-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cr1te/W8DmHNR9cdUk/5/f/N8N7e03heFnQdGpef2U5pBZsxgbtPl6qRxb2+Tw3Z MfiBDiJpxgJ5k1v8sP4aeA== 0000950152-99-004612.txt : 19990518 0000950152-99-004612.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950152-99-004612 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990325 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRW INC CENTRAL INDEX KEY: 0000100030 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340575430 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-02384 FILM NUMBER: 99626864 BUSINESS ADDRESS: STREET 1: 1900 RICHMOND RD CITY: LYNDHURST STATE: OH ZIP: 44124 BUSINESS PHONE: 2162917000 MAIL ADDRESS: STREET 1: 1900 RICHMOND ROAD CITY: LYNDHURST STATE: OH ZIP: 44124 8-K/A 1 TRW INC. FORM 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): March 25, 1999 ---------------- TRW Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 1-2384 34-0575430 - ---------------- ------------------------ ---------------------- (State or other (Commission File Number) (I.R.S. Employer jurisdiction of Identification Number) incorporation) 1900 Richmond Road, Cleveland, Ohio 44124 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 291-7000 N/A - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 The Registrant hereby amends and supplements the following items of its Current Report on Form 8-K, dated March 26, 1999 (the "Form 8-K"). Unless otherwise defined herein, all capitalized terms used herein shall have the respective meanings given such terms in the Form 8-K. Except as provided herein, there have been no other changes in the information previously reported in the Form 8-K. Item 2. Acquisition and Disposition of Assets. Item 2 is amended by adding the following paragraph at the conclusion thereof: On May 11, 1999, TRW Inc. announced that it had completed the acquisition of LucasVarity plc. The Offer expired at midnight (London time), 7:00 p.m. (New York City time) on May 7, 1999, and the compulsory acquisition period prescribed by Section 429 of the Companies Act of 1985 expired at midnight (London time), 7:00 p.m. (New York City time) on May 10, 1999. As a result, immediately after that time TRW Automotive UK acquired all of the LucasVarity Shares that had not been acquired pursuant to the Offer (including LucasVarity Shares underlying the LucasVarity ADSs that had not been acquired pursuant to the Offer). On May 11, 1999, LucasVarity plc was reregistered as a private company and the LucasVarity ADSs were delisted from the New York Stock Exchange. The LucasVarity Shares were delisted from the London Stock Exchange on May 12th. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. Items 7(a) and (b) are amended in their entirety as follows: (a) Financial Statements of LucasVarity plc. The audited (i) Consolidated Statements of Income, Statements of Total Recognised Gains and Losses, Consolidated Statements of Cash Flows and Consolidated Statements of Changes in Shareholders' Equity, each for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996 and (ii) Consolidated Balance Sheets at January 31, 1999 and January 31, 1998 are attached hereto as Exhibit 99.2. (b) Pro Forma Financial Information. The unaudited Pro Forma Statements of Operations for the year ended December 31, 1998 and for the quarter ended March 31, 1999 and the unaudited Balance Sheet as of March 31, 1999 are attached hereto as Exhibit 99.3. 2 3 Item 7(c) is amended by adding the following as exhibits to the Form 8-K: (c) Exhibits. 23.1 Consent of Ernst & Young 23.2 Consent of KPMG Audit Plc 23.3 Consents of Ernst & Young and KPMG Audit Plc 99.2 Audited consolidated financial statements of LucasVarity plc as follows: (i) Consolidated Statements of Income for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996; (ii) Statements of Total Recognised Gains and Losses for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996; (iii) Consolidated Balance Sheets at January 31, 1999 and January 31, 1998; (iv) Consolidated Statements of Cash Flows for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996; and (v) Consolidated Statements of Changes in Shareholders' Equity for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996. 99.3 Unaudited pro forma financial information as follows: (i) Unaudited Pro Forma Statement of Operations for the year ended December 31, 1998; (ii) Unaudited Pro Forma Statement of Operations for the quarter ended March 31, 1999; and (iii) Unaudited Balance Sheet as of March 31, 1999. 3 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TRW INC. Date: May 17, 1999 By /s/ William B. Lawrence ------------------------------- William B. Lawrence Executive Vice President, General Counsel and Secretary 4 5 EXHIBIT INDEX Exhibit Page Number Description of Exhibits Number - ------ ----------------------- ------ 23.1 Consent of Ernst & Young A-1 23.2 Consent of KPMG Audit Plc B-1 23.3 Consents of Ernst & Young and KPMG Audit Plc B-2 99.2 Audited consolidated financial statements of LucasVarity plc as follows: (i) Consolidated Statements of Income for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996 C-5 (ii) Statements of Total Recognised Gains and Losses for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996 C-6 (iii) Consolidated Balance Sheets at January 31, 1999 and January 31, 1998 C-7 (iv) Consolidated Statements of Cash Flows for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996 C-8 (v) Consolidated Statements of Changes in Shareholders' Equity for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996 C-9 99.3 Unaudited pro forma financial information as follows: (i) Unaudited Pro Forma Statement of Operations for the year ended December 31, 1998 D-2 (ii) Unaudited Pro Forma Statement of Operations for the quarter ended March 31, 1999 D-3 (iii) Unaudited Balance Sheet as of March 31, 1999 D-7 5 EX-23.1 2 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Form S-3: Nos. 333-48443, 333-43931, 33-61711 and 33-42870 and Form S-8: Nos. 333-27003, 333-27001, 333-20351, 333-06633, 333-03973, 33-53503, 33-29751, 2-90748 and 2-64035) of TRW Inc., of our report dated October 8, 1996, except for Note 2 - Accounting Policies, Prior period financial information, as to which the date is May 14, 1999, with respect to the consolidated financial statements and schedule of LucasVarity plc for the year ended July 31, 1996, included in the current report on Form 8-K/A of TRW Inc. dated May 17, 1999. /s/ Ernst & Young Ernst & Young London, England May 14, 1999 A-1 EX-23.2 3 EXHIBIT 23.2 1 Exhibit 23.2 The Board of Directors LucasVarity plc 44-46 Park Street London W14 4DJ 14 May 1999 We consent to the incorporation by reference in the registration statement No. 333-48443 on Form S-3, 333-43931 on Form S-3, 33-61711 on Form S-3, 33-42870 on Form S-3, 333-27003 on Form S-8, 333-27001 on Form S-8, 333-20351 on Form S-8, 333-06633 on Form S-8, 333-03973 on Form S-8, 33-53503 on Form S-8, 33-29751 on Form S-8, 2-90748 on Form S-8 and 2-64035 on Form S-8 of TRW Inc. of our report dated 24 March 1999, with respect to the consolidated balance sheets of LucasVarity and subsidiaries as of January 31, 1999 and 1998, and related consolidated statements of income, total recognised gains and losses, changes in shareholders' equity and cash flows for each of the years in the two year period ended January 31, 1999, which report appears in the Form 8-K/A of TRW Inc. dated May 17, 1999. Yours faithfully /s/ KPMG Audit Plc KPMG Audit Plc B-1 EX-23.3 4 EXHIBIT 23.3 1 Exhibit 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Form S-3: Nos. 333-48443, 333-43931, 33-61711 and 33-42870 and Form S-8: Nos. 333-27003, 333-27001, 333-20351, 333-06633, 333-03973, 33-53503, 33-29751, 2-90748 and 2-64035) of TRW Inc., of our report dated April 15, 1997, except for Note 2 - Accounting Policies, Prior period financial information, as to which the date is May 14, 1999, with respect to the consolidated financial statements and schedule of LucasVarity plc for the six months ended January 31, 1997, included in the Current Report on Form 8-K/A of TRW Inc. dated May 17, 1999. /s/ Ernst & Young /s/ KPMG Audit Plc Ernst & Young KPMG Audit Plc Chartered Accountants Registered Auditor London, England May 14, 1999 B-2 EX-99.2 5 EXHIBIT 99.2 1 Exhibit 99.2 FINANCIAL STATEMENTS LUCASVARITY plc The following consolidated financial statements, together with the report of KPMG Audit Plc, chartered accountants, independent auditor, on the consolidated financial statements for the years ended January 31, 1999 and January 31, 1998, and the reports of Ernst & Young and KPMG Audit Plc, independent auditors, on the consolidated financial statements at January 31, 1997 and for the six months then ended and the report of Ernst & Young, independent auditors, on the consolidated financial statements for the year ended July 31, 1996, are filed as part of this report: Page ---- Reports of Independent Auditors........................................ C-2 Consolidated Statements of Income for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996............................................... C-5 Statements of Total Recognised Gains and Losses for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996.................................. C-6 Consolidated Balance Sheets at January 31, 1999 and January 31, 1998... C-7 Consolidated Statements of Cash Flows for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996.......................................... C-8 Consolidated Statements of Changes in Shareholders' Equity for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996................. C-9 Notes to the Financial Statements...................................... C-12 Schedule for the years ended January 31, 1999 and 1998, the six months ended January 31, 1997 and the year ended July 31, 1996 Schedule II - Valuation and Qualifying Accounts........................ C-82 C-1 2 LUCASVARITY PLC AND SUBSIDIARY COMPANIES REPORT OF THE INDEPENDENT AUDITOR To THE BOARD OF DIRECTORS LucasVarity plc We have audited the accompanying consolidated balance sheets of LucasVarity plc as of January 31, 1999 and 1998, and the related consolidated statements of income, total recognised gains and losses, changes in shareholders' equity and cash flows for the years then ended. Our audit also included the financial statement schedule listed in the Index to Exhibit 99.2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audits in accordance with United Kingdom auditing standards which are substantially equivalent to United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LucasVarity plc at January 31, 1999 and 1998, and the consolidated results of its operations and its consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United Kingdom which differ in certain significant respects from those followed in the United States (see Note 31 of Notes to the Financial Statements). Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Audit Plc Chartered Accountants Registered Auditor London, England May 14, 1999 C-2 3 LUCASVARITY PLC AND SUBSIDIARY COMPANIES REPORT OF INDEPENDENT AUDITORS To THE BOARD OF DIRECTORS LucasVarity plc We have audited the accompanying consolidated statements of income, total recognised gains and losses, changes in shareholders' equity and cash flows of LucasVarity plc for the six months ended January 31, 1997. Our audit also included the financial statement schedule listed in the Index to Exhibit 99.2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with United Kingdom auditing standards which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and consolidated cash flows of LucasVarity plc for the six months ended January 31, 1997 in conformity with accounting principles generally accepted in the United Kingdom which differ in certain respects from those followed in the United States (see Note 31 of Notes to the Financial Statements). Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG KPMG Audit Plc Chartered Accountants Registered Auditor London, England April 15, 1997, except for Note 2-Accounting Policies, Prior period financial information, as to which the date is May 14, 1999. C-3 4 LUCASVARITY PLC AND SUBSIDIARY COMPANIES REPORT OF INDEPENDENT AUDITOR To THE BOARD OF DIRECTORS LucasVarity plc We have audited the accompanying consolidated statements of income, total recognised gains and losses, changes in shareholders' equity and cash flows of LucasVarity plc for the year ended July 31, 1996. Our audit also included the financial statement schedule listed in the Index to Exhibit 99.2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with United Kingdom auditing standards which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurances about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and consolidated cash flows of LucasVarity plc for the year ended July 31, 1996 in conformity with accounting principles generally accepted in the United Kingdom which differ in certain respects from those followed in the United States (see Note 31 of Notes to the Financial Statements). Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG Birmingham, England October 8, 1996, except for Note 2-Accounting Policies, Prior period financial information, as to which the date is May 14, 1999. C-4 5 LUCASVARITY PLC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JANUARY 31, 1999 -------------------------------- SIX MONTHS BEFORE YEAR ENDED ENDED YEAR ENDED EXCEPTIONAL EXCEPTIONAL JANUARY 31 JANUARY 31 JULY 31 ITEMS ITEMS TOTAL 1998 1997 1996 ----------- ----------- ------- ------------- ---------- ----------- ((POUND) MILLION) SALES Continuing operations .......................... 4,270 -- 4,270 4,018 1,841 2,989 Discontinued operations ........................ 42 -- 42 663 309 -- ----- --- ----- ----- ------ ----- Total sales-- (Note 3) ......................... 4,312 -- 4,312 4,681 2,150 2,989 ----- --- ----- ----- ------ ----- Costs and overheads less other income -- (Note 4) ................................. (3,941) (27) (3,968) (4,300) (2,031) (2,762) Restructuring charge--(Note 5) ................. -- -- -- -- (250) -- Profit on disposal of current asset investment--(Note 5) ......................... -- -- -- 13 -- -- ----- --- ----- ----- ------ ----- (3,941) (27) (3,968) (4,287) (2,281) (2,762) ----- --- ----- ----- ------ ----- Surplus/(deficit) on trading ................... 371 (27) 344 394 (131) 227 Share of profits less losses of associated undertakings ................................. 4 -- 4 7 3 6 ----- --- ----- ----- ------ ----- OPERATING PROFIT Continuing operations .......................... 377 (27) 350 342 (148) 233 Discontinued operations ........................ (2) -- (2) 59 20 -- ----- --- ----- ----- ------ ----- Total operating profit/(loss)--(Note 3) ........ 375 (27) 348 401 (128) 233 Profit/(loss) on sales and closures of businesses ................................... -- 224 224 (25) -- (12) (Loss)/profit on disposals of fixed assets ..... -- (2) (2) (1) (4) 1 ----- --- ----- ----- ------ ----- Income/(loss) before interest .................. 375 195 570 375 (132) 222 Interest payable less receivable-- (Note 6)..... (30) (7) (37) (59) (25) (42) ----- --- ----- ----- ------ ----- Income/(loss) before taxation .................. 345 188 533 316 (157) 180 Taxation--(Note 7) ............................. (105) (154) (259) (96) (41) (63) ----- --- ----- ----- ------ ----- Income/(loss) after taxation ................... 240 34 274 220 (198) 117 Minority interests ............................. (13) -- (13) (11) (4) (11) ----- --- ----- ----- ------ ----- Net income/(loss)(i) ........................... 227 34 261 209 (202) 106 Dividends--(Note 8) ............................ (35) (63) (32) (62) ----- ----- ------ ----- Amount transferred to/(from) retained earnings ..................................... 226 146 (234) 44 ----- ----- ------ ----- Earnings per share--(Note 9) ................... 18.5p 14.7p (15.2)p 12.1p Earnings per share before exceptional items--(Note 9) .............................. 16.1p 16.0p 3.9p 13.4p Diluted earnings per share-- (Note 9) .......... 18.3p 14.6p (15.2)p 11.9p ===== ===== ====== =====
- ----------- (i) A summary of the significant adjustments to net income/(loss) that would be required if United States generally accepted accounting principles had been applied instead of those generally accepted in the United Kingdom is set forth in Note 31 of the Notes to the Financial Statements. The Notes to the Financial Statements are an integral part of these financial statements. C-5 6 LUCASVARITY PLC AND SUBSIDIARY COMPANIES STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
SIX MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED JANUARY 31 JANUARY 31 JANUARY 31 JULY 31 1999 1998 1997 1996 ---------- ---------- ----------- ---------- ((POUND) MILLION) Net income/(loss) ................................................... 261 209 (202) 106 Unrealised surplus on revaluation of properties ..................... -- -- 1 4 Currency translation differences on foreign currency net investments 11 (55) (49) (19) --- --- ---- -- Total gains and losses recognised in the period ................... 272 154 (250) 91 === === ==== ==
The Notes to the Financial Statements are an integral part of these financial statements. C-6 7 LUCASVARITY PLC AND SUBSIDARY COMPANIES CONSOLIDATED BALANCE SHEETS
JANUARY 31 JANUARY 31 1999 1998 ---------- ---------- ((POUND) MILLION) ASSETS CURRENT ASSETS Cash--(Note 16)............................................................ 646 155 Receivables--(Note 10)..................................................... 790 869 Inventories--(Note 11)..................................................... 393 489 ----- ----- Total current assets..................................................... 1,829 1,513 ----- ----- FIXED ASSETS Tangible assets--(Note 12)................................................. 1,227 1,362 Intangible assets--(Note 13)............................................... 43 27 Investments--(Note 14)..................................................... 35 47 ----- ----- Total fixed assets....................................................... 1,305 1,436 ----- ----- TOTAL ASSETS........................................................ 3,134 2,949 ===== ===== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities--(Note 15)........................ 961 1,097 Borrowings--(Note 16)...................................................... 75 414 ----- ----- Total current liabilities................................................ 1,036 1,511 NONCURRENT LIABILITIES Borrowings--(Note 16)...................................................... 326 315 Accruals and deferred income............................................... 37 52 ----- ----- Total noncurrent liabilities............................................. 363 367 PROVISIONS FOR LIABILITIES AND CHARGES--(Note 17).......................... 487 545 MINORITY INTERESTS--(Note 18).............................................. 63 68 ----- ----- TOTAL LIABILITIES AND MINORITY INTERESTS............................... 1,949 2,491 CONTINGENT LIABILITIES AND COMMITMENTS-- (Note 25) SHAREHOLDERS' EQUITY* Share capital.............................................................. 351 351 Share premium.............................................................. 5 4 Capital redemption reserve................................................. 14 11 Merger reserve............................................................. 693 178 Revaluation reserves....................................................... 98 112 Retained earnings.......................................................... 22 (203) Associated undertakings' and joint ventures' reserves...................... 2 5 ----- ----- Total shareholders' equity............................................... 1,185 458 ----- ----- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... 3,134 2,949 ===== =====
- ----------- * A summary of the significant adjustments to shareholders' equity that would be required if United States generally accepted accounting principles had been applied instead of those generally accepted in the United Kingdom is set forth in Note 31 of the Notes to the Financial Statements. The Notes to the Financial Statements are an integral part of these financial statements. C-7 8 LUCASVARITY PLC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED YEAR ENDED ENDED YEAR ENDED JANUARY 31 JANUARY 31 JANUARY 31 JULY 31 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ((POUND) MILLION) NET CASH INFLOW FROM OPERATING ACTIVITIES--(Note 23 (i))... 391 451 101 180 --- --- --- --- Dividends received from associated undertakings............ 4 1 1 1 --- --- --- --- Interest received.......................................... 20 5 6 16 Interest paid.............................................. (47) (56) (26) (49) Interest element of finance lease payments................. (6) (8) (4) (7) Dividends paid to minority shareholders.................... (5) (2) -- (2) --- --- --- --- RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............ (38) (61) (24) (42) --- --- --- --- UK corporation tax paid.................................... (3) (12) (16) (15) Overseas tax paid.......................................... (80) (47) (21) (52) --- --- --- --- TAXATION................................................... (83) (59) (37) (67) --- --- --- --- Purchase of tangible fixed assets.......................... (274) (285) (138) (131) Disposal of tangible fixed assets.......................... 19 35 24 26 Investment in intangible fixed assets...................... (11) (15) -- -- --- --- --- --- CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT............... (266) (265) (114) (105) --- --- --- --- Purchase of subsidiary undertakings--(Note 28)............. (39) (60) (40) (12) Sales and closures of businesses--(Note 29)................ 915 62 -- -- Investment in associated undertakings...................... -- (12) (1) (10) Disposal of associated undertakings........................ 2 3 -- -- --- --- --- --- ACQUISITIONS AND DISPOSALS................................. 878 (7) (41) (22) --- --- --- --- EQUITY DIVIDENDS........................................... (66) (64) (38) (58) --- --- --- --- NET CASH INFLOW/(OUTFLOW) BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING.................................. 820 (4) (152) (113) --- --- --- --- Proceeds from sale of current asset investment............. -- 29 -- -- (Increase)/decrease in short-term deposits................. (438) 18 24 95 --- --- --- --- MANAGEMENT OF LIQUID RESOURCES............................. (438) 47 24 95 --- --- --- --- Issue of Ordinary Share Capital............................ 24 14 4 7 Repurchase of shares....................................... (29) (85) -- -- Increase in preference shares.............................. 35 -- -- -- (Decrease)/increase in bank loans.......................... (316) 33 101 66 Decrease in U.S. dollar Loan Notes......................... (18) -- (9) -- Capital element of finance lease rental payments........... (14) (22) (11) (14) --- --- --- --- FINANCING.................................................. (318) (60) 85 59 --- --- --- --- INCREASE/(DECREASE) IN CASH--(Note 23 (ii))................ 64 (17) (43) 41 === === === ===
- ----------- The significant differences between the cash flow presented above and those required under United States generally accepted accounting principles are set forth in Note 31 of Notes to the Financial Statements. The Notes to the Financial Statements are an integral part of these financial statements. C-8 9 LUCASVARITY PLC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SHARE CAPITAL ------------------------------------------------------------------------ FIRST FIRST PREFERENCE ORDINARY PREFERENCE ORDINARY SHARES OF SHARES OF SHARES OF SHARES OF (POUND)1 EACH 25P EACH (POUND)1 EACH 25P EACH TOTAL -------------- --------------- ----------------- ------------ ---------- (NUMBER) ((POUND) MILLIONS) AUTHORISED: LUCAS INDUSTRIES August 1, 1995 and July 31, 1996................... 247,500 1,039,010,000 0.2 260 260 ======= ============= === === === LUCASVARITY On incorporation May 30, 1996...................... 200,000 -- -- Increase........................................... 1,999,800,000 500 500 ------------- --- --- January 31, 1997 and 1998.......................... 2,000,000,000 500 500 ============= === === ISSUED: LUCAS INDUSTRIES AUGUST 1, 1995..................................... 247,500 874,596,996 0.2 219 219 Exercise of options................................ 6,763,483 2 2 Scrip dividends in lieu of cash dividends (i)...... 1,600,789 -- -- Conversion of bonds (ii)........................... 547,143 -- -- ------- ----------- --- --- --- JULY 31, 1996...................................... 247,500 883,508,411 0.2 221 221 Exercise of options................................ 59,240 Scrip dividends in lieu of cash dividends (i)...... 2,237,491 1 1 LucasVarity Ordinary Shares issued on incorporation.................................... 2 -- -- Elimination of Lucas Industries share capital on Scheme of Arrangement with LucasVarity........... (885,805,142) (222) (222) Transfer of preference shares to minority interest. (247,500) (0.2) -- LUCASVARITY LucasVarity Ordinary Shares issued for Lucas Industries Ordinary Shares (iii).......... 885,805,140 222 222 LucasVarity Ordinary Shares issued on acquisition of Varity (iv)................................... 545,791,490 136 136 Exercise of options................................ 2,774,368 1 1 ------- ----------- --- --- --- JANUARY 31, 1997................................... -- 1,434,371,000 -- 359 359 Exercise of options................................ 13,967,535 3 3 Repurchase of shares............................... (43,000,000) (11) (11) ------- ----------- --- --- --- JANUARY 31, 1998................................... -- 1,405,338,535 -- 351 351 Exercise of options................................ 13,502,415 3 3 Repurchase of shares............................... (14,594,971) (3) (3) ------- ----------- --- --- --- JANUARY 31, 1999................................... -- 1,404,245,979 -- 351 351 ======= ============= === === ===
- ---------- (i) Prior to the Merger, a scrip dividend alternative was offered to shareholders each year. (ii) At August 1, 1995, $1 million 5 1/4% Convertible Bonds 2002 were outstanding all of which were converted or redeemed by October 16, 1995. The bondholders had the right to convert at any time before 2002 at a rate of 415.9 Lucas Industries Ordinary Shares per Bond of $1,000 unless previously redeemed. (iii) In connection with the Scheme of Arrangement, each issued and outstanding Lucas Industries Ordinary Share was cancelled and one LucasVarity Ordinary Share was received for each Lucas Industries Ordinary Share. (iv) Pursuant to the Merger, each outstanding share of common stock, par value $.01 per share, of Varity (a "Varity Share") was converted into the right to receive 1.38 LucasVarity American Depositary Shares ("LucasVarity ADSs"), with each LucasVarity ADS representing 10 LucasVarity Ordinary Shares. The Notes to the Financial Statements are an integral part of these financial statements. C-9 10 LUCASVARITY PLC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY-(CONTINUED)
RETAINED EARNINGS AND OTHER RESERVE ------------------------------------------------------------------------ ASSOCIATED UNDERTAKINGS' CAPITAL AND JOINT TOTAL SHARE SHARE REDEMPTION MERGER REVALUATION RETAINED VENTURES' SHAREHOLDERS' CAPITAL PREMIUM(i) RESERVE(i) RESERVE(i) RESERVES(i) EARNINGS RESERVES EQUITY -------- ----------- ----------- ---------- ------------ --------- ----------- ------------ ((POUND) MILLION) AUGUST 1, 1995 (ii)(iv)................. 219 491 -- -- 135 (174) 16 687 Exchange adjustments.................... (17) (2) (19) Fixed asset revaluations................ 1 3 4 Disposal of revalued assets............. (6) 6 -- Goodwill set-off on acquisitions........ (4) (4) Shares issued........................... 2 9 11 Transfer on acquisition................. 2 (2) -- Retained earnings....................... 41 3 44 --- --- -- ----- --- --- -- ----- JULY 31, 1996 (ii)(iv).................. 221 500 -- -- 130 (146) 18 723 Exchange adjustments.................... (2) (45) (2) (49) Lucas Industries shares issued prior to September 6, 1996..................... 1 4 5 Elimination of Lucas Industries share capital and premium on Scheme of Arrangement with LucasVarity.......... (222) (504) (726) LucasVarity Ordinary Shares issued for Lucas Industries Ordinary Shares (v).. 222 504 726 LucasVarity Ordinary Shares issued on acquisition of Varity (vi)............ 136 1,163 1,299 LucasVarity Ordinary Shares issued after September 6, 1996............... 1 3 4 Revaluation reserve release............. (4) 4 -- Goodwill set-off on acquisition......... (1,202) (1,202) Transfer of goodwill to merger reserve.. (189) 189 -- Retained earnings....................... (235) 1 (234) --- --- -- ----- --- --- -- ----- JANUARY 31, 1997 (ii)(iii)(iv).......... 359 3 -- 276 124 (233) 17 546 Exchange adjustments.................... (2) (52) (1) (55) Shares issued........................... 3 1 10 14 Repurchase of shares.................... (11) 11 (85) (85) Acquisition of controlling interest..... 13 (13) -- Transfer on disposal.................... 2 (2) -- Revaluation reserve release............. (10) 10 -- Goodwill set-off on acquisitions........ (87) (87) Goodwill adjustment on prior year acquisition........................... (28) (28) Goodwill on disposals charged to retained earnings..................... 7 7 Retained earnings....................... 142 4 146 --- --- -- ----- --- --- -- ----- JANUARY 31, 1998 (ii)(iii)(iv).......... 351 4 11 178 112 (203) 5 458 Exchange adjustments.................... 11 11 Shares issued........................... 3 1 20 24 Repurchase of shares.................... (3) 3 (29) (29) Revaluation reserve release............. (14) 14 -- Goodwill adjustment on prior year acquisition........................... (2) (2) Goodwill on disposals charged to retained earnings..................... 497 497 Retained earnings....................... 226 226 Share of retained profits in associated undertakings and joint ventures....... 3 (3) -- --- --- -- ----- --- --- -- ----- JANUARY 31, 1999 (ii)(iii)(iv).......... 351 5 14 693 98 22 2 1,185 === === == ===== === === == =====
The Notes to the Financial Statements are an integral part of these financial statements. C-10 11 LUCASVARITY PLC AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY-(CONTINUED) - ----------- (i) Share premium, capital redemption reserve, merger reserve and revaluation reserves are not distributable. (ii) Cumulative exchange adjustments included in retained earnings and other reserves amounted to (pound)(406) million at January 31, 1999; (pound)(417) million at January 31, 1998; (pound)(362) million at January 31, 1997; (pound)(313) million at July 31, 1996; (pound)(294) million at August 1, 1995. (iii) Retained earnings of the Company available for distribution amounted to (pound)71 million at January 31, 1999; (pound)43 million at January 31, 1998. (iv) The cumulative amount of goodwill set-off against reserves net of disposals, amounted to (pound)1,005 million at January 31, 1999; (pound)1,500 million at January 31, 1998; (pound)1,392 million at January 31, 1997; (pound)189 million at July 31, 1996; (pound)185 million at August 1, 1995. (v) In connection with the Scheme of Arrangement, each issued and outstanding Lucas Industries Ordinary Share was cancelled and one LucasVarity Ordinary Share was received for each Lucas Industries Ordinary Share. (vi) Pursuant to the Merger, each outstanding share of common stock, par value $.01 per share, of Varity (a "Varity Share") was converted into the right to receive 1.38 LucasVarity American Depositary Shares ("LucasVarity ADS"), with each LucasVarity ADS representing 10 LucasVarity Ordinary Shares. The Notes to the Financial Statements are an integral part of these financial statements. C-11 12 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS 1. THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS INCORPORATION LucasVarity plc (the "Company") was incorporated on May 30, 1996 in connection with the merger of Lucas Industries plc ("Lucas Industries") and Varity Corporation ("Varity") (the "Merger"). ACQUISITION OF SUBSIDIARY On May 30, 1996, LucasVarity acquired all of the issued share capital of Varity Combination Corporation, a newly formed company organised under the laws of the state of Delaware ("New Varity"), for consideration of U.S. $.01. New Varity subsequently changed its name to LucasVarity Inc. REORGANISATION On May 31, 1996, LucasVarity, Lucas Industries, Varity and New Varity signed an agreement (the "Transaction Agreement") pursuant to which New Varity and Lucas Industries would become subsidiaries of the Company. The Transaction Agreement, among other things: (a) provided that pursuant to a scheme of arrangement (the "Scheme of Arrangement") in accordance with section 425 of the Companies Act 1985 of Great Britain (the "Companies Act"), each issued and outstanding Ordinary Share of 25p of Lucas Industries (a "Lucas Industries Ordinary Share") be cancelled and one Ordinary Share of 25p of LucasVarity (a "LucasVarity Ordinary Share") be received for each Lucas Industries Ordinary Share; and (b) provided for the merger of Varity with and into New Varity, with New Varity being the surviving corporation of the Merger, pursuant to which: (i) each outstanding share of common stock, par value $.01 per share, of Varity (a "Varity Share") be converted into the right to receive 1.38 LucasVarity American Depositary Shares ("LucasVarity ADSs"), with each LucasVarity ADS representing 10 LucasVarity Ordinary Shares, and (ii) each Varity Share owned by Varity as treasury stock or owned by LucasVarity or by a subsidiary of Varity, Lucas Industries or LucasVarity be cancelled. The Lucas Industries and Varity shareholders approved the Transaction Agreement on August 13, 1996 and August 23, 1996, respectively, and it became effective on September 6, 1996. The acquisition of Lucas Industries by the Company pursuant to the Scheme of Arrangement was accounted for as a merger under accounting principles generally accepted in the United Kingdom ("U.K. GAAP") and as a combination of entities under common control for purposes of United States generally accepted accounting principles ("U.S. GAAP"). The acquisition of Varity by the Company was accounted for as a purchase under U.K. GAAP and for the purposes of U.S. GAAP. FISCAL PERIOD The Company's year end is January 31. In accordance with the requirements of the Securities and Exchange Commission, these financial statements cover the year ended January 31, 1999, the year ended January 31, 1998, the six months ended January 31, 1997, which includes the results for the Company and Lucas Industries for six months and Varity for the five months, and the year ended July 31, 1996, which includes the results for the Company for the two months ended July 31, 1996 and Lucas Industries for the year ended July 31, 1996. C-12 13 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (CONTINUED) U.K. STATUTORY REQUIREMENTS These financial statements are not the Company's statutory accounts within the meaning of section 240 of the Companies Act. As noted above, the Company was incorporated on May 30, 1996 and as required by the Companies Act, the Company prepared statutory accounts for the period from that date to January 31, 1997, its fiscal year end. The statutory accounts of Lucas Industries for the year ended July 31, 1996, and of the Company for the year ended January 31, 1998, and the eight months to January 31, 1997 have been delivered to the Registrar of Companies for England and Wales. The statutory accounts of the Company for the year ended January 31, 1999 have not yet been delivered to the Registrar of Companies for England and Wales. The auditors' reports on all the above mentioned statutory accounts were unqualified. 2. ACCOUNTING POLICIES BASIS OF ACCOUNTING The financial statements are prepared under the historical cost convention adjusted for the revaluation of certain fixed assets and in accordance with applicable U.K. accounting standards. BASIS OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and all subsidiary undertakings (together, the "Group" or "LucasVarity") together with the Group's share of post-acquisition earnings and reserves of joint ventures and associated undertakings. The accounting date of all principal subsidiary undertakings is the same as that of LucasVarity with the exception of Freios Varga SA, a 65% owned Brazilian subsidiary, with an accounting date of December 31. PRIOR PERIOD FINANCIAL INFORMATION Certain prior period amounts have been reclassified in order to conform with the fiscal 1998 presentation of the Group's results. The results and segmental analyses have been adjusted to show the discontinued operations of the Diesel Engines segment separately from continuing operations; and, under Note 31, the treatment of entry fees and discounted bills have been included as U.S./U.K. GAAP differences where applicable, and diluted earnings per share has been presented in accordance with Statement of Financial Accounting Standard 128-Earnings Per Share. FIXED ASSET INVESTMENTS The Group has adopted the requirements of FRS 9 `Associates and joint ventures'. Investments are treated as associated undertakings where the Group has a participating interest, the investment is held for the long term, and the Group exercises significant influence. Investments are treated as joint ventures where the Group holds a long term interest and exercises joint control under a contractual arrangement. The amounts involved in respect of the Group are immaterial and all disclosure relating to joint ventures and associated undertakings are included in the notes to the financial statements. SEGMENTAL REPORTING The Group identifies significant segments in accordance with the provisions of Statement of Standard Accounting Practice 25. Segmental turnover comprises sales to third parties, excluding sales-related taxes. C-13 14 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) Segmental operating profit represents profit before interest, taxation and minority interests. Segmental net operating assets comprise tangible fixed assets, stock, debtors and creditors, but not non-operating assets and liabilities such as capitalised goodwill, all current and deferred tax balances, dividend liabilities, cash and borrowings. INTANGIBLE FIXED ASSETS--ENTRY FEES In certain circumstances in the aerospace industry, the Group invests in new customer products by way of a lump sum payment (entry fee) in return for a proportion of future revenues derived from eventual sales of the customers' product. Such sums are included in intangible fixed assets and amortised over the prudently estimated revenue pattern of the product or over ten years following flight certification, if shorter. The technical and commercial viability of the related product programmes is regularly reviewed in appraising the carrying value of entry fees. FOREIGN EXCHANGE TRANSLATION The statements of income of overseas undertakings are translated into sterling at the average rates of exchange prevailing during the period. The balance sheets of overseas undertakings and assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange prevailing at the end of the financial period. Exchange gains and losses arising in the normal course of trading are dealt with in the statement of income. Other exchange differences, arising from the translation of foreign currency funding loans and on consolidation of overseas net assets, are dealt with in retained earnings and other reserves. DEPRECIATION Depreciation is based on the estimated useful lives of assets and is charged on a straight line basis at the following rates: Land................................................. nil Buildings............................................ 2%-10% per annum Short-term leasehold properties...................... over period of lease Plant and equipment.................................. 4%-33% per annum RESEARCH AND DEVELOPMENT Expenditure on research and development, other than that which is specifically recoverable under contract, is written off as incurred. Amounts carried forward are included in other receivables. LEASING Assets acquired under finance (capital) leases are treated as tangible fixed assets and depreciation is provided accordingly. The deemed capital element of future rentals is included under borrowings. Deemed interest, C-14 15 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) calculated on a reducing balance basis, is charged as interest payable over the period of the lease. Rental costs of operating leases are charged against trading profits on a straight line basis. PROVISIONS Provisions for liabilities and charges include pension liabilities in certain overseas subsidiaries, post-retirement benefits other than pensions, provisions for restructuring, deferred taxation and other items not classified elsewhere, including warranty and other claims. INVENTORIES Inventories are valued at the lower of cost and net realisable value, using the first in, first out method, after making due allowance for obsolete and slow moving items. In the case of work in progress and finished goods, cost comprises direct materials, direct labour and an appropriate proportion of production overheads. DEFERRED TAXATION Provision for deferred taxation is made under the liability method, on the excess of capital allowances over depreciation and other timing differences where the tax liability is expected to become payable in the foreseeable future. PENSIONS The Group operates pension schemes under which contributions by employees and the companies are held in trust separate from the companies' finances. Pension costs, which are determined in the United Kingdom in accordance with the requirements of Statement of Standard Accounting Practice ("SSAP") 24, are charged to net income so as to spread the cost of pensions over the working lives of the employees within the Group. An independent valuation is conducted at regular intervals and the assessed regular pension cost is adjusted to reflect the amortisation of any surplus or deficit established by the valuation over the remaining service lives of current employees. The amortisation of valuation surpluses is restricted to an amount equal to the regular pension cost. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The estimated cost of providing post-retirement healthcare benefits for employees is charged in the statement of income on a systematic basis over the working lives of the employees within the Group. GOODWILL Purchased goodwill arising on consolidation in respect of acquisitions before February 1, 1998 was written off to reserves in the year of acquisition. When a subsequent disposal occurs, any related goodwill previously written off to reserves is written back through the profit and loss account as part of the profit or loss on disposal. Following the introduction of FRS 10 `Goodwill and intangible assets', purchased goodwill arising on consolidation in respect of acquisitions since February 1, 1998 is capitalised and amortised by equal annual instalments over its estimated useful economic life, not exceeding 20 years. C-15 16 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used in the amounts reflected as inventory reserves, provisions for the outcome of certain litigation cases and deferred tax assets. Actual results could differ from those estimates. MARKETABLE SECURITIES Marketable securities are carried at the lower of cost and net realisable value. DERIVATIVE FINANCIAL INSTRUMENTS The Group may, from time to time, use derivative financial instruments ("derivatives") to limit its exposure to fluctuations in foreign currency exchange rates and interest rates. Foreign currency forward exchange contracts are used to hedge significant non-local currency cash flows. Gains and losses from these contracts are deferred and recognised in the income statement or as adjustments to carrying amounts, as appropriate, when the underlying hedged transaction matures. Cross currency swap agreements are used to hedge a proportion of the Group's investment in overseas assets. Interest amounts payable or receivable in respect of these agreements are recognised in earnings over the period of the agreement. Foreign currency gains and losses arising from these agreements are deferred and recognised when the underlying hedged transaction matures. Interest rate swap agreements are used to hedge the Group's interest rate exposure. These agreements generally involve the exchange of fixed and floating interest rate payment obligations without exchange of the underlying principal amounts. Interest amounts payable or receivable in respect of these agreements are recognised in earnings over the period of the agreement. Where derivatives which are used to hedge interest rate or foreign currency exchange rate exposures or investments in overseas assets are terminated before the underlying exposures occurs, the resulting gain or loss is recognised in the income statement on termination. In the statement of cash flows, the effects of interest rate and cross currency swap agreements, are reflected in returns on investments and servicing of finance. The cash flow effects of forward foreign exchange contracts used to hedge future cash flows are included in net cash inflows from operating activities for items relating to earnings or in capital expenditure, acquisitions or disposals, as appropriate, for items of a capital nature. C-16 17 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3. SEGMENTAL ANALYSIS SALES AND OPERATING PROFIT Sales by origin to third parties and operating profit were as follows:
SALES TOTAL OPERATING PROFIT ------------------ ---------------------- YEAR ENDED YEAR ENDED JANUARY 31 JANUARY 31 ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- ((POUND) MILLION) BY CLASS OF BUSINESS: Braking Systems........................... 1,808 1,550 147 134 Other Automotive.......................... 1,746 1,812 158 162 Aerospace................................. 716 648 95 75 Corporate/other........................... -- 8 (50) (29) ----- ----- --- --- 4,270 4,018 350 342 Discontinued operations - Diesel Engines.. 42 663 (2) 59 ----- ----- --- --- 4,312 4,681 348 401 ===== ===== === === BY GEOGRAPHICAL REGION: United Kingdom............................ 1,169 1,226 15 70 North America............................. 1,623 1,552 172 139 Continental Europe........................ 1,182 1,025 138 109 Rest of World............................. 296 215 25 24 ----- ----- --- --- 4,270 4,018 350 342 Discontinued operations - Diesel Engines.. 42 663 (2) 59 ----- ----- --- --- 4,312 4,681 348 401 ===== ===== === ===
The share of sales and total operating profit of associated undertakings and joint ventures was (pound) 129 million (1998 - (pound) 134 million) and (pound) 4 million (1998 - (pound) 7 million), respectively. The results of associated undertakings and joint ventures do not materially affect the results of any of the reported segments. Third party export sales from the United Kingdom were (pound) 531 million (1998 - (pound) 854 million). C-17 18 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3. SEGEMENTAL ANALYSIS (CONTINUED) NET OPERATING ASSETS
JANUARY 31 -------------------- 1999 1998 -------- -------- ((POUND) MILLION) BY CLASS OF BUSINESS: Braking Systems............................... 411 404 Other Automotive.............................. 590 562 Aerospace..................................... 258 236 Corporate/other............................... (138) (193) ----- ----- 1,121 1,009 Unallocated net assets/(liabilities).......... 127 (653) Discontinued operations - Diesel Engines...... -- 170 ----- ----- 1,248 526 Minority interests............................ (63) (68) ----- ----- Total shareholders' funds..................... 1,185 458 ===== ===== BY GEOGRAPHICAL REGION: United Kingdom................................ 461 488 North America................................. 175 61 Continental Europe............................ 318 261 Rest of World................................. 167 199 ----- ----- 1,121 1,009 Unallocated net assets/(liabilities).......... 127 (653) Discontinued operations - Diesel Engines...... -- 170 ----- ----- 1,248 526 Minority interests............................ (63) (68) ----- ----- Total shareholders' funds..................... 1,185 458 ===== =====
ANALYSIS OF SALES Sales to third parties analysed by destination were as follows:
YEAR ENDED JANUARY 31 ------------------ 1999 1998 ---- ---- ((POUND) MILLION) United Kingdom................................ 802 821 North America................................. 1,708 1,589 Continental Europe France...................................... 519 440 Germany..................................... 457 410 Italy....................................... 91 96 Spain....................................... 66 57 Other countries............................. 249 244 Asia.......................................... 159 179 Rest of World................................. 219 182 ----- ----- 4,270 4,018 Discontinued operations - Diesel Engines...... 42 663 ----- ----- 4,312 4,681 ===== =====
C-18 19 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 4. COST AND OVERHEADS, LESS OTHER INCOME Cost and overheads, less other income is arrived at after charging/(crediting) the following items:
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED -------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------ ------------ -------------- ------------ ((POUND) MILLION) Decrease in inventories of finished goods and work in progress............................... 58 30 8 12 Raw materials and consumables.................... 2,326 2,451 1,021 1,265 Royalties received from licensees................ (2) (7) (3) (8) Hire of plant and equipment...................... 17 27 12 21 Property rentals................................. 11 15 7 14 Depreciation-owned assets........................ 150 154 86 78 Depreciation-leased assets....................... 13 13 10 13 Staff costs-wages and salaries................... 900 980 471 796 Staff costs-social security costs................ 133 134 72 141 Staff costs-other pension costs.................. (2) 21 32 24 Audit fees and expenses.......................... 1 1 2 2 Other fees paid to auditors...................... 2 1 -- -- Advertising...................................... 10 11 6 13 Research and development cost.................... 210 204 89 137 Research and development recoveries.............. (61) (45) (10) (29)
Advertising costs are expensed as incurred. 5. EXCEPTIONAL ITEMS The principal exceptional items reported within operating profit were as follows:
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ---------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 -------------- ------------- ----------- ---------- ((POUND) MILLION) Restructuring charges.................................... (14) -- (250) -- Costs of proposed change in domicile..................... (13) -- -- -- Profit on disposal of current asset investment........... -- 13 -- -- --- --- --- --- Total operating exceptional items........................ (27) 13 (250) -- === === ==== ===
Restructuring charges In response to the changing conditions in the Global Automotive industry, the Group has embarked on a restructuring programme in its Braking Systems and Other Automotive businesses. Gross costs of (pound)14 million associated with announced plant closures and redundancies were reported in the year, of which (pound)2 million had been spent by January 31, 1999. Approximately 2,000 employees have been made redundant in the first phase of this restructuring programme. C-19 20 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 5. EXCEPTIONAL ITEMS (CONTINUED) The (pound)250 million restructuring charge, during the six months ended January 31, 1997, relates to the restructuring and rationalisation of each of the businesses and of central facilities. Following the Merger, a transition team was formed to conduct a detailed examination of each of the businesses. The examination was directed at productivity improvements encompassing opportunities to reduce headcount and facilities resulting from the Merger and reconsideration of the future strategy and headcount requirements of each of the businesses. The major components of the restructuring charges were (pound)105 million for severance and other benefits related to the reduction in headcount of approximately 3,000, (pound)80 million for asset write downs, and (pound)65 million for other rationalisation and restructuring costs. Of the (pound)170 million of provisions for severence and other restructuring costs, (pound)20 million was utilised in the six months to January 31, 1997, (pound)86 million was utilised during the year to January 31, 1998 and a further (pound)57 million was utilised in the year to January 31, 1999. The remainder of the provisions are expected to be largely utilised by January 31, 2000. Costs of proposed change in domicile On November 6, 1998 a proposal to change the Group's domicile to the United States was put to the shareholders. This proposal was not approved by the requisite 75% majority of shareholders. In total, 82% of shareholders voted, with approximately 74% voting in favour versus 26% against. Costs of (pound)13 million, primarily fees to advisors, were incurred in relation to this proposal. Profit on disposal of current asset investment A listed investment in the U.S. was disposed of during the year to January 31, 1998 for net proceeds of (pound)29 million giving rise to a pre tax profit of (pound)13 million. 6. INTEREST PAYABLE LESS RECEIVABLE
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ------------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------- --------------- ----------- ------------ ((POUND) MILLION) Interest on bank overdrafts and loans repayable within 5 years................ 29 41 21 39 Interest on bank loans over 5 years....... 1 1 -- -- Interest on other loans over 5 years...... 12 13 7 12 Interest on finance leases................ 6 8 4 7 Termination of interest rate swaps........ 7 -- -- -- Share of associated undertakings' interest 2 1 -- -- --- --- --- --- 57 64 32 58 Less: Interest receivable................. 20 5 7 16 --- --- --- --- 37 59 25 42 === === === ===
The exceptional interest charge of(pound)7 million (1998 - nil) relates to costs pertaining to the termination of interest rate swaps. Interest payable, other than interest on fixed rate borrowings, is charged at variable rates as determined by the lenders in the countries in which the borrowings have been arranged. These rates were typically between 5% and 8% per annum. C-20 21 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TAXATION
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ------------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------- --------------- ------------- ------------- United Kingdom: ((POUND) MILLION) Corporation tax at 31% (1998-31%; 1997, 1996-33%)......................... 208 64 7 19 Deferred taxation......................... (17) (5) -- 3 Double taxation relief.................... (11) (27) (1) (8) Advance Corporation Tax .................. (22) (12) 8 5 --- --- --- --- Net U.K. taxation......................... 158 20 14 19 Overseas taxation: current................................. 93 45 26 42 deferred................................ 7 29 -- -- Share of associated undertakings' taxation 1 2 1 2 --- --- --- --- 259 96 41 63 === === === ===
The tax charge can be analysed between continuing and discontinued operations as follows:
YEAR ENDED JANUARY 31 SIX MONTHS ENDED YEAR ENDED ------------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ----------- ------------------- ---------------- ------------------ ((POUND) MILLION) Continuing operations..................... 140 82 36 63 Discontinued operations................... 119 14 5 -- --- --- --- --- 259 96 41 63 === === === ===
Utilisation of tax losses brought forward from earlier years reduced the overseas tax charge in the year ended January 31, 1999 by (pound)52 million (1998 - (pound)23 million, six months ended January 31, 1997 - (pound)4 million; 1996 - (pound)8 million). The overall tax charge is influenced by unrelieved losses overseas and the incidence of Advance Corporation Tax in the United Kingdom. Income/(loss) on ordinary activities before taxation is analysed as follows:
YEAR ENDED JANUARY 31 SIX MONTHS ENDED YEAR ENDED ----------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------- --------------- ------------------ ------------- ((POUND) MILLION) United Kingdom............................ 321 98 (209) 12 Overseas.................................. 212 218 52 168 ---- ---- ---- --- 533 316 (157) 180 ==== ==== ==== ===
A reconciliation of the charge for taxation computed at the U.K. statutory rate of corporation tax of 31% (1998 - 31%; 1997, 1996 - 33%) to the actual charge for taxation is as follows: C-21 22 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TAXATION (CONTINUED)
YEAR ENDED JANUARY 31 SIX MONTHS ENDED YEAR ENDED ---------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------ --------------- ------------------ --------------- ((POUND) MILLION) Tax computed at statutory rate............... 165 99 (52) 59 (Excess)/shortfall of tax depreciation over book depreciation.......................... (4) (8) 7 -- Short-term timing differences................ -- -- 1 (21) Permanent differences........................ 5 9 -- 11 Unrelieved losses and provisions............. 28 13 84 15 Utilisation of tax losses.................... (52) (23) (4) (8) Goodwill realised............................ 98 -- -- -- Surplus ACT.................................. -- -- 8 5 Capital gains relief......................... (9) -- -- -- Other items (net) including overseas taxation 28 6 (3) 2 --- --- --- --- Actual tax charge............................ 259 96 41 63 === === === ===
8. DIVIDENDS
YEAR ENDED JANUARY 31 SIX MONTHS ENDED YEAR ENDED ------------------------ JANUARY 31 JULY 31 1999 1998 1997 1996 ------------ ----------- ------------------ -------------- ((POUND) MILLION) First interim dividend paid per Ordinary Share- 2.50p (1998 - 2.25p; 1997 - nil; 1996 - 2.1p)...... 35 32 -- 19 Second interim dividend paid per Ordinary Share- nil (1998 - nil; 1997 - nil; 1996 - 4.9p).......... -- -- -- 43 Proposed final dividend per Ordinary Share- nil (1998 - 2.25p; 1997 - 2.25p; 1996 - nil)....... -- 31 32 -- --- --- --- --- 35 63 32 62 === === === ===
9. EARNINGS PER SHARE The calculation of earnings per share is based on: (i) Profit attributable to shareholders of (pound)261 million (net income of (pound)209 million for the year ended January 31, 1998; net loss of (pound)202 million for the six months ended January 31, 1997; for the year ended July 31, 1996-net income of (pound)106 million). C-22 23 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 9. EARNINGS PER SHARE (CONTINUED) (ii) Weighted average number of shares in issue
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ---------------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 -------------- ----------------- --------------- -------------- (MILLIONS) Basic EPS calculation............... 1,408 1,418 1,326 878 Conversion of share options......... 22 17 2 16 ----- ----- ----- --- Diluted EPS calculation............. 1,430 1,435 1,328 894 ===== ===== ===== ===
(iii) For the purpose of calculating the earnings per share before exceptional items the attributable net income is (pound)227 million (1998 - (pound)227 million; 1997 - (pound)52 million; 1996 - (pound)117 million). The Directors believe that the earnings before exceptional items more accurately represents the Group's underlying trading performance. 10. RECEIVABLES
JANUARY 31 -------------------------------- 1999 1998 --------------- ---------------- ((POUND) MILLION) Amounts due within one year Trade accounts receivable.................................................. 633 710 Allowance for doubtful accounts............................................ (10) (10) --- --- 623 700 Amounts owed by associated undertakings.................................... 10 10 Other...................................................................... 48 64 Prepayments and accrued income............................................. 17 27 --- --- 698 801 --- --- Amounts due beyond one year Other...................................................................... 88 60 Prepayments and accrued income............................................. 4 8 --- --- 92 68 --- --- 790 869 === ===
11. INVENTORIES
JANUARY 31 -------------------------------- 1999 1998 ---------------- --------------- ((POUND) MILLION) Raw materials and consumables.............................................. 121 159 Work in progress........................................................... 112 156 Finished goods............................................................. 165 179 Payments on account........................................................ (5) (5) --- --- 393 489 === ===
The replacement cost of inventories is not materially different from that shown above. C-23 24 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 12. TANGIBLE FIXED ASSETS
LAND AND PLANT AND BUILDINGS EQUIPMENT TOTAL ---------------------- ----------------- ---------------- ((POUND) MILLION) Cost or valuation: At February 1, 1998................................. 475 1,598 2,073 Exchange adjustments................................ 5 14 19 Acquisition of subsidiary undertakings.............. 1 1 2 Adjustment to prior year acquisition................ 4 -- 4 Additions........................................... 15 264 279 Disposals of group undertakings..................... (57) (261) (318) Disposals........................................... (14) (56) (70) --- ----- ----- AT JANUARY 31, 1999................................. 429 1,560 1,989 --- ----- ----- Depreciation: At February 1, 1998................................. 78 633 711 Exchange adjustments................................ 2 11 13 Provided in the year................................ 13 150 163 Disposal of group undertakings...................... (8) (68) (76) Disposals........................................... (8) (41) (49) --- ----- ----- AT JANUARY 31, 1999................................. 77 685 762 --- ----- ----- Net book values --at January 31, 1998........... 397 965 1,362 --AT JANUARY 31, 1999........... 352 875 1,227 === ===== =====
Land and buildings comprises:
JANUARY 31 ----------------------------------- 1999 1998 ------------------ ---------------- ((POUND) MILLION) Freehold................................................................... 324 354 Long-term leasehold (over 50 years unexpired).............................. 22 35 Short-term leasehold....................................................... 6 8
Fixed assets at January 31, 1999 include leased assets costing (pound)139 million (1998 - (pound)159 million) on which accumulated depreciation of (pound)82 million (1998 - (pound)81 million) has been charged. Land and buildings at January 31, 1999, reflect the following: (i) Certain U.K. properties of Lucas Industries were valued by the Directors in 1994 on the basis of open market value for existing use. (ii) Certain properties overseas are subject to periodic revaluations. The figures for land and buildings after eliminating the effect of revaluations were as follows:
JANUARY 31 ----------------------------------------- 1999 1998 ------------------- ------------------- ((POUND) MILLION) Original cost.............................................. 324 357 Depreciation............................................... (69) (72) --- --- 255 285 === ===
C-24 25 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 13. INTANGIBLE FIXED ASSETS
GOODWILL ENTRY FEES TOTAL ------------------ ----------------- ------------------ ((POUND) MILLION) Cost: At February 1, 1998.......................... -- 33 33 Additions.................................... 6 11 17 --- --- --- AT JANUARY 31, 1999.......................... 6 44 50 --- --- --- Amortisation: At February 1, 1998.......................... -- 6 6 Provided in the year......................... -- 1 1 --- --- --- AT JANUARY 31, 1999.......................... -- 7 7 --- --- --- Net book values - at January 31, 1998.... -- 27 27 - AT JANUARY 31, 1999.... 6 37 43 === === ===
14. FIXED ASSET INVESTMENTS
JOINT ASSOCIATED VENTURES UNDERTAKINGS TOTAL ---------------- ---------------------- --------------------- ((POUND) MILLION) COST: At February 1, 1998................................... -- 47 47 Exchange adjustments.................................. -- (1) (1) Additions............................................. 12 -- 12 Divestments........................................... -- (13) (13) Disposal of controlling interest...................... -- 2 2 Share of retained loss................................ (4) -- (4) --- --- --- AT JANUARY 31, 1999................................... 8 35 43 --- --- --- PROVISION Additions............................................. 12 -- 12 Release of provision.................................. (1) -- (1) --- --- --- AT JANUARY 31, 1999................................... 11 -- 11 --- --- --- Net book values -At January 31, 1998................. -- 47 47 -AT JANUARY 31, 1999................. (3) 35 32 -Transfer to creditors (see note 15 ) 3 -- 3 --- --- --- -- 35 35 === === ===
The cost of the investments in associated undertakings at January 31, 1999 amounted to(pound)31 million (1998 -(pound)42 million). During the year Group companies purchased goods from and sold goods to associated undertakings of (pound)11 million and (pound)11 million, respectively. Amounts shown in respect of joint ventures relate to TRW LucasVarity Electric Steering Limited, a joint venture entered into during the year to develop and manufacture electric power assisted steering. The accounting date of this entity is December 31. C-25 26 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. FIXED ASSET INVESTMENTS (CONTINUED) The Group's principal associated undertakings, the interest therein and the places of incorporation and countries of operation are listed below. All are held by intermediary undertakings. India.................................... Brakes India Ltd (49%) United States............................ Lucas Sumitomo Brakes Inc (50%) 15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JANUARY 31 ----------------------------------------- 1999 1998 -------------------- -------------------- ((POUND) MILLION) Trade accounts payable....................................... 500 603 Amounts owed to associated undertakings...................... 2 2 Corporate taxation........................................... 139 99 Social security and other taxes.............................. 28 33 Accruals and deferred income................................. 289 329 Net liabilities of joint venture company transferred from Investments (see Note 14).................................. 3 -- Accrued dividend............................................. -- 31 --- ----- 961 1,097 === =====
C-26 27 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 16. BORROWINGS
JANUARY 31 ------------------------------------- 1999 1998 ------------------ ------------------ ((POUND) MILLION) CURRENT Bank overdrafts..................................................... 19 30 Bank loans.......................................................... 34 352 U.S. $nil (1998 U.S. $15 million) 6.43% Loan Notes.................. -- 9 U.S. $14.3 million 6.98% Loan Notes................................. 9 9 Finance lease obligations........................................... 13 14 --- ---- Total short-term borrowings....................................... 75 414 --- ---- NONCURRENT Bank loans.......................................................... 28 29 U.S. $42.9 million (1998-U.S. $57.2 million) 6.98% Loan Notes....... 26 35 U.S. $15 million 7.46% Loan Notes................................... 9 9 U.S. $100 million 8.57% Loan Notes.................................. 61 61 10 7/8% Eurosterling Bonds 2020..................................... 100 100 Fixed rate redeemable 6.75% preference shares....................... 35 -- Finance lease obligations........................................... 67 81 --- ---- Total long-term borrowings........................................ 326 315 --- ---- Total borrowings.................................................. 401 729 === ==== CASH Cash at bank and in hand............................................ 126 73 Short-term deposits................................................. 520 82 --- ---- Total cash........................................................ 646 155 --- ---- Net cash/(borrowings)............................................. 245 (574) === ====
The U.S.$ Loan Notes are guaranteed by the Company and have a range of maturities from 1999 to 2005. LucasVarity is subject to various debt covenants relating to various financial and operating ratios. Included in bank loans are secured loans amounting to (pound)9 million (1998 - (pound)9 million). The security given by the various subsidiaries to which these relate is normally a charge on the land and buildings owned by those companies. At January 31, 1999 the weighted average interest rate on the bank loans and overdrafts was 5.9% (1998 - 6.6%). C-27 28 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 16. BORROWINGS (CONTINUED)
JANUARY 31 ------------------------------ 1999 1998 ---------------- ------------- ((POUND) MILLION) BANK LOANS AND OVERDRAFTS ANALYSED BY MATURITY: In one year or less or on demand............................. 53 382 Between one and two years.................................... 15 17 Between two and three years.................................. 4 3 Between three and four years................................. 2 3 Between four and five years.................................. -- -- Five years or more -by instalments......................... 7 6 --- --- 81 411 === === OTHER BORROWINGS ANALYSED BY MATURITY: In one year or less or on demand............................. 9 18 Between one and two years.................................... 56 9 Between two and three years.................................. 22 20 Between three and four years................................. 23 23 Between four and five years.................................. 14 23 Five years or more -by instalments......................... 16 30 -not by instalments..................... 100 100 --- --- 240 223 === === Total amounts payable by instalment part of which fall due after five years........................................... 105 114 === === FINANCE LEASE OBLIGATIONS: Obligations are payable as follows: Within one year.............................................. 13 14 Between one and two years.................................... 13 14 Between two and three years.................................. 12 15 Between three and four years................................. 10 12 Between four and five years.................................. 9 11 Five years or more -by instalments........................... 23 29 --- --- 80 95 === ===
C-28 29 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 16. BORROWINGS (CONTINUED) Obligations under finance leases The future minimum lease payments for the years ended January 31 together with the present value of the net minimum lease payments were as follows:
JANUARY 31 1999 -------------------------- ((POUND) MILLION) 2000................................................ 19 2001................................................ 17 2002................................................ 15 2003................................................ 13 2004................................................ 11 Thereafter.......................................... 28 --- 103 Less: amount representing lease interest............ 23 --- Present value of net minimum capital lease payments. 80 ===
Borrowings analysed by currency
BANK LOANS AND OTHER OVERDRAFTS BORROWINGS FINANCE LEASES TOTAL ---------------- ------------------ ------------------ -------------- ((POUND) MILLION) JANUARY 31, 1999 Sterling............................... 5 135 78 218 U.S. dollar............................ 3 105 2 110 French franc........................... 1 -- -- 1 German mark............................ 8 -- -- 8 Other.................................. 64 -- -- 64 --- --- --- --- 81 240 80 401 === === === === JANUARY 31, 1998 Sterling............................... 290 46 92 428 U.S. dollar............................ 81 177 3 261 French franc........................... 1 -- -- 1 German mark............................ 10 -- -- 10 Other.................................. 29 -- -- 29 --- --- --- --- 411 223 95 729 === === === ===
C-29 30 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 16. BORROWINGS (CONTINUED) Banking facilities At January 31, 1999 the Group had substantial amounts of undrawn committed borrowing facilities analysed by country of origin as follows:
EXPIRING EXPIRING WITHIN ONE BEYOND ONE YEAR YEAR TOTAL ---------------------- --------------------------- --------------------- ((POUND) MILLION) United Kingdom......................... -- 600 600 Spain.................................. 23 -- 23 Germany................................ 19 9 28 United States.......................... -- 46 46 --- --- --- 42 655 697 === === ===
In 1998, the Group entered into a financing agreement with various commercial banks to establish a revolving credit facility. This committed multicurrency advance facility permits the Group to borrow up to (pound)600 million through to maturity of May 2003, at 22.5 basis points over Libor. The Group pays quarterly an annual commitment fee of 0.10% on the unused portion of the commitment. The Group may withdraw from the agreement voluntarily by giving the agent not less than five business days notice of the Group's intention to cancel all or part of the unutilised portion of the total commitment. The lender may only withdraw from the agreement if there is an occurrence of an `Event of Default' as set out in the facility agreement, or if it is unlawful in any jurisdiction for a bank to give effect to any of its obligations under the agreement. 17. PROVISIONS FOR LIABILITIES AND CHARGES
PROVISIONS FOR DEFERRED PENSION POST-RETIREMENT RESTRUCTURING AND TAX OBLIGATIONS BENEFITS CLAIMS OTHER PROVISIONS TOTAL ------------ -------------- ----------------- ------------------ ----------------- ----------- ((POUND) MILLION) At February 1, 1998....... (12) 68 286 99 104 545 Reclassification.......... -- (4) -- (8) 12 -- Transfer from corporate taxation payable........ 8 -- -- -- -- 8 Exchange adjustments...... -- 3 -- -- -- 3 Acquisition of subsidiary undertakings............ -- -- -- -- 1 1 Disposal of group undertakings............ -- 9 (1) (4) 16 20 Utilised in the year...... -- (8) (22) (57) (32) (119) Charged in the year....... (10) (8) 25 (2) 24 29 --- --- --- --- --- --- AT JANUARY 31, 1999....... (14) 60 288 28 125 487 === === === === === ===
Certain of the opening balances have been reclassified to more appropriately reflect the nature of the provisions. C-30 31 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 18. MINORITY INTERESTS
JANUARY 31 ------------------------------------ 1999 1998 ------------------- ---------------- ((POUND) MILLION) Equity interests: minorities' share of net assets of subsidiaries...... 63 68 === ===
19. DERIVATIVE FINANCIAL INSTRUMENTS The Group uses non-leveraged derivatives to manage its exposure to fluctuations in foreign currency exchange rates and interest rates. The Group does not become a party to derivatives for trading purposes; they are used exclusively for hedging purposes. Derivatives involve, to varying degrees, credit and market risk. With regard to credit risk, the Group may be exposed to loss in the event of non-performance by a counterparty. The Group controls credit risk by entering into derivative contracts only with highly credit rated counterparties and through credit approvals, limits and monitoring procedures. The Group has not experienced material non-performance by any counterparty. Market risk is the possibility that a change in interest rates or currency exchange rates will cause the value of a financial instrument to decrease or its obligations to become more costly to settle. When derivatives are used for hedging purposes, they generally do not expose the Group to market risk on a net basis because gains and losses on the derivatives largely offset losses and gains on the asset, liability or transaction being hedged. Risk management strategies are reviewed and approved by senior management before being implemented. Policy controls limit the maximum amount of positions that can be taken in any instrument and with any single counterparty. Interest rate risk management In order to reduce the interest rate risk in respect of its debt portfolio, the Group from time to time enters into interest rate swap and similar agreements to change the interest payable on parts of its underlying borrowings from fixed rates to variable or variable rates to fixed. Accordingly, the Group is exposed to market risk to the extent that receipts and payments under interest rate agreements are affected by market interest rates. Interest amounts payable or receivable in respect of these agreements are recognised in earnings over the period of the agreement. As at January 31, 1999, there were no interest rate swaps or similar agreements outstanding. All interest rate swaps or similar agreements were terminated by the Group on September 15, 1998, at a cost of (pound)7 million. Details of interest rate swap agreements outstanding at the previous period end are set out in the table below.
INTEREST RATES NOTIONAL ------------------------------------------------------- PRINCIPAL MATURITY FIXED VARIABLE FIXED VARIABLE BALANCE DATES PAYABLE RECEIVABLE RECEIVABLE PAYABLE -------------- --------------- --------------------------- ------------- ------------- (MILLIONS) % % % % JANUARY 31, 1998 U.S. dollars........... 217 1998-2005 -- -- 6.43-8.57 6.91-8.60 U.S. dollars........... 190 2002-2005 6.41-8.28 5.63-5.81 -- --
In the event of counterparty default, the exposures created would be a function of the difference between the then prevailing market interest rates and the interest rates relevant to the particular interest rate swap agreement. C-31 32 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 19. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Foreign Exchange Risk Management-Borrowings In order to manage the relationship between the currency of denomination of the Group's borrowings and the currency of its investments in overseas assets, the Group from time to time enters into cross currency swap agreements. Accordingly, the Group is exposed to market risk to the extent that receipts and payments under cross currency swap agreements are affected by market interest rates and/or market foreign currency exchange rates. Interest amounts payable or receivable in respect of the agreement are recognised in earnings over the period of the agreement. Foreign currency gains and losses arising from these agreements are deferred and recognised when the underlying hedged transaction matures. As at January 31, 1999, there were no cross currency swaps or similar agreements outstanding. Details of cross currency swap agreements outstanding at the previous period end are set out in the table below.
INTEREST RATES ------------------------ NOTIONAL PRINCIPAL MATURITY FIXED FIXED BALANCE DATE RECEIVABLES PAYABLE -------------------- ----------------- ------------ ----------- (POUND) U.S.$ (POUND) U.S.$ MILLION MILLION % % JANUARY 31, 1998 U.S. dollars/sterling................. 55 100 1998 10.875 9.41
In the event of counterparty default, the exposure created would be a function of: (a) the difference between the then prevailing market interest rates and the interest rates relevant to the cross currency swap agreement; and (b) the difference between the then prevailing market foreign currency exchange rates and the foreign currency exchange rates relevant to the cross currency swap agreement. Foreign exchange risk management In order to manage the Group's ongoing currency transaction exposure risks, substantially arising from its Aerospace business, forward exchange contracts of up to ten years' original duration have been entered into. A summary of forward exchange contracts outstanding at the period end is set out in the table below. The outstanding U.S. dollar forward exchange contracts as at January 31, 1998 included (pound)604 million equivalent of hedges entered into prior to January 31, 1998 in anticipation of the disposal of the VarityPerkins business in March 1998.
JANUARY 31 ----------------------------------- 1999 1998 ------------------ ---------------- ((POUND) MILLION) U.S. dollars........................................................ 394 1,128 Other currencies.................................................... 34 (49) --- ----- 428 1,079 === =====
The unrealised exchange gains on these contracts amounted to(pound)64 million at January 31, 1999 (January 31, 1998 -(pound)42 million). C-32 33 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 19. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The Group accounts for forward exchange contracts using the deferral method whereby gains and losses from these derivatives are deferred and recognised in earnings or as adjustments to carrying amounts, as appropriate, when the underlying hedged transaction occurs. In the event of counterparty default, the exposure created would be the difference between the contracted rate and the then prevailing market exchange rate in the case of these contracts. The Group has no reason currently to expect non-performance by counterparties to these arrangements. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the material financial instruments of the Group are as follows:
JANUARY 31, 1999 JANUARY 31, 1998 --------------------------- ---------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------- ------------- ------------- --------------- ((POUND) MILLION) ASSETS Cash.................................................. 126 126 73 73 Short-term deposits................................... 520 520 82 82 LIABILITIES Current borrowings: Bank loans and overdrafts........................... 53 53 382 382 U.S. dollar Loan Notes.............................. 9 9 18 18 Noncurrent borrowings: Bank loans.......................................... 28 30 29 31 U.S. dollar Loan Notes.............................. 96 101 105 111 Eurosterling Bonds.................................. 100 171 100 147 OFF-BALANCE SHEET INSTRUMENTS Interest rate swaps................................... -- -- -- (8) Forward exchange contracts-U.S. dollars............... -- 53 -- 34 Forward exchange contracts-other currencies........... -- 11 -- 8
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments: Cash, short-term deposits and current borrowings: the carrying amount reported in the balance sheet approximates their fair value due to their short-term nature. Noncurrent bank loans: certain of the Group's noncurrent bank loans are fixed interest loans. The fair value of loans is estimated using discounted cash flow analyses, based on the Group's current incremental borrowing rate for similar types of borrowing arrangement. U.S. dollar Loan Notes and Eurosterling Bonds: the fair value of the Group's U.S. dollar Loan Notes and Eurosterling Bonds is estimated using discounted cash flow analyses, based on the Group's current incremental borrowing rates for similar types of borrowing arrangements. C-33 34 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 20. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Interest rate swaps: the fair value of the Group's interest rate swap agreements is based on discounted cash flow analyses. Forward exchange contracts: the fair value of the Group's forward exchange contracts is obtained by multiplying the contracted amounts under the forward contracts by the difference between the forward rate available for the remaining maturity of the contracts and the contracted forward rates. 21. PENSIONS AND POST-RETIREMENT HEALTH CARE BENEFITS PENSIONS The Group operates a number of pension schemes throughout the world in accordance with local conditions and practices. The majority are defined benefit schemes where the assets are held in trust funds separate from the Group's finances. Pension expense is assessed in accordance with the advice of independent professionally qualified actuaries and is disclosed in Note 4. U.K. The largest scheme, representing over 80% of Group pension liabilities, is the Lucas Pension Scheme for U.K. employees, a defined benefit scheme. The latest actuarial valuation of the Scheme was as at March 31, 1997. At that time the market value of the Scheme assets was (pound)3,047 million. The assessed value of these assets was sufficient to cover 141% of the benefits accrued to members, after allowing for expected future increases in earnings. Company contributions to the Scheme are suspended. In this latest funding valuation, assets were taken into account at 88% of their market value, which reflects the average level of investment markets over the 12 months prior to the valuation date. The main assumptions used for valuing liabilities were as follows: LPI pension increases .... 4.0% per annum Earnings increases ....... 6.0% per annum Return on investments .... 8.0% per annum Pension expense was determined using the projected unit method and on the basis of the above funding assumptions except that the investment return pre-retirement was 9.0% per annum. As a result of this significant surplus in the Lucas Pension Scheme, the regular pension cost of (pound)30 million is more than offset by the amortisation of surplus. As a prudent measure, no credit is recognised and the net pension expense in respect of the U.K. Scheme is reduced to zero. There are no outstanding or prepaid contributions at the balance sheet date. With effect from March 11, 1998 the Group disposed of VarityPerkins. The write-off of the accumulated provision in respect of Perkins' pension schemes is disclosed in Note 17. There was no material pension expense from these schemes for the period prior to the disposal. REST OF THE WORLD In the U.S. and in Canada, the Group operates a number of defined benefit and defined contribution schemes. During the year some plans converted to a defined contribution basis. The impact of this, including a one-off recognition of prior year accumulated surplus, is reflected in the pension expense. C-34 35 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 21. PENSIONS AND POST-RETIREMENT HEALTH CARE BENEFITS (CONTINUED) The principal U.S. plans are defined benefit schemes. The market value of their assets at January 31, 1999 was (pound)204 million and this was sufficient to cover 99% of the projected benefits that had accrued to members. Pension expense was determined using the projected unit method using U.S. GAAP valuation principles which are materially in line with those required under U.K. GAAP. The principal assumptions used were a discount rate of 6.5% per annum and an assumed return on assets of 9.0% per annum. In France the Group contributes to State and independent schemes at prescribed rates. In Germany the Group has defined benefit pension obligations which, in some schemes, are partly funded by insurance policies. The unfunded portion of these and other schemes are included in provisions in Note 17. POST-RETIREMENT HEALTH CARE The Group also operates a number of schemes, primarily in the U.S., which provide employees with post-employment benefits in respect of health care. These plans are generally unfunded. The liability in respect of these benefits is assessed by independent professionally qualified actuaries using the projected unit method and is included under provisions. The major assumptions were a discount rate of 7.0% per annum and an ultimate rate of inflation of medical expenses of 5.0% per annum. During the year lawsuits relating to the benefit obligation of some schemes were settled. The impact of these settlements was fully covered by existing provisions. 22. SHARE COMPENSATION PLANS LucasVarity has in existence eight employee plans (collectively, the "LucasVarity Share Option Schemes"), of which two plans were formed in contemplation of the Merger. LucasVarity has four plans inherited from Lucas Industries. By virtue of a change to the Articles of Association of Lucas Industries, approved by shareholders at an Extraordinary General Meeting of that company held on August 13, 1996, the Lucas Industries Ordinary Shares to be issued following the exercise of options under the Lucas Industries Executive Share Option Scheme (1984) and both Savings-Related Share Option Schemes will be exchanged for LucasVarity Ordinary Shares on the same terms as set out in the Scheme of Arrangement dated September 6, 1996. Options granted under the Lucas Industries 1994 Executive Share Option Scheme have been rolled over into Ordinary Shares of LucasVarity. In addition, Varity had two plans under which by a resolution of a Committee of the Board of LucasVarity passed on September 5, 1996 the options over Varity Common Stock granted under the Varity Stock Option Plans shown below were deemed, with effect from September 6, 1996 to constitute options to acquire, on the same terms and conditions, LucasVarity Ordinary Shares in the form of American Depositary Shares (ADSs), at option prices calculated by dividing the aggregate purchase price of each option by the number of ADSs comprised in that option. A LucasVarity ADS represents the right to receive 10 LucasVarity Ordinary Shares. EXECUTIVE SHARE OPTION PLANS LucasVarity 1996 Executive Share Option Scheme. The 1996 Scheme is available for the grant of options to purchase LucasVarity Ordinary Shares to full time employees or executive Directors who are not within two years of normal retirement, as selected by the Remuneration Committee of LucasVarity's Board of Directors. The price per LucasVarity Ordinary Share at which options may be exercised is the market price at the time of grant. In most circumstances a performance requirement must be satisfied before an option can be exercised. The performance standard adopted by the Remuneration Committee is that the Total Shareholder Return (TSR) of LucasVarity measured over a ten year period commencing with the date of grant must equal or exceed the TSR of C-35 36 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 22. SHARE COMPENSATION PLANS (CONTINUED) the FTSE 100 company ranked 50th by TSR over the same period. The test will be repeated quarterly until the requirement is satisfied or the option expires. Normally, options may only be exercised after three years and within ten years from their initial date of grant and where the participant remains an employee. If a participant ceases to be an employee under certain circumstances, including death, the option will be exercisable within a specified period from the date of the event causing such termination of employment. Special provisions also apply if LucasVarity is taken over or reorganised. Under the rules of the 1996 Scheme, the Directors of LucasVarity have the discretion to allow participants to exercise their options within a specified period from the date on which a scheme of arrangement becomes effective. Certain minor amendments may be made to the rules of the 1996 Scheme by the Directors to benefit its administration or to obtain favourable tax or other treatment. Lucas Industries 1994 Executive Share Option Scheme. The 1994 Scheme is now closed but options remain outstanding which were granted on terms similar to the LucasVarity 1996 Executive Share Option Scheme although the performance requirement was waived as a result of the Merger. Lucas Industries Executive Share Option Share Scheme (1984). Although the 1984 Executive Scheme expired on its tenth anniversary, options remain outstanding which were granted on terms similar to the 1994 Executive Scheme, although there is no performance requirement. Varity Corporation Shareholder Value Incentive Plan (1993). The plan is now closed but options remain outstanding. As a result of the Merger, the options became automatically exercisable. Varity Corporation Executive Stock Option Plan (1983). Although the Varity Corporation Executive Stock Option Plan expired, options remain outstanding. As a result of the Merger, the options became automatically exercisable. SAVINGS-RELATED SHARE OPTION PLANS LucasVarity Employees' 1996 Savings-Related Share Option Scheme. The 1996 SAYE Scheme is available to all U.K. employees who have completed at least three years' continuous service. Participants contribute a specified amount to a savings contract for a period of 5 years in conjunction with which they are granted an option to subscribe for LucasVarity Ordinary Shares out of the repayments made under that contract at the end of 5 or 7 years. The exercise price of any particular option may be discounted by no less than 80% of the market value at the time of grant. Options may normally only be exercised within the 6 month period following the 5 or 7 year duration of the contract. If a participant ceases to be an employee under certain circumstances, including death, the option will be exercisable within a specified period from the date of the event causing such termination of employment. Early exercise is permitted where LucasVarity is taken over or reorganised, and participants who have held their options for three years or more from the date of grant may exercise their options within a period of six months from the date on which the scheme of arrangement is sanctioned by the court. Lucas Industries Employees' 1991 Savings-Related Share Option Scheme. The 1991 SAYE Scheme is now closed but options remain outstanding which were granted on terms similar to the LucasVarity 1996 SAYE Scheme. C-36 37 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 22. SHARE COMPENSATION PLANS (CONTINUED) Lucas Industries Employees' 1981 Savings-Related Share Option Scheme. Although the Lucas Industries Employees' 1981 Savings Related Share Option Scheme expired on its tenth anniversary, options remain outstanding which have been granted on terms similar to the 1996 LucasVarity SAYE Scheme. LUCASVARITY ORDINARY SHARE BASED PLANS Movements in outstanding options are summarised as follows:
SAVINGS-RELATED EXECUTIVE OPTION SCHEMES OPTION SCHEMES ---------------------------------------- --------------------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE ------------------------ ----------------------- FAIR VALUE FAIR VALUE NUMBER OF EXERCISE OF OPTIONS NUMBER OF EXERCISE OF OPTIONS OPTIONS PRICE(P) GRANTED(P) OPTIONS PRICE(P) GRANTED(P) --------------- ----------- ------------ --------------- ----------------------- OUTSTANDING AUGUST 1, 1995.... 10,153,486 151.3 36,726,833 122.7 Granted....................... 1,331,077 198.7 53.1 6,513,955 171.2 75.0 Exercised..................... (2,308,937) 133.9 (4,454,544) 107.1 Lapsed or cancelled........... (1,049,720) 140.9 (1,863,678) 133.9 ---------- ---------- OUTSTANDING JULY 31, 1996..... 8,125,906 165.3 36,922,566 132.6 Granted....................... 3,652,000 246.5 71.0 -- -- Exercised..................... (259,224) 175.1 (552,574) 99.9 Lapsed or cancelled........... (758,281) 204.6 (825,668) 138.8 ---------- ---------- OUTSTANDING JANUARY 31, 1997.. 10,760,401 190.6 35,544,324 133.0 Granted....................... 6,078,448 185.3 58.0 11,374,122 154.8 81.0 Exercised..................... (2,879,725) 143.4 (10,371,780) 90.8 Lapsed or cancelled........... (495,725) 211.6 (2,477,987) 155.1 ---------- ---------- OUTSTANDING JANUARY 31, 1998.. 13,463,399 197.5 34,068,679 151.5 Granted....................... 13,367,870 228.2 73.7 -- -- Exercised..................... (1,531,810) 175.0 (2,311,665) 132.0 Lapsed or cancelled........... (567,347) 222.7 (2,697,380) 157.6 ---------- ---------- OUTSTANDING JANUARY 31, 1999.. 24,732,112 214.9 29,059,634 152.5 ========== ===== ========== ===== EXERCISABLE JANUARY 31, 1999.. 2,674,528 172.1 -- -- ========== ===== ========== =====
The weighted-average fair value of options granted were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield 1.98% (1998 - 2.17%; 1997, 1996 - 2.28%), expected volatility of 36.9% (1998 - 28.8%; 1997, 1996 - 27.3%), risk-free interest of 4.3% (1998 - 7.0%; 1997, 1996 - 5.43%) and expected life of 5 years (1998, 1997, 1996 - 5 years). Summarised information about Executive stock options outstanding under the LucasVarity and former Lucas Industries plans at January 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- --------------------------------- WEIGHTED-AVERAGE RANGE OF EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE PRICES(P) OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE(P) EXERCISABLE EXERCISE PRICE(P) ------------------- -------------- ------------------- ------------------ -------------- ------------------ 83.0 to 95.1 75,890 3.7 years 95.1 75,890 95.1 95.2 to 132.9 405,832 3.7 113.0 405,832 113.0 133.0 to 170.0 355,858 1.8 150.5 355,858 150.5 170.1 to 208.6 11,740,061 8.4 189.2 1,836,948 192.5 208.7 to 267.0 12,154,471 8.9 245.8 -- -- -------------- ---------- --------- 83.0 to 267.0 24,732,112 8.4 214.9 2,674,528 172.1 ============== ========== =========
C-37 38 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 22. SHARE COMPENSATION PLANS (CONTINUED) Summarised information about savings-related stock options outstanding under the LucasVarity and former Lucas Industries plans at January 31, 1999:
OPTIONS OUTSTANDING -------------------------------------------------------------- WEIGHTED-AVERAGE NUMBER REMAINING WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES(P) OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE(P) - ------------------------------------------ --------------- --------------------- -------------------- 83.0 to 95.1 2,442,031 0.4 years 83.0 95.2 to 132.9 -- -- -- 133.0 to 170.0 21,607,470 4.0 156.0 170.1 to 208.6 5,010,133 4.4 171.2 --------------- ---------- 83.0 to 208.6 29,059,634 3.8 152.5 =============== ==========
None of the savings-related stock options are currently exercisable. LUCASVARITY ADS BASED PLANS Summarised information about options for ADSs outstanding under the former Varity plans at January 31, 1999:
PERFORMANCE-BASED ---------------------------------------- WEIGHTED-AVERAGE NUMBER OF OPTIONS EXERCISE PRICE($) ------------------- -------------------- OUTSTANDING SEPTEMBER 6, 1996....................................... 4,179,363 30.55 Exercised........................................................... (200,585) 25.57 Lapsed or cancelled................................................. (5,244) 38.74 --------- OUTSTANDING JANUARY 31, 1997........................................ 3,973,534 30.79 Granted............................................................. 4,899 29.35 Exercised........................................................... (71,603) 29.80 --------- OUTSTANDING JANUARY 31, 1998........................................ 3,906,830 30.75 Exercised........................................................... (965,894) 31.73 --------- OUTSTANDING JANUARY 31, 1999........................................ 2,940,936 30.53 =========
OPTIONS OUTSTANDING -------------------------------------------------------------- WEIGHTED-AVERAGE NUMBER REMAINING WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES($) OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE($) - ------------------------------------------ --------------- --------------------- -------------------- 8.40 to 30.43 1,679,856 5.4 years 25.22 30.44 to 42.57 1,261,080 5.3 37.59 -------------- --------- 8.40 to 42.57 2,940,936 5.4 30.53 ============== =========
By virtue of change of control provisions in the Varity plans, all stock options are currently exercisable. C-38 39 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 23. NOTES TO THE STATEMENTS OF CASH FLOWS (i) NET CASH INFLOW FROM OPERATING ACTIVITIES
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED --------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------- ------------ -------------- --------------- ((POUND) MILLION) Total operating profit/(loss)............... 348 401 (128) 233 Share of profit of associated undertakings.. (4) (7) (3) (6) Depreciation................................ 163 167 96 91 Amortisation of intangible fixed assets..... 1 1 -- -- Profit on sale of current asset investment.. -- (13) -- -- Provision for restructuring................. -- -- 173 -- Utilisation of provision for restructuring.. (59) (125) (30) (98) Decrease in other provisions................ (28) (47) (9) (24) Decrease in inventory....................... 3 5 3 16 (Increase)/decrease in receivables.......... (64) (60) 11 (12) Increase/(decrease) in accounts payable..... 31 129 (12) (15) Exchange rate adjustments................... -- -- -- (5) --- --- --- --- Net cash inflow from operating activities... 391 451 101 180 === === === ===
(ii) RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET DEBT
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ---------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 -------- ----------- ----------- ----------- ((POUND) MILLION) Increase/(decrease) in cash in the period ....... 64 (17) (43) 41 Cash outflow/(inflow) from decrease/(increase) in debt and lease financing ...................... 313 (11) (81) (52) Cash outflow/(inflow) from increase/(decrease) in liquid resources .............................. 438 (18) (24) (95) ---- ---- ---- ---- Change in net debt resulting from cash flows .... 815 (46) (148) (106) Bank loans acquired with subsidiary undertakings -- (47) (4) (3) Short-term deposits acquired with subsidiary undertakings .................................. -- -- 18 -- Finance leases disposed of with subsidiary undertakings .................................. 3 -- -- -- Cancellation of finance leases .................. 3 -- -- -- Conversion of 5 1/4% Convertible Bonds .......... -- -- -- 1 New finance lease commitments ................... (5) (14) (8) (24) Exchange movements .............................. 3 (4) (3) (4) ---- ---- ---- ---- Movement in net debt in period .................. 819 (111) (145) (136) Net debt at beginning of period ................. (574) (463) (318) (182) ---- ---- ---- ---- Net cash/(debt) at end of period ................ 245 (574) (463) (318) === ==== ==== ====
C-39 40 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 23. NOTES TO THE STATEMENTS OF CASH FLOWS (CONTINUED) (iii) ANALYSIS OF NET DEBT
ACQUISITION (EXCLUDING OTHER AUGUST 1 CASH & NON-CASH EXCHANGE JULY 31 1995 CASH FLOWS OVERDRAFTS) CHANGES MOVEMENT 1996 ----------- -------------- ------------- ------------- ------------- ------------ ((POUND) MILLION) Cash at bank and in hand.... 121 27 -- -- (2) 146 Bank overdrafts............. (40) 14 -- -- -- (26) ---- ---- --- --- --- ---- Total cash and overdrafts. 81 41 -- -- (2) 120 Short-term deposits......... 209 (95) -- -- 2 116 Bank loans.................. (140) (66) (3) -- -- (209) Other borrowings............ (236) -- -- 1 (4) (239) Finance lease obligations... (96) 14 -- (24) -- (106) ---- ---- --- --- --- ---- Net borrowings............ (182) (106) (3) (23) (4) (318) ==== ==== === === === ====
ACQUISITION (EXCLUDING OTHER AUGUST 1 CASH & NON-CASH EXCHANGE JANUARY 31 1996 CASH FLOWS OVERDRAFTS) CHANGES MOVEMENT 1997 ----------- -------------- ------------- ------------- ------------- ------------ ((POUND) MILLION) Cash at bank and in hand.... 146 (14) -- -- (13) 119 Bank overdrafts............. (26) (29) -- -- 2 (53) ---- ---- --- --- --- ---- Total cash and overdrafts. 120 (43) -- -- (11) 66 Short-term deposits......... 116 (24) 18 -- (2) 108 Bank loans.................. (209) (101) (4) -- 6 (308) Other borrowings............ (239) 9 -- -- 4 (226) Finance lease obligations... (106) 11 -- (8) -- (103) ---- ---- --- --- --- ---- Net borrowings............ (318) (148) 14 (8) (3) (463) ==== ==== === === === ====
ACQUISITION (EXCLUDING OTHER FEBRUARY 1 CASH & NON-CASH EXCHANGE JANUARY 31 1997 CASH FLOWS OVERDRAFTS) CHANGES MOVEMENT 1998 ----------- -------------- ------------- ------------- ------------- ------------ ((POUND) MILLION) Cash at bank and in hand.... 119 (37) -- -- (9) 73 Bank overdrafts............. (53) 20 -- -- 3 (30) ---- ---- --- --- --- ---- Total cash and overdrafts. 66 (17) -- -- (6) 43 Short-term deposits......... 108 (18) -- -- (8) 82 Bank loans.................. (308) (33) (47) -- 7 (381) Other borrowings............ (226) -- -- -- 3 (223) Finance lease obligations... (103) 22 -- (14) -- (95) ---- ---- --- --- --- ---- Net borrowings............ (463) (46) (47) (14) (4) (574) ==== ==== === === === ====
C-40 41 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 23. NOTES TO THE STATEMENTS OF CASH FLOWS (CONTINUED)
DISPOSALS (EXCLUDING OTHER FEBRUARY 1 CASH & NON-CASH EXCHANGE JANUARY 31 1998 CASH FLOWS OVERDRAFTS) CHANGES MOVEMENT 1999 ----------- -------------- ------------- ------------- ------------- ------------ ((POUND) MILLION) Cash at bank and in hand.... 73 48 -- -- 5 126 Bank overdrafts............. (30) 16 -- -- (5) (19) ---- ---- --- --- --- ---- Total cash and overdrafts. 43 64 -- -- -- 107 Short-term deposits......... 82 438 -- -- -- 520 Bank loans.................. (381) 316 -- -- 3 (62) Other borrowings............ (223) (17) -- -- -- (240) Finance lease obligations... (95) 14 3 (2) -- (80) ---- ---- --- --- --- ---- Net (borrowings)/cash..... (574) 815 3 (2) 3 245 ==== ==== === === === ====
24. DIRECTORS' EMOLUMENTS AND INTERESTS The emoluments of the executive and non-executive Directors for the year to January 31, 1999 were as follows:
YEAR ENDED JANUARY 31 --------------------------------- 1999 1998 ----------------- --------------- (POUND) (POUND) Basic salary................................................. 1,620,821 1,465,269 Fees......................................................... 222,013 235,459 Bonus (a).................................................... 1,265,433 1,083,308 Benefits in kind............................................. 117,037 129,354 --------- --------- Total........................................................ 3,225,304 2,913,390 ========= =========
(a) Bonus shown is that earned during the year to January 31, 1999 and payable in March 1999. The amount attributable to the highest paid Director, V A Rice, was (pound)1,420,983 (1998 - (pound)1,265,597). The Group contributed a total amount of (pound)63,367 (1998 - (pound)25,947) during the year to pension arrangements of two of the Directors. No contributions were made in respect of pension arrangements for V A Rice during the period, except a Group matching contribution of (pound)28,350 into a defined contribution retirement savings plan. C-41 42 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 24. DIRECTORS' EMOLUMENTS AND INTERESTS (CONTINUED) The Directors of LucasVarity plc during the period, and their interests in the Ordinary Shares of LucasVarity plc, which were held beneficially, were as follows:
ORDINARY SHARES AT JANUARY 31 ----------------------------------- 1999 1998 ----------------- ----------------- E A Wallis............................................................ 5,234 5,234 V A Rice.............................................................. 1,112,410 1,060,458 J A Gilroy............................................................ 296,379 202,960 N D Arnold............................................................ 298,801 244,530 T N Davidson.......................................................... 160,820 119,420 R M Gates............................................................. 17,010 13,010 S Gillibrand.......................................................... 15,163 15,163 Sir Bryan Nicholson................................................... 72,430 31,030 Sir Brian Pearse (resigned May 15, 1998).............................. -- 21,104 Dr. A W Rudge......................................................... 5,000 5,000 W S Rustand........................................................... 22,380 22,380
OPTIONS ON OPTIONS ON ORDINARY SHARES OPTIONS GRANTED OPTIONS EXERCISED ORDINARY SHARES AT JANUARY 31 DURING THE YEAR DURING THE YEAR AT JANUARY 31 1999 1998 ----------------- --------------- ------------------- ----------------- V A Rice........................... 12,338,990 950,000 200,000 11,588,990 J A Gilroy......................... 4,582,010 550,000 -- 4,032,010 N D Arnold......................... 3,236,340 450,000 -- 2,786,340 T N Davidson....................... 124,200 -- 41,400 165,600 R M Gates.......................... 124,200 -- -- 124,200 Sir Bryan Nicholson................ 124,200 -- 41,400 165,600 W S Rustand........................ 124,200 -- -- 124,200
Since the year end, there have been no further options granted. The Directors retiring by rotation in accordance with the Articles of Association are E A Wallis, R M Gates and J A Gilroy and, being eligible, each offers himself for re-election. Of the Directors being proposed for re-election only J A Gilroy has a service agreement with the Group, which is terminable upon two years' notice. None of the Directors has any beneficial interest in shares of subsidiary undertakings or in the listed preference shares of Lucas Industries plc. C-42 43 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 24. DIRECTORS' EMOLUMENTS AND INTERESTS (CONTINUED) GLOBAL SHARE PLAN Executive Directors are also eligible to participate in the LucasVarity Global Share Plan which is available to employees generally. Under this Plan, a custodian purchases shares monthly using participants' salary deductions up to a maximum of (pound)3,000 per annum. Further shares, representing 10% of the value of the participant's contributions, are purchased with contributions from the Company each month and vest immediately. An additional 10% of shares are purchased with further contributions from the Company for each year the shares are retained in the Plan up to five years after original purchase. SERVICE AGREEMENTS The period of notice required to be given by the Company to terminate the service agreements of executive Directors is two years. Based upon their contracts at the time of the merger, V A Rice, J A Gilroy and N D Arnold have change-in-control agreements which provide certain benefits if employment ceases under certain circumstances prior to, in the case of V A Rice, September 6, 1999 (or September 6, 2001 if notice of termination of employment has been given prior to September 6, 1999) and in the case of J A Gilroy and N D Arnold, January 1, 2002. The Remuneration Committee believes that these arrangements are appropriate and necessary to provide long-term motivation and to maximise shareholder value. The benefits under the change-in-control agreements include, in addition to benefits which have accrued at the date of termination: i) a lump sum payment equal to a multiple of basic salary (excluding bonuses) at the date of termination or the occurrence of the change-in-control, whichever is greater, and the highest bonus earned during any of the previous three financial years. In the case of V A Rice the multiple is 4.4 and J A Gilroy and N D Arnold 3.35; and ii) a right to have all options granted prior to September 6, 1996 purchased at a price equal to the difference between the exercise price and the higher of the market price of LucasVarity Ordinary Shares at the date of termination or the highest price paid by a person or group in an acquisition which has resulted in a change-in-control, or alternatively a five-year interest-free loan to exercise the options. In either case all legal fees or (to the extent permitted by law) tax incurred will be reimbursed. These arrangements will not be renewed when they lapse. C-43 44 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 25. CONTINGENT LIABILITIES AND COMMITMENTS (i) CAPITAL COMMITMENTS
JANUARY 31 ---------------------------------- 1999 1998 ----------------- ---------------- ((POUND) MILLION) Contracted but not provided....................................... 39 37 === ===
(ii) LEASING COMMITMENTS
PROPERTIES PLANT AND EQUIPMENT JANUARY 31 JANUARY 31 ----------------------------------- -------------------------------- 1999 1998 1999 1998 ----------------- ----------------- ------------- ----------------- ((POUND) MILLION) Operating leases The annual charge for leases terminating: Within one year......................... 1 1 5 6 One to five years....................... 3 4 10 11 Over five years......................... 3 7 6 2 --- --- --- --- 7 12 21 19 === === === ===
The majority of property leases are subject to rent reviews. The future minimum lease payments for noncancellable operating leases for the years ended January 31 are as follows:
JANUARY 31, 1999 ------------------- ((POUND) MILLION) 2000....................................................................... 28 2001....................................................................... 23 2002....................................................................... 14 2003....................................................................... 11 2004....................................................................... 9 Thereafter................................................................. 18 --- 103 ===
(iii) CONTINGENT LIABILITIES In the normal course of business, the Group gives certain indemnities and also enters into forward commitments for the purchase and sale of foreign currencies. Such commitments are only entered into on the basis of forecast requirements. Product liability The sale of products utilised in the automotive and aerospace industries (particularly products utilised in the control systems of vehicles and aircraft) entail an inherent risk of product liability claims. Although LucasVarity's products are subjected to rigorous testing procedures, a design or manufacturing error could have catastrophic consequences and result in LucasVarity being named as a defendant in lawsuits asserting potentially large claims. Although LucasVarity has product liability insurance coverage, there can be no assurance that the coverage of these policies will be adequate or that future product liability insurance will be available on acceptable terms. Moreover, such insurance does not cover punitive damage awards. A successful claim against LucasVarity resulting in awards in excess of policy limits could have a material adverse effect on LucasVarity's financial condition and results of operations. C-44 45 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 26. DEFERRED TAXATION
JANUARY 31 ---------------------------------- 1999 1998 ----------------- ---------------- ((POUND) MILLION) Accounted for: Tax on excess of capital allowances over depreciation... 14 20 Other timing differences................................ (24) (28) Advance Corporation Tax recoverable..................... (4) (4) --- --- (14) (12) === === Not accounted for: Tax on excess of capital allowances over depreciation... 68 64 Other timing differences................................ (42) (6) --- --- 26 58 === ===
No provision has been made for potential taxation which could arise on the remittance to the United Kingdom of retained overseas earnings or on the disposal of revalued property, as no remittances or disposals are envisaged in the foreseeable future which would give rise to a material liability. Surplus Advance Corporation Tax amounting to (pound)65 million (1998 - (pound)87 million), of which (pound)4 million (1998 - (pound)4 million) is referred to above, is available for set-off against future U.K. corporation tax and deferred tax liabilities. The tax value of losses carried forward is (pound)47 million (1998 - (pound)99 million). The tax value of losses carried forward generally have no expiry date except for those in the United States where (pound)19 million will expire between 2010 and 2011. C-45 46 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 27. NUMBERS OF EMPLOYEES
JANUARY 31 ---------------------------------------------- JULY 31 1999 1998 1997 1996 --------------- --------------- -------------- --------------- HEADCOUNT: At the end of each period the actual numbers of employees were as follows: United Kingdom......................... 16,978 25,685 26,829 22,935 Rest of World.......................... 30,745 31,269 30,230 23,743 ------ ------ ------ ------ 47,723 56,954 57,059 46,678 ====== ====== ====== ======
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ------------------------------ JANUARY 31 JULY 31 1999 1998 1997 1996 -------------- -------------- ------------- -------------- AVERAGE NUMBERS OF EMPLOYEES: BY CLASS OF BUSINESS: Automotive....................................... 44,219 44,154 42,754 41,042 Aerospace........................................ 6,709 6,872 7,950 6,688 Corporate........................................ 169 300 685 -- Discontinued operations - Diesel Engines......... 399 4,620 3,878 -- ------ ------ ------ ------ 51,496 55,946 55,267 47,730 ====== ====== ====== ====== BY GEOGRAPHICAL REGION: United Kingdom................................... 19,776 25,530 26,105 23,616 Rest of World.................................... 31,720 30,416 29,162 24,114 ------ ------ ------ ------ 51,496 55,946 55,267 47,730 ====== ====== ====== ======
C-46 47 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 28. PURCHASE OF SUBSIDIARY UNDERTAKINGS (i) YEAR ENDED JANUARY 31, 1999 The Group acquired the business of AF Dormeyer Manufacturing Corp. Inc. during October and the 39% minority interest in Lucas Autobrzdy s.r.o. in December. Both transactions were accounted for as acquisitions. The total goodwill arising of (pound)6 million has been capitalised within intangible fixed assets (see note 13).
BOOK VALUE REVALUATIONS OF ASSETS AND ACQUIRED PROVISIONS FAIR VALUE ---------------- ----------------- ------------- ((POUND) MILLION) Cash and overdrafts.......................................... 1 -- 1 Working capital.............................................. 1 (2) (1) Tangible fixed assets........................................ 2 -- 2 Minority interest............................................ 7 -- 7 Provisions................................................... (1) -- (1) --- --- --- Net assets acquired.................................... 10 (2) 8 --- --- Goodwill capitalised......................................... 6 --- Total consideration.................................... 14 === Satisfied by: Cash consideration......................................... 13 Deferred consideration..................................... 1 --- Total consideration.................................... 14 === The net outflow of cash in respect of the purchase of subsidiary undertakings is as follows: Cash consideration....................................... 13 Cash balances of subsidiary undertakings purchased....... (1) --- 12 Deferred consideration paid............................. 27 --- 39 ===
The cash flows of subsidiary undertakings acquired during the year are not material. C-47 48 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 28. PURCHASE OF SUBSIDIARY UNDERTAKINGS (CONTINUED) (ii) YEAR ENDED JANUARY 31, 1998
BOOK VALUE REVALUATIONS OF ASSETS AND ACQUIRED PROVISIONS FAIR VALUE ---------------- ----------------- -------------- ((POUND) MILLION) Cash and overdrafts.......................................... 31 -- 31 Working capital.............................................. 45 (7) 38 Tangible fixed assets........................................ 78 (1) 77 Fixed asset investments...................................... 2 -- 2 Taxation payables............................................ (3) 1 (2) Borrowings................................................... (47) -- (47) Provisions................................................... (8) (3) (11) --- --- --- Net assets acquired.................................... 98 (10) 88 --- --- Minority shareholders' interest.............................. (20) Share of net assets of associated undertaking................ (15) Goodwill set-off against reserves............................ 87 --- Total consideration.................................... 140 === Satisfied by: Cash consideration......................................... 91 Deferred consideration..................................... 49 --- Total consideration.................................... 140 === The net outflow of cash in respect of the purchase of subsidiary undertakings is as follows: Cash consideration......................................... 91 Cash balances of subsidiary undertakings purchased......... (31) --- 60 ===
The cash flows of subsidiary undertakings acquired during the year are not material. The fair value assessments for the Freios Varga SA acquisition are provisional due to the timing of the transaction. C-48 49 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 28. PURCHASE OF SUBSIDIARY UNDERTAKINGS (CONTINUED) (iii) PURCHASE OF VARITY Varity was acquired during the six months to January 31, 1997, and due to the timing of the transaction, provisional fair value assessments were made at January 31, 1997. During the year to January 31, 1998, certain revisions have been made to certain fair values as detailed below:
ORIGINAL ORIGINAL U.S. TO U.K. ASSET BOOK VALUE GAAP AND REVALUATIONS OF ASSETS OTHER POLICY AND OTHER FAIR VALUE FINAL ACQUIRED CONFORMITY ADJUSTMENTS REVISIONS FAIR VALUE ------------- ------------- -------------- ------------ ------------- ((POUND) MILLION) Cash and overdrafts................ 33 -- -- -- 33 Short-term deposits................ 18 -- -- -- 18 Marketable securities.............. 15 1 -- -- 16 Accounts receivable................ 245 -- -- -- 245 Inventories........................ 108 1 (1) -- 108 Tangible fixed assets.............. 434 -- (18)(d) (7)(d) 409 Fixed asset investments............ 6 -- (1) -- 5 Goodwill........................... 181 (181)(a) -- -- -- Current liabilities................ (304) -- -- (7)(h) (311) Borrowings......................... (2) -- -- -- (2) Provisions......................... (172) (8)(b,c) (199)(e,f,g) (14)(i,j) (393) ---- ---- ---- --- ----- Net assets..................... 562 (187) (219) (28) 128 ---- ---- ---- --- Minority shareholders' interest.... (1) Goodwill - prior period............ 1,165 Goodwill - current period.......... 28 ----- Consideration.................. 1,320 ===== The net inflow of cash in respect of the purchase of Varity in the prior period was as follows: Cash expenses.................. (21) Cash purchased................. 33 ----- 12 =====
The reasons for the principal adjustments are described below: (a) elimination of goodwill which was previously capitalised by Varity; (b) restate deferred tax on a partial provisioning basis in accordance with Statement of Standard Accounting Practice 15; (c) additional provisions for planned redundancies which had been determined but not announced at the time of acquisition and which were not therefore provided in accordance with U.S. GAAP. In total (pound)15 million was charged as restructuring costs in the 12 months prior to acquisition; (d) revalue fixed assets to reflect the fair value of the assets acquired; (e) recognise liabilities relating to prior contractual obligations arising from the change in control ((pound)14 million); C-49 50 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 28. PURCHASE OF SUBSIDIARY UNDERTAKINGS (CONTINUED) (f) provide for the actuarial deficit on the Varity pension schemes and liabilities for other post-retirement benefits ((pound)134 million); (g) provision for the post-retirement medical benefit and environmental liability obligations of a Varity subsidiary which are indemnified by a predecessor of Fruehauf Trailer Corporation (FTC). Provision is required as FTC entered into Chapter 11 bankruptcy proceedings in September 1996 and is unlikely to be able to comply with its indemnity obligations ((pound)31 million); (h) updated estimate of acquisition date liabilities of the Group's captive insurance company; (i) final calculation of the fair value at acquisition of the post-retirement benefit liabilities of present and former Varity subsidiaries ((pound)54 million); and (j) establish a deferred tax asset in respect of Varity net operating and capital losses which are now considered recoverable against future taxable profits ((pound)40 million). (iv) SIX MONTHS ENDED JANUARY 31, 1997 The purchase of other subsidiary undertakings consists of the cargo handling business of Boeing Georgia Inc. ("Boeing Georgia") and Autospecialty. The goodwill arising of (pound)1 million and (pound)36 million, respectively, has been set-off against the merger reserve.
REVALUATIONS AND BOOK VALUE PROVISIONS FAIR VALUE ------------- -------------- ------------ ((POUND) MILLION) Working capital.............................................. 41 (6) 35 Tangible fixed assets........................................ 14 -- 14 Provisions................................................... (4) (28) (32) Borrowings................................................... (2) -- (2) --- --- --- Net assets................................................... 49 (34) 15 --- --- Goodwill arising............................................. 37 --- Cash consideration........................................... 52 === The net outflow of cash in respect of the purchase of other subsidiary undertakings is as follows: Cash consideration........................................... (52) ===
The principal adjustment relates to Boeing Georgia, reflecting a provision established pending finalisation of the purchase price allocation to fixed asset and inventory fair values and to reflect an onerous pricing commitment to the vendor. (v) YEAR ENDED JULY 31, 1996 There were no significant acquisitions during the period. Assets with a fair value of (pound)13 million were acquired, including cash of (pound)5 million and investment in associated undertakings and minority interests, for cash consideration of (pound)17 million resulting in goodwill of (pound)4 million being set-off against reserves. C-50 51 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 29. SALES AND CLOSURES OF BUSINESSES (i) YEAR ENDED JANUARY 31, 1999
HEAVY VEHICLE BRAKING VARITYPERKINS SYSTEMS OTHER TOTAL --------------- ------------- ----------- ----------- ((POUND) MILLION) Tangible fixed assets.................................. 165 58 19 242 Fixed asset investments................................ 11 -- -- 11 Working capital........................................ 24 28 23 75 Taxation creditors..................................... 6 -- (2) 4 Provisions............................................. (9) 27 2 20 Cash and overdrafts.................................... 30 -- 5 35 Bank loans............................................. -- (4) -- (4) --- --- --- ----- Net assets disposed ............................... 227 109 47 383 Minority interests..................................... -- (1) (2) (3) Share of net assets of associated undertakings......... -- -- (2) (2) Goodwill set off against reserves...................... 453 35 9 497 Profit on disposal..................................... 123 95 6 224 --- --- --- ----- Total consideration................................ 803 238 58 1,099 === === === ===== Satisfied by: Cash consideration..................................... 803 233 57 1,093 Deferred consideration................................. -- 5 1 6 --- --- --- ----- Total consideration................................ 803 238 58 1,099 === === === ===== The net inflow of cash in respect of the disposal of subsidiary undertakings is as follows: Cash consideration..................................... 660 233 57 950 Cash balances of subsidiary undertakings sold.......... (30) -- (5) (35) --- --- --- ----- 630 233 52 915 === === === =====
The cash flows of subsidiary undertakings disposed of during the year are not material. DISPOSAL OF VARITYPERKINS In March 1998, LucasVarity completed the sale of VarityPerkins, which constituted 100% of the Diesel Engines segment, to Caterpillar Inc. for gross proceeds of (pound)803 million. After deducting (pound)173 million of tax, claims and transaction costs relating to the disposal, net cash received amounted to (pound)630 million. A post-tax accounting profit of (pound)4 million was recorded on the sale after considering net assets disposed and the write-back of (pound)453 million of goodwill. This goodwill resulted from the accounting treatment of the acquisition of Varity Corporation by Lucas Industries in September 1996. The results of VarityPerkins have been shown in the accounts as discontinued operations. C-51 52 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 29. SALES AND CLOSURES OF BUSINESSES (CONTINUED) DISPOSAL OF HEAVY VEHICLE BRAKING SYSTEMS BUSINESS In January 1999, LucasVarity completed the sale of its Heavy Vehicle Braking Systems business to Meritor Inc. Net proceeds of (pound)233 million were received and a net profit of (pound)60 million recognised after transaction costs, provisions, a tax charge of (pound)35 million and the write-back of (pound)35 million of goodwill. OTHER DISPOSALS Other subsidiary undertakings disposed of during the year included the Aftermarket business of Lucas Services U.K. and Deeco Systems, an Electrical and Electronic Systems business. The disposal of Lucas Services U.K. generated an after-tax gain of (pound)11 million. The loss on the sale of Deeco Systems included the write-back of (pound)9 million of goodwill. A further exceptional gain related to the Electrical and Electronic Systems' joint venture agreement with TRW Inc. to develop and manufacture electronic power-assisted steering. Net proceeds of (pound)18 million were received which, after subtracting related assets, taxes and provisions, resulted in a net gain of (pound)5 million. In addition, a (pound)6 million loss was recognised on the termination of a product line within the Aerospace division. (ii) YEAR ENDED JANUARY 31, 1998
YEAR ENDED JANUARY 31 1998 ------------------ ((POUND) MILLION) Cash and overdrafts............................................................................ 1 Working capital................................................................................ 50 Tangible fixed assets.......................................................................... 48 Provisions..................................................................................... (17) --- Net assets................................................................................... 82 Goodwill charged to profit and loss account.................................................... 7 Loss on disposal............................................................................... (25) --- Total consideration.......................................................................... 64 --- Satisfied by: Cash........................................................................................... 63 Deferred consideration......................................................................... 1 --- 64 --- The net inflow of cash in respect of the disposal of subsidiary undertakings is as follows: Cash consideration............................................................................. 63 Cash balances of subsidiary undertakings sold.................................................. (1) --- 62 ===
The cash flows of subsidiary undertakings disposed of during the year are not material. C-52 53 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 30. POST BALANCE SHEET EVENT (Unaudited) It was announced on January 28, 1999 that the Board of Directors of TRW Inc. ("TRW") and of LucasVarity had agreed to the terms of a recommended cash offer to be made by TRW for the entire issued and to be issued share capital of LucasVarity. The offer valued the entire issued share capital of LucasVarity at (pound)4,022 million based on an offer price of 288 pence for each LucasVarity share ((pound)28.80 for each LucasVarity ADS). The formal offer document was sent to LucasVarity shareholders on February 6, 1999. The initial offer period expired on March 9, 1999, on which date TRW announced that the acceptance period had been extended to March 25, 1999. On March 25, 1999, TRW announced that all conditions to the recommended cash offer for LucasVarity had been satisfied or, where permitted, waived, and the offer had been declared unconditional in all respects. On March 29, 1999, TRW issued notices to those LucasVarity shareholders who had not already accepted the offer, informing them that it intended to exercise its right under section 429 of the Companies Act 1985 to acquire compulsorily all their LucasVarity shares (including those represented by LucasVarity ADSs). C-53 54 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Group's financial statements are prepared in accordance with U.K. GAAP which differ in certain respects from U.S. GAAP. The significant differences applicable to the Group are described below. GOODWILL For U.K. GAAP purposes, the purchased goodwill arising on consolidation in respect of acquisitions before February 1, 1998 was written off to reserves in the year of acquisition. Purchased goodwill arising on consolidation in respect of acquisitions since February 1, 1998 is capitalised and amortised by equal annual instalments over its useful life, not exceeding 20 years. Under U.S. GAAP, all goodwill is capitalised and amortised over its estimated useful life. Under U.K. GAAP, the amount of goodwill included in the calculation of the gain or loss on disposals of businesses is determined by the date of acquisition of the business. For businesses acquired before February 1, 1998, the total amount of goodwill is written back from reserves and included in the determination of the gain or loss on disposal of businesses. For businesses acquired after February 1, 1998, any unamortised balance of goodwill will be used in the gain or loss on disposal calculation. Under U.S. GAAP, the treatment of all disposals is similar to that under U.K. GAAP for businesses acquired after February 1, 1998. INTANGIBLE FIXED ASSETS - ENTRY FEES Under U.K. GAAP, entry fees are capitalised and subsequently amortised in order to match cost against estimated future revenues, having regard to the technical and commercial viability of the related product programmes. Under U.S. GAAP, such costs are only capitalised following flight certification of the engines to which the payments relate. EXCEPTIONAL ITEMS Under U.K. GAAP, profits less losses on sales and closures of businesses, including goodwill relating to businesses planned for divestment which is considered to be impaired, and profits less losses on disposals of fixed assets are credited or charged to income after operating profit. Under U.S. GAAP, such items would be charged in the determination of operating profit. Under U.S. GAAP, disclosure of operating profit before exceptional items and earnings per share before exceptional items is not permitted. Aerospace claims In the year ended July 31, 1994, a provision of $50 million was made towards the liability expected to arise in the United States in respect of the Lucas Industries' Geared Systems Division. Under U.S. GAAP, such a provision would not have been made as the criteria in Statement of Financial Accounting Standards ("SFAS") 5-"Accounting for Contingencies" were not met. The provision would, however, have been made in the year ended July 31, 1995 under U.S. GAAP. C-54 55 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Restructuring charges Under U.K. GAAP, restructuring charges are usually charged to net income in the accounting period in which the management decision, based on a predetermined plan, is taken to restructure the entity's operations. Under U.S. GAAP, provision is made when the entity is demonstrably committed to specific restructuring actions. This commitment would, typically, be demonstrated by a public announcement detailing the businesses, locations and numbers of employees involved together with the timing and size of expenditures. Under U.K. GAAP, the fair value balance sheet of an acquired company cannot include provisions for integration and reorganisation costs expected to be incurred as a result of the acquisition. Under U.S. GAAP, certain integration and reorganisation costs relating to the acquired business may be considered liabilities assumed and included in the allocation of the acquisition cost. Profit less losses on sales and closures of businesses and disposals of fixed assets Under U.K. GAAP, gains on sale and leaseback transactions are recognised as part of income to the extent that the sale proceeds do not exceed the fair value of the assets concerned. Gains arising on the portion of sale proceeds which exceed fair value are deferred and amortised over the minimum lease term. Under U.S. GAAP the total gains, net of the associated costs of the transaction, would be deferred in full and amortised over the minimum lease term. Under U.S. GAAP, the cumulative exchange translation adjustment relating to businesses sold would be included in the determination of the gain or loss arising on sale. PROPERTY REVALUATION Under U.K. GAAP, the Group's land and buildings are periodically revalued and the resulting carrying value adjustments to such assets are credited or debited to revaluation reserves. Subsequent depreciation is computed on the revalued amounts. Under U.S. GAAP, revaluations are not permitted and depreciation is computed on historical cost. DIVIDENDS Under U.K. GAAP, dividends, and the related Advance Corporation Tax ("ACT"), are recorded in the financial statements for the period to which they relate. Under U.S. GAAP, dividends are not recorded until they are declared. The final dividends, which are proposed by the Directors for approval and declaration by the shareholders at the next Annual General Meeting, would not therefore be included in the financial statements prepared under U.S. GAAP until so approved and declared. Accordingly, the related ACT would be similarly treated. DEFERRED TAXATION Under U.K. GAAP, the Group provides for deferred taxation where the tax liability will become payable in the foreseeable future. U.S. GAAP requires full provision to be made on all temporary differences between the book and tax bases of assets and liabilities using the liability method. Deferred tax assets are recognised if their realisation is considered more likely than not. C-55 56 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) PENSION COSTS For the purposes of the reconciliation below, the Group has adopted the provisions of SFAS 87-"Employers' Accounting for Pensions" as from August 1, 1992 in respect of its two principal pension plans in the United Kingdom. The Group's only other material pension plans are in the United States and have been reported on a SFAS 87 basis in the LucasVarity Group's consolidated financial statements as permitted for overseas pension plans under U.K. GAAP, as the difference to SSAP 24 is not material. SFAS 87 requires that the projected benefit obligation (pension liability) be matched against the market value of the underlying plan assets and be adjusted to reflect any other unrecognised obligations or assets in determining the pension cost or credit for the year. As a result, the pension expense can be significantly different from that computed under U.K. GAAP which requires the cost of providing pension benefits to be expensed over the periods benefiting from the employee's service on the basis of a constant percentage of current and estimated future earnings. MARKETABLE SECURITIES Under U.K. GAAP, the Group records marketable securities at the lower of cost and market value. Under U.S. GAAP, certain of the Group's marketable securities are carried at fair value, with the unrealised gains and losses, net of tax, reported in a separate component of shareholders' equity. Realised gains and losses, and declines in value, judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. BILLS DISCOUNTED Under U.S. GAAP, where a company enters into discounted bill arrangements in which it transfers receivables with recourse in the event of product failure, the transfer is accounted for as a secured borrowing with a pledge of collateral. A separate asset and liability is disclosed in the balance sheet. Under U.K. GAAP, when recourse is in the event of product failure, only disclosure of the net position is required. FORWARD EXCHANGE CONTRACTS The Group enters into forward exchange contracts which under U.K. GAAP are all treated as hedges of future income. Under U.S. GAAP, these contracts would not have been treated as hedges and, accordingly, the gain or loss arising on the translation of these contracts at the forward rates of exchange ruling at each balance sheet date would be included in the determination of net income. DEFERRED COMPENSATION PLAN For the purposes of U.S. GAAP reporting, the Group has implemented EITF 97-14 "Accounting for deferred compensation arrangements where amounts earned are held in a Rabbi Trust and invested". Rabbi Trusts are grantor trusts generally set up to fund compensation for a select group of management or executives. To qualify as a Rabbi Trust for U.S. income tax purposes, the terms of the trust agreement must explicitly state that the assets of the trust are available to satisfy the claims of general creditors in the event of bankruptcy of the employer. At January 31, 1999 the Group had one significant Rabbi Trust set up for such a purpose. C-56 57 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) Under the terms of EITF 97-14, the accounts of the Rabbi Trust should be consolidated with the accounts of the employer in their financial statements. The assets of the Trust should be marked to market value and the liability for deferred compensation adjusted to equal the value of the Trust. Since participants of the Trust have the right to choose their investments and make changes at their discretion, these investments are considered as trading securities and therefore, shown within current assets. The corresponding deferred compensation liability has been classified within long-term liabilities. Under U.K. GAAP, there is no requirement to show the assets or liabilities of the Trust on the balance sheet. DISCONTINUED OPERATIONS Under U.K. GAAP, the sales and operating profits of certain businesses that have been sold or permanently closed are reported as arising from discontinued operations. Under U.S. GAAP, only the disposal of a business segment which represents a separate major line of business or class of customer would qualify as discontinued operations. Under U.S. GAAP, the net assets and the net income/(loss) of the discontinued operations would be separately disclosed for all periods presented. The disposal of the Diesel Engine division, which was completed in March 1998, qualifies as a discontinued business segment under U.K. and U.S. GAAP and has been presented accordingly. C-57 58 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (i) RECONCILIATIONS TO U.S. GAAP The effect of the significant adjustments to net income/(loss) for the period and shareholders' equity which would be required if U.S. GAAP were to be applied instead of U.K. GAAP may be summarised as follows: NET INCOME
YEAR ENDED SIX MONTHS JANUARY 31 ENDED YEAR ENDED ------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------ ------------ ------------ ----------------- ((POUND)MILLION, EXCEPT PER SHARE AND PER ADS AMOUNTS) Net income/(loss) as reported ........................................ 261 209 (202) 106 ----- ----- ----- ----- Continuing operations ................................................ 229 180 (217) 106 Discontinued operations and exceptional items (a) .................... 32 29 15 -- ----- ----- ----- ----- Adjustments: Costs and overheads, less other income Goodwill amortisation .............................................. (33) (40) (18) (13) Goodwill on disposals transferred to income statement .............. 54 4 -- -- Pension curtailment gains on divestments ........................... 20 -- -- -- Intangible fixed assets - entry fees ............................... (10) (15) -- -- Provisions for restructuring ....................................... (23) (95) 91 (36) Property revaluation on disposals .................................. 13 10 1 2 Pension credit ..................................................... 132 117 62 81 Exchange gain/(loss) relating to forward exchange contracts ........ 17 (3) 14 10 Taxation Advance Corporation Tax ............................................ (8) -- 8 (10) Deferred taxation Effect of differences in methodology ............................. (40) (15) 52 (8) Effect of U.S. GAAP adjustments .................................. (4) 9 (60) (23) Other ................................................................ (5) (1) 1 1 ----- ----- ----- ----- 113 (29) 151 4 ----- ----- ----- ----- Net income/(loss) as adjusted to accord with U.S. GAAP attributable to ordinary shareholders .............................................. 374 180 (51) 110 ===== ===== ===== ===== Continuing operations (a) ............................................ 333 148 (66) 110 Discontinued operations .............................................. 41 32 15 -- ===== ===== ===== ===== (IN PENCE) ------------------------------------------ Basic EPS in accordance with U.S. GAAP Continuing operations ................................................ 23.7 p 10.4 p (4.9)p 12.6 p Discontinued operations .............................................. 2.9 p 2.3 p 1.1 p -- ----- ----- ----- ----- 26.6 p 12.7 p (3.8)p 12.6 p ===== ===== ===== ===== Per American Depositary Share as so adjusted (b) ..................... 265.6 p 127.0 p (38.0)p 126.0 p ===== ===== ===== ===== Diluted EPS in accordance with U.S. GAAP (ii) Continuing operations ................................................ 23.3 p 10.3 p (4.9)p 12.3 p Discontinued operations .............................................. 2.9 p 2.2 p 1.1 p -- ----- ----- ----- ----- 26.2 p 12.5 p (3.8)p 12.3 p ===== ===== ===== ===== Per American Depositary Share as so adjusted (b) ..................... 261.5 p 125.0 p (38.0)p 123.0 p ===== ===== ===== =====
C-58 59 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) - ---------- (a) Continuing operations net income in the year ended January 31, 1999 includes profits of (pound)34 million which have been classified as exceptional items under U.K. GAAP (1998 - losses of (pound)17 million, six months ended January 31, 1997 - Nil, 1996 - Nil). (b) Each American Depositary Share represents 10 LucasVarity Ordinary Shares. SHAREHOLDERS' EQUITY
JANUARY 31 --------------------------------------- 1999 1998 ------------------ ------------------- ((POUND) MILLION) Shareholders' equity as reported........................... 1,185 458 Adjustments: Goodwill Cost..................................................... 897 1,353 Amortisation............................................. (135) (127) ----- ----- 762 1,226 Property, plant and equipment Cost..................................................... (107) (118) Depreciation............................................. 9 6 ----- ----- (98) (112) Intangible fixed assets-entry fees......................... (25) (15) Current assets Deferred compensation plan............................... 34 -- Receivables sold......................................... 21 43 Exchange gains relating to forward exchange contracts.... 64 42 Noncurrent assets Prepaid pension cost..................................... 601 454 Current liabilities-accounts payable and accrued liabilities Receivables sold......................................... (21) (43) Proposed final dividend.................................. -- 31 Advance Corporation Tax thereon.......................... -- 8 Deferred revenue-sale and leaseback...................... (1) (1) Noncurrent liabilities Deferred compensation plan............................... (34) -- Deferred revenue-sale and leaseback...................... (12) (13) Provisions for liabilities and charges Restructuring............................................ 13 36 Deferred taxation Effect of differences in methodology................. 107 147 Effect of U.S. GAAP adjustments...................... (165) (160) Other...................................................... -- (2) ----- ----- 1,246 1,641 ----- ----- Shareholders' equity as adjusted to accord with U.S. GAAP.. 2,431 2,099 ===== =====
C-59 60 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (ii) ADDITIONAL INFORMATION IN RESPECT OF EARNINGS PER SHARE The Group adopted the provisions of Statement of Financial Accounting Standards (SFAS) 128: Earnings Per Share in fiscal 1997. For the purposes of calculating the basic and diluted earnings per share in accordance with U.S. GAAP, the income and weighted average ordinary number of shares were as follows:
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ------------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 --------------- --------------- ------------- ------------- NET INCOME ((POUND) MILLION) Per Basic and Diluted EPS calculation............ 374 180 (51) 110 ===== ===== ===== === WEIGHTED AVERAGE NUMBER OF SHARES (MILLIONS) Per Basic EPS calculation........................ 1,408 1,418 1,326 878 Conversion of share options...................... 22 17 -- 16 ----- ----- ----- --- Per Diluted EPS calculation...................... 1,430 1,435 1,326 894 ===== ===== ===== ===
The weighted average number of shares have not been adjusted for the conversion of share options in the periods where a net loss existed. Options to purchase 11,550,326 Ordinary Shares at a weighted average price of (pound)2.48 per share were outstanding during the period, but were not included in the computation of diluted EPS because the options' exercise price were greater than the average market price of the Ordinary Shares. Options to purchase 721,602 ADSs at a weighted average price of $42.34 per ADS were outstanding during the period, but were not included in the computation of diluted EPS because the options' exercise price were greater than the average market price of the ADSs. (iii) CONSOLIDATED STATEMENTS OF CASH FLOWS The Group's financial statements include a consolidated statement of cash flows in accordance with U.K. GAAP. The statement prepared under U.K. GAAP presents substantially the same information as that required under U.S. GAAP. Under U.K. GAAP cash flows are presented for (i) operating activities; (ii) returns on investments and servicing of finance; (iii) taxation; (iv) capital expenditure and financial investment; (v) acquisitions and disposals; (vi) equity dividends; (vii) management of liquid resources; and (viii) financing. U.S. GAAP only require presentation of cash flows from operating, investing and financing activities. Cash flows under U.K. GAAP in respect of taxation and interest would be included within operating activities under U.S. GAAP. Cash flows under U.K. GAAP in respect of capital expenditure and acquisitions and disposals would be included in investing activities under U.S. GAAP. Dividends paid would be included within financing activities. Under U.K. GAAP only short-term investments and bank overdrafts repayable on demand would be included within cash. Other short-term investments would be regarded as liquid resources. Under U.S. GAAP cash and cash equivalents would not include bank overdrafts but would include short-term investments with initial maturities of three months or less. Cash flows in respect of short-term investments with original maturities exceeding three months would be included in investing activities. C-60 61 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The categories of cash flow activity under U.S. GAAP are summarised in the table below.
SIX MONTHS YEAR ENDED JANUARY 31 ENDED YEAR ENDED ------------------------- JANUARY 31 JULY 31 1999 1998 1997 1996 ------------- ----------- ------------ -------------- ((POUND) MILLION) Cash inflow from operating activities............. 307 262 48 81 Cash outflow from investing activities............ (8) (167) (133) (144) Cash (outflow)/inflow from financing activities... (414) (156) 47 (9) Effect of foreign currency translation on cash and cash equivalents............................ 1 (17) (15) -- --- --- --- --- Decrease in cash and cash equivalents by continuing operations........................... (114) (78) (53) (72) Increase in cash and cash equivalents by discontinued operations......................... 604 2 4 -- Cash and cash equivalents at beginning of period.. 116 192 241 313 --- --- --- --- Cash and cash equivalents at end of period........ 606 116 192 241 === === === ===
(iv) CONCENTRATION OF CREDIT RISK Potential concentrations of risk are receivables and cash on deposit with banks. A large proportion of trade accounts receivable are amounts due from major automotive and aerospace manufacturers in the United States and Western Europe and the remainder are widely dispersed with a large number of aftermarket customers throughout the world. Cash deposits are only placed with prime banks with strict limits as to maturity and amount with any one institution. At January 31, 1999 the Group did not consider there to be any significant concentration of credit risk. (v) CONCENTRATION OF LABOUR Many of the operations of LucasVarity are subject to collective bargaining arrangements. Management does not believe, however, that any individual labour disturbances would materially affect the overall financial condition of the Group. Many of the operations of LucasVarity's customers and suppliers are subject to collective bargaining arrangements. Labour disturbances affecting LucasVarity's customers and suppliers could result in a strike that could adversely affect LucasVarity's financial condition and results of operations. It is not possible to predict whether any such disturbances may occur in connection with the renegotiation of contracts between the major U.S. vehicle manufacturers and their principal labour unions. C-61 62 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (vi) ADDITIONAL INFORMATION REQUIRED IN RESPECT OF PENSIONS AND POST-RETIREMENT BENEFITS BALANCE SHEET DISCLOSURES The changes in the benefit obligation and plan assets over the financial year are as follows. These have been computed in accordance with the requirements of SFAS 87, 88 and 106 and are presented in the format required by SFAS 132. Also shown is a statement of the funded status of the Group's plans at year end. The Lucas Deutschland plan in Germany is included in this disclosure for the first time this year and the previous year's disclosure is restated accordingly. The divestment item is in respect of the Perkins U.K. plan.
CHANGE IN BENEFIT OBLIGATION PENSION PLANS OTHER BENEFITS -------------------------------- ----------------------------- YEAR ENDED JANUARY 31 YEAR ENDED JANUARY 31 -------------------------------- ----------------------------- 1999 1998 1999 1998 --------------- ---------------- ------------- --------------- ((POUND) MILLION) BENEFIT OBLIGATION AT BEGINNING OF YEAR......... 2,508 2,430 284 243 Adjustment to prior year acquisition............ -- -- -- 54 Service cost.................................... 39 44 3 2 Interest cost................................... 163 197 19 15 Plan participants' contributions................ 11 14 -- -- Actuarial (gains) and losses.................... 181 (4) 8 (3) Benefits (paid)................................. (137) (146) (20) (18) Other income less (expenses).................... (2) (4) 9 (2) Curtailments, settlements, termination benefits. (24) (7) (1) -- Divestments..................................... (256) -- (1) -- Currency movements.............................. 1 (16) -- (7) ----- ----- --- --- BENEFIT OBLIGATION AT END OF YEAR............... 2,484 2,508 301 284 ===== ===== === ===
CHANGE IN FAIR VALUE OF ASSETS PENSION PLANS OTHER BENEFITS -------------------------------- ----------------------------- YEAR ENDED JANUARY 31 YEAR ENDED JANUARY 31 -------------------------------- ----------------------------- 1999 1998 1999 1998 --------------- ---------------- ------------- --------------- ((POUND) MILLION) FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR.. 3,689 3,371 -- -- Actual return on plan assets.................... 280 452 -- -- Employer contributions.......................... 7 13 21 17 Plan participants' contributions................ 11 13 -- -- Other income less expenses...................... (25) (5) -- -- Divestments..................................... (246) -- -- -- Benefits paid................................... (137) (146) (21) (17) Currency movements.............................. (2) (9) -- -- ----- ----- --- --- FAIR VALUE OF PLAN ASSETS AT END OF YEAR........ 3,577 3,689 -- -- ===== ===== === ===
C-62 63 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
FUNDED STATUS AND UNRECOGNISED GAINS/LOSSES PENSION PLANS OTHER BENEFITS -------------------------------- ----------------------------- YEAR ENDED JANUARY 31 YEAR ENDED JANUARY 31 -------------------------------- ----------------------------- 1999 1998 1999 1998 --------------- ---------------- ------------- --------------- ((POUND) MILLION) FUNDED STATUS................................... 1,093 1,181 (301) (284) Unrecognised net transition asset............... (106) (148) -- -- Unrecognised prior service (cost)............... 5 2 (1) 8 Unrecognised net (gain)/loss.................... (444) (655) 14 (10) Additional minimum liability.................... (6) (8) -- -- ----- ----- ---- ---- BENEFIT OBLIGATION AT END OF YEAR............... 542 372 (288) (286) ===== ===== ==== ====
AMOUNTS RECOGNISED IN FUNDED STATUS PENSION PLANS OTHER BENEFITS -------------------------------- ----------------------------- YEAR ENDED JANUARY 31 YEAR ENDED JANUARY 31 -------------------------------- ----------------------------- 1999 1998 1999 1998 --------------- ---------------- ------------- --------------- ((POUND) MILLION) PREPAID/(ACCRUED) BENEFIT COST.................. 545 379 (288) (286) Accrued benefit liability....................... (6) (8) -- -- Intangible asset................................ 3 1 -- -- --- --- ---- ---- NET AMOUNT RECOGNISED........................... 542 372 (288) (286) === === ==== ====
In some of the pension plans in Germany, U.S. and Canada, the accumulated benefit obligation exceeded the plan assets. In respect of these plans alone, the aggregate value of plan assets was (pound)42 million and the higher of the projected and accumulated benefit obligation was (pound)106 million (1998- (pound)502 million and (pound)527 million). LucasVarity has adopted the provisions of SFAS 87 as from August 1, 1992 in respect of its two pension plans in the United Kingdom. It was not feasible to apply SFAS 87 to these schemes on the effective date specified in the standard. For this plan, the amortisation period for the transition asset is 15 years. The amount accorded directly to equity in the opening balance sheet as at August 1, 1992 was (pound)67 million. The assets of the U.K. pension plans are invested primarily in equities and fixed interest securities in accordance with accepted U.K. practice. No special or contractual termination benefits were paid or recognised. At January 31, 1999, Lucas Pension Trust held 1,632,452 Ordinary Shares of LucasVarity plc and 214,544 First Preference Shares of Lucas Industries plc. C-63 64 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) NET PENSION COST FOR THE FINANCIAL YEAR The benefit cost for the year is computed in accordance with the requirements of SFAS 87, 88 and 106. It is presented in the format required by SFAS 132, as follows. Again the majority of the pension credit relates to the U.K. pension plan.
PENSION PLANS -------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED YEAR ENDED JANUARY 31 JANUARY 31 JULY 31 ------------------------------- -------------- --------------- 1999 1998 1997 1996 --------------- --------------- -------------- --------------- ((POUND) MILLION) Service cost net of employees' contributions.... 39 44 20 24 Interest cost................................... 163 197 95 157 Expected return on plan assets.................. (287) (311) (147) (227) Amortisation of net transition asset............ (22) (22) (22) (22) Amortisation of net gain........................ (21) (14) (1) (10) ---- ---- --- --- NET PERIODIC BENEFIT CREDIT..................... (128) (106) (55) (78) Settlement gains................................ (4) -- -- -- Curtailment gains............................... (28) -- -- -- ---- ---- --- --- TOTAL BENEFIT INCOME............................ (160) (106) (55) (78) ==== ==== === ===
The curtailment gain is primarily in respect of the U.K. pension plan arising from disposal of businesses during the year. The Group also has various defined contribution plans in the U.S. covering certain employees. The Group matches a percentage of the employees' contribution. Expenses under such plans were (pound)6 million in 1999 (1998 - (pound)4 million, 1997 - (pound)2 million; 1996 - (pound)2 million). The weighted averages of the major assumptions used in computing the pension liabilities were as follows. The majority (nearly 90%) of the pension liability relates to the U.K. plan. The assumptions are stated as at January 31.
ACTUARIAL ASSUMPTIONS: 1999 1998 1997 1996 --------------- --------------- -------------- --------------- Discount rate................................... 6.3% 6.7% 8.5% 8.5% Expected return of plan assets ................. 8.5% 8.0% 9.5% 9.5% Rate of compensation increase................... 4.1% 4.5% 6.0% 6.0%
C-64 65 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) NET PENSION COST FOR THE FINANCIAL YEAR (CONTINUED)
OTHER BENEFITS ---------------------------------------------- SIX MONTHS ENDED YEAR ENDED JANUARY 31 JANUARY 31 ------------------------------ --------------- 1999 1998 1997 ------------- --------------- --------------- ((POUND) MILLION) Service cost net of employees' contributions............ 3 2 1 Interest cost........................................... 19 15 6 Amortisation of net transition liability................ -- 9 -- Other................................................... 4 -- -- --- --- --- NET PERIODIC BENEFIT COST............................... 26 26 7 Curtailment gains....................................... (1) -- -- --- --- --- TOTAL BENEFIT EXPENSE................................... 25 26 7 === === ===
The liability for post-retirement medical benefits arises predominantly (nearly 90%) in the U.S. The assumptions are stated as at January 31.
ACTUARIAL ASSUMPTIONS: 1999 1998 1997 -------------- --------------- --------------- Discount rate..................................... 6.3% 7.4% 7.7% Rate of compensation increase..................... 4.9% 5.0% 6.0%
For post retirement medical benefits, the annual rate of increase in the per capita cost of cover is assumed to be 5% per annum in all future years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care cost trend rates would have the following effects.
+1% P.A. -1% P.A. --------------- --------------- Effect on service and interest cost components........................... 2 (2) Effect on post-retirement benefit obligation............................. 26 (23)
C-65 66 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (vii) ADDITIONAL INFORMATION REQUIRED UNDER U.S. GAAP IN RESPECT OF INVESTMENTS IN DEBT AND EQUITY SECURITIES The following is a summary of available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES ------------------------------------------ COST AND ESTIMATED FAIR VALUE ------------------------------------------- YEAR ENDED JANUARY 31 ------------------------------------------ 1999 1998 ----------------------- ------------------- ((POUND) MILLION) U.K. government securities...................................... 6 11 U.K. corporate securities....................................... 1 1 U.S. Treasury securities and obligations of U.S. governmental agencies...................................................... 9 9 U.S. corporate securities....................................... 7 5 European government securities.................................. -- 3 European corporate securities................................... 5 6 Other corporate securities...................................... 2 3 --- --- Total debt securities......................................... 30 38 U.K. equity securities.......................................... 1 1 --- --- 31 39 === ===
The gross realised gains and losses on sales of available-for-sale securities was immaterial for the year ended January 31, 1999 and 1998. C-66 67 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) The cost and estimated fair value of available-for-sale debt securities at January 31, 1999, by contractual maturity, are shown below.
COST ---------------- ((POUND) MILLION) AVAILABLE-FOR-SALE: Due within one year......................................................................... 1 Due after one year through three years...................................................... 7 Due after three years....................................................................... 22 -- 30 ==
(viii) ADDITIONAL INFORMATION REQUIRED IN RESPECT OF DEFERRED TAXATION The analysis of the deferred taxation liability under U.S. GAAP is as follows:
JANUARY 31, 1999 JANUARY 31, 1998 ------------------------ ------------------------- ((POUND) MILLION) Deferred taxation liabilities: Excess of book value over taxation value of fixed assets 90 112 Prepaid pension cost and employee benefits.............. 63 141 Other temporary differences............................. 20 33 --- ---- 173 286 Less: Advance Corporation Taxation...................... 65 87 --- ---- 108 199 Deferred taxation assets: Taxation effect of losses carried forward............... (77) (95) Other temporary differences............................. (71) (216) ---- ---- (148) (311) Less: valuation allowance................................. 84 113 ---- ---- (64) (198) --- ---- 44 1 === ==== Of which: Current................................................. (50) (126) Noncurrent.............................................. 94 127 --- ---- 44 1 === ====
The results of future operations are expected to generate sufficient taxable income to realise the deferred tax assets. C-67 68 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (ix) ACCOUNTING AND DISCLOSURE OF STOCK-BASED COMPENSATION SFAS 123 - Accounting for Stock-Based Compensation: SFAS 123 established financial accounting and reporting standards for stock-based employee compensation plans, and is effective for accounting periods beginning after December 15, 1995. The Statement provides the option to continue under the intrinsic value accounting provisions of Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations provided that proforma footnote disclosures of the effects on net income and earnings per share calculated as if the new fair value method had been implemented, are included. LucasVarity has elected to continue under APB 25. As required by SFAS 123, LucasVarity provides the following disclosure of hypothetical values for the stock awards and fair values detailed in Note 22. Had compensation expense been recorded based on the hypothetical values, LucasVarity's net income under U.S. GAAP for the year ended January 31, 1999 would have been (pound)370 million, or 26.3pence per share and the net income for the year ended January 31, 1998 would have been (pound)177 million, or 12.5pence per share. Because options vest over several years and additional options grants are expected, the effects of these hypothetical calculations are not likely to be representative of similar future calculations. (x) NEW ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognise all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management has not determined the effect of the adoption of SFAS 133. During January 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of Computer Software Developed for or Obtained for Internal Use" which becomes effective for all fiscal years beginning after December 15,1998. Under SOP 98-1, computer software costs that are incurred in the preliminary project stage are expensed as incurred. Once specific capitalisation criteria have been met, external direct costs of materials and service consumed in developing or obtaining internal-use computer software, certain personnel costs, and interest costs incurred when developing computer software for internal use are capitalised. Training costs and data conversion costs are generally expensed as incurred. Such capitalisation costs are amortised over the estimated useful life of the software. The Group is evaluating the effect of the pronouncement. The AICPA issued Statement of Positions 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up activities" in April 1998 and is effective for fiscal periods beginning after December 15, 1998. SOP 98-5 provides guidance on the financial reporting of start-up costs and organisation costs. It requires costs of start-up activities and organisation costs to be expensed as incurred. The Group is evaluating the effect of the pronouncement. C-68 69 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) (xi) CONDENSED U.S. GAAP FINANCIAL INFORMATION The following condensed financial information has been restated to be in accordance with U.S. GAAP. The condensed financial information is stated in sterling. The unaudited translations of sterling amounts into U.S. dollars are included solely for the convenience of the reader. The consolidated balance sheet has been translated using the noon buying rate certified for customs purposes by the Federal Reserve Bank of New York as of January 31, 1999 which was U.S. $1.64 to (pound)1.00. The consolidated statement of operations has been translated at the average rate for the year which was U.S. $1.66 to (pound)1.00. The convenience translations should not be construed as representations that the sterling amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. C-69 70 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED JANUARY 31 JANUARY 31 JANUARY 31 JANUARY 31 JULY 31 1999 1999 1998 1997 1996 ------------ ------------ -------------- ------------ ------------ (UNAUDITED) (IN MILLIONS) $ (POUND) (POUND) (POUND) (POUND) SALES ................................................... 7,088 4,270 4,018 1,841 2,989 ------ ----- ----- ----- ----- EXPENSES: Cost of goods sold .................................... 5,542 3,339 3,133 1,460 2,314 Marketing, general and administration ................. 495 298 313 184 277 Engineering and product development ................... 305 184 188 66 108 Interest, net ......................................... 58 35 58 24 42 Exchange (gains)/losses ............................... (28) (17) 3 (14) (10) Other (income)/expense, net ........................... (13) (8) (10) (3) (8) Sale of businesses, investments and fixed assets....... (256) (154) 1 4 10 Costs of proposed change in domicile .................. 22 13 -- -- -- Restructuring charges, net ............................ 73 44 89 151 36 ------ ----- ----- ----- ----- 6,198 3,734 3,775 1,872 2,769 ------ ----- ----- ----- ----- INCOME BEFORE INCOME TAXES, EARNINGS OF ASSOCIATED COMPANIES, MINORITIES' INTERESTS AND DISCONTINUED OPERATIONS ............................... 890 536 243 (31) 220 Income tax provision .................................... (315) (190) (90) (33) (103) ------ ----- ----- ----- ----- INCOME BEFORE EARNINGS OF ASSOCIATED COMPANIES, MINORITIES' INTERESTS AND DISCONTINUED OPERATIONS ............................................ 575 346 153 (64) 117 Equity in earnings of associated companies, net of tax ................................................... -- -- 6 2 4 Minorities' interests in earnings of subsidiaries, net of tax ................................................... (22) (13) (11) (4) (11) ------ ----- ----- ----- ----- INCOME BEFORE DISCONTINUED OPERATIONS ................... 553 333 148 (66) 110 ------ ----- ----- ----- ----- Earnings from discontinued operations, net of tax ....... 68 41 32 15 -- ------ ----- ----- ----- ----- NET INCOME (LOSS) ....................................... 621 374 180 (51) 110 ====== ===== ===== ===== ===== (IN PENCE) Basic EPS in accordance with U.S. GAAP -------------------------------------------------- Continuing operations ................................... $ 0.39 23.7 p 10.4 p (4.9)p 12.6 p Discontinued operations ................................. $ 0.05 2.9 p 2.3 p 1.1 p -- ------ ----- ----- ----- ----- $ 0.44 26.6 p 12.7 p (3.8)p 12.6 p ====== ===== ===== ===== ===== Per American Depositary Share as so adjusted (a) ........ $ 4.41 265.6 p 127.0 p (38.0)p 126.0 p ====== ===== ===== ===== ===== Diluted EPS in accordance with U.S. GAAP Continuing operations ................................... $ 0.38 23.3 p 10.3 p (4.9)p 12.3 p Discontinued operations ................................. $ 0.05 2.9 p 2.2 p 1.1 p -- ------ ----- ----- ----- ----- $ 0.43 26.2 p 12.5 p (3.8)p 12.3 p ====== ===== ===== ===== ===== Per American Depositary Share as so adjusted (a) ........ $ 4.34 261.5 p 125.0 p (38.0)p 123.0 p ====== ===== ===== ===== =====
- ----------- (a) Each American Depositary Share represents 10 LucasVarity Ordinary Shares. C-70 71 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) CONSOLIDATED BALANCE SHEETS
JANUARY 31 JANUARY 31 JANUARY 31 1999 1999 1998 -------------- ------------- ------------- (UNAUDITED) (IN MILLIONS) $ (POUND) (POUND) ASSETS Current assets: Cash and cash equivalents ................. 994 606 116 Marketable securities ..................... 121 74 39 Receivables ............................... 1,151 702 686 Inventories ............................... 645 393 434 Prepaid expenses and other ................ 215 131 200 Net assets of discontinued operations ..... -- -- 569 ------------ ------------ ------------ Total current assets ........................ 3,126 1,906 2,044 ------------ ------------ ------------ Investments in associated and other companies 57 35 37 Fixed assets: Land and buildings ........................ 528 322 326 Machinery, equipment and tooling .......... 2,562 1,562 1,438 ------------ ------------ ------------ 3,090 1,884 1,764 Accumulated depreciation and amortisation ... (1,235) (753) (680) ------------ ------------ ------------ Net fixed assets ............................ 1,855 1,131 1,084 Other assets and intangibles ................ 2,415 1,473 1,344 ------------ ------------ ------------ 7,453 4,545 4,509 ============ ============ ============ LIABILITIES Current liabilities: Short-term debt ........................... 121 74 412 Current portion of long-term debt ......... 36 22 32 Accounts payable and accrued liabilities .. 1,751 1,068 1,007 ------------ ------------ ------------ Total current liabilities ................... 1,908 1,164 1,451 ------------ ------------ ------------ Long-term debt .............................. 548 334 315 Other long-term liabilities ................. 907 553 576 Minority interests .......................... 103 63 68 SHAREHOLDERS' EQUITY Share capital ............................... 576 351 351 Contributed surplus ......................... 2,655 1,619 1,615 Retained earnings ........................... 1,435 875 567 Accumulated other comprehensive income -- foreign currency translation adjustment .... (679) (414) (434) ------------ ------------ ------------ Total shareholders' equity .................. 3,987 2,431 2,099 ------------ ------------ ------------ 7,453 4,545 4,509 ============ ============ ============
C-71 72 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SHARE CAPITAL ---------------------------------------------------------------------------- FIRST FIRST PREFERENCE ORDINARY PREFERENCE ORDINARY SHARES OF SHARES OF SHARES OF SHARES OF (POUND)1 EACH 25P EACH (POUND)1 EACH 25P EACH TOTAL --------------- ------------- -------------- -------------------- --------- (NUMBER) ((POUND) MILLION) AUTHORISED: Lucas Industries August 1, 1995 and July 31, 1996......... 247,500 1,039,010,000 0.2 260 260 ========== ================= ======= ========= ==== LucasVarity On incorporation May 30, 1996............ 200,000 -- -- Increase................................. 1,999,800,000 500 500 ----------------- --------- ---- January 31, 1997 , 1998 and 1999......... 2,000,000,000 500 500 ================= ========= ==== ISSUED: LUCAS INDUSTRIES AUGUST 1, 1995........................... 247,500 874,596,996 0.2 219 219 Exercise of options...................... 6,763,483 2 2 Scrip dividends in lieu of cash dividends (i).......................... 1,600,789 -- -- Conversion of bonds (ii)................. 547,143 -- -- ---------- ----------------- ------- -------- ---- JULY 31, 1996............................ 247,500 883,508,411 0.2 221 221 Exercise of options...................... 59,240 Scrip dividends in lieu of cash dividends (i).......................... 2,237,491 1 1 LucasVarity Ordinary Shares issued on incorporation.......................... 2 -- -- Elimination of Lucas Industries share capital on Scheme of Arrangement with LucasVarity............................ (885,805,142) (222) (222) Transfer of preference shares to minority interest...................... (247,500) (0.2) -- LUCASVARITY LucasVarity Ordinary Shares issued for Lucas Industries Ordinary Shares (iii). 885,805,140 222 222 LucasVarity Ordinary Shares issued on acquisition of Varity (iv)............. 545,791,490 136 136 Exercise of options...................... 2,774,368 1 1 ---------- ----------------- ------- -------- ---- JANUARY 31, 1997......................... -- 1,434,371,000 -- 359 359 Exercise of options...................... 13,967,535 3 3 Repurchase of shares..................... (43,000,000) (11) (11) ---------- ----------------- ------- -------- ---- JANUARY 31, 1998......................... -- 1,405,338,535 -- 351 351 Exercise of options...................... 13,502,415 3 3 Repurchase of shares..................... (14,594,971) (3) (3) ---------- ----------------- ------- -------- ---- JANUARY 31, 1999......................... -- 1,404,245,979 -- 351 351 ========== ================= ======= ========= ====
C-72 73 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) - --------------- (i) Prior to the Merger, a scrip dividend alternative was offered to shareholders each year. (ii) At August 1, 1995, $1 million 5 1/4% Convertible Bonds 2002 were outstanding all of which were converted or redeemed by October 16, 1995. The bondholders had the right to convert at any time before 2002 at a rate of 415.9 Lucas Industries Ordinary Shares per Bond of $1,000 unless previously redeemed. (iii) In connection with the Scheme of Arrangement, each issued and outstanding Lucas Industries Ordinary Share was cancelled and one LucasVarity Ordinary Share was received for each Lucas Industries Ordinary Share. (iv) Pursuant to the Merger, each outstanding share of common stock, par value $.01 per share, of Varity (a "Varity Share") was converted into the right to receive 1.38 LucasVarity American Depositary Shares ("LucasVarity ADSs"), with each LucasVarity ADS representing 10 LucasVarity Ordinary Shares. C-73 74 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
UNREALISED GAINS ON SHARE CONTRIBUTED RETAINED MARKETABLE TRANSLATION CAPITAL SURPLUS EARNINGS SECURITIES ADJUSTMENTS TOTAL ---------- ------------- ---------- ------------ ------------ ------------ ((POUND) MILLIONS) AUGUST 1, 1995........................ 219 491 497 -- (294) 913 Shares issued......................... 2 9 11 Net income............................ 110 110 Dividends............................. (105) (105) Foreign currency translation adjustments......................... (19) (19) ---- ------ ------ ----- ----- ------ JULY 31, 1996......................... 221 500 502 -- (313) 910 Shares issued by Lucas Industries..... 1 4 5 Elimination of Lucas Industries share capital and contributed surplus on Scheme of Arrangement with LucasVarity......................... (222) (504) (726) LucasVarity share capital issued for Lucas Industries share capital...... 222 504 726 LucasVarity share capital issued on acquisition of Varity............... 136 1,171 1,307 LucasVarity share capital issued after September 6, 1996............. 1 3 4 Net loss.............................. (51) (51) Unrealised gain on marketable security 5 5 Foreign currency translation adjustment.......................... (41) (41) ---- ------ ------ ----- ----- ------ JANUARY 31, 1997...................... 359 1,678 451 5 (354) 2,139 Shares issued......................... 3 11 14 Repurchase of shares.................. (11) (74) (85) Net income............................ 180 180 Dividends............................. (64) (64) Realised gain on marketable security.. (5) (5) Foreign currency translation adjustment.......................... (80) (80) ---- ------ ------ ----- ----- ------ JANUARY 31, 1998...................... 351 1,615 567 -- (434) 2,099 Shares issued......................... 3 21 24 Repurchase of shares.................. (3) (26) (29) Stock compensation.................... 9 9 Net income............................ 374 374 Dividends............................. (66) (66) Foreign currency translation adjustment.......................... 20 20 ---- ------ ------ ----- ----- ------ JANUARY 31, 1999...................... 351 1,619 875 -- (414) 2,431 ==== ====== ====== ===== ===== ====== JANUARY 31, 1999 IN U.S. DOLLARS (MILLIONS)(UNAUDITED)............... $576 $2,655 $1,435 -- $(679) $3,987 ==== ====== ====== ===== ===== ======
COMPREHENSIVE INCOME The Group adopted SFAS 130 "Reporting Comprehensive Income" in 1998. It requires that all items that are required to be recognised under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Accumulated other comprehensive income is equal to the sum of the translation adjustments and the unrealised gains on marketable securities. Accumulated other comprehensive income at January 31, 1999 was (pound)(414) million (1998 - (pound)(434) million; 1997 - (pound)(349) million; July 31, 1996 - - (pound)(313) million). The accumulated tax charge on other comprehensive income at January 31, 1999 was nil (1998 - nil; 1997 - (pound)2 million; 1996 - - nil). C-74 75 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED JANUARY 31 JANUARY 31 JANUARY 31 JANUARY 31 JULY 31 1999 1999 1998 1997 1996 ------------ ----------- ------------ ------------ ----------- (UNAUDITED) (IN MILLIONS) $ (pound) (pound) (pound) (pound) CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) from continuing operations............. 553 333 148 (66) 110 Adjustments to reconcile net income/(loss) to cash provided by operating activities: Depreciation and amortisation.......................... 319 192 177 104 102 Restructuring charges.................................. 50 30 89 76 36 Decrease in restructuring accrual...................... (98) (59) (113) (30) (37) Aerospace claims, net.................................. -- -- -- -- (61) Gain on sales of businesses, investments and fixed assets................................................. (256) (154) 1 4 10 Equity in earnings of associated undertakings in excess of dividends received.................................. -- -- (7) (2) (5) (Increase)/decrease in: Inventories.......................................... 17 10 5 2 16 Receivables.......................................... (80) (48) (68) 58 (27) Prepaid expenses and other........................... 10 6 8 (9) 11 Accounts payable and accrued liabilities............. 60 36 85 (32) (32) Other long-term liabilities.......................... (42) (25) (1) (5) (11) Deferred taxes and income tax creditor............... 181 109 40 5 38 Prepaid pension...................................... (219) (132) (116) (62) (81) Other................................................ 15 9 14 5 12 ---- ---- ---- ---- ---- Cash provided by operating activities from continuing operations............................................. 510 307 262 48 81 ---- ---- ---- ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to fixed assets.............................. (455) (274) (232) (112) (131) (Increase)/decrease in marketable securities........... (2) (1) 25 4 (5) Proceeds from sales of fixed assets.................... 32 19 35 24 26 Proceeds from sales of businesses...................... 474 285 62 -- -- Proceeds from sale of associate........................ 3 2 3 -- -- Acquisition of businesses, net of cash acquired........ (65) (39) (60) (44) (12) Additions to investments in associates................. -- -- (1) (1) (10) Additions to other assets and intangibles.............. -- -- 1 (4) (12) ---- ---- ---- ---- ---- Cash used by investing activities from continuing operations............................................. (13) (8) (167) (133) (144) ---- ---- ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from/(repayments of) bank borrowings and overdrafts, net........................................ (596) (359) 3 101 58 Increase/(decrease) in long-term debt.................. 58 35 -- (9) -- Repayments of capital leases........................... (23) (14) (22) (11) (14) Exercise of share options.............................. 40 24 14 4 7 Issue of share capital................................. -- -- -- -- -- Repurchase of share capital............................ (48) (29) (85) -- -- Dividends paid......................................... (110) (66) (64) (38) (58) Dividends paid to minority shareholders................ (8) (5) (2) -- (2) ---- ---- ---- ---- ---- Cash (used by)/provided by financing activities from continuing operations.................................. (687) (414) (156) 47 (9) ---- ---- ---- ---- ---- Effect of foreign currency translation on cash and cash equivalents............................................ (8) 1 (17) (15) -- ---- ---- ---- ---- ---- DECREASE IN CASH AND CASH EQUIVALENTS BY CONTINUING OPERATIONS............................................. (198) (114) (78) (53) (72) INCREASE IN CASH AND CASH EQUIVALENTS BY DISCONTINUED OPERATIONS............................................. 1,002 604 2 4 -- ---- ---- ---- ---- ---- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS......... 804 490 (76) (49) (72) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD. 190 116 192 241 313 ---- ---- ---- ---- ---- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD....... 994 606 116 192 241 ==== ==== ==== ==== ====
C-75 76 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 32. ADDITIONAL PRO FORMA SEGMENTAL ANALYSIS (UNAUDITED) These financial statements have been presented in accordance with Item 17 of Form 20-F. In this context the Company has not adopted FAS 131, however, the following unaudited segmental analysis shows selected financial information of LucasVarity on the basis of two reportable operating segments; Automotive and Aerospace. This presentation is consistent with the operating segments reported by TRW and reflects the way in which the businesses will be integrated into the TRW structure. (i) YEARS ENDED JANUARY 31, 1999 and 1998, and the six months ended January 31, 1997 SALES AND OPERATING PROFIT/(LOSS) Sales by origin to third parties and operating profit/(loss) were as follows:
SALES TOTAL OPERATING PROFIT/(LOSS) -------------------------- ----------------------------- YEAR ENDED SIX MONTHS YEAR ENDED SIX MONTHS JANUARY 31 ENDED JANUARY 31 ENDED ------------- JANUARY 31 ------------- JANUARY 31 1999 1998 1997 1999 1998 1997 ------ ----- ---------- ----- ----- ---------- ((POUND) MILLION) BY CLASS OF BUSINESS: Automotive.................................... 3,554 3,362 1,578 305 296 (7) Aerospace..................................... 716 648 243 95 75 (67) Corporate/other............................... - 8 20 (50) (29) (74) ------ ----- ---------- ----- ----- ---------- 4,270 4,018 1,841 350 342 (148) Discontinued operations - Diesel Engines...... 42 663 309 (2) 59 20 ------ ----- ---------- ----- ----- ---------- 4,312 4,681 2,150 348 401 (128) ====== ===== ========== ===== ===== ========== BY GEOGRAPHICAL REGION: United Kingdom................................ 1,169 1,226 517 15 70 (211) North America................................. 1,623 1,552 673 172 139 14 Continental Europe............................ 1,182 1,025 541 138 109 36 Rest of World................................. 296 215 110 25 24 13 ------ ----- ---------- ----- ----- ---------- 4,270 4,018 1,841 350 342 (148) Discontinued operations - Diesel Engines...... 42 663 309 (2) 59 20 ------ ----- ---------- ----- ----- ---------- 4,312 4,681 2,150 348 401 (128) ====== ===== ========== ===== ===== ==========
The share of sales and total operating profit of associated undertakings and joint ventures was (pound)129 million (1998 - (pound)134 million, 6 months to January 31, 1997 - (pound)73 million) and (pound)4 million (1998 - (pound) 7 million, 6 months to January 31, 1997 - (pound)3 million), respectively. The results of associated undertakings and joint ventures do not materially affect the results of any of the reported segments. Third party export sales from the United Kingdom were (pound)531 million (1998 - (pound)854 million, 6 months to January 31, 1997 - (pound)365 million). Inter-segment sales are immaterial. C-76 77 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 32. ADDITIONAL PRO FORMA SEGMENTAL ANALYSIS (UNAUDITED) (CONTINUED) SALES BY DESTINATION:
YEAR ENDED JANUARY 31 SIX MONTHS ENDED ---------------------------------------------------- JANUARY 31 1999 1998 1997 ------------------------- ------------------------- ------------------------- ((POUND) MILLION) (%) ((POUND) MILLION) (%) ((POUND) MILLION) (%) SALES: United Kingdom.................................... 802 19 821 18 401 19 ----- --- ----- --- ----- --- Continental Europe: France.......................................... 519 12 440 9 212 10 Germany......................................... 457 10 410 9 195 9 Italy........................................... 91 2 96 2 49 2 Spain........................................... 66 1 57 1 30 1 Other countries................................. 249 6 244 5 123 6 ----- --- ----- --- ----- --- Total Continental Europe...................... 1,382 31 1,247 26 609 28 North America:.................................... United States................................... 1,494 35 1,401 30 569 26 Canada.......................................... 214 5 188 4 85 5 Asia.............................................. 159 4 179 4 89 4 Rest of World..................................... 219 5 182 4 88 4 ----- --- ----- --- ----- --- 4,270 99 4,018 86 1,841 86 Discontinued operations--Diesel Engines........... 42 1 663 14 309 14 ----- --- ----- --- ----- --- 4,312 100 4,681 100 2,150 100 ===== === ===== === ===== ===
ASSETS BY SEGMENT:
JANUARY 31, 1999 JANUARY 31, 1998 ------------------------------ ----------------------------- NET NET TOTAL OPERATING TOTAL OPERATING ------------ ---------------- ------------- -------------- ((POUND) MILLION) ((POUND) MILLION) BY CLASS OF BUSINESS: Automotive........................................ 1,845 1,001 1,995 966 Aerospace......................................... 572 258 446 236 Corporate/other................................... 717 (138) 134 (193) ----- ----- ----- ----- 3,134 1,121 2,575 1,009 Unallocated net assets/(liabilities).............. - 127 - (653) Discontinued operations--Diesel Engines........... - - 374 170 ----- ----- ----- ----- 3,134 1,248 2,949 526 ===== ===== Minority interests................................ (63) (68) ----- ----- Total shareholders' equity........................ 1,185 458 ===== =====
C-77 78 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 32. ADDITIONAL PRO FORMA SEGMENTAL ANALYSIS (UNAUDITED) (CONTINUED) SALES BY DESTINATION:
JANUARY 31, 1999 JANUARY 31, 1998 --------------------------------------- --------------------------------------- NET NET NET TANGIBLE TOTAL OPERATING NET TANGIBLE TOTAL OPERATING FIXED ASSETS ASSETS ASSETS FIXED ASSETS ASSETS ASSETS ------------ ------ ------ ------------ ------ ------ ((POUND) MILLION) BY GEOGRAPHICAL REGION: United Kingdom ............................ 381 1,042 461 386 848 488 North America ............................. 408 1,041 175 394 765 61 Continental Europe ........................ 330 786 318 302 667 261 Rest of World ............................. 108 265 167 114 295 199 ------ ------ ------ ------ ------ ------ 1,227 3,134 1,121 1,196 2,575 1,009 Unallocated net assets/(liabilities) ...... - - 127 - - (653) Discontinued operations - Diesel Engines .. - - - 166 374 170 ------ ------ ------ ------ ------ ------ 1,227 3,134 1,248 1,362 2,949 526 ====== ====== ====== ====== Minority interests ........................ (63) (68) ----- ------ Total shareholder's equity ................ 1,185 458 ===== ======
CAPITAL EXPENDITURES AND DEPRECIATION:
YEAR ENDED JANUARY 31 SIX MONTHS ---------------------------------------------------------------- ENDED JANUARY 31 1999 1998 1997 ----------------------------- ----------------------------- --------------------------- CAPITAL CAPITAL CAPITAL EXPENDITURE DEPRECIATION EXPENDITURE DEPRECIATION EXPENDITURE DEPRECIATION ----------- ------------ ----------- ------------ ----------- ------------ ((POUND) MILLION) Automotive ............ 248 144 212 130 96 67 Aerospace ............. 28 17 23 18 8 8 Corporate/other ....... 1 - 6 1 7 15 --- --- --- --- --- --- 277 161 241 149 111 90 Discontinued operations - Diesel Engines ..... 2 2 52 18 30 6 --- --- --- --- --- --- 279 163 293 167 141 96 === === === === === ===
C-78 79 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 32. ADDITIONAL PRO FORMA SEGMENTAL ANALYSIS (UNAUDITED) (CONTINUED) (ii) YEAR ENDED JULY 31, 1996 Sales by origin to third parties and operating profit were as follows: BY CLASS OF BUSINESS:
YEAR ENDED JULY 31, 1996 -------------------------------------------------- SALES TOTAL OPERATING PROFIT ---------------------- ------------------------- ((POUND) MILLION) Automotive............................ 2,461 186 Aerospace............................. 528 47 ----- --- 2,989 233 === Share of associated undertakings...... 131 ----- 3,120 =====
Inter-segment sales are immaterial. BY GEOGRAPHIC REGION:
YEAR ENDED JULY 31, 1996 ------------------------------------------------------------------------- SALES TOTAL ------------------------------------------------------------- OPERATING TOTAL INTER-REGIONAL EXTERNAL PROFIT ---------------- -------------------- ------------ ---------- ((POUND) MILLION) United Kingdom.......................... 1,360 257 1,103 63 Continental Europe...................... 1,259 112 1,147 123 North America........................... 519 14 505 20 Rest of World........................... 257 23 234 21 ----- --- ----- --- 3,395 406 2,989 227 ===== === Share of associated undertakings........ 131 6 ----- --- 3,120 233 ===== ===
C-79 80 LUCASVARITY PLC AND SUBSIDIARY COMPANIES NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 32. ADDITIONAL PRO FORMA SEGMENTAL ANALYSIS (UNAUDITED) (CONTINUED) BY DESTINATION:
YEAR ENDED JULY 31, 1996 ------------------------ ((POUND)MILLION) (%) SALES: United Kingdom ..................................... 887 30 ----- --- Continental Europe: France ........................................... 448 15 Germany .......................................... 382 13 Italy ............................................ 93 3 Spain ............................................ 59 2 Other countries .................................. 227 8 ----- --- Total Continental Europe ....................... 1,209 41 North America ...................................... 553 18 Rest of World: Asia ............................................. 209 7 Central and South America ........................ 94 3 Africa ........................................... 27 1 Australasia ...................................... 10 - ----- --- Total overseas...................................... 2,102 70 ----- --- 2,989 100 ===== ===
CAPITAL EXPENDITURE AND DEPRECIATION:
YEAR ENDED JULY 31, 1996 ------------------------------------- CAPITAL EXPENDITURE DEPRECIATION ------------------- ------------ ((POUND)MILLION) Automotive ............................. 126 85 Aerospace .............................. 22 18 --- --- 148 103 === ===
C-80 81 33. NEW U.K. ACCOUNTING STANDARDS APPLICABLE TO THE GROUP In September 1998, the Accounting Standards Board in the United Kingdom issued Financial Reporting Standard 12 "Provisions, Contingent Liabilities and Contingent Assets" (FRS 12), and Financial Reporting Standard 13 "Derivatives and other Financial Instruments" (FRS 13). FRS 12 requires recognition of provisions only where it is more likely than not that there is a legal or constructive obligation arising from past events, and it is probable that there will be an outflow of benefits of an amount that can be reasonably estimated. FRS 13 is concerned only with disclosure, with the objective of enabling users to assess the entity's objectives, policies and strategies for holding or issuing financial instruments. The requirements comprise both narrative and numerical disclosures. FRS 12 and FRS 13 are effective for accounting periods ending on or after March 23, 1999. LucasVarity will comply with the standards for the year ending January 31, 2000. In October 1998, the Accounting Standards Board in the United Kingdom issued Financial Reporting Standard 14 "Earnings per Share" (FRS 14). FRS 14 has limited differences from the preceding U.K. Standard on earnings per share, SSAP 3, principally relating to the calculation and disclosure of diluted earnings per share. FRS 14 is effective for accounting periods ending on or after December 23, 1998, and has been adopted by the Group for the year ending January 31, 1999. In March 1999, the Accounting Standards Board in the United Kingdom issued Financial Reporting Standard 15 "Tangible Fixed Assets" (FRS 15). FRS 15 seeks consistency in the initial measurement, valuation and depreciation of fixed assets and in many respects is a codification of best practice. The standard is effective for periods ending on or after March 23, 2000. LucasVarity will comply with the standard for the year ending January 31, 2001. C-81 82 SCHEDULE II LUCASVARITY PLC AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO ARISING ON BALANCE AT BEGINNING EXCHANGE COSTS AND ACQUISITIONS/ END OF DESCRIPTION OF PERIOD DIFFERENCES EXPENSES DIVESTMENTS DEDUCTIONS PERIOD - ------------------------------- ------------ ------------ ----------- ------------- ---------- ------------ ((POUND) MILLION) YEAR ENDED JANUARY 31, 1999 Allowance for doubtful accounts 10 -- 4 (1) (3) 10 Reserve for inventory obsolescence................. 72 -- 15 (9) (25) 53 YEAR ENDED JANUARY 31, 1998 Allowance for doubtful accounts 14 -- 5 -- (9) 10 Reserve for inventory obsolescence................. 79 (2) 29 (5) (29) 72 SIX MONTHS ENDED JANUARY 31, 1997(i) Allowance for doubtful accounts 10 -- 2 4 (2) 14 YEAR ENDED JULY 31, 1996(i) Allowance for doubtful accounts 9 -- 3 -- (2) 10
(i) Prior period information regarding movements on inventory reserves is not available. C-82 EX-99.3 6 EXHIBIT 99.3 1 Exhibit 99.3 UNAUDITED PRO FORMA FINANCIAL INFORMATION The unaudited pro forma statements of operations for the year ended December 31, 1998 and for the quarter ended March 31, 1999 have been prepared to illustrate the effect of the acquisition of LucasVarity as if the acquisition had occurred on January 1, 1998 and January 1, 1999, respectively. Synergies and expected cost savings from the integration of LucasVarity with TRW's previously existing businesses have not been included in the pro forma statements of operations. The unaudited pro forma statement of operations presented for the year ended December 31, 1998 includes the historical financial results for the year ended December 31, 1998 for TRW and the year ended January 31, 1999 for LucasVarity. The unaudited pro forma statement of operations presented for the quarter ended March 31, 1999 includes the statement of operations for the quarter ended March 31, 1999 for TRW and the fourth quarter ended January 31, 1999 for LucasVarity. Unusual and/or one-time items recorded in the two month period ended March 31, 1999 for LucasVarity included primarily the investment banker fees of $21 million relating to the acquisition of LucasVarity by the Company. The historical statements of operations for LucasVarity have been presented using U.S. Generally Accepted Accounting Principles (U.S. GAAP). The statements were translated from British pounds to U.S. dollars using an average exchange rate for the applicable period. The unaudited pro forma statements of operations include the adjustments that have a continuing impact, to reflect the transaction using purchase accounting. The pro forma adjustments are described in the notes to the unaudited pro forma statements of operations. The adjustments are based upon preliminary information and certain management judgments. Certain reclassifications have been reflected to conform to TRW's presentation. The purchase accounting adjustments are subject to revisions which will be reflected in future periods. Revisions, if any, are not expected to have a material effect on the statement of operations or financial condition of the Company. The unaudited pro forma statements of operations are presented for illustrative purposes only and are not necessarily indicative of the results of operations which may occur in the future, or that would have occurred if the acquisition had been consummated on January 1, 1998 and January 1, 1999 for the statements of operations for the year ended December 31, 1998 and the quarter ended March 31, 1999, respectively. The unaudited pro forma statements of operations should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, the consolidated condensed unaudited financial statements and the notes thereto included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and the consolidated financial statements and notes thereto of LucasVarity plc for the year ended January 31, 1999 filed as Exhibit 99.2 to this report. D-1 2 Unaudited Pro forma Statement of Operations For the Year Ended December 31, 1998 (In millions, except per share data)
TRW LucasVarity Historical as Historical as Pro Forma Adjusted Reported Reported Adjustments TRW ------------- ------------- ----------- -------- Sales $11,886 $7,088 $ (10) (a) $18,964 Cost of sales 9,715 5,542 93 (b) 15,350 ------- ------ ----- ------- Gross profit 2,171 1,546 (103) 3,614 Administrative and selling expenses 826 495 -- (c) 1,321 Research and development expenses 522 305 (62) (d) 765 Interest expense 114 58 450 (f) 622 Other expense (income) - net (37) (180) (5) (g) (222) ------- ------ ----- ------- Earnings from continuing operations before income taxes 746 868 (486) 1,128 Income taxes 269 315 (182) (h) 402 ------- ------ ----- ------- Earnings from continuing operations $ 477 $ 553 $(304) $ 726 ======= ====== ===== ======= PER SHARE OF COMMON STOCK Diluted From continuing operations $ 3.83 $ 5.84 Basic From continuing operations $ 3.93 $ 5.98 SHARES USED IN COMPUTING PER SHARE AMOUNTS Diluted 124.4 124.4 Basic 121.3 121.3
See Notes to the Unaudited Pro forma Statement of Operations D-2 3 Unaudited Pro forma Statement of Operations For the Quarter Ended March 31, 1999 (In millions, except per share data)
TRW LucasVarity Historical as Historical as Pro Forma Adjusted Reported Reported Adjustments TRW ------------- ------------- ----------- -------- Sales $3,097 $1,733 $(107) (a) $4,723 Cost of sales 2,618 1,340 (15) (b) 3,943 ------ ------ ---- ------ Gross profit 479 393 (92) 780 Administrative and selling expenses 184 123 (14) (c) 293 Research and development expenses 144 81 (21) (d) 204 Purchased in-process research and development 85 -- (85) (e) -- Interest expense 43 10 106 (f) 159 Other expense (income) - net 16 (152) (31) (g) (167) ------ ----- ---- ------ Earnings from continuing operations before income taxes 7 331 (47) 291 Income taxes 35 117 (49) (h) 103 ------ ------ ---- ------ Earnings (loss) from continuing operations $ (28) $ 214 $ 2 $ 188 ====== ====== ==== ====== PER SHARE OF COMMON STOCK Diluted From continuing operations $(0.24) $ 1.53 Basic From continuing operations $(0.24) $ 1.56 SHARES USED IN COMPUTING PER SHARE AMOUNTS Diluted 120.1 122.9 Basic 120.1 120.1
See Notes to the Unaudited Pro forma Statement of Operations D-3 4 NOTES TO THE UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS (a) Sales were adjusted to reflect the elimination of sales between TRW and LucasVarity of $10 million for the year ended December 31, 1998 and $1 million for the quarter ended March 31, 1999. In addition, Sales for the quarter ended March 31, 1999, were adjusted to eliminate $106 million of LucasVarity sales included in the "TRW Historical as Reported" amount for the period subsequent to the date of acquisition (March 25, 1999) to March 31, 1999. (b) Cost of sales is adjusted to reflect the net amount of the following adjustments:
Quarter Year Ended Ended December 31, 1998 March 31,1999 ----------------- ------------- Elimination of LucasVarity Cost of sales included in the "TRW Historical as Reported" amount $ -- $(84) Reclassification of restructuring cost reported in LucasVarity historical accounts from Other expense (income)-net 73 42 Reclassification of engineering expenses from Research and development expenses to conform with TRW's presentation 62 21 Elimination of goodwill amortization reported in LucasVarity historical amounts (55) (12) Additional depreciation resulting from the write-up of fixed assets to fair value. The assets are depreciated over their estimated useful lives, primarily from 8 to 20 years. The adjustment also includes the reduction in earnings to reflect the adjustment of the fair market value of inventory 32 23 Capitalization of entry fees associated with an investment for aerospace partnering arrangements (17) (6) Elimination of the cost and profit for sales between LucasVarity and TRW (10) (1) Adjustment for LucasVarity pension expense to reflect the actuarial valuation as of the acquisition date 8 2 ---- ---- $ 93 $(15) ==== ====
(c) Elimination of LucasVarity Administrative and selling expenses of $14 million included in the "TRW Historical as Reported" amount for the quarter ended March 31, 1999. (d) Reclassification of $62 million and $21 million of engineering costs to Cost of sales for the year ended December 31, 1998 and the quarter ended March 31, 1999, respectively, to conform with TRW's presentation. (e) Elimination of the charge for Purchased in-process research and development of $85 million in the quarter ended March 31, 1999 reported in connection with the acquisition of LucasVarity. Although the charge is part of the purchase price allocation, it has been excluded from the pro forma adjusted TRW amounts because it does not have a continuing impact on the Statement of Operations. (f) Interest expense is adjusted to reflect the net amount of the following adjustments:
Quarter Year Ended Ended December 31, 1998 March 31, 1999 ----------------- -------------- Increase in interest expense to reflect the cash purchase price of LucasVarity $ 418 $ 93 Reclassification of LucasVarity's interest income to Other expense(income)-net 32 13 --- --- $ 450 $ 106 === ===
D-4 5 (g) Other expense (income)-net is adjusted to reflect the net amount of the following adjustments:
Quarter Year Ended Ended December 31, 1998 March 31, 1999 ----------------- -------------- Amortization over 40 years of goodwill resulting from the acquisition $ 73 $ 18 Reclassification of restructuring costs reported in LucasVarity's historical accounts to Cost of sales (73) (42) Reclassification of LucasVarity interest income from Interest expense (32) (13) Amortization of the fair value of identified intangibles over their estimated useful lives from 16 to 30 years 15 4 Elimination of the LucasVarity gain on the formation of a joint venture with TRW 12 -- Elimination of LucasVarity Other expense (income) - net included in the "TRW Historical as reported" amount -- 2 ---- ---- $ (5) $(31) ==== ====
(h) Reduction in income taxes of $182 million and $49 million for the applicable tax effect of the before tax pro forma adjustments to the statement of operations for the year ended December 31, 1998 and the quarter ended March 31, 1999, respectively. For the year ended December 31, 1998, the pro forma adjustments do not reflect a tax cost of $20 million which would have occurred if the Company had acquired LucasVarity as of January 1, 1998. The $20 million tax cost represents unused foreign tax credits with the assumption that neither TRW nor LucasVarity would have paid certain dividends from their respective foreign subsidiaries. Unusual and/or one-time special items included in the historical statements of operations for TRW and LucasVarity for the year ended December 31, 1998 are set forth below. Excluding these items, the pro forma adjusted earnings from continuing operations would have been $579 million, or $4.65 per diluted share. - - an after-tax gain of $32 million from the settlement of certain patent litigation with the Company - - an after-tax charge of $22 million for litigation, contract reserves, and severance costs relating to the combination of the Company's Systems Integration Businesses with BDM International, Inc., a company acquired in 1997 - - an after-tax charge of $18 million for restructuring primarily for plant closings and severance costs for the Company's Automotive businesses - - an after-tax benefit of $16 million for the Company's interest accrual adjustment for tax litigation settlement - - an after-tax charge for LucasVarity of $21 million for costs incurred for its proposed change of domicile - - an after-tax loss of $10 million recognized upon the termination of LucasVarity's interest rate swap portfolio D-5 6 - - net after-tax gains of $206 million relating to the sale of businesses during the year, including LucasVarity's heavy vehicle braking business - - after-tax charges of $36 million for restructuring related to LucasVarity's automotive businesses for the closure of two plants and severance costs and the loss associated with the termination of a product line within the aerospace business. Unusual and/or one-time special items included in the historical statements of operations for TRW and LucasVarity for the quarter ended March 31, 1999 are set forth below. Excluding these items, the pro forma adjusted earnings from continuing operations and earnings per diluted share would have been $132 million and $1.07, respectively. - - after-tax gains of $19 million from the issuance of stock by RF Micro Devices, Inc., an affiliate of TRW, and $10 million from the Company's concurrent sale of stock of the affiliate - - an after-tax charge of $28 million for the Company's losses from a commercial fixed price contract and a capped cost reimbursable contract for the U.S. Army - - a non-recurring after-tax loss of $33 million on foreign currency hedges relating to the acquisition of LucasVarity - - an after-tax charge of $8 million for the underwriting and participation fees incurred to secure committed credit facilities and the cost of the unutilized credit line in anticipation of the Company's acquisition of LucasVarity - - an after-tax charge of $7 million for severance costs relating to the restructuring of the Company's automotive businesses - - a cost of $85 million, with no income tax benefit, for the valuation of in-process research and development associated with the Company's acquisition of LucasVarity. The cost is eliminated as a pro forma adjustment - - an after-tax gain of $129 million principally related to the sale of LucasVarity's heavy vehicle braking system business - - an after-tax charge of $26 million for restructuring for the automotive business of LucasVarity including the closure of two plants and severance costs. On May 17, 1999, the Company announced that it will divest its engine businesses, which consist of TRW Engine Components and Lucas Diesel Systems operations; TRW Nelson Stud Welding; and the LucasVarity Wiring companies. The estimated net proceeds from these divestitures of $1.2 to $1.5 billion will be applied to reduce debt incurred to finance the acquisition of LucasVarity. The unaudited pro forma statements of operations for the year ended December 31, 1998 and the quarter ended March 31, 1999 included sales of $1,980 million and $485 million, respectively, relating to the businesses to be sold. The results of operations of the businesses to be divested will be reported in Earnings of continuing operations up to the date of their disposition. TRW expects to complete the divestitures of these businesses by year-end 1999. D-6 7 Unaudited Balance Sheet As of March 31, 1999 (In millions) The following unaudited balance sheet of TRW includes the acquisition of LucasVarity accounted for as a purchase. The March 31, 1999 unaudited balance sheet of the Company includes the accounts of the Company and LucasVarity. The balance sheet also reflects a preliminary purchase price allocation based upon the estimated fair value of assets and liabilities as of the date of acquisition. A pro forma balance sheet is not included as the unaudited balance sheet of TRW as of March 31, 1999 includes LucasVarity.
TRW as Reported -------- Assets Current Assets Cash and cash equivalents $ 1,058 Accounts receivable 2,826 Inventories 1,123 Prepaid expenses 275 Net assets of acquired businesses held for sale 739 Deferred income taxes 326 -------- Total current assets 6,347 Property, plant, and equipment - on the basis of cost 7,986 Less accumulated depreciation and amortization 3,890 -------- Total property, plant and equipment - net 4,096 Intangible Assets Intangibles arising from acquisitions 3,759 Other 780 -------- 4,539 Less accumulated amortization 150 -------- Total intangible assets - net 4,389 Investments in affiliated companies 335 Other notes and accounts receivable 349 Prepaid pension cost 2,198 Other assets 437 -------- $ 18,151 ======== Liabilities and shareholders' investment Current liabilities Short-term debt $ 1,837 Short-term payable for LucasVarity plc 2,899 Accounts payable 1,614 Current portion of long-term debt 677 Other current liabilities 1,890 -------- Total current liabilities 8,917 Long-term liabilities 1,764 Long-term payable for LucasVarity plc 3,359 Long-term debt 1,663 Long-term deferred income taxes 590 Minority interests in subsidiaries 131 Shareholders' investment Capital stock 75 Other capital 459 Retained earnings 1,991 Treasury shares - cost in excess of par value (625) Accumulated other comprehensive (loss) (173) -------- Total shareholders' investment 1,727 -------- $ 18,151 ========
On May 17, 1999 the Company announced that it will divest its engine businesses, which consist of TRW Engine Components and Lucas Diesel Systems operations; TRW Nelson Stud Welding; and the LucasVarity Wiring Companies. The net operating assets of the LucasVarity businesses to be sold of $739 million as of March 31, 1999 are included in the caption "Net assets of acquired businesses held for sale." The net assets of the TRW businesses to be sold are approximately $330 million and are reported in their respective balance sheet accounts. D-7 8 Purchase Price Allocation of LucasVarity The assets and liabilities of LucasVarity have been consolidated with TRW based upon the fair value of assets and liabilities. The fair value of employee benefit assets and liabilities were determined by a preliminary actuarial valuation. A preliminary allocation of the cash purchase price of $6,778 million is as follows:
LucasVarity as of March 31, 1999 (in millions) ----------- Cash and cash equivalents $ 774 Accounts receivable 888 Inventory 552 Net assets of businesses held for sale 739 Other current assets 285 ------- Total current assets 3,238 Property, plant and equipment 1,531 Intangible assets 413 Prepaid pension costs 2,198 Other assets 414 ------- Total assets $ 7,794 ======= Accounts payable $ (686) Other accruals (798) Debt (938) Long-term liabilities (932) Long-term deferred taxes (631) ------- Total liabilities $(3,985) ======= Minority Interests $ (39) ======= Purchased in-process research and development $ 85 ======= Excess of purchase price over fair value of net assets acquired $ 2,923 =======
The purchase price allocation is preliminary and is subject to the final appraisal and resolution of preacquisition contingencies and restructuring. D-8 -----END PRIVACY-ENHANCED MESSAGE-----