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[LOGO] harsco
corporation
HARSCO FINANCE B.V.
(incorporated with limited liability under the laws of The Netherlands)
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(pound)200,000,000
7.25 per cent. Guaranteed Notes due 2010
guaranteed by
HARSCO CORPORATION
(incorporated with limited liability under the laws of the State of Delaware)
Issue Price: 98.463 per cent.
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The (pound)200,000,000 7.25 per cent. Guaranteed Notes due 2010 (the "Notes") wi
issued by Harsco Finance B.V. (the "Issuer"). Unless previously redeemed or
cancelled, the Notes will be redeemed at their principal amount on 27 October,
2010. The Notes are subject to redemption in whole at their principal amount at
the option of the Issuer at any time in the event of certain changes affecting
taxation in the Netherlands or the United States of America. See "Terms and
Conditions of the Notes - Redemption and Purchase".
The Notes will bear interest from 27 October, 2000 at the rate of 7.25 per cent.
per annum payable annually in arrear on 27 October each year commencing on 27
October, 2001. Payments on the Notes will be made in sterling without deduction
for or on account of taxes imposed or levied by The Netherlands or the United
States of America to the extent described under "Terms and Conditions of the
Notes - Taxation". Harsco Corporation (the "Guarantor") will unconditionally and
irrevocably guarantee the due and punctual payment of all amounts at any time
becoming due and payable in respect of the Notes.
Application has been made to list the Notes on the Luxembourg Stock Exchange.
The Notes have not been, and will not be, registered under the United States
Securities Act of 1933, as amended (the "Securities Act") and are subject to
United States tax law requirements. The Notes are being offered outside the
United States by the Managers (as defined in "Subscription and Sale") in
accordance with Regulation S under the Securities Act ("Regulation S"), and may
not be offered, sold or delivered within the United States or to, or for the
account or benefit of, U.S. persons, subject to certain exemptions.
The Notes will be in bearer form and in the denominations of (pound)1,000,
(pound)10,000 and (pound)100,000 each. The Notes will initially be in the form
of a temp global note (the "Temporary Global Note"), without interest coupons,
which will be deposited on or around 27 October, 2000 (the "Closing Date") with
a common depositary for Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System ("Euroclear") and Clearstream
Banking, societe anonyme ("Clearstream, Luxembourg"). The Temporary Global Note
will be exchangeable, in whole or in part, for interests in a permanent global
note (the "Permanent Global Note"), without interest coupons, not earlier than
40 days after the Closing Date upon certification as to non-U.S. beneficial
ownership. Interest payments in respect of the Notes cannot be collected without
such certification of non-U.S. beneficial ownership. The Permanent Global Note
will be exchangeable in certain limited circumstances in whole, but not in part,
for Notes in definitive form in the denominations of (pound)1 (pound)10,000 and
(pound)100,000 each and with interest coupons attached. See y of Provisions
Relating to the Notes in Global Form".
The Royal Bank of Scotland, Chase Manhattan International Limited
Financial Markets
J. P. Morgan Securities Ltd.
25 October 2000
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Each of the Issuer and the Guarantor has confirmed to the Managers named under
"Subscription and Sale" that this Offering Circular contains all information
regarding the Issuer, the Guarantor and the Notes which is (in the context of
the issue of the Notes) material; such information is true and accurate in all
material respects and is not misleading in any material respect; any opinions,
predictions or intentions expressed in this Offering Circular on the part of the
Issuer or (as the case may be) the Guarantor are honestly held or made and are
not misleading in any material respect; this Offering Circular does not omit to
state any material fact necessary to make such information, opinions,
predictions or intentions (in such context) not misleading in any material
respect; and all proper enquiries have been made to ascertain and to verify the
foregoing. Each of the Issuer and the Guarantor accepts responsibility for the
information contained in this document.
Neither the Issuer nor the Guarantor has authorised the making or provision of
any representation or information regarding the Issuer, the Guarantor or the
Notes other than as contained in this Offering Circular or as approved for such
purpose by the Issuer and the Guarantor. Any such representation or information
should not be relied upon as having been authorised by the Issuer, the Guarantor
or the Managers.
Neither the delivery of this Offering Circular nor the offering, sale or
delivery of any Note shall in any circumstances create any implication that
there has been no adverse change, or any event reasonably likely to involve any
adverse change, in the condition (financial or otherwise) of the Issuer or the
Guarantor since the date of this Offering Circular.
This Offering Circular does not constitute an offer of, or an invitation to
subscribe for or purchase, any Notes.
The distribution of this Offering Circular and the offering, sale and delivery
of Notes in certain jurisdictions may be restricted by law. Persons into whose
possession this Offering Circular comes are required by the Issuer, the
Guarantor and the Managers to inform themselves about and to observe any such
restrictions. For a description of certain restrictions on offers, sales and
deliveries of Notes and on distribution of this Offering Circular and other
offering material relating to the Notes, see "Subscription and Sale".
In particular, the Notes have not been and will not be registered under the
Securities Act and are subject to United States tax law requirements. Subject to
certain exceptions, Notes may not be offered, sold or delivered in the United
States or to U.S. persons. In addition, neither the Issuer nor the Guarantor has
authorised any offer of Notes to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 (the "Regulations").
Notes may not lawfully be offered or sold to persons in the United Kingdom
except in circumstances which do not result in an offer to the public in the
United Kingdom within the meaning of the Regulations or otherwise in compliance
with all applicable provisions of the Regulations.
In this Offering Circular, unless otherwise specified, references to "sterling"
and "(pound)" are to the lawful currency of the United Kingdom; "U.S.$", "U.S.
dollars" or "dollars" are to United States dollars and references to "euro" and
"A" are to the currency introduced at the third stage of European Economic and
Monetary Union pursuant to the Treaty establishing the European Community, as
amended by the Treaty on European Union. References to "billions" are to
thousands of millions.
Certain figures included in this Offering Circular have been subject to rounding
adjustments; accordingly, figures shown for the same category presented in
different tables may vary slightly and figures shown as totals in certain tables
may not be an arithmetic aggregation of the figures which precede them.
In connection with this issue, The Royal Bank of Scotland plc may over-allot or
effect transactions which stabilise or maintain the market price of the Notes at
a level which might not otherwise prevail. Such stabilising, if commenced, may
be discontinued at any time.
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CONTENTS
Clause Page
TERMS AND CONDITIONS OF THE NOTES 4
SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM 18
USE OF PROCEEDS 19
DESCRIPTION OF THE ISSUER 20
DESCRIPTION OF THE GUARANTOR 21
TAXATION 38
SUBSCRIPTION AND SALE 41
GENERAL INFORMATION 43
FINANCIAL STATEMENTS AND AUDITORS' REPORT 44
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TERMS AND CONDITIONS OF THE NOTES
The following is the text of the Terms and Conditions of the Notes which
(subject to completion and amendment) will be endorsed on each Note in
definitive form:
The (pound)200,000,000 7.25 per cent. Guaranteed Notes due 2010 (the "Notes",
which expression includes any further notes issued pursuant to Condition 14
(Further issues) and forming a single series therewith) of Harsco Finance B.V.
(the "Issuer") are subject to, and have the benefit of, a trust deed dated 27
October, 2000 (as amended or supplemented from time to time, the "Trust Deed")
between the Issuer, Harsco Corporation (the "Guarantor") and Chase Manhattan
Trustees Limited as trustee (the "Trustee" which expression includes all persons
for the time being trustee or trustees appointed under the Trust Deed) and are
the subject of a paying agency agreement dated 27 October, 2000 (as amended or
supplemented from time to time, the "Paying Agency Agreement") between the
Issuer, the Guarantor, the Trustee, The Chase Manhattan Bank as principal paying
agent (the "Principal Paying Agent", which expression includes any successor
principal paying agent appointed from time to time in connection with the Notes)
and the paying agents named therein (together with the Principal Paying Agent,
the "Paying Agents", which expression includes any successor or additional
paying agents appointed from time to time in connection with the Notes). Certain
provisions of these Conditions are summaries of the Trust Deed and the Paying
Agency Agreement and subject to their detailed provisions. The holders of the
Notes (the "Noteholders") and the holders of the related interest coupons (the
"Couponholders" and the "Coupons", respectively) are bound by, and are deemed to
have notice of, all the provisions of the Trust Deed and the Paying Agency
Agreement applicable to them. Copies of the Trust Deed and the Paying Agency
Agreement are available for inspection during normal business hours at the
Specified Offices (as defined in the Paying Agency Agreement) of each of the
Paying Agents, the initial Specified Offices of which are set out below.
1. Form, Denomination and Title
The Notes are in bearer form in the denominations of (pound)1,000,
(pound)10,000 and (pound)100,000 with Coupons attached at the time of
issue. Notes of one denomination will not be exchangeable for Notes of
another denomination. Title to the Notes and the Coupons will pass by
delivery. The holder of any Note or Coupon shall (except as otherwise
required by law) be treated as its absolute owner for all purposes
(whether or not it is overdue and regardless of any notice of ownership,
trust or any other interest therein, any writing thereon or any notice of
any previous loss or theft thereof) and no person shall be liable for so
treating such holder.
2. Status and Guarantee
(a) Status of the Notes: The Notes constitute direct, general, unsecured,
unsubordinated and unconditional obligations of the Issuer which will at
all times rank pari passu among themselves and at least pari passu with
all other present and future unsecured obligations of the Issuer, save for
such obligations as may be preferred by provisions of law that are both
mandatory and of general application.
(b) Guarantee of the Notes: The Guarantor has in the Trust Deed
unconditionally and irrevocably guaranteed the due and punctual payment of
all sums from time to time payable by the Issuer in respect of the Notes.
This guarantee (the "Guarantee") constitutes the direct, general,
unsecured, unsubordinated and unconditional obligation of the Guarantor
which will at all times rank at least pari passu with all other present
and future unsecured obligations of the Guarantor, save for such
obligations as may be preferred by provisions of law that are both
mandatory and of general application.
3. Negative Pledge and Covenants
(a) Restrictions on creation of Secured Debt: So long as any of the Notes
remains outstanding (as defined in the Trust Deed), the Issuer and the
Guarantor and any Restricted Subsidiaries of the Guarantor are prohibited
from creating, incurring, assuming or guaranteeing any Secured Debt,
without equally and rateably securing the Notes then outstanding and any
other indebtedness of or guaranteed by the Issuer, the Guarantor or the
Restricted Subsidiaries of the Guarantor then entitled thereto, except
that this restriction will not apply to: (i) any Security Interest upon
any property acquired or constructed by the Issuer, the Guarantor or a
Restricted Subsidiary after 25 October, 2000 which is created
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contemporaneously with, or within twelve months after such acquisition or
construction to secure or provide for the payment of all or any part of
the purchase price of such property or construction, as the case may be;
(ii) the acquisition of property subject to any Security Interest upon
such property existing at the time of the acquisition thereof, whether or
not the obligation secured thereby is assumed by the Issuer, the Guarantor
or such Restricted Subsidiary; (iii) Security Interests existing on the
property, shares or indebtedness of a corporation at the time it becomes a
Restricted Subsidiary of the Guarantor; (iv) any Security Interest on
property of a corporation existing at the time such corporation is merged
into or consolidated with the Issuer, the Guarantor or a Restricted
Subsidiary of the Guarantor; (v) mechanics' and other statutory liens
arising in the ordinary course of business; (vi) liens for taxes not yet
due and for contested taxes against which adequate reserves have been
established, and judgment liens if the judgment is being contested and for
so long as execution thereof is stayed; (vii) leases and certain
landlords' liens; (viii) certain governmental liens arising in connection
with contracts or other transactions, including Security Interests arising
in connection with the financing of pollution control facilities or the
issuance of industrial development bonds, or in connection with any
governmental regulation, privilege or licence; and (ix) any extension,
renewal or replacement of (i) through (viii) above.
Notwithstanding the foregoing restrictions, the Guarantor and Restricted
Subsidiaries may issue, assume or guarantee Secured Debt not otherwise
permitted without equally and rateably securing the Notes if the sum of
(a) the amount of such Secured Debt plus (b) the aggregate value of Sale
and Leaseback Transactions permitted by Condition 3(b) below, does not
exceed 5 per cent. of Consolidated Net Tangible Assets as certified by the
Guarantor in accordance with Condition 18. In this Condition,
"Consolidated Net Tangible Assets" means (i) the aggregate amount of
assets (less applicable reserves and other properly deductible items)
appearing on the balance sheet of the Guarantor and its consolidated
Subsidiaries, except good will and similar intangible assets, less (ii)
the consolidated current liabilities (excluding all indebtedness for money
borrowed having a maturity of less than 12 months but by its terms being
renewable or extendable beyond 12 months from the date of such balance
sheet at the option of the borrower) of the Guarantor and its consolidated
Subsidiaries.
In these Conditions, unless stated otherwise:
"Restricted Subsidiary" means (a) any Subsidiary of the Guarantor other
than an Unrestricted Subsidiary and (b) any Subsidiary of the Guarantor
which, after the date of the Offering Circular relating to the Notes, was
an Unrestricted Subsidiary but which is designated by any two executive
officers of the Guarantor to be a Restricted Subsidiary;
"Secured Debt" means indebtedness (other than indebtedness of the Issuer,
the Guarantor, or a Restricted Subsidiary owed to the Guarantor or another
Restricted Subsidiary) for money borrowed or on which interest is by the
terms of such indebtedness paid or payable, which (a) is secured by a
Security Interest on any Principal Facility or on the stock or
indebtedness of a Restricted Subsidiary, or (b) in the case of
indebtedness of the Guarantor, is guaranteed by a Restricted Subsidiary;
"Security Interests" means any mortgage, pledge, lien, encumbrance or
other security interest which secures payment or performance of an
obligation;
"Subsidiary" means any corporation of which the Issuer or the Guarantor,
directly or indirectly, owns voting securities entitling it to elect a
majority of the directors; and
"Unrestricted Subsidiary" means (a) any Subsidiary of the Guarantor
acquired or incorporated after the date of the Offering Circular relating
to the Notes, provided that such Subsidiary is not a successor, directly
or indirectly, to any Restricted Subsidiary (as defined) on the date of
the Offering Circular relating to the Notes, (b) any Subsidiary the
principal business and assets of which are located outside the United
States of America, its territories and possessions and (c) any Subsidiary
substantially all the assets of which consist of stock or other securities
of a Subsidiary or Subsidiaries of the character described in (a) and (b),
above, in each case unless and until such Subsidiary or Subsidiaries shall
have been designated by any two executive officers of the Guarantor to be
a Restricted Subsidiary.
(b) Restrictions on Sales and Leasebacks: The Guarantor and the Restricted
Subsidiaries of the Guarantor are prohibited from engaging in any Sale and
Leaseback Transaction with respect to a Principal
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Facility, unless (i) the Guarantor and the Restricted Subsidiaries of the
Guarantor would on the date of such Sale and Leaseback Transaction be
entitled to incur, without the benefit of the exceptions referred to under
Condition 3(a) (i) to (ix) above, Secured Debt equal to the amount
realised upon the sale or transfer involved in such transaction without
equally and rateably securing the Notes or (ii) an amount equal to the
value of the property leased is applied to (a) the purchase or
construction of properties, facilities or equipment used for operating
purposes, (b) the repayment of Funded Debt of the Guarantor or any
Restricted Subsidiary of the Guarantor other than Funded Debt owed to the
Guarantor or a Restricted Subsidiary of the Guarantor, provided, however,
that the amount required by (ii) (b) to be applied to the repayment of
Funded Debt of the Guarantor shall be reduced by (A) the principal amount
of any Notes purchased and cancelled in accordance with Conditions 6(e)
and 6(f) within 120 days after such sale or transfer, and (B) the
principal amount of Funded Debt, other than the Notes, voluntarily repaid
by the Guarantor within 120 days after such sale or transfer.
Notwithstanding the foregoing, repayment referred to in clause (b) above
does not include payment of Funded Debt at maturity or pursuant to any
mandatory sinking fund payment or any mandatory prepayment provision.
In this Condition:
"Funded Debt" means all indebtedness for money borrowed maturing more than
one year from the date of the most recent balance sheet of the Guarantor
and its consolidated Subsidiaries or maturing less than one year but by
its term being renewable or extendible beyond one year from such date at
the Guarantor's option;
"Principal Facility" means any manufacturing plant, warehouse, office
building or other operating facility of the Guarantor or any Restricted
Subsidiary, owned at or acquired after May 1, 1985, other than any such
facility which the Board of Directors of the Guarantor by duly adopted
resolution deems not to be of material importance to the business
conducted by the Guarantor and its Subsidiaries, taken as a whole;
"Sale and Leaseback Transaction" means any sale or transfer of any
Principal Facility in operation for more than 120 days prior to such sale
or transfer if the sale or transfer is made with the intention of, or as
part of an arrangement involving, the lease of such property to the
Guarantor or a Restricted Subsidiary of the Guarantor (except a lease for
a period not exceeding 36 months with the intention that the use of such
property by the Guarantor or such Restricted Subsidiary will be
discontinued on or before the expiration of such period); and
"Value" means, with respect to a Sale and Leaseback Transaction, as of any
particular time, the amount equal to the greater of (i) the net proceeds
of the sale of the property leased pursuant to such Sale and Leaseback
Transaction or (ii) the fair value of such property at the time of
entering into such Sale and Leaseback Transaction, as determined by any
two executive officers of the Guarantor, in either case divided first by
the number of full years of such term remaining at the time of
determination, without regard to any renewal or extension options
contained in the lease.
(c) Restriction on Transfer of Principal Facility to Unrestricted Subsidiary:
The Guarantor and its Restricted Subsidiaries will be prohibited from
transferring any Principal Facility to an Unrestricted Subsidiary unless,
within 120 days of such transfer, it applies an amount equal to the fair
value (as determined by any two executive officers of the Guarantor) of
such Principal Facility to one of the alternatives set forth in Condition
3(b) above with respect to Sale and Leaseback Transactions.
(d) Merger and Consolidation: No merger or consolidation of the Guarantor with
or into any other corporation and no sale, or conveyance or lease of its
property as an entirety, or substantially as an entirety, may be made
without the consent of the Noteholders or Couponholders to another
corporation unless the Trustee is satisfied that immediately after such
transaction the successor corporation, if not the Guarantor, (i) will be
organised and existing under the laws of the United States of America or a
State thereof, (ii) will expressly assume the payment of principal and
premium and interest, if any, in respect of the Notes and Coupons and the
performance and observance of all covenants and conditions to be performed
and kept by the Guarantor in respect of the Notes, Coupons and the Trust
Deed and (iii) will not be in default in the performance or observance of
any of the covenants and conditions to be performed and kept by the
Guarantor in respect of the Notes, Coupons and the Trust Deed and (iv)
certain other conditions set out in the Trust Deed are complied with. No
Noteholder or Couponholder
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shall, in connection with any merger, consolidation, sale, conveyance or
lease as contemplated by this Condition 3(d), be entitled to claim any
indemnification or payment in respect of any tax consequence thereof for
such Noteholder or (as the case may be) Couponholder except as provided
for in Condition 7 (Taxation).
(e) Gearing: The Guarantor will not permit Total Debt at any time on or after
25 October, 2000 whilst any of the Notes remains outstanding (as defined
in the Trust Deed), to exceed 60 per cent. of Total Capital.
In this Condition 3(e):
"Capital Lease Obligations" means, at any time, the obligations of the
Guarantor or any Subsidiary to pay rent or other amounts under any lease
of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligations are required to be
classified and accounted for as capital leases on a balance sheet of the
Guarantor or any Subsidiary under United States generally accepted
accounting principles ("U.S. GAAP") and for the purposes of these Notes,
the amount of such obligations at any time shall be the capitalised amount
thereof at such time determined in accordance with U.S. GAAP;
"Guarantee" means any obligation, contingent or otherwise, of the
Guarantor or any Subsidiary, guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "primary obligor")
in any manner, whether directly or indirectly, and including any
obligation of the Guarantor or any Subsidiary, direct or indirect, (i) to
purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or to purchase (or to advance or supply funds for
the purchase of) any security for the payment of such Indebtedness, (ii)
to purchase property, securities or services for the purpose of assuring
the owner of such Indebtedness of the payment of such Indebtedness, or
(iii) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable
the primary obligor to pay such Indebtedness; provided however that the
term "Guarantee" shall not include endorsements for collection or deposit,
in either case in the ordinary course of business;
"Indebtedness" of the Guarantor or any Subsidiary means, without
duplication,:
(i) all obligations of the Guarantor or any Subsidiary for borrowed
money or with respect to deposits or advances of any kind;
(ii) all obligations of the Guarantor or any Subsidiary evidenced by
bonds, debentures, notes or similar instruments;
(iii) all obligations of the Guarantor or any Subsidiary upon which
interest charges are customarily paid;
(iv) all obligations of the Guarantor or any Subsidiary under conditional
sale or other title retention agreements relating to property or
assets purchased by the Guarantor or any Subsidiary;
(v) all obligations of the Guarantor or any Subsidiary issued or assumed
as the deferred purchase price of property or services;
(vi) all Indebtedness of others secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien on property owned or acquired by the
Guarantor or any Subsidiary, whether or not the obligations secured
thereby have been assumed;
(vii) all Guarantees by the Guarantor or any Subsidiary of Indebtedness of
others;
(viii) all Capital Lease Obligations of the Guarantor or any Subsidiary;
(ix) all obligations of the Guarantor or any Subsidiary in respect of
interest rate protection agreements, foreign currency exchange
agreements or other interest or exchange rate hedging arrangements;
and
(x) all obligations of the Guarantor or any Subsidiary as an account
party in respect of letters of credit and bankers' acceptances
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provided however that Indebtedness shall not include trade accounts
payable in the ordinary course of business. The Indebtedness of any person
shall include the Indebtedness of any partnership of which the Guarantor
or any Subsidiary is a general partner.
"Lien" means with respect to any asset, (i) any mortgage, deed of trust,
lien, pledge, encumbrance, charge or security interest in or on such
asset, (ii) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or title retention agreement relating to
such asset and (iii) in the case of securities, any purchase option, call
or similar right of a third party with respect to such securities;
"Net Worth" means, as at any date, the sum for the Guarantor and its
subsidiaries (determined on a consolidated basis without duplication in
accordance with U.S. GAAP) of the following:
(i) the amount of common stock; plus
(ii) the amount of any preferred stock that does not have any requirement
for the Guarantor to purchase, redeem, retire or otherwise acquire
the same; plus
(iii) the amount of additional paid-in capital and retained earnings (or,
in the case of an additional paid - in capital or retained earnings
deficit, minus the amount of such deficit); plus
(iv) cumulative translation adjustments (or, in the case of negative
adjustments, minus the amount of such adjustments); plus
(v) cumulative pension liability adjustments (or, in the case of
negative adjustments, minus the amount of such adjustments); minus
(vi) the cost of treasury stock;
"Subsidiary" means any corporation, partnership, association or other
business entity (a) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary
voting power or more than 50% of the general partnership interests are, at
the time any determination is being made, owned, controlled or held by the
Guarantor, or (b) which is, at the time any determination is being made,
otherwise controlled by the Guarantor or one or more subsidiaries of the
Guarantor or by the Guarantor and one or more subsidiaries of the
Guarantor;
For the purpose of this definition, "controlled" means possessing,
directly or indirectly, the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of
voting securities, by contract or otherwise.
"Total Capital" means, at any time whilst any of the Notes remains
outstanding (as defined in the Trust Deed), Net Worth plus Total Debt; and
"Total Debt" means, at any time whilst any of the Notes remains
outstanding (as defined in the Trust Deed), the aggregate outstanding
principal amount of all Indebtedness of the Guarantor and its subsidiaries
at such time (other than Indebtedness described in clause (ix) or (x) of
the definition of the term "Indebtedness") determined on a consolidated
basis (without duplication) in accordance with U.S. GAAP; provided that
the term "Total Debt" shall include any preferred stock that provides for
the mandatory purchase, retirement, redemption or other acquisition of the
same by the Guarantor or any Subsidiary (other than preferred stock held
by the Guarantor or any Subsidiary).
4. Interest
The Notes bear interest from 27 October, 2000 at the rate of 7.25 per
cent. per annum, payable in arrears on 27 October in each year, subject as
provided in Condition 6 (Payments).
Each Note will cease to bear interest from the due date for final
redemption unless, upon due presentation, payment of principal is
improperly withheld or refused, in which case it will continue to bear
interest at such rate (as well after as before judgement) until whichever
is the earlier of (a) the day on which all sums due in respect of such
Note up to that day are received by or on behalf of the relevant
Noteholder and (b) the day which is seven days after the Principal Paying
Agent or the Trustee has
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notified the Noteholders that it has received all sums due in respect of
the Notes up to such seventh day (except to the extent that there is any
subsequent default in payment).
If interest is required to be calculated for any period of less than a
year, it will be calculated on the basis of a year of 360 days consisting
of 12 months of 30 days each and, in the case of an incomplete month, the
actual number of days elapsed.
5. Redemption and Purchase
(a) Scheduled redemption: Unless previously redeemed, or purchased and
cancelled, the Notes will be redeemed at their principal amount on 27
October, 2010, subject as provided in Condition 6 (Payments).
(b) Redemption for tax reasons: The Notes may be redeemed at the option of the
Issuer in whole, but not in part, at any time, on giving not less than 30
nor more than 60 days' notice to the Noteholders (which notice shall be
irrevocable) at their principal amount, together with interest accrued to
the date fixed for redemption, if immediately before giving such notice,
the Issuer satisfies the Trustee that:
(i) (A) the Issuer has or will become obliged to pay additional amounts
as provided or referred to in Condition 7 (Taxation) as a result of
any change in, or amendment to, the laws or regulations of The
Netherlands or any political subdivision or any authority thereof or
therein having power to tax, or any change in the application or
official interpretation of such laws or regulations, which change or
amendment becomes effective on or after 25 October, 2000 and (B)
such obligation cannot be avoided by the Issuer taking reasonable
measures available to it; or
(ii) (A) the Guarantor has or (if a demand was made under the Guarantee)
would become obliged to pay additional amounts as provided or
referred to in Condition 7 (Taxation) as a result of any change in,
or amendment to, the laws or regulations of the United States of
America or any political subdivision or any authority thereof or
therein having power to tax, or any change in the application or
official interpretation of such laws or regulations (including a
holding by a court of competent jurisdiction), which change or
amendment becomes effective on or after 25 October, 2000 and (B)
such obligation cannot be avoided by the Guarantor taking reasonable
measures available to it,
provided, however, that no such notice of redemption shall be given
earlier than 90 days prior to the earliest date on which the Issuer or the
Guarantor would be obliged to pay such additional amounts if a payment in
respect of the Notes were then due or (as the case may be) a demand under
the Guarantee were then made.
Prior to the publication of any notice of redemption pursuant to this
paragraph, the Issuer shall deliver or procure that there is delivered to
the Trustee (1) a certificate signed by two directors of the Issuer
stating that the circumstances referred to in (i)(A) and (i)(B) above
prevail and setting out the details of such circumstances or (as the case
may be) a certificate signed by any two executive officers of the
Guarantor stating that the circumstances referred to in (ii)(A) and
(ii)(B) above prevail and setting out the details of such circumstances
and (2) an opinion in form and substance satisfactory to the Trustee of
independent legal advisers of recognised standing to the effect that the
Issuer or (as the case may be) the Guarantor has or will become obliged to
pay such additional amounts as a result of such change or amendment. The
Trustee shall be entitled to accept such certificate and opinion as
sufficient evidence of the satisfaction of the circumstances set out in
(i)(A) and (i)(B) above or (as the case may be) (ii)(A) and (ii)(B) above,
in which event they shall be conclusive and binding on the Noteholders.
Upon the expiry of any such notice as is referred to in this Condition
5(b), the Issuer shall be bound to redeem the Notes in accordance with
this Condition 5(b).
(c) Event Risk - Redemption at the option of the Noteholders: if whilst any
Note remains outstanding (as defined in the Trust Deed), there occurs a
Restructuring Event and within the Restructuring Period (i) (if at the
time that Restructuring Event occurs there are Rated Securities) a Rating
Downgrade in respect of that Restructuring Event occurs or (ii) (if at
such time there are no Rated Securities) a Negative Rating Event in
respect of that Restructuring Event occurs (that Restructuring Event and
Rating Downgrade or Negative Rating Event, as the case may be, occurring
within the Restructuring Period together called a "Put Event"), each
Noteholder will have the option (unless, prior to the giving
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of the Put Event Notice referred to below, the Issuer gives notice under
Condition 5(b) (Redemption for tax reasons)) to require the Issuer to
redeem or, at the Issuer's option, purchase (or procure the purchase of)
any of its Notes on the Put Date (as defined below) at their principal
amount together with (or, where purchased, together with an amount equal
to) accrued interest to the Put Date.
Promptly upon the Issuer becoming aware that a Put Event has occurred, the
Issuer shall, and if so requested by the holders of at least one-quarter
in principal amount of the Notes then outstanding or if so directed by an
Extraordinary Resolution of the Noteholders the Trustee shall, give notice
(a "Put Event Notice") to the Noteholders in accordance with Condition 15
(Notices) specifying the nature of the Put Event and the procedure for
exercising the option contained in this Condition 5(c).
In order to exercise the option to require redemption of a Note under this
Condition 5(c) the Noteholder must deliver such Note, on any business day
falling within the period (the "Put Period") of 45 days after a Put Event
Notice is given, to the Specified Office of any Paying Agent, accompanied
by a duly signed and completed notice of exercise in the form (for the
time being current) obtainable from the specified office of any Paying
Agent (a "Put Notice") and in which the holder may specify a bank account
to which payment is to be made under this Condition 5(c). The Note should
be delivered together with all Coupons appertaining thereto maturing after
the date (the "Put Date") seven days after the expiry of the Put Period,
failing which the Paying Agent will require payment of an amount equal to
the face value of any such missing Coupon. Any amount so paid will be
reimbursed in the manner provided in Condition 6 (Payments) against
presentation and surrender of the relevant missing Coupon (or any
replacement therefor issued pursuant to Condition 10 (Replacement of Notes
and Coupons)) at any time after such payment, but before the expiry of the
period of five years from the date on which such Coupon would have become
due, but not thereafter. The Paying Agent to which such Note and Put
Notice are delivered will issue to the Noteholder concerned a
non-transferable duly completed receipt in respect of the Note so
delivered ("Put Receipt"). Payment in respect of any Note so delivered
will be made, if the holder duly specified in the Put Notice a bank
account to which payment is to be made, on the Put Date by transfer to
that bank account and, in every other case, on or after the Put Date
against presentation and surrender or (as the case may be) endorsement of
such receipt at the Specified Office of any Paying Agent. The Issuer shall
redeem or, at the option of the Issuer, purchase (or procure the purchase
of) the relevant Notes on the Put Date unless previously redeemed or
purchased.
No Note, once deposited with a duly completed Put Notice in accordance
with this Condition 5(c), may be withdrawn; provided, however, that if,
prior to the Put Date, any such Note becomes immediately due and payable
or, upon due presentation of any such Note on the Put Date, payment of the
redemption moneys is improperly withheld or refused, the relevant Paying
Agent shall mail notification thereof to the depositing Noteholder at such
address as may have been given by such Noteholder in the relevant Put
Notice and shall hold such Note at its Specified Office for collection by
the depositing Noteholder against surrender of the relevant Put Receipt.
For so long as any outstanding Note is held by a Paying Agent in
accordance with this Condition 5(c), the depositor of such Note and not
such Paying Agent shall be deemed to be the holder of such Note for all
purposes.
For the purposes of Condition 6 and the Trust Deed, receipts issued
pursuant to this Condition 5(c) shall be treated as if they were Notes.
For the purpose of these Conditions:
"Consolidated Operating Profit" means the consolidated operating profits
on ordinary activities before tax and interest and before taking account
of depreciation and amortisation of goodwill (for the avoidance of doubt,
exceptional items shall not be included) of the Guarantor determined in
accordance with United States generally accepted accounting principles
("U.S. GAAP") by reference to the Relevant Accounts;
"Disposal Percentage" means, in relation to each consecutive period of 12
months (each a "Relevant Period") comprised in any period of 36 months,
the ratio of (i) the aggregate Operating Profit for that Relevant Period
to (ii) the Consolidated Operating Profit for that Relevant Period,
expressed as a percentage;
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"Disposed Assets" means, where the Guarantor and/or any of its
Subsidiaries sells, transfers, leases or otherwise disposes of or is
dispossessed of, by any means, otherwise than to a wholly-owned Subsidiary
of the Guarantor or to the Guarantor, the whole or any part (whether by a
single transaction or by a number of transactions whether related or not)
of its undertaking or (except in the ordinary course of business of the
Guarantor and its Subsidiaries taken as a whole) property or assets, the
undertaking, property or assets sold, transferred, leased or otherwise
disposed of or of which it is so dispossessed;
"Group" means the Guarantor and any of its Subsidiaries;
A "Negative Rating Event" shall occur (i) if the Guarantor does not,
either prior to or not later than 21 days after the relevant Restructuring
Event, seek, and thereupon use all reasonable endeavours to obtain, a
rating of the Notes or any other unsecured and unsubordinated debt of the
Guarantor (or of any Subsidiary which is guaranteed on an unsecured and
unsubordinated basis by the Guarantor) having an initial maturity of five
years or more ("Rateable Debt") from a Rating Agency or (ii) if it does so
seek and use such endeavours, but it is unable, as a result of such
Restructuring Event, to obtain such a rating of at least investment grade
(BBB-/Baa3, or their respective equivalents for the time being), provided
that a Negative Rating Event shall not occur in respect of a particular
Restructuring Event if the Rating Agency declining to assign a rating of
at least investment grade (as described above) does not announce or
publicly confirm that its declining to assign a rating of at least
investment grade (as described above) was the result, in whole or in part,
of any event or circumstance comprised in or arising as a result of, or in
respect of, the applicable Restructuring Event (whether or not the
Restructuring Event shall have occurred at the time such investment grade
rating is declined);
"Operating Profit", in relation to any Disposed Assets, means the
operating profits on ordinary activities before tax and interest and
before taking account of depreciation and amortisation of goodwill (for
the avoidance of doubt, exceptional items shall not be included) of the
Guarantor attributable to such Disposed Assets as determined in accordance
with U.S. GAAP by reference to the Relevant Accounts, provided that if any
of the Disposed Assets sold, transferred, leased or otherwise disposed of
or dispossessed during any Relevant Period was acquired after the date of
the Relevant Accounts, then the Operating Profit of such Disposed Assets
shall be determined in respect of the period from the date of such
acquisition to the date of such disposal or dispossession;
"Rated Securities" means the Notes so long as they shall have an effective
rating from any Rating Agency and otherwise any Rateable Debt which is
rated by either of the Rating Agencies; provided that if there shall be no
such Rateable Debt outstanding prior to the maturity of the Notes, the
holders of not less than one-quarter of the nominal amount of outstanding
Notes may request the Trustee to require the Guarantor to obtain and
thereafter update on an annual basis a rating of the Notes from one Rating
Agency. In addition, the Guarantor may at any time obtain and thereafter
update on an annual basis a rating of the Notes from either Rating Agency,
provided that, except as provided above, the Guarantor shall not have any
obligation to obtain such a rating of the Notes;
"Rating Agency" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. and its successors or Moody's Investors
Service, Limited and its successors or any rating agency substituted for
either of them (or any permitted substitute of them) by the Guarantor from
time to time with the prior written approval of the Trustee;
A "Rating Downgrade" shall occur in respect of a Restructuring Event if
the current rating whether provided by a Rating Agency at the invitation
of the Guarantor or by its own volition assigned to the Rated Securities
by any Rating Agency is withdrawn or reduced from an investment grade
rating BBB-/Baa3 (or their respective equivalents for the time being) or
better to a non-investment grade rating BB+/Ba1 (or their respective
equivalents for the time being) or worse; provided that a Rating Downgrade
otherwise arising by virtue of a particular reduction in rating shall not
occur in respect of a particular Restructuring Event if the Rating Agency
making the withdrawal or reduction in rating to which this definition
would otherwise apply does not publicly announce or publicly confirm that
the reduction was the result, in whole or part, of any event or
circumstance comprised in or arising as a result of, or in respect of, the
applicable Restructuring Event (whether or not the applicable
Restructuring Event shall have occurred at the time of the Rating
Downgrade);
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"Relevant Accounts" means, in respect of each Relevant Period, the most
recent annual audited consolidated financial accounts of the Guarantor
preceding the first sale, transfer, lease or other disposal or
dispossession of any Disposed Assets occurring during such Relevant
Period;
A "Restructuring Event" shall occur at each time (whether or not approved
by the Board of Directors of the Guarantor) that:
(a) any person or any persons acting in concert with each other or any
persons acting on behalf of any such person(s), at any time
become(s) legally or beneficially entitled to (A) more than 50 per
cent. of the issued or allotted common stock of the Guarantor or (B)
such number of stock in the capital of the Guarantor carrying more
than 50 per cent. of the voting rights normally exercisable at a
general meeting of the Guarantor, or
(b) the sum of Disposal Percentages within any period of 36 months is
greater than 30 per cent (as certified by the Guarantor pursuant to
Condition 18);
"Restructuring Period" means the period ending 90 days after the
occurrence of the Restructuring Event (or such longer period in which the
Rated Securities or Rateable Debt, as the case may be, is or are under
consideration (announced publicly by a Rating Agency within the first
mentioned period) for rating review or, as the case may be, rating by a
Rating Agency); and
"Subsidiary" means, for the purposes of this Condition 5(c) only, in
relation to the Guarantor, any entity whose affairs are required by law or
in accordance with U.S. GAAP to be consolidated in the consolidated
accounts of the Guarantor.
(d) No other redemption: The Issuer shall not be entitled to redeem the Notes
otherwise than as provided in paragraphs (a) to (c) above.
(e) Purchase: The Issuer, the Guarantor or any of their respective
Subsidiaries may at any time purchase Notes in the open market or
otherwise and at any price, provided that all unmatured Coupons are
purchased therewith.
(f) Cancellation: All Notes so redeemed or purchased by the Issuer, the
Guarantor or any of their respective Subsidiaries and any unmatured
Coupons attached to or surrendered with them shall be cancelled and may
not be reissued or resold.
6. Payments
(a) Principal: Payments of principal shall be made only against presentation
and (provided that payment is made in full) surrender of Notes at the
Specified Office of any Paying Agent outside the United States by sterling
cheque drawn on, or by transfer to a sterling account maintained by the
payee with, a bank to which sterling may be credited or transferred.
(b) Interest: Payments of interest shall, subject to paragraph (f) below, be
made only against presentation and (provided that payment is made in full)
surrender of the appropriate Coupons at the Specified Office of any Paying
Agent outside the United States in the manner described in paragraph (a)
above.
(c) Payments subject to fiscal laws: All payments in respect of the Notes are
subject in all cases to any applicable fiscal or other laws and
regulations, but without prejudice to the provisions of Condition 7
(Taxation). No commissions or expenses shall be charged to the Noteholders
or Couponholders in respect of such payments.
(d) Deduction for unmatured Coupons: If a Note is presented without all
unmatured Coupons relating thereto, a sum equal to the aggregate amount of
the missing Coupons will be deducted from the amount of principal due for
payment; provided, however, that, if the gross amount available for
payment is less than the principal amount of such Note, the sum deducted
will be that proportion of the aggregate amount of such missing Coupons
which the gross amount actually available for payment bears to the
principal amount of such Note. Each sum of principal so deducted shall be
paid in the manner provided in paragraph (a) above against presentation
and (provided that payment is made in full) surrender of the relevant
missing Coupons.
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(e) Payments on business days: If the due date for payment of any amount in
respect of any Note or Coupon is not a business day in the place of
presentation, the holder shall not be entitled to payment in such place of
the amount due until the next succeeding business day in such place and
shall not be entitled to any further interest or other payment in respect
of any such delay. In this paragraph, "business day" means, in respect of
any place of presentation, any day on which banks are open for business in
such place of presentation and, in the case of payment by transfer to a
sterling account as referred to above, a day on which dealings in foreign
currencies may be carried on both in London and in such place of
presentation.
(f) Payments other than in respect of matured Coupons: Payments of interest
other than in respect of matured Coupons shall be made only against
presentation of the relevant Notes at the Specified Office of any Paying
Agent outside the United States.
(g) Partial payments: If a Paying Agent makes a partial payment in respect of
any Note or Coupon presented to it for payment, such Paying Agent will
endorse thereon a statement indicating the amount and date of such
payment.
7. Taxation
All payments of principal and interest in respect of the Notes and the
Coupons (including payments by the Guarantor under the Guarantee) shall be
made free and clear of, and without withholding or deduction for, any
taxes, duties, assessments or governmental charges of whatsoever nature
imposed, levied, collected, withheld or assessed by The Netherlands or the
United States of America or any political subdivision or any authority
thereof or therein having power to tax, unless such withholding or
deduction is required by law. In that event, the Issuer or (as the case
may be) the Guarantor shall pay such additional amounts as will result in
the receipt by the Noteholders and the Couponholders of such amounts as
would have been received by them if no such withholding or deduction had
been required, except that no such additional amounts shall be payable in
respect of any Note or Coupon presented for payment:
(a) by a holder which is liable for such taxes, duties, assessments or
governmental charges in respect of such Note or Coupon by reason of its
having some connection with The Netherlands or (as the case may be) the
United States of America other than the mere holding of such Note or
Coupon;
(b) more than 30 days after the Relevant Date except to the extent that the
relevant holder would have been entitled to such additional amounts if it
had presented such Note or Coupon on the last day of such period of 30
days;
(c) where such tax, duty, assessment or other governmental charge is an
estate, inheritance, gift, sales, transfer or personal property tax or any
similar tax assessment or governmental charge;
(d) where such tax, duty, assessment or other governmental charge would not
have been imposed but for the failure of the Noteholder or Couponholder to
comply with certification, information or other reporting requirements
concerning the nationality, residence or identity of such Noteholder or
Couponholder, if such compliance is required by statute or by regulation
of The Netherlands or (as the case may be) the United States of America or
of any political subdivision or taxing authority thereof or therein as a
precondition to relief or exemption from such tax, duty, assessment or
other governmental charge; or
(e) where such tax, duty, assessment or other governmental charge is payable
otherwise than by withholding from payments on or in respect of a Note or
Coupon.
In these Conditions, "Relevant Date" means whichever is the later of (a)
the date on which the payment in question first becomes due and (b) if the
full amount payable has not been received by the Principal Paying Agent or
the Trustee on or prior to such due date, the date on which (the full
amount having been so received) notice to that effect has been given to
the Noteholders.
Any reference in these Conditions to principal or interest shall be deemed
to include any additional amounts in respect of principal or interest (as
the case may be) which may be payable under this
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Condition 7 or any undertaking given in addition to or in substitution of
this Condition 7 pursuant to the Trust Deed.
If the Issuer or the Guarantor becomes subject at any time to any taxing
jurisdiction other than The Netherlands or the United States of America
respectively, references in these Conditions to The Netherlands or the
United States of America shall be construed as references to The
Netherlands or (as the case may be) the United States of America and/or
such other jurisdiction.
8. Events of Default
If any of the following events occurs then the Trustee at its discretion
may and, if so requested in writing by holders of at least one quarter in
principal amount of the outstanding Notes or if so directed by an
Extraordinary Resolution, shall (subject to the Trustee having been
indemnified or provided with security to its satisfaction) give written
notice to the Issuer declaring or provided with security to its
satisfaction) give written notice to the Issuer declaring the Notes to be
immediately due and payable, whereupon they shall become immediately due
and payable at their principal amount together with accrued interest
without further action or formality:
(a) Non-payment: the Issuer fails to pay any amount of principal in respect of
the Notes on the due date for payment thereof or fails to pay any amount
of interest in respect of the Notes within 14 days of the due date for
payment thereof; or
(b) Breach of other obligations: the Issuer or the Guarantor defaults in the
performance or observance of any of its other obligations under or in
respect of the Notes or the Trust Deed and such default (i) is, in the
opinion of the Trustee, incapable of remedy or (ii) being a default which
is, in the opinion of the Trustee, capable of remedy, remains unremedied
for 30 days after the Trustee has given written notice thereof to the
Issuer and the Guarantor; or
(c) Cross-acceleration of Issuer, Guarantor or Subsidiary: any indebtedness
for money borrowed of the Issuer, the Guarantor or any of their respective
Subsidiaries is, under the terms of the instrument or instruments under
which such indebtedness is issued or secured, duly accelerated so that the
same shall be or become due and payable prior to the date on which the
same would otherwise have become due and payable, provided that any such
acceleration is not rescinded or annulled or such indebtedness discharged
within ten days after written notice thereof, requiring the Issuer, the
Guarantor or the Subsidiary to remedy the same having first been given and
provided that the amount of such indebtedness individually or in the
aggregate exceeds U.S.$10,000,000 (or its equivalent in any other currency
or currencies); or
(d) Security enforced: a secured party takes possession, or a receiver,
manager or other similar officer is appointed, of the whole or any part of
the undertaking, assets and revenues of the Issuer, the Guarantor or any
of their respective Subsidiaries; or
(e) Insolvency etc: (i) the Issuer, the Guarantor or any of their respective
Subsidiaries becomes insolvent or is unable to pay its debts as they fall
due, (ii) an administrator or liquidator of the Issuer, the Guarantor or
any of their respective Subsidiaries or the whole or any part of the
undertaking, assets and revenues of the Issuer, the Guarantor or any of
their respective Subsidiaries is appointed (or application for any such
appointment is made), (iii) the Issuer, the Guarantor or any of their
respective Subsidiaries takes any action for a readjustment or deferment
of any of its obligations or makes a general assignment or an arrangement
or composition with or for the benefit of its creditors or declares a
moratorium in respect of any of its indebtedness or any guarantee of any
indebtedness given by it or (iv) the Issuer, the Guarantor or any of their
respective Subsidiaries ceases or threatens to cease to carry on all or
any substantial part of its business (otherwise than, in the case of a
Subsidiary of the Guarantor, for the purposes of or pursuant to an
amalgamation, reorganisation or restructuring whilst solvent); or
(f) Winding up etc: an order is made or an effective resolution is passed for
the winding up, liquidation or dissolution of the Issuer, the Guarantor
except pursuant to Condition 3(d) or any of their respective Subsidiaries
(otherwise than, in the case of a Subsidiary of the Guarantor, for the
purposes of or pursuant to an amalgamation, reorganisation or
restructuring whilst solvent); or
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(g) Analogous event: any event occurs which under the laws of The Netherlands
or the United States of America has an analogous effect to any of the
events referred to in paragraphs (d) to (f) above.
9. Prescription
Claims for principal shall become void unless the relevant Notes are
presented for payment within ten years of the appropriate Relevant Date.
Claims for interest shall become void unless the relevant Coupons are
presented for payment within five years of the appropriate Relevant Date.
10. Replacement of Notes and Coupons
If any Note or Coupon is lost, stolen, mutilated, defaced or destroyed, it
may be replaced at the Specified Office of the Principal Paying Agent and
the Paying Agent having its Specified Office in Luxembourg, subject to all
applicable laws, upon payment by the claimant of the expenses incurred in
connection with such replacement and on such terms as to evidence,
security, indemnity and otherwise as the Issuer may reasonably require.
Mutilated or defaced Notes or Coupons must be surrendered before
replacements will be issued.
11. Trustee and Paying Agents
Under the Trust Deed, the Trustee is entitled to be indemnified and
relieved from responsibility in certain circumstances and to be paid its
costs and expenses in priority to the claims of the Noteholders. In
addition, the Trustee is entitled to enter into business transactions with
the Issuer, the Guarantor and any entity relating to the Issuer or the
Guarantor without accounting for any profit.
In the exercise of its powers and discretions under these Conditions and
the Trust Deed, the Trustee will have regard to the interests of the
Noteholders as a class and will not be responsible for any consequence for
individual holders of Notes or Coupons as a result of such holders being
connected in any way with a particular territory or taxing jurisdiction.
In acting under the Paying Agency Agreement and in connection with the
Notes and the Coupons, the Paying Agents act solely as agents of the
Issuer, the Guarantor and (to the extent provided therein) the Trustee and
do not assume any obligations towards or relationship of agency or trust
for or with any of the Noteholders or Couponholders.
The initial Paying Agents and their initial Specified Offices are listed
below. The Issuer and the Guarantor reserve the right (with the prior
written approval of the Trustee) at any time to vary or terminate the
appointment of any Paying Agent and to appoint a successor principal
paying agent and additional or successor paying agents; provided, however,
that the Issuer and the Guarantor shall at all times maintain a paying
agent in Luxembourg and a principal paying agent. Notice of any change in
any of the Paying Agents or in their Specified Offices shall promptly be
given to the Trustee and Noteholders.
12. Meetings of Noteholders; Modification and Waiver
(a) Meetings of Noteholders: The Trust Deed contains provisions for convening
meetings of Noteholders to consider matters relating to the Notes,
including the modification of any provision of these Conditions or the
Trust Deed. Any such modification may be made if sanctioned by an
Extraordinary Resolution. Such a meeting may be convened by the Trustee,
the Issuer or the Guarantor or by the Trustee upon the request in writing
of Noteholders holding not less than one-tenth of the aggregate principal
amount of the outstanding Notes. The quorum at any meeting convened to
vote on an Extraordinary Resolution will be two or more persons holding or
representing one more than half of the aggregate principal amount of the
outstanding Notes or, at any adjourned meeting, two or more persons being
or representing Noteholders whatever the principal amount of the Notes
held or represented; provided, however, that certain proposals (including
any proposal to change any date fixed for payment of principal or interest
in respect of the Notes, to reduce the amount of principal or interest
payable on any date in respect of the Notes, to alter the method of
calculating the amount of any payment in respect of the Notes or the date
for any such payment, to change the currency of payments under the Notes
or to change the quorum requirements relating to meetings or the majority
required to
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pass an Extraordinary Resolution (each, a "Reserved Matter")) may only be
sanctioned by an Extraordinary Resolution passed at a meeting of
Noteholders at which two or more persons holding or representing not less
than three-quarters or, at any adjourned meeting, one quarter of the
aggregate principal amount of the outstanding Notes form a quorum. Any
Extraordinary Resolution duly passed at any such meeting shall be binding
on all the Noteholders and Couponholders, whether present or not.
In addition, a resolution in writing signed by or on behalf of all
Noteholders who for the time being are entitled to receive notice of a
meeting of Noteholders under the Trust Deed will take effect as if it were
an Extraordinary Resolution. Such a resolution in writing may be contained
in one document or several documents in the same form, each signed by or
on behalf of one or more Noteholders.
(b) Modification and waiver: The Trustee may, without the consent of the
Noteholders or Couponholders agree to any modification of these Conditions
or the Trust Deed (other than in respect of a Reserved Matter) which is,
in the opinion of the Trustee, proper to make if, in the opinion of the
Trustee, such modification will not be materially prejudicial to the
interests of Noteholders and to any modification of the Notes or the Trust
Deed which is of a formal, minor or technical nature or is to correct a
manifest error.
In addition, the Trustee may, without the consent of the Noteholders or
Couponholders authorise or waive any proposed breach or breach of the
Notes or the Trust Deed (other than a proposed breach or breach relating
to the subject of a Reserved Matter) if, in the opinion of the Trustee,
the interests of the Noteholders will not be materially prejudiced
thereby.
Unless the Trustee agrees otherwise, any such authorisation, waiver or
modification shall be notified to the Noteholders as soon as practicable
thereafter.
13. Enforcement
The Trustee may at any time, at its discretion and without notice,
institute such proceedings as it thinks fit to enforce its rights under
the Trust Deed in respect of the Notes, but it shall not be bound to do so
unless:
(a) it has been so requested in writing by the holders of at least one quarter
in principal amount of the outstanding Notes or has been so directed by an
Extraordinary Resolution; and
(b) it has been indemnified or provided with security to its satisfaction.
No Noteholder may proceed directly against the Issuer or the Guarantor
unless the Trustee, having become bound to do so, fails to do so within a
reasonable time and such failure is continuing.
14. Further Issues
The Issuer may from time to time, without the consent of the Noteholders
or the Couponholders and in accordance with the Trust Deed, create and
issue further notes having the same terms and conditions as the Notes in
all respects (or in all respects except for the first payment of interest)
so as to form a single series with the Notes. The Issuer may from time to
time, with the consent of the Trustee, create and issue other series of
notes having the benefit of the Trust Deed.
15. Notices
Notices to the Noteholders shall be valid if published in a leading
newspaper having general circulation in Luxembourg (which is expected to
be the Luxemburger Wort) or, if such publication is not practicable, in a
leading English language daily newspaper having general circulation in
Europe. Any such notice shall be deemed to have been given on the date of
first publication. Couponholders shall be deemed for all purposes to have
notice of the contents of any notice given to the Noteholders.
16. Governing Law and Jurisdiction
(a) Governing law: The Trust Deed and the Notes are governed by, and shall be
construed in accordance with, English law.
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(b) Jurisdiction: Each of the Issuer and the Guarantor has in the Trust Deed
(i) submitted irrevocably to the jurisdiction of the courts of England for
the purposes of hearing and determining any suit, action or proceedings or
settling any disputes arising out of or in connection with the Trust Deed
or the Notes; (ii) waived any objection which it might have to any such
courts being nominated as the forum to hear and determine any such suit,
action or proceedings or to settle any such disputes and agreed not to
claim that any such court is not a convenient or appropriate forum; (iii)
designated a person in England to accept service of any process on its
behalf; (iv) consented to the enforcement of any judgment; and (v) to the
extent that it may in any jurisdiction claim for itself or its assets
immunity from suit, execution, attachment (whether in aid of execution,
before judgment or otherwise) or other legal process, and to the extent
that in any such jurisdiction there may be attributed to itself or its
assets or revenues such immunity (whether or not claimed), agreed not to
claim and irrevocably waived such immunity to the full extent permitted by
the laws of such jurisdiction.
17. Rights of Third Parties
No person shall have any right to enforce any term or condition of any Notes or
the Trust Deed under the Contracts (Rights of Third Parties) Act 1999.
18. Certificates of the Guarantor
The Guarantor has undertaken in the Trust Deed to certify compliance with the
Conditions in the manner set out in the Trust Deed.
There will appear at the foot of the Conditions endorsed on each Note in
definitive form the names and Specified Offices of the Paying Agents as set out
at the end of this Offering Circular.
17
<PAGE> 18
SUMMARY OF PROVISIONS
RELATING TO THE NOTES IN GLOBAL FORM
The Notes will initially be in the form of the Temporary Global Note which will
be deposited on or around the Closing Date with a common depositary for
Euroclear and Clearstream, Luxembourg. The Temporary Global Note will be
exchangeable in whole or in part for interests in the Permanent Global Note not
earlier than 40 days after the Closing Date upon certification as to non-U.S.
beneficial ownership. No payments will be made under the Temporary Global Note
unless exchange for interests in the Permanent Global Note is improperly
withheld or refused. In addition, interest payments in respect of the Notes
cannot be collected without such certification of non-U.S. beneficial ownership.
The Permanent Global Note will become exchangeable in whole, but not in part,
for Notes in definitive form ("Definitive Notes") in the denominations of
(pound)1,000, (pound)10,000 and (pound)100,000 each at the request of the bearer
of the Permanent Global Note against presentation and surrender of the Permanent
Global Note to the Principal Paying Agent if either of the following events
(each, an "Exchange Event") occurs: (a) Euroclear or Clearstream, Luxembourg is
closed for business for a continuous period of 14 days (other than by reason of
legal holidays) or announces an intention permanently to cease business or (b)
any of the circumstances described in Condition 8 (Events of Default) occurs.
Whenever the Permanent Global Note is to be exchanged for Definitive Notes, the
Issuer shall procure the prompt delivery (free of charge to the bearer) of such
Definitive Notes, duly authenticated and with Coupons attached, in an aggregate
principal amount equal to the principal amount of the Permanent Global Note to
the bearer of the Permanent Global Note against the surrender of the Permanent
Global Note at the Specified Office of the Principal Paying Agent within 30 days
of the occurrence of the relevant Exchange Event.
In addition, the Temporary Global Note and the Permanent Global Note will
contain provisions which modify the Terms and Conditions of the Notes as they
apply to the Temporary Global Note and the Permanent Global Note. The following
is a summary of certain of those provisions:
Payments: All payments in respect of the Temporary Global Note and the
Permanent Global Note will be made against presentation and (in the case
of payment of principal in full with all interest accrued thereon)
surrender of the Temporary Global Note or (as the case may be) the
Permanent Global Note at the Specified Office of any Paying Agent and will
be effective to satisfy and discharge the corresponding liabilities of the
Issuer in respect of the Notes.
Notices: Notwithstanding Condition 15 (Notices), while all the Notes are
represented by the Permanent Global Note (or by the Permanent Global Note
and/or the Temporary Global Note) and the Permanent Global Note is (or the
Permanent Global Note and/or the Temporary Global Note are) deposited with
a common depositary for Euroclear and Clearstream, Luxembourg, notices to
Noteholders may be given by delivery of the relevant notice to Euroclear
and Clearstream, Luxembourg and, in any case, such notices shall be deemed
to have been given to the Noteholders in accordance with Condition 15
(Notices) on the day seven days after the date of delivery to Euroclear
and Clearstream, Luxembourg; provided, however, that, so long as the Notes
are listed on the Luxembourg Stock Exchange and its rules so require,
notices will also be published in a leading newspaper having general
circulation in Luxembourg (which is expected to be the Luxemburger Wort).
In relation to Notes represented by a Global Note, and where such Global Note is
held on behalf of Euroclear and/or Clearstream, Luxembourg, in order to exercise
the option to require redemption of a Note represented by such Global Note under
this Condition 5(c), the beneficial owner of the Note must instruct its
accountholder to deliver, on any business day falling within the Put Period, at
the Specified Office of any Paying Agent, a duly signed and completed Put Notice
and in which the accountholder shall specify on behalf of such beneficial owner
a bank account to which payment is to be made under this Condition 5(c). Payment
in respect of any Note the subject of such a Put Notice so delivered will be
made, if the relevant beneficial owner duly specified a bank account in the Put
Notice to which payment is to be made, on the Put Date by transfer to that bank
account specified in the Put Notice against presentation and endorsement on or
before the Put Date of the Global Note at the Specified Office of the Principal
Paying Agent to reflect the redemption of the relevant Notes and, in every other
case, on or after the Put Date against presentation and endorsement of the
Global Note at the Specified Office of the Principal Paying Agent.
18
<PAGE> 19
USE OF PROCEEDS
The net proceeds of the issue of the Notes, which will be approximately
(pound)195,926,000 after deduction of the combined management and underwriting
commission and the selling concession and expenses incurred in connection with
the issue of the Notes, will be on-lent to the Guarantor or its subsidiaries
principally for the repayment of short-term and/ or long-term indebtedness.
19
<PAGE> 20
DESCRIPTION OF THE ISSUER
Incorporation, Registered Office and Purpose
The Issuer, which was incorporated in The Netherlands on 31 May, 2000 with
registered number 34135128, is a wholly owned subsidiary of the Guarantor. Its
registered office is Wenckebachstraat 1, 1951 JZ Velsen-Noord, Postbus 83, 1970
AB Ijmuiden, The Netherlands.
The objects of the Issuer as set out in Article 2 of its Deed of Incorporation
are to act as a funding vehicle in the international capital markets for the
Guarantor and to engage in other related activities. The Issuer has no employees
and no subsidiaries.
Financial Statements
The Issuer has appointed PricewaterhouseCoopers as its auditor. Since the date
of incorporation, no financial statements of the Issuer have been prepared and
no dividends have been declared or paid. The Issuer's financial year runs from 1
January to 31 December and its first financial statements, for the period from
its date of incorporation to 31 December, 2000, are expected to be available in
April 2001.
Board of Directors
The following are directors of the Issuer:
D. Hathaway
W.A. Weisel
S.D. Fazzolari
Capitalisation of Harsco Finance B.V.
The following table sets out the short-term liabilities, long-term liabilities
and stockholders' equity of the Issuer as at 30 September, 2000. The authorised
capital of the Issuer is euro 10,000,000, divided into 100 common shares with a
par value of euro 100,000 each, of which 20 are fully-paid and have been issued
to the Guarantor.
Since 30 September, 2000, there has been no material change in its shareholders'
funds, borrowings or debts, except for this issue of (pound)200,000,000
Guaranteed 7.25 per cent. Notes due 2010.
As at
September 30,
2000
-------------
Indebtedness (in Euro)
Short-term liabilities...................................... 4,427
Long-term liabilities....................................... 0
---------
Total indebtedness.............................................. 4,427
---------
Stockholders' equity............................................
Share capital............................................... 2,000,000
Reserves.................................................... 0
Retained earnings........................................... 8,360
---------
Total stockholders' equity...................................... 2,008,360
---------
Total capitalisation............................................ 2,012,787
=========
20
<PAGE> 21
DESCRIPTION OF THE GUARANTOR
Incorporation, Registered Office and Purpose:
Harsco Corporation (the "Company" or "Harsco") was incorporated in the State of
Delaware, U.S.A. on 28 February, 1956 with registration number 0497602. The
Company's registered office is The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, Delaware 19801 U.S.A. and its principal
administrative office is at 350 Poplar Church Road, PO Box 8888, Camp Hill,
Pennsylvania 17011 U.S.A. In accordance with Article 3 of its Certificate of
Incorporation, the Company operates as a manufacturing and trading business.
Share Capital:
As at 31 December, 1999 the Company's authorised share capital consisted of
150,000,000 Common Stock of U.S.$1.25 each, 66,221,544 of which were in issue,
and 4,000,000 Series A Junior Preferred Stock of U.S.$1.25 each, none of which
were in issue. See also "Capitalisation of Harsco Corporation" on page 31.
Overview of Business:
Harsco is a diversified provider of industrial services and products to
customers in the steel, gas and energy, and infrastructure development
industries. Harsco's principal lines of business are: mill services that are
provided to steel and non-ferrous metal producers in over 30 countries,
including the United States; gas control and containment products for customers
worldwide; scaffolding services to the industrial maintenance and construction
markets principally in North America, the United Kingdom and Europe; railway
maintenance-of-way services and equipment that are provided to worldwide
railroads; and several other lines of business including, but not limited to,
process equipment, industrial grating and bridge decking, industrial pipe
fittings, slag abrasives and roofing granules. The Company's operations fall
into three operating segments: Harsco Mill Services, Harsco Gas and Fluid
Control and Harsco Infrastructure. The Company has over 400 locations in 38
countries, including the United States.
Harsco furnishes building products and materials and a wide variety of
specialized equipment for commercial, industrial, public works and
non-residential construction which are seasonal in nature. In 1999,
construction-related operations accounted for 12 per cent. of total sales. The
raw materials used for this and other services include principally steel and to
a lesser extent aluminium which usually are readily available.
Description of Businesses:
The Company's operations fall into three operating segments: Harsco Mill
Services, Harsco Gas and Fluid Control and Harsco Infrastructure.
Harsco Mill Services
This segment is the world leader in providing on-site highly specialized
services and technology under long-term contracts to steel producers and
non-ferrous metal industries. The Company's flame and recycling technologies
along with computerized scrap handling are several examples of the specialized
services the Company provides. These highly specialized services and
technologies include: scarfing, ferrocut, carbofer, briquetting and scrap
management. The Company provides in-plant transportation and other specialized
services, including slab management systems, general plant services, and other
recycling technology. Other services provided include metal reclamation; slag
processing, marketing and utilization; raw material management and handling;
by-product recovery and recycling; and finished product handling and transport.
Highly specialized recovery and cleaning equipment, installed and operated on
the property of steel producers, together with standard material handling
equipment are employed to reclaim metal and handle material. The customer uses
this reclaimed metal in its steel production process. The nonmetallic residual
slag is graded into various sizes at on-site Company-owned processing facilities
and then sold commercially. It is used as an aggregate material in asphalt
paving applications, railroad ballast and building blocks. Similar services are
also provided to non-ferrous metal industries, such as aluminum, copper, and
nickel.
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<PAGE> 22
This segment also produces roofing granules and slag abrasives. The Company's
slag abrasives and roofing granules are produced from utility coal slag and
natural rock materials at a number of locations throughout the United States.
The Company's Black Beauty(TM) abrasives are used for industrial surface
preparation, such as rust removal and cleaning of bridges, ship hulls, and
various structures. Roofing granules are sold to residential roofing shingle
manufacturers.
This segment operates at more than 170 sites in over 30 countries through
Heckett MultiServ and Reed Minerals.
Heckett MultiServ
Heckett MultiServ is the world's premier provider of specialist services to the
steel industry and other metal producers. It operates on-site within customers'
premises and plants, typically under renewable long-term contracts, providing
tailor-made services that include the recovery and recycling of production
by-products, materials management and handling, material transport, and slag
processing and marketing.
Heckett MultiServ operates at over 160 mills in more than 30 countries.
Reed Minerals
Reed Minerals has supplied superior quality aggregates to manufacturers of
roofing products and industrial air abrasive users for more than 60 years. With
sixteen processing facilities throughout the U.S., Reed supplies both coal slag
and rock products to the market place. Roofing products include headlap, colored
granules and back-surfacing materials. Reed's industrial abrasive products are
marketed under the Black Beauty trade name. Black Beauty is a silica-d low
abrasive which is environmentally friendly.
Harsco Gas and Fluid Control
Major product classes in this segment are gas containment and control equipment,
industrial pipe fittings, and process equipment, principally air-cooled heat
exchangers.
Gas containment products include cryogenic gas storage tanks, high pressure and
acetylene cylinders, propane tanks, and composite vessels for industrial and
commercial gases and other products. Gas control products include valves and
regulators serving a variety of markets, including the industrial gas,
commercial refrigeration, life support, and outdoor recreation industries.
Products are used in applications such as scuba diving equipment and outdoor
barbecue grills.
The segment provides custom designed and manufactured air-cooled heat
exchangers, principally for applications on field-sited natural gas compression
packages, for both domestic and international locations.
The segment is a major supplier of industrial pipe fittings and related products
for the plumbing, hardware and energy industries and operates through the
following units:
Taylor-Wharton
Taylor-Wharton is one of America's oldest industrial companies (founded in 1742)
producing the broadest selection of gas containment products in the world. Its
products include cryogenic containers and high pressure and acetylene cylinders.
Taylor-Wharton cryogenic equipment serves a diverse array of industrial gas
storage and delivery applications in global markets. Taylor-Wharton liquid
cylinders are built to rugged construction standards designed for transportable
applications.
Sherwood
Sherwood is a premier producer of gas control valves and other products for
industrial, commercial and recreational use, including Superior Refrigeration
Products. Sherwood is the only totally integrated brass valve manufacturer in
North America. Sherwood's diverse product lines of compressed gas, propane,
refrigerant gas, scuba diving and life support equipment have enabled it to
develop broad technical expertise in the full range of gas control requirements.
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<PAGE> 23
American Welding & Tank
American Welding & Tank ("AWT") has served the propane industry since 1917 and
is North America's largest producer of domestic propane tanks. AWT has four
propane tank manufacturing operations: Bloomfield, Iowa; Jesup, Georgia; Salt
Lake City, Utah; and Fremont, Ohio.
Structural Composites Industries
Founded in 1971, Structural Composites Industries ("SCI") is the world's leading
producer of lightweight, filament-wound composite cylinders, pressure vessels
and structures used in gas storage. SCI's composite products offer design,
fabrication and performance opportunities not possible with conventional
materials. SCI developed the technology to make ultra-light air tanks for fire
fighters, while commercial airlines use SCI's composite cylinders for oxygen
supply and inflatable emergency escape systems.
Air-x-changers
Air-x-changers is the leading international supplier of air-cooled heat
exchangers for the natural gas and compression industries. One of the oldest and
largest companies in this industry, Air-x-changers also has the broadest air
cooler product line in the marketplace. Its Type EH Air Cooled Heat Exchanger is
the most widely used cooler in the world for cooling natural gas compressors and
engines. Air-x-changers has constructed over 100,000 air coolers, including
units as large as 22ft. wide x 50ft. long, and with test pressures up to 17,000
psig.
Harsco Infrastructure
Major product classes in this segment are scaffolding, shoring and concrete
forming services, railway maintenance-of-way services and equipment, and
industrial grating and bridge decking products.
The segment's scaffolding, shoring and concrete forming service products include
steel and aluminum support systems that are leased or sold to customers through
a North American network of some 50 branch service centers, a UK network of 68
branches and through various locations in 20 other countries. The Company also
provides design engineering services, on-site installation, and equipment
management services.
The segment's railway maintenance-of-way services provide high technology
comprehensive track maintenance and new track construction support to railroad
customers. The railway maintenance-of-way services and equipment product class
includes specialized track maintenance equipment used by private and
government-owned railroads and urban transit systems worldwide. The equipment
manufactured by the Company includes a comprehensive range of specially-designed
systems used in the construction and maintenance of track and railbeds.
The segment manufactures a varied line of industrial grating products at several
plants in North America. The Company produces a full range of riveted,
pressure-locked and welded grating in steel, aluminum and fiberglass, used
mainly in industrial flooring, safety, and security applications for power,
paper, chemical, refining and processing applications. The Company also produces
bridge decking and related products for bridge surfaces.
This segment also produces commercial and industrial boilers and hot water
heaters, and blenders, dryers and mixers for the chemical and food processing
industries. The segment operates through the following businesses:
Harsco Track Technologies
Harsco Track Technologies is a major international supplier of railway track
maintenance equipment and services for private and government-owned railways
worldwide. Harsco Track Technologies combines Pandrol Jackson and Fairmont
Tamper, two leading railway track maintenance companies, to create one of the
largest and most comprehensive track maintenance organizations in the world.
Harsco Track Technologies designs and manufactures an extensive line of
equipment, including rail grinders, used to reshape the rail profile; tampers,
which realign and surface track; and ultrasonic flaw detection equipment.
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<PAGE> 24
Major railway maintenance services include track renewal, resurfacing, and
replacement, including Harsco Track Technologies' unique Tie Masters(R) program.
Patent Group
Founded in 1909, Patent Construction Systems is North America's oldest and most
complete supplier of state-of-the-art scaffolding, concrete forming and shoring
products. Patent also offers a full range of services including product
engineering and on-site installation, including specialized scaffolding
contracting and management services to the petrochemical and refining
industries. Patent Construction Systems operates some 50 fully stocked,
company-owned branch offices and equipment centers throughout North America.
IKG Industries is America's leading producer of industrial grating products. IKG
manufactures every type of grating available on the market today, including
welded, riveted, pressure locked, closed mesh, and special configurations. IKG's
Deck Span is familiar as the diamond plank-type safety grating used for
pedestrian applications, such as ramps, walkways, and work platforms. Its
Weldforged(R) grating is the recommended style for general installation, while
the IKG Borden line of heavy duty grating serves areas where heavy rolling or
static loads are encountered, such as highways, airports, and industrial trench
cover applications. IKG's fiberglass reinforced plastic grating is designed to
withstand corrosive environments. IKG also produces grid-reinforced concrete
deck and open grid deck for bridge surfaces.
SGB Group
In existence for over 75 years, SGB is the UK market leader in construction
scaffolding and forming equipment and services. In addition to the UK, SGB has
operations in 19 countries in Europe, the Middle East, South East Asia and the
U.S.
General
Product Classes:
The products and services of Harsco include a number of classes. The product
classes that contributed 10% or more as a percentage of consolidated net sales
in any of the last three fiscal years are as set forth in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Mill Services 39% 40% 38%
Gas Control and Containment Equipment 24% 21% 21%
</TABLE>
New Products:
New products and services are added from time to time; however, in 1999 none
required the investment of a material amount of the Company's assets.
Raw Materials:
The manufacturing requirements of the Company's operations are such that no
unusual sources of supply for raw materials are required. The raw materials used
by the Company include principally steel and to a lesser extent aluminum which
usually are readily available.
Intellectual Property:
While Harsco has a number of trademarks, patents and patent applications, it
does not consider that any material part of its business is dependent upon them.
Building Products:
Harsco furnishes building products and materials and a wide variety of
specialized equipment for commercial, industrial, public works and
non-residential construction which are seasonal in nature. In 1999,
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<PAGE> 25
construction-related operations accounted for 12% of total sales.
Working Capital:
The practices of the Company relating to working capital items are not unusual
compared with those practices of other service providers or manufacturers
servicing mainly industrial and commercial markets.
Customers:
No material part of the business of the Company is dependent upon a single
customer or a few customers, the loss of any one of which would have a material
adverse effect upon the Company.
Backlog of Orders:
Backlog of orders was $231.6 million and $188.6 million as of 31 December, 1999
and 1998, respectively. It is expected that approximately 18% of the total
backlog at 31 December, 1999, will not be filled during 2000. There is no
significant seasonal aspect to the Company's backlog. Backlog for scaffolding,
shoring and forming services, and for roofing granules and slag abrasives is not
included in the total backlog, because it is generally not quantifiable due to
the nature of the products and services provided. Contracts for the Harsco Mill
Services Segment are also excluded from the total backlog. These contracts had
an estimated value of $3.6 billion at 31 December, 1999.
Material Contracts:
At 31 December, 1999, the Company had no material contracts that were subject to
renegotiation of profits or termination at the election of the United States
Government.
Competition:
The various businesses in which the Company operates are highly competitive and
the Company encounters active competition in all of its activities from both
larger and smaller companies who produce the same or similar products or
services or who produce different products appropriate for the same uses.
Product Development:
The expense for product development activities was $7,759,000, $6,977,000, and
$6,090,000 in 1999, 1998, and 1997, respectively.
Environmental Regulation:
The Company has become subject, as have others, to increasingly stringent air
and water quality control legislation. In general, the Company has not
experienced substantial difficulty in complying with these environmental
regulations in the past and does not anticipate making any major capital
expenditures for environmental control facilities. While the Company expects
that environmental regulations may expand, and its expenditures for air and
water quality control will continue, it cannot predict the effect on its
business of such expanded regulations. For additional information regarding
environmental matters see Note 10 to the Consolidated Financial Statements
headed "Commitments and Contingencies".
Employees:
As of 31 December, 1999, the Company had approximately 15,700 employees.
Recent Developments
On 16 May, 2000, Harsco agreed with UK-based John Mowlem & Company PLC
("Mowlem") to acquire Mowlem's 51 per cent. interest in SGB Group PLC ("SGB"),
and on 20 May, 2000, Harsco launched a tender offer to acquire all of the
remaining shares of SGB. Once final regulatory approvals were received, Harsco
took control of SGB with effect from 16 June, 2000. Following UK takeover
regulations, Harsco paid for the SGB shares in a series of payments from 30 June
to 23 August. The transaction valued SGB at (pound)188
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<PAGE> 26
million (approximately $269 million) for 100 per cent. of the outstanding shares
plus the assumption of SGB's indebtedness for a total consideration of
(pound)222 million (approximately $334 million). SGB, based in the UK, is one of
Europe's largest suppliers of scaffolding, form and related access products and
services. SGB also has operations in North America, the Middle East and the Asia
Pacific region. SGB had 1999 sales of (pound)283 million.
On 27 September, 2000 Harsco announced its intention to sell three non-core
business operations, being: Capitol Manufacturing, which produces pipe fittings
and related products for the industrial plumbing, electrical and other markets
and recorded 1999 sales of approximately $96 million; Patterson-Kelley, which
manufactures industrial and commercial boilers, water heaters and blenders and
recorded 1999 sales of approximately $27 million; and Faber Prest Distribution,
a materials transport business which recorded 1999 sales of approximately $33
million. All of the businesses are profitable and none has any shared
manufacturing, purchasing or inter-company sales with other Harsco operations.
Harsco announced on 26 July, 2000 that President and Chief Operating Officer
Leonard Campanaro resigned as part of a realignment. He also resigned from the
company board. Chairman and Chief Executive Derek Hathaway, 56, will assume the
added post of president.
Harsco announced on 13 July, 2000 that its Heckett MultiServ division, the
world's leading provider of on-site outsourced services to steel mills and other
metallurgical producers, won a multi-year contract valued at more than $115
million to provide expanded services to existing steel mill customers in Italy
and Saudi Arabia.
Harsco announced on 26 May, 2000 that it has acquired Bergslagen Stalservice AB
and Bergslagen Suomi Oy, privately-held providers of specialized slag processing
and metal recovery services to steel mills in Sweden and Finland, respectively.
The two organizations, part of Swedish-based Bergslagen Recycling Industries AB,
together recorded 1999 sales of nearly $10 million. Terms of the cash
transaction were not disclosed.
Harsco will integrate the Bergslagen operations into its Heckett MultiServ
division, the world's leading provider of on-site, outsourced services to steel
mills and other metallurgical producers. Heckett MultiServ currently operates at
more than 160 mills in over 30 countries, providing services to over 25 per
cent. of the world's steel making capacity.
On 6 April, 2000 the Company agreed to invest $20 million for a 49 per cent.
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 per cent. of net losses to the extent of its initial $20 million
investment. However, the Company will also record 100 per cent. 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.
In the first quarter of 2000 the U.S. Environmental Protection Agency (the
"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.
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<PAGE> 27
Properties:
Information as to the principal plants owned and operated by the Company is
summarized in the following table:
<TABLE>
<CAPTION>
Location Floor Space
(square feet) Principal Products
<S> <C> <C>
Harsco Infrastructure:
E. Syracuse, New York 48,000 Railroad Equipment
Ludington, Michigan 159,000 Railroad Equipment
Fairmont, Minnesota 312,000 Railroad Equipment
West Columbia, South Carolina 224,000 Railroad Equipment
Brendale, Australia 20,000 Railroad Equipment
Nashville, Tennessee 246,000 Grating
Nashville, Tennessee 87,000 Grating
Charlotte, North Carolina 23,000 Grating
Madera, California 48,000 Grating
Leeds, Alabama 51,000 Grating
Cheswick, Pennsylvania 56,000 Grating
Channelview, Texas 86,000 Grating
Marlboro, New Jersey 30,000 Grating
Queretaro, Mexico 63,000 Grating
Marion, Ohio 135,000 Construction Equipment
Thame, England 115,000 Construction Site Mobile Buildings
Harsco Mill Services:
Moundsville, West Virginia 12,000 Roofing Granules/Abrasives
Drakesboro, Kentucky 41,000 Roofing Granules
Gary, Indiana 19,000 Roofing Granules/Abrasives
Ione, California 33,000 Roofing Granules
Harsco Gas and Fluid Control:
West Jefferson, Ohio 148,000 Pipe Fittings
Crowley, Louisiana 172,000 Pipe Fittings
Houston, Texas 26,000 Pipe Fittings
Chicago, Illinois 35,000 Pipe Fittings
Hamden, Connecticut 47,000 Pipe Fittings
Vanastra, Ontario, Canada 55,000 Pipe Fittings
East Stroudsburg, Pennsylvania 172,000 Process Equipment
Port of Catoosa, Oklahoma 131,000 Heat Exchangers
Sapulpa, Oklahoma 83,000 Heat Exchangers
Lockport, New York 104,000 Valve Manufacturing
Niagara Falls, New York 66,000 Valve Manufacturing
Washington, Pennsylvania 112,000 Valve Manufacturing
Jesup, Georgia 87,000 Propane Tanks
Jesup, Georgia 65,000 Propane Tanks
Jesup, Georgia 63,000 Cryogenic Storage Vessels
Bloomfield, Iowa 48,000 Propane Tanks
West Jordan, Utah 36,000 Propane Tanks
Fremont, Ohio 69,000 Propane Tanks
Pomona, California 56,000 Composite Pressure Vessels
Gardena, California 26,000 Composite Pressure Vessels
Harrisburg, Pennsylvania 245,000 Cylinders
Hunstville, Alabama 220,000 Acetylene Tanks
Theodore, Alabama 305,000 Cryogenic Storage Vessels
Husum, Germany 61,000 Cryogenic Storage Vessels
Shah Alam, Malaysia 25,000 Cryogenic Storage Vessels
Shah Alam, Malaysia 29,000 Cylinders
Beijing, China 134,000 Cryogenic Storage Vessels
</TABLE>
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<PAGE> 28
The Company also operates the following plants which are leased:
<TABLE>
<CAPTION>
Location Floor Space Principal Products Expiration Date
(Square feet) of Lease
<S> <C> <C> <C>
Harsco Infrastructure:
Nottingham, England 30,000 Railroad Equipment 23/10/00
Danbury, Connecticut 16,000 Railroad Equipment 30/11/01
Tulsa, Oklahoma 10,000 Grating 28/04/01
Cosley, England 142,000 Scaffolding 24/03/19
Maldon, England 255,000 Access Products 28/09/17
Harsco Gas and Fluid Control:
Lansing, Ohio 67,000 Pipe Fittings 31/01/03
Cleveland, Ohio 50,000 Brass Castings 30/09/00
</TABLE>
The Company operates from a number of other plants, branches, warehouses and
offices in addition to the above. The Company has over 160 locations related to
mill services in over thirty countries; however, since these facilities are on
the property of the steel mill being serviced, they are not listed. The Company
considers all of its properties, at which operations are currently performed, to
be in satisfactory condition.
Management of the Guarantor:
Set forth below are the executive officers (this excludes one corporate officer
who is not deemed an "executive officer" within the meaning of applicable
Securities and Exchange Commission regulations) of the Company and certain
information with respect to each of them. The executive officers were elected to
their respective offices on 25 April, 2000, or at various times during the year
as noted. All terms expire on 24 April, 2001. There are no family relationships
between any of the officers.
<TABLE>
<CAPTION>
Name Age Principal Occupation or Employment
<S> <C> <C>
Corporate Officers:
D. C. Hathaway 55 Mr. Hathaway has been Chairman and Chief Executive
Officer since 1 January, 1998. He served as Chairman,
President and Chief Executive Officer from 1 April, 1994
to 31 December, 1997, and President and Chief Executive
Officer from 1 January, 1994 to 1 April, 1994. From 1991
to 1993, he served as President and Chief Operating
Officer. From 1986 to 1991 he served as Senior Vice
President-Operations, as Group Vice President from 1984
to 1986 and as President of the Dartmouth Division of
the Company from 1979 until 1984. Mr. Hathaway is
President of the Company, following Mr. Campanaro's
resignation in July 2000
P. C. Coppock 49 Mr. Coppock has been Senior Vice President, Chief
Administrative Officer, General Counsel and Secretary of
the Company since January 1, 1994. He served as Vice
President, General Counsel and Secretary of the Company
from 1 May, 1991 to 31 December, 1993 and was Secretary
and Corporate Counsel from 1989 to 1991. Mr. Coppock was
also Assistant Secretary and Corporate Counsel from 1986
to 1989, and also served in various Corporate Attorney
positions for the Company since 1981.
S. D. Fazzolari 47 Mr. Fazzolari has been Senior Vice President, Chief
Financial Officer and Treasurer of the Company since 24
August, 1999. He has served as Senior Vice President and
Chief Financial Officer from January 1998 to August
1999, Vice President and Controller from January 1994 to
December 1997 and as Controller from January 1993 to
January 1994. Mr. Fazzolari has previously served as
Director of Auditing from 1985 to 1993, and held various
auditing positions from 1980 to 1985.
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
R. W. Kaplan 48 Mr. Kaplan has been Senior Vice President of Operations
of the Company since 1 July, 1998. Concurrently he holds
the position of President of the Harsco Gas & Fluid
Control Group and was President of the Taylor-Wharton
Gas Equipment Division from 1 February, 1994 to 16
November, 1999. He has served as Vice President and
Treasurer of the Company from January 1992 to February
1994 and as Treasurer of the Company from May 1991 to
December 1992. Mr. Kaplan was Vice President and General
Manager of the Plant City Steel/Taylor-Wharton Division
from 1987 to 1991 and Vice President and Controller of
the Division from 1985 to 1987. Previously, he served in
various corporate treasury and financial positions since
1979.
S. J. Schnoor 46 Mr. Schnoor has been Vice President and Controller of
the Company since 15 May, 1998. He has been the Vice
President and Controller of the Patent Construction
Systems Division from February 1996 to May 1998 and
Controller of the Patent Construction Systems Division
from January 1993 to February 1996. Previously, he
served in various auditing positions for the Company
from 1988 to 1993.
</TABLE>
29
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA OF HARSCO CORPORATION
Five Year Statistical Summary
(All dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Information ........ $ $ $ $ $
Net sales ........................... 1,716,688 1,733,458 1,627,478 1,557,643 1,495,466
Income from continuing operations
before interest, income taxes, and
minority interest ................... 169,736 191,901 179,888 166,057 131,019
Income from continuing operations ... 90,713 107,513 100,400 83,903 61,318
Income from discontinued defense
business ............................ -- -- 28,424(a) 35,106 36,059
Gain on disposal of discontinued
defense business .................... -- -- 150,008 -- --
Net income .......................... 90,713 107,513 278,832 119,009 97,377
------------ ------------ ------------ ------------ ------------
Financial Position Information ...... $ $ $ $ $
Working capital ..................... 182,439 112,619 341,160 214,519 145,254
Total assets ........................ 1,659,823 1,623,581 1,477,188 1,324,419 1,310,662
Long-term debt ...................... 418,504 309,131 198,898 227,385 179,926
Total debt .......................... 455,111 363,738 225,375 253,567 288,673
Depreciation and amortisation ....... 135,853 131,381 116,539 109,399 104,863
Capital expenditures ................ 175,248 159,816 143,444 150,294 113,895
Cash provided by operating activities 213,953 189,260 148,541 217,202 258,815
Cash provided (used) by investing
activities .......................... (194,674) (233,490) 196,545 (153,225) (97,331)
Cash (used) by financing activities . (8,928) (134,324) (167,249) (92,944) (128,068)
------------ ------------ ------------ ------------ ------------
Ratios
Return on net sales(1) .............. 5.3% 6.2% 6.2% 5.4% 4.1%
Return on average equity(2) ......... 13.9% 14.3% 15.1% 14.0% 10.7%
Return on average assets(3) ......... 10.7% 12.9% 14.3% 13.7% 10.8%
Current ratio ....................... 1.4:1 1.2:1 1.9:1 1.7:1 1.4:1
Total debt to total capital(4) ...... 41.2% 34.7% 22.4% 27.1% 31.6%
------------ ------------ ------------ ------------ ------------
Per Share Information(b) ............ $ $ $ $ $
Diluted - Income from continuing
operations ................ 2.21 2.34 2.04 1.67 1.20
- Income from discontinued
defense business .......... -- -- .58(a) .70 .71
- Gain on disposal of
discontinued defense
business .................. -- -- 3.05 -- --
- Net income ................ 2.21 2.34 5.67 2.37 1.91
Book value .......................... 16.22 16.22 16.64 13.73 12.49
Cash dividends declared ............. .91 .885 .82 .77 .75
------------ ------------ ------------ ------------ ------------
Other Information
Basic average number of shares
outstanding(b) ...................... 40,882,153 45,568,256 48,754,212 49,894,515 50,504,707
Diluted average number of shares
outstanding(b) ...................... 41,017,067 45,910,531 49,191,872 50,317,664 50,856,929
Number of employees ................. 15,700 15,300 14,600 14,200 13,200
Backlog(c) .......................... $ 231,557 $ 188,594 $ 225,575 $ 211,734 $ 157,129
</TABLE>
(a) Includes income through August 1997 (the measurement date) from the
discontinued defense business.
(b) Reflects two-for-one stock split to shareholders of record 15 January,
1997
(c) Excludes the estimated value of long-term mill service contracts, which
had an estimated value of $3.6 billion at 31 December 1999
(1) "Return on net sales" is calculated by dividing income from continuing
operations by net sales.
(2) "Return on average equity" is calculated by dividing income from
continuing operations by quarterly weighted average equity.
(3) "Return on average assets" is calculated by dividing income from
continuing operations before interest expense, income taxes and minority
interest by quarterly weighted average assets.
(4) "Total debt to total capital" is calculated by dividing the sum of debt
(short-term borrowings and long-term debt including current maturities) by
the sum of equity and debt.
30
<PAGE> 31
Capitalisation of Harsco Corporation
The following table sets out the consolidated short-term liabilities, long-term
liabilities and stockholders' equity of the Guarantor as at 30 September, 2000,
adjusted to give effect to the issue of the Notes and the application of the
proceeds as described above under "Use of Proceeds", and is derived from the
unaudited consolidated financial statements of the Guarantor as at 30 September,
2000. There has been no material change in the capitalisation of the Guarantor
since 30 September, 2000 except for the guarantee of this issue of
(pound)200,000,000 Guaranteed 7.25 per cent. Notes due 2010.
<TABLE>
<CAPTION>
As at 30 September, 2000
(in thousands of dollars)
-------------------------
<S> <C>
LIABILITIES
Current Liabilities:
Notes payable and current maturities ........................ $ 63,417
Accounts payable ............................................ 195,776
Accrued compensation ........................................ 50,366
Income taxes ................................................ 43,053
Other current liabilities ................................... 211,767
-----------
Total current liabilities ................................... 564,379
-----------
Long-term debt .............................................. 824,755
Deferred income taxes ....................................... 95,106
Other liabilities ........................................... 107,337
-----------
Total liabilities ........................................... 1,591,577
-----------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital ................. 172,848
Accumulated other comprehensive income (expense) ............ (116,894)
Retained earnings ........................................... 1,198,148
Treasury stock .............................................. (600,028)
-----------
Total shareholders' equity .................................. 654,074
-----------
Total liabilities and shareholders' equity .................. $ 2,245,651
-----------
</TABLE>
Selected Financial Information relating to Harsco Corporation
The following tables set out balance sheet and income statement information
relating to the Guarantor. Such information is derived from the audited
consolidated financial statements of the Guarantor as at and for the years ended
1998 and 1999. Such financial statements, together with the reports of
PricewaterhouseCoopers LLP and the accompanying notes, appear elsewhere in this
Offering Circular. The financial information presented below should be read in
conjunction with such financial statements, reports and the notes thereto.
31
<PAGE> 32
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
as at December 31 1999 1998
----------- -----------
<S> <C> <C>
ASSETS $ $
Current Assets
Cash and cash equivalents ............................... 51,266 41,562
Accounts receivable, net ................................ 331,123 310,935
Inventories ............................................. 172,198 175,804
Other current assets .................................... 58,368 59,140
----------- -----------
TOTAL CURRENT ASSETS .................................... 612,955 587,441
----------- -----------
Property, plant and equipment, net ...................... 671,546 626,194
Cost in excess of net assets of businesses acquired, net 258,698 273,708
Other assets ............................................ 116,624 136,238
----------- -----------
TOTAL ASSETS ............................................ $ 1,659,823 $ 1,623,581
----------- -----------
LIABILITIES
Current Liabilities
Short-term borrowings ................................... 32,014 46,766
Current maturities of long-term debt .................... 4,593 7,841
Accounts payable ........................................ 132,394 142,681
Accrued compensation .................................... 46,615 43,938
Income taxes ............................................ 44,154 42,908
Dividends payable ....................................... 9,417 9,506
Other current liabilities ............................... 161,329 181,182
----------- -----------
TOTAL CURRENT LIABILITIES ............................... 430,516 474,822
----------- -----------
Long-term debt .......................................... 418,504 309,131
Deferred income taxes ................................... 52,932 55,195
Insurance liabilities ................................... 37,097 30,019
Other liabilities ....................................... 70,653 69,115
----------- -----------
TOTAL LIABILITIES ....................................... 1,009,702 938,282
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A junior participating cumulative
preferred stock ......................................... -- --
Common stock, par value $1.25, issued 66,221,544 and
66,075,380 shares as of December 31, 1999 and 1998,
respectively ............................................ 82,777 82,594
Additional paid-in capital .............................. 88,101 85,384
Accumulated other comprehensive income (expense) ........ (80,538) (55,045)
Retained earnings ....................................... 1,155,586 1,101,828
----------- -----------
1,245,926 1,214,761
Treasury stock, at cost (26,149,759 and 23,825,458
shares, respectively) ................................... (595,805) (529,462)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY .............................. 650,121 685,299
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY .................................................. $ 1,659,823 $ 1,623,581
=========== ===========
</TABLE>
32
<PAGE> 33
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
----------- ----------- -----------
<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 $14,082) ................. -- -- 28,424
Gain on disposal of defense business
(net of income taxes of $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>
33
<PAGE> 34
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ $ $
Net income ............................................................... 90,713 107,513 278,832
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ............................................................. 122,777 119,044 107,350
Amortization ............................................................. 13,076 12,337 9,189
Gain on disposal of defense business ..................................... -- -- (250,014)
Equity in income of unconsolidated entities .............................. (3,004) (1,354) (43,549)
Dividends or distributions from unconsolidated entities .................. 3,369 1,494 49,142
Deferred income taxes .................................................... 193 3,893 (8,175)
Other (income) and expenses .............................................. 6,019 24,843 4,198
Gain on sale of non-defense businesses ................................... -- (29,107) (1,620)
Other, net ............................................................... 5,205 5,260 (8,192)
Changes in assets and liabilities, net of acquisitions and dispositions of
businesses:
Accounts receivable ...................................................... (28,157) (15,718) (1,812)
Inventories .............................................................. 15,934 (24,991) (13,042)
Accounts payable ......................................................... (1,238) 8,379 4,840
Disbursements related to discontinued defense business ................... (14,605) (13,642) (951)
Other assets and liabilities ............................................. 3,671 (8,691) 22,345
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES(1) ............................. 213,953 189,260 148,541
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment ............................... (175,248) (159,816) (143,444)
Purchase of businesses, net of cash acquired* ............................ (48,907) (158,291) (8,508)
Proceeds from sale of businesses ......................................... 17,718 39,500 345,189
Proceeds from sale of property, plant and equipment ...................... 14,381 13,033 14,433
Investments available-for-sale:
Purchases ................................................................ -- -- (39,346)
Maturities ............................................................... -- 40,000 --
Investments held-to-maturity:
Purchases ................................................................ -- -- (42,241)
Maturities ............................................................... -- 4,010 71,469
Other investing activities ............................................... (2,618) (11,926) (1,007)
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES ............................................................... (194,674) (233,490) 196,545
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net ............................................... (10,546) 16,131 8,291
Current maturities and long-term debt:
Additions ................................................................ 214,133 172,709 61,310
Reductions ............................................................... (103,410) (116,163) (88,523)
Cash dividends paid on common stock ...................................... (37,022) (40,287) (39,120)
Common stock issued-options .............................................. 2,272 3,885 5,939
Common stock acquired for treasury ....................................... (71,860) (169,258) (113,161)
Other financing activities ............................................... (2,495) (1,341) (1,985)
-------- -------- --------
NET CASH (USED) BY FINANCING ACTIVITIES .................................. (8,928) (134,324) (167,249)
-------- -------- --------
</TABLE>
34
<PAGE> 35
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES ON CASH (647) (1,449) (2,134)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 9,704 (180,003) 175,703
Cash and cash equivalents at beginning of year ..... 41,562 221,565 45,862
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........... $ 51,266 $ 41,562 $ 221,565
--------- --------- ---------
*PURCHASE OF BUSINESSES, NET OF CASH ACQUIRED
Working capital, other than cash ................... $ 18,078 $ 11,159 $ 2,807
Property, plant and equipment ...................... (36,417) (89,182) (833)
Other noncurrent assets and liabilities, net ....... (30,568) (80,268) (10,482)
--------- --------- ---------
NET CASH USED TO ACQUIRE BUSINESSES ................ $ (48,907) $(158,291) $ (8,508)
========= ========= =========
</TABLE>
----------
(1) Cash provided by operating activities for 1997 includes approximately $100
million of income taxes paid related to the gain on the disposal of the
defense business, whereas the pre-tax cash proceeds are included under
investing activities.
35
<PAGE> 36
CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
---------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME (EXPENSE)
---------------------------------------------------
Net Un-
realised
Additional Investment
Common Stock paid-in Gains Pension
Issued Treasury capital Translation (Losses) Liability Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 .................. $81,823 $(238,065) $69,151 $(25,476) $ (619) $(26,095)
------- --------- ------- -------- ----- ------- --------
Net income .................................
Cash dividends declared, $.82 per share ....
Translation adjustments .................... (24,201) (24,201)
Unrealized investment (losses), net of $18
deferred income taxes ...................... (28) (28)
Pension liability adjustments, net of $412
deferred income taxes ...................... (650) (650)
Acquired during the year, 3,080,642 shares . (125,841) 34
Stock options exercised, 395,885 shares .... 495 9,299
Restricted stock, net, 57,487 shares ....... 1,117 846
Other, 1,048 shares ........................ 17 30
------- --------- ------- -------- ----- ------- --------
BALANCES, DECEMBER 31, 1997 ................ 82,318 (362,772) 79,360 (49,677) (28) (1,269) (50,974)
------- --------- ------- -------- ----- ------- --------
Net income .................................
Cash dividends declared, $.885 per share ... (1,714)
Translation adjustments .................... (1,714)
Unrealized investment gains, net of ($18)
deferred income taxes ...................... 28 28
Pension liability adjustments, net of $1,544
deferred income taxes ...................... (2,385) (2,385)
Acquired during the year, 4,989,483 shares . (168,405)
Stock options exercised, 221,293 shares .... 276 5,913
Restricted stock, net, 40,324 shares ....... 1,649 110
Other, 1,658 shares ........................ 66 1
------- --------- ------- -------- ----- ------- --------
BALANCES, DECEMBER 31, 1998 ................ 82,594 (529,462) 85,384 (51,391) -- (3,654) (55,045)
------- --------- ------- -------- ----- ------- --------
Net income .................................
Cash dividends declared, $.91 per share ....
Translation adjustments .................... (27,273) (27,273)
Pension liability adjustments,
net of ($1,277) deferred income taxes ...... 1,780 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, DECEMBER 31, 1999 ................ $82,777 $(595,805) $88,101 $(78,664) -- $(1,874) $(80,538)
======= ========= ======= ======== ===== ======= ========
<CAPTION>
Retained
Earnings
------------
<S> <C>
BALANCES, JANUARY 1, 1997 .................. $ 794,473
----------
Net income ................................. 278,832
Cash dividends declared, $.82 per share .... (39,535)
Translation adjustments ....................
Unrealized investment (losses), net of $18
deferred income taxes ......................
Pension liability adjustments, net of $412
deferred income taxes ......................
Acquired during the year, 3,080,642 shares .
Stock options exercised, 395,885 shares ....
Restricted stock, net, 57,487 shares .......
Other, 1,048 shares ........................
----------
BALANCES, DECEMBER 31, 1997 ................ 1,033,770
----------
Net income ................................. 107,513
Cash dividends declared, $.885 per share ... (39,455)
Translation adjustments ....................
Unrealized investment gains, net of ($18)
deferred income taxes ......................
Pension liability adjustments, net of $1,544
deferred income taxes ......................
Acquired during the year, 4,989,483 shares .
Stock options exercised, 221,293 shares ....
Restricted stock, net, 40,324 shares .......
Other, 1,658 shares ........................
----------
BALANCES, DECEMBER 31, 1998 ................ 1,101,828
----------
Net income ................................. 90,713
Cash dividends declared, $.91 per share .... (36,955)
Translation adjustments ....................
Pension liability adjustments,
net of ($1,277) deferred income taxes ......
Acquired during the year, 2,326,798 shares .
Stock options exercised, 146,164 shares ....
Other, 2,497 shares ........................
----------
BALANCES, DECEMBER 31, 1999 ................ $1,155,586
==========
</TABLE>
36
<PAGE> 37
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
-------- --------- ---------
<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 taxes 1,780 (2,385) (650)
-------- --------- ---------
Other comprehensive income (expense) ........................ (25,493) (4,071) (24,879)
-------- --------- ---------
Total comprehensive income .................................. $ 65,220 $ 103,442 $ 253,953
======== ========= =========
</TABLE>
37
<PAGE> 38
TAXATION
The following is a general description of certain tax considerations in The
Netherlands and the United States of America relating to the Notes. It does not
purport to be a complete analysis of all tax considerations relating to the
Notes. Prospective purchasers of the Notes should consult their tax advisers as
to the consequences under the tax laws of the country of which they are resident
for tax purposes and the tax laws of The Netherlands and the United States of
America of acquiring, holding and disposing of Notes and receiving payments of
interest, principal and/or other amounts under the Notes. This summary is based
upon the law as in effect on the date of this Offering Circular and is subject
to any change in law that may take effect after such date.
The Netherlands
General
The following is a summary of certain principal Netherlands income tax,
corporate income tax and certain estate tax consequences to a beneficial owner
that is a non-Netherlands Holder of the purchase, ownership and disposition of a
Note. This summary is based on the Corporate Income Tax Act 1969 ("Wet
Vennootschapsbelasting 1969"), the Income Tax Act 1964 ("Wet op de
Inkomstenbelasting 1964") and the Act on Estate Duties ("Successiewet 1956") all
in effect as of the date hereof. Prospective purchasers of the Notes should
consult their own tax advisors in determining the Netherlands tax consequences
of whatever nature imposed to them of the purchase, ownership and/or disposition
of the Notes.
For purposes of this discussion, a holder is a non-Netherlands Holder if the
Holder is not:
(i) an individual resident of the Netherlands for tax purposes;
(ii) a company or other entity taxable as a company resident of The
Netherlands;
(iii) otherwise subject to Netherlands tax of whatever nature imposed in respect
of the Notes.
If a partnership holds Notes, tax treatment of a partner generally will depend
upon the type of partnership involved, the status of tax partner and upon the
activities. Partners of partnerships holding Notes should consult their tax
advisors.
The Issuer has been advised that under the existing laws of The Netherlands:
(a) payments of principal and interest under the Notes can be made free of
withholding or deduction for, or on account of, any taxes of whatever
nature imposed, levied, withheld or assessed by The Netherlands or any
political subdivision or taxing authority thereof or therein; and
(b) A holder of a Note who derives income from a Note or who realises a gain
on the disposal or redemption of a Note will not be subject to Netherlands
taxation on income or capital unless:
(i) such Holder is, or is deemed to be resident in The Netherlands for
tax purposes;
(ii) such income or gain is attributable to an enterprise or part thereof
which is carried on through a permanent establishment or a permanent
representative in The Netherlands; or
(iii) such Holder has a substantial interest or a deemed substantial
interest in the Issuer and such interest does not form part of the
assets of an enterprise.
Generally, a holder of a Note will not have a substantial interest if he, his
spouse, certain other relatives (including foster children) or certain persons
sharing his household, do not hold, alone or together, whether directly or
indirectly, the ownership of, or certain other rights over, shares representing
5 per cent or more of the total issued and outstanding capital (or the issued
and outstanding capital of any class of shares) of the Issuer, or rights to
acquire shares, whether or not currently issued, that represent 5 per cent or
more of the total currently issued and outstanding capital (or the currently
issued and outstanding capital of any class of shares) of the Issuer. A deemed
substantial interest is present if part of a substantial interest has been
disposed of, or is deemed to have been disposed of, on a non-recognition basis.
The (prospective) Holder of a Note who is or is deemed to be a resident in The
Netherlands for the purpose of any relevant provision or who has
38
<PAGE> 39
a substantial interest or who is subject to specific rules should consult his
own tax advisor at all times in determining any liability to The Netherlands
taxation of whatever nature imposed in relation to the purchase, ownership and
disposition of the Notes.
(c) Dutch net wealth tax will not be levied on a holder of a Note unless such
holder is an individual and:
(i) is, or is deemed to be, resident in The Netherlands for the purpose
of the relevant provisions; or
(ii) such Note is attributable to an enterprise or part thereof which is
carried on through a permanent establishment or a permanent
representative in The Netherlands.
(d) Dutch gift, estate or inheritance taxes will not be levied on the occasion
of the transfer of a Note by way of gift, or on the death of a Holder,
unless:
(i) the Holder is, or is deemed to be, resident in The Netherlands for
the purpose of the relevant provisions; or
(ii) in the case of a gift of a Note by an individual who at the date of
the gift was neither resident nor deemed to be resident in The
Netherlands, such individual dies within 180 days after the date of
the gift, while being resident or deemed to be resident in The
Netherlands; or
(iii) such Note is attributable to an enterprise or part thereof which is
carried on through a permanent establishment or a permanent
representative in The Netherlands.
(e) There is no Dutch registration tax, transfer tax, capital tax, stamp duty
or any other similar tax or duty, other than court fees and contributions
for the registration with the Trade Register of the Chamber of Commerce,
payable in The Netherlands in respect of or in connection with the
execution, delivery and enforcement by legal proceedings (including any
foreign judgement in the courts of The Netherlands) of the Notes or the
performance of the Issuer's obligations under the Notes, with the
exception of deemed capital contributions and capital tax that may be due
from the Issuer on capital contributions made or deemed to be made to the
Issuer under the Guarantee.
(f) There is no Dutch value added tax (VAT) payable in respect of payments in
consideration for the issue of the Notes or in respect of the payment of
interest or principal under the Notes or the transfer of the Notes.
(g) A holder of a Note will not become resident or deemed to be resident, or
otherwise subject to taxation in the Netherlands, by reason only of the
holding of the Note or the execution, performance and/or enforcement of
the Notes.
As of January 1, 2001 the income tax and wealth tax system will change
considerably if legislation pending at present in The Netherlands (known as Tax
Plan 2001 - Belastingplan 2001) is adopted. A Holder of the Notes should consult
his own tax advisor in determining any possible change in tax consequences in
respect of any such change.
United States of America
General
In accordance with prevailing market practices, the Issuer and the Guarantor
will treat the Permanent Global Note as the definitive form of the obligations
of the Issuer and the Guarantor for United States federal income tax purposes.
Based on this treatment, the following is a summary of certain principal United
States federal income and certain estate tax consequences to a beneficial owner
that is a Non-U.S. Holder (as defined below) of the purchase, ownership and
disposition of a Note. This summary is based upon the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), its legislative history, existing and proposed
U.S. Treasury Regulations (the "Treasury Regulations") promulgated thereunder,
published rulings by the U.S. Internal Revenue Service ("IRS"), and
administrative and judicial decisions, all in effect as of the date hereof, all
of which authorities are subject to change or differing interpretations,
possibly with retroactive effect. Neither the Issuer nor the Guarantor has
sought (or will seek) a ruling from the IRS relating to the United States
federal tax treatment of the Notes and there can be no assurance that the IRS or
a reviewing
39
<PAGE> 40
court would agree with the conclusions set forth below. Prospective purchasers
of the Notes should consult their own tax advisors in determining the United
States federal, as well as any state, local or foreign, tax consequences to them
of the purchase, ownership and disposition of the Notes.
The discussion below is intended to address the general tax consequences of
ownership of a Note and does not address taxpayers subject to special
circumstances or special tax regimes. A person acquiring a Note should consult a
tax adviser as to the tax consequences relating to the purchase, ownership and
disposition of a Note. For purposes of this discussion, a holder is a Non-U.S.
Holder if the holder is not (i) a citizen or resident of the United States, (ii)
a corporation, partnership or other business entity created or organized in or
under the laws of the United States or any State or political subdivision
thereof; (iii) an estate the income of which is subject to United States federal
income taxation regardless of its source; (iv) a trust if a court within the
United States is able to exercise primary supervision over its administration,
and one or more United States persons have the authority to control all of its
substantial decisions; or (v) otherwise subject to U.S. federal income tax on a
net income basis in respect of the Notes.
Subject to certain exceptions, an individual generally will be a resident of the
United States in a given year by reason of (i) being present in the United
States for at least 183 days during such year, or (ii) being present in the
United States for at least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the current calendar year
(counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year).
Treatment of Interest
Under United States federal income tax laws in effect as of the date of this
Offering Circular, and subject to the discussion below concerning information
reporting and backup withholding, payments of principal and interest on the
Notes and Coupons made outside the United States by the Issuer, the Guarantor or
any of its paying agents to any Non-U.S. Holder will not be subject to United
States federal income tax or withholding tax, provided that the following
conditions are met: (1) the holder does not actually or constructively own 10
percent or more of the total combined voting power of all classes of stock of
the issuer entitled to vote within the meaning of section 871(h)(3) of the Code
and the Treasury Regulations thereunder, (2) the holder is not a controlled
foreign corporation that is related to the issuer actually or constructively
through stock ownership, and (3) the holder is not a bank receiving interest on
an extension of credit made pursuant to a loan entered into in the ordinary
course of its trade or business.
Proceeds from Sale or other Dispositions of Notes
Under United States federal income tax laws in effect as of the date of this
Offering Circular, and subject to the discussion below concerning information
reporting and backup withholding, a holder of a Note or Coupon who is a Non-U.S.
Holder generally will not be subject to United States federal income tax or
withholding tax on any gain or income realized on the sale, exchange or
redemption of such Note or Coupon unless (1) such gain or income is effectively
connected with the conduct by such holder of a trade or business in the United
States or (2) such holder is an individual and is present in the United States
for at least 183 days during the year in which the individual disposes of the
Note and certain other conditions are satisfied.
United States Federal Estate Tax
A Note or Coupon held or beneficially owned by an individual at the time of
death who at that time is not a citizen or resident of the United States will
not be subject to United States federal estate tax, provided the Non-U.S. Holder
is not at the time of death a "10-percent shareholder" (after giving effect to
certain constructive ownership rules) of the Guarantor and payments of interest
on such Notes would not have been considered effectively connected with a US
trade or business.
Information Reporting and Backup Withholding
Under certain circumstances, United States federal income tax law requires
"information reporting" annually to the IRS and "backup withholding" at a rate
of 31% with respect to certain payments.
40
<PAGE> 41
Information reporting and backup withholding will generally not apply to
payments of principal and interest made outside the United States by the Issuer,
the Guarantor or any of its paying agents to a Non-U.S. Holder. For these
purposes, payment made to an address in the United States or by transfer to an
account maintained by the holder in the United States will not be considered
made outside the United States. In addition, if interest or principal payments
are collected by a foreign office of a custodian, nominee or other agent acting
on behalf of a beneficial owner of a Note and such custodian, nominee, other
agent or broker is a United States person or is deemed a "U.S. payor" or "U.S.
middleman" (as defined below) information reporting would be required with
respect to payments made to the Non-U.S. Holder unless, generally, the Holder
certifies its status as a Non-U.S. Holder under penalties of perjury or the
broker has certain documentary evidence in its files as to the Non-U.S. Holder's
foreign status and the broker has no actual knowledge to the contrary.
The payment of the proceeds on the disposition of a Note by a Non-U.S. Holder to
or through a non-U.S. office of a non-U.S. broker will not be subject to backup
withholding or information reporting unless the non-U.S. broker is deemed a
"U.S. payor" or "U.S. middleman". The payment of proceeds on the disposition of
a Note by a Non-U.S. Holder to or through a non-U.S. office of a U.S. broker or
a "U.S. payor" or "U.S. middleman" generally will be subject to information
reporting and backup withholding unless the Holder certifies its status as a
Non-U.S. Holder under penalties of perjury or the broker has certain documentary
evidence in its files as to the Non-U.S. Holder's foreign status and the broker
has no actual knowledge to the contrary. For this purpose, a "U.S. payor" or
"U.S. middleman" is: (1) a "controlled foreign corporation" (as defined for U.S.
federal income tax purposes); (2) a foreign person 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a U.S. trade or business; or for payments made on
or after January 1, 2001, a foreign partnership if, at any time during its tax
year, one or more of its partners are United States persons who, in the
aggregate, hold more than 50% of the income or capital interest of the
partnership or if, at any time during its taxable year, the partnership is
engaged in the conduct of a U.S. trade or business.
The U.S. Treasury Department issued final Treasury Regulations relating to
withholding, information reporting and backup withholding that unify current
certification procedures and forms and clarify reliance standards. These final
Regulations generally will be effective with respect to payments made after 31
December, 2000. Prospective purchasers of the Notes should consult their own tax
advisors concerning the effect of these Regulations on their purchase, ownership
and disposition of the Notes.
41
<PAGE> 42
SUBSCRIPTION AND SALE
The Royal Bank of Scotland plc and Chase Manhattan International Limited (the
"Lead Managers") and J.P. Morgan Securities Ltd. (together with the Lead
Managers, the "Managers") have, in a subscription agreement dated 25 October,
2000 (the "Subscription Agreement") and made between the Issuer, the Guarantor
and the Managers upon the terms and subject to the conditions contained therein,
jointly and severally agreed to subscribe and pay for the Notes at their issue
price of 98.463 per cent. of their principal amount less a combined management
and underwriting commission of 0.30 per cent. of their principal amount and a
selling concession of 0.15 per cent. of their principal amount. The Issuer
(failing which, the Guarantor) has also agreed to reimburse the Lead Managers
for certain of their expenses incurred in connection with the management of the
issue of the Notes. The Managers are entitled in certain circumstances to be
released and discharged from their obligations under the Subscription Agreement
prior to the closing of the issue of the Notes.
The Notes have not been and will not be registered under the Securities Act and,
subject to certain exceptions, may not be offered or sold within the United
States or to, or for the account or benefit of, U.S. persons. Terms used in this
paragraph have the meanings given to them by Regulation S.
The Notes are subject to U.S. tax law requirements and may not be offered, sold
or delivered within the United States or its possessions or to a United States
person, except in certain transactions permitted by U.S. tax regulations. Terms
used in this paragraph have the meanings given to them by the United States
Internal Revenue Code of 1986, as amended, and regulations thereunder.
In addition, each of the Managers has represented in the Subscription Agreement,
with respect to itself and with respect to any of its affiliates that acquire
from it Notes for the purpose of offering and selling such Notes during the
restricted period, that it has in effect procedures reasonably designed to
ensure that its employees or agents who are directly engaged in selling Notes
are aware that the Notes may not be offered or sold during the restricted period
to a person who is within the United States or its possessions or to a United
States person, except as permitted under U.S. Treasury Regulations section
1.163-5(c) (2) (1) (D) (the "D Rules"); that, if it is a United States person,
it is acquiring the Notes for resale in connection with their original issuance;
and that it has not offered and will not during the restricted period offer or
sell the Notes to a person who is within the United States or its possessions or
to a United States person and that it has not delivered and will not deliver
within the United States or its possessions Notes in bearer form during the
restricted period, except to the extent permitted under the D Rules.
Each Manager has agreed that, except as permitted by the Subscription Agreement,
it will not offer, sell or deliver the Notes, (a) as part of their distribution
at any time or (b) otherwise, until 40 days after the later of the commencement
of the offering and the issue date of the Notes, within the United States or to,
or for the account or benefit of, U.S. persons, and that it will have sent to
each dealer to which it sells Notes during the distribution compliance period a
confirmation or other notice setting forth the restrictions on offers and sales
of the Notes within the United States or to, or for the account or benefit of,
U.S. persons.
In addition, until 40 days after commencement of the offering, an offer or sale
of Notes within the United States by a dealer (whether or not participating in
the offering) may violate the registration requirements of the Securities Act.
Each Manager has further represented and agreed that:
(a) it has not offered or sold and will not offer or sell any Notes to persons
in the United Kingdom prior to the expiry of the period six months from
the Closing Date except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal
or agent) for the purposes of their business or otherwise in circumstances
which have not resulted and will not result in an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
(b) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the Notes in, from or otherwise involving the United Kingdom;
and
42
<PAGE> 43
(c) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue of
the Notes to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1996, as amended, or is a person to whom such document may otherwise
lawfully be issued or passed on.
In addition, each Manager has further represented and agreed that the Notes have
not been offered, made available, sold, delivered, or transferred and will not
be offered, made available, sold, delivered, or transferred in The Netherlands,
or to Dutch residents as part of their initial distribution or otherwise, either
directly or indirectly, other than to companies or persons which or who trade or
invest in securities in the conduct of a business or profession in The
Netherlands.
No action has been or will be taken in any jurisdiction by the Issuer, the
Guarantor or any Manager that would, or is intended to, permit a public offering
of the Notes, or possession or distribution of this Offering Circular or any
other offering material, in any country or jurisdiction where action for that
purpose is required. Persons into whose hands this Offering Circular comes are
required by the Issuer, the Guarantor and the Managers to comply with all
applicable laws and regulations in each country or jurisdiction in which they
purchase, offer, sell or deliver Notes or have in their possession, distribute
or publish this Offering Circular or any other offering material relating to the
Notes, in all cases at their own expense.
43
<PAGE> 44
GENERAL INFORMATION
1. The creation and issue of the Notes has been authorised by a resolution of
the Board of Directors of the Issuer dated 19 October, 2000. The giving of
the Guarantee of the Notes has been authorised by a resolution of the
Board of Directors of the Guarantor dated 26 September, 2000.
2. Save as disclosed in this Offering Circular, there are no litigation or
arbitration proceedings against or affecting the Issuer, the Guarantor,
any of their respective subsidiaries or any of their respective assets,
nor is the Issuer or the Guarantor aware of any pending or threatened
proceedings, which are or might be material in the context of the issue of
the Notes.
3. Save as disclosed in this Offering Circular, there has been no adverse
change, or any development reasonably likely to involve an adverse change,
in the condition (financial or otherwise) or general affairs of the Issuer
or the Guarantor since 31 December 1999 (in the case of the Guarantor) and
its date of incorporation (in the case of the Issuer) that is material in
the context of the issue of the Notes.
4. For so long as any of the Notes are outstanding, copies of the following
documents may be inspected during normal business hours at the Specified
Office of each Paying Agent:
(a) the Paying Agency Agreement; and
(b) the Trust Deed.
5. For so long as any of the Notes are outstanding, copies of the following
documents may be obtained during normal business hours at the Specified
Office of each Paying Agent:
(a) the audited consolidated financial statements of the Guarantor for
the years December 31, 1998 and 1999;
(b) the unaudited consolidated financial statements of the Guarantor for
the six months ended June30, 2000; and
(c) the latest published unaudited quarterly consolidated interim and
audited year-end consolidated financial statements of the Guarantor
and audited year-end unconsolidated financial statements of the
Issuer. The Issuer does not publish interim financial statements nor
consolidated financial statements.
The Guarantor publishes quarterly unaudited consolidated interim financial
statements. The Guarantor does not publish unconsolidated financial
statements. The Issuer does not publish interim financial statements.
6. In connection with the application for the Notes to be listed on the
Luxembourg Stock Exchange, copies of the constitutive documents of the
Issuer and the Guarantor (together, in the case of the Issuer, with an
English translation thereof) and a legal notice relating to the issue of
the Notes will be deposited prior to listing with the Greffier en Chef du
Tribunal d'Arrondissement de et a Luxembourg, where they may be inspected
and copies obtained upon request.
7. The Notes and any Coupons appertaining thereto will bear a legend to the
following effect: "Any United States person who holds this obligation will
be subject to limitations under the United States income tax laws,
including the limitations provided in Sections 165(j) and 1287(a) of the
Internal Revenue Code." The sections referred to in such legend provide
that a United States person who holds a Note or Coupon will generally not
be allowed to deduct any loss realised on the sale, exchange or redemption
of such Note or Coupon and any gain (which might otherwise be
characterised as capital gain) recognised on such sale, exchange or
redemption will be treated as ordinary income.
8. The Notes have been accepted for clearance through Euroclear and
Clearstream, Luxembourg. The ISIN is XS0119504776 and the common code is
11950477.
44
<PAGE> 45
FINANCIAL STATEMENTS AND AUDITORS' REPORT
Content
Auditors' report and consolidated financial statements of the
Guarantor as at and for the year ended 31 December 1998 and 31
December 1999 F-1
Unaudited consolidated financial statements of the Guarantor as at
and for the six months ended 30 June 1999 and 30 June 2000 F-21
Unaudited consolidated financial statements of the Guarantor as at
and for the nine months ended 30 September 1999 and 30 September
2000 F-30
45
<PAGE> 46
Report of Independent Accountants
To the Shareholders of Harsco Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity, of comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Harsco Corporation and Subsidiary Companies at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 27, 2000
F-1
<PAGE> 47
HARSCO CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 51,266 $ 41,562
Accounts receivable, net 331,123 310,935
Inventories 172,198 175,804
Other current assets 58,368 59,140
-----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 612,955 587,441
-----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 671,546 626,194
Cost in excess of net assets of businesses acquired, net 258,698 273,708
Other assets 116,624 136,238
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,659,823 $ 1,623,581
===========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ 32,014 $ 46,766
Current maturities of long-term debt 4,593 7,841
Accounts payable 132,394 142,681
Accrued compensation 46,615 43,938
Income taxes 44,154 42,908
Dividends payable 9,417 9,506
Other current liabilities 161,329 181,182
-----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 430,516 474,822
-----------------------------------------------------------------------------------------------------------
Long-term debt 418,504 309,131
Deferred income taxes 52,932 55,195
Insurance liabilities 37,097 30,019
Other liabilities 70,653 69,115
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,009,702 938,282
-----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A junior participating cumulative preferred stock -- --
Common stock, par value $1.25, issued 66,221,544 and 66,075,380
shares as of December 31, 1999 and 1998, respectively 82,777 82,594
Additional paid-in capital 88,101 85,384
Accumulated other comprehensive income (expense) (80,538) (55,045)
Retained earnings 1,155,586 1,101,828
-----------------------------------------------------------------------------------------------------------
1,245,926 1,214,761
Treasury stock, at cost (26,149,759 and 23,825,458 shares, respectively) (595,805) (529,462)
-----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 650,121 685,299
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,659,823 $ 1,623,581
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 48
HARSCO CORPORATION
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
<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
-----------------------------------------------------------------------------------------------------------------
NET SERVICES AND SALES 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 $14,082) -- -- 28,424
Gain on disposal of defense business (net of income taxes
of $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.
F-3
<PAGE> 49
HARSCO CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 90,713 $ 107,513 $ 278,832
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 122,777 119,044 107,350
Amortization 13,076 12,337 9,189
Gain on disposal of defense business -- -- (250,014)
Equity in income of unconsolidated entities (3,004) (1,354) (43,549)
Dividends or distributions from unconsolidated entities 3,369 1,494 49,142
Deferred income taxes 193 3,893 (8,175)
Other (income) and expenses 6,019 24,843 4,198
Gain on sale of non-defense businesses -- (29,107) (1,620)
Other, net 5,205 5,260 (8,192)
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (28,157) (15,718) (1,812)
Inventories 15,934 (24,991) (13,042)
Accounts payable (1,238) 8,379 4,840
Disbursements related to discontinued
defense business (14,605) (13,642) (951)
Other assets and liabilities 3,671 (8,691) 22,345
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES(1) 213,953 189,260 148,541
===========================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (175,248) (159,816) (143,444)
Purchase of businesses, net of cash acquired* (48,907) (158,291) (8,508)
Proceeds from sale of businesses 17,718 39,500 345,189
Proceeds from sale of property, plant and equipment 14,381 13,033 14,433
Investments available-for-sale: Purchases -- -- (39,346)
Maturities -- 40,000 --
Investments held-to-maturity: Purchases -- -- (42,241)
Maturities -- 4,010 71,469
Other investing activities (2,618) (11,926) (1,007)
-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (194,674) (233,490) 196,545
===========================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net (10,546) 16,131 8,291
Current maturities and long-term debt: Additions 214,133 172,709 61,310
Reductions (103,410) (116,163) (88,523)
Cash dividends paid on common stock (37,022) (40,287) (39,120)
Common stock issued-options 2,272 3,885 5,939
Common stock acquired for treasury (71,860) (169,258) (113,161)
Other financing activities (2,495) (1,341) (1,985)
-----------------------------------------------------------------------------------------------------------
NET CASH (USED) BY FINANCING ACTIVITIES (8,928) (134,324) (167,249)
===========================================================================================================
EFFECT OF EXCHANGE RATE CHANGES ON CASH (647) (1,449) (2,134)
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,704 (180,003) 175,703
Cash and cash equivalents at beginning of year 41,562 221,565 45,862
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 51,266 $ 41,562 $ 221,565
===========================================================================================================
*PURCHASE OF BUSINESSES, NET OF CASH ACQUIRED
Working capital, other than cash $ 18,078 $ 11,159 $ 2,807
Property, plant and equipment (36,417) (89,182) (833)
Other noncurrent assets and liabilities, net (30,568) (80,268) (10,482)
-----------------------------------------------------------------------------------------------------------
NET CASH USED TO ACQUIRE BUSINESSES $ (48,907) $(158,291) $ (8,508)
===========================================================================================================
</TABLE>
(1) Cash provided by operating activities for 1997 includes approximately $100
million of income taxes paid related to the gain on the disposal of the
defense business, whereas the pre-tax cash proceeds are included under
investing activities.
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
HARSCO CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL
ISSUED PAID-IN
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) EARNINGS TREASURY CAPITAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES, JANUARY 1, 1997 $ 81,823 $ (238,065) $ 69,151
-----------------------------------------------------------------------------------
Net income
Cash dividends declared, $.82 per share
Translation adjustments
Unrealized investment (losses), net of
$18 deferred income taxes
Pension liability adjustments, net of
$412 deferred income taxes
Acquired during the year, 3,080,642 shares (125,841) 34
Stock options exercised, 395,885 shares 495 9,299
Restricted stock, net, 57,487 shares 1,117 846
Other, 1,048 shares 17 30
-----------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 82,318 (362,772) 79,360
-----------------------------------------------------------------------------------
Net income
Cash dividends declared, $.885 per share
Translation adjustments
Unrealized investment gains, net of
($18) deferred income taxes
Pension liability adjustments, net of
$1,544 deferred income taxes
Acquired during the year, 4,989,483 shares (168,405)
Stock options exercised, 221,293 shares 276 5,913
Restricted stock, net, 40,324 shares 1,649 110
Other, 1,658 shares 66 1
-----------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 82,594 (529,462) 85,384
-----------------------------------------------------------------------------------
Net income
Cash dividends declared, $.91 per share
Translation adjustments
Pension liability adjustments, net of
($1,277) deferred income taxes
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, DECEMBER 31, 1999 $ 82,777 $ (595,805) $ 88,101
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (EXPENSE)
---------------------------------------------------------------
NET
UNREALIZED
INVESTMENT
GAINS PENSION RETAINED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) TRANSLATION (LOSSES) LIABILITY TOTAL EARNINGS
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 $ (25,476) $ -- $ (619) $(26,095) $ 794,473
--------------------------------------------------------------------------------------------------------------
Net income 278,832
Cash dividends declared, $.82 per share (39,535)
Translation adjustments (24,201) (24,201)
Unrealized investment (losses), net of
$18 deferred income taxes (28) (28)
Pension liability adjustments, net of
$412 deferred income taxes (650) (650)
Acquired during the year, 3,080,642 shares
Stock options exercised, 395,885 shares
Restricted stock, net, 57,487 shares
Other, 1,048 shares
--------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 (49,677) (28) (1,269) (50,974) 1,033,770
--------------------------------------------------------------------------------------------------------------
Net income 107,513
Cash dividends declared, $.885 per share (39,455)
Translation adjustments (1,714) (1,714)
Unrealized investment gains, net of
($18) deferred income taxes 28 28
Pension liability adjustments, net of
$1,544 deferred income taxes (2,385) (2,385)
Acquired during the year, 4,989,483 shares
Stock options exercised, 221,293 shares
Restricted stock, net, 40,324 shares
Other, 1,658 shares
--------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 (51,391) -- (3,654) (55,045) 1,101,828
--------------------------------------------------------------------------------------------------------------
Net income 90,713
Cash dividends declared, $.91 per share (36,955)
Translation adjustments (27,273) (27,273)
Pension liability adjustments, net of
($1,277) deferred income taxes 1,780 1,780
Acquired during the year, 2,326,798 shares
Stock options exercised, 146,164 shares
Other, 2,497 shares
--------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1999 $ (78,664) $ -- $ (1,874) $(80,538) $1,155,586
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
HARSCO CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31 1999 1998 1997
<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 taxes 1,780 (2,385) (650)
----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense) (25,493) (4,071) (24,879)
----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 65,220 $ 103,442 $ 253,953
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
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.
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 and $58.6 million at
December 31, 1999 and 1998, respectively.
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 recognized for product sales generally when title and risk of loss
transfer. Service sales are recognized over the contractual period or as
services are performed.
F-6
<PAGE> 52
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 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 December 31, 1996 exceeded 100%. 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%. As of January
1, 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%. The Company measures the financial
statements of its Brazilian entities using the Brazilian real as the functional
currency.
F-7
<PAGE> 53
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
flows 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.
F-8
<PAGE> 54
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 June 15, 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 January 1, 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 August 25, 1997, the Company and FMC Corporation signed an agreement to sell
United Defense, L.P. for $850 million, and the sale was completed on October 6,
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.
On the Consolidated Statement of Cash Flows for 1997, equity in income of the
defense business and distributions from the defense business through the
measurement date are included in "Equity in income of unconsolidated entities"
and "Dividends or distributions from unconsolidated entities", respectively.
Disbursements related to the discontinued defense business, principally legal
fees and settlements, are shown separately on the Consolidated Statement of Cash
Flows for 1997, 1998, and 1999.
F-9
<PAGE> 55
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.
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 Racal
Electronics Plc for approximately $7.2 million. EFIC produces lightweight
composite cylinders used extensively in firefighter 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 totaling $9.4 million
in 1999 and $94.6 million in 1998. Results of operations are included in income
since the dates of acquisition.
F-10
<PAGE> 56
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
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>
(IN MILLIONS, EXCEPT PER SHARE DATA)
PRO-FORMA INFORMATION FOR YEARS ENDED DECEMBER 31 1999 1998
----------------------------------------------------------------------------------------------------
<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.
F-11
<PAGE> 57
4. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $13.3
million and $13.6 million at December 31, 1999 and 1998, respectively.
Inventories consist of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 37,715 $ 45,259
Work-in-process 37,198 36,060
Raw materials and purchased parts 76,911 71,576
Stores and supplies 20,374 22,909
-----------------------------------------------------------------------------------------------------------------------------------
$ 172,198 $ 175,804
===================================================================================================================================
Valued at lower of cost or market:
LIFO basis $ 132,366 $ 129,708
FIFO basis 16,483 28,473
Average cost basis 23,349 17,623
-----------------------------------------------------------------------------------------------------------------------------------
$ 172,198 $ 175,804
===================================================================================================================================
</TABLE>
Inventories valued on the LIFO basis at December 31, 1999 and 1998 were
approximately $28.4 million and $32.5 million, respectively, 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 $1.1 million, $0.2 million and $0.1 million in 1999,
1998, and 1997, respectively.
F-12
<PAGE> 58
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 28,847 $ 31,048
Buildings and improvements 147,742 147,291
Machinery and equipment 1,243,437 1,196,223
Uncompleted construction 79,797 63,540
-----------------------------------------------------------------------------------------------------------------------------------
1,499,823 1,438,102
Less accumulated depreciation 828,277 811,908
-----------------------------------------------------------------------------------------------------------------------------------
$ 671,546 $ 626,194
===================================================================================================================================
</TABLE>
The estimated useful lives of different types of assets are generally:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Land improvements 10 years
Buildings and improvements 10 to 50 years
Certain plant, buildings and installations 3 to 15 years
(Principally Mill Services Segment)
Machinery and equipment 3 to 20 years
--------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE> 59
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 December
31, 1999) that varies based upon its credit ratings. At December 31, 1999 and
1998, 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 December 31,
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 December 31, 1999 and 1998, $233.7 million and $108.8
million of commercial paper was outstanding, respectively. Commercial paper is
classified as long-term debt at December 31, 1999 and 1998, 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 and $46.8 million at December 31, 1999
and 1998, respectively. The weighted average interest rate for short-term
borrowings at December 31, 1999 and 1998 was 4.6% and 7.9%, respectively.
F-14
<PAGE> 60
6. DEBT AND CREDIT AGREEMENTS (CONTINUED)
Long-term debt consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
6.0% notes due September 15, 2003 $ 150,000 $ 150,000
Commercial paper borrowings, with a weighted
average interest rate of 5.8% as of December 31, 1999 233,746 108,784
Faber Prest loan notes due October 31, 2008 with interest
based on Sterling LIBOR minus .75% (5.4% at
December 31, 1999) 16,285 19,222
Industrial development bonds, payable in varying
amounts from 2001 to 2005 with a weighted
average interest rate of 6.4% as of December 31, 1999 11,400 11,400
Other financing payable in varying
amounts to 2005 with a weighted
average interest rate of 7.3% as of December 31, 1999 11,666 27,566
---------------------------------------------------------------------------------------------------------------------------------
423,097 316,972
Less current maturities 4,593 7,841
---------------------------------------------------------------------------------------------------------------------------------
$ 418,504 $ 309,131
=================================================================================================================================
</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 December 31, 1999, the Company was in compliance with
these covenants.
The maturities of long-term debt for the four years following December 31, 2000,
are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2001 $ 242,927 2003 $ 150,967
2002 $ 2,049 2004 $ 4,778
------------------------------------------------------------------------------------------
</TABLE>
Cash payments for interest on all debt were (in millions) $25.0, $20.0, and
$16.3 in 1999, 1998 and 1997, respectively. Capitalized interest was $893
thousand, $10 thousand, and zero in 1999, 1998, and 1997, respectively.
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 $200 million
of new debt securities, preferred stock, or common stock.
F-15
<PAGE> 61
7. LEASES
The Company leases certain property and equipment under noncancelable operating
leases. Rental expense under such operating leases was (in millions) $16.9,
$17.6, and $13.5 in 1999, 1998 and 1997, respectively.
Future minimum payments under operating leases with noncancelable terms are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------------------------------------------
<S> <C> <C>
2000 $15,703
2001 12,534
2002 9,399
2003 7,268
2004 13,309
After 2004 16,598
-------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE> 62
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>
(IN THOUSANDS) 1999 1998 1997
----------------------------------------------------------------------------------------------------
<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) expense $ 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.
F-17
<PAGE> 63
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The change in the financial status of the pension plans and amounts recognized
in the Consolidated Balance Sheet at December 31, 1999 and 1998 are:
<TABLE>
<CAPTION>
PENSION BENEFITS
----------------
(IN THOUSANDS) 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 371,454 $ 220,428
Service cost 15,882 13,785
Interest cost 23,048 21,367
Plan participants' contributions 1,887 1,452
Amendments 5,416 11,048
Actuarial (gain) loss (42,466) (3,824)
Curtailment (gain) loss - 542
Benefits paid (15,229) (16,126)
Obligations of acquired companies 8,574 122,388
Effect of foreign currency (5,598) 394
-------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 362,968 $ 371,454
=========================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 458,241 $ 335,106
Actual return on plan assets 67,692 (16,342)
Employer contributions 1,425 2,370
Plan participants' contributions 1,887 1,452
Benefits paid (15,103) (16,007)
Plan assets of acquired companies 8,057 151,346
Effect of foreign currency (6,270) 316
-------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 515,929 $ 458,241
=========================================================================================================================
FUNDED STATUS
Funded status at end of year $ 152,961 $ 86,787
Unrecognized net (gain) loss (92,817) (19,683)
Unrecognized transition (asset) obligation (13,222) (15,657)
Unrecognized prior service cost 25,534 22,446
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 72,456 $ 73,893
=========================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEET CONSIST OF:
Prepaid benefit cost $ 85,914 $ 84,251
Accrued benefit liability (18,907) (19,576)
Intangible asset 2,588 3,297
Accumulated other comprehensive income 2,861 5,921
-------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 72,456 $ 73,893
=========================================================================================================================
</TABLE>
Plan assets include equity and fixed-income securities. At December 31, 1999 and
1998, 732,640 shares of the Company's common stock with a fair market value of
$23.3 million and $22.3 million, respectively, are included in plan assets.
Dividends paid on such stock amounted to $0.7 million and $0.6 million in 1999
and 1998.
F-18
<PAGE> 64
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial assumptions used for the defined benefit pension plans, including
international plans, are:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average assumed discount rates 6.9% 6.3% 7.4%
Weighted average expected long-term rates of
return on plan assets 8.4% 8.2% 9.1%
Rates of compensation increase 4.2% 4.4% 4.5%
=====================================================================================================
</TABLE>
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 December 31, 1999, and $32.1 million, $30.1 million, and
$11.6 million, respectively, as of December 31, 1998.
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
-----------------------
(IN THOUSANDS) 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 6,421 $ 6,220
Service cost 129 107
Interest cost 466 431
Actuarial loss (gain) 319 49
Benefits paid (325) (386)
Obligation of acquired company 3,294 -
-----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 10,304 $ 6,421
===================================================================================================================================
FUNDED STATUS
Funded status at end of year $ (10,304) $ (6,421)
Unrecognized prior service cost (39) (42)
Unrecognized net actuarial (gain) (1,328) (1,861)
-----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized as accrued benefit liability $ (11,671) $ (8,324)
===================================================================================================================================
</TABLE>
F-19
<PAGE> 65
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial assumptions used for postretirement benefit plans are:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
<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.
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
millions) $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 authorized 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 January 1, 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 January 6, 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 January 6, 1999.
F-20
<PAGE> 66
9. INCOME TAXES
Income from continuing operations before income taxes and minority interest in
the Consolidated Statement of Income consists of:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
---------------------------------------------------------------------------------------------------
<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 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.
F-21
<PAGE> 67
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 years ended December 31,
1999 and 1998 are:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEFERRED INCOME TAXES ASSET LIABILITY Asset Liability
-------------------------------------------------------------------------------------------------------------
Depreciation $ -- $36,580 $ -- $42,284
Expense accruals 34,975 -- 43,015 --
Inventories 5,294 -- 3,783 --
Provision for receivables 3,867 -- 2,986 --
Postretirement benefits 4,221 -- 3,235 --
Deferred revenue -- 4,196 -- 4,447
Unrelieved foreign tax losses 6,694 -- 3,729 --
Unrelieved domestic tax losses 2,424 -- 3,079 --
Pensions -- 22,923 -- 18,917
Other -- 1,913 -- 2,120
-------------------------------------------------------------------------------------------------------------
57,475 65,612 59,827 67,768
Valuation allowance (4,045) -- (6,293) --
-------------------------------------------------------------------------------------------------------------
Total deferred income taxes $ 53,430 $65,612 $ 53,534 $67,768
=============================================================================================================
</TABLE>
At December 31, 1999 and 1998, Other current assets included deferred income tax
benefits of $35.0 million and $37.2 million, respectively.
F-22
<PAGE> 68
9. INCOME TAXES (CONTINUED)
At December 31, 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 and 1998, $2.3 million and $4.4 million, respectively, of
preacquisition NOLs were utilized by the Company, resulting in tax benefits of
$0.8 million and $1.7 million, respectively.
The valuation allowance of $4.0 million and $6.3 million at December 31, 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.
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.
F-23
<PAGE> 69
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
September 27, 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.
F-24
<PAGE> 70
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $9.3 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.
F-25
<PAGE> 71
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 December 22,
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 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 December 31, 1999, and 1998 includes an accrual of
$3.0 million and $4.9 million, respectively, 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 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.
F-26
<PAGE> 72
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 June 24, 1997, the
Company adopted a revised Shareholder Rights Plan to replace the Company's 1987
Plan which expired on September 28, 1997. Under the new Plan, the Board declared
a dividend to shareholders of record on September 28, 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% or more, or intends to commence a
tender offer for 20% 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% 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 September 28, 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% or more
of the Company's common stock. At December 31, 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 December 31, 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 January 25, 2001.
In 1999, additional share repurchases of 58,155, net of issues, were made
principally as part of the 1995 Executive Compensation Plan.
<TABLE>
<CAPTION>
COMMON STOCK SUMMARY
--------------------------------------------------------------------------------
SHARES TREASURY SHARES
BALANCES ISSUED SHARES OUTSTANDING
--------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996 65,458,202 15,855,850 49,602,352
December 31, 1997 65,854,087 18,877,957 46,976,130
December 31, 1998 66,075,380 23,825,458 42,249,922
DECEMBER 31, 1999 66,221,544 26,149,759 40,071,785
--------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE> 73
11. CAPITAL STOCK (CONTINUED)
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>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------------
<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>
F-28
<PAGE> 74
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>
(IN THOUSANDS, EXCEPT PER SHARE) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------------------
<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 $ .91 $ .88 $ .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 December
31, 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.
F-29
<PAGE> 75
12. STOCK-BASED COMPENSATION (CONTINUED)
Changes during 1999, 1998, and 1997 in options outstanding were:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED AVERAGE
OPTION EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding, January 1, 1997 1,202,026 $22.24
Granted 294,600 34.41
Exercised (395,885) 20.81
Terminated and expired (15,280) 22.90
--------- ------
Outstanding, December 31, 1997 1,085,461 26.06
Granted 275,100 38.30
Exercised (221,293) 24.93
Terminated and expired (16,500) 35.73
--------- ------
Outstanding, December 31, 1998 1,122,768 29.14
Granted 428,400 26.92
Exercised (146,164) 19.06
Terminated and expired (68,400) 31.36
--------- ------
OUTSTANDING, DECEMBER 31, 1999 1,336,604 $28.97
========= ======
</TABLE>
Options to purchase 932,704 shares, 857,168 shares and 793,061 shares were
exercisable at December 31, 1999, 1998, and 1997, respectively. The following
table summarizes information concerning outstanding and exercisable options at
December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ---------------------------------
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISABLE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE 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.
F-30
<PAGE> 76
12. STOCK-BASED COMPENSATION (CONTINUED)
As of January 1, 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.
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 and $38.7 million at December 31, 1999 and 1998, respectively.
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 percent per
annum of their face value. If the Company were required to obtain replacement
standby letters of credit and bonds as of December 31, 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 December 31, 1999 and 1998, the Company had $19.2 million and $18.3 million,
respectively, 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 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.
F-31
<PAGE> 77
13. FINANCIAL INSTRUMENTS (CONTINUED)
The following tables summarize by major currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars as of December 31, 1999 and
1998. 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>
(IN THOUSANDS) AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLAR RECOGNIZED UNREALIZED
TYPE EQUIVALENT MATURITY GAIN (LOSS) GAIN (LOSS)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FORWARD EXCHANGE
CONTRACTS:
EUROS BUY $17,339 JANUARY 18, 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 December 31, 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 December 31, 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 March 18, 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 identifiable foreign currency
firm commitments, the losses were deferred and will be accounted for as part of
the underlying transactions.
<TABLE>
<CAPTION>
(IN THOUSANDS) AS OF DECEMBER 31, 1998
--------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLAR RECOGNIZED UNREALIZED
TYPE EQUIVALENT MATURITY GAIN (LOSS) GAIN (LOSS)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Forward exchange
contracts:
Belgian francs Sell $ 806 Various in 1999 $ 9 --
British pounds Sell 1,466 Various in 1999 12 --
French francs Sell 15,798 Various in 1999 46 --
Norwegian kronor Sell 199 Various in 1999 2 --
--------------------------------------------------------------------------------------------------------------------------------
$18,269 $ 69 --
================================================================================================================================
</TABLE>
At December 31, 1998, the Company had entered into forward exchange contracts in
Belgian francs, British pounds, French francs, and Norwegian kronor, which were
used to hedge certain future payments between the Company and its various
subsidiaries. These forward contracts did not qualify as hedges for financial
reporting purposes. At December 31, 1998, the Company had recorded net gains of
$0.1 million on these contracts.
F-32
<PAGE> 78
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 December 31, 1999 and 1998 are:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
-----------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 51,266 $ 51,266 $ 41,562 $ 41,562
Long-term debt 423,097 416,925 316,972 317,530
Foreign currency exchange contracts 19,167 18,571 18,269 18,336
-----------------------------------------------------------------------------------------------------------------
</TABLE>
F-33
<PAGE> 79
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
aluminum, 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.
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.
F-34
<PAGE> 80
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
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% of sales and
no single customer represented 10% 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% of
total segment assets as of December 31, 1999 and 1998 and are disclosed
separately in the geographic area information.
SEGMENT INFORMATION (1)(2)
<TABLE>
<CAPTION>
SEGMENTS NET SALES TO UNAFFILIATED CUSTOMERS INCOME FROM CONTINUING OPERATIONS
------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------
<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>
SEGMENTS ASSETS DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES
------------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harsco Mill Services(4) $ 934.6 $ 922.7 $ 715.3 $ 99.5 $ 98.2 $ 87.2 $ 134.9 $102.7 $ 94.8
Harsco Gas and
Fluid Control 347.9 380.9 249.3 18.1 16.1 11.4 21.4 30.6 19.8
Harsco Infrastructure(5) 325.7 241.1 222.6 17.0 15.9 16.7 17.9 26.1 27.3
------------------------------------------------------------------------------------------------------------------------------------
Segment totals 1,608.2 1,544.7 1,187.2 134.6 130.2 115.3 174.2 159.4 141.9
Corporate 51.6 78.9 290.0 1.3 1.2 1.2 1.0 .4 1.5
------------------------------------------------------------------------------------------------------------------------------------
Total $1,659.8 $1,623.6 $1,477.2 $135.9 $ 131.4 $116.5 $175.2 $159.8 $143.4
====================================================================================================================================
</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, and $28.2 million for the years 1999, 1998, and 1997,
respectively.
(3) For the years ended December 31, 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
Prest 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 December 31, 1999.
F-35
<PAGE> 81
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
HARSCO GAS AND HARSCO
MILL FLUID INFRA- GENERAL CONSOLIDATED
(IN MILLIONS) SERVICES CONTROL STRUCTURE CORPORATE TOTAL
---------------------------------------------------------------------------------------------------------------------
<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
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HARSCO
HARSCO GAS AND HARSCO
MILL FLUID INFRA- GENERAL CONSOLIDATED
(IN MILLIONS) SERVICES CONTROL STRUCTURE CORPORATE TOTAL
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HARSCO
HARSCO GAS AND HARSCO
MILL FLUID INFRA- GENERAL CONSOLIDATED
(IN MILLIONS) SERVICES CONTROL STRUCTURE CORPORATE TOTAL
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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).
F-36
<PAGE> 82
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED)
INFORMATION BY GEOGRAPHIC AREA (4)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA NET SALES TO UNAFFILIATED CUSTOMERS SEGMENT ASSETS
--------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1999 1998 1997 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $1,095.3 $1,085.6 $1,044.8 $ 797.1 $ 721.2 $ 569.4
United Kingdom 155.5 126.4 61.1 186.2 180.7 51.4
All Other 465.9 521.5 521.6 624.9 642.8 566.4
--------------------------------------------------------------------------------------------------------------------
Segment Totals $1,716.7 $1,733.5 $1,627.5 $1,608.2 $1,544.7 $1,187.2
=====================================================================================================================
</TABLE>
(4) Revenues are attributed to individual countries based on the location of
the facility generating the revenue.
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
------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------
<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>
F-37
<PAGE> 83
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)
------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
------------------------------------------------------------------------------------------
<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
businesses and property, plant and equipment in the investing activities section
of 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. Fair value was determined using available information based upon
the estimated amount at which the assets could be sold in a current transaction
between willing parties. The investment carrying value as of December 31, 1999
was $6.6 million. For the year ended December 31, 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.
F-38
<PAGE> 84
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 December 31, 1998 was $7.6 million. For the year
ended December 31, 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 benefit 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.
F-39
<PAGE> 85
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.
EMPLOYEE TERMINATION BENEFIT COSTS AND PAYMENTS
<TABLE>
<CAPTION>
(IN MILLIONS)
SUMMARY OF ACTIVITY
-------------------
<S> <C> <C>
Original reorganization action period 1999 1998
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
December 31, 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
-------------------
<S> <C> <C>
Original reorganization action period 1999 1998
Employees affected by new reorganization 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
December 31, 1999 39 4
==== ====
</TABLE>
F-40
<PAGE> 86
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.
F-41
<PAGE> 87
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Service sales $255,854 $217,776 $486,713 $417,997
Product sales 201,184 212,902 419,460 417,312
Other 236 147 439 258
----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 457,274 430,825 906,612 835,567
----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services sold 189,979 167,947 368,683 323,242
Cost of products sold 157,571 165,226 333,367 328,691
Selling, general, and administrative expenses 56,265 51,022 110,059 103,817
Research and development expenses 1,441 1,478 3,088 3,128
Other expense (income) (650) 1,309 (276) 2,721
----------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 404,606 386,982 814,921 761,599
----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 52,668 43,843 91,691 73,968
Equity in income (loss) of affiliates, net (1) (588) 610 (438) 960
Interest income 1,262 1,147 2,450 2,236
Interest expense (8,727) (6,865) (16,217) (13,078)
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 44,615 38,735 77,486 64,086
Provision for income taxes 15,615 13,818 27,120 23,071
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 29,000 24,917 50,366 41,015
Minority interest in net income 769 1,094 1,933 2,393
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 28,231 $ 23,823 $ 48,433 $ 38,622
============================================================================================================================
Average shares of common stock outstanding 39,964 41,125 39,989 41,376
----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ .71 $ .58 $ 1.21 $ .93
============================================================================================================================
Diluted average shares of common shares outstanding 40,048 41,308 40,067 41,525
----------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ .70 $ .58 $ 1.21 $ .93
============================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ .235 $ .225 $ .47 $ .45
</TABLE>
(1) Equity in income (loss) of affiliates is now separately reported.
Previously, these amounts were included in operating income as other
revenues. Amounts previously reported as operating income for the three
months and six months ended June 30, 1999 were $44,453 and $74,928,
respectively.
See accompanying notes to consolidated financial statements.
F-42
<PAGE> 88
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30 December 31
(IN THOUSANDS) 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,182 $ 51,266
Receivables, less allowance for doubtful accounts of $26,027 in
2000 and $13,339 in 1999 435,609 331,123
Inventories 231,052 172,198
Other current assets 63,056 58,368
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 797,899 612,955
---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost 1,744,625 1,499,823
Allowance for depreciation 854,873 828,277
---------------------------------------------------------------------------------------------------------------------
889,752 671,546
Cost in excess of net assets of businesses acquired, net 339,400 258,698
Other assets 203,983 116,624
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,231,034 $1,659,823
=====================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Notes payable and current maturities $ 260,016 $ 36,607
Accounts payable 229,863 132,394
Accrued compensation 42,810 46,615
Income taxes 48,090 44,154
Other current liabilities 183,498 170,746
---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 764,277 430,516
---------------------------------------------------------------------------------------------------------------------
Long-term debt 600,071 418,504
Deferred income taxes 91,113 52,932
Other liabilities 117,625 107,750
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,573,086 1,009,702
---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 171,899 170,878
Accumulated other comprehensive income (expense) (99,483) (80,538)
Retained earnings 1,185,234 1,155,586
Treasury stock (599,702) (595,805)
---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 657,948 650,121
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,231,034 $1,659,823
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 89
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
(IN THOUSANDS) 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 48,433 $ 38,622
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 64,651 59,501
Amortization 6,753 6,448
Equity in (income) loss of affiliates, net 438 (960)
Dividends or distributions from affiliates 587 766
Deferred income taxes 9,194 1,588
Other, net (551) 509
Changes in assets and liabilities, net of acquisitions and
dispositions of businesses:
Accounts receivable 4,968 (22,200)
Inventories (18,332) 2,005
Accounts payable (4,976) (10,150)
Disbursements related to discontinued defense business (617) (13,249)
Other assets and liabilities (18,869) (13,786)
-------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 91,679 49,094
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (78,046) (73,837)
Purchase of business, net of cash acquired (263,711) (2,378)
Proceeds from sale of business 9,745 8,502
Other investing activities 2,503 3,607
-------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (329,509) (64,106)
-------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 268,561 (11,530)
Current maturities and long-term debt:
Additions 59,971 121,956
Reductions (46,212) (21,757)
Cash dividends paid on common stock (18,808) (18,752)
Common stock issued-options 853 1,296
Common stock acquired for treasury (3,768) (42,831)
Other financing activities (3,114) (1,767)
-------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 257,483 26,615
-------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (2,737) (980)
-------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 16,916 10,623
Cash and cash equivalents at beginning of period 51,266 41,562
-------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,182 $ 52,185
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 90
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN THOUSANDS) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 28,231 $23,823 $ 48,433 $38,622
Other comprehensive income (expense):
Foreign currency translation adjustments (11,318) (5,517) (18,945) (29,062)
----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 16,913 $18,306 $ 29,488 $ 9,560
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 91
REVIEW OF OPERATIONS BY SEGMENT
(Unaudited)
<TABLE>
<CAPTION>
HARSCO
HARSCO GAS AND HARSCO
MILL FLUID INFRA- S3NETWORKS GENERAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 2000 SERVICES CONTROL STRUCTURE LLC CORPORATE TOTALS
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
NET SALES TO UNAFFILIATED CUSTOMERS $195.2 $125.4 $136.4 $ -- $ -- $457.0
------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 27.2 $ 10.7 $ 14.5 $ -- $ 0.3 $ 52.7
EQUITY IN INCOME (LOSS) OF
AFFILIATES, NET 0.3 -- -- (0.9) -- (0.6)
INTEREST INCOME 1.0 -- 0.2 -- -- 1.2
INTEREST EXPENSE (2.3) (1.0) (2.3) -- (3.1) (8.7)
INCOME TAX (EXPENSE) BENEFIT (8.7) (3.5) (4.5) 0.3 0.8 (15.6)
MINORITY INTEREST IN NET INCOME (0.7) -- (0.1) -- -- (0.8)
------------------------------------------------------------------------------------------------------------------------------
SEGMENT NET INCOME (LOSS) $ 16.8 $ 6.2 $ 7.8 $(0.6) $(2.0) $ 28.2
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HARSCO
HARSCO GAS AND HARSCO
MILL FLUID INFRA- S3NETWORKS GENERAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 1999 SERVICES CONTROL STRUCTURE LLC CORPORATE TOTALS
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers $182.3 $139.1 $109.3 $-- $ -- $430.7
------------------------------------------------------------------------------------------------------------------------------
Operating income $ 19.0 $ 10.5 $ 13.8 $-- $0.5 $ 43.8
Equity in income of affiliates, net(1) 0.6 -- -- -- -- 0.6
Interest income 1.1 0.1 -- -- -- 1.2
Interest expense (2.9) (1.3) (1.6) -- (1.1) (6.9)
Income tax (expense) benefit (5.6) (3.8) (4.5) -- 0.1 (13.8)
Minority interest in net income (1.1) -- -- -- -- (1.1)
------------------------------------------------------------------------------------------------------------------------------
Segment net income (loss) $ 11.1 $ 5.5 $ 7.7 $-- $(0.5) $ 23.8
==============================================================================================================================
</TABLE>
(1) Equity in income (loss) of affiliates is now separately reported.
Previously, these amounts were included in operating income. Amounts
previously reported as operating income for the three months ended June
30, 1999 were $19.6 million for Harsco Mill Services Segment and a
consolidated total of $44.4 million. Reported operating income amounts for
the other segments are unchanged.
F-46
<PAGE> 92
REVIEW OF OPERATIONS BY SEGMENT
(Unaudited)
<TABLE>
<CAPTION>
HARSCO
HARSCO GAS AND HARSCO
MILL FLUID INFRA- S3NETWORKS GENERAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2000 SERVICES CONTROL STRUCTURE LLC CORPORATE TOTALS
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------
NET SALES TO UNAFFILIATED CUSTOMERS $386.8 $260.8 $258.6 $ -- $ -- $906.2
----------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) $ 47.0 $ 21.8 $ 23.3 $ -- $(0.5) $ 91.6
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET 0.5 -- -- (0.9) -- (0.4)
INTEREST INCOME 2.1 0.1 0.2 -- -- 2.4
INTEREST EXPENSE (4.4) (2.0) (4.1) -- (5.7) (16.2)
INCOME TAX (EXPENSE) BENEFIT (15.4) (7.3) (6.9) 0.3 2.2 (27.1)
MINORITY INTEREST IN NET INCOME (1.8) -- (0.1) -- -- (1.9)
----------------------------------------------------------------------------------------------------------------------------
SEGMENT NET INCOME (LOSS) $ 28.0 $ 12.6 $ 12.4 $(0.6) $(4.0) $ 48.4
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HARSCO
HARSCO GAS AND HARSCO
MILL FLUID INFRA- S3NETWORKS GENERAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 1999 SERVICES CONTROL STRUCTURE LLC CORPORATE TOTALS
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers $355.4 $273.2 $206.7 $ -- $ -- $835.3
-----------------------------------------------------------------------------------------------------------------------------
Operating income $ 35.1 $ 18.5 $ 20.1 $ -- $ 0.2 $ 73.9
Equity in income of affiliates, net (1) 1.0 -- -- -- -- 1.0
Interest income 2.0 0.1 0.1 -- 0.1 2.3
Interest expense (5.7) (2.7) (3.0) -- (1.7) (13.1)
Income tax (expense) benefit (10.3) (6.0) (6.3) -- (0.5) (23.1)
Minority interest in net income (2.5) 0.1 -- -- -- (2.4)
-----------------------------------------------------------------------------------------------------------------------------
Segment net income (loss) $ 19.6 $ 10.0 $ 10.9 $ -- $(1.9) $ 38.6
=============================================================================================================================
</TABLE>
(1) Equity in income (loss) of affiliates is now separately reported.
Previously, these amounts were included in operating income. Amounts
previously reported as operating income for the six months ended June 30,
1999 were $36.1 million for Harsco Mill Services Segment and a consolidated
total of $74.9 million. Reported operating income amounts for the other
segments are unchanged.
F-47
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30 December 31
(in thousands) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 91,057 $ 37,715
Work-in-process 40,270 37,198
Raw materials and purchased parts 79,511 76,911
Stores and supplies 20,214 20,374
--------------------------------------------------------------------------------------
$231,052 $172,198
======================================================================================
</TABLE>
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
September 27, 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 $10.4 million and
applicable interest currently estimated to be $49.5 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
F-48
<PAGE> 94
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $44.8 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 $10.4 million and $49.5 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 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.
F-49
<PAGE> 95
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 December 22,
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. In June 2000,
the US District Court gave final approval to the settlement. In accordance with
the settlement, Harsco paid the Government a $200,000 fine in June 2000 and in
July 2000 paid the $10.8 million in damages for a total of $11 million.
The settlement ends the Government's investigation and releases Harsco and BMY
from further liability for the issues under investigation. Harsco charged the
payment against an existing reserve, resulting in no charge to the Company's
earnings.
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 June 30, 2000, and December 31, 1999 includes an
accrual of $4.7 million and $3.0 million, respectively, for environmental
matters. The increase from December 31, 1999 principally relates to
environmental liabilities of acquired companies. The amounts affecting pre-tax
earnings related to environmental matters totaled $1.2 million of expense for
the first six months of 2000, and $0.4 million of income for the first six
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.
F-50
<PAGE> 96
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 recognized in income based on fair market value.
As of June 30, 2000, the total of all forward exchange contracts amounted to
$5.0 million with an unfavorable mark-to-market fluctuation of $56,000.
F-51
<PAGE> 97
Reconciliation of Basic and Diluted Shares
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(In thousands, except amounts per share) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $28,231 $23,823 $48,433 $ 38,622
======= ======= ======= ========
Average shares of common stock
outstanding used to compute basic
earnings per common share 39,964 41,125 39,989 41,376
Additional common shares to be
issued assuming exercise of
stock options, net of shares
assumed reacquired 84 183 78 149
------- ------- ------- --------
Shares used to compute dilutive
effect of stock options 40,048 41,308 40,067 41,525
======= ======= ======= ========
Basic earnings per common share $ .71 $ .58 $ 1.21 $ .93
======= ======= ======= ========
Diluted earnings per common share $ .70 $ .58 $ 1.21 $ .93
======= ======= ======= ========
</TABLE>
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 date effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 was further amended by SFAS No. 138. 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 by
the first quarter of 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.
New Staff Accounting Bulletin Issued
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the Commission. In June 2000, the SEC issued SAB
No. 101B, "Second Amendment: Revenue Recognition in Financial Statements". SAB
101B delays the implementation of SAB 101 until no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. Based on a review of
the Company's policies and practices and current interpretations of SAB 101, the
Company believes it is in general compliance with SAB 101.
Acquisitions
F-52
<PAGE> 98
In June 2000, the Company made its tender offer for SGB Group PLC (SGB)
unconditional and by June 30 had received acceptances for 94.8 percent of the
shares of SGB. The Company plans to compulsorily acquire the remaining shares in
the third quarter of 2000. SGB, based in the UK, is one of Europe's largest
suppliers of scaffolding, forming and related access products and services. SGB
also has operations in North America, the Middle East and the Asia Pacific
region. SGB had 1999 sales of pound sterling283 million (approximately $426
million U.S. dollars). Through June 30, 2000 the Company had borrowed $255.1
million to finance the acquisition. Approximately $32 million of additional
funds will be borrowed in the third quarter to complete the purchase of SGB's
outstanding stock.
The acquisition of SGB has been accounted for using the purchase method of
accounting and accordingly, the operating results of SGB have been included in
the consolidated results of the Company from June 16, 2000, the date of
acquisition. The purchase price allocation is based upon preliminary appraisal
values and management estimates and is subject to reclassifications and
adjustments in the future. The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
(In millions)
--------------------------------------------------------------------------------------------------------
<S> <C>
Working capital, other than cash $(54.4)
Property, plant and equipment 221.0
Other assets 64.2
Goodwill 85.0
Noncurrent liabilities (58.8)
--------------------------------------------------------------------------------------------------------
Purchase price, net of cash received $257.0
</TABLE>
Harsco management is in the process of finalizing fair value adjustments, asset
write downs, and its plan to exit certain activities of SGB. Estimates of the
associated costs have been included in the opening balance sheet. Management
expects to finalize the plan and the associated estimates by September 30, 2000.
In May 2000, the Company completed the acquisitions of Bergslagen Steelservice
AB and Bergslagen Suomi Oy (collectively Bergslagen). The two companies provide
specialized slag processing and metal recovery services to steel mills in Sweden
and Finland, respectively. The two organizations together recorded 1999 sales of
nearly $10 million.
In April 2000, the company agreed to invest $20 million for a 49 percent
ownership interest in S3Networks, LLC, a start-up company providing internet and
e-business infrastructure consulting services primarily to Fortune 1000
corporations. Cash of $8 million has been invested through June 30, 2000 with an
additional $12 million to be paid over a period not to exceed fifteen months
from the initial investment date. The investment is being 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.
F-53
<PAGE> 99
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.
F-54
<PAGE> 100
REGISTERED PRINCIPAL
OFFICE OF THE ISSUER OFFICE OF THE GUARANTOR
Harsco Finance B.V. Harsco Corporation
Wenckebachstraat 1 350 Poplar Church Road
1951 JZ Velsen-Noord P.O. Box 8888
Postbus 83 Camp Hill, PA 17001-8888
1970 AB Ijmuiden
The Netherlands
TRUSTEE
Chase Manhattan Trustees Limited
Trinity Tower
9 Thomas More Street
London E1W 1YT
PRINCIPAL PAYING AGENT
The Chase Manhattan Bank
Trinity Tower
9 Thomas More Street
London E1W 1YT
PAYING AGENT
Chase Manhattan Bank Luxembourg S.A.
5 rue Plaetis
L-2338 Luxembourg
LEGAL ADVISERS
To the Guarantor as to To the Issuer as to
New York law: Netherlands law:
Kirkpatrick & Lockhart LLP Boekel de Neree
1251 Avenue Of The Americas Atrium Building
45th Floor 2nd Floor
New York, New York 10020 Strawinskylaan 3037
1077 ZX Amsterdam
The Netherlands
To the Managers and the Trustee as to
English law:
Clifford Chance
Limited Liability Partnership
200 Aldersgate Street
London EC1A 4JJ
AUDITORS TO THE ISSUER LISTING AGENT
AND THE GUARANTOR
Kredietbank S.A. Luxembourgeoise
PricewaterhouseCoopers LLP 43, boulevard Royal
2400 Eleven Penn Center L-2955 Luxembourg
Philadelphia, PA 19103-2962
