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Exhibit 2
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
ANY DOUBT AS TO THE ACTION YOU SHOULD TAKE, YOU ARE RECOMMENDED TO SEEK YOUR OWN
FINANCIAL ADVICE FROM YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR
OTHER INDEPENDENT FINANCIAL ADVISER, DULY AUTHORISED UNDER THE FINANCIAL
SERVICES ACT 1986, IMMEDIATELY.
If you have sold or otherwise transferred all your SGB Shares, please send this
document, the accompanying Form of Acceptance and the reply-paid envelope at
once to the purchaser or transferee, or to the stockbroker, bank or other agent
through or to whom the sale or transfer was effected for delivery to the
purchaser or transferee. HOWEVER, SUCH DOCUMENTS SHOULD NOT BE FORWARDED OR
TRANSMITTED IN OR INTO THE UNITED STATES, CANADA, JAPAN OR AUSTRALIA.
Lazard, which is regulated in the UK by the Securities and Futures Authority
Limited, is acting exclusively for Harsco and Harsco Investment and no one else
in connection with the Offer and will not be responsible to anyone other than
Harsco and Harsco Investment for providing the protections afforded to customers
of Lazard nor for providing advice in relation to the Offer or any other matter
referred to herein.
This document should be read in conjunction with the accompanying Form of
Acceptance.
CASH OFFER
BY
LAZARD
ON BEHALF OF
HARSCO INVESTMENT LIMITED
A WHOLLY OWNED UK SUBSIDIARY OF
HARSCO CORPORATION
FOR
SGB GROUP PLC
ACCEPTANCES SHOULD BE DESPATCHED AS SOON AS POSSIBLE AND, IN ANY EVENT, SO AS TO
BE RECEIVED BY POST OR BY HAND BY COMPUTERSHARE SERVICES PLC AT P.O. BOX 859,
THE PAVILIONS, BRIDGWATER ROAD, BRISTOL BS99 1XZ OR BY HAND ONLY DURING NORMAL
WORKING HOURS TO COMPUTERSHARE AT 7TH FLOOR, JUPITER HOUSE, TRITON COURT, 14
FINSBURY SQUARE, LONDON EC2A 1BR NOT LATER THAN 3.00 P.M. ON 10 JUNE 2000. THE
PROCEDURE FOR ACCEPTANCE OF THE OFFER IS SET OUT ON PAGES 6 TO 9 OF THIS
DOCUMENT AND IN THE ACCOMPANYING FORM OF ACCEPTANCE.
The Offer is not being made, directly or indirectly, in or into, or by use of
the mails or any means or instrumentality (including, without limitation,
facsimile transmission, telex or telephone) of interstate or foreign commerce
of, or any facilities of a national securities exchange of, the United States,
nor is it being made in Canada, Japan or Australia and the Offer should not be
accepted by any such use, means, instrumentality or facilities or from within
the United States, Canada, Japan or Australia. Doing so may render invalid any
purported acceptance. Accordingly, all persons (including nominees, trustees and
custodians) who would, or otherwise intend to, forward this document and the
accompanying Form of Acceptance must not distribute or send them in, into or
from the United States, Canada, Japan or Australia, and doing so may render
invalid any related purported acceptance of the Offer.
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
LETTER FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF HARSCO 3
LETTER FROM LAZARD 4
1. Introduction 4
2. Irrevocable Undertaking 4
3. The Offer 4
4. Information on Harsco 4
5. Information on SGB 5
6. Background to and Reasons for the Offer 6
7. Compulsory Acquisition and De-listing 6
8. Management and Employees 6
9. Further Details of the Offer 6
10. SGB Share Option Schemes 6
11. Procedure for Acceptance of the Offer 6
12. Settlement 9
13. United Kingdom Taxation 10
14. Further Information 10
15. Action to be taken 10
APPENDIX
I Conditions and further terms of the Offer 11
II Further Information on Harsco and Harsco Investment 28
III Further Information on SGB 64
IV Calculations and Sources of Information 87
V Additional Information 88
VI Definitions 92
</TABLE>
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[Harsco Corporation Letterhead]
20 May 2000
To SGB Shareholders and, for information only, to participants in the SGB Share
Option Schemes
Dear Shareholder,
CASH OFFER FOR SGB GROUP PLC
On 16 May 2000, Harsco announced the terms of a cash Offer for SGB Group PLC.
The Offer values the entire issued share capital of SGB at approximately pound
sterling188 million. Full details of the Offer are set out in the letter from
Lazard on pages 4 to 10 of this document.
Harsco is a diversified provider of industrial services and products to major
customers in strategic worldwide industries, including steel, gas and energy,
and infrastructure development. In the year ended 31 December 1999, Harsco had
sales of USD1,717 million (pound sterling1,133 million) and currently has a
market capitalisation of approximately US$1,146 million (pound sterling756
million). Our Patent Construction Systems business is a North American market
leader in access equipment and services. A combination with SGB, which also
holds a significant position in its geographic markets, would be capable of
serving major customers on a global basis.
We believe Harsco is capable of providing the best possible environment to
assist in the enhancement of SGB's business. Harsco looks forward to working
with SGB in building a strong, mutually beneficial future.
Prior to the announcement of the Offer, we were able to secure an irrevocable
undertaking to accept the Offer from Mowlem in respect of the 38,250,000 SGB
Shares held by it, representing 50.96 per cent. of SGB's issued share capital,
subject only to Mowlem shareholders' approval. Mowlem has also agreed to
recommend that Mowlem shareholders vote in favour of a resolution to approve
such acceptance at a forthcoming EGM of Mowlem.
We believe our Offer of 250p per SGB share in cash represents fair value for
your SGB Shares. It gives you, the SGB Shareholder:
- certain value now;
- a premium of 56.7 per cent. to the pre-announcement price;
- an exit multiple of 10.1 times earnings per share for the last financial
year.
Having reached agreement with Mowlem, we remain hopeful that the Board of SGB
will recommend this Offer, which we believe is in the interest of both
shareholders and employees.
WE STRONGLY URGE YOU TO ACCEPT OUR CASH OFFER AS SOON AS POSSIBLE AND, IN ANY
EVENT, BY NOT LATER THAN 3.00 P.M. ON 10 JUNE 2000.
Yours faithfully,
Derek Hathaway
Chairman and Chief Executive Officer
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[Lazard Letterhead]
20 May 2000
To SGB Shareholders and, for information only, to participants in the SGB Share
Option Schemes
Dear Shareholder,
CASH OFFER FOR SGB GROUP PLC
1. INTRODUCTION
Harsco announced on 16 May 2000 the terms of a cash Offer, to be made by Lazard
on behalf of Harsco Investment, a wholly-owned UK subsidiary of Harsco, to
acquire the whole of the issued and to be issued share capital of SGB.
The Offer is 250p in cash for each SGB Share, valuing the entire issued share
capital of SGB at approximately pound sterling188 million. Assuming the exercise
of all outstanding options, the Offer values SGB at approximately pound
sterling195.9 million.
ACCEPTANCES OF THE OFFER SHOULD BE RECEIVED AS SOON AS POSSIBLE AND IN ANY EVENT
NOT LATER THAN 3.00 P.M. ON 10 JUNE 2000.
The conditions and terms of the Offer are set out in Appendix I and in the Form
of Acceptance.
2. IRREVOCABLE UNDERTAKING
Harsco Investment has received an irrevocable undertaking to accept the Offer
from Mowlem, in respect of 38,250,000 SGB Shares (representing 50.96 per cent.
of SGB's issued share capital). This undertaking is subject only to Mowlem
obtaining its shareholders' approval and otherwise will lapse only in the event
of the Offer lapsing or being withdrawn.
3. THE OFFER
Lazard hereby offers to acquire, on behalf of Harsco Investment, on the terms
and conditions set out or referred to in this document and in the accompanying
Form of Acceptance, all of the SGB Shares on the following basis:
FOR EACH SGB SHARE 250P IN CASH.
The Offer represents a premium of 56.7 per cent. to the closing middle market
price of 159.5p per SGB Share on 15 May 2000, the last business day prior to the
announcement of the Offer.
The Offer value of 250p per SGB Share represents a multiple of 10.1 times SGB's
basic pre-exceptional earnings per share of 24.8p for the 12 months ended 31
December 1999.
This letter contains the formal Offer by Lazard, on behalf of Harsco Investment,
for your SGB Shares. The procedure for acceptance of the Offer is set out below
and detailed on the accompanying Form of Acceptance to which your attention is
drawn.
4. INFORMATION ON HARSCO
Harsco is a diversified provider of industrial services and products to major
customers in strategic worldwide industries, including steel, gas and energy,
and infrastructure development.
Harsco's operations are organised in three core business segments: (i) Mill
Services; (ii) Gas and Fluid Control; and (iii) Infrastructure. Harsco operates
out of more than 300 service, manufacturing, sales and distribution locations in
32 countries.
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The Mill Services Group is the world's leading provider of outsourced services
to the steel industry and other metal producers and is a leading manufacturer of
high quality industrial abrasives and roofing granules. For the year ended 31
December 1999, Mill Services accounted for approximately 42 per cent. of
Harsco's net sales.
The Gas and Fluid Control Group is the premier supplier of technology, products
and services to the global gas production and energy industries. Products
include gas containment products, gas control products, liquid petroleum gas
tanks, industrial pipe fittings and conduit pipe products and cylinders,
pressure vessels and structures for gas storage. It also provides
custom-designed and manufactured air-cooled heat exchangers. For the year ended
31 December 1999, Gas and Fluid Control accounted for approximately 33 per cent.
of Harsco's net sales.
The Infrastructure Group serves the worldwide railroad maintenance-of-way and
non-residential construction industries. Services include scaffolding, concrete
forming and shoring products, industrial grating products and highway bridge
decking. The Infrastructure Group also includes a manufacturer of water heaters
and boilers for commercial, institutional and industrial buildings and a
producer of blenders, dryers and mixers for the chemical and food processing
industries. For the year ended 31 December 1999, Infrastructure accounted for
approximately 25 per cent. of Harsco's net sales.
For the year ended 31 December 1999, Harsco had sales of US$1,717 million (pound
sterling1,133 million), net income from continuing operations of US$91 million
(pound sterling60 million) and basic earnings per share of US$2.22 (pound
sterling1.46). Total assets as at 31 December 1999 were US$1,660 million (pound
sterling1,095 million) with shareholders' equity of US$650 million (pound
sterling429 million).
Harsco is quoted on the New York, Pacific, Boston and Philadelphia stock
exchanges under the ticker symbol "HSC" and has a stock market capitalisation of
approximately US$1,146 million
(pound sterling756 million).
5. INFORMATION ON SGB
SGB is a holding company of a group of companies whose principal activities are
the manufacture, supply and hire of a wide range of access and access related
products and services. SGB's operations are organised as four business units:
SGB UK's operations, SGB International, SGB North Europe and SGB South Europe.
SGB UK's operations, the largest in the Group, comprise seven businesses:
Contracts, Branch Operations, Manufacturing, Rovacabin, Youngman, Powered Access
and Channel Islands. For the year ended 31 December 1999, SGB UK's operations
accounted for approximately 61 per cent. of SGB's consolidated sales (including
joint ventures).
SGB International includes SGB's U.S., Middle East, Far East and Eastern
European operations. For the year ended 31 December 1999, SGB International
accounted for approximately 16 per cent. of SGB's consolidated sales (including
joint ventures).
SGB North Europe covers Northern Europe including Austria, Denmark, Germany and
Holland but excluding the UK. The core activity of this division is the
provision of contract scaffolding services in oil and petrochemical plants. For
the year ended 31 December 1999, SGB North Europe accounted for approximately 16
per cent. of SGB's consolidated sales (including joint ventures).
SGB South Europe serves France and Belgium and for the year ended 31 December
1999, SGB South Europe accounted for approximately 7 per cent. of SGB's
consolidated sales (including joint ventures).
For the year ended 31 December 1999, SGB reported turnover (including joint
ventures) of pound sterling282.9 million, profit before taxation and exceptional
items of pound sterling26.6 million and basic earnings per SGB Share of 24.8p.
As at 31 December 1999, SGB reported net assets of pound sterling126.6 million.
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<PAGE> 6
6. BACKGROUND TO AND REASONS FOR THE OFFER
In recent years, Harsco has sought to transform itself into a diversified
provider of industrial services to global customers in the strategic industrial
sectors of steel, gas, energy and infrastructure development.
Harsco's Infrastructure Group has continued to benefit from the increasing trend
towards services outsourcing by its major customers, and has improved its market
penetration by building on its excellent record of safety, customer service and
innovation.
The Board of Harsco believes that the acquisition of SGB provides an excellent
opportunity to implement this strategy further by capitalising on the increasing
globalisation of the major markets it serves.
7. COMPULSORY ACQUISITION AND DE-LISTING
If sufficient acceptances are received and/or sufficient SGB Shares are
otherwise acquired, Harsco intends to apply the provisions of sections 428 to
430F of the Companies Act to acquire compulsorily any other outstanding SGB
Shares. After the Offer becomes or is declared unconditional in all respects,
Harsco intends to procure the making of an application by SGB for the
cancellation of the listing of the SGB Shares on the London Stock Exchange as
soon as practicable and in any event by the time outstanding SGB Shares are
acquired pursuant to the relevant provisions of the Companies Act referred to
above. It is anticipated that such cancellation will take effect no earlier than
20 business days after the Offer becomes or is declared unconditional in all
aspects.
8. MANAGEMENT AND EMPLOYEES
Harsco confirms that the existing employment rights, including pension rights,
of the employees of the SGB Group will be fully safeguarded.
9. FURTHER DETAILS OF THE OFFER
The SGB Shares will be acquired by Harsco Investment free from all liens,
equities, charges, encumbrances and other third party rights or interests and
together with all rights now or hereafter attaching thereto, including voting
rights and the right to receive and retain all dividends and other distributions
(if any) declared, made or paid after 15 May 2000.
The Offer is subject to the conditions and further terms set out in Appendix I
of this document and in the Form of Acceptance.
10. SGB SHARE OPTION SCHEMES
The Offer will extend to any SGB Shares unconditionally allotted or issued
whilst the Offer remains open for acceptance (or before such earlier date as the
Offeror may, subject to the City Code, determine, not (without the consent of
the Panel) being earlier than the date on which the Offer becomes unconditional
as to acceptances or, if later, the first closing date of the Offer), as a
result of the exercise of options granted under the SGB Share Option Schemes.
Harsco will make appropriate proposals to option holders under the SGB Share
Option Schemes in due course once the Offer becomes or is declared unconditional
in all respects.
11. PROCEDURE FOR ACCEPTANCE OF THE OFFER
THIS SECTION SHOULD BE READ TOGETHER WITH THE INSTRUCTIONS AND NOTES ON THE FORM
OF ACCEPTANCE.
(a) Completion of Form of Acceptance
You should note that if you hold SGB Shares in both certificated and
uncertificated form (that is, in CREST), you should complete a separate Form of
Acceptance for each holding. In addition, you should complete a separate Form of
Acceptance for SGB Shares held in uncertificated form, but under different
member account IDs, and for SGB Shares held in certificated form but under
different designations. If you hold SGB Shares in CREST you should also refer to
paragraphs (d) and (e) below. Additional Forms of Acceptance are available from
Computershare Services PLC, PO Box 859, The Pavilions, Bridgwater Road, Bristol
BS99 1XZ (telephone number: 0870 702 0100).
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To accept the Offer in respect of all or any of your SGB Shares, you must
complete Boxes 1 and 3 and, if appropriate, Boxes 5 and 6 and, if your SGB
Shares are in CREST, Box 4. In all cases you must sign Box 2 of the enclosed
Form of Acceptance IN THE PRESENCE OF A WITNESS, WHO SHOULD ALSO SIGN IN
ACCORDANCE WITH THE INSTRUCTIONS PRINTED THEREON.
IF YOU HAVE ANY QUESTIONS AS TO HOW TO COMPLETE THE FORM OF ACCEPTANCE, PLEASE
TELEPHONE COMPUTERSHARE (TELEPHONE NUMBER: 0870 702 0100).
(b) Return of Form of Acceptance
TO ACCEPT THE OFFER, THE COMPLETED FORM(S) OF ACCEPTANCE SHOULD BE RETURNED
WHETHER OR NOT YOUR SGB SHARES ARE IN CREST. THE COMPLETED FORM(S) OF ACCEPTANCE
SHOULD BE RETURNED BY POST TO COMPUTERSHARE SERVICES PLC, P.O. BOX 859, THE
PAVILIONS, BRIDGWATER ROAD, BRISTOL BS99 1XZ OR BY HAND TO COMPUTERSHARE
SERVICES PLC, 7TH FLOOR, JUPITER HOUSE, TRITON COURT, 14 FINSBURY SQUARE,
LONDON, EC2A 1BR, TOGETHER (SUBJECT TO PARAGRAPH (D) BELOW) WITH THE RELEVANT
SHARE CERTIFICATE(S) AND/OR OTHER DOCUMENT(S) OF TITLE AS SOON AS POSSIBLE BUT
IN ANY EVENT SO AS TO ARRIVE NO LATER THAN 3.00 P.M. ON 10 JUNE 2000. A
reply-paid envelope for use in the UK only is enclosed for your convenience. No
acknowledgement of the receipt of documents will be given by or on behalf of
Harsco Investment. The instructions printed on Forms of Acceptance are deemed to
form part of the terms of the Offer.
(c) Documents of title
If your SGB Shares are in certificated form, a completed and signed Form of
Acceptance should be accompanied by the relevant share certificate(s) and/or
other document(s) of title. If for any reason the relevant share certificate(s)
and/or the other document(s) of title is/are lost or not readily available, you
should nevertheless complete, sign and lodge the Form of Acceptance as stated
above so as to be received by Computershare, by no later than 3.00 p.m. on 10
June 2000. You should send, with the completed Form of Acceptance, any share
certificate(s) and/or other document(s) of title which you may have available
and a letter stating that the remaining documents will follow as soon as
possible or that you have lost one or more of your share certificate(s) and/or
documents of title. No acknowledgement of receipt of documents will be given. If
you have lost your share certificate(s) and/or other document(s) of title, you
should contact SGB's registrars, Lloyds TSB Registrars, The Causeway, Worthing,
West Sussex BN99 6DA (telephone number: 01903 502 541), for a letter of
indemnity for the lost share certificate(s) and/or other document(s) of title
which, when completed in accordance with the instructions given, should be
returned by post or by hand to Computershare, as above.
(d) Additional Procedures for SGB Shares in uncertificated form (that is, in
CREST)
If your SGB Shares are in uncertificated form, you should insert in Box 4 of the
enclosed Form(s) of Acceptance the participant ID and member account ID under
which such SGB Shares are held by you in CREST and otherwise complete and return
the Form(s) of Acceptance as described above. In addition, you should take (or
procure to be taken) the action set out below to transfer the SGB Shares in
respect of which you wish to accept the Offer to an escrow balance (that is, a
TTE instruction) specifying Computershare Services PLC (in its capacity as a
CREST participant under its participant ID referred to below) as the Escrow
Agent, as soon as possible AND IN ANY EVENT SO THAT THE TRANSFER TO ESCROW
SETTLES NO LATER THAN 3.00 P.M. ON 10 JUNE 2000.
IF YOU ARE A CREST PERSONAL MEMBER, YOU SHOULD REFER TO YOUR CREST SPONSOR
BEFORE TAKING ANY ACTION. Your CREST sponsor will be able to confirm details of
your participant ID and the member account ID under which your SGB Shares are
held. In addition, only your CREST sponsor will be able to sent the TTE
instruction to CRESTCo in relation to your SGB Shares.
You should send (or, if you are a CREST personal member, procure that your CREST
sponsor sends) a TTE instruction to CRESTCo which must be properly authenticated
in accordance with CRESTCo's specifications and which must contain, in addition
to the information that is required for a TTE instruction to settle in CREST,
the following details:
(i) the number of SGB Shares to be transferred to an escrow balance;
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(ii) your member account ID. This must be the same member account ID as
that inserted in Box 4 of the Form of Acceptance;
(iii)your participant ID. This must be the same participant ID as the
participant ID that is inserted in Box 4 of the Form of Acceptance;
(iv) the participant ID of the Escrow Agent which is, for the purposes of
the Offer, 3RAO9;
(v) the member account ID of the Escrow Agent which is, for the purposes
of the Offer, HARSCO;
(vi) the Form of Acceptance reference number. This is the reference number
that appears at the top of page three of the Form of Acceptance. This
reference number should be inserted in the first eight characters of
the shared note field on the TTE instruction. Such insertion will
enable Computershare to match the transfer to escrow to your Form of
Acceptance. You should keep a separate record of this reference number
for future reference;
(vii)the intended settlement date. This should be as soon as possible and
in any event no later than 3.00 p.m. on 10 June 2000; and
(viii) the Corporate Action Number for the Offer is allocated by CRESTCo
and can be found by viewing the relevant Corporate Action details in
CREST.
After settlement of the TTE instruction, you will not be able to access the SGB
Shares concerned in CREST for any transaction or charging purposes. If the Offer
becomes or is declared unconditional in all respects, the Escrow Agent will
transfer the SGB Shares concerned to itself in accordance with paragraph (e) of
Part C of Appendix I to this document.
You are recommended to refer to the CREST manual published by CRESTCo for
further information on the CREST procedures outlined above. For ease of
processing, you are requested, wherever possible, to ensure that a Form of
Acceptance relates to only one transfer to escrow.
If no Form of Acceptance reference number, or an incorrect Form of Acceptance
reference number is included in the TTE instruction Harsco Investment may treat
any number of SGB Shares transferred to an escrow balance in favour of the
Escrow Agent specified above from the participant ID and member account ID
identified in the TTE instruction as relating to any Form(s) of Acceptance which
relate(s) to the same member account ID and participant ID (up to the amount of
SGB Shares inserted or deemed to be inserted on the Form(s) of Acceptance
concerned).
YOU SHOULD NOTE THAT CRESTCO DOES NOT MAKE AVAILABLE SPECIAL PROCEDURES IN CREST
FOR ANY PARTICULAR CORPORATE ACTION. NORMAL SYSTEM TIMINGS AND LIMITATIONS WILL
THEREFORE APPLY IN CONNECTION WITH A TTE INSTRUCTION AND ITS SETTLEMENT. YOU
SHOULD THEREFORE ENSURE THAT ALL NECESSARY ACTION IS TAKEN BY YOU (OR BY YOUR
CREST SPONSOR) TO ENABLE A TTE INSTRUCTION RELATING TO YOUR SGB SHARES TO SETTLE
PRIOR TO 3.00 P.M. ON 10 JUNE 2000. IN THIS REGARD, YOU ARE REFERRED IN
PARTICULAR TO THOSE SECTIONS OF THE CREST MANUAL CONCERNING PRACTICAL
LIMITATIONS OF THE CREST SYSTEM AND TIMINGS.
Harsco Investment will make an appropriate announcement if any of the details
contained in this paragraph (d) alter for any reason.
(e) Deposits of SGB Shares into, and withdrawals of SGB Shares from, CREST
Normal CREST procedures (including timings) apply in relation to any SGB Shares
that are, or are to be, converted from uncertificated to certificated form, or
from certificated to uncertificated form during the course of the Offer (whether
any such conversion arises as a result of a transfer of SGB Shares or
otherwise). Holders of SGB Shares who are proposing so to convert any such SGB
shares are recommended to ensure that the conversion procedures are implemented
in sufficient time to enable the person holding or acquiring the SGB Shares as a
result of the conversion to take all necessary steps in connection with an
acceptance of the Offer (in particular, as regards delivery of share
certificate(s) or other document(s) of title or transfers to an escrow balance
as described above) prior to 3.00 p.m. on 10 June 2000.
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(f) Validity of acceptance
Without prejudice to Parts B and C of Appendix I of this document, Harsco
Investment and Lazard reserve the right to treat as valid in whole or in part
any acceptance of the Offer which is not entirely in order or which is not
accompanied by the relevant TTE instruction or (as applicable) the relevant
share certificate(s) and/or other document(s) of title. In that event, no
payment of cash under the Offer will be made until after the relevant TTE
instruction has settled or (as applicable) the relevant share certificate(s)
and/or other document(s) of title or indemnities satisfactory to Harsco
Investment have been received.
(g) Overseas shareholders
The attention of SGB Shareholders who are citizens or residents of jurisdictions
outside the UK is drawn to paragraph 6 of Part B and paragraph (b) of Part C of
Appendix I of this document, and to the relevant provisions of the Form of
Acceptance. The availability of the Offer to persons not resident in the UK may
be affected by the laws of the relevant jurisdictions. Persons not resident in
the UK should inform themselves about and observe any applicable requirements.
The Offer is not being made, directly or indirectly, in or into, the United
States, Canada, Australia or Japan. Accordingly, any accepting SGB Shareholder
who is unable to give the warranties set out in paragraph (b) of Part C of
Appendix I to this document will be deemed not to have accepted the Offer.
IF YOU ARE IN ANY DOUBT AS TO THE PROCEDURE FOR ACCEPTANCE, PLEASE CONTACT
COMPUTERSHARE BY TELEPHONE ON 0870 702 0100. YOU ARE REMINDED THAT, IF YOU ARE A
CREST PERSONAL MEMBER, YOU SHOULD CONTACT YOUR CREST SPONSOR BEFORE TAKING ANY
ACTION.
12. SETTLEMENT
Subject to the Offer becoming or being declared unconditional in all respects
(except as provided in paragraph 6 of Part B of Appendix I in the case of
certain SGB Shareholders who are not resident in the UK), settlement of the
consideration to which any SGB Shareholder is entitled under the Offer will be
effected (i) in the case of acceptances received, complete in all respects, by
the date on which the Offer becomes or is declared unconditional in all
respects, within 14 days of such date, or (ii) in the case of acceptances of the
Offer received, complete in all respects, after the date on which the Offer
becomes or is declared unconditional in all respects but while it remains open
for acceptance, within 14 days of such receipts in the following manner:
(a) SGB Shares in uncertificated form (that is, in CREST)
Where an acceptance relates to SGB Shares in uncertificated form, settlement of
any cash consideration to which the accepting SGB Shareholder is entitled will
be paid by means of CREST by Harsco Investment procuring the creation of an
assured payment obligation in favour of the accepting SGB Shareholder's payment
bank in respect of the cash consideration due, in accordance with the CREST
assured payment arrangements.
Harsco Investment reserves the right to settle all or any part of the
consideration referred to this paragraph (a), for all or any accepting SGB
Shareholder(s), in the manner referred to in paragraph (b) below, if, for any
reason, it wishes to do so.
(b) SGB Shares in certificated form
Where an acceptance relates to SGB Shares in certificated form, settlement of
any cash due will be despatched by first class post (or by such other method as
the Panel may approve). All such payments will be made in pounds sterling by
cheque drawn on a branch of a UK clearing bank.
(c) General
If the Offer does not become or is not declared unconditional in all respects
(i) share certificate(s) and/or other document(s) of title will be returned by
post (or such other method as may be approved by the Panel), within 14 days of
the Offer lapsing, to the person or agent whose name and address (outside the
United States, Canada, Australia or Japan) is set out in Box 6 of the Form of
Acceptance or, if none is set out, to the first named holder at his registered
address (outside the United States, Canada, Australia or Japan) and (ii) the
Escrow Agent will, immediately after the lapsing of the Offer
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(or within such longer period, not exceeding 14 days after the Offer lapsing, as
the Panel may approve), give TFE instructions to CRESTCo to transfer all SGB
Shares held in escrow balances and in relation to which it is the Escrow Agent
to the original available balances of the SGB Shareholders concerned. ALL
DOCUMENTS AND REMITTANCES SENT BY, TO OR FROM SGB SHAREHOLDERS OR THEIR
APPOINTED AGENTS WILL BE SENT AT THEIR OWN RISK.
13. UNITED KINGDOM TAXATION
THE FOLLOWING PARAGRAPHS, WHICH ARE INTENDED AS A GENERAL GUIDE ONLY, ARE BASED
ON CURRENT UNITED KINGDOM LEGISLATION AND INLAND REVENUE PRACTICE AND ARE
SUBJECT TO CHANGES THEREIN. THEY SUMMARISE CERTAIN LIMITED ASPECTS OF THE UK
TAXATION TREATMENT OF THE ACCEPTANCE OF THE OFFER, AND THEY RELATE ONLY TO THE
POSITION OF CERTAIN CLASSES OF TAXPAYERS AND ONLY THOSE SGB SHAREHOLDERS WHO ARE
RESIDENT OR ORDINARILY RESIDENT IN THE UK FOR TAXATION PURPOSES AND WHO HOLD
THEIR SGB SHARES BENEFICIALLY AS AN INVESTMENT (OTHERWISE THAN UNDER A PERSONAL
EQUITY PLAN OR AN INDIVIDUAL SAVINGS ACCOUNT) AND NOT AS AN ASSET OF A FINANCIAL
TRADER OR AS A BUSINESS ASSET. THE TAXATION POSITION OF SPECIAL CLASSES OF
TAXPAYERS SUCH AS BANKS, INSURANCE COMPANIES AND COLLECTIVE INVESTMENT SCHEMES
IS NOT CONSIDERED BELOW.
ANY SGB SHAREHOLDER OR OPTIONHOLDER WHO IS IN ANY DOUBT AS TO HIS TAXATION
POSITION OR WHO IS SUBJECT TO TAXATION IN ANY JURISDICTION OTHER THAN THE UK,
SHOULD CONSULT AN APPROPRIATE PROFESSIONAL ADVISER IMMEDIATELY.
(a) UK taxation of chargeable gains
Liability to UK taxation of chargeable gains will depend on the individual
circumstances of SGB Shareholders. Acceptance of the Offer will, if it becomes
wholly unconditional, constitute a disposal or part disposal by the SGB
Shareholder of his SGB Shares for the purposes of UK taxation of chargeable
gains. Such a disposal or part disposal may, depending upon the individual
circumstances of the SGB Shareholder (including the availability of any
allowances, reliefs, exemptions or allowable losses), give rise to a liability
to UK taxation on chargeable gains.
(b) SGB Share Option Schemes
Special tax provisions may apply to SGB Shareholders who have acquired or
acquire their SGB Shares by exercising options under the SGB Share Option
Schemes including provisions imposing a charge to income tax when such an option
is exercised or on any disposal of SGB Shares acquired on exercise. Further
details will be provided to participants in these Schemes in due course if
appropriate.
(c) Stamp duty and stamp duty reserve tax (SDRT)
No stamp duty or SDRT will be payable by SGB Shareholders as a result of
accepting the Offer.
14. FURTHER INFORMATION
Your attention is drawn to the further information contained in the Appendices
to this document.
15. ACTION TO BE TAKEN
TO ACCEPT THE OFFER, THE FORM OF ACCEPTANCE MUST BE COMPLETED, SIGNED AND
RETURNED IN ACCORDANCE WITH THE INSTRUCTIONS THEREON, WHETHER OR NOT YOUR SGB
SHARES ARE IN CREST, TOGETHER WITH SHARE CERTIFICATES AND/OR OTHER DOCUMENTS OF
TITLE, AS APPROPRIATE. FORMS OF ACCEPTANCE SHOULD BE RETURNED AS SOON AS
POSSIBLE BY POST OR BY HAND AND, IN ANY EVENT, SO AS TO BE RECEIVED BY
COMPUTERSHARE AT THE ADDRESSES SPECIFIED IN PARAGRAPH 11(B) OF THIS LETTER AS
SOON AS POSSIBLE AND IN ANY EVENT NOT LATER THAN 3.00 P.M. ON 10 JUNE 2000.
Yours faithfully,
for and on behalf of
Lazard Brothers & Co., Limited
<TABLE>
<S> <C>
William Buist-Wells Richard Stables
Director Director
</TABLE>
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<PAGE> 11
APPENDIX I
CONDITIONS AND FURTHER TERMS OF THE OFFER
PART A CONDITIONS OF THE OFFER
The Offer is subject to the following conditions:
(a) valid acceptances being received (and not, where permitted, withdrawn) by
not later than 3.00 p.m. (London time) on 10 June 2000 (or such later
time(s) and/or date(s) as Harsco Investment may, subject to the rules of
the City Code, decide) in respect of not less than 90 per cent. (or such
lower percentage as Harsco Investment may decide) in nominal value of the
SGB Shares to which the Offer relates, provided that this condition will
not be satisfied unless Harsco and/or its wholly owned subsidiaries shall
have acquired or agreed to acquire (whether pursuant to the Offer or
otherwise) SGB Shares carrying in aggregate more than 50 per cent of the
voting rights then normally exercisable at a general meeting of SGB,
including for this purpose (except to the extent otherwise agreed by the
Panel) any such voting rights attaching to any SGB Shares that are
unconditionally allotted or issued before the Offer becomes or is declared
unconditional as to acceptances, whether pursuant to the exercise of any
outstanding subscription or conversion rights or otherwise; and for this
purpose:
(i) the expression "SGB Shares to which the Offer relates" shall be
construed in accordance with sections 428 to 430F of the Companies Act
1985, and
(ii) SGB Shares which have been unconditionally allotted shall be deemed to
carry the voting rights which they will carry upon issue;
(b) the passing at an Extraordinary General Meeting of Mowlem (or at any
adjournment thereof) of an ordinary resolution to approve the disposal by
Mowlem of its entire shareholding in the ordinary issued share capital of
SGB:
(c) no Third Party having intervened and there not continuing to be outstanding
any statute, regulation or order of any Third Party in each case which
would or might reasonably be expected (in any case to an extent which is
material in the context of the Wider Harsco Group or the Wider SGB Group,
as the case may be, taken as a whole) to:
(i) make the Offer, its implementation or the acquisition or proposed
acquisition by Harsco or any member of the Wider Harsco Group of any
shares or other securities in, or control or management of, SGB or
any member of the Wider SGB Group void, illegal or unenforceable in
any jurisdiction, or otherwise directly or indirectly restrain,
prevent, prohibit, restrict or delay the same or impose additional
conditions or obligations with respect to the Offer or such
acquisition, or otherwise impede, challenge or interfere with the
Offer or such acquisition, or require amendment to the terms of the
Offer or the acquisition or proposed acquisition of any SGB Shares or
the acquisition of control of SGB or the Wider SGB Group by Harsco
Investment;
(ii) limit or delay the ability of any member of the Wider Harsco Group or
any member of the Wider SGB Group to acquire or to hold or to
exercise effectively, directly or indirectly, all or any rights of
ownership in respect of shares or other securities in, or to exercise
voting or management control over, any member of the Wider SGB Group
or any member of the Wider Harsco Group;
(iii) require, prevent or delay the divestiture or alter the terms
envisaged for any proposed divestiture by any member of the Wider
Harsco Group of any shares or other securities in SGB;
(iv) require, prevent or delay the divestiture or alter the terms
envisaged for any proposed divestiture by any member of the Wider
Harsco Group or by any member of the Wider SGB Group of all or any
portion of their respective businesses, assets or properties or
impose any limitation on the ability of any of them to conduct any of
their respective
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<PAGE> 12
businesses or to own or control any of their respective assets or
properties or any part thereof;
(v) except pursuant to Part XIIIA of the Companies Act, require any
member of the Wider Harsco Group or of the Wider SGB Group to
acquire, or to offer to acquire, any shares or other securities (or
the equivalent) in any member of either group owned by any third
party;
(vi) limit the ability of any member of the Wider Harsco Group or of the
Wider SGB Group to conduct or integrate or co-ordinate its business,
or any part of it, with the businesses or any part of the businesses
of any other member of the Wider Harsco Group or of the Wider SGB
Group;
(vii) result in any member of the Wider SGB Group or the Wider Harsco
Group ceasing to be able to carry on business under any name under
which it presently does so; or
(viii) otherwise adversely affect the business, assets, profits, financial
or trading position or prospects of any member of the Wider SGB
Group or of the Wider Harsco Group,
and all applicable waiting and other time periods during which any Third
Party could intervene under the laws of any relevant jurisdiction having
expired, lapsed or been terminated;
(d) without limitation to condition (c) above.
(i) the Office of Fair Trading having indicated, in terms satisfactory to
Harsco Investment, that it is not the intention of the Secretary of
State for Trade and Industry to refer the proposed acquisition of SGB
by Harsco Investment, or any matters arising from that proposed
acquisition, to the Competition Commission; and
(ii) if required, all filings having been made and all or any applicable
waiting periods (including any extensions thereof) under the United
States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
regulations thereunder having expired, lapsed or been terminated as
appropriate in each case in respect of the proposed acquisition of SGB
by Harsco Investment, or any matters arising from that proposed
acquisition;
(e) all notifications and filings which are necessary or are reasonably
considered appropriate by Harsco Investment having been made, all
appropriate waiting and other time periods (including any extensions of
such waiting and other time periods) under any applicable legislation or
regulation of any relevant jurisdiction having expired, lapsed or been
terminated (as appropriate) and all statutory or regulatory obligations in
any relevant jurisdiction having been complied with in each case in
connection with the Offer or the acquisition or proposed acquisition of any
shares or other securities in, or control of, SGB or any other member of
the Wider SGB Group by any member of the Wider Harsco Group or the carrying
on by any member of the Wider SGB Group of its business;
(f) all Authorisations which are necessary or are reasonably considered
necessary or appropriate by Harsco Investment in any relevant jurisdiction
for or in respect of the Offer or the acquisition or proposed acquisition
of any shares or other securities in, or control of, SGB or any other
member of the Wider SGB Group by any member of the Wider Harsco Group or
the carrying on by any member of the Wider SGB Group of its business having
been obtained, in terms and in a form satisfactory to Harsco Investment,
from all appropriate Third Parties or from any persons or bodies with whom
any member of the Wider SGB Group has entered into contractual arrangements
in each case where the absence of such Authorisation would have a material
adverse effect on the Wider SGB Group taken as a whole and all such
Authorisations remaining in full force and effect and there being no notice
or intimation of any intention to revoke, suspend, restrict, modify or not
to renew any of the same at the time at which the Offer becomes otherwise
unconditional;
(g) except as otherwise publicly announced by SGB (by the delivery of an
announcement to the Company Announcements Office in accordance with the
rules governing the admission of securities to the official list of the UK
Listing Authority or as included herein (publicly announced)) prior to 15
May 2000, there being no provision of any arrangement, agreement,
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<PAGE> 13
licence, permit, franchise or other instrument to which any member of the Wider
SGB Group is a party, or by or to which any such member or any of its assets is
or are or may be bound, entitled or subject or any circumstance, which, in each
case as a consequence of the Offer or the acquisition or proposed acquisition of
any shares or other securities in, or control of, SGB or any other member of the
Wider SGB Group by any member of the Wider Harsco Group or otherwise, could or
might reasonably be expected to result in, (in any case to an extent which would
be material in the context of the Wider SGB Group taken as a whole):
(i) any monies borrowed by or any other indebtedness or liabilities
(actual or contingent) of, or any grant available to, any member of
the Wider SGB Group being or becoming repayable or capable of being
declared repayable immediately or prior to its stated repayment date
or the ability of any member of the Wider SGB Group to borrow monies
or incur any indebtedness being withdrawn or inhibited or becoming
capable of being withdrawn;
(ii) the creation or enforcement of any mortgage, charge or other security
interest over the whole or any part of the business, property, assets
or interests of any member of the Wider SGB Group or any such
mortgage, charge or other security interest (wherever created,
arising or having arisen) becoming enforceable;
(iii) any such arrangement, agreement, licence, permit, franchise or
instrument, or the rights, liabilities, obligations or interests of
any member of the Wider SGB Group thereunder, being, or becoming
capable of being, terminated or adversely modified or affected or any
adverse action being taken or any obligation or liability arising
thereunder;
(iv) any asset or interest of any member of the Wider SGB Group being or
falling to be disposed of or ceasing to be available to any member of
the Wider SGB Group or any right arising under which any such asset
or interest could be required to be disposed of or could cease to be
available to any member of the Wider SGB Group otherwise than in the
ordinary course of business;
(v) the creation of liabilities (actual or contingent) by any member of
the Wider SGB Group;
(vi) the rights, liabilities, obligations or interests of any member of
the Wider SGB Group under any such arrangement, agreement, licence,
permit, franchise or other instrument or the interests or business of
any such member in or with any other person, firm, company or body
(or any arrangement or arrangements relating to any such interests or
business) being terminated adversely modified or affected; or
(vii) the financial or trading position or the prospects or the value of
any member of the Wider SGB Group being prejudiced or adversely
affected,
and no event having occurred which, under any provision of any such
arrangement, agreement, licence, permit or other instrument, could result
in any of the events or circumstances which are referred to in paragraphs
(i) to (vii) of this condition (g);
(h) since 31 December 1999 and except as disclosed in SGB's annual report and
accounts for the year then ended or as otherwise publicly announced by SGB
prior to 15 May 2000 no member of the Wider SGB Group having:
(i) issued or agreed to issue, or authorised or proposed the issue of,
additional shares of any class, or securities convertible into or
exchangeable for, or rights, warrants or options to subscribe for or
acquire, any such shares or convertible securities other than as
between SGB and wholly-owned subsidiaries of SGB and other than any
options granted and any shares issued upon the exercise of any
options granted under any of the SGB Share Option Schemes;
(ii) purchased or redeemed or repaid any of its own shares or other
securities or reduced or made any other change to any part of its
share capital;
(iii) recommended, declared, paid or made any bonus, dividend or other
distribution whether payable in cash or otherwise (other than to SGB
or a wholly-owned subsidiary of SGB);
(iv) made or authorised or proposed or announced any change in its loan
capital;
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<PAGE> 14
(v) other than any acquisition or disposal in the ordinary course of
business (or a transaction between SGB and a wholly-owned subsidiary
of SGB) merged with, demerged (or acquired any body corporate,
partnership or business or acquired or disposed of or transferred,
mortgaged or charged or created any security interest over any
assets or any right, title or interest in any assets (including
shares in any undertaking and trade investments) or authorised the
same (which in any case is material in the context of the Wider SGB
Group taken as a whole);
(vi) issued or authorised the issue of, or made any change in or to, any
debentures or (except in the ordinary course of business) incurred
or increased any indebtedness or liability (actual or contingent);
(vii) entered into, varied, or authorised any agreement, transaction,
arrangement or commitment (whether in respect of capital expenditure
or otherwise) which:
(A) is of a long term, onerous or unusual nature or magnitude or
which is or could involve an obligation of such nature or
magnitude; or
(B) could restrict the business of any member of the Wider SGB Group;
or
(C) is other than in the ordinary course of business,
in each case to an extent which is material in the context of the
Wider SGB Group taken as a whole;
(viii) entered into or changed the terms of, or made any offer (which
remains open for acceptance) to enter into or change the terms of,
any contract, agreement or arrangement with any of the directors or
senior executives of any member of the Wider SGB Group;
(ix) taken any corporate action or had any legal proceedings instituted
or threatened against it or petition presented or order made for its
winding-up (voluntarily or otherwise), dissolution or reorganisation
or for the appointment of a receiver, administrator, administrative
receiver, trustee or similar officer of all or any of its assets and
revenues or any analogous proceedings in any jurisdiction or
appointed any analogous person in any jurisdiction (in each case
with a material adverse effect on the Wider SGB Group taken as a
whole);
(x) been unable, or admitted in writing that it is unable, to pay its
debts or having stopped or suspended (or threatened to stop or
suspend) payment of its debts generally or ceased or threatened to
cease carrying on all or a substantial part of its business;
(xi) waived or compromised any claim with a material adverse effect on
the Wider SGB Group taken as a whole;
(xii) made any alteration to its memorandum or articles of association;
(xiii) entered into any agreement, commitment or arrangement or passed any
resolution or made any offer (which remains open for acceptance) or
proposed or announced any intention with respect to any of the
transactions, matters or events referred to in this condition (h);
(i) since 31 December 1999 and except as disclosed in SGB's annual report
and accounts for the year then ended or as otherwise publicly
announced by SGB prior to 15 May 2000:
(i) there having been no adverse change or deterioration in the
business, assets, financial or trading positions or profits or
prospects of any member of the Wider SGB Group which is material in
the context of the Wider SGB Group taken as a whole;
(ii) no litigation, arbitration proceedings, prosecution or other legal
proceedings to which any member of the Wider SGB Group is or may
become a party (whether as plaintiff, defendant or otherwise) having
been threatened, announced, implemented or instituted by or against
or remaining outstanding against or in respect of any member of the
Wider SGB Group which, in any such case, is material in the context
of the Wider SGB Group taken as a whole;
14
<PAGE> 15
(iii) no contingent or other liability of any member of the Wider SGB Group
having arisen or become apparent or increased which would or could
reasonably be expected materially and adversely to affect the Wider
SGB Group taken as a whole; and
(iv) no enquiry or investigation (save as a result of the Offer) by, or
complaint or reference to, any Third Party having been threatened,
announced, implemented, instituted by or against or remaining
outstanding against or in respect of any member of the Wider SGB
Group which, in any such case, is material in the context of the
Wider SGB Group taken as a whole;
(j) Harsco Investment not having discovered:
(i) that any financial or business or other information concerning the
Wider SGB Group disclosed at any time by or on behalf of any member
of the Wider SGB Group, whether publicly, to any member of the Wider
Harsco Group or otherwise, is misleading or contains any
misrepresentation of fact or omits to state a fact necessary to make
any information contained therein not misleading and which was not
subsequently corrected before 15 May 2000 by disclosure either
publicly or otherwise to Harsco Investment and, in any such case, to
an extent which is material in the context of the Wider SGB Group;
(ii) that any member of the Wider SGB Group or partnership, company or
other entity in which any member of the Wider SGB Group has an
interest and which is not a subsidiary undertaking of SGB is subject
to any liability (actual or contingent) which is not disclosed in
SGB's annual report and accounts for the financial year ended 31
December 1999 except as publicly announced prior to the date hereof
and which is material in the context of the Wider SGB Group taken as
a whole; or
(iii) any information which affects the import of any information disclosed
at any time by or on behalf of any member of the Wider SGB Group to
an extent which is material in the context of the Wider SGB Group
taken as a whole;
(k) Harsco Investment not having discovered:
(i) that any past or present member of the Wider SGB Group has not
complied with any applicable legislation or regulations of any
jurisdiction with regard to the use, treatment, handling, storage,
transport, release, disposal, discharge, spillage, leak or emission
of any waste or hazardous substance or any substance likely to impair
the environment or harm human health, or otherwise relating to
environmental matters or the health and safety of any person, or that
there has otherwise been any such use, treatment, handling, storage,
transport, release, disposal, discharge, spillage, leak or emission
(whether or not this constituted a non-compliance by any person with
any legislation or regulations and wherever the same may have taken
place) which, in any such case, would be likely to give rise to any
liability (whether actual or contingent) or cost on the part of any
member of the Wider SGB Group and which is material in the context of
the Wider SGB Group taken as a whole;
(ii) that there is, or is likely to be, any liability, whether actual or
contingent, to make good, repair, reinstate or clean up any property
now or previously owned, occupied or made use of by any past or
present member of the Wider SGB Group or any other property or any
controlled waters under any environmental legislation, regulation,
notice, circular, order or other lawful requirement of any relevant
authority or third party or otherwise and which, in any such case, is
material in the context of the Wider SGB Group taken as a whole; or
(iii) that circumstances exist whereby a person or class of persons would
be likely to have a claim in respect of any product or process of
manufacture or materials used therein now or previously manufactured,
sold or carried out by any past or present member of the Wider SGB
Group which is or would be material in the context of the Wider SGB
Group taken as a whole.
For the purpose of these conditions:
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<PAGE> 16
(a) "Third Party" means any government, government department or governmental,
quasi-governmental, supranational, statutory, regulatory or investigative
body, authority (including any national anti-trust or merger control
authority), court, trade agency, association, institution or professional
or environmental body or any other person or body whatsoever in any
relevant jurisdiction;
(b) a Third Party shall be regarded as having "intervened" if it has decided to
take, institute, implement or threaten any action, proceeding, suit,
investigation, enquiry or reference or made, proposed or enacted any
statute, regulation, decision or order or taken any measures or other steps
or required any action to be taken or information to be provided or
otherwise having done anything and "intervene" shall be construed
accordingly;
(c) "Authorisations" means authorisations, orders, grants, recognitions,
determinations, certificates, confirmations, consents, licences,
clearances, provisions and approvals.
Subject to the requirements of the Panel, Harsco Investment reserves the right
to waive all or any of the above conditions, in whole or in part, except
condition (a).
Conditions (b) to (k) (inclusive) must be fulfilled, be determined by Harsco
Investment to be or remain satisfied or (if capable of waiver) be waived by
midnight on the 21st day after the later of 10 June 2000 and the date on which
condition (a) is fulfilled (or in each case such later date as Harsco Investment
may, with the consent of the Panel, decide), failing which the Offer will lapse.
Harsco Investment shall be under no obligation to waive (if capable of waiver),
to determine to be or remain satisfied or to treat as fulfilled any of
conditions (b) to (k) (inclusive) by a date earlier than the latest date
specified above for the fulfilment of that condition.
If Harsco Investment is required by the Panel to make an offer for SGB Shares
under the provisions of Rule 9 of the City Code, Harsco Investment may make such
alterations to the conditions of the Offer, including to condition (a), as are
necessary to comply with the provisions of that Rule.
The Offer will lapse if the acquisition of SGB by Harsco Investment is referred
to the Competition Commission before the later of 3.00 p.m. on 10 June 2000 and
the date when the Offer becomes or is declared unconditional as to acceptances.
If the Offer lapses it will cease to be capable of further acceptance. SGB
Shareholders who have accepted the Offer and Harsco Investment shall then cease
to be bound by acceptances delivered on or before the date on which the Offer
lapses.
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<PAGE> 17
PART B FURTHER TERMS OF THE OFFER
The following further terms apply to the Offer. Except where the context
otherwise requires, any reference in Parts B or C of this Appendix I and in the
Form of Acceptance:
(i) to the "Offer" shall include any revision, variation or renewal thereof or
extension of the Offer (as the case may be);
(ii) to the "Offer becoming unconditional" shall include references to the
Offer being or being declared unconditional;
(iii) to the "acceptance condition" means the condition set out in paragraph (a)
of Part A of this Appendix I;
(iv) to the "Offer becoming unconditional" means the acceptance condition being
or becoming or being declared satisfied whether or not any other condition
of the Offer remains to be fulfilled and references to the Offer having
become or not becoming unconditional shall be construed accordingly;
(v) to "acceptances of the Offer" shall include deemed acceptances of the
Offer.
1. ACCEPTANCE PERIOD
(a) The Offer will initially be open for acceptance until 3.00 p.m. on 10 June
2000. Although no revision is envisaged, if the Offer is revised it will
remain open for acceptance for a period of at least 14 days (or such other
period as may be permitted by the Panel) from the date of despatching
written notification of the revision to SGB Shareholders. Except with the
consent of the Panel, no revision of the Offer may be posted to SGB
Shareholders after 5 July 2000 or, if later, the date falling 14 days prior
to the last date on which the Offer is capable of becoming unconditional.
(b) The Offer, whether revised or not, shall not (except with the consent of
the Panel) be capable of becoming unconditional after midnight on 19 July
2000 (or any earlier time and/or date announced (and not withdrawn) by
Harsco Investment as the date beyond which the Offer will not be extended)
nor of being kept open for acceptance after that time and date, unless it
has previously become unconditional, provided that Harsco Investment
reserves the right, with the permission of the Panel, to extend the Offer
to (a) later time(s) and/or date(s). Except with the consent of the Panel,
Harsco Investment may not, for the purpose of determining whether the
acceptance condition has been satisfied, take into account acceptances
received or purchases of SGB Shares made after 1.00 p.m. on 19 July 2000
(or any earlier time and/or date announced (and not withdrawn) by Harsco
Investment as the date beyond which the Offer will not be extended) or, if
the Offer is so extended, any such later time and/or date as may be agreed
with the Panel. If the latest time at which the Offer may become
unconditional is extended beyond midnight on 19 July 2000, acceptances
received and purchases of SGB Shares made in respect of which the relevant
documents are received by Computershare after 1.00 p.m. on the relevant
date may (except where the Code otherwise permits) only be taken into
account with the agreement of the Panel.
(c) If the Offer becomes or is declared unconditional, it will remain open for
acceptance for not less than 14 days from the date on which it would
otherwise have expired. If the Offer has become unconditional and it is
stated that the Offer will remain open until further notice, then not less
than 14 days' notice in writing will be given prior to the closing of the
Offer to those SGB Shareholders who have not accepted the Offer.
(d) If a competitive situation arises after a "no increase" and/or "no
extension" statement has been made in relation to the Offer, Harsco
Investment may, if it specifically reserves the right to do so at the time
such statement is made, or otherwise with the consent of the Panel,
withdraw such statement provided that it complies with the requirements of
the Code and in particular that:
(i) it announces such withdrawal within four business days after the
announcement of' the competing offer and notifies SGB Shareholders in
writing thereof at the earliest practicable opportunity or, in the
case of SGB Shareholders with registered addresses outside the UK
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<PAGE> 18
or whom Harsco Investment knows to be nominees, trustees or custodians
holding SGB Shares for such persons, by announcement in the UK; and
(ii) any SGB Shareholders who accepted the Offer after the date of the "no
extension" or "no increase" statement are given a right of withdrawal
in accordance with paragraph 3(c) below.
Harsco Investment may, if it has reserved the right to do so, choose not to
be bound by the terms of a "no increase" or "no extension" statement if it
would otherwise prevent the posting of an increased or improved Offer which
is recommended for acceptance by the board of directors of SGB, or in other
circumstances permitted by the Panel.
(e) For the purpose of determining at any particular time whether the
acceptance condition has been satisfied, Harsco Investment shall be
entitled to take account only of those SGB Shares carrying voting rights
which have been unconditionally allotted or issued before that time and
written notice of the allotment or issue of which, containing all the
relevant details, has been received by Computershare from SGB or its agents
at either of the addresses specified in paragraph 3(a) below. Telex, e-mail
or facsimile transmission will not be sufficient.
2. ANNOUNCEMENTS
(a) By 8.00 a.m. on the business day (the "relevant day") following the day on
which the Offer is due to expire or becomes or is declared unconditional or
is revised or extended, Harsco Investment will make an appropriate
announcement and simultaneously inform the UK Listing Authority of the
position. Such announcement will (unless otherwise permitted by the Panel)
also state (as nearly as practicable) the total number of SGB Shares and
rights over SGB Shares:
(i) for which acceptances of the Offer have been received (showing the
extent, if any, to which such acceptances have been received from any
person deemed to be acting in concert with Harsco Investment);
(ii) acquired or agreed to be acquired by or on behalf of Harsco
Investment or any person deemed to be acting in concert with Harsco
Investment during the course of the Offer Period;
(iii) held by or on behalf of Harsco Investment or any person deemed to be
acting in concert with Harsco Investment prior to the Offer Period,
and will specify the percentage of share capital represented by each
of these figures.
(b) Any decision to extend the time and/or date by which the acceptance
condition has to be fulfilled may be made at any time up to, and will be
announced not later than, 8.00 a.m. on the relevant day (or such later time
and/or date as the Panel may agree) and the announcement will state the
next expiry date (unless the Offer is unconditional, in which case a
statement may instead be made that the Offer will remain open until further
notice). In computing the number of SGB Shares represented by acceptances
and/or purchases, there may be included or excluded for announcement
purposes acceptances and purchases not in all respects in order or subject
to verification provided that such acceptances or purchases shall not be
included unless they could be counted towards fulfilling the acceptance
condition in accordance with paragraphs 5(e) and (f) below.
(c) In this Appendix I, references to the making of an announcement by or on
behalf of Harsco Investment include the release of an announcement to the
press by public relations consultants or by Lazard and the delivery by hand
or telephone, telex or facsimile or other electronic transmission of an
announcement to the Company Announcements Office. An announcement made
otherwise than to the Company Announcements Office shall be notified
simultaneously to the Company Announcements Office.
3. RIGHTS OF WITHDRAWAL
(a) If Harsco Investment, having announced the Offer to be unconditional, fails
to comply by 3.30 p.m. on the relevant day (or such later time and/or date
as the Panel may agree) with any of the other relevant requirements
specified in paragraph 2(a) above, an accepting SGB Shareholder may
immediately thereafter withdraw his acceptance of the Offer by written
notice signed by
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such accepting SGB Shareholder (or his agent duly appointed in writing and
evidence of whose appointment in a form reasonably satisfactory to Harsco
Investment is produced with the notice) given by post or by hand to
Computershare, P.O. Box 859, The Pavilions, Bridgwater Road, Bristol BS99
1XZ or by hand only during normal business hours to Computershare, 7th
Floor, Jupiter House, Triton Court, 14 Finsbury Square, London EC2A 1BR on
behalf of Harsco Investment. Subject to paragraph 1(b) above, this right of
withdrawal may be terminated not less than eight days after the relevant
day by Harsco Investment confirming, if such be the case, that the Offer is
still unconditional, and complying with the other requirements specified in
paragraph 2(a) above. If any such confirmation is given, the first period
of 14 days referred to in paragraph 1(c) above will run from the date of
such confirmation and compliance.
(b) If by 3.00p.m. on 1 July 2000 (or such later time and/or date as the Panel
may agree) the Offer has not become unconditional, an accepting SGB
Shareholder may withdraw his acceptance at any time thereafter by written
notice received by Computershare on behalf of Harsco Investment at either
of the address(es) and in the manner referred to in paragraph 3(a) above,
before the earlier of (i) the time when the Offer becomes unconditional and
(ii) the final time for lodgement of acceptances of the Offer which can be
taken into account in accordance with paragraph 1(b) above.
(c) If a "no increase" and/or "no extension" statement has been withdrawn in
accordance with paragraph 1(d) above, any SGB Shareholder who accepts the
Offer after such statement is made may withdraw his acceptance thereafter
in the manner referred to in paragraph 3(a) above not later than the eighth
day after the date on which notice of the withdrawal of such statement is
posted to SGB Shareholders.
(d) Except as provided by this paragraph 3, acceptances shall be irrevocable.
(e) In this paragraph 3, "written notice" (including any letter of appointment,
direction or authority) means notice in writing bearing the original
signature(s) of the relevant accepting SGB Shareholder(s) or his/their
agent(s) duly appointed in writing (evidence of whose appointment in a form
reasonably satisfactory to Harsco Investment is produced with the notice).
Telex, e-mail or facsimile transmission or copies will not be sufficient to
constitute written notice. No notice which is postmarked in, or otherwise
appears to Harsco Investment or its agents to have been sent from, the
United States, Canada, Japan or Australia will be treated as valid.
4. REVISED OFFER
(a) Although no such revision of the Offer is envisaged, if the Offer (in its
original or any previously revised form(s)) is revised (either in its terms
and conditions or in the value or nature of the consideration offered or
otherwise) and such revision represents, on the date on which such revision
is announced, (on such basis as Lazard may consider appropriate) an
improvement (or no diminution) in the value of the Offer as so revised
compared with the consideration or terms previously offered or in the
overall value received and/or retained by a SGB Shareholder (under the
Offer or otherwise), the benefit of the revised Offer will, subject as
provided in paragraphs 4(b), (c) and 6 below, be made available to SGB
Shareholders who have accepted the Offer in its original or previously
revised form(s) (hereinafter called "Previous Acceptors"). The acceptance
by or on behalf of a Previous Acceptor of the Offer in its original or any
previously revised form(s) shall, subject as provided in paragraphs 4(b),
(c) and 6 below, be treated as an acceptance of the Offer as so revised and
shall also constitute the separate appointment of any director of Harsco
Investment and/or of Lazard as his attorney and/or agent with authority to
accept any such revised Offer on behalf of such Previous Acceptor and, if
such revised Offer includes alternative forms of consideration, to make
elections and/or accept such alternative forms of consideration in such
proportions as such attorney and/or agent in his absolute discretion thinks
fit and to execute on behalf of and in the name of such Previous Acceptor
all such further documents (if any) as may be required to give effect to
such acceptances and/or elections. In making any such election and/or
acceptance, such attorney and/or agent shall take into account the nature
of any previous acceptances made by or on behalf of the Previous Acceptor
and such other facts or matters as he may reasonably consider relevant.
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(b) The deemed acceptance referred to in paragraph 4(a) above shall not apply
and the authority conferred by paragraph 4(a) above shall not be exercised
by any director of Harsco Investment or any director of Lazard if, as a
result thereof, the Previous Acceptor would (on such basis as Lazard may
consider appropriate) thereby receive and/or retain (as appropriate) less
in aggregate under the Offer or otherwise than he would have received in
aggregate as a result of acceptance of the Offer in the form in which it
was previously accepted by him. The authorities conferred by paragraph 4(a)
above shall not be exercised in respect of any election available under the
revised Offer save in accordance with this paragraph.
(c) The deemed acceptance referred to in paragraph 4(a) above shall not apply
and the authority conferred by paragraph 4(a) above shall be ineffective to
the extent that a Previous Acceptor shall lodge with Computershare, within
14 days of the posting of the document pursuant to which the revision of
the Offer is made available to SGB Shareholders, a Form of Acceptance or
some other form issued by or on behalf of Harsco Investment in which he
validly elects to receive the consideration receivable by him under such
revised Offer in some other manner.
(d) The authorities conferred by this paragraph 4 and any acceptance of a
revised Offer and any election pursuant thereto shall be irrevocable unless
and until the Previous Acceptor becomes entitled to withdraw his acceptance
under paragraph 3 above and duly does so.
(e) Harsco Investment reserves the right to treat an executed Form of
Acceptance relating to the Offer (in its original or any previously revised
form (s)) which is received after the announcement or issue of the Offer in
any revised form as a valid acceptance of the revised Offer and such
acceptance shall constitute an authority in the terms of paragraph 4(a)
above mutatis mutandis on behalf of the relevant SGB Shareholder.
5. GENERAL
(a) Save with the consent of the Panel, the Offer will lapse unless all the
conditions have been fulfilled or (if capable of waiver) waived or, where
appropriate, have been determined by Harsco Investment in its reasonable
opinion to be or remain satisfied by 10 June 2000 or within 21 days after
the date on which the Offer becomes unconditional, whichever is the later,
or such later date as Harsco Investment may, with the consent of the Panel,
decide. If the Offer lapses for any reason, the Offer shall cease to be
capable of further acceptance and Harsco Investment and SGB Shareholders
shall cease to be bound by prior acceptances.
(b) The expression "Offer Period" when used in this document means, in relation
to the Offer, the period commencing on 16 May 2000 until whichever of the
following dates shall be the latest: (i) 3.00 p.m. on 10 June 2000, (ii)
the time and date on which the Offer becomes unconditional and (iii) the
time and date on which the Offer lapses.
(c) Except with the consent of the Panel, settlement of the consideration to
which any SGB Shareholder is entitled under the Offer will be implemented
in full in accordance with the terms of the Offer without regard to any
lien, right of set-off, counterclaim or other analogous right to which
Harsco Investment or Lazard may otherwise be, or claim to be, entitled as
against such SGB Shareholder and will be posted not later than 14 days
after the date on which the Offer becomes unconditional in all respects or
14 days after receipt of a valid and complete acceptance, whichever is the
later.
(d) The terms, provisions, instructions and authorities contained in or deemed
to be incorporated in the Form of Acceptance constitute part of the terms
of the Offer. Words and expressions defined in this document will have the
same meanings when used in the Form of Acceptance unless the context
otherwise requires.
(e) Notwithstanding the right reserved by Harsco Investment to treat a Form of
Acceptance as valid even though not entirely in order or not accompanied by
the relevant share certificate(s) and/or other documents of title or not
accompanied by the relevant TTE instructions, except as otherwise agreed
with the Panel, an acceptance of the Offer will only be counted towards
fulfilling the acceptance condition if the requirements of Note 4 and, if
applicable, Note 6 on Rule 10 of the City Code are satisfied in respect of
it.
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(f) Except as otherwise agreed with the Panel, a purchase of SGB Shares by
Harsco Investment or persons acting in concert with it or its nominee(s)
will only be counted towards fulfilling the acceptance condition if the
requirements of Note 5 and, if applicable, Note 6 on Rule 10 of the City
Code are satisfied in respect of it.
(g) Except with the consent of the Panel, the Offer will not become or be
declared unconditional unless Computershare has issued a certificate to
Harsco Investment or Lazard which states the number of SGB Shares in
respect of which acceptances have been received which comply with paragraph
5(e) above and the number of SGB Shares otherwise acquired, whether before
or during the Offer Period, which comply with the requirements of paragraph
5(f) above. Copies of such certificate will be sent to the Panel and to
SGB's financial adviser as soon as possible after it is issued.
(h) The Offer and all acceptances of it and the relevant Form of Acceptance and
all contracts made pursuant to the Offer and action taken or made or deemed
to be taken or made under any of the foregoing shall be governed by and
construed in accordance with English law. Execution by or on behalf of a
SGB Shareholder of a Form of Acceptance will constitute his submission, in
relation to all matters arising out of or in connection with the Offer and
the Form of Acceptance, to the jurisdiction of the Courts of England and
his agreement that nothing shall limit the right of Harsco Investment or
Lazard to bring any action, suit or proceeding arising out of or in
connection with the Offer and the Form of Acceptance in any other manner
permitted by law or in any court of competent jurisdiction.
(i) Any reference in this document and in the Form of Acceptance to 10 June
2000 shall, except in the final paragraph of Part A of this Appendix I and
paragraphs 1(a) and 5(b) of this Part B of Appendix I and except where the
context otherwise requires, be deemed, if the expiry date of the Offer be
extended, to refer to the expiry date of the Offer as so extended.
(j) Any omission to despatch this document or the Form of Acceptance or any
notice required to be despatched under the terms of the Offer to, or any
failure to receive the same by, any person to whom the Offer is made, or
should be made, shall not invalidate the Offer in any way or create any
implication that the Offer has not been made to any such person. The Offer
extends to any such person and to all SGB Shareholders to whom this
document, the Form of Acceptance and any related documents may not be
despatched or who may not receive such documents, and such persons may
collect copies of those documents from Computershare at the address set out
in paragraph 3(a) above.
(k) Without prejudice to any other provision in this Part B of Appendix I,
Harsco Investment and Lazard reserve the right to treat acceptances of the
Offer as valid if received by or on behalf of either of them at any place
or places determined by them otherwise than as set out herein or in the
Form of Acceptance.
(l) All powers of attorney, appointments of agents and authorities on the terms
conferred by or referred to in this Appendix I or in the Form of Acceptance
are given by way of security for the performance of the obligations of the
SGB Shareholder concerned and are irrevocable (in respect of powers of
attorney in accordance with section 4 of the Powers of Attorney Act 1971)
except in the circumstances where the donor of such power of attorney,
appointment or authority is entitled to withdraw his acceptance in
accordance with paragraph 3 above and duly does so.
(m) No acknowledgement of receipt of any Form of Acceptance, transfer by means
of CREST, share certificate(s) and/or other document(s) of title will be
given. All communications, notices, certificates, documents of title and
remittances to be delivered by or sent to or from SGB Shareholders (or
their designated agent(s)) will be delivered by or sent to or from such SGB
Shareholders (or their designated agent(s)) at their risk.
(n) If the Offer does not become unconditional in all respects:
(i) the Form of Acceptance and any share certificate(s) and/or other
document(s) of title will be returned by post (or by such other method
as may be approved by the Panel) within 14 days of the Offer lapsing,
at the risk of the person entitled thereto, to the person or agent
whose name and address outside the United States, Canada, Japan or
Australia is set out in
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the relevant box on the form of Acceptance or, if none is set out, to
the first-named holder at his/her registered address outside the
United States, Canada, Japan or Australia. No such documents will be
sent to an address in the United States, Canada, Japan or Australia.
(ii) Computershare will, immediately after the lapsing of the Offer (or
within such longer period as the Panel may permit, not exceeding 14
days of the lapsing of the Offer), give instructions to CRESTCo to
transfer all SGB Shares held in escrow balances and in relation to
which it is the escrow agent for the purposes of the Offer to the
original available balances of the SGB Shareholders concerned.
(o) The Offer is made on 20 May 2000 and is capable of acceptance from and
after that time. Copies of this document, the Form of Acceptance and any
related documents are available from Computershare at the address(es) set
out in paragraph 3(a) above from that time. The Offer is made by means of
this document and by means of an advertisement inserted in the Financial
Times dated 22 May 2000.
(p) If sufficient acceptances are received, Harsco Investment intends to apply
the provisions of sections 428 to 430F of the Companies Act to acquire
compulsorily any outstanding SGB Shares.
(q) After the Offer becomes or is declared unconditional in all respects,
Harsco intends to procure the making of an application by SGB for the
cancellation of the listing of the SGB Shares on the London Stock Exchange
as soon as practicable and in any event by the time outstanding SGB Shares
are acquired pursuant to the relevant provisions of the Companies Act;
(r) Harsco Investment and Lazard reserve the right to notify any matter
(including the making of the Offer) to all or any SGB Shareholder(s) with
(a) registered address(es) outside the UK or whom Harsco Investment or
Lazard know to be nominees for such persons by announcement or paid
advertisement in any daily newspaper published and circulated in the UK in
which case such notice shall be deemed to have been sufficiently given
notwithstanding any failure by any such shareholders to receive such
notice, and all references in this document to notice in writing (other
than in paragraphs 3(a), 3(b) and 3(c) above) shall be construed
accordingly.
(s) If Harsco Investment is required by the Panel to make an offer for SGB
Shares under the provisions of Rule 9 of the City Code, Harsco Investment
may make such alterations to the conditions of the Offer as are necessary
to comply with the provisions of that Rule.
(t) All references in this Appendix to any statute or statutory provision shall
include a statute or statutory provision which amends, consolidates or
replaces the same (whether before or after the date hereof).
(u) In relation to any acceptance of the Offer in respect of a holding of SGB
Shares which are in uncertificated form, Harsco Investment reserves the
right to make such alterations, additions or modifications as may be
necessary or desirable to give effect to any purported acceptance of the
Offer, whether in order to comply with the facilities or requirements of
CREST or otherwise, provided such alterations, additions or modifications
are consistent with the requirements of the Code or are otherwise made with
the consent of the Panel.
6. OVERSEAS SHAREHOLDERS
(a) The making of the Offer in, or to citizens, residents or nationals of
jurisdictions outside the United Kingdom ("overseas shareholders"), may be
affected by the laws of the relevant jurisdiction. Such overseas
shareholders should inform themselves about and observe any applicable
legal requirements. It is the responsibility of any overseas shareholder
wishing to accept the Offer to satisfy himself as to the full observance of
the laws and regulatory requirements of the relevant jurisdiction in
connection therewith, including the obtaining of any governmental, exchange
control or other consents which may be required or the compliance with
other necessary formalities and the payment of any issue, transfer or other
taxes or other requisite payments due in such jurisdiction. Any such SGB
Shareholder will be responsible for any such issue, transfer or other taxes
or other requisite payments by whomsoever payable and Harsco Investment
shall be fully indemnified and held harmless by such overseas shareholder
for any such issue, transfer or other taxes as Harsco Investment may be
required to pay.
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(b) In particular, the Offer is not being made, directly or indirectly, in or
into, or by the use of the mails of, or by any means or instrumentality
(including, without limitation, facsimile transmission, telex and
telephone) of interstate or foreign commerce of, or any facility of a
national securities exchange of, the United States, Canada, Australia or
Japan. Harsco Investment will not (unless otherwise determined by Harsco
Investment in its sole discretion and save as provided for in paragraph
6(c) below) mail or deliver, or authorise the mailing or delivery of, this
document, the Form of Acceptance or any related offering document in or
into the United States, Canada, Australia or Japan including to SGB
Shareholders with registered addresses in the United States, Canada,
Australia or Japan or to persons whom Harsco Investment knows to be
trustees, nominees or custodians holding SGB Shares for such persons.
Persons receiving such documents (including, without limitation, trustees,
nominees or custodians) should not distribute or send them in or into the
United States, Canada, Australia or Japan or use such mails or any such
means or instrumentality for any purpose directly or indirectly in
connection with the Offer and so doing may invalidate any purported
acceptance. Persons wishing to accept the Offer should not use such mails
or any such means or instrumentality for any purpose directly or indirectly
related to acceptance of the Offer or such election. Envelopes containing
the Form of Acceptance should not be postmarked in the United States,
Canada, Australia or Japan or otherwise despatched from the United States,
Canada, Australia or Japan and all acceptors must provide addresses outside
the United States, Canada, Australia or Japan for the receipt of the
remittance of cash or for the return of the Form of Acceptance,
certificate(s) for SGB Shares and/or other document(s) of title.
(c) The provisions of this paragraph 6 and/or any other terms of the Offer
relating to overseas shareholders may be waived, varied or modified as
regards specific SGB Shareholder(s) or on a general basis by Harsco
Investment in its absolute discretion. Subject to this, the provisions of
this paragraph 6 supersede any terms of the Offer inconsistent therewith.
References in this paragraph 6 to a SGB Shareholder shall include the
person or persons executing a Form of Acceptance and, in the event or more
than one person executing a Form of Acceptance, the provisions of this
paragraph shall apply to them jointly and to each of them.
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PART C FORM OF ACCEPTANCE
Each SGB Shareholder by whom, or on whose behalf, a Form of Acceptance is
executed and received by Computershare or by or on behalf of Harsco Investment
or Lazard irrevocably undertakes, represents, warrants and agrees to and with
Harsco Investment and Lazard, (so as to bind him, his personal representatives,
heirs, successors and assigns) to the following effect:
(a) that the execution of a Form of Acceptance, whether or not any other Boxes
are completed, shall constitute:
(i) an acceptance of the Offer in respect of the relevant SGB
Shareholder's entire holding of SGB Shares (or such lesser number as
may have been inserted in Box 1 of the Form of Acceptance), provided
that if a number is inserted in Box 1 which exceeds such shareholder's
holding of SGB Shares, the acceptance will be deemed to have been made
in respect of that shareholder's entire holding of SGB Shares; and
(ii) an undertaking to execute any further documents and give any further
assurances which may be required to enable Harsco Investment to obtain
the full benefit of this Part C and/or to perfect any of the
authorities expressed to be given hereunder,
in each case on and subject to the terms and conditions set out or referred
to in this document and the Form of Acceptance and that, subject only to
the rights of withdrawal set out in paragraph 3 of Part B of this Appendix
I, each such acceptance shall be irrevocable;
(b) that unless "No" has been inserted in Box 5 of the Form of Acceptance, such
SGB Shareholder has not received or sent copies or originals of this
document, the Form of Acceptance or any related documents in, into or from
the United States, Canada, Japan or Australia and has not otherwise
utilised in connection with the Offer, directly or indirectly, the mails
of, or any means or instrumentality (including, without limitation, the
post, facsimile transmission, telex and telephone) of interstate or foreign
commerce or any facility of a national securities exchange of the United
States, Canada, Japan or Australia; was outside the United States, Canada,
Japan or Australia when the Form of Acceptance was delivered; and, in
respect of the SGB Shares to which the Form of Acceptance relates, is not
an agent or a fiduciary acting on a non-discretionary basis for a
principal, unless such agent or fiduciary is an authorised employee of such
principal or such principal has given any instructions with respect to the
Offer from outside the United States, Canada, Japan or Australia;
(c) that the SGB Shares in respect of which the Offer is accepted or deemed to
be accepted are sold free from all liens, equities, charges, encumbrances
and other interests and together with all rights attaching thereto,
including voting rights and the right to all dividends and other
distributions declared, made or paid after 16 May 2000;
(d) that the execution of the Form of Acceptance and such receipt will
constitute, subject to the Offer becoming unconditional in all respects and
to the person accepting the Offer not having validly withdrawn his
acceptance, the irrevocable appointment of each of Harsco Investment and
Lazard and their respective directors and agents as such shareholder's
attorney and/or agent (the "attorney"), and an irrevocable instruction to
the attorney with the authority to complete and execute all or any form(s)
of transfer and/or other document(s) at the discretion of the attorney in
relation to the SGB Shares in respect of which the Offer has been accepted
in favour of Harsco Investment or such other person or persons as Harsco
Investment or its agents may direct and to deliver such form(s) of transfer
and/or other document(s) at the discretion of the attorney and/or agent
together with the share certificate(s) and/or other document(s) of title
relating to such SGB Shares for registration within six months of the Offer
becoming or being declared unconditional in all respects and to do all such
other acts and things as may in the opinion of the attorney be necessary or
expedient for the purposes of, or in connection with, the acceptance of the
Offer and to vest in Harsco Investment or its nominee(s) the SGB Shares as
aforesaid;
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(e) that the execution of the Form of Acceptance and such receipt will
constitute the irrevocable appointment of Computershare as such
shareholder's attorney and/or agent and an irrevocable instruction and
authority to the attorney and/or agent (i) subject to the Offer becoming
unconditional in all respects in accordance with its terms and to an
accepting SGB Shareholder not having validly withdrawn his acceptance, to
transfer to itself (or to such other person or persons as Harsco Investment
or its agents may direct) by means of CREST all or any of the Relevant SGB
Shares (but not exceeding the number of SGB Shares in respect of which the
Offer is accepted); and (ii), if the Offer does not become unconditional in
all respects, to give instructions to CRESTCo, immediately after the
lapsing of the Offer (or within such longer period as the Panel may permit,
not exceeding 14 days of the lapsing of the Offer), to transfer all
Relevant SGB Shares to the original available balance of the accepting SGB
Shareholder. "Relevant SGB Shares" means SGB Shares in uncertificated form
and in respect of which a transfer or transfers to escrow has or have been
effected pursuant to the procedures described in paragraph 11(d) of the
letter from Lazard contained in this document and where the transfer(s) to
escrow was or were made in respect of SGB Shares held under the same member
account ID and participant ID as the member account ID and participant ID
relating to the Form of Acceptance concerned (but irrespective of whether
or not any Form of Acceptance Reference Number, or a Form of Acceptance
Reference Number corresponding to that appearing on the Form of Acceptance
concerned, was included in the TTE instruction concerned);
(f) that the execution of the Form of Acceptance and such receipt will
constitute, subject to the Offer becoming unconditional in all respects and
to an accepting SGB Shareholder not having validly withdrawn his
acceptance, an irrevocable authority and request:
(i) to SGB or its agents to procure the registration of the transfer of
the SGB Shares pursuant to the Offer and the delivery of the share
certificate(s) and/or other document(s) of title in respect thereof to
Harsco Investment or as it may direct;
(ii) if the SGB Shares concerned are in certificated form, or if either of
the provisos to sub-paragraph (iii) of this paragraph (f) apply to
Harsco Investment or its agents, to procure the despatch by post (or
by such other method as may be approved by the Panel) of a cheque
drawn on a branch of a UK clearing bank for any cash consideration, to
which an accepting SGB Shareholder becomes entitled pursuant to his
acceptance of the Offer, at the risk of such SGB Shareholder to the
person whose name and address is set out in Box 3 or, if applicable,
Box 6 of the Form of Acceptance or, if none is set out, to the first
named holder at his registered address (outside the United States,
Canada, Japan and Australia);
(iii) if the SGB Shares concerned are in uncertificated form, to Harsco
Investment or its agents to procure the creation of an assured payment
obligation in favour of the SGB Shareholder's payment bank in
accordance with the CREST assured payment arrangements in respect of
any cash consideration to which an accepting SGB Shareholder becomes
entitled pursuant to his acceptance of the Offer, provided that (a)
Harsco Investment may (if, for any reason, it wishes to do so)
determine that all or any part of any such cash shall be paid by
cheque despatched by post and (b) if the SGB Shareholder concerned is
a CREST member whose registered address is in the United States,
Canada, Japan or Australia, any cash to which such shareholder is
entitled shall be paid by cheque despatched by post to the address set
out in Box 6 of the Form of Acceptance or, if none is set out, to the
first-named holder at his registered address outside the United
States, Canada, Australia or Japan;
(g) that the execution of the relevant Form of Acceptance and such receipt will
constitute the irrevocable appointment of each of Harsco Investment and
Lazard and their respective directors and agents as such shareholder's
attorney and/or agent (the "attorney") within the terms of paragraph 4 of
Part B of this Appendix I and this Part C and with authority to execute any
further documents and give any further assurances which may be required in
connection with the matters referred to in Parts B and C of this Appendix I
and an irrevocable undertaking to such attorney to execute any such further
documents and/or give any such further assurances as may be required;
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(h) that Harsco Investment shall be entitled after the Offer becomes or is
declared wholly unconditional, to direct the exercise of any votes and any
or all other rights and privileges (including the right to requisition the
convening of a general or separate class meeting of SGB) attaching to any
SGB Shares in respect of which the Offer has been accepted and not validly
withdrawn, and the execution of the Form of Acceptance will constitute an
authority to SGB from such shareholder to send any notice, circular,
warrant or other document of communication which may be required to be sent
to him as a member of SGB in respect of such shares (including any share
certificate(s) or other document(s) of title issued as a result of
conversion of such SGB Shares into certificated form) to Harsco Investment
at its registered office, and an authority to Harsco Investment or any
person nominated by Harsco Investment to sign any consent to short notice
of a general or separate class meeting as his attorney and/or agent and on
his behalf and/or to execute a form of proxy in respect of such SGB Shares
appointing any person nominated by Harsco Investment to attend general and
separate class meetings of SGB and to exercise the votes attaching to such
shares on his behalf, where relevant, such votes to be cast so far as
possible to satisfy any outstanding condition of the Offer, and will also
constitute the agreement of such shareholder not to exercise any such
rights without the consent of Harsco Investment and the irrevocable
undertaking of such shareholder not to appoint a proxy for or to attend
such general or separate class meeting. This authority will cease to be
valid if the acceptance is withdrawn in accordance with paragraph 3 of Part
B of this Appendix I;
(i) that he will deliver, or procure the delivery of, to Computershare, at the
address(es) set out in paragraph 3(a) of Part B of this Appendix I, his
share certificate(s) and/or other document(s) of title in respect of the
SGB Shares in respect of which the Offer has been accepted and not validly
withdrawn held by him in certificated form, or an indemnity acceptable to
Harsco Investment in lieu thereof, as soon as possible and in any event
within six months of the Offer becoming unconditional in all respects;
(j) that he will take (or procure to be taken) the action set out in paragraph
11(d) of the letter from Lazard contained in this document to transfer all
SGB Shares in respect of which the Offer has been accepted held by him in
uncertificated form to an escrow balance as soon as possible and in any
event so that the transfer to escrow settles within 6 months of the Offer
becoming unconditional in all respects;
(k) that if, for any reason, any SGB Shares in respect of which a transfer to
an escrow balance has been effected in accordance with paragraph 11(d) of
the letter from Lazard contained in this document are converted to
certificated form, he will (without prejudice to paragraph (j) of this Part
C) immediately deliver or procure the immediate delivery of the share
certificate(s) or other document(s) of title in respect of all such SGB
Shares as so converted to Computershare at either of the address(es)
referred to in paragraph 3(a) of Part B of this Appendix I or to Harsco
Investment at its registered office or as Harsco Investment or its agents
may direct;
(l) that the creation of an assured payment obligation in favour of his payment
bank in accordance with CREST assured payments arrangements as referred to
in paragraph (f) (iii) of this Part C shall, to the extent of the
obligation so created, discharge in full any obligation of Harsco
Investment and/or Lazard to pay to him any cash consideration in respect of
fractional entitlements to which he is entitled pursuant to the Offer;
(m) that he agrees to ratify each and every act or thing which may be done or
effected by Harsco Investment or Lazard or any of their respective
directors or agents or SGB or its agents, as the case may be, in the proper
exercise of any of its or his powers and/or authorities hereunder;
(n) that he shall do all such acts and things as shall be necessary or
expedient to vest in Harsco Investment or its nominee(s) the SGB Shares
aforesaid and all such acts and things as may be necessary or expedient to
enable Computershare to perform its function as Escrow Agent for the
purposes of the Offer; and
(o) that if any provision of Part B of this Appendix I or this Part C shall be
unenforceable or invalid or shall not operate so as to afford Harsco
Investment or Lazard or any of their respective
26
<PAGE> 27
directors the benefit of the authority expressed to be given therein, he
shall with all practicable speed do all such acts and things and execute
all such documents that may be required to enable Harsco Investment and/or
Lazard and/or any of their respective directors or agents to secure the
full benefits of Part B of this Appendix I and this Part C.
References in this Part C to a SGB Shareholder shall include references to
the person or persons executing a Form of Acceptance and in the event of
more than one person executing a Form of Acceptance the provisions of this
Part C shall apply to them jointly and to each of them.
27
<PAGE> 28
APPENDIX II
FURTHER INFORMATION ON HARSCO AND HARSCO INVESTMENT
1. HARSCO INVESTMENT
Harsco Investment was incorporated on 4 May 2000 under the name Marksgood
Limited (No. 3985379), changed its name to Harsco Investment Limited on 15 May
2000 and has its registered office at Commonwealth House, 2 Chalkhill Road,
London, W6 8DW. Harsco Investment is a wholly owned subsidiary of Harsco and has
been established for the purpose of making the Offer. It has an authorised share
capital of pound sterling1,000 and an issued share capital of 1 ordinary share
of pound sterling1.
2. FINANCIAL INFORMATION ON HARSCO
The information contained in Section 3 of this Appendix for each of the years
ended 31 December 1997, 1998 and 1999 has been extracted from the published
audited consolidated financial statements of Harsco.
The information contained in Section 4 of this Appendix for each of the three
months ended 31 March 1999, 2000 has been extracted from the published unaudited
financial statements of Harsco.
28
<PAGE> 29
3. FINANCIAL INFORMATION FOR THE YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997.
CONSOLIDATED STATEMENT OF INCOME OF HARSCO
The summarised consolidated profit and loss accounts of Harsco for the three
years ended 31 December 1999 are set out below:
<TABLE>
<CAPTION>
Years ended 31 December
-------------------------------------------------
1999 1998 1997
(In US$ thousands, except per share amounts)
<S> <C> <C> <C>
Revenues
Service sales $ 864,035 $ 866,404 $ 782,406
Product sales 852,653 867,054 845,072
Other 4,123 1,936 1,643
----------- ----------- -----------
Total revenues 1,720,811 1,735,394 1,629,121
----------- ----------- -----------
Costs and expenses
Cost of services sold 666,560 666,806 584,290
Cost of products sold 662,972 660,536 645,044
Selling, general, and administrative expenses 207,765 213,438 211,231
Research and development expenses 7,759 6,977 6,090
Other (income) and expenses 6,019 (4,264) 2,578
----------- ----------- -----------
Total costs and expenses 1,551,075 1,543,493 1,449,233
----------- ----------- -----------
Income from continuing operations before interest, income
taxes, and minority interest 169,736 191,901 179,888
Interest income 4,662 8,378 8,464
Interest expense (26,968) (20,504) (16,741)
----------- ----------- -----------
Income from continuing operations before income taxes and
minority interest 147,430 179,775 171,611
Provision for income taxes 51,599 67,361 65,213
----------- ----------- -----------
Income from continuing operations before minority interest 95,831 112,414 106,398
Minority interest in net income 5,118 4,901 5,998
----------- ----------- -----------
Income from continuing operations 90,713 107,513 100,400
Discontinued operations:
Equity in income of defense business (net of income taxes of US$14,082) -- -- 28,424
Gain on disposal of defense business (net of income taxes of US$100,006) -- -- 150,008
=========== =========== ===========
Net income $ 90,713 $ 107,513 $ 278,832
=========== =========== ===========
Basic earnings per common share:
Income from continuing operations $ 2.22 $ 2.36 $ 2.06
Income from discontinued operations -- -- .58
Gain on disposal of discontinued operations -- -- 3.08
=========== =========== ===========
Basic earnings per common share $ 2.22 $ 2.36 $ 5.72
=========== =========== ===========
Average shares of common stock outstanding 40,882 45,568 48,754
=========== =========== ===========
Diluted earnings per common share:
Income from continuing operations $ 2.21 $ 2.34 $ 2.04
Income from discontinued operations -- -- .58
Gain on disposal of discontinued operations -- -- 3.05
----------- ----------- -----------
Diluted earnings per common share $ 2.21 $ 2.34 $ 5.67
=========== =========== ===========
Diluted average shares of common stock outstanding 41,017 45,911 49,192
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
CONSOLIDATED BALANCE SHEET OF HARSCO
The consolidated balance sheet of Harsco as at 31 December 1999 is set out
below:
<TABLE>
<CAPTION>
31 December
1999
(In US$
thousands,
except share
amounts)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 51,266
Accounts receivable, net 331,123
Inventories 172,198
Other current assets 58,368
--------------
TOTAL CURRENT ASSETS 612,955
--------------
Property, plant and equipment, net 671,546
Cost in excess of net assets of businesses acquired, net 258,698
Other assets 116,624
==============
TOTAL ASSETS $ 1,659,823
==============
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ 32,014
Current maturities of long-term debt 4,593
Accounts payable 132,394
Accured compensation 46,615
Income taxes 44,154
Dividends payable 9,417
Other current liabilities 161,329
--------------
TOTAL CURRENT LIABILITIES 430,516
--------------
Long-term debt 418,504
Deferred income taxes 52,932
Insurance liabilities 37,097
Other liabilities 70,653
--------------
TOTAL LIABILITIES 1,009,702
--------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A junior participating cumulative preferred stock
Common stock, par value $1.25, issued 66,221,544 as at 31 December 1999 82,777
Additional paid-in capital 88,101
Accumulated other comprehensive income (expense) (80,538)
Retained earnings 1,155,586
--------------
1,245,926
Treasury stock, at cost (26,149,759 Shares) (595,805)
--------------
TOTAL SHAREHOLDERS' EQUITY 650,121
==============
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,659, 823
==============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
CONSOLIDATED STATEMENT OF CASH FLOWS OF HARSCO
The consolidated cash flow statement of Harsco for the year ended 31 December
1999 is set out below:
<TABLE>
<CAPTION>
Year ended
31 December 1999
(In US$
thousands)
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 90,713
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 122,777
Amortization 13,076
Equity in income of unconsolidated entities (3,004)
Dividends or distributions from unconsolidated entities 3,369
Deferred income taxes 193
Other (income) and expenses 6,019
Other, net 5,205
Changes in assets and liabilities, net of acquisitions and
dispositions of businesses:
Accounts receivable (28,157)
Inventories 15,934
Accounts payable (1,238)
Disbursements related to discontinued defense business (14,605)
Other assets and liabilities 3,671
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 213,953
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (175,248)
Purchase of businesses, net of cash acquired* (48,907)
Proceeds from sale of businesses 17,718
Proceeds from sale of property, plant and equipment 14,381
Other investing activities (2,618)
---------
NET CASH USED BY INVESTING ACTIVITIES (194,674)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (10,546)
Current maturities and long-term debt: Additions 214,133
Reductions (103,410)
Cash dividends paid on common stock (37,022)
Common stock issued-options 2,272
Common stock acquired for treasury (71,860)
Other financing activities (2,495)
---------
NET CASH (USED) BY FINANCING ACTIVITIES (8,928)
---------
Effect of exchange rate changes on cash (647)
---------
Net increase in cash and cash equivalents 9,704
Cash and cash equivalents at beginning of year 41,562
=========
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 51,266
=========
* Purchase of businesses, net of cash acquired
Working capital, other than cash $ 18,078
Property, plant and equipment (36,417)
Other noncurrent assets and liabilities, net (30,568)
=========
Net cash used to acquire businesses $ (48,907)
=========
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE> 32
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Other Comprehensive Income (Expense)
----------------------------------------------------
Net
Additional Unrealized
Common Stock Paid-In Investment Pension
------------------------ Capital Translation Gains/(losses) Liability
Issued Treasury
(In US$ thousands, except share amounts)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, 31 December 1998 $ 82,594 (529,462) $ 85,384 $ (51,391) - $(3,654)
---------- ----------- ----------- ----------- ----------- ---------
Net income
Cash dividends declared, $.91
per share
Translation adjustments (27,273)
Pension liability adjustments,
net of ($1,277) deferred
income taxes 1,780
Acquired during the year,
2,326,798 shares (66,441)
Stock options exercised,
146,164 shares 183 2,740
Other, 2,497 shares 98 (23)
---------- ----------- ----------- ----------- ----------- ---------
Balances, 31 December 1999 $ 82,777 (595,805) $ 88,101 $ (78,664) $ - $(1,874)
========== ========== ========== =========== =========== ========
</TABLE>
<TABLE>
<CAPTION> Retained
Total Earnings
---------------------------
<S> <C> <C>
Balances, 31 December 1998 $ (55,045) 1,101,828
----------- -----------
Net income 90,713
Cash dividends declared, $.91
per share (36,955)
Translation adjustments (27,273)
Pension liability adjustments,
net of ($1,277) deferred
income taxes 1,780
Acquired during the year,
2,326,798 shares
Stock options exercised,
146,164 shares
Other, 2,497 shares
----------- -----------
Balances, 31 December 1999 $ (80,538) 1,155,586
========== ===========
</TABLE>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended 31 December
----------------------------------
1999 1998 1997
(In US$ thousands)
----------------------------------
<S> <C> <C> <C>
Net income $ 90,713 $ 107,513 $ 278,832
---------- ---------- ----------
Other comprehensive income (expense):
Foreign currency translation adjustments (27,273) (1,714) (24,201)
Unrealized investment gains (losses), net of deferred
income taxes - 28 (28)
Pension liability adjustments, net of deferred income 1,780 (2,385) (650)
taxes
---------- ---------- ----------
Other comprehensive income (expense) (25,493) (4,071) (24,879)
---------- ---------- ----------
Total comprehensive income $ 65,220 $ 103,442 $ 253,953
========== ========== ==========
</TABLE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF HARSCO
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Harsco Corporation
and its majority-owned subsidiaries ("Company"). Investments in unconsolidated
entities (all of which are 20-50% owned) are accounted for under the equity
method.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits, and short-term
investments which are highly liquid in nature and have an original maturity of
three months or less.
32
<PAGE> 33
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. Inventories in the United
States are accounted for using principally the last-in, first-out (LIFO) method.
Other inventories are accounted for using the first-in, first-out (FIFO) or
average cost methods.
Depreciation
Property, plant and equipment is recorded at cost and depreciated over the
estimated useful lives of the assets using principally the straight-line method.
When property is retired from service, generally the cost of the retirement is
charged to the allowance for depreciation to the extent of the accumulated
depreciation, and the balance is charged to income. Long-lived assets to be
disposed are not depreciated while they are held for disposal.
Intangible Assets
Intangible assets consist principally of cost in excess of net assets of
businesses acquired, which is amortized on a straight line basis over a period
not to exceed 30 years. Accumulated amortization was $74.9 million at 31
December 1999.
Impairment of Long-Lived Assets
Long-lived assets, including cost in excess of net assets of businesses acquired
and other intangible assets, used in the Company's operations are reviewed for
impairment when events and circumstances indicate that the carrying amount of an
asset may not be recoverable.
The Company's policy is to record an impairment loss when it is determined that
the carrying amount of the asset exceeds the sum of the expected undiscounted
future cash flows resulting from use of the asset and its eventual disposition.
Impairment losses are measured as the amount by which the carrying amount of the
asset exceeds its fair value. Long-lived assets to be disposed are reported at
the lower of the carrying amount or fair value less cost to sell.
Revenue Recognition
Revenue is recognised for product sales generally when title and risk of loss
transfer. Service sales are recognised over the contractual period or as
services are performed.
Income Taxes
United States federal and state income taxes and non-U.S. income taxes are
provided currently on the undistributed earnings of international subsidiaries
and unconsolidated affiliated entities, giving recognition to current tax rates
and applicable foreign tax credits, except when management has specific plans
for reinvestment of undistributed earnings which will result in the indefinite
postponement of their remittance. Deferred taxes are provided using the asset
and liability method for temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Accrued Insurance and Loss Reserves
The Company retains a significant portion of the risk for workers' compensation,
automobile, general and product liability losses. Reserves have been recorded
which reflect the undiscounted estimated liabilities including claims incurred
but not reported. Changes in the estimates of the reserves are included in net
income in the period determined. Amounts estimated to be paid within one year
have been classified as Other current liabilities, with the remainder included
in Insurance liabilities.
Foreign Currency Translation
The financial statements of the Company's subsidiaries outside the United
States, except for those subsidiaries located in highly inflationary economies,
are principally measured using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange
rates as of the balance sheet date. Resulting translation adjustments are
recorded in the cumulative translation adjustment, a separate component of other
comprehensive income (expense). Income and expense
33
<PAGE> 34
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
items are translated at average monthly exchange rates. Gains and losses from
foreign currency transactions are included in net income. For subsidiaries
operating in highly inflationary economies, gains and losses on foreign currency
transactions and balance sheet translation adjustments are included in net
income.
Effective January 1997, the Company's operations in Mexico were accounted for as
a highly inflationary economy since the three-year cumulative rate of inflation
at 31 December 1996 exceeded 100 per cent. The functional currency for the
Company's operations in Mexico was the U.S. dollar for 1997 and 1998. Effective
January 1999, the three-year cumulative rate of inflation fell below 100 per
cent. As of 1 January 1999, the Company measures the financial statements of its
Mexican entities using the Mexican new peso as the functional currency.
Effective January 1998, the Company's operations in Brazil were no longer
accounted for as a highly inflationary economy, because the three-year
cumulative rate of inflation fell below 100 per cent. The Company measures the
financial statements of its Brazilian entities using the Brazilian real as the
functional currency.
Financial Instruments and Hedging
The Company has subsidiaries principally operating in North America, South
America, Europe, and Asia-Pacific. These operations are exposed to fluctuations
in related foreign currencies in the normal course of business. The Company
seeks to reduce exposure to foreign currency fluctuations, through the use of
forward exchange contracts. The Company does not hold or issue financial
instruments for trading purposes, and it is the Company's policy to prohibit the
use of derivatives for speculative purposes. The Company has a Foreign Currency
Risk Management Committee that meets periodically to monitor foreign currency
risks.
The Company executes forward foreign exchange contracts to hedge transactions of
its non-U.S. subsidiaries for firm purchase commitments and for export sales
denominated in foreign currencies. These contracts generally are for 90 to 180
days or less. For those contracts that hedge an identifiable transaction, gains
or losses are deferred and accounted for as part of the underlying transaction.
The cash flows from these contracts are classified consistent with the cash flow
from the transaction being hedged. The Company also enters into forward foreign
exchange contracts for intercompany foreign currency commitments. These foreign
exchange contracts do not qualify as hedges. Therefore, gains and losses are
recognized in income based on fair market value.
Options for Common Stock
The Company uses the intrinsic value based method to account for options granted
for the purchase of common stock. No compensation expense is recognized on the
grant date, since at that date, the option price equals the market price of the
underlying common stock. The Company discloses the pro-forma effect of
accounting for stock options under the fair value method.
Earnings Per Share
Basic earnings per share is calculated using the average shares of common stock
outstanding, while diluted earnings per share reflects the potential dilution
that could occur if stock options were exercised.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications.
34
<PAGE> 35
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Financial Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with
an amended effective date for fiscal years beginning after 15 June 2000. SFAS
133 requires that an entity recognize on its balance sheet all derivative
instruments as either assets or liabilities at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or Other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction, and, if it is, the type of hedge transaction. The Company
will adopt SFAS 133 as of 1 January 2001. Due to the Company's limited use of
derivative instruments, SFAS 133 is not expected to have a material effect on
the financial position or results of operations of the Company.
2. DISCONTINUED DEFENSE BUSINESS
On 25 August 1997, the Company and FMC Corporation signed an agreement to sell
United Defense, L.P. for $850 million, and the sale was completed on 6 October
1997. Prior to the sale, FMC had been the managing general partner and 60% owner
of United Defense, L.P., while the Company owned the balance of 40% as the
limited partner. United Defense supplies ground combat and naval weapons systems
for the U.S. and military customers worldwide.
On the Consolidated Statement of Income under Discontinued Operations, "Equity
in income of defense business" includes equity income through August 1997 (the
measurement date) from the Company's 40% interest in United Defense, L.P. The
sale resulted in pre-tax cash proceeds to the Company in 1997 of $344 million
and resulted in an after tax gain on the sale of $150 million or $3.08 per share
after taking into account certain retained liabilities from the partnership and
estimated post-closing net worth adjustments, as well as pre-partnership
formation contingencies and other defense business contingencies.
Disbursements related to the discontinued defense business, principally legal
fees and settlements, are shown separately on the Consolidated Statement of Cash
Flows for 1999.
3. ACQUISITIONS AND DISPOSITIONS
Acquisitions
In October 1999, the Company acquired Charter plc's Pandrol Jackson railway
track maintenance business. The transaction was completed for approximately $48
million in cash plus assumption of liabilities, for a total consideration of
approximately $65 million. Pandrol Jackson manufactures and markets worldwide a
wide range of equipment and services used in railway track maintenance. In
December 1999, the Company completed the sale of the railway switch, crossing
and transit grinding business obtained as part of the Pandrol Jackson railway
maintenance acquisition. This business with annual sales of approximately $6
million was divested in accordance with an agreement with the Department of
Justice as a condition to the acquisition of Pandrol Jackson.
In July 1999, the Company acquired certain assets and assumed certain
liabilities of Structural Accessories, Inc. The total consideration was
approximately $2 million. Structural accessories, Inc. manufactures and sells
bridge bearings and expansion joints.
In February 1999, the Company acquired certain assets and assumed certain
liabilities of Natural Gas Vehicle Systems, Inc. Total consideration was
approximately $3 million. Natural Gas Vehicle Systems, Inc. manufactures
cylinders used in vehicles which use natural gas.
In October 1998, the Company acquired Superior Valve Company from Amcast
Industrial Corporation. Superior Valve designs, manufactures, and sells high
pressure, precision valves for a range of commercial and industrial
applications.
35
<PAGE> 36
3. ACQUISITION AND DISPOSITION (CONTINUED)
In June 1998, the Company acquired Chemi-Trol Chemical Co. for approximately $46
million. Chemi-Trol's principal business is the production and distribution of
steel pressure tanks for the storage of propane gas and anhydrous ammonia.
In April 1998, the Company acquired Faber Prest Plc for approximately $98
million. Faber Prest is a UK-based provider of mill services to worldwide steel
producers and integrated logistics services to the steel industry and other
market sectors.
In February 1998, the Company acquired EFI Corporation (EFIC) from Real
Electronics Plc for approximately $7.2 million. EFIC produces lightweight
composite cylinders used extensively in fire-fighter breathing apparatus as well
as other industrial and commercial applications.
All acquisitions have been accounted for using the purchase method of accounting
with cost in excess of net assets of businesses acquired totalling $9.4 million
in 1999 and $94.6 million in 1998. Results of operations are included in income
since the dates of acquisition.
The following unaudited pro-forma consolidated net sales, net income, and
earnings per share data are presented as if the above businesses had been
acquired at the beginning of the periods presented.
<TABLE>
<CAPTION>
for Years Ended 31 December
Proforma Information 1999 1998
(In US$ millions, except per share data)
<S> <C> <C>
Net sales $ 1,767 $ 1,929
Net income 90 97
Basic earnings per share 2.20 2.13
Diluted earnings per share 2.19 2.12
========= =========
</TABLE>
The unaudited pro-forma information is not necessarily indicative of the results
of operations that would have occurred had the purchases been made at the
beginning of the periods presented, or of the future results of the combined
operations.
The pro-forma information includes the actual results of the acquired businesses
prior to the acquisition dates. These results do not reflect the effect of
reorganization actions, synergies, cost reductions and other benefits resulting
from the combinations. Additionally, the pro-forma information reflects
amortization of the cost in excess of net assets acquired and interest expense
on assumed borrowings for acquisitions for the full periods presented.
Dispositions
In October 1998, the Company completed the sale of Nutter Engineering to the
Sulzer Chemtech division of Swiss-based Sulzer Technology Corporation. Nutter
had sales of approximately $25 million and $24 million in 1998 and 1997,
respectively.
The sale of HydroServ SAS was completed in December 1998.
The Company completed the sales of Astralloy Wear Technology in March 1999; the
pavement marking and vegetation control business of Chemi-Trol in August 1999;
and the Manchester truck dealership in September 1999. Additionally, the Company
plans to dispose of its investments in Bio-Oxidation Services Inc., Gunness
Wharf Limited and Flixborough Wharf Limited.
36
<PAGE> 37
4. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of US$13.3
million at 31 December 1999.
<TABLE>
<CAPTION>
1999
(In US$
thousands)
<S> <C>
Inventories consist of:
Finished goods $ 37,715
Work-in-process 37,198
Raw materials and purchased parts 76,911
Stores and supplies 20,374
--------
$172,198
========
Valued at lower of cost or market:
LIFO basis $132,366
FIFO basis 16,483
Average cost basis 23,349
--------
$172,198
========
</TABLE>
Inventories valued on the LIFO basis at 31 December 1999 were approximately
US$28.4 million less than the amounts of such inventories valued at current
costs.
As a result of reducing certain inventory quantities valued on the LIFO basis,
net income increased from that which would have been recorded under the FIFO
basis of valuation, by US$1.1 million.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1999
(In US$
thousands)
<S> <C>
Property, plant and equipment consists of:
Land and improvements $ 28,847
Buildings and improvements 147,742
Machinery and equipment 1,243,437
Uncompleted construction 79,797
----------
1,499,823
Less accumulated depreciation 828,277
----------
$ 671,546
==========
</TABLE>
The estimated useful lives of different types of assets are generally:
<TABLE>
<S> <C>
Land improvements 10 years
Buildings and improvements 10 to 50 years
Certain plant, buildings and installations (principally Mill Services Segment) 3 to 15 years
Machinery and equipment 3 to 20 years
</TABLE>
37
<PAGE> 38
6. DEBT AND CREDIT AGREEMENTS
The Company has a $400 million Five-Year Competitive Advance and Revolving
Credit Facility ("credit facility") maturing in July 2001. Borrowings under this
agreement are available in U.S. dollars or Eurocurrencies and the credit
facility serves as back-up to the Company's U.S. commercial paper program.
Interest rates are either negotiated, based upon the U.S. federal funds
interbank market, prime, or based upon the London Interbank Offered Rate (LIBOR)
plus a margin. The Company pays a facility fee (0.08% per annum as of 31
December 1999) that varies based upon its credit ratings. At 31 December 1999
there were no borrowings outstanding.
The Company can also issue up to $400 million of short-term notes in the U.S.
commercial paper market. In addition, the Company has a three billion Belgian
franc commercial paper program (approximately U.S. $75 million at 31 December
1999) which is used to fund the Company's international operations. The Company
limits the aggregate commercial paper and credit facility borrowings at any one
time to a maximum of $400 million. Commercial paper interest rates, which are
based on market conditions, have been lower than on comparable borrowings under
the credit facility. At 31 December 1999 $233.7 million of commercial paper was
outstanding. Commercial paper is classified as long-term debt at 31 December
1999 because the Company has the ability and intent to refinance it on a
long-term basis through existing long-term credit facilities.
Short-term debt amounted to $32.0 million at 31 December 1999. The weighted
average interest rate for short-term borrowings at 31 December 1999 was 4.6%.
Long-term debt consists of:
<TABLE>
<CAPTION>
1999
(In US$
thousands)
<S> <C>
6.0% notes due 15 September 2003 $150,000
Commercial paper borrowings, with a weighted average interest rate of 5.8% as of
31 December 1999 233,746
Faber Prest loan notes due 31 October 2008 with interest based on sterling LIBOR
minus .75% (5.4% at 31 December 1999) 16,285
Industrial development bonds, payable in varying amounts from 2001 to 2005 with a
weighted average interest rate of 6.4% as of 31 December 1999 11,400
Other financing payable in varying amounts to 2005 with a weighted average interest
rate of 7.3% as of 31 December 1999 11,666
--------
423,097
Less current maturities 4,593
--------
$418,504
========
</TABLE>
The credit facility and certain notes payable agreements contain covenants
restricting, among other things, the amount of debt as defined in the agreement
that can be issued. At 31 December 1999, the Company was in compliance with
these covenants.
The maturities of long-term debt for the four years following 31 December 2000,
are:
<TABLE>
<CAPTION>
(In US$
thousands)
<S> <C>
2001 $242,927
2002 2,049
2003 150,967
2004 4,778
</TABLE>
Cash payments for interest on all debt was $25.0 US$ millions in 1999.
Capitalized interest was US$893 thousand in 1999.
38
<PAGE> 39
6. DEBT AND CREDIT AGREEMENTS (CONTINUED)
The Company has on file with the Securities and Exchange Commission, a Form S-3
shelf registration for the possible issuance of up to an additional US$200
million of new debt securities, preferred stock, or common stock.
7. LEASES
The Company leases certain property and equipment under non-cancelable operating
leases. Rental expense under such operating leases was US$16.9 millions in 1999.
Future minimum payments under operating leases with non-cancelable terms are:
<TABLE>
<CAPTION>
(In US$
thousands)
<S> <C>
2000 $15,703
2001 12,534
2002 9,399
2003 7,268
2004 13,309
After 2004 16,598
</TABLE>
8. EMPLOYEE BENEFIT PLANS
Pension Benefits
The Company has pension and profit sharing retirement plans, most of which are
noncontributory, covering substantially all of its employees. The benefits for
salaried employees generally are based on years of service and the employee's
level of compensation during specified periods of employment. Plans covering
hourly employees generally provide benefits of stated amounts for each year of
service. The multi-employer plans in which the Company participates provide
benefits to certain unionized employees. The Company's funding policy for
qualified plans is consistent with statutory regulations and customarily equals
the amount deducted for income tax purposes. The Company's policy is to amortize
prior service costs over the average future service period of active plan
participants.
<TABLE>
<CAPTION>
1999 1998 1997
(In US$ thousands)
<S> <C> <C> <C>
PENSION EXPENSE
Defined benefit plans:
Service cost $ 15,882 $ 13,785 $ 9,519
Interest cost 23,048 21,367 15,129
Expected return on plan assets (36,848) (39,859) (27,604)
Recognized prior service costs 2,052 1,307 1,368
Recognized (gains) or losses 278 (4,034) (3,517)
Amortization of transition asset (2,447) (2,453) (2,457)
Curtailment (gains) or losses -- 542 (5,468)
-------- -------- --------
1,965 (9,345) (13,030)
Multi-employer plans 4,922 4,054 4,457
Defined contribution plans 4,466 6,043 4,131
-------- -------- --------
Pension (income) expenses $ 11,353 $ 752 $ (4,442)
======== ======== ========
</TABLE>
In 1997, the curtailment gain of $5.5 million was the result of a sizable
reduction in the number of employees under a plan related to a discontinued
facility. This gain, along with certain costs, was recorded under Other (income)
and expenses in the Consolidated Statement of Income.
39
<PAGE> 40
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The change in the financial status of the pension plans and amounts recognized
in the Consolidated Balance Sheet at 31 December 1999 are:
<TABLE>
<CAPTION>
1999
Pension Benefits (In US$
thousands)
<S> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 371,454
Service cost 15,882
Interest cost 23,048
Plan participants' contributions 1,887
Amendments 5,416
Actuarial (gain) loss (42,466)
Benefits paid (15,229)
Obligations of acquired companies 8,574
Effect of foreign currency (5,598)
---------
Benefit obligation at end of year $ 362,968
=========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 458,241
Actual return on plan assets 67,692
Employer contributions 1,425
Plan participants' contributions 1,887
Benefits paid (15,103)
Plan assets of acquired companies 8,057
Effect of foreign currency (6,270)
---------
Fair value of plan assets at end of year $ 515,929
=========
FUNDED STATUS
Funded status at end of year $ 152,961
Unrecognized net (gain) loss (92,817)
Unrecognized transition (asset) obligation (13,222)
Unrecognized prior service cost 25,534
---------
Net amount recognized $ 72,456
=========
AMOUNTS RECOGNISED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF
Prepaid benefit cost $ 85,914
Accrued benefit liability (18,907)
Intangible asset 2,588
Accumulated other comprehensive income 2,861
---------
Net amount recognized $ 72,456
=========
</TABLE>
Plan assets include equity and fixed-income securities. At 31 December 1999
732,640 shares of the Company's common stock with a fair market value of $23.3
million are included in plan assets. Dividends paid on such stock amounted to
$0.7 million in 1999.
The actuarial assumptions used for the defined benefit pension plans, including
international plans, are:
<TABLE>
1999
<S> <C>
Weighted average assumed discount rates 6.9%
Weighted average expected long-term rates of return on plan assets 8.4%
Rates of compensation increase 4.2%
</TABLE>
40
<PAGE> 41
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $33.6 million, $32.4 million and $15.7 million respectively,
as of 31 December 1999.
POSTRETIREMENT BENEFITS
The Company has postretirement life insurance benefits for a majority of
employees, and postretirement health care benefits for a limited number of
employees mainly under plans related to acquired companies. The cost of life
insurance and health care benefits are accrued for current and future retirees
and are recognized as determined under the projected unit credit actuarial
method. Under this method, the Company's obligation for postretirement benefits
is to be fully accrued by the date employees attain full eligibility for such
benefits. The Company's postretirement health care and life insurance plans are
unfunded.
The postretirement benefit expense (health care and life insurance) was $0.4
million in 1999, $0.3 million in 1998, and $0.2 million in 1997. The components
of these expenses are not shown separately as they are not material.
The changes in the postretirement benefit liability recorded in the Consolidated
Balance Sheet are:
<TABLE>
<CAPTION>
Postretirement Benefits 1999
(In US$
thousands)
<S> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 6,421
Service cost 129
Interest cost 466
Actuarial loss (gain) 319
Benefits paid (325)
Obligation of acquired company 3,294
--------
Benefit obligation at end of year $ 10,304
========
FUNDED STATUS
Funded status at end of year $(10,304)
Unrecognized prior service cost (39)
Unrecognized net actuarial (gain) (1,328)
--------
Net amount recognized as accrued benefit liability $(11,671)
========
</TABLE>
The actuarial assumptions used for postretirement benefit plans are:
<TABLE>
<CAPTION>
1999 1998 1997
(In US$ thousands)
<S> <C> <C> <C>
Assumed discount rate 7.75% 6.75% 7.25%
Health care cost trend rate 7.50% 8.30% 8.70%
Decreasing to ultimate rate 6.50% 5.50% 5.50%
Effect of one percent increase in health care cost trend rate:
On cost components $ 21 $ 21 $ 47
On accumulated benefit obligation $ 415 $ 185 $ 192
------- ------- -------
</TABLE>
For 1999, a one percent decrease in the health care cost trend rate would
decrease the cost component by $19 thousand and decrease the accumulated benefit
obligation by $405 thousand.
It is anticipated that the health care cost trend rate will decrease from 7.5%
in 2000 to 6.5% in the year 2003.
41
<PAGE> 42
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
SAVINGS PLAN
The Company has a 401(k) savings plan which covers substantially all U.S.
employees with the exception of employees represented by a collective bargaining
agreement, unless the agreement expressly provides otherwise. Employee
contributions are generally determined as a percentage of covered employee's
compensation. The expense for contributions to the plan by the Company was (in
million) $4.4, $4.8, and $4.5 for 1999, 1998, and 1997, respectively.
EXECUTIVE INCENTIVE COMPENSATION PLAN
Under the 1995 Executive Incentive Compensation Plan, the Management Development
and Compensation Committee awarded 60% of the value of any earned annual
incentive compensation award to be paid to participants in the form of cash and
40% in the form of restricted shares of the Company's common stock. Upon the
request of the participant, the Committee was authorised to make the incentive
award payable all in cash, subject to a 25% reduction in the total amount of the
award. Awards were made in February of the following year. The Company accrued
amounts based on performance reflecting the value of cash and common stock which
was anticipated to be earned for the year. Compensation expense relating to
these awards was (in millions) $3.8, $3.7, and $5.1 in 1999, 1998 and 1997,
respectively.
Effective 1 January 1999 the restricted stock portion of the compensation plan
was discontinued and the terms of the plan were amended to provide for payment
of the incentive compensation all in cash. On 6 January 1999 the Company
repurchased from the participants, at the original award value, the restricted
shares awarded in 1998. For all other shares, the restrictions were removed
effective 6 January 1999.
9. INCOME TAXES
Income from continuing operations before income taxes and minority interest in
the Consolidated Statement of Income consists of:
<TABLE>
<CAPTION>
1999 1998 1997
(In US$ thousands)
<S> <C> <C> <C>
United States $ 78,689 $ 121,091 $ 93,386
International 68,741 58,684 78,225
--------- --------- ---------
$ 147,430 $ 179,775 $ 171,611
========= ========= =========
Provision for income taxes:
Currently payable:
Federal $ 22,474 $ 37,297 $ 21,627
State 1,743 2,835 4,309
International 25,203 23,468 30,538
--------- --------- ---------
49,420 63,600 56,474
Deferred federal and state 3,890 6,552 9,426
Deferred international (1,711) (2,791) (687)
--------- --------- ---------
$ 51,599 $ 67,361 $ 65,213
========= ========= =========
</TABLE>
Cash payments for income taxes were (in US$ millions) $50.7, $38.8, and $167.0,
for 1999, 1998, and 1997, respectively. Approximately $5.4 million of the taxes
paid in 1998 and $100.0 million of the taxes paid in 1997 are related to the
gain on the disposal of the defense business.
42
<PAGE> 43
9. INCOME TAXES (CONTINUED)
The following is a reconciliation of the normal expected statutory U.S. federal
income tax rate to the effective rate as a percentage of Income from continuing
operations before income taxes and minority interest as reported in the
Consolidated Statement of Income:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 1.6 1.6 2.1
Export sales corporation benefit (.5) (.6) (.4)
Losses for which no tax benefit was recorded .3 1.3 .4
Difference in effective tax rates on international earnings
and remittances (1.9) (1.3) (.2)
Nondeductible acquisition costs 2.1 2.0 1.8
Other, net (1.6) (.5) (.7)
------ ------ ------
Effective income tax rate 35.0% 37.5% 38.0%
====== ====== ======
</TABLE>
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities for the year ended 31 December,
1999 are:
<TABLE>
<CAPTION>
1999
----------------------
Deferred income taxes Asset Liability
(In US$ thousands)
<S> <C> <C>
Depreciation $ -- $ 36,580
Expense accruals 34,975 --
Inventories 5,294 --
Provision for receivables 3,867 --
Postretirement benefits 4,221 --
Deferred revenue -- 4,196
Unrelieved foreign tax losses 6,694 --
Unrelieved domestic tax losses 2,424 --
Pensions -- 22,923
Other -- 1,913
-------- --------
57,475 65,612
Valuation allowance (4,045) --
-------- --------
Total deferred income taxes $ 53,430 $ 65,612
======== ========
</TABLE>
At 31 December, 1999, Other current assets included deferred income tax benefits
of $35.0 million.
At 31 December, 1999, certain of the Company's subsidiaries had total available
net operating loss carryforwards ("NOLs") of approximately $27.8 million, of
which approximately $17.9 million may be carried forward indefinitely and $9.9
million have varying expiration dates. Included in the total are $8.7 million of
preacquisition NOLs.
During 1999, $2.3 million of preacquisition NOLs were utilized by the Company,
resulting in tax benefits of $0.8 million.
The valuation allowance of $4.0 million and $6.3 million at 31 December, 1999
and 1998, respectively, relates principally to cumulative unrelieved tax losses
which are uncertain as to realizability. To the extent that the preacquisition
NOLs are utilized in the future and the associated valuation allowance reduced,
the tax benefit will be allocated to reduce the cost in excess of net assets of
businesses acquired.
43
<PAGE> 44
9. INCOME TAXES (CONTINUED)
The change in the valuation allowances for 1999 and 1998 results primarily from
the utilization of international tax loss carryforwards and the release of
valuation allowances in certain international jurisdictions based on the
Company's reevaluation of the realizability of future benefits. The release of
valuation allowances in certain jurisdictions was allocated to reduce the cost
in excess of net assets of businesses acquired by $ 0.3 million in 1999. There
was no reduction in 1998.
10. COMMITMENTS AND CONTINGENCIES
DISCONTINUED DEFENSE BUSINESS - CONTINGENCIES
Federal Excise Tax and Other Matters Related to the Five-Ton Truck Contract
In 1995, the Company, the United States Army ("Army"), and the United States
Department of Justice concluded a settlement of Harsco's previously reported
claims against the Army relating to Federal Excise Tax ("FET") arising under a
completed 1986 contract for the sale of five-ton trucks to the Army. On 27
September, 1995, the Army paid the Company $49 million in accordance with the
settlement terms. The Company released the Army from any further liability for
those claims, and the Department of Justice released the Company from a
threatened action for damages and civil penalties based on an investigation
conducted by the Department's Commercial Litigation Branch that had been pending
for several years.
The settlement preserves the rights of the parties to assert claims and defenses
under the Internal Revenue Code, and rights of the Army and the Company to claim
certain amounts that may be owed by either party to reconcile possible
underpayments or overpayments on the truck contract as part of the formal
contract close-out process.
The settlement does not resolve the claim by the Internal Revenue Service
("IRS") that, contrary to the Company's position, certain cargo truck models
sold by the Company should be considered to have gross vehicle weights in excess
of the 33,000 pound threshold under FET law, are not entitled to an exemption
from FET under any other theory, and therefore are taxable. In 1999, the IRS
assessed an increase in FET of $30.4 million plus penalties of $9.3 million and
applicable interest currently estimated to be $45.5 million. In October 1999,
the Company posted an $80 million bond required as security by the IRS. This
increase in FET takes into account offsetting credits of $9.2 million, based on
a partial allowance of the Company's $31.9 million claim that certain truck
components are exempt from FET. The IRS disallowed in full the Company's
additional claim that it is entitled to the entire $52 million of FET (plus
applicable interest currently estimated by the Company to be $41.7 million) the
Company has paid on the five-ton trucks, on the grounds that such trucks qualify
for the FET exemption applicable to certain vehicles specially designed for the
primary function of off-highway transportation. In the event that the Company
ultimately receives from the IRS a refund of tax (including applicable interest)
with respect to which the Company has already received reimbursement from the
Army, the refund would be allocated between the Company and the Army. The
Company plans to vigorously contest the IRS assessment in the U.S. Court of
Federal Claims. Although there is risk of an adverse outcome, both the Company
and the Army believe that the cargo trucks are not taxable. No recognition has
been given in the accompanying financial statements for the Company's claims
with the IRS.
The settlement agreement with the Army preserves the Company's right to seek
reimbursement of after-imposed tax from the Army in the event that the cargo
trucks are determined to be taxable, but the agreement limits the reimbursement
to a maximum of $21 million. Additionally, in an earlier contract modification,
the Army accepted responsibility for $3.6 million of the potential tax, bringing
its total potential responsibility up to $24.6 million.
44
<PAGE> 45
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under the settlement, the Army agreed that if the cargo trucks are determined to
be taxable, the 1993 decision of the Armed Services Board of Contract Appeals
(which ruled that the Company is entitled to a price adjustment to the contract
for reimbursement of FET paid on vehicles that were to be delivered after 1
October 1988) will apply to the question of the Company's right to reimbursement
from the Army for after-imposed taxes on the cargo trucks. In the Company's view
application of the 1993 decision will favourably resolve the principal issues
regarding any such future claim by the Company. Therefore, the Company believes
that even if the cargo trucks are ultimately held to be taxable, the Army would
be obligated to reimburse the Company for a majority of the tax, (but not
interest or penalty, if any), resulting in a net maximum liability for the
Company of $5.8 million plus penalties and applicable interest currently
estimated to be $9.3 million and $45.5 million, respectively. The Company
believes it is unlikely that resolution of this matter will have a material
adverse effect on the Company's financial position, however, it could have a
material effect on quarterly or annual results of operations.
Other Defense Business Litigation
In 1992, the U.S. Government filed a counterclaim against the Company in a civil
suit alleging violations of the False Claims Act and breach of a contract to
supply M109A2 Self-Propelled Howitzers. In May 1999, the Company and the U.S.
Government settled. Under the settlement agreement, Harsco paid the U.S.
Government $11 million and both parties released all claims in the case. The
settlement payment was charged against an existing reserve in the second quarter
of 1999.
In 1992, the United States Government through its Defense Contract Audit Agency
commenced an audit of certain contracts for sale of tracked vehicles by the
Company to foreign governments, which were financed by the United States
Government through the Defense Security Assistance Agency. In September 1994,
the Company received a subpoena issued by the Department of Defense Inspector
General seeking various documents relating to issues raised in the audit.
The Government subsequently subpoenaed a number of former employees of the
Company's divested defense business to testify before a grand jury and issued
grand jury subpoenas to the Company for additional documents. On 22 December
1999, the Company announced that it reached agreement with the U.S. Government
on behalf of its former BMY Combat Systems Division to settle the matter. Under
the agreement, BMY Combat Systems pled guilty to a one-count misdemeanor
relating to submitting advance payment certifications which resulted in BMY
receiving a portion of the payments for the contract prematurely. Harsco will
pay the Government a $200,000 fine plus $10.8 million in damages for a total of
$11 million.
The settlement, which is subject to acceptance by the U.S. District Court, ends
the Government's investigation and releases Harsco and BMY from further
liability for the issues under investigation. Harsco will charge the payment
against an existing reserve, resulting in no charge to the Company's earnings.
Based on the terms of the settlement, the Company expects to pay the $11 million
in the second quarter of 2000, following the Court's entry of judgement.
CONTINUING OPERATIONS - CONTINGENCIES
Environmental
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavourably to
the Company. The Company has evaluated its potential liability, and its
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheet at 31 December 1999, and 1998 includes an accrual of
$3.0 million and $4.9 million, respectively,
45
<PAGE> 46
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
for environmental matters. The amounts affecting pre-tax earnings related to
environmental matters totaled $0.7 million of income for the year 1999, $0.8
million of expense for the year 1998 and $1.7 million of expense for the year
1997.
The liability for future remediation costs is evaluated on a quarterly
basis. Actual costs to be incurred at identified sites in future period may vary
from the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position
or results of operations.
Other
The Company is subject to various other claims, legal proceedings, and
investigations covering a wide range of matters that arose in the ordinary
course of business. In the opinion of management, all such matters are
adequately covered by insurance or by accruals, and if not so covered, are
without merit or are of such kind, or involve such amounts, that would not have
a material adverse effect on the financial position or results of operations of
the Company.
11. CAPITAL STOCK
The authorized capital stock consists of 150,000,000 shares of common stock and
4,000,000 shares of preferred stock, both having a par value of $1.25 per share.
The preferred stock is issuable in series with terms as fixed by the Board of
Directors. None of the preferred stock has been issued. On 24 June 1997, the
Company adopted a revised Shareholder Rights Plan to replace the Company's 1987
Plan which expired on 28 September 1997. Under the new Plan, the Board declared
a dividend to shareholders of record on 28 September 1997, of one right for each
share of common stock. The rights may only be exercised if, among other things,
a person or group has acquired 15 per cent. or more, or intends to commence a
tender offer for 20 per cent. or more, of the Company's common stock. Each right
entitles the holder to purchase 1/100th share of a new Harsco Junior
Participating Cumulative Preferred Stock at an exercise price of $150. Once the
rights become exercisable, if any person acquires 20 per cent. or more of the
Company's common stock, the holder of a right will be entitled to receive common
stock calculated to have a value of two times the exercise price of the right.
The rights, which expire on 28 September 2007, do not have voting power, and may
be redeemed by the Company at a price of $.05 per right at any time until the
10th business day following public announcement that a person or group has
accumulated 15 per cent. or more of the Company's common stock. At 31 December
1999, 750,000 shares of $1.25 par value preferred stock were reserved for
issuance upon exercise of the rights.
In November 1998, the Board of Directors authorized the purchase, over a
one-year period, of 2,000,000 shares of the Company's common stock. The Company
purchased 877,500 shares of this authorization in 1998. The Board of Directors
subsequently increased the authorization by 2,000,000 shares in January 1999.
Through 31 December 1999, 3,143,646 shares of common stock were purchased under
these authorizations. This leaves 856,354 shares remaining under the
authorization. In January 2000, the Board of Directors extended the share
purchase authorization through 25 January 2001.
In 1999, additional share repurchases of 58,155, net of issues, were made
principally as part of the 1995 Executive Compensation Plan.
COMMON STOCK SUMMARY
<TABLE>
<CAPTION>
Share Treasury Shares
Balances Issued Shares Outstanding
<S> <C> <C> <C>
31 December 1999 66,221,544 26,149,759 40,071,785
</TABLE>
46
<PAGE> 47
The following is a reconciliation of the average shares of common stock used to
compute basic earnings per common share to the shares used to compute diluted
earnings per common share as shown on the Consolidated Statement of Income:
<TABLE>
<CAPTION>
1999 1998 1997
(In US$ thousands, except per share data)
<S> <C> <C> <C>
Income from continuing operations $ 90,713 $ 107,513 $ 100,400
----------- ----------- -----------
Average shares of common stock outstanding used to
compute basic earnings per common share 40,882,153 45,568,256 48,754,212
Additional common shares to be issued assuming exercise
of stock options, net of shares assumed reacquired 134,914 342,275 437,660
----------- ----------- -----------
Shares used to compute dilutive effect of stock options 41,017,067 45,910,531 49,191,872
----------- ----------- -----------
Basic earnings per common share from continuing
operations $ 2.22 $ 2.36 $ 2.06
Diluted earnings per common share from continuing
operations $ 2.21 $ 2.34 $ 2.04
</TABLE>
47
<PAGE> 48
12. STOCK-BASED COMPENSATION
The Company's net income and net income per common share would have been reduced
to the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant date
for awards in accordance with the provisions of SFAS No. 123.
<TABLE>
<CAPTION>
1999 1998 1997
(In US$ thousands, except per share data)
<S> <C> <C> <C>
Net income:
As reported $ 90,713 $ 107,513 $ 278,832
Pro forma 89,113 105,736 277,101
Basic earnings per share:
As reported 2.22 2.36 5.72
Pro forma 2.18 2.32 5.68
Diluted earnings per share:
As reported 2.21 2.34 5.67
Pro forma 2.17 2.30 5.63
</TABLE>
The fair value of the options granted during 1999, 1998 and 1997 is estimated on
the date of grant using the binomial option pricing model. The weighted-average
assumptions used and the estimated fair value are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Expected term 4 years 4 years 4 years
Expected stock volatility 25.0% 16.0% 16.0%
Risk free interest rate 4.65% 5.65% 6.46%
Dividend $ 0.91 $ 0.88 $ 0.80
Rate of dividend increase 5% 5% 5%
Fair value $ 5.18 $ 6.68 $ 6.55
</TABLE>
The Company has granted stock options to officers, certain key employees, and
directors for the purchase of its common stock under two shareholder approved
plans. The 1995 Executive Incentive Compensation Plan authorizes the issuance of
up to 4,000,000 shares of the Company's common stock for use in paying incentive
compensation awards in the form of restricted stock and stock options. The 1995
Non-employee Directors' Stock Plan authorizes the issuance of up to 300,000
shares of the Company's common stock for stock option awards. Options are
granted at fair market value at date of grant and become exercisable commencing
one year later. The options expire ten years from the date of grant. Upon
shareholder approval of these two plans in 1995, the Company terminated the use
of the 1986 stock option plan for granting of stock option awards. At 31
December 1999, there were 2,729,158 and 220,000 shares available for granting
stock options under the 1995 Executive Incentive Compensation Plan and the 1995
Non-Employee Directors' Stock Plan, respectively.
48
<PAGE> 49
12. STOCK-BASED COMPENSATION (CONTINUED)
Changes during 1999, 1998, and 1997 in options outstanding were:
<TABLE>
<CAPTION>
Weighted
Average
Shares Under Exercise
Option Price
<S> <C> <C>
Outstanding, 1 January 1997 1,202,026 $ 22.24
Granted 294,600 34.41
Exercised (395,885) 20.81
Terminated and expired (15,280) 22.90
--------- ---------
Outstanding, 31 December 1997 1,085,461 26.06
Granted 275,100 38.30
Exercised (221,293) 24.93
Terminated and expired (16,500) 35.73
--------- ---------
Outstanding, 31 December 1998 1,122,768 29.14
Granted 428,400 26.92
Exercised (146,164) 19.06
Terminated and expired (68,400) 31.36
--------- ---------
Outstanding, 31 December 1999 1,336,604 $ 28.97
========= =========
</TABLE>
Options to purchase 932,704 shares, 857,168 shares and 793,061 shares were
exercisable at 31 December 1999, 1998, and 1997, respectively. The following
table summarizes information concerning outstanding and exercisable options at
31 December 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Remaining Weighted Weighted
Contractual Average Average
Range of Exercisable Number Life In Exercise Number Exercise
Prices Outstanding Years Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$11.81 - $17.63 34,778 1.8 $15.39 34,778 $15.39
20.69 - 29.47 793,726 7.0 25.61 407,826 24.62
32.81 - 46.16 508,100 7.6 36.31 490,100 36.44
--------- -------
1,336,604 932,704
========= =======
</TABLE>
During 1999, 1998 and 1997, the Company had non-cash transactions related to
stock option exercises of $0.5 million, $1.6 million and $2.3 million,
respectively, whereby old shares were exchanged for new shares.
As of 1 January 1999, the restricted stock portion of the 1995 Executive
Incentive Compensation Plan was discontinued.
The following table summarizes the restricted stock activity for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Restricted shares awarded 40,702 57,622
Restricted shares forfeited 378 135
Weighted average market value of stock on grant date $43.22 $36.69
------ ------
</TABLE>
During 1998 and 1997, the Company recorded $.1 million and $1.9 million
respectively, in compensation expense related to restricted stock.
49
<PAGE> 50
13. FINANCIAL INSTRUMENTS
Off-Balance Sheet Risk
As collateral for performance and to ceding insurers, the Company is
contingently liable under standby letters of credit and bonds in the amount of
$165.9 million at 31 December 1999. These standby letters of credit and bonds
are generally in force for up to four years. Certain issues have no scheduled
expiration date. The Company pays fees to various banks and insurance companies
that range from 0.08 to 1.9 per cent. per annum of their face value. If the
Company were required to obtain replacement standby letters of credit and bonds
as of 31 December 1999 for those currently outstanding, it is the Company's
opinion that the replacement costs would not vary significantly from the present
fee structure.
At 31 December 1999, the Company had $19.2 million of forward foreign currency
exchange contracts outstanding. These contracts are part of a worldwide program
to minimize foreign currency exchange operating income and balance sheet
exposure. The unsecured contracts mature within 12 months and are with major
financial institutions. The Company is exposed to credit loss in the event of
non-performance by the other parties to the contracts. The Company evaluates the
credit worthiness of the counterparties' financial condition and does not expect
default by the counterparties.
Foreign Exchange Risk Management
The Company generally has currency exposures in thirty-two countries. The
Company's primary foreign currency exposures are in the United Kingdom, France,
Canada, South Africa, Brazil, Germany, Australia, and Mexico.
Forward foreign currency exchange contracts are used to hedge commitments, such
as foreign currency debt, firm purchase commitments, and foreign currency cash
flows for certain export sales transactions.
The following table summarize by major currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars as of 31 December 1999. The
"Buy" amounts represent the U.S. dollar equivalent of commitments to purchase
foreign currencies, and the "Sell" amounts represent the U.S. dollar equivalent
of commitments to sell foreign currencies.
<TABLE>
<CAPTION>
As of 31 December 1999
-----------------------------------------------------------------------
Type U.S. Maturity Recognized Unrealized
Dollar Gain (Loss) Gain (Loss)
Equivalent
(in thousands)
<S> <C> <C> <C> <C> <C>
Forward exchange contracts:
Euros Buy $ 17,339 18 January 2000 $ (661) $ --
British pounds Buy 1,506 Various in 2000 79 --
French francs Buy 229 Various in 2000 -- (13)
British pounds Buy 93 Various in 2000 -- (2)
-------- -------- --------
$ 19,167 $ (582) $ (15)
======== ======== ========
</TABLE>
At 31 December 1999, the Company had entered into forward exchange contracts in
euros and British pounds, which were used to hedge certain future payments
between the Company and its various subsidiaries. These forward contracts do not
qualify as hedges for financial reporting purposes. At 31 December 1999, the
Company had recorded net losses of $0.6 million on these contracts. These losses
were generally offset by gains on the hedged items. In January 2000, the euro
contract was extended to 18 March 2000. The Company also had forward exchange
contracts in French francs and British pounds, which were used to hedge
equipment purchases. Since these contracts hedge indentifiable foreign currency
firm commitments. the losses were deferred and will be accounted for as part of
the underlying transactions.
50
<PAGE> 51
13. FINANCIAL INSTRUMENTS (CONTINUED)
Concentrations of credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents, investments
and accounts receivable. The Company places its cash and cash equivalents with
high quality financial institutions and, by policy limits the amount of credit
exposure to any one institution. Concentrations of credit risk with respect to
accounts receivable are limited due to the Company's large number of customers
and their dispersion across different industries and geographies. The Company
generally does not require collateral or other security to support customer
receivables.
Fair value of financial instruments.
The major methods and assumptions used in estimating the fair values of
financial instruments are:
Cash and cash equivalents
The carrying amount approximates fair value due to the relatively short period
to maturity of these instruments.
Long-term debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities.
Foreign currency exchange contracts
The fair value of foreign currency exchange contracts are estimated by obtaining
quotes from brokers.
The carrying amounts and estimated fair values of the Company's financial
instruments as of 31 December 1999 are:
<TABLE>
<CAPTION>
1999
---------------------
Carrying Fair
Amount Value
(in US$ thousands)
<S> <C> <C>
Cash and cash equivalents $ 51,266 $ 51,266
Long-term debt 423,097 416,925
Foreign currency exchange contracts 19,167 18,571
</TABLE>
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA
The Company reports information about its operating segments according to the
"management approach". The management approach is based on the way management
organizes the segments within the enterprise for making operating decisions and
assessing performance.
The Company's reportable segments are identified based upon differences in
products, services and markets served. The Company's business units are
aggregated into three reportable segments. The three reportable segments and the
type of products and services offered include:
Harsco Mill Services
This segment provides metal reclamation and other mill services, principally for
the global steel industry. Mill services include slag processing, marketing, and
disposal; slab management systems; materials handling and scrap management
programs; in-plant transportation; and a variety of environmental services.
Similar services are provided to non-ferrous metallurgical industries, such as
aluminium, nickel, and copper. Also, slag recovery services are provided to
electric utilities from which granules for asphalt roofing shingles and slag
abrasives for industrial surface preparation are derived.
51
<PAGE> 52
Harsco Gas and Fluid Control
Major products and services are gas containment cylinders and tanks, including
cryogenic equipment; valves, regulators, and gauges; including scuba and life
support equipment; industrial pipe fittings; and air-cooled heat exchangers.
Major customers include various industrial markets; hardware, plumbing, and
petrochemical sectors; natural gas and process industries; propane, compressed
gas, life support, scuba, and refrigerant gas industries; gas equipment
companies; welding distributors; medical laboratories; beverage carbonation
users; and the animal husbandry industry.
Harsco Infrastructure
Major products and services include railway maintenance-of-way equipment and
services; scaffolding, shoring, and concrete forming products and erection and
dismantling services; bridge decking and industrial grating; process equipment,
including industrial blenders, dryers, mixers, water heaters, boilers, and heat
transfer equipment.
Products and services are provided to private and government-owned railroads
worldwide; urban mass transit operators; public utilities; industrial plants;
the oil, chemical, petrochemical, and process industries; bridge repair
companies; commercial and industrial construction firms; and infrastructure
repair and maintenance markets. Other customers include the chemical, food
processing, and pharmaceutical industries; and institutional building and
retrofit markets.
Other Information
The measurement basis of segment profit or loss is income after taxes from
continuing operations. Interest income is recorded by each segment as incurred.
Interest expense is allocated to the segments based on actual interest expense
incurred by international operations and based on internal borrowings at an
estimated weighted average interest rate for domestic operations. Income taxes
are allocated to the segments based on actual income tax expense incurred, or
where aggregated for tax purposes, based on the effective income tax rates for
the countries in which they operate. The operations of the Company in any one
country, except the United States, do not account for more than 10 per cent of
sales and no single customer represented 10 per cent or more of the Company's
sales, during 1999, 1998, and 1997. There are no significant intersegment sales.
Corporate assets include principally cash investments prepaid pension costs, and
United States deferred taxes. Assets in the United Kingdom represent 12 per
cent of total segment assets as of 31 December 1999 and 1998 and are disclosed
separately in the geographic area information.
52
<PAGE> 53
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
SEGMENT INFORMATION(1)(2)
<TABLE>
<CAPTION>
Segments Net Sales to Unaffiliated Customers Income from Continuing Operations
------------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
(in US$ millions)
<S> <C> <C> <C> <C> <C> <C>
Harsco Mill
Services(3)(4) $ 729.6 $ 751.9 $ 672.7 $ 45.1 $ 43.3 $ 50.3
Harsco Gas and
Fluid Control 560.9 588.7 558.3 27.0 40.9 29.5
Harsco
Infrastructure(5) 426.2 392.9 396.5 22.5 18.6 15.5
--------- --------- --------- ------ ------ -------
Segment totals $ 1,716.7 $ 1,733.5 $ 1,627.5 94.6 102.8 95.3
--------- --------- --------- ------ ------ -------
General corporate
income (expense) (3.9) 4.7 5.1
------ ------ -------
Income from
continuing
operations $ 90.7 $107.5 $100.4
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Depreciation
and Capital
Segments Assets Amortization Expenditure
1999 1999 1999
----------------------------------------
<S> <C> <C> <C>
Harsco Mill Services(4) $ 934.6 $ 99.5 $ 134.9
Harsco Gas and Fluid Control 347.9 18.1 21.4
Harsco Infrastructure(5) 325.7 17.0 17.9
--------- ------------ -----------
Segment totals 1,608.2 134.6 174.2
Corporate 51.6 1.3 1.0
--------- ------------ -----------
Total $ 1,659.8 $ 135.9 $ 175.2
========= ============ ===========
</TABLE>
(1) The 1997 segment information has been restated in accordance with the
Financial Accounting Standards Board SFAS No.131, "Disclosure about
Segments of an Enterprise and Related Information."
(2) Segment information reflects the first quarter 1999 reorganization of
the Patterson-Kelley division. Segment information for 1998 and 1997
has been restated to reflect this change. The reorganization resulted
in the realignment of the heat transfer and industrial blending
equipment product lines from the Harsco Gas and Fluid Control Segment
to the Harsco Infrastructure Segment. Sales of these product lines were
$ 26.9 million, $ 29.2 million, $ 28.2 million for the years 1999, 1998
and 1997, respectively.
(3) For the years ended 31 December 1999, 1998 and 1997 the Harsco Mill
Services Segment included equity in income of unconsolidated entities
of $ 3.0 million, $ 1.4 million, and $1.0 million, respectively.
(4) A non-cash amount of $ 26.6 million of loan notes was issued for the
Faber Press acquisition related to the Harsco Mill Services Segment in
1998.
(5) The Pandrol Jackson railway maintenance-of-way business was acquired in
October 1999 and is included as part of the Harsco Infrastructure
Segment. Pandrol Jackson sales were $ 12.4 million in 1999, and assets
were $ 69.2 million as of 31 December 1999.
53
<PAGE> 54
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
Reconciliation of reported income before interest, income taxes and minority
interest to segment income.
<TABLE>
<CAPTION>
Harsco Gas
and
Harsco Mill Fluid Harsco General Consolidated
Services Control Infrastructure Corporate Total
(in US$ millions)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 (1)
Income (loss) from continuing operations
before interest, income taxes, and
minority interest $ 81.2 $ 47.5 $ 41.2 $ (0.2) $ 169.7
Interest income 4.3 0.1 0.2 0.1 4.7
Interest expense (10.8) (4.8) (6.3) (5.1) (27.0)
Income tax (expense) benefit (24.4) (15.9) (12.6) 1.3 (51.6)
Minority interest in net (income) loss (5.2) 0.1 -- -- (5.1)
--------- --------- --------- --------- ---------
Segment income (loss) from continuing
operations $ 45.1 $ 27.0 $ 22.5 $ (3.9) $ 90.7
========= ========= ========= ========= =========
1998(2)
Income from continuing operations
before interest, income taxes, and
minority interest $ 84.3 $ 72.3 $ 32.9 $ 2.4 $ 191.9
Interest income 4.8 0.2 0.4 3.0 8.4
Interest expense (11.0) (4.1) (5.4) -- (20.5)
Income tax expense (29.9) (27.5) (9.3) (0.7) (67.4)
Minority interest in net income (4.9) -- -- -- (4.9)
--------- --------- --------- --------- ---------
Segment income from continuing operations $ 43.3 $ 40.9 $ 18.6 $ 4.7 $ 107.5
========= ========= ========= ========= =========
1997(3)
Income (loss) from continuing operations
before interest, income taxes, and
minority interest $ 99.1 $ 51.3 $ 29.7 $ (0.2) $ 179.9
Interest income 2.0 0.1 0.2 6.1 8.4
Interest expense (6.6) (3.1) (5.9) (1.1) (16.7)
Income tax (expense) benefit (38.5) (18.5) (8.5) 0.3 (65.2)
Minority interest in net income (5.7) (0.3) -- -- (6.0)
--------- --------- --------- --------- ---------
Segment income from continuing operations $ 50.3 $ 29.5 $ 15.5 $ 5.1 $ 100.4
========= ========= ========= ========= =========
</TABLE>
(1) For 1999, segment income includes pre-tax special charges of $3.4
million and $2.5 million for the Harsco Mill Services Segment and
Harsco Gas and Fluid Control Segment, respectively.
(2) For 1998, segment income includes pre-tax special charges (gains) of
$15.6 million, ($18.2) million, and $4.8 million for the Harsco Mill
Services Segment, Harsco Gas and Fluid Control Segment and the Harsco
Infrastructure Segment, respectively.
(3) For 1997, segment income includes pre-tax special charges (gains) of
$0.4 million, $1.8 million, and $(0.3) million for the Harsco Mill
Services Segment, Harsco Gas and Fluid Control Segment and the Harsco
Infrastructure Segment, respectively.
See Note 15 for further information on special charges and gains.
By Geographic Area
<TABLE>
<CAPTION>
Segment
Net Sales to Unaffiliated Customers Assets
1999 1998 1997 1999
------------------------------------------------
(In US$ millions)
<S> <C> <C> <C> <C>
United States $1,095.3 $1,085.6 $1,044.8 $ 797.1
United Kingdom 155.5 126.4 61.1 186.2
All other 465.9 521.5 521.6 624.9
-------- -------- -------- --------
Segment Totals $1,716.7 $ 1733.5 $1,627.5 $1,608.2
======== ======== ======== ========
</TABLE>
(4) Revenues are attributed to individual countries based on the location
of the facility generating the revenue.
54
<PAGE> 55
15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS)
In the years 1999, 1998, and 1997, the Company recorded Other (income) and
expenses of $6.0 million, $(4.3) million, and $2.6 million, respectively:
<TABLE>
<CAPTION>
Other (Income) and Expenses
----------------------------------
1999 1998 1997
----------------------------------
(In US$ thousands)
<S> <C> <C> <C>
Net gains $ (560) $(29,107) $(1,620)
Impaired asset write-downs 2,878 14,410 1,592
Employee termination benefit costs 2,889 6,543 (810)
Costs to exit activities 502 2,792 3,313
Other 310 1,098 103
------ -------- -------
Total $6,019 $ (4,264) $ 2,578
======== ========= ========
</TABLE>
Additionally, in 1998 the Company recorded $6.5 million of other special
charges, of which $2.2 million is included in cost of products sold, $3.5
million in cost of services sold, and $.8 million in general and administrative
expenses. For 1998 this resulted in net special charges of $2.2 million which
includes Other (income) and expenses. The 1998 amounts were incurred principally
in the fourth quarter in which results included $29.6 million of gains and other
credits offset by $29.5 million of special charges. Other (income) and expenses
and special charges and gains consist principally of gains on the sale of
businesses, impaired asset write-downs, employee termination benefit costs,
costs to exit activities, and other reorganization-related costs. Pre-tax
amounts by operating segment include:
<TABLE>
<CAPTION>
Special Charges and (Gains)
1999 1998 1997
--------------------------------
(In US$ thousands)
<S> <C> <C> <C>
Harsco Mill Services $3,350 $ 15,618 $ 441
Harsco Gas and Fluid Control 2,452 (18,232) 1,766
Harsco Infrastructure (10) 4,826 (348)
Corporate 227 (11) 719
------ -------- ------
Total $6,019 $ 2,201 $2,578
====== ========= =======
</TABLE>
Net Gains
Net gains for 1998 consist principally of a pre-tax net gain of $27 million
recorded on the October 1998 sale of the Nutter Engineering unit of the Harsco
Gas and Fluid Control Segment. Such gains are reflected as adjustments to
reconcile net income to net cash provided by operating activities in the
Consolidated Statement of Cash Flows. Total proceeds associated with 1998
special gains were $42.9 million and are included in proceeds from the sale of
business and property, plant and equipment in the investing activities section
to the Consolidated Statement of Cash Flows. Other related information
concerning dispositions is discussed in Note 3.
Impaired Asset Write-downs
Impaired asset write-downs for 1999 include a $1.9 million pre-tax, non-cash,
write-down of the Company's investment in Bio-Oxidation Services Inc. which is
included in the Harsco Gas and Fluid Control Segment. The Company's investment
in Bio-Oxidation Services Inc. is being held for disposal. The write-down amount
was measured on the basis of the lower of carrying amount or fair value less
cost to sell.
55
<PAGE> 56
15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS) (CONTINUED)
Fair value was determined using available information based upon the estimated
amount at which the assets could be sold in the current transaction between
willing parties. The investment carrying value as of 31 December 1999 was $6.6
million. For the year ended 31 December 1999, Bio-Oxidation Services Inc.
recorded a pre-tax loss of $2.3 million which includes the asset write-down of
$1.9 million. The Company estimates that the disposal will occur during 2000.
Impaired asset write-downs for 1998 include a $6.1 million pre-tax, non-cash,
write-down of the Company's investment in Bio-Oxidation Services Inc. The
investment carrying value as of 31 December 1998 was $7.6 million. For the year
ended 31 December 1998 Bio-Oxidation Services Inc. recorded a pre-tax loss of
$9.8 million which includes the asset write-down of $6.1 million.
Impaired asset write-downs for 1998 also include a $6.1 million pre-tax,
non-cash, write-down of assets, principally property, plant and equipment in the
Harsco Mill Services Segment. The write-down became necessary as a result of
significant adverse changes in the international economic environment and the
steel industry. Impairment loss was measured as the amount by which the carrying
amount of assets exceeded their estimated fair value. Fair value was estimated
based upon the expected future realizable net cash flows. In September 1999,
assets associated with a substantial portion of this provision were sold in
conjunction with the termination settlement of a contract in Russia.
Non-cash impaired asset write-downs are included in Other (income) and expenses
in the Consolidated Statement of Cash Flows as adjustments to reconcile net
income to net cash provided by operating activities.
Employee Termination Benefit Costs
Employee termination costs consist principally of severance arrangements to
employees terminated as a result of management reorganization actions. Under
these reorganization actions, the Company's management has established and
approved specific plans of termination. Details of the termination benefit plans
have been communicated to the affected employees prior to recognition of related
provisions. Non-cash charges for employee termination benefit costs are included
as adjustments to reconcile net income to net cash provided by operating
activities in the Consolidated Statement of Cash Flows.
During 1999, $2.9 million of reorganization expense related to employee
termination benefits was incurred, principally in the Harsco Mill Services
Segment, primarily in France and the United Kingdom. In 1999, 220 employees were
included in employee termination arrangements initiated by the Company and
approximately $1.8 million of cash payments were made under such arrangements.
The payments are reflected as uses of operating cash in the Consolidated
Statement of Cash Flows.
During 1998, $6.5 million of reorganization expense related to employee
termination benefits was incurred, principally in the Harsco Mill Services
Segment, primarily in South Africa, United States, France, and Germany. In 1998,
approximately 670 employees were included in employee termination arrangements
initiated by the Company and approximately $2.4 million of cash payments were
made under such arrangements. An additional $3.3 million was disbursed in 1999
for the 1998 reorganization actions.
56
<PAGE> 57
15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS) (CONTINUED)
EMPLOYEE TERMINATION BENEFITS, COSTS AND EXPENSES
<TABLE>
<CAPTION>
Summary of Activity
Original reorganization action period 1999 1998
(In US$ millions)
<S> <C> <C>
Employee Termination Benefits expense $ 2.9 $ 6.5
Payments:
Disbursed in 1998 -- (2.4)
Disbursed in 1999(1) (1.8) (3.3)
------ ------
Total payments (1.8) (5.7)
Other -- (0.4)
------ ------
Remaining payments as of 31 December 1999(2) $ 1.1 $ 0.4
====== ======
</TABLE>
(1) Disbursements in 1999 are categorized according to the original
reorganization action period to which they relate (1999 or 1998). Cash
severance payments in 1999 occurred principally in the Harsco Mill
Services Segment in South Africa principally for 1998 reorganization
actions.
(2) Remaining payments are categorized according to the original
reorganization action period to which they relate (1999 or 1998).
EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES
<TABLE>
<CAPTION>
Summary of Activity
-------------------
Original reorganization action period 1999 1998
--------------
<S> <C> <C>
Employees affected by new reorganisation actions 220 670
Employee Terminations:
Terminated in 1998 -- (349)
Terminated in 1999 (172) (352)
----- -----
Total terminations (172) (701)
Other (9) 35
----- -----
Remaining terminations as of 31 December 1999 39 4
===== =====
</TABLE>
COSTS TO EXIT ACTIVITIES
Costs to exit activities consist of incremental direct costs of reorganization
actions and lease run-out costs. Such costs are recorded when a specific exit
plan is approved by management. Relocation expenses, such as employee moving
costs, are classified as exit costs and are expensed as incurred. Other costs
classified in this category are generally expensed as incurred.
During 1998, $1.0 million and $0.8 million of exit costs, principally relocation
expenses, were included in the Harsco Mill Services and Harsco Infrastructure
Segments, respectively.
During 1997, $1.5 million of exit costs were included in the Harsco Mill
Services Segment. These costs resulted principally from the expiration or
termination of contracts at certain mill sites, as well as facility relocation
costs.
57
<PAGE> 58
4. FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED 31 MARCH 2000 AND 31
MARCH 1999. CONDENSED CONSOLIDATED STATEMENTS ON INCOME
The following condensed consolidated statements of income of Harsco Corporation
for the three months ended 31 March 1999 and 31 March 2000 have been extraced
from the published unaudited consolidated financial statements at 31 March 2000
<TABLE>
<CAPTION>
Three months ended
31 March
-------------------------
2000 1999
----------- ---------
(In US$ thousands, except
per share amount)
<S> <C> <C>
Revenues
Service sales $ 230,859 $ 200,221
Product sales 218,276 204,410
Other 353 461
----------- ---------
TOTAL REVENUES 449,488 405,092
----------- ---------
COSTS AND EXPENSES:
Cost of services sold 178,704 155,295
Cost of products sold 175,796 163,465
Selling, general, and administrative expenses 53,794 52,795
Research and development expenses 1,647 1,650
Other expenses 374 1,412
----------- ---------
TOTAL COSTS AND EXPENSES 410,315 374,617
----------- ---------
OPERATING INCOME 39,173 30,475
Interest income 1,188 1,089
Interest expense (7,490) (6,213)
----------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 32,871 25,351
Provision for income taxes 11,505 9,253
----------- ---------
Income before minority interest 21,366 16,098
Minority interest in net income 1,164 1,299
--------- --------
Net income $ 20,202 $ 14,799
========== =========
Average shares of common stock outstanding 40,015 41,629
Basic earnings per common shares $ .50 $ .36
========== =========
Diluted average shares of common stock outstanding 40,085 41,745
Diluted earnings per common share $ .50 $ .35
---------- ---------
Cash dividends declared per common share $ .235 $ .225
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE> 59
CONDENSED CONSOLIDATED BALANCE SHEETS OF HARSCO CORPORATION
The following condensed consolidated balance sheets of Harsco Corporation as of
31 March 1999 and 31 March 2000 have been extracted from the published unaudited
consolidated financial statements as at 31 March 2000.
<TABLE>
<CAPTION>
31 March 31 December
------------ ------------
2000 1999
-----------------------------
(In US$ thousands)
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,848 $ 51,266
Receivables, less allowance for doubtful accounts of $12,035 in 2000
and $13,339 in 1999 335,221 331,123
Inventories 175,998 172,198
Other current assets 58,525 58,368
------------ ------------
TOTAL CURRENT ASSETS 615,592 612,955
------------ ------------
Property, plant and equipment, at cost 1,509,560 1,499,823
Allowance for depreciation 839,747 828,277
------------ ------------
669,813 671,546
Cost in excess of net assets of businesses acquired, net 252,063 258,698
Other assets 118,373 116,624
------------ ------------
TOTAL ASSETS $ 1,655,841 $ 1,659,823
============ ============
LIABILITIES
CURRENT LIABILITIES:
Notes payable and current maturities $ 39,520 $ 36,607
Accounts payable 120,033 132,394
Accrued compensation 40,429 46,615
Income taxes 46,527 44,154
Other current liabilities 155,873 170,746
------------ ------------
TOTAL CURRENT LIABILITIES 402,382 430,516
------------ ------------
Long-term debt 449,500 418,504
Deferred income taxes 55,255 52,932
Other liabilities 98,901 107,750
------------ ------------
TOTAL LIABILITIES 1,006,038 1,009,702
------------ ------------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 171,286 170,878
Accumulated other comprehensive income (expense) (88,165) (80,538)
Retained earnings 1,166,397 1,155,586
Treasury stock (599,715) (595,805)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 649,803 650,121
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,655,841 $ 1,659,823
============ ============
</TABLE>
59
<PAGE> 60
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The following condensed consolidated statements of cash flows of Harsco
Corporation for the three months ended 31 March 2000 and 31 March 1999 have been
extracted from the published unaudited consolidated financial statements as at
31 March 2000.
<TABLE>
<CAPTION>
Three months ended
31 march
-------------------------
2000 1999
---------- ----------
(In US$ thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,202 $ 14,799
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 31,883 29,219
Amortisation 3,350 3,163
Equity in income of unconsolidated entities (150) (350)
Dividends or distributions from unconsolidated entities -- 377
Deferred income taxes 1,859 (1,032)
Other, net 864 1,068
Changes in assets and liabilities, net of acquisitions and dispositions of
businesses:
Accounts receivable (6,901) (2,398)
Inventories (6,117) (2,565)
Accounts payable (7,887) (18,683)
Disbursements related to discontinued defense business (227) (982)
Other assets and liabilities (19,393) (11,273)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,483 11,343
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (39,207) (34,195)
Purchase of business, net of cash acquired (9,502) (2,903)
Proceeds from sale of business 3,743 8,502
Other investing activities 915 519
---------- ----------
NET CASH (USED) BY INVESTING ACTIVITIES (44,051) (28,077)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 3,661 (7,148)
Current maturities and long-term debt:
Additions 34,208 84,249
Reductions (1,992) (3,083)
Cash dividends paid on common stock (9,421) (9,479)
Common stock issued-options 265 870
Common stock acquired for treasury (3,768) (38,047)
Other financing activities (748) (1,767)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,205 25,595
---------- ----------
Effect of exchange rate changes on cash (1,055) (1,045)
---------- ----------
Net increase (decrease) in cash and cash equivalents (5,418) 7,816
Cash and cash equivalents at beginning of period 51,266 41,562
========== ==========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,848 $ 49,378
========== ==========
</TABLE>
60
<PAGE> 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES
DISCONTINUED DEFENSE BUSINESS - CONTINGENCIES
FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT In
1995, the Company, the United States Army ("Army"), and the United States
Department of Justice concluded a settlement of Harsco's previously reported
claims against the Army relating to Federal Excise Tax ("FET") arising under a
completed 1986 contract for the sale of five-ton trucks to the Army. On 27
September 1995, the Army paid the Company $49 million in accordance with the
settlement terms. The Company released the Army from any further liability for
those claims, and the Department of Justice released the Company from a
threatened action for damages and civil penalties based on an investigation
conducted by the Department's Commercial Litigation Branch that had been pending
for several years.
The settlement preserves the rights of the parties to assert claims and defenses
under the Internal Revenue Code, and rights of the Army and the Company to claim
certain amounts that may be owed by either party to reconcile possible
underpayments or overpayments on the truck contract as part of the formal
contract close-out process.
The settlement does not resolve the claim by the Internal Revenue Service
("IRS") that, contrary to the Company's position, certain cargo truck models
sold by the Company should be considered to have gross vehicle weights in excess
of the 33,000 pound threshold under FET law, are not entitled to an exemption
from FET under any other theory, and therefore are taxable. In 1999, the IRS
assessed an increase in FET of $30.4 million plus penalties of $9.9 million and
applicable interest currently estimated to be $47.3 million. In October 1999,
the Company posted an $80 million bond required as security by the IRS. This
increase in FET takes into account offsetting credits of $9.2 million, based on
a partial allowance of the Company's $31.9 million claim that certain truck
components are exempt from FET. The IRS disallowed in full the Company's
additional claim that it is entitled to the entire $52 million of FET (plus
applicable interest currently estimated by the Company to be $43.1 million) the
Company has paid on the five-ton trucks, on the grounds that such trucks qualify
for the FET exemption applicable to certain vehicles specially designed for the
primary function of off-highway transportation. In the event that the Company
ultimately receives from the IRS a refund of tax (including applicable interest)
with respect to which the Company has already received reimbursement from the
Army, the refund would be allocated between the Company and the Army. The
Company plans to vigorously contest the IRS assessment in the U.S. Court of
Federal Claims. Although there is risk of an adverse outcome, both the Company
and the Army believe that the cargo trucks are not taxable. No recognition has
been given in the accompanying financial statements for the Company's claims
with the IRS.
The settlement agreement with the Army preserves the Company's right to seek
reimbursement of after-imposed tax from the Army in the event that the cargo
trucks are determined to be taxable, but the agreement limits the reimbursement
to a maximum of $21 million. Additionally, in an earlier contract modification,
the Army accepted responsibility for $3.6 million of the potential tax, bringing
its total potential responsibility up to $24.6 million.
Under the settlement, the Army agreed that if the cargo trucks are determined to
be taxable, the 1993 decision of the Armed Services Board of Contract Appeals
(which ruled that the Company is entitled to a price adjustment to the contract
for reimbursement of FET paid on vehicles that were to be delivered after
October 1, 1988) will apply to the question of the Company's right to
reimbursement from the Army for after-imposed taxes on the cargo trucks. In the
Company's view, application of the 1993 decision will favorably resolve the
principal issues regarding any such future claim by the Company. Therefore, the
Company believes that even if the cargo trucks are ultimately held to be
taxable, the Army would be obligated to reimburse the Company for a majority of
the tax, (but not interest or penalty, if any), resulting in a net maximum
liability for the Company of $5.8 million plus penalties and applicable interest
currently estimated to be $9.9 million and $47.3 million, respectively. The
Company believes it is unlikely that resolution of this matter will have a
material adverse effect on the Company's financial position, however, it could
have a material effect on quarterly or annual results of operations.
61
<PAGE> 62
OTHER DEFENSE BUSINESS LITIGATION
In 1992, the United States Government through its Defense Contract Audit Agency
commenced an audit of certain contracts for sale of tracked vehicles by the
Company to foreign governments, which were financed by the United States
Government through the Defense Security Assistance Agency. In September 1994,
the Company received a subpoena issued by the Department of Defense Inspector
General seeking various documents relating to issues raised in the audit.
The Government subsequently subpoenaed a number of former employees of the
Company's divested defense business to testify before a grand jury and issued
grand jury subpoenas to the Company for additional documents. On 22 December
1999, the Company announced that it reached agreement with the U.S. Government
on behalf of its former BMY Combat Systems Division to settle the matter. Under
the agreement, BMY Combat Systems pled guilty to a one-count misdemeanor
relating to submitting advance payment certifications which resulted in BMY
receiving a portion of the payments for the contract prematurely. Harsco will
pay the Government a $200,000 fine plus $10.8 million in damages for a total of
$11 million.
The settlement, which is subject to acceptance by the U.S. District Court, ends
the Government's investigation and releases Harsco and BMY from further
liability for the issues under investigation. Harsco will charge the payment
against an existing reserve, resulting in no charge to the Company's earnings.
Based on the terms of the settlement, the Company expects to pay the $11 million
by the third quarter of 2000, following the Court's entry of judgment.
CONTINUING OPERATIONS - CONTINGENCIES
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheet at 31 March 2000, and 31 December 1999 includes an
accrual of $3.5 million and $3.0 million, respectively, for environmental
matters. The amounts charged against pre-tax earnings related to environmental
matters totaled $0.8 million for the first three months of 2000, and $0.1
million for the first three months of 1999.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position
or results of operations.
In the first quarter of 2000 the U.S. Environmental Protection Agency issued a
Notice of Violation to the Company for violations of the Clean Air Act arising
from slag dust emissions at one of the Company's mill services locations. The
Agency is seeking abatement of dust emissions at the site and has advised that
it is seeking financial penalties which exceed $100,000. The Company is
cooperating with the mill and the Agency to abate the dust emissions and is in
settlement discussions with the Agency.
OTHER
The Company is subject to various other claims, legal proceedings, and
investigations covering a wide range of matters that arose in the ordinary
course of business. In the opinion of management, all such matters are
adequately covered by insurance or by accruals, and if not so covered, are
without merit or are of such kind, or involve such amounts, as would not have a
material adverse effect on the financial position or results of operations of
the Company.
62
<PAGE> 63
FINANCIAL INSTRUMENTS AND HEDGING
OFF BALANCE SHEET RISK
The Company has subsidiaries principally operating in North America, Latin
America, Europe and Asia-Pacific. These operations are exposed to fluctuations
in related foreign currencies, in the normal course of business. The Company
seeks to reduce exposure to foreign currency fluctuations through the use of
forward exchange contracts. The Company does not hold or issue financial
instruments for trading purposes, and it is the Company's policy to prohibit the
use of derivatives for speculative purposes. The Company has a Foreign Currency
Risk Management Committee that meets periodically to monitor foreign currency
risks.
The Company enters into forward foreign exchange contracts to hedge transactions
of its non-U.S. subsidiaries, for firm commitments to purchase equipment and for
export sales denominated in foreign currencies. These contracts generally are
for 90 to 180 days or less. For those contracts that hedge an identifiable
transaction, gains or losses are deferred and accounted for as part of the
underlying transactions. The cash flows from these contracts are classified
consistent with the cash flows from the transaction being hedged. The Company
also enters into forward exchange contracts for intercompany foreign currency
commitments. These foreign exchange contracts do not qualify as hedges,
therefore, gains and losses are recognised in income based on fair market value.
As of 31 March 2000, the total of all forward exchange contracts amounted to
$3.1 million with a favorable mark-to-market fluctuation of twelve thousand
dollars.
NEW FINANCIAL ACCOUNTING STANDARD ISSUED
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with
an amended effective date for fiscal years beginning after 15 June 2000. SFAS
133 requires that an entity recognize all derivative instruments as either
assets or liabilities on its balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or Other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction, and, if it is, the type of hedge transaction. The Company
will adopt SFAS 133 as of 1 January 2001. Due to the Company's limited use of
derivative instruments, SFAS 133 is not expected to have a material effect on
the financial position or results of operations of the Company.
OPINION OF MANAGEMENT
Financial information furnished herein, which is unaudited, reflects in the
opinion of management all adjustments (all of which are of a recurring nature)
that are necessary to present a fair statement of the interim period.
DIVIDEND INFORMATION
On 16 March 2000, the Company announced that the Board of Directors declared a
quarterly cash dividend of 23.5 cents per share, payable 15 May 2000, to
shareholders of record on 14 April 2000.
SUBSEQUENT EVENT
On 6 April 2000 the Company agreed to invest $20 million for a 49% ownership
interest in S3Networks, LLC, a start-up company providing internet and
e-business infrastructure consulting services to Fortune 1000 corporations. Cash
of $6 million has been invested with an additional $14 million to be paid over a
period not to exceed fifteen months from the initial investment date. The
investment will be accounted for under the equity method. Since the Company is
the principal provider of initial capital for S3Networks, LLC, the Company will
record 100% of net losses to the extent of its initial $20 million investment.
However, the Company will also record 100% of subsequent net income until the
entire initial investment amount is reinstated. Subsequent to reinstatement of
the initial investment amount, the Company will record net income to the extent
of its ownership percentage of S3Networks, LLC.
63
<PAGE> 64
APPENDIX III
FURTHER INFORMATION ON SGB
NATURE OF FINANCIAL INFORMATION
The financial information contained in this Appendix does not constitute
statutory accounts within the meaning of Section 240 of the Companies Act 1985.
The information for the three years ended 31 December 1999, 1998 and 1997 is
summarised and extracted from the audited financial statements of SGB for each
of the three years. SGB's auditors have made reports under Section 235 of the
Companies Act 1985 on the financial statements for each of the three years ended
31 December 1999, 1998 and 1997 and statutory accounts have been delivered to
the Registrar of Companies. These reports were unqualified and did not contain a
statement under section 237(2) or (3) of the Companies Act 1985.
64
<PAGE> 65
CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
For the Year Ended 31 December 1999
-------------------------------------------------------------------------------------
After Before
exceptional Exceptional exceptional
items Items items
1999 1999 1999 1998 1997
Note pound sterling pound sterling pound sterling pound sterling pound sterling
m m m m m
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
TURNOVER
Group and share of joint
venture 1 282.9 - 282.9 284.8 266.5
Less: Share of joint venture (9.5) - (9.5) (12.8) (9.1)
----- ---- ----- ----- -----
Group turnover 273.4 - 273.4 272.0 257.4
----- ---- ----- ----- -----
GROUP OPERATING PROFIT 28.1 - 28.1 22.5 18.5
Share of operating profit of
joint venture 0.4 - 0.4 0.9 0.9
Exceptional Items:
Sale of French operation 0.5 0.5 - - -
Goodwill on French
disposal previously written
off (5.6) (5.6) - - -
----- ---- ----- ----- -----
Net loss on sale of French
operations (5.1) (5.1) - - -
----- ---- ----- ----- -----
PROFIT ON ORDINARY
ACTIVITIES BEFORE INTEREST 2 23.4 (5.1) 28.5 23.4 19.4
Net interest payable 4 (1.9) - (1.9) (1.5) (2.5)
----- ---- ----- ----- -----
PROFIT ON ORDINARY
ACTIVITIES BEFORE TAXATION 21.5 (5.1) 26.6 21.9 16.9
Taxation 5 (8.1) - (8.1) (6.7) (5.1)
----- ---- ----- ----- -----
PROFIT ON ORDINARY
ACTIVITIES AFTER TAXATION 13.4 (5.1) 18.5 15.2 11.8
Equity minority interests (0.1) - (0.1) (0.1) (0.1)
----- ---- ----- ----- -----
PROFIT FOR THE FINANCIAL YEAR 7 13.3 (5.1) 18.4 15.1 11.7
Dividends paid and proposed 6 (6.6) - (6.6) (5.5) (2.6)
----- ---- ----- ----- -----
Retained profit for the year 6.7 (5.1) 11.8 9.6 9.1
----- ---- ----- ----- -----
DILUTED EARNINGS PER SHARE (PENCE) 17.7p - 24.5p 20.1p 15.6p
BASIC EARNINGS PER SHARE (PENCE) 17.9p - 24.8p 20.2p 15.6p
DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES 7 75.1m - 75.1m 75.2m 75.1m
BASIC WEIGHTED AVERAGE NUMBER OF
SHARES 7 74.1m - 74.1m 74.8m 75.0m
</TABLE>
65
<PAGE> 66
CONSOLIDATED BALANCE SHEET
as at 31 December 1999
<TABLE>
<CAPTION>
1999
Note pound sterling
m
<S> <C> <C>
FIXED ASSETS
Tangible fixed assets 8 141.9
Investment in joint venture:
Share of gross assets 1.5
Share of gross liabilities (0.9)
-----
8 0.6
Other Investments 8 1.6
-----
144.1
-----
CURRENT ASSETS
Stocks and work in progress 9 22.0
Debtors 10 80.8
Cash at bank and in hand 18(d) 15.0
-----
117.8
-----
CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
External borrowings 18(a) (46.7)
Creditors 11 (72.0)
-----
(118.7)
-----
NET CURRENT (LIABILITIES)/ASSETS (0.9)
-----
TOTAL ASSETS LESS CURRENT LIABILITIES 143.2
-----
CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
External borrowings 18(a) (2.1)
PROVISIONS FOR LIABILITIES AND CHARGES 12 (14.5)
-----
NET ASSETS 126.6
-----
CAPITAL AND RESERVES
Share capital 13 30.0
Share premium account 14 47.8
Revaluation reserve 14 4.0
Other non-distributable reserves 14 -
Profit and loss account 14 44.7
-----
EQUITY SHAREHOLDERS' FUNDS 126.5
EQUITY MINORITY INTERESTS 15 0.1
-----
126.6
-----
</TABLE>
66
<PAGE> 67
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 1999
<TABLE>
<CAPTION>
1999
Note pound sterling
m
--------------
<S> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES 16 35.3
Dividends received from Joint Venture 0.3
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 0.4
Interest paid (1.9)
-----
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE (1.5)
-----
TAXATION (5.6)
CAPITAL EXPENDITURE
Purchase of fixed assets (57.6)
Sale of fixed assets - land and buildings 0.9
- other 14.4
-----
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE (42.3)
-----
ACQUISITIONS AND DISPOSALS
Sale of businesses 17 6.1
-----
NET CASH INFLOW/(OUTFLOW) FROM ACQUISITIONS AND DISPOSALS 6.1
-----
Equity dividends paid - final (3.3)
interim (2.6)
-----
NET CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID RESOURCES AND FINANCING (13.6)
-----
NET CASH INFLOW/(OUTFLOW) FROM THE MANAGEMENT OF LIQUID RESOURCES 18a 18.3
NET CASH INFLOW FROM FINANCING 18b 1.6
=====
NET INCREASE/(DECREASE) IN CASH 6.3
=====
</TABLE>
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
for the year ended 31 December 1999
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
m m m
<S> <C> <C> <C>
Profit for the financial year 13.3 15.1 11.7
Revaluation of land and buildings - 2.9 -
Currency translation differences on foreign currency net (0.9) 0.9 (1.6)
investments taken directly to reserves
---- ---- ----
TOTAL GAINS AND LOSSES RECOGNISED IN THE YEAR 12.4 18.9 10.1
==== ==== ====
</TABLE>
The actual recognised gains and losses in 1999 include a tax charge on currency
translation differences arising on foreign currency borrowings of pound
sterling0.1 million (1998 tax credit: pound sterling0.3 million). It is
currently the Group's policy to hedge overseas assets by the use of currency
borrowings which amounted to pound sterling40.0 million at 31 December 1999
(1998: pound sterling33.6 million).
There were no material differences between the results shown in the profit and
loss account and the results calculated in the historical cost basis.
67
<PAGE> 68
RECONCILIATION OF MOVEMENTS IN CONSOLIDATED EQUITY SHAREHOLDERS' FUNDS
for the year ended 31 December 1999
<TABLE>
<CAPTION>
1999
pound sterling
m
--------------
<S> <C>
Profit for the financial year 13.3
Dividends (6.6)
------
6.7
Fixed asset revaluation -
Goodwill charged to the Profit and Loss Account 5.6
Foreign exchange movements (0.9)
------
NET ADDITION TO SHAREHOLDERS' FUNDS 11.4
Opening shareholders' funds 115.1
------
Closing shareholders' funds 126.5
------
</TABLE>
ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The consolidated accounts of the Group are prepared under the historical cost
convention (modified by the revaluation of certain land and buildings and
investments in subsidiaries) and in accordance with applicable accounting
standards.
BASIS OF PREPARATION
Unless otherwise stated, the acquisition method of accounting has been adopted.
Where subsidiary undertakings are acquired or sold during the year the
consolidated profit and loss account includes the results for the part of the
year for which they were subsidiary undertakings. The Group's share of operating
profits, net interest payable and taxation of joint ventures is separately
included in the Group profit and loss account using the equity accounting
method, based on the latest available audited accounts after appropriate
adjustment to achieve uniformity of accounting policies.
The Company carries its investments in subsidiaries at a valuation equal to the
underlying net asset value of the subsidiary.
FOREIGN CURRENCIES
Assets and liabilities denominated or recorded in foreign currencies are
translated into Sterling at rates of exchange ruling at the balance sheet date.
Trading results are translated at the average rates for the year. Exchange
differences arising on foreign currency net investments are taken directly to
reserves, whereas the exchange differences arising in the ordinary course of
trading are included in the profit and loss account.
The main exchange rates used for translation purposes (other than those subject
to hedging activities or fixed contractual rates) are as follows:
<TABLE>
<CAPTION>
Average Year end
rates rates
-------------------- --------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
US Dollar 1.62 1.66 1.61 1.66
French Franc 9.97 9.78 10.55 9.29
Dutch Guilder 3.35 3.29 3.54 3.12
Hong Kong Dollar 12.56 12.86 12.53 12.89
</TABLE>
68
<PAGE> 69
ACCOUNTING POLICIES (CONTINUED)
TURNOVER
Turnover represents the invoiced value for goods and services supplied during
the year and excludes sales taxes.
TANGIBLE FIXED ASSETS
At 31 December 1998 the Group's UK properties were revalued by Gooch Webster,
Chartered Surveyors on the basis of open market value for existing use and in
accordance with the Royal Institution of Chartered Surveyors' Statement of Asset
Valuation Practice and Guidance Notes. Any impairment loss on revalued fixed
assets caused by the consumption of economic benefits are recognised in the
profit and loss account. Surpluses, and deficits to the extent that reserves
already exist, are taken to non-distributable reserves.
DEPRECIATION OF TANGIBLE FIXED ASSETS
No depreciation is provided on land. Buildings are depreciated over the lower of
50 years or the life of the lease by equal annual instalments. Vehicles, plant
and machinery are depreciated over a period ranging mainly between 3 and 7 years
with weighting where appropriate to recognise the impact of obsolescence.
Equipment for hire is depreciated to its residual value over a period of between
2 and 20 years by equal annual instalments depending on product type.
LEASES
Assets which are the subject of finance leases together with the corresponding
lease obligations are capitalised. The assets are depreciated as described above
and the finance charge element of each lease payment, representing a constant
interest rate on the reducing obligation is charged to the profit and loss
account. Payments under operating leases are charged to the profit and loss
account in the period to which they refer.
TAXATION
Deferred taxation is accounted for by using the liability method in relation to
timing differences in respect of which there is a reasonable probability that
they will reverse in the foreseeable future without being replaced by similar
differences. No provision is made for taxation arising on distribution of
profits retained by overseas resident subsidiary undertakings.
STOCKS
Stocks are stated at the lower of cost and net realisable value. In determining
the cost of raw materials, consumables and goods purchased for resale, the
weighted average purchase price is used.
PENSION FUNDING
The Company and its subsidiary undertakings operate various pension schemes
financed, with certain exceptions, through separate trustee administered funds.
The expected costs of providing pensions are recognised on a systematic and
rational basis over the expected service lives of current employees, in
accordance with established actuarial practice.
RESEARCH AND DEVELOPMENT
Research and development expenditure is charged to the profit and loss account
in the year in which it is incurred.
GOODWILL
Purchased goodwill (both positive and negative) arising on consolidation in
respect of acquisitions before 1 January 1998, when FRS 10 Goodwill and
Intangible Assets was adopted, was written off to reserves in the year of
acquisition. When a subsequent disposal occurs any related goodwill previously
written off to reserves is written back through the profit and loss account as
part of the profit or loss on disposal.
69
<PAGE> 70
ACCOUNTING POLICIES (CONTINUED)
Purchased goodwill (representing the excess of the fair value of the
consideration given over the fair value of the separable net assets acquired)
arising on consolidation in respect of acquisitions since 1 January 1998 is
capitalised. Positive goodwill is amortised to nil by equal annual instalments
over its estimated useful life.
Negative goodwill arising on consolidation in respect of acquisitions since 1
January 1998 is included with fixed assets and released to the profit and loss
account in the periods in which the fair values of the non-monetary assets
purchased on the same acquisition are recovered, whether through depreciation or
sale.
NOTES TO THE ACCOUNTS
for the year ended 31 December 1999
1. SEGMENTAL INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
m m m
-------------- -------------- --------------
<S> <C> <C> <C>
TURNOVER(i)(ii)(iii)
UK Operations 163.4 152.4 142.0
Joint Venture - UK Operations 9.5 12.8 9.1
SGB International 44.4 49.3 50.3
SGB North Europe 44.3 40.9 37.3
SGB South Europe 21.3 29.4 27.8
----------- ---------- -----------
282.9 284.8 266.5
----------- ---------- -----------
PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAX (PBIT)
UK Operations 20.0 14.7 11.7
Joint Venture - UK Operations 0.4 0.9 0.9
SGB International 6.8 6.6 6.5
SGB North Europe 3.0 2.8 2.5
SGB South Europe 1.2 1.0 (0.1)
----------- ---------- -----------
31.4 26.0 21.5
Central costs (2.9) (2.6) (2.1)
----------- ---------- -----------
PBIT before exceptional items 28.5 23.4 19.4
Exceptional items (SGB South Europe) (5.1) - -
----------- ---------- -----------
PBIT after exceptional items 23.4 23.4 19.4
----------- ---------- -----------
ASSETS EMPLOYED
UK Operations 107.1 81.0 81.7
Joint Venture - UK Operations 0.6 0.6 0.5
SGB International 34.7 33.3 26.8
SGB North Europe 19.3 18.7 16.1
SGB South Europe 11.6 14.3 14.3
Centre 4.7 4.7 1.1
----------- ---------- -----------
TOTAL ASSETS EMPLOYED 178.0 152.6 140.5
Net borrowings (33.8) (22.4) (23.8)
Taxation and dividends (17.6) (15.0) (14.0)
----------- ---------- -----------
NET ASSETS 126.6 115.2 102.7
=========== ========== ===========
</TABLE>
(i) The operations of the Group comprise only one segmental class of business
being the supply of access and related products and services.
(ii) Turnover by geographical destination is not materially different from
turnover by geographical origin.
(iii) SGB divisions are operated on a geographic basis. SGB Youngman serves the
UK market, SGB North Europe serves Northern Europe (excluding the UK), SGB
South Europe serves France and Belgium and SGB International serves the
rest of the world. Central costs are attributable to the UK head office
operations.
2. PROFIT ON ORDINARY ACTIVITIES BEFORE INTEREST AND TAX (PBIT)
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
m m m
-------------- -------------- --------------
<S> <C> <C> <C>
Group turnover 273.4 272.0 281.2
----- ----- -----
Change in stocks 4.1 (1.7) 11.3
Raw materials and consumables (80.9) (79.2) (92.9)
Research and development (0.9) (0.7) (0.7)
Staff costs (Note 3) (90.4) (89.7) (85.6)
Depreciation (18.1) (17.5) (16.4)
Auditors' remuneration:
- audit fees (Company audit fee:pound sterling 5,000: 1998:
pound sterling nil) (0.5) (0.4) (0.3)
- non audit work - UK (fees paid to auditor and its (1.2) (0.2) (0.1)
</TABLE>
70
<PAGE> 71
<TABLE>
<S> <C> <C> <C>
associates)
Operating lease charges for plant and machinery (4.7) (4.0) (3.6)
Operating lease charges for land and buildings (4.6) (4.6) (3.6)
Other operating charges (48.1) (51.5) (70.5)
Net flotation costs - - (0.3)
Share of operating profit of joint venture 0.4 0.9 0.9
----- ----- -----
(244.9) (248.6) (261.8)
----- ----- -----
PBIT before exceptional items 28.5 23.4 19.4
Exceptional items (5.1) - -
----- ----- -----
PBIT after exceptional items 23.4 23.4 19.4
===== ===== =====
</TABLE>
3. EMPLOYEES
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
The average weekly number of employees, including directors, was: 4,390 4,304 4,200
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
-------------- -------------- --------------
<S> <C> <C>
Payroll costs were:
Wages and salaries 78.1 77.8 73.6
Social security costs 9.9 9.6 8.6
Other pension costs (Note 20) 2.4 2.3 2.2
---- ---- ----
90.4 89.7 84.4
==== ==== ====
</TABLE>
71
<PAGE> 72
3. EMPLOYEES (CONTINUED)
DIRECTORS' EMOLUMENTS
<TABLE>
<CAPTION>
Other
Basic benefits
salary/ excl.
fees Bonus pension) Total Total Total
1999 1999 1999 1999 1998 1997
pound sterling pound sterling pound sterling pound sterling pound sterling pound sterling
-------------- --------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
NON-EXECUTIVE DIRECTORS
K J Minton 80,000 - - 80,000 65,000 32,500
J C Gains 26,500 - - 26,500(1) 25,000(1) 12,500
M R B Gatenby 26,500 - - 26,500 25,000 25,000
P W Harrisson 26,500 - - 26,500 25,000 16,122
A H Moore 26,500 - - 26,500(1) - -
EXECUTIVE DIRECTORS
R Stokell 190,000 32,820 12,465 235,285 288,415 279,141
K L Mansell 135,140 22,612 10,630 168,382 203,324 194,560
A J Scull 115,500 19,692 10,688 145,880 171,757 109,464
S Yapp 127,500 22,974 7,565 158,039 174,754 136,984
------- ------ ------ ------- ------- -------
Total emoluments 754,140 98,098 41,348 893,586 978,250 806,271
======= ====== ====== ======= ======= =======
</TABLE>
(1) Fees paid to Mowlem & Company PLC ("Mowlem") in respect of Messrs J C Gains
and A H Moore who are also Directors of Mowlem.
4. NET INTEREST PAYABLE
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
-------------- -------------- --------------
<S> <C> <C> <C>
Interest payable on bank loans and overdrafts and other loans
repayable within five years (2.3) (2.7) (4.3)
Interest receivable 0.4 1.2 1.8
----- ---- ----
Net interest payable (1.9) (1.5) (2.5)
===== ==== =====
</TABLE>
5. TAXATION
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
-------------- -------------- --------------
<S> <C> <C> <C>
United Kingdom:
Corporation tax at 30.25% (1998: 31.0%) 3.6 3.1 2.1
Deferred taxation 1.3 0.3 0.5
--- --- ---
4.9 3.4 2.6
Overseas taxation 3.1 3.0 2.2
--- --- ---
The Company and its subsidiary undertakings 8.0 6.4 4.8
Joint venture 0.1 0.3 0.3
--- --- ---
8.1 6.7 5.1
--- --- ---
</TABLE>
72
<PAGE> 73
6. DIVIDENDS PAID AND PROPOSED
<TABLE>
<CAPTION>
1999 1998 1997
pound sterling pound sterling pound sterling
-------------- -------------- --------------
<S> <C> <C> <C>
Interim dividend - 3.4p per share (1998: 2.9p per share) 2.6 2.2 6.8
Final proposed - 5.4p per share (1998: 4.4p per share) 4.0 3.3 2.6
--- --- ---
6.6 5.5 9.4
--- --- ---
</TABLE>
The final proposed dividend per share is calculated on 75,053,008 shares
although it is recognised that the ESOT has waived its right to dividends on the
913,209 shares it holds.
7. EARNINGS PER SHARE
The calculation of earnings per share has been prepared in accordance with
FRS14, Accounting for Earnings per Share, and is based on profit before
exceptional items attributable to shareholders of pound sterling18.4 million
(1998: pound sterling15.1 million). Earnings after exceptional items were pound
sterling13.3 million (1998: pound sterling15.1 million).
The weighted average number of shares has been calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Weighted average shares in issue 75,028,374 75,001,870 75,000,000
Less weighted average ESOT shares not ranking for dividend (913,209) (214,183) --
---------- ---------- ----------
Weighted average shares used for basic earnings per share 74,115,165 74,787,687 75,000,000
Adjustment for share options granted but not yet exercised 979,963 432,744 107,276
---------- ---------- ----------
Weighted average shares used for diluted earnings per share 75,095,128 75,220,431 75,107,276
========== ========== ==========
</TABLE>
73
<PAGE> 74
8. TANGIBLE FIXED ASSETS
Group
<TABLE>
<CAPTION>
Owned Leased
vehicles, vehicles,
Land and plant and plant and Equipment
buildings machinery machinery for hire Total
pound sterling pound sterling pound sterling pound sterling pound sterling
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
COST OR VALUATION
At 1 January 1999 28.4 33.0 4.5 149.6 215.5
Currency translation (0.2) 0.2 (0.2) (3.3) (3.5)
Additions 6.3 3.3 1.8 46.2 57.6
Disposals (4.3) (5.8) - (18.8) (28.9)
---- ---- --- ----- -----
At 31 December 1999 30.2 30.7 6.1 173.7 240.7
---- ---- --- ----- -----
DEPRECIATION
At 1 January 1999 (5.3) (22.1) (2.3) (69.0) (98.7)
Currency translation 0.2 - - 1.8 2.0
Reclassification - 1.6 (1.6) - -
Disposals 1.7 4.5 - 9.8 16.0
Depreciation provided during the year (0.7) (2.7) (0.2) (14.5) (18.1)
---- ---- --- ----- -----
At 31 December 1999 (4.1) (18.7) (4.1) (71.9) (98.8)
---- ---- --- ----- -----
NET BOOK VALUE
31 DECEMBER 1999 26.1 12.0 2.0 101.8 141.9
==== ==== === ===== =====
31 December 1998 23.1 10.9 2.2 80.6 116.8
==== ==== === ===== =====
</TABLE>
The capital value of powered access equipment held under operating leases at 31
December 1999 was pound sterling23.0 million (1998 pound sterling10.8 million).
The above analysis includes freehold land at cost or valuation not subject to
depreciation of pound sterling13.8 million (1998: pound sterling12.8 million).
At 31 December 1998 the Group's UK properties were revalued by Gooch Webster,
Chartered Surveyors on the basis of open market value for existing use and in
accordance with the Royal Institution of Chartered Surveyors' Statement of Asset
Valuation Practice and Guidance Notes.
The net book value of land and buildings comprises:
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
Freehold 22.8
Long leasehold 1.7
Short leasehold 1.6
----
26.1
====
</TABLE>
74
<PAGE> 75
8. TANGIBLE FIXED ASSETS (CONTINUED) PARTICULARS RELATING TO REVALUED ASSETS ARE
GIVEN BELOW:
<TABLE>
<CAPTION>
1999 1998
pound sterling pound sterling
-------------- --------------
<S> <C> <C>
Analysis of land and buildings:
Cost 10.8 8.1
1998 valuation 19.4 20.3
---- ----
30.2 28.4
==== ====
</TABLE>
If land and buildings had not been revalued, they would have been included at
the following book values:
<TABLE>
<CAPTION>
1999 1998
pound sterling pound sterling
-------------- --------------
<S> <C> <C>
Cost 27.4 22.7
Depreciation thereon (4.8) (4.3)
---- ----
Historical cost net book value 22.6 18.4
==== ====
</TABLE>
GROUP
FIXED ASSET INVESTMENTS - JOINT VENTURE:
<TABLE>
<CAPTION>
1999 1998
pound sterling pound sterling
-------------- --------------
<S> <C> <C>
SALAMIS SGB LIMITED
At 1 January 0.6 0.5
Share of profit after tax 0.3 0.6
Dividends received (0.3) (0.5)
---- ----
At 31 December 0.6 0.6
==== ====
</TABLE>
OTHER INVESTMENTS
During 1998 the Company established an Employee Share Ownership Trust (ESOT)
details of which are given in note 14 to the accounts. As at 31 December 1999
the ESOT had purchased 913,209 SGB Group PLC ordinary shares with a cost of
pound sterling1.6 million at prices ranging from 153p to 180 pence per share.
9. STOCKS AND WORK IN PROGRESS
<TABLE>
<CAPTION>
1999
pound sterling
-------------
<S> <C>
Raw materials and consumables 2.9
Work in progress 2.8
Finished goods and goods for resale 16.3
----
22.0
====
</TABLE>
75
<PAGE> 76
10. DEBTORS
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
FALLING DUE WITHIN ONE YEAR:
Trade debtors
- third parties 60.5
- John Mowlem & Company PLC 0.8
----
61.3
Assets held for resale 8.2
Other debtors 2.5
Prepayments and accrued income 8.8
----
80.8
====
</TABLE>
Assets held for resale are powered access equipment acquired which had not been
placed under operating leases by 31 December 1999.
11. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
Trade creditors
- third parties (31.4)
- John Mowlem & Company PLC (0.2)
-----
(31.6)
- Corporation tax (4.0)
- Other taxation and social security (6.5)
- Financial Instruments including bills of exchange (0.7)
- Powered Access equipment creditors (10.3)
- Other creditors (5.5)
- Accruals and deferred income (9.4)
- Dividends payable (4.0)
-----
(72.0)
=====
</TABLE>
76
<PAGE> 77
12. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
1999
pound sterling
<S> <C>
DEFERRED TAXATION:
Accelerated capital allowances (6.0)
Other timing differences 0.3
Overseas deferred tax (3.9)
-----
(9.6)
Pension provision (Note 20) -
Other (4.9)
-----
(14.5)
=====
</TABLE>
Movements on provisions during the year were as follows:
<TABLE>
<CAPTION>
Deferred tax Pensions Other Total
pound sterling pound sterling pound sterling pound sterling
<S> <C> <C> <C> <C>
At 1 January 1999 (7.3) (1.8) (5.7) (14.8)
Net charge for the year (2.3) - - (2.3)
Utilised - 1.8 0.8 2.6
---- --- --- ----
At 31 December 1999 (9.6) - (4.9) (14.5)
==== === === ====
</TABLE>
Other provisions include insurance and property dilapidation provisions.
The full potential liability to deferred tax is as follows:
<TABLE>
<CAPTION>
1999
pound sterling
<S> <C>
Accelerated capital allowances (UK and Overseas) (10.2)
Other timing differences (UK and Overseas) (0.5)
----
(10.7)
====
</TABLE>
13. SHARE CAPITAL
<TABLE>
<CAPTION>
1999
-------------------------------
Number pound sterling
<S> <C> <C>
Authorised:
Ordinary shares of 40p each 100,000,000 40,000,000
Allotted, issued and fully paid 75,053,008 30,021,203
</TABLE>
77
<PAGE> 78
13. SHARE CAPITAL (CONTINUED)
Share option schemes
The Company operates a Sharesave Scheme (The SGB Group PLC Sharesave Scheme
1997) which is savings-related and enables those eligible to participate to
invest up to a maximum permitted level of pound sterling250 per month. In
addition, a Discretionary Share Option Scheme (The SGB Group PLC Discretionary
Share Option Scheme 1997 (Parts I and II) provides share options for Executive
Directors and other senior executives.
<TABLE>
<CAPTION>
Sharesave Scheme Discretionary
Scheme Total
<S> <C> <C> <C>
Outstanding at 31 December 1998 542,363 2,072,243 2,614,606
Granted 482,890 575,395 1,058,285
Exercised (14,269) (35,000) (49,269)
Lapsed (72,345) (142,435) (214,780)
------- --------- ---------
Outstanding at 31 December 1999 938,639 2,470,203 3,408,842
======= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Option price Total number
of options
outstanding
Date of at 31
Scheme grant Exercise period December 1999
<S> <C> <C> <C> <C>
Sharesave 31/10/97 131.0p 1/1/01 - 30/6/01 461,346
28/10/99 218.0p 1/12/02 - 31/5/03 477,293
---------
938,639
---------
Discretionary part I (approved) 26/6/97 156.0p 26/6/00 - 25/6/07 38,460
22/10/97 165.5p 22/10/00 - 21/10/07 95,000
21/9/98 171.5p 21/9/01 - 20/9/08 134,984
29/3/99 230.0p 29/3/02 - 28/3/09 46,086
14/9/99 285.0p 14/9/02 - 13/9/09 135,526
Discretionary part II (unapproved) 26/6/97 156.0p 26/6/00 - 25/6/04 1,413,142
22/10/97 165.5p 22/10/00 - 21/10/04 105,000
21/9/98 171.5p 21/9/01 - 20/9/05 118,222
29/3/99 230.0p 29/3/02 - 28/3/06 85,218
14/9/99 285.0p 14/9/02 - 13/9/06 298,565
=========
2,470,203
=========
</TABLE>
EMPLOYEE SHARE OWNERSHIP TRUST (ESOT)
During 1998 the Company established an Employee Share Ownership Trust (ESOT) to
acquire SGB Group PLC shares from the market to satisfy current and future
requirements of the Company's share option schemes. Funding is provided to the
ESOT by the Company. The ESOT's administrative costs are charged to the Profit
and Loss Account of the Company. The assets of the ESOT are recognised as assets
of the Company within these accounts. The ESOT has waived its rights to
dividends but must be paid a minimum dividend of 0.01p per share. At 31 December
1999 the ESOT held 913,209 SGB Group PLC ordinary shares of which 818,601 shares
were specifically under options to employees. The remaining 94,608 uncommitted
shares had a market value at 31 December 1999 of pound sterling0.2 million. The
913,209 shares held by the ESOT were purchased at prices ranging from 153p per
share to 180 pence per share.
78
<PAGE> 79
14. Reserves
<TABLE>
<CAPTION>
Share Other non Profit
Premium Revaluation distributabl and loss
Account reserve reserves account Total
pound sterling pound sterling pound sterling pound sterling pound sterling
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
GROUP
At 1 January 1999 47.8 4.4 0.2 32.7 85.1
Retained profit for the year - - - 6.7 6.7
Goodwill charged to the profit and loss
account - - - 5.6 5.6
Transfers between reserves - (0.4) (0.2) 0.6 -
Currency translation and related tax charge - - - (0.9) (0.9)
---- ---- ---- --- ---
AT 31 DECEMBER 1999 47.8 4.0 - 44.7 96.5
==== ==== ==== ==== ====
</TABLE>
The cumulative amount of goodwill written off to reserves at 31 December 1999,
net of goodwill relating to subsidiary undertakings disposed of, amounts to
pound sterling4.9 million (1998: pound sterling10.5 million).
15. MINORITY INTERESTS
<TABLE>
<CAPTION>
1999
pound sterling
-------------
<S> <C>
Minority interests on 1 January 1999 0.1
Share of profits and losses 0.1
Dividends and other payments (0.1)
---
Minority interests on 31 December 1999 0.1
===
</TABLE>
16. RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS
<TABLE>
<CAPTION>
1999
pound sterling
-------------
<S> <C>
Group operating profit 28.1
Depreciation 18.1
Profit on disposal of fixed assets (5.6)
Decrease/(increase) in stock 0.1
Increase in debtors (11.3)
Increase in creditors 8.5
(Decrease)/increase in provisions (2.6)
-----
Net cash inflow from operating activities 35.3
=====
</TABLE>
79
<PAGE> 80
17. BUSINESS DISPOSALS
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
DISPOSAL OF BUSINESS Net assets disposed of:
Land and buildings 2.5
Other fixed assets 0.7
Stock 3.3
Creditors (0.7)
Goodwill 5.6
Loss on disposal (5.1)
----
6.3
----
Satisfied by:
Cash proceeds 6.1
Deferred consideration 0.2
----
6.3
====
</TABLE>
18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
18(a) Analysis of net borrowings
<TABLE>
<CAPTION>
At 1 Currency
January 1999 translation At 31 December
Cash Flow movement 1999
pound sterling pound sterling pound sterling pound sterling
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Bank and cash balances 6.0 6.3 - 12.3
Overdrafts (3.1) - - (3.1)
------ ---- ---- -----
2.9 6.3 - 9.2
------ ---- ---- -----
Debt due after one year (45.9) 41.6 2.2 (2.1)
Debt due within one year (0.4) (43.2) - (43.6)
------ ---- ---- -----
(46.3) (1.6) 2.2 (45.7)
------ ---- ---- -----
Liquid resources 21.0 (18.3) - 2.7
------ ---- ---- -----
Net borrowings (22.4) (13.6) 2.2 (33.8)
====== ==== ==== =====
</TABLE>
Debt due after one year represents finance lease obligations.
80
<PAGE> 81
18. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (CONTINUED)
18(b) Net cash inflow from financing
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
Drawdown underpound sterling 60 million multi-currency revolving facility (0.4)
Other borrowing movements
- under one year 43.2
- more than one year (41.0)
Capital element of finance lease rental payments (0.2)
------
As per consolidated cash flow statement 1.6
======
18(c) Reconciliation of net cash flow to movement in net funds and debt
Net (decrease)/increase in cash 6.3
Net cash (outflow)/inflow from decrease in debt and lease financing (1.6)
Net cash (inflow)/outflow from increase in liquid resources (18.3)
Change in net debt resulting from cash flows (13.6)
Effect of currency translation changes on net debt 2.2
------
Movement in net funds and debt (11.4)
Net borrowings at 1 January 1999 (22.4)
------
NET BORROWINGS AT 31 DECEMBER 1999 (33.8)
======
</TABLE>
18(d) Cash and deposits
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
CASH AT BANK AND IN HAND
Short term deposits 2.7
Bank and cash balances 12.3
-----
15.0
-----
Sterling 7.7
Other currencies 7.3
-----
15.0
-----
</TABLE>
Cash at bank and in hand includes cash in hand and deposits repayable on demand
with any financial institution.
Deposits are repayable on demand if they can be withdrawn at any time without
notice and without penalty or if a maturity or period of notice of not more than
24 hours or one working day has been agreed.
Cash includes cash in hand and deposits denominated in foreign currencies.
The Group includes in liquid resources term bank deposits of less than one year.
81
<PAGE> 82
19. FINANCIAL INSTRUMENTS
This is the first year of disclosure under FRS13 and no comparatives are
disclosed as permitted by that Standard, Group operations are financed through a
combination of shareholders funds and net borrowings, principally comprising
bank and revolving credit facilities.
<TABLE>
<CAPTION>
1999
pound sterling
--------------
<S> <C>
OTHER CURRENCIES Revolving credit facility:
US Dollar 14.6
Euro 18.0
Hong Kong Dollar 2.9
Singapore Dollar 3.5
Swedish Kroner 0.6
Danish Kroner 1.4
-------
41.0
-------
US Dollar short term borrowings 2.6
US Dollar overdrafts 0.4
French Franc finance lease obligations 1.7
Dutch Guilder finance lease obligations 0.4
Dutch Guilder overdrafts 2.3
Other overdrafts 0.4
-------
48.8
-------
NET DEBT
Gross borrowings 48.8
Cash and short term deposits (15.0)
-------
NET DEBT 33.8
-------
REPAYMENT ANALYSIS
Less than one year or on demand 46.7
In more than one year but less than two years 0.5
In more than two years but less than five years 1.6
-------
48.8
-------
SECURITY ANALYSIS
Secured 2.1
Unsecured 46.7
-------
48.8
-------
INTEREST RATE PROFILE
At fixed rates 2.1
At variable rates 46.7
-------
48.8
-------
</TABLE>
82
<PAGE> 83
19. FINANCIAL INSTRUMENTS (CONTINUED)
The weighted average interest rate of the fixed rate financial liabilities is
4.8 per cent. fixed for an average of four years.
The floating rate financial liabilities are subject to interest rates referenced
to LIBOR. The drawings under the Revolving Credit facility at 31 December 1999
are at a weighted average of 5.09 per cent. for a period of five months.
The group allows a degree of interest rate risk as long as the effects of
changes in rates remain within acceptable parameters.
As at 31 December 1999 the Group had committed multi-currency facility of pound
sterling 60.0 million of which pound sterling 41.0 million was utilised. In
addition the Group has facilities in the UK of pound sterling 3.0 million and in
its overseas operations of pound sterling 12.2 million.
Amounts drawn under the revolving credit facility are for periods of less than
one year, and as the facility expires in June 2000, these amounts have been
classified as falling due within one year. The Group has entered into a new
three year pound sterling 72.0 million revolving credit facility in February
2000 to replace the facility existing at the year-end.
The Group operates a foreign exchange hedging policy, whereby 75 per cent. of
foreign currency denominated assets are hedged through the use of foreign
currency borrowings. As a result of this policy pound sterling 40.0 million of
the revolving credit facility has been utilised for hedging purposes.
The Group continues to comply with all of its borrowing covenants, none of which
represents a restriction on funding or investment policy in the foreseeable
future.
There is no material difference between book value and the fair value of the
Group's financial assets and financial liabilities as at 31 December 1999.
20. PENSION ARRANGEMENTS
20.1 The Group operates two defined benefit pension schemes. The SGB Group
Staff Pension and Family Security Scheme ("the SGB Scheme") is the larger
of the two. The other is the Youngman Group Limited Operatives Pension and
Family Security Scheme ("the Youngman Scheme"). The Group also makes
contributions to funded unapproved retirement benefits schemes (FURBS) in
respect of three executive directors. The total pension charge in 1999 was
pound sterling2.4 million (1998: pound sterling2.3 million).
20.2 The assets of the SGB Scheme and the Youngman Scheme are held under trust
separately from those of the Group and invested directly on the advice of
independent professional investment managers. Pension costs are assessed
on the advice of an independent qualified actuary using the projected unit
method.
<TABLE>
<CAPTION>
SGB Scheme Youngman Scheme
G Harman, FIA, William G Harman, FIA, William
Actuary M Mercer Ltd M Mercer Ltd
<S> <C> <C>
Date of last valuation/review 31 December 1999 31 December 1997
Date of next valuation 31 December 2000 31 December 1999
Market value of the schemes' assets pound sterling165.8m pound sterling10.3m
Level of funding 115% 100%
Key Assumptions:
Investment return Pre-retirement 6.2% 8.5%
Post-retirement 5.2% 8.5%
General pensionable earnings increases 4.7% 6.5%
Increases in pensions in excess of GMP 3.2%* 4.5%
Increase in equity dividends N/A 4.0%
Average future working lifetime of the active members 11 years 17 years
</TABLE>
The surplus revealed by the valuations is being spread over the average future
service lives of the active members.
* Certain members of the SGB Scheme are guaranteed increases in pensions in
excess of GMP of 4.0%.
83
<PAGE> 84
21. COMMITMENTS AND CONTINGENT LIABILITIES
<TABLE>
<CAPTION>
Powered
Land and access
buildings equipment Vehicles
1999 1999 1999
pound sterling pound sterling pound sterling
<S> <C> <C> <C>
OPERATING LEASE ANNUAL COMMITMENTS
Non-cancellable operating leases which expire:
Within one year 0.3 - 0.5
In two to five years 0.6 3.6 4.1
Over five years 3.1 - -
--- --- ---
4.0 3.6 4.6
=== === ===
</TABLE>
<TABLE>
<CAPTION>
Powered
access
equipment Vehicles
pound sterling pound sterling
<S> <C> <C>
NOTIONAL CAPITAL VALUE OF OPERATING LEASES
The movement in the notional capital value of leased assets not included in
fixed assets is as follows:
Brought forward on 1 January 1999 10.8 10.5
Net additions 15.3 4.7
Capital element of lease payments (2.6) (3.6)
Foreign exchange movement (0.5) (0.3)
---- ----
CARRIED FORWARD ON 31 DECEMBER 1999 23.0 11.3
---- ----
The interest element of operating lease payments charged to the Profit and Loss
Account was: 0.8 1.1
==== ====
</TABLE>
The notional value of powered access equipment under operating leases at 31
December 1999 includes pound sterling7.5 million of equipment (1998: pound
sterling3.3 million) where leases have not yet been incepted.
The Group has guaranteed pound sterling107.3 million of facilities (including
leases facilities) for subsidiary undertakings (including the Revolving Credit
Facility of pound sterling60 million).
The Group has contingent liabilities arising in the ordinary course of business
from which it is anticipated that no material liabilities will arise.
The Group has also guaranteed borrowings of pound sterling1.8 million (1998:
pound sterling 1.8 million) of certain of its overseas agents.
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22. RELATED PARTY TRANSACTIONS
During the year the Group sold pound sterling 2.4 million (1998: pound
sterling 3.6 million) of goods and services to Mowlem & Company PLC ("Mowlem"),
the Group's parent company, on arm's length terms and on a normal commercial
basis. In addition the Group paid pound sterling 0.1 million (1998: pound
sterling 0.1 million) to Mowlem being the fees in respect of two non-executive
directors who are also directors of Mowlem.
These fees are detailed in the Report of the Remuneration and Appointments
Committee.
The Group supplied pound sterling 6.5 million (1998: pound sterling 10.8
million) of goods and services to Salamis SGB Limited, a joint venture company,
on normal commercial terms.
At 31 December 1999 the Group had net debtor balances outstanding with Mowlem
and Salamis SGB Limited of pound sterling 0.6 million and pound sterling nil
million respectively.
AGM CHAIRMAN'S STATEMENT, 9 MAY 2000
"1999 was another year of substantial progress for the SGB Group. The main
features of the Group's performance were:
- Sales at pound sterling 283 million, similar levels to 1998;
- Profits before interest and tax increased by 21.8% to pound sterling 28.5
million, moving operating margins into double figures - 10.1% compared
with 8.2% in 1998;
- Pre-tax profits increased by 21.5% to pound sterling 26.6 million;
- Earnings per share increased by 21.9% to 24.5p per share;
- The Board is recommending a final dividend of 5.4p per share which, if
shareholders approve, will make the total dividend for the year 8.8p per
share, an increase of 20.5% over 1998.
KEY ACHIEVEMENTS
The Group's, achievements in 1999 were not limited to the realisation of
significant increases in financial performance; 1999 was also a year when the
developments set out at last year's AGM were implemented.
In the UK, we have extended our hub and satellite coverage and diversified
further our product offering. By the end of the year, ten hubs were established.
We replaced three old and inadequate satellites with new upgraded units and
added a completely new one. To enhance our customer service capability, we
established seven new call centres. In addition, we have widened the range of
products on offer in our Powered Access sector, introduced Cuplok 3000, and
launched our new formwork panel system "Logik".
In Continental Europe, we are now servicing our traditional markets with a wider
product range. We have extended our penetration of the petrochemical industry,
and re-focused our French operations. In 1999, we have extended the Powered
Access product range by adding mobile climbing units and material hoists, and
extended our geographic penetration into Germany and Austria. We have also
widened our customer base for the range of services we provide to the
petrochemical industry. In France, we have established two new hubs and two new
satellites in our drive to extend our provision of access products and services
to the French market.
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In the USA, our objective was to extend the Group's coverage. New branches have
been set up and the product range has been extended by the addition of the GASS
aluminium shoring system and the new "Logik" panel formwork product.
In Asia, we planned to develop our business cautiously in the aftermath of the
recession of 1998. The Asian market is now emerging from that setback, and
opportunities in Hong Kong and elsewhere in the region are now coming to the
fore. While we are being selective about the projects we accept, our confidence
in prospects for Asia is returning.
STRATEGY
We shall continue to develop our current business in the major areas of the
world in which we operate and where we have extensive market knowledge and
experience. We shall continue to extend our product offering through our own
innovation and where we can acquire products and services which fit our
portfolio.
We continue to refine our management organisation to meet the changing needs of
the Group and its growth plans.
As we continue to develop and consider further growth through acquisition, we
will only make investments where we are very confident they will meet our
rigorous profitability criteria. We have examined a number of acquisition
opportunities over 1999 but none of them met our needs. We shall continue to
search for the right investments but will only commit if our criteria are met.
Turning now to the prospects for this year, we see progress being achieved in
most of the principal regions in which we operate. We began the year with some
encouraging orders and our US operations, in particular, are showing the benefit
of our investments last year.
Nevertheless, the strength of Sterling is adversely affecting both the Sterling
value of earnings from our overseas operations and the competitive position of
UK manufactured goods. Sales of these in the UK have so far been slower than
anticipated. Powered Access performance in our UK Branch Operations continues to
reflect the difficult environment.
However, overall, the Board expects modest improvement over last year and looks
forward to the future with confidence."
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APPENDIX IV
CALCULATIONS AND SOURCES OF INFORMATION
1. GENERAL
Unless otherwise stated, (i) financial information relating to Harsco has been
extracted from the audited Annual Report for the year ended 31 December 1999,
and (ii) financial information relating to SGB has been extracted from the
audited Annual Reports and Accounts for the year ended 31 December 1999 and from
a Dresdner Kleinwort Benson research report dated 7 January 2000.
2. EXCHANGE RATES
Amounts denominated in US$ have, for the purpose of this document, been
converted into pound sterling at an exchange rate of US$1.5159 to pound
sterling1, being the closing mid-point exchange rate sourced from the Financial
Times on 15 May 2000 (the last business day prior to the announcement of the
Offer).
3. SHARE PRICES
The market price of an SGB share is based on the closing middle market price of
159.5p for a SGB Share obtained from Bloomberg on 15 May 2000 (the last business
day prior to the announcement of the Offer).
4. MARKET CAPITALISATION
The market capitalisation of Harsco is based on the closing middle market price
of US$29.69 for a Harsco share, obtained from Bloomberg on 18 May 2000 (the last
practical date prior to the publication of the document).
5. VALUE OF THE OFFER
References to the value of the Offer for the whole of the issued share capital
of SGB assume the number of SGB Shares currently in issue to be 75,053,008.
References to the value of the Offer assuming the exercise of all outstanding
options assume the number of options to be 3,297,015.
6. EARNINGS PER SHARE
The calculation relating to the basic pre-exceptional earnings per SGB Share of
24.8p is based on profit before exceptional items attributable to shareholders
of pound sterling18.4 million and the weighted average number of Shares in issue
during the year of 74,115,165.
The exit multiple of 10.1 times earnings per SGB Share for the year ended 31
December 1999 is calculated by dividing the Offer price of 250p by the basic
pre-exceptional earnings as set out above.
7. PREMIUM
The premium of the Offer price to the pre-announcement price of 56.7 per cent.
is calculated on the basis of the Offer price of 250p and the market price per
SGB Share as set out in paragraph 3 above.
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<PAGE> 88
APPENDIX V
ADDITIONAL INFORMATION
1. RESPONSIBILITY
Derek Hathaway as Chairman and Chief Executive Officer of Harsco and director of
Harsco Investment, Robert Nation as Chairman of the Management Development and
Compensation Committee of Harsco, James Scheiner as Chairman of the Audit
Committee of Harsco, Dr. Robert Wilburn as Chairman of the Nominating Committee
of Harsco, Salvatore Fazzolari as Senior Vice President, Chief Financial Officer
and Treasurer of Harsco and director of Harsco Investment and Paul Coppock as
Senior Vice President, Chief Administrative Officer, General Counsel and
Secretary and Company Secretary of Harsco Investment (in this paragraph 1, "the
Directors") are responsible for the information contained in this document save
that the sole responsibility accepted by the Directors in respect of information
relating to SGB, SGB's directors and the SGB Group has been to ensure that it
has been correctly compiled from published sources and is fairly reproduced and
presented. Subject as aforesaid, to the best of the knowledge and belief of the
Directors (who have taken all reasonable care to ensure that such is the case),
the information contained in this document for which they are responsible is in
accordance with the facts and does not omit anything likely to affect the import
of such information. The Directors accept responsibility accordingly.
2. DIRECTORS
(a) The directors of Harsco are as follows:
Derek Hathaway
Leonard Campanaro
Andrew Sordoni III
Jerry Jasinowski
Robert Nation
Carolyn Scanlan
James Scheiner
Joseph Viviano
Robert Wilburn
The Chief Financial Officer of Harsco is Salvatore Fazzolari. The Chief
Administrative Officer of Harsco is Paul Coppock.
(b) The directors of Harsco Investment are as follows:
Derek Hathaway
Salvatore Fazzolari
The Company Secretary of Harsco Investment is Paul Coppock.
(c) As far as Harsco is aware, the directors of SGB are:
Kenneth Minton
Robert Stokell
John Gains
Michael Gatenby
Peter Harrisson
Kenneth Mansell
Arthur Moore
Andrew Scull
Stephen Yapp
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<PAGE> 89
3. MARKET QUOTATIONS
The following table shows the closing middle market quotations for SGB Shares as
derived from the Daily Official List on the first dealing day in each of six
months immediately prior to the date of this document, on 15 May 2000 (the last
dealing day prior to the commencement of the Offer Period) and on 18 May 2000
(the latest practicable date prior to the publication of this document):
<TABLE>
<CAPTION>
SGB
Share price
Date in pence
<S> <C>
1 December 1999 262.5
4 January 2000 263.5
1 February 2000 245.5
1 March 2000 234.0
3 April 2000 214.0
2 May 2000 195.0
15 May 2000 159.5
18 May 2000 256.0
</TABLE>
4. IRREVOCABLE UNDERTAKING
An irrevocable undertaking to accept the Offer has been received in respect of
the following SGB Shares:
<TABLE>
<CAPTION>
SGB
Name Shares
<S> <C>
Mowlem 38,250,000
</TABLE>
5. DISCLOSURE OF INTERESTS AND DEALINGS
As at 19 May 2000 (the latest practicable date prior to the publication of this
document):
(a) Mowlem was interested in 38,250,000 SGB Shares.
(b) neither Harsco, Harsco Investments nor Mowlem nor the Directors of Harsco
or Harsco Investments nor any member of their immediate families or
related trusts or connected persons nor any persons acting in concert with
Harsco owns, controls or (in the case of any director of Harsco or Harsco
Investments or their immediate families or related trusts) is directly or
indirectly interested in any relevant securities and no such person has
dealt for value in any relevant securities during this disclosure period;
and
(c) save as above and save for the irrevocable undertaking referred to in
paragraph 4 above, neither Harsco, Harsco Investments, nor any person
acting in concert with Harsco is a party to an arrangement with any
director, recent director, shareholder or recent shareholder of SGB in
relation to relevant securities including, in addition to indemnity and
option arrangments, any agreement or understanding, formal or informal, of
whatever nature, which may be an inducement to deal or refrain from
dealing.
For the purposes of this paragraph 5:
"arrangement" includes any indemnity or option arrangement and any
agreement or understanding, formal or informal, of whatever nature,
relating to relevant securities which may be an inducement to deal or
refrain from dealing;
"derivative" includes any financial product whose value in whole or in
part is determined directly or indirectly by reference to the price of an
underlying security but which does not include the possibility of delivery
of such underlying securities;
"disclosure period" means the period commencing on 16 May 1999 (the date
12 months prior to the commencement of the Offer period) and ending on 18
May 2000 (the latest practicable date prior to the publication of this
document);
"relevant securities" means SGB Shares and securities convertible into,
or exchangeable for, rights to subscribe for and options (including traded
options) in respect of, or derivatives referenced to SGB Shares.
"control" means a holding, or aggregate holdings, of shares carrying 30
per cent. or more of the voting rights attributable to the share capital
of the company which are currently exercisable at a general meeting,
irrespective of whether the holding or aggregate holding gives de facto
control.
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<PAGE> 90
6. MATERIAL CONTRACTS
The following contracts have been entered into by members of the Harsco Group
otherwise than in the ordinary course of business since 16 May 1998 (the date
two years prior to the commencement of the Offer Period) and are or may be
material:
(a) a pound sterling 190,000,000 term credit facility dated 18 May 2000 (the
"Facility Agreement") between Harsco (as borrower and guarantor), Harsco
Investment (as borrower), Chase Manhattan International Limited (as London
Agent), The Chase Manhattan Bank (as administrative agent) and the Lenders
(as defined in the Facility Agreement). The facility is underwritten by
the Chase Manhattan Bank.
The Facility Agreement is subject to the laws of the State of New York and
contains limited conditions precedent, representations and warranties,
covenants and events of default customary for this type of facility.
(b) a merger agreement dated 20 February 1998 between Harsco, H-Chemi
Acquisition Corp. and Chemi-Trol Chemical Co., under which Harsco acquired
Chemi-Trol Chemical Co. for a cash consideration of approximately US$46
million;
(c) an asset purchase agreement dated 9 September 1998 between Harsco and
Amcast Industrial Corporation under which Harsco acquired the Superior
Valve Company for a cash consideration plus assumption of liabilities, for
a total consideration of approximately US$40 million;
(d) an asset purchase agreement dated 30 October 1998 between Harsco and
Sulzer Chemtech USA Inc., for the sale by Harsco of Nutter Engineering for
a cash consideration plus assumption of liabilities, for a total
consideration of approximately US$37 million; and
(e) an agreement dated 30 January 1998, as amended 15 October 1999 between
Harsco and Charter plc under which Harsco acquired Charter plc's Pandrol
Jackson Limited railway track maintenance business for a cash
consideration plus assumption of liabilities, for a total consideration of
approximately US$65 million. Pursuant to a condition of the U.S.
Department of Justice relating to Harsco's asset purchase of Pandrol
Jackson, Harsco was required to dispose of certain assets of this
business. This disposal does not constitute a material contract for the
purposes of this paragraph 6 of Appendix V.
Save as disclosed above, no members of Harsco Group have entered into any
contracts otherwise than in the ordinary course of business since 16 May 1998
(the date two years prior to the commencement of the Offer Period) that are or
may be material.
7. MATERIAL CHANGES
Save as disclosed elsewhere in this document, there have been no material
changes in the financial or trading position of the Harsco Group since 31
December 1999 (the date to which the last audited accounts of Harsco were
prepared).
The directors of Harsco are not aware of any significant change in the financial
or trading position of the SGB Group other than as set out in the AGM Chairman's
Statement which was released on 9 May 2000.
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<PAGE> 91
8. INFORMATION ON HARSCO INVESTMENT
Harsco Investment, a newly-formed U.K. subsidiary of Harsco, has been formed to
implement the Offer. To date, Harsco Investment has engaged in no activities
other than those incidental to its organisation and making the Offer. Harsco
Investment is a wholly-owned subsidiary of Harsco and is incorporated in England
and Wales under registered number 3985379 having its registered office at
Commonwealth House, 2 Chalkhill Road, London, W6 8DW.
9. OTHER INFORMATION
(a) Lazard is satisfied that financial resources available to Harsco
Investment are sufficient to satisfy full acceptance of the Offer. Full
acceptance of the Offer would involve the payment of approximately pound
sterling195.9 million in cash by Harsco Investment, assuming the exercise
of all options outstanding under the SGB Share Option Schemes.
(b) The Offer will be financed principally with funds from the term credit
facility agreement, details of which are set out in paragraph 6(a) above
and from Harsco's own resources. Harsco does not intend that the payment
of interest on, the repayment of, or the security for, any liability
(contingent or otherwise) will depend to any significant extent on the
business of SGB.
(c) No agreement, arrangement or understanding exists whereby the legal or
beneficial ownership of any of the SGB Shares acquired in pursuance of the
Offer will be transferred to any other person, save that Harsco Investment
reserves the right to transfer any SGB Shares so acquired to any other
member of the Harsco Group.
(d) The registered office of SGB is 4th Floor, Lilly House, 13 Hanover Square,
London WIR 0PA.
(e) The registered office of Harsco is 350 Poplar Church Road, P.O. Box 8888,
Camp Hill, Pennsylvania, 17001-8888, U.S.A.
(f) Save as otherwise disclosed in this document, no agreement, arrangement or
understanding (including any compensation arrangement) exists between
Harsco Investment and/or Harsco or any person acting in concert with
Harsco Investment and/or Harsco and any of the directors, recent
directors, shareholders or recent shareholders of SGB having any
connection with, or dependence on, or which is conditional on, the outcome
of the Offer and there is no proposal existing in connection with the
Offer whereby any payment or other benefit will be made or given to any
director of SGB as compensation for loss of office or as consideration for
or in connection with his retirement from office or otherwise in
connection with the Offer.
10. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the
offices of Freshfields, 65 Fleet Street, London EC4Y 1HS during usual business
hours on any weekday (weekends and public holidays excepted) while the Offer
remains open for acceptance:
(a) the restated certificate of incorporation and by-laws of Harsco;
(b) the memorandum and articles of association of Harsco Investment;
(c) the published audited and consolidated accounts of Harsco for the last two
fiscal years ended 31 December 1998 and 31 December 1999;
(d) the published audited consolidated accounts of SGB for the last two
financial years ended 31 December 1998 and 31 December 1999;
(e) the material contracts referred to in paragraph 6 above;
(f) copies of the irrevocable undertaking to accept the Offer given by Mowlem,
as referred to in paragraph 4 above; and
(g) this document and the Form of Acceptance.
20 May 2000
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<PAGE> 92
DEFINITIONS
The following definitions apply throughout this document unless the context
requires otherwise:
"COMPANIES ACT" the UK Companies Act 1985 (as amended)
"CITY CODE" the City Code on Takeovers and Mergers
"COMPUTERSHARE" Computershare Services PLC, whose registered office
is at 7th Floor, Jupiter House, Triton Court, 14
Finsbury Square, London EC2A 1BR
"CREST" the relevant system (as defined in the CREST
Regulations) in respect of which CRESTCo is the
Operator (as defined in the CREST Regulations)
"CRESTCO" CRESTCo Limited
"CREST MANUAL" the CREST manual referred to in the arrangements
entered into by CRESTCo
"CREST MEMBER" a person who has been admitted by CRESTCo as a
system-member (as defined in the CREST Regulations)
"CREST PARTICIPANT" a person who is, in relation to CREST, a
system-participant (as defined in the CREST
Regulations)
"CREST SPONSOR" a CREST participant admitted to CREST as a CREST
sponsor
"CREST PERSONAL MEMBER" a CREST member admitted to CREST as a personal member
"CREST REGULATIONS" the Uncertificated Securities Regulations 1995
"ESCROW AGENT" Computershare in its capacity as a CREST participant
under ID 3RA09
"FORM OF ACCEPTANCE" the form of acceptance, authority and election
relating to the Offer accompanying this document
"HARSCO" Harsco Corporation
"HARSCO GROUP" Harsco, its subsidiaries and subsidiary undertakings
"HARSCO INVESTMENT" Harsco Investment Limited, a wholly-owned subsidiary
of Harsco
"LAZARD" Lazard Brothers & Co., Limited, financial adviser to
Harsco and Harsco Investment
"LONDON STOCK EXCHANGE" the London Stock Exchange Limited
"MEMBER ACCOUNT ID" the identification code or number attached to any
member account in CREST
"MOWLEM" John Mowlem & Company PLC
"OFFER" the offer by Lazard, on behalf of Harsco Investment,
to acquire the SGB Shares and where the context so
requires any subsequent revision, variation,
extension or renewal of such offer
"OFFER PERIOD" has the meaning given to it in Part B of Appendix I
of this document
"OFFICIAL LIST" the Daily Official List of the London Stock Exchange
"OPTIONHOLDERS" holders of options granted under the SGB Share Option
Schemes
"PANEL" The Panel on Takeovers and Mergers
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<PAGE> 93
"PARTICIPANT ID" the identification code or membership number used in
CREST to identify a particular CREST member or other
CREST participant
"RECEIVING AGENT" Computershare in its capacity as receiving agent for
Harsco Investment for the purposes of the Offer
"SECURITIES ACT" the United States Securities Act of 1933, as amended
"SGB" SGB Group PLC
"SGB GROUP" SGB, its subsidiaries and subsidiary undertakings
"SGB SHAREHOLDER" a holder of SGB Shares
"SGB SHARES" the existing unconditionally allotted or issued and
fully paid ordinary shares of 40p each in the
capital of SGB and any further such shares which
are unconditionally allotted or issued and fully
paid up on or before the date on which the Offer
closes (or such earlier date(s) as Harsco
Investment Limited may, subject to the Code,
determine) as a result of the exercise of any options
"SGB SHARE OPTION SCHEMES" such share option schemes as may be in existence in
respect of SGB Shares
"TFE INSTRUCTION" a transfer from escrow instruction (as defined in the
CREST manual issued by CRESTCo.)
"TTE INSTRUCTION" a transfer to escrow instruction (as defined in the
CREST manual issued by CRESTCo. )
"UK" OR "UNITED KINGDOM" the United Kingdom of Great Britain and Northern
Ireland
"UNCERTIFICATED FORM" register of members of SGB as being held in
uncertificated form in CREST and title to which, by
virtue of the Regulations, may be transferred by
means of CREST
"US", "U.S.A" OR the United States of America, its territories and
"UNITED STATES" possessions, any state of the United States and the
District of Columbia and all other areas subject to
its jurisdiction
"US GAAP" US generally accepted accounting practice or
principles
"US PERSON" a US person as defined in Reputation S under the
Securities Act
"WIDER HARSCO GROUP" Harsco and the subsidiaries and subsidiary
undertakings of Harsco or any company of which 20 per
cent. or more of the voting capital is held directly
or indirectly by Harsco or any partnership, joint
venture or firm in which Harsco may be directly or
indirectly interested
"WIDER SGB GROUP" SGB and the subsidiaries and subsidiary undertakings
of SGB or any company of which 20 per cent. or more
of the voting capital is held directly or indirectly
by SGB or any partnership, joint venture or firm in
which SGB may be directly or indirectly interested
For the purposes of this document, "subsidiary" and "subsidiary undertaking"
have the respective meanings given by the Act.
93
