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Previous: TOTAL TEL USA COMMUNICATIONS INC, 8-K, 1998-04-07 |
Next: FEDERAL MOGUL CORP, PRE 14A, 1998-04-07 |
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-KA
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: February 24, 1998
(Date of earliest event reported)
FEDERAL-MOGUL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
(State or other jurisdiction of incorporation)
1-1511 38-0533580
------ ----------
(Commission File Number) (IRS Employer Identification Number)
26555 Northwestern Highway, Southfield, Michigan 48034
- ------------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
(248) 354-7700
(Registrant's telephone number including area code)
The total number of pages is 73
<PAGE> 2
Federal-Mogul Corporation (the "Corporation") hereby amends and
restates Item 7 of its reports on Form 8-K dated February 24, 1998 and March 23,
1998, as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) Financial Statements of Businesses acquired
1. The audited financial statements of the Operating businesses of
the Fel-Pro Group
2. The audited financial statements of T&N plc
(b) Unaudited Pro Forma Financial Information
1. Discussion
2. Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1997
3. Unaudited Pro Forma Balance Sheet as of December 31, 1997
(c) Exhibits
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit Plc
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
FEDERAL-MOGUL CORPORATION
By: /s/ Edward W. Gray, Jr.
--------------------------------
Edward W. Gray, Jr.
Title: Sr. Vice President,
General Counsel
and Secretary
Dated: April 6, 1998
2
<PAGE> 3
Financial Statements
Operating Businesses of the
Fel-Pro Group
At December 28, 1997 and December 29, 1996
and for the three fiscal years ended December 28, 1997
with Report of Independent Auditors
<PAGE> 4
Operating Businesses of the
Fel-Pro Group
Financial Statements
At December 28, 1997 and December 29, 1996
and for the three fiscal years ended December 28, 1997
with Report of Independent Auditors
CONTENTS
Report of Independent Auditors...........................................1
Audited Financial Statement
Balance Sheets...........................................................2
Statements of Operations.................................................4
Statements of Cash Flows.................................................5
Notes to Financial Statements............................................6
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
The Management of the Operating Businesses
of the Fel-Pro Group
We have audited the accompanying balance sheets of the Operating Businesses of
the Fel-Pro Group as of December 28, 1997 and December 29, 1996 and the related
statements of operations and cash flows for each of the three fiscal years in
the period ended December 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Operating Businesses of the
Fel-Pro Group at December 28, 1997 and December 29, 1996 and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended December 28, 1997 in conformity with generally accepted accounting
principles.
February 13, 1998
1
<PAGE> 6
Operating Businesses of the
Fel-Pro Group
Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Trade accounts receivable, less allowances of $5,009 in 1997
and $3,210 in 1996 $ 83,412 $ 79,266
Inventories, net 61,009 51,469
Refundable income taxes 530 3,859
Deferred income taxes -- 5,530
Other current assets 4,162 2,972
---------------------------
Total current assets 149,113 143,096
Property, plant, and equipment:
Land 4,197 4,165
Buildings and improvements 45,750 44,371
Machinery and equipment 64,426 58,555
Construction in process 9,087 5,945
Accumulated depreciation (42,828) (41,419)
---------------------------
Total property, plant, and equipment 80,632 71,617
Other assets:
Investment in marketable securities 7,490 10,352
Intangible assets, net 16,685 17,665
Deferred income taxes -- 10,183
Other long-term assets 16,199 8,872
---------------------------
Total other assets 40,374 47,072
---------------------------
Total assets $ 270,119 $ 261,785
===========================
</TABLE>
See notes to financial statements.
2
<PAGE> 7
Operating Businesses of the
Fel-Pro Group
Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
----------------------------
<S> <C> <C>
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable $ 22,703 $ 17,596
Accrued income taxes 6,725 --
Accrued sales rebates 10,466 7,999
Accrued real estate taxes 2,169 1,958
Accrued payroll and benefits 24,142 21,640
Other current liabilities 10,507 8,969
------------------------
Total current liabilities 76,712 58,162
Accrued postretirement benefit obligation 46,835 46,572
Other long-term liabilities 6,633 5,203
Equity:
Owners' equity 138,159 149,925
Foreign currency translation adjustments 1,256 1,483
Unrealized gain on marketable equity securities, net of taxes
524 440
------------------------
Total equity 139,939 151,848
------------------------
Total liabilities and equity $270,119 $261,785
========================
</TABLE>
See notes to financial statements.
3
<PAGE> 8
Operating Businesses of the
Fel-Pro Group
Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Net sales $ 489,305 $ 448,042 $ 387,928
Cost of goods sold 268,477 245,761 217,572
--------------------------------------------
Gross profit 220,828 202,281 170,356
Operating expenses:
Shipping 22,537 19,808 16,946
Advertising and selling 74,955 72,433 63,335
General and administrative 72,829 68,026 57,754
Other 3,496 2,897 3,831
--------------------------------------------
173,817 163,164 141,866
--------------------------------------------
Income from operations 47,011 39,117 28,490
Other income (expense), net (66) 125 (265)
--------------------------------------------
Income before income taxes 46,945 39,242 28,225
Income taxes 25,488 6,871 4,796
--------------------------------------------
Net income $ 21,457 $ 32,371 $ 23,429
============================================
</TABLE>
See notes to financial statements.
4
<PAGE> 9
Operating Businesses of the
Fel-Pro Group
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 21,457 $ 32,371 $ 23,429
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 9,486 8,775 8,003
Amortization of intangibles 2,016 2,526 2,750
Provision for losses on accounts receivable 2,754 707 (71)
Deferred income taxes 15,978 (835) (209)
Accrued postretirement benefit obligation 263 2,406 2,139
Other (406) (165) (8,591)
Changes in operating assets and liabilities:
Trade accounts receivable (6,121) (17,447) (3,351)
Inventories (8,553) (4,608) 348
Other assets (5,166) (6,578) (4,443)
Trade accounts payable 5,107 1,615 3,555
Accrued payroll and benefits 2,502 6,354 1,132
Other liabilities 12,371 5,979 (2,480)
-----------------------------------------
Net cash provided by operating activities 51,688 31,100 22,211
INVESTING ACTIVITIES
Acquisition of business, less cash acquired (3,501) (13,491) (7,101)
Proceeds from sale of marketable securities 3,850 -- --
Purchases of marketable securities (988) (3,042) (7,310)
Purchases of property, plant, and equipment (18,277) (14,058) (12,505)
Proceeds from disposal of property, plant, and equipment 451 72 --
Other investment activities -- (112) --
--------
-----------------------------------------
Net cash used in investing activities (18,465) (30,631) (26,916)
FINANCING ACTIVITIES
Cash distributions to owners (27,500) (21,055) (11,099)
-----------------------------------------
Net Cash provided to/from affiliates (5,723) 20,586 15,804
=========================================
</TABLE>
See notes to financial statements
5
<PAGE> 10
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements
December 28, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On January 9, 1998, the owners of the Fel-Pro Group of affiliated entities
signed an agreement to sell the Fel-Pro Group operating businesses and certain
related real estate (collectively, the operating businesses of the Fel-Pro Group
or the Company) to Federal Mogul Corporation (Federal Mogul). Certain
non-operating assets, including cash, debt, certain marketable securities, real
estate and insurance assets, are not included in the transaction. The
transaction closed on February 24, 1998 and the owners received $491.8 million
in cash plus $225 million of Federal Mogul Corporation stock.
The accompanying financial statements include the net assets and operations
purchased by Federal Mogul and are presented as if the Company had existed as an
entity separate from certain affiliated entities not purchased by Federal Mogul.
Any activity with those affiliated entities has been reflected in owners'
equity.
The operating businesses of the Fel-Pro Group are owned by the following
affiliated entities:
Felt Products Mfg. Co. and Fel-Pro Specialty Sealing Products L.P.
subsidiaries (Felt) (SSP)
Fel-Pro Mexico S.A. de C.V. Fel-Pro Chemical Products L.P.
(FP Mexico) (Chemical)
Meridian Parts Corporation (Meridian) FP Performance Products L.P.
(Performance)
FP Diesel L.P. (Diesel)
All significant intercompany accounts and transactions have been eliminated in
the financial statements.
The Company is engaged in the manufacture and/or distribution of automotive,
heavy duty and industrial gaskets (primary product line); replacement parts for
heavy duty diesel engines; adhesives, lubricants, sealers, and other chemical
products for industrial use, and high performance transmissions and torque
converters. Products are primarily sold to customers located throughout the
United States, Canada, Mexico, South America, the Middle East, Asia and Europe
either directly to original equipment manufacturers or to aftermarket customers.
All of these activities constitute a single business segment. Domestic sales,
including export sales, represent over 90% of total net sales in 1997, 1996 and
1995. Export sales represent approximately 13%, 11% and 9% of total net sales
for 1997, 1996 and 1995, respectively. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.
6
<PAGE> 11
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The terms of customer receivables vary based on customer agreements. Credit
losses are provided for in the financial statements and consistently have been
within management's expectations. Primary manufacturing operations and corporate
offices are located at facilities in Skokie, Illinois.
The following is a summary of significant accounting policies:
FISCAL YEAR
The Company uses a 52 or 53 week year, ending on the last Sunday in December.
The fiscal years ended December 28, 1997 and December 29, 1996 include 52 weeks,
while the fiscal year ended December 31, 1995 includes 53 weeks.
CASH AND CASH EQUIVALENTS
An affiliated entity provides a centralized cash management function;
accordingly, the Company does not maintain separate cash accounts and its cash
disbursements and collections are settled through owners' equity.
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments at the
time of acquisition and reevaluates such determination at each balance sheet
date. All investments are classified as available-for-sale securities which are
carried at fair value, with unrealized holding gains and losses, net of tax,
reported as a separate component of equity. Marketable equity and debt
securities being held for non-current uses such as the funding of postretirement
benefit obligations are classified as long-term assets. Quoted market prices
have been used in determining the fair value of these investments.
INVENTORIES
Inventories owned by Felt, Diesel and Meridian, are carried at the lower of last
in, first out (LIFO) cost or market. The aggregate inventories owned by all
other entities are carried at the lower of first in, first out (FIFO) cost or
market. At December 28, 1997 and December 29, 1996, 21% of total inventories are
carried on a FIFO basis.
INTANGIBLE ASSETS
Goodwill, patents, and trademarks are being amortized over periods of 14 to 20
years using the straight-line method. Noncompetition agreements are being
amortized over the terms of the related agreements.
7
<PAGE> 12
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
TRANSLATION OF FOREIGN OPERATIONS
The financial statements of the foreign entities have been translated in
accordance with Statement of Financial Accounting Standards No. 52 and
accordingly, unrealized foreign currency translation adjustments are reflected
as a component of equity, except for those related to FP Mexico. In 1997, Mexico
was determined to be a highly inflationary country. As a result, unrealized
foreign currency translation adjustments related to peso denominated monetary
assets and liabilities, which are not significant, are reported under "Other
income, net", and other assets and liabilities are translated at historical
exchange rates.
DEPRECIATION AND AMORTIZATION
Property, plant, and equipment is recorded at cost. For depreciable assets
acquired prior to 1991, provisions for depreciation and amortization are
computed using both straight-line and accelerated methods for financial
reporting purposes, based on the estimated useful lives of the assets. Beginning
in 1991, provisions for newly acquired depreciable assets are computed using the
straight-line method, based on the estimated useful lives of the assets.
RESEARCH AND DEVELOPMENT
Activities related to new product development and major improvements to existing
products and processes are expensed as incurred and amounted to approximately
$4.4 million in 1997, $4.1 million in 1996, and $4.2 million in 1995.
MANAGEMENT ESTIMATES
The financial statements include estimated amounts and disclosures based on
management's assumptions about future events. Actual results could differ from
those estimates.
8
<PAGE> 13
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
2. INVESTMENTS
The composition of marketable securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 28, 1997 DECEMBER 29, 1996
--------------------------------------------------------------------------------
(In Thousands)
COST FAIR VALUE COST FAIR VALUE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long term investments:
Brinson Global Fund $6,617 $7,490 $9,618 $10,352
================================================================================
</TABLE>
Interest and dividend income, net is included in other income(expense), net, and
was $.8 million in 1997 and 1996, and $.5 million in 1995.
3. INVENTORIES
Inventories at December 28, 1997, and December 29, 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Raw materials $13,931 $12,595
Work in process 6,869 7,930
Finished goods 59,871 51,396
---------------------------
Inventories at FIFO 80,671 71,921
Less: Excess of FIFO cost over LIFO cost 19,662 20,452
---------------------------
$61,009 $51,469
===========================
</TABLE>
4. INCOME TAXES
Earnings of the operating businesses of the Fel-Pro Group owned by Diesel, SSP,
Performance and Chemical are not subject to federal or state income
taxes because these entities are partnerships. The partners include the earnings
from these partnerships in the partner's Federal and state income tax returns.
Effective December 30, 1996, the stockholders of Felt elected under Subchapter S
of the Internal Revenue Code to include Felt's income in their own income for
federal tax purposes. Accordingly, Felt is not subject to federal income taxes
effective December 30, 1996, and the net deferred tax asset of approximately
$15.7 million at December 29, 1996 was written off as a charge to tax expense in
fiscal 1997. Additionally, the LIFO reserve of $21.2 million was included in
taxable income and the tax cost recorded as a charge to tax expense in the
income statement in fiscal 1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts
9
<PAGE> 14
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
4. INCOME TAXES (CONTINUED)
used for income tax purposes for Felt for the year ended December 29, 1996.
Significant components of the deferred tax assets and liabilities are as
follows:
1996
---------------------
(In Thousands)
DEFERRED TAX ASSETS
Postretirement benefit obligation $14,383
Other 7,538
-------
Total deferred tax assets 21,921
DEFERRED TAX LIABILITIES
Tax over book depreciation (5,877)
Other (331)
-------
Total deferred tax liabilities (6,208)
=======
Net deferred tax assets/(liabilities) $15,713
=======
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 8,986 $ 5,500 $ 3,992
State 719 1,436 758
Foreign 70 770 255
----------------------------------------------
9,775 7,706 5,005
Deferred (credit) 15,713 (835) (209)
----------------------------------------------
$25,488 $ 6,871 $ 4,796
==============================================
</TABLE>
10
<PAGE> 15
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
4. INCOME TAXES (CONTINUED)
The reconciliation of income taxes (tax benefits) computed at the United States
federal statutory tax rate to income tax expense is:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Pretax income for taxable entities $ 2,133.0 $19,502.0 $11,966.0
====================================================
Income taxes at U.S. statutory rate $ 746.6 $ 6,825.7 $ 4,088.1
Tax effect from:
Reversal of deferred taxes 15,713.0
LIFO recapture 7,420.0
State income taxes 251.6 933.4 492.7
Other 1,356.8 (888.1) 215.2
----------------------------------------------------
$25,488.0 $ 6,871.0 $ 4,796.0
====================================================
</TABLE>
Income taxes paid were approximately $3.7 million in 1997, $12.8 million in
1996, and $5.6 million in 1995.
5. OWNERS' EQUITY
A summary of the account activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $ 149,925 $ 118,023 $ 89,889
Net income 21,457 32,371 23,429
Distribution to owners (27,500) (21,055) (11,099)
Net cash provided to/(from) affiliates (5,723) 20,586 15,804
-----------------------------------------------------
Ending balance $ 138,159 $ 149,925 $ 118,023
=====================================================
</TABLE>
The operating businesses of the Fel-Pro Group are owned by entities having the
following stock authorized and issued at December 28, 1997. These amounts are
included in owners' equity above.
11
<PAGE> 16
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
5. OWNERS' EQUITY (CONTINUED)
FELT
Authorized shares ($.01 par value) 200,100
Shares issued and outstanding 198,137.62
Par value $1,981
FP MEXICO
Authorized shares ($.12 par value) 410,000
Shares issued and outstanding 410,000
Par value $48,200
MERIDIAN
Authorized shares ($1 par value) 250,000
Shares issued and outstanding 20,000
Par value $20,000
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains, for the benefit of its eligible employees, the following
benefit plans:
EMPLOYEES' PROFIT-SHARING AND RETIREMENT PLAN
This plan is noncontributory on the part of participants, except for their
voluntary contributions (which are limited, as provided in the plan agreement).
Discretionary contributions by the Company for each year are determined by the
Board of Directors. Distributions from the plan are made to participants or
their beneficiaries on death, retirement, disability, or termination of
employment. Contributions were approximately $9.8 million in 1997, $9.3 million
in 1996, and $7.8 million in 1995.
DEATH BENEFIT PLAN
The Company maintains a "death benefit plan" for selected managerial employees.
The plan provides that in the event of death of a participant, before
termination of employment or retirement, the applicable death benefits, as
defined, are payable to the participant's designated beneficiaries. There were
no beneficiary payments made in 1997, 1996, or 1995.
The Company may at any time amend or revoke the "death benefit plan" without the
consent of its participants. Since the plan is presently fully funded through
life insurance policies in which the participants possess no interest and the
payment of benefits is contingent upon the death of participants, no provision
for such future possible payments has been reflected in the financial
statements.
12
<PAGE> 17
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
DEFERRED COMPENSATION PLAN
The Company maintains deferred compensation plans for qualified managers. The
plans allow such participants to defer up to 90% of their annual bonuses and
salary (subject to certain limitations). The plans also provide for matching
amounts (as defined) from the employer, provide for a growth increment dependent
on several factors, and provide for additional employer contributions on
compensation in excess of $160,000. Distributions from the plan are made to the
participants or their designated beneficiaries upon the earlier of death,
retirement, disability, termination of employment, or by participant choice.
Employer and employee contributions, including interest, of $2.7 million, $2.3
million, and $2.2 million were paid to the plans in 1997, 1996, and 1995,
respectively.
OTHER POSTRETIREMENT BENEFITS
The Company provides postretirement medical, dental, and death benefits to
domestic employees hired prior to January 1, 1988, who have worked at least 10
years and attained age 55 while in service with the Company. All employees hired
subsequent to this date are eligible for these benefits if they have worked at
least 20 years and attained age 55. The plan amendment in November 1996 provided
that for all retiree groups, the Company caps its contributions toward retiree
health care at the employer cost levels reached in 2004, thereby reducing the
liability and annual expense. The plan is contributory and contains certain
cost-sharing features such as deductibles, coinsurance, and a lifetime payout
maximum. Assets with a fair value of $7.5 million and $10.4 million which are
included in investments in marketable securities at December 28, 1997 and
December 29, 1996, respectively, are being held for non-current uses such as the
posretirement benefits. The Company's foreign entities provide no significant
postretirement benefits. The following table presents the components of the
liability recognized in the Company's balance sheet:
13
<PAGE> 18
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
OTHER POSTRETIREMENT BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------------------------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $16,297 $13,412
Fully eligible active plan participants 4,708 7,592
Other active plan participants 7,381 9,238
Unrecognized net gain 4,514 1,205
Unrecognized plan reduction 13,935 15,125
------------------------------------
Accrued postretirement benefit cost $46,835 $46,572
====================================
</TABLE>
A summary of the components of net periodic postretirement benefit cost is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $666 $1,612 $1,435
Interest cost 1,991 2,824 2,978
Amortization of plan reduction (1,190) (421) (267)
Amortization of unrecognized gain (97) - -
-------------------------------------------------------
Net periodic postretirement benefit cost $1,370 $4,015 $4,146
=======================================================
</TABLE>
The health care cost trend rate utilized to determine the benefit cost was 9.5%
for 1997 and 1996, decreasing gradually to 5.5% for 2005 and thereafter.
Increasing the trend rate by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 28, 1997, by
$1.8 million and increase the 1997 postretirement benefit cost by $0.2 million.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.50% at December 28, 1997 and December 29, 1996.
7. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal actions arising in the ordinary course
of its business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that it has adequate legal
defenses or insurance coverages and that the outcome of these matters will not
have a material adverse effect on the Company's financial position.
14
<PAGE> 19
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
8. ACQUISITIONS
On September 8, 1997 Chemical acquired for $3.5 million certain operating assets
of Biwax Corporation, a manufacturer of urethane potting and encapsulating
products.
On June 27, 1996, Diesel acquired for $1.2 million certain operating assets of
Infinitive, a manufacturer of pistons and liners.
On December 29, 1995, Performance acquired for $12.3 million the net assets of
Torque Converters, Inc. (TCI), a high performance transmission and torque
converter remanufacturer, marketer and distributor and assumed a $0.4 million of
long-term liability.
On October 30, 1995, Diesel acquired for $7.1 million certain operating assets
of Korody-Colyer, a marketer and distributor of heavy duty diesel engine parts
and gaskets.
The acquisitions were accounted for under the purchase method, and, accordingly,
the accounts and transactions of the acquired companies have been included in
the financial statements from the dates of acquisition.
9. IMPACT OF YEAR 2000 (UNAUDITED)
Felt personnel are presently implementing an enterprise resource planning system
using Oracle software for manufacturing, OEM management, and financial systems,
and IMI software for an Aftermarket order management system. This system will be
Year 2000 compliant. This project was undertaken in late 1996 recognizing that
information will be a key driver for growth in the 21st century and that
business needs are changing. The system solution provides the ability to handle
multiple product lines, currencies, businesses, and locations. The existing
mainframe systems lack functionality and flexibility, and are also incompatible
with the Year 2000. The total project is expected to be completed by February
1999. Information systems for Chemical, Performance, SSP, Meridian, Diesel and
FP Mexico will undertake system changes in 1998 to ensure compatibility with the
Year 2000 by such date.
15
<PAGE> 20
T&N PLC
FINANCIAL STATEMENTS
Year ended 31 December 1997
<PAGE> 21
T&N plc
FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 1997
CONTENTS
Independent auditor's report 1
Consolidated profit and loss accounts 2
Consolidated balance sheets as at 31 December 4
Consolidated cash flow statements 6
Statements of total recognised gains and losses 8
Notes 9
17
<PAGE> 22
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS OF T&N plc
We have audited the accompanying consolidated balance sheets of T&N plc and its
subsidiaries at 31 December 1997 and 31 December 1996, and the related
consolidated profit and loss accounts, reconciliations of movements in
shareholders' funds and consolidated cash flow statements for each of the years
in the three year period ended 31 December 1997. These consolidated financial
statements are the responsibility of the management of T&N plc. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United Kingdom, which are substantially consistent with those of the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of T&N plc and its
subsidiaries at 31 December 1997 and 31 December 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended 31 December 1997, in conformity with generally accepted accounting
principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States of America. Application of accounting principles generally accepted in
the United States would have affected net income for the two years ended 31
December 1997 and shareholders' funds at 31 December 1997 and 31 December 1996,
to the extent summarised in Note 29 to the consolidated financial statements.
Chartered Accountants
Registered Auditor
London, England
17 February 1998
18
<PAGE> 23
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
TURNOVER
Turnover including share of associated 1,883.3 2,037.9 2,164.5
undertakings
Associated undertakings (84.2) (81.9) (73.0)
------- ------- -------
Turnover excluding associated undertakings 1,799.1 1,956.0 2,091.5
Continuing operations 1,734.7 1,814.4 1777.0
Acquisitions 29.6 - -
------- ------- -------
Total continuing operations 1,764.3 1,814.4 1777.0
Discontinued operations 34.8 141.6 314.5
Total turnover excluding associated 2(a) 1,799.1 1,956.0 2,091.5
undertakings
Cost of sales 2(d) (1,293.5) (1,418.3) (1,507.8)
------- ------- -------
GROSS PROFIT 505.6 537.7 583.7
Federal-Mogul bid related costs (10.0) - -
Other operating expenses 2(d) (331.6) (370.3) (369.7)
------- ------- -------
Group operating profit before asbestos-related 164.0 167.4 214.0
costs
Share of profits of associated undertakings 2(d) 13.2 11.8 11.8
------- ------- -------
Operating profit before asbestos-related costs 2(b),2(e) 177.2 179.2 225.8
Asbestos-related costs 2(d) - (515.0) (51.3)
------- ------- -------
OPERATING PROFIT/(LOSS) ON ORDINARY ACTIVITIES
Continuing operations 171.4 (350.3) 148.0
Acquisitions 3.2 - -
------- ------- -------
Total continuing operations 174.6 (350.3) 148.0
Discontinued operations 2.6 14.5 26.5
------- ------- -------
TOTAL OPERATING PROFIT/(LOSS) ON ORDINARY 2(d) 177.2 (335.8) 174.5
ACTIVITIES
Profit/(loss) on disposal of discontinued 3 14.5 (1.0) 1.5
operations
Release/(charge) of provision against loss on 3 - 1.4 (1.4)
disposals
Provision for loss on disposal of properties
(continuing operations) (3.1) (2.0) -
Release of provision/(provision against) fixed 4
asset investments: Kolbenschmidt costs 32.4 (23.4) (19.5)
------- ------- -------
PROFIT/(LOSS) ON ORDINARY ACTIVITIES BEFORE
FINANCE CHARGES 221.0 (360.8) 155.1
Net interest payable and similar charges - Group 5 (28.4) (26.8) (35.8)
Net interest (payable)/receivable and similar
charges - Associates (2.5) (0.7) 0.8
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 24
<TABLE>
<CAPTION>
1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
PROFIT/(LOSS)ON ORDINARY ACTIVITIES BEFORE 190.1 (388.3) 120.1
TAXATION
Tax on profit/(loss) on ordinary activities 6 (62.8) (8.0) (41.4)
----- ----- -----
PROFIT/(LOSS) ON ORDINARY ACTIVITIES AFTER 127.3 (396.3) 78.7
TAXATION
Minority interests (4.9) (4.5) (8.4)
----- ----- -----
Profit/(loss) attributable to shareholders 122.4 (400.8) 70.3
Dividends paid and proposed 7 (49.5) (16.0) (31.9)
----- ----- -----
TRANSFER TO/(FROM) RESERVES 21 72.9 (416.8) 38.4
===== ===== =====
Earnings/(loss) per share 8 22.9p (75.4)p 13.3p
Earnings per share pre asbestos-related costs 8 20.4p 14.8p 22.7p
Dividends per share 7 9.2p 3.0p 6.0p
</TABLE>
Where applicable, figures for the year ended 31 December 1996 and 31 December
1995 have been restated to disclose separately the results of business
discontinued during 1997. In addition, the 1996 and 1995 figures have been
restated to show the share of interest payable and similar charges of associated
companies below operating profit.
See accompanying notes to consolidated financial statements
20
<PAGE> 25
CONSOLIDATED BALANCE SHEETS AS AT 31 DECEMBER
<TABLE>
<CAPTION>
BEFORE 1997 ASBESTOS TOTAL TOTAL
ASBESTOS 1997 1996
RELATED ITEMS RELATED ITEMS
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible assets 11 676.4 - 676.4 697.2
Investments 12 83.6 - 83.6 59.5
------- ------ ------- -------
760.0 - 760.0 756.7
------- ------ ------- -------
CURRENT ASSETS
Stocks 13 221.9 - 221.9 247.6
Debtors falling due within one year 14 318.8 - 318.8 350.8
Debtors falling due after more than one year 14 73.5 - 73.5 66.1
Investments 15 8.0 - 8.0 5.6
Cash at bank and in hand 18 115.8 78.2 194.0 131.5
------- ------ ------- -------
738.0 78.2 816.2 801.6
------- ------ ------- -------
CREDITORS: due within one year
Borrowings 18 103.7 - 103.7 77.2
Other creditors 16 403.4 19.6 423.0 472.5
------- ------ ------- -------
507.1 19.6 526.7 549.7
------- ------ ------- -------
NET CURRENT ASSETS 230.9 58.6 289.5 251.9
------- ------ ------- -------
Total assets less current liabilities 990.9 58.6 1,049.5 1,008.6
Creditors: due after more one year
Borrowings 18 285.4 - 285.4 260.2
Other creditors 17 12.0 - 12.0 15.9
------- ------ ------- -------
297.4 - 297.4 276.1
------- ------ ------- -------
Provisions for liabilities and charges 19 147.1 388.2 535.3 589.5
------- ------ ------- -------
NET ASSETS 546.4 (329.6) 216.8 143.0
======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 26
<TABLE>
<CAPTION>
TOTAL TOTAL
1997 1996
(POUND (POUND
STERLING)M STERLING)M
<S> <C> <C> <C>
CAPITAL AND RESERVES
Called up share capital 20 219.5 532.2
Share premium account 21 2.7 0.2
Shares to be issued 0.7 -
Special reserve 63.2 -
Revaluation reserve 21 14.2 21.6
Associated undertakings' reserve 21 (2.1) 5.0
Goodwill write off reserve 21 (182.9) (181.1)
Profit and loss account 21 76.1 (259.6)
Equity shareholders' funds 191.4 118.3
Minority equity interests 25.4 24.7
------- -------
216.8 143.0
======= =======
</TABLE>
These financial statements were approved by the board of directors and were
signed on its behalf by Sir Colin Hope (Chairman) and David Harding (Finance
Director) on 17 February 1998.
See accompanying notes to consolidated financial statements
22
<PAGE> 27
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
Note BEFORE
ASBESTOS ASBESTOS
RELATED RELATED 1997
FLOWS FLOWS TOTAL
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
CASH INFLOW FROM OPERATING ACTIVITIES
Before asbestos related payments 22(a) 260.8 - 260.8
Asbestos related payments 22(a)
IBNR - (12.7) (12.7)
Other claims - (44.7) (44.7)
Insurance - (92.0) (92.0)
------- -------- -------
Net cash inflow from operating activities 22(a) 260.8 (149.4) 111.4
Dividends from associates 6.5 - 6.5
Returns on investments and servicing of finance 22(b) ( 27.6) 2.7 ( 24.9)
Taxation 22(c) ( 20.1) - (20.1)
Capital expenditure and financial investment 22(d) (101.9) - (101.9)
------- -------- -------
117.7 (146.7) (29.0)
Acquisitions and disposals 22(e) 43.1 - 43.1
Equity dividends paid (17.6) - (17.6)
------- -------- -------
143.2 (146.7) (3.5)
------- -------- -------
Management of liquid resources 22(f) (76.5) - (76.5)
Financing 22(g) 34.0 - 34.0
------- -------- -------
INCREASE/(DECREASE) IN CASH 100.7 (146.7) (46.0)
======= ======== =======
RECONCILIATION OF ASBESTOS RELATED FLOWS TO
ASBESTOS FUND
Cash outflows (as above) (146.7)
Cash transferred to asbestos fund 88.2
Non IBNR payments 136.7
--------
Asbestos fund at year end 78.2
========
<CAPTION>
Note BEFORE
ASBESTOS ASBESTOS
RELATED RELATED 1996 1995
FLOWS FLOWS TOTAL TOTAL
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C>
CASH INFLOW FROM OPERATING ACTIVITIES
Before asbestos related payments 22(a) 280.5 - 280.5 298.6
Asbestos related payments 22(a)
IBNR - (1.2) (1.2) -
Other claims - (63.6) (63.6) (55.7)
Insurance - - - -
------- ------ -------- -------
Net cash inflow from operating activities 22(a) 280.5 (64.8) 215.7 242.9
Dividends from associates 6.8 - 6.8 1.6
Returns on investments and servicing of finance 22(b) ( 31.4) - (31.4) (37.4)
Taxation 22(c) (28.9) - (28.9) (13.3)
Capital expenditure and financial investment 22(d) (125.5) - (125.5) (155.6)
------- ------ -------- -------
101.5 (64.8) 36.7 38.2
Acquisitions and disposals 22(e) 59.3 - 59.3 5.8
Equity dividends paid (31.9) - (31.9) (33.0)
------- ------ -------- -------
128.9 (64.8) 64.1 11.0
------- ------ -------- -------
Management of liquid resources 22(f) (6.2) - (6.2) 6.7
Financing 22(g) (27.1) - (27.1) (0.4)
------- ------ -------- -------
INCREASE/(DECREASE) IN CASH 95.6 (64.8) 30.8 17.3
======= ====== ======== =======
RECONCILIATION OF ASBESTOS RELATED FLOWS TO
ASBESTOS FUND
Cash outflows (as above) (64.8) (55.7)
Cash transferred to asbestos fund 1.2 -
Non IBNR payments 63.6 55.7
------ ------
Asbestos fund at year end - -
====== ======
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 28
<TABLE>
<CAPTION>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
(Decrease)/increase in cash in the year (46.0) 30.8 17.3
Cash (inflow) / outflow from movement in debt 22(g)
and lease financing (22.8) 30.1 3.2
Cash outflow/ (inflow) from movement in
liquid resources 76.5 6.2 (6.7)
Loans acquired with businesses (4.8) - (7.4)
------ ------ ------
Change in net debt resulting from cash flows 2.9 67.1 6.4
Deduction of costs of raising finance paid
from net debt 1.6 - -
Amortisation of costs of raising finance (0.2) - -
Exchange difference 8.9 42.6 (14.9)
------ ------ ------
Reduction / (increase) in net debt 13.2 109.7 (8.5)
Net debt at start of year (200.3) (310.0) (301.5)
------ ------ ------
Net debt at end of year (187.1) (200.3) (310.0)
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE> 29
STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS 122.4 (400.8) 70.3
Other recognised gains and losses
Unrealised loss on revaluation of fixed assets 21 (1.7) - 1.6
Currency translation differences on foreign 21
currency net investments (17.4) (23.1) (1.6)
Other recognised losses - (0.6) (1.4)
----- ------- -------
Total recognised gains and losses relating to the year 103.3 (424.5) 68.9
===== ======= ======
HISTORICAL COST PROFITS/(LOSSES)
Reported profit/(loss) on ordinary activities
before taxation 190.1 (388.3) 120.1
Realisation of revaluation surpluses 4.8 5.6 6.6
Difference between the historical depreciation
charge and the actual depreciation charge 0.5 0.6 0.7
----- ------- -------
Historical cost profit/(loss) on ordinary
activities before taxation 195.4 (382.1) 127.4
----- ------- -------
Historical cost profit/(loss) for the year
after taxation, minority interests and dividends 78.2 (410.6) 45.7
===== ======= =======
</TABLE>
RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
Profit/(loss) attributable to shareholders 122.4 (400.8) 70.3
Dividends (49.5) (16.0) (31.9)
----- ------- -------
Transfer to/(from) to reserves 72.9 (416.8) 38.4
Other recognised gains and losses (as above) (19.1) (23.7) (1.4)
New share capital subscribed 9.2 1.2 2.2
Scrip dividends 15.4 - -
Shares to be issued under Executive Share
Option Schemes 0.7 - -
Goodwill 21 (6.0) 9.4 (4.4)
----- ------- -------
Net change 73.1 (429.9) 34.8
Shareholders' funds at start of year 118.3 548.2 513.4
----- ------- -------
Shareholders' funds at end of year 191.4 118.3 548.2
===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE> 30
NOTES
(forming part of the financial statements)
1 ACCOUNTING POLICIES
The Group follows applicable UK Accounting Standards and Practice. The
consolidated financial statements are prepared under the historical cost
convention, as modified by the revaluation of certain fixed assets.
During 1997 the accounting policy for Executive share options has been amended
as set out below, in accordance with UITF Abstract 17, Employee Share Schemes.
BASIS OF CONSOLIDATION
The consolidated financial statements comprise the audited accounts of the
Company and its subsidiary undertakings, together with the Group's share of the
profits and losses and of the reserves of its associated undertakings. The
accounts of subsidiaries are drawn up to the same date as those of the Company.
Results of subsidiaries acquired or sold during the year are included from, or
up to, their respective dates of acquisition or disposal.
ASSOCIATED UNDERTAKINGS
Associated undertakings are companies, other than subsidiaries, in which the
Group has a long-term and substantial investment and over which significant
influence is exercised, normally through board representation. Associated
undertakings are accounted for on the equity basis, that is, the Group's share
of operating profit and items reported below operating profit are included in
the profit and loss account. Its interest in their net assets, other than
goodwill, is included in investments in the Group balance sheet.
DEFERRED TAX
Deferred tax is attributable to timing differences between results as computed
for tax purposes and as stated in the accounts. These differences arise from,
for example, different rates at which allowances are granted for capital
expenditure for tax purposes and at which depreciation is charged in the
accounts. Provision for deferred tax, including that relating to post retirement
benefits, is made only to the extent that it is probable that an actual
liability or asset will crystallise.
DEPRECIATION
Depreciation is provided on cost or the revalued amount, as applicable, to write
fixed assets down to their estimated residual values on a straight line basis as
follows:
- - Freehold buildings, 2.5% per annum;
- - Leasehold buildings are assumed to have a life equal to the period of the
lease, but with a maximum of 40 years;
- - Plant and machinery, at rates ranging from 7% to 33% per annum.
FOREIGN CURRENCIES
Overseas companies' results and cash flows are translated into sterling at
average exchange rates and their balance sheets at year end exchange rates. An
adjustment to local currency results is made to reflect current price levels,
where appropriate, before translation into sterling. Exchange differences
arising from the translation of the opening balance sheets and results of
overseas companies are dealt with through reserves. Exchange differences on
transactions in foreign currencies are included in the profit and loss account.
26
<PAGE> 31
NOTES (continued)
ACCOUNTING POLICIES (continued)
GRANTS
Grants related to expenditure on tangible fixed assets are credited to profit
over a period approximating to the lives of qualifying assets. Grants receivable
to date, less the amounts so far credited to profit, are included in creditors.
INTANGIBLES
Goodwill, being the excess of the fair value of purchase consideration over the
fair value attributed to the net assets acquired, is charged to reserves. On
disposal of businesses, any goodwill previously eliminated on acquisition is
included in determining the profit or loss on disposal. Other intangibles are
written off when acquired.
LEASING
Finance leases of significant items of plant and machinery are capitalised and
depreciated in accordance with the Group's depreciation policy. The capital
element of future lease payments is included under borrowings. Interest,
calculated on the reducing balance method, is included within net financing
charges. Operating lease rentals are charged to the profit and loss account on a
straight line basis over the life of the lease.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The cost of providing pensions and other post-employment benefits is charged
against profits on a systematic basis, with pension surpluses and deficits being
amortised over the expected remaining service lives of current employees.
Differences between the amounts charged in the profit and loss account and
payments made to the plans are treated as assets or liabilities in the
consolidated balance sheet. The unfunded post-employment medical benefit
liability is included in provisions in the consolidated balance sheet.
RESEARCH AND DEVELOPMENT
Research and development revenue expenditure, including all expenditure on
patents and trademarks, is written off when incurred.
SHARE OPTIONS
For options which are expected to be exercised under the Executive share option
schemes, the difference between the market value on the date of granting options
and the option price is charged to the profit and loss account over the period
to which the employees' performance relates. No charge is made in respect of the
Save As You Earn option scheme which is open to all UK employees who satisfy the
necessary length of service requirements.
STOCKS
Stocks are stated at the lower of original costs and net realisable value on a
first-in-first out basis. Cost comprises material, labour and an allocation of
attributable overhead expenses. Net realisable value is the price at which stock
can be sold in the normal course of business after allowing for the costs of
realisation.
TURNOVER
Turnover is the value of sales to third parties at net invoice value excluding
value added tax or equivalent overseas sales taxes.
27
<PAGE> 32
NOTES (continued)
2 ANALYSIS OF RESULTS
The composites and camshafts grouping comprises camshafts, powder metal
products, heat transfer products and industrial products and materials. Figures
for the engine parts aftermarket group are reflected in the product groupings to
which they relate.
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
(A) TURNOVER
Market supplied
Light vehicle original equipment 731.2 772.9 756.6
Automotive aftermarket 497.1 529.4 480.1
Industrial and heavy duty original equipment 570.8 653.7 854.8
------- ------- -------
1,799.1 1,956.0 2,091.5
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
PRODUCT GROUPINGS
Bearings 329.6 333.1 342.5
Sealing Products 195.1 216.0 227.0
Friction Products 293.9 309.5 319.0
Piston Products 572.8 574.7 559.6
Composites and Camshafts 372.9 381.1 328.9
------- ------- -------
Continuing operations 1,764.3 1,814.4 1,777.0
Discontinued operations 34.8 141.6 314.5
------- ------- --------
1,799.1 1,956.0 2,091.5
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
ACQUISITIONS DISCONTINUED DISCONTINUED DISCONTINUED
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
BUSINESS ACQUIRED AND DISCONTINUED
Sealing Products - 12.1 49.8 49.6
Friction Products - 12.5 18.6 10.9
Piston Products 27.7 - - -
Composites and Camshafts 1.9 10.2 18.9 170.8
Construction Materials and Engineering - - 54.3 83.2
------- ------- ------- ------
29.6 34.8 141.6 314.5
======= ======= ======= ======
</TABLE>
28
<PAGE> 33
<TABLE>
<CAPTION>
BY ORIGIN
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
REGIONAL
UK 442.1 431.5 418.6
Mainland Europe 640.2 724.4 720.6
North America 563.1 527.7 503.2
South Africa 101.7 111.2 115.0
Other countries 17.2 19.6 19.6
-------- -------- --------
Continuing operations 1,764.3 1,814.4 1,777.0
Discountinued operations 34.8 141.6 314.5
-------- -------- --------
1,799.1 1,956.0 2,091.5
======== ======== ========
<CAPTION>
BY Destination
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
REGIONAL
UK 283.3 280.4 271.8
Mainland Europe 715.0 785.3 791.9
North America 568.1 540.2 518.7
South Africa 93.1 93.0 99.8
Other countries 104.8 115.5 94.8
-------- -------- --------
Continuing operations 1,764.3 1,814.4 1,777.0
Discountinued operations 34.8 141.6 314.5
-------- -------- --------
1,799.1 1,956.0 2,091.5
======== ======== ========
</TABLE>
Inter-group turnover between product groupings and regions is not material.
29
<PAGE> 34
ANALYSIS RESULTS (continued)
<TABLE>
(B) OPERATING PROFIT BEFORE ASBESTOS - RELATED 1997 1996 1995
COSTS (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
PRODUCT GROUPINGS
Bearings 47.9 44.1 48.5
Sealing Products 18.8 16.1 25.1
Friction Products 20.4 16.0 28.2
Piston Products 50.9 43.9 56.5
Composites and Camshafts 46.6 44.6 41.8
------- ------- -------
184.6 164.7 200.1
------- ------- -------
Bid costs (10.0) - -
------- ------- -------
Continuing operations 174.6 164.7 200.1
Discontinued operations 2.6 14.5 26.5
------- ------- -------
177.2 179.2 226.6
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
ACQUISITIONS DISCONTINUED DISCONTINUED DISCONTINUED
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
BUSINESS ACQUIRED AND DISCONTINUED
Sealing Products - 1.1 5.2 1.2
Friction Products - (0.1) 0.4 0.6
Piston Products 3.4 - - -
Composites and Camshafts (0.2) 1.6 3.5 7.9
Construction Materials and Engineering - - 5.4 16.8
------ ------ ------ ------
3.2 2.6 14.5 26.5
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
REGIONAL
UK 53.6 58.5 59.3
Mainland Europe 62.7 46.4 73.4
North America 64.0 52.7 52.3
South Africa 7.0 7.6 12.9
Other countries (2.7) (0.5) 2.2
-------- ------- -------
184.6 164.7 200.1
Bid costs (10.0) - -
-------- ------- -------
Continuing operations 174.6 164.7 200.1
Discounting operations 2.6 14.5 26.5
-------- ------- -------
177.2 179.2 226.6
======== ======= =======
</TABLE>
30
<PAGE> 35
Asbestos-related costs, finance charges, losses on disposal of discontinued
operations and the movements in the provision against the Kolbenschmidt
investment are not allocated by product groupings or region.
(c) Capital employed
<TABLE>
<CAPTION>
1997 1996
(pound sterling) (pound sterling)
Product groupings M M
<S> <C> <C>
Bearings 128.1 121.5
Scaling products 67.1 65.6
Friction products 117.3 124.6
Piston products 294.0 272.9
Composites and Camshafts 148.5 137.0
------ ------
Continuing operations 755.0 721.6
Discontinued operations - 22.9
------ ------
755.0 744.5
Assets held for disposal and trade investments 37.0 14.6
Asbestos-related provisions (388.2) (440.6)
Net deferred consideration for acquisitions and disposals 0.1 24.8
------ ------
Capital employed 403.9 343.3
Net borrowings (187.1) (200.3)
------ ------
Net assets 216.8 143.0
====== ======
<CAPTION>
1997 1996
(pound sterling) (pound sterling)
M M
<S> <C> <C>
Regional
UK 251.2 230.6
Mainland Europe 181.2 240.4
North America 236.4 190.7
South Africa 43.0 40.4
Other countries 43.2 42.4
------ ------
755.0 744.5
====== ======
</TABLE>
31
<PAGE> 36
NOTES (continued)
ANALYSIS OF RESULTS (CONTINUED)
(d) Continuing and discontinued activities
<TABLE>
<CAPTION>
Continuing Acquisitions Discontinued 1997 Total
(pound (pound (pound (pound
sterling) sterling) sterling) sterling)
M M M M
<S> <C> <C> <C> <C>
Turnover 1,734.7 29.6 34.8 1,799.1
Cost of sales (1,245.2) (24.3) (24.0) (1,293.5)
-------- ------ ------ ---------
Gross profit 489.5 (53) 10.8 505.6
Selling and distribution
costs (143.5) (0.3) (5.0) (148.8)
Administrative expenses (137.0) (1.1) (2.6) (140.7)
Research and development (50.7) (0.7) (0.7) (52.1)
Share of profits of
associated undertakings 13.1 - 0.1 13.2
-------- ------ ------ ---------
Operating profit before
asbestos-related costs 171.4 3.2 2.6 177.2
Asbestos-related costs - - - -
-------- ------ ------ ---------
Operating profit 171.4 3.2 2.6 177.2
======== ====== ====== =========
<CAPTION>
Continuing Discontinued 1996 Total
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Turnover 1,814.4 141.6 1,956.0
Cost of sales (1,317.2) (101.1) (1,418.3)
-------- ------ --------
Gross profits 497.2 (40.5) 517.7
Selling and distribution
costs (155.2) (13.2) (168.6)
Administrative expenses (137.4) (11.3) (148.7)
Research and development (51.5) (1.5) (53.0)
Share of profits of
associated undertakings 11.6 0.2 11.8
-------- ------ --------
Operating profit before
asbestos-related costs 164.7 14.5 179.2
Asbestos-related costs (515.0) - (515.0)
-------- ------ --------
Operating profit (350.3) 14.5 (335.8)
======== ====== ========
<CAPTION>
Continuing Discontinued 1995 Total
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Turnover 1,777.0 314.5 2,091.5
Cost of sales (1,267.8) (240.0) (1,507.8)
-------- ------ --------
Gross profit 509.2 74.5) 583.7
Selling and distribution
costs (152.0) (21.5) (173.5)
Administrative expenses (120.5) (23.5) (144.0)
Research and development (49.2) (3.0) (52.2)
Share of profits of
associated undertakings 11.8 - 11.8
-------- ------ --------
Operating profit before
asbestos-related costs 199.3 26.5 225.8
Asbestos-related costs (51.3) - (51.3)
-------- ------ --------
Operating profit 148.0 26.5 174.5
======== ====== ========
</TABLE>
1996 and 1995 amounts have been restated to reflect businesses disposed of in
1997.
32
<PAGE> 37
NOTES (CONTINUED)
ANALYSIS OF RESULTS (continued)
(e) Costs of continuing operations charged in arriving at operating profit
before asbestos-related costs include 17.5 pound sterling millions (1996 15.3
pound sterling millions, 1995 11.3 pound sterling million) in respect of
redundancy and rationalisation. 4.5 pound sterling millions of these costs (1996
8.1 pound sterling milions) have been charged as administrative costs and the
majority of the remainder as cost of sales.
(f) Profit before finance charges is stated after charging
<TABLE>
<CAPTION>
1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Auditors and its associates' remuneration
- - as Group auditors (including T&N plc 0.4 pound sterling
millions (1996 0.6 pound sterling millions 1995 pound 0.6m)) (1.3) (1.8) (1.8)
fees for other services (includes T&N plc 0.9 pound sterling
millions (1996 0.9 pound sterling millions 1995 0.4 pound
sterling million)) (1.9) (1.4) (0.9)
Depreciation of tangible fixed assets
- owned assets (94.2) (97.3) (100.3)
- finance leased assets (0.7) (1.0) (1.3)
Operating lease rentals
- on plant and machinery (9.1) (8.7) (7.8)
- on land and buildings (6.3) (7.4) (7.0)
</TABLE>
33
<PAGE> 38
<TABLE>
<CAPTION>
1997
(pound sterling)
3 SALE OF DISCONTINUED OPERATIONS M
<S> <C>
The profit for the year on disposal of discontinued operations comprises
Provisions against amounts receivable on disposal of the Construction Materials business in Zimbabwe (7.5)
Profit on disposal in the year 22.0
----
Net profit 14.5
====
<CAPTION>
BUSINESS DISPOSED EFFECTIVE DATE
<S> <C>
Flexitallic 10 April 1997
Ferodo Caemarfon 3 May 1997
Kafue Fisheries 26 June 1997
Tenmal 4 August 1997
Ferodo US Heavy Parts 9 December 1997
</TABLE>
Details of assets disposed are set out below:
<TABLE>
<CAPTION>
Flexitallic Tenmat Others T&N Total
S Africa
Net assets at date of disposal (pound sterling) (pound sterling) (pound sterling) (pound sterling) (pound sterling)
M M M M M
<S> <C> <C> <C> <C> <C>
Fixed assets 10.7 6.5 5.7 - 22.9
Investments 0.5 - - - 0.5
Stocks 4.7 1.8 2.9 - 9.4
Debtors 7.8 2.9 3.0 - 13.7
Creditors and provisions (5.1) (2.3) (1.1) - (8.5)
Net cash - 0.4 - - 0.4
Goodwill on acquisition of businesses 1.6 2.4 - - 4.0
Minority interest sold - - - 0.4 0.4
---- ---- ---- --- ----
Assets disposed 20.2 11.7 10.5 0.4 42.8
Profit/(loss) 20.8 5.0 (3.8) - 22.0
---- ---- ---- --- ----
Cash consideration realised 41.0 16.7 6.7 0.4 64.8
==== ==== ==== === ====
Cash arising during the year from the disposal
of operations
Net cash proceeds 64.8
Prior year disposals 9.6
Deferred payments 1.7
Net cash disposed (0.4)
----
Cash flow 75.7
====
Operating profit in 1997 to date of disposal 1.1 1.6 (0.1) - 2.6
==== ==== ==== === ====
</TABLE>
During the year the Group's shareholdings in T&N Holdings Ltd in South Africa
was reduced from 52.4% to 50.8% by selling shares which were taken up as scrip
dividends.
34
<PAGE> 39
4 OPTION OVER SHARES IN KOLBENSCHMIDT AG ("KS")
In December 1996 option arrangements with Commerzbank AG over 6,727,260 shares
in KS expired. Commerzbank AG subsequently sold the shares subject to the
arrangement and under the terms of the agreement, the Company received part of
the proceeds. The gain of pound sterling 13.2 million has been recognised as a
profit.
At 31 December 1996 the Company held options to acquire 6,727,260 shares in KS,
representing 24.99% of the issued share capital of KS. The option price is
DM 17 per share and the consideration payable on exercise of the options would
be DM 114.4 pound sterling millions (38.7 pound sterling millions). On 28 May
1997 the Company announced that it had entered into option arrangements to sell
6,727,260 shares in KS at a price of DM 30 per share. The revenue receivable on
exercise of these options would be DM 201.8 pound sterling millions (68.2 pound
sterling millions). The costs of these options, which are exercisable in
December 1999, was 6.1 pound sterling million. An offer has been received to
purchase both of the above rights for 10.7 pound sterling million per share
resulting in a release of provisions totalling 19.2 pound sterling million.
<TABLE>
<CAPTION>
1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Received from Commerzbank AG
on sale of shares 13.2 -- --
Release/(creation) of provision
made in prior years 19.2 -- (12.0)
Transfer of options to
Metallbank GmbH -- (8.5) --
Payable on lapse of options with
Commerzbank AG -- (10.0) --
Other holding costs -- (4.9) (7.5)
---- ----- -----
32.4 (23.4) (19.5)
==== ===== =====
</TABLE>
5 NET INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Interest payable on bank loans,
overdrafts and other loans
- - repayable within five years,
not by instalments (28.4) (26.2) (31.5)
- - repayble within five years,
by instalments (4.0) (4.4) (4.6)
- - repayable wholly or partly in
more than five years (4.1) (1.5) (3.4)
Interest on finance leases
repayable within five years (0.3) (0.4) (0.3)
Amortisation of discounted
asbestos provisions (2.5) -- --
----- ----- -----
(39.3) (32.5) (39.8)
===== ===== =====
Interest receivable
On asbestos fund 2.7 -- --
Other interest receivable 8.2 5.7 4.0
----- ----- -----
10.9 5.7 4.0
===== ===== =====
Net interest payable and
similar charges (28.4) (26.8) (35.8)
===== ===== =====
</TABLE>
35
<PAGE> 40
6 Taxation
<TABLE>
<CAPTION>
1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
UK corporation tax at 31.5%
(1996 33% 1995 33%) (13.1) (15.2) (13.9)
Relief for overseas taxation 7.8 8.6 8.8
Advance corporation tax written
(off)/back (3.2) 0.7 (3.9)
Deferred tax (0.5) 9.0 (4.4)
Adjustments in respect of prior
years (2.7) -- 0.4
----- ----- -----
Total UK (11.7) 3.1 (13.0)
Overseas (30.6) (21.5) (23.3)
Overseas deferred tax (15.3) 16.2 (0.8)
Associated undertakings (5.0) (7.0) (5.6)
Adjustments in respect of prior years (0.2) 1.2 1.3
----- ----- -----
(62.8) (8.0) (41.4)
===== ===== =====
</TABLE>
The overseas tax charge has been reduced by pound sterling 10.9 million (1996
pound sterling 5.0 million, 1995 pound sterling 6.0 million) by utilising
losses brought forward.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The tax (charge)/credit arise
as follows
On the disposal of operations (5.1) (1.8) (2.4)
On provision for loss/loss on
disposal of properties -- (0.1) --
On (release of provision)/provision
against fixed asset investments (11.9) 0.6 5.5
On asbestos-related costs 13.1 35.5 1.6
On other profits (58.9) (42.2) (46.1)
----- ----- -----
(62.8) (8.0) (41.4)
===== ===== =====
</TABLE>
The tax credit taken in these accounts in respect of asbestos is calculated by
reference to the payments made rather than the charge in the accounts and has
been reduced by the related movements in the deferred tax debtor. No tax relief
is available on the goodwill of pound sterling 4.0 million (1996: pound
sterling 9.7 million) charged in arriving at the profit on disposal of
operations of pound sterling 14.5 million (1996: pound sterling 0.4 million).
36
<PAGE> 41
The group's tax charge differs from the "expected" tax charge that would result
from applying the UK rate of 31.5% (1996 and 1995; 33%) to profit before tax as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Tax actually (charged) (62.8) (8.0) (41.4)
Less: "Expected" tax charge at 31.5% (1996: 33%) 59.9 (128.0) 39.6
----- ------ -----
(2.9) (136.0) (1.8)
===== ====== =====
Reconciliation
Differences from UK tax rate (12.2) 2.6 (6.0)
Prior year differences (2.7) -- --
UK tax on inter-company dividends (14.3) -- --
Bid costs not deductible for tax (3.1) -- --
Other items not deductible for tax (permanent differences) (6.6) (3.5) (3.6)
Timing differences on asbestos provisions not provided for 39.1 (132.7) 11.0
Timing differences not provided for other 2.2 (0.3) 8.4
Impact of ACT (3.2) 0.7 (4.0)
Others (2.1) (2.8) (7.6)
----- ------ -----
(2.9) (136.0) (1.8)
===== ====== =====
</TABLE>
The UK tax charge for 1997 has increased by pound 2.2 million due to the
reduction in the rate of UK corporation tax as from 1 April 1997 from 33% to
31% the reduced rate means there is a smaller deferred tax asset carried
forward.
7 DIVIDENDS
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
pence (pound pence (pound pence (pound
per sterling) per sterling) per sterling)
share M share M share M
<S> <C> <C> <C> <C> <C> <C>
First interim paid on 11 July 1997 3.0 (16.0) -- -- 3.0 (15.9)
Second interim paid on 14 November 1997 3.2 (17.0) 3.0 (16.0) -- --
Third interim paid 30 January 1998 3.0 (16.5) -- -- -- --
Final proposed -- -- -- -- 3.0 (16.0)
--- ----- --- ----- --- -----
9.2 (49.5) 3.0 (16.0) 6.0 (31.9)
=== ===== === ===== === =====
</TABLE>
Because of the exceptional asbestos-related charge during 1996, the Company did
not have sufficient distributable reserves to declare a final dividend for
1996. A first interim dividend of 3.0 pence per share was paid to shareholders
on the register on 2 May 1997 in lieu of the final 1996 dividend with the
result that shareholders received dividends totalling 6.0 pence per share in
respect of 1996. A third interim dividend of 3.0 pence per share was declared
on 16 October 1997 and paid on 30 January 1998. No final dividend for 1997 is
proposed. Together with the second interim dividend of 3.2 pence per share,
shareholders have received dividends totalling 6.2 pence per share in respect of
1997.
Dividends with a value of pound 15.4 million were taken up as scrip dividends.
This comprises pound sterling 0.6 million in respect of the first interim
dividend and pound 14.8 million in respect of the second interim dividend.
37
<PAGE> 42
NOTES (continued)
8 EARNINGS/(LOSS) PER SHARE
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
pence per (pound pence per (pound pence per (pound
share sterling) share sterling) share sterling)
M M M
<S> <C> <C> <C> <C> <C> <C>
Earnings/(loss):
Net basis 22.9 122.4 (75.4) (400.8) 13.3 70.3
Nil basis 24.4 130.9 (75.6) (401.5) 14.0 74.2
Pre asbestos-related cost basis 20.4 109.3 14.8 78.7 22.7 22.7
Average number of shares in issue
weighted on a time basis 534.5m 531.6m 530.2m
</TABLE>
In addition to earnings per share on a net basis as required by SSAP 3, the
earnings per share are also shown after adjustment for asbestos-related costs.
The adjustment made is to add back asbestos-related costs of pound sterling nil
(1996 pound sterling 515.0 million, 1995 pound sterling 51.3 million) and
associated tax credits of pound sterling 13.1 million (1996 pound sterling 35.5
million, 1995 pound sterling 1.6 million). In the opinion of the directors,
this allows shareholders to gain a clearer understanding of the performance of
the Group. There is no material differences between the earnings per share
figures noted above and those calculated on a fully diluted basis.
Earnings per share calculated on a nil basis has been adjusted for Advance
Corporate Tax payable for the year of pound sterling 8.5 million (1996 write
back of pound sterling 0.7 million, 1995 charge of pound sterling 3.9 million).
9 EMPLOYEES
<TABLE>
<CAPTION>
1997 1996 1995
Average Average Average
numbers numbers numbers
<S> <C> <C> <C>
UK 8.637 10.036 11.613
Mainland Europe 9.388 9.765 10.228
North America 7.398 7.172 7.115
South America 3.767 4.379 4.221
Zimbabwe - 2.069 8.785
Other countries 444 472 695
------ ------ ------
29.634 33.893 42.657
====== ====== ======
</TABLE>
At the year end the total number of employees was 28,904 (1996 30,473).
<TABLE>
<CAPTION>
Employment costs 1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
Wages and salaries 543.0 601.1 635.8
Social security costs 81.4 96.0 96.0
Other pension costs (note 10) 11.3 12.9 12.4
Other post-employment benefits (note 10) 3.0 3.0 2.6
Redundancy payments 14.6 13.9 6.5
----- ----- -----
653.3 726.9 753.3
===== ===== =====
</TABLE>
38
<PAGE> 43
10 POST-EMPLOYMENT BENEFITS
The Company and most of its subsidiaries operate both defined benefit and
defined contribution pension schemes. With the exception of the schemes in
Germany, the assets of the principal schemes are held in separate
trustee-administered funds. The most significant schemes are in the UK,
Germany, and the US. The element of the total pension cost relating to overseas
schemes has been determined in accordance with local best practice and
regulations and, where applicable, on the advice of consultant actuaries.
The major pension costs are:
<TABLE>
<CAPTION>
1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
UK (credit) (6.4) (5.7) (4.9)
United States 5.9 5.9 5.9
Germany 5.7 6.0 4.4
France 2.3 3.3 3.5
Others 3.8 3.4 3.5
---- ---- ----
Total 11.3 12.9 12.4
==== ==== ====
</TABLE>
The UK scheme is the largest, covering the majority of UK employees. The
pension cost is assessed in accordance with the advice of independent qualified
actuaries in order to secure final salary-related benefits. The most recent
actuarial review, using the projected unit method, was carried out on 31 March
1996 and, as a result of this review, a number of scheme improvements were
made. At 31 March 1996 the market value of the assets of the UK scheme was 963
pound sterling millions (1993 747 pound sterling millions) and the actuarial
value of these assets represented 121% (1993 129%) of the benefits that had
accrued to members, after allowing for increases in earnings and scheme
improvements.
The assumptions made which have the most significant effect on the results of
this valuation are those relating to the differentials between the rates of
return on investments and the rates of increase in salaries and pensions. It
was assumed that the investment return would be 2% (1993 2%) per annum higher
than the rate of annual salary increases, and 5% (1993 5%) per annum higher than
the rate at which present and future pensions would increase.
The surplus in the UK scheme is being amortised over 13 years, the average
remaining service lives of employees. The credit arising from the amortisation
of this surplus more than offsets ongoing pension costs. The resultant SSAP 24
credit, including interest, was 6.6 pound sterling millions (1996 5.7 pound
sterling millions, 1995 4.9 pound sterling millions).
From January 1995 until 31 March 1996 the Group made payments to the UK scheme
at a rate of 4% of pensionable earnings. Since 1 April 1996 no payments have
been necessary because of the surplus in the scheme.
During the year the prepayment in respect of pensions for the UK scheme
increased by 6.6 pound sterling millions to 51.6 pound sterling millions at the
end of 1997. This amount is included in debtors (note 14).
In the US, the Group operates a number of defined benefits schemes and defined
contribution schemes. These schemes undergo an actuarial analysis annually.
In Germany, the Group operates a number of defined benefit pension schemes.
These undergo an actuarial valuation annually. Provisions for the liabilities
amounted to 70.0 pound sterling millions at the end of 1997 (1996 76.9 pound
sterling millions, 1995 89.1 pound sterling millions).
In addition, other post-employment benefits in the US are fully provided for in
accordance with UK accounting standards. Provisions amounted to 32.3 pound
sterling millions the end of 1997 (1996 31.1 pound sterling millions, 1995
34.3 pound sterling millions) in respect of these benefits. The cost of
post-employment medical benefits in the US was 2.8 pound sterling millions
(1996 2.8 pound sterling millions, 1995 2.9 pound sterling millions).
There are no other significant post-employment benefits.
39
<PAGE> 44
11 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Land & buildings Plant & machinery Total
(pound sterling) (pound sterling) (pound sterling)
M M M
<S> <C> <C> <C>
COST OR VALUATION
At 1 January 1997 230.8 1,017.8 1,248.6
Currency translation (8.6) (31.8) (40.4)
Acquisition of business 3.5 14.4 17.6
Capital expenditure 10.8 94.6 105.4
Transfers between Group
companies and reclassifications 2.2 (2.2) --
Disposal of operations (9.8) (36.9) (46.7)
Other disposals (4.4) (22.9) (27.3)
Valuation adjustment (1.7) -- (1.7)
----- ------- -------
At 31 December 1997 222.8 1,032.6 1,255.4
===== ======= =======
Comprising:
Cost 145.2 937.5 1,082.7
Valuation in
1989 48.0 11.0 59.0
Other years 29.6 84.1 113.7
----- ------- -------
222.8 1,032.6 1,255.4
===== ======= =======
</TABLE>
Revaluations are carried out on an existing use basis. The valuation adjustment
of 1.7 pound sterling millions relates to one property. The value of this
property has been estimated by the directors.
<TABLE>
<CAPTION>
Depreciation Land & buildings Plant & machinery Total
pound sterling pound sterling pound sterling
millions millions millions
<S> <C> <C> <C>
At 1 January 1997 30.9 520.5 551.4
Currency translation (1.2) (18.5) (19.7)
Transfers between Group companies
and reclassifications 0.5 (0.5) --
Disposal of operations (1.8) (22.0) (23.8)
Other disposals (2.4) (20.9) (23.5)
Charge for the year 7.4 87.5 94.9
----- ------ ------
At 31 December 1997 33.4 545.6 579.0
===== ====== ======
Net book value
At 31 December 1997 189.4 487.0 676.4
===== ====== ======
At 31 December 1996 199.9 497.3 697.2
===== ====== ======
</TABLE>
Included in the cost of fixed assets at 31 December 1997 are buildings in the
course of construction of 0.5 pound sterling millions (1996 2.8 pound sterling
millions) and plant and machinery in the course of construction of 29.0 pound
sterling millions. (1996 25.9 pound sterling millions).
40
<PAGE> 45
TANGIBLE FIXED ASSETS (continued)
<TABLE>
<CAPTION>
NET BOOK VALUE OF LAND AND BUILDINGS 1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Freehold land - not depreciated 44.9 49.5
Freehold buildings 142.4 148.3
Long leasehold (over 50 years unexpired) 0.2 0.2
Short leasehold 1.9 1.9
----- -----
189.4 199.9
===== =====
<CAPTION>
CAPITALISED LEASES INCLUDED IN PLANT AND MACHINERY 1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Cost 24.1 28.4
Depreciation (20.9) (23.8)
----- -----
Net book value 3.2 4.6
===== =====
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL COST OF TANGIBLE FIXED ASSETS LAND & PLANT &
BUILDINGS MACHINERY TOTAL
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Cost (or ascribed value) 196.7 1,031.7 1,228.4
Depreciation (32.1) (544.9) (577.0)
------- ------- -------
Net historical cost value at 31 December 1997 164.6 486.8 651.4
======= ======= =======
Net historical cost value at 31 December 1996 161.6 497.1 658.7
======= ======= =======
</TABLE>
41
<PAGE> 46
12 FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
ASSOCIATED OTHER OTHER
UNDERTAKINGS SHARES INVESTMENTS TOTAL
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
COST OF VALUATION
<S> <C> <C> <C> <C>
At 1 January 1997 51.7 7.9 37.6 97.2
Currency translation (4.7) (0.2) (3.8) (8.7)
Additions 5.3 0.2 6.1 11.6
Acquisitions of operations - 0.6 - 0.6
Disposals and repayments (0.7) - (12.8) (13.5)
Share of retained losses (0.8) - - (0.8)
------ ------ ------ ------
At 31 December 1997 50.8 8.5 27.1 86.4
====== ====== ====== ======
PROVISIONS
At 1 January 1996 - (0.1) (37.6) (37.7)
Currency translation - - 2.8 2.8
Disposals - - 12.8 12.8
Release of provision - 0.1 19.2 19.3
------ ------ ------ ------
At 31 December 1997 - - (2.8) (2.8)
====== ====== ====== ======
NET BOOK VALUE
At 31 December 1997 50.8 8.5 24.3 83.6
====== ====== ====== ======
At 31 December 1996 51.7 7.8 - 59.5
====== ====== ====== ======
</TABLE>
Listed investments included above in associated undertakings at net book value
are (pound sterling)7.7m (1996 (pound sterling)7.5m) - market value (pound
sterling)4.7m (1996 (pound sterling)5.7m). At 31 December 1997, Group associated
undertakings investments included loans receivable of (pound sterling)5.1m (1996
(pound sterling)1.8m).
42
<PAGE> 47
13 STOCKS
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Raw materials and consumables 45.5 41.9
Work in progress 39.3 45.7
Finished goods 137.1 160.0
----- -----
221.9 247.6
===== =====
</TABLE>
14 DEBTORS
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
DEBTORS FALLING DUE WITHIN ONE YEAR
Trade 264.4 260.2
Amounts owed by associated undertakings 3.9 1.4
Amounts owed in respect of disposals of operations 7.8 24.8
Assets held for disposal 4.2 6.8
Overseas taxation recoverable 2.8 6.1
Deferred tax recoverable (note 25) 1.8 13.9
Prepayments and accrued income 9.8 13.9
Other 24.1 23.7
----- -----
318.8 350.8
===== =====
DEBTORS FALLING DUE AFTER MORE THAN ONE YEAR
Amounts owed in respect of disposal of operations 0.6 3.4
Prepaid pension costs (note 10) 51.6 45.0
Deferred tax recoverable (note 25) 19.3 16.5
Overseas taxation recoverable 0.4 0.2
Other debtors 1.6 1.0
----- -----
73.5 66.1
===== =====
TOTAL DEBTORS 392.3 416.9
===== =====
</TABLE>
43
<PAGE> 48
15 CURRENT ASSET INVESTMENT
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Listed investments - market value(pound sterling)8.1m (1996(pound sterling)5.1m) 7.7 5.1
Other investments - market value(pound sterling)0.4m (1996(pound sterling)0.6m) 0.3 0.5
----- -----
8.0 5.6
===== =====
</TABLE>
16 CREDITORS - DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Trade 165.3 168.9
Amounts owed to associated undertakings 2.7 2.1
Amounts owed in respect of acquisitions 2.8 -
Payroll and other taxes, including social security 48.4 54.1
Taxation - United Kingdom corporation tax 8.7 5.9
- Overseas taxation 30.1 13.6
Accruals and deferred income 88.4 69.4
Grants not yet credited to profit 1.3 1.7
Proposed dividend (note 7) 16.5 -
Asbestos-related insurance premium - 92.0
Other 58.8 64.8
----- -----
423.0 472.5
===== =====
</TABLE>
17 CREDITORS - DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Amounts owed in respect of acquisitions 5.5 3.4
Accruals and deferred income - 1.3
Grants not yet credited to profit 3.8 4.4
Other 2.7 6.8
----- -----
12.0 15.9
===== =====
</TABLE>
44
<PAGE> 49
18 NET BORROWINGS
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
BORROWINGS
Repayable after more than five years
- instalments 7.3 7.7
- otherwise 153.7 0.7
Two to five years
- Instalments 16.9 23.0
- Otherwise 100.3 186.0
One to two years
- Instalments 5.8 8.7
- Otherwise 1.4 34.1
------- -------
Total due after more than one year 285.4 260.2
Total due within one year 103.7 77.2
------- -------
Total borrowings 389.1 337.4
Cash at bank and in hand and current asset investments (202.0) (137.1)
------- -------
Net borrowings 187.1 200.3
======= =======
ANALYSIS OF TOTAL BORROWINGS
Finance leases 3.9 5.3
Bank overdrafts and loans secured on assets of the Group 27.5 37.4
Unsecured bank overdrafts and loans 357.7 294.7
------- -------
389.1 337.4
======= =======
ANALYSIS OF BORROWINGS BY CURRENCY
Sterling (28.6) (33.9)
Other European currencies 78.0 130.3
United States Dollar 119.0 80.4
South African Rand 8.1 9.3
Other currencies 10.6 14.2
------- -------
187.1 200.3
======= =======
</TABLE>
The majority of the Group's borrowings are at variable rates between 35 and 50
basis points above the applicable base rate for the currency. Interest rate
swaps have been entered into in a mix of currencies whereby the interest charge
on total debt of (pound sterling)154.2m has been swapped from variable to fixed
rates for periods of between two and five years. Included in cash and current
asset investments, at 31 December 1997, amounts totalling (pound sterling)23.7m
(1996 (pound sterling)22.8m) are held by the Group's insurance company of which
(pound sterling)18.0m (1996 (pound sterling)17.6m) is required to meet insurance
regulatory requirements and which, as a result, is not readily available for the
general purposes of the Group.
45
<PAGE> 50
19 PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
POST-
DEFERRED EMPLOYMENT ASBESTOS OTHER
TAXATION BENEFITS RELATED PROVISIONS TOTAL
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C> <C>
At 1 January 1997 - 142.1 440.6 6.8 589.5
Reclassified from creditors - - 90.7 - 90.7
Reclassified from debtors - - (0.3) - (0.3)
Acquisition of operations - 0.6 - 0.4 1.0
Currency translation (0.2) (9.1) 4.1 (0.2) (5.4)
Charge for the year 5.9 13.9 - 0.6 20.4
Amortisation of discount - - 2.5 - 2.5
Payments - (11.5) (149.4) (2.2) (163.1)
------- ------- ------- ------- -------
At 31 December 1997 5.7 136.0 388.2 5.4 535.3
======= ======= ======= ======= =======
</TABLE>
Other provisions include leaving benefits payable to employees in certain
acquired companies and costs of environmental cleaning.
20 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
ISSUED AND ISSUED AND
AUTHORISED AUTHORISED FULLY PAID FULLY PAID
NO. OF SHARES (POUND STERLING)M NO. OF SHARES (POUND STERLING)M
ORDINARY SHARES
<S> <C> <C> <C> <C>
At 1 January 1997 725,000,000 725.0 532,203,165 532.2
Options exercised to 30 January 1997 - - 113,269 0.1
------------ -------- ------------- --------
At 30 January 1997 725,000,000 725.0 532,316,434 532.3
Capital reduction - (435.0) - (319.4)
------------ -------- ------------- --------
After capital reduction 725,000,000 290.0 532,316,434 212.9
Options issued to 31 December 1997 - - 6,275,782 2.6
Issued as scrip dividends - - 10,111,955 4.0
------------ -------- ------------- --------
At 31 December 1997 725,000,000 290.0 548,704,171 219.5
============ ======== ============= =========
</TABLE>
A capital reduction was approved by the Court on 29 January 1997 and took effect
on 30 January 1997. In accordance with the terms of the capital reduction, the
nominal value of authorised and issued shares was reduced from (pound
sterling)1.00 to 40p.
46
<PAGE> 51
<TABLE>
<CAPTION>
SHARE OPTION SCHEMES EXECUTIVE SAVINGS-RELATED TOTAL
NO. OF SHARES NO. OF SHARES NO. OF SHARES
<S> <C> <C> <C>
At 1 January 1997 12,332,229 12,537,575 24,869,804
Granted 2,965,000 4,100,923 7,065,923
Exercised (4,001,750) (2,387,301) (6,389,051)
Lapsed (628,255) (2,234,510) (2,862,765)
----------- ----------- -----------
At 31 December 1997 10,667,224 12,016,687 22,683,911
=========== =========== ===========
<CAPTION>
SHARE OPTION SCHEMES EXECUTIVE SAVINGS-RELATED TOTAL
Number of holders 236 3,976 4,212
Latest dates exercisable range between 1998/2007 1998/2003
Exercisable at the following price per share
101.7p - 599,843 599,843
111.4p 873,136 - 873,136
119.7p-147.8p 812,777 6,459,850 7,272,627
151.6p-172.1p 6,294,224 4,420,819 10,715,043
182.8p-199.8p 271,162 536,175 807,337
201.6p-226.2p 2,415,925 - 2,415,925
----------- ----------- -----------
10,667,224 12,016,687 22,683,911
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ORDINARY SHARES
31 DECEMBER 31 DECEMBER
The interests in the Company, of those who were directors at 31 1997 1996
December 1997, were as follows:
<S> <C> <C>
Sir Colin Hope 107,774 105,562
R G Beeston 10,000 -
R H Boissier 2,595 2,488
D A Harding 5,104 5,000
Sir Terence Harrison 10,000 5,000
Professor F R Hartley 3,131 3,001
P S Lewis 1,000 1,000
A C McWilliam 2,375 2,326
I F R Much 34,952 34,168
T A Welsh 19,445 5,914
Sir Geoffrey Whalen 4,856 4,654
------- -------
201,232 169,113
======= =======
</TABLE>
There have been no changes in the interests of directors between 31 December
1997 and 17 February 1998. No director has any beneficial interest in shares of
any subsidiary.
47
<PAGE> 52
21 RESERVES
<TABLE>
<CAPTION>
ASSOCIATED
SHARE SHARES TO SPECIAL REVAL- UNDER-
PREMIUM BE ISSUED RESERVE UATION TAKINGS
ACCOUNT RESERVES RESERVES
--------------------------------------------------------------------------------------------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C> <C>
AT 1 JANUARY 1995 - - - 34.3 7.8
Currency translation on - - - 0.1 (1.0)
overseas assets
Currency translation on net - - - - -
debt
Transfer to profit & loss - - - - 6.1
Realisation of revaluation - - - 1.6 -
surplus
Premium on share issues 0.5 - - (6.6) -
Goodwill arising on - - - - -
acquisitions
Goodwill arising on formation - - - - -
of Turkish joint venture
Goodwill on disposals - - - - -
Scrip issues of shares (0.5) - - (0.1) -
Other movements - - - - -
----- ----- ----- ----- -----
AT 31 DECEMBER 1995 - - - 29.3 12.9
Currency translation on - - - (1.7) (5.9)
overseas assets
Currency translation on net - - - - -
debt
Transfer to profit & loss - - - - (2.7)
Realisation of revaluation - - - (5.6) -
surplus
Premium on share issues 0.2 - - - -
Goodwill arising on - - - - -
acquisitions
Goodwill on disposals - - - - -
Other movements - - - (0.4) 0.7
----- ----- ----- ----- -----
AT 31 DECEMBER 1996 0.2 - - 21.6 5.0
Transfer to special reserve - - (262.5) - -
Transfer capital reduction to - - 3 19.4 - -
special reserve
Currency translation on - - - (0.4) (4.9)
overseas assets
Currency translation on net - - - - -
debt
Transfer to profit and loss - - - - (0.8)
Realisation of revaluation - - 5.2 (5.3) -
surplus
Revaluations - - - (1.7) -
Premium on share issues 6.5 - - - -
Scrip dividend (Note 7) (4.0) - - - -
Goodwill arising on - - - - -
acquisitions
Goodwill on disposals - - 1.1 - -
Realisation of reserves on - - - - (0.3)
disposal
Executive share options - 0.7 - - -
Other movements - - - - (1.1)
----- ----- ----- ----- -----
AT 31 DECEMBER 1997 2.7 0.7 63.2 14.2 (2.1)
===== ===== ===== ===== =====
</TABLE>
48
<PAGE> 53
<TABLE>
<CAPTION>
GOODWILL PROFIT &
WRITE OFF LOSS
RESERVE ACCOUNT
--------------------------------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
AT 1 JANUARY 1995 (186.1) 127.9
Currency translation on - 14.4
overseas assets
Currency translation on net - (15.1)
debt
Transfer to profit & loss - 32.3
Realisation of revaluation - -
surplus
Premium on share issues - 6.6
Goodwill arising on (7.5) -
acquisitions
Goodwill arising on formation (3.5) -
of Turkish joint venture
Goodwill on disposals 6.6 -
Scrip issues of shares - 0.6
Other movements - (1.4)
------- --------
AT 31 DECEMBER 1995 (190.5) 165.3
Currency translation on - (58.1)
overseas assets
Currency translation on net - 42.6
debt
Transfer to profit & loss - (414.1)
Realisation of revaluation - 5.6
surplus
Premium on share issues - -
Goodwill arising on (0.3) -
acquisitions
Goodwill on disposals 9.7 -
Other movements - (0.9)
------- --------
AT 31 DECEMBER 1996 (181.1) (259.6)
Transfer to special reserve 5.3 257.2
Transfer capital reduction to - -
special reserve
Currency translation on - (21.0)
overseas assets
Currency translation on net - 8.9
debt
Transfer to profit and loss - 73.7
Realisation of revaluation - 0.1
surplus
Revaluations - -
Premium on share issues - -
Scrip dividend (Note 7) - 15.4
Goodwill arising on (10.0) -
acquisitions
Goodwill on disposals 2.9 -
Realisation of reserves on - 0.3
disposal
Executive share options - -
Other movements - 1.1
------- --------
AT 31 DECEMBER 1997 (182.9) 76.1
======== ========
</TABLE>
49
<PAGE> 54
A capital reduction, which was approved by the Court on 29 January 1997, took
effect on 30 January 1997 and, in accordance with the Court Order, was applied
to eliminating the deficit on the Company's profit and loss account (including
goodwill previously written off). The accounting entries recorded in the
accounting records of the Company in accordance with the terms approved by the
Court were as follows:
(i) The nominal value of each share in issue at 30 January 1997 was reduced
from (pound sterling)1.00 to 40p. As a consequence, the nominal value of
shares in issue at 30 January 1997 (1996 (pound sterling)532.2m, 1995
(pound sterling)531.2m) was reduced by (pound sterling)319.4m to (pound
sterling)212.9m. The reduction of (pound sterling)319.4m was credited to
the special reserve.
(ii) The balance of(pound sterling)5.3m on the goodwill reserve of the Company
at 31 December 1996 was transferred to the special reserve.
(iii) The balance of (pound sterling)257.2m on the profit and loss account
reserve of the Company at 31 December 1996 was transferred to the special
reserve. The special reserve is not distributable except in certain
limited circumstances. Any goodwill or revaluation reserves in existence
at 1 January 1997 must be credited to the special reserve when they are
realised.
Cumulative goodwill written off to Group reserves at 31 December 1997 totals
(pound sterling)254.3m (1996 (pound sterling)248.3m, 1995 (pound sterling)
257.7m), comprising (pound sterling)182.9m (1996 (pound sterling)181.1m, 1995
(pound sterling)190.5m) shown above, (pound sterling)67.2m (1996 (pound
sterling)67.2m, 1995 (pound sterling)67.2m) written off to a merger reserve in
earlier years and (pound sterling)4.2m transferred to the special reserve
in 1997.
Retained earnings of overseas subsidiaries and associated undertakings would be
liable to tax if remitted as dividends to the United Kingdom. No provision has
been made for this liability as there are no plans to remit such earnings.
50
<PAGE> 55
22 NOTES TO THE CASH FLOW STATEMENT
(A) RECOGNITION OF OPERATING PROFIT TO NET CASH
INFLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Operating profit/(loss) 177.2 (335.8) 175.3
Share of profit of associated undertakings (13.2) (11.8) (12.6)
Depreciation 93.5 98.3 101.6
Loss on sale of tangible fixed assets 0.8 2.5 2.3
Decrease/(increase) in stocks 12.8 22.2 (15.8)
(Increase)/decrease in debtors (25.4) 1.0 (1.7)
Increase/(decrease) in creditors 13.7 (2.0) 21.4
Increase/(decrease) in provisions 1.6 (7.9) (19.1)
Other non cash movements (0.2) (1.0) (4.1)
Charge for asbestos-related costs - 515.0 51.3
------- -------- -------
Cash inflow from operating activities before 260.8 280.5 298.6
asbestos-related payments
Asbestos-related payments (149.4) (64.8) (55.7)
------- -------- -------
Cash inflow from operating activities after 111.4 215.7 242.9
asbestos-related payments ======= ======== =======
<CAPTION>
(B) RETURNS ON INVESTMENT AND SERVICING OF FINANCE 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Interest received 11.0 5.2 3.8
Interest paid (35.1) (35.4) (40.1)
Dividends paid to minorities (0.8) (1.2) (1.1)
------- ------- ------
(24.9) (31.4) (37.4)
======= ======= ======
<CAPTION>
(C) TAXATION 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
UK tax paid (8.5) (9.3) (5.0)
Overseas tax paid (11.6) (19.6) (3.3)
------ ------ -----
(20.1) (28.9) (8.3)
====== ====== =====
</TABLE>
51
<PAGE> 56
<TABLE>
<CAPTION>
(D) CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Purchase of tangible fixed assets
(103.9) (114.3) (151.8)
Grants received 0.2 - 0.2
Disposal of tangible fixed assets 3.3 2.3 2.0
Additions to trade and other investments (primarily (14.7) (13.6) (6.0)
Kolbenschmidt)
Disposal of trade investments (Kolbenschmidt) 13.2 0.1 -
-------- -------- -------
(101.9) (125.5) (155.6)
======== ======== =======
<CAPTION>
(E) ACQUISITIONS AND DISPOSALS 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Acquisitions (note 23)
(27.3) (8.5) (58.7)
Sale of discontinued operations (note 3) 75.7 74.8 69.3
Additions to associated undertakings (5.3) (7.0) (1.1)
Impact of Turkish joint venture (3.7)
------ ------ ------
43.1 59.3 5.8
====== ====== ======
<CAPTION>
(F) MANAGEMENT OF LIQUID RESOURCES 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
(Additions)/reduction to current asset investments
(2.4) (4.4) 5.4
(Increase)/reduction in short term investments (74.1) (1.8) 1.3
------ ----- ----
(76.5) (6.2) 6.7
====== ===== ====
<CAPTION>
(G) FINANCING 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
New loans
139.4 176.7 60.4
Repayment of loans (116.6) (206.8) (63.6)
------- ------- ------
Cash inflow/(outflow) from decrease in debt and 22.8 (30.1) (3.2)
lease financing
Issue of ordinary share capital 9.1 1.2 1.6
Capital input by minorities 2.1 1.8 1.2
------- ------- ------
34.0 (27.1) (0.4)
======= ======= ======
</TABLE>
(H) ACQUIRED AND DISCONTINUED OPERATIONS
In 1997, acquired and discontinued operations had no significant impact on any
of the cash flow categories, other than as disclosed in acquisitions and
disposals (Note 22(e)) above.
52
<PAGE> 57
23 ACQUISITIONS
On 27 February 1997 the group acquired Michigan Stamping Corporation, which
manufactures heat shields and is based in Michigan, USA. On 16 June 1997 The
group acquired Metal Leve Inc, a manufacturer of articulated pistons also based
in Michigan, USA. This Company was subsequently renamed AE Goetze Carolina Inc.
In addition, on various dates during the year, the Group acquired the following
minority interests:
<TABLE>
<CAPTION>
% OWNERSHIP AT % OWNERSHIP AT
START OF YEAR END OF YEAR
<S> <C> <C>
Ferodo a.s 55% 100%
Ferodo India Pvt Ltd 76% 100%
AE Goetze Argentina SA 94% 100%
Nanchang Payen Company Limited 70% 80%
</TABLE>
Details of the acquisitions, including the fair value adjustments made to the
assets and liabilities acquired, are set out below. Substantially all the assets
and goodwill acquired relate to Metal Leve Inc. Substantially all the minority
interest acquired relate to Ferodo a.s.
<TABLE>
<CAPTION>
BOOK VALUE ACCOUNTING
AT POLICY OTHER FAIR
ACQUISITION ALIGNMENT ADJUSTMENTS VALUE
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Tangible fixed assets 15.6 - 2.3 17.9
Investments 0.6 - - 0.6
Stocks 3.4 0.3 - 3.7
Debtors 8.6 - (0.5) 8.1
Creditors (8.9) - - (8.9)
Provisions (1.5) (0.4) 1.0 (0.9)
Cash 4.2 - - 4.2
Loans (4.8) - - (4.8)
Minority interests - - - -
----- ----- ----- -----
Assets acquired 17.2 (0.1) 2.8 19.9
Goodwill 10.3
-----
Cash consideration 30.2
=====
<CAPTION>
MINORITY
INTERESTS TOTAL
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Tangible fixed assets - 17.9
Investments - 0.6
Stocks - 3.7
Debtors - 8.1
Creditors - (8.9)
Provisions - (0.9)
Cash - 4.2
Loans - (4.8)
Minority interests 5.1 5.1
----- -----
Assets acquired 5.1 25.0
Goodwill (0.3) 10.0
----- -----
Cash consideration 4.8 35.0
===== =====
</TABLE>
All accounting policy alignments and other adjustments relate to Metal Leve Inc.
The accounting policy alignments comprise the recording as stocks of (pound
sterling)0.3m of consumable stores previously written off and a provision of
(pound sterling)0.4m in respect of environmental work required at the date of
acquisition. Other adjustments comprise the revaluation of fixed assets ((pound
sterling)2.3m) and the elimination of deferred tax debtors ((pound
sterling)0.5m) and creditors ((pound sterling)1.0m).
53
<PAGE> 58
In its last statutory year, ended 31 December 1996, Metal Leve Inc earned
profits after taxation of(pound sterling)1.4m; in the period from 1 January 1997
to 15 June 1997 it earned profits after taxation of(pound sterling)1.6m.
<TABLE>
<CAPTION>
CASH PAID FOR ACQUISITIONS (POUND STERLING)M
<S> <C>
Cash consideration 35.0
Consideration deferred (4.0)
Prior year deferred consideration paid 0.5
Less cash acquired (4.2)
------
CASH OUTFLOW ON ACQUISITIONS 27.3
======
</TABLE>
24 ANALYSIS OF MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
AT 1 OTHER NON
JANUARY CASH CASH DEBT
1997 FLOW MOVEMENTS ACQUIRED
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Cash at bank and in hand 110.4 (3.2) - -
Overdrafts (24.0) (42.8) - -
-------- -------- -------- --------
86.4 (46.0) - -
-------- -------- -------- --------
Debt due within one year (51.7) 12.4 - (1.5)
Debt due after one year (256.4) (36.4) 1.4 (3.2)
Finance leases (5.3) 1.2 - (0.1)
-------- -------- -------- --------
(313.4) (22.8) 1.4 (4.8)
-------- -------- -------- --------
Short term deposits 21.1 74.1 - -
Current asset investments 5.6 2.4 - -
-------- -------- -------- --------
26.7 76.5 - -
-------- -------- -------- --------
NET BORROWINGS (200.3) 7.7 1.4 (4.8)
======== ======== ======== ========
<CAPTION>
EXCHANGE MOVEMENT ON
AT 31
OPENING MOVEMENT DECEMBER
BALANCES IN YEAR 1997
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Cash at bank and in hand (5.0) (2.3) 99.9
Overdrafts 1.4 0.3 (65.1)
------ ------ -------
Debt due within one year (3.6) (2.0) 34.8
------ ------ -------
3.9 (0.6) (37.5)
10.5 1.5 (282.6)
0.3 - (3.9)
------ ------ -------
14.7 0.9 (324.0)
------ ------ -------
(0.2) (0.9) 94.1
- - 8.0
------ ------ -------
(0.2) (0.9) 102.1
------ ------ -------
10.9 (2.0) (187.1)
====== ====== =======
</TABLE>
Included within the closing balance of short ter m deposits is (pound
sterling) 78.2m in the asbestos fund.
54
<PAGE> 59
25 DEFERRED TAXATION
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
ASSET/(LIABILITY) RECOGNISED
Asbestos-related costs 21.1 27.4
Losses and other timing differences (5.7) 3.0
------ ------
15.4 30.4
====== ======
</TABLE>
No provision has been made for tax which would become payable on the amount by
which assets have been revalued because there is no current intention to dispose
of these assets.
Provision for deferred taxation is only made to the extent that it is probable
that an actual liability or asset will crystallise, as noted below.
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
DEFERRED TAX ASSETS:
Advance corporation tax 61.9 56.5
Operating losses 36.6 41.6
Capital losses 24.8 30.8
Asbestos provision 129.7 179.1
Other 40.9 78.3
-------- --------
293.9 386.3
Less: Deferred tax not recognised under UK GAAP (272.8) (355.9)
-------- --------
Deferred tax asset recognised under UK GAAP 21.1 30.4
======== ========
</TABLE>
55
<PAGE> 60
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
DEFERRED TAX LIABILITY:
Accelerated capital allowances (64.5) (60.8)
Other (26.8) (25.3)
--------- --------
(91.3) (86.1)
Less: Deferred tax not recognized under UK GAAP (85.6) (86.1)
--------- --------
Deferred tax liability provided under UK GAAP (5.7) -
========= ========
NET DEFERRED TAX ASSET RECOGNIZED UNDER UK GAAP 15.4 30.4
========= ========
</TABLE>
A deferred tax asset is carried in respect of the provision for asbestos claims
settlements in the UK and US (and at 1996 additionally in respect of the
insurance premium against asbestos liabilities). The amount recognised is the
forecast tax relief to be obtained for asbestos claims settlements over the next
three years.
The analysis of the deferred tax liability provided under UK GAAP between
current and non-current amounts is as follows:
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
CURRENT:
UK - -
US 1.8 10.8
Germany - 3.1
--------- --------
1.8 13.9
========= ========
NON-CURRENT:
UK 9.9 10.3
US 9.4 6.2
Germany (5.7) -
---------
13.6 16.5
========= ========
TOTAL ASSET 15.4 30.4
========= ========
</TABLE>
No deferred tax liability has been recognised for temporary differences related
to investments in foreign subsidiaries and associates. Remittance of retained
earnings of overseas subsidiaries and associates as dividends would be liable to
tax in the UK. However, it is likely that no net tax liability would arise,
since credit would be available for foreign taxes suffered on those earnings,
and surplus ACT, of (pound sterling)61.9 million at 31 December 1997 ((pound
sterling)56.5 million at 31 December 1996) that has not been recognised for
deferred tax, would be available to offset the liability. The temporary
difference could also become taxable if capital of the foreign companies were
repaid to their UK parent company. However, the taxable gain would be reduced by
the base cost of the shares and an inflation allowance. Additionally, capital
losses, with a value of (pound sterling)24.8 million at 31 December 1997 ((pound
sterling)30.8 million at 31 December 1996) that have not been recognised for
deferred tax, would be available to offset the net taxable gain.
56
<PAGE> 61
The value of tax losses (excluding capital losses) carried forward and their
expiry dates are as follows:
<TABLE>
<CAPTION>
(POUND STERLING)M
<S> <C>
1998 4.4
1999 4.1
2000 3.2
2001 1.0
After 2001 23.8
-------
36.5
=======
</TABLE>
26 RELATED PARTY TRANSACTIONS
The T&N Group is related to all its associated undertakings because it exerts
significant influence over them. During the year various transaction have
occurred between the T&N Group and its associates including:
- - Sales of goods and equipment to associated undertakings of (pound
sterling)12.1m (1996 (pound sterling)12.8m);
- - purchases of goods from associated undertakings of (pound sterling)15.9m
(1996 (pound sterling)15.5m);
- - royalties received from associated undertakings of (pound sterling)1.9m (1996
(pound sterling)1.4m);
- - dividends received from associated undertakings of (pound sterling)6.5m
(1996 (pound sterling)6.8m);
- - investments in associated undertakings as set out in Note 12.
Sales between associated undertakings totalled (pound sterling)26.1m (1996
(pound sterling)16.0m).
Trading balances with associated undertakings at 31 December 1996 and 1997 are
set out in Notes 14 and 16.
Entities which the T&N Group sold and acquired during the year, details of which
are set out in Notes 3 and 23, are deemed to be related parties because the T&N
Group exercise control over these whilst they were part of the T&N Group.
Transactions during the year which are not eliminated on consolidation totalled
(pound sterling)0.3m (1996 (pound sterling)1.0m) comprising mainly the provision
of utilities to disposed businesses.
All these transaction were entered into on arms length terms.
57
<PAGE> 62
27 COMMITMENTS AND CONTINGENT LIABILITIES
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Future capital expenditure - contracts placed 20.0 12.6
========= =======
Operating leases - payment commitments for 1998 On leases of land and
buildings expiring:
- within one year 1.0 1.0
- between two and five years 3.3 2.1
- in more than five years 2.5 2.1
--------- -------
6.8 5.2
========= =======
On leases of plant and machinery expiring:
- within one year 1.2 1.4
- between two and five years 5.7 7.0
- in more than five years - 0.1
--------- -------
6.9 8.5
========= =======
</TABLE>
At 31 December 1997 the Company and its UK subsidiaries had contingent
liabilities of (pound sterling)67.6m (1996 (pound sterling)64.3m) in connection
with guarantees relating to bank borrowings of certain overseas subsidiaries.
The maximum potential liability under those guarantees is (pound sterling)99.4m
(1996 (pound sterling)121.4m). Contingent liabilities also exist in respect of
cross-guarantees given by the Company and its UK subsidiaries to support some of
the Group's UK bank borrowings.
28 ASBESTOS-RELATED LITIGATION
In the United States of America, T&N plc and two of its US subsidiaries ("the
T&N Companies") are among many defendants named in numerous court actions
alleging personal injury resulting from exposure to asbestos or
asbestos-containing products. T&N plc is also subject to asbestos-disease
litigation, to a lesser extent, in the UK. Because of the slow onset of
asbestos-related diseases, the directors anticipate that similar claims will be
made in the future. It is not known how many such claims may be made nor the
expenditure which may arise therefrom. Provisions are, however, made in respect
of both known and possible future claims, on the following bases.
Claims Notified after 30 June 1996
As announced on 27 November 1996 the Company has secured, by payment of a
premium of (pound sterling)92m, a (pound sterling)500m layer of insurance cover
which will be triggered should the aggregate number of claims notified after 30
June 1996, where the exposure occurred prior to that date ("IBNR claims"),
exceed (pound sterling)690m.
This, together with recent claims experience and medical information, enabled
the directors of the company during 1996 to estimate the cost of IBNR claims
with reasonable accuracy. Accordingly, provision was made of (pound
sterling)550m during the year ended 31 December 1996 for IBNR claims at 30 June
1996 (being a point between the high ((pound sterling)690m) and low ((pound
sterling)429m) estimates prepared by actuaries using assumptions referred to
below). The provision was made on a discounted basis, using a rate of 7%. The
directors intend to set aside this provision in a separate fund, and the
provision established in 1996 of (pound sterling)327m allowed a margin to enable
this to be phased in accordance with the assumptions over a period of
approximately 36 months. Tax relief is available on this provision when payments
are made. At 31 December 1997, the provision amounted to (pound sterling)300m
and the fund established for IBNR claims stood at (pound sterling)78.2m. Details
of the movement in the IBNR provision are set out in Note 19.
58
<PAGE> 63
Claims notified and outstanding at 30 June 1996
As regards claims notified and outstanding at 30 June 1996 in the UK, full
provision is made in respect of such claims, based on estimates agreed with the
Company's external litigation lawyers.
As regards claims notified and outstanding at 30 June 1996 in the US, provision
continues to be made based on data provided by the Center for Claims Resolution
(CCR), who T&N has appointed as its exclusive representative in relation to all
asbestos-related personal injury claims made against the T&N Companies in the
United States. In estimating the provision, the directors have had regard
principally to the industry in which the plaintiff claims exposure, the alleged
disease type, the State in which the action is being brought and the share which
will be applicable to the T&N Companies having regard to the agreed method of
operation of the CCR. Such shares may in certain circumstances be subject to
retroactive adjustment. Even where settlement has already been agreed in
principle with plaintiffs' lawyers in respect of a group of cases, the actual
cost of each claim to the T&N Companies may not be determined until it is
finally processed and paid sometime in the future.
Contingent liability
Accordingly, although the directors believe that they have made appropriate
provision for claims, because of the factors described in this note, there are
contingencies in relation to the amount at which such claims will be finally
settled.
Given the substantial layer of insurance cover, one contingency in relation to
IBNR claims concerns claims exceeding the amount provided, but below the level
of insurance cover. This amounts to (pound sterling)140m gross, and (pound
sterling)58m when discounted. The directors also recognise the importance of
setting up a separate fund in accordance with the assumptions used in arriving
at the discounted provision. During 1997 the sum of (pound sterling)88.2m was
put into such a fund.
In arriving at the IBNR provision, assumptions have been made regarding the
total number of claims which it is anticipated may be received in the future,
the average cost of settlement (which is sensitive to the industry in which the
plaintiff claims exposure, the alleged disease type and the State in which the
action is being brought), the rate of receipt of claims and the timing of
settlement and the level of subrogation claims brought by insurance companies.
So far as relates to claims reported at 30 June 1996, T&N is primarily exposed
to differences between the assumptions referred to above and the actual claims
settlement experience as it emerges.
US property damage litigation
Following the successful jury verdict in the Chase Manhattan property damage
case in December 1995, judgement was entered in the Company's favour on all
counts during the year. The Chase Manhattan Bank has appealed against the
decision in the Company's favour. That appeal is still pending. The Company has
received legal advice that such appeal stands no realistic prospect of success.
Full provision has been made in respect of the anticipated legal costs which may
be incurred in relation to the Chase Manhattan case, and for the other three
remaining property claims.
59
<PAGE> 64
29 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
The Group's accounts are prepared in conformity with generally accepted
accounting principles applicable in the United Kingdom (UK GAAP), which differ
in certain significant respects from those applicable in the United States (US
GAAP). These differences, together with the approximate effects of the
adjustments on net profit and shareholders' funds, relate principally to the
items set out below:
GOODWILL AND OTHER INTANGIBLE ASSETS
Under UK GAAP goodwill arising on acquisition is charged to reserves. Under US
GAAP goodwill is capitalised and amortised by charges against income over the
period, not to exceed 40 years, over which the benefit arises. For US GAAP,
goodwill has been amortised by the Group over periods not exceeding 40 years.
Under UK GAAP the profit and loss on the disposal of all or part of a previously
acquired business is calculated after taking account of the gross amount of any
goodwill previously charged to reserves. Under US GAAP an adjustment to profit
or loss on disposal is required in respect of goodwill previously amortised.
Under UK GAAP patents acquired as part of the acquisition of a company are
written off to reserves as part of goodwill. US GAAP requires patents to be
capitalised and amortised by charges against income over the period to expiring
of the patent.
US GAAP requires direct costs, such as legal fees and filing fees, to be
capitalised in respect of internally developed intangibles.
DIVIDENDS
Under UK GAAP dividends proposed after the end of an accounting period in
respect of that accounting period are deducted in arriving at retained earnings
for that period. Under US GAAP such dividends are not deducted until formally
approved.
DEFERRED TAXATION
Under UK GAAP provision is made for deferred taxation only to the extent that it
is probable that an actual liability or asset will crystallise in the
foreseeable future. US GAAP requires full provision for deferred income taxes
under the liability method on all temporary differences and, if required, a
valuation allowance is established to reduce gross deferred taxation assets to
the amount which is likely to be realised.
Deferred taxation also arises in relation to the tax effect of other US GAAP
differences.
PENSION COSTS
Under UK GAAP, the cost of providing pensions and post employment benefits is
charged against profits on a systematic basis, with pension surpluses and
deficits being amortised over the expected remaining service lives of current
employees. Under US GAAP, costs and surpluses are similarly spread over the
expected remaining service lives but based on prescribed actuarial assumptions,
allocation of costs and valuation methods, which differ in certain respects from
those used for UK GAAP.
DERIVATIVES
Under UK GAAP only the accrued interest to the balance sheet date is carried on
the consolidated balance sheet. Under US GAAP, where the swaps do not meet
specific hedging criteria the swap must be carried on the consolidated balance
sheet at fair value with the related gains or losses recorded in income.
60
<PAGE> 65
ASBESTOS PROVISION
Under UK GAAP an element of asbestos provision has been discounted to reflect
the long term nature of this environmental provision. Under US GAAP, such
environmental provisions are not generally discounted.
IMPAIRMENT OF LONG LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Group, for US GAAP purposes, has adopted the provision of SFAS No. 121,
Accounting for The Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognised is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
RESTRUCTURING COSTS
Under US GAAP the Group recognises a liability for restructuring costs and
charges the Group's profit and loss account in the period in which the decision
has been made to restructure a part of the business. Under US GAAP, certain
types of restructuring costs are only recognised when further specific criteria
have been met. Among these criteria is the requirement that all significant
actions arising from a restructuring and integration plan and their completion
dates must be identified by the balance sheet date. These criteria also apply to
the recognition of integration costs considered liabilities on acquisition.
CAPITALISATION OF INTEREST
Under UK GAAP the capitalisation of interest is not required. US GAAP requires
that gross interest should be capitalised on all qualifying assets during the
time required to prepare them for their intended use.
SHARE OPTION SCHEMES
Under UK GAAP the Group does not recognise any compensation cost for share
options granted to directors and employees. US GAAP requires compensation cost
to be recorded, over the vesting period, for the excess of the market value of
the underlying shares, at the date of granting of the options, over the exercise
price of the options.
REVALUATION OF FIXED ASSETS
Under UK GAAP the Group has revalued certain fixed assets. This is not permitted
under US GAAP.
CARRYING VALUE OF INVESTMENTS
Under UK GAAP the Group has during 1997 reversed certain provisions in respect
of fixed asset investments held at the balance sheet date. Under US GAAP these
provisions would not be reversed on the basis that they related to impairments
which were other than temporary in nature.
DISCONTINUED OPERATIONS
UK and US GAAP have different criteria for determining discontinued operations.
Under UK GAAP, certain disposals in 1996 and 1997 have been treated as
discontinued operations. Under US GAAP, the only disposal in 1996 and 1997
treated as discontinued operations was the disposal of the Construction
Materials business in 1996.
CURRENT ASSETS AND LIABILITIES
Under UK GAAP current assets include amounts which fall due after more than one
year. Under US GAAP such assets would be reclassified as non-current assets.
Also under UK GAAP provisions for liabilities and charges include amounts due
within one year which would be reclassified to current liabilities under US
GAAP.
61
<PAGE> 66
ASSOCIATED UNDERTAKINGS
The Group' share of the results of associated undertakings, excluding interest
and taxation, have been disclosed within the UK Group financial statements as
part of operating results. The net interest in respect of associated
undertakings is included, and separately disclosed, within `net interest payable
and similar charges; The tax attributable to the Group's share of the results of
associated undertakings is included within the Group tax charge.
Under US GAAP, the Group's share of the results of associated undertakings would
be disclosed, net of interest and tax, below the operating result of the Group.
CAPITAL GRANTS
Under UK GAAP capital grants not yet released to the profit and loss account are
held as deferred income within creditors due within one year and due after more
than one year. Under US GAAP such capital grants are netted off against the
carrying value of the fixed assets to which they relate.
CASH FLOWS
The principal difference between UK GAAP and US GAAP is in respect of
classification. Under UK GAAP, the Group presents its cash flows for operating
activities, returns on investments and servicing of finance, taxation, capital
expenditures and financial investments, acquisition and disposals, equity
dividends paid, management of liquid resources, and financing. US GAAP requires
only three categories of cash flow activities which are operating, investing and
financing.
Cash flows arising from taxation and returns on investments and servicing of
finance under UK GAAP would, with the exception of dividends paid, be included
as operating activities under US GAAP; dividend payments would be included as a
financing activity under US GAAP. In addition, capital expenditures and
financial investment, acquisition and disposals, and management of liquid
resources under UK GAAP would be presented as investing activities under US
GAAP.
UK GAAP defines cash as cash in hand and deposits repayable on demand. Short
term deposits which are readily convertible into cash into known amounts of cash
at, or close to, their carrying value are classified as liquid resources. US
GAAP defines cash and cash equivalents as cash in hand and short term highly
liquid investments with original maturities of three months or less. Cash flows
in respect of short term deposits with original maturities exceeding three
months are included in investing activities under US GAAP and are included in
capital expenditure and financial investment under UK GAAP.
Under US GAAP, the following amounts would be reported:
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Net cash provided by operating activities 163.4 73.7
Net cash used in investing activities (70.9) (135.1)
Net cash provided by/(used in) financing activities (71.9) 56.7
Effect of changes in exchange rate (4.1) (5.6)
----- -----
Net increase/(decrease) in cash and cash equivalents 16.5 (10.3)
Cash and cash equivalents at beginning of year 114.8 131.3
----- -----
Cash and cash equivalents at end of year 131.3 121.0
===== =====
</TABLE>
62
<PAGE> 67
Effect on profit/(loss) attributable to shareholders of differences between UK
and US GAAP
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Profit/(loss) attributable to shareholders as reported under UK GAAP 122.4 (400.8)
US GAAP adjustments:
Goodwill (6.8) (3.4)
Amortisation of patents (1.6) (1.6)
Deferred taxation - full provision (40.8) 101.2
Tax effect of other US GAAP 1.8 77.7
reconciling items
Pension costs (7.0) (15.1)
Asbestos provision (0.5) (227.0)
Fixed asset revaluations 5.8 6.2
Carrying value of investments (19.2) -
Other 1.3 1.3
Minority interests (0.5) (0.7)
------------ --------
Net income/(loss) under US GAAP 54.9 (462.2)
=========== =========
Basic and diluted earnings per 40p (1996:(pound sterling)1) share under US GAAP
.10 (0.87)
=========== =========
</TABLE>
63
<PAGE> 68
The after-tax net loss under US GAAP for 1996 comprises income from discontinued
operations of(pound sterling)3.6 million (per share(pound sterling)0.01) and
loss from continuing operations of(pound sterling)465.8 million (per share(pound
sterling)0.87).
Effect on shareholders' funds of differences between UK and US GAAP
<TABLE>
<CAPTION>
1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Shareholders' funds as reported under UK GAAP 191.4 118.3
US GAAP adjustments:
Goodwill 208.0 207.0
Amortisation of patents 9.2 10.7
Deferred taxation - full provision 64.5 100.8
Tax effect of other US GAAP reconciling items 85.6 83.5
Pension costs (11.0) (4.0)
Asbestos provision (230.5) (227.0)
Fixed asset revaluations (14.2) (21.6)
Carrying value of investments (19.2) -
Other (0.1) (1.4)
Minority interests (0.1) 0.4
------- -------
Shareholders' funds under US GAAP 283.6 266.7
======= =======
</TABLE>
Under US GAAP the gross value of goodwill, prior to amortisation, at 31 December
1997 was (pound sterling)254.6 million (1996: (pound sterling)248.3 million).
NEW US ACCOUNTING STANDARDS AND PRONOUNCEMENTS NOT YET ADOPTED
SFAS No. 131 - Disclosure about segments of an Enterprise and Related
Information: SFAS No. 131 was issued in June 1997 and is effective for fiscal
years beginning after 15 December 1997. In the initial year of application,
comparative information for earlier years is to be restated. It requires that
companies disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance. It also
requires entity wide disclosures about the products and services and entity
provides, the material countries in which it holds assets and reports revenues
and its major customers.
NEW UK ACCOUNTING STANDARDS NOT YET ADOPTED
FRS 9 - Associates and Joint Ventures: In December 1997, the Accounting
Standards Board in the United Kingdom issued Financial Reporting Standard No. 9
"Associates and Joint Ventures" (FRS 9). FRS 9 sets out the definitions and
accounting treatments for associated companies, joint ventures and joint
arrangements. It requires the Group's share of results of associated companies
to be analysed between operating income, interest, exceptional items and
taxation. Previously the Group's share of associated companies income before tax
was included in the consolidated statement of income on a single line. FRS 9
requires the sales of joint ventures to be separately disclosed, though the
underlying accounting is the same as for associated companies. FRS 9 is
effective for accounting periods ending on or after 23 June 1998.
FRS 10 - Goodwill and Intangible Assets: In December 1997, the Accounting
Standard Board in the United Kingdom issued Financial Reporting Standard No. 10
"Goodwill and Intangible Assets" (FRS 10). FRS 10 requires that purchased
goodwill and intangible assets should be capitalised as assets and amortised
over the life of the assets. Goodwill and intangible assets need not be
amortised if it can be demonstrated that the current market value of the
goodwill or intangible is not below its carrying value. FRS 10 is effective for
accounting periods ending on or after 23 December 1998. The standard does not
require reinstatement of goodwill previously eliminated against retained
surplus.
64
<PAGE> 69
COMPANIES ACT 1985
These consolidated financial statements do not constitute "statutory accounts"
within the meaning of the Companies Act 1985 of Great Britain for any of the
periods presented. Statutory accounts for the year ended 31 December 1996 have
been filed with the United Kingdom's Registrar of Companies and statutory
accounts for the year ended 31 December 1997 will be filed with the United
Kingdom's Registrar of Companies. The auditor has reported on these accounts.
The reports were unqualified and did not contain statements under Section 237
(2) or (3) of the Act.
These consolidated financial statements exclude certain parent company
statements and other information required by the Companies Act 1985, however,
they include all material disclosures required by generally accepted accounting
principles in the United Kingdom including those Companies Act 1985 disclosures
relating to the statement of income and balance sheet items.
65
<PAGE> 70
Item 7(b) Unaudited Pro Forma Financial Information
As previously reported in the Company's Form 8-K filed March 11, 1998, the
Company completed the acquisition of Fel-Pro, Incorporated and certain
affiliated entities (Fel-Pro) for $716.8 million on February 24, 1998. Fel-Pro
is a leading manufacturer of gaskets and seals headquartered in Skokie,
Illinois. The acquisition has been accounted for using the purchase method of
accounting. The purchase price consists of 1,030,325.6 shares of newly issued
Series E Mandatory Exchangeable Preferred Stock (exchangeable into 5,151,628
shares of common stock) with an imputed value of $225 million and $491.8
million in cash. The cash was provided through an existing revolving credit
facility provided by a syndicate led by The Chase Manhattan Bank and three
short-term loans, each in the amount of $50 million, from The Chase Manhattan
Bank, ABN Amro Bank NV and First Chicago NBD Bank, respectively.
Also, as previously reported in the Company's Form 8-K filed March 23, 1998, the
Company completed its cash offer announced October 16, 1997 to acquire all the
outstanding common stock of T&N plc (T&N) for 260 pence per share on March 6,
1998. T&N, based in Manchester, England, manufactures and supplies high
technology engineered automotive components and industrial materials including
pistons, piston rings, friction products, bearings, composites, camshafts and
sealing products. The acquisition has been accounted for using the purchase
method of accounting. The purchase price of approximately $2,434.2 million was
funded primarily through a $2.75 billion floating rate Senior Credit Agreement
(consisting of a $2.35 billion term loan facility, $1.8 billion of which was
drawn down, and a $400 million revolving loan facility) and a $500 million
floating rate Senior Subordinated Credit Agreement (the full amount of which was
drawn down), each from a syndicate led by The Chase Manhattan Bank. These credit
facilities also refinanced the borrowings used to finance the cash portion of
the purchase price for Fel-Pro. Additional funds for the acquisition of T&N were
obtained through the December 1997 sale of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company. The Company intends to put into
place a permanent capital structure with an appropriate combination of debt and
equity which will partially replace the Senior Credit Agreement and Senior
Subordinated Credit Agreement debt.
The estimated cost of the acquisitions of Fel-Pro and T&N are computed as
follows:
<TABLE>
<CAPTION>
(in millions)
Fel-Pro T&N
------------------ ----------------
<S> <C> <C>
Cash $491.8 $2,434.2
Series E Mandatory Exchangeable Preferred Stock 225.0 -
Expected proceeds from exercisable options - (52.6)
Direct transaction costs .9 29.3
------------------ ----------------
Estimated acquisition cost $717.7 $2,410.9
================== ================
</TABLE>
66
<PAGE> 71
The pro forma preliminary allocations of the purchase price of the acquisitions
of Fel-Pro and T&N are expected to be as follows:
<TABLE>
<CAPTION>
(in millions)
Fel-Pro T&N
------------------ ----------------
<S> <C> <C>
Current assets $ 173.1 $ 1,087.6
Liabilities assumed* (133.1) (3,143.9)
Property, plant and equipment 110.2 1,055.4
Identifiable intangible assets 16.7 315.7
Other noncurrent assets 31.4 525.9
Purchased research and development - 18.6
Goodwill 519.4 1,990.7
Estimated fair value of Bearings Business (see below) - 560.9
------- --------
Total $ 717.7 $2,410.9
======= ========
</TABLE>
* Includes an increase of $329 million ot adjust the acquired asbestos liability
to estimated fair value and an increase of $124 million to adjust the acquired
income tax liability in relation to the anticipated gain on the sale of the
Bearings Business.
In connection with securing regulatory approvals for the acquisition of T&N, the
Company executed an Agreement Containing Consent Order with the Federal Trade
Commission on February 27, 1998. Pursuant to this agreement the Company must
divest of certain assets of T&N within eight months from the date of the
consent order and must provide for independent management of those assets
pending such divestiture. The assets to be divested consist principally of T&N's
thinwall and dry bearings (polymer bearings) operations (the Bearings
Business). The agreement stipulates that the Bearings Business is to be
maintained as a viable, independent competitor of the Company and that the
Company shall not attempt to direct the activities of, or exercise control over,
the Bearings Business or have contact with the Bearings Business outside of
normal business activities.
The Company has separately identified the estimated effect of the divestiture
of the Bearings Business in the unaudited pro forma statement of operations and
balance sheet. The estimated net cash flows from operations of the Bearings
Business from March 6, 1998 to the date of sale, the interest expense on debt
incurred during this period and the proceeds from the sale will be accounted for
as adjustments to the purchase price of T&N. Proceeds are estimated to be
between $500 and $650 million, calculated using multiples of earnings similar
to recent automotive industry transactions. An amount within the low end of this
range has been used in the pro forma financial information. There can be no
assurance that the actual proceeds received from the disposition will fall
within the estimated range.
67
<PAGE> 72
The unaudited pro forma statement of operations for the year ended December 31,
1997 has been prepared to illustrate the effect of the acquisitions of T&N and
Fel-Pro as if they had occurred on January 1, 1997. The unaudited pro forma
statement of operations includes only the results of ongoing operations and
excludes such impacts as extraordinary items, one-time items relating to the
acquisitions and synergies and expected cost savings associated with the
integration of the acquisitions. The unaudited pro forma balance sheet as of
December 31, 1997 has been prepared to illustrate the effect of the acquisitions
of T&N and Fel-Pro as if they had occurred on that date.
The unaudited pro forma financial information gives effect to the acquisition
transactions using the purchase method of accounting. The pro forma adjustments
are described in the accompanying notes to the unaudited pro forma financial
information and are based upon preliminary available information and upon
certain assumptions made by management. Accordingly, the pro forma adjustments
reflected in the unaudited pro forma financial information are preliminary and
subject to revision. Such revision could be material.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which may occur in the future or that would have occurred
had the acquisitions of T&N and Fel-Pro been consummated on the dates indicated,
nor are they necessarily indicative of the Company's future results of
operations or financial position. The unaudited pro forma financial information
should be read in conjunction with the audited consolidated financial statements
of the Company, as well as the audited financial statements of the acquired
companies.
68
<PAGE> 73
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DISPOSITION
FEDERAL- OF
MOGUL T&N FEL-PRO BEARINGS
HISTORICAL HISTORICAL HISTORICAL BUSINESS
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 1,806.6 $ 2,948.4 $ 489.3 $ (393.1) (a)
Cost of products sold 1,381.8 2,187.6 268.5 (295.4) (a)
------------ ------------ ------------ -------------
Gross margin 424.8 760.8 220.8 (97.7)
Selling general and administrative expenses 286.2 500.3 173.8 (46.1) (a)
Restructuring charges (credits) (1.1) - - -
Reengineering and other related charges (benefits) (1.6) - - -
Adjustment of assets held for sale to fair value 2.4 - - -
Interest expense 32.0 60.5 - (16.9) (a)
Interest income (7.1) (17.9) - 2.3 (a)
International currency exchange losses 0.6 4.4 - (0.3) (a)
British pound currency option, net 10.5 - - -
Gain on sale of Kolbenschmidt AG share purchase options - (21.7) - -
Other (income) expense, net 3.4 (14.5) - (1.3) (a)
------------ ------------ ------------ -------------
Earnings before income taxes, extraordinary item
and nonrecurring charges 99.5 249.7 47.0 (35.4)
Income tax expense (benefit) 27.5 159.3 25.5 (9.4) (a)
------------ ------------ ------------ -------------
Net earnings (loss) before extraordinary item
and nonrecurring charges $ 72.0 $ 90.4 $ 21.5 $ (26.0)
============ ============ ============ =============
Earnings (loss) per common share:
Basic $ 1.81
Diluted $ 1.67
Weighted average shares outstanding (thousands):
Basic 36,647
============
Diluted 41,854
============
<CAPTION>
T&N FEL-PRO
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS COMBINED
---------------- ---------------- --------------
<S> <C> <C> <C>
Sales $ (15.3) (b) $ (11.9) (i) $ 4,824.0
Cost of products sold (0.9) (c) (6.9) (j) 3,534.7
----------- ------------- ------------
Gross margin (14.4) (5.0) 1,289.3
Selling general and administrative expenses 58.9 (d) 13.0 (k) 986.1
Restructuring charges (credits) - - (1.1)
Reengineering and other related charges (benefits) - - (1.6)
Adjustment of assets held for sale to fair value - - 2.4
Interest expense 148.5 (e) 38.2 (l) 262.3
Interest income 13.7 (f) - (9.0)
International currency exchange losses - - 4.7
British pound currency option, net - - 10.5
Gain on sale of Kolbenschmidt AG share purchase options - - (21.7)
Other (income) expense, net 36.9 (g) - 24.5
----------- ------------- ------------
Earnings before income taxes, extraordinary item
and nonrecurring charges (272.4) (56.2) 32.2
Income tax expense (benefit) (85.2) (h) (24.2) (m) 93.5
----------- ------------- ------------
Net earnings (loss) before extraordinary item
and nonrecurring charges $ (187.2) $ (32.0) $ (61.3)
=========== ============= ============
Earnings (loss) per common share:
Basic $ (2.16)
Diluted $ (2.16)
Weighted average shares outstanding (thousands):
Basic 36,647
============
Diluted 47,006
============
</TABLE>
See accompanying notes to Unaudited Pro Forma Statement of Operations.
69
<PAGE> 74
Notes to the Unaudited Pro Forma Statement of Operations
(in millions unless otherwise noted)
Relating to the divestiture of the Bearings Business:
(a) To eliminate the historical statement of operations of the Bearings
Business.
Relating to the purchase of T&N:
(b) To eliminate intercompany sales between the Company and T&N.
70
<PAGE> 75
Notes to the Unaudited Pro Forma Statement of Operations
(in millions unless otherwise noted)
(c) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Increase in depreciation expense relating to the adjustment of
property, plant and equipment acquired to estimated fair
value (to be depreciated over an average period of 14 years) $ 5.4
Elimination of intercompany cost of products sold between the Company and T&N (15.3)
Elimination of profit in ending inventory on intercompany sales between the
Company and T&N 0.8
Increase in pension expense - elimination of amortization of deferred gain 8.7
Decrease in postretirement benefits expense - elimination of amortization of
deferred loss (0.5)
-------
$ (0.9)
=======
</TABLE>
(d) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Amortization of additional goodwill resulting from the purchase of T&N
(to be amortized over a period of 40 years) $ 43.0
Amortization of other identifiable intangible assets acquired to
estimated fair value (to be amortized over periods from 10 to 24
years) 15.9
-------
$ 58.9
=======
</TABLE>
(e) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Increase in interest expense relating to the net debt incurred for the net
purchase of T&N (see unaudited pro forma balance sheet footnote 1) $ 148.2
Reduction in historical interest expense of T&N relating to the elimination
of historical outstanding debt (23.4)
Amortization of debt issuance costs (to be amortized over a period
of 12 to 96 months) 23.7
-------
$ 148.5
=======
</TABLE>
(f) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Reduction in interest income as a result of the use of existing cash balances
of the Company to finance a portion of the T&N transaction $ 2.2
Reduction in interest income as a result of the use of existing
cash balances of T&N 11.5
-------
$ 13.7
=======
</TABLE>
(g) To record an additional eleven months of minority interest-preferred
securities of affiliates expense.
(h) To record the income tax effects of the statement of operations
adjustments.
Relating to the purchase of Fel-Pro:
(i) To eliminate intercompany sales between the Company and Fel-Pro
71
<PAGE> 76
Notes to the Unaudited Pro Forma Statement of Operations
(in millions unless otherwise noted)
(j) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Increase in depreciation expense relating to the adjustment of property,
plant and equipment acquired to estimated fair value (to be depreciated
over an average period of 10 years) $ 3.0
Elimination of intercompany cost of products sold between the Company and
Fel-Pro (11.9)
Elimination of profit in ending inventory on intercompany sales between the
Company and Fel-Pro 0.6
Increase in postretirement benefits expense - elimination of amortization of 1.4
deferred loss --------
$ (6.9)
========
</TABLE>
(k) To record the amortization of goodwill resulting from the purchase of
Fel-Pro (to be amortized over a period of 40 years)
(l) To record interest expense relating to the debt incurred for the purchase
of Fel-Pro
(m) To record the income tax effects of the statement of operations
adjustments
The unaudited pro forma statement of operations discloses the income (loss) from
continuing operations before nonrecurring charges directly attributable to the
transactions. The following nonrecurring charges were not considered in the
unaudited pro forma statement of operations:
<TABLE>
<S> <C>
Penalty for early retirement of private placement debt of T&N $25.0
Estimated purchased research and development costs 18.6
Adjustment of inventory to estimated fair value 4.0
-----
$54.6
=====
</TABLE>
<TABLE>
<S> <C>
Loss per share as calculated for the pro forma combined entity:
Net earnings before extraordinary item and non-recurring charges $ (61.3)
Less: Series C preferred dividend requirement (2.4)
Less: Series D preferred dividend requirement (3.1)
Less: Series E preferred dividend requirement (12.3)
-------
Net earnings available to common shareholders before extraordinary
item and non-recurring charges $ (79.1)
=======
Weighted average common shares outstanding 36,647
=======
Loss per share - basic and diluted $ (2.16)
=======
</TABLE>
72
<PAGE> 77
Unaudited Pro Forma Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
FEDERAL- T&N
MOGUL T&N FEL-PRO PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
-------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Cash and equivalents $ 541.4 $ 319.2 $ - $ (765.3) (1)
Accounts receivable 158.9 458.8 83.4 (2.6) (2)
Investment in accounts receivable securitization 48.7 - - -
Inventories 277.0 365.1 61.0 10.2 (3)
Prepaid expenses and income tax benefits 113.2 58.2 4.7 10.7 (4)
--------- --------- ------- ---------
Total current assets 1,139.2 1,201.3 149.1 (747.0)
Property, plant and equipment 313.9 1,089.5 80.6 75.4 (5)
Goodwill 143.8 342.2 - 1,715.0 (6)
Other intangible assets 48.4 17.9 16.7 297.8 (7)
Business investments and other assets 156.8 469.2 23.7 161.5 (8)
--------- --------- ------- ---------
Total Assets $ 1,802.1 $ 3,120.1 $ 270.1 $ 1,502.7
========= ========= ======= =========
Short-term debt $ 28.6 $ 125.4 $ - $ -
Accounts payable 102.3 326.3 22.7 (2.6) (2)
Accrued compensation 36.8 57.6 24.1 -
Accrued customer incentives 22.4 - 10.5 -
Restructuring reserves 31.5 - - 150.0 (9)
Current portion of asbestos liability - 101.3 - -
Other accrued liabilities 108.0 305.3 19.4 -
--------- --------- ------- ---------
Total current liabilities 329.6 915.9 76.7 147.4
Long-term debt 273.1 469.5 - 1,220.4 (1)
Postemployment benefits 190.9 223.7 46.8 6.4 (10)
Noncurrent portion of asbestos liability - 948.7 329.0 (11)
Other accrued liabilities 64.2 53.8 6.6 53.7 (12)
--------- --------- ------- ---------
Total liabilities 857.8 2,611.6 130.1 1,756.9
Minority interest-preferred securities of affiliates 575.0 - - -
Minority interest, other - 42.0 - -
Series C ESOP preferred stock 49.0 - - -
Series E preferred stock - -
Common stock 201.0 361.1 - (361.1) (13)
Additional paid-in capital 332.6 4.4 - (4.4) (13)
Retained earnings (Accumulated deficit),
currency translation and other (191.5) 101.0 140.0 111.3 (14)
Unearned ESOP compensation (21.8) - - -
- -
--------- --------- ------- ---------
Total equity 369.3 466.5 140.0 (254.2)
--------- --------- ------- ---------
$ 1,802.1 $ 3,120.1 $ 270.1 $ 1,502.7
========= ========= ======= =========
<CAPTION>
FEL-PRO DISPOSITION
PRO FORMA OF BEARINGS PRO FORMA
ADJUSTMENTS BUSINESS COMBINED
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash and equivalents $ (0.9) (15) $ (38.0) (28) $ 56.4
Accounts receivable (4.2) (16) (49.4) (28) 645.0
Investment in accounts receivable securitization - - 48.7
Inventories 23.4 (17) (42.3) (28) 694.4
Prepaid expenses and income tax benefits 2.2 (18) (5.8) (28) 183.1
------- -------- ---------
Total current assets 20.5 (135.5) 1,627.6
Property, plant and equipment 29.6 (19) (109.4) (28) 1,479.6
Goodwill 519.4 (20) (66.8) (28) 2,653.6
Other intangible assets - - 380.8
Business investments and other assets 7.7 (21) (74.9) (28) 744.0
------- -------- ---------
Total Assets $ 577.2 $ (386.6) $ 6,885.6
======= ======== =========
Short-term debt $ - $ (0.5) (28) $ 153.5
Accounts payable (2.0) (22) (38.5) (28) 408.2
Accrued compensation - (10.9) (28) 107.6
Accrued customer incentives - - 32.9
Restructuring reserves 15.0 (23) - 196.5
Current portion of asbestos liability - - 101.3
Other accrued liabilities - (22.0) (28) 410.7
------- -------- ---------
Total current liabilities 13.0 (71.9) 1,410.7
Long-term debt 491.8 (15) (2.1) (28) 2,452.7
Postemployment benefits (18.0) (24) (12.3) (28) 437.5
Noncurrent portion of asbestos liability - - 1,277.7
Other accrued liabilities 6.0 (25) (43.5) (28) 140.8
------- -------- ---------
Total liabilities 492.8 (129.8) 5,719.4
Minority interest-preferred securities of affiliates - - 575.0
Minority interest, other - - 42.0
Series C ESOP preferred stock - - 49.0
Series E preferred stock 225.0 (26) 225.0
Common stock - - 201.0
Additional paid-in capital - - 332.6
Retained earnings (Accumulated deficit),
currency translation and other (140.6) (27) (256.8) (236.6)
Unearned ESOP compensation - - (21.8)
-
------- -------- ---------
Total equity 84.4 (256.8) 549.2
------- -------- ---------
$ 577.2 $ (386.6) $ 6,885.6
======= ======== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Balance Sheet.
73
<PAGE> 78
Notes to the Unaudited Pro Forma Balance Sheet
(in millions unless otherwise noted)
Relating to the purchase of T&N:
(1) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
Cash Debt
------------- -------------
<S> <C> <C>
Proceeds from the issuance of debt $ 2,300.0 $2,300.0
Acquisition of T&N shares (2,434.2) -
Payoff of existing T&N debt (469.5) (469.5)
Cash used from T&N asbestos fund to pay down debt (130.0) (130.0)
Proceeds from the exercise of T&N stock options
at close 52.6 -
Estimated proceeds from sale of the Bearings Business 560.9 -
Pay down debt and other liabilities using proceeds from sale
of the Bearings Business (560.9) (436.6)
Proceeds from sale of KolbenSchmidt AG share
purchase options 43.5 -
Pay down debt using proceeds from sale of Kolben Schmidt AG
share purchase options (43.5) (43.5)
Debt issuance costs (32.2)
-
Other fees (27.0)
-
Penalty for early retirement of private placement debt
of T&N (25.0)
-
========= ========
$ (765.3) $1,220.4
========= ========
</TABLE>
(2) To eliminate intercompany accounts receivable and accounts payable
between the Company and T&N
(3) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
<S> <C>
Adjustment of inventories acquired to estimated fair value $11.0
Elimination of intercompany profit in ending inventory (0.8)
-----
$10.2
=====
</TABLE>
(4) To record the current deferred income tax effects of the balance sheet
adjustments
(5) To adjust property, plant and equipment acquired to estimated fair
value
(6) To record estimated acquired goodwill as the excess of the preliminary
purchase price paid and estimated costs incurred relating to the
acquisition over the estimated fair value of identifiable net assets
acquired
(7) To adjust other identifiable intangible assets acquired to estimated
fair value
(8) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Adjustment of pension assets acquired to estimated fair value $ 131.6
Debt issuance costs 32.2
Other (2.3)
------
$161.5
======
</TABLE>
(9) To provide for estimated severance and exit costs relating to T&N
74
<PAGE> 79
Notes to the Unaudited Pro Forma Balance Sheet
(in millions unless otherwise noted)
(10) To adjust postemployment benefit liabilities acquired to estimated
fair value
(11) To record estimated fair value of the acquired asbestos liability
(12) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
<S> <C>
Estimated fair value of reserves for returns, allowances and environmental $ 41.3
Adjustment of the noncurrent deferred income tax asset for pro forma balance sheet
adjustments 12.4
-------
$ 53.7
=======
</TABLE>
(13) To eliminate the historical common stock and additional paid in capital
of T&N
(14) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of historical retained earnings of T&N, net of the Bearings Business $ 155.6
Penalty for early retirement of private placement debt of T&N (25.0)
Estimated purchased research and development costs (18.6)
Elimation of the profit in ending inventory on intercompany sales between
the Company and T&N (0.7)
-------
$ 111.3
=======
</TABLE>
Relating to the purchase of Fel-Pro:
(15) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
Cash Debt
------------- -------------
<S> <C> <C>
Proceeds from the issuance of debt $491.8 $491.8
Acquisition of Fel-Pro (491.8) -
Other fees (.9) -
====== ======
$ (.9) $491.8
====== ======
</TABLE>
(16) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of intercompany accounts receivable $(2.0)
Increase in allowance for doubtful accounts (2.2)
-----
$(4.2)
=====
</TABLE>
(17) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Adjustment of inventories acquired to estimated fair value $24.0
Elimination of intercompany profit in ending inventory (0.6)
-----
$23.4
=====
</TABLE>
(18) To record the current deferred income tax effects of the balance sheet
adjustments
(19) To adjust property, plant and equipment acquired to estimated fair
value
75
<PAGE> 80
Notes to the Unaudited Pro Forma Balance Sheet
(in millions unless otherwise noted)
(20) To record estimated acquired goodwill as the excess of the preliminary
purchase price paid and estimated costs incurred relating to the
acquisition over the estimated fair value of identifiable net assets
acquired
(21) To record the noncurrent deferred income tax effects of the balance
sheet adjustments
(22) To eliminate intercompany accounts payable between the Company and
Fel-Pro
(23) To provide for estimated severance and exit costs relating to Fel-Pro
(24) To adjust postemployment benefits acquired to estimated fair value
(25) To record the estimated fair value reserves for returns, allowances
and environmental
(26) To record the issuance of Series E Mandatory Exchangeable Preferred
Stock, exchangeable into common stock, to the former owners of Fel-Pro
(27) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of the historical equity of Fel-Pro $(140.0)
Elimination of intercompany profit in ending inventory (.6)
-------
$(140.6)
=======
</TABLE>
Relating to the divestiture of the Bearings Business:
(28) To eliminate the historical balance sheet of the Bearings Business.
The estimated effects of the sale of the Bearings Business are located
in the T&N pro forma adjustments.
76
<PAGE> 81
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit Plc
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Form S-8 Registration Statement
No. 333-38961, effective October 29, 1997, Form S-3 Registration Statement No.
33-55135, effective September 2, 1994, Form S-3 Registration Statement No.
33-54717, effective August 5, 1994, Form S-3 Registration Statement No.
33-54301, effective June 24, 1994, Form S-3 Registration Statement No. 33-51265,
effective January 13, 1994, Form S-8 Registration Statement No. 33-51403,
effective December 10, 1993, Form S-8 Registration Statement No. 33-32429,
effective December 31, 1989, Form S-8 Registration Statement No. 33-32323,
effective December 22, 1989, Form S-8 Registration Statement No. 33-30172,
effective August 21, 1989, and Form S-8 Registration Statement No. 2-93179,
effective October 1, 1984, of our report dated February 13, 1998, with respect
to the financial statements of The Operating Businesses of the Fel-Pro Group
included in Federal Mogul Corporation's Form 8-K/A dated April 6, 1998.
/s/ Ernst & Young LLP
April 6, 1998
Chicago, Illinois
<PAGE> 1
EXHIBIT 23.2
[KPMG Audit Plc Letterhead]
The Directors
Federal-Mogul Corporation
World Headquarters Our ref rr/ss/560
26555 Northwestern Highway
Southfield
MICHIGAN 48034
7 April 1998
Dear Sirs
T&N PLC FINANCIAL STATEMENTS
We consent to the incorporation by reference in the registration statements
(33-55135, 33-54717, 33-54301 and 33-51265) on Form S-3 and the registration
statements (333-38961, 33-51403, 33-32429, 33-32323, 33-30172 and 2-93179) on
Form S-8 of Federal-Mogul Corporation of our report dated 17 February 1998,
with respect to the consolidated balance sheets of T&N plc and its subsidiaries
at 31 December 1997 and 31 December 1996, and the related consolidated profit
and loss accounts, reconciliations of movements in shareholders' funds and
consolidated cash flow statements for each of the years in the three-year period
ended 31 December 1997.
Yours sincerely
KPMG Audit Plc
KPMG Audit Plc
London, England
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