under such leases are expected to amount to an
aggregate of approximately $3.6 million per year.
MEMBERS OF BOARDS AND EXECUTIVE OFFICERS OF THE COMPANY AND JHIL
Dr. Barton, who is President, Chief Executive Officer and Chairman of the
Board of Directors and the Managing Board of the Company, is also the Managing
Director and a member of the Board of Directors of JHIL. Mr. Morley, who is the
Chief Financial Officer and a member of the Board of Directors and the Managing
Board of the Company, is also the Chief Financial Officer of JHIL. In addition,
Mr. McGregor and Mr. Willcox, both of whom are members of the Board of Directors
and the Supervisory Board of the Company, are also the Chairman and a member of
the Board of Directors of JHIL, respectively. Dr. Barton has an employment
agreement with JHIL for services provided to JHIL. See "Management -- Directors
and Executive Officers of the Company." From time to time, these interlocking
directorships may give rise to conflicts of interests. Several of the Company's
other executive officers will also continue to be executive officers of JHIL,
which may give rise to additional conflicts of interest. The Company intends to
implement policies designed to identify any conflicts of interest that may arise
in the future, and to avoid or minimize possible adverse consequences of any
such conflicts. See "Risk Factors -- Control by JHIL."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have
shares of Common Stock issued and outstanding. The shares of
Common Stock ( shares if the U.S. Underwriters' over-allotment
option is exercised in full) offered hereby will be freely transferable and
tradable in the United States without restrictions under the Securities Act,
except for any shares purchased by an affiliate of the Company (as that term is
defined below), which will be subject to the resale limitations of the
Securities Act ("Rule 144"). None of the outstanding shares of Common Stock that
will be beneficially owned by JHIL after the Offerings have been registered
under the Securities Act and, as a result, such shares may not be sold in the
United States in the absence of an effective registration statement under the
Securities Act other than in accordance with Rule 144 or another exemption from
registration. Upon completion of the Offerings, JHIL will have certain rights to
register its shares of Common Stock under the Securities Act. JHIL will bear its
pro rata share of registration expenses incurred in connection with any future
offerings. See "Certain Relationships and Related Transactions -- Registration
Rights Agreement." JHIL has no agreement with the Company not to sell or
distribute such shares and, except for restrictions in the Underwriting
Agreement set forth below, there can be no assurance concerning the period of
time during which JHIL will maintain its beneficial ownership of shares of
Common Stock. Although JHIL has made no decision on its future intentions
regarding a further selldown of its shares of Common Stock held by it after the
Offerings or a distribution of such shares to the JHIL shareholders, it has
informed the Company that it intends to consider such a selldown or distribution
in 12 to 24 months. Pursuant to the Underwriting Agreement, JHIL has agreed,
subject to certain exceptions, not to sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any security convertible into or
exchangeable or exercisable for shares of Common Stock
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for a period of 180 days after the date of this Prospectus without the prior
written consent of Warburg Dillon Read LLC on behalf of the Underwriters.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares of the Company
are required to be aggregated) who has been deemed to have owned shares of an
issuer for at least one year, including an affiliate, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding number of shares of such class or the
average weekly reported volume of trading in such shares on all national
securities exchanges during the four calendar weeks preceding the filing with
the Commission of the required notice of sale. A person (or persons whose shares
of the Company are required to be aggregated) who is not deemed an affiliate of
an issuer at the time of the sale and for at least three months prior to the
sale is entitled to sell such shares under Rule 144 without regard to the volume
limitations described above, provided that at least two years have elapsed since
such shares were purchased from either the issuer or an affiliate of the issuer.
As defined in Rule 144, an "affiliate" of an issuer is a person that directly,
or indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, such issuer.
Prior to the Offerings, there has been no market for the Common Stock.
Although the Company can make no predictions as to the effect, if any, that
sales of shares of Common Stock or the possibility of future sales of shares by
JHIL or its shareholders or by persons who exercise awards under the Equity
Incentive Plan would have on the market price of the shares of Common Stock
prevailing from time to time, sales of substantial amounts of the shares of
Common Stock in the public market, including any future public offering of such
stock, could have an adverse affect on the market price of the shares of Common
Stock.
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DESCRIPTION OF CAPITAL STOCK
James Hardie was incorporated under the laws of The Netherlands by notarial
deed dated August 11, 1998. Certain provisions of the Articles of Association of
James Hardie, a copy of which, together with an English translation, has been
included as an exhibit to the Registration Statement of which this Prospectus
forms a part, and certain provisions of Dutch law, are summarized below. Such
summary does not purport to be complete and is qualified in its entirety by
reference to the Articles of Association and Dutch law.
SHARE CAPITAL
Upon consummation of the Offerings, the authorized share capital of the
Company will amount to NLG , consisting of shares
of Common Stock, with a nominal value of NLG per share, and
shares of preferred stock ("Preferred Stock"), with a nominal
value of NLG per share.
Common Stock
Upon consummation of the Offerings, shares of Common Stock
will be issued and outstanding. Shares of Common Stock will only be issued in
registered form. All of the shares of Common stock offered hereby will initially
be represented by a single global certificate held through DTC and registered in
the name of Cede & Co., the nominee of DTC. will maintain the New
York Registry and act as transfer agent and registrar for the shares (the
"Transfer Agent and Registrar"). Beneficial interests in the shares represented
by the global certificate will be represented, and transfers of such beneficial
interests will be effected, through accounts of financial institutions acting on
behalf of beneficial owners as direct and indirect participants in DTC.
Preferred Stock
Upon the consummation of the Offerings, no shares of Preferred Stock will
be outstanding. The Board of Directors (or, upon the expiration of the
delegation of authority described below and any extensions thereof, the general
meeting of shareholders) will have the power to issue shares of Preferred Stock,
in one or more series and, from time to time, although it has no current plans
to do so. If such shares are issued, the holders thereof will be entitled to
receive, when and as declared by the Board of Directors, dividends prior to the
payment of any dividends to the holders of Common Stock. Dividends on any given
series of Preferred Stock shall be calculated as a percentage (the "Preferred
Dividend Rate") of the nominal value of the shares of such series plus the
amount of share premium paid to the Company upon the issuance of shares of such
series. The Preferred Dividend Rate shall be the "prime rate" on corporate loans
in the United States as quoted in the Wall Street Journal (on such date, not
more than sixty days prior to the first issuance of the relevant series, as the
Board of Directors may determine), as increased or decreased by such amount, not
to exceed four percentage points, as the Board of Directors may determine at the
time of the first issuance of shares of such series. In addition, holders of
Preferred Stock will be entitled to a liquidation preference, payable in the
event of any liquidation, dissolution or winding up of the Company, before any
distribution is made to the holders of Common Stock. The liquidation preference
for any given series of Preferred Stock shall be equal to the nominal value of
the shares of such series plus the amount of share premium paid to the Company
upon the issuance of shares of such series, together with any accrued but unpaid
dividends. Holders of Preferred Stock will have the right to one vote for each
share of Preferred Stock held on every matter submitted to a vote of the
shareholders and such holders will also vote as a class on certain matters.
Shares of Preferred Stock may be issued for a subscription price equal to their
nominal value and, if so designated by the Board of Directors (or, if
applicable, the general meeting of shareholders), only 25% of the nominal value
of the shares of Preferred Stock needs to be paid up at the time of issuance.
Shares of Preferred Stock will only be issued in registered form evidenced by
certificates. Issuances of Preferred Stock may adversely affect, among other
matters, the voting, dividend and liquidation rights of holders of Common Stock.
The issuance of Preferred Stock may also have the effect of delaying, deferring
or preventing a change in control of the Company.
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DIVIDENDS
Pursuant to the Articles of Association and Dutch law, the declaration of
dividends, if any, will be at the discretion of the Board of Directors (subject
to the dividend rights of holders of Preferred Stock, if any). The Board of
Directors may resolve that James Hardie make distributions out of James Hardie's
annual profit, general share premium account and out of any other reserves that
are available for shareholder distributions under Dutch law. James Hardie may
make stock dividends as well as cash dividends. The Board of Directors may also
resolve that James Hardie pay interim dividends. James Hardie may not pay
dividends, including interim dividends, if the payment would reduce
shareholders' equity to an amount less than the sum of James Hardie's share
capital account, plus certain reserves that are required to be maintained by
Dutch law or the Articles of Association. Rights to cash dividends and
distributions that have not been collected within five years and two days after
the date on which they became due and payable revert to James Hardie.
All calculations to determine the amounts available for dividends will be
based on James Hardie's statutory accounts which will, as a holding company, be
different from its consolidated accounts. Because James Hardie is a holding
company and has no operations of its own, James Hardie is dependent on dividends
or other advances from its subsidiaries to fund any cash dividends. See
"Dividend Policy."
James Hardie's Articles of Association provide that future dividends, if
any, will be declared and paid in U.S. dollars, unless the Board of Directors
determines otherwise. Cash dividends payable to holders of shares will be paid
to the Transfer Agent and Registrar (which will, if necessary, convert such
dividends into dollars) for disbursement to the holders of the shares.
SHAREHOLDERS MEETINGS AND VOTING RIGHTS
Each shareholder has the right to attend general meetings of shareholders,
either in person or by proxy, to address shareholder meetings and to exercise
voting rights, subject to the provisions of the Articles of Association. A
meeting of shareholders will be held in The Netherlands at least annually,
within six months after the close of each fiscal year and in either Amsterdam,
Haarlemmermeer (Schiphol Airport), The Hague or Rotterdam. Additional meetings
of shareholders may be held as often as the Board of Directors, the Managing
Board or the Supervisory Board deems necessary or upon the call of holders of
shares of Common Stock or other persons entitled to attend such meetings jointly
representing at least 10% of the total outstanding share capital.
The Company will give notice of each meeting of shareholders by mail. Such
notice will be given no later than the fifteenth day prior to the day of the
meeting and will include or be accompanied by an agenda identifying the business
to be considered at the meeting. The Company is exempt from the proxy rules
under the Exchange Act. Holders of shares of Common Stock directly or indirectly
held through DTC will be provided notice of general meetings of shareholders and
other communications with shareholders by DTC in accordance with its customary
procedures. DTC may grant proxies or otherwise authorize DTC participants (or
persons holding beneficial interests in the shares of Common Stock through such
DTC participants) to exercise any rights of a shareholder. Under its usual
procedures, DTC will mail an omnibus proxy to the Company assigning Cede & Co.'s
consenting or voting rights to those DTC participants to whose accounts the
shares of Common Stock are credited on a record date as soon as possible after
such record date. In order for holders of shares of Common Stock held directly
or indirectly through DTC to attend general meetings of shareholders in person,
such holders need not withdraw such shares of Common Stock from DTC but must
follow such rules and procedures as may be established by the Transfer Agent and
Registrar.
Each share of Common Stock (and each share of Preferred Stock, if any)
entitles the holder thereof to one vote on each matter to be voted upon by the
holders of the Common Stock. The Board of Directors has the power to make
binding nominations for the election of members of the Supervisory Board and the
Managing Board. If the Board of Directors exercises this power, it must nominate
at least two persons for each position to be filled, and the person receiving
the greater number of votes will be elected. The general meeting of shareholders
may resolve by a resolution passed with a two-thirds majority of the votes cast
at the meeting (provided that shareholders representing at least half of the
issued share capital are present) to overrule such
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binding nominations. Members of the Supervisory Board and members of the
Managing Board will be elected to serve one-year terms.
Unless otherwise required by the Articles of Association or Dutch law,
resolutions of the general meeting of shareholders will be validly adopted by a
majority of the votes cast at a meeting at which at least a majority of the
outstanding share capital is present or represented except that, pursuant to the
Articles of Association, there is no quorum requirement for the valid adoption
of resolutions proposed or approved by the Board of Directors. Except where
expressly otherwise stated in this Prospectus, all references here and elsewhere
in this Prospectus to actions by the shareholders are references to actions
taken by way of such a resolution at a meeting of shareholders.
ADOPTION OF ANNUAL ACCOUNTS AND DISCHARGE OF MANAGEMENT
Each year, the Managing Board must prepare annual accounts within five
months after the end of the Company's fiscal year (unless the shareholders have
approved an extension of this period for up to six additional months due to
certain special circumstances recognized as such under Dutch law) and submit
such accounts to the shareholders for adoption. Pursuant to the Articles of
Association (and unless the shareholders approve a resolution to the contrary),
the annual accounts, including the management report, will be prepared in
English and according to GAAP.
Adoption of the Company's annual accounts by the shareholders discharges
the directors for liability towards the Company in respect of the exercise of
their duties during the financial year covered by the accounts, unless an
explicit reservation is made by the shareholders and subject to certain
exceptions under Dutch law, including exceptions relating to the liability of
the directors upon bankruptcy of a company and to general principles of
reasonableness and fairness. Under Dutch law, this discharge does not extend to
matters not disclosed to shareholders.
LIQUIDATION RIGHTS
In the event of the dissolution and liquidation of the Company, holders of
shares of Common Stock are entitled to receive all of the assets of the Company
available for distribution after payment of all liabilities and liquidation
expenses pro rata based on the number of shares of Common Stock held by such
holders, subject to the prior liquidation rights of the holders of Preferred
Stock then outstanding, if any. As a holding company, James Hardie's sole
material assets are the capital stock of its subsidiaries. Therefore, in the
event of a dissolution or liquidation, James Hardie will either distribute the
capital stock of its subsidiaries or sell such stock and distribute the net
proceeds thereof, after satisfying its liabilities.
ISSUE OF SHARES; PREEMPTIVE RIGHTS
Unless limited or eliminated by the shareholders or the Board of Directors
as described below, holders of shares of Common Stock have a pro rata preemptive
right to subscribe for any newly issued shares of Common Stock, except for
shares of Common Stock issued for consideration other than cash, shares of
Common Stock issued to employees of James Hardie or a group company (as
determined under Dutch law) and shares of Common Stock issued to persons upon
exercise of previously acquired rights to subscribe for such shares.
The shareholders, upon proposal by the Board of Directors, have the power
to cause the Company to issue additional shares of Common Stock as well as
shares of Preferred Stock, in each case on the terms and conditions proposed by
the Board of Directors. Shortly before the consummation of the Offerings, JHIL
will delegate to the Board of Directors, for a period of five years (the maximum
permitted by Dutch law), authority to issue additional shares of Common Stock
and shares of Preferred Stock from time to time and the authority to limit or
eliminate preemptive rights with respect to issuances of Common Stock. It is
anticipated that the Board of Directors will eliminate preemptive rights with
respect to any and all issuances of shares of Common Stock during such period.
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REPURCHASE OF SHARES
The Company may acquire shares of Common Stock, subject to certain
provisions of Dutch law and of the Company's Articles of Association, if and
insofar as (1) shareholders' equity, less the amount to be paid for the shares
of Common Stock acquired, is not less than the sum of the Company's issued share
capital, plus any reserves required to be maintained by Dutch law or the
Articles of Association, and (2) the Company and its subsidiaries would
thereafter not hold, or hold as pledgee, shares of Common Stock with an
aggregate par value exceeding one-tenth of the Company's issued share capital
(all calculated in accordance with accounting principles generally accepted in
The Netherlands). Common Stock repurchases may be effected by the Managing Board
only if the shareholders have authorized the Managing Board to effect such
repurchases. Shortly before the consummation of the Offerings, the Selling
Shareholder will grant such authority to the Managing Board for a period of 18
months (the maximum permitted by Dutch law).
REDUCTION OF SHARE CAPITAL
Upon proposal by the Board of Directors, the shareholders may reduce the
issued share capital by cancellation of shares of Common Stock held by James
Hardie or by reducing the par value of shares of Common Stock, subject to
certain statutory provisions. A resolution to reduce the issued share capital
requires the approval of at least a majority of the votes cast or, if less than
half of the issued share capital is represented at the meeting, the approval of
at least two-thirds of the votes cast. In addition, James Hardie is required to
file such resolution of the shareholders with the trade register of the Chamber
of Commerce and Industry in the district in which James Hardie has its place of
business (the "Filing") and publish the Filing in a national daily newspaper.
During a two-month period following the publication of the Filing, creditors of
James Hardie may oppose such reduction of share capital.
AMENDMENT OF ARTICLES OF ASSOCIATION
The Articles of Association may be amended by resolution of the
shareholders upon proposal by the Board of Directors.
DISCLOSURE OF HOLDINGS
Under the Dutch Act on disclosure of holdings in listed companies 1996 (Wet
melding zeggenschap in ter beurze genoteerde vennootschappen 1996) (the
"Disclosure Act"), if shares of Common Stock are admitted to official quotation
or listing on the Amsterdam Stock Exchange or on any other such stock exchange
in the European Economic Area, holders and certain beneficial owners of an
interest in the voting rights and/or the capital of James Hardie must promptly
notify James Hardie and the Securities Board of The Netherlands (Stichting
Toezicht Effectenverkeer) if their voting rights or capital interest in James
Hardie reaches, exceeds or falls below the rate of 5% - 10%, 10% - 25%,
25% - 50%, 50% - 66 2/3% or over 66 2/3%. Failure to comply constitutes a
criminal offense and could result in criminal as well as civil sanctions,
including suspension of voting rights. At this time, James Hardie does not
intend to list on any such exchange.
LIMITATIONS ON RIGHT TO HOLD OR VOTE SHARES OF COMMON STOCK
Article 10 of the Company's Articles of Association provides that, unless
approved by the Board of Directors, any person (a "Large Shareholder") who
acquires ownership of more than 20% of the outstanding shares of Common Stock
must sell or otherwise transfer the portion of the shares exceeding such
threshold (the "Excess Shares") to one or more third parties or to the Company
within 30 days of the date on which such person became a Large Shareholder, at a
price to be agreed between the Large Shareholder and the third parties or the
Company, as the case may be. If the Large Shareholder does not sell or otherwise
transfer the Excess Shares within 30 days after notice from the Company, the
Company may redeem the Excess Shares or sell, on behalf of the Large
Shareholder, the Excess Shares to one or more third parties, at a price per
share equal to the average of the high and low sales prices for the shares of
Common Stock on the NYSE for the 20 trading days immediately preceding the
notice described above from the Company. Large Shareholders may not vote, or
receive dividends with respect to, any Excess Shares. For purposes of Article
10, a person shall not be considered to beneficially own a share of the Common
Stock solely as a result of an agreement, arrangement or understanding to vote
such share if such agreement, arrangement or understanding arises solely from a
revocable proxy given in response to a public proxy solicitation made pursuant
to, and in compliance with, all applicable laws.
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There are currently no limitations imposed by Dutch Law or the Company's
Articles of Association on the rights of persons who are not residents of The
Netherlands to hold or vote shares of Common Stock.
SHARE CERTIFICATES AND TRANSFER
GENERAL
The shares of Common Stock will be in registered form only and will be
registered in a register kept by or on behalf of the Company by the Transfer
Agent and Registrar, evidenced by certificates.
The shares of Common Stock have been approved for listing (subject to
official notice of issuance) on the NYSE.
The transfer of shares of Common Stock requires a written instrument
intended for such purpose and, except when James Hardie itself is a party to
such legal act, the written acknowledgment of the transfer by James Hardie or
service of the instrument of transfer (or a certified copy or extract thereof)
on James Hardie. In order to facilitate such transfer, James Hardie will provide
the Transfer Agent and Registrar with powers of attorney to enable execution and
acknowledgment of the appropriate documents to comply with Dutch law.
Certificates representing shares of Common Stock are transferred by delivery
thereof to the Transfer Agent and Registrar on behalf of James Hardie and will
be acknowledged by the Transfer Agent and Registrar on behalf of James Hardie by
endorsement on the certificate itself or by the issuance of a new share
certificate.
The CUSIP number for the Common Stock is N47235 10 1.
TAXATION
GENERAL
The following general discussion of the material tax consequences of an
investment in the shares of Common Stock is based on the current law applicable
in The Netherlands and the United States as in effect on the date of this
Prospectus and is subject to changes therein, including changes that could have
retroactive effect. This discussion does not purport to describe all tax
consequences that may be relevant to a purchaser of Common Stock. The statements
set forth below, to the extent they constitute matters of U.S. law, summaries of
U.S. legal matters or U.S. legal conclusions, are the opinion of Gibson, Dunn &
Crutcher LLP, U.S. tax counsel to the Company, and to the extent they constitute
matters of Dutch tax law, summaries of Dutch tax matters or Dutch taxation
conclusions, are the opinion of PricewaterhouseCoopers N.V., Dutch tax counsel
to the Company. Gibson, Dunn & Crutcher LLP, U.S. tax counsel to the Company,
has not opined as to whether the Company is or will become either a "foreign
personal holding company" or a "passive foreign investment company" for U.S. tax
purposes because such determinations are inherently factual in nature. Except as
specifically provided for herein, this discussion does not consider the effect
of any foreign, state, local or other tax laws that may be applicable to a
purchaser of Common Stock.
UNITED STATES TAXATION
The following discussion contains a description of the material U.S.
federal income tax consequences generally applicable to an investment in the
shares of Common Stock ("Shares") by the following persons who invest in Shares
pursuant to the Offerings, and who hold such Shares as capital assets ("U.S.
Shareholders"): (1) citizens or residents of the United States (as defined for
U.S. federal income tax purposes), (2) corporations, partnerships or other
entities created or organized in or under the laws of the United States or any
political subdivision thereof, (3) estates the income of which is subject to
U.S. federal income taxation regardless of its source, and (4) trusts if (A) a
court in the United States is able to exercise primary supervision over the
administration of the trust and (B) one or more U.S. persons have the authority
to control all of the substantial decisions of the trust. This summary does not
purport to be a comprehensive description of all the tax considerations that may
be relevant to a U.S. Shareholder's decision to acquire Shares. In particular,
this summary does not address (a) the tax treatment of special classes of U.S.
Shareholders, such as financial institutions, life insurance companies,
tax-exempt organizations, shareholders whose functional currency is not the U.S.
dollar or dealers in securities, (b) the tax treatment of U.S. Shareholders who
own (directly or indirectly by attribution through certain related parties) 10%
or more of
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the voting stock of the Company, (c) the application of other U.S. federal taxes
such as U.S. federal estate tax, and (d) the application of any aspect of state,
local and non-U.S. tax laws.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE TAX
CONSEQUENCES OF AN INVESTMENT IN SHARES IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, INCLUDING THE EFFECT OF ANY NON-U.S. TAXES AND STATE OR LOCAL
TAXES.
Taxation of Distributions
The gross amount of any distribution by the Company (including any Dutch
taxes withheld therefrom) with respect to Shares generally will be included in
the gross income of a U.S. Shareholder as dividend income to the extent paid out
of current or accumulated earnings and profits of the Company, as determined
under U.S. federal income tax principles ("earnings and profits"). To the extent
that the amount of any distribution is not paid out of earnings and profits of
the Company, such amount will first be treated as a tax-free return of capital
to the extent of the U.S. Shareholder's adjusted tax basis in the Shares and, to
the extent that such amount exceeds the U.S. Shareholder's adjusted tax basis in
the Shares, such excess will be taxed as capital gain. See discussion of
"Capital Gains Rates" below. Distributions treated as dividends generally will
be treated as income from sources outside the United States and generally will
be foreign source "passive" income (or, in the case of certain U.S.
Shareholders, foreign source "financial services income") for purposes of the
foreign tax credit provisions. See discussion of "Credit of Foreign Taxes
Withheld" below. U.S. Shareholders will not be entitled to the dividends
received deduction with respect to any distributions by the Company treated as
dividends.
The amount of any distribution in Dutch guilders (or another foreign
currency) will generally equal the fair market value in U.S. dollars of the
Dutch guilders (or other foreign currency) on the date of receipt. A U.S.
Shareholder will have a basis for U.S. federal income tax purposes in the Dutch
guilders (or other foreign currency) distributed equal to their U.S. dollar
value on the date of receipt. Any gain or loss recognized upon the subsequent
disposition of the Dutch guilders (or other foreign currency) will generally be
U.S. source ordinary income or loss, but individual U.S. Shareholders may be
entitled to nonrecognition of any gain realized on the disposition of the Dutch
guilders (or other foreign currency) to the extent such gain does not exceed
$200 and the realization transaction constitutes a "personal transaction" for
purposes of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). The
amount of any distribution of property other than money will be equal to its
fair market value on the date of distribution.
Credit of Foreign Taxes Withheld
Subject to certain conditions and limitations, the foreign tax withheld or
paid with respect to dividends on Shares generally will be eligible for credit
against a U.S. Shareholder's federal income tax liability. Alternatively, a U.S.
Shareholder may claim a deduction for such amount of withheld foreign taxes, but
only for a year for which such U.S. Shareholder elects to do so with respect to
all foreign income taxes. The rules relating to the determination of the foreign
tax credit are complex, and U.S. Shareholders should consult their tax advisors
to determine whether and to what extent a foreign tax credit would be available.
Under certain specific circumstances, and subject to certain limitations
and conditions, the Company may be permitted to retain a portion of Dutch
withholding taxes that are withheld from dividend distributions to its
shareholders, rather than paying such amounts to the Netherlands Tax
Administration. This will result from the application of a Netherlands tax
credit which may not exceed 3% of the dividend distribution, and which will be
available to the extent that the dividend distribution relates to dividends
received by the Company from qualifying non-Netherlands subsidiaries, with
respect to which at least 5% withholding tax has been withheld. It is unclear
whether U.S. Shareholders will be eligible for a foreign tax credit for the
retained portion of Dutch withholding taxes. If the U.S. Shareholders are
ineligible for a foreign tax credit with respect to this amount, they may be
entitled to claim a deduction for such amount for U.S. federal income tax
purposes. The Company does not anticipate that a significant portion of
dividends will be subject to the above-described rules.
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Sale or Other Disposition of Shares
Gain or loss, if any, recognized by a U.S. Shareholder on the sale or other
disposition of Shares will be subject to U.S. federal income taxation as capital
gain or loss in an amount equal to the difference between the U.S. Shareholder's
adjusted tax basis in such Shares and the amount realized on the sale or other
disposition. Lower marginal tax rates may apply to individual U.S. Shareholders
in the case of capital gains, depending on the holding period of Shares sold by
such U.S. Shareholders. See discussion of "Capital Gains Rates" below. For U.S.
federal income tax purposes, capital losses not offset by capital gain are
subject to limitations on deductibility. Gain realized by a U.S. Shareholder on
the sale or other disposition of Shares generally will be treated as income from
sources within the United States for purposes of the foreign tax credit
provisions, unless the gain is attributable to an office or fixed place of
business maintained by the U.S. Shareholder outside the United States, and
certain other conditions are met. It is currently unclear whether any loss
realized by a U.S. Shareholder will be treated as from sources within the United
States or outside the United States. If proposed Treasury Regulations were
finalized in their current form, such loss would be treated as from sources
outside the United States. U.S. Shareholders should consult their tax advisors
in this regard.
Capital Gains Rates
For individual U.S. Shareholders, the difference between the tax rates
applicable to capital gain and ordinary income may be significant. The highest
marginal income tax rate (disregarding the effect of limitations on deductions)
applicable to ordinary income by an individual U.S. Shareholder is 39.6%. Any
net capital gain recognized by an individual U.S. Shareholder generally will be
taxed at a maximum rate of 20% with respect to capital gain attributable to the
sale or exchange of assets held for more than one year. Gain attributable to the
sale or exchange of capital assets held for one year or less is short-term
capital gain, which is taxable as ordinary income.
Passive Foreign Investment Company Status
Special U.S. federal income tax rules apply to U.S. Shareholders owning
capital stock of a "passive foreign investment company" (a "PFIC"). A foreign
corporation will be considered a PFIC for any taxable year in which 75% or more
of its gross income is passive income or in which 50% or more of the average
value of its assets are considered "passive assets" (generally assets that
generate passive income or assets held for the production of passive income).
For these purposes, passive income generally does not include interest,
dividends or royalties received from related parties. The Company believes that
it currently is not a PFIC for U.S. federal income tax purposes and does not
anticipate that it will become a PFIC in the future.
If the Company were classified as a PFIC, a U.S. Shareholder generally
would be subject to increased tax liability (possibly including an interest
charge) upon the sale or other disposition of Shares or upon receipt of "excess
distributions," unless such U.S. Shareholder elects (1) to be taxed currently on
its pro rata portion of the Company's income, whether or not such income was
distributed in the form of dividends or otherwise, or (2) to mark its Shares to
market by accounting for any difference between such Shares' fair market value
and adjusted basis at the end of the taxable year by either an inclusion in
income or a deduction from income.
Foreign Personal Holding Company Status
A foreign corporation will be classified as a "foreign personal holding
company" (an "FPHC") if (i) at any time during the corporation's taxable year,
five or fewer individuals, who are U.S. citizens or residents, directly or
indirectly own more than 50% of the corporation's capital stock (by either
voting power or value) (the "Shareholder Test") and (ii) the corporation
receives at least 60% of its gross income (reduced to at least 50% after the
initial year of qualification under certain circumstances), as adjusted, for the
taxable year from certain passive sources (the "Income Test"). Although the
Company believes that it will meet the Income Test because most of its income
will likely be derived from dividends paid by its subsidiaries, the Company
believes that the Shareholder Test was not met prior to the Offerings and will
not be met immediately after the Offerings. Therefore, the Company believes that
it currently is not an FPHC for U.S. federal income tax purposes.
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If the Company were classified as an FPHC, U.S. Shareholders (including
certain indirect holders) would be required to include in income, as a dividend,
their pro rata share of the Company's undistributed taxable income, as
specifically adjusted, if they were holders on the last day of the Company's
taxable year (or, if earlier, the last day on which the Company satisfies the
Shareholder Test), but such pro rata share would increase their basis in shares
of Common Stock by a corresponding amount. In addition, if the Company became an
FPHC, U.S. persons who acquire Shares from decedents would not receive a
"stepped-up" basis in such Shares. Instead, such a holder would have a tax basis
equal to the lower of fair market value or the decedent's basis.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends paid
in respect of Shares to non-corporate U.S. Shareholders or the proceeds received
on the sale, exchange or redemption of Shares by non-corporate U.S.
Shareholders, and such amounts may be subject to a 31% U.S. backup withholding
tax. Backup withholding tax will not apply, however, to a U.S. Shareholder who
(1) is a corporation or comes within certain exempt categories and, when
required, demonstrates this fact, or (2) furnishes a correct taxpayer
identification number or certificate of foreign status and makes certain other
required certifications as provided by the backup withholding rules. Generally,
a U.S. Shareholder will provide such certifications on Form W-9 (Request for
Taxpayer Identification Number and Certification). A U.S. Shareholder who does
not furnish the Company with his or her correct taxpayer identification number
may also be subject to penalties imposed by the U.S. Internal Revenue Service
(the "IRS"). Backup withholding is not an additional tax and may be claimed as a
credit against the U.S. federal income tax liability of a U.S. Shareholder,
provided that the required information is furnished to the IRS.
NETHERLANDS TAXATION
The statements below represent a broad analysis of the current Netherlands
tax laws and are limited to tax implications for a holder of shares of Common
Stock who is not a citizen or resident or deemed resident of The Netherlands.
The description is not to be read as extending by implication to matters not
specifically referred to herein. Any prospective investor is strongly urged to
consult such investor's own tax advisor, as individual circumstances may affect
the general tax consequences described in this summary.
Withholding Tax
Dividends distributed by the Company generally are subject to a withholding
tax imposed by The Netherlands at a rate of 25%. The term "dividends" for this
purpose includes, but is not limited to:
(1) distributions in cash or in kind, constructive distributions, and
repayments of additional paid-in capital not recognized as such for
Netherlands dividend withholding tax purposes;
(2) liquidation proceeds, proceeds of redemption of shares of Common
Stock or, generally, consideration for the repurchase of shares of Common
Stock by the Company in excess of the average paid-in capital recognized
for Netherlands dividend withholding tax purposes;
(3) the par value of shares of Common Stock issued to a holder of
shares of Common Stock or an increase of the par value of shares of Common
Stock, as the case may be, to the extent that no contribution to capital,
recognized for Netherlands dividend withholding tax purposes, was made or
will be made; and
(4) partial repayment of paid-in capital, recognized for Netherlands
dividend withholding tax purposes, if and to the extent that there are net
profits, within the meaning of the Dividend Withholding Tax Act, unless the
general meeting of shareholders of the Company has previously resolved to
make such repayment and provided that the par value of the shares of Common
Stock concerned has been reduced by a corresponding amount by changing the
Articles of Association of the Company.
As a result of contributions in shares to the paid-in capital of the
Company made prior to the initial public offering, a portion of such paid-in
capital may not be recognized for Dutch dividend withholding tax purposes.
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If a holder of shares of Common Stock is resident in a country with which The
Netherlands has concluded a convention to avoid double taxation that is in
effect, such holder may, depending on the terms of such double taxation
convention, be eligible for a full or partial exemption from, or refund of,
Netherlands dividend withholding tax. Arguably, repayment of paid-in capital in
the manner described in the second part of the sentence in (4) above, may be
subject to dividend withholding tax to the extent that dividends have been
received from qualifying non-Netherlands subsidiaries out of profits generated
after the contribution in shares.
Under the US-NL Treaty, dividends paid by the Company to a resident of the
United States (other than an exempt organization or exempt pension organization)
are generally eligible for a reduction of the 25% Netherlands withholding tax to
15%, or in the case of certain U.S. corporate shareholders owning at least 10%
of the voting power of the Company, 5%, unless the shares of Common Stock held
by such resident are attributable to a business or part of a business that is,
in whole or in part, carried on through a permanent establishment or a permanent
representative in The Netherlands. The US-NL Treaty provides for a complete
exemption for dividends received by exempt pension organizations and exempt
organizations, as defined therein. A holder of shares of Common Stock other than
an individual will not be eligible for the benefits of the US-NL Treaty if such
holder of shares of Common Stock does not satisfy one or more of the tests set
forth in the limitation on benefits provisions of Article 26 of the US-NL
Treaty.
A holder of shares of Common Stock (other than an exempt organization or
exempt pension organization) generally may claim the benefits of a reduced
withholding tax rate pursuant to the US-NL Treaty by submitting a duly signed
Form 1B 92 USA, which form includes a banker's affidavit stating that the shares
of Common Stock are in the bank's custody in the name of the applicant, or that
the shares of Common Stock have been shown to the bank as being the property of
the applicant. If the Form IB 92 USA is submitted prior to the dividend payment
date and all relevant conditions are fulfilled, the Company can apply the
reduced withholding tax rate to the dividend payment. A holder of shares of
Common Stock unable to claim withholding tax relief in this manner can obtain a
refund of excess tax withheld by filing a Form IB 92 USA and describing the
circumstances that prevented claiming withholding tax relief at source.
Holders of shares of Common Stock through DTC will initially receive
dividends subject to a withholding tax rate of 25%. An additional amount equal
to 10% of the dividend will be paid to such holders upon receipt by the dividend
disbursing agent of notification that such holders are eligible for the reduced
rate under the US-NL Treaty.
Qualifying U.S. exempt organizations must seek a full refund of the tax
withheld by using Form IB 95 USA, which form also includes a banker's affidavit.
An exempt pension organization can obtain a full exemption of the dividend
withholding tax at source upon payment of the dividends, provided a duly signed
Form IB 92 USA is filed in advance of the payment, which form also includes a
banker's affidavit, and all relevant conditions are fulfilled.
Taxes on Income and Capital Gains
A holder of shares of Common Stock will not be subject to any Netherlands
taxes on income or capital gains in respect of dividends distributed by the
Company or in respect of capital gains realized on the disposition of shares of
Common Stock (other than the dividend withholding tax described above), provided
that:
(1) such holder is neither resident nor deemed to be resident in The
Netherlands;
(2) such holder does not have a business or an interest in a business
that is, in whole or in part, carried on through a permanent establishment
or a permanent representative in The Netherlands and to which business or
part of a business, as the case may be, the shares of Common Stock are
attributable; and
(3) the shares of Common Stock owned by such holder do not form part
of a substantial interest or a deemed substantial interest, as defined, in
the share capital of the Company or, if such shares of Common Stock do form
part of such an interest, they form part of the assets of a business.
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Shares of Common Stock will generally not form part of a substantial
interest if the holder of such shares of Common Stock, alone or together with
his spouse, certain other relatives and/or certain persons sharing his
household, does not own, directly or indirectly, or is entitled to certain other
rights over, shares of Common Stock representing 5% or more of the total issued
and outstanding capital or the issued and outstanding capital of shares of
Common Stock of the Company. A deemed substantial interest generally exists if
(part of) a substantial interest has been disposed of or is deemed to have been
disposed of without recognition of gain.
A holder of shares of Common Stock, who meets the conditions set forth in
this section under (i) and (ii), but who has a substantial interest or a deemed
substantial interest, which does not form part of the assets of a business, is
generally subject to Netherlands income tax in respect of dividends distributed
by the Company or capital gains realized on the disposition of shares of Common
Stock, at a rate of up to 25%, if such holder is an individual, or at a rate of
35%, if such holder is not an individual. Such holder is generally entitled to a
credit for Netherlands dividend withholding tax withheld against Netherlands
income tax, if any.
If such holder is resident of a country with which The Netherlands has
concluded a convention to avoid double taxation, such holder may, depending on
the terms of such double taxation convention, be eligible for an exemption from
Netherlands income tax on capital gains realized upon the disposition or deemed
disposition of shares of Common Stock, or to a full or partial exemption from
Netherlands income tax on dividends distributed by the Company.
Under the US-NL Treaty, capital gains realized by such holder upon the
disposition of shares of Common Stock, provided such holder is a resident, as
defined, of the United States, are, with certain exceptions, generally exempt
from Netherlands tax on income and capital gains.
Under the US-NL Treaty, dividends received from the Company by such holder
who is a resident of the United States (other than an exempt organization or an
exempt pension organization) are generally eligible for a reduction of The
Netherlands income tax liability to 15%. The US-NL Treaty provides for a
complete exemption of Netherlands income tax for dividends received by exempt
pension organizations and exempt organizations, as defined.
As indicated above, a holder of shares of Common Stock, other than an
individual, will not be eligible for the benefits of the US-NL Treaty if such
holder of shares of Common Stock does not satisfy one or more of the tests set
forth in the limitation on benefits provisions of Article 26 of the US-NL
Treaty.
Net Wealth Tax
A holder of shares of Common Stock will not be subject to Netherlands net
wealth tax in respect of the shares of Common Stock, provided that such holder
is not an individual or, if the holder is an individual, provided that the
conditions set forth under paragraphs (1) and (2) of the section "Taxes on
Income and Capital Gains" above are met.
Gift, Estate and Inheritance Taxes
No gift, estate or inheritance taxes will arise in The Netherlands with
respect to an acquisition of shares of Common Stock by way of a gift by, or on
the death of, a holder of shares of Common Stock who is neither resident nor
deemed to be resident in The Netherlands, unless:
(1) such holder has at the time of the gift or had at the time of the
holder's death, a business or an interest in a business that is or was, in
whole or in part, carried on through a permanent establishment or a
permanent representative in The Netherlands and to which business or part
of a business, as the case may be, the shares of Common Stock are or were
attributable; or
(2) in the case of a gift of shares of Common Stock made by a holder
at a time when such holder was not a resident or deemed to be resident in
The Netherlands, such holder dies within 180 days after the date of the
gift, while being resident or deemed to be resident in The Netherlands.
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<PAGE> 93
For purposes of Netherlands gift and inheritance tax, an individual who
holds Netherlands nationality will be deemed to be resident in The Netherlands
if he has been resident in The Netherlands at any time during the 10 years
preceding the date of the gift or his death.
For purposes of Netherlands gift tax, an individual not holding Netherlands
nationality will be deemed to be resident in The Netherlands if he has been
resident in The Netherlands at any time during the 12 months preceding the date
of the gift.
Capital Duty Payable by the Company
Netherlands capital duty will be payable by the Company at the rate of 1%
of any contribution (including cash, in kind and/or deemed capital
contributions) made in respect of the shares of Common Stock, including a 1%
capital duty payable in The Netherlands on the proceeds received by the Company
in any future issuance of shares. Specific exemptions from capital duty were
applicable with respect to the contributions to the capital of the Company
(excluding certain minimum cash contributions) made prior to the Offerings.
Other Taxes and Duties
No Netherlands registration tax, transfer tax, stamp duty or any other
similar documentary tax or duty will be payable by investors in the Company in
respect of or in connection with the subscription issue, placement, allotment or
delivery of the shares of Common Stock.
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<PAGE> 94
UNDERWRITING
The names of the U.S. Underwriters for the United States Offering and the
aggregate number of shares of Common Stock that each has severally agreed to
purchase from the Selling Shareholder, subject to the terms and conditions
specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
U.S. UNDERWRITERS NUMBER OF SHARES
----------------- ----------------
<S> <C>
Warburg Dillon Read LLC.....................................
-------
Total.............................................
=======
</TABLE>
The U.S. Managing Underwriter is Warburg Dillon Read LLC.
The names of the International Underwriters for the International Offering
and the aggregate number of shares of Common Stock that each has severally
agreed to purchase from the Selling Shareholder, subject to the terms and
conditions specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
INTERNATIONAL UNDERWRITERS NUMBER OF SHARES
-------------------------- ----------------
<S> <C>
UBS AG, acting through its division Warburg Dillon Read.....
-------
Total.............................................
=======
</TABLE>
The International Managing Underwriter is UBS AG, acting through its
division Warburg Dillon Read.
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The per share price to the public and the per
share underwriting discounts and commissions for the Offerings will be
identical. The closing of the United States Offering is a condition to the
closing of the International Offering, and vice versa. The Offerings are also
conditional upon consummation of the other steps of the Reorganization.
If any shares of Common Stock offered are purchased by the Underwriters,
all such shares will be so purchased. The Underwriting Agreement contains
certain provisions whereby if any U.S. Underwriter or International Underwriter
defaults in its obligation to purchase the shares to be purchased by it and if
the aggregate obligations of the U.S. Underwriters or International Underwriters
so defaulting do not exceed 10% of the shares offered in the United States
Offering or the International Offering, respectively, the remaining U.S.
Underwriters, or some of them, or the remaining International Underwriters, or
some of them, as the case may be, must assume such obligations.
The shares of Common Stock offered hereby are being initially offered
severally by the Underwriters for sale at the price set forth on the cover page
hereof, or at such price less a concession not in excess of $ per share on
sales to certain dealers. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
The Offerings of the shares are made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offerings without notice. The Underwriters reserve the right
to reject any order for the purchase of the shares of Common Stock offered
hereby. After the initial public offering of the shares of Common Stock, the
public offering price, the concession and the reallowance may be changed by the
U.S. Managing Underwriter or the International Managing Underwriter.
Pursuant to the Agreement Between the U.S. Underwriters and International
Underwriters (the "Agreement Between Underwriters"), each U.S. Underwriter has
represented and agreed that, with certain exceptions, (1) it is not purchasing
any U.S. Shares (as defined below) for the account of anyone other than a United
States or Canadian Person (as defined below) and (2) it has not offered or sold,
and will not offer or
92
<PAGE> 95
sell, directly or indirectly, any U.S. Shares or distribute any prospectus
relating to the U.S. Shares outside the United States or Canada or to anyone
other than a United States or Canadian Person. Pursuant to the Agreement Between
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions, (1) it is not purchasing any International Shares (as
defined below) for the account of any United States or Canadian Person and (2)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any International Shares or distribute any prospectus relating to the
International Shares within the United States or Canada or to any United States
or Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement Between
Underwriters. As used herein "United States or Canadian Person" means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian Person) and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian Person. All shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Underwriters are referred to herein as the "U.S. Shares" and the "International
Shares," respectively.
Pursuant to the Agreement Between Underwriters, sales may be made between
the U.S. Underwriters and the International Underwriters of such number of
shares of Common Stock as may be mutually agreed. As a result, shares of Common
Stock originally purchased pursuant to the U.S. Underwriting Agreement may be
sold outside the United States and Canada, and shares of Common Stock originally
purchased pursuant to the International Underwriting Agreement may be sold in
the United States or Canada. The price of any shares so sold will, unless
otherwise agreed, be the price to the public, less an amount not greater than
the selling concession.
Pursuant to the Agreement Between Underwriters, each U.S. Underwriter has
represented that it has not offered or sold, and has agreed not to offer or
sell, any shares of Common Stock, directly or indirectly, in Canada in
contravention of the securities laws of Canada or any province or territory
thereof and has represented that any offer of Common Stock in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus in
the province or territory of Canada in which such offer is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
shares of Common Stock a notice stating in substance that, by purchasing such
Common Stock, such dealer represents and agrees that it has not offered or sold,
and will not offer or sell, directly or indirectly, any of such Common Stock in
Canada or to, or for the benefit of, any resident of Canada in contravention of
the securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption from
the requirement to file a prospectus in the province of Canada in which such
offer is made, and that such dealer will deliver to any other dealer to whom it
sells any of such Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between Underwriters, each International
Underwriter has represented and agreed that: (1) it has not offered or sold and
during the period of six months from the date hereof will not offer or sell any
shares of Common Stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations of 1995 (the "Regulations"); (2) it has
complied and will comply with all applicable provisions of the Financial
Services Act of 1986 and the Regulations with respect to anything done by it in
relation to the shares of Common Stock in, from or otherwise involving the
United Kingdom; and (3) it has only issued or passed on and will only issue or
pass on to any person in the United Kingdom any document received by it in
connection with the offer of the shares of Common Stock if that person is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
In any jurisdiction this Prospectus is for distribution only to persons to
whom it may lawfully be issued and only in accordance with the laws and
regulations of such jurisdiction. The distribution of this Prospectus
93
<PAGE> 96
and the offer and the sale of the Common Stock offered hereby may be restricted
by law in certain jurisdictions. Persons who receive this Prospectus must inform
themselves about and observe such restrictions.
In Belgium, this Prospectus is being distributed only to banks, subscribers
and other persons, distribution to whom will not contravene any relevant laws or
restrictions regarding the public offering of securities.
Neither this Prospectus, which has not been approved by, nor registered nor
filed with the Commission des Operations de Bourse, nor any other offering
material relating to the shares of Common Stock may be used in connection with
any offer for subscription or sale of the shares of Common Stock to the public
in France or be distributed to the public in France other than to a limited
number of institutional investors (excluding investment trusts or funds) acting
for their own account. Persons into whose possession this material comes must
inform themselves about and observe any such restrictions. This material does
not constitute and may not be used for or in connection with either an offer to
any person to whom it is unlawful to make such an offer or a solicitation by
anyone not authorized so to act.
The Selling Shareholder has granted to the U.S. Underwriters an option,
which may be exercised within 30 days after the date of this Prospectus, to
purchase up to an additional shares of Common Stock to cover
over-allotments, if any, on the same terms per share. To the extent the U.S.
Underwriters exercise this option, each of the U.S. Underwriters will be
obligated, subject to certain conditions, to purchase the number of additional
shares of Common Stock proportionate to such U.S. Underwriter's initial
commitment.
The Company and JHIL have agreed, subject to certain limited exceptions,
that they will not sell, offer or agree to sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock or warrants or other rights to purchase Common Stock or any other
securities of the Company that are substantially similar to Common Stock or
permit the registration under the Securities Act of any shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Warburg Dillon Read LLC.
The Company, the Selling Shareholder and JHIL have agreed in the
Underwriting Agreement to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Warburg Dillon Read LLC and its affiliates have rendered certain financial
advisory and investment banking services to JHIL and its affiliates, including
in connection with the Reorganization, for which they have received customary
fees.
The U.S. Managing Underwriter and the International Managing Underwriter
have advised the Company and the Selling Shareholder that they do not expect
sales to discretionary accounts by the Underwriters to exceed 5% of the total
number of shares sold in the Offerings.
At the request of the Company, the Underwriters have reserved up to
of the shares of Common Stock offered hereby for sale to
employees and officers of the Company at the public offering price set forth on
the cover page of this Prospectus, net of underwriting discounts and
commissions.
In connection with the Offerings, the U.S. Managing Underwriter and the
International Managing Underwriter, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions of
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of shares of Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the U.S. and the International Managing
Underwriters to reclaim a selling concession from a syndicate member when shares
of Common Stock originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the
94
<PAGE> 97
price of the shares of Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the NYSE
or otherwise and, if commenced, may be discontinued at any time.
Prior to the Offerings, there has been no public market for the shares of
Common Stock. Consequently, the offering price will be determined by
negotiations among the Selling Shareholder, the U.S. Managing Underwriter and
the International Managing Underwriter. Among the principal factors considered
in such negotiations will be the prevailing market and general economic
conditions, the price-to-earnings ratios of other publicly traded companies, the
revenues and earnings of the Company in recent periods, the current financial
position of the Company, estimates of the business potential of the Company and
the present state of the Company's development. Additionally, consideration will
be given to the general state of the securities market, the market conditions
for new issues of securities and the demand for securities of comparable
companies at the time the Offerings are made.
The shares of Common Stock have been approved for listing (subject to
official notice of issuance) on the NYSE.
95
<PAGE> 98
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the shares of Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that the Company and
the Selling Shareholder prepare and file a prospectus with the securities
regulatory authorities in each province where trades of the shares are effected.
Accordingly, any resale of the shares of Common Stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the shares of Common
Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of shares of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling Shareholder
and the dealer from whom such purchase confirmation is received that (1) such
purchaser is entitled under applicable provincial securities laws to purchase
such shares of Common Stock without the benefit of a prospectus qualified under
such securities laws, (2) where required by law, that such purchaser is
purchasing as principal and not as agent, and (3) such purchaser has reviewed
the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign company and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities law.
ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein and the Selling Shareholder may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the Company, the Selling Shareholder or such persons.
All or a substantial portion of the assets of the Company, the Selling
Shareholder and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the Company, the Selling
Shareholder or such persons in Canada or to enforce a judgment obtained in
Canadian courts against the Company, the Selling Shareholder or persons outside
of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within 10 days of the sale of
any shares of Common Stock acquired by such purchaser pursuant to the Offerings.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from the
Company. Only one such report must be filed in respect of shares of Common Stock
acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of shares of Common Stock should consult their own
legal and tax advisors with respect to tax consequences of an investment in the
shares of Common Stock in their particular circumstances and with respect to the
eligibility of the shares for investment by the purchasers under relevant
Canadian legislation.
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<PAGE> 99
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholder by De Brauw Blackstone
Westbroek N.V. Advice with respect to Dutch tax matters has been provided by
PricewaterhouseCoopers N.V., Dutch tax advisors to the Company. Certain legal
matters in connection with the Offerings will be passed upon for the Company by
Gibson, Dunn & Crutcher LLP and for the Underwriters by Davis Polk & Wardwell.
Gibson, Dunn & Crutcher LLP and Davis Polk & Wardwell will rely on the opinions
of De Brauw Blackstone Westbroek N.V. with respect to all matters of Dutch law
and PricewaterhouseCoopers N.V. with respect to Dutch tax law matters.
EXPERTS
The consolidated balance sheets as of March 31, 1997 and 1998, and the
consolidated statements of income, cash flows and changes in equity for each of
the three years in the period ended March 31, 1998, included in this Prospectus
have been included herein in reliance on the report of PricewaterhouseCoopers,
Australia, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form F-1
filed by the Company with the U.S. Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Company and the securities offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and in
such instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified by such reference.
As a result of the United States Offering, the Company will become subject
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), applicable to "foreign private issuers," and in accordance
therewith will file reports, including annual reports on Form 20-F, and other
information with the Commission. Such reports and other information may be
obtained, upon written request, from the Transfer Agent and Registrar at its
principal office located at . Such reports and other information
may also be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at Room 1024 Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, reports and other information concerning the
Company may be inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005. As a foreign private issuer, the Company
is exempt from the rules under the Exchange Act prescribing the furnishing and
content of proxy statements and annual reports to shareholders and the
shortswing profit recovery provisions set forth in Section 16 of the Exchange
Act. The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements examined by an independent
accounting firm and with quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
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<PAGE> 100
ENFORCEMENT OF CIVIL LIABILITIES
The Company is incorporated under the laws of The Netherlands with its
corporate seat in Amsterdam, The Netherlands. Certain of the Company's
directors, executive officers and subsidiaries, and certain of the experts named
herein, are residents of jurisdictions outside the United States and significant
assets of the Company and of such persons are located outside the United States.
As a result, it may be difficult for investors to effect service of process
within the United States upon the Company or such other persons, or to enforce
outside the United States judgments obtained against such persons in the U.S.
courts, or to enforce in U.S. courts judgments obtained against such persons in
courts in jurisdictions outside the United States, in each case, in any action,
including actions predicated upon the civil liability provisions of U.S.
securities laws.
The Company has been advised by its Dutch counsel, De Brauw Blackstone
Westbroek N.V., that the United States and The Netherlands do not currently have
a treaty providing for reciprocal recognition and enforcement of judgments
(other than arbitration awards) in civil and commercial matters. In the view of
such counsel, a final judgment for the payment of money rendered by any federal
or state court in the United States based on civil liability, whether or not
predicated solely upon the federal securities laws of the United States, would
not be directly enforceable in The Netherlands. However, if the party in whose
favor such final judgment is rendered brings a new suit in a court of competent
jurisdiction in The Netherlands, such party may submit in the course of such
proceedings the final judgment that has been rendered in the United States. If a
Netherlands court finds that the jurisdiction of the federal or state court in
the United States has been based on grounds that are internationally acceptable
and that proper legal procedures have been observed, the court in The
Netherlands would, in principle, give binding effect to the final judgment that
has been rendered in the United States unless such judgment contravenes
Netherlands' public policy. In addition, there is doubt as to whether a court in
The Netherlands would render a judgment in an original action predicated solely
upon the federal securities laws of the United States. Further, it may be
difficult for investors to enforce, in original actions brought in courts in
jurisdictions located outside the United States, rights predicated upon the U.S.
securities laws. See "Risk Factors -- Potential Difficulties in Protecting
Shareholder Rights and in Enforcing Civil Liabilities."
98
<PAGE> 101
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
JAMES HARDIE N.V.:
Report of Independent Accountants......................... F-2
Balance Sheet as of September 1, 1998..................... F-3
Notes to the Balance Sheet................................ F-4
JAMES HARDIE BUSINESSES:
Report of Independent Accountants......................... F-5
Consolidated Balance Sheets as of March 31, 1997 and
1998................................................... F-6
Consolidated Statements of Income for the Years Ended
March 31, 1996, 1997 and 1998.......................... F-7
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1997 and 1998.......................... F-8
Consolidated Statements of Changes in Equity for the Years
Ended March 31, 1996, 1997 and 1998.................... F-9
Notes to Consolidated Financial Statements................ F-10
Consolidated Balance Sheets as of March 31, 1998 (audited)
and June 30, 1998 (unaudited).......................... F-37
Consolidated Statements of Income for the Three Month
Periods Ended June 30, 1997 and 1998 (unaudited)....... F-38
Consolidated Statements of Cash Flows for the Three Month
Periods Ended June 30, 1997 and 1998 (unaudited)....... F-39
Consolidated Statement of Changes in Equity for the Three
Month Period Ended June 30, 1998 (unaudited)........... F-40
Notes to Consolidated Financial Statements (unaudited).... F-41
</TABLE>
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II Valuation and Qualifying Accounts:
See Note 3, Accounts Receivable, to the Consolidated
Financial Statements................................... F-15
See Note 13, Income Taxes, to the Consolidated Financial
Statements............................................. F-23
</TABLE>
F-1
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
James Hardie N.V., Amsterdam
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of James Hardie N.V. as at September
1, 1998, in conformity with generally accepted accounting principles in the
United States. This balance sheet is the responsibility of management; our
responsibility is to express an opinion on this balance sheet based on our
audit. We conducted our audit in accordance with generally accepted auditing
standards in the Netherlands which have been applied on a basis consistent with
generally accepted auditing standards in the United States, and which require
that we plan and perform the audit to obtain reasonable assurance about whether
the balance sheet is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the balance
sheet and assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers N.V.
Amsterdam, The Netherlands
September 1, 1998
F-2
<PAGE> 103
JAMES HARDIE N.V.
BALANCE SHEET
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 1,
1998
------------
<S> <C>
CURRENT ASSETS:
Cash........................................................ $ 55.0
------
Total assets...................................... $ 55.0
======
CURRENT LIABILITIES:
Accrued liabilities......................................... $ 1.1
Payable to shareholder...................................... 5.1
------
Total liabilities................................. $ 6.2
======
EQUITY:
Common stock -- NLG 100 per share par value; authorized
5,000 shares;
issued 1,000 shares....................................... $ 50.0
Accumulated deficit......................................... (1.2)
------
Total equity...................................... 48.8
------
Total liabilities and equity...................... $ 55.0
======
</TABLE>
The accompanying notes are an integral part of this balance sheet
F-3
<PAGE> 104
JAMES HARDIE N.V.
NOTES TO BALANCE SHEET
1. BACKGROUND
On July 2, 1998, James Hardie Industries Limited ("JHIL") announced a plan
of reorganization (the "Reorganization"). JHIL has historically operated a
number of businesses in the building products industry (the "James Hardie
Businesses" or the "Businesses"). In connection with the Reorganization, JHIL
intends to transfer its U.S. fiber cement and gypsum wallboard businesses, its
Australian, New Zealand and Asian fiber cement businesses, and its Australian
building systems and windows businesses (collectively the "Transferred
Businesses") to James Hardie N.V. (the "Company" or "James Hardie") and will
retain certain unrelated assets and liabilities (the "Retained Assets and
Liabilities"). As part of the Reorganization, JHIL also announced its intention
to sell a portion of its interest in the Company in initial public offerings in
the United States and elsewhere (the "Offerings") and to refinance certain
indebtedness. The Offerings are conditional on obtaining shareholder approval
from JHIL shareholders.
2. BASIS OF PRESENTATION
The Company was formed on August 11, 1998 and the Company will enter into
purchase and sale agreements to acquire the James Hardie Businesses. The
Retained Assets and Liabilities will not be transferred to or assumed by the
Company. The consolidated financial statements of the James Hardie Businesses
include both the Transferred Businesses and the Retained Assets and Liabilities.
The financial adjustments required to eliminate the Retained Assets and
Liabilities will be recorded as a deemed transfer to JHIL upon the consummation
of the Reorganization (see also the Unaudited Pro Forma Consolidated Financial
Data presented elsewhere in this Prospectus).
In accordance with generally accepted accounting principles in the United
States, the transfers to the Company will be accounted for at cost using the
"as-if" pooling method on the basis that transfers are under common control.
3. ACCOUNTING POLICIES
Unless stated otherwise, assets and liabilities are recorded at costs
incurred. Foreign currency transactions are initially translated into USD at the
rate of exchange at the date of the transaction. At September 1, 1998 amounts
payable and receivable in foreign currencies are translated into USD at rates of
exchange current at that date.
4. COMMON STOCK
The authorized capital comprises 5,000 common shares with a par value of
NLG 100 each, of which 1,000 common shares are issued and fully paid-in.
5. DIRECTORS
The Company has three Directors, none of whom receive any remuneration.
F-4
<PAGE> 105
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
James Hardie Industries Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and cash flows and changes in equity present
fairly, in all material respects, the financial position of the James Hardie
Businesses at March 31, 1997 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1998,
in conformity with generally accepted accounting principles in the United
States. These financial statements are the responsibility of management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
Australian Auditing Standards which have been applied on a basis consistent with
generally accepted auditing standards in the United States, and which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers
Sydney, Australia
May 12, 1998
F-5
<PAGE> 106
JAMES HARDIE BUSINESSES
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 338.6 $ 350.0
Accounts and notes receivable, net of allowance for
doubtful accounts of $4.8 million in 1997 and $5.4
million in 1998........................................ 169.3 125.3
Inventories............................................... 84.3 63.7
Prepaid expenses and other current assets................. 6.8 13.5
Deferred tax assets....................................... 12.6 53.3
Net current assets -- discontinued operations............. 47.7 --
-------- --------
Total current assets.............................. 659.3 605.8
Cash on deposit............................................. 49.0 --
Long-term receivables....................................... 5.4 11.0
Investments................................................. 31.0 14.6
Equity investments.......................................... 179.2 --
Property, plant and equipment, net.......................... 400.5 479.0
Intangibles, net............................................ 38.0 36.4
Mineral reserves............................................ 25.4 24.7
Prepaid pension cost........................................ 8.0 12.2
Deferred tax assets......................................... 62.6 58.0
Net non-current assets -- discontinued operations........... 75.6 --
-------- --------
Total assets...................................... $1,534.0 $1,241.7
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 97.2 $ 112.4
Bank overdraft............................................ 5.3 2.1
Current portion of long-term debt......................... 18.4 35.3
Current portion of related party borrowings............... 70.3 --
Accrued compensation...................................... 13.8 12.0
Accrued product warranties................................ 16.9 11.4
Firmandale liability...................................... -- 61.7
Deferred tax liability.................................... 1.3 --
Other liabilities......................................... 10.8 16.1
-------- --------
Total current liabilities......................... 234.0 251.0
Long term debt.............................................. 470.2 496.3
Related party borrowings.................................... 202.8 --
Firmandale liability........................................ 55.6 --
Deferred tax liability...................................... -- 13.7
Other liabilities........................................... 19.6 14.9
-------- --------
Total liabilities................................. 982.2 775.9
-------- --------
Minority interest........................................... 7.0 --
-------- --------
Commitments and contingencies (Note 11)
Equity:
Capital................................................... 533.1 551.7
Unrealized gain (loss) on available-for-sale securities... 0.2 (1.3)
Cumulative translation adjustment......................... 15.6 (74.0)
Executive and employee loans.............................. (4.1) (10.6)
-------- --------
Total equity...................................... 544.8 465.8
-------- --------
Total liabilities and equity...................... $1,534.0 $1,241.7
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 107
JAMES HARDIE BUSINESSES
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... $ 624.9 $ 713.4 $ 822.3
Cost of goods sold.......................................... (429.9) (508.7) (592.3)
------- ------- -------
Gross profit........................................... 195.0 204.7 230.0
Selling, general and administrative expenses................ (134.1) (150.3) (142.7)
Restructuring and other operating expenses (Note 12)........ -- (38.8) (5.1)
------- ------- -------
Operating profit....................................... 60.9 15.6 82.2
Interest expense............................................ (48.7) (39.6) (37.6)
Interest expense -- related parties......................... (17.3) (16.9) (11.3)
Interest income............................................. 33.1 30.8 28.3
Equity income -- RCI Corporation............................ 7.9 9.2 6.2
Other nonoperating expenses, net (Note 12).................. (15.0) (14.6) (12.1)
------- ------- -------
Income (loss) from continuing operations before income
tax.................................................. 20.9 (15.5) 55.7
Income tax (expense) benefit................................ (2.8) 3.0 (25.0)
------- ------- -------
Income (loss) from continuing operations............... 18.1 (12.5) 30.7
------- ------- -------
Discontinued operations:
Income (loss) from discontinued operations, net of income
tax (expense) benefit of $9.8 million, $(0.6) million and
$(2.1) million in 1996, 1997 and 1998, respectively....... (5.8) (18.1) 4.2
Gain on disposal, net of income tax (expense) benefit of
$(5.7) million and $9.7 million in 1997 and 1998,
respectively.............................................. -- 121.4 6.0
------- ------- -------
Income (loss) from discontinued operations............. (5.8) 103.3 10.2
------- ------- -------
Net income............................................. $ 12.3 $ 90.8 $ 40.9
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 108
JAMES HARDIE BUSINESSES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 12.3 $ 90.8 $ 40.9
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of subsidiaries and businesses........... -- (121.4) (6.0)
Goodwill impairment (Note 8 and Note 12).................. -- 31.8 --
Depreciation and amortization............................. 53.5 59.7 43.8
Obsolete equipment writedown.............................. -- 11.4 --
Equity income from RCI Corporation........................ (7.9) (9.2) (6.2)
Firmandale provisions..................................... 14.8 11.4 9.0
Deferred income taxes..................................... (26.8) (25.7) 6.4
Prepaid pension cost...................................... 4.3 7.6 9.7
Other..................................................... 11.4 14.8 6.3
Changes in operating assets and liabilities:
Accounts receivables, prepaids and other current assets... (7.8) (22.2) 41.0
Inventories............................................... 30.7 (14.6) 4.0
Accounts payable and accrued liabilities.................. 3.2 44.1 (31.1)
Other provisions.......................................... (7.5) 4.3 (8.7)
------- ------- -------
Net cash provided by operating activities............... 80.2 82.8 109.1
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment............... (100.5) (159.4) (147.7)
Proceeds from sale of property, plant, and equipment...... 19.8 37.0 14.0
Payments for subsidiaries and businesses, net of cash
acquired................................................ (3.1) (103.4) --
Disposal of subsidiaries and businesses, net of cash
invested................................................ 5.9 310.0 61.4
Purchases of investments and negotiable securities........ (0.8) (25.4) (41.2)
Proceeds from sale and maturity of investments............ 36.0 65.8 65.3
Loans to other entities................................... (0.7) (4.8) (0.2)
Loans repaid by other entities............................ 4.0 2.9 1.7
Payments for intangibles.................................. (0.1) (4.3) --
------- ------- -------
Net cash provided by (used in) investing activities....... $ (39.5) $ 118.4 $ (46.7)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................. $ 664.1 $ 821.1 $ 402.2
Repayments of borrowings.................................. (705.9) (727.4) (450.1)
Proceeds from issuance of capital......................... 0.7 -- 7.0
Proceeds from outside equity interests.................... -- 6.3 14.6
Payments to outside equity interests (Note 6)............. -- (72.1) --
Dividends paid............................................ (36.9) (16.6) (28.1)
Contribution (dividend) with respect to excluded
businesses.............................................. (9.9) 3.3 (9.5)
------- ------- -------
Net cash provided by (used in) financing activities..... (87.9) 14.6 (63.9)
------- ------- -------
Effects of exchange rate changes on cash.................... 1.8 1.7 (40.0)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (45.4) 217.5 (41.5)
Cash and cash equivalents at beginning of year.............. 219.4 174.0 391.5
------- ------- -------
Cash and cash equivalents at end of year.................... $ 174.0 $ 391.5 $ 350.0
======= ======= =======
COMPONENTS OF CASH AND CASH EQUIVALENTS:
Cash at bank and on hand -- continuing operations......... $ (0.6) $ 58.5 $ 29.3
Cash at bank and on hand -- discontinued operations....... 11.4 3.9 --
Negotiable securities..................................... 9.6 4.6 --
Deposits.................................................. 153.6 324.5 320.7
------- ------- -------
Cash and cash equivalents at end of year.................... $ 174.0 $ 391.5 $ 350.0
======= ======= =======
Cash and cash equivalents at year end comprise:
Current assets -- cash and cash equivalents................. 142.1 338.6 350.0
Cash on deposit............................................. 20.5 49.0 --
Discontinued operations..................................... 11.4 3.9 --
------- ------- -------
174.0 391.5 350.0
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid during the year for interest...................... $ 60.9 $ 42.4 $ 30.9
Cash paid during the year for income taxes.................. $ 22.7 $ 29.2 $ 12.3
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 109
JAMES HARDIE BUSINESSES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(MILLIONS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
EXECUTIVE
CUMULATIVE AND
UNREALIZED TRANSLATION EMPLOYEE
CAPITAL GAIN (LOSS) ADJUSTMENT LOANS TOTAL
------- ----------- ----------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance as of March 31, 1995.................... $481.4 $ 1.4 $(14.7) $ (4.7) $463.4
Net income...................................... 12.3 12.3
Dividends paid.................................. (36.9) (36.9)
Deemed dividend with respect to excluded
businesses.................................... (9.9) (9.9)
Issuance of capital............................. 5.1 (4.4) 0.7
Stock compensation.............................. 0.7 0.7
Translation adjustment.......................... 28.7 28.7
Executive and employee loans.................... 2.1 2.1
Unrealized gain (loss) on available-for-sale
securities.................................... (0.7) (0.7)
------ ----- ------ ------ ------
Balance as of March 31, 1996.................... 452.7 0.7 14.0 (7.0) 460.4
Net income...................................... 90.8 90.8
Dividends paid.................................. (16.6) (16.6)
Deemed contribution with respect to excluded
businesses.................................... 3.3 3.3
Stock compensation.............................. 2.9 2.9
Translation adjustment.......................... 1.6 1.6
Executive and employee loans.................... 2.9 2.9
Unrealized loss on available-for-sale
securities.................................... (0.5) (0.5)
------ ----- ------ ------ ------
Balance as of March 31, 1997.................... 533.1 0.2 15.6 (4.1) 544.8
Net income...................................... 40.9 40.9
Dividends paid.................................. (28.1) (28.1)
Deemed dividend with respect to excluded
businesses.................................... (9.5) (9.5)
Issuance of capital............................. 14.8 (7.8) 7.0
Stock compensation.............................. 0.5 0.5
Translation adjustment.......................... (89.6) (89.6)
Executive and employee loans.................... 1.3 1.3
Unrealized loss on available-for-sale
securities.................................... (1.5) (1.5)
------ ----- ------ ------ ------
Balance as of March 31, 1998.................... $551.7 $(1.3) $(74.0) $(10.6) $465.8
====== ===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 110
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On July 2, 1998, James Hardie Industries Limited ("JHIL") announced a plan
of reorganization (the "Reorganization"). JHIL has historically operated a
number of businesses in the building products industry (the "James Hardie
Businesses" or the "Business"). In connection with the Reorganization, JHIL
intends to transfer its U.S. fiber cement and gypsum wallboard businesses, its
Australian, New Zealand and Asian fiber cement businesses, and its Australian
building systems and windows businesses (collectively the "Transferred
Businesses") to James Hardie N.V. (the "Company" or "James Hardie") and will
retain certain unrelated assets and liabilities (the "Retained Assets and
Liabilities"). As part of the Reorganization, JHIL also announced its intention
to sell a portion of its interest in the Company in initial public offerings in
the United States and elsewhere (the "Offerings") and to refinance certain
indebtedness. The Offerings are conditional on obtaining shareholder approval
from JHIL shareholders.
The Company and several of its subsidiaries have entered into purchase and
sale agreements to acquire the Businesses. The Retained Assets and Liabilities
will not be transferred to or assumed by the Company.
BASIS OF PRESENTATION
The consolidated financial statements of the James Hardie Businesses
include both the Transferred Businesses and the Retained Assets and Liabilities.
The financial adjustments required to eliminate the Retained Assets and
Liabilities will be recorded as a deemed transfer to JHIL upon the consummation
of the Reorganization (see also the Unaudited Pro Forma Consolidated Financial
Data presented elsewhere in this Prospectus). Due to their dissimilar and
unrelated nature, the consolidated financial statements have been prepared after
retroactively accounting for the removal of the results of operations, cash
flows and financial position of Australia's Wonderland, the Healthcare
Corporation and certain asbestos-related costs and liabilities related to
businesses abandoned in 1987. All significant intercompany transactions have
been eliminated.
Interest expense, income tax expense and selling, general and
administrative expenses included in the consolidated financial statements
reflect the historical expenses associated with borrowings of the James Hardie
Businesses, their Australian and international tax structure, the compensation
costs associated with JHIL's stock purchase and option arrangements and the
costs of JHIL's head office functions located in Sydney, Australia. All such
costs incurred by JHIL are included in these consolidated financial statements.
The Company, however, plans to refinance these borrowings, substantially
restructure the international tax arrangements of the James Hardie Businesses,
establish new stock compensation plans and establish new operational
headquarters in the United States. Accordingly, the historical consolidated
balance sheets, statements of income, cash flows and changes in equity of the
James Hardie Businesses are not necessarily indicative of the results of
operations and financial condition of the Business had the Reorganization been
consummated prior to such periods.
2. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Business manufactures and sells fiber cement building products for
internal and external building construction applications primarily in the United
States, Australia, New Zealand and the Philippines. In addition, the Business
produces gypsum wallboard products in the United States. It also manufactures
modular relocatable buildings, insulated steel panel products and windows in
Australia and New Zealand.
F-10
<PAGE> 111
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP"). The U.S.
dollar is used as the reporting currency.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the 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 these
estimates.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities are translated into U.S. dollars at current
exchange rates while revenues and expenses are translated at average exchange
rates in effect for the period. The effects of foreign currency translation
adjustments are included directly in a separate component of equity.
Historically, the Business has used financial instruments to hedge, from an
Australian dollar perspective, the amount of its net investment in foreign
operations. Gains and losses, net of taxes, arising on such hedges are
recognized in the cumulative translation adjustment account in equity. Gains and
losses arising from foreign currency transactions are recognized in income
currently.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts on deposit in banks and cash
invested temporarily in various highly liquid financial instruments with
maturities of three months or less when acquired. At March 31, 1997 and 1998,
cash and cash equivalents include a deposit designated, but not legally
restricted, for legal settlement of the Firmandale litigation (see Note 11) in
the amount of $49.0 million and $61.7 million, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is generally
determined under the first-in, first-out method, except that the cost of raw
materials and supplies is determined using actual or average costs. Cost
includes the costs of materials, labor and applied factory overhead.
INVESTMENTS
Management determines the proper classifications of investments at the time
of purchase and re-evaluates such designations at each balance sheet date. All
marketable securities were designated as available for sale securities.
Accordingly, these securities are stated at fair value, with unrealized gains
and losses charged to a separate component of equity, net of taxes. Realized
gains and losses on sales of investments are recognized in income currently.
F-11
<PAGE> 112
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Property, plant and
equipment of businesses acquired are recorded at their fair market value at the
date of the acquisition. Depreciation of property, plant and equipment is
computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 40
Building improvements....................................... 5 to 10
Modular relocatable building lease fleet.................... 10
Machinery and equipment..................................... 5 to 20
Computer equipment.......................................... 3 to 4
----
Office furniture and equipment.............................. 3 to 10
</TABLE>
The cost of additions and improvements are capitalized, while maintenance
and repair costs are expensed as incurred. Interest is capitalized in connection
with the construction of major facilities. The capitalized interest is recorded
as part of the asset to which it relates and is amortized over the asset's
estimated useful life. Retirements, sales and disposals of assets are recorded
by removing the cost and accumulated depreciation amounts with any resulting
gain or loss reflected in income.
INTANGIBLES
Intangibles consist primarily of goodwill, which represents cost in excess
of the fair value of the identifiable net assets of businesses acquired.
Goodwill is amortized using the straight-line method over the period such
additional value is expected to be realized, typically twenty to twenty-five
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Business evaluates its long-lived assets, including goodwill, for
financial impairment in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and will continue to evaluate them
as events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. The Business evaluates the recoverability
of long-lived assets by measuring the carrying amount of the assets against the
estimated undiscounted future cashflows associated with them. At the time such
evaluations indicate that the future undiscounted cashflows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values.
ENVIRONMENTAL
Environmental remediation expenditures that relate to current operations
are expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable, and the
costs can be reasonably estimated. Estimated liabilities are not discounted to
present value. Generally, the timing of these accruals coincides with completion
of a feasibility study or the Business' commitment to a formal plan of action.
MINERAL RESERVES
The Business records acquired gypsum and silica mineral proven and probable
ore reserves at their fair market value at the date of acquisition. Depletion
expense is recorded based on the estimated rate per ton multiplied by the number
of tons extracted during the period. The rate per ton may be periodically
revised by management based on changes in the estimated tons available to be
extracted which is based on third party
F-12
<PAGE> 113
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
studies of proven and probable reserves. The estimated costs of reclamation
associated with mining activities are accrued during production and are included
in determining the cost of production.
REVENUE RECOGNITION
Sales revenue is recognized when products are shipped or as services are
rendered. Construction contract revenues are recognized using the
percentage-of-completion method based on the costs incurred relative to total
estimated costs. Provisions for anticipated losses on construction contracts are
recognized in income currently. Rental income from the modular relocatable
building lease fleet is recognized on a monthly basis in accordance with the
terms of the operating leases. Sales revenue is presented net of sales returns
and allowances.
ACCRUED WARRANTY
An accrual for estimated future warranty costs is recorded based on the
historical relationship of warranty costs to sales.
FINANCIAL INSTRUMENTS
Interest rate swaps and forward exchange contracts are used to manage
market risks and reduce exposure resulting from fluctuations in interest rates
and foreign currency exchange rates. Where such contracts are designated as, and
effective as, a hedge, gains and losses arising on such contracts are deferred
and recognized on a basis consistent with corresponding losses and gains on the
underlying hedged item.
Financial instruments, which potentially subject the Business to
significant concentrations of credit risk, consist principally of cash
investments, trade accounts receivable, forward exchange contracts and interest
rate swaps (Note 17).
The Business maintains cash and cash equivalents, investments, and certain
other financial instruments with various major financial institutions. The
Business performs periodic evaluations of the relative credit standing of these
financial institutions in an effort to limit the amount of credit exposure with
any institution.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across many
geographic areas. Credit is extended based on an evaluation of each customer's
financial condition and, generally, collateral is not required. The Business has
historically not incurred significant credit losses.
STOCK-BASED COMPENSATION
The Business accounts for stock option grants and other equity incentive
awards in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No. 25, compensation expense is recorded when the current market price of
the underlying stock exceeds the exercise price on the date of grant. Under the
JHIL Employee and Executive Share Purchase Plans, the Business provides loans to
its employees to buy shares in JHIL.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting on Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. This standard
is effective for the fiscal year ending March 31, 1999. Comprehensive income
consists of "net income" and "other comprehensive income" items that are
recognized directly in equity such as foreign currency translation adjustments
and the net unrealized gain (loss) on available-for-sale securities. The
Statement also requires the accumulated balance of other comprehensive income to
be
F-13
<PAGE> 114
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
disclosed separately from retained earnings and capital in the balance sheet. In
the first quarter ended June 30, 1998, the Business will adopt the additional
disclosure provisions of SFAS No. 130. This Statement relates to the disclosure
and presentation of financial information and will have no impact on results of
operations or financial position.
In 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. This standard is effective for the
fiscal year ending March 31, 1999. The Business has decided to adopt this
standard early (Note 18).
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
disclosure requirements and requires additional information regarding changes in
benefit obligations and the fair value of plan assets. This standard is
effective for the fiscal year ending March 31, 1999. SFAS No. 132 does not
change the existing measurement or recognition provisions of SFAS No. 87,
"Employers' Accounting for Pensions," and SFAS No. 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The Business has decided to adopt this standard in the
fiscal year ending March 31, 1999.
In 1998, the FASB also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. The effective date of this standard is for the
fiscal year ending March 31, 2001. All derivatives are required to be recognized
in the statement of financial position as either assets or liabilities and
measured at fair value. The Business has not yet determined the effects SFAS No.
133 will have on either its financial position or results of operations.
In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use. It also provides guidance for determining whether computer
software is for internal-use and for the accounting of the proceeds of computer
software originally developed or obtained for internal use and then subsequently
sold to the public. SOP 98-1 is effective for the fiscal year ending March 31,
2000. Management believes the effect of adopting SOP 98-1 will not have a
material impact on the accompanying consolidated financial statements.
In 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that costs of start-up activities,
including organization costs, be expensed as incurred. Start-up activities are
broadly defined and include one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, commencing some new operation,
and organizing a new entity. SOP 98-5 is effective for the fiscal year ending
March 31, 2000, with initial application reported as the cumulative effect of a
change in accounting principle. As the Business' policy is to expense all
start-up costs as incurred, management believes the effect of adopting SOP 98-5
will not have a material impact on the accompanying consolidated financial
statements.
F-14
<PAGE> 115
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE
The collectibility of accounts receivable, consisting mainly of trade
receivables, is reviewed on an ongoing basis and an allowance for doubtful
accounts is provided for known and estimated bad debts. The movement in the
allowance for doubtful accounts and credit notes is as follows (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of period...................... $ 4.8 $ 5.1 $ 4.8
Charged to expense.................................. 2.2 0.6 2.3
Costs and deductions................................ (2.2) (0.5) (2.3)
Foreign currency movements.......................... 0.3 (0.4) 0.6
----- ----- -----
Balance at end of period............................ $ 5.1 $ 4.8 $ 5.4
===== ===== =====
</TABLE>
4. INVENTORIES
Inventories consist of the following components (in millions):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Raw materials and supplies.................................. $31.4 $30.0
Work-in-process............................................. 8.5 7.0
Contracts in progress less advance billings................. 4.6 3.3
Finished goods.............................................. 39.8 23.4
----- -----
Total inventory................................... $84.3 $63.7
===== =====
</TABLE>
Work-in-process includes amounts related to construction contracts. The net
amount of construction work in process of $4.6 million and $3.3 million was
determined after deducting payments and progress billings of $33.4 million and
$56.6 million as of March 31, 1997 and 1998, respectively.
5. INVESTMENTS
Investments consist of the following components (in millions):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Available-for-sale securities:
Marketable securities at cost............................. $ 3.3 $ 5.6
Gross unrealized gains (losses)........................... 0.2 (1.3)
----- -----
Marketable securities at fair value....................... 3.5 4.3
Other investments at cost approximating fair value.......... 27.5 10.3
----- -----
Total investments................................. $31.0 $14.6
===== =====
</TABLE>
6. EQUITY INVESTMENTS
Included in equity investments at March 31, 1997 is $178.0 million related
to the net assets of RCI Corporation and $1.2 million related to other equity
investments. The net assets of RCI Corporation, represented a 39.6% voting
interest in the issued share capital of RCI Corporation. The Business also had
borrowings of $273.1 million from subsidiaries of RCI Corporation. After
purchasing additional shares in RCI Corporation for $38.5 million, receiving
dividends of $54.0 million and a return of capital of $5.8 million, paying break
fees of $22.2 million, accruing additional equity income of $6.2 million, and
other costs of
F-15
<PAGE> 116
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$0.3 million, the Business' carrying amount on the date of disposal was $184.8
million. During 1998, the Business disposed of its investment in RCI Corporation
to a subsidiary of RCI Corporation for a total consideration of $185.4 million,
of which $7.4 million was received in cash and $178.0 million through the
exercise of a legal right of set-off between the resulting receivable from the
RCI Corporation subsidiary and the borrowings. An additional $95.0 million of
borrowings was repaid during 1998.
During 1996, 1997 and 1998, the Business earned equity income on its
investment in RCI Corporation of $7.9 million, $9.2 million and $6.2 million,
respectively, and incurred interest expense of $17.3 million, $16.9 million and
$11.3 million, respectively, on its borrowings from RCI Corporation. A gain on
disposal of $0.6 million was recognized within equity income in 1998 as a result
of disposing of the investment and repaying the borrowings.
At March 31, 1997, RCI Corporation had total assets of $452.1 million,
shareholders' equity of $451.5 million, and the quoted market price of the
Business' investment was $184.4 million. In March 1997, the minority interest
held by RCI Corporation in redeemable common stock of a subsidiary of JHIL was
redeemed for $72.1 million. This amount has been disclosed in the consolidated
statement of cash flows as a payment to minority interests. At the same time,
the Business borrowed $72.1 million from RCI Corporation.
In March 1997, the minority interest held by RCI Corporation in redeemable
common stock of a subsidiary of JHIL was redeemed for $72.1 million. This amount
has been disclosed in the consolidated statement of cash flows as a payment to
minority interests. At the same time, the Business borrowed $72.1 million from
RCI Corporation.
The consolidated results of operations of RCI Corporation are summarized as
follows (in millions):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED MARCH 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Investment income........................................... 9.8 9.1
Loan interest -- James Hardie Businesses.................... 17.3 16.9
Bank deposit interest....................................... 0.8 0.4
----- -----
27.9 26.4
Expenses.................................................... (2.8) (2.6)
----- -----
Net income before taxation.................................. 25.1 23.8
Taxation.................................................... -- --
----- -----
Net income after taxation................................... 25.1 23.8
Dividends to preference shareholders........................ (14.0) (13.0)
----- -----
Net income after claims of preference shareholders.......... 11.1 10.8
===== =====
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following components (in
millions):
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Property, plant and equipment, at cost:
Land................................................... $ 27.7 $ 24.5
Buildings and improvements............................. 96.0 115.7
Modular relocatable building lease fleet............... 48.1 55.2
Machinery and equipment................................ 393.4 433.8
------- -------
565.2 629.2
Less accumulated depreciation............................ (164.7) (150.2)
------- -------
Property, plant and equipment, net....................... $ 400.5 $ 479.0
======= =======
</TABLE>
F-16
<PAGE> 117
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest related to the construction of major facilities is capitalized and
included in the cost of the asset to which it relates. Interest capitalized was
$0.5 million, $2.5 million and $2.1 million for the years ended March 31, 1996,
1997 and 1998, respectively. Depreciation expense for the continuing businesses
was $26.9 million, $34.2 million and $36.5 million for the years ended March 31,
1996, 1997 and 1998, respectively.
8. INTANGIBLE ASSETS
Intangible assets consist of the following components (in millions):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Intangible assets:
Goodwill.................................................. $38.1 $38.4
Trademarks, patents and other intangibles................. 0.9 0.3
----- -----
39.0 38.7
Less accumulated amortization............................... (1.0) (2.3)
----- -----
Intangibles, net............................................ $38.0 $36.4
===== =====
</TABLE>
Amortization expense related to goodwill and other intangibles was $1.1
million, $1.4 million, and $2.0 million for the years ended March 31, 1996, 1997
and 1998, respectively.
In 1997, there was a write-off of goodwill of $21.0 million in the Windows
business in accordance with the Business' impairment of long-lived assets
policy. An additional amount of $10.8 million was also written off in 1997 with
respect to goodwill of a discontinued business.
9. RETIREMENT PLANS
The Business sponsors a defined contribution plan for employees in its U.S.
operations and a defined benefit plan for its Australian employees. Pension plan
benefits for defined benefit plans are based primarily on the participants'
eligible compensation and years of credited service. The defined contribution
plan covers all U.S. employees meeting certain eligibility requirements and
provides for contributions of up to 6% of their salary. The Business' expense
for the defined contribution plan totalled $1.1 million, $1.2 million, and $1.3
million in 1996, 1997 and 1998, respectively.
The components of net periodic pension cost for the Australian defined
benefit pension plans are as follows (in millions):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
Service cost on benefits earned during the year... $(8.6) $(11.1) $ (6.7)
Interest cost on projected benefit obligation..... (9.4) (10.2) (7.1)
Actual return on plan assets...................... 18.2 20.9 32.0
Net amortization and deferral..................... (4.5) (6.6) (22.0)
----- ------ ------
Net periodic pension cost......................... $(4.3) $ (7.0) $ (3.8)
===== ====== ======
</TABLE>
F-17
<PAGE> 118
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assumptions used in developing the projected benefit obligation as of March
31 for the Australian defined benefit plans were as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Discount rate........................................... 9.0% 8.0% 6.0%
Rate of increase in compensation........................ 5.0% 4.5% 4.5%
Rate of return on plan assets........................... 9.0% 9.0% 9.0%
</TABLE>
The change in the net amortization and deferral component of the net
periodic pension cost from 1996 to 1998 was primarily due to the deferral of
significant investment gains. These gains arose from actual investment returns
being considerably greater than the expected investment returns for each year.
The discount rate is based on the yield on 10 year high quality investment
securities. The decline in the discount rate from 1996 to 1998 is a direct
result of the decline in the yields of the high quality investment securities
over the same period.
The actuarial present value of benefit obligations and funded status of the
Australian defined benefit plans are (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1998
------ ------
<S> <C> <C>
Benefit obligations:
Vested benefits......................................... $(76.0) $(52.6)
Non-vested benefits..................................... (8.0) (5.8)
------ ------
Accumulated benefit obligation............................ (84.0) (58.4)
Effect on benefits from projected compensation
increases............................................... (10.4) (9.0)
------ ------
Projected benefit obligation.............................. (94.4) (67.4)
Plan assets at fair value................................. 135.3 108.2
------ ------
Plan assets in excess of projected benefit obligation..... 40.9 40.8
Unrecognized net gain..................................... (16.9) (20.4)
Unrecognized net transition asset......................... (16.0) (8.2)
------ ------
Net prepaid pension cost.................................. $ 8.0 $ 12.2
====== ======
</TABLE>
Plan assets consist primarily of investments in marketable securities. Net
unrecognized gains and losses are amortized over the average remaining service
period of active employees. A market related value of assets is used to
determine pension costs using a five year average of stocks held for investment
purposes.
The Pipelines, Bathroom Products, Building Services and Irrigation
businesses were sold during 1997 and 1998, resulting in settlement gains of $3.9
million and $10.0 million, respectively. The cost of providing for termination
benefits related to the ordinary course of business were $0.9 million and $0.8
million in 1997 and 1998, respectively. These terminations resulted in
curtailment gains of $0.3 million and $0.5 million in 1997 and 1998,
respectively.
F-18
<PAGE> 119
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG TERM DEBT AND RELATED PARTY BORROWINGS
<TABLE>
<CAPTION>
MARCH 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Long term debt consists of the following (in millions):
U.S.$ noncollateralized notes, 6.67% average rate, payable
to 2007................................................ $158.0 $158.0
U.S.$ revolving credit facility, 5.935% average rate...... 245.5 300.0
NZD promissory note, 9.295% average rate.................. 70.3 64.7
NZD convertible notes, 7.5% interest rate, payable in
2001................................................... 14.8 8.9
------ ------
488.6 531.6
Less current maturities..................................... (18.4) (35.3)
------ ------
Total long term debt........................................ $470.2 $496.3
====== ======
Related party borrowings consists of the following (in
millions):
U.S.$ fixed rate 9.70% loan due March 29, 2012 ........... $100.0 $ --
U.S.$ Libor plus 1.25% loan due March 29, 2012............ 93.0 --
U.S.$ revolving credit loan due March 29, 1998 extendable
to March 29, 2012...................................... 9.8 --
U.S.$ extendable Libor plus 0.15% term loans due September
15, 1997............................................... 70.3 --
------ ------
273.1 --
Less current maturities..................................... (70.3) --
------ ------
Total long term related party borrowings.................... $202.8 $ --
====== ======
</TABLE>
The noncollateralized U.S. $ notes form part of a two tranche private
placement facility. Repayments are due in six monthly installments between 1999
and 2007. The tranches bear fixed rates of interest of 9.23% and 9.44%,
respectively, but have been swapped for floating rates which match the cash
flows of the notes exactly at LIBOR + 0.96%. At March 31, 1997 and 1998, the
swap rates were 6.67%.
The U.S. $ revolving credit facility can be repaid and redrawn until
maturity at various dates in 2000 and 2001. Interest is recalculated quarterly
based on LIBOR + 0.175% to 0.35% and the rates at March 31, 1997 were 5.76% to
6.03%. The rates at March 31, 1998 were 5.83% to 6.04%.
The NZD promissory note is repayable within 90 days but the Business has
entered into refinancing agreements that permit the Business to replace the
notes with two credit note facilities for the same principal and which expire in
1999 and 2000. The Business intends to refinance $41.6 million with facilities
that expire in April 2000. Accordingly, of the $64.7 million NZD promissory
note, $23.1 million has been classified as current. At March 31, 1997, the rates
were 7.47% to 7.71% and at March 31, 1998, interest rates were 8.72% to 9.87%.
The related party borrowings with RCI Corporation (Note 6) were settled in
fiscal year 1998.
The scheduled maturities of debt for the next five years are as follows:
$35.3 million in 1999; $53.5 million in 2000; $311.9 million in 2001; $20.6
million in 2002; $12.0 million in 2003; and $98.3 million in total thereafter.
The weighted average interest rate on outstanding short-term borrowings was
8.8%, 7.3% and 8.2% for 1996, 1997 and 1998, respectively.
F-19
<PAGE> 120
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Business has the following credit facilities available at March 31,
1998, which had not been drawn down (in millions):
<TABLE>
<S> <C>
AUD promissory note standby................................. $66.5
NZD revolving credit facility............................... 60.1
U.S.$ revolving credit facility............................. 55.0
</TABLE>
The loan agreements contain certain restrictive covenants which address the
incurrence of additional debt and the maintenance of consolidated tangible net
worth, ratios of total borrowings to total tangible assets, profit to net
borrowing costs, consolidated funded indebtedness to consolidated total
capitalization, and limits on the amount of subsidiary indebtedness.
11. COMMITMENTS AND CONTINGENCIES
FIRMANDALE
On March 12, 1998, JHIL entered into a comprehensive settlement of all
litigation arising out of a dispute between American Endeavour Fund ("AEF") and
London Pacific Group Limited. JHIL was joined to the litigation as a result of a
transaction it entered into in 1987 with Firmandale Investments Limited
("Firmandale"). All litigation between the parties has been discontinued, with
each party bearing its own costs and each party has released each other party
from any future claims arising out of or connected with the dispute or the
litigation. Certain indemnities given by JHIL to the directors of AEF and
Firmandale for liabilities they may incur in those capacities will continue.
Because of the releases contained in the settlement agreement, the Directors of
JHIL consider that these indemnities do not expose JHIL to any further
liability. As part of the settlement arrangements, Yelrom International Pty
Limited ("Yelrom"), a wholly-owned subsidiary of JHIL, made a partial offer in
March 1998 to acquire 10,976,512 AEF shares for $20.3 million, representing
approximately 20% of AEF's issued share capital, at $1.85 each. The underlying
net asset value of AEF is estimated to be $0.853 per share, or $9.4 million. In
April 1998, JHIL made a payment of $51.8 million to settle its liabilities under
its guarantee of the financial obligations of Firmandale, and assumed control of
the 75% of AEF owned by Firmandale. As part of the settlement arrangements, AEF
was placed into voluntary liquidation with its assets to be distributed between
AEF's shareholders in a way which will permit Yelrom to recover up to $4.0
million of its acquisition costs. The Firmandale provision of $61.7 million at
March 31, 1998 covers the $51.8 million guarantee payment, the anticipated loss
arising from the Yelrom offer and all related legal and professional costs. No
insurance recoveries have been assumed or included in estimating this accrual.
In the opinion of management, any further adjustments to this provision will not
be material to the financial position, results of operations or cash flows of
the Business.
YEAR 2000
The Business has established a Year 2000 compliance program. All of the
Business' computer systems are expected to be compliant by December 1998 or
replaced by a compliant solution by mid-1999. In the United States and the
Philippines, the Business believes that its exposure is relatively small due to
the more recent acquisition of its central systems. The Business is also exposed
to Year 2000 failures in key suppliers and in its customer base. There can be no
assurance that problems will not arise as a result of Year 2000 issues with the
Business' systems or those of its key suppliers and its customer base.
ENVIRONMENTAL
The operations of the Business, like those of other companies engaged in
similar businesses, are subject to various federal, state and local laws and
regulations on air and water quality, waste handling and disposal. The
Business's policy is to accrue for environmental costs when it is determined
that it is probable that an obligation exists and the amount can be reasonably
estimated. In the opinion of management, based on
F-20
<PAGE> 121
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
information presently known, the ultimate liability for such matters should not
have a material adverse effect on the Business's consolidated results of
operations, financial position or liquidity, but could exceed the cleanup costs
of $2.0 million accrued.
LEGAL
The Business is involved from time to time in various legal proceedings and
administrative actions incident to the normal conduct of its business. Although
it is impossible to predict the outcome of any pending legal proceeding,
management believes that such proceedings and actions should not, individually
or in the aggregate, have a material adverse effect on its results of
operations, cash flows or financial position.
OPERATING LEASES
As the lessee, the Business principally enters into property and equipment
leases. The following are future minimum lease payments for non-cancellable
operating leases having a remaining term in excess of one year at March 31, 1998
(in millions):
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
1999............................................. $ 8.0
2000............................................. 6.8
2001............................................. 5.6
2002............................................. 5.1
2003............................................. 0.8
Remainder........................................ 4.6
-----
Total............................................ $30.9
=====
</TABLE>
Rental expense amounted to $12.9 million, $15.1 million and $9.7 million in
the years ended March 31, 1996, 1997 and 1998, respectively.
MODULAR RELOCATABLE BUILDING LEASE FLEET INCOME
Future guaranteed hire rental income under operating leases in which the
Business is the lessor is $4.4 million, of which $4.1 million becomes due in
fiscal year 1999.
CAPITAL COMMITMENTS
Commitments for the acquisition of plant and equipment contracted for but
not recognized as liabilities (in millions):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Payable within one year..................................... $37.1 $63.1
Payable later than one year, not later than two years....... -- 27.1
----- -----
$37.1 $90.2
===== =====
</TABLE>
12. RESTRUCTURING AND OTHER OPERATING EXPENSES AND OTHER NONOPERATING EXPENSES,
NET
The Business incurred restructuring and other operating expenses of $38.8
million and $5.1 million for the years ended March 31, 1997 and 1998,
respectively. For fiscal year 1997, the Business incurred asset write-downs and
employee termination costs of $15.4 million associated with the restructuring
and upgrade of the fiber cement business in Australia, a Windows goodwill
write-off of $21.0 million and environmental costs of
F-21
<PAGE> 122
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2.4 million. For fiscal year 1998, employee termination costs of $5.1 million
associated with the restructuring and upgrade of the fiber cement business in
Australia was incurred.
Restructuring and other operating expenses consist of the following amounts
(in millions):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1996 1997 1998
---- ------ -----
<S> <C> <C> <C>
Obsolete equipment write-down....................... $ -- $(11.4) $ --
Impairment charge -- Largs Bay and Brooklyn property
writedowns........................................ -- (2.4) --
Goodwill write-off -- Windows....................... -- (21.0) --
Environmental costs................................. -- (2.4) --
Employee termination costs.......................... -- (1.6) (5.1)
---- ------ -----
$ -- $(38.8) $(5.1)
==== ====== =====
</TABLE>
Following the acquisition of Trend Windows in December 1994, sales declined
severely during fiscal year 1996 and 1997 as a result of a slump in housing
starts which was not foreseen at the time of acquisition. In February and March
1997, a Board review of the Windows Business Plan for 1998 to 2000 and a full
post-implementation review of the Windows acquisition revealed that Windows
would continue to incur future operating losses due to changes in market and
economic trends. These changes in circumstances indicated that the
recoverability of the carrying amount of Window's long-lived assets, including
goodwill, should be assessed. The Business estimated the future cash flows
(undiscounted and without interest charges) expected to result from the use of
the assets of the Window's business and their eventual disposition. As the sum
of the expected future cash flows was less than the carrying amount of the
assets, the Business had to recognize an impairment loss, measured as the amount
by which the carrying amount exceeds the fair value of the assets. The Business
determined the fair value of the assets using the present value of estimated
expected future cash flows. The carrying amount exceeded the fair value of the
assets by $21.0 million. In instances where goodwill is identified with assets
that are subject to an impairment loss, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
requires the carrying amount of the identified goodwill to be eliminated before
reducing the carrying amount of impaired long-lived assets. Accordingly, the
Business wrote-off $21.0 million in goodwill related to the Windows business
during fiscal year 1997.
During fiscal year 1997, the Business adopted a plan to restructure and
upgrade the fiber cement business in Australia due to a change in technology.
The upgrade included a complete replacement of existing machinery with new
machinery designed to handle the new technological innovations in fiber cement.
The existing machinery and equipment could not be used with the new technology
and did not have any alternate uses. These changes in circumstances resulted in
these assets being scrapped and the Business recognized an impairment loss of
$11.4 million to reduce the carrying amount of the assets to zero.
The writedowns related to Brooklyn and Largs Bay were in connection with
properties that have been abandoned and are held for disposal. Such assets have
been written down to their fair value.
Other nonoperating expenses, net consist of the following amounts (in
millions):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Other income..................................... 4.4 1.6 0.1
Firmandale provisions and expenses (Note 11)..... (17.9) (14.7) (12.2)
Other expenses, net.............................. (1.5) (1.5) --
------ ------ ------
$(15.0) $(14.6) $(12.1)
====== ====== ======
</TABLE>
F-22
<PAGE> 123
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other income consists principally of dividend income.
13. INCOME TAXES
The income tax (expense) benefit includes income taxes currently payable
and those deferred because of temporary differences between the financial
statement and tax bases of assets and liabilities. The income tax expense
(benefit) for income from continuing operations consists of the following (in
millions):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Income (loss) before income tax (expense) benefit
Australia...................................... $(14.3) $(16.9) $(17.4)
Foreign........................................ 35.2 1.4 73.1
------ ------ ------
20.9 (15.5) 55.7
====== ====== ======
Income tax (expense) benefit:
Current
Australia................................... $ -- $ -- $ --
Foreign..................................... (19.8) (29.0) (11.0)
------ ------ ------
(19.8) (29.0) (11.0)
------ ------ ------
Deferred
Australia................................... 19.5 35.3 (4.5)
Foreign..................................... (2.5) (3.3) (9.5)
------ ------ ------
17.0 32.0 (14.0)
------ ------ ------
Income tax (expense) benefit..................... $ (2.8) $ 3.0 $(25.0)
====== ====== ======
</TABLE>
Income tax (expense) benefit for discontinued operations consists of the
following (in millions):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Income tax (expense) benefit on discontinued
operations:
Current
Australia....................................... $ -- $ -- $ --
Foreign......................................... -- -- --
---- ----- -----
-- -- --
---- ----- -----
Deferred
Australia....................................... 9.8 (0.6) (2.1)
Foreign......................................... -- -- --
---- ----- -----
9.8 (0.6) (2.1)
---- ----- -----
Income tax (expense) benefit on disposal of
discontinued operations............................ -- (5.7) 9.7
---- ----- -----
Total income tax (expense) benefit for discontinued
operations......................................... $9.8 $(6.3) $ 7.6
==== ===== =====
</TABLE>
F-23
<PAGE> 124
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The statutory rate was 35% in the U.S., 36% for Australia and 33% for New
Zealand during the three years. The provision for income taxes is reconciled to
the tax at the statutory rate as follows (in millions):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
CONTINUING OPERATIONS
Income tax (expense) benefit computed at the
statutory tax rate.............................. $(6.9) $ 4.6 $(21.2)
Depreciation and amortization not allowable....... (0.8) (0.6) 0.1
Expenses not deductible........................... (3.1) (4.4) (28.1)
Rebates on dividends received..................... 2.8 0.2 21.4
Non-assessable income............................. 3.6 0.1 --
Research and development incentive................ 7.2 1.3 2.4
Other items....................................... (7.0) 0.5 5.3
Movement in valuation allowance................... 1.4 1.3 (4.9)
----- ------ ------
Income tax (expense) benefit...................... $(2.8) $ 3.0 $(25.0)
----- ------ ------
Effective tax rate................................ 13.4% 19.4% 44.9%
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
DISCONTINUED OPERATIONS
Income tax (expense) benefit computed at the
statutory tax rate.............................. $ 5.5 $ 6.6 $ (2.1)
Depreciation and amortization not allowable....... (0.5) (0.6) 0.3
Expenses not deductible........................... (0.4) (0.7) --
Adjustment of prior year taxes.................... 0.6 (5.0) --
Other items....................................... 2.9 0.3 (0.3)
Movement in valuation allowance................... 1.7 (1.2) --
----- ------ ------
Income tax (expense) benefit...................... $ 9.8 $ (0.6) $ (2.1)
===== ====== ======
Effective tax rate................................ 62.8% (3.4)% 33.3%
===== ====== ======
</TABLE>
F-24
<PAGE> 125
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Provisions and accruals.................................. $ 18.7 $ 34.9
Income in advance........................................ 27.8 32.3
Net operating loss carryforwards......................... 30.9 27.3
Foreign currency movements............................... -- 9.8
Capital loss carryforwards............................... 1.9 6.5
Income in advance........................................ 5.4 6.4
Provisions............................................... 26.1 6.2
AMT credit carryforwards................................. -- 5.8
Customer lists........................................... -- 4.3
Plant and equipment...................................... -- 1.4
Customer lists........................................... 4.4 --
Other.................................................... 2.7 5.2
------ ------
117.9 140.1
Valuation allowance...................................... (3.1) (7.7)
------ ------
$114.8 $132.4
------ ------
Deferred tax liabilities:
Plant and equipment...................................... $ -- $(20.2)
Prepaid pension cost..................................... (6.3) (4.4)
Provisions............................................... -- (4.3)
Currency swaps........................................... (3.2) (2.8)
Leveraged investments.................................... (6.6) (2.4)
Prepayments.............................................. (2.6) (0.7)
Plant and equipment...................................... (10.6) --
Foreign currency movements............................... (9.7) --
Prepayments.............................................. (1.3) --
Income receivable........................................ (0.6) --
------ ------
(40.9) (34.8)
------ ------
Total deferred taxes, net.................................. $ 73.9 $ 97.6
====== ======
</TABLE>
The Business establishes valuation allowances in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
are reduced by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax asset will not be realized. The valuation
allowance has primarily been established against capital losses in existence on
the basis that there is doubt about the ability of the Business to generate
capital gains sufficient to offset the losses. During 1998, the net increase in
the valuation allowance was $4.6 million which resulted from increased capital
losses in the year.
At March 31, 1998, the cumulative undistributed earnings of non-Australian
subsidiaries were approximately $108.0 million. Since it is the Business'
intention to indefinitely reinvest these earnings, no taxes have been provided.
The amount of foreign withholding taxes that would be payable upon remittance of
those earnings is approximately $21 million.
The Business has net operating loss carryforwards of approximately $76.0
million, which may be carried forward indefinitely. There are no foreign tax
credit entitlements at March 31, 1998 which have not been reflected as
deductible foreign taxes for financial and tax reporting purposes.
F-25
<PAGE> 126
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The movement in the valuation allowance is as follows (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of period...................... $(6.1) $(3.1) $(3.1)
Charged to expense.................................. 3.1 0.1 (4.9)
Costs and deductions................................ -- -- --
Foreign currency movements.......................... (0.1) (0.1) 0.3
----- ----- -----
Balance at end of period............................ $(3.1) $(3.1) $(7.7)
===== ===== =====
</TABLE>
14. DISCONTINUED OPERATIONS
PIPELINES
On September 5, 1997, the Board of Directors approved a plan to sell the
pipelines businesses. This divestment was consummated on September 26, 1997. A
loss of $10.1 million, represented the deficiency of the proceeds of sale of
$56.0 million over the net book value of the assets transferred of $71.4 million
and retirement plan settlement gains of $5.3 million. The sale resulted in an
income tax benefit of $5 million. The proceeds of sale was comprised of cash of
$61.0 million less selling costs of $2.5 million and repayment of payables of
$2.5 million.
BATHROOM PRODUCTS
On November 7, 1996, the Board of Directors approved a plan to sell the
bathroom products businesses. This divestment of the Australian operations was
consummated on March 21, 1997. A profit of $4.7 million, represented the excess
of the proceeds of sale of $46.0 million over the net book value of the assets
transferred of $41.3 million. Retirement plan settlement gains of $4.7 million
were recognized in 1998 with respect to the sale. The sale resulted in an income
tax benefit of $1.6 million in 1997 with the income tax expense relating to
retirement plan settlement gains recognized in 1998 amounting to $1.7 million.
An additional gain on disposal of $0.1 million, net of an income tax expense of
$0.5 million was recognized in 1998 relating to this sale. The proceeds of sale
was comprised of cash of $49.3 million less sales costs of $3.3 million.
In addition, on May 7, 1997, the sale of the New Zealand operations of
Bathroom Products was consummated. Proceeds from sale amounted to $5.4 million
representing the book value of the assets transferred. No profit or loss was
recognized on the sale.
BUILDING SERVICES
On November 7, 1996, the Board of Directors approved a plan to sell the
building services businesses. The divestment was consummated on November 19,
1996. A gain of $96.5 million represented the excess of the proceeds of sale of
$158.9 million over the net book value of the assets transferred of $65.6
million and includes retirement plan settlement gains of $3.2 million. The sale
resulted in an income tax benefit of $1 million. An additional gain on disposal
of $0.6 million was recognized in 1998 relating to this sale after an income tax
benefit of $0.9 million. The proceeds of sale was comprised of cash of $174.7
million less selling costs of $15.8 million.
In addition, on September 13, 1995 the Board of Directors approved a plan
to sell the security business of Building Services. On December 4, 1995 the
divestment was consummated. Proceeds from sale amounted to $5.9 million and the
book value of assets transferred was $5.9 million. There was no income tax
associated with the sale.
F-26
<PAGE> 127
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IRRIGATION
On May 8, 1996, the Board of Directors approved a plan to sell the
irrigation businesses. This divestment was consummated on September 20, 1996. A
gain of $26.1 million represented the excess of the proceeds of sale of $105.1
million over the net book value of the assets transferred of $79.7 million and
includes retirement plan settlement gains of $0.7 million. The sale resulted in
an income tax expense of $8.4 million. An additional gain on disposal of $7.7
million was recognized in 1998 relating to this sale after an income tax benefit
of $6.0 million. The proceeds of sale comprise cash of $114.4 million less
selling costs of $5.4 million and other holding fee costs of $3.9 million.
The results of operations of discontinued businesses are as follows (in
millions):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -----
<S> <C> <C> <C>
PIPELINES
Net sales....................................... $180.1 $185.0 $96.1
Income (loss) before income tax................. 4.6 (12.7) 6.3
Income tax (expense) benefit.................... 0.6 -- (2.1)
------ ------ -----
Net income (loss)............................... 5.2 (12.7) 4.2
------ ------ -----
BATHROOM PRODUCTS
Net sales....................................... 79.7 78.4 --
Income (loss) before income tax................. (8.7) (3.2) --
Income tax (expense) benefit.................... 3.5 0.6 --
------ ------ -----
Net income (loss)............................... (5.2) (2.6) --
------ ------ -----
BUILDING SERVICES
Net sales....................................... 247.7 194.2 --
Income (loss) before income tax................. (15.2) 4.1 --
Income tax (expense) benefit.................... 7.6 (2.1) --
------ ------ -----
Net income (loss)............................... (7.6) 2.0 --
------ ------ -----
IRRIGATION
Net sales....................................... 137.7 84.0 --
Income (loss) before income tax................. 3.7 (5.7) --
Income tax (expense) benefit.................... (1.9) 0.9 --
------ ------ -----
Net income (loss)............................... 1.8 (4.8) --
------ ------ -----
TOTAL
Net sales....................................... 645.2 541.6 96.1
Income (loss) before income tax................. (15.6) (17.5) 6.3
Income tax (expense) benefit.................... 9.8 (0.6) (2.1)
------ ------ -----
Net income (loss)............................... (5.8) (18.1) 4.2
------ ------ -----
Gain (loss) on disposal, net of income tax........ -- 121.4 6.0
------ ------ -----
Income (loss) from discontinued operations........ $ (5.8) $103.3 $10.2
====== ====== =====
</TABLE>
F-27
<PAGE> 128
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net assets of discontinued operations at March 31, 1997
at net realizable value are as follows (in millions):
<TABLE>
<CAPTION>
1997
------
<S> <C>
NET CURRENT ASSETS
Cash...................................................... $ 3.9
Accounts and notes receivable -- net...................... 57.2
Inventories............................................... 28.5
Accounts payable and accrued liabilities.................. (29.2)
Other current liabilities................................. (12.7)
------
Total net current assets.................................... 47.7
------
NET NON-CURRENT ASSETS
Property, plant and equipment -- net...................... 66.4
Deferred tax assets....................................... 8.3
Other assets.............................................. 0.9
------
Total net non-current assets................................ 75.6
------
Total net assets............................................ $123.3
======
</TABLE>
15. STOCK-BASED COMPENSATION
DR. R.K. BARTON PLAN
Dr. R.K. Barton was granted 2,500,000 options by JHIL on September 8, 1993
under the R.K. Barton Share Option Plan. Each option conferred the right to
subscribe for 1 ordinary JHIL share at a price of AUD 2.42 per share, provided
that the market price exceeded AUD 3.63 on the date of exercise. On June 16,
1997, R.K. Barton exercised all of his 2,500,000 options. This Plan was
accounted for as a variable plan under APB No. 25 and accordingly compensation
expense of $2.5 million was recognized in 1997.
SHADOW STOCK PLAN
The Shadow Stock Plan provides an incentive to certain key employees in the
United States based on the growth and profitability of the U.S. operations and
JHIL as if such employees were the owners of that number of JHIL's common stock
as are equal to the number of shares of Shadow Stock issued to employees. The
vesting period in all the value represented by the shares of Shadow Stock is
five years. The total number of shares outstanding at March 31, 1996, 1997 and
1998 were 365,000 shares, 783,500 shares and 1,540,500 shares, respectively. The
Plan was accounted for as a variable plan under APB No. 25 and accordingly
compensation expense of $0.1 million, $0.2 million and $0.6 million was
recognized in 1996, 1997 and 1998, respectively.
EXECUTIVE SHARE PURCHASE PLAN
JHIL has an Executive Share Purchase Plan. Under the terms of the Plan,
eligible executives may purchase JHIL shares at their market price when issued.
At March 31, 1998, no shares remained available for issue under the Plan.
Executives may fund purchases of JHIL shares with interest-free loans provided
by JHIL and collateralized by the shares. In such cases, the amount of
indebtedness is reduced by any amounts payable by JHIL in respect of such
shares, including dividends. Loans are generally payable within two years after
termination of an executive's employment. Based on JHIL's experience,
substantially all of such loans are being repaid over time. Accordingly, fixed
plan accounting has been applied under APB No. 25, however, dividends declared
on the shares are recognized as compensation expense. Compensation expense was
$0.7 million, $0.4 million and $0.5 million for 1996, 1997 and 1998,
respectively. Shares issued to executives
F-28
<PAGE> 129
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
during 1996, 1997 and 1998 were 2,862,000, 10,000 and 2,502,000, respectively.
The average issue price per share was $1.72, $2.85 and $2.95 in 1996, 1997 and
1998, respectively.
16. ACQUISITIONS
On February 1, 1997, the Business purchased Boral Gypsum, Inc. ("Boral"), a
gypsum mining and wallboard manufacturing operation in Nashville, Arkansas. The
acquisition has been accounted for as a purchase for financial reporting
purposes. The purchase price was comprised of $94.7 million in cash and the
assumption of $4.2 million in liabilities. The estimated fair values of assets
acquired are summarized as follows (in millions):
<TABLE>
<S> <C>
Trade receivables........................................... $11.3
Inventories................................................. 2.1
Prepaid expenses............................................ 0.1
Property, plant and equipment............................... 27.3
Mineral reserves............................................ 20.8
Goodwill.................................................... 37.3
-----
Total............................................. $98.9
=====
</TABLE>
The operating results for Boral have been included with those of the
Business from February 1, 1997. Sales for the period from February 1, 1997 to
March 31, 1997 were $14.5 million.
The following summarized unaudited pro forma financial information for the
fiscal years ended March 31 assumes the acquisition had occurred on April 1 of
each year (in millions):
<TABLE>
<CAPTION>
PRO FORMA
----------------
1996 1997
------ ------
<S> <C> <C>
Pro forma net sales........................................ $705.6 $786.3
====== ======
Pro forma operating profit................................. $ 77.4 $ 32.3
====== ======
</TABLE>
These amounts include the actual results of the Boral operation for fiscal
year 1996 and for the first ten months of fiscal year 1997. These amounts are
based on certain assumptions and estimates and do not reflect any benefits that
might be achieved by the acquisition. The pro forma results do not necessarily
represent results which would have occurred if the acquisition had taken place
on the basis assumed above, nor are they indicative of the results of future
combined operations.
17. FINANCIAL INSTRUMENTS
The Business enters into foreign currency forward exchange contracts and
interest rate swaps to manage its market risk due to fluctuations in foreign
exchange rates and interest rates.
INTEREST RATES
Bank overdrafts and loans bear an average variable interest rate of 6.54%
and 6.50% as of March 31, 1997 and 1998, respectively. These liabilities expose
the Business to the risk of rising interest rates increasing interest expense.
The Business's policy is generally to use interest rate swaps and purchased
options to hedge these exposures. A swap or other instrument is designated as a
hedge if it is expected to be effective as a hedge. Both the swap and the
underlying position are monitored to ensure hedge effectiveness is maintained
over time. At March 31, 1998, these instruments cover approximately 57% of the
Business's net liabilities (liabilities of $524.8 million less assets of $350.0
million) that are exposed to variable interest rates.
F-29
<PAGE> 130
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Simultaneously with the issuance of the $158.0 million non-collateralized
fixed rate notes, the Business entered into an interest rate swap. This
effectively converted these fixed rate notes, issued between 9.23% and 9.44%, to
variable rates (6.67% at March 31, 1998).
The interest rate swaps the Business has entered into are plain vanilla
contracts to receive variable swap interest at variable rates and to pay swap
interest at fixed interest rates for a specified period and at specified rates.
Variable rates are primarily determined by reference to the 90 day LIBOR rate.
Net swap interest paid or received is accrued as an adjustment to interest
expense.
The following table summarizes the notional values and related terms of
interest rate swaps. Notional amounts (shown in millions) provide an indication
of the extent to which the Business is involved in such agreements but do not
represent its exposure to market risk.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------------------------------
WEIGHTED AVERAGE RATE
-----------------------------
NOTIONAL VALUE MATURITY DATES RECEIVE PAY
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Interest rate swaps:
Pay variable........................ $158.0 1999 - 2007 9.23% to 9.44% 6.67 at Libor
+ 0.96%
Pay fixed........................... $100.0 2001 90-day Libor 5.90 to 5.96%
</TABLE>
FOREIGN CURRENCY
As a multinational corporation, the Business maintains significant
operations in foreign countries. As a result of these activities, the Business
is exposed to changes in exchange rates which affect its results of operations
and cash flows. Historically, the Business manages its Australian dollar
exposure to changes in foreign currency exchange rates through its normal
operating and financing activities, as well as through the use of financial
instruments. The major areas considered for hedging include foreign currency
denominated sale and purchase commitments, receivables and payables,
intercompany loans, net investments and dividends relating to foreign
operations. Where they are effective as hedges, both on-balance sheet financial
instruments and forward exchange contracts may be designated as hedges in net
investments in foreign operations, in which case the after-tax gains or losses
arising on the hedge are included in the cumulative translation adjustment
account in equity. The principal investments are in operations located in
Australia, New Zealand and the United States.
Generally, the only instruments the Business uses are foreign exchange
contracts. At March 31, 1997, the Business had contracts to buy Australian
dollars and sell U.S. dollars of $501.5 million at average exchange rates of
U.S.$0.7398 buys AUD 1, and contracts to buy U.S. dollars and sell Australian
dollars of $143.5 million at average exchange rates of U.S.$0.7833 buys AUD 1,
maturing within one year, that resulted in a net short U.S. dollar hedge
position of $358.0 million hedging its net investment in the U.S. operations. At
March 31, 1998, the Business had contracts to buy Australian dollars and sell
U.S. dollars of $192.6 million at average exchange rates of U.S.$0.6943 buys AUD
1 and contracts to buy U.S. dollars and sell Australian dollars of $242.0
million at average exchange rates of U.S.$0.6690 buys AUD 1, maturing within two
years, that resulted in a net long U.S. dollar hedge position of $49.4 million
hedging its negative net investment in the U.S. operations. The change in the
net investment resulted from returns of capital and other distributions from the
U.S. and other U.S. dollar denominated subsidiaries.
At March 31, 1997 and 1998, the Business had contracts to buy New Zealand
dollars and sell Australian dollars of $150.8 million and $68.6 million, at
average exchange rates of AUD 1 buys NZD 1.1205 and NZD 1.1618, respectively,
and maturing within one year. This hedge relates to the New Zealand operations
net NZD liability position.
F-30
<PAGE> 131
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Business also purchases raw materials and fixed assets and sells some
finished product for amounts denominated in foreign currencies. In order to
protect against exchange rate movements, the Business may enter into forward
exchange contracts timed to mature when settlement of the underlying
transactions is due to occur. Any unrealized gains and losses on the contracts,
together with the cost of the contracts, are deferred and will be recognized in
the measurement of the underlying transaction. At March 31, 1997 and 1998, there
were no material contracts outstanding.
CREDIT RISK
The credit risk on financial assets of the Business which have been
recognized on the balance sheet, other than equity investments, is generally the
carrying amount, net of any provisions for doubtful accounts.
Investments in government stocks and bonds which have been purchased at a
discount to face value, are carried on the balance sheet at an amount less than
the amount realizable at maturity. The total credit risk exposure of the
Business could also be considered to include the difference between the carrying
amount and the realizable amount.
For off-balance sheet financial instruments, including derivatives, which
are deliverable, credit risk also arises from the potential failure of
counterparties to meet their obligations under the respective contracts at
maturity.
The Business is exposed to losses on forward exchange contracts in the
event that counterparties fail to deliver the contracted amount. In accordance
with the terms of its master netting agreement with each counterparty, at March
31, the credit exposure to the Business is calculated as the net fair value of
all contracts outstanding with that counterparty at the balance sheet date. At
March 31, 1997 and 1998, total credit exposure arising from forward exchange
contracts was $388.4 million and $194.8 million, respectively.
The counterparties are prime financial institutions. The Business controls
risk through the use of credit ratings and reviews. At March 31, 1998, the
Business has no significant concentration of credit risk with any single
counterparty or group of counterparties.
FAIR VALUES
The carrying value of cash and cash equivalents, marketable securities,
accounts receivable, short-term borrowings and accounts payable are a reasonable
estimate of their fair value due to the short-term nature of these instruments.
The following table summarizes the estimated fair value of the Business's
remaining financial instruments (in millions):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------------
1997 1998
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Long-term debt
Floating.................... $310.2 $318.5 $341.6 $357.0
Fixed....................... 160.0 160.0 154.7 154.7
------ ------ ------ ------
Total............... $470.2 $478.5 $496.3 $511.7
====== ====== ====== ======
</TABLE>
F-31
<PAGE> 132
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1998
----------- -----------
FAIR VALUE FAIR VALUE
GAIN (LOSS) GAIN (LOSS)
----------- -----------
<S> <C> <C>
Derivatives
Currency forwards................................. $27.5 $(9.1)
Interest rate swaps
Pay variable................................... $10.3 $16.3
Receive variable............................... -- --
Options........................................... -- --
</TABLE>
Fair values of long-term debt was determined by reference to the March 31,
1997 and 1998 market values for comparably rated debt instruments and without
any adjustment for the effect of hedges. Fair values of forward contracts and
swaps are based on dealer quotes at the respective reporting dates.
18. OPERATING SEGMENT INFORMATION AND CONCENTRATIONS OF RISK
The Business has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires the reporting of certain
financial information by operating segment and geographical area. The Business
has reported its operating segment information in the format that the operating
segment information will be available to and evaluated by the Board of
Directors. U.S. Fiber Cement manufactures and sells fiber cement products in the
United States. Gypsum manufactures and sells gypsum wallboard products in the
United States. Australia/New Zealand Fiber Cement manufactures and sells fiber
cement products in Australia, New Zealand and Asian export markets other than
the Philippines. Building Systems manufactures, leases and installs modular
relocatable buildings, and also manufactures and sells insulated panel systems
in Australia. Other includes the Research and Development center in Sydney,
Australia, the Philippines fiber cement operations and the manufacturing and
selling operations of Windows in Australia. The Business's reportable operating
segments are strategic operating units that are managed separately due to their
different products and geographical location.
OPERATING SEGMENTS
The Business's operating segments and geographical information are as
follows (in millions):
<TABLE>
<CAPTION>
NET SALES TO CUSTOMERS(1)
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
U.S. Fiber Cement................................ $100.7 $148.7 $181.1
Gypsum........................................... 77.0 103.8 200.5
Australia/New Zealand Fiber Cement............... 264.6 262.1 211.6
Building Systems................................. 118.2 133.8 147.9
Other............................................ 63.2 63.2 79.4
------ ------ ------
Segments Total.............................. 623.7 711.6 820.5
General Corporate................................ 1.2 1.8 1.8
------ ------ ------
Worldwide Total............................. $624.9 $713.4 $822.3
====== ====== ======
</TABLE>
F-32
<PAGE> 133
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
TOTAL
INCOME FROM OPERATIONS IDENTIFIABLE ASSETS
------------------------ -------------------
1996 1997 1998 1997 1998
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Fiber Cement............................. $ 17.5 $ 27.7 $ 37.6 $ 162.5 $ 188.9
Gypsum........................................ 6.9 18.1 39.9 190.2 214.8
Australia/New Zealand Fiber Cement(2),(3)..... 62.9 25.8 35.7 182.6 156.1
Building Systems(7)........................... 10.2 10.0 9.9 85.8 86.9
Other(2),(4).................................. (13.1) (43.3) (27.0) 63.5 82.6
------ ------ ------ -------- --------
Segments Total........................... 84.4 38.3 96.1 684.6 729.3
General Corporate(6),(9)...................... (23.5) (22.7) (13.9) 726.1 512.4
------ ------ ------ -------- --------
Total Operating Profit........................ 60.9 15.6 82.2 N/A N/A
Net interest expense(8)....................... (15.6) (8.8) (9.3) N/A N/A
Other income/(expense)........................ (24.4) (22.3) (17.2) N/A N/A
Discontinued.................................. N/A N/A N/A 123.3 --
------ ------ ------ -------- --------
Worldwide Total.......................... $ 20.9 $(15.5) $ 55.7 $1,534.0 $1,241.7
====== ====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS TO PROPERTY, DEPRECIATION AND
PLANT & EQUIPMENT(5) AMORTIZATION
----------------------- ---------------------
1996 1997 1998 1996 1997 1998
----- ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Fiber Cement............................ $16.8 $ 76.2 $ 41.9 $ 4.4 $ 6.7 $ 9.0
Gypsum....................................... 9.5 47.8 28.3 3.6 5.0 8.9
Australia/New Zealand Fiber Cement........... 10.3 28.4 29.7 9.4 12.0 9.2
Building Systems............................. 16.4 12.2 22.6 6.1 7.5 8.1
Other........................................ 3.3 4.9 24.2 3.0 3.3 2.3
----- ------ ------ ----- ----- -----
Segments Total.......................... 56.3 169.5 146.7 26.5 34.5 37.5
General Corporate............................ 8.4 2.6 8.1 1.5 1.1 1.0
Discontinued................................. N/A N/A N/A 25.5 24.1 5.3
----- ------ ------ ----- ----- -----
Worldwide Total......................... $64.7 $172.1 $154.8 $53.5 $59.7 $43.8
===== ====== ====== ===== ===== =====
</TABLE>
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
TOTAL
NET SALES TO CUSTOMERS(1) IDENTIFIABLE ASSETS
--------------------------- -------------------
1996 1997 1998 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
United States.................................. $177.7 $252.5 $381.5 $ 352.8 $ 403.7
Australia...................................... 364.3 379.3 361.8 263.3 242.3
New Zealand.................................... 77.0 77.9 63.4 40.6 33.3
Other Countries................................ 4.7 1.9 13.8 27.9 50.0
------ ------ ------ -------- --------
Segments Total............................ 623.7 711.6 820.5 684.6 729.3
General Corporate.............................. 1.2 1.8 1.8 726.1 512.4
Discontinued................................... N/A N/A N/A 123.3 --
------ ------ ------ -------- --------
Worldwide Total........................... $624.9 $713.4 $822.3 $1,534.0 $1,241.7
====== ====== ====== ======== ========
</TABLE>
- ---------------
(1) Export sales and intersegment sales are not significant. No single customer
represents 10% or more of total sales.
(2) The operating profit of Australia/New Zealand Fiber Cement was reduced by
restructuring and other expenses of $17.8 million in fiscal year 1997 and
$5.1 million in fiscal year 1998 (Note 12). In addition,
F-33
<PAGE> 134
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the operating profit of Other was reduced by restructuring and other
expenses of $21.0 million for a goodwill impairment charge in fiscal year
1997 (Note 12).
(3) Sales of building systems products in New Zealand are included in the
Australia/New Zealand Fiber Cement segment.
(4) Income from the operations of Other includes expenses of $9.2 million, $10.6
million, and $11.0 million in 1996, 1997 and 1998, respectively, relating to
the Sydney based Research and Development center. Additionally, research and
development costs of $0.8 million and $3.6 million in 1997 and 1998 are
expensed in the U.S. Fiber Cement operating segment and research and
development costs of $2.9 million, $3.6 million and $3.4 million are
expensed in the Australia/New Zealand Fiber Cement segment.
Research and development expenditures are expensed as incurred and in total
amounted to $12.1 million, $15.0 million and $18.0 million for the years
ended March 31, 1996, 1997 and 1998, respectively.
(5) Additions to property, plant and equipment include both cash and credit
purchases.
(6) General Corporate comprises selling, general and administrative expenses
related to the Business' Sydney, Australia corporate office and the existing
U.S. corporate office. The principal components are officer and employee
compensation and related benefits, professional and legal fees,
administrative costs, and rental expense, net of rental income, on the
Business' corporate offices.
Additionally, pension costs related to the Australian defined benefit plans
for Australia/New Zealand Fiber Cement, Building Systems and Other segments
totalling $2.0 million, $3.3 million and $2.4 million in 1996, 1997 and
1998, respectively have been included in the general corporate segment. In
1996, there was an expense of $6.7 million related to surplus lease space
and, in 1997, stock compensation expense of $2.9 million.
(7) The Building Systems segment includes commission income received from the
Australia/New Zealand Fiber Cement segment for fiber cement systems which
are marketed to architects and specifiers by Building Systems but are
physically distributed by the Australia/New Zealand Fiber Cement segment.
Commissions earned during 1996, 1997 and 1998 were $6.9 million, $7.4
million and $6.7 million respectively.
(8) The Business does not report net interest and expense for each reportable
segment as reportable segments are not held directly accountable for
interest expense.
(9) The Business does not report deferred tax assets and liabilities for each
reportable segment as reportable segments are not held directly accountable
for deferred taxes. All deferred taxes are included in General Corporate.
"N/A" -- Not applicable.
CONCENTRATIONS OF RISK
The sole source of gypsum rock for the Seattle, Washington gypsum wallboard
manufacturing facility is a gypsum mine located in Santa Rosalia, Mexico. The
mine is owned by Compania Minera Caopas S.A. de C.V. (and its affiliates), which
is currently operating under a form of Mexican bankruptcy protection, and
management has been unable to determine the status of certain licenses and
permits necessary for operation of the mine. Therefore, there can be no
assurance that shipments from the Caopas mine will continue. A cessation of
shipments from the Caopas mine would have a material adverse effect on the
results of operations, cash flows and financial position of the Business.
The distribution channels for the Business' fiber cement products are
concentrated with the top ten U.S. distributors accounting for substantially all
of the total volume of U.S. shipments in fiscal year 1998 by the Business and
the top ten distributors in Australia and New Zealand accounting for
approximately half of the
F-34
<PAGE> 135
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total volume of Australia and New Zealand shipments by the Business in fiscal
year 1998. In the event that the Business loses one or more of these
distributors, there can be no assurance that the Business will be able to
replace such distributors. Therefore, the loss of one or more distributors could
have a material adverse effect on the results of operations, cash flows and
financial position of the Business.
Approximately 54% of the Business' revenues in fiscal year 1998 were
derived from sales outside the United States. Consequently, changes in the value
of foreign currencies could significantly affect the results of operations, cash
flows and financial position of the Business' non-U.S. operations on
translations into U.S. dollars.
F-35
<PAGE> 136
[This page intentionally left blank]
F-36
<PAGE> 137
JAMES HARDIE BUSINESSES
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1998
--------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 350.0 $ 204.5
Accounts and notes receivable, net of allowance for
doubtful accounts of $5.4 million at March 31 and $4.7
million at June 30..................................... 125.3 113.9
Inventories............................................... 63.7 60.0
Prepaid expenses and other current assets................. 13.5 14.2
Deferred tax assets....................................... 53.3 24.9
-------- --------
Total current assets.............................. 605.8 417.5
Long-term receivables....................................... 11.0 10.9
Investments................................................. 14.6 20.4
Property, plant and equipment, net.......................... 479.0 488.6
Intangibles, net............................................ 36.4 36.0
Mineral reserves............................................ 24.7 24.4
Prepaid pension cost........................................ 12.2 10.7
Deferred tax assets......................................... 58.0 68.5
-------- --------
Total assets...................................... $1,241.7 $1,077.0
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 112.4 $ 84.0
Bank overdraft............................................ 2.1 2.7
Current portion of long-term debt......................... 35.3 31.4
Accrued compensation...................................... 12.0 11.8
Accrued product warranties................................ 11.4 10.7
Firmandale liability...................................... 61.7 --
Other liabilities......................................... 16.1 6.2
-------- --------
Total current liabilities......................... 251.0 146.8
Long term debt.............................................. 496.3 481.9
Deferred tax liability...................................... 13.7 14.4
Other liabilities........................................... 14.9 14.1
-------- --------
Total liabilities................................. 775.9 657.2
-------- --------
Commitments and contingencies (Note 4)
Equity:
Capital................................................... 551.7 543.4
Accumulated other comprehensive income (Note 8)........... (75.3) (113.2)
Executive and employee loans.............................. (10.6) (10.4)
-------- --------
Total equity...................................... 465.8 419.8
-------- --------
Total liabilities and equity...................... $1,241.7 $1,077.0
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-37
<PAGE> 138
JAMES HARDIE BUSINESSES
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED JUNE 30,
--------------------
1997 1998
------- -------
<S> <C> <C>
Net sales................................................... $ 218.2 $ 206.2
Cost of goods sold.......................................... (153.5) (147.7)
------- -------
Gross profit.............................................. 64.7 58.5
Selling, general and administrative expenses................ (40.9) (35.1)
Restructuring and other operating expenses (Note 5)......... -- (0.5)
------- -------
Operating profit.......................................... 23.8 22.9
Interest expense............................................ (7.0) (7.3)
Interest expense -- related parties......................... (5.4) --
Interest income............................................. 6.3 3.4
Equity income -- RCI Corporation............................ 2.9 --
Other nonoperating expenses, net (Note 5)................... (2.1) --
------- -------
Income (loss) from continuing operations before income
tax.................................................... 18.5 19.0
Income tax (expense) benefit................................ (5.6) (6.6)
------- -------
Income (loss) from continuing operations.................. 12.9 12.4
------- -------
Discontinued operations:
Income (loss) from discontinued operations, net of income
tax (expense) benefit of $(1.2) million in 1997........... 3.0 --
Gain on disposal, net of income tax (expense) benefit of
$(1.0) million in 1997.................................... 3.3 --
------- -------
Income (loss) from discontinued operations................ 6.3 --
------- -------
Net income................................................ $ 19.2 $ 12.4
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-38
<PAGE> 139
JAMES HARDIE BUSINESSES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 19.2 $ 12.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of non-current assets.................... (1.6) (0.4)
Devaluation (revaluation) of non-current assets........... (1.3) 0.6
Depreciation and amortization............................. 11.2 9.6
Equity income from RCI Corporation........................ (2.9) --
Deferred income taxes..................................... 1.6 8.2
Prepaid pension cost...................................... (3.1) 0.6
Other..................................................... 3.7 1.5
Cash settlement of Firmandale liability................... -- (57.4)
Changes in operating assets and liabilities:
Accounts receivables, prepaids and other current assets... 9.6 (0.7)
Inventories............................................... (1.6) 0.5
Accounts payable and accrued liabilities.................. 4.6 (15.1)
Other provisions.......................................... (19.6) (4.3)
------- -------
Net cash provided by (used in) operating activities..... 19.8 (44.5)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment............... (35.8) (30.9)
Proceeds from sale of property, plant, and equipment...... 3.6 0.8
Disposal of subsidiaries and businesses, net of cash
invested................................................ 3.0 (10.5)
Purchases of investments and negotiable securities........ (0.8) (7.9)
Proceeds from sale and maturity of investments............ 5.0 2.3
Loans to other entities................................... (0.1) --
Loans repaid by other entities............................ 0.2 0.1
------- -------
Net cash provided by (used in) investing activities....... (24.9) (46.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................. 63.1 72.0
Repayments of borrowings.................................. (125.9) (86.5)
Proceeds from issuance of capital......................... 4.6 --
Proceeds from outside equity interests.................... 3.6 --
Dividends paid............................................ -- (19.1)
Contribution (dividend) with respect to excluded
businesses.............................................. (2.9) (1.9)
------- -------
Net cash provided by (used in) financing activities..... (57.5) (35.5)
------- -------
Effects of exchange rate changes on cash.................... (12.1) (19.4)
------- -------
Net increase (decrease) in cash and cash equivalents........ (74.7) (145.5)
Cash and cash equivalents at beginning of period............ 391.5 350.0
------- -------
Cash and cash equivalents at end of period.................. $ 316.8 204.5
======= =======
COMPONENTS OF CASH AND CASH EQUIVALENTS:
Cash at bank and on hand -- continuing operations......... $ -- $ --
Cash at bank and on hand -- discontinued operations....... 3.7 --
Deposits.................................................. 313.1 204.5
------- -------
Cash and cash equivalents at end of period.................. $ 316.8 $ 204.5
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid during the period for interest.................... $ 14.6 $ 8.0
Cash paid (received) during the period for income taxes..... $ 6.6 $ (0.1)
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-39
<PAGE> 140
JAMES HARDIE BUSINESSES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(MILLIONS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED TRANSLATION EXECUTIVE
CAPITAL GAIN (LOSS) ADJUSTMENT LOANS TOTAL
------- ----------- ----------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance as of March 31, 1998.............. $551.7 $(1.3) $ (74.0) $(10.6) $465.8
Net income................................ 12.4 12.4
Dividends paid............................ (19.1) (19.1)
Deemed dividend with respect to excluded
businesses.............................. (1.9) (1.9)
Stock compensation........................ 0.3 0.3
Translation adjustment.................... (37.4) (37.4)
Executive and employee loans.............. 0.2 0.2
Unrealized gain (loss) on
available-for-sale securities........... (0.5) (0.5)
------ ----- ------- ------ ------
Balance as of June 30,1998................ $543.4 $(1.8) $(111.4) $(10.4) $419.8
====== ===== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these unaudited interim
consolidated financial statements.
F-40
<PAGE> 141
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On July 2, 1998, James Hardie Industries Limited ("JHIL") announced a plan
of reorganization (the "Reorganization"). JHIL has historically operated a
number of businesses in the building products industry (the "James Hardie
Businesses" or the "Business"). In connection with the Reorganization, JHIL
intends to transfer its U.S. fiber cement and gypsum wallboard businesses, its
Australian, New Zealand and Asian fiber cement businesses, and its Australian
building systems and windows businesses (collectively the "Transferred
Businesses") to James Hardie N.V. (the "Company" or "James Hardie") and will
retain certain unrelated assets and liabilities (the "Retained Assets and
Liabilities"). As part of the Reorganization, JHIL also announced its intention
to sell a portion of its interest in the Company in initial public offerings in
the United States and elsewhere (the "Offerings") and to refinance certain
indebtedness. The Offerings are conditional on obtaining shareholder approval
from JHIL shareholders.
The Company and several of its subsidiaries have entered into purchase and
sale agreements to acquire the Businesses. The Retained Assets and Liabilities
will not be transferred to or assumed by the Company.
The interim period information included herein reflects all adjustments
which are, in the opinion of the management of James Hardie Businesses,
necessary for a fair statement of the results of the respective interim periods.
Such adjustments are of a normal recurring nature. Results of operations for
interim periods are not necessarily indicative of results to be expected for an
entire year. It is suggested that these summary financial statements be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this Prospectus. Interim financial statements are by necessity
somewhat tentative; judgments are used to estimate quarterly amounts for items
that are normally determinable only on an annual basis.
BASIS OF PRESENTATION
The consolidated financial statements of the James Hardie Businesses
include both the Transferred Businesses and the Retained Assets and Liabilities.
The financial adjustments required to eliminate the Retained Assets and
Liabilities will be recorded as a deemed transfer to JHIL upon the consummation
of the Reorganization (see also the Unaudited Pro Forma Consolidated Financial
Data presented elsewhere in this Prospectus). Due to their dissimilar and
unrelated nature, the consolidated financial statements have been prepared after
retroactively accounting for the removal of the results of operations, cash
flows and financial position of Australia's Wonderland, the Healthcare
Corporation and certain asbestos-related costs and liabilities related to
businesses abandoned in 1987. All significant intercompany transactions have
been eliminated.
Interest expense, income tax expense and selling, general and
administrative expenses included in the consolidated financial statements
reflect the historical expenses associated with borrowings of the James Hardie
Businesses, their Australian and international tax structure, the compensation
costs associated with JHIL's stock purchase and option arrangements and the
costs of JHIL's head office functions located in Sydney, Australia. The Company,
however, plans to refinance these borrowings, substantially restructure the
international tax arrangements of the James Hardie Businesses, establish new
stock compensation plans and establish new operational headquarters in the
United States. Accordingly, the historical consolidated balance sheets,
statements of income, cash flows and changes in equity of the James Hardie
Businesses are not necessarily indicative of the results of operations and
financial condition of the Business had the Reorganization been consummated
prior to such periods.
F-41
<PAGE> 142
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RECENT ACCOUNTING PRONOUNCEMENTS
As of April 1, 1998 the Business adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting on Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income consists of "net income" and "other
comprehensive income" items that are recognized directly in equity such as
foreign currency translation adjustments and the net unrealized gain (loss) on
available-for-sale securities. The Statement also requires the accumulated
balance of other comprehensive income to be disclosed separately from retained
earnings and capital in the balance sheet. This statement relates to the
disclosure and presentation of financial information and has no impact on
results of operations or financial position (Note 8).
In 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. This standard is effective for the
fiscal year ending March 31, 1999. The Business has decided to adopt this
standard early (Note 7).
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
disclosure requirements and requires additional information regarding changes in
benefit obligations and the fair value of plan assets. This standard is
effective for the fiscal year ending March 31, 1999. SFAS No. 132 does not
change the existing measurement or recognition provisions of SFAS No. 87,
"Employers' Accounting for Pensions," and SFAS No. 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The Business has decided to adopt this standard in the
fiscal year ending March 31, 1999.
In 1998, the FASB also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. The effective date of this standard is for the
fiscal year ending March 31, 2001. All derivatives are required to be recognized
in the statement of financial position as either assets or liabilities and
measured at fair value. The Business has not yet determined the effects SFAS No.
133 will have on either its financial position or results of operations.
In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use. It also provides guidance for determining whether computer
software is for internal-use and for the accounting of the proceeds of computer
software originally developed or obtained for internal use and then subsequently
sold to the public. SOP 98-1 is effective for the fiscal year ending March 31,
2000. Management believes the effect of adopting SOP 98-1 will not have a
material impact on the accompanying consolidated financial statements.
In 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that costs of start-up activities,
including organization costs, be expensed as incurred. Start-up activities are
broadly defined and include one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, commencing some new operation,
and organizing a new entity. SOP 98-5 is effective for the fiscal year ending
March 31, 2000, with initial application reported as the cumulative effect of a
change in accounting principle. As the Business' policy is to expense all
start-up costs as incurred, management believes the effect of adopting SOP 98-5
will not have a material impact on the accompanying consolidated financial
statements.
F-42
<PAGE> 143
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVENTORIES
Inventories consist of the following components (in millions):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1998
--------- --------
<S> <C> <C>
Raw materials and supplies............................... $30.0 $31.0
Work-in-process.......................................... 7.0 7.1
Contracts in progress less advance billings.............. 3.3 0.8
Finished goods........................................... 23.4 21.1
----- -----
Total inventory................................ $63.7 $60.0
===== =====
</TABLE>
Work-in-process includes amounts related to construction contracts. The net
amount of construction work in process of $3.3 million and $0.8 million was
determined after deducting payments and progress billings of $56.6 million and
$55.4 million as of March 31, 1998 and June 30, 1998, respectively.
4. COMMITMENTS AND CONTINGENCIES
FIRMANDALE
On March 12, 1998, JHIL entered into a comprehensive settlement of all
litigation arising out of a dispute between American Endeavour Fund ("AEF") and
London Pacific Group Limited. JHIL was joined to the litigation as a result of a
transaction it entered into in 1987 with Firmandale Investments Limited
("Firmandale"). All litigation between the parties has been discontinued, with
each party bearing its own costs and each party has released each other party
from any future claims arising out of or connected with the dispute or the
litigation. Certain indemnities given by JHIL to the directors of AEF and
Firmandale for liabilities they may incur in those capacities will continue.
Because of the releases contained in the settlement agreement, the Directors of
JHIL consider that these indemnities do not expose JHIL to any further
liability. In April 1998, JHIL made a payment of $57.4 million to settle its
liabilities under its guarantee of the financial obligations of Firmandale and
acquired 10,976,512 AEF shares with a value of $7.5 million.
YEAR 2000
The Business has established a Year 2000 compliance program. All of the
Business' computer systems are expected to be compliant by December 1998 or
replaced by a compliant solution by mid-1999. In the United States and the
Philippines, the Business believes that its exposure is relatively small due to
the more recent acquisition of its central systems. The Business is also exposed
to Year 2000 failures in key suppliers and in its customer base. There can be no
assurance that problems will not arise as a result of Year 2000 issues with the
Business' systems or those of its key suppliers and its customer base.
ENVIRONMENTAL
The operations of the Business, like those of other companies engaged in
similar businesses, are subject to various federal, state and local laws and
regulations on air and water quality, waste handling and disposal. The
Business's policy is to accrue for environmental costs when it is determined
that it is probable that an obligation exists and the amount can be reasonably
estimated. In the opinion of management, based on information presently known,
the ultimate liability for such matters should not have a material adverse
effect on the Business's consolidated results of operations, financial position
or liquidity, but could exceed the cleanup costs of $1.8 million accrued at June
30, 1998.
F-43
<PAGE> 144
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
LEGAL
The Business is involved from time to time in various legal proceedings and
administrative actions incident to the normal conduct of its business. Although
it is impossible to predict the outcome of any pending legal proceeding,
management believes that such proceedings and actions should not, individually
or in the aggregate, have a material adverse effect on its results of
operations, cash flows or financial position.
OTHER COMMITMENTS
On May 14, 1998, the U.S. Gypsum business entered into a paperboard supply
agreement which commences on or before October 1, 2000 and runs for ten years
from commencement date (as defined in the agreement) or until October 1, 2010,
whichever is later. Under the agreement the selling price is computed by a
formula whereby an initial base price is adjusted for changes in the cost of
certain key grades of paper stock and other factors as detailed in the
agreement. The percentage of the recycled paperboard requirements of the U.S.
Gypsum business to be supplied under the agreement is as follows:
<TABLE>
<CAPTION>
LAS VEGAS,
NEVADA AND
ARKANSAS SEATTLE
% %
--------- ----------
<S> <C> <C>
From commencement to September 30, 2000..................... 7 --
From October 1, 2000 to December 31, 2000................... 7 95%
(plus or
minus 5%)
From January 1, 2001 to termination......................... 95% 95%
(plus or (plus or
minus 5%) minus 5%)
</TABLE>
No paperboard was supplied under this agreement in the three month period
ended June 30, 1998.
5. RESTRUCTURING AND OTHER OPERATING EXPENSES AND OTHER NON OPERATING EXPENSES,
NET
Restructuring and other operating expenses consist of the following amounts
(in millions):
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED JUNE 30,
--------------------
1997 1998
------ ------
<S> <C> <C>
Employee termination costs............................... $ -- $ 0.5
===== =====
</TABLE>
The Business incurred restructuring and other operating expenses of $0.5
million for the period ended June 30, 1998 being employee termination costs
associated with the restructuring and upgrade of the fiber cement business in
Australia.
Other nonoperating expenses, net consist of the following amounts (in
millions):
<TABLE>
<CAPTION>
THREE MONTH PERIODS
ENDED JUNE 30,
--------------------
1997 1998
------ ------
<S> <C> <C>
Other expenses, net...................................... $(2.1) $ --
===== =====
</TABLE>
Other nonoperating expenses consist of provisions and expenses related to
Firmandale litigation.
F-44
<PAGE> 145
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. DISCONTINUED OPERATIONS
The results of operations of discontinued businesses are as follows (in
millions):
<TABLE>
<CAPTION>
THREE MONTH
PERIODS ENDED
JUNE 30,
--------------
1997 1998
----- ----
<S> <C> <C>
PIPELINES
Net sales................................................. $52.2 $ --
Income (loss) before income tax........................... 4.2 --
Income tax (expense) benefit.............................. (1.2) --
----- ----
Net income (loss)......................................... 3.0 --
----- ----
Gain (loss) on disposal, net of income tax.................. 3.3 --
----- ----
Income (loss) from discontinued operations.................. $ 6.3 $ --
===== ====
</TABLE>
PIPELINES
On September 5, 1997, the Board of Directors approved a plan to sell the
pipelines businesses. This divestment was consummated on September 26, 1997.
BATHROOM PRODUCTS
On November 7, 1996, the Board of Directors approved a plan to sell the
bathroom products businesses. This divestment of the Australian operations was
consummated on March 21, 1997. Retirement plan settlement gains of $4.1 million
were recognized in the first quarter 1998 with respect to the sale. Income tax
expense relating to retirement plan settlement gains recognized in 1998 amounted
to $1.4 million. An additional gain on disposal of $0.1 million, net of an
income tax expense of $0.4 million was recognized in the first quarter 1998
relating to this sale.
BUILDING SERVICES
On November 7, 1996, the Board of Directors approved a plan to sell the
building services businesses. The divestment was consummated on November 19,
1996. An additional gain on disposal of $0.5 million was recognized in the first
quarter of 1998 relating to this sale after an income tax benefit of $0.8
million.
7. OPERATING SEGMENT INFORMATION AND CONCENTRATIONS OF RISK
The Business has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires the reporting of certain
financial information by operating segment and geographical area. The Business
has reported its operating segment information, in the format that the operating
segment information will be available to and evaluated by the Board of
Directors. U.S. Fiber Cement manufactures and sells fiber cement products in the
United States. Gypsum manufactures and sells gypsum wallboard products in the
United States. Australia/New Zealand Fiber Cement manufactures and sells fiber
cement products in Australia, New Zealand and Asian export markets other than
the Philippines. Building Systems manufactures, leases and installs modular
relocatable buildings, and also manufactures and sells insulated panel systems
in Australia. Other includes the Research and Development center in Sydney,
Australia, the Philippines fiber cement operations and the manufacturing and
selling operations of Windows in Australia. The Business's reportable operating
segments are strategic operating units that are managed separately due to their
different products and geographical location.
F-45
<PAGE> 146
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
OPERATING SEGMENTS
The Business's operating segments and geographical information are as
follows (in millions):
<TABLE>
<CAPTION>
NET SALES TO
CUSTOMERS(1)
-----------------------
FOR THE THREE MONTH
PERIODS ENDED JUNE 30,
-----------------------
1997 1998
--------- ---------
<S> <C> <C>
U.S. Fiber Cement........................................... $ 43.1 $ 58.8
Gypsum...................................................... 48.4 59.9
Australia/New Zealand Fiber Cement.......................... 61.3 43.2
Building Systems............................................ 43.2 27.9
Other....................................................... 21.5 15.8
------ ------
Segments Total............................................ 217.5 205.6
General Corporate........................................... 0.7 0.6
------ ------
Worldwide Total........................................... $218.2 $206.2
====== ======
</TABLE>
<TABLE>
<CAPTION>
INCOME FROM
OPERATIONS TOTAL IDENTIFIABLE ASSETS
-------------------- --------------------------
FOR THE THREE MONTH
PERIODS ENDED
JUNE 30,
-------------------- MARCH 31, JUNE 30,
1997 1998 1998 1998
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Fiber Cement.................................... $ 9.4 $12.6 $ 188.9 $ 208.2
Gypsum............................................... 12.6 13.2 214.8 222.7
Australia/New Zealand Fiber Cement(2)(3)............. 12.6 4.4 156.1 145.7
Building Systems(6).................................. 3.6 1.2 86.9 70.7
Other(2)(4).......................................... (7.6) (4.9) 82.6 77.7
----- ----- -------- --------
Segments Total..................................... 30.6 26.5 729.3 725.0
General Corporate(5)(8).............................. (6.8) (3.6) 512.4 352.0
----- ----- -------- --------
Total Operating Profit............................... 23.8 22.9 N/A N/A
Net interest expense(7).............................. (6.1) (3.9) N/A N/A
Other income/(expense)............................... 0.8 -- N/A N/A
Discontinued......................................... N/A N/A -- --
----- ----- -------- --------
Worldwide Total............................ $18.5 $19.0 $1,241.7 $1,077.0
===== ===== ======== ========
</TABLE>
F-46
<PAGE> 147
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
NET SALES TO
CUSTOMERS(1) TOTAL IDENTIFIABLE ASSETS
---------------------- --------------------------
FOR THE THREE MONTH
PERIODS ENDED JUNE 30,
---------------------- MARCH 31, JUNE 30,
1997 1998 1998 1998
-------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
United States..................................... $ 91.5 $118.7 $ 403.7 $ 430.9
Australia......................................... 103.2 74.1 242.3 217.9
New Zealand....................................... 18.7 11.2 33.3 28.5
Other Countries................................... 4.1 1.6 50.0 47.7
------ ------ -------- --------
Segments Total.................................. 217.5 205.6 729.3 725.0
General Corporate................................. 0.7 0.6 512.4 352.0
Discontinued...................................... N/A N/A -- --
------ ------ -------- --------
Worldwide Total................................. $218.2 $206.2 $1,241.7 $1,077.0
====== ====== ======== ========
</TABLE>
- ---------------
(1) Export sales are not significant. No single customer represents 10% or more
of total sales.
(2) The operating profit of Australia/New Zealand Fiber Cement was reduced by
restructuring and other expenses of $0.5 million in the quarter to June
1998. (See Note 5)
(3) Sales of building systems products in New Zealand are included in the
Australia/New Zealand Fiber Cement segment.
(4) Income from the operations of Other includes expenses of $2.6 million and
$1.8 million in 1997 and 1998, respectively, relating to the Sydney based
Research and Development center. Additionally, research and development
costs of $0.7 million and $1.1 million in 1997 and 1998 respectively are
expensed in the U.S. Fiber Cement operating segment and research and
development costs of $1.2 million and $0.6 million are expensed in the
Australia/New Zealand Fiber Cement segment.
Research and development expenditures are expensed as incurred and in total
amounted to $4.5 million and $3.5 million in 1997 and 1998, respectively.
(5) General Corporate comprises selling, general and administrative expenses
related to the Business' Sydney, Australia corporate office and the existing
U.S. corporate office. The principal components are officer and employee
compensation and related benefits, professional and legal fees,
administrative costs and rental expense, net of rental income, on its
Business' corporate offices. Additionally, pension costs related to the
Australian defined benefit plans for Australia/New Zealand Fiber Cement,
Building Systems and Other segments totalling $0.7 million and $0.6 million
in 1997 and 1998 respectively have been included in the General Corporate.
In the quarter ended June 30, 1998, General Corporate costs were offset by a
$1.2 million gain in connection with settlement of an asserted claim.
(6) The Building Systems segment includes commission income received from the
Australia/New Zealand Fiber Cement segment for fiber cement systems which
are marketed to architects and specifiers by Building Systems but are
physically distributed by the Australia/New Zealand Fibre Cement segment.
Commissions earned during 1997 and 1998 were $1.4 million and $1.8 million
respectively.
(7) The Business does not report net interest and expense for each reportable
segment as reportable segments are not held directly accountable for
interest expense.
(8) The Business does not report deferred tax assets and liabilities for each
reportable segment as reportable segments are not held directly accountable
for deferred taxes. All deferred taxes are included in General Corporate.
"N/A" -- Not applicable.
F-47
<PAGE> 148
JAMES HARDIE BUSINESSES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. COMPREHENSIVE INCOME
As of April 1, 1998 the Business adopted SFAS No. 130 which establishes
standards for the reporting and display of comprehensive income and its
components.
The components of total comprehensive income were as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTH
PERIODS
ENDED JUNE 30,
---------------
1997 1998
------ ------
<S> <C> <C>
Net income.................................................. $ 19.2 $ 12.4
Other comprehensive income (loss) comprises:
Net unrealized gains (losses) on available-for-sale
securities, net of income tax............................. (1.2) (0.5)
Currency translation gains (losses), net of income tax
(expense) benefit of $11.9 million and $(4.1) million for
1997 and 1998, respectively on hedging, from an Australian
dollar perspective, the net investment in foreign
operations................................................ (4.0) (2.3)
Currency translation gains (losses), net of income tax
(expense) benefit of $0 for both 1997 and 1998 on
translation into U.S. dollars............................. (27.0) (35.1)
------ ------
Total other comprehensive income, net of income tax.... (32.2) (37.9)
------ ------
Total comprehensive income........................ $(13.0) $(25.5)
====== ======
</TABLE>
The components of total accumulated other comprehensive income, net of
related tax, which is displayed in the balance sheet, were as follows (in
millions):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1998
--------- --------
<S> <C> <C>
Net unrealized gain (loss) on available-for-sale
securities................................................ $ (1.3) $ (1.8)
Foreign currency translation gains (losses)................. (74.0) (111.4)
------ -------
Total accumulated other comprehensive income...... $(75.3) $(113.2)
====== =======
</TABLE>
F-48
<PAGE> 149
No dealer, salesperson or other individual has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this Prospectus or in the affairs
of the Company since the date hereof.
TABLE OF CONTENTS
------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 11
The Reorganization...................... 20
Use of Proceeds......................... 22
Dividend Policy......................... 22
Capitalization.......................... 23
Dilution................................ 24
Unaudited Pro Forma Consolidated
Financial Data........................ 25
Selected Financial and Operating Data... 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 38
Business................................ 52
Management.............................. 69
JHIL and the Selling Shareholder........ 77
Certain Relationships and Related
Transactions.......................... 78
Shares Eligible for Future Sale......... 79
Description of Capital Stock............ 81
Share Certificates and Transfer......... 85
Taxation................................ 85
Underwriting............................ 92
Notice to Canadian Residents............ 96
Legal Matters........................... 97
Experts................................. 97
Available Information................... 97
Enforcement of Civil Liabilities........ 98
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
Until , 1998 all dealers effecting transactions in the Common Stock,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
PROSPECTUS , 1998
Shares
JAMES HARDIE N.V.
JH LOGO
Common Stock
WARBURG DILLON READ LLC
<PAGE> 150
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS Subject to Completion, Dated October 15, 1998
- --------------------------------------------------------------------------------
Shares
JH LOGO
JAMES HARDIE N.V.
Common Stock
- --------------------------------------------------------------------------------
All of the shares of common stock, nominal value NLG 0.02 per share
(the "Common Stock"), of James Hardie N.V. ("James Hardie") offered hereby are
being sold by a wholly owned indirect subsidiary (the "Selling Shareholder") of
James Hardie Industries Limited, a public company organized under the laws of
Australia and listed on the Australian Stock Exchange ("JHIL"), in concurrent
offerings outside the United States and Canada and in the United States and
Canada (collectively, the "Offerings"). Of such shares, are initially
being offered outside the United States and Canada by the International
Underwriters (the "International Offering") and are initially being
offered in the United States and Canada by the U.S. Underwriters (the "United
States Offering"). The per share price to the public and per share underwriting
discounts and commissions in each of the Offerings will be identical. See
"Underwriting." James Hardie will not receive any of the proceeds from the sale
of the shares offered hereby. The Offerings are contingent on the completion of
the other steps of the Reorganization (as defined herein).
James Hardie is a wholly-owned indirect subsidiary of JHIL. Following
consummation of the Offerings, JHIL will beneficially own approximately 85% of
the outstanding shares of Common Stock (or approximately 83% of the outstanding
shares of Common Stock if the U.S. Underwriters' over-allotment option is
exercised in full).
Prior to the Offerings, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price per share will
be between $ and $ . See "Underwriting" for the factors to be considered in
determining the initial public offering price. The shares of Common Stock have
been approved for listing (subject to official notice of issuance) on the New
York Stock Exchange (the "NYSE") under the symbol "JHX."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" COMMENCING ON PAGE 11.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds
Price to Discounts and to Selling
Public Commissions(1) Shareholder(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per Share $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3) $ $ $
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) James Hardie, the Selling Shareholder and JHIL have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by JHIL estimated to be
$ .
(3) The Selling Shareholder has granted the U.S. Underwriters a 30-day option to
purchase up to additional shares of Common Stock on the same terms per
share solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public will be $ , the total
Underwriting Discounts and Commissions will be $ and the total
proceeds to the Selling Shareholder will be $ . See "Underwriting."
The shares of Common Stock are being offered by the Underwriters as set forth
under "Underwriting" herein. It is expected that delivery of the certificates
therefor will be made at the offices of UBS AG, acting through its division
Warburg Dillon Read, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1998.
WARBURG DILLON READ
The date of this Prospectus is , 1998.
<PAGE> 151
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholder by De Brauw Blackstone
Westbroek N.V. Advice with respect to Dutch tax matters has been provided by
PricewaterhouseCoopers N.V., Dutch tax advisors to the Company. Certain legal
matters in connection with the Offerings will be passed upon for the Company by
Gibson, Dunn & Crutcher LLP and for the Underwriters by Davis Polk & Wardwell.
Gibson, Dunn & Crutcher LLP and Davis Polk & Wardwell will rely on the opinions
of De Brauw Blackstone Westbroek N.V. with respect to all matters of Dutch law
and PricewaterhouseCoopers N.V. with respect to Dutch tax law matters.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheets as of March 31, 1997 and 1998, and the
consolidated statements of income, cash flows and changes in equity for each of
the three years in the period ended March 31, 1998, included in this Prospectus
have been audited by PricewaterhouseCoopers, Australia, independent accountants,
as stated in their report appearing herein.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form F-1
filed by the Company with the U.S. Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"). This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Company and the securities offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and in
such instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified by such reference.
As a result of the United States Offering, the Company will become subject
to the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), applicable to foreign private issuers, and in accordance
therewith will file reports, including annual reports on Form 20-F, and other
information with the Commission. Such reports and other information may be
obtained, upon written request, from the Transfer Agent and Registrar at its
principal office located at . Such reports and other information
may also be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at Room 1024 Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, reports and other information concerning the
Company may be inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005. As a foreign private Company, the
Company is exempt from the rules under the Exchange Act prescribing the
furnishing and content of proxy statements and annual reports to shareholders
and the shortswing profit recovery provisions set forth in Section 16 of the
Exchange Act.
97
<PAGE> 152
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
ENFORCEMENT OF CIVIL LIABILITIES
The Company is incorporated under the laws of The Netherlands with its
corporate seat in Amsterdam, The Netherlands. Certain of the members of the
Company's directors, executive officers and subsidiaries, and certain of the
experts named herein, are residents of jurisdictions outside the United States
and significant assets of the Company and of such persons are located outside
the United States. As a result, it may be difficult for investors to effect
service of process within the United States upon the Company or such other
persons, or to enforce outside the United States judgments obtained against such
persons in the U.S. courts, or to enforce U.S. court judgments obtained against
such persons in courts in jurisdictions outside the United States, in each case,
in any action, including actions predicated upon the civil liability provisions
of U.S. securities laws.
98
<PAGE> 153
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
No dealer, salesperson or other individual has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this Prospectus or in the affairs
of the Company since the date hereof.
TABLE OF CONTENTS
------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 11
The Reorganization..................... 20
Use of Proceeds........................ 22
Dividend Policy........................ 22
Capitalization......................... 23
Dilution............................... 24
Unaudited Pro Forma Consolidated
Financial Data....................... 25
Selected Financial and Operating
Data................................. 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 38
Business............................... 52
Management............................. 69
JHIL and the Selling Shareholder....... 77
Certain Relationships and Related
Transactions......................... 78
Shares Eligible for Future Sale........ 79
Description of Capital Stock........... 81
Share Certificates and Transfer........ 85
Taxation............................... 85
Underwriting........................... 92
Notice to Canadian Residents........... 96
Legal Matters.......................... 97
Independent Public Accountants......... 97
Available Information.................. 97
Enforcement of Civil Liabilities....... 98
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
PROSPECTUS , 1998
Shares
JAMES HARDIE N.V.
JH LOGO
Common Stock
WARBURG DILLON READ
<PAGE> 154
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than sales commissions) payable by JHIL in connection with the
issuance and distribution of the shares of Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 53,941
NASD Filing Fee............................................. 18,785
New York Stock Exchange Listing Fee......................... *
Blue Sky Fees and Expenses.................................. 10,000
Printing and Mailing Fees and Expenses...................... 450,000
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Transfer Agent and Registrar Fees and Expenses.............. 15,000
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Association provide that the Company is
authorized to indemnify its directors, officers and agents against all
liabilities resulting from (1) any action, suit or proceeding (other than an
action by or in the right of the Company), provided that such person acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Company and, with respect to any criminal action or
proceeding, such person had no reasonable cause to believe his conduct was
unlawful or out of his mandate, and (2) any action or proceeding by or in the
right of the Company to procure a judgment in its favor provided that such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the Company and except that no indemnification
shall be made if such person is adjudged to be liable for gross negligence or
willful misconduct in the performance of his duty to the Company, unless a court
determines that such person is fairly and reasonably entitled to
indemnification. Such indemnification shall only be made upon a determination by
the Board of Directors or, if the Board of Directors so resolves, by independent
legal counsel or by a general meeting of shareholders that indemnification is
proper under the circumstances because such person has satisfied the applicable
standard of conduct.
The Company and/or JHIL is entering into indemnity agreements (copies of
which are filed as exhibits to the Registration Statement) with the directors
and certain officers of the Company which provide indemnification to the
greatest degree permitted by law. The Company has also purchased insurance
policies under which such individuals are insured against liabilities resulting
from their conduct when acting in their capacities on behalf of the Company. In
addition, Article 37 of the Articles of Association provides that the adoption
by the general meeting of shareholders of the annual accounts shall fully
discharge the directors from liability in respect of the exercise of their
duties during the financial year concerned, unless a proviso is made by the
general meeting of shareholders and without prejudice to certain provisions of
the Dutch Civil Code. Under Dutch law, this discharge is not absolute and would
not be effective as to any matters not disclosed to the Company's shareholders
and is subject to general principles of reasonableness and fairness.
Reference is also made to the form of Underwriting Agreement filed as an
exhibit to the Registration Statement for provisions relating to the
indemnification of the directors and certain officers of the Company.
II-1
<PAGE> 155
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On , 1998, in connection with the Reorganization, James Hardie
issued shares of the Common Stock to a subsidiary of JHIL in exchange
for . The issuance of such shares of the Common Stock was exempt from
registration under the Securities Act because, among other reasons, such shares
were offered and sold outside of the United States.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
1.1 Underwriting Agreement(2)
2.1 Share Acquisition Agreement between JHIL and James Hardie
Australia Pty Limited re acquisition of shares of James
Hardie Fibre Cement Pty Limited(3)
2.2 Share Acquisition Agreement between JHIL and James Hardie
Australia Pty Limited re acquisition of shares of James
Hardie Windows (Holdings) Pty Limited and James Hardie
Building Systems (Holdings) Pty Limited(3)
2.3 Share Sale and Purchase Agreement between RCI Pty Limited
and the Company re acquisition of shares of PT James Hardie
Indonesia(3)
2.4 Share Acquisition Agreement among RCI Pty Limited, the
Company and JHIL re acquisition of shares of James Hardie
Philippines Inc.(3)
2.5 Share Contribution Agreement among the Company, RCI Malta
Investments Limited and JHIL re acquisition of shares of
James Hardie Research Holdings Pty Limited(3)
2.6 Share Contribution Agreement among the Company, RCI Malta
Investments Limited and JHIL re acquisition of shares of
James Hardie (Holdings) Inc.(3)
2.7 Business Acquisition Agreement among James Hardie & Coy Pty
Limited, James Hardie Australia Pty Limited and JHIL(3)
2.8 Business Acquisition Agreement among James Hardie & Coy Pty
Limited, James Hardie US Investments Carson Inc. and JHIL(3)
2.9 Business Acquisition Agreement among James Hardie US
Investments Carson Inc., James Hardie Australia Pty Limited
and JHIL(3)
2.10 Agreement for Sale and Purchase of Business among James
Hardie Building Products Limited, James Hardie New Zealand
Limited and JHIL(3)
3.1 Articles of Association of the Registrant(3)
4.1 Form of Common Stock Certificate(1)
5.1 Opinion of De Brauw Blackstone Westbroek N.V.(3)
8.1 Opinion of PricewaterhouseCoopers N.V. as to certain tax
matters(3)
8.2 Opinion of Gibson, Dunn & Crutcher LLP as to certain tax
matters(1)
10.1 Registration Rights Agreement between James Hardie N.V. and
JHIL(1)
10.2 1998 Equity Incentive Plan(1)
10.3 Employment Agreement, dated September 1, 1998, between James
Hardie (USA) Inc. and Dr. Keith Barton(3)
10.4 Employment Agreement between James Hardie N.V. and Dr. Keith
Barton(3)
10.5 Employment Agreement, dated September 1, 1998, between James
Hardie (USA) Inc. and Peter Macdonald(3)
10.6 Form of Joint and Several Indemnity Agreement among James
Hardie N.V., James Hardie (USA) Inc. and certain indemnitees
thereto(1)
10.7 Reimbursement Agreement between James Hardie (USA) Inc. and
JHIL(1)
10.8 Gypsum Supply Agreement, dated January 1, 1995, between
Oxbow Carbon & Minerals, Inc. and James Hardie Gypsum
(Washington), Inc.(3)
</TABLE>
II-2
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.9 Paperboard Supply Agreement, dated May 14, 1998, among
Republic Paperboard Company, Republic Group Incorporated and
James Hardie Gypsum, Inc.(3)
10.10 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie AustraliaPty Limited re premises at Cobalt
& Silica Street, Carole Park, Queensland, Australia(3)
10.11 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at 46
Randle Road, Meeandah, Queensland, Australia(3)
10.12 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at Devon
Street, Rosehill, New South Wales, Australia(3)
10.13 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at
Colquhoun Street, Rosehill, New South Wales, Australia(3)
10.14 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at
Rutland, Avenue, Welshpool, Western Australia, Australia(3)
10.15 Lease Agreement among James Hardie Building Products
Limited, JHIL and James Hardie New Zealand Limited re
premises at Cnr Station & O'Rorke Roads, Penrose, Auckland,
New Zealand(3)
10.16 Lease Agreement among James Hardie Building Products
Limited, JHIL and James Hardie New Zealand Limited re
premises at Cnr Church & O'Rorke Roads, Penrose, Auckland,
New Zealand(3)
10.17 Lease Agreement among James Hardie Building Products
Limited, James Hardie New Zealand Limited and JHIL re
premises at State Highway 16, Kumeu, New Zealand(3)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers(1)
23.2 Consent of PricewaterhouseCoopers N.V.(1)
23.3 Consent of De Brauw Blackstone Westbroek N.V. (included in
Exhibit 5.1)(3)
23.4 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
8.2)(1)
23.5 Consent of Allen Allen & Hemsley
24.1 Powers of Attorney(1)
99.1 Consent of Michael Gillfillan(1)
99.2 Consent of Martin Koffel(1)
99.3 Consent of Roger Siboni(1)
</TABLE>
- ---------------
(1) Previously filed with this Registration Statement on September 17, 1998.
(2) To be subsequently filed in electronic format by amendment.
(3) To be subsequently filed in paper format by amendment.
(b) FINANCIAL STATEMENTS SCHEDULES.
Not Applicable.
II-3
<PAGE> 157
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be decreed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-1 and has duly caused this Amendment
No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Irvine, State of California, on the 15th day of October, 1998.
JAMES HARDIE N.V.,
a company incorporated under the laws
of The Netherlands
By: *
------------------------------------
Keith Barton
President, Chief Executive Officer
and Chairman of the Board of
Directors and the Managing Board**
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 has been signed by the following persons in the capacities
indicated on the 15th day of October, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
* President, Chief Executive Officer and
- -------------------------------------------------------- Chairman of the Board of Directors and the
Keith Barton Managing Board (Principal Executive
Officer)**
* Chief Financial Officer and Member of the
- -------------------------------------------------------- Board of Directors and the Managing Board
Phillip Morley (Principal Financial Officer and Principal
Accounting Officer)**
* Member of the Board of Directors and the
- -------------------------------------------------------- Supervisory Board**
Alan McGregor
* Member of the Board of Directors and the
- -------------------------------------------------------- Supervisory Board**
Peter Willcox
* Member of the Managing Board
- --------------------------------------------------------
Donald Cameron
/s/ PETER MACDONALD Authorized Representative in the United
- -------------------------------------------------------- States
Peter Macdonald
</TABLE>
II-5
<PAGE> 159
- ---------------
* By: /s/ PETER MACDONALD
-------------------------------------------
Peter Macdonald
Attorney-in-fact
** Pursuant to a resolution of the Managing Board and the general meeting of
shareholders of the Registrant, these persons have been appointed to the
positions indicated, to take effect upon the adoption of the amendments to
the Articles of Association or such earlier date as may be practicable and,
in any event, prior to the consummation of the Offerings. Such persons have
also been specifically authorized to sign the Registration Statement.
II-6
<PAGE> 160
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
1.1 Underwriting Agreement(2)
2.1 Share Acquisition Agreement between JHIL and James Hardie
Australia Pty Limited re acquisition of shares of James
Hardie Fibre Cement Pty Limited(3)
2.2 Share Acquisition Agreement between JHIL and James Hardie
Australia Pty Limited re acquisition of shares of James
Hardie Windows (Holdings) Pty Limited and James Hardie
Building Systems (Holdings) Pty Limited(3)
2.3 Share Sale and Purchase Agreement between RCI Pty Limited
and the Company re acquisition of shares of PT James Hardie
Indonesia(3)
2.4 Share Acquisition Agreement among RCI Pty Limited, the
Company and JHIL re acquisition of shares of James Hardie
Philippines Inc.(3)
2.5 Share Contribution Agreement among the Company, RCI Malta
Investments Limited and JHIL re acquisition of shares of
James Hardie Research Holdings Pty Limited(3)
2.6 Share Contribution Agreement among the Company, RCI Malta
Investments Limited and JHIL re acquisition of shares of
James Hardie (Holdings) Inc.(3)
2.7 Business Acquisition Agreement among James Hardie & Coy Pty
Limited, James Hardie Australia Pty Limited and JHIL(3)
2.8 Business Acquisition Agreement among James Hardie & Coy Pty
Limited, James Hardie US Investments Carson Inc. and JHIL(3)
2.9 Business Acquisition Agreement among James Hardie US
Investments Carson Inc., James Hardie Australia Pty Limited
and JHIL(3)
2.10 Agreement for Sale and Purchase of Business among James
Hardie Building Products Limited, James Hardie New Zealand
Limited and JHIL(3)
3.1 Articles of Association of the Registrant(3)
4.1 Form of Common Stock Certificate(1)
5.1 Opinion of De Brauw Blackstone Westbroek N.V.(3)
8.1 Opinion of PricewaterhouseCoopers N.V. as to certain tax
matters(3)
8.2 Opinion of Gibson, Dunn & Crutcher LLP as to certain tax
matters(1)
10.1 Registration Rights Agreement between James Hardie N.V. and
JHIL(1)
10.2 1998 Equity Incentive Plan(1)
10.3 Employment Agreement, dated September 1, 1998, between James
Hardie (USA) Inc. and Dr. Keith Barton(3)
10.4 Employment Agreement between James Hardie N.V. and Dr. Keith
Barton(3)
10.5 Employment Agreement, dated September 1, 1998, between James
Hardie (USA) Inc. and Peter Macdonald(3)
10.6 Form of Joint and Several Indemnity Agreement among James
Hardie N.V., James Hardie (USA) Inc. and certain indemnitees
thereto(1)
10.7 Reimbursement Agreement between James Hardie (USA) Inc. and
JHIL(1)
10.8 Gypsum Supply Agreement, dated January 1, 1995, between
Oxbow Carbon & Minerals, Inc. and James Hardie Gypsum
(Washington), Inc.(3)
10.9 Paperboard Supply Agreement, dated May 14, 1998, among
Republic Paperboard Company, Republic Group Incorporated and
James Hardie Gypsum, Inc.(3)
10.10 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at Cobalt
& Silica Street, Carole Park, Queensland, Australia(3)
10.11 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at 46
Randle Road, Meeandah, Queensland, Australia(3)
</TABLE>
<PAGE> 161
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.12 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at Devon
Street, Rosehill, New South Wales, Australia(3)
10.13 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at
Colquhoun Street, Rosehill, New South Wales, Australia(3)
10.14 Lease Agreement among James Hardie & Coy Pty Limited, JHIL
and James Hardie Australia Pty Limited re premises at
Rutland, Avenue, Welshpool, Western Australia, Australia(3)
10.15 Lease Agreement among James Hardie Building Products
Limited, JHIL and James Hardie New Zealand Limited re
premises at Cnr Station & O'Rorke Roads, Penrose, Auckland,
New Zealand(3)
10.16 Lease Agreement among James Hardie Building Products
Limited, JHIL and James Hardie New Zealand Limited re
premises at Cnr Church & O'Rorke Roads, Penrose, Auckland,
New Zealand(3)
10.17 Lease Agreement among James Hardie Building Products
Limited, James Hardie New Zealand Limited and JHIL re
premises at State Highway 16, Kumeu, New Zealand(3)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers(1)
23.2 Consent of PricewaterhouseCoopers N.V.(1)
23.3 Consent of De Brauw Blackstone Westbroek N.V. (included in
Exhibit 5.1)(3)
23.4 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit
8.2)(1)
23.5 Consent of Allen Allen & Hemsley
24.1 Powers of Attorney(1)
99.1 Consent of Michael Gillfillan(1)
99.2 Consent of Martin Koffel(1)
99.3 Consent of Roger Siboni(1)
</TABLE>
- ---------------
(1) Previously filed with this Registration Statement on September 17, 1998.
(2) To be subsequently filed in electronic format by amendment.
(3) To be subsequently filed in paper format by amendment.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF JAMES HARDIE N.V.
James Hardie Australia Pty Limited, a company organized under the laws of
Australia
James Hardie Aust. Investments No. 1 Pty Ltd, a company organized under the laws
of Australia
James Hardie Aust. Investments No. 2 Pty Ltd, a company organized under the laws
of Australia
James Hardie Finance BV, a company organized under the laws of The Netherlands
James Hardie Aust. Investco Pty Limited, a company organized under the laws of
Australia
James Hardie Aust. Investco Services Pty Limited, a company organized under the
laws of Australia
James Hardie NZ Investco Trust, a company organized under the laws of New
Zealand
James Hardie Aust. Holdings Pty Limited, a company organized under the laws of
Australia
PT James Hardie Indonesia, a company organized under the laws of Indonesia
James Hardie FC Pty Limited, a company organized under the laws of Australia
James Hardie Building Systems Pty Limited, a company organized under the laws of
Australia
James Hardie Building Systems (Holdings) Pty Limited, a company organized under
the laws of Australia
James Hardie Building Products Inc., a Nevada corporation
James Hardie Fibre Cement Pty Limited, a company organized under the laws of
Australia
James Hardie Gypsum Inc., a Nevada corporation
James Hardie (Holdings) Inc., a Nevada corporation
James Hardie (USA) Inc., a Nevada corporation
James Hardie Credit Corp., a California corporation
James Hardie Industries (USA) Inc., a California corporation
James Hardie Research Pty Limited, a company organized under the laws of
Australia
James Hardie Research (Holdings) Pty Limited, a company organized under the laws
of Australia
James Hardie Tech Pty Limited, a company organized under the laws of Australia
James Hardie Windows Pty Limited, a company organized under the laws of
Australia
James Hardie Windows (Holdings) Pty Limited, a company organized under the laws
of Australia
Louvre Properties Pty Ltd, a company organized under the laws of Australia
James Hardie US Investments Sierra Inc., a Nevada corporation
James Hardie US Investments Washoe Inc., a Nevada corporation
James Hardie International Holdings BV, a company organized under the laws of
The Netherlands
James Hardie USA Investments BV, a company organized under the laws of The
Netherlands
James Hardie New Zealand Limited, a company organized under the laws of New
Zealand
James Hardie NZ Holdings Trust, a company organized under the laws of New
Zealand
James Hardie NZ Trustee Limited, a company organized under the laws of New
Zealand
James Hardie Philippines Inc., a company organized under the laws of the
Philippines
<PAGE> 1
EXHIBIT 23.5
CONSENT
OF ALLEN ALLEN & HEMSLEY
We hereby consent to the references in this Registration Statement on
Form F-1 (Registration No. 333-63649) to our opinion with respect to the
doctrine of "successor liability" under Australian law and hereby further
consent to the references to our firm in connection with such opinion.
Date: September 30, 1998 /s/ Allen Allen & Hemsley
-------------------------
ALLEN ALLEN & HEMSLEY
