-----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, JcDTkihm5EzojikuELqRcgAWR5uDRqbnptVQKmo8B2X9RQbcPl8OpgbDhtjf1TUa AxLOplOVadnu8xiwwql8Tw== 0000950130-99-002656.txt : 19990506 0000950130-99-002656.hdr.sgml : 19990506 ACCESSION NUMBER: 0000950130-99-002656 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990504 GROUP MEMBERS: TI AUTOMOTIVE SYSTEMS, INC. GROUP MEMBERS: TI GROUP PLC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: WALBRO CORP CENTRAL INDEX KEY: 0000104174 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 381358966 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-15764 FILM NUMBER: 99610396 BUSINESS ADDRESS: STREET 1: 6242 GARFIELD ST CITY: CASS CITY STATE: MI ZIP: 48726 BUSINESS PHONE: 5178722131 MAIL ADDRESS: STREET 1: 6242 GARFIELD STREET CITY: CASS CITY STATE: MI ZIP: 48726 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: TI GROUP PLC CENTRAL INDEX KEY: 0000908726 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 50 CURZON STREET CITY: LONDON W1Y 7PN STATE: X0 ZIP: 00000 BUSINESS PHONE: 4414999131 MAIL ADDRESS: STREET 1: TI GROUP PLC STREET 2: 50 CURZON ST CITY: LONDON ZIP: 00000 SC 14D1 1 SCHEDULE 14D1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- SCHEDULE 14D-1 Tender Offer Statement Pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934 ---------------- WALBRO CORPORATION (Name of Subject Company) TI AUTOMOTIVE SYSTEMS, INC. TI GROUP PLC (Bidders) COMMON STOCK, PAR VALUE $.50 PER SHARE (INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK) (Title of Class of Securities) 931154108 (CUSIP Number of Class of Securities) David Lillycrop Director and General Counsel TI Group plc 50 Curzon Street London W1Y 7PN 011-44-171-560-5700 (Name, Address and Telephone Number of Persons Authorized to Receive Notices and Communications on Behalf of Bidders) Copies to: John Evangelakos, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 (212) 558-4000 CALCULATION OF FILING FEE: - ------------------------------------------------------------------------------- Transaction Valuation* Amount of Filing Fee - ------------------------------------------------------------------------------ $257,946,120 $51,589.22 - ------------------------------------------------------------------------------
* For purposes of calculating amount of filing fee only. The amount assumes the purchase of 12,897,306 shares of Common Stock, par value $.50 per share (together with the associated rights to purchase Series A Junior Participating Preferred, the "Shares"), at a price per Share of $20 in cash. Such number of shares represents all the Shares outstanding as of May 3, 1999, plus the number of Shares issuable upon the exercise of outstanding options or other rights to acquire Shares. [_]Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: None Filing Party: N/A Page 1 of 5 Pages Form of Registration No.: N/A Date filed: N/A Exhibit Index on page
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Item 1. Security and Subject Company. (a) The name of the subject company is Walbro Corporation, a Delaware corporation (the "Company"), and the address of its principal executive offices is 1227 Centre Road, Auburn Hills, Michigan 48326. (b) The class of securities to which this statement relates is the common stock, par value $.50 per share (the "Common Stock"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights" and together with the Common Stock, the "Shares"), of the Company. The information set forth in the Introductory Section (including the section entitled "Certain Conditions to the Offer") and Section 1 of the Offer to Purchase (the "Offer to Purchase") annexed hereto as Exhibit (a) (1) is incorporated herein by reference. (c) The information set forth in Section 6 of the Offer to Purchase is incorporated herein by reference. Item 2. Identity and Background. (a)-(d);(g) The information set forth in Section 9 of the Offer to Purchase is incorporated herein by reference. The name, business address, present principal occupation or employment, the material occupations, positions, offices or employments for the past five years and citizenship of each director and executive officer of TI Group plc, a company organized under the laws of England and Wales ("Parent") and of TI Automotive Systems, Inc., a Delaware corporation ("Purchaser"), an indirect wholly-owned subsidiary of Parent, and the name, principal business and address of any corporation or other organization in which such occupations, positions, offices and employments are or were carried on are set forth in Schedule A to the Offer to Purchase and are incorporated herein by reference. (e)-(f) During the last five years, neither Purchaser nor Parent, nor, to the best of Parent's knowledge, any of the directors or executive officers of Purchaser or Parent has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which any such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such law. Item 3. Past Contacts, Transactions or Negotiations with the Subject Company. (a)-(b) The information set forth in the Introductory Section and Sections 10 and 12 of the Offer to Purchase is incorporated herein by reference. Item 4. Source and Amount of Funds or Other Consideration. (a)-(b) The information set forth in Section 14 of the Offer to Purchase is incorporated herein by reference. (c) Not applicable. Item 5. Purpose of the Tender Offer and Plans or Proposals of the Bidder. (a)-(g) The information set forth in the Introductory Section and Sections 7 and 11 of the Offer to Purchase is incorporated herein by reference. Item 6. Interest in Securities of the Subject Company. (a)-(b) The information set forth in Section 9 of the Offer to Purchase is incorporated herein by reference. 2 Item 7. Contracts, Arrangements, Understandings or Relationships with Respect to the Subject Company's Securities. The information set forth in the Introductory Section and Sections 9 and 12 of the Offer to Purchase is incorporated herein by reference. Item 8. Persons Retained, Employed or to be Compensated. The information set forth in Section 17 of the Offer to Purchase is incorporated herein by reference. Item 9. Financial Statements of Certain Bidders. The information set forth in Section 9 of the Offer to Purchase and the information annexed hereto as Exhibits (g)(1) and (g)(2) is incorporated herein by reference. Item 10. Additional Information. (a) The information set forth in Section 12 of the Offer to Purchase is incorporated herein by reference. (b)-(d) The information set forth in Section 16 of the Offer to Purchase is incorporated herein by reference. (e) Not applicable. (f) Not applicable. Item 11. Material to be filed as Exhibits. (a)(1) Offer to Purchase, dated May 4, 1999. (a)(2) Letter of Transmittal with respect to the Shares. (a)(3) Form of letter, dated May 4, 1999, to brokers, dealers, commercial banks, trust companies and nominees. (a)(4) Form of letter to clients to be used by brokers, dealers, commercial banks, trust companies and nominees. (a)(5) Press Release, dated April 28, 1999. (a)(6) Form of newspaper advertisement, dated May 4, 1999. (a)(7) Notice of Guaranteed Delivery. (a)(8) IRS Guidelines to Substitute Form W-9. (b)(1) Agreement, dated April 27, 1998, among TI Group plc, TI International Holdings Limited, ABN AMRO Bank N.V., Citibank, N.A. and Midland Bank plc as Arrangers, HSBC Investment Bank plc as Agent, and certain lenders named therein. (b)(2) Syndication Agreement, dated June 23, 1998, among TI Group plc, TI International Holdings Limited, ABN AMRO Bank N.V., Citibank, N.A. and Midland Bank plc as Arrangers, HSBC Investment Bank plc as Agent, and certain lenders named therein. Agreement and Plan of Merger, dated as of April 27, 1999, among the (c)(1) Company, Parent and Purchaser. (c)(2) First Amendment to Agreement and Plan of Merger, dated as of May 3, 1999, among the Company, Parent and Purchaser. (d) None. (e) None. (f) None. (g)(1) TI Group plc's Annual Report to Shareholders for the year ended December 31, 1997. (g)(2) TI Group plc's Annual Report to Shareholders for the year ended December 31, 1998.
3 SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: May 4, 1999 TI GROUP PLC By: /s/ David P. Lillycrop _________ Name: David P. Lillycrop Title: Director TI AUTOMOTIVE SYSTEMS, INC. By: /s/ William J. Laule ___________ Name: William J. Laule Title: President 4 EXHIBIT INDEX
Exhibit Page Number Exhibit Name Number ------- ------------ ------ (a)(1) Offer to Purchase, dated May 4, 1999.......................... (a)(2) Letter of Transmittal with respect to the Shares.............. (a)(3) Form of letter, dated May 4, 1999, to brokers, dealers, commercial banks, trust companies and nominees................ (a)(4) Form of letter to clients to be used by brokers, dealers, commercial banks, trust companies and nominees................ (a)(5) Press Release, dated April 28, 1999........................... (a)(6) Form of newspaper advertisement, dated May 4, 1999............ (a)(7) Notice of Guaranteed Delivery................................. (a)(8) IRS Guidelines to Substitute Form W-9......................... (b)(1) Agreement, dated April 27, 1998, among TI Group plc, TI International Holdings Limited, ABN AMRO Bank N.V., Citibank, N.A. and Midland Bank plc as Arrangers, HSBC Investment Bank plc as Agent, and certain lenders named therein............... (b)(2) Syndication Agreement, dated June 23, 1998, among TI Group plc, TI International Holdings Limited, ABN AMRO Bank N.V., Citibank, N.A. and Midland Bank plc as Arrangers, HSBC Investment Bank plc as Agent, and certain lenders named therein....................................................... (c)(1) Agreement and Plan of Merger, dated as of April 27, 1999, among the Company, Parent and Purchaser....................... (c)(2) First Amendment to Agreement and Plan of Merger, dated as of May 3, 1999, among the Company, Parent and Purchaser.......... (d) None.......................................................... (e) None.......................................................... (f) None.......................................................... (g)(1) TI Group plc's Annual Report to Shareholders for the year ended December 31, 1997....................................... (g)(2) TI Group plc's Annual Report to Shareholders for the year ended December 31, 1998.......................................
EX-99.(A)(1) 2 OFFER TO PURCHASE EXHIBIT (A)(1) OFFER TO PURCHASE FOR CASH ALL OF THE OUTSTANDING SHARES OF COMMON STOCK (INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK) OF WALBRO CORPORATION AT $20 NET PER SHARE BY TI AUTOMOTIVE SYSTEMS, INC. AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF TI GROUP PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 10, 1999, UNLESS THE OFFER IS EXTENDED. THE OFFER (AS DEFINED BELOW) IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ON A FULLY DILUTED BASIS BEING VALIDLY TENDERED PRIOR TO THE EXPIRATION OF THE OFFER AND NOT WITHDRAWN, (2) ANY WAITING PERIODS UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER, AND ANY EUROPEAN ANTITRUST LAWS APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED AND (3) APPROVAL UNDER ANY APPLICABLE EUROPEAN ANTITRUST LAW HAVING BEEN OBTAINED. CERTAIN OTHER CONDITIONS TO CONSUMMATION OF THE OFFER ARE DESCRIBED IN SECTION 15. THE BOARD OF DIRECTORS OF WALBRO CORPORATION HAS UNANIMOUSLY DETERMINED THAT EACH OF THE MERGER AGREEMENT (AS DEFINED BELOW), THE OFFER AND THE MERGER (AS DEFINED BELOW) ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY (INCLUDING THE OFFER AND THE MERGER) AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE OFFER, TENDER THEIR SHARES TO PURCHASER AND APPROVE AND ADOPT THE MERGER AGREEMENT AND THE MERGER. --------------- IMPORTANT Any stockholder desiring to tender all or any portion of such stockholder's common stock, par value $.50 per share (the "Common Stock") (including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights" and collectively with the Common Stock, the "Shares")) of Walbro Corporation should (1) complete and sign the Letter of Transmittal or a facsimile thereof in accordance with the instructions in the Letter of Transmittal, including any required signature guarantees, and mail or deliver the Letter of Transmittal or such facsimile with such stockholder's certificate(s) for the tendered Shares and any other required documents to the Depositary (as defined below), (2) follow the procedure for book-entry tender of Shares set forth in Section 3 or (3) request such stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such stockholder. Stockholders having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if they desire to tender Shares so registered. The Rights are presently evidenced by the certificates for the Common Stock and a tender by a stockholder of such stockholder's shares of Common Stock will also constitute a tender of the associated Rights. A stockholder who desires to tender Shares and whose certificates for such Shares are not immediately available, or who cannot comply with the procedure for book-entry transfer on a timely basis, may tender such Shares by following the procedures for guaranteed delivery set forth in Section 3. Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Requests for additional copies of this Offer to Purchase and the Letter of Transmittal may be directed to the Information Agent, the Dealer Manager or to brokers, dealers, commercial banks or trust companies. --------------- The Dealer Manager for the Offer is: [LOGO] Warburg Dillon Read --------------- The date of this Offer to Purchase is May 4, 1999 TABLE OF CONTENTS
SECTION PAGE - ------- ---- Introduction.............................................................. 1 1. Terms of the Offer.................................................... 2 2. Acceptance for Payment and Payment for Shares......................... 4 3. Procedure for Tendering Shares........................................ 4 4. Rights of Withdrawal.................................................. 8 5. Certain United States Federal Income Tax Consequences of the Offer.... 8 6. Price Range of Shares; Dividends...................................... 9 7. Effect of the Offer on the Market for the Shares; Stock Quotation, Margin Regulations and Exchange Act Registration..................... 10 8. Certain Information Concerning the Company............................ 11 9. Certain Information Concerning Purchaser and Parent................... 12 10. Background of the Offer; Contacts with the Company.................... 17 11. Purpose of the Offer; Plans for the Company; the Merger............... 21 12. Merger Agreement...................................................... 22 13. Rights Agreement...................................................... 26 14. Source and Amount of Funds............................................ 28 15. Certain Conditions of the Offer....................................... 28 16. Certain Legal Matters................................................. 30 17. Fees and Expenses..................................................... 33 18. Miscellaneous......................................................... 33 Schedule A Information Concerning the Directors and Executive Officers of Parent and Purchaser.......................................................... A-1
i To the Holders of Shares of Walbro Corporation: INTRODUCTION TI Automotive Systems, Inc., a Delaware corporation ("Purchaser") and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the laws of England and Wales ("Parent"), hereby offers to purchase all of the outstanding shares of Common Stock, par value $.50 per share (the "Common Stock"), of Walbro Corporation, a Delaware corporation (the "Company"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights") issued pursuant to the Rights Agreement, dated as of June 30, 1998, as amended April 27, 1999 (as amended, the "Rights Agreement"), between the Company and Harris Trust and Savings Bank (the Common Stock and the Rights together are referred to herein as the "Shares") at $20 per Share, net to the seller in cash (such price, or any such higher price per Share as may be paid in the Offer (as defined below), being referred to herein as the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). Tendering stockholders will not be obligated to pay brokerage fees or commissions or, subject to Instruction 6 of the Letter of Transmittal, transfer taxes on the purchase of Shares by Purchaser pursuant to the Offer. Purchaser will pay all charges and expenses of the Dealer Manager, Citibank, N.A. (the "Depositary") and Innisfree M&A Incorporated (the "Information Agent"). Unless the context requires otherwise, all references to Shares herein shall include the associated Rights, and all references to the Rights shall include all benefits that may inure to the holders of the Rights pursuant to the Rights Agreement. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ON A FULLY DILUTED BASIS BEING VALIDLY TENDERED PRIOR TO THE EXPIRATION OF THE OFFER AND NOT WITHDRAWN (THE "MINIMUM TENDER CONDITION"), (2) ANY WAITING PERIOD UNDER THE HART-SCOTT- RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER (THE "HSR ACT"), AND ANY EUROPEAN ANTITRUST LAWS APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED AND (3) APPROVAL UNDER ANY APPLICABLE EUROPEAN ANTITRUST LAW HAVING BEEN OBTAINED (TOGETHER WITH (2), THE "ANTITRUST CONDITION"). CERTAIN OTHER CONDITIONS TO CONSUMMATION OF THE OFFER ARE DESCRIBED IN SECTION 15. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY DETERMINED THAT EACH OF THE MERGER AGREEMENT (AS DEFINED BELOW), THE OFFER AND THE MERGER (AS DEFINED BELOW) ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY (INCLUDING THE OFFER AND THE MERGER) AND UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE OFFER, TENDER THEIR SHARES TO PURCHASER AND APPROVE AND ADOPT THE MERGER AGREEMENT AND THE MERGER. Purpose of the Offer; The Proposed Merger. The Offer is being made pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 27, 1999, as amended by the First Amendment thereto dated as of May 3, 1999, among the Company, Parent and Purchaser. The purpose of the Offer is to acquire for cash as many outstanding Shares as possible as a first step in acquiring the entire equity interest in the Company. Purchaser currently intends, as soon as practicable upon consummation of the Offer, to propose and seek to have Purchaser merged with and into the Company, pursuant to which each issued and outstanding Share (other than Shares held in the Company's treasury or beneficially owned by Parent or Purchaser or Shares, if any, that are held by stockholders ("Dissenting Stockholders") who properly exercise and perfect appraisal rights pursuant to Section 262 of the Delaware General Corporation Law (the "DGCL")) shall, by virtue of the Merger and 1 without any action on the part of the Company, Parent, Purchaser or the holder thereof, be converted into the right to receive, without interest, the Offer Price (the "Merger"). As a result of the Merger, the Company (sometimes referred to herein as the "Surviving Corporation") will become an indirect wholly-owned subsidiary of Parent. CERTAIN CONDITIONS TO THE OFFER Consummation of the Offer is subject to the fulfillment of a number of conditions, including the following: Minimum Tender Condition. THE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THE MINIMUM TENDER CONDITION BEING SATISFIED. See Section 15. According to the Company, as of May 3, 1999 there were 8,688,294 Shares issued and outstanding, 969,600 Shares subject to issuance pursuant to the Company's stock option and incentive plans and 3,239,412 Shares subject to issuance upon the conversion of outstanding preferred securities of Walbro Capital Trust (the "Preferred Securities"). Based on the foregoing, Purchaser believes there are currently approximately 12,897,306 Shares outstanding on a fully diluted basis. Based on this information Purchaser believes that the Minimum Tender Condition would currently be satisfied if at least 6,448,654 Shares were validly tendered prior to the Expiration Date (as defined below) and not withdrawn. From and after the Effective Time (as defined below) each holder of Preferred Securities shall have the right to convert its Preferred Securities only into the amount of cash provided for by the terms of the Preferred Securities after giving effect to any adjustment in the conversion price provided for by such terms, which is $26.40 per Preferred Security. The Antitrust Condition. THE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THE ANTITRUST CONDITION BEING SATISFIED. The Offer is conditioned on the expiration or termination of any applicable waiting periods under the HSR Act (the "HSR Condition") and the granting of approval of the transactions contemplated by the Merger Agreement by the Commission of the European Union. For a more detailed description of certain time periods applicable to this condition, see Section 16. Certain other conditions to the Offer are described in Section 15. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ IN THEIR ENTIRETY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 1.TERMS OF THE OFFER. Upon the terms and subject to the conditions set forth in the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), Purchaser will accept for payment all Shares validly tendered on or prior to the Expiration Date and not withdrawn as permitted by Section 4. The term "Expiration Date" means 12:00 Midnight, New York City time, on June 10, 1999, unless and until Purchaser shall, in its sole discretion (subject to the terms of the Merger Agreement), have extended the period for which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date on which the Offer, as so extended by Purchaser, shall expire. Rights are presently evidenced by the certificates for the Common Stock and the tender by a stockholder of such stockholder's shares of Common Stock will also constitute a tender of the associated Rights. Pursuant to the Offer, no separate payment will be made by Purchaser for the Rights. Prior to entering into the Merger Agreement, the Board of Directors of the Company authorized and the Company entered into an amendment to the Rights Agreement so that the execution of the Merger Agreement and any amendments thereto and the consummation of any of the transactions contemplated thereby will not cause (i) Parent and/or Purchaser or their respective Affiliates to become an Acquiring Person (as such terms are defined in the Rights Agreement) unless the Merger Agreement has been terminated in accordance with its terms or (ii) a Distribution Date, a Shares Acquisition Date, or a Triggering Event (as such terms are defined in the Rights Agreement) to occur, irrespective of the number of Shares acquired pursuant to the Offer or the Merger or other transactions 2 contemplated by the Merger Agreement. In all cases, payment for Shares tendered and purchased pursuant to the Offer will be made only after timely receipt by the Depository of, among other things, Rights certificates, if such certificates have been distributed to stockholders. Subject to the terms of the Merger Agreement (see Section 12) and applicable rules and regulations of the Securities and Exchange Commission (the "SEC"), Purchaser expressly reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to the Depositary. Any such extension will also be publicly announced by press release issued no later than 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the right of a tendering stockholder to withdraw such stockholder's Shares. See Section 4. Subject to the applicable rules and regulations of the SEC, Purchaser also expressly reserves the right, in its sole discretion at any time or from time to time, (i) to delay acceptance for payment of or, regardless of whether such Shares were theretofore accepted for payment, payment for, any Shares, or to terminate or amend the Offer and not accept for payment or pay for any Shares not theretofore accepted for payment, or paid for, on the occurrence of any of the conditions specified in Section 15 and (ii) to waive any condition (other than the Minimum Tender Condition) and to set forth or change any other term and condition of the Offer, by giving oral or written notice of such delay, termination or amendment to the Depositary and by making a public announcement thereof; provided that Purchaser shall not amend or waive the Minimum Tender Condition and shall not decrease the Offer Price or decrease the number of Shares sought, or amend any other condition of the Offer in any manner adverse to the holders of Shares without the prior written consent of the Company; provided, however, that if on the initial scheduled expiration date of the Offer, the sole condition remaining unsatisfied is the HSR Condition, Purchaser shall extend the expiration date from time to time until two business days after the expiration of the waiting period under the HSR Act. Purchaser shall, on the terms and subject to the prior satisfaction or waiver of the conditions of the Offer, accept for payment Shares tendered as soon as it is legally permitted to do so under applicable law; provided, however, that if, immediately prior to the initial expiration date of the Offer (as it may be extended), the Shares tendered and not withdrawn pursuant to the Offer equal less than 90% of the outstanding Shares, Purchaser may extend the Offer two times for a period not to exceed ten business days, notwithstanding that all conditions to the Offer are satisfied as of such expiration date of the Offer. Purchaser confirms that its reservation of the right to delay payment for Shares which it has accepted for payment is limited by Rule 14e-1(c) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), which requires that a tender offeror pay the consideration offered or return the tendered securities promptly after the termination or withdrawal of a tender offer. Any extension, delay, termination or amendment of the Offer will be followed as promptly as practicable by public announcement thereof, such announcement in the case of an extension to be issued no later than 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. Subject to applicable law (including Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act, which require that any material change in the information published, sent or given to stockholders in connection with the Offer be promptly disseminated to stockholders in a manner reasonably designed to inform stockholders of such change) and without limiting the manner in which Purchaser may choose to make any public announcement, Purchaser shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a press release to the Dow Jones News Service. Purchaser confirms that if it makes a material change in the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, Purchaser will extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. If, prior to the Expiration Date, Purchaser (if previously approved by the Company in writing if required by the Merger Agreement) shall increase or decrease the percentage of Shares being sought or the consideration offered to holders of Shares, such increase or decrease shall be applicable to all holders whose Shares are 3 accepted for payment pursuant to the Offer and, if at the time notice of any such increase or decrease is first published, sent or given to holders of Shares, the Offer is scheduled to expire at any time earlier than the tenth business day from and including the date that such notice is first so published, sent or given, the Offer will be extended until the expiration of such ten business-day period. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or federal holiday and consists of the time period from 12:01 A.M. through 12:00 Midnight, New York City time. The Company has provided Purchaser with the Company's stockholder lists and security position listings for the purpose of disseminating the Offer to holders of the Shares. This Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed by Purchaser to record holders of Shares and will be furnished by Purchaser to brokers, dealers, banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. 2.ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject to the prior satisfaction or waiver of the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will accept for payment Shares validly tendered and not withdrawn as promptly as practicable after the later of (i) the satisfaction of the HSR Condition and (ii) the Expiration Date. Parent filed a Notification and Report Form under the HSR Act on April 30, 1999 and, accordingly, unless earlier terminated or extended by a request for additional information, the waiting period under the HSR Act is scheduled to expire at 11:59 p.m., New York City time, on May 15, 1999. See Section 16. In addition, subject to applicable rules and regulations of the SEC, Purchaser expressly reserves the right to delay acceptance for payment of or payment for Shares in order to comply, in whole or in part, with any applicable law. See Section 15. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for such Shares (or a confirmation of a book-entry transfer of such Shares (a "Book-Entry Confirmation") into the Depositary's account at The Depository Trust Company (the "Book-Entry Transfer Facility")), a properly completed and duly executed Letter of Transmittal (or facsimile thereof) and any other required documents. For purposes of the Offer, Purchaser will be deemed to have accepted for payment Shares validly tendered and not withdrawn as, if and when Purchaser gives oral or written notice to the Depositary of its acceptance for payment of such Shares pursuant to the Offer. Payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the Offer Price therefor with the Depositary, which will act as agent for the tendering stockholders for the purpose of receiving payments from Purchaser and transmitting such payments to the tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE OFFER PRICE FOR SHARES BE PAID, REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT. If any tendered Shares are not accepted for payment pursuant to the terms and conditions of the Offer for any reason, or if certificates are submitted for more Shares than are tendered, certificates for such unpurchased Shares will be returned, without expense to the tendering stockholder (or, in the case of Shares tendered by book-entry transfer of such Shares into the Depositary's account at the Book-Entry Transfer Facility pursuant to the procedures set forth in Section 3, such Shares will be credited to an account maintained with the Book-Entry Transfer Facility), as soon as practicable following expiration or termination of the Offer. 3.PROCEDURE FOR TENDERING SHARES. Valid Tender. To tender Shares pursuant to the Offer, either (a) a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) in accordance with the instructions of the Letter of Transmittal, with any required signature guarantees, certificates for Shares to be tendered, and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back 4 cover of this Offer to Purchase prior to the Expiration Date, (b) such Shares must be delivered pursuant to the procedures for book-entry transfer described below (and a Book-Entry Confirmation of such delivery received by the Depositary, including an Agent's Message (as defined herein) if the tendering stockholder has not delivered a Letter of Transmittal), prior to the Expiration Date, or (c) the tendering stockholder must comply with the guaranteed delivery procedures set forth below. The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Purchaser may enforce such agreement against the participant. Pursuant to the Rights Agreement, until the close of business on the Distribution Date (as defined in Section 13), the Rights will be transferred with and only with the certificates for Common Stock and the surrender for transfer of any certificates for Common Stock will also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. If separate certificates representing the Rights are issued to holders of Common Stock prior to the time a holder's Shares are tendered pursuant to the Offer, certificates representing a number of Rights equal to the number of shares of Common Stock tendered must be delivered to the Depositary, or, if available, a Book-Entry Confirmation must be received by the Depositary with respect thereto, in order for such shares of Common Stock to be validly tendered. If a Distribution Date occurs and separate certificates representing the Rights are not distributed prior to the time shares of Common Stock are tendered pursuant to the Offer, Rights may be tendered prior to a stockholder receiving the certificates for Rights by use of the guaranteed delivery procedure described below. A tender of shares of Common Stock constitutes an agreement by the tendering stockholder to deliver certificates representing all Rights formerly associated with the number of shares of Common Stock tendered pursuant to the Offer to the Depositary prior to expiration of the period permitted by such guaranteed delivery procedures for delivery of certificates for, or a Book-Entry Confirmation with respect to, Rights (the "Rights Delivery Period"). However, after expiration of the Rights Delivery Period, Purchaser may elect to reject as invalid a tender of shares of Common Stock with respect to which certificates for, or a Book-Entry Confirmation with respect to, the number of Rights required to be tendered with such Common Stock have not been received by the Depositary. Nevertheless, Purchaser will be entitled to accept for payment shares of Common Stock tendered by a stockholder prior to receipt of the certificates for the Rights required to be tendered with such shares of Common Stock, or a Book-Entry Confirmation with respect to such Rights, and either (a) subject to complying with applicable rules and regulations of the SEC, withhold payment for such shares of Common Stock pending receipt of the certificates for, or a Book-Entry Confirmation with respect to, such Rights or (b) make payment for shares of Common Stock accepted for payment pending receipt of the certificates for, or a Book-Entry Confirmation with respect to, such Rights in reliance upon the agreement of a tendering stockholder to deliver Rights and such guaranteed delivery procedures. Any determination by Purchaser to make payment for shares of Common Stock in reliance upon such agreement and such guaranteed delivery procedures or, after expiration of the Rights Delivery Period, to reject a tender as invalid will be made in the sole and absolute discretion of Purchaser. Book-Entry Delivery. The Depositary will establish an account with respect to the Shares at the Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the Book-Entry Transfer Facility's system may make a book-entry transfer of Shares by causing a Book- Entry Transfer Facility to transfer such Shares into the Depositary's account in accordance with the Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book- entry transfer, either the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or an Agent's Message in lieu of the Letter of Transmittal, and any other required documents, must, in any case, be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase by the Expiration Date, or the tendering stockholder must comply with the guaranteed delivery procedures described 5 below. If a Distribution Date occurs, the Depositary will also make a request to establish an account with respect to the Rights at the Book-Entry Transfer Facility, but no assurance can be given that book-entry transfer of Rights will be available. If book-entry transfer of Rights is available, the foregoing book-entry transfer procedures will also apply to Rights. If book- entry transfer of Rights is not available and a Distribution Date occurs, a tendering stockholder will be required to tender Rights by means of physical delivery of certificates for Rights to the Depositary (in which event references in this Offer to Purchase to Book-Entry Confirmations with respect to Rights will be inapplicable). DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. THE METHOD OF DELIVERY OF SHARES, RIGHTS, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. SHARES WILL BE DEEMED DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT THE STOCKHOLDER USE PROPERLY INSURED REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Signature Guarantees. Except as otherwise provided below, all signatures on a Letter of Transmittal must be guaranteed by a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (each, an "Eligible Institution"). Signatures on a Letter of Transmittal need not be guaranteed (a) if the Letter of Transmittal is signed by the registered holders (which term, for purposes of this section, includes any participant in the Book-Entry Transfer Facility's system whose name appears on a security position listing as the owner of the Shares or Rights) of Shares and Rights tendered therewith and such registered holder has not completed the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (b) if such Shares and Rights are tendered for the account of an Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. If the certificates for Shares or Rights are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made or certificates for Shares or Rights not tendered or not accepted for payment are to be returned to a person other than the registered holder of the certificates surrendered, then the tendered certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered holders or owners appear on the certificates, with the signatures on the certificates or stock powers guaranteed as described above. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. A stockholder who desires to tender Shares (or Rights, if applicable) pursuant to the Offer and whose certificates for Shares (or Rights, if applicable) are not immediately available (including because certificates for Rights have not yet been distributed by the Rights Agent), or who cannot comply with the procedure for book-entry transfer on a timely basis, or who cannot deliver all required documents to the Depositary prior to the Expiration Date, may tender such Shares (and/or Rights, if applicable) by following all of the procedures set forth below: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser, is received by the Depositary (as provided below) prior to the Expiration Date; and (iii) the certificates for all tendered Shares and/or Rights, in proper form for transfer (or a Book-Entry Confirmation with respect to all such Shares and/or Rights), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal), and 6 any other required documents, are received by the Depositary within (a) in the case of Shares, three trading days after the date of execution of such Notice of Guaranteed Delivery or (b) in the case of Rights, a period ending on the later of (1) three trading days after the date of execution of such Notice of Guaranteed Delivery or (2) three trading days after the date certificates for Rights are distributed to stockholders by the Rights Agent. A "trading day" is any day on which the New York Stock Exchange, Inc. (the "NYSE") is open for business. The Notice of Guaranteed Delivery may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery. Other Requirements. Notwithstanding any provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (a) certificates for (or a timely Book-Entry Confirmation with respect to) such Shares and, if a Distribution Date occurs, certificates for (or a timely Book-Entry Confirmation, if available, with respect to) the associated Rights (unless Purchaser elects to make payment for such Shares pending receipt of the certificates for, or a Book-Entry Confirmation with respect to, such Rights as described above), (b) a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book- entry transfer, an Agent's Message in lieu of the Letter of Transmittal) and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering stockholders may be paid at different times depending upon when certificates for Shares (or Rights) or Book-Entry Confirmations with respect to Shares (or Rights, if available) are actually received by the Depositary. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE OFFER PRICE BE PAID BY PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. Tender Constitutes an Agreement. The valid tender of Shares and, if applicable, Rights, pursuant to one of the procedures described above will constitute a binding agreement between the tendering stockholder and Purchaser upon the terms and subject to the conditions of the Offer. Appointment. By executing a Letter of Transmittal as set forth above, the tendering stockholder irrevocably appoints designees of Purchaser as such stockholder's proxies, each with full power of substitution, to the full extent of such stockholder's rights with respect to the Shares tendered by such stockholder and accepted for payment by Purchaser and with respect to any and all other Shares or other securities issued or issuable in respect of such Shares on or after April 27, 1999. All such proxies will be considered coupled with an interest in the tendered Shares and Rights. Such appointment is effective when, and only to the extent that, Purchaser deposits the payment for such Shares with the Depositary. Upon the effectiveness of such appointment, all prior powers of attorney, proxies and consents given by such stockholder will be revoked, and no subsequent powers of attorney, proxies and consents may be given (and, if given, will not be deemed effective). Purchaser's designees will, with respect to the Shares for which the appointment is effective, be empowered to exercise all voting and other rights of such stockholder as they, in their sole discretion, may deem proper at any annual, special or adjourned meeting of the stockholders of the Company, by written consent in lieu of any such meeting or otherwise. Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's payment for such Shares, Purchaser must be able to exercise full voting rights with respect to such Shares. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any tender of Shares or Rights will be determined by Purchaser in its sole discretion, which determination will be final and binding. Purchaser reserves the absolute right to reject any and all tenders of Shares or Rights determined by it not to be in proper form or the acceptance for payment of or payment for which may, in the opinion of Purchaser's counsel, be unlawful. Purchaser also reserves the absolute right to waive any defect or irregularity in the tender of any Shares or Rights of any particular stockholder whether or not similar defects or irregularities are waived in the case of other stockholders. No tender of Shares or Rights will be deemed to have been validly made until all defects and irregularities relating thereto have been cured or waived. None of Purchaser, Parent, the Depositary, the Information Agent, the Dealer Manager or any other 7 person will be under any duty to give notification of any defects or irregularities in tenders of Shares or Rights or incur any liability for failure to give any such notification. Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and instructions thereto) will be final and binding. 4.RIGHTS OF WITHDRAWAL. Tenders of Shares made pursuant to the Offer are irrevocable except that Shares tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after July 2, 1999. For a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the names in which the certificate(s) evidencing the Shares to be withdrawn are registered, if different from that of the person who tendered such Shares. The signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of any Eligible Institution. If Shares have been tendered pursuant to the procedures for book-entry tender as set forth in Section 3, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares. If certificates for Shares to be withdrawn have been delivered or otherwise identified to the Depositary, the name of the registered holder and the serial numbers of the particular certificates evidencing the Shares to be withdrawn must also be furnished to the Depositary as aforesaid prior to the physical release of such certificates. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by Purchaser, in its sole discretion, which determination shall be final and binding. None of Purchaser, Parent, the Dealer Manager, the Depositary, the Information Agent, or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give such notification. Any Shares properly withdrawn will be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by following one of the procedures described in Section 3 at any time prior to the Expiration Date. If Purchaser extends the Offer, is delayed in its acceptance for payment of Shares, or is unable to accept for payment Shares pursuant to the Offer, for any reason, then, without prejudice to Purchaser's rights under this Offer, the Depositary may, nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent that tendering stockholders are entitled to withdrawal rights as set forth in this Section 4. 5.CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER. Sales of Shares pursuant to the Offer and the exchange of Shares for cash pursuant to the Merger will be taxable transactions for Federal income tax purposes and may also be taxable under applicable state, local, foreign and other tax laws. For Federal income tax purposes, a stockholder whose Shares are purchased pursuant to the Offer or who receives cash as a result of the Merger will realize gain or loss equal to the difference between the adjusted basis of the Shares sold or exchanged and the amount of cash received therefor. Such gain or loss will be capital gain or loss if the Shares are held as capital assets by the stockholder and will be long-term capital gain or loss if the stockholder's holding period in such Shares for Federal income tax purposes is more than one year at the time of the sale or exchange. Long- term capital gain of a non-corporate stockholder is generally subject to a maximum tax rate of 20%. Backup Withholding. In order to avoid "backup withholding" of Federal income tax on payments of cash pursuant to the Offer or the Merger, a stockholder surrendering Shares in the Offer or the Merger must, unless an exemption applies, provide the Depositary with such stockholder's correct taxpayer identification number ("TIN") on a Substitute Form W-9 and certify under penalties of perjury that such TIN is correct and that such stockholder is not subject to backup withholding. If a stockholder does not provide such stockholder's correct 8 TIN or fails to provide the certifications described above, the Internal Revenue Service may impose a penalty on such stockholder and payment of cash to such stockholder pursuant to the Offer or the Merger may be subject to backup withholding of 31%. All stockholders surrendering Shares pursuant to the Offer or the Merger should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal to provide the information and certification necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to Purchaser and the Depositary). Certain stockholders (including, among others, all corporations and certain foreign individuals and entities) are not subject to backup withholding. Foreign stockholders should complete and sign the main signature form and a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See Instruction 9 to the Letter of Transmittal. THE INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO STOCKHOLDERS IN SPECIAL SITUATIONS SUCH AS STOCKHOLDERS WHO RECEIVED THEIR SHARES UPON THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION AND STOCKHOLDERS WHO ARE NOT UNITED STATES PERSONS. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE OFFER AND THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. 6.PRICE RANGE OF SHARES; DIVIDENDS. The Shares are traded on the NASDAQ Stock Market's National Market (the "NASDAQ/NMS") under the symbol "WALB". The following table sets forth, for the calendar quarters indicated, the high and low sales prices for the Shares on the NASDAQ/NMS and the amount of cash dividends paid per share, based upon public sources:
COMPANY COMMON STOCK ------------------------- SALES PRICE --------------- CASH HIGH LOW DIVIDENDS ------- ------- --------- CALENDAR YEAR 1997 First Quarter.................................... $19.125 $17.625 $0.10 Second Quarter................................... 21.000 15.875 0.10 Third Quarter.................................... 23.906 20.000 0.10 Fourth Quarter................................... 24.000 12.250 0.10 1998 First Quarter.................................... $15.750 $11.000 $0.00 Second Quarter................................... 12.750 8.625 0.00 Third Quarter.................................... 12.938 7.500 0.00 Fourth Quarter................................... 8.500 6.250 0.00 1999 First Quarter.................................... $10.844 $ 6.188 $0.00 Second Quarter (through May 3)................... $19.688 $ 7.125 $0.00
The Rights trade together with the Common Stock. On April 27, 1999, the last full trading day prior to the public announcement of the terms of the Offer and the Merger, the reported closing price on the NASDAQ/NMS was $12.313 per Share. On May 3, 1999, the last full trading day prior to commencement of the Offer, the reported closing price on the NASDAQ/NMS was $19.625 per Share. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES. 9 7. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; STOCK QUOTATION, MARGIN REGULATIONS AND EXCHANGE ACT REGISTRATION. Market for Shares. The purchase of Shares by Purchaser pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and may reduce the number of holders of Shares, which could adversely affect the liquidity and market value of the remaining Shares held by the public. Stock Quotation. The Shares are authorized for quotation on the NASDAQ/NMS. According to published guidelines of the National Association of Securities Dealers, the Shares might no longer be eligible for quotation on the NASDAQ/NMS if, among other things, either (i) the number of Shares publicly held was less than 750,000, there were fewer than 400 holders of round lots, the aggregate market value of publicly held Shares was less than $5,000,000, net tangible assets were less than $4,000,000 and there were fewer than two registered and active market makers for the Shares, or (ii) the number of Shares publicly held was less than 1,100,000, there were fewer than 400 holders of round lots, the aggregate market value of publicly held Shares was less than $15,000,000, there were fewer than four registered and active market makers, and either (x) the Company's market capitalization was less than $50,000,000 or (y) the total assets and total revenue of the Company for the most recently completed fiscal year or two of the last three most recently completed fiscal years did not exceed $50,000,000. Shares held directly or indirectly by directors, officers or beneficial owners of more than 10% of the Shares are not considered as being publicly held for this purpose. According to the Company's 1998 Annual Report, there were 1,024 holders of record of shares of Common Stock on February 23, 1999. If the Shares were to cease to be quoted on the NASDAQ/NMS, the market therefor could be adversely affected. It is possible that the Shares would be traded on other securities exchanges or in the over-the-counter market, and that price quotations would be reported by such exchanges, or through the National Association of Securities Dealers Automated Quotation System, Inc. ("NASDAQ") or other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend upon the number of stockholders and/or the aggregate market value of the Shares remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act and other factors. Margin Regulations. The shares of Common Stock are presently "margin securities" under the regulations of the Board of Governors of the Federal Reserve Board (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of such shares of Common Stock. Depending upon factors similar to those described above regarding listing and market quotations, the shares of Common Stock might no longer constitute "margin securities" for the purposes of the Federal Reserve Board's margin regulations in which event the shares of Common Stock would be ineligible as collateral for margin loans made by brokers. Exchange Act Registration. The shares of Common Stock and associated Rights are currently registered under the Exchange Act. Such registration may be terminated by the Company upon application to the SEC if the outstanding shares of Common Stock and associated Rights are not listed on a national securities exchange and if there are fewer than 300 holders of record of shares of Common Stock and associated Rights. Termination of registration of the Shares under the Exchange Act would reduce the information required to be furnished by the Company to its stockholders and to the SEC and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b) and the requirement to furnish a proxy statement in connection with stockholders' meetings pursuant to Section 14(a) and the related requirement to furnish an annual report to stockholders, no longer applicable with respect to the Shares. Furthermore, the ability of "affiliates" of the Company and persons holding "restricted securities" of the Company to dispose of such securities pursuant to Rule 144 under the Securities Act of 1933, as amended, may be impaired or eliminated. If registration of the shares of Common Stock under the Exchange Act were terminated, the shares of Common Stock would no longer be eligible for NASDAQ reporting or for continued inclusion on the Federal Reserve 10 Board's list of "margin securities." Purchaser intends to seek to cause the Company to apply for termination of registration of the shares of Common Stock and associated Rights as soon as possible after consummation of the Offer if the requirements for termination of registration are met. Even if the registration of the shares of Common Stock and associated Rights under the Exchange Act is terminated, the Exchange Act requirement that the Company file periodic reports would remain applicable as long as its currently outstanding listed debt securities continue to be so listed on the NYSE and registered under the Exchange Act. 8.CERTAIN INFORMATION CONCERNING THE COMPANY. The Company is a Delaware corporation with its principal executive offices located at 1227 Centre Road, Auburn Hills, Michigan 48326. The Company is a global leader in the design, development and manufacture of precision fuel storage and delivery systems and products for automotive and small engine markets worldwide. The Company manufactures plastic fuel tanks, fuel pumps, fuel modules, plastic fuel rails and fuel level sensors for sale to automotive original equipment manufacturers. Products manufactured for the small engine market include carburetors and ignitions for chain saws, outboard marine engines, two-wheeled vehicles, industrial engines and lawn and garden equipment, such as lawn mowers and weed trimmers. Set forth below is certain summary consolidated financial information for each of the Company's last three fiscal years as contained in the Company's 1998 Annual Report on Form 10-K (the "Form 10-K"). More comprehensive financial information is included in the Form 10-K (including management's discussion and analysis of financial condition and results of operation) and other documents filed by the Company with the SEC, and the following summary is qualified in its entirety by reference to the Form 10-K and other documents and all of the financial information and notes contained therein. Copies of the Form 10-K and other documents may be examined at or obtained from the SEC in the manner set forth below. WALBRO CORPORATION SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998 -------- -------- -------- YEAR ENDED DECEMBER 31, From Continuing Operations: Net sales......................................... $585,389 $619,905 $677,990 Cost of sales..................................... 488,134 538,751 571,992 Income (loss) before extraordinary item........... 11,229 (36,627) 5,191 Income (loss) per share before extraordinary item (basic and diluted).............................. 1.30 (4.23) 0.60 Cash dividends per share.......................... 0.40 0.40 -- AT DECEMBER 31, Working capital................................... 68,275 75,273 96,926 Total assets...................................... 589,649 610,593 648,667 Long-term debt.................................... 291,723 291,393 291,723 Stockholders' equity.............................. 137,733 69,866 77,556
Parent has conducted due diligence reviews of the Company and has received certain non-public information from the Company pursuant to the terms of a confidentiality agreement dated January 7, 1999. The non-public information provided by the Company included certain projections of the Company's future operating performance showing net sales increasing to $754,300,000, $851,200,000 and $954,200,000, respectively, net income increasing to $11,800,000, $18,600,000 and $27,200,000, respectively, and diluted earnings per share increasing to $1.35, $1.95 and $2.69, respectively, in the years ending December 31, 1999, 2000 and 2001, respectively. 11 The Company has advised Purchaser and Parent that it does not as a matter of course publicly disclose projections as to future revenues or earnings. The projections set forth above (the "Projections") were not prepared with a view to public disclosure or compliance with the published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants regarding projections and are included in the Offer to Purchase only because such information was made available to Parent. None of Parent, Purchaser, the Company or any of their financial advisors or any of their respective directors or officers assumes any responsibility for the accuracy of the Projections. The Company's independent auditors have not examined or compiled the Projections presented herein and, accordingly, assume no responsibility for them. In addition, because the estimates and assumptions, many of which are not set forth herein, underlying the Projections are inherently subject to significant economic and competitive uncertainties and contingencies which are difficult or impossible to predict accurately and are beyond Parent's and the Company's control, there can be no assurance that the Projections will be realized at the times or in the amounts indicated. Accordingly, it is expected that there will be differences between actual and projected results, and actual results may be materially higher or lower than the Projections. Cautionary Statement Regarding Forward-Looking Information. Parent and Purchaser have identified the following important factors which could cause the Company's actual results to differ materially from the Projections: (i) the effect of changing technology, (ii) the dependence of the Company's growth prospects on a relatively small number of customers and (iii) the highly competitive nature of the industry which may adversely affect prices for fuel delivery system components and other aspects of the Company's businesses. Except as otherwise set forth herein, the information concerning the Company contained in this Offer to Purchase has been taken from or based upon publicly available documents and records on file with the SEC and other public sources and is qualified in its entirety by reference thereto. Although neither Parent nor Purchaser has knowledge that would indicate that any statements contained herein based on such documents and records are untrue, neither Parent nor Purchaser can take responsibility for the accuracy or completeness of the information contained in such documents and records, or for any failure by the Company to disclose events which may have occurred or may affect the significance or accuracy of any such information but which are unknown to Parent or Purchaser. Available Information. The Company is subject to the information and reporting requirements of the Exchange Act and in accordance therewith is obligated to file reports and other information with the SEC relating to its business, financial condition and other matters. Information, as of particular dates, concerning the Company's directors and officers, their remuneration, stock options granted to them, the principal holders of the Company's securities, any material interests of such persons in transactions with the Company and other matters is required to be disclosed in proxy statements distributed to the Company's stockholders and filed with the SEC. Such reports, proxy statements and other information should be available for inspection at the public reference room at the SEC's offices at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and also should be available for inspection and copying at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611. Copies may be obtained, by mail, upon payment of the SEC's customary charges, by writing to its principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and can be obtained electronically on the SEC's Website at http://www.sec.gov. 9.CERTAIN INFORMATION CONCERNING PURCHASER AND PARENT. Purchaser is a Delaware corporation that was incorporated on April 23, 1999 and to date has engaged in no activities other than those incident to its formation and the commencement of the Offer. Purchaser is an indirect wholly- owned subsidiary of Parent. The principal executive offices of Purchaser are located at 375 Park Avenue, Suite 222, New York, New York 10152, and its telephone number at such address is (212) 319-3101. Parent was incorporated in England on July 2, 1919 and was re-registered as a public limited company on March 1, 1982. It operates under the Companies Act 1985. Listed on the London Stock Exchange, Parent is one 12 of the world's leading specialized engineering companies. Headquartered in the United Kingdom, Parent operates on a global basis and employs over 35,000 people at more than 400 manufacturing and customer service facilities in over 45 countries. Parent's strategy is to be an international engineering group concentrating on specialized engineering businesses operating in selected niches on a global basis. Key businesses must be able to command positions of sustainable technological and market share leadership, have a high knowledge and service content, and be able to anticipate and meet customers' needs. Implementation of this focused strategy since 1986 has led to the creation of four world leading businesses and has involved considerable corporate activity, including some 45 major acquisitions and over 30 disposals. Over this period, Parent's market capitalization has grown from $450 million in 1986 to $4.0 billion today. Parent's four world leading businesses are John Crane (engineered sealing systems), Forsheda (engineered elastomer seals), Bundy (fluid carrying systems) and Dowty (aerospace systems). Parent's sales revenue in 1998 was $3.5 billion, of which 45% was from North America, 27% from Continental Europe, 20% from the United Kingdom and 8% from the rest of the world. In North America, Parent employs over 14,000 people in more than 120 manufacturing and customer service facilities across the United States, Canada and Mexico. Parent's sales revenue in North America in 1998 was approximately $1.5 billion. The principal executive offices of Parent are located at 50 Curzon Street, London, England W1Y 7PN, and its telephone number at such address is 011-44- 171-560-5700. The name, citizenship, business address, present principal occupation and five-year employment history of each of the directors and executive officers of Purchaser and Parent are set forth in Schedule A hereto. Except as described herein with respect to the Offer and the Merger, neither Purchaser nor Parent, nor, to the best of their knowledge, any of the persons listed in Schedule A hereto, nor any associate or majority-owned subsidiary of any of the foregoing, beneficially owns or has a right to acquire any equity securities of the Company. Neither Purchaser nor Parent, nor, to the best of their knowledge, any of the persons or entities referred to above, nor any director, executive officer or subsidiary of any of the foregoing, has effected any transaction in such equity securities during the past 60 days. Except as described herein with respect to the Offer and the Merger, neither Purchaser nor Parent, nor, to the best of their knowledge, any of the persons listed in Schedule A hereto, has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as set forth in Sections 10 and 12, there have been no contacts, negotiations or transactions since January 1, 1996 between Parent or Purchaser, or, to the best of their knowledge, any of the persons listed in Schedule A hereto, on the one hand, and the Company or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, a tender offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets. Although not required to continue their employment with the Company, the Company has advised Parent that it believes that certain members of the Company's senior management team intend to continue with the Surviving Corporation after consummation of the Merger. Neither Purchaser nor Parent, nor, to the best of their knowledge, any of the persons listed in Schedule A hereto, has since January 1, 1996 had any transaction with the Company or any of its executive officers, directors or affiliates that would require disclosure under the rules and regulations of the SEC applicable to the Offer. Parent is not subject to the information reporting requirements of the Exchange Act, and, accordingly does not file reports or other information with the SEC relating to its business, financial condition and other matters. The following selected consolidated financial data relating to Parent and its subsidiaries for Parent's last three fiscal years have been extracted or derived from the audited consolidated financial statements contained in 13 Parent's annual reports to its shareholders for 1997 and 1998, which have been filed as Exhibits (g)(1) and (g)(2) to the Statement on Schedule 14D-1 with respect to the Offer filed by Purchaser and Parent with the SEC and the summary below is qualified by reference to such information which may be inspected and obtained at the office of the SEC as set forth in Section 8. All the financial information and related notes contained therein are incorporated herein by reference. The selected financial data are stated in pounds sterling. On May 3, 1999, the noon buying rates in New York indicated that one pound sterling equaled 1.6083 U.S. dollars. Parent's consolidated financial statements are prepared in British pounds sterling in accordance with accounting principles generally accepted in the United Kingdom ("UK GAAP"), which principles and policies are described in the "Accounting Policies" section and the notes to the consolidated financial statements contained in the aforementioned annual reports. UK GAAP are not the same as generally accepted accounting principles in the United States ("US GAAP"). See the information set forth below under the heading "Summary of Certain Significant Differences Between UK GAAP and US GAAP" for a description of generic differences between UK GAAP and US GAAP which may affect the reported consolidated net income and/or consolidated shareholders' equity of Parent. Parent, however, believes that the differences are not material to a decision by a holder of Shares whether to sell, tender or hold any Shares because any such differences would not affect the ability of Parent to obtain sufficient funds to pay for Shares to be acquired pursuant to the Offer and to repay any funds which have been borrowed for such purpose. 14 TI GROUP PLC SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN MILLIONS, EXCEPT PER SHARE DATA)
1996 1997 1998 --------------- --------------- --------------- (POUNDS STERLING EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, CONSOLIDATED PROFIT AND LOSS DATA Turnover (sales) including share of joint ventures.... (Pounds)1,756.6 (Pounds)1,870.4 (Pounds)2,168.1 --------------- --------------- --------------- Profit before interest, goodwill amortization, ex- ceptional items and taxa- tion....................... 219.7 237.0 265.3 Interest.................... (8.6) (14.5) (26.7) --------------- --------------- --------------- Profit on ordinary activi- ties before goodwill, amor- tization, exceptional items and taxation............... (Pounds) 211.1 (Pounds) 222.5 (Pounds) 238.6 --------------- --------------- --------------- Earnings per share, before goodwill, amortization and exceptional items (pence).. 30.0p 32.0p 34.3p =============== =============== =============== AT DECEMBER 31, CONSOLIDATED BALANCE SHEET DATA Fixed assets: Intangible assets--good- will..................... -- -- 524.1 Tangible assets (property, plant and equipment)..... 342.7 361.6 478.8 Investments............... 43.3 38.4 11.1 --------------- --------------- --------------- 386.0 400.0 1,014.0 Net current assets.......... 396.1 425.0 398.1 --------------- --------------- --------------- Total assets less current liabilities................ 782.1 825.0 1,412.1 Creditors falling due after more than one year (includ- ing long term debt) and provisions for liabilities and charges................ (446.4) (421.0) (805.6) =============== =============== =============== Total shareholders' funds... 335.7 404.0 606.5 =============== =============== ===============
15 SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP The differences between UK GAAP and US GAAP involve both methods for measuring the amounts shown in the financial statements, as well as certain additional disclosures which are required by US GAAP. The generic differences which are significant and may affect the reported consolidated net income and/or the consolidated shareholders' equity of Parent are set out below. Parent has not undertaken an exercise to quantify the potential impact of these differences. Purchase accounting adjustments (i) Goodwill In accordance with UK GAAP prior to January 1, 1998, Parent wrote off goodwill, being the excess of the fair value of consideration over the fair values of the separately identifiable tangible and intangible net assets acquired, directly to reserves in the year of acquisition. From January 1, 1998, under UK GAAP, goodwill arising from acquisitions is to be capitalized in sterling and amortized over its estimated economic useful life, a period not to exceed 20 years, unless the goodwill is regarded as having an indefinite useful life and can meet certain ongoing criteria, in which case it is not amortized. Parent has amortized goodwill arising on acquisitions subsequent to January 1, 1998 on a straight-line basis over 20 years. Under US GAAP, goodwill is denominated in currency, capitalized and amortized over its expected economic useful life, not to exceed 40 years. Under UK GAAP, the profit or loss on the sale of a subsidiary or business recorded in the consolidated profit and loss account is determined after taking into account the goodwill previously written off to reserves for acquisitions prior to January 1, 1998 or the unamortized capitalized goodwill for acquisitions since January 1, 1998. Under US GAAP the profit or loss is determined after taking account of any unamortized goodwill. (ii) Inventory Under UK GAAP, where there is no ready market for a category of inventory, which includes most manufactured inventory, the current cost to the acquired company of reproducing the inventory is taken to represent fair value. Under US GAAP, the fair value of purchased (Work in Process and Finished Goods) inventory is represented as the selling price less the costs to complete the manufacturing and selling of the associated inventory, as well as an appropriate profit margin on the manufacturing and selling efforts. (iii) Other purchase accounting adjustments UK GAAP requires an estimate of the fair value of any deferred contingent consideration to be included as part of the purchase consideration at the date of the acquisition. US GAAP requires the contingent consideration to be resolved and the actual amount to be determinable before it is recognized as a component of consideration and included as part of goodwill. UK GAAP does not attribute a value to the stock options an acquiring company may give employees of an acquired business as a result of an acquisition as part of the fair value of consideration for the acquisition. Under US GAAP, these options would be included as purchase consideration at their intrinsic value on the date of acquisition. Stock based compensation. Under UK GAAP, the cost of options granted under Save As You Earn schemes (at a discount of up to 20% to the market price) and Executive Share Option schemes (no discount to the market price), are not required to be charged against profits. Under US GAAP, certain option schemes are regarded as employee compensation and the inherent cost of awards under these schemes, being the difference between the quoted market price of the stock at the date when 16 the number of shares of stock is known (the date the performance conditions are satisfied) and the exercise price of the option, is accrued over the vesting period of the grants. Pensions and Other Post Retirement Benefits. Under UK GAAP, the cost of providing pension and other post-retirement benefits is determined using long- term actuarial assumptions and consistent methods and is expensed over the average expected service lives of eligible employees. Variations from the regular pension cost arising from, for example, experience deficiencies or surpluses, are charged or credited to the income statement over the expected average remaining service lives of current employees in the schemes. Under US GAAP, employee pension and other post-retirement benefit costs are determined using a prescribed actuarial method, valuing pension scheme assets annually at market values and assessing liabilities based on current interest rates. US GAAP also provides for the deferral of actuarial gains and losses (in excess of a specified corridor) that result from changes in assumptions or actual experience differing from that assumed, and for the prospective amortization of costs related to changes in the benefit plan, as well as the obligation resulting from the transition. Derivative financial instruments. Under UK GAAP, gains or losses on forward foreign currency contracts that hedge anticipated transactions are deferred and recognized at the time of the transactions. US GAAP only permits deferral of gains or losses on forward foreign currency contracts that hedge firm commitments. Employee share ownership trusts. Under UK GAAP, shares in Parent that are held by the TI Group Employee Share Ownership Trust are recorded as fixed asset investments at cost less amounts written off. Under US GAAP, these shares would be recorded as a deduction from shareholders' equity as they are regarded as treasury shares. Dividends. Under UK GAAP, ordinary share dividends paid and proposed are shown on the face of the profit and loss account as an appropriation of the current year's earnings. Proposed dividends are provided on the recommendation of the directors of Parent and are subject to subsequent approval by shareholders. Under US GAAP, dividends are recorded in the period in which they are approved by shareholders. Deferred income taxes. Under UK GAAP, a deferred taxation provision or asset is recorded under the liability method to the extent that it is probable that such taxation will crystallize within the foreseeable future, except that deferred taxation on pension and other post-retirement balances is recognized in full. Under US GAAP, deferred tax is provided for on a full liability basis with deferred tax assets or liabilities being recognized for all differences between the financial and tax basis of assets and liabilities. Valuation allowances are provided against all deferred tax assets to the extent that their realization is not more likely than not. 10. BACKGROUND OF THE OFFER; CONTACTS WITH THE COMPANY. In April 1998, Sir Christopher Lewinton, Chairman of the Board of Directors of Parent, approached Lambert Althaver, the then Chairman and Chief Executive Officer of the Company, regarding a possible combination between Parent and the Company. Sir Christopher subsequently wrote to Mr. Althaver to outline a non-binding proposal to commence discussions to acquire the Company at $24 per Share. On April 17, 1998, Mr. Althaver resigned his position as Chairman and Chief Executive Officer and was replaced by Frank E. Bauchiero. On April 20, 1998, Mr. Bauchiero wrote back to Sir Christopher to reject the approach, stating that the Company "is in good position to pursue its strategy independently". Following receipt of Mr. Bauchiero's letter, Sir Christopher wrote to Mr. Bauchiero and to each of the other directors of the Company requesting an opportunity for him and William J. Laule, Chief Executive Officer of Parent, to meet with the Board of Directors of the Company to explain Parent's proposal in detail. No such meeting took place. In June and July 1998, Sir Christopher and Mr. Bauchiero met in New York and Detroit, respectively, to discuss the possibility of cooperative opportunities for the two companies. No decisions were reached or actions taken as a result of these meetings. 17 During the Fall of 1998, the Board of Directors of the Company met to examine the impact of short term and long term trends in the automobile manufacturing and automobile component industries and the Company's short and long term projected financial outlook. After these meetings the Board of Directors authorized Mr. Bauchiero to pursue strategic alternatives, including a possible sale of the Company. In October 1998, the Company engaged Salomon Smith Barney Inc. ("Salomon Smith Barney") to act as its financial advisor and to assist the Company in its review of strategic alternatives. On November 3, 1998 the Company met with its legal and financial advisors to discuss potential strategic alternatives, including a possible business combination, and the timing of such alternatives. In November 1998, at the direction of the Company, representatives of Salomon Smith Barney contacted representatives of Warburg Dillon Read LLC ("Warburg Dillon Read"), the financial advisor to Parent, and informed them that the Board of Directors of the Company was considering various options available to the Company and that a selected group of interested parties would be approached regarding their possible interest in acquiring the Company. Following consultations with Parent, Warburg Dillon Read confirmed to Salomon Smith Barney that Parent was interested in participating in such process. On January 7, 1999, Parent signed a confidentiality agreement and thereafter received an information memorandum and certain other information regarding the Company. During February 1999 representatives of Parent conducted a due diligence review of the Company and members of senior management of the Company met with representatives of Parent to discuss business issues and the structure and timing of a potential business combination. On March 1, 1999, Sir Christopher wrote to Mr. Bauchiero to identify a number of areas in relation to which Parent needed additional due diligence information before it could consider making any proposal to the Board of Directors of the Company. The parties suspended negotiations shortly thereafter primarily as a result of disagreement with respect to the price and terms of a potential transaction. On March 3, 1999, Parent's Board of Directors determined that Parent was not in a position to pursue the possible acquisition of the Company at that time as its representatives had not been able to complete due diligence to Parent's satisfaction and had not received certain financial information it deemed necessary. Also on March 3, 1999, Sir Christopher sent a letter to Mr. Bauchiero restating Parent's position that it was unable to proceed with the transaction based on the foregoing. Thereafter, during March 1999, Mr. Bauchiero and Sir Christopher met or talked by telephone on numerous occasions to resume discussions regarding a business combination transaction. After further review of the Company's financial information and further due diligence, Sir Christopher and Mr. Laule wrote a letter to Mr. Bauchiero on March 19, 1999, informing Mr. Bauchiero that Parent was not prepared to proceed at a price which would likely be attractive to the Company. On March 22, 1999, Sir Christopher, Mr. Laule and Mr. Bauchiero met to further discuss the possibility of a business combination. On March 23, 1999, Sir Christopher wrote a letter to Mr. Bauchiero expressing Parent's desire to structure a transaction acceptable to both parties and made a conditional offer to purchase the assets of the fuel delivery systems business from the Company. Mr. Bauchiero contacted Sir Christopher in response and indicated that the Board of Directors of the Company preferred to pursue the sale of the entire Company. After further discussions internally and with Warburg Dillon Read, and after receiving, among other things, assurances from Mr. Bauchiero regarding the ability to obtain the desired consents from the Company's joint venture partners, on April 5, 1999, Parent made a formal offer to purchase the Company by the following letter to Mr. Bauchiero from Sir Christopher: April 5, 1999 Mr. Frank Bauchiero Walbro Corporation 1227 Centre Road Auburn Hills, Michigan 48326 18 Dear Mr. Bauchiero: TI Group plc ("TI") is pleased to submit this offer to Walbro's Board of Directors to acquire Walbro Corporation ("Walbro" or the "Company") in a transaction in which a wholly owned subsidiary of TI will make a cash tender offer for all the outstanding common stock of the Company at $20 per share in cash (the "Consideration"), to be followed by a merger in which all remaining shares of common stock will be converted into the right to receive the Consideration. This offer extends to all options validly exercisable prior to expiration of the offer and is based on the currently outstanding number of common shares of approximately 8.7 million and 0.8 million shares underlying existing options; the total consideration will not be increased to take into account any further shares or rights to shares that may be issued prior to completion. A mark-up of the draft Agreement and Plan of Merger (the "Agreement") indicating TI's proposed changes will be sent tomorrow by courier. Subject to finalization of the disclosure letter and any consequent required amendments to the Agreement, TI would be prepared to sign the Agreement as submitted. Our offer is not subject to any financing contingency and is capable of being met from existing cash resources and committed credit facilities. Entering into the Agreement will be conditional upon TI accomplishing the following three objectives which we have discussed and which should be achievable, under the direction of Bill Laule and you, in a two week period beginning on April 8: 1. Information must be readily available for review by TI's senior management covering the key contracts, including price and cost information, to confirm the profit and cash flow projections of Walbro's businesses. It is important we review these issues in face- to-face meetings between the senior management of Walbro and TI in Detroit and Europe as needed. Our team is prepared to begin these meetings on April 8, and continue through to April 16 to cover all issues if necessary. At least one representative of our team would like to visit your plants in Cass City and Caro, Michigan during this two-week period. 2. Our second objective requires the prior receipt of irrevocable written consents satisfactory to TI from Walbro's principal joint venture partners to TI's acquisition of Walbro, and confirmation that Walbro's current ownership position in, and rights under, its material joint ventures will be unaffected by the acquisition. Such consents, or contract revisions if required, will also need to permit TI to integrate the combined fuel systems businesses of Bundy and Walbro in order to derive the full benefits of the combination of the businesses and to meet the needs of our customers on a global basis. We would expect to meet as soon as possible with the joint venture partners and the management of the joint ventures in Detroit, Italy and Japan to assure ourselves of this. Our team is prepared to proceed as soon as your office can schedule these meetings. 3. It is important that we reach agreement on the continuity of Walbro's management, and assure ourselves that key members of your management will remain with the business on terms acceptable to all parties. It is our expectation that TI will be granted a reasonable period of exclusivity to complete the process. We have assumed that you will approve going forward with this process on Wednesday, April 7. This offer will expire at close of business on April 8 Eastern Daylight Time unless exclusivity is received. During such a period of exclusivity we would expect to complete these objectives referenced above and resolve any other outstanding issues. We believe that this should be achievable in a two week period if our respective teams work together to achieve this goal. Although this offer is made with the full knowledge of the Board of Directors of TI, entering into the definitive Agreement will be subject to the final approval of TI's Board at its meeting on April 21. The target date for a public announcement would be around April 28. The offer is also contingent upon the expiration of certain waiting periods under the Hart Scott Rodino Antitrust Improvements Act of 1976, European anti-trust authority approval, the approval of any other necessary governmental authorities, satisfaction of the Minimum Condition as defined in the Agreement and other customary conditions as set out therein. For planning purposes, we would target completion around the end of May. 19 This offer is submitted to you on a confidential basis and may not be shared by the Company or its advisors with any other party without our prior written consent. The offer will terminate in the event of unauthorized disclosure by you or your advisors. By accepting this offer, Walbro also agrees to confer with TI prior to any public announcement concerning the fact or circumstances of our discussions. We and our advisors are prepared to meet with you and your advisors immediately to move towards expeditious completion of definitive documentation for this transaction. Key contacts are: [Omitted] To ensure the due diligence process is a success and there are no communication problems, Bill Laule will base himself in Detroit as of Thursday, April 8, and will be based there until April 15/16. This will enable Bill to start discussions with you and jointly lead this process with you and resolve any problems in "real time". To enable this to be achieved we need to be given the "go ahead" by Wednesday, April 7. Bill will provisionally plan a working supper with you on the 8th in Detroit and will telephone you to confirm on Wednesday, the 7th. We very much appreciate the courtesies and cooperation we have received from the Company during the course of our review and remain enthusiastic about the opportunities offered by this transaction. We are convinced that the combination of Walbro and TI will provide the opportunity to accelerate Walbro's growth, provide significant career opportunities for you management and employees, and create a world class fuel systems business to serve our global customers. We look forward to hearing from you and to working with you towards a rapid and successful conclusion of this transaction. Yours sincerely, Sir Christopher Lewinton On April 7, 1999, at the direction of the Company, representatives of Salomon Smith Barney contacted representatives of Warburg Dillon Read to indicate that the Company wished to proceed with Parent's proposal and to inquire what additional information regarding the Company Parent required. On April 13 and 14, 1999, representatives of Parent met or had telephonic conferences with representatives of the Company to conduct further due diligence, to discuss the terms of the transactions to be proposed to their respective boards of directors and to negotiate definitive transaction documents. Contacts between the representatives of Parent and the Company, and certain of Company's joint venture partners, continued over the next two weeks. On April 19, 1999 the Board of Directors of the Company met in Chicago to discuss the current state of negotiations with Parent. At this meeting, Salomon Smith Barney presented an overview of the automotive OEM (i.e. Original Equipment Manufacturing) component industry. Also at this meeting Katten Muchin & Zavis, counsel to the Company, presented a draft of the Merger Agreement, discussed its terms, conditions and timing and discussed the issues for which no agreement had been reached with Parent. Representatives from Katten Muchin & Zavis also advised the members of the Company's Board of Directors of their fiduciary obligations in considering a potential business combination transaction. Subsequent to these presentations the Board of Directors discussed the proposed transaction and certain open issues pertaining thereto. After such discussion, the Board of Directors directed senior management to continue negotiations with Parent and to attempt to resolve the remaining open issues. On Wednesday, April 21, Parent's Board of Directors met and approved in principle the transaction, subject to the completion of the negotiation of an acceptable definitive acquisition agreement, receipt of satisfactory consents from certain of the Company's joint venture partners and final approval from a committee of the Board of Directors consisting of Sir Christopher, Mr. Laule and Martin D. Angle. On April 24, 1999 the parties and their respective advisors met in London, England to negotiate the terms of the Merger Agreement, which negotiations continued until the early morning on April 25, 1999. 20 On April 26, 1999, the Company's Board of Directors held a telephonic meeting, during which Mr. Bauchiero briefed the Board of Directors on the current status of the negotiations and the Board of Directors held a discussion regarding certain unresolved issues. Subsequent to this telephonic Board of Directors meeting, the Company and Parent and their respective representatives held a telephonic conference call to discuss certain unresolved issues, authorization of the Merger Agreement and the transactions contemplated thereby, and the timing of the announcement of the Merger. During the early evening of April 27, 1999 the Company's Board of Directors held a telephonic meeting during which Mr. Bauchiero briefed the Board of Directors on what had taken place since the previous meeting. At this meeting, Salomon Smith Barney made a financial presentation and delivered to the Board of Directors its opinion as to the fairness, from a financial point of view, of the $20 per Share cash consideration to be received in the Offer and Merger by holders of Shares (other than Parent and its affiliates). The Company's counsel reviewed the terms of the Merger Agreement and reminded the members of the Board of Directors of their fiduciary duties as previously described at the meeting held on April 19, 1999. The Board of Directors asked senior management and the advisers a number of questions regarding the terms, conditions and timing of the proposed transaction. After a discussion, the Board of Directors unanimously approved, among other things, the Merger Agreement and the transactions contemplated thereby. Following completion of this meeting, the parties entered into the Merger Agreement. 11. PURPOSE OF THE OFFER; PLANS FOR THE COMPANY; THE MERGER. Purpose. The purpose of the Offer is to acquire for cash as many outstanding Shares as possible as a first step in acquiring the entire equity interest in the Company. Plans for the Company. Parent currently intends that the Surviving Corporation will remain an indirect wholly-owned subsidiary of Parent and that the Surviving Corporation's businesses will become part of the TI Automotive Systems Group, of which the Surviving Corporation and Bundy Corporation will be the key businesses. The Merger. The DGCL requires, among other things, that the adoption of any plan of merger or consideration of the Company must be approved by the Board of Directors of the Company and, if the "short form" merger procedure described below is not available, by the holders of a majority of the Company's outstanding Shares. The Board of Directors of the Company has approved the Offer, the Merger and the Merger Agreement; consequently, the only additional action of the Company that may be necessary to effect the Merger is approval by such stockholders if the "short form" merger procedure described below is not available. Under the DGCL, the affirmative vote of holders of a majority of the outstanding Shares (including any Shares owned by Purchaser) is generally required to approve the Merger. If Purchaser acquires, through the Offer or otherwise, voting power with respect to at least a majority of the outstanding Shares (which would be the case if the Minimum Tender Condition were satisfied and Purchaser were to accept for payment Shares tendered pursuant to the Offer), it would have sufficient voting power to effect the Merger without the vote of any other stockholder of the Company. In addition, the Company's Restated Articles of Incorporation provide that the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding Shares (the "Supermajority Provision") would be required to approve the Merger unless the Merger is approved by a majority of the Company's Disinterested Directors. For the purposes of the Supermajority Provision, "Disinterested Directors" generally means any member of the Company's Board of Directors (and certain successors thereto) who is unaffiliated with Purchaser or Parent, or any affiliates thereof, and who was a member of the Company's Board of Directors prior to the time that Purchaser became an Interested Stockholder. For the purposes of the Supermajority Provision, "Interested Stockholder" means, among other things, a person who owns 15% or more of the Shares directly or indirectly or which the person or any of its affiliates or associates has the right to acquire pursuant to any agreement, arrangement or understanding. If the stockholders of the Company tender, and Purchaser pays for, at least 15% of the Shares pursuant to the Offer, Purchaser would be an Interested Stockholder and would need to satisfy the Supermajority Provision. However, because at least a majority of the Company's Disinterested Directors have approved the Merger, the Supermajority Provision does not apply. The foregoing discussion is a summary of the relevant portions of the Company's Restated Articles of Incorporation and is by nature not complete and is qualified in its entirety to the relevant portions of the Company's Restated Articles of Incorporation. 21 If Purchaser acquires over 50% of the outstanding Shares pursuant to the Offer, it will have the vote necessary under the DGCL and the Company's Restated Certificate of Incorporation to approve the Merger. Under the DGCL, if Purchaser owns at least 90% of the outstanding Shares, Purchaser could effect the Merger using the "short-form" merger procedures without prior notice to, or any action by, any other stockholder of the Company. Therefore, if at least approximately 7,819,465 Shares (or such greater number as may be necessary if options are exercised or Preferred Securities are converted) are acquired pursuant to the Offer or otherwise, Purchaser will be able to and intends to effect the Merger without a meeting of holders of Shares. 12. THE MERGER AGREEMENT. The Merger Agreement provides that upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with the DGCL, Purchaser will be merged with and into the Company. Upon consummation of the Merger (the "Effective Time"), each then outstanding Share (other than Shares held in the Company's treasury or Shares beneficially owned by Parent or Purchaser or Shares that are held by Dissenting Stockholders), shall, by virtue of the Merger and without any action on the part of the Company, Parent, Purchaser or the holder thereof, be converted into the right to receive, without interest, the Offer Price. Conditions to the Merger. The obligations of the Company, Purchaser and Parent to effect the Merger are subject to the satisfaction of certain conditions set forth in the Merger Agreement, including (i) the purchase by Purchaser, Parent or their affiliates of Shares pursuant to the Offer, (ii) the receipt of stockholder approval, if required, (iii) that no statute, rule or regulation shall have been enacted or promulgated by any federal, state, local or foreign court, arbitral tribunal, administrative agency or commission or other governmental or regulatory authority or administrative agency (each, a "Governmental Entity") which prohibits the consummation of the Merger, and there shall be no order or injunction of a court of competent jurisdiction in effect precluding consummation of the Merger, and (iv) that clearance from the appropriate agencies pursuant to the HSR Act shall have been obtained or the waiting period thereby shall have expired or been terminated. Termination of the Merger Agreement. According to its terms, the Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger Agreement by the stockholders of the Company, by the mutual consent of Parent and the Company. In addition the Merger Agreement may be terminated by either Parent or the Company if (i) (x) the Offer shall have expired without any Shares being purchased therein or (y) Purchaser shall not have accepted for payment all Shares tendered pursuant to the Offer by September 30, 1999; provided that the right to terminate the Merger Agreement under (x) or (y) is not available to any party whose failure to fulfill any obligation under the Merger Agreement is the cause of, or resulted in, the failure of Parent or Purchaser to purchase the Shares pursuant to the Offer on or prior to such date or (ii) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action which permanently restrains, enjoins or otherwise prohibits the acceptance for payment of, or payment for, Shares pursuant to the Offer or Merger and such order, decree, ruling or other action shall have become final and non- appealable. The Merger Agreement may be terminated by Parent if, among other things, (i) prior to the purchase of Shares pursuant to the Offer, the Company shall have breached any representation, warranty, covenant or other agreement contained in the Merger Agreement (with certain exceptions) which (A) would give rise to the failure of one of the conditions to the Offer which requires the truth or performance thereof as of certain specified dates and (B) cannot be or has not been cured, in all material respects, within 30 days after the giving of written notice to the Company; (ii) if there has been a material breach of the provisions of the Merger Agreement described below under "- Acquisition Proposal" which, if capable of being cured, has not been cured within 10 days; or (iii) if the Board of Directors of the Company has withdrawn or modified in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or the Board of Directors of the Company has approved or recommended any Acquisition Transaction (as defined below) or the Company shall have entered into any agreement or agreement in principle with respect to any Acquisition Transaction. The Merger Agreement may be terminated by the Company, among other reasons, upon execution by it of a definitive agreement for a merger, consolidation or other business combination involving the Company or any of its subsidiaries or with respect to the acquisition of beneficial ownership of all or any significant part of the assets or capital stock of the Company (an "Acquisition Transaction") that the 22 Board of Directors of the Company shall have decided to recommend to the Company's stockholders after it has reasonably concluded, after consultation with its outside independent legal counsel and a nationally recognized investment bank, that such transaction is more favorable to the stockholders of the Company from a financial point of view than the Offer and the Merger and that its failure to make such recommendation and terminate the Merger Agreement could violate its fiduciary duties under applicable law (a "Superior Proposal") provided (A) it has complied with all provisions of the Merger Agreement governing conduct of the Company with respect to offers or proposals for Acquisition Transactions, including the notice provisions therein, (B) that it has paid or made arrangement reasonably satisfactory to Parent to pay promptly (and in any event within five (5) business days of the termination of the Merger Agreement) the Termination Expenses (as defined below) and (C) it shall have provided to Parent at least five business days' prior written notice that the Board of Directors intends to terminate the Merger Agreement, specifying the material terms and conditions of such Acquisition Transaction. In connection with the foregoing, the Company agreed in the Merger Agreement that it will (X) not enter into a binding agreement with respect to an Acquisition Transaction until at least the sixth business day after it has provided the notice to Parent required by the Merger Agreement, (Y) consider in good faith any offer made by Parent during that period, and (Z) notify Parent promptly if its intention to enter into such an agreement shall change at any time after such notification. The Company may also terminate the Merger Agreement if Parent or Purchaser shall have breached in any material respect any of their respective representations, warranties, covenants or other agreements contained in the Merger Agreement, which breach cannot be or has not been cured, in all material respects, within 30 days after the giving of written notice to Parent or Purchaser, as applicable. Fees and Expenses. The Company shall immediately pay to Parent (x) the amount of $11.0 million and (y) all actual documented out-of-pocket expenses reasonably incurred by Parent and Purchaser in connection with the Merger Agreement and the Merger in an amount not to exceed $2.0 million (the "Termination Expenses") if the Merger Agreement is terminated: (1) by the Company if it executes an agreement for an Acquisition Transaction that it has decided to recommend to the Company's stockholders after it has concluded that such transaction constitutes a Superior Proposal, (2) by Parent if (i) the Board of Directors of the Company shall have withdrawn or modified in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any Acquisition Transaction or (ii) the Company shall have entered into any agreement or agreement in principle with respect to any Acquisition Transaction, if within six (6) months after such termination an Acquisition Transaction shall be consummated or (3) by either the Company or Parent (if such party is entitled to terminate the Merger Agreement pursuant to the terms thereof) if (i) the Offer shall have expired without any Shares being purchased therein or (ii) Purchaser shall not have accepted for payment all Shares tendered pursuant to the Offer by September 30, 1999 and (a) within six (6) months thereafter there shall be publicly announced another Acquisition Transaction or prior thereto any person shall have acquired beneficial ownership of at least 30% of the outstanding Shares (the "Termination Date") and (b) an Acquisition Transaction shall be consummated prior to the Termination Date or any person shall have acquired beneficial ownership of at least 30% of the outstanding Shares, as the case may be. In the event that the Merger Agreement is terminated by Parent due to a breach by the Company of the provisions described below under "- Acquisition Proposal", the Company shall immediately pay Parent the Termination Expenses. In the event that the Company becomes obligated to make the payment described in the preceding sentence and another Acquisition Transaction is consummated within six (6) months after termination by Parent, the Company shall also pay to Parent the amount of $11.0 million. The Company shall immediately pay to Parent the Termination Expenses if the Merger Agreement is terminated by Parent due to breach of any representation, warranty, covenant or other agreement by the Company which cannot be or has not been cured within 30 days of notice thereof if the breach thereof is due solely to the Company's intentional or bad faith acts. Upon receipt of such payments, Parent shall not be entitled to and shall waive the right to seek damages or other amounts or remedies from the Company for breach of, or otherwise in connection with, the Merger Agreement other than in the case of termination by Parent as described in the preceding sentence. If the Company fails to promptly pay such amount, and, in order to obtain such payment, Parent or Purchaser commences a suit which results in a judgment against the Company for the fee set forth above, the Company shall pay to Parent or Purchaser its reasonable cost and expenses (including reasonable attorneys' fees) in connection with such suit. 23 Amendment of the Merger Agreement. Subject to the applicable provisions of the DGCL and the Merger Agreement, the Merger Agreement may be amended by action taken by the Company, Parent and Purchaser at any time prior to the Effective Time. Treatment of Convertible Preferred Securities and Options. The Merger Agreement provides that each holder of an outstanding option, warrant or commitment to purchase any capital stock or other equity interest of the Company (other than holders of the Preferred Securities) (each, an "Option") shall be entitled to receive at or after the Effective Time, upon surrender of such option for cancellation, cash equal to the positive difference, if any, between the Offer Price less the exercise price of each such Option multiplied by the number of Shares covered by such Option. Notwithstanding the foregoing, from and after the Effective Time each holder of Preferred Securities shall have the right to convert its Preferred Securities only into the amount of cash provided for by the terms of the Preferred Securities after giving effect to any adjustment in the conversion price provided for by such terms, which amount is $26.40 per Preferred Security. Upon the consummation of the Merger, Parent will cause to be delivered to each holder of Preferred Securities the notice required by the terms of the indenture related thereto. Indemnification of Officers and Directors. The Merger Agreement provides that from and after the Effective Time, the Surviving Corporation will cause to be maintained in effect the Company's existing directors' and officers' liability insurance for a period of six years after the Effective Time; provided the Surviving Corporation may substitute therefor other policies of at least the same coverage amounts and which contain terms and conditions not less advantageous (other than to a de minimus extent) to the beneficiaries of the current policies, provided that such substitution may not result in any gaps or lapses in coverage with respect to matters occurring prior to the Effective Time; and provided further that the Surviving Corporation is not required to pay an annual premium in excess of 200% of the last annual premium paid by the Company prior to the date of the Merger Agreement and if the Surviving Corporation is unable to obtain the required insurance, it is required to obtain as much comparable insurance as possible for an annual premium equal to such maximum amount. The Merger Agreement also provides that, after the Effective Time, Parent will indemnify each present and former director or officer of the Company and each of its subsidiaries against all losses, claims, damages, costs, expenses (including attorneys' fees and expenses), liabilities or judgments, fines or amounts that are paid in settlement as a result of or in connection with any threatened or actual action, suit or proceeding based on or arising out of the fact that such person is or was a director or officer of the Company or any of its subsidiaries or out of or in connection with activities in such capacity, whether pertaining to any matter existing or occurring at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities"), including all Indemnified Liabilities based on, or arising out of, or pertaining to, the Merger Agreement or the transactions contemplated thereby, in each case to the fullest extent a corporation is permitted to do so under the DGCL and to the fullest extent provided in the by-laws or Certificate of Incorporation of the Company and its subsidiaries in effect on the date of the Merger Agreement. Treatment of Employee Benefits. Parent has agreed in the Merger Agreement that, as soon as administratively practicable after the Effective Time, it will cause all employees of the Company then actually at work to be covered under employee benefit and fringe benefit plans that are no less favorable than those that Parent maintains for its similarly situated employees. Parent has also agreed that the Company will honor all obligations under employee benefit plans and all employment agreements entered into by the Company prior to the date of the Merger Agreement. Composition of the Board of Directors. The Merger Agreement provides that promptly upon the purchase of and payment for any Shares by Parent or any of its subsidiaries which represents at least a majority of the outstanding Shares (on a fully diluted basis), Parent shall be entitled to designate such number of directors, rounded up to the next whole number, on the Board of Directors of the Company as is equal to the product of the total number of directors on such Board (giving effect to the directors designated by Parent pursuant to this sentence) multiplied by the percentage that the number of Shares so accepted for payment bears to the total number of Shares then outstanding. In furtherance thereof, the Company shall upon request of Purchaser, promptly either increase the size of its Board of Directors or secure the resignation of such number of its incumbent directors, or both, as is necessary to enable Parent's designees to be so elected to the Company's Board, and shall take all actions available to the Company to cause Parent's designees to be so elected. At such 24 time, the Company shall, if requested by Parent, also cause persons designated by Parent to constitute at least the same percentage (rounded up to the next whole number) as is on the Company's Board of Directors on each committee of the Company's Board of Directors. Parent is required to use its best efforts to cause the Company to have at least one independent director until the Effective Time, including, but not limited to, retaining one of the Company's current directors. Acquisition Proposal. The Company has agreed that neither it nor any of its affiliates nor any of their respective directors, officers, employees, agents or representatives shall, directly or indirectly, solicit or initiate or knowingly facilitate or encourage (including by way of furnishing or disclosing non-public information) any inquiries or the making of any proposal with respect to an Acquisition Transaction, or negotiate, explore or otherwise engage in discussions with any person (other than Parent and its representatives) with respect to any Acquisition Transaction, or which may lead to a proposal for an Acquisition Transaction, or enter into any agreement, arrangement or understanding with respect to any such Acquisition Transaction or which would require it to abandon, terminate or fail to consummate the Merger or any other transaction contemplated by the Merger Agreement, or which may cause the Board of Directors of the Company to withdraw, modify or amend its recommendation that the Company's stockholders accept the Offer, tender their Shares to Purchaser or approve and adopt the Merger Agreement and the Merger; provided, however, that the Company may, in response to a bona fide unsolicited proposal from a third party regarding an Acquisition Transaction, (x) furnish information to and engage in discussions and negotiations with such third party (subject to such third party entering into a confidentiality agreement with the Company containing terms substantially similar to the Confidentiality Agreement between the Company and Parent), but only if the Board of Directors of the Company reasonably determines in good faith, after consultation with its outside independent counsel and a nationally recognized investment bank, that such unsolicited proposal could reasonably lead to a Superior Proposal and that failing to take such action could violate the Board's fiduciary duties under applicable law and (y) take and disclose to the Company's stockholders any proposal, and make related filings with the SEC, as required by Rule 14e-3 and 14d-9 under the Exchange Act. Covenants, Representations and Warranties. The Merger Agreement also contains certain other restrictions as to the conduct of business by the Company pending the Merger, as well as representations and warranties of each of the parties customary in transactions of this kind. Appraisal Rights. Holders of Shares do not have appraisal rights as a result of the Offer. However, if the Merger is consummated, each holder of Shares who has neither voted in favor of the Merger nor consented thereto in writing will be entitled to an appraisal by the Delaware Court of Chancery of the fair value of such holder's Shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, to be paid. In determining such fair value, the Delaware Court of Chancery may consider all relevant factors. The value so determined could be more or less than the consideration to be paid in the Offer and the Merger. Any judicial determination of the fair value could be based upon considerations other than or in addition to the market value of the Shares, including, among other things, asset values and earning capacity. If any holder of Shares who demands appraisal under Section 262 of the DGCL fails to perfect, or effectively withdraws or loses such holder's right to appraisal as provided in the DGCL, the Shares of such stockholder will be converted into the Offer Price in accordance with the Merger Agreement. A stockholder may withdraw his demand for appraisal by delivery to Parent of a written withdrawal of such holder's demand for appraisal and acceptance of the Merger. The foregoing discussion is not a complete statement of law pertaining to appraisal rights under the DGCL and is qualified in its entirety by the full text of Section 262 of the DGCL. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. 25 13. RIGHTS AGREEMENT. Set forth below is a summary description of the Rights as filed with the Company's Registration Statement on Form 8-A dated July 8, 1998 relating to the Rights: On June 24, 1998, the Board of Directors of the Company declared a dividend of one Right for each outstanding share of Common Stock. The dividend was payable on July 17, 1998 (the "Record Date") to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (each, a "Preferred Share"), of the Company at a price of $45 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, dated as of June 30, 1998, as amended April 27, 1999 (the "Rights Agreement") between the Company and Harris Trust and Savings Bank, as Rights Agent. Until the earlier of (i) the close of business on the tenth day after the first public announcement by the Company or an Acquiring Person (as defined below) that a person or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the outstanding Common Stock (other than the Company, its majority-owned subsidiaries, and certain other related persons ("Excluded Persons")) (an "Acquiring Person") (with certain exceptions), or (ii) the close of business on the tenth business day (or such later date as may be determined by action of the Board of Directors prior to such time as any person becomes an Acquiring Person) following the commencement of, or the first public announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by such person or group (other than by Excluded Persons) of 15% or more of such outstanding Common Stock (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced by the Common Stock certificates, will be transferable only by the transfer of the Common Stock associated with such Rights and any transfer of the Common Stock (including a transfer to the Company) will constitute a transfer of the associated Rights. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Stock certificates issued after the Record Date, upon transfer or new issuance of Common Stock, will contain a legend incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender for transfer of any certificates for Common Stock outstanding as of the Record Date, even without such notation will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and such separate Rights Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on June 30, 2008 (the "Rights Expiration Date"), unless the Rights Expiration Date is extended or unless the Rights are redeemed earlier by the Company, in each case, as described below. If a person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right (other than those described in the next sentence) will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price of the Right. All Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be void. At any time after the first date of public announcement by the Company or an Acquiring Person than an Acquiring Person has become such (a "Shares Acquisition Date"), if (i) the Company is the surviving corporation in a merger with any other company or entity, (ii) the Company is acquired in a merger or other business combination transaction, (iii) 50% or more of the Company's consolidated assets or earning power are 26 sold or (iv) an Acquiring Person engages in certain "self-dealing" transactions with the Company, each holder of an outstanding Right (other than those whose Rights have become void) will thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the surviving or acquiring company or the Acquiring Person, as the case may be, which at the time of such transaction will have a market value of two times the Purchase Price of such Right. At any time after a person or group becomes an Acquiring Person (other than Excluded Persons), the Board of Directors of the Company may exchange the Rights (other than Rights owned by an Acquiring Person which have become void), in whole or in part, without any additional payment, for Common Stock at an exchange ratio of one share of Common Stock (or of a share of a class or series of the Company's preferred shares having equivalent rights, preferences and privileges), per Right (subject to adjustment). The foregoing right of exchange shall not be available at any time after any person or group and their affiliates and associates (other than Excluded Persons) becomes the beneficial owner of 50% or more of the Common Stock. The Purchase Price payable, and the number of Preferred Shares or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights or warrants to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then-current market price of the Preferred Shares or (iii) upon the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. At any time prior to the time that any person or group becomes an Acquiring Person, the Board of Directors of the Company may redeem all, but not less than all, of the Rights at a price of $.01 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time, on such basis and with such conditions, as the Board of Directors in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Any of the provisions of the Rights may be amended by the Board of Directors of the Company prior to the time that any person or group becomes an Acquiring Person. After the time that any person or group becomes an Acquiring Person, the provisions of the Rights Agreement may be amended by the Board in order to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. Pursuant to the Merger Agreement, on April 27, 1999, the Company amended the Rights Agreement to provide that (x) the execution of the Merger Agreement and any amendment thereto and the consummation of the transactions contemplated thereby will not cause (i) Parent and/or Purchaser or their respective Affiliates to become an Acquiring Person (as such terms are defined in the Rights Agreement) unless the Merger Agreement has been terminated in accordance with its terms or (ii) a Distribution Date, a Shares Acquisition Date or a Triggering Event (as such terms are defined in the Rights Agreement) to occur, irrespective of the number of Shares acquired pursuant to the Merger or other transactions contemplated by the Merger Agreement. Copies of the Merger Agreement have been filed as Exhibits to the Schedule 14D-1 filed by Parent with the SEC and, along with the Rights Agreement, are available for inspection and copying at the principal office of the SEC in the manner set forth in Section 8. The foregoing descriptions of these documents are qualified in their entireties by reference to such documents. 27 14. SOURCE AND AMOUNT OF FUNDS. Purchaser estimates that the total amount of funds required to purchase all of the outstanding Shares (assuming the exercise of all outstanding options and the conversion of all of the Preferred Securities) (other than those already owned by Parent) pursuant to the Offer and the Merger and to pay related fees and expenses will be approximately $264,000,000. Purchaser will obtain these funds from existing cash resources or from borrowings pursuant to the (Pounds)630,000,000 revolving credit facility dated April 27, 1998, as supplemented on June 23, 1998 (as supplemented, the "Credit Facility Agreement") among Parent, TI International Holdings Ltd, and ABN AMRO Bank N.V., Citibank, N.A. and Midland Bank plc as Arrangers, HSBC Investment Bank plc as Agent and certain other financial institutions named therein. The Credit Facility Agreement includes a five year sterling denominated multicurrency revolving credit facility up to the amount of (Pounds)315,000,000 ("Facility A") and a 364 day sterling denominated multicurrency revolving credit facility up to the amount of (Pounds)315,000,000 ("Facility B"). Each Facility bears interest at a rate per annum equal to LIBOR plus a margin equal to .25% plus, in the case the loan is made in Sterling, the cost imputed to the banks making such loan in compliance with the Mandatory Cost Rate requirements of the Bank of England calculated pursuant to the terms of the Credit Facility Agreement. The Credit Facility Agreement contains certain financial covenants which require Parent to maintain specified (i) profit before interest to net borrowing costs ratios and (ii) maximum leverage ratios. The Credit Facility Agreement also contains certain restrictions on, among other things, (i) encumbrances, (ii) disposal of assets and (iii) indebtedness of subsidiaries. Pursuant to the terms of the Credit Facility Agreement, conditions precedent to Parent obtaining funding include that there can be no default existing or resulting from the making of the loan and that certain representations and warranties of Parent must be correct. It is anticipated that the indebtedness incurred by Parent under the Credit Facility Agreement will be repaid by funds generated internally by Parent and its subsidiaries (including, after the Merger, if consummated, funds generated by the Surviving Corporation and its subsidiaries), through additional borrowings, or through a combination of such sources. No final decisions have been made concerning the method Parent will employ to repay such indebtedness. Such decisions when made will be based on Parent's review from time to time of the advisability of particular actions, as well as on prevailing interest rates and financial and other economic conditions. 15. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision of the Offer and in addition to (and not in limitation of) Purchaser's right to extend and amend the Offer at any time in its sole discretion (subject to the provisions of the Merger Agreement), Purchaser shall not be required to accept for payment or, subject to applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser's obligation to pay for or returned tendered Shares promptly after termination or withdrawal of the Offer), and may terminate or amend the Offer as to any Shares not then paid for if (i) any applicable waiting period under the HSR Act or any applicable European antitrust law has not expired or terminated, (ii) approval under any applicable European antitrust law has not been obtained, (iii) the Minimum Tender Condition has not been satisfied or (iv) at any time on or after April 27, 1999 and before the time of acceptance for payment of any such Shares, any of the following events shall have occurred: (a) there shall be pending any action, suit, investigation or proceeding by any Governmental Entity before any court or governmental authority or agency, (i) seeking to make illegal, or otherwise directly or indirectly restrain or prohibit the making of the Offer, or the acceptance for payment or payment for some of or all the Shares pursuant to the Offer or the consummation of the Merger or seeking to obtain material damages in connection with the transactions contemplated by the Merger Agreement; (ii) seeking to restrain, prohibit or terminate the Company's or, as a result of the transactions contemplated by the Merger Agreement, Parent's ownership, operation or lease (or that of their respective subsidiaries or affiliates) of any business, properties or assets which are material to the business or operation, as such business or operations are currently conducted, of the Company and its subsidiaries or of Parent and its subsidiaries, as the case may be, or to compel the Company 28 or, as a result of the transactions contemplated by the Merger Agreement, Parent or any of their respective subsidiaries or affiliates to dispose of, cease operating or hold separate any business, properties or assets that are material to the business or operations, as such business or operations are currently conducted, of the Company and its subsidiaries or of Parent and its subsidiaries; (iii) seeking to impose limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Company Common Stock, including, without limitation, the right to vote any shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to the Company's stockholders; (iv) seeking to require divestiture by Parent or any of its subsidiaries or affiliates of any Company Common Stock; (b) there shall be in effect any judgment, decree or order of any court or Governmental Entity, domestic or foreign, or any other legal restraint that: (i) makes illegal, or otherwise directly or indirectly restrains or prohibits the making of the Offer or the acceptance for payment or payment for some of or all the Shares pursuant to the Offer or the consummation of the Merger or that imposes or would impose upon the Company or Parent or any of their respective subsidiaries or affiliates material damages in connection with the transactions contemplated by the Merger Agreement; (ii) restrains, prohibits or terminates the Company's or, as a result of the transactions contemplated by the Merger Agreement, Parent's ownership, operation or lease (or that of their respective subsidiaries or affiliates) of any business, properties or assets which are material to the business or operation, as such business or operations are currently conducted, of the Company and its subsidiaries or of Parent and its subsidiaries, as the case may be, or compels the Company or, as a result of the transactions contemplated by the Merger Agreement, Parent or any of their respective subsidiaries or affiliates to dispose of, cease operating or hold separate any business, properties or assets that are material to the business or operations, as such business or operations are currently conducted, of the Company and its subsidiaries or of Parent and its subsidiaries; (iii) imposes limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Company Common Stock, including, without limitation, the right to vote any shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to the Company's stockholders; or (iv) requires divestiture by Parent or any of its subsidiaries or affiliates of any Company Common Stock; or (c) there shall be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or issued or applicable to the Offer or the Merger, on behalf of a Governmental Entity, or any other action shall be taken by any Governmental Entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (iv) of paragraph (a) above; or (d) there shall have occurred any events or state of circumstances after April 27, 1999 which, either individually or in the aggregate, would have a material adverse affect on the Company; or (e) (i) the Board of Directors of the Company shall have withdrawn or modified in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger or the Merger Agreement, approved or recommended any Acquisition Transaction, or (ii) the Company shall have entered into any agreement or agreement in principle with respect to any Acquisition Transaction; or (f) any of the representations or warranties of the Company set forth in the Merger Agreement that is qualified by materiality or material adverse affect shall not be true or any of the representations or 29 warranties of the Company set forth in the Merger Agreement that is not so qualified shall not be true in any material respect, in each case (i) as of the date referred to in any representation or warranty which addresses matters as of a particular date, or (ii) as to all other representations and warranties, as of the date of the Merger Agreement and as of the scheduled expiration of the Offer; or (g) the Company shall have failed in any material respect to perform any obligation or to comply with any agreement or covenant to be performed or complied with by it under the Merger Agreement; or (h) any person acquires beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of at least 30% of the outstanding Company Common Stock (other than any person not required to file a Schedule 13D under the rules promulgated under the Exchange Act); or (i) the Merger Agreement shall have been terminated in accordance with its terms; or (j) there shall have occurred and be continuing (i) any suspension of, or limitation on prices for, trading in securities on NASDAQ or (ii) any limitation by any governmental authority on the extension of credit by banks or other lending institutions or banking moratorium or any suspension of payments in respect of banks, which materially affects the ability of Parent or Purchaser to pay for the Company Common Stock; which in the reasonable judgment of Parent in any such case makes it inadvisable to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of Parent and Purchaser, may be asserted by Parent or Purchaser regardless of the circumstances giving rise to such condition (including any action or inaction by Parent or Purchaser not in violation of the Merger Agreement) and may be waived by Parent or Purchaser in whole or in part at any time and from time to time in the sole discretion of Parent or Purchaser, subject in each case to the terms of the Merger Agreement. The failure by Parent or Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. A public announcement shall be made of a material change in, or waiver of, such conditions, and the Offer may, in certain circumstances, be extended in connection with any such change or waiver. 16. CERTAIN LEGAL MATTERS. General. Except as otherwise disclosed herein, based upon an examination of publicly available filings with respect to the Company, Parent and Purchaser are not aware of any licenses or other regulatory permits which appear to be material to the business of the Company and which might be adversely affected by the acquisition of Shares by Purchaser pursuant to the Offer or of any approval or other action by any governmental, administrative or regulatory agency or authority which would be required for the acquisition or ownership of Shares by Purchaser pursuant to the Offer. Should any such approval or other action be required, it is currently contemplated that such approval or action would be sought or taken. There can be no assurance that any such approval or action, if needed, would be obtained or, if obtained, that it will be obtained without substantial conditions or that adverse consequences might not result to the Company's or Purchaser's business or that certain parts of the Company's or Purchaser's business might not have to be disposed of in the event that such approvals were not obtained or such other actions were not taken, any of which could cause Purchaser to elect to terminate the Offer without the purchase of the Shares thereunder. Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions. See Section 15. United States Antitrust Compliance. Under the HSR Act and the rules that have been promulgated thereunder by the Federal Trade Commission ("FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The acquisition of Shares by Purchaser is subject to these requirements. See Section 2 of this Offer to Purchase as to the effect of the HSR Act on the timing of Purchaser's obligation to accept Shares for payment. 30 Pursuant to the HSR Act, Parent filed a Notification and Report Form with respect to the acquisition of Shares pursuant to the Offer and the Merger with the Antitrust Division and the FTC on April 30, 1999. Under the provisions of the HSR Act applicable to the purchase of Shares pursuant to the Offer, such purchases may not be made until the expiration of a 15-calendar day waiting period following the filing by Parent. Accordingly, the waiting period under the HSR Act will expire at 11:59 p.m., New York City time, on May 15, 1999, unless early termination of the waiting period is granted or Parent receives a request for additional information or documentary material prior thereto. Pursuant to the HSR Act, Parent has requested early termination of the waiting period applicable to the Offer. There can be no assurances given, however, that the 15-day HSR Act waiting period will be terminated early. If either the FTC or the Antitrust Division were to request additional information or documentary material from Parent, the waiting period would expire at 11:59 p.m., New York City time, on the tenth calendar day after the date of substantial compliance by Parent with such request unless the waiting period is sooner terminated by the FTC or the Antitrust Division. Thereafter, the waiting period could be extended only by agreement or by court order. If the acquisition of Shares is delayed pursuant to a request by the FTC or Antitrust Division for additional information or documentary material pursuant to the HSR Act, the purchase of and payment for Shares will be deferred until 10 days after the request is substantially complied with unless the waiting period is sooner terminated by the FTC or the Antitrust Division. See Section 2. Only one extension of such waiting period pursuant to a request for additional information is authorized by the rules promulgated under the HSR Act, except by agreement or by court order. Any such extension of the waiting period will not give rise to any withdrawal rights not otherwise provided for by applicable law. See Section 4. Although the Company is required to file certain information and documentary material with the Antitrust Division and the FTC in connection with the Offer, neither the Company's failure to make such filings nor a request from the Antitrust Division or the FTC for additional information or documentary material made to the Company will extend the waiting period. The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of Shares by Purchaser pursuant to the Offer. At any time before or after Purchaser's purchase of Shares, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the acquisition of Shares pursuant to the Offer or seeking divestiture of Shares acquired by Purchaser or the divestiture of substantial assets of Parent, the Company or any of their respective subsidiaries. Private parties may also bring legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if a challenge is made, what the result will be. See Section 15 of this Offer to Purchase for certain conditions to the Offer that could become applicable in the event of such a challenge. European Antitrust Approval. Under Council Regulation (EEC) No. 4064/89, the Offer and the Merger may not be consummated until the European Commission has granted its approval thereof. Parent expects to file the requisite notification with respect to the Offer and the Merger with the European Commission on May 7, 1999. Approval will be deemed granted upon it being established, in terms satisfactory to Purchaser, that it is not the intention of the European Commission to initiate proceedings under Article 6(1)(c) of Council Regulation (EEC) 4064/89 or to make a referral to a competent authority under Article 9(1) thereof in connection with the proposed acquisition of the Company by Purchaser or any matter arising therefrom. Foreign Approvals. The Company owns property or conducts business in various foreign countries and jurisdictions. In connection with the acquisition of the Shares pursuant to the Offer, the laws of certain of those foreign countries and jurisdictions may require the filing of information with, or the obtaining of the approval of, governmental authorities in such countries and jurisdictions. The governments in such countries and jurisdictions might attempt to impose additional conditions on the Company's operations conducted in such countries and jurisdictions as a result of the acquisition of the Shares pursuant to the Offer. There can be no assurance that Parent or Purchaser will be able to cause the Company or its subsidiaries to satisfy or comply with such laws or that compliance or non-compliance will not have a material adverse effect on the financial condition, properties, 31 business or results of operations of the Company and its subsidiaries taken as a whole or impair Parent, Purchaser or the Company or any of their respective affiliates, following consummation of the Offer or Merger, to conduct any material business or operations in any jurisdiction where they are now being conducted. See Section 15. Federal Reserve Board Regulations. Regulations G, T, U and X (the "Margin Regulations") promulgated by the Federal Board place restrictions on the amount of credit that may be extended for the purpose of purchasing margin stock (including the Shares) if such credit is secured directly or indirectly by margin stock. Parent and Purchaser will attempt to ensure that the financing of the acquisition of the Shares will be in compliance with the Margin Regulations. State Takeover Laws. A number of states have adopted laws and regulations applicable to offers to acquire securities of corporations which are incorporated in such states and/or which have substantial assets, stockholders, principal executive offices or principal places of business therein. In Edgar v. MITE Corporation, the Supreme Court of the United States held that the Illinois Business Takeover Statute, which made the takeover of certain corporations more difficult, imposed a substantial burden on interstate commerce and was therefore unconstitutional. In CTS Corporation v. Dynamics Corporation of America, the Supreme Court held that as a matter of corporate law, and in particular, those laws concerning corporate governance, a state may constitutionally disqualify an acquiror of "Control Shares" (ones representing ownership in excess of certain voting power thresholds e.g. 20%, 33% or 50%) of a corporation incorporated in its state and meeting certain other jurisdictional requirements from exercising voting power with respect to those shares without the approval of a majority of the disinterested stockholders. Section 203 of the DGCL limits the ability of a Delaware corporation to engage in business combinations with "interested stockholders" (defined generally as any beneficial owner of 15% or more of the outstanding voting stock of the corporation) unless, among other things, the corporation's board of directors has given its prior approval to either the business combination or the transaction which resulted in the stockholder becoming an "interested stockholder." The Company's Board of Directors and a disinterested Committee of the Board of Directors have approved the Merger Agreement and Purchaser's acquisition of Shares pursuant to the Offer and, therefore, Section 203 of the DGCL is inapplicable to the Offer and the Merger. Based on information supplied by the Company, Purchaser does not believe that any state takeover laws apply to the Offer or the Merger and neither it nor Parent has complied with any state takeover laws. If it is asserted that one or more state takeover laws applies to the Offer or the Merger and it is not determined by an appropriate court that such act or acts do not apply or are invalid as applied to the Offer or the Merger, Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, Purchaser might be unable to accept for payment any Shares tendered pursuant to the Offer, or be delayed in consummating the Offer. In such case, Purchaser may not be obligated to accept for payment any Shares tendered. See Section 15. Exon-Florio. Under Section 721 of Title VII of the United States Defense Production Act of 1950, as amended by Section 5021 of the Omnibus Trade and Competitiveness Act of 1988 ("Exon-Florio"), the President of the United States is authorized to prohibit or suspend acquisitions, mergers or takeovers by foreign persons of persons engaged in interstate commerce in the United States if the President determines, after investigation, that such foreign persons in exercising control of such acquired persons might take action that threatens to impair the national security of the United States and that other provisions of existing law do not provide adequate authority to protect national security. Pursuant to Exon-Florio, notice of an acquisition by a foreign person is to be made to the Committee on Foreign Investment in the United States ("CFIUS"), which is comprised of representatives of the Departments of the Treasury, State, Commerce, Defense and Justice, the Office of Management and Budget, the United States Trade Representative's Office and the Council of Economic Advisors and which has been selected by the President to administer Exon-Florio, either voluntarily by the parties to such proposed acquisition, merger or takeover or by any member of CFIUS. A determination that an investigation is called for must be made within 30 days after notification of a proposed acquisition, merger or takeover is first filed with CFIUS. Any such investigation must be completed 32 within 45 days of such determination. Any decision by the President to take action must be announced within 15 days of the completion of the investigation. Although Exon-Florio does not require the filing of a notification, nor does it prohibit the consummation of an acquisition, merger or takeover if notification is not made, such an acquisition, merger or takeover thereafter remains indefinitely subject to divestment should the President subsequently determine that the national security of the United States has been threatened or impaired. Parent and Purchaser do not believe that the Offer or the Merger threatens to impair the national security of the United States and do not intend to notify CFIUS of the proposed transaction. 17. FEES AND EXPENSES. Warburg Dillon Read is acting as Dealer Manager in connection with the Offer and has provided certain financial advisory services to Purchaser in connection therewith. Parent has agreed to pay reasonable and customary compensation for its services as financial advisor in connection with the Offer, and to reimburse Warburg Dillon Read for its out-of-pocket expenses. Warburg Dillon Read will not receive any compensation for its services as Dealer Manager, but will be reimbursed for all out-of-pocket expenses, including the reasonable fees and expenses of its legal counsel, associated with it acting as Dealer Manager. Parent and Purchaser agreed to indemnify Warburg Dillon Read against certain liabilities and expenses in connection with the Offer and the Merger, including liabilities under the federal securities laws. Purchaser has also retained Innisfree M&A Incorporated to act as the Information Agent in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telex, telegraph and personal interviews and may request brokers, dealers and other nominee stockholders to forward materials relating to the Offer to beneficial owners of Shares. Purchaser has agreed to pay the Information Agent $7,500 for such services, plus reimbursement of out-of-pocket expenses and has agreed to indemnify the Information Agent against certain liabilities and expenses in connection with the Offer, including liabilities under the federal securities laws. Purchaser has agreed to pay the Depositary reasonable and customary compensation for its services in connection with the Offer, plus reimbursement for out-of-pocket expenses, and has agreed to indemnify the Depositary against certain liabilities and expenses in connection therewith, including liabilities under the federal securities laws. Brokers, dealers, commercial banks and trust companies will be reimbursed by Purchaser for customary mailing and handling expenses incurred by them in forwarding material to their customers. 18. MISCELLANEOUS. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. However, Purchaser may, in its sole discretion, take such action as it may deem necessary to make the Offer in any such jurisdiction and extend the Offer to holders of Shares in such jurisdiction. Neither Purchaser nor Parent is aware of any jurisdiction in which the making of the Offer or the acceptance of Shares in connection therewith would not be in compliance with the laws of such jurisdiction. Purchaser and Parent have filed with the SEC a Statement on Schedule l4D-1 pursuant to Rule l4d-3 of the General Rules and Regulations under the Exchange Act, furnishing certain additional information with respect to the Offer, and may file amendments thereto. Such Statement on Schedule 14D-1 and any amendments thereto, including exhibits, may be examined and copies may be obtained from the principal office of the SEC in Washington, D.C. and NASDAQ in the manner set forth in Section 8. No person has been authorized to give any information or make any representation on behalf of Parent or Purchaser not contained in this Offer to Purchase or in the Letter of Transmittal and, if given or made, such information or representation must not be relied upon as having been authorized. TI Automotive Systems, Inc. May 4, 1999 33 SCHEDULE A INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF PARENT AND PURCHASER 1. Directors and Executive Officers of Parent. The following table sets forth the name, business address, citizenship, present principal occupation or employment and material occupations, positions, offices or employments for the past five years of each director and executive officer of TI Group plc. Unless otherwise indicated, each such person is a citizen of the United Kingdom, the business address of each person is 50 Curzon Street, London W1Y 7PN, England, each occupation set forth opposite an individual's name refers to employment with TI Group plc and each person has held such occupation for at least the past five years.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND NAME; BUSINESS ADDRESS; OTHER MATERIAL OCCUPATIONS, CITIZENSHIP OFFICES OR EMPLOYMENTS HELD DURING LAST FIVE YEARS ----------------------- -------------------------------------------------- Sir Christopher Lewinton Chairman of the Board of Directors of TI Group plc Citizen of U.S.A. and U.K. since 1989; Chief Executive of the Board of Directors of TI Group plc from 1986 until 1997; non-executive Director of Reed International plc from 1990 to 1999 and of Reed Elsevier plc from 1993 to 1999; member of the Supervisory Board of Mannesman AG since 1996; non-executive director of Young & Rubicam Inc. since 1999. John M. Hignett Deputy Chairman of the Board of Directors of TI Group plc since 1993; Non-Executive Director of TI Group plc since 1989; Chairman, Audit & Organisation and Remuneration Committees; Director of Schroders Income Growth Fund plc; Director, Glaxo (Bermuda) Ltd. since 1989; Director, Glaxo Trading Bermuda since 1989; Director, Glaxo Insurance Bermuda since 1988; Director, Glaxo Finance Bermuda since 1988; Director, Glaxo Trustees Ltd. until 1995; Director, Clarges Pharmaceuticals Trustees Ltd. until 1995; Director, London American Growth Trust from until 1996; Director, The Emerging World Trust Fund until 1996; Director; Alfred McAlpine plc until 1998; Director, Sedgwick Group plc from 1993 to 1999. Sir Colin Chandler Member of the Board of Directors of TI Group plc Vickers plc since 1992; Member, Audit & Organisation and Vickers House Remuneration Committees; non-executive Chairman, 2 Bessborough Gardens Vickers plc since 1999; Executive Chairman, London SW1V 2JE Vickers plc, from 1998 to 1999; Executive Chairman and Chief Executive, Vickers plc, from 1997 to 1998; Chief Executive, Vickers plc, from 1992 to 1997; Director, Vickers plc, since 1989; Director, Guardian Royal Exchange plc since 1995; Director, Siemens Plessey Electronic Systems Ltd. until 1995; Formerly Head of Defense Export Services, Ministry of Defense of the United Kingdom. John M. Harris Member of the Board of Directors of TI Group plc Citizen of U.S.A. since 1991; Member, Organisation and Remuneration Forum Corporation Committee; Managing Director, formerly President, 1 Exchange Place of the Forum Corporation; Previously President and Boston, MA 02109 Chief Executive Officer, Rockefeller Financial Service Inc. until 1994; President of the European Operations of Booz Allen and Hamilton. Rudolf G. Mueller CBE Member of the Board of Directors of TI Group plc Citizen of Switzerland since 1996; Member, Organisation and Remuneration Chiltern Group Committee; Chairman of Chiltern Group since 1998; Sceptre House Member of the Board of International Management 169/173 Regent Street Institute, Kiev since 1993; Director of London London W1R 7FB First since 1996; Director of Lend Lease Corporation Ltd.; Director, Chelveton Properties Ltd.; Director of International Stock Exchange of United Kingdom until 1995; Director of Republic of Ireland Ltd. until 1995; Director of SBG (Deutschland AG) until 1998; Director of UBS and subsidiaries until 1998; Director of Royal Opera House from 1992 until 1998; Director of Tenhe Mining Corporation from 1997 to 1998.
A-1
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND OTHER MATERIAL OCCUPATIONS, NAME; BUSINESS OFFICES OR EMPLOYMENTS HELD DURING LAST FIVE ADDRESS; CITIZENSHIP YEARS -------------------- ---------------------------------------------- Sir Nigel Broomfield Member of the Board of Directors of TI Group plc Bracken since 1998; Member, Audit Committee; non- Brackheath executive Director of Foreign & Colonial German Guildford Investment Trust since 1997; Formerly British Surrey GU4 8RD Ambassador to the Federal Republic of Germany until 1997; Trustee, the Dresden Trust. William J. Laule Member of the Board of Directors of TI Group plc Citizen of the U.S.A. since 1995; Chief Executive of TI Group plc since 1998; previously held Chief Executive position at Bundy International from 1994 to 1998; President, Bundy North America from 1993 to 1994; Member, Chairman's Committee; Director of National Association of Manufacturers of the USA. Martin D. Angle Member of the Board of Directors of TI Group plc and Group Finance Director since 1997; Member, Chairman's Committee; Chartered Accountant; former Group Director of Dresdner Kleinwort Benson Ltd. and member of the Board of Directors of Dresdner Kleinwort Benson (North America) Inc. until 1997; former Head of International Corporate Finance at Dresdner Kleinwort Benson from 1992 to 1995. David P. Lillycrop Member of the Board of Directors of TI Group plc since 1998; General Counsel since 1997 and Group Secretary since 1991; Chairman, TI Pension Trustee Ltd.; Barrister. James L. Roe Member of the Board of Directors of TI Group plc since 1994; Director, Strategic Development since 1986. John Langston Member of the Board of Directors of TI Group and Chief Executive of Forsheda since 1998; former Chief Executive of Bundy Corporation from 1997 to 1998; Managing Director of Bundy Europe from 1994 to 1997. T. Allan Welsh Director of TI Automotive Systems, Inc.; Member of the Board of Directors of TI Group and Chief Executive, Bundy, since 1999; Formerly a Director of T&N plc and former Chief Executive Officer of T&N Piston Products Group and T&N Bearings Group. 2. Directors and Executive Officers of Purchaser. The following table sets forth the name, business address, citizenship, present principal occupation or employment and material occupations, positions, offices or employments for the past five years of each director and officer of Purchaser. Unless otherwise indicated, each such person is a citizen of the United Kingdom and the business address of each person is 50 Curzon Street, London W1Y 7PN, England. PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; NAME; BUSINESS OR MATERIAL POSITIONS HELD DURING THE PAST FIVE RESIDENCE ADDRESS YEARS ----------------- -------------------------------------------- William J. Laule Director and President of TI Automotive Systems, Citizen of U.S.A. Inc. Member of the Board of Directors of TI Group plc since 1995; Chief Executive of TI Group plc since January 1998; previously held Chief Executive position at Bundy International from 1994 to 1998; President of Bundy North America from 1993 to 1994; Member, Chairman's Committee; Director of National Association of Manufacturing Ltd. T. Allan Welsh Director of TI Automotive Systems, Inc.; Member of the Board of Directors of TI Group and Chief Executive, Bundy, since 1999; Formerly a Director of T&N plc and former Chief Executive Officer of T&N Piston Products Group and T&N Bearings Group.
A-2
NAME; BUSINESS OR PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; RESIDENCE ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS ----------------- -------------------------------------------------- Guy Norris Vice President of TI Automotive Systems, Inc. since 1999; Deputy Group Secretary of TI Group plc since 1998; Consultant of Foster, Baxter & Cookse from 1997 to 1998; Group Secretary of Lucas Varity plc from 1996 to 1997; Secretary, Group Lawyer of Lucas Industries plc from 1994 to 1996. Nicholas Moore Treasurer of TI Automotive Systems, Inc. since April 1999; Group Treasurer of TI Group plc since 1990. Ralph Kessler Secretary of TI Automotive Systems, Inc. since April 1999; Citizen of U.S.A. Senior Vice President of Legal Affairs of TI Group Inc. 375 Park Avenue since January 1998; Vice President of Legal Affairs of TI New York, NY Group Inc. from June 1988 to December 1997; Secretary of TI 10152 Group Inc. since June 1988.
A-3 Facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for the Shares and any other required documents should be sent by each stockholder of the Company or his broker-dealer, commercial bank, trust company or other nominee to the Depositary as follows: The Depositary for the Offer is: CITIBANK, N.A. By Mail: By Overnight Courier: By Hand: CITIBANK, N.A. CITIBANK, N.A. CITIBANK, N.A. P.O. BOX 685 915 Broadway Corporate Trust Window Old Chelsea Station 5th Floor 111 Wall Street, 5th New York, NY 10113 New York, NY 10010 Floor New York, NY 10043 By Facsimile Transmission (For Eligible Institutions Only): (212) 505-2248 Confirm Receipt of Facsimile by Telephone Only: (800) 270-0808 Any questions or requests for assistance or additional copies of the Offer to Purchase and the Letter of Transmittal may be directed to the Information Agent or the Dealer Manager at their respective telephone numbers and locations listed below. You may also contact your broker, dealer, commercial bank or trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: INNISFREE M&A INCORPORATED 501 Madison Avenue, 20th Floor New York, New York 10022 Banks and Brokers Call Collect: (212) 750-5833 All Others Call Toll Free: (888) 750-5834 The Dealer Manager for the Offer is: [LOGO] Warburg Dillon Read 299 Park Avenue New York, New York 10171 (212) 821-2875 EX-99.(A)(2) 3 LETTER OF TRANSMITTAL EXHIBIT (A)(2) Letter of Transmittal To Tender Shares of Common Stock (Including the Associated Rights to Purchase Series A Junior Participating Preferred Stock) of WALBRO CORPORATION at $20 Net Per Share by TI AUTOMOTIVE SYSTEMS, INC. an indirect wholly-owned subsidiary of TI GROUP PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 10, 1999, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: Citibank, N.A. By Mail: By Overnight Courier: By Hand: CITIBANK, N.A. CITIBANK, N.A. CITIBANK, N.A. P.O. BOX 685 915 Broadway Corporate Trust Window Old Chelsea Station 5th Floor 111 Wall Street, 5th New York, NY 10113 New York, NY 10010 Floor New York, NY 10043 By Facsimile Transmission (For Eligible Institutions Only): (212) 505-2248 Confirm Receipt of Facsimile by Telephone Only: (800) 270-0808 --------------- DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be used either if certificates are to be forwarded herewith or, unless an Agent's Message (as defined in Section 3 of the Offer to Purchase (as defined below)) is utilized, if delivery is to be made by book-entry transfer to an account maintained by the Depositary at a Book-Entry Transfer Facility, as defined in and pursuant to the procedures set forth in Section 3 of the Offer to Purchase. Stockholders who deliver Shares by book-entry transfer are referred to herein as "Book-Entry Stockholders" and other stockholders are referred to herein as "Certificate Stockholders." Stockholders whose certificates for Shares are not immediately available or who cannot comply with the procedure for book-entry transfer on a timely basis, or who cannot deliver all required documents to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase), may tender their Shares in accordance with the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. See Instruction 2. Delivery of documents to the Book-Entry Transfer Facility in accordance with such Book- Entry Transfer Facility's procedures does not constitute delivery to the Depositary. DESCRIPTION OF SHARES TENDERED - -------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Owner(s) (Please fill in if blank, exactly as name(s) appear(s) Shares Tendered on certificate(s)) (Attach additional list if necessary) - --------------------------------------------------------------------------------- Total Number of Shares Number Certificate Represented by of Shares Number(s)(1) Certificate(s)(1) Tendered(2) -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- Total Shares - ---------------------------------------------------------------------------------
(1)Need not be completed by Book-Entry Stockholders. (2)Unless otherwise indicated, it will be assumed that all Shares described above are being tendered. See Instruction 4. [_]CHECK HERE IF A CERTIFICATE HAS BEEN LOST OR MUTILATED. SEE INSTRUCTION 11. [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY FINANCIAL INSTITUTIONS THAT ARE PARTICIPANTS IN THE SYSTEM OF ANY BOOK-ENTRY TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER): Name of Tendering Institution ______________________________________________ Account Number at The Depository Trust Company _____________________________ Transaction Code Number ____________________________________________________ [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY, ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s) _____________________________________________ Date of Execution of Notice of Guaranteed Delivery _________________________ Name of Institution which Guaranteed Delivery ______________________________ If delivered is by book-entry transfer: Name of Tendering Institution ______________________________________________ Account Number at The Depository Trust Company______________________________ Transaction Code Number ____________________________________________________ 2 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to TI Automotive Systems, Inc., a Delaware corporation ("Purchaser") and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the laws of England and Wales ("Parent"), the above-described shares of common stock, par value $.50 per share (the "Common Stock"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights" and, together with the Common Stock, the "Shares"), of Walbro Corporation, a Delaware corporation (the "Company"), pursuant to the Offer to Purchase, dated May 4, 1999 (the "Offer to Purchase"), all of the outstanding Shares at a price of $20 per Share, net to the seller in cash (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, together with the Offer to Purchase, constitute the "Offer"). The undersigned understands that Purchaser reserves the right to transfer or assign, from time to time, in whole or in part, to one or more of its affiliates, the right to purchase the Shares tendered herewith. On the terms and subject to the conditions of the Offer (including the conditions set forth in Section 15 of the Offer to Purchase and together with, if the Offer is extended or amended, the terms and conditions of such extension or amendment), subject to, and effective upon, acceptance for payment of, and payment for, the Shares tendered herewith in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, Purchaser, all right, title and interest in and to all of the Shares being tendered hereby and any and all cash dividends, distributions, rights, other Shares or other securities issued or issuable in respect of such Shares on or after May 4, 1999 (collectively, "Distributions"), and appoints Citibank, N.A. (the "Depositary") the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares (and any Distributions) with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to the fullest extent of such stockholder's rights with respect to such Shares (and any Distributions) (a) to deliver such Share Certificates (as defined herein) (and any Distributions) or transfer ownership of such Shares (and any Distributions) on the account books maintained by the Book-Entry Transfer Facility, together in either such case with all accompanying evidences of transfer and authenticity, to or upon the order of Purchaser, (b) to present such Shares (and any Distributions) for transfer on the books of the Company and (c) to receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and any Distributions), all in accordance with the terms and the conditions of the Offer. The undersigned hereby irrevocably appoints the designees of Purchaser, and each of them, the attorneys-in-fact and proxies of the undersigned, each with full power of substitution, to the full extent of such stockholder's rights with respect to the Shares tendered hereby which have been accepted for payment by Purchaser and with respect to any Distributions. The designees of Purchaser will, with respect to the Shares (and any associated Distributions) for which the appointment is effective, be empowered to exercise all voting and any other rights of such stockholder, as they, in their sole discretion, may deem proper at any annual, special or adjourned meeting of the Company's stockholders, by written consent in lieu of any such meeting or otherwise. This proxy and power of attorney shall be irrevocable and coupled with an interest in the tendered Shares. Such appointment is effective when, and only to the extent that, Purchaser deposits the payment for such Shares with the Depositary. Upon the effectiveness of such appointment, without further action, all prior powers of attorney, proxies and consents given by the undersigned with respect to such Shares (and any associated Distributions) will be revoked, and no subsequent powers of attorney, proxies, consents or revocations may be given (and, if given, will not be deemed effective). Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares, Purchaser must be able to exercise full voting rights with respect to such Shares (and any associated Distributions), including voting at any meeting of stockholders. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares (and any Distributions) tendered hereby and, when the same are accepted for payment by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances, and the same will not be subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares (and any Distributions) tendered hereby. In addition, the undersigned shall promptly 3 remit and transfer to the Depositary for the account of Purchaser any and all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer; and, pending such remittance or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of any such Distributions and may withhold the entire purchase price or deduct from the purchase price the amount or value thereof, as determined by Purchaser in its sole discretion. No authority conferred or agreed to be conferred pursuant to this Letter of Transmittal shall be affected by, and all such authority shall survive, the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that the valid tender of Shares pursuant to one of the procedures described in Section 3 of the Offer to Purchase will constitute a binding agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer. The undersigned recognizes that under certain circumstances set forth in the Offer to Purchase, Purchaser may not be required to accept for payment any of the Shares tendered hereby. Unless otherwise indicated herein under "Special Payment Instructions," please issue the check for the Offer Price and/or return any certificates for Shares not tendered or accepted for payment in the name(s) of the registered owner(s) appearing under "Description of Shares Tendered." Similarly, unless otherwise indicated under "Special Delivery Instructions," please mail the check for the purchase price and/or return any certificates for Shares not tendered or accepted for payment (and accompanying documents, as appropriate) to the address(es) of the registered owner(s) appearing under "Description of Shares Tendered." In the event that both the Special Delivery Instructions and the Special Payment Instructions are completed, please issue the check for the Offer Price and/or issue any certificates for Shares not tendered or accepted for payment (and any accompanying documents, as appropriate) in the name of, and deliver such check and/or return such certificates (and any accompanying documents, as appropriate) to, the person or persons so indicated. The undersigned recognizes that Purchaser has no obligation pursuant to the Special Payment Instructions to transfer any Shares from the name of the registered owner thereof if Purchaser does not accept for payment any of the Shares so tendered. SPECIAL PAYMENT INSTRUCTIONS (See SPECIAL DELIVERY INSTRUCTIONS Instructions 1, 5, 6 and 7) (See Instructions 5 and 7) To be completed ONLY if certifi- To be completed ONLY if certifi- cate(s) for Shares not tendered cate(s) for Shares not tendered or not accepted for payment or not accepted for payment and/or the check for the purchase and/or the check for the purchase price of Shares accepted for pay- price of Shares accepted for pay- ment are to be issued in the name ment are to be sent to someone of someone other than the under- other than the undersigned, or to signed. the undersigned at an address other than that shown above. Issue: [_] Check [_] Certificate(s) to: Deliver:[_] Check [_] Certificate(s) to: Name: ____________________________ (Please Print) Name: ____________________________ (Please Print) Address: _________________________ Address: _________________________ __________________________________ (Include Zip Code) __________________________________ (Include Zip Code) __________________________________ (Tax Identification or Social Security No.) 4 IMPORTANT SIGN HERE (also complete Substitute Form W-9 Below) (Signature(s) of Holder(s)) ........................... Dated: ..............., 1999 (Must be signed by registered owner(s) exactly as name(s) appear(s) on stock certificate(s) or on a security position listing or by person(s) authorized to become registered owner(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please set forth full title and see Instruction 5.) Name(s)................................................ (Please Print) Address................................................ ................................................ (Including Zip Code) Capacity (Full Title).................................. .......................... .......................... Area Code and Telephone Tax Identification or No. Social Security No. GUARANTEE OF SIGNATURE(S) (See Instructions 1 and 5) Authorized Signature................................... Name................................................... (Please Type or Print) Address................................................ ................................................ (Include Zip Code) Full Title and Name of Firm............................ Dated: ..............., 1999 5 INSTRUCTIONS Forming Part of the Terms and Conditions of the Offer 1. Guarantee of Signatures. Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by a financial institution (including most commercial banks, savings and loan associations and brokerage houses) which is a participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (an "Eligible Institution"). Signatures on this Letter of Transmittal need not be guaranteed (a) if this Letter of Transmittal is signed by the registered owners (which term, for purposes of this document, includes any participant in the Book-Entry Transfer Facility's system whose name appears on a security position listing as the owner of the Shares) of Shares tendered herewith and such registered owner has not completed the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (b) if such Shares are tendered for the account of an Eligible Institution. See Instruction 5 of this Letter of Transmittal. 2. Delivery of Letter of Transmittal and Certificates or Book-Entry Confirmations. This Letter of Transmittal is to be used either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for tender by book-entry transfer set forth in Section 3 of the Offer to Purchase. Certificates for all physically tendered Shares ("Share Certificates"), or confirmation of any book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility of Shares tendered by book-entry transfer, as well as this Letter of Transmittal properly completed and duly executed with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message), and all other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth herein on or prior to the Expiration Date (as defined in the Offer to Purchase). Stockholders whose certificates for Shares are not immediately available or who cannot deliver all other required documents to the Depositary on or prior to the Expiration Date or who cannot comply with the procedures for book-entry transfer on a timely basis may nevertheless tender their Shares by properly completing and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by Purchaser must be received by the Depositary prior to the Expiration Date; and (iii) Share Certificates or confirmation of any book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility of Shares tendered by book-entry transfer, as well as this Letter of Transmittal properly completed and duly executed with any required signature guarantees (or, in the case of a book- entry transfer, an Agent's Message), and all other documents required by this Letter of Transmittal, must be received by the Depositary within three New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery. If Share Certificates are forwarded separately to the Depositary, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE ELECTION AND RISK OF THE TENDERING STOCKHOLDER. THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF A BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT SUCH CERTIFICATES AND DOCUMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. All tendering stockholders, by execution of this Letter of Transmittal (or facsimile thereof), waive any right to receive any notice of the acceptance of their Shares for payment. 3. Inadequate Space. If the space provided herein is inadequate, the certificate numbers and/or the number of Shares should be listed on a separate schedule attached hereto. 6 4. Partial Tenders (Applicable to Certificate Stockholders Only). If fewer than all the Shares evidenced by any certificate submitted are to be tendered, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such cases, new certificate(s) for the remainder of the Shares that were evidenced by the old certificate(s) will be sent to the registered owner, unless otherwise provided in the appropriate box on this Letter of Transmittal, as soon as practicable after the Expiration Date. All Shares represented by certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. Signatures on Letter of Transmittal; Stock Powers and Endorsements. If this Letter of Transmittal is signed by the registered owners of the Shares tendered hereby, the signature must correspond with the names as written on the face of the certificates without alteration, enlargement or any other change whatsoever. If any of the Shares tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any of the tendered Shares are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of certificates. If this Letter of Transmittal or any certificates or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to the Parent of their authority so to act must be submitted. If this Letter of Transmittal is signed by the registered owner(s) of the Shares listed and transmitted hereby, no endorsements of certificates or separate stock powers are required unless payment is to be made to, or certificates for Shares not tendered or accepted for payment are to be issued in the name of, a person other than the registered owner(s). Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered owner of the certificates(s) listed, the certificate(s) must be endorsed or accompanied by the appropriate stock powers, in either case signed exactly as the name or names of the registered owner or holders appears on the certificate(s). Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. 6. Stock Transfer Taxes. Purchaser will pay any stock transfer taxes with respect to the transfer and sale of Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or (in the circumstances permitted hereby) if certificates for Shares not tendered or accepted for payment are to be registered in the name of, any person other than the registered owner, or if tendered certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered owner or such person) payable on account of the transfer to such person will be deducted from the purchase price if satisfactory evidence of the payment of such taxes, or exemption therefrom, is not submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificates listed in this Letter of Transmittal. 7. Special Payment and Delivery Instructions. If a check is to be issued in the name of, and/or certificates for Shares not tendered or accepted for payment are to be issued or returned to, a person other than the signer of this Letter of Transmittal or if a check and/or such certificates are to be mailed to a person other than the signer of this Letter of Transmittal or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. 8. Requests for Assistance or Additional Copies. Questions or requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective telephone numbers and addresses set forth below or from your broker, dealer, commercial bank or trust company. Additional copies of the Offer to Purchase, this Letter of Transmittal, the Notice of Guaranteed Delivery and other tender offer materials may be obtained from the Information Agent or the Dealer Manager. 7 9. Substitute Form W-9. Each tendering stockholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN"), generally the stockholder's social security or federal employer identification number, on Substitute Form W-9 below. Failure to provide the information on the form may subject the tendering stockholder to 31% federal income tax backup withholding on the payment of the purchase price. The box in Part 3 of the form may be checked if the tendering stockholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 3 is checked and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% of all payments of the purchase price thereafter until a TIN is provided to the Depositary. 10. Waiver of Conditions. The conditions of the Offer may be waived by Purchaser (subject to certain limitations), in whole or in part, at any time or from time to time, in Purchaser's sole discretion. 11. Lost or Destroyed Certificates. If any certificate(s) representing Shares has been lost or destroyed, the holder should promptly notify the Company's Transfer Agent. The holder will then be instructed as to the procedure to be followed in order to replace the certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed Certificates have been followed. Important: This Letter of Transmittal or a manually signed facsimile thereof (together with Share certificates or confirmation of book-entry transfer and all other required documents) or the Notice of Guaranteed Delivery must be received by the Depositary prior to the Expiration Date. IMPORTANT TAX INFORMATION Under the federal income tax law, a stockholder whose tendered Shares are accepted for purchase is required by law to provide the Depositary (as payer) with such stockholder's correct TIN on Substitute Form W-9 below and to certify that such TIN is correct (or that such stockholder is awaiting a TIN) or otherwise establish a basis for exemption from backup withholding. If such stockholder is an individual, the TIN is his or her social security number. If a stockholder fails to provide a TIN to the Depositary, such stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such stockholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31% (see below). Certain stockholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, that stockholder must generally submit a Form W-8, signed under penalties of perjury, attesting to that individual's exempt status. A Form W-8 can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the stockholder or payee. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The box in Part 3 of the Substitute Form W-9 may be checked if the tendering stockholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 3 is checked, the stockholder or other payee must also complete the Certification of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. If a stockholder's TIN is provided to the Depositary within 60 days of the date of the Substitute Form W-9, payment will be made to such stockholder without the imposition of backup withholding. If a stockholder's TIN is not provided to the Depositary within such 60-day period, the Depositary will make such payment, subject to backup withholding. 8 Purpose of Substitute Form W-9 To prevent backup withholding on payments made to a stockholder whose tendered Shares are accepted for purchase, the stockholder is required to notify the Depositary of its correct TIN by completing Substitute Form W-9 certifying that the TIN provided on such Form is correct (or that such stockholder is awaiting a TIN, in which case the stockholder should check the box in Part 3 of the Substitute Form W-9) and that (A) such stockholder is exempt from backup withholding, (B) such stockholder has not been notified by the Internal Revenue Service that such stockholder is subject to backup withholding as a result of failure to report all interest or dividends or (C) the Internal Revenue Service has notified the stockholder that the stockholder is no longer subject to backup withholding. The stockholder must sign and date the Substitute Form W-9 where indicated, certifying that the information on such Form is correct. Alternatively, a stockholder that qualifies as an exempt recipient (other than a stockholder required to complete Form W-8 as described above) should write "Exempt" in Part 1 of the Substitute Form W-9, enter its correct TIN and sign and date such Form where indicated. What Number to Give the Depositary The stockholder is required to give the Depositary the social security number or employer identification number of the record owner of the Shares or of the last transferee appearing on the transfers attached to, or endorsed on, the Shares. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. 9 TO BE COMPLETED BY ALL TENDERING STOCKHOLDERS (See Instruction 9) PAYER: Citibank, N.A. Part 1--PLEASE PROVIDE YOUR SUBSTITUTE TIN IN THE BOX AT RIGHT AND Social security number Form W-9 CERTIFY BY SIGNING AND OR DATING BELOW. Employer identification Department of number the Treasury Internal ---------------------- Revenue Service -------------------------------------------------------- Payer's Request for Part 3-- Taxpayer Identification Awaiting Number (TIN) TIN [_] Part 2--Certification--Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me); and (2) I am not subject to backup withholding because (i) I am exempt from backup withholding, (ii) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (iii) the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions--You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup with- holding because of under-reporting interest or dividends on your tax re- turn. However, if after being noti- fied by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer sub- ject to backup withholding, do not cross out item (2). -------------------------------------------------------- SIGNATURE ______________ DATE _, 1999 Name (Please Print) __________________ NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL INFORMATION. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. CERTIFICATION OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (i) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (ii) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number within 60 days, 31% of all reportable payments made to me thereafter will be withheld until I provide a taxpayer identification number to the Depositary. ____________________________________ ______________________________, 1999 Signature Date ____________________________________ Name (Please Print) 10 Manually signed facsimile copies of this Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or such stockholder's broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below. The Depositary for the Offer is: Citibank, N.A. By Mail: By Overnight Courier: By Hand: CITIBANK, N.A. CITIBANK, N.A. CITIBANK, N.A. P.O. BOX 685 915 Broadway Corporate Trust Window Old Chelsea Station 5th Floor 111 Wall Street, 5th New York, NY 10113 New York, NY 10010 Floor New York, NY 10043 By Facsimile Transmission (For Eligible Institutions Only): (212) 505-2248 Confirm Receipt of Facsimile by Telephone Only: (800) 270-0808 --------------- DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY. Questions and request for assistance or for additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent or the Dealer Manager at their respective telephone numbers and addresses listed below. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: INNISFREE M&A INCORPORATED 501 Madison Avenue, 20th Floor New York, New York 10022 Banks and Brokers Call Collect: (212) 750-5833 All Others Call Toll Free: (888) 750-5834 The Dealer Manager for the Offer is: [LOGO] Warburg Dillon Read 299 Park Avenue New York, New York 10171 (212) 821-2875 May 4, 1999 EX-99.(A)(3) 4 FORM OF LETTER, DATED 05/04/99, TO BROKERS, DEALER EXHIBIT (A)(3) Offer to Purchase for Cash All of the Outstanding Shares of Common Stock (Including the Associated Rights to Purchase Series A Junior Participating Preferred Stock) of WALBRO CORPORATION at $20 Net Per Share by TI AUTOMOTIVE SYSTEMS, INC. an indirect wholly-owned subsidiary of TI GROUP PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 10, 1999, UNLESS THE OFFER IS EXTENDED. May 4, 1999 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been engaged by TI Automotive Systems, Inc., a Delaware corporation ("Purchaser") and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the laws of England and Wales ("Parent"), to act as Dealer Manager in connection with Purchaser's offer to purchase all outstanding shares of common stock, par value $.50 per share (the "Common Stock"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights" and, together with the Common Stock, the "Shares"), of Walbro Corporation, a Delaware corporation (the "Company"), at $20 per Share, net to the seller in cash (the "Offer Price"), on the terms and subject to the conditions set forth in the Offer to Purchase, dated May 4, 1999, and the related Letter of Transmittal (which together with any amendments or supplements thereto collectively constitute the "Offer"). Please furnish copies of the enclosed materials to those of your clients for whom you hold Shares registered in your name or in the name of your nominee. Enclosed herewith are the following documents: 1. Offer to Purchase, dated May 4, 1999; 2. Letter of Transmittal to be used by stockholders of the Company in accepting the Offer; 3. Letter to Stockholders of the Company from the President and Chief Executive Officer of the Company, accompanied by the Company's Solicitation/Recommendation Statement on Schedule 14D-9; 4. A printed form of letter that may be sent to your clients for whose account you hold Shares in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; 5. Notice of Guaranteed Delivery; 6. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 7. Return envelope addressed to Citibank, N.A., the Depositary. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ON A FULLY DILUTED BASIS BEING VALIDLY TENDERED PRIOR TO THE EXPIRATION OF THE OFFER AND NOT WITHDRAWN, (2) ANY WAITING PERIODS UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER, AND ANY EUROPEAN ANTITRUST LAWS APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED AND (3) APPROVAL UNDER ANY APPLICABLE EUROPEAN ANTITRUST LAW HAVING BEEN OBTAINED. CERTAIN OTHER CONDITIONS TO CONSUMMATION OF THE OFFER ARE DESCRIBED IN SECTION 15 OF THE OFFER TO PURCHASE. We urge you to contact your clients promptly. Please note that the Offer and withdrawal rights will expire at 12:00 Midnight, New York City time, on June 10, 1999 unless the Offer is extended. The Board of Directors of the Company has unanimously determined that each of the Merger Agreement (as defined below), the Offer and the Merger (as defined below) are fair to and in the best interests of the Company's stockholders and has unanimously approved the Merger Agreement and the transactions contemplated thereby (including the Offer and the Merger) and unanimously recommends that the Company's stockholders accept the Offer, tender their shares to Purchaser and approve and adopt the Merger Agreement and the Merger. The Offer is being made pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 27, 1999, as amended by the First Amendment thereto dated as of May 3, 1999, among the Company, Parent and Purchaser, pursuant to which, after the completion of the Offer, Purchaser will be merged with and into the Company and each issued and outstanding Share (other than Shares held in the Company's treasury or beneficially owned by Parent or Purchaser or Shares, if any, that are held by stockholders who properly exercise and perfect appraisal rights pursuant to Section 262 of the Delaware General Corporation Law) shall, by virtue of the Merger and without any action on the part of the Company, Parent, Purchaser or the holder thereof, be converted into the right to receive, without interest, the Offer Price (the "Merger"). As a result of the Merger, the Company will become an indirect wholly-owned subsidiary of Parent. The Merger Agreement is more fully described in Section 12 of the Offer to Purchase. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates for such Shares or timely confirmation of the book-entry transfer of such Shares into the Depositary's account at the Book-Entry Transfer Facility (as defined in the Offer to Purchase) pursuant to the procedures set forth in Section 3 of the Offer to Purchase, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message (as defined in the Offer to Purchase)) and (iii) any other documents required by such Letter of Transmittal. Under no circumstances will interest be paid on the Offer Price for Shares, regardless of any extension of the Offer or any delay in making such payment pursuant to the Offer. Neither Parent nor Purchaser will pay any fees or commissions to any broker or dealer or other person (other than the Depositary and the Information Agent, as disclosed in the Offer to Purchase) in connection with the solicitation of tenders of Shares pursuant to the Offer. You will be reimbursed upon request for customary mailing and handling expenses incurred by you in forwarding the enclosed offering materials to your clients. Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth on the back cover of the enclosed Offer to Purchase. Requests for additional copies of the enclosed materials may be directed to the Information Agent or the Dealer Manager or to brokers, dealers, commercial banks or trust companies. Very truly yours, WARBURG DILLON READ LLC 2 NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL RENDER YOU OR ANY OTHER PERSON THE AGENT OF PARENT, PURCHASER, THE DEALER MANAGER, THE DEPOSITARY OR THE INFORMATION AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR USE ANY DOCUMENT OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFER NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF TRANSMITTAL. 3 EX-99.(A)(4) 5 FORM OF LETTER TO CLIENTS EXHIBIT (A)(4) Offer to Purchase for Cash All of the Outstanding Shares of Common Stock (Including the Associated Rights to Purchase Series A Junior Participating Preferred Stock) of WALBRO CORPORATION at $20 Net Per Share by TI AUTOMOTIVE SYSTEMS, INC. an indirect wholly-owned subsidiary of TI GROUP PLC THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON JUNE 10, 1999, UNLESS THE OFFER IS EXTENDED. To Our Clients: Enclosed for your consideration is an Offer to Purchase, dated May 4, 1999 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer") relating to the offer by TI Automotive Systems, Inc., a Delaware corporation ("Purchaser") and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the laws of England and Wales ("Parent"), to purchase for cash all of the outstanding shares of common stock, par value $.50 per share (the "Common Stock"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights"), of Walbro Corporation, a Delaware corporation (the "Company") (the Common Stock and the Rights together are referred to herein as the "Shares"), on the terms and subject to the conditions set forth in the Offer. Also enclosed is the letter to stockholders of the Company from the President and Chief Executive Officer of the Company accompanied by the Company's Solicitation/Recommendation Statement on Schedule 14D-9. We are (or our nominee is) the holder of record of Shares held by us for your account. A tender of such Shares can be made only by us as the holder of record and pursuant to your instructions. The Letter of Transmittal is furnished to you for your information only and cannot be used to tender Shares held by us for your account. We request instructions as to whether you wish to tender any or all of the Shares held by us for your account, pursuant to the terms and subject to the conditions set forth in the Offer. Your attention is directed to the following: 1. The Offer price is $20 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions of the Offer (the "Offer Price"). 2. The Offer is being made for all of the outstanding Shares. 3. The Board of Directors of the Company has unanimously determined that each of the Merger Agreement (as defined below), the Offer and the Merger (as defined below) are fair to and in the best interests of the Company's stockholders and has unanimously approved the Merger Agreement and the transactions contemplated thereby (including the Offer and the Merger) and unanimously recommends that the Company's stockholders accept the Offer, tender their shares to Purchaser and approve and adopt the Merger Agreement and the Merger. 4. The Offer is conditioned upon, among other things, (1) there being at least a majority of the outstanding shares of common stock on a fully diluted basis being validly tendered prior to the expiration of the Offer and not withdrawn, (2) any waiting periods under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder, and any European antitrust laws applicable to the purchase of Shares pursuant to the Offer having expired or been terminated and (3) approval under any applicable European antitrust law having been obtained. Certain other conditions to consummation of the Offer are described in Section 15 of the Offer to Purchase. 5. The Offer and withdrawal rights expire at 12:00 Midnight, New York City time, on June 10, 1999, unless the Offer is extended by Purchaser (the "Expiration Date"). 6. The Offer is being made pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 27, 1999, as amended by the First Amendment thereto dated as of May 3, 1999, among the Company, Parent and Purchaser, pursuant to which, after the completion of the Offer, Purchaser will be merged with and into the Company and each issued and outstanding Share (other than Shares held in the Company's treasury or beneficially owned by Parent or Purchaser or Shares, if any, that are held by stockholders who properly exercise and perfect appraisal rights pursuant to Section 262 of the Delaware General Corporation Law) shall, by virtue of the Merger and without any action on the part of the Company, Parent, Purchaser or the holder thereof, be converted into the right to receive, without interest, the Offer Price (the "Merger"). As a result of the Merger, the Company will become an indirect wholly-owned subsidiary of Parent. The Merger Agreement is more fully described in Section 12 of the Offer to Purchase. 7. Any stock transfer taxes applicable to a sale of Shares to Purchaser will be borne by Purchaser, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Your instructions to us should be forwarded promptly to permit us to submit a tender on your behalf prior to the Expiration Date. If you wish to have us tender any of or all of the Shares held by us for your account, please so instruct us by completing, executing, detaching and returning to us the instruction form on the detachable part hereof. Your instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf prior to the Expiration Date. Payment for Shares accepted for payment pursuant to the Offer will be in all cases made only after timely receipt by Citibank, N.A. (the "Depositary"), of (a) certificates for (or a timely Book-Entry Confirmation (as defined in the Offer to Purchase) with respect to) such Shares, (b) a Letter of Transmittal, properly completed and duly executed, with any required signature guarantees, or, in the case of a book-entry transfer effected pursuant to the procedure set forth in Section 3 of the Offer to Purchase, an Agent's Message, and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering stockholders may be paid at different times depending upon when certificates for Shares or Book-Entry Confirmations with respect to Shares are actually received by the Depositary. Under no circumstances will interest be paid on the Offer Price, regardless of any extension of the Offer or any delay in making payment pursuant to the Offer. The Offer is not being made to, nor will tenders be accepted from, or on behalf of, holders of Shares in any jurisdiction in which the making or acceptance of the Offer would not be in compliance with the laws of such jurisdiction. In any jurisdiction where the securities or blue sky laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed made on behalf of Purchaser by Warburg Dillon Read LLC, the Dealer Manager for the Offer, or one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. An envelope in which to return your instructions to us is enclosed. If you authorize tender of your Shares, all such Shares will be tendered unless otherwise indicated in such instruction form. Please forward your instructions to us as soon as possible to allow us ample time to tender Shares on your behalf prior to the Expiration Date. 2 Instructions with Respect to the Offer to Purchase for Cash All of the Outstanding Shares of Common Stock (including the Associated Rights to purchase Series A Junior Participating Preferred Stock) of WALBRO CORPORATION The undersigned acknowledge(s) receipt of your letter, the Offer to Purchase, dated May 4, 1999 (the "Offer to Purchase"), and the related Letter of Transmittal relating to the Offer by TI Automotive Systems, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the laws of England and Wales, to purchase for $20 net to the seller in cash all of the outstanding shares of common stock, par value $.50 per share (the "Common Stock"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights"), of Walbro Corporation, a Delaware corporation. The Common Stock and the Rights together are referred to herein as the "Shares." This will instruct you to tender the number of Shares indicated below held by you for the account of the undersigned, on the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal. NUMBER OF SHARES TO BE SIGN HERE TENDERED:* ------------------------------------- ------------------------------------- SHARES: _________________________ (Signature(s)) Daytime Area Code ------------------------------------- and Telephone Number: ___________ ------------------------------------- Taxpayer Identification Number (Please Print Name(s) and or Social Security Number: ______ Address(es) - -------- Dated: ____________________, 1999 * Unless otherwise indicated, it will be assumed that all your Shares are to be tendered. 3 EX-99.(A)(5) 6 PRESS RELEASE, DATED 04/28/99 EXHIBIT (A)(5) HEADLINE: TI Group Recommended $570 Million Offer for Walbro Corporation; - - Announces the Formation of TI Automotive Systems Group To Accelerate Growth DATELINE: LONDON, April 28 BODY: TI Group, the global specialized engineering company, today announced a recommended offer for Walbro, a Nasdaq quoted company which is a leading manufacturer of automotive fuel storage and delivery systems. TI Group is offering US$20 for each of the 8.7 million shares in issue (and up to 0.85 million shares to be issued on the exercise of options) which values Walbro at around $570 million, after assumed debt which was $388 million at 31 December 1998. The all cash offer is being met from TI Group's existing facilities. The offer is being recommended by the Board of Walbro to its shareholders and is subject to regulatory clearances. It is anticipated that completion will take place by the end of June. The total offer value of $570 million represents 0.8 times 1998 sales and 7.2 times 1998 EBITDA. The acquisition is expected to be earnings enhancing in 2000, the first full year under TI's ownership, before amortization of goodwill but after one off integration costs of $30 million which will be incurred during 1999 and 2000. TI Group will combine its existing fuel business with Walbro to create a world leading position in the supply of complete automotive fuel storage and delivery systems where the Walbro name plays a prominent role. This enlarged business will sit alongside Bundy's global brake and powertrain business. Headquartered in Auburn Hills, Michigan, Walbro is an acknowledged technological leader in the design and manufacture of single and multi-layer composite fuel tanks, pumps and level sensors, these products being incorporated in complete fuel storage and delivery systems. Walbro supplies key automotive and small engine OEMs in North America, Europe, South America and Asia Pacific, employs approximately 5,000 people at 28 facilities in 15 countries, and operates two "state of the art" emissions testing facilities in the US and Germany. In 1998 Walbro had sales of $678m, EBIT of $43m and EBITDA of $79m, representing significant improvement over 1997. 1998 net assets were $78m. Walbro also has stakes in a series of important joint ventures engaged in the same business with additional gross sales of $210 million. These interests include a 49% stake in a joint venture with Magneti Marelli in Europe and South America, a 50% owned joint venture with Mitsuba in Japan and a 48% owned joint venture in Vitec L.L.C. located in Detroit. On completion Mr. Frank Bauchiero, President and Chief Executive Officer of Walbro, will report to Bill Laule, Chief Executive of TI Group. Walbro comprises two businesses -- a $530 million automotive fuel storage and delivery systems business and a $150 million fuel systems business for small engines used in industrial applications. These figures do not include joint venture sales. The $530 million fuel systems business is totally complementary to TI's existing $375 million Bundy fuel delivery systems business. This Bundy business comprises rigid and flexible lines and quick connectors, used for fuel delivery and vapour control throughout the fuel system, and Bundy is a world leader in this product area. Sir Christopher Lewinton, Chairman of TI Group, commented: "This attractive acquisition is consistent with the strategy TI Group has followed over a number of years and I am very pleased that, on completion, it will enable TI to form a new TI Automotive Systems group of which Bundy and Walbro will be the key businesses. I am confident that the combination of these two businesses within TI Automotive Systems will accelerate the growth of this important part of the Group." The new TI Automotive Systems group will have important positions in three key fluid handling automotive markets for brake, fuel and powertrain systems. The combined revenues for this new group in 1998 would have been around $2.0 billion. TI's Bundy business already operates on a worldwide basis with facilities in 27 countries. Together with Walbro, which operates in 15 countries including all the major economies, it creates a powerful combination able to provide enhanced service to customers in all these markets and generate further growth. Demand for higher value fuel storage and delivery systems from the global automotive OEMs is expected to exceed significantly the underlying growth in automotive markets, driven by design requirements, tighter safety and emissions legislation, increasing system performance requirements and greater outsourcing on the part of the automotive OEMs. In response to these market drivers, automotive manufacturers are replacing metal fuel tanks with composite tanks for which Walbro has both a world leading position in the market coupled with leading technology and quality. The automotive manufacturers are seeking to create a completely integrated fuel storage and delivery system comprising fuel tanks, pumps, level sensors and sophisticated vapour management equipment, together with low permeability connectors and fuel lines. This fuel system integration is consistent with the strategic direction of both Bundy and Walbro and offers significant growth opportunities. Frank Bauchiero, Walbro's Chief Executive Officer, stated: "We believe this merger agreement offers significant benefits to our shareholders, customers and employees, as well as to the communities where we are located. This combination with TI strengthens the global reach of both companies and offers current and potential customers of both businesses an impressive array of products and systems that enjoy strong market positions. Moreover, the respective cultures of both companies are very similar. We believe that merging these talents will have a positive synergistic effect on the competitiveness of the combined company." Bill Laule, Chief Executive of TI Group, commented: "I am delighted that we are able to make this recommended offer for Walbro. With the strong strategic fit and Walbro's sustained investment in new facilities, this acquisition now gives us the opportunity to continue its strong record of sales growth, enhance its margins and deliver increased profitability and cash generation. The creation of a uniquely positioned TI Automotive Systems group, capable of supplying completely integrated fuel storage and delivery systems on a global basis, moves the business further up the added value chain. The enlarged market that will now be served by us provides great potential for accelerated growth and ideally positions TI Automotive Systems to enjoy even greater success in the future, and contribute to improved shareholder value." For further information please contact: TI Group - -------- . London Bill Laule Chief Executive Tel:+44(0)171 560 5700 Martin Angle Group Finance Director Tel:+44(0)171 560 5700 Allan Welsh CEO, Bundy Tel:+44(0)171 560 5700 John Dawson Investor Relations Tel:+44(0)171 560 5700 John Reynolds Shandwick Tel:+44(0)171 329 0096 . Detroit Jim Davis President, Bundy North America Tel: 810 758 4511 Jim Katzoff Executive Vice-President, TI Group Inc Tel: 810 758 4511 NOTES TO EDITORS TI Group plc, listed on the London Stock Exchange, is one of the world's leading specialized engineering companies. Headquartered in the UK, the Group operates on a global basis and employs over 35,000 people at more than 400 manufacturing and customer service facilities in over 45 countries. TI's strategy was put in place by the Group's Chairman, Sir Christopher Lewinton, following his appointment as Chief Executive in 1986. The strategy is to be an international engineering group concentrating on specialized engineering businesses operating in selected niches on a global basis. Key businesses must be able to command positions of sustainable technological and market share leadership. They will have a high knowledge and service content and be able to anticipate and meet customers' needs. Implementation of this focused strategy since 1986 led to the creation of four world leading businesses and has involved considerable corporate activity, including some 45 major acquisitions and over 30 disposals. Over this period, the Group's market capitalization has grown from $450 million in 1986 to $3.7 billion today. TI Group's four world leading businesses are John Crane (engineered sealing systems), Forsheda (engineered elastomer seals), Bundy (fluid carrying systems) and Dowty (aerospace systems). Group sales revenue in 1998 was $3.5 billion, of which 45% was made in North America, 27% Continental Europe, 20% UK and 8% Rest of the World. In North America, TI Group employs over 14,000 people in more than 120 manufacturing and customer service facilities across the US, Canada and Mexico. TI sales revenue in North America in 1998 was around $1.5 billion. US shareholders currently hold approximately 25% of the total issued share capital of the Group, including through an ADR program in the US. A detailed description of TI Group and its businesses can be found on the company's website at www.tigroup.com. Magneti Marelli Magneti Marelli, in which Fiat S.p.a. has a controlling interest, sells a wide variety of automotive components, principally electrical and electronics-based. In 1998 Magneti Marelli had sales of around $4bn and 29,400 employees worldwide. Mitsuba Corporation Headquartered in Japan, Mitsuba Corporation (formerly Mitsuba Electric Manufacturing Co. Ltd.) was established in 1946 and manufactures automobile parts, motorcycle parts and bicycle accessories. Vitec LLC Vitec is a joint venture formed in October 1996 between Walbro and the heads of two minority-owned plastics companies. EX-99.(A)(6) 7 FORM OF NEWSPAPER ADVERTISEMENT, DATED 05/04/99 EXHIBIT (A)(6) This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares (as defined below). The Offer (as defined below) is made solely by the Offer to Purchase dated May 4, 1999 and the related Letter of Transmittal and any amendments or supplements thereto, and is being made to all holders of Shares. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of Purchaser (as defined below) by Warburg Dillon Read LLC ("Dealer Manager") or one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. Notice of Offer to Purchase for Cash All of the Outstanding Shares of Common Stock (Including the Associated Rights to Purchase Series A Junior Participating Preferred Stock) of WALBRO CORPORATION at $20 Net Per Share by TI AUTOMOTIVE SYSTEMS, INC. an indirect wholly-owned subsidiary of TI GROUP PLC TI Automotive Systems, Inc., a Delaware corporation ("Purchaser") and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the laws of England and Wales ("Parent"), hereby offers to purchase all of the outstanding shares of common stock, par value $.50 per share (the "Common Stock") and the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights" and, together with the Common Stock, the "Shares"), of Walbro Corporation, a Delaware corporation (the "Company"), at $20 per Share, net to the seller in cash (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). Tendering stockholders will not be obligated to pay brokerage fees or commissions or, subject to Instruction 6 of the Letter of Transmittal, transfer taxes on the purchase of Shares by Purchaser pursuant to the Offer. The purpose of the Offer is to acquire for cash as many outstanding Shares as possible as a first step in acquiring the entire equity interest in the Company. Following the consummation of the Offer, Purchaser intends to effect the Merger described below. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING AT LEAST A -1- MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK ON A FULLY DILUTED BASIS BEING VALIDLY TENDERED PRIOR TO THE EXPIRATION OF THE OFFER AND NOT WITHDRAWN, (2) ANY WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE REGULATIONS THEREUNDER, AND ANY EUROPEAN ANTITRUST LAWS APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED AND (3) APPROVAL UNDER ANY APPLICABLE EUROPEAN ANTITRUST LAWS HAVING BEEN OBTAINED. CERTAIN OTHER CONDITIONS TO CONSUMMATION OF THE OFFER ARE DESCRIBED IN SECTION 15 OF THE OFFER TO PURCHASE. The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of April 27, 1999, as amended by the First Amendment thereto dated as of May 3, 1999 (the "Merger Agreement"), among the Company, Parent and Purchaser, pursuant to which, after the completion of the Offer, Purchaser will be merged with and into the Company and each issued and outstanding Share (other than any Shares held in the Company's treasury or beneficially owned by Parent or Purchaser or Shares, if any, that are held by stockholders who properly exercise and perfect appraisal rights pursuant to Section 262 of the Delaware General Corporation Law) shall, by virtue of the Merger and without any action on the part of the Company, Parent, Purchaser or the holder thereof, be converted into the right to receive, without interest, the Offer Price (the "Merger"). As a result of the Merger, the Company will become an indirect wholly-owned subsidiary of Parent. The Merger Agreement is more fully described in Section 12 of the Offer to Purchase. The Board of Directors of the Company has unanimously determined that each of the Merger Agreement, the Offer and the Merger are fair to and in the best interests of the Company's stockholders and has unanimously approved the Merger Agreement and the transactions contemplated thereby (including the Offer and the Merger) and unanimously recommends that the Company's stockholders accept the Offer, tender their Shares to Purchaser and approve and adopt the Merger Agreement and the Merger. For purposes of the Offer, Purchaser will be deemed to have accepted for payment Shares validly tendered and not withdrawn as, if and when Purchaser gives oral or written notice to Citibank, N.A. (the "Depositary") of its acceptance for payment of such Shares pursuant to the Offer. Payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the Offer Price therefor with the Depositary, which will act as agent for the tendering stockholders for the purpose of receiving payments from Purchaser and transmitting such payments to the tendering stockholders. Under no circumstances will interest on the Offer Price for Shares be paid, regardless of any delay in making such payment. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (a) certificates for such Shares or a timely confirmation of the book-entry transfer of such Shares into the Depositary's account at a Book-Entry Transfer Facility (as defined in the Offer to Purchase), pursuant to the procedures set forth in Section 3 of the Offer to Purchase, (b) a Letter -2- of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in connection with a book-entry transfer and (c) any other documents required by the Letter of Transmittal. Subject to the terms of the Merger Agreement and applicable rules and regulations of the Securities and Exchange Commission, Purchaser expressly reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to the Depositary. Any such extension will also be publicly announced by press release issued no later than 9:00 A.M., New York City time, on the next business day after the previously scheduled expiration date of the Offer. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the right of a tendering stockholder to withdraw such stockholder's Shares. Except as otherwise provided in Section 4 of the Offer to Purchase, tenders of Shares made pursuant to the Offer are irrevocable. Shares tendered pursuant to the Offer may be withdrawn at any time prior to the expiration of the Offer and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after July 2, 1999. For a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the names in which the certificate(s) evidencing the Shares to be withdrawn are registered, if different from that of the person who tendered such Shares. The signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in the Offer to Purchase), unless such Shares have been tendered for the account of any Eligible Institution. If Shares have been tendered pursuant to the procedures for book-entry tender as set forth in Section 3 of the Offer to Purchase, any notice of withdrawal must specify the name and number of the account at a Book-Entry Transfer Facility to be credited with the withdrawn Shares. If certificates for Shares to be withdrawn have been delivered or otherwise identified to the Depositary, the name of the registered holder and the serial numbers of the particular certificates evidencing the Shares to be withdrawn must also be furnished to the Depositary prior to the physical release of such certificates. None of Parent, Purchaser, the Dealer Manager, the Depositary, the Information Agent (listed below), or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give such notification. Any Shares properly withdrawn will be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be retendered by following one of the procedures described in Section 3 of the Offer to Purchase at any time prior to the expiration of the Offer. -3- The information required to be disclosed by paragraph (e)(1)(vii) of Rule 14d-6 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided Purchaser with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase and the Letter of Transmittal and, if required, other relevant materials, will be mailed by Purchaser to record holders of Shares and will be furnished by Purchaser to brokers, dealers, banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the Company's stockholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. The offer to Purchase and the Letter of Transmittal contain important information which should be read carefully before any decision is made with respect to the Offer. Questions and requests for assistance may be directed to the Information Agent or to the Dealer Manager at their respective addresses and telephone numbers set forth below. Requests for additional copies of the Offer to Purchase and the related Letter of Transmittal may be directed to the Information Agent or to brokers, commercial banks, trust companies or the Dealer Manager. Such additional copies will be furnished at Purchaser's expense. Purchaser will not pay any fees or commissions to any broker or dealer or any other person (other than the Depositary and the Information Agent) for soliciting tenders of Shares pursuant to the Offer. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by Purchaser, in its sole discretion, which determination shall be final and binding. The Information Agent for the Offer is: [Innisfree logo] 501 Madison Avenue, 20th Floor New York, New York 10022 Call Toll-Free: (888) 750-5834 Banks and Brokers Call: (212) 750-5833 (Collect) The Dealer Manager for the Offer is: Warburg Dillon Read LLC 299 Park Avenue New York, New York 10171 (212) 821-2875 May 4, 1999 -4- EX-99.(A)(7) 8 NOTICE OF GUARANTEED DELIVERY EXHIBIT (A)(7) Notice of Guaranteed Delivery for Tender of Shares of Common Stock (Including the Associated Rights to Purchase Series A Junior Participating Preferred Stock) of WALBRO CORPORATION Pursuant to the Offer to Purchase Dated May 4, 1999 by TI AUTOMOTIVE SYSTEMS, INC. an indirect wholly-owned subsidiary of TI GROUP PLC As set forth in Section 3 of the Offer to Purchase (as defined below), this form or one substantially equivalent may be used to accept the Offer (as defined below) if certificates for shares of common stock, par value $.50 per share (the "Common Stock"), including the associated rights to purchase Series A Junior Participating Preferred Stock (the "Rights" and, collectively with the Common Stock, the "Shares"), of Walbro Corporation, a Delaware corporation (the "Company"), are not immediately available, or if the procedure for book- entry transfer cannot be complied with on a timely basis, or all required documents cannot be delivered to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase). This form may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution (as defined in Section 3 of the Offer to Purchase). See Section 3 of the Offer to Purchase. The Depositary: Citibank, N.A. By Mail: By Overnight Courier: By Hand: CITIBANK, N.A. CITIBANK, N.A. CITIBANK, N.A. P.O. BOX 685 915 Broadway Corporate Trust Window Old Chelsea Station 5th Floor 111 Wall Street, 5th New York, NY 10113 New York, NY 10010 Floor New York, NY 10043 By Facsimile Transmission (For Eligible Institutions Only): (212) 505-2248 Confirm Receipt of Facsimile by Telephone Only: (800) 270-0808 ---------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an Eligible Institution under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to TI Automotive Systems, Inc., a Delaware corporation ("Purchaser") and an indirect wholly-owned subsidiary of TI Group plc, a company organized under the Laws of England and Wales, on the terms and subject to the conditions set forth in the Offer to Purchase, dated May 4, 1999 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments on supplements thereto collectively constitute the "Offer"), receipt of which is hereby acknowledged, the number of Shares set forth below, all pursuant to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. Number of Shares: _________________ Name(s) of Record Holder(s) _________ ------------------------------------- Share Certificate Nos. (if available): ------------------------------------- (Please Type or Print) ----------------------------------- ----------------------------------- Address(es): ________________________ ------------------------------------- (Check box if Shares Zip Code will be tendered by book-entry transfer) Daytime Telephone Number: ------------------------------------- [_]The Depository Trust Company (Area Code) Account Signature(s): _______________________ Number: ___________________________ --------------------------- Dated: , 1999 2 GUARANTEE (Not to be used for signature guarantee) The undersigned, a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (each, an "Eligible Institution"), hereby guarantees that either the certificates representing the Shares tendered hereby in proper form for transfer, or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company (pursuant to procedures set forth in Section 3 of the Offer to Purchase), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message (as defined in the Offer to Purchase)) and any other documents required by the Letter of Transmittal, will be received by the Depositary at one of its addresses set forth above within three (3) New York Stock Exchange trading days after the date of execution hereof. The Eligible Institution that completes this form must communicate this guarantee to the Depositary and must deliver the Letter of Transmittal, certificates for Shares and any other required documents to the Depositary within the time period shown herein. Failure to do so could result in a financial loss to such Eligible Institution. Name of Firm: _____________________________________________________________ Address: __________________________________________________________________ ___________________________________________________________________________ Zip Code Area Code and Telephone Number: ___________________________________________ Authorized Signature Name: _____________________________________________________________________ (Please Type or Print) Title: ____________________________________________________________________ Dated: _______, 1999 NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE OF GUARANTEED DELIVERY. CERTIFICATES FOR SHARES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 3 EX-99.(A)(8) 9 IRS GUIDELINES TO SUBSTITUTE FORM W-9 EXHIBIT (A)(8) GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 - --------------------------------------------------------------------------------
- ------------------------------------------------------- ------------------------------------------------------- Give the SOCIAL SECURITY Give the EMPLOYER For this type of account: number of-- FOR THIS TYPE OF ACCOUNT: IDENTIFICATION number of-- - ------------------------------------------------------- ------------------------------------------------------- 1. An individual's The individual 9. A valid trust, Legal entity (Do not account estate or pension furnish the identifying trust number of the personal 2. Two or more The actual owner of the representative or individuals (joint account or, if combined trustee unless the legal account) funds, any one of the entity itself is not individuals/1/ designated in the account title)/5/ 3. Husband and wife The actual owner of the 10. Corporate account The corporation (joint account) account or, if joint funds, either person/1/ 11. Religious, The organization charitable, or 4. Custodian account of The minor/2/ educational other tax- a minor (Uniform Gift exempt organization to Minors Act) account 5. Adult and minor The adult or, if the 12. Partnership held in The partnership (joint account) minor is the only the name of the contributor, the business minor/1/ 13. Association, club or The organization 6. Account in the name The ward, minor, or other tax-exempt of guardian or incompetent person/3/ organization committee for a designated ward, minor, 14. A broker or The broker or nominee or incompetent person registered nominee 7. a. The usual The grantor-trustee/1/ 15. Account with the The public entity revocable savings Department trust account of Agriculture in the (grantor is also name of a public trustee) entity (such as a state or local b. So-called trust The actual owner/1/ government, school account that district, or prison) is not a legal or that receives valid trust under agriculture program state law payment 8. Sole proprietorship The owner/4/ account - ---------------------------------------------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate, or pension trust. (Do not furnish the taxpayer identification number of the personal representative or trustee unless the legal entity itself is not designated in the account title.) NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 1 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 Obtaining a Number. If you do not have a taxpayer identification number or don't know your number obtain FORM SS-5. Application for a Social Security Card or FORM SS-4 Application for Employer Identification Number at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. Payees Exempt From Backup Withholding. Payees specifically exempted from backup withholding on ALL payments include the following: (1) A corporation. (2) A financial institution. (3) An organization exempt from tax under Section 501(a), or an individual retirement plan. (4) The United States or any of its agencies or instrumentalities. (5) A State, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities. (6) A foreign government or any of it political subdivisions, agencies or instrumentalities. (7) An international organization or any of its agencies or instrumentalities. (8) A foreign central bank of issue. (9) A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. (10) A real estate investment trust. (11) An entity registered at all times during the tax year under the Investment Company Act of 1940. (12) A common trust fund operated by a bank under section 584(a). (13) An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). Payments of dividends and patronage dividends generally not subject to backup withholding also include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in trade or business in the U.S. and that have at least one nonresident partner. . Payments of patronage dividends where the amount renewed is not paid in money. . Payments made by certain foreign organizations. . Payments made to a nominee. Payments of interest generally not subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to nonresident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. . Payments made to a nominee. Payments that are not subject to information reporting are also not subject to backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A, and 6050N, and their regulations Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. 2 Penalties (1) Failure to Furnish Taxpayer Identification Number. If you fail to furnish your correct taxpayer identification number to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Civil Penalty for False Information With Respect to Withholding. If you make a false statement with no reasonable basis that results in no backup withholding, you are subject to a $500 penalty. (3) Criminal Penalty for Falsifying Information. Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. Privacy Act Notice.--Section 6109 requires most recipients of dividends, interest, or other payments to furnish their correct taxpayer identification number to persons who must file information returns with the IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. You must provide your taxpayer identification number whether or not you are required to file a tax return. Payers must generally withhold 31% of taxable who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. 3 EX-99.(B)(1) 10 AGREEMENT, DATED 04/27/98 Exhibit (B)(1) CONFORMED COPY AGREEMENT DATED 27th April, 1998 (Pounds)500,000,000 MULTICURRENCY REVOLVING CREDIT FACILITY FOR TI GROUP plc ARRANGED BY ABN AMRO BANK N.V. CITIBANK, N.A. MIDLAND BANK plc ALLEN & OVERY London BK:236837.5 INDEX CLAUSE PAGE 1. Interpretation.....................................................1 2. The Facilities....................................................15 3. Purpose...........................................................16 4. Conditions precedent..............................................16 5. Drawdown and Term-Out Option......................................17 6. Repayment.........................................................18 7. Prepayment and cancellation.......................................19 8. Interest Periods..................................................21 9. Interest..........................................................22 10. Optional Currencies...............................................24 11. Amount of Optional Currencies.....................................26 12. Payments..........................................................27 13. Taxes.............................................................29 14. Market Disruption.................................................31 15. Increased Costs...................................................33 16. Illegality........................................................34 17. Guarantee.........................................................34 18. Representations and warranties....................................36 19. Undertakings......................................................38 20. Default...........................................................45 21. The Agent and the Arrangers.......................................48 22. Fees..............................................................53 23. Expenses..........................................................54 24. Stamp Duties......................................................54 25. Indemnities.......................................................54 26. Evidence and calculations.........................................56 27. Amendments and waivers............................................56 28. Changes to the Parties............................................57 29. Disclosure of information.........................................60 30. Set-off...........................................................60 31. Pro rata sharing..................................................61 32. Severability......................................................62 33. Economic and monetary union.......................................62 34. Counterparts......................................................64 35. Notices...........................................................64 36. Language..........................................................65 37. Jurisdiction......................................................65 38. Governing law.....................................................66 SCHEDULES 1. Banks and Commitments.............................................67 Part I - Banks and Commitments - Facility A.......................67 Part II - Banks and Commitments - Facility B......................67 2. Conditions Precedent Documents....................................68 Part I - To be delivered before the First Loan....................68 Part II - To be delivered by an Additional Borrower...............69 3. Calculation of the MLA Cost.......................................70 4. Form of Request...................................................72 5. Forms of Accession Documents......................................73 Part I - Novation Certificate.....................................73 Part II - Borrower Accession Agreement............................74 Signatories............................................................75 THIS AGREEMENT is dated 27th April, 1998 between: (1) TI GROUP plc of 50 Curzon Street, London W1Y 7PN (the "COMPANY"); (2) TI INTERNATIONAL HOLDINGS LIMITED of 50 Curzon Street, London, W1Y 7PN ("TIIH"); (3) ABN AMRO BANK N.V., CITIBANK, N.A. and MIDLAND BANK plc as arrangers (in this capacity the "ARRANGERS"); (4) THE FINANCIAL INSTITUTIONS listed in Schedule 1 as banks (the "BANKS"); and (5) HSBC INVESTMENT BANK plc as agent (in this capacity the "AGENT"). IT IS AGREED as follows: 1. INTERPRETATION 1.1 DEFINITIONS In this Agreement: "Additional Borrower" means a member of the Group which becomes a Borrower in accordance with Clause 28.4 (Additional Borrowers). "Affiliate" means a Subsidiary or a Holding Company (as defined in Section 736 of the Companies Act 1985) of a person or any other Subsidiary of that Holding Company. "Agent's Spot Rate of Exchange" means the Agent's spot rate of exchange for the purchase of the relevant Optional Currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on a particular day. "Borrower" means the Company, TIIH or an Additional Borrower. "Borrower Accession Agreement" means a letter in the form of Part II of Schedule 5 with such amendments as the Agent and the Company may agree. "Business Day" means a day (other than a Saturday or a Sunday) on which banks are open for business in: 2 (a) London; and (b) in relation to a transaction involving an Optional Currency (other than ECU prior to EMU or euros), the principal financial centre of the country of that Optional Currency; and (c) in relation to a transaction involving ECU (prior to EMU), Paris and Brussels. "Commencement Date" means the date of commencement of the third stage of EMU as contemplated by the Treaty (expected, as at the date of this Agreement, to be 1st January, 1999). "Commitment" means a Facility A Commitment or a Facility B Commitment. "Commitment Period" means the Facility A Commitment Period or the Facility B Commitment Period. "Compliance Certificate" means any certificate supplied to the Agent pursuant to Clause 19.4 (Compliance Certificates). "Dangerous Substances" means any radioactive emissions and any natural or artificial substance (whether in solid or liquid form or in the form of a gas or vapour), the generation, transportation, storage, treatment, use or disposal of which (whether alone or in combination with any other substance) gives a risk of causing harm to man or any other living organism or damaging in any material respect the Environment or public health or welfare, including, but not limited to, any controlled, special, hazardous, toxic, radioactive or dangerous waste. "Default" means an Event of Default or a Potential Event of Default. "Drawdown Date" means the date of the advance of a Loan. "ECU" means the ECU, as referred to in Article 109(g) of the Treaty and as defined in Council Regulation (EC) No. 3320/94 that is from time to time used as the unit of account of the European Union. Changes to the ECU may be made by the European Union, in which event the ECU will change accordingly. 3 "EMU" means Economic and Monetary Union as contemplated in the Treaty. "euro" means the single currency to be introduced on the Commencement Date. "Encumbrance" means any mortgage, pledge, lien, charge, assignment by way of security or hypothecation and, in relation to a jurisdiction other than England and Wales, any other agreement or arrangement having a similar effect to any of the foregoing (but expressly excluding title retention). "Environment" means the environment as defined in section 1(2) of the Environmental Protection Act 1990. "Environmental Law" means any common or statutory law, regulation, code of practice, circular, guidance note and the like (whether or not having the force of law but in respect of which compliance is customary) concerning the protection of human health, any living organism, the workplace or the Environment or Dangerous Substances. "Event of Default" means an event specified as such in Clause 20.1 (Events of Default). "Facility" means Facility A or Facility B. "Facility A" means the revolving credit facility referred to in Clause 2.1(a)(i) (The Facilities). "Facility A Commitment" means : (a) in relation to a Bank which is a Bank on the date of this Agreement, the amount in Sterling set opposite its name in Part I of Schedule 1 under the heading "Facility A" and the amount of any other Bank's Facility A Commitment acquired by it under Clause 28 (Changes to the Parties); and (b) in relation to a Bank which becomes a Bank after the date of this Agreement, the amount of any other Bank's Facility A Commitment acquired by it under Clause 28 (Changes to the Parties), 4 to the extent not cancelled, transferred or reduced under this Agreement. "Facility A Commitment Period" means, for Facility A, the period from the date of this Agreement up to and including the Facility A Final Maturity Date. "Facility A Final Maturity Date" means the fifth anniversary of the date of this Agreement. "Facility A Loan" means a Loan drawn down or to be drawn down under Facility A. "Facility A Margin" means, for a Facility A Loan, 0.25 per cent. per annum. "Facility A Repayment Date" means the last day of the Interest Period for a Facility A Loan. "Facility B" means the revolving credit facility (with a term-out option) referred to in Clause 2.1(a)(ii) (The Facilities). "Facility B Commitment" means: (a) in relation to a Bank which is a Bank on the date of this Agreement, the amount in Sterling set opposite its name in Part II of Schedule 1 under the heading "Facility B" and the amount of any other Bank's Facility B Commitment acquired by it under Clause 28 (Changes to the Parties); and (b) in relation to a Bank which becomes a Bank after the date of this Agreement, the amount of any other Bank's Facility B Commitment acquired by it under Clause 28 (Changes to the Parties), to the extent not cancelled, transferred or reduced under this Agreement. "Facility B Commitment Period" means, for Facility B, the period from the date of this Agreement up to and including the Facility B Final Maturity Date or, if the Term-out Option is exercised, the Facility B Term Date. 5 "Facility B Final Maturity Date" means: (a) the day falling 364 days after the date of this Agreement; (b) such later date as may apply under Clause 2.4 (Extension of Facility B Final Maturity Date); or (c) if the Term-out Option is exercised, the second anniversary of the Facility B Term Date. "Facility B Loan" means a Loan drawn down or to be drawn down under Facility B. "Facility B Margin" means, for a Facility B Loan, 0.25 per cent. per annum. "Facility B Repayment Date" means the last day of the Interest Period of a Facility B Loan. "Facility B Term Date" means, if the Term-out Option is exercised, the then scheduled Facility B Final Maturity Date immediately before the exercise of the Term-out Option. "Facility Office" means the office(s) notified by a Bank to the Agent: (a) on or before the date it becomes a Bank; or (b) by not less than five Business Days' notice, as the office(s) through which it will perform all or any of its obligations under this Agreement. "Fee Letter" means a letter dated the date of this Agreement between the Arrangers and the Company or the Agent and the Company setting out the amount of various fees referred to in Clause 22 (Fees). "Final Maturity Date" means the Facility A Final Maturity Date or the Facility B Final Maturity Date. 6 "Finance Document" means: (a) this Agreement; (b) a Novation Certificate; (c) a Fee Letter; (d) a Borrower Accession Agreement; (e) the Syndication Side-Letter; (f) a Syndication Agreement; or (g) any other document designated as such by the Agent and the Company. "Finance Party" means an Arranger, a Bank or the Agent. "Financial Indebtedness" means any indebtedness incurred by any member of the Group in respect of: (a) moneys borrowed or raised; (b) any debenture, bond, note, loan stock or other security; (c) acceptance credits; (d) the acquisition cost of property, assets or services to the extent payable before or after the time of acquisition or possession by the party liable where the advance or deferred payment was arranged primarily as a method of raising finance or financing the acquisition of the property, assets or services acquired, which shall not be inferred solely because the payment is interest-bearing, but excluding liabilities incurred in relation to the acquisition of property, assets or services in the ordinary course of business; (e) future rental payments under leases (whether in respect of land, machinery, equipment or otherwise, but excluding operating leases) entered into primarily as a method of raising finance or financing the acquisition of the property or asset leased; (f) receivables or bills sold or discounted (other than on a non-recourse basis); (g) any amount raised pursuant to any issue of preference shares which are redeemable at any time prior to or on the Facility A Final Maturity Date; (h) (for the purpose of Clause 20.1(e) (Cross-acceleration) only) any interest rate swap or currency swap; and 7 (i) any guarantee or indemnity or other similar binding assurance in respect of indebtedness of a type described in paragraphs (a) to (g) (inclusive) above in respect of any person and (for the purpose of Clause 20.1(e) (Cross-acceleration) only) any guarantee or indemnity or other similar binding assurance in respect of indebtedness of a type described in paragraph (h) above in respect of any person, but excludes any obligation of a type described in paragraphs (a) to (i) (inclusive) above that is owed by a member of the Group to another member of the Group. "GROSS SHAREHOLDERS' FUNDS" means, as at any accounting date of the Group, the aggregate of: (a) the amount for the time being paid up or credited as being paid up on the issued share capital of the Company; (b) the consolidated reserves of the Group (including any share premium accounts and any capital reserves); and (c) the consolidated retained earnings of the Group (less any amount standing to the debit of the consolidated profit and loss account of the Group); before deducting, or if already deducted after adding back, any amount attributable to goodwill arising on consolidation, LESS any amount included in the above which is attributable to: (i) equity interests of minority shareholders; (ii) intangible assets (other than goodwill arising on consolidation referred to above); and (iii) any revaluation of assets since 31 December 1997, other than a revaluation carried out by a professional external valuer, all as calculated in accordance with accounting principles or standards generally accepted in the United Kingdom applied in connection with the preparation of the consolidated accounts of the Group for that accounting date. "Group" means the Company and its Subsidiaries. "Information Memorandum" means an information memorandum referred to in a Syndication Agreement. "Interest Period" means each period determined in accordance with Clause 8 (Interest Periods). 8 "LIBOR" means: (a) the rate per annum which appears on the relevant page on the Telerate Screen; or (b) if no such rate appears, the arithmetic mean (rounded upward to four decimal places) of the relevant offered rates which appear on the relevant page (if any) on the Reuters Screen; or (c) if no such rate appears on the Telerate Screen and one only or no offered rate appears on the relevant page of the Reuters Screen, or there is no relevant page on the Reuters Screen, the arithmetic mean (rounded upward to four decimal places) of the rates, as supplied to the Agent at its request, quoted by the Reference Banks to leading banks in the London interbank market, at or about 11.00 a.m. on the Rate Fixing Day for the offering of deposits in the currency of the relevant Loan for a period comparable to the Interest Period of the relevant Loan. "Loan" means, subject to Clauses 8 (Interest Periods) and 10 (Optional Currencies), the principal amount of each borrowing by a Borrower under this Agreement or the principal amount outstanding of that borrowing. "Majority Banks" means, at any time, Banks: (a) whose participations in the Loans then outstanding aggregate more than 662/3 per cent. of all the Loans then outstanding; or (b) if there are no Loans then outstanding, whose Commitments then aggregate more than 662/3 per cent. of the Total Commitments; or (c) if there are no Loans then outstanding and the Total Commitments have been reduced to nil, whose Commitments aggregated more than 662/3 per cent. of the Total Commitments immediately before the reduction. "Margin" means the Facility A Margin or the Facility B Margin. 9 "Measuring Assets" means: (a) in relation to the Group, as of any date of determination, the aggregate of the Group's fixed tangible assets, trade debtors and stocks, all computed on a consolidated basis and as would be shown on the Group's consolidated balance sheet prepared as of such date in accordance with accounting principles or standards generally accepted in the United Kingdom; and (b) in relation to any Subsidiary of the Company as of any date of determination, the aggregate of that Subsidiary's fixed tangible assets, trade debtors other than from members of the Group and stocks, as would be shown on an unconsolidated balance sheet of such Subsidiary prepared as of such date in accordance with accounting principles or standards generally accepted in the United Kingdom. "MLA Cost" means the cost imputed to the Bank(s) making a Loan in Sterling of compliance with the Mandatory Liquid Assets requirements of the Bank of England as determined in accordance with Schedule 3. "NET BORROWING COSTS" means, in respect of any financial period of the Group, all continuing, regular or periodic costs, charges and expenses (including, but not limited to, interest) shown in the relevant consolidated accounts of the Group as interest payable by any member of the Group plus any interest arising in such financial period which is capitalised by any member of the Group less all income shown in the relevant consolidated accounts of the Group as interest receivable by any member of the Group, all as calculated in accordance with accounting principles or standards generally accepted in the United Kingdom applied in connection with the preparation of the consolidated accounts of the Group for the relevant financial period. "Novation Certificate" has the meaning given to it in Clause 28.3 (Procedure for novations). "Optional Currency" means any currency (other than Sterling) which is for the time being freely transferable and convertible into Sterling and deposits of which are readily available in the London interbank market and, unless Sterling is replaced by the euro, includes euros. "Original Group Accounts" means the audited consolidated accounts of the Group for the year ended 31st December, 1997. 10 "Original Sterling Amount" in relation to a Loan, means: (a) if that Loan is denominated in Sterling, the amount of that Loan; or (b) if that Loan is denominated in an Optional Currency and is a Term Loan, the equivalent in Sterling of the amount of that Loan if it had first been drawn down and had remained denominated in Sterling; or (c) if that Loan is denominated in an Optional Currency and is a Revolving Loan, the equivalent in Sterling of that Loan calculated by reference to the Agent's Spot Rate of Exchange three Business Days before its Drawdown Date. "Party" means a party to this Agreement. "Principal Subsidiary" means a Subsidiary of the Company: (a) which has Measuring Assets exceeding 2.5% of Measuring Assets of the Group; or (b) the annual turnover of which (excluding sales between members of the Group) equals or exceeds 2.5% of the turnover of the Group (excluding sales between members of the Group) (or, on a pro forma basis in the case of a newly acquired or created Subsidiary, would have accounted for 2.5% or more of such turnover) for the most recent financial year, except that any company which becomes a Subsidiary of the Company after the date of this Agreement as the result of the acquisition of a business and which would otherwise be deemed a Principal Subsidiary shall not be a Principal Subsidiary for the purposes of this Agreement until 180 days after it becomes a Subsidiary of the Company, but no such Subsidiary shall, during that period, enter into any new transaction or incur any new liability which it would be prohibited from entering into or incurring if it were a Principal Subsidiary. "Profit Before Interest" means, in respect of any financial period of the Group, the consolidated profits on ordinary activities before taxation of the Group (before taking into account any exceptional or extraordinary items) adjusted by adding back Net Borrowing Costs and any goodwill amortised during that financial period of the Group, all as calculated in accordance with accounting principles or standards generally accepted in the United Kingdom applied in connection with the preparation of the consolidated accounts of the Group for the relevant financial period. 11 "Potential Event of Default" means an event or circumstance which, with the giving of notice and/or lapse of time as provided in Clause 20.1 (Events of Default), would be likely to constitute an Event of Default. "Qualifying Bank" means: (a) a person which is: (i) a bank as defined in section 840A of the Income and Corporation Taxes Act 1988; and (ii) within the charge to U.K. corporation tax for the purposes of section 349(3) of the Income and Corporation Taxes Act 1988 as regards any interest received by it under this Agreement; or (b) a person which is a bank or financial institution (whether incorporated in the U.K. or elsewhere) which, by virtue of the provisions of a double taxation agreement between the U.K. and the country of residence of that person is, subject only to a prior direction given to the Borrower by the U.K. Inland Revenue pursuant to an application by that person, eligible to have the payments made by the Borrower without any deduction or withholding in respect of Taxes. "Rate Fixing Day" means: (a) the first day of an Interest Period for a Loan denominated in Sterling (unless Sterling is replaced by euros); or (b) the second Business Day before the first day of an Interest Period for a Loan denominated in an Optional Currency or euros. "Reference Banks" means, subject to Clause 28.5 (Reference Banks), Midland Bank plc, Citibank, N.A. and ABN AMRO Bank N.V. "Relevant Taxes" means any Tax imposed, levied or assessed by or on behalf of:- (a) the U.K.; or (b) any jurisdiction from or through which a relevant Borrower makes any payment under the Finance Documents; 12 (c) any federation or organisation of which the U.K. or any jurisdiction referred to in paragraph (b) is a member; or (d) any political sub-division or authority of any of the above. "Repayment Date" means a Facility A Repayment Date or a Facility B Repayment Date. "Request" means a request made by a Borrower for a Loan, substantially in the form of Schedule 4. "Revolving Loan" means a Facility A Loan or, prior to exercise of the Term-out Option, a Facility B Loan. "Rollover Loan" means a Loan whose Drawdown Date coincides with the Repayment Date of another Loan the Original Sterling Amount of which is equal to or less than the Original Sterling Amount of the other Loan. "Sterling" or "(Pounds)" means the lawful currency for the time being of the United Kingdom. "Subsidiary" means: (a) a subsidiary within the meaning of section 736 of the Companies Act 1985; and (b) unless the context otherwise requires, a subsidiary undertaking within the meaning of section 258 of the Companies Act 1985. "SYNDICATION AGREEMENT" means an agreement between the Parties and other banks and financial institutions, substantially in the form set out in the schedule to the Syndication Side-Letter. "SYNDICATION SIDE-LETTER" means the letter between the Company and the Arrangers, dated the date of this Agreement, relating to primary syndication. "TAXES" includes all present and future income and other taxes, levies, imposts, deductions and charges and withholdings whatsoever together with 13 interest thereon and penalties with respect thereto, if any, and any payments made on or in respect thereof; "TAXATION" and "TAX" shall be construed accordingly. "Term Loan" means a Facility B Loan made after the exercise of the Term-out Option. "Term-out Option" means the option of the Company in Clause 5.4 (Term-out Option) to convert Facility B into a term loan facility. "Total A Commitments" means the aggregate of the Facility A Commitments of all the Banks, being (Pounds)250,000,000 at the date of this Agreement. "Total B Commitments" means the aggregate of the Facility B Commitments of all the Banks, being (Pounds)250,000,000 at the date of this Agreement. "Total Commitments" means the aggregate of the Total A Commitments and the Total B Commitments, being (Pounds)500,000,000 at the date of this Agreement. "Total Consolidated Net Borrowings" means, as at any accounting date of the Group, the aggregate (without double counting and excluding borrowings between members of the Group) of: (a) all short term borrowings falling due within one year; (b) all loans and other borrowings falling due after more than one year; and (c) all obligations of the types described in subparagraphs (a) or (b) above of third parties outside of the Group to the extent guaranteed by any member of the Group, in the case of each of paragraphs (a) and (b) above, as shown in the consolidated accounts of the Group as at that accounting date, LESS the aggregate of: (i) all cash in hand and cash balances with banks; (ii) all time deposits; and (iii) all short term investments and marketable securities including, without limitation to the generality of the foregoing, commercial paper with a maturity of not more than twelve months, certificates of deposit and U.K. treasury bills, 14 all as calculated in accordance with accounting principles or standards generally accepted in the United Kingdom applied in connection with the preparation of the consolidated accounts of the Group for that accounting date. "Treaty" means the Treaty Establishing the European Community, being the Treaty of Rome of 25th March, 1957, as amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on 7th February, 1992 and came into force on 1st November, 1993), as amended from time to time. "U.K." means the United Kingdom of Great Britain and Northern Ireland. 1.2 CONSTRUCTION (a) In this Agreement, unless the contrary intention appears, a reference to: (i) an "AMENDMENT" includes a supplement, novation or re-enactment and "AMENDED" is to be construed accordingly; "ASSETS" includes present and future properties, revenues and rights of every description; an "AUTHORIZATION" includes an authorization, consent, approval, resolution, licence, exemption, filing and registration; a "CURRENCY" includes ECU; a "MONTH" is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that: (1) if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last Business Day in that calendar month; or (2) if an Interest Period commences on the last Business Day of a calendar month, that Interest Period shall end on the last Business Day in the calendar month in which it is to end; a "PERSON" includes any person, company, partnership, association, government, state, agency or other entity or any of its successors and assigns; a "REGULATION" includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having the force of law, being of a type which the person to whom it applies is accustomed to comply) of any governmental, inter- governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation; 15 a "SCREEN" or "PAGE" on a "SCREEN" in the definition of "LIBOR" includes any replacement screen or page nominated by the British Bankers Association as the information vendor for the purpose of displaying British Bankers Association Interest Settlement Rates for deposits in various currencies; (ii) a provision of law is a reference to that provision as amended or re- enacted; (iii) a Clause or a Schedule is a reference to a clause of or a schedule to this Agreement; (iv) a Finance Document or another document is a reference to that Finance Document or other document as amended; and (v) a time of day is a reference to London time. (b) Unless the contrary intention appears, a term used in any other Finance Document or in any notice given under or in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement. (c) The index to and the headings in this Agreement are for convenience only and are to be ignored in construing this Agreement. 2. THE FACILITIES 2.1 THE FACILITIES (a) Subject to the terms of this Agreement, the Banks agree to make available to the Borrowers the following facilities: (i) a multicurrency revolving credit facility under which the Banks agree to make Facility A Loans to the Borrowers up to an aggregate Original Sterling Amount not exceeding the Total A Commitments; and (ii) a multicurrency revolving credit facility (with a term-out option) under which the Banks agree to make Facility B Loans to the Borrowers up to an aggregate Original Sterling Amount not exceeding the Total B Commitments. (b) The aggregate Original Sterling Amount of all outstanding Loans shall not exceed the Total Commitments. (c) No Bank is obliged to lend if it would cause the Original Sterling Amount of its participations in the Loans to exceed its Commitment. 2.2 NUMBER OF LOANS AND CURRENCIES Unless otherwise agreed by the Agent, no more than 15 Loans may be outstanding at any time and Loans may not be denominated in more than 5 currencies at any time. 2.3 NATURE OF A FINANCE PARTY'S RIGHTS AND OBLIGATIONS (a) The obligations of a Finance Party under the Finance Documents are several. Failure of a Finance Party to carry out those obligations 16 does not relieve any other Party of its obligations under the Finance Documents. No Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents. (b) The rights of a Finance Party under the Finance Documents are divided rights. A Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights. 2.4 EXTENSION OF FACILITY B FINAL MATURITY DATE (a) The Company may, by not more than 60 days' nor less than 30 days' notice prior to the then current Facility B Final Maturity Date, request an extension of the then current Facility B Final Maturity Date to a date falling not more than 364 days after the date of the then current Facility B Final Maturity Date. (b) If the Agent has received, not less than 10 days before the then current Facility B Final Maturity Date, a notice of acceptance to any request made by the Company under paragraph (a) above from all the Banks, the Facility B Final Maturity Date shall be extended to the date falling 364 days after the date of the then current Facility B Final Maturity Date and the Agent shall promptly notify the Company accordingly. (c) The Agent shall notify the Banks promptly on receipt of any notice under paragraph (a) above and any such notice will be irrevocable. 3. PURPOSE Each Borrower shall apply each Loan made to it towards general corporate purposes (including the financing of acquisitions, as a commercial paper back-up and as a stand-by). Without affecting the obligations of any Borrower in any way, no Finance Party is bound to monitor or verify the application of any Loan. 4. CONDITIONS PRECEDENT 4.1 DOCUMENTARY CONDITIONS PRECEDENT No Borrower may deliver the first Request until the Agent has notified the Company and the Banks that it has received all of the documents set out in Part I of Schedule 2 in form and substance satisfactory to the Agent, which the Agent shall do promptly on receipt. 4.2 FURTHER CONDITIONS PRECEDENT The obligations of each Bank to participate in any Loan under Clause 5.3 (Advance of Loan) are subject to the further conditions precedent that: (a) on both the date of the Request (if applicable) and the Drawdown Date: (i) in the case of a Rollover Loan, no Event of Default is outstanding or would result from the making of that Rollover Loan; (ii) in the case of any other Loan: 17 (A) no Default is outstanding or would result from the making of the Loan; and (B) the representations and warranties in Clause 18 (Representations and warranties) to be repeated on those dates are correct, and will be correct immediately after the Loan is made, in all material respects; and (b) the making of the Loan would not cause Clause 2.1 (The Facilities) or Clause 2.2 (Number of Loans and currencies) to be contravened. 5. DRAWDOWN AND TERM-OUT OPTION 5.1 COMMITMENT PERIOD A Borrower may borrow a Loan during the relevant Commitment Period if the Agent receives, not later than 11.00 a.m., three (or, in the case of a Loan in Sterling, one) Business Day(s) before the proposed Drawdown Date, a duly completed Request. Each Request is irrevocable and, subject to the terms of this Agreement, shall oblige the Borrower to borrow the Loan. 5.2 COMPLETION OF REQUESTS A Request will not be regarded as having been duly completed unless: (a) it specifies whether the Loan is a Facility A Loan or a Facility B Loan; (b) the Drawdown Date is a Business Day falling on or before the final day of the relevant Commitment Period; (c) if the currency selected is Sterling, the amount of the Loan is: (i) a minimum of (Pounds)5,000,000 and an integral multiple of (Pounds)1,000,000; or (ii) if the Loan is a Facility A Loan, the balance of the undrawn Total A Commitments; or (iii) if the Loan is a Facility B Loan, the balance of the undrawn Total B Commitments; or (iv) such other amount as the Agent may agree; (d) if the currency selected is an Optional Currency, the amount of the Loan is: (i) an integral multiple of 1,000,000 of the largest currency unit of that Optional Currency but at least the equivalent of (Pounds)5,000,000; or (ii) if the Loan is a Facility A Loan, the balance of the undrawn Total A Commitments; or 18 (iii) if the Loan is a Facility B Loan, the balance of the undrawn Total B Commitments; or (iv) such other amount as the Agent may agree; (e) the amount selected under paragraph (c) or (d) above does not cause Clause 2.1 (The Facilities) to be contravened; (f) the currency selected complies with Clause 10 (Optional Currencies); (g) the Interest Period selected complies with Clause 8 (Interest Periods) and does not extend beyond the relevant Final Maturity Date; and (h) the payment instructions comply with Clause 12 (Payments). 5.3 ADVANCE OF LOAN (a) The Agent shall promptly notify each Bank of the details of the requested Loan and the amount of its participation in the Loan. (b) Subject to the terms of this Agreement, each Bank shall make its participation in the Loan available to the Agent for the Borrower on the relevant Drawdown Date. (c) The amount of each Bank's participation in the Loan will be the proportion of the Loan which its relevant Commitment bears to the Total A Commitments or the Total B Commitments on the proposed Drawdown Date. 5.4 TERM-OUT OPTION (a) The Company may by notice to the Agent convert Facility B into a term loan facility. (b) With effect from the date of the notice under paragraph (a) above:- (i) the Facility B Final Maturity Date shall be the date falling on the second anniversary of the Facility B Term Date; and (ii) Facility B Loans may, subject to the terms of this Agreement, be borrowed for the remainder of the Facility B Commitment Period, but all subsequent Facility B Loans will be Term Loans. 6. REPAYMENT 6.1 REPAYMENT (a) Each Borrower shall repay each Facility A Loan made to it in full on its Facility A Repayment Date. (b) (i) Subject to sub-paragraph (ii) below, each Borrower shall repay each Facility B Loan made to it in full on its Facility B Repayment Date. 19 (ii) After the exercise of the Term-out Option, each Borrower shall repay each Facility B Loan made after that date in full on the Facility B Final Maturity Date. 6.2 RE-BORROWING Subject to the other terms of this Agreement: (a) any amounts repaid under Clause 6.1(a) (Repayment) may be re-borrowed; and (b) any amounts repaid under Clause 6.1(b) (Repayment) may, if the Term- out Option has not been exercised, be re-borrowed. 7. PREPAYMENT AND CANCELLATION 7.1 AUTOMATIC CANCELLATION (a) The Facility A Commitment of each Bank shall be automatically cancelled at the close of business in London on the Facility A Final Maturity Date. (b) (i) If the Term-out Option has not been exercised, the Facility B Commitment of each Bank shall be automatically cancelled at the close of business in London on the Facility B Final Maturity Date. (ii) If the Term-out Option has been exercised, the undrawn amount of the Facility B Commitment of each Bank shall be automatically cancelled on the Facility B Term Date. 7.2 VOLUNTARY CANCELLATION (a) The Company may, by giving not less than 10 days' prior notice (or such shorter period as the Majority Banks may agree) to the Agent, cancel the undrawn amount of the Total A Commitments or the Total B Commitments in whole or in part (but, if in part, in a minimum of (Pounds)5,000,000 and an integral multiple of (Pounds)1,000,000). (b) Any cancellation in part shall be applied against the relevant Commitment of each Bank pro rata. 7.3 VOLUNTARY PREPAYMENT A Borrower may, by giving not less than 10 days' prior notice (or such shorter period as the Majority Banks may agree) to the Agent, and, subject to Clause 25.2(b) (Other indemnities), prepay any Loan in whole or in part (but, if in part, in a minimum amount of (Pounds)5,000,000 and an integral multiple of (Pounds)1,000,000 or if the Loan is denominated in an Optional Currency an integral multiple of 1,000,000 of the largest currency unit of that Optional Currency but at least the equivalent of (Pounds)5,000,000). 7.4 ADDITIONAL RIGHT OF PREPAYMENT AND CANCELLATION If: 20 (a) a Borrower is required to pay to a Bank any additional amounts under Clause 13 (Taxes); or (b) a Borrower is required to pay to a Bank any amount under Clause 15 (Increased costs); or (c) interest on a Bank's participation in a Loan is being calculated in accordance with Clause 14.3(d) (Alternative basis), then, without prejudice to the obligations of any Borrower under those Clauses, the Company may, whilst the circumstances giving rise to the requirement continue, serve a notice of prepayment and cancellation on that Bank through the Agent. On the date falling five Business Days after the date of service of the notice and subject to Clause 25.2(b) (Other indemnities): (i) each Borrower shall prepay that Bank's participation in all the Loans made to it; and (ii) the Commitments of that Bank shall be cancelled. 7.5 MITIGATION If, in respect of any Bank, circumstances arise which would, or would on the giving of notice, result in: (a) any additional amounts becoming payable under Clause 13 (Taxes); or (b) any amount becoming payable under Clause 15 (Increased costs); or (c) any prepayment, early payment or cancellation under Clause 16 (Illegality), then, without in any way limiting, reducing or otherwise qualifying the obligations of the Borrowers under this Agreement and without prejudice to the terms of those Clauses, that Bank shall, in consultation with the Company through the Agent, and to the extent that it can do so lawfully and without prejudice to its own position, take such reasonable steps as may be open to it to mitigate or remove such circumstances, including (without limitation) the transfer of its rights and obligations under this Agreement to another branch or another bank or financial institution acceptable to the Company, unless to do so might (in the opinion of the Bank) be prejudicial to it. 7.6 MISCELLANEOUS PROVISIONS (a) Any notice of prepayment and/or cancellation under this Agreement is irrevocable. The Agent shall notify the Banks promptly of receipt of any such notice. (b) All prepayments under this Agreement shall be made together with accrued interest on the amount prepaid and, subject to Clause 25.2 (Other indemnities), without premium or penalty. (c) No prepayment or cancellation is permitted except in accordance with the express terms of this Agreement. 21 (d) No amount of the Total Commitments cancelled under this Agreement may subsequently be reinstated. (e) Without prejudice to the rights of a Borrower to re-borrow under Clause 6.2 (Re-borrowing), no amount prepaid under this Agreement (otherwise than under Clause 7.3 (Voluntary prepayment)) may subsequently be re-borrowed. 7.7 CANCELLATION FOLLOWING CHANGE OF CONTROL (a) If any person, or group of persons acting in concert (as defined in the City Code on Takeovers and Mergers) acquires control (as defined in section 416 of the Income and Corporation Taxes Act 1988) of the Company, the Company shall immediately notify the Agent, specifying the date of the change of control and, so far as known to it, the names of the person or persons which have acquired control. (b) The Majority Banks shall be entitled, within a period of 30 days after the date of the notice from the Company under paragraph (a) above, to require the Agent to give notice to the Company (a "CANCELLATION NOTICE") terminating the Facilities and specifying the date, being not less than 45 days after the date of the cancellation notice from the Agent, on which the Facilities shall terminate. (c) On the date referred to in the cancellation notice given by the Agent: (i) the Facilities shall be cancelled; and (ii) each Borrower shall prepay all Loans made to it together with accrued interest and all other amounts payable by it under the Finance Documents. (d) Any cancellation notice is irrevocable. (e) If the Company gives notice under paragraph (a) above, then, unless the Majority Banks otherwise agree, only Rollover Loans may be made during the period from the date of that notice to: (i) the latest date on which the Agent can give a cancellation notice; or (ii) if earlier, the date on which the Agent notifies the Company that it will not give the cancellation notice; or (iii) if the Agent gives a cancellation notice, the date specified in the cancellation notice on which the Facilities shall terminate. 8. INTEREST PERIODS 8.1 SELECTION (a) (i) Each Term Loan will have successive Interest Periods. (ii) Each Revolving Loan has one Interest Period only. 22 (b) A Borrower may select the Interest Period for a Revolving Loan in the relevant Request. Each Interest Period for a Revolving Loan will commence on its Drawdown Date. (c) A Borrower may select the Interest Period for a Term Loan by a notice received by the Agent not later than three (or, in the case of Sterling, one) Business Day(s) before the commencement of that Interest Period. Each Interest Period for a Term Loan (other than the first which shall commence on its Drawdown Date) shall commence on the expiry of its preceding Interest Period. (d) Subject to the following provisions of this Clause 8, each Interest Period will be one, two, three or six months or any other period agreed by the relevant Borrower and the Banks. (e) If a Borrower fails to select an Interest Period for a Term Loan in accordance with paragraph (c) above, that Interest Period will, subject to the other provisions of this Clause 8, be three months. 8.2 NON-BUSINESS DAYS If an Interest Period would otherwise end on a day which is not a Business Day, that Interest Period shall instead end on the next Business Day in that calendar month (if there is one) or the preceding Business Day (if there is not). 8.3 NO OVERRUNNING OF A FINAL MATURITY DATE If an Interest Period would otherwise overrun the relevant Final Maturity Date, it will be shortened so that it ends on that Final Maturity Date. 8.4 OTHER ADJUSTMENTS The Agent (after consultation with the Banks) and the Company may enter into such other arrangements as they may agree for the adjustment of Interest Periods and the consolidation and/or splitting of Loans. 8.5 NOTIFICATION The Agent shall notify the relevant Borrower and the Banks of the duration of each Interest Period promptly after ascertaining its duration. 9. INTEREST 9.1 INTEREST RATE The rate of interest on each Loan for each of its Interest Periods is the rate per annum determined by the Agent to be the aggregate of the applicable: (a) Margin; (b) LIBOR; and (c) in the case of a Loan in Sterling, MLA Cost. 23 9.2 DUE DATES Except as otherwise provided in this Agreement, accrued interest on each Loan is payable by the relevant Borrower on the last day of each Interest Period for that Loan and also, if the Interest Period is longer than six months, on the dates falling at six monthly intervals after the first day of that Interest Period. 9.3 DEFAULT INTEREST (a) (i) If a Borrower fails to pay any amount payable by it under the Finance Documents, it shall forthwith on demand by the Agent pay interest on the overdue amount from the due date up to the date of actual payment, as well after as before judgment, at a rate (the "DEFAULT RATE") determined by the Agent to be one per cent. per annum above, subject to sub-paragraph (ii) below, the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a Loan in the currency of the overdue amount for such successive Interest Periods of such duration as the Agent may determine (each a "DESIGNATED INTEREST PERIOD"). (ii) If the overdue amount is a principal amount of a Loan and it becomes due and payable prior to the last day of an Interest Period for that Loan, then: (1) the first Designated Interest Period for that overdue sum will be the unexpired portion of that Interest Period; and (2) the rate of interest on the overdue amount for that first Designated Interest Period will be one per cent per annum above the rate on the overdue amount under Clause 9.1 (Interest rate) immediately before the due date. After the expiry of the first Designated Interest Period for that overdue amount, the rate on the overdue amount will be calculated in accordance with sub-paragraph (i) above. (b) The default rate will be determined by the Agent on each Business Day or the first day of, or two Business Days before the first day of, the relevant Designated Interest Period, as appropriate. (c) If, for any Designated Interest Period, LIBOR cannot be determined, the rate of interest applicable to any overdue amount shall be the aggregate of one per cent. per annum, the Margin and the rate per annum determined by the Agent to be the arithmetic mean (rounded upwards to the nearest four decimal places) of the rates notified by each Reference Bank to the Agent before the last day of the Designated Interest Period to be those which express as a percentage rate per annum the cost to it of funding from whatever source it may reasonably select its portion of the overdue amount, for the Designated Interest Period. (d) Default interest will be compounded at the end of each Designated Interest Period. 9.4 NOTIFICATION OF RATES OF INTEREST The Agent shall promptly notify each relevant Party of the determination of a rate of interest under this Agreement. 24 10. OPTIONAL CURRENCIES 10.1 SELECTION (a) A Borrower shall select the currency of a Revolving Loan in the relevant Request. (b) A Borrower shall select the currency of a Term Loan for an Interest Period in a notice received by the Agent not later than 11.00 a.m. three (or, if the currency is Sterling, one) Business Day(s) before the commencement of that Interest Period. A Borrower may specify whether that Term Loan is to be denominated in more than one currency, and, if so, the amount in Sterling of each such currency (being an integral multiple of 1,000,000 of the largest currency unit of that Optional Currency but at least the equivalent of (Pounds)5,000,000 or the balance of the Term Loan, if more). (c) The currency of each Loan must be Sterling or an Optional Currency. (d) If a Borrower fails to give a notice in respect of a Term Loan in accordance with paragraph (b) above, that Loan will remain denominated for its next Interest Period in the same currency in which it is then denominated. (e) Each part of a Loan which is to be denominated in a different currency from any other part of that Loan shall be treated as a separate Loan. (f) The Agent shall notify each Bank and each Borrower of the Original Sterling Amount of each Loan denominated in an Optional Currency and the applicable Agent's Spot Rate of Exchange promptly after they are ascertained. 10.2 REVOCATION OF CURRENCY If before 9.30 a.m. on any Rate Fixing Day the Agent receives notice from a Bank that: (a) it is impracticable for that Bank to fund its participation in the Loan in the relevant Optional Currency during that Interest Period in the ordinary course of business in the London interbank market; and/or (b) the use of the proposed Optional Currency might contravene any law or regulation, the Agent shall give notice to the relevant Borrower and to the Banks to that effect before 11.00 a.m. on that day. In this event: (i) the Borrower and the Banks may agree that the drawdown will not be made; or (ii) in the absence of agreement that Bank's participation in the Loan (or if more than one Bank is similarly affected, those Banks' participations in the Loan) shall be treated as a separate Loan denominated in Sterling during that Interest Period. 10.3 ECU (a) If, at any time prior to EMU: (i) the ECU ceases to be utilised as the basic accounting unit of the European Union; or 25 (ii) the ECU ceases to be used in the European Monetary System; or (iii) it becomes illegal, impossible or impracticable for payments to be made under this Agreement in ECU; or (iv) the Agent determines that any event mentioned in sub-paragraphs (i) - (iii) above is likely to occur before the Facility A Final Maturity Date, then: (1) the Agent shall notify the Company and the Banks promptly upon becoming aware of the event; (2) the Banks shall not be obliged to make any Loans denominated in ECU on or after the date of that notification; and (3) subsequently each amount which would otherwise have been payable by the Borrowers under this Agreement in ECU shall be paid by the Borrowers in Sterling or another currency acceptable to the Banks (the "REPLACEMENT CURRENCY") and the amount of the replacement currency so payable will be determined in accordance with paragraph (b) below. (b) (i) The equivalent in the replacement currency of any Loan in ECU for the purposes of paragraph (a) above will be calculated by the Agent as the sum of the equivalent in the replacement currency of the components of the ECU; (ii) the components of the ECU for this purpose will be the currency amounts that were components of the ECU when the ECU was most recently used in the European Monetary System, except that, if the ECU is being used for the settlement of transactions by public institutions of or within the European Union, or was so used after its most recent use in the European Monetary System, the components will be: (1) the currency amounts that are components of the ECU as so used on the day the calculation of the amount of the replacement currency is to be made (the "DAY OF VALUATION"); or (2) the currency amounts that were components of the ECU when it was most recently so used, as appropriate; (iii) the rates to be used by the Agent for the above purposes will be its rates for the purchase in the London foreign exchange market of the replacement currency with each of the components at or about 11.00 am on the day of valuation for value on the day the relevant payment in the replacement currency is due; and (iv) the day of valuation will be the day determined by the Agent for the purposes of calculating the equivalent in the replacement currency of any amount in ECU and, unless the Agent considers it inappropriate, will be the day two Business Days before the relevant payment in the replacement currency is due. 26 11. AMOUNT OF OPTIONAL CURRENCIES 11.1 CHANGE OF CURRENCY (a) If a Term Loan is to be continued during its next Interest Period in a different currency (the "NEW CURRENCY") from that in which it is currently denominated, the Term Loan shall be repaid by the relevant Borrower in full at the end of its current Interest Period in the currency in which it is then denominated and, subject to the terms of this Agreement, shall be forthwith re-advanced by the Banks in the new currency. (b) If the new currency is Sterling, the amount of each Bank's participation in that Term Loan will be its participation in the Original Sterling Amount of that Term Loan for that Interest Period. (c) If the new currency is an Optional Currency, the amount of each Bank's participation in that Term Loan will be determined by converting into the new currency its participation in the Original Sterling Amount of that Term Loan on the basis of the Agent's Spot Rate of Exchange three Business Days before the commencement of that Interest Period. 11.2 SAME OPTIONAL CURRENCY (a) If a Term Loan is to be continued during its next Interest Period in the same Optional Currency as that in which it is denominated during its current Interest Period, there shall be calculated the difference between the amount of the Term Loan (in that Optional Currency) for the current Interest Period and for the next Interest Period. The amount of the Term Loan for the next Interest Period will be determined by notionally converting into that Optional Currency the Original Sterling Amount of the Term Loan on the basis of the Agent's Spot Rate of Exchange three Business Days before the commencement of that Interest Period. (b) At the end of the current Interest Period (but subject always to paragraph (c) below): (i) if the amount of the Term Loan for the next Interest Period is less than for the preceding Interest Period, the relevant Borrower shall repay the difference; or (ii) if the amount of the Term Loan for the next Interest Period is greater, each Bank shall (unless an Event of Default has occurred which is then continuing) forthwith make available to the Agent for that Borrower its participation in the difference. (c) If the Sterling equivalent of a Loan calculated by reference to the Agent's Spot Rate of Exchange for the next Interest Period shows an appreciation or depreciation of the Optional Currency against Sterling of less than five per cent. when compared with the Sterling equivalent of a Loan calculated by reference to the Original Exchange Rate, no amounts are payable in respect of the difference. In this Clause 11 "ORIGINAL EXCHANGE RATE" means the Agent's Spot Rate of Exchange used for determining the amount of the Optional Currency for the Interest Period which is the later of the following: (i) the Interest Period during which the Term Loan was first denominated in that Optional Currency if the Term Loan has since then remained denominated in that Optional Currency; and 27 (ii) the most recent Interest Period immediately prior to which a difference was required to be paid under this Clause 11.2. 11.3 NOTIFICATION The Agent shall notify the Banks and the relevant Borrower of Optional Currency amounts (and the applicable Agent's Spot Rate of Exchange) promptly after they are ascertained. 12. PAYMENTS 12.1 PLACE All payments by a Borrower or a Bank under the Finance Documents shall be made to the Agent to its account at such office or bank in the principal financial centre of the country of the relevant currency (or, in the case of ECU or euros, any major financial centre in which payment in ECU or euros can be effected) as it may notify to that Borrower or Bank for this purpose. A payment by a Borrower under the Finance Documents to the Agent in accordance with this Clause constitutes a good discharge of that Borrower's obligation. 12.2 FUNDS Payments under the Finance Documents to the Agent shall be made for value on the due date at such times and in such funds as the Agent may specify to the Party concerned as being customary at the time for the settlement of transactions in the relevant currency in the place for payment. 12.3 DISTRIBUTION (a) Each payment received by the Agent under this Agreement for another Party shall, subject to paragraphs (b) and (c) below, be made available by the Agent to that Party by payment (on the date and in the currency and funds of receipt) to its account with such office or bank in the principal financial centre of the country of the relevant currency (or, in the case of ECU or euros, any major financial centre in which payment in ECU or euros can be effected) as it may notify to the Agent for this purpose by not less than five Business Days' prior notice. (b) If the relevant Borrower agrees, the Agent may apply any amount received by it for a Borrower in or towards payment (on the date and in the currency and funds of receipt) of any amount due from that Borrower under the Finance Documents or in or towards the purchase of any amount of any currency to be so applied. (c) Where the Repayment Date for an outstanding Loan coincides with the Drawdown Date for a new Loan to the same Borrower to be denominated in the same currency as the outstanding Loan, the Agent shall apply the new Loan in or towards repayment of the outstanding Loan so that:- (i) where the amount of the outstanding Loan exceeds the amount of the new Loan, the relevant Borrower shall be required to repay only the excess; and (ii) where the amount of the outstanding Loan is exactly the same as or less than the amount of the new Loan, the relevant Borrower shall not be required to make any payment of principal. 28 (d) Where a sum is to be paid to the Agent under this Agreement for another Party, the Agent is not obliged to pay that sum to that Party until it has established that it has actually received that sum. The Agent may, however, assume that the sum has been paid to it in accordance with this Agreement, and, in reliance on that assumption, make available to that Party a corresponding amount. If the sum has not been made available but the Agent has paid a corresponding amount to another Party, that Party shall forthwith on demand by the Agent refund the corresponding amount together with interest on that amount from the date of payment to the date of receipt, calculated at a rate determined by the Agent to reflect its cost of funds. 12.4 CURRENCY (a) A repayment or prepayment of a Loan or any part of a Loan is payable in the currency in which the Loan is denominated on its due date. (b) Interest is payable in the currency in which the relevant amount in respect of which it is payable is denominated. (c) Amounts payable in respect of costs, expenses and taxes and the like are payable in the currency in which they are incurred. (d) Any other amount payable under the Finance Documents is, except as otherwise provided in the Finance Documents, payable in Sterling. 12.5 SET-OFF AND COUNTERCLAIM All payments made by a Borrower under the Finance Documents shall be made without set-off or counterclaim. 12.6 NON-BUSINESS DAYS (a) If a payment under the Finance Documents is due on a day which is not a Business Day, the due date for that payment shall instead be the next Business Day in the same calendar month (if there is one) or the preceding Business Day (if there is not). (b) During any extension of the due date for payment of any principal under this Agreement interest is payable on that principal at the rate payable on the original due date. 12.7 PARTIAL PAYMENTS (a) If the Agent receives a payment insufficient to discharge all the amounts then due and payable by the Borrowers under the Finance Documents, the Agent shall apply that payment towards the obligations of the Borrowers under the Finance Documents in the following order: (i) FIRST, in or towards payment pro rata of any unpaid fees, costs and expenses of the Agent under the Finance Documents; 29 (ii) SECONDLY, in or towards payment of any commitment fee due under Clause 22.3 (Commitment fee) but unpaid or any utilisation fee due under Clause 22.4 (Utilisation fee) but unpaid; (iii) THIRDLY, in or towards payment pro rata of any accrued interest due but unpaid under this Agreement; (iv) FOURTHLY, in or towards payment pro rata of any principal due but unpaid under this Agreement; and (v) FIFTHLY, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents. (b) The Agent shall, if so directed by all the Banks, vary the order set out in sub-paragraphs (a)(ii) to (v) above. (c) Paragraphs (a) and (b) above will override any appropriation made by a Borrower. 13. TAXES 13.1 GROSS-UP All payments by a Borrower under the Finance Documents shall be made without any deduction and free and clear of and without any deduction for or on account of any Relevant Taxes, except to the extent that the Borrower is required by law to make payment subject to any Relevant Taxes. If any Relevant Tax, or amounts in respect of Relevant Tax, must be deducted from any amounts payable or paid by a Borrower, or paid or payable by the Agent to a Bank, under the Finance Documents, the Borrower shall pay such additional amounts as may be necessary to ensure that the relevant Bank receives a net amount equal to the full amount which it would have received had payment not been made subject to Relevant Tax. 13.2 TAX RECEIPTS All Relevant Taxes required by law to be deducted by a Borrower from any amounts paid or payable under the Finance Documents shall be paid by the relevant Borrower when due and the Borrower shall, within 30 days of the payment being made, deliver to the Agent for the relevant Bank appropriate evidence that the payment has been duly remitted to the appropriate authority. 13.3 QUALIFYING BANKS (a) Subject to paragraph (b) below, if a Bank is not or ceases to be a Qualifying Bank no Borrower will be liable to pay to that Bank under Clause 13.1 (Gross-up), any amount in respect of taxes levied or imposed by the U.K. or any taxing authority of or in the U.K. in excess of the amount it would have been obliged to pay if that Bank had been, or had not ceased to be, a Qualifying Bank. (b) Paragraph (a) above does not apply if a Bank ceases to be a Qualifying Bank as a result of the introduction of, change in, or any change in the interpretation, administration or application of, any law or regulation or any practice or concession of the U.K. Inland Revenue occurring after the date of this Agreement. 30 (c) (i) Each Bank represents and warrants to each Borrower that it is a Qualifying Bank. Subject to sub-paragraph (iii) below, this representation and warranty shall be deemed to be repeated by each Bank on each date on which it participates in the making of a Loan and on each date on which any payment of interest in respect of any Loan is due to be made to it pursuant to this Agreement. (ii) If the Income and Corporation Taxes Act 1988 or any applicable double taxation agreement is amended or repealed or there is any change in the interpretation thereof, the Agent may, after consultation with the Company, amend this representation to reflect the amendment or repeal of that Act or double taxation agreement or change in interpretation. (iii) If the Income and Corporation Taxes Act 1988 or any applicable double taxation agreement is amended or repealed, or there is a change in interpretation, in a manner which requires an amendment to the representation under sub-paragraph (i) no Bank is obliged to make the representation unless and until the representation is amended in a manner acceptable to the Bank. (d) Each Finance Party shall cooperate with the relevant Borrower and the Agent in respect of any application to the relevant revenue authorities by the completion and execution (as soon as reasonably practicable following a request from the Borrower or the Agent) of such certificates, claim forms or other documentation as: (i) the Finance Party is reasonably able to complete and execute without incurring any liability or significant administrative burden on its part; and (ii) the Borrower or the Agent reasonably requests for the purpose of enabling the Borrower or the Agent to obtain authorisation from the relevant revenue authorities to make interest payments in full without deduction or withholding of Tax. (e) No additional amount shall be payable pursuant to Clause 13.1 (Gross-up) in respect of any deduction or withholding for or on account of Tax which would not have been required to be deducted or withheld if the person to whom that payment was made had complied with the obligations assumed by it under paragraph (d) above or the Inspector of Foreign Dividends had given the requisite clearance. 13.4 REIMBURSEMENT OF TAX CREDITS If:- (a) a Borrower pays any additional amount (a "TAX PAYMENT") under Clause 13.1 (Gross-up); and (b) a Bank effectively obtains a refund of Tax, or credit against Tax on its overall net income, by reason of that Tax Payment (a "TAX CREDIT"); and (c) that Bank is able to identify such Tax Credit as being attributable to the Tax Payment, 31 then the Bank shall reimburse to the relevant Borrower such proportion of such Tax Credit as will leave the Bank, after that reimbursement, in no better or worse position than it would have been in if such Tax Payment had not been required. Each Bank shall use its reasonable endeavours to claim any Tax Credit which may be due to it unless to do so might be prejudicial to it. No Bank shall be obliged to disclose any information regarding its tax affairs or computations to any Borrower. 13.5 CLAWBACK OF TAX CREDITS If any Bank pays all or any part of a Tax Credit to any Borrower pursuant to Clause 13.4 (Reimbursement of Tax Credits) and the Bank subsequently determines, in its reasonable judgment, that the Tax Credit in respect of which the payment was made was not available to it or has been withdrawn from it or that it was unable to use such Tax Credit in full, the relevant Borrower shall reimburse the Bank to the extent the Bank determines, in its reasonable judgment, to be required to place it in the same after-tax position as it would have been in if the Tax Credit had been obtained and fully used and retained by such Bank. Any reimbursement made by any Borrower to any Bank under this Clause in respect of any payment of all or any part of a Tax Credit made by the Bank to the Borrower pursuant to Clause 13.4 shall not exceed the amount of such Tax Credit received by the Borrower. 14. MARKET DISRUPTION 14.1 ABSENCE OF QUOTATIONS If LIBOR is to be determined by reference to the Reference Banks but a Reference Bank does not supply an offered rate by 11.30 a.m. on the relevant Rate Fixing Day, the applicable LIBOR shall, subject to Clause 14.2 (Market disruption), be determined on the basis of the quotations of the remaining Reference Banks. 14.2 MARKET DISRUPTION If: (a) LIBOR is to be determined by reference to the Reference Banks but no, or only one, Reference Bank supplies a rate by 11.30 a.m. on the Rate Fixing Day or the Agent otherwise determines that adequate and fair means do not exist for ascertaining LIBOR; or (b) the Agent receives notification from Banks whose participations in a Loan exceed 50 per cent. of that Loan that, in their opinion: (i) matching deposits may not be available to them in the London interbank market in the ordinary course of business to fund their participations in that Loan for the relevant Interest Period; or (ii) by reason of factors affecting the London interbank market generally, the cost to them of matching deposits in the London interbank market would be in excess of the relevant LIBOR, the Agent shall promptly notify the relevant Borrower and the Banks of the fact and that this Clause 14 is in operation. 32 14.3 ALTERNATIVE BASIS If a notification under Clause 14.2 (Market disruption) applies: (a) (i) in the case of a Loan which has not been made, unless the relevant Borrower notifies the Agent to the contrary before close of business on the day it received the notification under Clause 14.2 (Market disruption), the Loan shall still be made but it shall have an Interest Period of one month and the interest payable on that Loan shall be determined in accordance with paragraph (d) below; and (ii) in the case of a Loan which has been made or a Rollover Loan, the Loan shall continue or be made, as appropriate, but it shall have an Interest Period of one month and the interest payable on that Loan shall be determined in accordance with paragraph (b), (c) or (d) below; (b) within five Business Days of receipt of the notification for a Loan, referred to in sub-paragraph (a) (ii) above, the Company and the Agent shall enter into negotiations for a period of not more than 30 days with a view to agreeing an alternative basis for determining the rate of interest and/or funding applicable to that Loan; (c) any alternative basis agreed under paragraph (b) above shall be, with the prior consent of all the Banks, binding on all the Parties; (d) if no alternative basis is agreed or in the case of a Loan referred to in sub-paragraph (a) (i) above, each Bank shall (through the Agent) certify on or before 10.00 a.m. on the last day of the Interest Period (in respect of a Loan in Sterling) or 10.00 a.m. on the second Business Day before the last day of the Interest Period (in respect of a Loan in an Optional Currency or euros) to which the notification relates an alternative basis for maintaining its participation in that Loan; (e) any alternative basis under paragraph (b) or (d) above may include an alternative method of fixing the interest rate, alternative Interest Periods or alternative currencies but it must reflect the cost to each Bank of funding its participation in the Loan from whatever sources it may select in order to provide the relevant Borrower with funds on as economic a basis as is practicable (having regard to the sources then known to the Bank) plus the Margin plus any applicable MLA Cost; (f) each alternative basis so certified shall be binding on the Borrowers and each certifying Bank and treated as part of this Agreement; and (g) the Agent and the Company shall consult in good faith following any significant change in market conditions with a view to returning to the normal provisions of this Agreement. 33 15. INCREASED COSTS 15.1 INCREASED COSTS (a) Subject to Clause 15.2 (Exceptions), the Company shall within 14 days of demand by a Bank pay to that Bank the amount of any increased cost incurred by it or its Holding Company as a result of: (i) the introduction of, or any change in, or any change in the interpretation or application of any law or regulation; or (ii) compliance with any regulation made after the date of this Agreement, including any law or regulation relating to taxation, or reserve asset, special deposit, cash ratio, liquidity or capital adequacy requirements or any other form of banking or monetary control. (b) In this Agreement "INCREASED COST" means: (i) an additional cost incurred by a Bank or its Holding Company as a result of having entered into, or performing, maintaining or funding its obligations under, this Agreement; or (ii) that portion of an additional cost incurred by a Bank or its Holding Company in making, funding or maintaining all or any advances comprised in a class of advances formed by or including that Bank's participations in the Loans made or to be made under this Agreement as is attributable to that Bank making, funding or maintaining those participations; or (iii) a reduction in any amount payable to a Bank or its Holding Company or the effective return to a Bank or its Holding Company under this Agreement or (to the extent that it is attributable to this Agreement) on its capital; or (iv) the amount of any payment made by a Bank or its Holding Company, or the amount of any interest or other return foregone by a Bank or its Holding Company, calculated by reference to any amount received or receivable by that Bank or its Holding Company from any other Party under this Agreement. 15.2 EXCEPTIONS Clause 15.1 (Increased costs) does not apply to any increased cost: (a) compensated for by the payment of the MLA Cost; or (b) referred to in Clause 13 (Taxes); or (c) attributable to tax on the overall net income of a Bank or its Holding Company; or (d) which is referable to a default by a Bank or its Holding Company. 34 16. ILLEGALITY If it is or becomes unlawful in any jurisdiction for a Bank to give effect to any of its obligations as contemplated by this Agreement or to fund or maintain its participation in any Loan, then: (a) that Bank may notify the Company through the Agent accordingly; and (b) (i) each Borrower shall forthwith or (if later) on the latest date(s) permitted by the relevant law prepay the participations of that Bank in all the Loans made to it; and (ii) the Commitments of that Bank shall forthwith or (if later) on the latest date(s) permitted by the relevant law be cancelled. 17. GUARANTEE 17.1 GUARANTEE The Company irrevocably and unconditionally: (a) as principal obligor guarantees to each Finance Party prompt performance by each Borrower of all its obligations under the Finance Documents; (b) undertakes with each Finance Party that whenever a Borrower does not pay any amount when due under or in connection with any Finance Document, the Company shall forthwith on demand by the Agent pay that amount as if the Company instead of the relevant Borrower were expressed to be the principal Borrower; and (c) indemnifies as primary obligor each Finance Party on demand against any loss or liability suffered by it if any obligation guaranteed by the Company is or becomes unenforceable, invalid or illegal. 17.2 CONTINUING GUARANTEE This guarantee is a continuing guarantee and will extend to the ultimate balance of all sums payable by the Borrowers under the Finance Documents, regardless of any intermediate payment or discharge in whole or in part. 17.3 REINSTATEMENT (a) Where any discharge (whether in respect of the obligations of any Borrower or any security for those obligations or otherwise) is made in whole or in part or any arrangement is made on the faith of any payment, security or other disposition which is avoided or must be restored on insolvency, liquidation or otherwise without limitation, the liability of the Company under this Clause 17 shall continue as if the discharge or arrangement had not occurred. (b) Each Finance Party may concede or compromise any claim that any payment, security or other disposition is liable to avoidance or restoration. 35 17.4 WAIVER OF DEFENCES The obligations of the Company under this Clause 17 will not be affected by an act, omission, matter or thing which, but for this provision, would reduce, release or prejudice any of its obligations under this Clause 17 or prejudice or diminish those obligations in whole or in part, including (whether or not known to it or any Finance Party): (a) any time or waiver granted to, or composition with, any Borrower or other person; (b) the taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect, take up or enforce, any rights against, or security over assets of, any Borrower or other person or any non- presentation or non-observance of any formality or other requirement in respect of any instrument or any failure to realise the full value of any security; (c) any incapacity or lack of powers, authority or legal personality of or dissolution or change in the members or status of a Borrower or any other person; (d) any variation (however fundamental) or replacement of a Finance Document or any other document or security so that references to that Finance Document in this Clause 17 shall include each variation or replacement; (e) any unenforceability, illegality or invalidity of any obligation of any person under any Finance Document or any other document or security, to the intent that the Company's obligations under this Clause 17 shall remain in full force and its guarantee be construed accordingly, as if there were no unenforceability, illegality or invalidity; or (f) any postponement, discharge, reduction, non-provability or other similar circumstance affecting any obligation of any Borrower under a Finance Document resulting from any insolvency, liquidation or dissolution proceedings or from any law, regulation or order so that each such obligation shall for the purposes of the Company's obligations under this Clause 17 be construed as if there were no such circumstance. 17.5 IMMEDIATE RECOURSE The Company waives any right it may have of first requiring any Finance Party (or any trustee or agent on its behalf) to proceed against or enforce any other rights or security or claim payment from any person before claiming from the Company under this Clause 17. 17.6 APPROPRIATIONS Until all amounts which may be or become payable by the Borrowers under or in connection with the Finance Documents have been irrevocably paid in full, each Finance Party (or any trustee or agent on its behalf) may: (a) refrain from applying or enforcing any other moneys, security or rights held or received by that Finance Party (or any trustee or agent on its behalf) in respect of those amounts, or apply and enforce the same in such manner and order as it sees fit 36 (whether against those amounts or otherwise) and the Company shall not be entitled to the benefit of the same; and (b) hold in a suspense account any moneys received from the Company or on account of the Company's liability under this Clause 17, and interest will accrue on those moneys at the rate payable by the relevant Borrower on the corresponding amount outstanding under this Agreement. 17.7 NON-COMPETITION Until all amounts which may be or become payable by the Borrowers under or in connection with the Finance Documents have been irrevocably paid in full, the Company shall not, after a claim has been made or by virtue of any payment or performance by it under this Clause 17: (a) be subrogated to any rights, security or moneys held, received or receivable by any Finance Party (or any trustee or agent on its behalf) or be entitled to any right of contribution or indemnity in respect of any payment made or moneys received on account of the Company's liability under this Clause 17; (b) claim, rank, prove or vote as a creditor of any Borrower or its estate in competition with any Finance Party (or any trustee or agent on its behalf); or (c) receive, claim or have the benefit of any payment, distribution or security from or on account of any Borrower, or exercise any right of set-off as against any Borrower, unless the Agent otherwise directs. The Company shall hold in trust for and forthwith pay or transfer to the Agent for the Finance Parties any payment or distribution or benefit of security received by it contrary to this Clause 17.7 or as directed by the Agent. 17.8 ADDITIONAL SECURITY This guarantee is in addition to and is not in any way prejudiced by any other security now or subsequently held by any Finance Party. 18. REPRESENTATIONS AND WARRANTIES 18.1 REPRESENTATIONS AND WARRANTIES Each Borrower makes the representations and warranties set out in this Clause 18.2 (Status) to 18.9 (Litigation) inclusive to each Finance Party on the date of this Agreement. 18.2 STATUS It is a limited liability company, duly incorporated and validly existing under the laws of its jurisdiction of incorporation, possessing perpetual corporate existence and the capacity to sue and be sued in its own name, has the power to own its property and assets and carry on its business as it is now being conducted. 37 18.3 POWERS AND AUTHORITY It has the power to enter into and perform its obligations under the Finance Documents and the transactions contemplated by the Finance Documents and has taken all necessary action to authorise the entry into and performance of its obligations under the Finance Documents and the transactions contemplated by the Finance Documents. 18.4 LEGAL VALIDITY This Agreement constitutes, and each other Finance Document (when executed in accordance with the terms of this Agreement) will (subject to the qualifications as to matters of law only expressed in any legal opinion delivered to the Agent pursuant to this Agreement) constitute, its legal, valid and binding obligation. 18.5 NON-CONFLICT The entry into and performance of each Finance Document and the transactions contemplated by each Finance Document do not and will not conflict with:- (a) any applicable law or regulation or any applicable official or judicial order; (b) its constitutional documents; or (c) any document to which it is a party or which is binding upon it or any of its assets to an extent or in a manner which might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents. 18.6 NO DEFAULT (a) No Event of Default or (unless this representation is being repeated or deemed to be repeated on the date of a Request or a Drawdown Date in respect of a Rollover Loan) Potential Event of Default has occurred and is continuing; and (b) no other event has occurred which constitutes a default under or in respect of any agreement or document to which it is a party or by which it may be bound to an extent or in a manner which might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents. 18.7 CONSENTS All applicable authorisations required in connection with the entry into, performance, validity and enforceability of each Finance Document to which it is a party and the transactions contemplated by each Finance Document have been obtained or effected and are in full force and effect. 18.8 ACCOUNTS The audited consolidated accounts of the Group most recently delivered to the Agent (which, at the date of this Agreement, are the audited consolidated accounts for the financial year of the Group ended 31st December, 1997):- 38 (a) have been prepared in accordance with accounting principles and standards generally accepted in the U.K.; and (b) fairly represent the consolidated financial condition of the Group as at the date to which they were drawn up. 18.9 LITIGATION No litigation, arbitration or administrative proceedings against it are current or pending or, to its knowledge, threatened or pending (including, without limitation, any relating to any breach or alleged breach of any Environmental Law), which, if adversely determined against it, might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents, other than any proceedings where it has received independent legal advice that, on balance, those proceedings will not be adversely determined, and a copy of that advice has been supplied to the Agent. 18.10 REPRESENTATIONS AT SIGNING The Company further represents that as at the date of this Agreement:- (a) there has been no material adverse change in the financial condition of the Group from that shown in the audited consolidated accounts of the Group for the year ended 31st December, 1997, which might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents; and (b) there has been no breach by it of any Environmental Law which would have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents. 18.11 REPETITION The representations set out in Clauses 18.2 (Status) to 18.9 (Litigation) inclusive shall survive the execution of this Agreement and shall be deemed to be repeated on the date of each Request and on each Drawdown Date, with reference to the facts and circumstances then subsisting, as if made at each such time. 19. UNDERTAKINGS 19.1 DURATION The undertakings in this Clause 19 remain in force from the date of this Agreement for so long as any amount is or may be outstanding under this Agreement or any Commitment is in force. 19.2 INFORMATION The Company shall supply to the Agent in sufficient copies for all the Banks in 39 respect of the items referred to in paragraphs (a) and (b) below and in sufficient copies for all the Banks in respect of the items referred to in paragraphs (c), (d), (e) and (f) below if the Agent so requests: (a) as soon as practicable (and in any event within 180 days after the close of each of its financial years), the audited consolidated accounts of the Group and the audited accounts of each Borrower for that year; (b) as soon as practicable (and in any event within 120 days of the end of the first half of each of its financial years), the unaudited consolidated accounts of the Group for that half-year; (c) promptly at the request of the Agent, a list of the then current Principal Subsidiaries, together with computations in reasonable detail showing the bases for such list; (d) promptly, all notices or other documents despatched by the Company to the Company's shareholders (or any class thereof) or its creditors generally; (e) (i) subject to sub-paragraph (ii) below, promptly such further information in the possession or control of the Company regarding the financial condition and operations of the Company or any of its Subsidiaries which is material for evaluation of any Borrower's ability to perform its obligations under the Finance Documents, as the Agent may reasonably request; (ii) the Company shall be obliged to provide any information requested under sub-paragraph (i) above only: (A) if it does not breach any undertaking of confidentiality given by the Company or any of its Subsidiaries in relation to such information; and (B) on the basis that each Finance Party which receives such information will be deemed to have undertaken to the Company to keep it confidential unless it is or comes into the public domain and not to use it or exploit it for any purpose other than in connection with its participation under this Agreement; and (f) details of any litigation, arbitration or administrative proceedings against it which might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents, as soon as the same are instituted or, to the knowledge of the Company, threatened or pending. 19.3 NOTIFICATION OF DEFAULT (a) Each Borrower shall notify the Agent promptly upon any senior officer having actual knowledge of any Default and of the steps being taken to remedy the same. (b) If the Agent shall have reasonable cause to believe a Default may have occurred, the Company shall promptly at the request of the Agent from time to time, supply the Agent with a certificate signed on behalf of the Company by a duly authorised officer thereof certifying 40 that no Default has occurred and is continuing or, if the same has occurred, specifying the Default and the steps being taken to remedy the same. 19.4 COMPLIANCE CERTIFICATES (a) The Company shall, as soon as practicable and in any event within 180 days of the end of each of its financial years and within 120 days of the end of the first half of each of its financial years, supply the Agent with a certificate signed on behalf of the Company by an officer of the Company which sets out in reasonable detail computations which establish compliance with Clause 19.14 (Financial condition). (b) The Company shall, on request by the Agent (acting on the instructions of the Majority Banks), supply the Agent with a certificate from the Company's auditors setting out in reasonable detail computations which establish compliance with Clause 19.14 (Financial condition) as at the end of a financial year of the Group. 19.5 CONSENTS Each Borrower shall obtain and promptly renew from time to time, and will promptly upon the request of the Agent furnish certified copies to the Agent of, all authorisations as may be required under any applicable law or regulation to enable it to perform its obligations under any Finance Document or required for the validity or enforceability of any Finance Document and each Borrower shall comply with the terms of the same. 19.6 PARI PASSU RANKING Each Borrower undertakes that its obligations under the Finance Documents shall rank at least pari passu with all of its other present and future unsecured and unsubordinated obligations other than those obligations which are mandatorily preferred by law and not by reason of contract. 19.7 NEGATIVE PLEDGE No Borrower shall, and the Company shall not permit any Principal Subsidiary to, create or suffer to exist any Encumbrance upon any of its property, assets or revenues now owned or hereafter acquired, to secure any Financial Indebtedness, provided however, that the foregoing shall not apply to, and there shall be excluded from Financial Indebtedness secured by Encumbrances in any computation under this covenant, Financial Indebtedness secured by: (a) Encumbrances in existence on the date of this Agreement securing Financial Indebtedness not exceeding (Pounds)10,000,000 (or its equivalent) in aggregate; (b) Encumbrances arising by operation of law (or by an agreement to the same effect) or arising in the conduct of the ordinary course of business by any Borrower or Principal Subsidiary, including mechanics', materialmen's, carriers', workmen's, vendors' or other like Encumbrances securing amounts which are not more than 60 days overdue or which are being contested in good faith; (c) Encumbrances existing at the time of acquisition on any asset (including real property) acquired or leased by any Borrower or Principal Subsidiary after the date 41 of this Agreement or existing over property of any person at the time such person is merged with or consolidated with that Borrower or Principal Subsidiary or otherwise becomes a member of the Group and not created in contemplation of that acquisition, lease, merger or consolidation, provided that the principal amount of indebtedness secured by such Encumbrance shall not be increased after the date of that acquisition, lease, merger or consolidation; (d) Encumbrances securing any asset (including real property) acquired, leased or developed by any Borrower or Principal Subsidiary after the date of this Agreement, so long as the aggregate principal amount secured by such Encumbrances does not exceed five per cent. (5%) of Gross Shareholders' Funds (as determined by reference to the then most recent audited annual or unaudited interim consolidated accounts of the Group) and such Encumbrances are for the sole purpose of financing or refinancing or securing the cost of the acquisition or lease of that asset or any improvements thereon or the projected cost of that development, so long as the principal moneys thereby secured do not exceed the cost of that acquisition or improvement or the projected cost (including rolled up interest) of that development; (e) judgment Encumbrances not giving rise to an Event of Default; (f) rights of set off (which constitute Encumbrances) of a financial institution with respect to: (i) cash management schemes or similar arrangements within the normal course of banking arrangements; or (ii) deposits of any Borrower or Principal Subsidiary held by such financial institution as security for its exposure in respect of the clearing of funds in an amount not to exceed the aggregate amount owed to such financial institution by the Company or any of its Subsidiaries and where such rights of set off exist for no more than five Business Days; (g) Encumbrances upon specific items of inventory or other goods and proceeds of any Borrower or Principal Subsidiary securing that Borrower's or Principal Subsidiary's obligations in respect of letters of credit issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods; (h) any extension, renewal or replacement (or successive extensions, renewals, or replacements), as a whole or in part, of any Encumbrance referred to in paragraph (a), or (f) for amounts not exceeding the principal amount of the borrowed money so extended, renewed or replaced, provided that such extension, renewal or replacement Encumbrance is limited to all or a part of the same assets that secured the Encumbrance extended, renewed or replaced (plus improvements on such assets); and (i) Encumbrances of any Principal Subsidiary in favour of the Company. Notwithstanding the foregoing, each Borrower and each Principal Subsidiary may create or suffer to exist an Encumbrance which would otherwise be subject to the foregoing 42 restrictions or result in any limit in those restrictions being exceeded, provided that, after giving effect thereto, the aggregate amount of secured Financial Indebtedness (excluding therefrom the amount of indebtedness secured by Encumbrances set forth in paragraphs (a) to (i) (both inclusive) above) does not exceed five per cent. (5%) of Gross Shareholders' Funds (as determined by reference to the then most recent audited annual or unaudited interim consolidated accounts of the Group). 19.8 GUARANTEES (a) The Company shall procure that no guarantee or indemnity or other similar binding assurance against financial loss is granted by any of its Subsidiaries in respect of any Financial Indebtedness of the Company, unless a similar guarantee, indemnity or other binding assurance has been granted in favour of the Banks in respect of the Company's obligations under the Finance Documents. (b) Paragraph (a) above shall not apply to any guarantee, indemnity or other similar binding assurance against financial loss granted by any Subsidiary of the Company in connection with a cash management, pooling or set-off arrangement operated in the ordinary course of business by a member of the Group at any of its banks. 19.9 DISPOSALS No Borrower shall, and the Company shall procure that none of the Principal Subsidiaries shall: (a) either in a single transaction or in a series of transactions, whether related or not and whether voluntarily or involuntarily, sell, transfer, lease or otherwise dispose of all or a substantial part of its respective assets, except that the following disposals shall not be taken into account:- (i) disposals (including the discounting of bills or notes) made in the ordinary course of business of the disposing entity; (ii) disposals from a member of the Group to another member of the Group unless the disposal is to enable the member of the Group (not being a Borrower or a Principal Subsidiary) to make a disposal which would not be permitted to be made by a Borrower or Principal Subsidiary under this Clause; (iii) disposals of cash raised or borrowed for the purposes for which it was raised or borrowed; (iv) disposals of investments listed or dealt in on any securities exchange or over-the-counter market (not being investments in any member of the Group); (v) disposals of property in exchange for (or sale of assets for cash and the application within 12 months of such amounts in the acquisition of) other property comparable or superior as to type, value and quality; (vi) disposals on arm's length terms (including as to consideration); 43 (vii) disposals of obsolete assets for cash; (viii) disposals, in addition to those permitted under sub-paragraphs (i) to (vii) (both inclusive) above, during any financial year of the Group where the aggregate book value of the property or assets disposed of in that financial year does not exceed five per cent. (5%) of Gross Shareholders' Funds (as determined by reference to the then most recent audited annual or unaudited interim consolidated accounts of the Group); or (b) sell or otherwise dispose of any of its assets on terms whereby such asset is or may be leased to or re-acquired or acquired by it or any of its Subsidiaries, except that the following disposals shall not be taken into account:- (i) any sale and lease backs of real property on normal arm's length commercial terms and any arrangement in existence at the date hereof; or (ii) any sale and lease-back or disposals of any property or assets which are entered into to finance all or part of the price of its acquisition, development, modification or improvement so long as the aggregate book value of the property and assets so disposed during any financial year of the Group (not including those falling within sub-paragraph (i) above) does not exceed five per cent. (5%) of Gross Shareholders' Funds (as determined by reference to the then most recent audited annual or unaudited interim consolidated accounts of the Group). Notwithstanding the above, any Borrower or any Principal Subsidiary may dispose of a substantial part of its assets if:- (A) the Company delivers to the Agent, prior to the disposal being effected, a certificate, signed on behalf of the Company by a director of the Company, certifying that, immediately after the disposal, the Company would be in compliance with Clause 19.14 (Financial condition), together with calculations in reasonable detail evidencing the compliance; and (B) in the reasonable opinion of the Majority Banks, the disposal would not have a material adverse effect on the ability of the Company to perform its payment obligations under the Finance Documents. 19.10 INDEBTEDNESS OF OPERATING SUBSIDIARIES The Company shall not permit any Operating Subsidiary to incur or permit to subsist any Financial Indebtedness to any person provided however that the foregoing shall not apply to the following (so that they shall be excluded from Financial Indebtedness in any computation under this covenant): (a) Financial Indebtedness incurred pursuant to arrangements in existence at the date of this Agreement and any renewal or extension of those arrangements; (b) liabilities under the Finance Documents; 44 (c) Financial Indebtedness incurred by any person existing either at the time of the acquisition of such person by a member of the Group or at the time such person is merged with or consolidated with a member of the Group or otherwise becomes a member of the Group provided that the principal amount of such Financial Indebtedness shall not be increased after the date of that acquisition, merger or consolidation; (d) any Financial Indebtedness constituted by debits on accounts maintained with banks as a result of pooling, netting and set-off arrangements existing with those banks which have extended overdraft, cash settlement and cash management and other working capital and investment management facilities; (e) any Financial Indebtedness consented to by the Majority Banks; and (f) any Financial Indebtedness (other than Financial Indebtedness referred to in paragraphs (a) to (e) above) the principal aggregate amount of which does not exceed 10 per cent. (10%) of Gross Shareholders' Funds (as determined by reference to the then most recent audited annual or unaudited interim consolidated accounts of the Group). For the purposes of this Clause, an "OPERATING SUBSIDIARY" is a trading Subsidiary of the Company with its own turnover. 19.11 INSURANCE Each Borrower will, and the Company shall procure that each of the Principal Subsidiaries shall, carry and maintain in full force and effect at all times with financially sound and reputable insurers, insurance with respect to its real property and business against such liabilities, casualties, risks and contingencies and of such types (including self- insurance with appropriate reserves) and in such amounts as is consistent with prudent business practice as determined by the Company's directors. 19.12 ENVIRONMENTAL LAWS Each Borrower will, and the Company shall procure that each of the Principal Subsidiaries shall, comply with and carry out its business in accordance with all Environmental Laws necessary for the conduct of its business where any failure to comply or carry out its business in accordance with such Environmental Laws would have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents. 19.13 CHANGE OF BUSINESS The Company shall ensure that the majority of the business carried on by the Group at any time (determined by reference to the annual turnover of the Group) comprises businesses relating to engineering, defence, general manufacturing industry, related industrial services or any business ancillary or related to any of the foregoing types. 19.14 FINANCIAL CONDITION The Company shall procure that: 45 (a) as at the end of each of its financial years and as at the end of the first half of each of its financial years, Total Consolidated Net Borrowings shall not exceed 1.25 times Gross Shareholders' Funds; and (b) as at the end of each of its financial years and as at the end of the first half of each of its financial years, the ratio of Profit Before Interest for the preceding 12 month period to Net Borrowing Costs for the preceding 12 month period shall not be less than 3 to 1. 20. DEFAULT 20.1 EVENTS OF DEFAULT Each of the events set out below is an Event of Default: (a) NON-PAYMENT: a Borrower does not pay on the due date any amount payable by it under the Finance Documents at the place and in the currency at or in which it is expressed to be payable and the failure to pay continues for five Business Days; or (b) BREACH OF CLAUSE 19.14 (FINANCIAL CONDITION): the Company fails to comply with either of its obligations under Clause 19.14 (Financial condition); or (c) BREACH OF OTHER OBLIGATIONS: a Borrower fails to comply with any provision of any Finance Document (other than any provision referred to in paragraphs (a) and (b) above) and such failure, if, in the opinion of the Majority Banks, it is capable of remedy, is not remedied within 30 days of the giving of written notice by the Agent to the Company requiring such failure to be remedied; or (d) MISREPRESENTATION: any representation, warranty or statement made or repeated in any Finance Document, Request or any Compliance Certificate is incorrect in any respect which is, in the opinion of the Majority Banks, material in the context of this Agreement or either of the Facilities to be provided under this Agreement; or (e) Cross-acceleration: (i) any Financial Indebtedness of any Borrower and/or any Principal Subsidiary in an aggregate amount in excess of (Pounds)10,000,000 at any time becomes prematurely due and payable as a result of an event of default (howsoever described) under any contract or document relating to any such Financial Indebtedness; or (ii) any Financial Indebtedness of any Borrower and/or any Principal Subsidiary in an aggregate amount in excess of (Pounds)10,000,000 is not paid when due (after the expiry of any applicable grace period specified in the terms of the relevant contract(s) or documents relating to such Financial Indebtedness); or (f) Insolvency: (i) any Borrower or Principal Subsidiary is deemed unable to pay its debts within the meaning of section 123(1)(b), (c), (d) (e) or (2) of the Insolvency 46 Act 1986 (as that section may be amended by order under Section 416 of the Insolvency Act 1986 or otherwise); or (ii) any Borrower or Principal Subsidiary becomes unable to pay its debts as they fall due; or (iii) any Borrower or Principal Subsidiary otherwise becomes insolvent; or (iv) any Borrower or Principal Subsidiary suspends making payments (whether of principal or interest) with respect to all or any class of its debts, or announces an intention to do so; or (g) Administration: (i) an administration order in relation to any Borrower or Principal Subsidiary is made; or (ii) any Borrower or Principal Subsidiary passes a resolution to present an application for an administration order; or (h) COMPOSITIONS ETC.: any steps are taken by the Company with a view to proposing any kind of composition, scheme of arrangement, compromise or arrangement involving any Borrower or Principal Subsidiary and any of their respective creditors generally (or any class of them); or (i) Appointment of receivers and managers: (i) any administrative or other receiver or any manager is appointed of any Borrower or Principal Subsidiary or of all or any substantial part of their respective assets; or (ii) the directors of any Borrower or Principal Subsidiary request any person to appoint such a receiver or manager; or (iii) any other steps are taken to enforce any Encumbrance over any substantial part ("substantial" being regarded as 15% for this purpose) of the assets of any Borrower or Principal Subsidiary unless such enforcement is being contested in good faith or does not have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents or is otherwise discharged or stayed within 28 days; or (j) LEGAL PROCESS: any attachment, sequestration, distress or execution affects any substantial part ("substantial" being regarded as 15% for this purpose) of the assets of any Borrower or Principal Subsidiary and is not discharged or stayed within 28 days; or (k) Winding up: (i) any Borrower or Principal Subsidiary passes a resolution for (or to petition for) its winding-up; or 47 (ii) any Borrower or Principal Subsidiary presents any petition for the winding up of any Borrower or Principal Subsidiary; or (iii) an order of a United Kingdom court or regulatory body for the winding up of any Borrower or Principal Subsidiary is made; (iv) any person (other than a Borrower or Principal Subsidiary) presents a petition for the winding up of any Borrower or Principal Subsidiary where the proceedings are not set aside or withdrawn (unless they are vexatious or frivolous) within 28 days of their being instituted, save in connection with a solvent winding-up of a Borrower (other than the Company) or a Principal Subsidiary as part of a reorganisation made with the consent of the Majority Banks such consent not to be unreasonably withheld or delayed; or (l) ANALOGOUS PROCEEDINGS: there occurs, in relation to any Borrower or Principal Subsidiary in any country or territory in which any of them carries on business or to the jurisdiction of whose courts any part of their assets is subject, any event which, in the reasonable opinion of the Majority Banks, corresponds in that country or territory with any of those mentioned in paragraphs (f) to (k) (inclusive) above or any Borrower or Principal Subsidiary otherwise becomes subject, in any such country or territory, to any law relating to insolvency, bankruptcy or liquidation; or (m) UNLAWFULNESS: at any time it is unlawful for any Borrower to perform any of its payment obligations under the Finance Documents or such obligations cease to be legal, valid, binding and enforceable; or (n) MATERIAL ADVERSE CHANGE: there shall occur any material adverse change in the financial condition of the Group as of the date of this Agreement which might reasonably be expected to prejudice the ability of the Company to comply with its payment obligations under the Finance Documents; or (o) GUARANTEE: the obligations of the Company under Clause 17.1 (Guarantee) are not effective, or are alleged by the Company not to be effective, for any reason; or (p) CESSATION OF BUSINESS: any Borrower or Principal Subsidiary ceases or threatens to cease to carry on its business as a going concern and, in the case of a Principal Subsidiary, the cessation might, in the reasonable opinion of the Majority Banks, be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents; or (q) FAILURE TO COMPLY WITH FINAL JUDGMENT: any Borrower fails to comply with or pay any sum due from it under any final judgment or any final order made or given by any court of competent jurisdiction where such failure to comply or pay such sum might reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Finance Documents; or (r) REPUDIATION OF AGREEMENT: the Company repudiates this Agreement or does or causes to be done any act or thing clearly evidencing an intention to repudiate this Agreement. 48 20.2 ACCELERATION If any such event as is mentioned in Clause 20.1 (Events of Default) occurs and at any time thereafter if any such event shall then be continuing, the Agent may, and shall if so directed by the Majority Banks, by written notice to the Company, such notice to be copied to the other Borrowers: (a) declare that the Facilities and the Commitments shall be cancelled forthwith, whereupon the same shall be so cancelled forthwith; and/or (b) declare all or part of the Loans immediately due and payable, whereupon the same shall become immediately due and payable together with all interest accrued thereon and all other amounts payable under the Finance Documents to the Finance Parties. 20.3 ADVANCES DUE ON DEMAND If, pursuant to Clause 20.2 (Acceleration), the Agent declares all or any part of the Loans to be due and payable on demand of the Agent, then, and at any time thereafter, the Agent may (and, if so instructed by Majority Banks, shall) by notice to the Company, such notice to be copied to the other Borrowers: (a) require repayment of all or such part of the Loans on such date as it may specify in such notice (whereupon the same shall become due and payable on the date specified together with accrued interest thereon and any other sums then owed by the Borrowers under this Agreement) or withdraw its declaration with effect from such date as it may specify; and/or (b) select as the duration of any Interest Period which begins whilst such declaration remains in effect a period of six months or less. 21. THE AGENT AND THE ARRANGERS 21.1 APPOINTMENT AND DUTIES OF THE AGENT (a) Each Finance Party (other than the Agent) irrevocably appoints the Agent to act as its agent under and in connection with the Finance Documents. (b) Each Party appointing the Agent irrevocably authorizes the Agent on its behalf to: (i) perform the duties and to exercise the rights, powers and discretions that are specifically delegated to it under or in connection with the Finance Documents, together with any other incidental rights, powers and discretions; and (ii) execute each Finance Document expressed to be executed by the Agent on that Party's behalf. (c) The Agent has only those duties which are expressly specified in the Finance Documents. Those duties are solely of a mechanical and administrative nature. 49 21.2 ROLE OF THE ARRANGERS Except as specifically provided in the Finance Documents, the Arrangers have no obligations of any kind to any other Party under or in connection with any Finance Document. 21.3 RELATIONSHIP The relationship between the Agent and the other Finance Parties is that of agent and principal only. Except as contemplated by the Finance Documents, nothing in this Agreement constitutes the Agent as trustee or fiduciary for any other Party or any other person and the Agent need not hold in trust any moneys paid to it for a Party or be liable to account for interest on those moneys. 21.4 MAJORITY BANKS' INSTRUCTIONS (a) The Agent will be fully protected if it acts in accordance with the instructions of the Majority Banks in connection with the exercise of any right, power or discretion or any matter not expressly provided for in the Finance Documents. Any such instructions given by the Majority Banks will be binding on all the Banks. In the absence of such instructions, the Agent may act as it considers to be in the best interests of all the Banks. (b) The Agent is not authorized to act on behalf of a Bank (without first obtaining that Bank's consent) in any legal or arbitration proceedings relating to any Finance Document. 21.5 DELEGATION The Agent may act under the Finance Documents through its personnel and agents. 21.6 RESPONSIBILITY FOR DOCUMENTATION Neither the Agent nor any Arranger is responsible to any other Party for: (a) the execution, genuineness, validity, enforceability or sufficiency of any Finance Document or any other document; (b) the collectability of amounts payable under any Finance Document; or (c) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document (including, without limitation, any Information Memorandum). 21.7 DEFAULT (a) The Agent is not obliged to monitor or enquire as to whether or not a Default has occurred. The Agent will not be deemed to have knowledge of the occurrence of a Default. However, if the Agent receives notice from a Party referring to this Agreement, describing the Default and stating that the event is a Default, it shall promptly notify the Banks. (b) The Agent may require the receipt of security satisfactory to it, whether by way of payment in advance or otherwise, against any liability or loss which it will or may incur in taking any 50 proceedings or action arising out of or in connection with any Finance Document before it commences those proceedings or takes that action. 21.8 EXONERATION (a) Without limiting paragraph (b) below, the Agent will not be liable to any other Finance Party for any action taken or not taken by it under or in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct. (b) No Party may take any proceedings against any officer, employee or agent of the Agent in respect of any claim it might have against the Agent or in respect of any act or omission of any kind (including gross negligence or wilful misconduct) by that officer, employee or agent in relation to any Finance Document. 21.9 RELIANCE The Agent may: (a) rely on any notice or document believed by it to be genuine and correct and to have been signed by, or with the authority of, the proper person; (b) rely on any statement made by a director or employee of any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify; and (c) engage, pay for and rely on legal or other professional advisers selected by it (including those in the Agent's employment and those representing a Party other than the Agent). 21.10 CREDIT APPROVAL AND APPRAISAL Without affecting the responsibility of any Borrower for information supplied by it or on its behalf in connection with any Finance Document, each Bank confirms that it: (a) has made its own independent investigation and assessment of the financial condition and affairs of each Borrower and its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Agent or the Arranger in connection with any Finance Document; and (b) will continue to make its own independent appraisal of the creditworthiness of each Borrower and its related entities while any amount is or may be outstanding under the Finance Documents or any Commitment is in force. 21.11 INFORMATION (a) The Agent shall promptly forward to the person concerned the original or a copy of any document which is delivered to the Agent by a Party for that person. 51 (b) The Agent shall promptly supply a Bank with a copy of each document received by the Agent under Clause 4 (Conditions precedent) or 28.4 (Additional Borrowers) upon the request and at the expense of that Bank. (c) Except where this Agreement specifically provides otherwise, the Agent is not obliged to review or check the accuracy or completeness of any document it forwards to another Party. (d) Except as provided above, the Agent has no duty: (i) either initially or on a continuing basis to provide any Bank with any credit or other information concerning the financial condition or affairs of any Borrower or any related entity of any Borrower whether coming into its possession before, on or after the date of this Agreement; or (ii) unless specifically requested to do so by a Bank in accordance with a Finance Document, to request any certificates or other documents from any Borrower. 21.12 THE AGENT AND THE ARRANGERS INDIVIDUALLY (a) If it is also a Bank, the Agent and each Arranger has the same rights and powers under this Agreement as any other Bank and may exercise those rights and powers as though it were not the Agent or an Arranger. (b) The Agent and each Arranger may: (i) carry on any business with a Borrower or its related entities; (ii) act as agent or trustee for, or in relation to any financing involving, a Borrower or its related entities; and (iii) retain any profits or remuneration in connection with its activities under this Agreement or in relation to any of the foregoing. (c) In acting as the Agent, the agency division of the Agent will be treated as a separate entity from its other divisions and departments. Any information acquired by the Agent which, in its opinion, is acquired by it otherwise than in its capacity as the Agent may be treated as confidential by the Agent and will not be deemed to be information possessed by the Agent in its capacity as such. (d) Each Borrower irrevocably authorizes the Agent to disclose to the other Finance Parties any information which, in the opinion of the Agent, is received by it in its capacity as the Agent. (e) The Agent may deduct from any amount received by it for the Banks pro rata any unpaid fees, costs and expenses of the Agent incurred by it in connection with the Finance Documents. 21.13 INDEMNITIES (a) Without limiting the liability of any Borrower under the Finance Documents, each Bank shall forthwith on demand indemnify the Agent for that Bank's proportion of any liability or loss 52 incurred by the Agent in any way relating to or arising out of its acting as the Agent, except to the extent that the liability or loss arises directly from the Agent's gross negligence or wilful misconduct. (b) A Bank's proportion of the liability or loss set out in paragraph (a) above will be the proportion which its participation in the Loans (if any) bears to the Original Sterling Amount of all the Loans on the date of the demand. However, if there are no Loans outstanding on the date of demand, then the proportion will be the proportion which its Commitments bears to the Total Commitments at the date of demand or, if the Total Commitments have then been cancelled, bore to the Total Commitments immediately before being cancelled. 21.14 COMPLIANCE (a) The Agent may refrain from doing anything which might, in its opinion, constitute a breach of any law or regulation or be otherwise actionable at the suit of any person, and may do anything which, in its opinion, is necessary or desirable to comply with any law or regulation of any jurisdiction. (b) Without limiting paragraph (a) above, the Agent need not disclose any information relating to any Borrower or any of its related entities if the disclosure might, in the opinion of the Agent, constitute a breach of any law or regulation or any duty of secrecy or confidentiality or be otherwise actionable at the suit of any person. 21.15 RESIGNATION OF THE AGENT (a) Notwithstanding its irrevocable appointment, the Agent may resign by giving notice to the Banks and the Company, in which case the Agent may forthwith appoint one of its Affiliates as successor Agent or, failing that, the Majority Banks may (with the prior consent of the Company) appoint a successor Agent. (b) If the appointment of a successor Agent is to be made by the Majority Banks but they have not, within 30 days after notice of resignation, appointed a successor Agent which accepts the appointment, the Agent may (with the prior consent of the Company) appoint a successor Agent. (c) The resignation of the Agent and the appointment of any successor Agent will both become effective only upon the successor Agent notifying all the Parties that it accepts its appointment. On giving the notification, the successor Agent will succeed to the position of the Agent and the term "AGENT" will mean the successor Agent. (d) The retiring Agent shall, at its own cost, make available to the successor Agent such documents and records and provide such assistance as the successor Agent may reasonably request for the purposes of performing its functions as the Agent under this Agreement. (e) Upon its resignation becoming effective, this Clause 21 shall continue to benefit the retiring Agent in respect of any action taken or not taken by it under or in connection with the Finance Documents while it was the Agent, and, subject to paragraph (d) above, it shall have no further obligations under any Finance Document. 53 (f) The Majority Banks may, by notice to the Agent, require it to resign in accordance with paragraph (a) above. In this event, the Agent shall resign in accordance with paragraph (a) above but it shall not be entitled to appoint one of its Affiliates as successor Agent. 21.16 BANKS (a) The Agent may treat each Bank as a Bank, entitled to payments under this Agreement and as acting through its Facility Office(s) until it has received not less than five Business Days' prior notice from that Bank to the contrary. (b) The Agent may at any time, and shall if requested to do so by the Majority Banks, convene a meeting of the Banks. 22. FEES 22.1 ARRANGEMENT FEE The Company shall pay to the Arrangers an arrangement fee (comprising underwriting and syndication fees) in the amounts and on the dates agreed in the Fee Letter between the Arrangers and the Company. 22.2 AGENT'S FEE The Company shall pay to the Agent for its own account an agency fee in the amount and on the dates agreed in the Fee Letter between the Agent and the Company. 22.3 COMMITMENT FEE (a) The Company shall during the Commitment Period pay to the Agent for each Bank a commitment fee in Sterling computed at the rate of: (i) 0.125 per cent. per annum on the undrawn, uncancelled amount of that Bank's Facility A Commitment; and (ii) 0.08 per cent. per annum on the undrawn, uncancelled amount of that Bank's Facility B Commitment. For this purpose Loans are taken at their Original Sterling Amount. (b) Accrued commitment fee is payable quarterly in arrear, with the first payment being payable three months after the date of this Agreement. Accrued commitment fee shall also be payable to the Agent for the relevant Bank on the cancelled amount of its Commitment at the time the cancellation comes into effect. 22.4 UTILISATION FEE (a) The Company shall pay to the Agent for each Bank a utilisation fee in Sterling computed at the rate of 0.025 per cent. per annum on the aggregate Original Sterling Amount of Loans outstanding in respect of any period during which the Original Sterling Amount of Loans outstanding during that period exceeds 50% of the Total Commitments at the date of this Agreement. For this purpose Loans are taken at their Original Sterling Amount. 54 (b) Accrued utilisation fee is payable quarterly in arrear. 22.5 VAT Any fee referred to in this Clause 22 is exclusive of any value added tax or any other tax which might be chargeable in connection with that fee. If any value added tax or other tax is so chargeable, it shall be paid by the Company at the same time as it pays the relevant fee. 23. EXPENSES 23.1 INITIAL AND SPECIAL COSTS The Company shall within 14 days of demand pay the Arrangers the amount of all reasonable costs and expenses (including reasonable legal fees up to the limit agreed in the Fee Letter between the Arrangers and the Company and any applicable value added tax) incurred by them in connection with the negotiation, preparation, printing and execution of this Agreement and the syndication of the Facilities. 23.2 ENFORCEMENT COSTS The Company shall within 14 days of demand pay to each Finance Party the amount of all reasonable costs and expenses (including legal fees and any applicable value added tax) incurred by it in connection with the enforcement of, or the preservation of any rights under, any Finance Document. 24. STAMP DUTIES The Company shall pay and forthwith on demand indemnify each Finance Party against any liability it incurs in respect of any stamp, registration and similar tax which is or becomes payable: (a) in the jurisdiction of incorporation of any Borrower in connection with the entry into or performance of any Finance Document; or (b) anywhere in connection with the enforcement of any Finance Document, including any liability which results from any failure to pay or any delay in paying such tax. 25. INDEMNITIES 25.1 CURRENCY INDEMNITY (a) If a Finance Party receives an amount in respect of a Borrower's liability under the Finance Documents or if that liability is converted into a claim, proof, judgment or order in a currency other than the currency (the "CONTRACTUAL CURRENCY") in which the amount is expressed to be payable under the relevant Finance Document: (i) that Borrower shall indemnify that Finance Party as an independent obligation against any loss or liability arising out of or as a result of the conversion; 55 (ii) if the amount received by that Finance Party, when converted into the contractual currency at a market rate in the usual course of its business is less than the amount owed in the contractual currency, the Borrower concerned shall forthwith on demand pay to that Finance Party an amount in the contractual currency equal to the deficit; and (iii) the Borrower shall forthwith on demand pay to the Finance Party concerned any exchange costs and taxes payable in connection with any such conversion. (b) Each Borrower waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency other than that in which it is expressed to be payable. 25.2 OTHER INDEMNITIES (a) The Company shall indemnify each Finance Party against any loss or liability which that Finance Party incurs as a consequence of: (i) the occurrence of any Event of Default; (ii) the operation of Clause 20.2 (Acceleration); or (iii) a Loan (or part of a Loan) not being prepaid in accordance with a notice of prepayment or (other than by reason of negligence or default by that Finance Party) a Loan not being made after the Borrower has delivered a Request. The Company's liability in each case includes any loss (other than loss of margin) or expense on account of funds borrowed, contracted for or utilised to fund any amount payable under any Finance Document, any amount repaid or prepaid or any Loan. (b) If a Bank receives or recovers any payment of principal of a Loan or of an overdue amount other than on the last day of the Interest Period relative to that Loan or amount so received or recovered, the Bank shall calculate the difference between: (i) the additional interest which would have been payable on the principal so received or recovered had it been received or recovered on the last day of the relevant Interest Period; and (ii) the amount of interest which, in the reasonable opinion of the Bank, would have been payable to the Bank on the last day of that Interest Period in respect of the principal so received or recovered if the principal so received or recovered had been placed on deposit by the Bank earning interest at the rate quoted by the Bank to the relevant Borrower to be that at which money can be deposited by that Bank with a prime bank for a period starting on the Business Day following the date of receipt or recovery and ending on the last day of that Interest Period. If (i) is greater than (ii) then the relevant Borrower shall, within five Business Days of a demand from the relevant Bank, pay to that Bank an amount equal to the difference. 56 26. EVIDENCE AND CALCULATIONS 26.1 ACCOUNTS Accounts maintained by a Finance Party in connection with this Agreement are prima facie evidence of the matters to which they relate. 26.2 CERTIFICATES AND DETERMINATIONS Any certification or determination by a Finance Party of a rate or amount under the Finance Documents must be accompanied by a calculation in reasonable detail and any applicable invoices and is prima facie evidence of the matters to which it relates. 26.3 CALCULATIONS Interest (including any applicable MLA Cost) and the fees payable under Clause 22.3 (Commitment fee) and 22.4 (Utilisation fee) accrue from day to day and are calculated on the basis of the actual number of days elapsed and a year of 365 days, or, in the case of interest payable on an amount denominated in an Optional Currency or euros only (unless market practice otherwise dictates), 360 days. 27. AMENDMENTS AND WAIVERS 27.1 PROCEDURE (a) Subject to Clause 27.2 (Exceptions), any term of the Finance Documents may be amended or waived with the agreement of the Company, and the Majority Banks. The Agent may effect, on behalf of any Finance Party, an amendment or waiver permitted under this Clause. (b) The Agent shall promptly notify the other Parties of any amendment or waiver effected under paragraph (a) above, and any such amendment or waiver shall be binding on all the Parties. 27.2 EXCEPTIONS (a) An amendment or waiver which relates to: (i) the definition of "MAJORITY BANKS" in Clause 1.1 (Definitions); (ii) an extension of the date (including any Final Maturity Date) for, or a decrease in an amount or a change in the currency of, any payment to that Bank under the Finance Documents (including the Margin and any fee payable under Clause 22.3 (Commitment fee) or 22.4 (Utilisation fee)); (iii) an increase in a Bank's Commitment; (iv) a term of a Finance Document which expressly requires the consent of all the Banks; or (v) Clause 2.3 (Nature of a Finance Party's rights and obligations), Clause 28.2 (Transfers by Banks), Clause 31 (Pro rata sharing) or this Clause 26, 57 may not be effected without the agreement of all the Banks. (b) An amendment or waiver which relates to the rights and/or obligations of the Agent may not be effected without the agreement of the Agent. 27.3 WAIVERS AND REMEDIES CUMULATIVE The rights of each Finance Party under the Finance Documents: (a) may be exercised as often as necessary; (b) are cumulative and not exclusive of its rights under the general law; and (c) may be waived only in writing and specifically. Delay in exercising or non-exercise of any such right is not a waiver of that right. 28. CHANGES TO THE PARTIES 28.1 TRANSFERS BY BORROWERS No Borrower may assign, transfer, novate or dispose of any of, or any interest in, its rights and/or obligations under the Finance Documents. 28.2 TRANSFERS BY BANKS (a) A Bank (the "EXISTING BANK") may, subject to paragraph (b) below, at any time assign, transfer or novate any of its Commitments and/or any of its rights and/or obligations under this Agreement to another bank or financial institution (the "NEW BANK"). (b) (i) A transfer of part of a Commitment must be in a minimum amount of at least (Pounds)5,000,000; and (ii) the prior consent of the Company is required for any such assignment, transfer or novation. However, the prior consent of the Company must not be unreasonably withheld or delayed. The consent of the Company will be deemed to be given if the Company has not responded to any request for consent by the expiry of 15 Business Days from the date of the delivery of such request to the Company. Notwithstanding the above, if the Existing Bank gives the Company prior notice, any transfer from an Existing Bank to :- (A) a Bank which is a Qualifying Bank; or (B) an Affiliate (which is a Qualifying Bank) of a Bank, shall not require the prior consent of the Company. (c) A transfer of obligations will be effective only if either: 58 (i) the obligations are novated in accordance with Clause 28.3 (Procedure for novations); or (ii) the New Bank confirms to the Agent and the Company that it undertakes to be bound by the terms of this Agreement as a Bank in form and substance satisfactory to the Agent. On the transfer becoming effective in this manner the Existing Bank shall be relieved of its obligations under this Agreement to the extent that they are transferred to the New Bank. (d) If a Bank gives the Company prior notice, a Bank may sub-contract an obligation to a person if that Bank remains liable under this Agreement for that obligation. (e) On each occasion an Existing Bank assigns, transfers or novates any of its Commitments and/or any of its rights and/or obligations under this Agreement (otherwise than pursuant to a Syndication Agreement), the New Bank shall, on the date the assignment, transfer and/or novation takes effect, pay to the Agent for its own account a fee of (Pounds)750. (f) An Existing Bank is not responsible to a New Bank for: (i) the execution, genuineness, validity, enforceability or sufficiency of any Finance Document or any other document; (ii) the collectability of amounts payable under any Finance Document; or (iii) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document. (g) Each New Bank confirms to the Existing Bank and the other Finance Parties that it: (i) has made its own independent investigation and assessment of the financial condition and affairs of each Borrower and its related entities in connection with its participation in this Agreement and has not relied exclusively on any information provided to it by the Existing Bank in connection with any Finance Document; and (ii) will continue to make its own independent appraisal of the creditworthiness of each Borrower and its related entities while any amount is or may be outstanding under this Agreement or any Commitment is in force. (h) Nothing in any Finance Document obliges an Existing Bank to: (i) accept a re-transfer from a New Bank of any of the rights and/or obligations assigned, transferred or novated under this Clause; or (ii) support any losses incurred by the New Bank by reason of the non- performance by any Borrower of its obligations under this Agreement or otherwise. (i) Any reference in this Agreement to a Bank includes a New Bank but excludes a Bank if no amount is or may be owed to or by it under this Agreement and its Commitment has been cancelled or reduced to nil. 59 28.3 PROCEDURE FOR NOVATIONS (a) A novation is effected if: (i) the Existing Bank and the New Bank deliver to the Agent a duly completed certificate, substantially in the form of Part I of Schedule 5 (a "NOVATION CERTIFICATE"); and (ii) the Agent executes it. (b) Each Party (other than the Existing Bank and the New Bank) irrevocably authorises the Agent to execute any duly completed Novation Certificate on its behalf. (c) To the extent that they are expressed to be the subject of the novation in the Novation Certificate: (i) the Existing Bank and the other Parties (the "EXISTING PARTIES") will be released from their obligations to each other (the "DISCHARGED OBLIGATIONS"); (ii) the New Bank and the existing Parties will assume obligations towards each other which differ from the discharged obligations only insofar as they are owed to or assumed by the New Bank instead of the Existing Bank; (iii) the rights of the Existing Bank against the existing Parties and vice versa (the "DISCHARGED RIGHTS") will be cancelled; and (iv) the New Bank and the existing Parties will acquire rights against each other which differ from the discharged rights only insofar as they are exercisable by or against the New Bank instead of the Existing Bank, all on the date of execution of the Novation Certificate by the Agent or, if later, the date specified in the Novation Certificate. 28.4 ADDITIONAL BORROWERS (a) If the Company wishes one of its Subsidiaries to become an Additional Borrower, then it may (after prior consultation with the Agent) deliver to the Agent the documents listed in Part II of Schedule 2. (b) On delivery of a Borrower Accession Agreement, executed by the relevant Subsidiary and the Company, the Subsidiary concerned will become an Additional Borrower. However, it may not submit a Request until the Agent confirms to the other Finance Parties and the Company that it has received all the documents referred to in paragraph (a) above in form and substance satisfactory to it. (c) Delivery of a Borrower Accession Agreement, executed by the relevant Subsidiary and the Company, constitutes confirmation by that Subsidiary and the Company that the representations and warranties set out in Clause 18.2 (Status) to 18.9 (Litigation) are correct on the date of the Borrower Accession Agreement, as if made by them with reference to the facts and circumstances then existing. 60 28.5 REFERENCE BANKS If a Reference Bank (or, if a Reference Bank is not a Bank, the Bank of which it is an Affiliate) ceases to be a Bank, the Agent shall (in consultation with the Company) appoint another Bank or an Affiliate of a Bank to replace that Reference Bank. 28.6 REGISTER The Agent shall keep a register of all the Parties and shall supply any other Party (at that Party's expense) with a copy of the register on request. 28.7 CESSATION OF BORROWER If no amount is owed under the Finance Documents by a Borrower (other than the Company), the Company may by notice to the Agent designate that that Borrower will cease to be a Borrower for the purposes of this Agreement. Without prejudice to any right which a Finance Party may have against that Borrower, notwithstanding any other term of this Agreement, that Borrower shall cease to be a Borrower for the purposes of this Agreement on the date specified in the notice. 29. DISCLOSURE OF INFORMATION A Bank may disclose to one of its Affiliates or any person with whom it is proposing to enter, or has entered into, any kind of transfer, participation or other agreement in relation to this Agreement: (a) a copy of any Finance Document; and (b) any information which that Bank has acquired under or in connection with any Finance Document, but only if: (i) the Company has given its consent in circumstances where its consent is required under Clause 28 (Changes to the Parties) to the relevant assignment, transfer or novation; and (ii) the proposed recipient of the information has agreed with the Company to keep that information confidential on terms acceptable to the Company. 30. SET-OFF Except to the extent that an Encumbrance is created, a Finance Party may, if an Event of Default is then outstanding, set off any matured obligation owed by a Borrower under the Finance Documents (to the extent beneficially owned by that Finance Party) against any obligation (whether or not matured) owed by that Finance Party to that Borrower, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off. If either obligation is 61 unliquidated or unascertained, the Finance Party may set off in an amount estimated by it in good faith to be the amount of that obligation. 31. PRO RATA SHARING 31.1 REDISTRIBUTION If any amount owing by a Borrower under this Agreement to a Finance Party (the "RECOVERING FINANCE PARTY") is discharged by payment, set-off or any other manner other than through the Agent in accordance with Clause 12 (Payments) (a "RECOVERY"), then: (a) the recovering Finance Party shall, within three Business Days, notify details of the recovery to the Agent; (b) the Agent shall determine whether the recovery is in excess of the amount which the recovering Finance Party would have received had the recovery been received by the Agent and distributed in accordance with Clause 12 (Payments); (c) subject to Clause 31.3 (Exceptions), the recovering Finance Party shall within three Business Days of demand by the Agent pay to the Agent an amount (the "REDISTRIBUTION") equal to the excess; (d) the Agent shall treat the redistribution as if it were a payment by the Borrower concerned under Clause 12 (Payments) and shall pay the redistribution to the Finance Parties (other than the recovering Finance Party) in accordance with Clause 12.7 (Partial payments); and (e) after payment of the full redistribution, the recovering Finance Party will be subrogated to the portion of the claims paid under paragraph (d) above and that Borrower will owe the recovering Finance Party a debt which is equal to the redistribution, immediately payable and of the type originally discharged. 31.2 REVERSAL OF REDISTRIBUTION If under Clause 31.1 (Redistribution): (a) a recovering Finance Party must subsequently return a recovery, or an amount measured by reference to a recovery, to a Borrower; and (b) the recovering Finance Party has paid a redistribution in relation to that recovery, each Finance Party shall, within three Business Days of demand by the recovering Finance Party through the Agent, reimburse the recovering Finance Party all or the appropriate portion of the redistribution paid to that Finance Party together with interest on the amount to be returned to the recovering Finance Party for the period whilst it held the re- distribution. Thereupon, the subrogation in Clause 31.1(e) (Redistribution) will operate in reverse to the extent of the reimbursement. 62 31.3 EXCEPTIONS (a) A recovering Finance Party need not pay a redistribution to the extent that it would not, after the payment, have a valid claim against the Borrower concerned in the amount of the redistribution pursuant to Clause 31.1(e) (Redistribution). (b) A recovering Finance Party is not obliged to share with any other Finance Party any amount which the recovering Finance Party has received or recovered as a result of taking legal proceedings, if the other Finance Party had an opportunity to participate in those legal proceedings but did not do so or did not take separate legal proceedings. 32. SEVERABILITY If a provision of any Finance Document is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect: (a) the validity or enforceability in that jurisdiction of any other provision of the Finance Documents; or (b) the validity or enforceability in other jurisdictions of that or any other provision of the Finance Documents. 33. ECONOMIC AND MONETARY UNION 33.1 COMING INTO EFFECT OF PROVISIONS Clause 33.2 (Redenomination and alternative currencies) to Clause 33.8 (Rounding and other consequential changes) (inclusive) shall come into effect on the Commencement Date PROVIDED THAT, if and to the extent that any such Clause relates to any state (or the currency of such state) which shall not be a participating member state on the Commencement Date, such Clause shall come into effect in relation to such state (and the currency of such state) on and from the date on which such state becomes a participating member state. 33.2 REDENOMINATION AND ALTERNATIVE CURRENCIES Each obligation under this Agreement which has been denominated in a national currency shall be redenominated into euros in accordance with EMU legislation. However, if and to the extent that any EMU legislation provides that an amount (which is (a) denominated either in euros or in the national currency of a participating member state and (b) payable within that participating member state by crediting an account of the creditor) can be paid by the debtor either in euros or in that national currency, each party to this Agreement shall be entitled to pay or repay any such amount either in euros or in such national currency. 33.3 LOANS Any Loans in the currency of a participating member state shall be made in euros. 63 33.4 BUSINESS DAYS In relation to any amount denominated or to be denominated in euros or a national currency, any reference to a Business Day shall be construed as a reference to a day (other than a Saturday or Sunday) on which banks are generally open for business in London. 33.5 PAYMENTS TO THE AGENT Clause 12.2 (Funds) shall be construed so that, in relation to the payment of any amount of euros or national currency, such amount shall be made available to the Agent in immediately available, freely transferable, cleared funds to such account with such bank in such principal centre in such participating member state (or in London) as the Agent shall from time to time nominate for this purpose. 33.6 PAYMENTS BY THE AGENT TO THE BANKS Any amount payable by the Agent to the Banks under this Agreement in the currency of a participating member state shall be paid in euros. 33.7 PAYMENTS SYSTEM AND THE AGENT In relation to the payment of any amount denominated in euros or in a national currency, the Agent shall not be liable to any of the Banks for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Agent if the Agent shall have taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds (in euros or, as the case may be, in the national currency) to the account with the bank in the principal financial centre in the participating member state which the Borrower or, as the case may be, any Bank shall have specified for such purpose. In this Clause 33.7, "all relevant steps" means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Agent may from time to time determine for the purpose of clearing or settling payments of euros. 33.8 ROUNDING AND OTHER CONSEQUENTIAL CHANGES Without prejudice and in addition to any method of conversion or rounding prescribed by any EMU legislation: (a) each reference in this Agreement to a minimum amount (or an integral multiple thereof) in a national currency to be paid to or by the Agent shall be replaced by a reference to such reasonably comparable and convenient amount (or an integral multiple thereof) in euros as the Agent may from time to time specify; and (b) save as expressly provided in this Clause 33, this Agreement shall be subject to such reasonable changes of construction as the Agent may from time to time specify to be necessary or appropriate to reflect the introduction of or changeover to euros in participating member states, PROVIDED THAT this Clause 33 (Economic and Monetary Union) shall not reduce or increase any actual or contingent liability arising under this Agreement. 64 34. COUNTERPARTS Each Finance Document may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document. 35. NOTICES 35.1 GIVING OF NOTICES All notices or other communications under or in connection with this Agreement shall be given in writing and, unless otherwise stated, may be made by letter or facsimile. Any such notice will be deemed to be given as follows: (a) if by letter, when delivered personally or on actual receipt; and (b) if by facsimile, when received in legible form. Any notice received by facsimile by the Agent will require to be delivered in its original form. However, any facsimile not received in original form by the Agent shall not invalidate the notice. However, a notice given in accordance with the above but received on a non- working day or after business hours in the place of receipt will only be deemed to be given on the next working day in that place. 35.2 ADDRESSES FOR NOTICES (a) The address and facsimile number of each Party (other than the Company and the Agent) for all notices under or in connection with the Finance Documents are: (i) those notified by that Party for this purpose to the Agent on or before the date it becomes a Party; or (ii) any other notified by that Party for this purpose to the Agent by not less than five Business Days' notice. (b) The address and facsimile number of the Borrowers are: TI Group plc Lambourn Court Abingdon Oxon OX14 1UH Facsimile no: 01235 555818 For the attention of: Group Treasurer or such other as the Company may notify to the Agent by not less than five Business Days' notice. 65 (c) The address and facsimile number of the Agent are: HSBC Investment Bank plc Vintners Place 68 Upper Thames Street London EC4V 3BJ Facsimile no: (0171) 336 9293 For the attention of: Specialised Financing Loans Administration or such other as the Agent may notify to the other Parties by not less than five Business Days' notice. (d) All notices from or to a Borrower shall be sent through the Agent. (e) The Agent shall, promptly upon request from any Party, give to that Party the address or fax number of any other Party applicable at the time for the purposes of this Clause. 36. LANGUAGE (a) Any notice given under or in connection with any Finance Document shall be in English. (b) All other documents provided under or in connection with any Finance Document shall be: (i) in English; or (ii) if not in English, accompanied by a certified English translation and, in this case, the English translation shall prevail unless the document is a statutory or other official document. 37. JURISDICTION 37.1 SUBMISSION For the benefit of each Finance Party, each Borrower agrees that the courts of England have jurisdiction to settle any disputes in connection with any Finance Document and accordingly submits to the jurisdiction of the English courts. 37.2 SERVICE OF PROCESS Without prejudice to any other mode of service, each Borrower (other than a Borrower incorporated in England and Wales): (a) irrevocably appoints the Company as its agent for service of process in relation to any proceedings before the English courts in connection with any Finance Document; (b) agrees that failure by a process agent to notify the relevant Borrower of the process will not invalidate the proceedings concerned; and 66 (c) consents to the service of process relating to any such proceedings by prepaid posting of a copy of the process to its address for the time being applying under Clause 35.2 (Addresses for notices). 37.3 FORUM CONVENIENCE AND ENFORCEMENT ABROAD Each Borrower: (a) waives objection to the English courts on grounds of inconvenient forum or otherwise as regards proceedings in connection with a Finance Document; and (b) agrees that a judgment or order of an English court in connection with a Finance Document is conclusive and binding on it and may be enforced against it in the courts of any other jurisdiction. 37.4 NON-EXCLUSIVITY Nothing in this Clause 37 limits the right of a Finance Party to bring proceedings against a Borrower in connection with any Finance Document: (a) in any other court of competent jurisdiction; or (b) concurrently in more than one jurisdiction. 38. GOVERNING LAW This Agreement is governed by English law. This Agreement has been entered into on the date stated at the beginning of this Agreement. 67 SCHEDULE 1 BANKS AND COMMITMENTS PART I BANKS AND COMMITMENTS - FACILITY A
BANKS COMMITMENTS (Pounds) ABN AMRO BANK N.V. 83,333,334 CITIBANK, N.A. 83,333,333 MIDLAND BANK plc 83,333,333 ___________ Total A Commitments (Pounds)250,000,000 ___________
PART II BANKS AND COMMITMENTS - FACILITY B
BANKS COMMITMENTS (Pounds) ABN AMRO BANK N.V. 83,333,333 CITIBANK, N.A. 83,333,334 MIDLAND BANK plc 83,333,333 ___________ Total B Commitments (Pounds)250,000,000 ___________
68 SCHEDULE 2 CONDITIONS PRECEDENT DOCUMENTS PART I TO BE DELIVERED BEFORE THE FIRST LOAN 1. A copy of the memorandum and articles of association and certificate of incorporation of the Company and TIIH. 2. A copy of a resolution of the board of directors or a duly authorised committee of the board of directors of each of the Company and TIIH, approving the terms of, and the transactions contemplated by, this Agreement, together with, if applicable, a copy of a resolution of the relevant board of directors establishing the committee. 3. A specimen of the signature of each person authorized by each resolution referred to in paragraph 2 above to sign this Agreement and to sign and/or despatch all documents and notices (including Requests) to be signed and/or despatched by it under or in connection with this Agreement. 4. A certificate of an authorized signatory of the Company confirming that the borrowing of the Total Commitments in full would not cause any borrowing limit binding on any Borrower to be exceeded. 5. A certificate of an authorized signatory of the Company certifying that each copy document specified in Part I of this Schedule 2 is correct, complete and in full force and effect as at a date no earlier than the date of this Agreement. 6. A legal opinion of Clifford Chance, legal advisers to the Arrangers and the Agent, addressed to the Finance Parties. 69 PART II TO BE DELIVERED BY AN ADDITIONAL BORROWER 1. A Borrower Accession Agreement, duly executed by the Additional Borrower and the Company. 2. A copy of the memorandum and articles of association and certificate of incorporation or other constitutional documents of the Additional Borrower. 3. A copy of a resolution of the board of directors of the Additional Borrower approving the terms of, and the transactions contemplated by, the Borrower Accession Agreement. 4. A specimen of the signature of each person authorized by the resolution referred to in paragraph 3 above to sign the Borrower Accession Agreement and to sign and/or despatch all documents and notices (including Requests) to be signed and/or despatched by it under or in connection with this Agreement. 5. A certificate of a director of the Additional Borrower confirming that the borrowing of the Total Commitments in full would not cause any borrowing limit binding on it to be exceeded. 6. A copy of any other authorization or other document which is necessary in connection with the entry into and performance of, and the transactions contemplated by, the Borrower Accession Agreement or for the validity and enforceability of any Finance Document. 7. If produced, the latest audited accounts of the Additional Borrower. 8. A certificate of an authorized signatory of the Additional Borrower certifying that each copy document specified in Part II of this Schedule 2 is correct, complete and in full force and effect as at a date no earlier than the date of the Borrower Accession Agreement. 9. A legal opinion of Allen & Overy, legal advisers to the Company, addressed to the Finance Parties. 10. Where relevant, a legal opinion from appropriate overseas counsel to the Additional Borrower, acceptable to the Agent, addressed to the Finance Parties. 70 SCHEDULE 3 CALCULATION OF THE MLA COST (a) The MLA Cost for a Loan denominated in Sterling for its Interest Periods is calculated in accordance with the following formula: BY + L(Y-X) + S(Y-Z) % per annum = MLA Cost -------------------- 100-(B + S) where on the day of application of the formula: B is the percentage of the Agent's eligible liabilities which the Bank of England requires the Agent to hold on a non-interest-bearing deposit account in accordance with its cash ratio requirements; Y is the rate at which Sterling deposits are offered by the Agent to leading banks in the London interbank market at or about 11.00 a.m. on that day for the relevant period; L is the percentage of eligible liabilities which the Bank of England requires the Agent to maintain as secured money with members of the London Discount Market Association and/or as secured call money with certain money brokers and gilt-edged primary market makers; X is the rate at which secured Sterling deposits may be placed by the Agent with members of the London Discount Market Association and/or as secured call money with certain money brokers and gilt-edged primary market makers at or about 11.00 a.m. on that day for the relevant period; S is the percentage of the Agent's eligible liabilities which the Bank of England requires the Agent to place as a special deposit; and Z is the interest rate per annum allowed by the Bank of England on special deposits. (b) For the purposes of this Schedule 3: (i) "ELIGIBLE LIABILITIES" and "SPECIAL DEPOSITS" have the meanings given to them at the time of application of the formula by the Bank of England; and (ii) "RELEVANT PERIOD" in relation to each Interest Period, means: (A) if it is three months or less, that Interest Period; or (B) if it is more than three months, three months. (c) In the application of the formula, B, Y, L, X, S and Z are included in the formula as figures and not as percentages, e.g. if B = 0.5% and Y = 15%, BY is calculated as 0.5 x 15. (d) (i) The formula is applied on the first day of the relevant Interest Period. 71 (ii) Each rate calculated in accordance with the formula is, if necessary, rounded upward to four decimal places. (e) If the Agent determines that a change in circumstances has rendered, or will render, the formula inappropriate, the Agent (after consultation with the Banks) shall notify the Company of the manner in which the MLA Cost will subsequently be calculated. The manner of calculation so notified by the Agent must not place the Banks in a better or worse position than they had prior to the change in circumstances and shall, in the absence of manifest error, be binding on all the Parties. 72 SCHEDULE 4 FORM OF REQUEST To: HSBC INVESTMENT BANK plc From: [BORROWER] Date: [ ] TI GROUP PLC-(Pounds)500,000,000 CREDIT AGREEMENT DATED 27TH APRIL, 1998 1. We wish to borrow a Facility A Loan/Facility B* Loan as follows: (a) Drawdown Date: [ ] (b) Amount of currency: [ ] (c) Interest Period: [ ] (d) Payment instructions: [ ]. 2. We confirm that each condition specified in Clause 4.2 (Further conditions precedent) is satisfied on the date of this Request. By: [BORROWER] Authorized Signatory ________________________ * Delete as applicable 73 SCHEDULE 5 FORMS OF ACCESSION DOCUMENTS PART I NOVATION CERTIFICATE To: HSBC INVESTMENT BANK plc as Agent From: [THE EXISTING BANK] and [THE NEW BANK] Date: [ ] TI GROUP PLC -(Pounds)500,000,000 CREDIT AGREEMENT DATED 27TH APRIL, 1998 We refer to Clause 28.3 (Procedure for novations). 1. We [ ] (the "EXISTING BANK") and [ ] (the "NEW BANK") agree to the Existing Bank and the New Bank novating all or part of the Existing Bank's Commitment, rights and obligations referred to in the Schedule in accordance with Clause 28.3 (Procedure for novations). 2. The specified date for the purposes of Clause 28.3(c) (Procedure for novations) is [date of novation]. 3. The Facility Office and address for notices of the New Bank for the purposes of Clause 35.2 (Addresses for notices) are set out in the Schedule. 4. This Novation Certificate is governed by English law. THE SCHEDULE COMMITMENT/RIGHTS AND OBLIGATIONS TO BE NOVATED [insert relevant details]. [Existing Bank] [New Bank] By: By: Date: Date: [NEW BANK] [Facility Office Address for notices] HSBC INVESTMENT BANK plc By: Date: 74 PART II BORROWER ACCESSION AGREEMENT To: HSBC INVESTMENT BANK plc as Agent From: [PROPOSED BORROWER] and TI GROUP plc Date] TI GROUP PLC -(Pounds)500,000,000 CREDIT AGREEMENT DATED 27TH APRIL, 1998 (THE "CREDIT AGREEMENT") We refer to Clause 28.4 (Additional Borrowers). [Name of company] of [Registered Office] (Registered no. [ ]) (the "PROPOSED BORROWER") agrees to become an Additional Borrower and to be bound by the terms of the Credit Agreement as an Additional Borrower in accordance with Clause 28.4 (Additional Borrowers). The address for notices of the Proposed Borrower for the purposes of Clause 35.2 (Addresses for notices) is: [ ] This Agreement is governed by English law. By: [PROPOSED BORROWER] Authorized Signatory By: TI GROUP plc Authorized Signatory 75 SIGNATORIES COMPANY TI GROUP plc By: N. MOORE TIIH TI INTERNATIONAL HOLDINGS LIMITED By: N. MOORE ARRANGERS AND BANKS ABN AMRO BANK N.V. By: M.J. CURRAN CITIBANK, N.A. By: JOHN STAFFORD MIDLAND BANK plc By: F.T. SKINNER AGENT HSBC INVESTMENT BANK plc By: D.R.R. STENT BK:236837.5 B1:131361.5 EX-99.(B)(2) 11 SYNDICATION AGREEMENT DATED 06/23/98 EXHIBIT (B)(2) CONFORMED COPY Dated 23rd June, 1998 SYNDICATION AGREEMENT between TI GROUP plc TI INTERNATIONAL HOLDINGS LIMITED ABN AMRO BANK N.V., CITIBANK, N.A. and MIDLAND BANK plc (as Arrangers and Existing Banks) THE NEW BANKS (as listed in Schedule 1) and HSBC INVESTMENT BANK plc (as Agent) ALLEN & OVERY London BK:125984.1 INDEX Clause Page No. 1. Interpretation.........................................................1 2. Consent and Confirmation...............................................2 3. Novation...............................................................2 4. Nature of this Agreement...............................................3 5. Amendments.............................................................3 6. Representation and Warranty from the Company...........................4 7. Governing Law..........................................................4 1. The New Banks..........................................................5 2. Part I - Banks and Commitments - Facility A............................6 Part II - Banks and Commitments - Facility B...........................7 3. Calculation of the Mandatory Cost......................................8 Signatories................................................................10 THIS AGREEMENT is dated 23rd June, 1998 between: (1) TI GROUP plc (the "COMPANY"); (2) TI INTERNATIONAL HOLDINGS LIMITED ("TIIH"); (3) ABN AMRO BANK N.V., CITIBANK, N.A. and MIDLAND BANK plc as arrangers (in this capacity the "ARRANGERS"); (4) ABN AMRO BANK N.V., CITIBANK, N.A. and MIDLAND BANK plc as the banks party to the Credit Agreement (as defined below) as at today's date (the "EXISTING BANKS"); (5) THE FINANCIAL INSTITUTIONS listed in Schedule 1 as the banks who wish to accede to the Credit Agreement as Banks (the "NEW BANKS"); and (6) HSBC INVESTMENT BANK plc as agent (the "AGENT"). IT IS AGREED as follows: 1. INTERPRETATION 1.1 DEFINITIONS In this Agreement, unless the contrary intention appears or the context otherwise requires: "CREDIT AGREEMENT" means the Original Credit Agreement as amended pursuant to Clause 4 (Nature of this Agreement) and Clause 5 (Amendments) of this Agreement. "EFFECTIVE DATE" means 23rd June, 1998. "INFORMATION MEMORANDUM" means the information memorandum dated May, 1998 prepared by the Company in connection with the Credit Agreement. "ORIGINAL CREDIT AGREEMENT" means the Credit Agreement dated 27th April, 1998 between the Company, TIIH, the Arrangers, the Existing Banks and the Agent. 1.2 INCORPORATION OF CREDIT AGREEMENT DEFINITIONS Terms defined in the Credit Agreement shall, unless the contrary intention appears or the context otherwise requires, have the same meaning in this Agreement. 1.3 INCORPORATION Clauses 1.2 (Construction) and 34 (Counterparts) of the Credit Agreement shall apply to this Agreement, mutatis mutandis. 2. CONSENT AND CONFIRMATION The Company, TIIH, the Arrangers, the Existing Banks and the Agent each consent to the New Banks becoming Banks and confirm that, except as expressly provided by the terms of this Agreement, the Credit Agreement and each of the documents contemplated by the Credit Agreement shall continue in full force and effect. 3. NOVATION 3.1 NOVATION OF COMMITMENTS AND RELATED RIGHTS AND OBLIGATIONS On the Effective Date: (a) each New Bank will become a Bank under the Credit Agreement with those Commitments as set out opposite its name in Schedule 2; (b) the Commitments of each Existing Bank shall be and be deemed to be reduced down to the level set out opposite its name in Schedule 2 so long as the overall level of the Total Commitments is not reduced; and (c) each New Bank will automatically obtain and assume, and undertakes to perform, all of the rights and obligations of a Bank under and in respect of the Credit Agreement and the documents contemplated in the Credit Agreement in respect of the rights and obligations transferred to it under paragraphs (a) and (b) above. 3.2 AMOUNTS DUE ON OR BEFORE THE EFFECTIVE DATE (a) All amounts (if any) payable to an Existing Bank by the Borrowers on or before the Effective Date (including, without limitation, all interest and fees payable on the Effective Date) in respect of any period ending prior to the Effective Date shall be for the account of the Existing Banks, and none of the New Banks shall have any interest in, or any rights in respect of, any such amounts. (b) If any Loan falls to be made on the Effective Date: (i) the Agent will promptly notify each of the New Banks of that fact (and the amount of its participation in that Loan in accordance with paragraph (ii) below); and (ii) each Existing Bank and each New Bank shall participate in that Loan (subject to the terms of the Credit Agreement) as if the novation of the Commitments under Clauses 3.1(a) and (b) (Novation of Commitments and related rights and obligations) of this Agreement had taken effect prior to opening of business on the Business Day before the Effective Date, and the relevant Borrower acknowledges that no Existing Bank will be obliged to participate in any such Loan to any greater extent. 3.3 ADMINISTRATIVE DETAILS Each New Bank has delivered to the Agent its initial details for the purposes of Clause 35 (Notices) of the Credit Agreement. 4. NATURE OF THIS AGREEMENT The novation of Commitments and rights and obligations contemplated by this Agreement shall take effect (in accordance with its terms) as a novation so that: (a) Schedule 2 is substituted for Schedule 1 to the Credit Agreement on the Effective Date; and (b) Clause 28.3 (Procedure for novations) of the Credit Agreement shall apply to the Commitments, rights and obligations transferred, assumed and released under Clause 3.1 (Novation of Commitments and related rights and obligations) of this Agreement and to the associated rights and obligations under the Credit Agreement and the documents contemplated in the Credit Agreement, as if this Agreement were a Novation Certificate. 5. AMENDMENTS On and from the Effective Date the Credit Agreement will be amended as follows: (a) In Clause 1.1 (Definitions) of the Credit Agreement, the definition of "MLA Cost" shall be deleted and replaced with a new definition as follows: "MANDATORY COST RATE" means the cost imputed to the Banks of compliance with the Mandatory Cost Rate requirements of the Bank of England and the Financial Services Authority during the term of a Loan denominated in Sterling, determined in accordance with Schedule 3". (b) Each reference to "MLA Cost" in the Credit Agreement shall be deleted and replaced with a reference to "Mandatory Cost Rate." (c) Schedule 3 (Calculation of the MLA Cost) of the Credit Agreement, shall be amended by deleting its contents and replacing them with the contents of Schedule 3. (d) Clause 33.4 shall be deleted and replaced with the following: "33.4 BUSINESS DAYS In relation to a payment or rate fixing in or other matters relating to euros, any reference to a Business Day shall be construed as a reference to a day on which the Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET) is operating". 6. REPRESENTATION AND WARRANTY FROM THE COMPANY The Company represents and warrants for the benefit of each other party to this Agreement in respect of the Information Memorandum that : (a) the material factual information relating to the Group contained in the Information Memorandum was true and accurate in all material respects as at its date; (b) to the best of its knowledge the opinions, projections and forecasts contained in it and the assumptions on which they are based were arrived at after due and careful consideration and genuinely represented its views; and (c) to the best of its knowledge there are no material facts or circumstances which have not been disclosed to the parties to this Agreement by the Information Memorandum or otherwise prior to the date of this Agreement and which would make any of the information, opinions, projections, forecasts or assumptions contained in it untrue, incomplete, inaccurate or misleading in any material respect. 7. GOVERNING LAW This Agreement is governed by English law. This Agreement has been entered into on the date stated at the beginning of this Agreement. SCHEDULE 1 THE NEW BANKS BANQUE NATIONALE DE PARIS, LONDON BRANCH BARCLAYS BANK PLC THE BANK OF TOKYO-MITSUBISHI, LTD. DEUTSCHE BANK AG LONDON MELLON BANK N.A. ROYAL BANK OF CANADA WESTDEUTSCHE LANDESBANK GIROZENTRALE, LONDON BRANCH BANCA DI ROMA - LONDON BRANCH BANCA NAZIONALE DEL LAVORO S.P.A., LONDON BRANCH BAYERISCHE LANDESBANK GIROZENTRALE, LONDON BRANCH DEN DANSKE BANK AKTIESELSKAB THE FIRST NATIONAL BANK OF CHICAGO SVENSKA HANDELSBANKEN AB (PUBL) BANCA COMMERCIALE ITALIANA S.P.A., LONDON BRANCH BANCO BILBAO VIZCAYA BANKBOSTON, N.A. BANK BRUSSELS LAMBERT THE DAI-ICHI KANGYO BANK, LIMITED ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. MERITA BANK PLC NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) NORDDEUTSCHE LANDESBANK GIROZENTRALE SCHEDULE 2 PART I BANKS AND COMMITMENTS - FACILITY A
BANKS Facility A Commitments (Pounds) ABN AMRO Bank N.V. 20,166,666.67 Citibank, N.A. 20,166,666.66 Midland Bank plc 20,166,666.67 Banque Nationale de Paris, London Branch 16,000,000.00 Barclays Bank PLC 16,000,000.00 The Bank of Tokyo-Mitsubishi, Ltd. 16,000,000.00 Deutsche Bank AG London 16,000,000.00 Mellon Bank N.A. 16,000,000.00 Royal Bank of Canada 16,000,000.00 Westdeutsche Landesbank Girozentrale, London Branch 16,000,000.00 Banca di Roma - London Branch 12,500,000.00 Banca Nazionale del Lavoro S.p.A., London Branch 12,500,000.00 Bayerische Landesbank Girozentrale, London Branch 12,500,000.00 Den Danske Bank Aktieselskab 12,500,000.00 The First National Bank of Chicago 12,500,000.00 Svenska Handelsbanken AB (publ) 12,500,000.00 Banca Commerciale Italiana S.p.A., London Branch 7,500,000.00 Banco Bilbao Vizcaya 7,500,000.00 BankBoston, N.A. 7,500,000.00 Bank Brussels Lambert 7,500,000.00 The Dai-Ichi Kangyo Bank, Limited 7,500,000.00 Istituto Bancario San Paolo di Torino S.p.A. 7,500,000.00 Merita Bank Plc 7,500,000.00 National Australia Bank Limited (ACN 004 044 937) 7,500,000.00 Norddeutsche Landesbank Girozentrale 7,500,000.00 -------------- TOTAL (Pounds)315,000,000.00 --------------
PART II BANKS AND COMMITMENTS - FACILITY B
BANKS Facility B Commitments (Pounds) ABN AMRO Bank N.V. 20,166,666.66 Citibank, N.A. 20,166,666.67 Midland Bank plc 20,166,666.67 Barclays Bank PLC 16,000,000.00 Banque Nationale de Paris, London Branch 16,000,000.00 The Bank of Tokyo-Mitsubishi, Ltd. 16,000,000.00 Deutsche Bank AG London 16,000,000.00 Mellon Bank N.A. 16,000,000.00 Royal Bank of Canada 16,000,000.00 Westdeutsche Landesbank Girozentrale, London Branch 16,000,000.00 Banca di Roma - London Branch 12,500,000.00 Banca Nazionale del Lavoro S.p.A., London Branch 12,500,000.00 Bayerische Landesbank Girozentrale, London Branch 12,500,000.00 Den Danske Bank Aktieselskab 12,500,000.00 The First National Bank of Chicago 12,500,000.00 Svenska Handelsbanken AB (publ) 12,500,000.00 Banco Bilbao Vizcaya 7,500,000.00 BankBoston, N.A. 7,500,000.00 Bank Brussels Lambert 7,500,000.00 Banca Commerciale Italiana S.p.A., London Branch 7,500,000.00 The Dai-Ichi Kangyo Bank, Limited 7,500,000.00 Istituto Bancario San Paolo di Torino S.p.A. 7,500,000.00 Merita Bank Plc 7,500,000.00 National Australia Bank Limited (ACN 004 044 937) 7,500,000.00 Norddeutsche Landesbank Girozentrale, London Branch 7,500,000.00 -------------- TOTAL (Pounds)315,000,000.00 --------------
SCHEDULE 3 CALCULATION OF THE MANDATORY COST (a) The Mandatory Cost for a Loan denominated in Sterling for each of its Interest Periods is the rate determined by the Agent to be equal to the arithmetic mean rounded upward, if necessary, to four decimal places of the respective rates notified by each of the Reference Banks to the Agent and calculated in accordance with the following formulae: BY + S(Y-Z) + F x 0.01 % per annum = Mandatory Cost ---------------------- 100-(B + S) where on the day of application of the formula: B is the percentage of the Reference Bank's eligible liabilities (in excess of any stated minimum) which the Bank of England requires the Reference Bank to hold on a non-interest-bearing deposit account in accordance with its cash ratio requirements; Y is the rate at which Sterling deposits are offered by the Reference Bank to leading banks in the London interbank market at or about 11.00 a.m. on that day for the relevant period; S is the percentage of the Reference Bank's eligible liabilities which the Bank of England requires the Reference Bank to place as a special deposit; Z is the interest rate per annum allowed by the Bank of England on special deposits; and F is the charge payable by the Reference Bank to the Financial Services Authority under the Fees Regulations expressed in pounds per (Pounds)1 million of the fee base of the Reference Bank. A negative result obtained from subtracting Z from Y shall be counted as zero. (b) For the purposes of this Schedule 3: (i) "ELIGIBLE LIABILITIES" and "SPECIAL DEPOSITS" have the meanings given to them at the time of application of the formula by the Bank of England; (ii) "FEE BASE" has the meaning given to it in the Fees Regulations; (iii) "FEES REGULATIONS" means any regulations governing the payment of fees for banking supervision. (ii) "RELEVANT PERIOD" in relation to each Interest Period, means: (A) if it is three months or less, that Interest Period; or (B) if it is more than three months, three months. (c) In the application of the formula, B, Y, S and Z are included in the formula as figures and not as percentages, e.g. if B = 0.5% and Y = 15%, BY is calculated as 0.5 x 15. (d) If a Reference Bank does not supply a rate to the Agent, the applicable Mandatory Cost will be determined on the basis of the rate(s) supplied by the remaining Reference Banks. (e) (i) The formula is applied on the first day of each relevant period comprised in the relevant Interest Period. (ii) Each rate calculated in accordance with the formula is, if necessary, rounded upward to four decimal places. (f) If the Agent determines that a change in circumstances has rendered, or will render, the formula inappropriate, the Agent (after consultation with the Banks) shall notify the Company of the manner in which the Mandatory Cost will subsequently be calculated. The manner of calculation so notified by the Agent shall, in the absence of manifest error, be binding on all the Parties. SIGNATORIES COMPANY TI GROUP plc By: N. MOORE TIIH TI INTERNATIONAL HOLDINGS LIMITED By: N. MOORE ARRANGERS AND EXISTING BANKS ABN AMRO BANK N.V. By: M. CURRAN A.R.HILL CITIBANK, N.A. By: JOHN H.W. STEEDMAN MIDLAND BANK plc By: NIGEL BATLEY NEW BANKS BANQUE NATIONALE DE PARIS, LONDON BRANCH By: ALASDAIR MACLEOD BARCLAYS BANK PLC By: IAN MOSELEY THE BANK OF TOKYO-MITSUBISHI, LTD. By: CHARLES GRIFFITHS DEUTSCHE BANK AG LONDON By: BRIAN STEVENSON RICHARD SEDLACEK MELLON BANK N.A. By: KEITH R.C. BRACKLEY ROYAL BANK OF CANADA By: S.R. DOUGLAS WESTDEUTSCHE LANDESBANK GIROZENTRALE, LONDON BRANCH By: C.B. GREAVES BANCA DI ROMA - LONDON BRANCH By: R. PANDOLFINO J. CONNOLLY BANCA NAZIONALE DEL LAVORO S.P.A., LONDON BRANCH By: PAUL MITCHELL COLIN HALL BAYERISCHE LANDESBANK GIROZENTRALE, LONDON BRANCH By: C.A. FLETCHER KEVIN BUCK DEN DANSKE BANK AKTIESELSKAB By: DAVID STENT (Power of attorney) THE FIRST NATIONAL BANK OF CHICAGO By: J.P.B. BENNETT SVENSKA HANDELSBANKEN AB (PUBL) By: MARK EMMETT ANDREW COLIN DAY BANCA COMMERCIALE ITALIANA S.P.A., LONDON BRANCH By: CHRISTOPHER PIPER BANCO BILBAO VIZCAYA By: DAVID STENT (Power of attorney) BANKBOSTON, N.A. By: DALMARIS G. ALBARRAN BANK BRUSSELS LAMBERT By: J.R. BAILEY THE DAI-ICHI KANGYO BANK, LIMITED By: C.S. WILLIAMS ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. By: C.C.E. STAMFORD RENATO CARDUCCI MERITA BANK PLC By: RITCHIE ROBERTSON JOE DUANE NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) By: RICHARD G. WOODHOUSE NORDDEUTSCHE LANDESBANK GIROZENTRALE By: JEANETTE McCAULEY AGENT HSBC INVESTMENT BANK plc By: DAVID STENT BK:125984.1 B1:138442.1 EX-99.(C)(1) 12 AGREEMENT AND PLAN OF MERGER EXHIBIT (C)(1) EXECUTION COPY AGREEMENT AND PLAN OF MERGER AMONG TI GROUP PLC, TI AUTOMOTIVE SYSTEMS, INC. AND WALBRO CORPORATION Dated as of April 27, 1999 TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS.................................................... 1 1.1 Accounts................................................. 1 1.2 Acquisition Transaction.................................. 1 1.3 Affiliate................................................ 1 1.4 Agreement................................................ 1 1.5 Closing.................................................. 1 1.6 Closing Date............................................. 1 1.7 Code..................................................... 2 1.8 Company.................................................. 2 1.9 Company Common Stock..................................... 2 1.10 Company Disclosure Letter................................ 2 1.11 Company Financial Statements............................. 2 1.12 Company Preferred Rights................................. 2 1.13 Company Preferred Shares................................. 2 1.14 Company SEC Documents.................................... 2 1.15 Confidentiality Agreement................................ 2 1.16 Constituent Corporations................................. 2 1.17 Contracts................................................ 2 1.18 Control.................................................. 2 1.19 DGCL..................................................... 3 1.20 Dissenting Shares........................................ 3 1.21 ERISA.................................................... 3 1.22 Effective Time........................................... 3 1.23 Employee Benefit Plans................................... 3 1.24 Environmental Claim...................................... 3 1.25 Environmental Laws....................................... 3 1.26 Environmental Release.................................... 4 1.27 ERISA Affiliate.......................................... 4 1.28 Exchange Act............................................. 4 1.29 Exchange Agent........................................... 4 1.30 Exchange Fund............................................ 4 1.31 Existing Insurance Policies.............................. 4 1.32 Existing Liens........................................... 4 1.33 Existing Options......................................... 4 1.34 Existing Permits......................................... 4 1.35 Expiration Date.......................................... 4 1.36 Fully Diluted Basis...................................... 4 1.37 GAAP..................................................... 4 (i) 1.38 Governmental Entity.......................................... 5 1.39 HSR Act...................................................... 5 1.40 Hazardous Materials.......................................... 5 1.41 Indebtedness................................................. 5 1.42 Indemnified Liabilities...................................... 5 1.43 Indemnified Party(ies)....................................... 5 1.44 Intangible Assets............................................ 5 1.45 Investment................................................... 5 1.46 Joint Ventures............................................... 6 1.47 Knowledge.................................................... 6 1.48 Law.......................................................... 6 1.49 Letter of Transmittal........................................ 6 1.50 Lien......................................................... 6 1.51 Material Adverse Effect...................................... 6 1.52 Merger....................................................... 7 1.53 Merger Consideration......................................... 7 1.54 Merger Sub................................................... 7 1.55 Minimum Condition............................................ 7 1.56 Offer........................................................ 7 1.57 Offer Documents.............................................. 7 1.58 Offer Price.................................................. 7 1.59 Offer to Purchase............................................ 7 1.60 Optionholders................................................ 7 1.61 Parent....................................................... 7 1.62 Parent-Provided Plan......................................... 7 1.63 Pension Plan................................................. 7 1.64 Permitted Liens.............................................. 7 1.65 Person....................................................... 7 1.66 Proxy Statement.............................................. 8 1.67 Real Estate.................................................. 8 1.68 SEC.......................................................... 8 1.69 Schedule 14D-1............................................... 8 1.70 Schedule 14D-9............................................... 8 1.71 Special Meeting.............................................. 8 1.72 Stockholders................................................. 8 1.73 Subsidiary................................................... 8 1.74 Superior Proposal............................................ 8 1.75 Surviving Corporation........................................ 8 1.76 Systems...................................................... 8 1.77 Takeover Laws................................................ 8 1.78 Transactions................................................. 8 1.79 Voting Debt.................................................. 8 (ii) ARTICLE 2 THE MERGER............................................................. 9 2.1 The Offer........................................................ 9 2.2 Company Actions.................................................. 10 2.3 Directors........................................................ 11 2.4 The Merger....................................................... 12 2.5 Effective Time; Filing of Certificate of Merger.................. 12 2.6 Certificate of Incorporation..................................... 13 2.7 Bylaws........................................................... 13 2.8 Directors and Officers........................................... 13 2.9 Additional Actions............................................... 13 2.10 Time and Place of Closing........................................ 13 2.11 Conversion of Company Common Stock............................... 13 2.12 Exchange of Shares............................................... 14 2.13 No Further Rights or Transfers; Cancellation of Treasury Shares.. 16 2.14 Dissenters' Rights............................................... 16 2.15 Special Meeting of Stockholders.................................. 16 2.16 Merger Without Meeting of Stockholders........................... 17 2.17 Reasonable Best Efforts.......................................... 17 2.18 Existing Options................................................. 18 ARTICLE 3 OTHER AGREEMENTS....................................................... 18 3.1 Access........................................................... 18 3.2 Company Disclosure Letter........................................ 18 3.3 Deliveries of Information........................................ 19 3.4 Acquisition Proposals............................................ 19 3.5 Public Announcements............................................. 20 3.6 Confidentiality Agreement........................................ 20 3.7 Regulatory and Other Approvals................................... 20 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 21 4.1 Organization; Business........................................... 21 4.2 Capitalization................................................... 21 4.3 Authorization; Enforceability.................................... 22 4.4 No Violation or Conflict......................................... 22 4.5 Title to Assets.................................................. 23 4.6 Litigation....................................................... 23 4.7 Books and Records; Company Financial Statements.................. 23 4.8 Absence of Certain Changes....................................... 24 4.9 Performance of Contracts......................................... 26 (iii) 4.10 Insurance..................................................... 26 4.11 Employee Benefit Plans........................................ 26 4.12 Brokers' and Finders' Fees.................................... 28 4.13 Taxes......................................................... 28 4.14 Real Estate................................................... 29 4.15 Governmental Approvals........................................ 29 4.16 No Pending Acquisitions....................................... 29 4.17 Labor Matters................................................. 30 4.18 Existing Permits and Violations of Law........................ 30 4.19 Warranty or Other Claims...................................... 31 4.20 Intangible Assets............................................. 31 4.21 Customers and Suppliers....................................... 31 4.22 Environmental Protection...................................... 32 4.23 Vote Required................................................. 32 4.24 SEC Reports................................................... 32 4.25 Content of Proxy Statement.................................... 32 4.26 Opinion of Financial Advisor.................................. 33 4.27 Certain Agreements............................................ 33 4.28 Takeover Law; Company Rights Agreement........................ 33 4.29 Year 2000 Compliance.......................................... 34 4.30 Approval by Disinterested Directors........................... 34 ARTICLE 5 REPRESENTATIONS OF THE PARENT AND MERGER SUB........................ 34 5.1 Due Incorporation and Authority............................... 34 5.2 Consents and Approvals........................................ 35 5.3 Brokers' and Finders' Fees.................................... 35 5.4 No Violation or Conflict...................................... 35 5.5 Litigation.................................................... 35 5.6 Sufficient Funds.............................................. 36 ARTICLE 6 COVENANTS AND AGREEMENTS............................................ 36 6.1 Conduct of Business by the Company............................ 36 6.2 Indemnification............................................... 38 6.3 Certain Benefit Plans......................................... 40 6.4 No Survival of Representations and Warranties................. 41 6.5 Company Rights Plan........................................... 41 6.6 Consents...................................................... 41 6.7 Potential Claims.............................................. 41 (iv) ARTICLE 7 CONDITIONS TO THE MERGER.............................................. 41 7.1 Conditions to Each Party's Obligation to Effect the Merger...... 41 7.2 Conditions to the Parent's and Merger Sub's Obligation to Effect the Merger............................................ 42 ARTICLE 8 TERMINATION, WAIVER AND AMENDMENT..................................... 42 8.1 Termination..................................................... 42 8.2 Rights on Termination........................................... 44 8.3 Termination Fee Payable to the Parent........................... 44 8.4 Other Remedies.................................................. 45 8.5 Notice of Termination........................................... 45 ARTICLE 9 MISCELLANEOUS......................................................... 45 9.1 Entire Agreement................................................ 45 9.2 Amendment....................................................... 45 9.3 Extension; Waiver............................................... 46 9.4 Governing Law................................................... 46 9.5 Assignment; Binding Effect...................................... 46 9.6 Notices......................................................... 46 9.7 Counterparts; Headings.......................................... 47 9.8 Interpretation.................................................. 47 9.9 Specific Performance............................................ 47 9.10 No Reliance..................................................... 47 9.11 Disclosure Letter............................................... 47 9.12 No Third Party Beneficiary...................................... 47 9.13 Severability.................................................... 48 9.14 Other Remedies.................................................. 48 9.15 Rules of Construction........................................... 48 (v) AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER, dated as of April 27, 1999 (the "Agreement"), is among TI Group plc, a company organized under the laws of England and Wales (the "Parent"), TI Automotive Systems, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Parent ("Merger Sub"), and Walbro Corporation, a Delaware corporation (the "Company"). The Company and Merger Sub are hereinafter sometimes collectively referred to as the "Constituent Corporations." WHEREAS, the Boards of Directors of the Parent, Merger Sub and the Company have approved and deem it advisable and in the best interests of their respective shareholders to consummate the merger of Merger Sub with and into the Company upon the terms and subject to the conditions set forth herein (the "Merger"); and WHEREAS, the Parent, Merger Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the Parent, Merger Sub and the Company agree as follows: ARTICLE 1 DEFINITIONS When used in this Agreement, and in addition to the other terms defined herein, the following terms shall have the meanings specified: 1.1 Accounts. "Accounts" shall mean all accounts receivable, notes and associated rights owned by or payable to the Company or any Subsidiary. 1.2 Acquisition Transaction. "Acquisition Transaction" shall have the meaning set forth in Section 3.4(a). 1.3 Affiliate. "Affiliate" shall mean, in relation to any party hereto, any entity directly or indirectly controlling, controlled by or under common control with such party. 1.4 Agreement. "Agreement" shall have the meaning set forth in the Introduction. 1.5 Closing. "Closing" shall have the meaning set forth in Section 2.10. 1.6 Closing Date. "Closing Date" shall have the meaning set forth in Section 2.10. 1.7 Code. "Code" shall mean the Internal Revenue Code of 1986, as the same may be in effect from time to time. 1.8 Company. "Company" shall have the meaning set forth in the Introduction. 1.9 Company Common Stock. "Company Common Stock" shall mean shares of common stock, par value $0.50 per share, of the Company and all references herein to Company Common Stock, unless the context requires otherwise, shall include the associated Company Preferred Rights. 1.10 Company Disclosure Letter. "Company Disclosure Letter" shall have the meaning set forth in Article 4. 1.11 Company Financial Statements. "Company Financial Statements" shall mean the audited Consolidated Balance Sheet, Consolidated Statement of Income, Consolidated Statement of Cash Flows and Consolidated Statement of Shareholders' Equity of the Company, and the audited balance sheet, statement of income, statement of cash flows and statement of shareholders equity of Marwal Systems SNC and of Mitsuba Walbro Inc., together with, in each of the foregoing cases the related notes thereto, for each of the fiscal years ended on December 31, 1996, 1997 and 1998. 1.12 Company Preferred Rights. "Company Preferred Rights" shall mean those Preferred Share Purchase Rights issued pursuant to the Shareholder Rights Agreement dated as of June 30, 1998 by and between the Company and Harris Trust and Savings Bank, as Rights Agent (the "Company Rights Agreement"). 1.13 Company Preferred Shares. "Company Preferred Shares" means the Convertible Trust Preferred Securities of Walbro Capital Trust, a wholly-owned subsidiary of the Company. 1.14 Company SEC Documents. "Company SEC Documents" shall have the meaning set forth in Section 4.24. 1.15 Confidentiality Agreement. "Confidentiality Agreement" shall have the meaning set forth in Section 3.6. 1.16 Constituent Corporations. "Constituent Corporations" shall have the meaning set forth in the Introduction. 1.17 Contracts. "Contracts" shall mean all of the contracts, agreements, and obligations of the Company or any Subsidiary to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of the assets of the Company or any Subsidiary are bound, including, without limitation, any loan, bond, mortgage, indenture, lease, instrument, franchise or license. 2 1.18 Control. "Control" (including the terms "controlling," "controlled by," and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities or by contract. 1.19 DGCL. "DGCL" shall have the meaning set forth in Section 2.4. 1.20 Dissenting Shares. "Dissenting Shares" shall mean shares of Company Common Stock which (i) dissent from the Merger in accordance with the provisions of Section 262 of DGCL and (ii) are held by Stockholders who have properly exercised and perfected appraisal rights under Section 262 of DGCL. 1.21 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 as in effect on the date hereof. 1.22 Effective Time. "Effective Time" shall have the meaning set forth in Section 2.5. 1.23 Employee Benefit Plans. "Employee Benefit Plans" shall mean any pension plan, profit sharing plan, bonus plan, incentive compensation plan, stock purchase plan, stock ownership plan, stock option plan, stock appreciation plan, employee benefit plan, employee benefit policy, retirement plan, fringe benefit program, insurance plan, severance plan, disability plan, health care plan, sick leave plan, death benefit plan, or any other plan, program or policy to provide retirement income, fringe benefits or other benefits to former or current employees and/or directors of the Company or any Subsidiary or an ERISA Affiliate as of the date hereof or as of the Closing (including, without limitation, any employee pension benefit plan, employee welfare plan or multi- employer plan, as each term is defined in ERISA). 1.24 Environmental Claim. "Environmental Claim" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, Liens, investigations, proceedings or notices of noncompliance or violation (written or oral) by any Person alleging liability (including, without limitation, liability for enforcement, investigatory costs, cleanup costs, governmental response costs, removal costs, remedial costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from: (A) the presence or environmental release of any Hazardous Materials at any parcel of real property; or (B) circumstances forming the basis of any violation or alleged violation, of any Environmental Law; or (C) any and all claims by any Person seeking damages, contribution, indemnification, cost, recovery, compensation or injunctive relief resulting from the presence or Environmental Release of any Hazardous Materials. 1.25 Environmental Laws. "Environmental Laws" shall mean any federal, state, local or foreign statute, Law, rule, ordinance, code, policy, rule of common law and regulations, as in effect on the date hereof, relating to pollution or protection of human health (including those parts of OSHA relating to Hazardous Materials) or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, Laws and regulations relating to Environmental Releases or threatened Environmental 3 Releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, presence, use, treatment, storage, disposal, transport or handling of Hazardous Materials. 1.26 Environmental Release. "Environmental Release" shall mean any release, spill, emission, leaking, injection, deposit, disposal, discharge, dispersal, leaching or migration into the atmosphere, soil, surface water or groundwater . 1.27 ERISA Affiliate. "ERISA Affiliate" shall mean a member of the controlled group with the meaning of Code Section 414(b) or (c) of which the Company is a member. 1.28 Exchange Act. "Exchange Act" shall have the meaning set forth in Section 2.1(a). 1.29 Exchange Agent. "Exchange Agent" shall have the meaning set forth in Section 2.12(a). 1.30 Exchange Fund. "Exchange Fund" shall have the meaning set forth in Section 2.12(a). 1.31 Existing Insurance Policies. "Existing Insurance Policies" shall mean all of the insurance policies currently in effect and owned by the Company or any Subsidiary. 1.32 Existing Liens. "Existing Liens" shall mean those Liens affecting any of the assets or properties of the Company or any Subsidiary. 1.33 Existing Options. "Existing Options" shall mean any of the following relating to any capital stock or other equity interest of the Company, and as described in the Company Disclosure Letter: (a) options or warrants (whether vested or not) to purchase or other rights (including registration rights), agreements, arrangements or commitments of any character to which the Company or any Subsidiary is a party relating to the issued or unissued capital stock or other equity or phantom equity interests of the Company to grant, issue or sell any shares of the capital stock or other equity or phantom equity interests of the Company, by sale, lease, license or otherwise; (b) rights to subscribe for or purchase any shares of the capital stock or other equity or phantom equity interests of the Company; (c) Contracts to which the Company or any Subsidiary is a party with respect to any right to purchase, put or call; or (d) stock appreciation rights, limited stock appreciation rights, performance shares or restricted stock of the Company. 1.34 Existing Permits. "Existing Permits" shall mean those permits, licenses, approvals, qualifications, authorizations, and registrations required by Law which the Company and its Subsidiaries have or hold. 1.35 Expiration Date. "Expiration Date" shall have the meaning set forth in Section 8.3. 4 1.36 Fully Diluted Basis. "Fully Diluted Basis" shall have the meaning set forth in Section 2.1(a). 1.37 GAAP. "GAAP" shall have the meaning set forth in Section 4.7(a). 1.38 Governmental Entity. "Governmental Entity" shall have the meaning set forth in Section 4.15. 1.39 HSR Act. "HSR Act" shall have the meaning set forth in Section 7.1(a). 1.40 Hazardous Materials. "Hazardous Materials" shall mean: (A) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, and transformers or other equipment that contain dielectric fluid containing polychlorinated biphenyls ("PCBs") above regulated levels and radon gas; and (B) any chemicals, materials or substances which are now defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," or words of similar import, under any Environmental Law; and (C) any other chemical, material, substance or waste, exposure to which is now prohibited, limited or regulated by any governmental authority. 1.41 Indebtedness. "Indebtedness" shall mean all liabilities or obligations of the Company or any Subsidiary, whether primary or secondary or absolute or contingent: (a) for borrowed money; (b) evidenced by notes, bonds, debentures or similar instruments; or (c) secured by Liens on any assets of the Company or any Subsidiary. 1.42 Indemnified Liabilities. "Indemnified Liabilities" shall have the meaning set forth in Section 6.2(b). 1.43 Indemnified Party(ies). "Indemnified Party(ies)" shall have the meaning set forth in Section 6.2(b). 1.44 Intangible Assets. "Intangible Assets" shall mean (a) any invention, United States and foreign patents, pending patent applications, trade names, trade dress, logos, corporate names, trademarks, service marks, trademark registrations, service mark registrations, pending trademark applications, pending service mark applications, registered copyrights, and pending copyright applications, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith; (b) proprietary software; and (c) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals). 5 1.45 Investment. "Investment" by the Company shall mean (a) any equity, debt, preferred stock, partnership interest, participation or any other security of another Person that is beneficially owned by the Company or any Subsidiary; (b) any loan or capital contribution by the Company or any Subsidiary to or in any other Person; (c) any guaranty of any obligation to pay money to the Company or any Subsidiary, or perform an obligation for or on behalf of the Company or any Subsidiary, of any other Person; and (d) any investments in any property or assets other than properties and assets acquired and used in the ordinary course of the business of the Company and its Subsidiaries. 1.46 Joint Ventures. "Joint Ventures" shall mean the entities listed on Section 1.47 of the Company Disclosure Letter. 1.47 Knowledge. "Knowledge" shall mean the actual knowledge of the directors and executive officers of the Company. 1.48 Law. "Law" shall mean any foreign, federal, state or local governmental law, rule, regulation or requirement, including any rules, regulations and orders promulgated thereunder and any orders, decrees, consents or judgments of any governmental regulatory agencies and courts having the force of law, other than any Environmental Laws. 1.49 Letter of Transmittal. "Letter of Transmittal" shall have the meaning set forth in Section 2.12(a). 1.50 Lien. "Lien" shall mean, with respect to any asset (real, personal or mixed): (a) any mortgage, pledge, encumbrance, lien, easement, lease, title defect or imperfection or any other form of security interest, whether imposed by Law or by contract; and (b) the interest of a vendor or lessor under any conditional sale agreement, financing lease or other title retention agreement relating to such asset. 1.51 Material Adverse Effect. "Material Adverse Effect" or "Material Adverse Change" means any effect, change, event, circumstance or condition which when considered with all other effects, changes, events, circumstances or conditions has materially adversely affected or would reasonably be expected to materially adversely affect the results of operations or financial condition of the Parent or the Company, in each case including its respective Subsidiaries together with it taken as a whole, as the case may be. In no event shall any of the following, considered alone without regard to any other effects, changes, events, circumstances or conditions, constitute a Material Adverse Effect or a Material Adverse Change: (i) a change in the trading prices of either of the Parent's or the Company's securities between the date hereof and the Effective Time, in and of itself; (ii) effects, changes, events, circumstances or conditions generally affecting the industry in which either the Parent or the Company operates or arising from changes in general business or economic conditions, provided such effects, changes, events, circumstances or conditions do not disproportionately impact the Company and its Subsidiaries, unless the Company can establish that they arise solely and directly as a result of the armed hostilities in Kosovo, Republic of Yugoslavia; (iii) any effects, changes, events, circumstances or conditions resulting from any change in law or generally accepted accounting principles, which affect 6 generally entities such as the Company unless such effects, events, circumstances or conditions disproportionately impact the Company and its Subsidiaries; (iv) any effects, changes, events, circumstances or conditions resulting from the announcement or pendency of any of the transactions contemplated by this Agreement other than a breach of a representation or warranty pursuant to this Agreement which would occur except for clauses (iv) or (v) of this definition of Material Adverse Effect; and (v) any effects, changes, events, circumstances or conditions resulting from actions taken by the Parent or the Company in order to comply with the terms of this Agreement other than a breach of a representation or warranty pursuant to this Agreement which would occur except for clauses (iv) or (v) of this definition of Material Adverse Effect. 1.52 Merger. "Merger" shall have the meaning set forth in the Introduction. 1.53 Merger Consideration. "Merger Consideration" shall have the meaning set forth in Section 2.11. 1.54 Merger Sub. "Merger Sub" shall have the meaning set forth in the Introduction. 1.55 Minimum Condition. "Minimum Condition" shall have the meaning set forth in Section 2.1(a). 1.56 Offer. "Offer" shall have the meaning set forth in Section 2.1(a). 1.57 Offer Documents. "Offer Documents" shall have the meaning set forth in Section 2.1(b). 1.58 Offer Price. "Offer Price" shall have the meaning set forth in Section 2.1(a). 1.59 Offer to Purchase. "Offer to Purchase" shall have the meaning set forth in Section 2.1(a). 1.60 Optionholders. "Optionholders" shall mean all Persons holding the Existing Options. 1.61 Parent. "Parent" shall have the meaning set forth in the Introduction. 1.62 Parent-Provided Plan(s). "Parent-Provided Plan(s)" shall have the meaning set forth in Section 6.3(a). 1.63 Pension Plan. "Pension Plan" shall mean the Employee Benefit Plan which is an employee pension benefit and which is subject to Title IV of ERISA (other than a multiemployer plan as defined in ERISA). 1.64 Permitted Liens. "Permitted Liens" shall mean those of the Existing Liens that do not materially detract from the value of the property or assets of the Company subject thereto and do not materially impair the business or operations of the Company. 7 1.65 Person. "Person" shall mean a natural person, corporation, limited liability company, association, joint stock company, trust, partnership, governmental entity, agency or branch or department thereof, or any other legal entity. 1.66 Proxy Statement. "Proxy Statement" shall have the meaning set forth in Section 2.15(b). 1.67 Real Estate. "Real Estate" shall mean the parcels of real property owned or leased by the Company or any Subsidiary. 1.68 SEC. "SEC" shall have the meaning set forth in Section 2.1(b). 1.69 Schedule 14D-1. "Schedule 14D-1" shall have the meaning set forth in Section 2.1(b). 1.70 Schedule 14D-9. "Schedule 14D-9" shall have the meaning set forth in Section 2.2(b). 1.71 Special Meeting. "Special Meeting" shall have the meaning set forth in Section 2.15(a). 1.72 Stockholders. "Stockholders" shall mean all Persons owning any shares of Company Common Stock. 1.73 Subsidiary. "Subsidiary" shall mean any corporation, at least a majority of the outstanding capital stock of which (or any class or classes, however designated, having ordinary voting power for the election of at least a majority of the board of directors of such corporation) shall at the time be owned by the Company directly or through one or more corporations which are themselves Subsidiaries. 1.74 Superior Proposal. "Superior Proposal" shall have the meaning set forth in Section 3.4(b). 1.75 Surviving Corporation. "Surviving Corporation" shall have the meaning set forth in Section 2.4. 1.76 Systems. "Systems" shall have the meaning set forth in Section 4.29. 1.77 Takeover Laws. "Takeover Laws" shall have the meaning set forth in Section 4.28(a). 1.78 Transactions. "Transactions" shall have the meaning set forth in Section 2.2(a). 1.79 Voting Debt. "Voting Debt" shall have the meaning set forth in Section 4.2(c). 8 ARTICLE 2 THE MERGER 2.1 The Offer. (a) As promptly as practicable (but in no event later than five business days after the public announcement of the execution hereof), Merger Sub shall commence (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (collectively, the "Exchange Act")) a tender offer (the "Offer") for all of the outstanding shares of Company Common Stock (including the Company Preferred Rights) at a price of $20 per share of Company Common Stock, net to the seller in cash (such price, or any such higher price per share as may be paid in the Offer, being referred to herein as the "Offer Price"), subject to there being validly tendered and not withdrawn prior to the expiration of the Offer, that number of shares of Company Common Stock (excluding shares of Company Common Stock held in the Company's treasury) which represents at least a majority of the Company Common Stock outstanding on a Fully Diluted Basis (the "Minimum Condition") and to the other conditions set forth in Annex A hereto, and shall consummate the Offer in accordance with its terms ("Fully Diluted Basis" means issued and outstanding Company Common Stock and Company Common Stock subject to issuance under the Existing Options). The obligations of Merger Sub to accept for payment and to pay for any Company Common Stock validly tendered on or prior to the expiration of the Offer and not withdrawn shall be subject only to the Minimum Condition and the other conditions set forth in Annex A hereto. The Offer shall be made by means of an offer to purchase (the "Offer to Purchase") containing the terms set forth in this Agreement, the Minimum Condition and the other conditions set forth in Annex A hereto. Merger Sub shall not amend or waive the Minimum Condition and shall not decrease the Offer Price or decrease the number of shares of Company Common Stock sought, or amend any other condition of the Offer in any manner adverse to the holders of the Company Common Stock without the prior written consent of the Company; provided, however, that if on the initial scheduled expiration date of the Offer which shall be twenty business days after the date the Offer is commenced, the sole condition remaining unsatisfied is the failure of the waiting period under the HSR Act to have expired or been terminated, Merger Sub shall extend the expiration date from time to time until two business days after the expiration of the waiting period under the HSR Act. Merger Sub shall, on the terms and subject to the prior satisfaction or waiver of the conditions of the Offer, accept for payment Company Common Stock tendered as soon as it is legally permitted to do so under applicable law; provided, however, that if, immediately prior to the initial expiration date of the Offer (as it may be extended), the Company Common Stock tendered and not withdrawn pursuant to the Offer equals less than 90% of the outstanding Company Common Stock, Merger Sub may extend the Offer two times for a period not to exceed ten business days, notwithstanding that all conditions to the Offer are satisfied as of such expiration date of the Offer. (b) As soon as practicable on the date the Offer is commenced, Parent and Merger Sub shall file with the United States Securities and Exchange Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 with respect to the Offer (together with all amendments and supplements thereto and including the exhibits thereto, the "Schedule 14D-1"). 9 The Schedule 14D-1 will include, as exhibits, the Offer to Purchase and a form of letter of transmittal and summary advertisement (collectively, together with any amendments and supplements thereto, the "Offer Documents"). The Offer Documents will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Stockholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by Parent or Merger Sub with respect to information furnished by the Company to Parent or Merger Sub, in writing, expressly for inclusion in the Offer Documents. The information supplied by the Company to Parent or Merger Sub, in writing, expressly for inclusion in the Offer Documents and by Parent or Merger Sub to the Company, in writing, expressly for inclusion in the Schedule 14D-9 will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) Each of Parent and Merger Sub will take all steps necessary to cause the Offer Documents to be filed with the SEC and to be disseminated to the Stockholders, in each case as and to the extent required by applicable federal securities laws. Each of Parent and Merger Sub, on the one hand, and the Company, on the other hand, will promptly correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect and Parent and Merger Sub will take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to the Stockholders, in each case as and to the extent required by applicable federal securities laws. The Company and its counsel shall be given the opportunity to review the Schedule 14D-1 before it is filed with the SEC. In addition, Parent and Merger Sub will provide the Company and its counsel, in the form in which they are received, with any comments, whether written or oral, Parent, Merger Sub or their counsel may receive from time to time from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments. 2.2 Company Actions. (a) The Company hereby approves of and consents to the Offer and represents that its Board of Directors, at a meeting duly called and held, has (i) unanimously determined that each of the Agreement, the Offer and the Merger are fair to and in the best interests of the Stockholders, (ii) approved this Agreement and the transactions contemplated hereby, including the Offer and the Merger (collectively, the "Transactions"), and (iii) resolved to recommend that the Stockholders accept the Offer, tender their Company Common Stock thereunder to Merger Sub and approve and adopt this Agreement and the Merger; provided, that such recommendation may be withdrawn, modified or amended if, in the good faith opinion of the Board of Directors, based upon the receipt of advice from outside independent legal counsel and after consultation with a nationally recognized investment bank, failure to withdraw, modify or amend such recommendation could violate the Board's fiduciary duties under applicable Law. 10 (b) Concurrently with the commencement of the Offer, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto and including the exhibits thereto, the "Schedule 14D-9") which shall contain the approval and recommendation of the Board referred to in Section 2.2(a) hereof. The Schedule 14D-9 will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Stockholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to information furnished by Parent or Merger Sub, in writing, expressly for inclusion in the Schedule 14D-9. The Company further agrees to take all steps necessary to cause the Schedule 14D-9 to be filed with the SEC and to be disseminated to the Stockholders, in each case as and to the extent required by applicable federal securities laws. Each of the Company, on the one hand, and Parent and Merger Sub, on the other hand, agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false and misleading in any material respect, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to the Stockholders, in each case as and to the extent required by applicable federal securities laws. Parent and its counsel shall be given the opportunity to review the Schedule 14D-9 before it is filed with the SEC. In addition, the Company agrees to provide Parent, Merger Sub and their counsel, in the form in which they are received, with any comments, whether written or oral, that the Company or its counsel may receive from time to time from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments or other communications. (c) In connection with the Offer, the Company will promptly furnish or cause to be furnished to Merger Sub mailing labels, security position listings and any available listing, or computer file containing the names and addresses of all recordholders of Company Common Stock as of a recent date, and shall furnish Merger Sub with such additional information (including, but not limited to, updated lists of Stockholders and their addresses, mailing labels and lists of security positions) and assistance as Merger Sub or its agents may reasonably request in communicating the Offer to the record and beneficial holders of the Company Common Stock. Except for such steps as are necessary to disseminate the Offer Documents, Parent and Merger Sub shall hold in confidence the information contained in any of such labels and lists and the additional information referred to in the preceding sentence, will use such information only in connection with the Offer, and, if this Agreement is terminated, will, upon request of the Company, deliver or cause to be delivered to the Company all copies of such information then in its possession or the possession of its agents or representatives. 2.3 Directors. (a) Promptly upon the purchase of and payment for any Company Common Stock by Parent or any of its Subsidiaries which represents at least a majority of the outstanding Company Common Stock (on a Fully Diluted Basis), Parent shall be entitled to designate such number of directors, rounded up to the next whole number, on the Board of Directors of the 11 Company as is equal to the product of the total number of directors on such Board (giving effect to the directors designated by Parent pursuant to this sentence) multiplied by the percentage that the number of shares of Company Common Stock so accepted for payment bears to the total number of shares then outstanding. In furtherance thereof, the Company shall, upon request of Merger Sub, promptly either increase the size of its Board of Directors or secure the resignation of such number of its incumbent directors, or both, as is necessary to enable Parent's designees to be so elected to the Company's Board, and shall take all actions available to the Company to cause Parent's designees to be so elected. At such time, the Company shall, if requested by Parent, also cause persons designated by Parent to constitute at least the same percentage (rounded up to the next whole number) as is on the Company's Board of Directors on each committee of the Company's Board of Directors. The Parent shall use its best efforts to cause the Company to have at least one independent director until the Effective Time, including, but not limited to retaining one of the Company's current directors. (b) The Company shall promptly take all actions required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under Section 2.3(a), including mailing to shareholders the information required by such Section 14(f) and Rule 14f-1 as is necessary to enable Parent's designees to be elected to the Company's Board of Directors. Parent or Merger Sub will supply the Company and be solely responsible for any information provided by them in writing expressly for inclusion in the information sent to Stockholders with respect to either of them and their nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1. The provisions of this Section 2.3 are in addition to and shall not limit any rights which the Merger Sub, Parent or any of their affiliates may have as a holder or beneficial owner of Company Common Stock as a matter of law with respect to the election of directors or otherwise. 2.4 The Merger. Upon the terms and subject to the conditions set forth in this Agreement and in accordance with the Delaware General Corporation Law ("DGCL") at the Effective Time, Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub shall cease and the Company shall (i) be the surviving corporation in the Merger (in such capacity, the "Surviving Corporation"), (ii) succeed to and assume all the rights and obligations of Merger Sub in accordance with the DGCL, and (iii) continue its corporate existence under the laws of the State of Delaware. The Merger shall be pursuant to the provisions of, and shall be with the effect provided in, the DGCL. In accordance with the DGCL, all of the rights, privileges, property, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all of the debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 2.5 Effective Time; Filing of Certificate of Merger. Subject to the terms of this Agreement, the parties hereto shall cause the Merger to be consummated by filing a properly executed Certificate of Merger or other appropriate documents with the Secretary of State of the State of Delaware in accordance with the provisions of the DGCL. The Merger shall become effective at the time of such filing of the Certificate of Merger with the Secretary of State of the State of Delaware or at such later date or time as Merger Sub and the Company shall agree and specify in the Certificate of Merger (the "Effective Time"). 12 2.6 Certificate of Incorporation. At the Effective Time, the Certificate of Incorporation of Merger Sub as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended in accordance with its terms and the DGCL. 2.7 Bylaws. At the Effective Time, the Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended in accordance with their terms and the DGCL. 2.8 Directors and Officers. At the Effective Time, the directors of Merger Sub and the officers of the Company immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation. Each director and officer of the Surviving Corporation shall hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation until his or her death, resignation or removal or a successor is duly elected or appointed and qualified. 2.9 Additional Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that consistent with the terms of this Agreement any further assignments or assurances in law or any other acts are necessary or desirable (i) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, title to and possession of any property or right of either Constituent Corporation acquired or to be acquired by reason of, or as a result of, the Merger, or (ii) otherwise to carry out the purposes of this Agreement, then, subject to the terms and conditions of this Agreement, each such Constituent Corporation and its officers and directors shall be deemed to have granted to the Surviving Corporation an irrevocable power of attorney to execute and deliver all such deeds, assignments and assurances in law and to do all acts necessary or proper to vest, perfect or confirm title to and possession of such property or rights in the Surviving Corporation and otherwise to carry out the purposes of this Agreement; and the officers and directors of the Surviving Corporation are fully authorized in the name of either Constituent Corporation to take any and all such action. 2.10 Time and Place of Closing. The closing of the Merger (the "Closing") shall take place (i) at the offices of Sullivan & Cromwell, 375 Park Avenue, New York, New York on a date and at a time to be specified by the parties, which shall be no later than the second business day following satisfaction or waiver of all of the conditions set forth in Article 7, or (ii) at such other place, at such other time or on such other date as the parties may mutually agree (the date of the Closing is hereinafter sometimes referred to as the "Closing Date"). 2.11 Conversion of Company Common Stock. (a) Each share of the Company Common Stock issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, shares of Company Common Stock beneficially owned by Parent and Merger Sub, and shares of Common Stock held in the Company's treasury), shall, by virtue of the Merger and without any action on the part of the Company, the Parent, Merger Sub or the holder thereof, be converted into the right to receive 13 the Offer Price in cash, payable to the holder thereof, without any interest thereon ("Merger Consideration"), as soon as reasonably practicable after the surrender of the certificate(s) representing such Company Common Stock as provided in Section 2.12. (b) Each share of common stock, par value $0.01 per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into one share of common stock of the Surviving Corporation. Each certificate evidencing ownership of any such shares shall, following the Merger, evidence ownership of the same number of shares of common stock of the Surviving Corporation. (c) Payments in respect of the Existing Options are provided for in Section 2.18 below. 2.12 Exchange of Shares. (a) Prior to the Effective Time, the Company shall appoint a Person that is reasonably acceptable to the Parent to act as the exchange agent hereunder (the "Exchange Agent") to receive in trust the funds to which Stockholders shall become entitled upon surrender of the certificates for exchange in accordance with this Section 2.12. As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a share certificate which immediately prior to the Effective Time represented outstanding Company Common Stock (other than Parent, the Company, any Subsidiary of Parent and any holder of Dissenting Shares): (1) a letter of transmittal (a "Letter of Transmittal") which shall (x) specify that delivery shall be effected, and risk of loss and title to each such certificate shall pass, only upon delivery of such certificates to the Exchange Agent, (y) contain a representation in a form reasonably satisfactory to the Parent as to the good and marketable title to the Company Common Stock held by such holder free and clear of any Lien, and (z) contain such other provisions as the Company and the Parent may reasonably specify; and (2) instructions to effect the surrender of such certificate(s) in exchange for a check in an amount equal to the Offer Price multiplied by the number of shares of Company Common Stock represented by such certificate(s). Parent shall cause Merger Sub to provide the Exchange Agent from time to time on behalf of the Stockholders, amounts in cash required to make prompt payment of the Merger Consideration provided for in Section 2.11(a) to the holder of such certificate(s). Parent shall provide to the Company prompt written notice of the provision of funds to the Exchange Agent. Thereafter (except as otherwise provided for in Section 2.12(c)), each holder of certificate(s) representing Company Common Stock may surrender such certificate(s) to the Exchange Agent and (subject to applicable abandoned property, escheat and similar laws) receive from the Exchange Agent in exchange therefor an amount equal to the product of (x) the Offer Price and (y) the number of shares of Company Common Stock represented by the certificate(s) 14 so surrendered, without interest, but such holder shall have no rights whatsoever against the Surviving Corporation. Upon the surrender of any such certificate(s) to the Exchange Agent, the Exchange Agent shall promptly surrender such certificate(s) to the Surviving Corporation for cancellation. (b) If the consideration payable for any Company Common Stock is to be delivered to a person other than the person in whose name the certificate(s) representing such Company Common Stock is registered, it shall be a condition of such delivery that the certificate(s) so surrendered shall be properly endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name of the record holder appears on such certificate, and shall otherwise be in proper form for transfer, and that the person requesting such delivery shall pay to the Exchange Agent or the Surviving Corporation, as the case may be, any transfer or other taxes required by law as a result of such delivery to a person other than the record holder of the certificate(s) surrendered or shall establish to the Exchange Agent's and the Surviving Corporation's reasonable satisfaction that such tax has been paid or is not payable. (c) From and after one (1) year following the Closing Date, any Stockholders who have not theretofore complied with Section 2.12(a) shall thereafter look only to the Surviving Corporation for delivery of the Merger Consideration, subject in all events to all applicable escheat and other similar laws. (d) Until surrender as contemplated by this Section 2.12, certificate(s) representing Company Common Stock shall be deemed at all times after the Effective Time to represent only the right to receive upon surrender the Merger Consideration as specified in this Agreement. (e) No interest shall accrue or be payable with respect to any amounts which any Stockholder or Optionholder shall be entitled to receive pursuant to this Agreement. The Exchange Agent shall be authorized to pay the Merger Consideration attributable to any certificate(s) representing Company Common Stock which has been lost or destroyed upon receipt of evidence of ownership of the Company Common Stock represented thereby and of appropriate indemnification and/or bond in each case reasonably satisfactory to the Company or the Surviving Corporation, as the case may be (but no bond shall be required in cases of 25 shares or less). (f) Neither the Exchange Agent nor any party to this Agreement shall be liable to any Stockholder or Optionholder for any Company Common Stock, any Existing Options, the Offer Price, the Merger Consideration, or cash delivered to a public official pursuant to any abandoned property, escheat or similar law. (g) The Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any Stockholder or Optionholder such amounts as the Company reasonably determines are required to be deducted and withheld with respect to the making of such payment under the Code, or any provision of state, local or foreign tax Law. To the extent that amounts are so withheld by the Exchange Agent, such 15 withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Stockholder or Optionholder in respect of which such deduction and withholding was made by the Exchange Agent. 2.13 No Further Rights or Transfers; Cancellation of Treasury Shares. Except for the surrender of the certificate(s) representing the Company Common Stock in exchange for the Merger Consideration with respect to each share of Company Common Stock or the perfection of appraisal rights with respect to the Dissenting Shares, at and after the Effective Time, the holder of shares of Company Common Stock shall cease to have any rights as a stockholder of the Company, and no transfer of shares of Company Common Stock shall thereafter be made on the stock transfer books of the Surviving Corporation. Each share of Company Common Stock held in the Company's treasury or held by Parent or Merger Sub immediately prior to the Effective Time shall, by virtue of the Merger, be canceled and retired and cease to exist without any conversion thereof. 2.14 Dissenters' Rights. Shares of Company Common Stock which immediately prior to the Effective Time are held by Stockholders who have properly exercised and perfected appraisal rights under Section 262 of the DGCL (the "Dissenting Shares") shall, if required by the DGCL, but only to the extent required thereby, not be converted into the right to receive the Merger Consideration, but the holders of Dissenting Shares shall be entitled to receive such consideration as shall be determined pursuant to Section 262 of the DGCL; provided, however, that if any such holder shall have failed to perfect or shall withdraw or lose his right to appraisal and payment under the DGCL, such holder's shares of Company Common Stock shall thereupon be deemed to have been converted as of the Effective Time into the right to receive the Merger Consideration, without any interest thereon, and such shares shall no longer be Dissenting Shares. The Company shall give the Parent, Merger Sub and the Exchange Agent prompt notice of any claim by a Stockholder for payment of fair value for Dissenting Shares as provided in Section 262 of the DGCL. Prior to the Effective Time, the Company will not, except with the prior written consent of Parent and Merger Sub, make any payments with respect to, or settle or offer to settle, any such demands. 2.15 Special Meeting of Stockholders. (a) If required by applicable law in order to consummate the Merger, the Company agrees to take all steps necessary to cause a special meeting of the Stockholders (the "Special Meeting") to be duly called, noticed, convened and held as soon as practicable following the acceptance for payment and purchase of shares of Company Common Stock by the Parent or its affiliates pursuant to the Offer for the purpose of voting to approve this Agreement and the Merger. In connection with the Special Meeting, the Board of Directors of the Company shall, subject to the Board's fulfillment of its fiduciary duties under applicable Law, unanimously recommend to the Stockholders that the Stockholders vote in favor of the approval of this Agreement and the Merger. (b) In connection with the Special Meeting, the Company agrees to promptly prepare and cause to be filed with the SEC and mailed to the Stockholders a notice of the Special 16 Meeting and a definitive proxy statement (the "Proxy Statement") and shall cause such notice to be mailed no later than the time required by applicable Law and the certificate of incorporation and bylaws of the Company. The Parent and Merger Sub agree to provide the Company with any information for inclusion in the Proxy Statement (or any amendments or supplements thereto) which is required by applicable Law or which is reasonably requested by the Company. The Company shall consult with the Parent and Merger Sub with respect to the Proxy Statement (and any amendments or supplements thereto) and shall afford the Parent and Merger Sub reasonable opportunity to comment thereon prior to its finalization. If, at any time prior to the Special Meeting, any event shall occur relating to the Company or the transactions contemplated by this Agreement which should be set forth in an amendment or a supplement to the Proxy Statement, the Company will promptly notify in writing the Parent and Merger Sub of such event. In such case, the Company, with the cooperation of the Parent and Merger Sub, will promptly prepare and mail such amendment or supplement and the Company shall consult with the Parent and Merger Sub with respect to such amendment or supplement and shall afford the Parent and Merger Sub reasonable opportunity to comment thereon prior to such mailing. The Company agrees to notify the Parent and Merger Sub at least three (3) days prior to the mailing of the Proxy Statement (or any amendment or supplement thereto) to the Stockholders. (c) The Parent agrees that if any event with respect to the Parent, Merger Sub or their officers or directors shall occur which is required to be described in an amendment or supplement to the Proxy Statement or any other filing with the SEC that may be required in connection with this Agreement, the Merger and all matters related thereto, the Parent will promptly inform the Company thereof and the Company will cause such event to be so described and such amendment or supplement to be promptly filed with the SEC and, as required by law, disseminated to the Stockholders; provided, however, that prior to such filing or mailing the Company shall consult with the Parent and Merger Sub with respect to such amendment, supplement or other filing and shall afford the Parent and Merger Sub a reasonable opportunity to comment thereon. 2.16 Merger Without Meeting of Stockholders. Notwithstanding Section 2.15 hereof, in the event that Parent, Merger Sub and any other Subsidiaries of Parent shall acquire in the aggregate at least 90% of the Company Common Stock, pursuant to the Offer or otherwise, the parties hereto shall, at the request of Parent and subject to Article 7 hereof, take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without a meeting of stockholders of the Company, in accordance with Section 253 of the DGCL. 2.17 Reasonable Best Efforts. So long as this Agreement has not been terminated, the Company, Parent and Merger Sub shall: (i) promptly make their respective filings and thereafter make any other submissions required under all applicable laws with respect to this Agreement, the Offer, the Merger and the other transactions contemplated hereby and (ii) use their respective reasonable best efforts to promptly take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the Offer and the Merger as provided for in this Agreement. 17 2.18 Existing Options. (a) As of the Effective Time, each Existing Option other than the Company Preferred Shares which is outstanding at the Effective Time will be exchanged for, and the holders of each such Existing Option will be entitled to receive at the Closing (or thereafter, if necessary) upon surrender of such Existing Option for cancellation, cash equal to (i) the product of (a) the positive difference, if any, between the Offer Price less the exercise price of each such Existing Option, multiplied by (b) the number of shares of Company Common Stock covered by such Existing Option. Notwithstanding the foregoing, from and after the Effective Time each holder of Company Preferred Shares shall have the right to convert its Company Preferred Shares only into the amount of cash provided for by the terms of the Company Preferred Shares after giving effect to any adjustment in the conversion price provided for by such terms, which the Company hereby acknowledges and represents shall be $26.40 per Company Preferred Share. (b) The Company shall take all actions reasonably necessary to ensure that from and after the Effective Time the Surviving Corporation will not be bound by any options, warrants, rights or agreements which would entitle any person, other than Parent or Merger Sub, to beneficially own shares of Surviving Corporation or Parent or receive any payments (other than as set forth in Section 2.18(a)) in respect of such options, warrants, rights or agreements. The Company shall take all actions necessary to terminate each plan with respect to Existing Options as of the Effective Time. ARTICLE 3 OTHER AGREEMENTS 3.1 Access. Subject to the provisions of the Confidentiality Agreement referred to in Section 3.6 below, and so long as this Agreement has not been terminated as herein provided, upon reasonable request, the Company shall grant to Parent, Merger Sub and their agents, accountants, attorneys and other advisers reasonable access during normal business hours to the properties, facilities, books, records, financial statements and other documents and materials of the Company and its Subsidiaries. In addition, the Company shall confer and consult with representatives of Parent, as Parent may reasonably request, to report on operational matters, financial matters and the status of ongoing business operations of the Company. 3.2 Company Disclosure Letter. The Company has delivered to Parent the Company Disclosure Letter as provided in Article 4. The Company Disclosure Letter shall be signed by the President and the Secretary of the Company and shall state that such Company Disclosure Letter was delivered pursuant to this Agreement and that such Company Disclosure Letter is the Company Disclosure Letter referred to in this Agreement. The Company Disclosure Letter is deemed to constitute an integral part of this Agreement and to modify, as specified, the representations, warranties, covenants or agreements of the Company contained in this Agreement. 18 3.3 Deliveries of Information. From time to time after the date of this Agreement and prior to the Closing Date (unless this Agreement is terminated), the Company shall furnish promptly to Parent a copy of each report, schedule and other document filed by the Company or received by the Company after the date of this Agreement pursuant to the requirements of federal or state securities Laws promptly after such documents are available. 3.4 Acquisition Proposals. (a) The Company agrees that, as of the date hereof, it, its Affiliates, and the respective directors, officers, employees, agents and representatives of the foregoing, shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Person (other than Parent and its representatives) conducted heretofore with respect to any Acquisition Transaction. Prior to the Effective Time, the Company agrees that neither it, any of its Affiliates, nor any of the respective directors, officers, employees, agents or representatives of the foregoing, will, directly or indirectly, (i) solicit or initiate, or knowingly facilitate or encourage (including by way of furnishing or disclosing non-public information) any Acquisition Transaction or (ii) negotiate, explore or otherwise engage in discussions with any Person (other than Parent and its representatives) with respect to any Acquisition Transaction, or which may lead to a proposal for an Acquisition Transaction, or enter into any agreement, arrangement or understanding with respect to any such Acquisition Transaction or which would require it to abandon, terminate or fail to consummate the Merger or any other transaction contemplated by this Agreement, or which may cause the Board to withdraw, modify or amend its recommendation that the Stockholders accept the Offer, tender their Company Common Stock to Merger Sub or approve and adopt the Agreement and the Merger; provided, however, that the Company may, in response to a bona fide unsolicited proposal from a third party regarding an Acquisition Transaction, (x) furnish information to and engage in discussions and negotiations with such third party (subject to such third party entering into a confidentiality agreement with the Company containing terms substantially similar to the Confidentiality Agreement (as defined herein)), but only if the Board of Directors of the Company reasonably determines in good faith, after consultation with its outside independent counsel and a nationally recognized investment bank, that such unsolicited proposal could reasonably lead to a Superior Proposal and that failing to take such action could violate the Board's fiduciary duties under applicable Law and (y) take and disclose to the Stockholders any proposal, and make related filings with the SEC, as required by Rule 14e-3 and 14d-9 under the Exchange Act. Any violation of this Section 3.4 by any director, officer, Affiliate, investment banker, financial advisor, attorney or other advisor or representative of the Company, whether or not such Person is purporting to act on behalf of the Company, or otherwise, shall be deemed to be a breach of this Section 3.4 by the Company. As used herein, "Acquisition Transaction" means any inquiries or the making of any proposal other than by Parent or any of its Affiliates with respect to any merger, consolidation or other business combination involving the Company or any Subsidiary or with respect to the acquisition of beneficial ownership of all or any significant part of the assets or capital stock of the Company (including assets held by, or shares of, Subsidiaries). As used herein, "Superior Proposal" means a bona fide, written Acquisition Proposal for at least a majority of the outstanding Company Common Stock that is on terms that the Board reasonably determines in good faith, after consultation with its outside independent legal counsel and a nationally recognized investment bank, would result 19 in a transaction, if consummated, that is more favorable to the Stockholders from a financial point of view than the Offer and the Merger. (b) The Company agrees to advise Parent promptly (within 24 hours in the case of written inquiries or proposals, and otherwise within 48 hours) of (x) the existence of any inquiries or proposals (or desire to make a proposal) received by (or indicated to) it after the date hereof, any such information requested from, or any negotiations or discussions sought to be initiated or continued with, the Company, its Affiliates, or any of the respective directors, officers, employees, agents or representatives of the foregoing, in each case from a Person (other than Parent and its representatives) with respect to an Acquisition Transaction, and (y) the material terms thereof (including the identity of such Person). If the Company engages in discussions or negotiations with respect to any such Acquisition Proposal thereafter in accordance with clause (x) above, the Company shall keep Parent and Merger Sub informed on a timely basis as to such discussions and negotiations and the material terms being discussed or negotiated. 3.5 Public Announcements. Any public announcement made by or on behalf of either Parent or the Company prior to the termination of this Agreement pursuant to Article 8 hereof concerning this Agreement, the transactions described herein or any other aspect of the dealings heretofore had or hereafter to be had between the Company and Parent and their respective Affiliates must first be approved by the other party (any such approval not to be unreasonably withheld), subject to either party's obligations under applicable Law or stock exchange listing requirements or rules (but such party shall use its reasonable best efforts to consult with the other party as to all such public announcements). 3.6 Confidentiality Agreement. The Company and Parent agree that the Confidentiality Agreement entered into between the Company and the Parent, dated November 30, 1998 (the "Confidentiality Agreement") remains in effect, but shall at the Effective Time be deemed to have terminated without further action by the parties. 3.7 Regulatory and Other Approvals. (a) Subject to the terms and conditions herein provided, the Company will (i) take all steps necessary or reasonably desirable, and proceed diligently and in good faith and use its reasonable best efforts to obtain all approvals required by any Contract to consummate the transactions contemplated hereby, (ii) take all steps necessary or reasonably desirable, and proceed diligently and in good faith and use its reasonable best efforts to obtain all approvals, authorizations, and clearances of governmental and regulatory authorities required of the Company or any Subsidiary to permit the Company to consummate the transactions contemplated hereby, (iii) provide such other information and communications to such governmental and regulatory authorities as such authorities may reasonably request, and (iv) cooperate with Parent in obtaining all approvals, authorizations, and clearances of governmental or regulatory authorities and others required of Parent to consummate the transactions contemplated hereby. (b) The Company and Parent will (i) take all reasonable actions necessary to file as soon as practicable, notifications under the HSR Act, (ii) comply at the earliest practicable 20 date with any request for additional information received from the Federal Trade Commission or Antitrust Division of the Department of Justice pursuant to the HSR Act, (iii) request early termination of the applicable waiting period, and (iv) take all reasonable actions necessary to comply with any applicable European Union antitrust laws. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Parent and Merger Sub, subject to the exceptions disclosed in writing in the disclosure letter dated as of the date hereof delivered to the Parent by the Company pursuant to, and as an integral part of, this Agreement (the "Company Disclosure Letter"), which identifies the Section and Subsection numbers hereof to which the disclosures pertain, as follows: 4.1 Organization; Business. (a) Organization. Each of the Company and its Subsidiaries, and to the Company's knowledge, each of the Joint Ventures, is a corporation or similar entity duly and validly organized and existing and in good standing under the Laws of the jurisdiction of its incorporation or formation and is qualified to do business as a foreign corporation or similar entity and in good standing in the jurisdictions where the ownership, leasing or operation of property or the conduct of its business requires its qualification as a foreign corporation or similar entity except where the failure to so qualify would not have a Material Adverse Effect on the Company. (b) Powers. The Company and each of its Subsidiaries has all requisite corporate power and authority to carry on its business as it is now conducted and to own, lease and operate its current assets and properties. 4.2 Capitalization. (a) Capital Stock. The authorized capital stock of the Company consists of (i) 25,000,000 shares of common stock, par value $0.50 per share, of which 8,688,294 shares are issued and outstanding as of the date hereof and none are held in treasury and (ii) 1,000,000 shares of preferred stock having such rights and preferences as the Board of Directors may designate, none of which are outstanding as of the date hereof. Section 1.34 of the Company Disclosure Letter sets forth all of the Existing Options and the number of shares of Company Common Stock which are issuable in respect of the Existing Options. (b) Issuance; Ownership. All of the outstanding capital stock of the Company is duly authorized, validly issued, fully paid and nonassessable and was not issued in violation of any preemptive rights. Section 4.2(b) of the Company Disclosure Letter contains a complete list of the Company's Subsidiaries. Except as set forth in Section 4.2(b) of the Company Disclosure Letter, each of the outstanding shares of capital stock of each of the Company's Subsidiaries and 21 to the Company's knowledge, each of the outstanding shares of capital stock of the Joint Ventures beneficially owned directly or indirectly by the Company is duly authorized, validly issued, fully paid and nonassessable and owned, either directly or indirectly, by the Company free and clear of all Liens. Except for the Company's Existing Options, the Company Preferred Rights, and the Company Preferred Shares, there are no options, warrants, conversion rights or other rights to subscribe for or purchase, or other contracts with respect to, any capital stock of the Company and there are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company. Except as provided in the Joint Venture agreements previously provided to Parent and Merger Sub, to the Company's knowledge, there are no options, warrants, conversion rights or other rights to subscribe for or purchase, or other contracts with respect to, any capital stock of any of the Joint Ventures. Except as set forth in Section 4.2(b) of the Company Disclosure Letter, to the knowledge of the Company, there are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the capital stock of the Company. (c) Voting Debt. As of the date of this Agreement, (i) no bonds, debentures, notes or other indebtedness of the Company having the right to vote under ordinary circumstances ("Voting Debt") are issued or outstanding, and (ii) there are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares of capital stock of the Company. (d) Listings. The Company Common Stock and the Company Preferred Shares are listed for trading on the Nasdaq National Market; the Company's 9 7/8% Senior Notes due 2005, and 10 1/8% Senior Notes due 2007 are listed for trading on the New York Stock Exchange. Except as set forth in the preceding sentence, the Company's securities are not listed or quoted, for trading on any U.S. domestic or foreign securities exchange. 4.3 Authorization; Enforceability. The execution, delivery and performance by the Company of this Agreement are within the corporate power and authority of the Company and have been duly authorized by the Board of Directors of the Company. Except for the approval of the Stockholders as required by Law and the Company's Certificate of Incorporation, and as described in Section 4.23 hereof, no other corporate proceeding or action on the part of the Company is necessary to authorize the execution and delivery by the Company of this Agreement and the consummation by it of the Merger and the other transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and is, and each of the other documents and instruments required by this Agreement to be executed and delivered by the Company will be when executed and delivered by the Company, the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws generally affecting the rights of creditors and subject to general equity principles. 4.4 No Violation or Conflict. Subject to the receipt of the clearance or expiration or termination of the waiting period described in Section 7.1(a), the execution and delivery of this Agreement by the Company and all documents and instruments required by this Agreement to be 22 executed and delivered by the Company do not, and the consummation by the Company of the Offer, the Merger and the other transactions contemplated hereby and the Company's compliance with the provisions hereof will not, (i) except as disclosed in Section 4.4 of the Company Disclosure Letter, result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation under, or result in the loss by the Company or any Subsidiary or to the Company's knowledge, any of the Joint Ventures, of a material benefit or provide any third party with any material benefit under, any Contract of the Company or its Subsidiaries or to the Company's knowledge, any of the Joint Ventures, or result in the creation of any Lien upon any of the properties or assets of the Company or its Subsidiaries or to the Company's knowledge, any of the Joint Ventures, (ii) result in any violation of any provision of the Certificate of Incorporation or Bylaws of the Company or the charter documents of its Subsidiaries or to the Company's knowledge, any of the Joint Ventures, (iii) violate any Existing Permits of the Company or its Subsidiaries or to the Company's knowledge, any of the Joint Ventures, or any Law applicable to the Company or its Subsidiaries or to the Company's knowledge, any of the Joint Ventures, or its properties or assets, other than, in the case of clauses (i) and (iii), any such violations, defaults, rights, losses or Liens that, individually or in the aggregate, would not have a Material Adverse Effect on the Company, or would not affect adversely the ability of the Company to consummate the Merger and the other transactions contemplated by this Agreement. 4.5 Title to Assets. Each of the Company and its Subsidiaries, and, to the Company's knowledge, each of the Joint Ventures owns fee simple or valid leasehold (as the case may be) title to its Real Estate and has valid title to its other tangible assets and properties necessary for the conduct of its business, free and clear of any and all Liens, except for its Permitted Liens or liens listed on Section 4.5 of the Company Disclosure Letter. 4.6 Litigation. Except as set forth in Section 4.6 of the Company Disclosure Letter, (a) there are no actions, suits, claims, litigation, or proceedings pending or, to the knowledge of the Company, threatened against the Company or its Subsidiaries or to the Company's knowledge with respect to any of the Joint Ventures that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company; (b) there are no such actions, suits or proceedings pending or, to the knowledge of the Company, threatened, against the Company or its Subsidiaries or to the Company's knowledge with respect to any of the Joint Ventures which question the legality or validity of the Merger and the other transactions contemplated by this Agreement; and (c) there are no outstanding orders, judgments, injunctions, awards or decrees of any Governmental Entity against the Company or its Subsidiaries or to the Company's knowledge, any of the Joint Ventures, that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company. 4.7 Books and Records; Company Financial Statements. (a) Audited Company Financial Statements. The Company Financial Statements comply in all respects with the applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with the applicable generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the 23 periods involved (except as may be indicated therein). The Company Financial Statements fairly present the consolidated financial position of the Company and its Subsidiaries and to the Company's knowledge, the Joint Ventures, as of the date set forth on each of such Company Financial Statements and the consolidated results of operations and cash flows of the Company and its Subsidiaries and to the Company's knowledge, the Joint Ventures, for the periods indicated on each of the Company Financial Statements. (b) Unaudited Company Financial Statements. Those consolidated financial statements which are unaudited and contained in the Company SEC Documents fairly present the consolidated financial position of the Company and its Subsidiaries and to the Company's knowledge, the Joint Ventures, as of the date set forth on each of such consolidated financial statements and the consolidated results of operations and cash flows of the Company and its Subsidiaries and to the Company's knowledge, the Joint Ventures, for the periods indicated on each of such consolidated financial statements in accordance with GAAP applied on a consistent basis throughout the periods involved except that such unaudited consolidated financial statements do not reflect normal and recurring year-end adjustments and other adjustments described therein and do not contain footnote disclosure of the type associated with audited financial statements. (c) Accounting Records. The accounting books and records of the Company and each of its Subsidiaries and to the Company's knowledge, the Joint Ventures: (i) are in all material respects correct and complete; (ii) are current in a manner consistent with past practice; and (iii) have recorded therein all the properties, assets and liabilities of the Company and its Subsidiaries and the Joint Ventures. (d) Undisclosed Liabilities. There is no material indebtedness, obligation or liability (whether absolute or contingent) of the Company or any of its Subsidiaries and to the Company's knowledge, the Joint Ventures, except for (i) liabilities reflected or reserved for in the Consolidated Balance Sheet for the year ended December 31, 1998 included in the Company Financial Statements or (ii) liabilities or obligations incurred in the ordinary course, consistent with past practice, from January 1, 1999 until the date hereof. 4.8 Absence of Certain Changes. Except as described in Section 4.8 of the Company Disclosure Letter, since December 31, 1998 there has not been any: (a) Material Adverse Effect; (b) transactions by the Company or its Subsidiaries outside the ordinary course of business of the Company or its Subsidiaries, or, to the knowledge of the Company, any of the Joint Ventures, except for the transactions contemplated by this Agreement; (c) declaration, setting aside or payment of any dividend or any distribution in respect of the capital stock of the Company or its Subsidiaries or any direct or indirect redemption, purchase or other acquisition of any such stock by the Company or any Subsidiary; 24 (d) payments or distributions, to the Stockholders as such, other than normal salaries, and except for transactions in the ordinary course of business upon commercially reasonable terms of the Company, to any Affiliate of the Company; (e) tax elections, other than those consistent with past practice, not required by law or any settlement or compromise of any tax liability in either case that is material to the Company or its Subsidiaries; (f) any amendment of any material term of any outstanding security of the Company or any Subsidiary; (g) any incurrence, assumption or guarantee by the Company or any Subsidiary of any Indebtedness in excess of $3.0 million as to any single item or $10.0 million in the aggregate, or any foreign currency, hedging, financial derivative or similar transactions, other than in the ordinary course of business and in amounts and on terms consistent with past practices; (h) the making by the Company or any Subsidiary of any Investment; (i) any transaction or any agreement entered into, by the Company or any Subsidiary or, to the knowledge of the Company, any of the Joint Ventures relating to its assets or business (including the acquisition or disposition of assets) or any relinquishment by the Company or any Subsidiary or any Joint Venture of any contract or other right, in either case, material to the Company and the Subsidiaries taken as a whole, other than transactions and commitments in the ordinary course of business consistent with past practice and those contemplated by this Agreement; (j) any change in any method of accounting or accounting practice by the Company or any Subsidiary, except for any such change required by reason of a concurrent change in GAAP or in Regulation S-X promulgated under the Exchange Act; (k) any grant of any severance or termination pay to any director, officer or employee of the Company or any Subsidiary, increase in benefits payable under any existing severance or termination pay policies or employment agreements, entering into any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any Subsidiary, or increases in compensation, bonus or other benefits payable to directors, officers or employees of the Company or any Subsidiary (other than any such increases payable to employees other than directors or officers in the ordinary course of business consistent with past practice); (l) any cancellation, termination, lapse, assignment or other loss of any material permits, licenses, approvals, qualification, authorizations or registrations held by the Company or any Subsidiary or, to the knowledge of the Company, any of the Joint Ventures or any notification to the Company or any Subsidiary or, to the knowledge of the Company, any of the Joint Ventures that any permit, license, approval, qualification, authorization or registration will 25 not be extended beyond its expiration date in effect on the date hereof except for any such occurrence that would not cause a Material Adverse Effect; (m) any capital expenditure by the Company or its Subsidiaries (or series of related capital expenditures) either involving more than $6.0 million (unless such expenditure is identified in the current business plan of the Company or its Subsidiary) or outside the ordinary course of business; (n) any material damage, destruction, or loss (whether or not covered by insurance) from fire or other casualty to its tangible property of the Company or any Subsidiary or, to the knowledge of the Company, any of the Joint Ventures; (o) neither the Company nor its Subsidiaries have adopted, amended, modified, or terminated any bonus, profit-sharing, incentive, severance, or other similar plan for the benefit of any of its directors, officers or employees; or (p) any agreement or binding commitment by the Company or any Subsidiary or, to the knowledge of the Company, any of the Joint Ventures relating to any of the foregoing. 4.9 Performance of Contracts. Each of the material Contracts of the Company and its Subsidiaries is in full force and effect and constitutes the legal and binding obligation of the Company or its Subsidiaries and, to the knowledge of the Company, constitutes the legal and binding obligation of the other parties thereto. Except as disclosed in Section 4.9 of the Company Disclosure Letter, there are no existing breaches or defaults by the Company or its Subsidiaries under any such Contract the effect of which could constitute a Material Adverse Effect on the Company, and, to the knowledge of the Company, no event has occurred or state of circumstances or facts exists which, with the passage of time or the giving of notice or both, could reasonably be expected to constitute such a breach or default. 4.10 Insurance. Section 4.10 of the Company Disclosure Letter lists all of the Existing Insurance Policies of the Company and its Subsidiaries and all outstanding claims against such Existing Insurance Policies. Neither the Company nor any of its Subsidiaries has received notice of cancellation or termination of, or material premium increase with respect to, any such Existing Insurance Policy. All such Existing Insurance Policies provide adequate insurance coverage for the assets and properties of the Company and its Subsidiaries necessary for the conduct of its business as currently being conducted. 4.11 Employee Benefit Plans. Except as disclosed in Section 4.11 of the Company Disclosure Letter for the six-calendar year period prior to and including the calendar year in which the Closing Date occurs: (a) Employee Benefit Plans. Neither the Company nor any ERISA Affiliate maintains or contributes to, any Employee Benefit Plan. Each Employee Benefit Plan that is subject to ERISA or the Code is in substantial compliance with ERISA and the Code. True and complete copies of all Employee Benefit Plans, including, but not limited to, any trust instruments 26 and insurance contracts forming a part of any Employee Benefit Plans, and all amendments thereto have been provided or made available to Parent. Each Pension Plan which is intended to meet the requirements of Section 401(a) of the Code has been determined by the Internal Revenue Service to be "qualified" within the meaning of the Code with respect to "TRA" (as defined in Section 1 of Rev. Proc. 93-39) or will be filed with the Internal Revenue Service with a request for a determination letter on or prior to the end of the applicable remedial amendment period and, to the knowledge of the Company, there are no facts which would adversely affect the tax qualified status of any Pension Plan. (b) ERISA; Code. There is no accumulated funding deficiency, within the meaning of Section 302 of ERISA or Section 412 of the Code, in connection with a Pension Plan. No reportable event, as defined in ERISA (other than reportable events for which the 30-day notice requirement has been waived), has occurred in connection with a Pension Plan. Neither the Company nor any ERISA Affiliate is contributing to, nor has any such party incurred any liability with respect to, any multi-employer plan, as defined in Section 3(37) of ERISA. (c) Compliance. Neither the Company nor any ERISA Affiliate has incurred, directly or indirectly, any liability to or on account of a Pension Plan or any terminated or frozen single employer Pension Plan within the meaning of Section 4001(a)(15) of ERISA; no proceedings have been instituted to terminate any Pension Plan; and, to the knowledge of the Company, no condition exists that presents a material risk to the Company or any ERISA Affiliate of incurring a liability to or on account of a Pension Plan. (d) Funding. As of December 31, 1999, the current value of the assets of each Pension Plan exceeds the accumulated benefit obligation for the Pension Plan as defined under FASB No. 87 (as amended by statement 132); and all contributions or other amounts payable by the Company as of the Effective Time with respect to each of its Employee Benefit Plans in respect of current or prior plan years have been either paid or accrued on the balance sheet of the Company. There are no pending or, to the knowledge of the Company, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the Employee Benefit Plans or any trusts related thereto and neither the Company nor any Subsidiary has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. (e) Other Plan Obligations. To the knowledge of the Company, neither the Company nor any ERISA Affiliate, nor any of its Employee Benefit Plans, nor any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which the Company or any ERISA Affiliate, any of its Employee Benefit Plans, any such trust, or any trustee or administrator thereof, or any party dealing with any of its Employee Benefit Plans or any such trust could be subject to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the Code. No Employee Benefit Plan of the Company provides death or medical benefits (whether or not insured), with respect to current or former employees of the Company or any ERISA Affiliate beyond their retirement or other termination of service other than (i) coverage mandated by applicable Law or (ii) death benefits under any "employee pension plan," as that term is defined in Section 3(2) of ERISA. 27 Subject to requirements in a collective bargaining agreement, under the terms of the Employee Benefit Plans, the Company or any Subsidiary may amend or terminate any such Employee Benefit Plan at any time without incurring any liability thereunder. The consummation of the transactions contemplated by this Agreement will not (i) entitle any employees of the Company or any Subsidiary to severance pay; (ii) accelerate the time of payment or vesting or trigger any payment or funding (through a grantor trust or otherwise) of compensation or benefits under, increase the amount payable or trigger any other material obligation pursuant to, any of the Employee Benefit Plans; or (iii) result in any breach or violation of, or a default under, any of the Employee Benefit Plans. All Employee Benefit Plans covering current or former non-U.S. employees comply in all material respects with applicable local law. The Company and its Subsidiaries have no material unfunded liabilities with respect to any Pension Plan that covers such non-U.S. employees. 4.12 Brokers' and Finders' Fees. Except for fees to be paid to Salomon Smith Barney Inc., the Company has not incurred any brokers', finders', investment bankers' or any similar fee in connection with the transactions contemplated by this Agreement. A true, correct and complete copy of the engagement letter between the Company and Salomon Smith Barney Inc. has been made available to Parent. 4.13 Taxes. (a) Tax Returns. For all years for which the applicable statutory period of limitations has not expired, the Company and each of its Subsidiaries has timely and properly filed, and will through the Closing Date timely and properly file, all material federal, state, local and foreign tax returns (including but not limited to income, franchise, sales, payroll, employee withholding and social security and unemployment) which were or will be required to be filed and all such tax returns are or will be true and complete in all material respects. The Company and each of its Subsidiaries has paid all taxes shown on such returns (including interest and penalties) and withholding amounts owed by the Company and each of its Subsidiaries except where the failure to do so would not cause a Material Adverse Effect on the Company. The Company and each of its Subsidiaries have made adequate provisions or reserves for any accrued taxes that are not yet due and payable. No material tax deficiencies have been proposed or assessed against the Company or its Subsidiaries. To the knowledge of the Company, no issue has been raised in any prior tax audit of the Company or its Subsidiaries which, by application of the same or similar principles, could reasonably be expected, upon a future tax audit of the Company or its Subsidiaries to result in a proposed deficiency for any period and which deficiency would have a Material Adverse Effect on the Company. Except as disclosed in Section 4.13 of the Company Disclosure Letter, the Company is not liable for any taxes attributable to any other Person, whether by reason of being a member of another affiliated group, being a party to a tax sharing agreement, as a transferee or successor, or otherwise. (b) Audits. Except as disclosed on Section 4.13 of the Company Disclosure Letter, the Company and each of its Subsidiaries have not consented to any extension of the statute of limitations with respect to any open federal, state or local tax returns. 28 (c) Liens. There are no tax Liens upon any property or assets of the Company necessary for the conduct of its business as currently being conducted, except for Liens for current taxes not yet due and payable, and except for such claims which, individually or in the aggregate, would not have a Material Adverse Effect on the Company. (d) Deliveries. The Parent has had the opportunity to review correct and complete copies of all tax returns and reports of the Company filed for all periods not barred by the applicable statute of limitations through the date hereof. Except as disclosed in Section 4.13 of the Company Disclosure Letter, no examination or audit of any tax return or report for any period not barred by the applicable statute of limitations has occurred, no such examination is in progress and, the Company has not received written notice that any such examination or audit is planned. (e) Withholding Taxes. The Company has properly withheld and timely paid substantially all withholding and employment taxes which it was required to withhold and pay relating to salaries, compensation and other amounts heretofore paid to its employees or other Persons. All Forms W-2 and 1099 required to be filed with respect thereto have been timely and properly filed except where the failure to file would not have a Material Adverse Effect. (f) Other Representations. The Company has not and will not make any elections under Section 341(f) of the Code and, except as shown in Section 4.13 of the Company Disclosure Letter, has and will not be subject to Section 280G of the Code. 4.14 Real Estate. Except as set forth in Section 4.14 of the Company Disclosure Letter, the Real Estate: (a) constitutes all real property and improvements leased or owned by the Company or any Subsidiary; and (b) is not subject to any leases, tenancies, encumbrances or encroachments of any kind except for Permitted Liens. 4.15 Governmental Approvals. No permission, approval, determination, consent or waiver by, or any declaration, filing or registration with, any federal, state, local or foreign court, arbitral tribunal, administrative agency or commission or other governmental or regulatory authority or administrative agency (a "Governmental Entity") is required by the Company in connection with the execution and delivery of this Agreement by the Company or the consummation of the Offer or the consummation by the Company of the Merger or the other transactions described herein, except for: (a) the approvals or filings in connection with (i) the HSR Act as described in Section 7.1(a) and (ii) the Exchange Act, including, without limitation, filing the Proxy Statement with the SEC; (b) the filing of the Certificate of Merger as described in this Agreement; and (c) such other permissions, approvals, determinations, consents, waivers, declarations, filings, or registrations that are not material and that would not materially impair the Company's ability to consummate the Merger and the other transactions contemplated hereby. 4.16 No Pending Acquisitions. Except for this Agreement and previously executed confidentiality agreements, the Company is not a party to or bound by any agreement, undertaking or commitment with respect to an Acquisition Transaction. 29 4.17 Labor Matters. (a) Employment Claims. Except as set forth in Section 4.17 of the Company Disclosure Letter, there is no present or former employee of the Company or any of its Subsidiaries who has any claim against the Company or any of its Subsidiaries (whether under Law, under any employee agreement or otherwise) on account of or for: (i) overtime pay, other than overtime pay for the current payroll period; (ii) wages or salaries, other than wages or salaries for the current payroll period; or (iii) vacations, sick leave, time off or pay in lieu of vacation or time off, other than vacation, sick leave or time off (or pay in lieu thereof) earned in the period immediately preceding the date of this Agreement or incurred in the ordinary course of business and appearing as a liability on the most recent Company Financial Statements; except where such claims, individually or in the aggregate, would not have a Material Adverse Effect on the Company. (b) Labor Disputes. Except as disclosed in Schedule 4.17 of the Company Disclosure Letter, (i) there are no pending and unresolved material claims by any Person against the Company or any of its Subsidiaries arising out of any statute, ordinance or regulation relating to unfair labor practices, discrimination toward employees or in employment practices, or occupational or safety and health standards; (ii) there is no pending, nor has the Company or any of its Subsidiaries experienced any, material labor dispute, strike or organized work stoppage; (iii) to the knowledge of the Company, there is no threatened material labor dispute, strike or organized work stoppage against the Company or any of its Subsidiaries or (iv) the Company is not subject to a proceeding seeking to compel it to bargain with any labor union or labor organization. (c) Union Matters. Except as disclosed in Section 4.17 of the Company Disclosure Letter, (i) neither the Company nor any Subsidiary is a party to any collective bargaining agreement; (ii) to the knowledge of the Company, no union organizing activities are in process or have been proposed or threatened involving any employees of the Company or any of its Subsidiaries; and (iii) no petitions have been filed or, to the knowledge of the Company, have been threatened or proposed to be filed, for union organization or representation of employees of the Company or any of its Subsidiaries not presently organized. 4.18 Existing Permits and Violations of Law. The Company and each of its Subsidiaries and to the Company's knowledge, the Joint Ventures, have all licenses, permits, approvals, exemptions, orders, franchises, qualifications, permissions, agreements and governmental authorizations required by Law and required for the conduct of the business of the Company and its Subsidiaries and the Joint Ventures as currently conducted, except where the failure to have the same would not have a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole. No action or proceeding is pending or, to the knowledge of the Company, threatened that is reasonably likely to result in a revocation, non-renewal, termination, suspension or other material impairment of any material Existing Permits of the Company or its Subsidiaries or the Joint Ventures. The business of the Company and its Subsidiaries and to the Company's knowledge, the Joint Ventures, is not being conducted in violation of any applicable Law, except for such violations which would not have a Material Adverse Effect on the Company 30 and except for such violations of any Environmental Law set forth on Section 4.22 of the Company Disclosure Letter. No Governmental Entity has notified the Company or any Subsidiary or to the Company's knowledge, the Joint Ventures, of the Company of its intention to conduct an investigation or review with respect to the Company or any Subsidiary of the Company or the Joint Ventures other than, in each case, those which would not have a Material Adverse Effect on the Company. 4.19 Warranty or Other Claims. No product manufactured, sold, leased or delivered by the Company or any of its Subsidiaries is subject to any guaranty, warranty, right of return or other indemnity beyond the applicable standard terms and conditions of sale or lease. Except as set forth in Section 4.19 of the Company Disclosure Letter, there are no existing or, to the knowledge of the Company, threatened claims or any facts upon which a claim could be based, against the Company, any of its Subsidiaries or any of the Joint Ventures for services or merchandise which are defective or fail to meet any service or product warranties which would, individually or in the aggregate, have a Material Adverse Effect on the Company. 4.20 Intangible Assets. Section 4.20 of the Company Disclosure Letter contains a complete list identifying each patent which is owned or licensed by the Company or any of its Subsidiaries. Except as set forth in Section 4.20 of the Company Disclosure Letter, (i) there are no claims, demands or proceedings instituted, pending or, to the knowledge of the Company, threatened by any Person contesting or challenging the right of the Company or its Subsidiaries or any of the Joint Ventures to use any Intangible Assets currently used by it in the operation of its business, except where such claims, individually or in the aggregate, would not have a Material Adverse Effect on the Company; (ii) each trademark registration, service mark registration, copyright registration and patent which is owned by the Company or its Subsidiaries, has been maintained in good standing and which is licensed to the Company or its Subsidiaries, to the Company's knowledge, has been maintained in good standing except where the failure to so maintain would not have a Material Adverse Effect on the Company; (iii) there are no Intangible Assets owned by a Person which the Company or its Subsidiaries or, to the knowledge of the Company, any of the Joint Ventures is using without license to do so, except where the failure to possess such license could not reasonably be expected to have a Material Adverse Effect on the Company; (iv) to the Company's knowledge, the Company and each of its Subsidiaries and the Joint Ventures own or possess adequate licenses or other rights to use all Intangible Assets necessary to conduct its business as now conducted, except where the failure to possess such licenses could not reasonably be expected to have a Material Adverse Effect on the Company; and (v) to the Company's knowledge, the consummation of the Merger and the other transactions contemplated by this Agreement will not impair the validity, enforceability, ownership or right of the Company or its Subsidiaries or, to the knowledge of the Company, any of the Joint Ventures to use the Intangible Assets currently used by it in the operation of its business except, in each case, where the impairment would not have a Material Adverse Effect on the Company. 4.21 Customers and Suppliers. Since December 31, 1998, there has been no termination, cancellation or curtailment of the business relationship of the Company with any customer or supplier or group of affiliated customers or suppliers which would result in a Material 31 Adverse Effect, and the Company has not received written notice of any such termination, cancellation or curtailment. 4.22 Environmental Protection. Except as set forth in Section 4.22 of the Company Disclosure Letter or as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on the Company, the Company and each of its Subsidiaries and to the Company's knowledge, each of the Joint Ventures: (i) is in compliance with all applicable Environmental Laws; and (ii) has not received any Environmental Claim or any communication (written or oral), from a governmental authority or third party that alleges that the Company or any current or former Affiliate of the Company is not in compliance with applicable Environmental Laws; (iii) has not owned or operated any property that is contaminated with any Hazardous Material which may be expected to require remediation under any Environmental Law; (iv) is not subject to liability for any off-site disposal or contamination; and (v) is not subject to any other circumstances in connection with any Environmental Law that could reasonably be expected to result in any claims, liabilities, costs or restrictions on the business or the ownership, use or transfer of any property. 4.23 Vote Required. The affirmative vote of the holders of at least a majority of the outstanding shares of Company Common Stock entitled to vote with respect to the Merger is the only vote of the holders of any class or series of the Company's capital stock necessary to approve the Merger and this Agreement. 4.24 SEC Reports. The Company has filed with the SEC true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it since December 31, 1996 under the Exchange Act or the Securities Act (as such documents have been amended since the time of their filing, collectively, the "Company SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the Company SEC Documents, including, without limitation, any financial statements or schedules included therein (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, at such time of filing. 4.25 Content of Proxy Statement. The Proxy Statement, if any (or any amendment thereof or supplement thereto), will, at the date mailed to the Stockholders and at the time of the Special Meeting to be held in connection with the Merger, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Company with respect to statements made therein based on information supplied by Parent or Merger Sub in writing specifically for inclusion in the Proxy Statement. The Proxy Statement will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. 32 4.26 Opinion of Financial Advisor. The Board of Directors of the Company has received the opinion of Salomon Smith Barney Inc., its financial advisor, to the effect that, as of the date of this Agreement, the cash consideration to be received in the Offer and the Merger by the Stockholders (other than Parent and its Affiliates), based upon and subject to the assumptions and limitations set forth in such opinion, is fair to such Stockholders from a financial point of view. 4.27 Certain Agreements. Except as set forth in Section 4.27 of the Company Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to any oral or written agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the consummation of the Merger or any of the other transactions contemplated by this Agreement. Except as described in Section 4.27 of the Company Disclosure Letter, the Merger and the other transactions contemplated by this Agreement will not constitute a "change of control" under, require the consent from or the giving of notice to any third party pursuant to, or accelerate the vesting or repurchase rights under, any Contract to which the Company or any of its Subsidiaries is a party, other than Contracts which are not Contracts with directors, officers or employees of the Company or any Subsidiary and which have been entered into in the ordinary course and are not material. Except as set forth in Section 4.27 of the Company Disclosure Letter, there are no amounts payable by the Company to any officers of the Company (in their capacity as officers) as a result of the Merger or the other transactions contemplated by this Agreement. 4.28 Takeover Law; Company Rights Agreement. (a) The Company has taken all action required to be taken by it in order to exempt this Agreement and the Merger and the other transactions contemplated hereby from, and this Agreement is exempt from, the requirements of all anti-takeover Laws and regulations (collectively, "Takeover Laws") that apply or may purport to apply to the Offer and the Merger, including, without limitation, Section 203 of DGCL. (b) The Company has (i) duly entered into an appropriate amendment to the Company Rights Agreement and (ii) taken all other action necessary or appropriate so that the entering into of this Agreement and the consummation of the Merger and the other transactions contemplated hereby do not and will not result in the ability of any Person to exercise any Company Preferred Rights under the Company Rights Agreement or enable or require the Company Preferred Rights to separate from the shares of Company Common Stock to which they are attached or to be triggered or become exercisable, and the Company Rights Agreement, as so amended, has not been further amended or modified. In particular, the Company has taken all actions necessary under the Rights Agreement, so that the execution of this Agreement and any amendments thereto by the parties hereto and the consummation of any of the transactions contemplated hereby shall not cause (i) Parent and/or Merger Sub or their respective Affiliates to become an Acquiring Person (as such terms are defined in the Rights Agreement) unless this Agreement has been terminated in accordance with its terms or (ii) a Distribution Date, a Shares Acquisition Date, or a Triggering Event (as such terms are defined in the Rights Agreement) to 33 occur, irrespective of the number of shares of Company Common Stock acquired pursuant to the Offer, Merger or other transactions contemplated by this Agreement. 4.29 Year 2000 Compliance. Except as set forth on Schedule 4.29 of the Company Disclosure Letter or as would not result in a Material Adverse Effect, (i) all functions including, without limitation, date-reliant (which includes year-reliant) functions of the information and business systems of the Company and its Subsidiaries (collectively, the "Systems") are capable of continuing to operate up to, during and after the year 2000, (ii) neither the performance nor functionality of the Systems will be affected by any changes to the field configuration which contains the date information within any part of the System caused by the advent of the year 2000, and (iii) the Systems will perform consistent with past performance and there shall be no faults in the processing of dates and date-dependent information or data including, without limitation, in calculations, comparisons and sequencing of information or data. Schedule 4.29 of the Company Disclosure Letter sets forth, with respect to any exception, the nature of such exception in detail, including the nature of the problem, the nature of the steps undertaken and planned, and the Company's good faith estimate of the cost to correct such problem and its projection of a date for project completion. 4.30 Approval by Disinterested Directors. A majority of the Company's Disinterested Directors (as defined in the Company's Restated Certificate of Incorporation, as amended) have approved the Merger. ARTICLE 5 REPRESENTATIONS OF THE PARENT AND MERGER SUB The Parent and Merger Sub represent and warrant to the Company on the date of this Agreement as follows: 5.1 Due Incorporation and Authority. Each of the Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation. Each of Parent and Merger Sub has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Merger. The execution, delivery and performance by each of Parent and Merger Sub of this Agreement and all of the documents and instruments required by this Agreement to be executed and delivered by Parent and/or Merger Sub, and the consummation by Merger Sub of the Merger, have been duly authorized by all the shareholders of Merger Sub and the Board of Directors of Parent and Merger Sub as required by Law and the organizational documents of each such entity, and no other corporate proceedings on the part of Parent or Merger Sub will be necessary to authorize the execution, delivery and performance by each of Parent and Merger Sub of this Agreement, or the consummation by Merger Sub and Parent of the Merger. This Agreement has been duly executed and delivered by Parent and Merger Sub and is, and each of the other documents and instruments required by this Agreement to be executed and delivered by Parent and/or Merger Sub will be, when executed and delivered by Parent and/or Merger Sub, the valid 34 and binding obligations of Parent and Merger Sub, as the case may be, enforceable against Parent and Merger Sub, as the case may be, in accordance with their respective terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar Laws generally affecting the rights of creditors and subject to general equity principles. 5.2 Consents and Approvals. No permission, approval, determination, consent or waiver by, or any declaration, filing or registration with, any Governmental Entity is required by Parent and Merger Sub in connection with the execution and delivery of this Agreement by Parent and Merger Sub or the consummation of the Offer or the consummation by Parent and Merger Sub of the Merger or the other transactions described herein, except for: (a) the approvals or filings in connection with (i) the HSR Act as described in Section 7.1(a), (ii) filings and approvals pursuant to European Union or other applicable European antitrust laws, and (iii) the Exchange Act including, without limitation, filing the Proxy Statement with the SEC; (b) the filing of the Certificate of Merger as described in this Agreement; and (c) such other permissions, approvals, determinations, consents, waivers, declarations, filings, or registrations that are not material and that would not materially impair Parent or Merger Sub's ability to consummate the Merger and the other transactions contemplated hereby. 5.3 Brokers' and Finders' Fees. Except for fees to be paid to Warburg Dillon Read LLC, neither Parent nor Merger Sub has incurred any brokers', finders', investment bankers' or any similar fee in connection with the transactions contemplated by this Agreement. 5.4 No Violation or Conflict. Subject to the receipt of the clearance or expiration or termination of the waiting period described in Section 7.1(a), the execution and delivery of this Agreement by Parent and Merger Sub and all documents and instruments required by this Agreement to be executed and delivered by Parent or Merger Sub do not, and the consummation by Parent and Merger Sub of the Offer, the Merger and the other transactions contemplated hereby and Parent's and Merger Sub's compliance with the provisions hereof will not, (i) result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or the loss by Parent or Merger Sub of a material benefit or provide any third party with any material benefit under, any Contract of Parent or Merger Sub, or result in the creation of any Lien upon any of the properties or assets of Parent or Merger Sub, (ii) result in any violation of any provision of the charter documents of the Parent or the Certificate of Incorporation or Bylaws of Merger Sub, (iii) violate any Existing Permits of Parent or Merger Sub or any Law applicable to Parent or Merger Sub or any of such party's properties or assets, other than, in the case of clauses (i) and (iii), any such violations, defaults, rights, losses or Liens that, individually or in the aggregate, would not affect adversely the ability of Parent or Merger Sub to consummate the Merger and the other transactions contemplated by this Agreement. 5.5 Litigation. As of the date hereof, there are no actions, suits, claims, litigation or proceedings pending or, to the knowledge of Parent or Merger Sub, threatened, against Parent or its Subsidiaries by any Person which question the legality, validity or consummation of the Merger and the other transactions contemplated by this Agreement. 35 5.6 Sufficient Funds. Parent has possession of, or has available to it under existing lines of credit, sufficient funds to consummate the Merger and the other transactions contemplated by this Agreement, including payment of the aggregate cash to be paid in respect of shares of Company Common Stock converted into the right to receive cash in the Merger and all related costs and expenses and will cause Merger Sub to have sufficient funds available to consummate the Merger and the transactions contemplated hereby. ARTICLE 6 COVENANTS AND AGREEMENTS 6.1 Conduct of Business by the Company. From and after the date of this Agreement and until the earlier of the termination of this Agreement, the Effective Time, or the date Parent's designees constitute a majority of the Board of Directors of the Company, the Company shall, and shall cause each of its Subsidiaries to: (a) carry on its business in the usual, regular and ordinary course substantially in the same manner as heretofore carried on; (b) not (i) make payments or distributions (other than normal salaries) to any Affiliate of the Company except for transactions in the ordinary course of business upon commercially reasonable terms and in accordance with past practice; (ii) sell, lease, transfer or assign any of its assets, tangible or intangible, other than the sale of products manufactured by the Company or any Subsidiary in the ordinary course of business and other than the disposition of obsolete or unusable property; (iii) enter into any Contract (x) involving more than $1.0 million individually or $5.0 million in the aggregate (other than purchase and sales orders in the ordinary course of business in accordance with past practice) or (y) outside the ordinary course of business, without the consent of the Parent (which consent shall not be unreasonably withheld, assuming for purposes of determining such reasonableness that the Offer and the Merger are consummated pursuant to the terms of this Agreement); (iv) accelerate, terminate, modify in any material respect, or cancel any Contract (other than purchase and sales orders in the ordinary course of business in accordance with past practice) involving more than $1.0 million individually or $5.0 million in the aggregate to which the Company or any Subsidiary is a party without the consent of the Parent (which consent shall not be unreasonably withheld, assuming for purposes of determining such reasonableness that the Offer and the Merger are consummated pursuant to the terms of this Agreement); (v) make any capital expenditure (or series of related capital expenditures) other than expenditures identified in the current business plan of the Company or its Subsidiaries or (y) outside the ordinary course of business, without the consent of the Parent (which consent shall not be unreasonably withheld, assuming for purposes of determining such reasonableness that the Offer and the Merger are consummated pursuant to the terms of this Agreement); (vi) delay or postpone the payment of accounts payable and other liabilities outside the ordinary course of business; (vii) cancel, compromise, waive or release any right or claim (or series of related rights and claims) not covered by the reserves or accruals relating to such claim in the Company Financial Statements (x) involving more than $1.0 million each or $5.0 million 36 in the aggregate or (y) outside the ordinary course of business consistent with past practice without the consent of the Parent (which consent shall not be unreasonably withheld, assuming for purposes of determining such reasonableness that the Offer and the Merger are consummated pursuant to the terms of this Agreement); (viii) grant any license or sublicense of any rights under, or with respect to, any Intangible Assets; or (ix) make any loan to, or enter into any other transaction with, any of its Affiliates, directors, officers and employees outside the ordinary course of business consistent with past practice; (c) use, operate, maintain and repair all assets and properties of the Company necessary to conduct its business as currently conducted in a normal business manner consistent with its past practices; (d) use its reasonable best efforts to preserve its business organization intact, to retain the services of its employees, subject to changes in the ordinary course, and to conduct business with suppliers, customers, creditors and others having business relationships with the Company or its Subsidiaries in the best interests of the Company and its Subsidiaries, taken as a whole; (e) use its reasonable best efforts to maintain all of its Existing Insurance Policies (or policies substantially equivalent thereto) in full force and effect; (f) not (i) except as required by any Contract to which the Company or any of its Subsidiaries are a party, increase the rate of pay of or other compensation to any of its directors, officers or employees; (ii) institute or amend any Employee Benefit Plan unless required by Law; (iii) enter into or modify any employment or severance agreement with any Person; or (iv) pay or accrue any bonus or incentive compensation to any Person; (g) except for Indebtedness for working capital not to exceed $6.0 million at any one time, not create, incur or assume any Indebtedness in excess of $5.0 million in the aggregate or make any Investment; (h) not amend its Certificate of Incorporation, Bylaws or charter documents; (i) not (i) issue any additional shares of stock of any class (except pursuant to its Existing Options) or grant any warrants, options or rights to subscribe for or acquire any additional shares of stock of any class; (ii) declare or pay any dividend or make any capital, surplus or other distributions (other than normal salaries) of any nature to the Stockholders; or (iii) directly or indirectly redeem, purchase or otherwise acquire, recapitalize or reclassify any of its capital stock or liquidate in whole or in part; (j) timely and properly file, or timely and properly file requests for extensions to file, all federal, state, local and foreign tax returns which are required to be filed, and pay or make provision for the payment of all taxes owed by it; and 37 (k) not do any act or omit to do any act that would result in a breach of any representation by the Company set forth in this Agreement. (l) not make any tax elections, other than those consistent with past practice, not required by law or make any settlement or compromise any tax liability in either case that is material to the Company or its Subsidiaries, without the prior written consent of the Parent (which consent shall not be unreasonably withheld). (m) enter into any agreement, arrangement or understanding with respect to any of the foregoing. 6.2 Indemnification. (a) From and after the date of this Agreement through and including the Effective Time (without regard to the termination of this Agreement), neither Parent nor the Company will take any action, nor permit any action to be taken, which would change or amend the provisions of the Certificate of Incorporation or the Bylaws of the Company in effect on the date hereof relating to limitation of liability or indemnification inconsistent with its obligations under Section 6.2(b) hereof or eliminate or make any modification in the Company's existing director's and officer's insurance inconsistent with its obligations under Section 6.2(c) hereof. The Parent agrees that from and after the Effective Time all rights to indemnification now existing in favor of individuals who at or prior to the Effective Time were directors or officers of the Company or any of its Subsidiaries as set forth in the Certificate of Incorporation or the Bylaws of the Company shall survive the Merger with respect to matters existing or occurring at or prior to the Effective Time and shall continue in full force and effect for a period of six years following the Effective Time. (b) The Company shall, and from and after the Effective Time, the Surviving Corporation shall, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer or director of the Company or any of its Subsidiaries (each individually an "Indemnified Party" and, collectively, the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including attorneys' fees and expenses), liabilities or judgments, fines or amounts that are paid in settlement as a result of or in connection with any threatened or actual action, suit or proceeding based on or arising out of the fact that such person is or was a director or officer of the Company or any of its Subsidiaries or out of or in connection with activities in such capacity, whether pertaining to any matter existing or occurring at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities"), including all Indemnified Liabilities based on, or arising out of, or pertaining to this Agreement or the transactions contemplated hereby, in each case to the full extent a corporation is permitted under the DGCL to indemnify any such person and, without limiting the generality or effect of the foregoing, to the fullest extent provided in the Certificate of Incorporation or the Bylaws of the Company and its Subsidiaries as in effect on the date hereof. The Parent will cause the Surviving Corporation to pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the fullest extent permitted by law and, without limiting 38 the generality or effect of the foregoing, to the fullest extent provided in the respective Certificate of Incorporation or Bylaws of the Company and its Subsidiaries as in effect on the date hereof subject to receipt by the Company of an undertaking by or on behalf of such officer or director contemplated by the DGCL. Without limiting the generality or effect of the foregoing, in the event any such claim, action, suit, proceeding or investigation is brought against any Indemnified Parties (whether arising before or after the Effective Time) and, in the opinion of counsel to an Indemnified Party, under applicable standards of professional conduct, there is a conflict on any significant issue between the position of the Company and an Indemnified Party or different defenses may reasonably be expected to exist, the Indemnified Parties may retain counsel which counsel shall be reasonably satisfactory to the Company (or the Surviving Corporation after the Effective Time) and the Company shall (or after the Effective Time, Parent will cause the Surviving Corporation to) pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received, provided, however that (i) Parent or the Surviving Corporation shall have the right, from and after the Effective Time, to assume the defense thereof (which right shall not affect the right of the Indemnified Parties to be reimbursed for separate counsel as specified in the preceding sentence), (ii) the Company and the Indemnified Parties will cooperate in the defense of any such matter and (iii) neither Parent, the Company nor the Surviving Corporation shall be liable for any settlement effected without its prior written consent. Any Indemnified Party wishing to claim indemnification under this Section 6.2, upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify both the Parent and the Company (or, after the Effective Time, the Surviving Corporation) (but the failure to so notify shall not relieve a party from any liability which it may have under this Section 6.2 except and only to the extent such failure materially prejudices such party), and shall deliver to both the Parent and the Company (or after the Effective Time, the Surviving Corporation) the undertaking contemplated by the DGCL. The Indemnified Parties as a group may not retain more than one counsel to represent them with respect to each such matter unless there is, in the opinion of counsel to an Indemnified Party, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties or unless different defenses may reasonably be expected to exist. The Company, Parent and Merger Sub agree that all rights to indemnification including provisions relating to advances of expenses incurred in defense of any action or suit, existing in favor of the Indemnified Parties with respect to matters occurring through the Effective Time, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Indemnified Liabilities asserted or made within such period shall continue until the disposition of such Indemnified Liabilities. (c) The Parent agrees that the Company, and from and after the Effective Time, the Surviving Corporation shall cause to be maintained in effect for not less than six years (except as provided in the last sentence of this Section 6.2(c)) from the Effective Time the current policies of the directors' and officers' liability insurance maintained by the Company; provided that the Surviving Corporation may substitute therefor other policies of at least the same coverage amounts and which contain terms and conditions not less advantageous (other than to a de minimus extent) to the beneficiaries of the current policies and provided that such substitution shall not result in any gaps or lapses in coverage with respect to matters occurring prior to the Effective Time; and 39 provided, further, that the Surviving Corporation shall not be required to pay an annual premium in excess of 200% of the last annual premium paid by the Company prior to the date hereof and if the Surviving Corporation is unable to obtain the insurance required by this Section 6.2(c) it shall obtain as much comparable insurance as possible for an annual premium equal to such maximum amount. (d) The Parent shall guarantee the obligations of the Surviving Corporation under this Section 6.2. (e) This Section 6.2 shall survive the consummation of the Merger at the Effective Time, is intended to benefit the Company, the Surviving Corporation and the Indemnified Parties, shall be binding on all successors and assigns of Parent and the Surviving Corporation and shall be enforceable by the Indemnified Parties. 6.3 Certain Benefit Plans. (a) Parent agrees that the Company will honor and, from and after the Effective Time, it will cause the Surviving Corporation to honor all obligations under Employee Benefit Plans and all employment agreements entered into by the Company prior to the date hereof; provided, however, that nothing in this Agreement shall be interpreted as limiting the power of Parent or the Surviving Corporation to amend or terminate any such Employee Benefit Plan or as requiring the Parent or the Surviving Corporation to offer to continue (other than as required by its terms) any written employment contract so long as any such action shall not adversely affect the rights or benefits of any employees or other beneficiaries which shall have arisen thereunder prior to such amendment or termination and shall not affect any rights or benefits for which the agreement of the other party or a beneficiary is required as a condition to any such amendment or termination. As soon as administratively practicable following the Effective Time, Parent shall cause all employees of the Company then actually at work to be covered under employee benefit and fringe benefit plans, programs, policies and arrangements (including, without limitation, those which provide medical, dental or life insurance benefits) that are no less favorable than the employee benefit plans, programs, policies and arrangements that Parent maintains for its similarly situated employees ("Parent-Provided Plans"); provided, that nothing in this sentence shall be deemed to limit or otherwise affect the right of the Surviving Corporation to terminate the employment or change the place of work, responsibilities, status or designation of any employee of the Company as the Surviving Corporation may determine in the exercise of its business judgment and in compliance with the terms of any applicable employment or retainer agreement to which the Company or any of its Subsidiaries is presently a party. (b) All service of an employee of the Company taken into account prior to the Effective Time under any Employee Benefit Plan shall, on and after the Effective Time, be taken into account as service with the Parent for purposes of eligibility to participate and vesting under any similar Parent-Provided Plan. Parent shall cause all Parent-Provided Plans to (i) waive any pre-existing condition limitations otherwise applicable on and after the Effective Time to the extent that such conditions are covered under the Company's Employee Benefit Plans immediately prior to the Effective Time and (ii) provide that any expenses incurred by the Company's employees 40 (and their dependents) during the plan year within which the Effective Time occurs shall be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions (and like adjustments or limitations on coverage) under the Parent-Provided Plans. Any salary reduction elections of employees of the Company under a flexible spending plan maintained by the Company pursuant to section 125 of the Code prior to the Effective Time shall continue in effect under any similar Parent-Provided Plan on and after the Effective Time, and any amounts credited and debited to accounts of such employees under such Employee Benefit Plan as of the Effective Time shall be credited and debited to such employees' accounts under such Parent-Provided Plan. 6.4 No Survival of Representations and Warranties. Except for the provisions of Sections 2.9, 2.12, 2.13, 2.14, 2.18, 6.2, 6.3 and 8.3, and Article 9, none of the representations, warranties, covenants, agreements and certifications contained herein shall survive the Effective Time. 6.5 Company Rights Plan. The Company shall make no further amendments to or modifications of the Company Rights Agreement, or adopt any similar rights agreement, from and after the date of this Agreement without the prior written consent of Parent. 6.6 Consents. The Company will use its reasonable best efforts to obtain the consents under the contracts listed in Section 4.28 of the Company Disclosure Letter. 6.7 Potential Claims. The Company and Parent each agree to use their reasonable best efforts to resolve any actions, suits, claims, litigation, or proceedings instituted or threatened by any Governmental Entity or otherwise against any of the parties hereto which would give rise to the occurrence of any of the events specified in paragraph (a) or (b) of Annex A to this Agreement. ARTICLE 7 CONDITIONS TO THE MERGER 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to consummate and effect the Merger shall be subject to the satisfaction prior to or at the Closing as hereinafter provided of the following conditions, each of which may be waived in whole or in part by the party for whose benefit the condition exists, to the extent permitted by Law: (a) Regulatory Approvals. Clearance from the appropriate agencies, pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have been obtained by the Company and the Parent or the waiting period thereby required shall have expired or been terminated. 41 (b) Approval of Stockholders. This Agreement, the Merger and the transactions contemplated by this Agreement shall, if necessary, have received the requisite approval and authorization of the Stockholders in accordance with applicable Law and the Certificate of Incorporation and Bylaws of the Company. (c) Statutes, Court Orders. No statute, rule or regulation shall have been enacted or promulgated by any Governmental Entity which prohibits the consummation of the Merger; and there shall be no order or injunction of a court of competent jurisdiction in effect precluding consummation of the Merger. (d) Purchase of Company Common Stock in Offer. Parent, Merger Sub or their Affiliates shall have purchased Company Common Stock pursuant to the Offer, except that this condition shall not apply if Parent, Merger Sub or their Affiliates shall have failed to purchase Company Common Stock pursuant to the Offer in breach of their obligations under this Agreement. 7.2 Conditions to the Parent's and Merger Sub's Obligation to Effect the Merger. The obligations of the Parent and Merger Sub to consummate the Merger and the other transactions contemplated hereby are further subject to the fulfillment of the condition that all actions contemplated by Section 2.18(b) hereto shall have been taken, which may be waived in whole or part by the Parent or Merger Sub and that the representations and warranties of the Company in Section 4.28 shall have been true when made and shall be true as of the Effective Time. ARTICLE 8 TERMINATION, WAIVER AND AMENDMENT 8.1 Termination. This Agreement may be terminated and the Merger and transactions contemplated by this Agreement may be abandoned at any time prior to the Effective Time (whether before or after the approval of this Agreement by the Stockholders), as follows: (a) by mutual written consent of the Company and the Parent; (b) by either of the Parent or the Company: (i) if (x) the Offer shall have expired without any Company Common Stock being purchased therein or (y) Merger Sub shall not have accepted for payment all Company Common Stock tendered pursuant to the Offer by September 30, 1999; provided, however, that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of Parent or Merger Sub, as the case may be, to purchase the Company Common Stock pursuant to the Offer on or prior to such date; or 42 (ii) if any Governmental Entity shall have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties hereto shall use their reasonable efforts to lift), which permanently restrains, enjoins or otherwise prohibits the acceptance for payment of, or payment for, Company Common Stock pursuant to the Offer or the Merger and such order, decree, ruling or other action shall have become final and non- appealable. (c) by the Company: (i) if Parent, Merger Sub or any of their Affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer; provided, that the Company may not terminate this Agreement pursuant to this Section 8.1(c)(i) if the Company is at such time in breach of its obligations under this Agreement; (ii) upon the execution of a definitive agreement for an Acquisition Transaction that the Board shall have decided to recommend to the Stockholders after the Board has reasonably concluded, after consultation with its outside independent counsel, that such Acquisition Transaction constitutes a Superior Proposal and that its failure to make such recommendation and terminate this Agreement could violate the Board's fiduciary duties under applicable Law, provided (A) it has complied with all provisions of Section 3.4, including the notice provisions therein, (B) that it has paid or made arrangements reasonably satisfactory to Parent to pay promptly (and, in any event, within five (5) business days of the termination of this Agreement) the amounts referred to in Section 8.3 hereof and (C) it shall have provided to Parent at least five business days' prior written notice that the Board intends to terminate this Agreement pursuant to this Section 8.1(c)(ii), specifying the material terms and conditions of such Acquisition Transaction. In connection with the foregoing, the Company agrees that it will (X) not enter into a binding agreement with respect to an Acquisition Transaction until at least the sixth business day after it has provided the notice to Parent required hereby, (Y) consider in good faith any offer made by Parent during that period, and (Z) notify Parent promptly if its intention to enter into such an agreement shall change at any time after such notification; or (iii) if Parent or Merger Sub shall have breached in any material respect any of their respective representations, warranties, covenants or other agreements contained in this Agreement, which breach cannot be or has not been cured, in all material respects, within 30 days after the giving of written notice to Parent or Merger Sub, as applicable. 43 (d) by Parent: (i) if, due to an occurrence, not involving a breach by Parent or Merger Sub of their obligations hereunder, which makes it impossible to satisfy any of the conditions set forth in Annex A hereto, Parent, Merger Sub, or any of their affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer; (ii) if prior to the purchase of Company Common Stock pursuant to the Offer, the Company shall have breached any representation, warranty, covenant or other agreement contained in this Agreement (other than those contained in Section 3.4) which (A) would give rise to the failure of a condition set forth in paragraph (f) or (g) of Annex A hereto and (B) cannot be or has not been cured, in all material respects, within 30 days after the giving of written notice to the Company; (iii) if either Parent or Merger Sub is entitled to terminate the Offer as a result of the occurrence of any event set forth in paragraph (e) of Annex A hereto; or (iv) if there has been a material breach of Section 3.4 of this Agreement which, if capable of being cured, has not been cured within 10 days. 8.2 Rights on Termination. In the event of termination and abandonment of the Merger by any party pursuant to Section 8.1, written notice thereof shall forthwith be given to the other parties and this Agreement shall terminate and the Merger and the other transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated and the transactions contemplated hereby are not consummated pursuant to Section 8.1 of this Agreement, this Agreement shall become void and of no further force and effect, except for (a) the provisions of Section 3.1 relating to the obligation of the Parent and Merger Sub to keep confidential and not to use certain information obtained from the Company and (b) the provisions of Section 8.3 relating to the Company's obligations to make certain payments to the Parent. 8.3 Termination Fee Payable to the Parent. Notwithstanding any provision to the contrary contained herein, the Company shall immediately pay to the Parent (x) the amount of $11.0 million and (y) all actual documented out-of-pocket expenses reasonably incurred by the Parent and Merger Sub in connection with this Agreement and the Merger in an amount not to exceed $2.0 million (the "Termination Expenses") if this Agreement is terminated: (1) by the Company pursuant to Section 8.1(c)(ii), (2) by Parent pursuant to Section 8.1(d)(iii) if within six (6) months after such termination an Acquisition Transaction shall be consummated or (3) by either the Company or Parent pursuant to Section 8.1(b)(i) and (a) within six (6) months thereafter there shall be publicly announced another Acquisition Transaction or prior thereto an event set forth in paragraph (h) of Annex A shall have occurred (the "Expiration Date") and (b) an Acquisition Transaction shall be consummated prior to the Expiration Date, or an event set forth in paragraph (h) of Annex A shall have occurred, as the case may be. In the event that this Agreement is terminated by Parent pursuant to Section 8.1(d)(iv), the Company shall immediately 44 pay Parent the Termination Expenses. In the event that the Company becomes obligated to make the payment described in the preceding sentence and another Acquisition Transaction is consummated within six (6) months after termination by the Parent, the Company shall also pay to Parent the amount in (x) above. Notwithstanding any provision to the contrary contained herein, the Company shall immediately pay to the Parent, the Termination Expenses, if this Agreement is terminated by Parent pursuant to Section 8.1(d)(ii) if the breach thereof is due solely to the Company's intentional or bad faith acts. The amount in (x) above shall be paid concurrently with any such termination and the Termination Expenses shall be paid within five (5) business days after receipt by the Company of reasonably detailed evidence of the same. Upon receipt of such payments, Parent shall not be entitled to and shall waive the right to seek damages or other amounts or remedies from the Company for breach of, or otherwise in connection with, this Agreement, other than in the case of termination by Parent pursuant to Section 8.1(d)(ii). 8.4 Other Remedies. Notwithstanding any provision to the contrary contained herein, if this Agreement is terminated pursuant to Article 8 or otherwise by the Company, on the one hand, or Parent or Merger Sub, on the other hand, and the non-terminating party is not entitled to receive the payments described in Section 8.3 (as the case may be) or if Parent terminates this Agreement pursuant to Section 8.1(d)(ii)), then the non-terminating party shall be entitled to pursue any available legal rights to recover actual damages (not to exceed $5.0 million in respect of claim following a termination by Parent pursuant to Section 8.1(d)(ii)), including, without limitation, its reasonable costs and expenses incurred in pursuing such recovery (including, without limitation, reasonable attorneys' fees). 8.5 Notice of Termination. Any termination of this Agreement under Section 8.1 above will be effective immediately upon the delivery of written notice of the terminating party to the other parties hereto upon satisfaction of the requirements set forth in Section 8.1. ARTICLE 9 MISCELLANEOUS 9.1 Entire Agreement. This Agreement and the documents referred to in, or contemplated by, this Agreement, including the Company Disclosure Letter and the Confidentiality Agreement, constitute the entire agreement among the parties pertaining to the subject matter of this Agreement, and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written, and there are no warranties, representations or other agreements between the parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement, it being understood that the Confidentiality Agreement shall continue in full force and effect until the Effective Time and shall survive termination of this Agreement. 9.2 Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. 45 9.3 Extension; Waiver. At any time prior to the Effective Time, any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. 9.4 Governing Law. This Agreement shall be governed and construed (i) with respect to the Merger, in accordance with the Laws of the State of Delaware and (ii) with respect to all other transactions contemplated hereunder, in accordance with the Laws of the State of New York, applicable to agreements made and to be performed entirely within such States. 9.5 Assignment; Binding Effect. Neither this Agreement, nor any rights, obligations or interests hereunder, may be assigned by any party hereto, except with the prior written consent of the other parties hereto. Any such purported assignment made without such written consent shall be null and void. Subject to the preceding sentence, this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. 9.6 Notices. All communications or notices required or permitted by this Agreement shall be in writing and shall be deemed to have been given at the earlier of the date personally delivered or sent by telephonic facsimile transmission (with a copy via regular mail) or one day after sending via nationally recognized overnight courier or five days after deposit in the United States mail, certified or registered mail, postage prepaid, return receipt requested, and addressed as follows, unless and until any of such parties notifies the others in accordance with this Section 9.6 of a change of address: If to the Company: Walbro Corporation 1227 Centre Road Auburn Hills, Michigan 48326 Telephone: 248-377-1800 Telecopy: 248-377-6820 Attention: Frank E. Bauchiero Chief Executive Officer With a copy to: Katten Muchin & Zavis 525 W. Monroe Suite 1600 Chicago, Illinois 60661-3693 Telephone: (312) 902-5200 Telecopy: (312) 902-1061 Attention: Howard S. Lanznar, Esq. David J. Kaufman, Esq. 46 If to the Parent or Merger Sub: TI Group plc 50 Curzon Street London, W1Y 7PN United Kingdom Telephone: 011-49-171-560-5700 Telecopy: 011-44-171-560-5701 Attention: David Lillycrop Director and General Counsel with a copy to: Sullivan & Cromwell 125 Broad Street New York, New York 10004 Telephone: (212) 558-4000 Telecopy: (212) 558-3588 Attention: John Evangelakos, Esq. 9.7 Counterparts; Headings. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same Agreement. 9.8 Interpretation. Unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the plural number shall extend to and include the singular, and all words in any gender shall extend to and include all genders. The Article and Section headings in this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. 9.9 Specific Performance. The parties agree that the assets and business of the Company as a going concern constitute unique property and, accordingly, each party shall be entitled, at its option and in addition to any other remedies available as herein provided, to the remedy of specific performance to effect the Merger as provided in this Agreement. 9.10 No Reliance. Except for the parties to this Agreement: (a) no Person is entitled to rely on any of the representations, warranties and agreements of the parties contained in this Agreement; and (b) the parties assume no liability to any Person because of any reliance on the representations, warranties and agreements of the parties contained in this Agreement. 9.11 Disclosure Letter. The Company Disclosure Letter is a part of this Agreement as if fully set forth herein. All references herein to Sections, subsections, clauses and the Company Disclosure Letter shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. The inclusion of any information in the Disclosure Letter shall not be deemed to be an admission or an acknowledgment by the Company that such information is material to or outside the ordinary course of business activity of the Company. The specification of any dollar amount in the representations and warranties set forth in this Agreement shall not 47 be deemed to constitute an admission by the Company or otherwise imply that any such amount is material for purposes of this Agreement. 9.12 No Third Party Beneficiary. Except as provided pursuant to Section 6.2 hereof, the terms and provisions of this Agreement are intended solely for the benefit of the parties hereto and their respective successors and assigns and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person. 9.13 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such voided or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such voided or unenforceable provision. 9.14 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.15 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. * * * * 48 IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of Merger to be duly executed as of the day and year first above written. TI GROUP PLC By: /s/ Sir Christopher Lewinton ----------------------------------------- Name: Sir Christopher Lewinton Title: Chairman TI AUTOMOTIVE SYSTEMS, INC. By: /s/ William J. Laule ----------------------------------------- Name: William J. Laule Title: President WALBRO CORPORATION By: /s/ Frank E. Bauchiero ----------------------------------------- Name: Frank E. Bauchiero Title: President and Chief Executive Officer 49 (ANNEX A TO THE MERGER AGREEMENT) CONDITIONS OF THE OFFER Notwithstanding any other provisions of the Offer, and in addition to (and not in limitation of) Merger Sub's right to extend and amend the Offer at anytime in its sole discretion (subject to the provisions of the Merger Agreement), Merger Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Merger Sub's obligation to pay for or return tendered Company Common Stock promptly after termination or withdrawal of the Offer), and may terminate or amend the Offer as to any Company Common Stock not then paid for, if (i) any applicable waiting period under the HSR Act or any applicable European antitrust law has not expired or terminated, (ii) approval under any applicable European antitrust law has not been obtained, (iii) the Minimum Condition has not been satisfied, or (iv) at any time on or after the date of the Merger Agreement and before the time of acceptance for payment for any such Company Common Stock, any of the following events shall have occurred: (a) there shall be pending any action, suit, investigation or proceeding by any Governmental Entity before any court or governmental authority or agency, (i) seeking to make illegal, or otherwise directly or indirectly restrain or prohibit the making of the Offer or, the acceptance for payment or payment for some of or all the Shares pursuant to the Offer or the consummation of the Merger or seeking to obtain material damages in connection with the transactions contemplated by the Merger Agreement; (ii) seeking to restrain, prohibit or terminate the Company's or, as a result of the transactions contemplated by the Merger Agreement, Parent's ownership, operation or lease (or that of their respective subsidiaries or affiliates) of any business, properties or assets which are material to the business or operation, as such business or operations are currently conducted, of the Company and its Subsidiaries or of Parent and its subsidiaries, as the case may be, or to compel the Company or, as a result of the transactions contemplated by the Merger Agreement, Parent or any of their respective subsidiaries or affiliates to dispose of, cease operating or hold separate any business, properties or assets that are material to the business or operations, as such business or operations are currently conducted, of the Company and its Subsidiaries or of Parent and its subsidiaries; (iii) seeking to impose limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Company Common Stock, including, without limitation, the right to vote any shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to the Stockholders; or (iv) seeking to require divestiture by Parent or any of its subsidiaries or affiliates of any Company Common Stock; (b) there shall be in effect any judgment, decree or order of any court or Governmental Entity, domestic or foreign, or any other legal restraint that: (i) makes illegal, or otherwise directly or indirectly restrains or prohibits the making of the Offer or the acceptance for payment or payment for some of or all the Shares pursuant to the Offer or the consummation of the Merger or that imposes or would impose upon the Company or Parent or any of their respective subsidiaries or affiliates material damages in connection with the transactions contemplated by the Merger Agreement; (ii) restrains, prohibits or terminates the Company's or, as a result of the transactions contemplated by the Merger Agreement, Parent's ownership, operation or lease (or that of their respective subsidiaries or affiliates) of any business, properties or assets which are material to the business or operation, as such business or operations are currently conducted, of the Company and its Subsidiaries or of Parent and its subsidiaries, as the case may be, or compels the Company or, as a result of the transactions contemplated by the Merger Agreement, Parent or any of their respective subsidiaries or affiliates to dispose of, cease operating or hold separate any business, properties or assets that are material to the business or operations, as such business or operations are currently conducted, of the Company and its Subsidiaries or of Parent and its subsidiaries; (iii) imposes limitations on the ability of Parent or any of its subsidiaries or affiliates effectively to exercise full rights of ownership of the Company Common Stock, including, without limitation, the right to vote any shares acquired or owned by Parent or any of its subsidiaries or affiliates on all matters properly presented to stockholders; or (iv) requires divestiture by Parent or any of its subsidiaries or affiliates of any Company Common Stock; (c) there shall be any statute, rule, regulation, judgment, order or injunction enacted, entered, enforced, promulgated or issued or applicable to the Offer or the Merger, on behalf of a Government Entity, or any other action shall be taken by any Governmental Entity, other than the application to the Offer or the Merger of applicable waiting periods under the HSR Act, that is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (v) of paragraph (a) above; (d) there shall have occurred any events or state of circumstances after the date of the Agreement which, either individually or in the aggregate, would have a Material Adverse Effect on the Company; (e) (i) the Board of Directors of the Company shall have withdrawn or modified in a manner adverse to Parent or Merger Sub its approval or recommendation of the Offer, the Merger or the Agreement, or approved or recommended any Acquisition Transaction or (ii) the Company shall have entered into any agreement or agreement in principle with respect to any Acquisition Transaction; (f) any of the representations and warranties of the Company set forth in the Agreement that is qualified by materiality or Material Adverse Effect shall not be true or any of the representations and warranties of the Company set forth in the Agreement that is not so 2 qualified shall not be true in any material respect, in each case (i) as of the date referred to in any representation or warranty which addresses matters as of a particular date, or (ii) as to all other representations and warranties, as of the date of the Agreement and as of the scheduled expiration of the Offer; (g) the Company shall have failed in any material respect to perform any obligation or to comply with any agreement or covenant to be performed or complied with by it under the Agreement; (h) any person acquires beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange Act) of at least 30% of the outstanding Company Common Stock (other than any person not required to file a Schedule 13D under the rules promulgated under the Exchange Act); (i) the Agreement shall have been terminated in accordance with its terms; or (j) there shall have occurred and be continuing (i) any suspension of, or limitation on prices for, trading in securities on the National Association of Securities Dealers Automated Quotation System, or (ii) any limitation by any governmental authority on the extension of credit by banks or other lending institutions or banking moratorium or any suspension of payments in respect of banks, which materially affects the ability of Parent or Merger Sub to pay for the Company Common Stock; which in the reasonable judgment of Parent in any such case makes it inadvisable to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of Parent and Merger Sub, may be asserted by Parent or Merger Sub regardless of the circumstances giving rise to such condition (including any action or inaction by Parent or Merger Sub not in violation of the Agreement) and may be waived by Parent or Merger Sub in whole or in part at any time and from time to time in the sole discretion of Parent or Merger Sub, subject in each case to the terms of the Merger Agreement. The failure by Parent or Merger Sub at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. 3 EX-99.(C)(2) 13 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER EXHIBIT (c)(2) FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER FIRST AMENDMENT ("Amendment No. 1") dated as of May 3, 1999 to the Agreement and Plan of Merger (the "Agreement") dated as of April 27, 1999 among TI Group plc, a company organized under the laws of England and Wales ("Parent"), TI Automotive Systems, Inc., a Delaware corporation ("Purchaser"), and Walbro Corporation, a Delaware corporation (the "Company"). WHEREAS, the Company, Parent and Purchaser have each determined that it is in their respective best interests, and the best interests of their respective stockholders, to amend the Agreement as hereinafter set forth; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement has the meaning assigned to such term in the Agreement. SECTION 2. Amendment of Section 2.1(a). Section 2.1(a) of the Agreement is amended by replacing the fourth sentence thereof in its entirety with the following: Merger Sub shall not amend or waive the Minimum Condition and shall not decrease the Offer Price or decrease the number of shares of Company Common Stock sought, or amend any other condition of the Offer in any manner adverse to the holders of the Company Common Stock without the prior written consent of the Company; provided, however, that if on the initial scheduled expiration date of the Offer, which shall be June 10, 1999, the sole condition remaining unsatisfied is the failure of the waiting period under the HSR Act to have expired or been terminated, Merger Sub shall extend the expiration date from time to time until two business days after the expiration of the waiting period under the HSR Act has been received. SECTION 3. Confirmation of Agreement. Except as modified or amended in this Amendment No. 1, all terms and conditions in the Agreement remain in full force and effect and are hereby ratified and confirmed. SECTION 4. Governing Law. This Amendment No. 1 shall be construed in accordance with and governed by the laws specified in the Agreement. SECTION 5. Counterparts. This Amendment No. 1 may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective when each party hereto shall have received counterparts hereof signed by all of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed by their respective authorized officers as of the day and the year first above written. WALBRO CORPORATION /s/ Frank E. Bauchiero By:________________________ Name: Frank E. Bauchiero Title: President and Chief Executive Officers TI GROUP PLC /s/ David P. Lillycrop By: _________________________ Name: David P. Lillycrop Title: Director TI AUTOMOTIVE SYSTEMS, INC. /s/ William J. Laule By: ___________________________ Name: William J. Laule Title: President EX-99.(G)(1) 14 TI GROUP PLC'S ANNUAL REPORT DEC 1997 EXHIBIT (G)(1) TI Group [LOGO] 1997 Global Specialised Engineering - -------------------------------------------------------------------------------- [GRAPHIC] - -------------------------------------------------------------------------------- TI Group plc Annual Report TI Group's strategy is to be an international engineering group concentrating on specialised engineering businesses, operating in selected niches on a global basis. Key businesses must be able to command positions of sustainable technological and market share leadership. They will have a high knowledge and service content and will be able to anticipate and meet customers' needs. Summary of Results 1996 - -------------------------------------------------------------------------------- (pound)million Turnover 1,756.6 Turnover - subsidiary undertakings 1,552.5 Profit before taxation 232.2 Profit before taxation (pre-exceptionals) 211.1 Net debt 68.0 TI shareholders' funds - gross 1,364.6 TI shareholders' funds - net 324.5 - -------------------------------------------------------------------------------- % Operating margin 12.5 - -------------------------------------------------------------------------------- p Earnings per Ordinary share 34.1 Earnings per Ordinary share (pre-exceptionals) 30.0 Dividends per Ordinary share 14.5 FIVE YEAR FINANCIAL HIGHLIGHTS TI Group is one of the world's leading specialised engineering companies and is quoted on the London Stock Exchange. The Group operates on a global basis and employs 25,500 people at over 350 manufacturing and customer facilities in 46 countries. TI Group's four world leading business groups are John Crane, Forsheda Polymer Engineering, Bundy and Dowty. Total Sales (pounds) Million [GRAPHIC] Profit Before Taxation & Exceptional Items (pounds) Million [GRAPHIC] Pre-Exceptional Earnings/Dividends Per Share EPS pence DPS pence [GRAPHIC] Free Cash Flow (pounds) Million [GRAPHIC] TI GROUP 1 STATEMENT BY THE CHAIRMAN [GRAPHIC] "1997 was another year of strong performance and significant investment, with the Group continuing to benefit from the global spread and balance of its businesses. With our strong balance sheet, healthy order books and the establishment of our top management team, we are confident we will continue to satisfy our customers and enhance shareholder value." Sir Christopher Lewinton, Chairman PERFORMANCE 1997 was another year of strong performance. The Group benefited from the global spread and balance of its activities, achieving organic sales and profit growth of 12% in mixed market conditions. All three core businesses continued to perform well. In December 1997 it was announced that the Groups 50% share of Messier-Dowty and TI's wholly-owned associated landing gear repair and overhaul business, which together account for around 8% of group profit before interest and exceptional items, were to be sold to Snecma. Whilst Messier-Dowty's results were the best since the formation of the joint venture three years ago, it still failed to meet TI's expectations and, without the opportunity to gain 100% control in the foreseeable future, the decision was taken to dispose of the business. The Group remains committed to the 100% owned Dowty Aerospace business which has enjoyed strong sales growth and further margin improvements. The Group's pretax profit (before exceptional items) was (pound)222.5m, up from (pound)211.1m in 1996 after adverse currency translation of (pound)15.2m, reflecting organic profit growth of 12%. After exceptional items of (pound)(1.9)m (1996: (pound)21.1m) arising from property disposals, profit before tax was (pound)220.6m (1996: (pound)232.2m). Earnings per share before exceptional items were 32.0p(1996: 30.0p), an increase of 7% or, at constant exchange rates, an increase of l4%. After exceptional items, earnings per share were 31.6p (1996: 34.1p), 7% lower, reflecting the exceptional profit on the sale of the Smaller Engineering Businesses in 1996. Revenue and capital investment in 1997 was significantly increased to (pound)121m, from (pound)104m in 1996, of which capital expenditure rose to (pound)80m from (pound)63m in the previous year. Group return on investment rose from 15% to 16%, and interest cover remained strong at 16 times. The dividend has been increased by 10% from 14.5p to 15.9p and is covered 2.0 times by earnings. Further commentary on the results is given in the operating and financial review on pages 6 to 25. BUSINESS REVIEW During the year it was announced that John Crane's Polymer Engineering division had grown sufficiently -- organically and through acquisition -- to become TI's fourth business group alongside John Crane, Bundy and Dowty. This took effect in January 1998 and Polymer Engineering has subsequently been re-named Forsheda Polymer Engineering Group, an internationally recognised name with a strong reputation for quality and service. 2 TI GROUP John Crane John Crane, a world leader in engineered sealing systems, demonstrated good performance in difficult industrial markets and continued to make significant investment in future growth opportunities. Its three divisions -- Mechanical Seals, Marine and Polymer Engineering -- recorded a good financial performance and continued to gain market share. John Crane's order books at the end of 1997 were ahead of those one year before. Mechanical Seals The Mechanical Seals division continued to strengthen its market position, enjoying strong order books as the year ended. Through its wide global coverage, the division was well placed to develop further global supplier relationships with its customers and added 10 major new alliances in 1997. Product development and globalisation remained key to the division's success and several important new products were launched in 1997 including the T2800 High Pressure non-contacting seal and the T5600 Universal Cartridge Seal, a process industry product, which has already received strong customer acceptance. The global sales force was significantly strengthened during the year with the recruitment of additional sales and application engineers bringing the total to around 1,200, supported by around 140 service centres worldwide. Over (pound)15m has been committed to advanced global IT networks and business systems which will greatly enhance the competitiveness of John Crane Mechanical Seals in bringing its high level of knowledge and service to customers in markets which are increasingly service driven. The division will be further strengthened by the acquisition of EG&G's Sealol Industrial Division. Sealol is a leading manufacturer of mechanical seals with a primary focus on the high temperature segment of the petroleum and chemical industries which is complementary to the John Crane product range. Sealol's primary market is the United States and it is anticipated that John Crane's worldwide marketing and service capability will accelerate the growth of this business globally. Marine The Marine division performed well, increasing its market share in both the commercial shipbuilding and defence markets. The division will be strengthened further with the acquisitions announced in December. The combination of John Crane's global presence and sealing expertise and the additional products of Lips will help satisfy the growing demand for fully integrated marine propulsion systems. In addition, an agreement to purchase the Sealol marine seal product line from EG&G increased access to the US Navy's submarine fleet. Polymer Engineering Polymer Engineering continued to make significant progress with the Forsheda business, acquired in November 1996, being integrated into the division and the necessary investment made for the creation of TI's fourth business group. Forsheda had a good year, performing in line with expectations, and the process of globalising its product range and engineering skills has begun. To accelerate expansion from its traditional Scandinavian and Continental European markets, focused investment is underway in North America and projects are in hand in Latin America and Asia Pacific. Sales continued to grow in broadly flat market conditions. The division continued to benefit from the extension of existing business supported by a new product management structure designed to accelerate the growth of its world leader Engineered Seals and Pipe Seals businesses. Bundy Bundy, a world leader in fluid carrying systems, performed well in both its automotive and refrigeration markets and gained market share. During the year, the management team was strengthened with the appointment of Ken Templeton as Deputy Chief Executive and John Langston as Chief Executive of Bundy Automotive, and the arrival of Malcolm Aitken as Chief Executive of Bundy Refrigeration. In addition, Jim Davis became President of Bundy North America. Bundy ended the year with order books at a record level, well up on the previous year. Automotive The Automotive division continued to outperform. A number of major vehicle platforms, including the GM Saturn, the VW A4 and the BMW E46, moved into full scale production. In addition, there were further platform wins throughout the world, in part assisted by the development of new coatings which provide superior performance, and the continued focus on lean manufacturing to create world class facilities. Bundy made significant revenue and capital investment to support major OEM programmes won in earlier years which are now moving into production. The division achieved TI GROUP 3 STATEMENT BY THE CHAIRMAN continued Quality and customer recognition in all its major markets, including the worldwide "Supplier of the Year" award from General Motors. Refrigeration The Refrigeration division continued to make progress alongside customers who are becoming increasingly global in their operations, although refrigeration markets remained difficult with European production down slightly on 1996 and North America flat. The 1996 acquisition of Alcan's refrigeration components business in Brazil expanded the division's product range and provided further globalisation opportunities. The global partnership agreement with Peerless of America, established in the first half of 1997 for the marketing, sale and distribution of frost-free evaporator systems, has also started to create new business opportunities. Significant successes included a major contract with Whirlpool in India and the division's first contract -- with Electrolux -- to supply its new innovative Waveline(TM) condenser. In addition, a further contract with Electrolux in Eastern Europe strengthened its presence in the region. Dowty In 1997 Dowty comprised two separately managed businesses: Dowty Aerospace, wholly-owned by TI Group, primarily serving the aerospace engine and hydraulic and actuation markets; and Messier-Dowty, the 50:50 landing gear joint venture with Snecma of France. As mentioned above, TI has announced its intention to sell to Snecma its landing gear interests which comprise its stake in Messier-Dowty and its 100% owned repair and overhaul business which primarily services Messier-Dowty's product range. These two businesses continued to benefit from strong growth in their aerospace markets. The management team was strengthened with the appointment of Geoff Smith as Deputy Chief Executive. Dowty Aerospace's order book stood at a record level at the year end, well up on 1996. Messier-Dowty Messier-Dowty had a good year, benefiting from the increase in Airbus A320 and A330/A340 production and, at the Toronto operation, from regional and business jet programmes. During the year, it delivered the 750th set of Airbus A320 family landing gear and the 200th set of A330/A340 landing gear. Dowty Aerospace Dowty Aerospace benefited from its strong position on key civil and military programmes and from the continued outsourcing of components by the aero engine manufacturers. Further major supply contracts were awarded in 1997 which underlined the strong performance across the business. The Propellers business won contracts to supply the C-27J Spartan transport aircraft while the Engine Rings business won -- from GE --its largest ever order. The Hydraulics and Actuation business was selected to provide a major part of the hydraulic system on the Raytheon Company's Premier 1 entry-level business jet and actuators and offset gearboxes for the new Boeing 767-400ER aircraft. Dowty continued to invest in additional capacity to meet this ongoing growth in demand, particularly for turbine engine components. BOARD AND MANAGEMENT I was pleased to be able to announce during 1997 that Bill Laule was to become Chief Executive of TI. I had said publicly that I was confident that my successor as Chief Executive would come from within the Company, and so it has proved. Bill, who has headed Bundy since 1994 and who joined the Board the following year, is already making an important contribution to the development of the Group. His appointment, which became effective on 1st January 1998, will help to ensure continuity of the strategy and culture which have been so crucial to the Group's success. To make the transition as seamless as possible we have made certain structural changes within the TI headquarters. A Chairman's Committee has been formed which comprises myself, Bill Laule as Chief Executive, and Martin Angle who joined the Board as Group Finance Director in February 1997. This committee is responsible on behalf of the Board for maintaining the strategic direction of the Group. An Executive Board has also been formed: this is chaired by Bill Laule and is responsible for the overall management of the business. The membership of the Executive Board is the executive Directors of the Company together with John Edwards, Deputy Group Finance Director, and David Lillycrop whose appointment as General Counsel, in addition to his existing role of Group Secretary, was announced in October 1997. Further details of these developments appear in the report of the Directors on pages 32 and 33. 4 TI GROUP I referred in last year's Annual Report to the appointment to the TI Board of Martin Angle, Group Finance Director, and Gerrit Aronson, Group Director of Human Resources. Both appointments have proved highly successful, and have done much to facilitate the development of the global management team needed for the continuing development of the Group. The non-executive element of the Board has also been strengthened recently with the appointment of Sir Nigel Broomfield on 18th February 1998. Sir Nigel has enjoyed a distinguished diplomatic career, culminating in a term as British Ambassador to the Federal Republic of Germany. His experience gained in a variety of European and other overseas postings will make him a valuable addition to the Board. Senior management continued to demonstrate its confidence in the Company by its significant TI shareholdings. As in previous years, executive Directors' and other senior executives' after tax bonuses were paid half in shares. The total value of TI shares currently held by the management team is in excess of (pound)5m, with senior management continuing to align its interests more closely with those of shareholders generally. OUTLOOK 1997 was another successful year for the Group. We achieved strong organic growth in both sales and profits, good cash generation along with continuing improvements in margins and return on investment. We have established a top management team with Bill Laule as Chief Executive, and Martin Angle as Group Finance Director, both of whom along with myself will work closely together to ensure the continuing direction and growth of the Group. Following a year of significant investment, including the creation of the Forsheda Polymer Engineering Group as our fourth leg and the implementation of advanced IT systems within John Crane, we entered 1998 with a strong balance sheet, good cash resources, order books well up on last year and we had a good trading start to the year. We are confident that with our global spread and balance we will achieve continued growth both in our businesses and in returns to our shareholders. /s/ Christopher Lewinton Sir Christopher Lewinton Chairman 11th March 1998 TI GROUP 5 FINANCIAL REVIEW [GRAPHIC] "In 1997 TI Group achieved organic growth in sales and profit of 12% with all core businesses continuing to capture market share. The Group continued to generate strong cash flow whilst increasing its investment to support future growth." Martin Angle, Group Finance Director INTRODUCTION The Group's accounting policies are unchanged from last year. The Group has adopted FRS 9 "Associates and Joint Ventures" in 1997 and has increased the disclosures given in respect of the use of financial instruments drawing on the recommendations in FRED 13 "Derivatives and Other Financial Instruments: Disclosures". FRS 10 "Goodwill and Intangible Assets" was issued in December 1997 and will be adopted for the 1998 financial statements. The strength of sterling had a material effect on the translation of the 1997 results of the Group's overseas subsidiaries for accounting purposes. However, the Group does not suffer any material foreign exchange transaction exposure because of the global spread of its operations. The table below shows the 1996 and 1997 average and year end exchange rates for the US dollar and the Deutschmark, the movement of which against sterling was representative of other major European currencies. (pound)1=US$ (pound)1=DM 1997 average 1.64 2.84 1996 average 1.56 2.37 Sterling stronger 5% 20% 1997 year end 1.65 2.96 1996 year end 1.71 2.64 Sterling stronger/(weaker) (4)% 12% Year-on-year comparisons in 1997 are affected by the first full year contribution made by Forsheda and other businesses acquired in 1996 and by the reduction in the proportion of Messier-Dowty sales, profit and dividend attributable to TI Group from 80% in 1996 to 62.5% in 1997 in accordance with the joint venture agreement. Details of corporate activity completed in 1997 are given in note 1 on page 48. Towards the end of the year, it was announced that the Group's 50% share of Messier-Dowty and TI's wholly-owned associated landing gear repair and overhaul business, which together in 1997 accounted for around 8% of Group profit before interest and exceptional items, are, subject to contract, to be sold to Snecma of France. The 1997 results are not affected directly by this proposed disposal but, for clarity, the analysis of results by business segment set out in note 2 on page 49 identifies separately the contribution of the businesses to be divested. ANALYSIS OF RESULTS 1997 was another year of strong performance by the Group with organic growth of 12% both in sales and in profit before interest and exceptional items. Earnings per share excluding exceptional items increased by 7% and at constant exchange rates were up 14%. Cash flow generation was strong despite a significant increase in investment. Total sales in 1997, including the Group's share of joint ventures, were (pound)1,870m (1996: (pound)1,757m). Adjusting for adverse currency translation of (pound)126m, and for changes in the portfolio, organic sales growth was 12% over 1996. John Crane demonstrated good performance in difficult industrial markets. The principal process industry markets served by John Crane's Mechanical Seals division were weaker than in 1996. Against this background, sales by The John Crane Group, which 6 TI GROUP OPERATING AND FINANCIAL REVIEW in 1997 comprised Mechanical Seals, Marine and Polymer Engineering, were up 11% at (pound)655m (1996: (pound)593m) after adverse currency translation of (pound)43m and representing 35% of Group turnover. At constant exchange rates and after adjusting for portfolio changes, including the Forsheda acquisition in November 1996, sales grew organically by 4%. Within this the sales of Mechanical Seals and Marine grew organically by 3% and Polymer Engineering by 8%. All three of John Crane's divisions strengthened their market positions. Mechanical Seals added 10 new alliance agreements worldwide in 1997, launched several important new products and made significant investment in IT networks and business systems. The Marine division experienced strong market growth driven by record commercial shipbuilding order books. Polymer Engineering made significant progress during the year. The Forsheda business, acquired in November 1996, was integrated into the division. Forsheda had a good year, performing in line with expectations. Polymer Engineering's sales in 1997 were (pound)244m (1996: (pound)168m), with operating profit of (pound)33.6m and a margin of 14%. Sales by the Bundy Group, which comprises two divisions, Automotive and Refrigeration, were up 3% at (pound)740m (1996: (pound)718m) after adverse currency translation of (pound)62m, and representing 40% of the Group's turnover. At constant exchange rates and adjusting for changes in the portfolio, Bundy achieved organic sales growth of 11%, significantly above its underlying markets. North American automotive production continued at high levels, 4% ahead of 1996. In Europe, production increased by a similar amount although there was considerable variation in individual markets. Latin American production volumes showed year-on-year growth but were depressed late in the year by economic issues. Production volumes in Asia Pacific were only marginally higher than in 1996. Bundy's Automotive division sales benefited from a number of major vehicle platforms moving into full scale production and there were further platform wins throughout the world. The Refrigeration business continued to make progress although markets remained mixed with European production down slightly on 1996 and North America flat. In 1997 The Group's aerospace interests comprised two separately managed businesses: Dowty Aerospace, wholly-owned by TI, which primarily serves the aerospace engine and hydraulic and actuation markets; and Messier-Dowty, The 50% owned landing gear joint venture. Aerospace markets showed a significant increase production levels for large commercial aircraft following the upturn in airline orders in 1996. Activity levels at the aerospace engine manufacturers also showed significant growth. Excluding the landing gear repair and overhaul business, Dowty Aerospace represented 15% of Group turnover with sales in 1997 increasing by 34% on an organic basis to (pound)275m (1996: (pound)218m). The division benefited from its strong position on key civil and military programmes and from the continued outsourcing of components by the aero engine manufacturers. For Messier-Dowty, total sales were (pound)266m (1996: (pound)247m), benefiting from the increase in Airbus A320 and A330/340 production. TI Group's attributable sales from Messier-Dowty and the wholly-owned associated landing gear repair and overhaul business in 1997 totalled (pound)200m (1996: (pound)228m) up 16% on an organic basis and representing around 10% of the Group's turnover. Group profit before interest and exceptional items was (pound)237.0m, up (pound)17.3m over 1996, representing organic growth of 12% after adjusting for adverse currency translation of (pound)15.2m and for changes in the portfolio. Within this total, operating profit at John Crane declined by 3% on an organic basis as a consequence of significantly increased revenue investment coupled with a decline in the principal process industry markets served by Mechanical Seals. Bundy achieved organic profit growth of 7%, reflecting increased volumes, cost efficiencies and added product value offset by weakness in the Brazilian market towards the end of the year which TI sees persisting for the balance of 1998. Organic profit growth at Return on investment [GRAPHIC] TI GROUP 7 FINANCIAL REVIEW continued Dowty Aerospace, excluding the landing gear repair and overhaul business being divested, was 87%, reflecting the increase in sales volume. North America showed strong profit performance throughout 1997 and, in the second half, there was considerable improvement in Continental Europe compared with the same period in 1996. With only around 10% of its businesses in Asia Pacific and Latin America, there was no material effect on the Group's results from the economic downturn in these regions. The Group's share of operating profit from joint ventures and associates, principally Messier-Dowty, was (pound)18.2m (1996: (pound)18.7m). Group operating margin increased to 12.7% (1996: 12.5%). Return on investment (profit before interest, exceptional items and tax as a percentage of investment including goodwill) for the Group as a whole increased by 1 percentage point over the prior year to 16%. Net interest expense for the year was (pound)14.5m (1996: (pound)8.6m) with the increase principally due to the full year effect of the acquisition of Forsheda in November 1996. Interest was well covered at 16 times (1996: 26 times) by profit before interest and exceptional items. Group profit before tax and exceptional items was (pound)222.5m, an increase of (pound)11.4m or 5%. After exceptional items relating to property disposals of (pound)(1.9)m (1996: (pound)21.1m), profit before tax was (pound)220.6m (1996: (pound)232.2m). The effective rate of tax on profit before exceptional items reduced to 30.9% (1996: 31.7%) following changes announced in the UK Budget on 2nd July 1997. No tax was attributable to the 1997 exceptional items (1996: (pound)2.2m charge). Earnings per share excluding exceptional items were 32.0p (1996: 30.0p) an increase of 7%, or 14% after adjusting for the effect of changes in exchange rates. After exceptional items earnings per share were 31.6p (1996: 34.1p), 7% lower reflecting the exceptional profit on the sale of the Smaller Engineering Businesses in 1996. DIVIDEND The Directors are recommending a final dividend of 10.8p giving a total dividend per Ordinary share for the year of 15.9p (1996:14.5p), an increase of 10% over the previous year. The dividend is covered 2.0 times by earnings before exceptional items (1996: 2.1 times) and will be paid as a Foreign Income Dividend. Payment details for the final dividend are set out in the report of the Directors on page 31. CASH AND DEBT The strong cash generative nature of all the business groups was demonstrated again in 1997. Cash flow from operating activities increased by (pound)23.3m or 11% to (pound)241.4m compared with (pound)218.1m in 1996 due to the increase in operating profit and tight control over working capital, which as a percentage of sales at the year end was below 12% (1996: 12.5%). The Group's total investment, comprising revenue investment, which is charged to the profit and loss account, and capital expenditure, increased significantly to (pound)121.2m from (pound)104.2m in 1996. Within this, capital expenditure increased to (pound)79.9m (1996: (pound)63.4m) with all business groups investing in new capacity, new products and the application of advanced manufacturing techniques. Excluding the Group's joint ventures, total investment rose by 21% to (pound)106.4m (1996: (pound)88.1m) of which (pound)71.7m was capital expenditure. Group free cash flow (net cash flow from operating activities after the cash effect of capital expenditure) was (pound)192.0m (1996: (pound)173.2m), which exceeded interest, tax and dividend payments by (pound)35.6m representing a free cash flow ratio of 1.25 times, or more than 10% of sales. After (pound)13.7m net expenditure on acquisitions and disposals during the year, internal cash generation reduced debt at 31st December 1997 to (pound)37.9m (1996: (pound)68.0m). Net TI shareholders' funds increased to (pound)392.6m (1996: (pound)324.5m), principally as a result of retained profits of (pound)74.5m, and Change in Net Debt [GRAPHIC] 8 TI GROUP OPERATING AND FINANCIAL REVIEW gearing reduced to 10% (1996: 2l%). The impact of exchange translation on net TI shareholders' funds and net debt at the year end was not significant. TREASURY TI operates a central treasury function providing services to the whole Group arranging borrowings, investing surplus funds and managing and reducing financial risks. Group Treasury is not a profit centre and no speculative transactions are permitted. It operates within specific Board policies with compliance confirmed regularly in formal reports to the Audit Committee. There are extensive written control procedures in place and Group Treasury is subject to regular reviews by the financial control function, and by internal and external audit. Treasury systems, including disaster recovery arrangements, are also reviewed and updated regularly. Prudent use is made of financial instruments, mainly forward rate agreements, interest rate swaps, and forward foreign exchange contracts, with relationship banks as the counterparty. Such instruments may also include the purchase, but not the writing, of options in specific circumstances. The Group's principal exposures to exchange rate fluctuations arise on the translation of overseas net assets and profits into sterling for accounting purposes. Translation exposures arising on consolidation of the Group's overseas net assets are minimised by broadly matching assets with borrowings in each major currency. The level of hedging cover required by Group policy is over 80% across all currencies and TI is fully hedged in all relevant major currencies. As a consequence the Group has significant foreign currency denominated debt offset by sterling deposits. The Group's gross debt at 31st December 1997 totalled (pound)406.8m (1996: (pound)366.6m), with (pound)256.7m in US and Canadian dollars, reflecting the Group's strong North American presence, and (pound)118.6m denominated in Continental European currencies. The principal components of this debt are two private placements of US $220m in total outstanding, and centrally administered bank loans totaling (pound)163.2m. The Group also has a US commercial paper programme rated A1/P1 by Standard and Poor's Corporation and Moody's Investor Services respectively. To support the commercial paper programme and to provide medium term liquidity, the Group has committed bank facilities of (pound)260m maturing in 1999 or later and a further (pound)78m maturing in late 1998. Year end cash and deposits predominantly in sterling, totalled (pound)368.9m (1996: (pound)298.6m). The Group adopts a conservative investment policy for its surplus funds, most of which are pooled and managed centrally, with deposits limited by amount and maturity across highly-rated banks. Counterparty risk limits are established for all banks used by the Group, depending on the credit standing of the bank. Extensive use is made of intra-group loans to provide cost effective core funding to operating businesses worldwide. Interest rate exposures on borrowings and deposits are monitored carefully and hedging actions taken when market conditions are considered appropriate. Normally, at least one third of borrowings in each major currency is hedged at fixed rates for the next 12 months, using long dated drawings, forward rate agreements, interest rate swaps or collars. Interest rate differentials between the US dollar private placement loans and sterling deposits currently give rise to a net interest charge. Exchange translation exposures arising on the consolidation of overseas operating profits are partially offset by interest charges on foreign currency borrowings. These exposures are monitored but are not normally hedged, and no such hedging was undertaken in 1997. Exposures to movements in exchange rates on transactions are minimised using forward foreign exchange contracts, normally up to 12 months forward, on a rolling basis. Some aerospace businesses may hedge exposures up to four years into the future, reflecting the nature of commitments in that industry. All TI business units hedge their net exposures through or at the direction of Group Treasury. LITIGATION The circumstances surrounding the civil action in the US courts against Dowty Woodville Polymer remain as disclosed in the 1996 Annual Report. The Group does not believe there is any material substance to the claim and will continue to defend its position vigorously. YEAR 2000 AND EMU Work is well advanced throughout TI's operations to ensure that `Millennium compliance' is achieved both for all business critical systems and to minimise the potential for disruption arising from any non-compliance by suppliers or customers. Action is also being taken to ensure that, where appropriate, the Group's electronic and other systems will be adapted to handle the introduction of the Euro following European Economic and Monetary Union. Martin D. Angle, Group Finance Director TI GROUP 9 OPERATING REVIEW [GRAPHIC] EXECUTIVE BOARD Foreground William J Laule Chief Executive Background from left to right Martin D Angle Group Finance Director John W Potter Chief Executive, John Crane L Antony Edwards Chief Executive, Dowty Gerrit O Aronson Group Director of Human Resources James L Roe Director of Strategic Development Robert J M Fisher President, Asia Pacific David P Lillycrop General Counsel & Group Secretary John R Edwards Deputy Group Finance Director 10 TI GROUP OPERATING AND FINANCIAL REVIEW TI Group Structure Throughout 1997 and 1996, TI Group consisted of three core businesses, John Crane, Bundy and Dowty, each of which is briefly described below. This structure is reflected in the segment analysis of results on pages 49 and 50. The principal businesses included within each segment are shown on pages 72 and 73. As from 1st January 1998, the Polymer Engineering business of John Crane Group was separated to form a fourth core business, as described on pages 16 and 17, which now trades as Forsheda Polymer Engineering Group. - ------------------------------------ John Crane[LOGO} - ------------------------------------ world leader in engineered sealing systems - ------------------------------------ Mechanical Seals - ------------------------------------ Marine - ------------------------------------ Polymer Engineering* - ------------------------------------ John Crane is a world leader in the design, manufacture and distribution of engineered sealing systems. Through its divisions, John Crane provides a wide range of sealing solutions which satisfies customers' needs for knowledge and service in the process, marine and general industrial markets of the world. *part of John Crane Group until 31st December 1997 - ------------------------------------ FORSHEDA[LOGO} - ------------------------------------ world leader in engineered elastomer seals - ------------------------------------ Engineered Seals - ------------------------------------ Pipe Seals - ------------------------------------ Speciality Products - ------------------------------------ Forsheda Polymer Engineering is a world leader in engineered elastomer seals for the industrial, automotive and aerospace industries. It has a world class capability in design, materials and process engineering and focuses on products and applications with exacting environmental and service demands. - ------------------------------------ BUNDY[LOGO} - ------------------------------------ world leader in fluid carrying systems - ------------------------------------ Automotive - ------------------------------------ Refrigeration - ------------------------------------ Bundy is a world leader in specialised small diameter fluid carrying systems for the automotive and refrigeration industries. Through its unrivalled capability in design, development and manufacturing, Bundy supplies systems to satisfy the global needs of its customers in both the automotive and refrigeration markets. - ------------------------------------ DOWTY[LOGO] MESSIER-DOWTY[LOGO] - ------------------------------------ world leader in aerospace systems - ------------------------------------ Dowty Aerospace - ------------------------------------ Messier-Dowty - ------------------------------------ Dowty, through its Dowty Aerospace business units, is one of the world's leaders in hydraulic and actuation systems, turbine engine components and propellers. Through the Messier-Dowty joint venture between TI Group and Snecma of France, it is part of the world leading team in design, development and manufacture of landing gear systems. - -------------------------------------------------------------------------------- Distribution of sales by geographic origin - -------------------------------------------------------------------------------- [GRAPHIC] United Kingdom (19%) Continental Europe (26%) North America (44%) Rest of World (11%) - -------------------------------------------------------------------------------- Distribution of profits by geographic origin - -------------------------------------------------------------------------------- [GRAPHIC] United Kingdom (20%) Continental Europe (25%) North America (49%) Rest of World (6%) TI GROUP 11 JOHN CRANE GROUP world leader in engineered sealing systems John Crane is a world leader in the design, manufacture and distribution of engineered seals and sealing systems. Through its three divisions John Crane provides the most Comprehensive range of sealing solutions to satisfy customers' needs for knowledge and service in the process, marine and general industrial markets of the world. There are 10,000 employees based in more than 240 locations in 46 countries ensuring a global presence which is unsurpassed in the industry. During the year John Crane's world leadership was enhanced by continued investment in new products and capacity, the integration of Forsheda into the existing Polymer activities and the announcement of three strategically significant acquisitions. Against a background of mixed market conditions, John Crane consolidated its position as a world leader and gained share in all three divisions. Order books at the end of the year were stronger than at the previous year end and, when coupled with the substantial investment programme implemented during 1997, John Crane is well positioned to continue to serve its customers and sustain profitable growth. On 1st January 1998 the Polymer Engineering business was separated from John Crane Group to form a fourth core business which now trades as Forsheda Polymer Engineering Group. See pages 16 and 17 for further information. (pound) million 1997 1996 Turnover 654.9 592.5 Profit Before Interest 99.0 97.1 Net Assets 193.5 199.2 Management Under the continued leadership of John Potter, the John Crane management team has been further strengthened during the year. Robin Thompson was appointed Director of Strategic Development and John Crane's commitment to people was confirmed with the appointment of Frank Richardson as Director of Management Development. Bob Saunders was appointed Managing Director, Lubrication Systems to focus on global growth opportunities for this developing business. John Cousins OBE continues as Managing Director of Marine and Clive Stearnes as Chief Executive, Polymer Engineering (now Forsheda Polymer Engineering). With the regional management of Mechanical Seals also continuing unchanged John Crane has a strong and highly experienced team clearly focused on generating profitable growth. 12 TI GROUP John Crane[LOGO] [GRAPHIC] Group Structure Mechanical Seals Designs manufactures and distributes a comprehensive range of mechanical seals and sealing systems for the process industries of the world. Marine Provides a total on-board sealing service for the commercial and naval fleets of the world. Polymer Engineering* Supplies an extensive range of engineered polymer sealing solutions for global industrial markets. *part of John Crane Group until 31st December 1997 TI GROUP 13 Mechanical Sales [GRAPHIC] New T2800EX Slurry Seals The new Type 2800EX gas lubricated non-contacting pump seals were specified to seal molten product pumps at this Mid-West chemical plant. [GRAPHIC] Eli Lilly chooses John Crane products Following a recently signed alliance agreement, a Type 5600 Universal Cartridge Seal is fitted to a Syltherm circulation pump at Eli Lilly and Company's Lafayette, Indiana facility. The world's process industries, principally chemical, petroleum, pulp and paper and food and beverage, represented challenging markets in 1997 which were weaker than the previous year. The Mechanical Seals division outperformed the underlying growth of its served market with continued investment in new products, extension of its alliance programme and the recruitment of additional sales and application engineers. At the end of the year the order book was at a record high, 5% greater than at the same time as last year. In 1997 the global launch of the T5600 Series Universal Cartridge Seal was completed. First year sales, coupled with outstanding customer acceptance, make the T5600 one of the most successful new products ever launched by John Crane. The innovative T2800 Seal, which uses the principle of non-contacting technology developed for use in compressors, was extended during the year to cover high pressure applications and high purity equipment used in the production of pharmaceuticals and chemicals. An Integrated Sealing Information System (ISIS) was launched, providing the John Crane global sales force with a powerful and portable software tool. Using ISIS, sales engineers are able to produce an optimum proposal at a customer site, utilising state-of-the-art seal selection software that provides access to the total John Crane global database. ISIS puts John Crane knowledge, technology and service at the fingertips of any authorised user worldwide. Customer alliances continue to be an important source of organic growth for John Crane. Under an alliance programme, John Crane actively participates in the management of maintenance and repair of its customer's pumping system to achieve improved reliability and reduce operating costs. In return John Crane can become an exclusive supplier of mechanical sealing systems to the customer. In 1997 a more focused organisation was established specifically to develop relationships with customers in this respect. During the year 10 new alliance agreements were added worldwide, including agreements with Koch Refining and ICI. Additional sales and application engineers were recruited in all regions of the world and there are now some 1,200 highly skilled individuals dedicated to satisfying the needs of John Crane's customers globally. During the year the number of sales and service locations was increased by 16 including 9 new service centres in areas such as Czech Republic, Germany, Mexico, Venezuela, Colombia and Norway, demonstrating John Crane's continuing commitment to total customer support on a global basis. In December it was announced that John Crane had reached agreement to acquire the Sealol Industrial Division of EG&G. The primary focus of Sealol is on the high temperature segment of the petroleum and chemical industries and it is anticipated that John Crane's worldwide organisation will accelerate the global growth of Sealol. At the same time John Crane agreed to sell its Belfab business to EG&G. John Crane's unrivaled capability to provide knowledge and service that satisfies customer needs worldwide will ensure that Mechanical Seals continues to strengthen its global leadership position and continues to grow. 14 TI GROUP OPERATING AND FINANCIAL REVIEW Marine [GRAPHIC] Seals for US Navy John Crane Marine stern shaft seals for an aircraft carrier: submarine propulsion shaft seals will be supplied following the acquisition of EG&G's marine product line. Polymer Engineering 1997 [GRAPHIC] Forsheda Polymer Engineering 3.6m diameter Forsheda pipe seals were specified to seal the Cologne flood control reservoir's 50 tonne concrete pipes. John Crane Marine continued to strengthen its global leadership position, increasing market share by outperforming both the defence and commercial shipbuilding markets. The strength of the commercial shipbuilding market continued in 1997, with the world order book at an all time high. The division expanded its global network during the year and, along with its extensive technological sealing portfolio, was able to take advantage of this trend to record strong gains. Major contracts were secured to supply products for all types of ships ranging from cruise liners to offshore support vessels. Despite the relatively flat market in the defence sector the division continued to expand in both existing and new countries with the number of navies served increasing from 62 to 65. In the US major contracts were received for hull seals for 3 aircraft carriers and 14 new destroyers. In Australia, the seals of 6 submarines were upgraded as part of the Australian Navy's new shipbuilding programme. The precision handling cable systems business, integrated into the division at the beginning of the year, also benefited from leveraging the global network and from the rapidly expanding underwater telecommunications cable market to secure multimillion pound contracts in Asia Pacific and Europe. Substantial investments were made in the division. An agreement to take a 30% stake in Lips United was announced, with an option to buy the remaining 70% by mid 1998. Based in the Netherlands, Lips designs and manufactures propellers, shafts, thrusters and water jets together with electronic controls for manoeuvring ships. The acquisition of the marine seal product line from US based EG&G to enlarge the division's on-board product portfolio was also announced. The products comprise hull, pump and torpedo seals, used predominantly by the US Navy's submarine fleet. The division is already the major marine seals supplier to the US surface fleet. The integration of these businesses will provide the basis to transform the division from a global leader in seals and bearings into a world leader in Marine Propulsion Systems. 1997 was a year of substantial expansion for Polymer Engineering as the Swedish industrial group Forsheda was successfully integrated into the existing Polymer Engineering activities. A new organisational structure for the combined operations was established on a global basis designed to increase customer focus and maximise operating efficiency. During 1997 markets were mixed with favourable conditions in North America and the UK but industrial markets in Continental Europe were flat. However, both Forsheda and Polypac performed in line with expectations and good growth was maintained across the division. Performance was enhanced by opportunities which were identified in the Forsheda acquisition and the introduction of new sealing programmes. With the recent acquisition now integrated and the new global organisation in place, Polymer Engineering is of sufficient size and substance to operate on a "stand alone" basis. From 1st January 1998 it was separated from John Crane Group to form a fourth core business which now trades as Forsheda Polymer Engineering Group. TI GROUP 15 FORSHEDA POLYMER ENGINEERING GROUP world leader in engineered elastomer seals From 1st January 1998, TI Group's polymer engineering interests have been combined in Forsheda Polymer Engineering Group, which now stands alongside John Crane, Bundy and Dowty as TI Group's fourth world leader business. Forsheda Polymer Engineering has 5,000 employees, operates from 41 locations and has 24 manufacturing sites spread across 16 countries. The product range covers three main areas: Engineered Seals, Pipe Seals and Speciality Products. Very much a knowledge and service business, Forsheda Polymer Engineering specialises in devising customised polymer sealing solutions, Its main customer base is in the industrial, automotive and aerospace markets, serving blue chip customers who value quality, seek innovation and delegate design. It has one of the world's largest range of elastomer seals and an extensive capability in design, materials and process engineering. There are dedicated centres of excellence in the UK, USA, Sweden and Malta with fully equipped laboratories working on product development. Enabling technologies include finite element modelling, and prototypes are tested and evaluated in comprehensive facilities which incorporate environmental, dynamic, thermal and pressure cycle testing. Forsheda Polymer Engineering has an internationally experienced senior management team with a clear global strategy and has good prospects for enhanced organic growth. With the Support of TI Group, there will be continued investment in process and product and, where appropriate, bolt-on acquisitions to accelerate global spread and to expand technological capability. (pound) million 1997 -------------------------------------- Turnover 243.8 -------------------------------------- Profit Before Interest 33.6 -------------------------------------- Net Assets 22.0 -------------------------------------- The figures in the above table are included in the review for John Crane on page 12. Management A new global management structure was established in 1997 under the leadership of Clive Stearnes as Chief Executive. Regional heads are Eduardo Moraes in Europe, Geoff Bicknell in North America, Nick Anderson in Latin America, and Mick Davies as Technical Director. The management team will be further strengthened in 1998 with the appointment of a President for Asia Pacific, and Fred DeCusatis will be joining the team as Finance Director. 16 TI GROUP OPERATING AND FINANCIAL REVIEW [LOGO] New in 1998 [GRAPHIC] Group Structure Engineered Seals Includes "0" rings, shaft seals, hydraulic seals, gaskets and diaphragms designed for industrial, automotive and aerospace markets. The focus is on exacting environmental and service applications. Pipe Seals A world leader in sealing systems for concrete and plastic pipes used principally in the water and construction industries. The products service the increasing worldwide demand for leak-free, long service life sealing for water and sewer systems. Speciality Products A range of niche polymer engineering activities servicing specialised applications including rail gangways, protective masks, military vehicle track components and resonance dampers. TI GROUP 17 BUNDY GROUP world leader in fluid carrying systems Bundy is a world leader in specialised small diameter fluid carrying systems for the automotive and refrigeration industries, The business employs over 12,000 people located in over 95 facilities in 27 countries and its sales are approximately 70% automotive and 30% refrigeration. Bundy's geographical spread is 45% North America, 40% Europe and 15% Rest of World. During 1997 Bundy's global position was further strengthened through continued investment in new product technology and capacity together with increased shareholdings in subsidiaries in China and India, In the year Bundy consolidated its world leadership position recording market share gains in both Automotive and Refrigeration against a background of mixed market conditions. Following the successful launch of a significant number of new programmes during the year, Bundy is well positioned to sustain profitable growth entering 1998 with record order book levels. (pound) million 1997 1996 -------------------------------------- Turnover 740.0 717.9 -------------------------------------- Profit Before Interest 78.2 79.3 -------------------------------------- Net Assets 247.4 231.3 -------------------------------------- Management Bill Laule, promoted to Chief Executive of TI Group on 1st January 1998, continues as Chief Executive, Bundy Group. Ken Templeton was appointed Deputy Chief Executive in addition to his role as Finance Director to ensure continuity of Bundy's overall objective of profitable growth. John Langston was appointed Chief Executive of the Automotive division and Malcolm Aitken was appointed Chief Executive of the Refrigeration division. Supporting the above is a strong management team clearly focused on growing the business profitably. 18 TI GROUP OPERATING AND FINANCIAL REVIEW [LOGO] [GRAPHIC] Group Structure Bundy Automotive Leading global supplier of small diameter fluid carrying systems for brake, fuel and powertrain applications. The combination of Bundy's technologies in rigid tube, flexible hoses and quick connectors offers complete solutions for fluid carrying systems to the world's automotive industry. Refrigeration World leader in the design, manufacture and supply of a comprehensive range of cooling systems, including condensers, evaporators, freezer shelves and heat exchangers, thereby offering a global capability to supply the world's refrigeration manufacturers. TI GROUP 19 [GRAPHIC] Bundy Supplies Ford Taurus/Sable Bundy's Kit Scarbrough joins the Ford Atlanta Assembly Fuel Line Supervisor to see Bundy front and rear fuel bundles fitted on the vehicle line. [GRAPHIC] Thrust SSC Thrust SSC relied on Bundy brake and fuel lines when it set the world's first supersonic and speed record of 763.035 mph. 1997 was a year of continued success for Bundy Automotive. The management team was strengthened with the appointment of John Langston as Chief Executive, Automotive. During the year Bundy gained full control over its North China subsidiary by increasing its shareholding to 90% whilst the investment in Bundy India was increased from 56% to 7l% via a preferential share issue. Investment continued in 1997, both in capital and in product development, to provide quality support to customer programmes and to further enhance "just-in-time" delivery concepts. New product introductions included the Alu/Pa coating in Europe for the VW Group. This product has also been selected by Fiat for its Multipla model. An important co-operation agreement with Freudenberg was announced during 1997. This will support further growth through the joint marketing of brake systems to the major OEMs adding Freudenberg's flexible hose technology to Bundy's product range. In 1997 dedicated business units were formed to provide improved support and service to customers on a global basis. The creation of these business units, together with improved advanced quality planning techniques, enabled Bundy to successfully introduce 56 new vehicle programmes. In North America, automotive production remained strong with a continued increased market share for light trucks. Bundy benefited from this trend with its participation on key volume platforms, notably the Ford F series and Expedition, and the Chrysler Ram. The capability to design, develop and manufacture solutions to meet the ever increasing legislation and environmental standards of safety and emissions resulted in new business gains. Business won included brake systems for the GM T800 light truck, the Mitsubishi Galant programme and the Nissan Frontier combined brake and fuel systems. In Europe, automotive production was mixed across the major markets but overall was slightly ahead of last year. Bundy achieved increased sales driven by the launching of several major programmes including the GM Astra by Bundy Belgium, the Volvo S90 by Bundy Sweden and the Rover Freelander by Bundy UK. In the rest of the world, Bundy successfully leveraged its product and technological expertise in coatings, quick connectors and multi-layer fuel hose into many countries including Brazil, Mexico, India and Korea. Bundy China was awarded 100% of the brake and fuel line business for the GM Buick Regal whilst Bundy Brazil secured the GM Blue Macaw business, through providing the level of support being sought on a global basis. Bundy's commitment to quality was recognised and rewarded in all of the continents with many "Best Supplier" awards including, for the third year, GM's "Supplier of the Year - Brake and Fuel Lines". All major facilities are now approved to ISO 9000 quality levels with progress towards achieving the ISO14001 environmental standard well underway. Order books at the end of 1997 were at record levels and Bundy Automotive is well positioned to continue its profitable growth. 20 TI GROUP OPERATING AND FINANCIAL REVIEW [GRAPHIC] No-Frost Evaporator These evaporators use Peerless advanced all aluminium technology available to Bundy under the strategic alliance. [GRAPHIC] Chest Freezer Evaporator Bundy's Klas Klogborg inspecting evaporators for chest freezers which are supplied in wrap-round or serpentines. In 1997 Malcolm Aitken was appointed Chief Executive of the Refrigeration division. Following this appointment, the division was reorganised into a clearly focused global business to provide an improved service to all its customers. Bundy is the only truly global supplier of refrigeration cooling systems and the dedicated focus will ensure the continuing growth of the division. Bundy formed a global alliance with Peerless of America for the manufacture, sale and distribution of frost-free evaporators, adding this important product to Bundy's comprehensive range of cooling system products. Major refrigeration OEMs, including Electrolux, Whirlpool Bosch Siemens and Daewoo, are becoming increasingly global in their activities, providing Bundy with opportunities on all continents to leverage its established global presence. Investment in 1997 included a new satellite for Whirlpool in Delhi and a single-wall tube line in Baroda, India. Further investments were made in Europe, Asia Pacific and Latin America, where Bundy is the lead supplier in cooling systems to the refrigeration OEMs. In North America, markets were fairly flat but Bundy continued to achieve growth from outsourcing opportunities. Newly focused teams are building relationships with the major OEMs and Bundy is well placed for substantial growth in this region. In Latin America, the division benefited from the acquisition of the Roll Bond evaporator business of Alcan in the second half of 1996. This enabled the complete range of cooling system products to be sold in Brazil, Mexico, Colombia and Venezuela. Bundy Mexico is working with Vitro in Mexico and a number of OEMs in the USA to provide components which will help them meet the new energy regulations. New business has also been won in Brazil to supply components to Bosch Siemens, for a new range of refrigerators, and Embraco, for its compressors. In Europe, the market was slightly weaker than in 1996 but Bundy continued to grow its sales and won new programmes. These included the supply of Candy's cold wall evaporators in the UK, products to Arcelik in Turkey, all condensers and evaporators for Electrolux's chest freezer production in Hungary and compressor components to both Electrolux and Embraco. Of significant importance was the contract to supply the new patented Waveline(TM) condenser to Electrolux and the first contract for frost-free evaporators in Europe. A contract has also been finalised to supply condensers and door-warmers to Daewoo's new factory in Spain. In Asia Pacific, Bundy maintained its leading position in Australia and substantially increased sales in China and India. In China sales to the largest OEM, Kelon, improved, whilst in India Whirlpool awarded Bundy the contract to supply all condensers for its direct cool business. This success, built upon Bundy's relationship with Whirlpool in Europe and Latin America, positions Bundy as the largest condenser manufacturer in India. During 1997 Electrolux do Brazil awarded "Best Supplier" status to Bundy Brazil. Bundy's commitment to its customers and the ever increasing demands of greater quality, environmental legislation and energy usage regulations around the world have supported growth in 1997 and place it well for accelerating the rate of growth in the future. TI GROUP 21 DOWTY GROUP world leader in aerospace systems The Dowty Aerospace businesses and Messier-Dowty, the joint venture between TI Group and Snecma of France, enjoyed another good year. As major suppliers to Airbus and Boeing they were able to benefit from the buoyant civil aerospace market, within which the world's two leading aircraft manufacturers announced record build rates and substantial new orders. Dowty Group has recorded an increase in both sales and profit, despite the decrease in TI Group's share of Messier-Dowty profits which was 80 percent in 1996 and 62,5 percent in 1997, The Dowty Aerospace businesses continued to grow strongly and, with an order book which has strengthened considerably, are well positioned for further growth in 1998. In December it was announced that Snecma of France, the joint venture partner, would acquire TI's share of Messier-Dowty, together with TI's wholly-owned landing gear repair and overhaul business. (pound) million 1997 1996 -------------------------------------- Turnover 475.5 446.2 -------------------------------------- Profit Before Interest 61.5 43.5 -------------------------------------- Net Assets 127.5 118.3 -------------------------------------- Management Dowty Group has continued under the leadership of Tony Edwards and, during the year, appointed Geoff Smith to the position of Deputy Chief Executive. For the strengthened Dowty Aerospace international management team, 1997 has been a year of team building and consolidation. Led by Peter Wright, Managing Director, increasing attention has been given to customer service and reducing costs while successfully managing this group of businesses through a significant growth period. Messier-Dowty has increased its focus on the service provided to customers worldwide through a management reorganisation. Within this, Andy Stevens has been appointed Managing Director of Messier-Dowty Europe which combines the facilities at Gloucester, Velizy, Bidos and Montreal. 22 TI GROUP OPERATING AND FINANCIAL REVIEW [LOGO] [GRAPHIC] Dowty Global Locations Group Structure Dowty Aerospace Specialised aerospace systems for major civil and military aircraft programmes throughout the world -- hydraulic and actuation systems, turbine engine components, propeller systems and repair and overhaul. Messier-Dowty All types of landing gear systems for civil and military aircraft from helicopters to large transport Design and manufacture on both sides of the Atlantic with worldwide customer support. TI GROUP 23 Dowty Aerospace [GRAPHIC] Boeing 737 Thrust Reverser Actuator James Gutierrez assembling one of 300 such actuators supplied monthly by Dowty Aerospace Los Angeles. [GRAPHIC] Combustion Chamber Outer Case Tru-Form's Brad Fleeger inspects critical height dimensions on a combustion chamber outer case for the new Pratt & Whitney (Canada) PW3O8 engine. Dowty Aerospace has been well placed to benefit from the aerospace growth cycle through its involvement on a number of key aircraft programmes and strong position with the major engine manufacturers. The Hydraulics and Actuation businesses benefited from the growth in aircraft build rates, in terms of both original equipment sales and increased spares demand. This, coupled with significant gains in manufacturing efficiency through various lean manufacturing initiatives, has resulted in an improved financial performance. Products with unsurpassed in-service records have led to selection on major programmes and a customer list that includes all the major civil and military, fixed and rotary wing aircraft constructors. In 1997 a significant milestone was reached with on-time delivery of the first sets of equipment for the aircraft selected to satisfy the US Air Force/US Navy Joint Primary Aircraft Training System (JPATS), which includes over 700 aircraft. Another boost came with the decision to proceed with Eurofighter, on which Dowty is a major supplier. A number of new orders were secured during the year. The Raytheon Aircraft Company selected Dowty to provide a major part of the hydraulic system on its Premier 1 business jet and Boeing placed contracts to supply high lift systems equipment for the new Boeing 767-400ER, a new extended range and increased capacity version of the highly successful Boeing 767. Dowty Turbine Engine Components (D-TEC) leads the world in aircraft engine ring technology and rigid tube fabrication, supplying gas turbine engine components to every major engine programme in the Western World. The D-TEC businesses had another strong year, with increases in sales to all of the big three engine companies, General Electric, Rolls-Royce and Pratt & Whitney. Specialist machining outsourced from the engine companies also increased substantially enabling D-TEC to capitalise upon the programme of focused investment carried out in previous years. Penetration of the world market was widened with delivery of equipment for Zorya, in the Ukraine for the MR-90 industrial gas turbine engine. In addition, the company was successful in securing a US$100m order to supply engine rings to General Electric Aircraft Engines. This three-year contract which starts in 1999, is the largest ever won by D-TEC. Dowty Aerospace Propellers increased its sales in 1997 as production of the new C-130J Hercules aircraft was stepped up, first deliveries to both the Royal Air Force and the Royal Australian Air Force being scheduled for 1998. Following its success on that programme, the company was selected to supply the propeller system for the Lockheed Martin/Alenia C-27J Spartan transport aircraft, an order worth US$100m on projected aircraft sales. Dowty's advanced propeller systems are also being supplied to Bombardier for the new de Havilland Dash 8 Series 400 aircraft which was unveiled at a ceremony in November. The Repair and Overhaul business in the UK, USA and Singapore, which largely supports the landing gear activities of Messier-Dowty, continued to grow steadily. Volume increases and wide ranging efficiency improvements resulted in improved sales and profit margins. Demand for heat treatment services from Thermal Processing Group remained high throughout the year. This business was sold in early 1998. 24 TI GROUP OPERATING AND FINANCIAL REVIEW Messier-Dowty [GRAPHIC] Combustion Chamber Liner Bryan Monahan checking co-ordinates at D-TEC's Valley Manufacturing, where these components are machined and assembled. [GRAPHIC] Equipment for Eurofighter Messier-Dowty is the main contractor for Eurofighter landing gear systems. Dowty Aerospace supplies hydraulic and actuation systems and turbine engine components. Dowty Aerospace equipment is flying on more than 200 current types of aircraft and supporting some 450 airlines and 150 military operators worldwide. It has entered 1998 with an increased order book and a strong position on key civil and military programmes, including all of the current Airbus and Boeing programmes. To take advantage of the buoyant aerospace market, capital investment was increased substantially in 1997 and is forecast to be further increased in 1998. These factors, coupled with a commitment to maintain high levels of customer service and quality, give confidence in the division's ability to ensure future strength and profitable growth. Messier-Dowty has continued to build on its strong foundations. The facilities in UK and France, together with Montreal, benefited from the increase in Airbus A319/A320/A321 and A330/A340 production build rates while Toronto achieved a strong performance from its regional and business jet programmes. During the year, the Raytheon Aircraft Company chose Messier-Dowty to design and manufacture the integrated landing gear system for the all-new Hawker Horizon business jet and Fairchild Dornier selected the company to supply landing gear for the DO328-300 commuter jet. These contracts should be worth US$150m over the life of the two aircraft programmes. CASA, one of the partners in Airbus Industrie, selected Messier-Dowty to develop the landing gear system for its new C295 military transport aircraft, a programme launched at the Paris Air Show. The same venue was used by Airbus Industrie to communicate the commercial launch of the A340-500/600 aircraft and for the announcement of Messier-Dowty's selection as the landing gear supplier on both programmes. The Airbus Industrie Board authorised full go-ahead for these new ultra long-range/increased capacity derivatives of the A340 aircraft in December, after finalising agreements with several major launch customers. These new contracts, combined with Messier-Dowty's position on existing major programmes in all segments of the aerospace market, have helped consolidate its world leading position. To cope with the growing order book, the company has continued its investment programme, primarily in manufacturing facilities and equipment. All sites have benefited, including Toronto which completed a new assembly facility that was officially opened by Canada's Minister of Economic Development, Trade and Tourism. Messier-Dowty has continued to pursue initiatives aimed at achieving efficiencies and improved customer service and it has produced increases in market share, sales and profitability. These achievements over its first three years have meant that the business is well positioned to develop its world leadership under the ownership of Snecma. TI GROUP 25 INTERNATIONAL MANAGEMENT -- TI Group's global businesses are driven by a strong Cadre of senior managers, all of whom have extensive international experience. Pictured below are just some of the senior team whose knowledge and experience covers all regions of the globe, from North America to Europe and from South America to the Far East, [GRAPHIC] 1 Joe Macneil Vice President Finance Bundy North America, DETROIT 2 Jim Davis President Bundy North America, DETROIT 3 Dan Cook Commercial Director Bundy Automotive, DETROIT 4 John Cousins OBE Managing Director John Crane Marine, HAMPSHIRE 5 Derek Wilson Managing Director John Crane Mechanical Seals, Europe, Middle East and Africa 6 Clive Stearnes Chief Executive Forsheda Polymer Engineering Group, ABINGDON 7 Geoff Bicknell President Forsheda Polymer Engineering, North America, CHICAGO 8 Jorge Garces President John Crane Mechanical Seals, Latin America, MEXICO CITY 9 Doug Fockler Senior Vice President Operations John Crane North America, CHICAGO 10 Roger Fix President John Crane Mechanical Seals, North America, CHICAGO 11 Pracheesh Mathur President Dowty Aerospace Asia Pacific, SINGAPORE 12 Eduardo Moraes Managing Director Forshedo Polymer Engineering, Europe, Middle East and Africa, ABINGDON 13 Tony Martin President Bundy Asia Pacific, ADELAIDE 14 Geoff Gieske Vice President Human Resources John Crane North America, CHICAGO 15 Bob Wasson Senior Vice President Finance John Crane North America, CHICAGO 26 TI GROUP [GRAPHIC] 16 Fred DeCusatis Chief Financial Officer Messier Dowty International, ABINGDON 17 Andy Stevens Managing Director Messier-Dowty Europe, PARIS/GLOUCESTER 18 Malcolm Aitken Chief Executive Bundy Refrigeration, ABINGDON 19 Ken Templeton Deputy Chief Executive Bundy Group, ABINGDON 20 Rick Berg President Dowty Aerospace Los Angeles, LOS ANGELES 21 Peter Wright Managing Director Dowty Aerospace, ABINGDON/PENNSYLVANIA 22 Mark Celusniak President Dowty Turbine Engine Components, PENNSYLVANIA 23 Richard Scanlon Managing Director John Crane Asia Pacific, SINGAPORE 24 Roger Bishop Process Industry Sales Director John Crane Mechanical Seals, SLOUGH 25 Keith McCartney Director Human Resources TI Asia Pacific, SINGAPORE 26 Ralph Kessler Vice President Legal Affairs TI Group Inc, NEW YORK 27 Jim Katzoff Executive Vice President TI Group Inc, NEW YORK 28 Michael Steel Commercial/Legal Director Messier-Dowty International, ABINGDON 29 Geoff Smith Deputy Chief Executive Dowty Group, ABINGDON/GLOUCESTER 30 John Langston Chief Executive Bundy Automotive, ABINGDON TI GROUP 27 DIRECTORS AND SECRETARY [GRAPHIC] Sir Christopher Lewinton ++ # Chairman Joined the Board in 1986 as Chief Executive and Deputy Chairman, becoming Chairman in 1989. Wide international experience; based in the United States for many years. A non-executive Director of Reed Elsevier and a member of the Supervisory Board of Mannesmann AG. Age 66 o Member, Organisation and Remuneration Committee + Member, Audit Committee ++ Member, Nominations Committee # Member, Chairman's Committee NON-EXECUTIVE DIRECTORS [GRAPHIC] John M Hignett o + ++ Deputy Chairman Joined the Board in 1989, becoming Deputy Chairman in 1993. Chairman, Audit Committee. A Director of Sedgwick Group and Alfred McAlpine. Formerly a Director of Glaxo Holdings, a Managing Director of Lazard Brothers & Co and Director General of the Takeover Panel. Age 64 [GRAPHIC] Sir Colin Chandler o + Joined the Board in 1992. Chairman and Chief Executive, Vickers. A Director of Guardian Royal Exchange. Vice President, Engineering Employers Federation. A Member of the National Defence Industries Council. Formerly Head of Defence Export Services, Ministry of Defence. Age 58 [GRAPHIC] Lord Fanshawe of Richmond KCMG o + ++ Joined the Board in 1990. Chairman, Organisation and Remuneration Committee. A Director of Xerox UK. Member, Pratt & Whitney European Advisory Board. Chairman of Sedgwick Group until 1997. Formerly a Foreign Office Minister. Age 70 [GRAPHIC] John M Harris o Joined the Board in 1991. President, The Forum Corporation based in Boston. Formerly President and CEO, Rockefeller Financial Services Inc and President of the European operations of Booz Allen & Hamilton. An American citizen. Age 57 [GRAPHIC] Rudolf G Mueller CBE o Joined The Board in 1996. Chairman of Chiltern Group. Member of the Board of Lend Lease Corporation and Chairman of Lend Lease Europe. Previously held senior positions with DBS in Zurich, Singapore and London where he was Chairman of the DBS Group until December 1997. Formerly Director of the London Stock Exchange. A Swiss citizen. Age 63 [GRAPHIC] Sir Nigel Broomfield KCMG + Joined the Board in February 1998. A non-executive Director of Foreign and Colonial German Investment Trust. Director Designate of the Ditchley Foundation and an adviser to Arthur Andersen. A retired diplomat, British Ambassador to the Federal Republic of Germany until March 1997. Age 61 28 TI GROUP EXECUTIVE DIRECTORS [GRAPHIC] William J Laule # Chief Executive Joined the Board in 1995. Chief Executive, Bundy since 1994 becoming Chief Executive, TI Group in January 1998. Previously President Bundy North America. Senior management experience gained with Rockwell International in the United States and Europe. An American citizen. Age 49 [GRAPHIC] Martin D Angle # Group Finance Director Joined the Board in February 1997. Wide international business experience gained in senior positions with SG Warburg, Morgan Stanley and the Dresdner Kleinwort Benson Group, based in the United States and the UK. A Chartered Accountant. Age 47 [GRAPHIC] John W Potter Chief Executive, John Crane Joined the Board in 1992, becoming Chief Executive, John Crane in 1994. Previously Chief Executive, Bundy. International operating and senior management experience gained in global companies whilst based in Europe and the United States. Age 54 [GRAPHIC] L Antony Edwards Chief Executive, Dowty Joined the Board in 1992. Senior management experience gained with General Electric in the United States and as President, Canadair. Formerly Group Managing Director, Lucas Industries. Past President, Society of British Aerospace Companies. A Member of the National Defence Industries Council. Age 53 [GRAPHIC] Gerrit O Aronson Group Director of Human Resources Joined the Board in February 1997. Senior human resource management experience gained with Northern Telecom and Bell-Northern Research in the UK, the United States and Canada. Formerly, Group Director of Human Resources, Wellcome, subsequently Glaxo-Wellcome. A Canadian citizen. Age 47 [GRAPHIC] James L Roe Director of Strategic Development Joined the board in 1994. Director, Strategic Development since 1986. Previously, Senior Vice President, John Crane International. Experience outside TI includes management consultancy. Age 53 [GRAPHIC] Robert J M Fisher President, Asia Pacific Joined the Board in 1992, becoming President, Asia Pacific in 1996. Previously, Managing Director, Operations and Chief Executive, John Crane. International marketing and senior management experience gained in global companies whilst based in Asia, South America and the United States. Age 59 David P Lillycrop General Counsel and Group Secretary TI GROUP 29 STATUTORY INFORMATION 31 REPORT OF THE DIRECTORS 36 REPORT OF THE ORGANISATION AND REMUNERATION COMMITTEE 40 STATEMENTS OF THE DIRECTORS 41 AUDITORS' REPORTS 42 ACCOUNTING POLICIES 44 CONSOLIDATED PROFIT AND LOSS ACCOUNT 45 BALANCE SHEETS 46 CASH FLOW STATEMENT 47 STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES MOVEMENTS IN NET TI SHAREHOLDERS' FUNDS 48 NOTES TO THE FINANCIAL STATEMENTS 72 PRINCIPAL SUBSIDIARIES, ASSOCIATED UNDERTAKINGS AND OTHER PARTICIPATING INTERESTS 74 GROUP FINANCIAL HISTORY 75 NOTICE OF ANNUAL GENERAL MEETING IBC GROUP ADDRESSES, REGISTRARS AND ADR DEPOSITARY 30 TI GROUP REPORT OF THE DIRECTORS TI group is an international engineering group concentrating on products in specialised niches on a global basis. A summary of the businesses in each segment with the names of the principal Group companies appears on pages 72 and 73. The Chairman's statement is set out on pages 2 to 5, the operating and financial review on pages 6 to 25, and the profit and loss account on page 44. DIVIDEND The Board recommends a final dividend of 10.8p per Ordinary share of 25p payable on 29th May 1998 to Ordinary shareholders registered on the books of the Company at the close of business on 27th March 1998. When taken with the interim dividend of 5.1p per Ordinary share paid on 7th October 1997 this makes a total of 15.9p per Ordinary share for the year ended 31st December 1997 (1996 14.5p per Ordinary share). The 1997 final dividend will be paid as a Foreign Income Dividend ("FID"). No scrip dividend alternative is being offered in respect of this dividend as this is precluded under current FID regulations. In the UK Budget Statement on 2nd July 1997, the Government announced changes to the rules surrounding the taxation of dividends. These changes make it advantageous for an international group such as TI Group to pay dividends as FIDs, as the Company can reclaim advance corporation tax paid on the dividend by setting it against tax on overseas profits, At the Annual General Meeting held in 1997 shareholders authorised the Directors to offer a scrip alternative to any dividend declared or paid during a period of five years. In accordance with the Directors' intention to seek annual renewal, and to provide flexibility for offering scrip dividends in the future, resolution 5 will be proposed as an Ordinary Resolution at the Annual General Meeting to extend this authority until 2003. EMPLOYMENT POLICIES Due to the spread of TI Group's constituent businesses and the devolution of responsibility to local management, the arrangements for involving employees in the business vary considerably, Nevertheless the overriding objective -- to achieve a shared commitment by all employees to the success of the business in which they work -- applies throughout the Group. Team briefings, management conferences and house newspapers are some of the methods used to ensure that employees are well informed. Employees in the UK are encouraged to be financially involved in the Group through participation in Savings-Related Share Option Schemes. Member participation in the affairs of the TI Group Pension Scheme is provided in the form of member and pensioner representation on the trustee body, Occupational health and safety matters continue to receive management attention at Group and company level. The employment, training. career development and promotion of disabled persons receive positive consideration by Group companies. RESEARCH AND DEVELOPMENT TI Group has a continuing commitment to a strategy of market leadership through investment in customer-focused applied technology. Each of the Group's core businesses maintains self-sufficiency in applied technology geared to new product development and world-class manufacturing practice. ENVIRONMENT TI Group's environmental policies are implemented by its global Environmental Co-ordination Panel which reports to a main Board Director. It is tasked with ensuring that all TI businesses execute the Group's environmental policies through the implementation of environmental management systems. TI GROUP 31 REPORT OF THE DIRECTORS continued Specific objectives have been developed for TI Group's main business groups which have active programmes for the management of scarce resources, reducing discharges to the air, waste management amid energy conservation. TI Group's commitment is endorsed by senior management and environmental issues are an integral part of managerial responsibilities at every level. The Panel has undertaken a global audit of TI Group's businesses and is implementing regular reporting against agreed objectives, TI Group has begun working towards the international environmental standard ISO14001 in all its worldwide businesses. TI Group's businesses are used to operating in the most demanding legislative environment. As proof of this, the Group has won Environmental Awards in the UK, the USA and Continental Europe and is a member of environmental organisations in these regions. DIRECTORS The Directors retiring by rotation are Sir Colin Chandler and Sir Christopher Lewinton who, being eligible, offer themselves for re-election. Sir Colin does not have a service contract with the Company. Sir Christopher has a service contract with the Company determinable on 2 years' notice. Sir Nigel Broomfield was appointed to the Board on 18th February 1998. Sir Nigel does not have a service contract with the Company. In accordance with the Articles, Sir Nigel will retire at the Annual General Meeting and members will be invited to re-elect him. The present constitution of the Board is set out on pages 28 and 29. SHARE SCHEMES At 31st December 1997, the total number of Ordinary shares in TI Group plc under option was 13,351,538. The holders of these options are members of TI Group plc schemes and/or of one or more of three schemes operated by Dowty Group PLC prior to its acquisition by TI Group in 1992. In the latter case these options were obtained, following the acquisition, in exchange for options over shares in Dowty Group. There are 3,291 participants in the TI Group schemes and 273 participants in the Dowty Group schemes. Details of Ordinary shares under option are shown in note 21 on pages 64 and 65, The interests of Directors of the Company who are participants in the above schemes are shown in the table on page 54. CORPORATE GOVERNANCE The Board is satisfied that the Company has complied throughout 1997 with the provisions of the Code of Best Practice issued in 1992 as part of the Cadbury Report on the Financial Aspects of Corporate Governance. The report of the Company's auditors, Price Waterhouse, concerning the Company's compliance with the Cadbury Code appears on page 41. Compliance, where appropriate, with the recommendations of the Greenbury Report is a matter covered by the report of the Organisation and Remuneration Committee on pages 36 to 39. Statements by the Directors of their responsibilities in relation to financial statements, the adoption of the going concern basis for the preparation of accounts and the Group's system of internal financial control appear on page 40, opposite the auditors' report. The Board and Management With effect from 1st January 1998 the roles of Chairman and Chief Executive were separated on the appointment of Mr W J Laule as Chief Executive with Sir Christopher Lewinton continuing as Chairman. The Board is broadly balanced with the Chairman supported by a non-executive Deputy Chairman and five other non-executive Directors and by seven executive Directors. The Board includes US, Canadian and Swiss, as well as UK, nationals reflecting the international nature of the Company's activities. The non-executives, who provide a strong and independent element, are appointed initially for a three year term and may be re-appointed. The business reserved to the Board includes, in particular, matters of policy, approval of the strategic and financial plans, major expenditure proposals and acquisitions and disposals. 32 TI GROUP A number of key committees, some of which have been in place for several years with others recently constituted, contribute to an effective check and balance on the operations and to good communication throughout the Group. The Chairman's Committee is chaired by the TI Group Chairman with Mr Laule and Mr Angle as members. The Committee is responsible, on behalf of the Board, for maintaining the strategic direction of the Group. The Executive Board, which is responsible for the overall management of the business, comprises the executive Directors, the General Counsel & Group Secretary and the Deputy Group Finance Director, and is chaired by Mr Laule. The Investment Committee, chaired by the Chief Executive, and the Finance Committee, chaired by the Group Finance Director, have responsibility for the management of financial issues, the application of financial disciplines to the decision-making process, and the evaluation of the commercial aspects of major proposals. The Contract Review Committee, also chaired by the Group Finance Director, is responsible for the review and approval of major contract and bid terms. In addition, the Board has had in place for many years the Committees referred to below where the non-executive Directors are primarily responsible, on behalf of the Board, for the business undertaken. Audit Committee The Audit Committee, which was established in 1987. is comprised wholly of non-executive Directors and normally meets three times per year. Currently four non-executive Directors are members and the Committee is chaired by Mr J M Hignett. Its objective is to give formal support to the Board in fulfilling its obligations to shareholders to maintain standards of management and financial control and reporting throughout the Group consistent with regulatory requirements and current best practice. Its terms of reference include: 1. The review of such written reports from the auditors as the Committee may from time to time require, including for example a report on the quality of TI Group's financial accounting and operational controls worldwide and on any significant areas of vulnerability in control, accounting or financial management resource which the audit process has identified. 2. The review of the work of the Internal Audit function and its relationship with the external audit. 3. The review prior to publication and to submission to the TI Board of the TI Group published accounts for the half-year and full year. The external auditors attend the meetings of the Audit Committee. They are entitled to and do meet with the Audit Committee privately and have direct access to the Chairman of the Committee. Organisation and Remuneration Committee The role of this Committee, which was also set up in 1987, was reviewed following publication of the Greenbury Report and the incorporation of aspects of the 'Greenbury Code' into the listing requirements of the London Stock Exchange. The Committee comprises not less than three non-executive Directors. Currently five non-executive Directors are members and the Committee is chaired by Lord Fanshawe. The powers and terms of reference of the Committee include the following: a. to approve the organisation of the Company's top management structure and succession planning; b. to determine the terms of appointment and total remuneration of members of the Board; c. to approve annual and longer term incentive plans and to administer any Group share option schemes or related arrangements; d. to determine policy and maintain governance over any Group pension schemes or related arrangements. The Company complies with part A of the Best Practice provisions concerning Directors' remuneration included within the Stock Exchange Listing Rules. There is set out on pages 36 to 39 a separate report to shareholders by the Organisation and Remuneration Committee. TI GROUP 33 REPORT OF THE DIRECTORS continued Nominations Committee This Committee currently comprises the TI Group Chairman, the Deputy Chairman who is also Chairman of the Audit Committee, and the Chairman of the Organisation and Remuneration Committee. Its objective is to provide a forum at which the TI Group Chairman may seek general counsel and advice in relation to matters which may not have reached a stage where formal consideration by the Board is appropriate. The Committee has responsibility for initial consideration of all Board appointments. The Committee also has responsibility for considering and if appropriate approving the obtaining of independent external advice by either a Director or a Board committee in accordance with standing guidelines adopted by the Board. SHARE CAPITAL Details of shares issued during the year are set out in note 21 on page 64. At the Annual General Meeting held in 1997 shareholders authorised the Directors, pursuant to section 80 of the Companies Act 1985, to allot Ordinary shares without the prior consent of shareholders for a period of five years. In accordance with the Directors' intention to seek annual renewal, resolution 7 will be proposed as an Ordinary Resolution at the Annual General Meeting to extend this authority until 2003. The (pound)39,800,000 nominal amount of relevant securities to which the authority relates, including Ordinary shares that are subject to options, represents approximately 33% of the nominal amount of issued Ordinary share capital of the Company as at 11th March 1998. Except pursuant to the exercise of options, the Directors have no present intention of exercising this authority. Also at last year's meeting a Special Resolution was passed, pursuant to section 95 of the Companies Act 1985, empowering the Directors to allot equity securities for cash without first being required to offer such shares to existing shareholders. Resolution 8 will be proposed as a Special Resolution to renew this power until 13th May 2003. The (pound)5,900,000 nominal amount of equity securities to which this authority relates represents approximately 5% of the issued Ordinary share capital of the Company as at 11th March 1998. PURCHASE BY THE COMPANY OF ITS OWN SHARES The Company was authorised at the Annual General Meeting held in 1997 to purchase in the market Ordinary shares representing up to approximately 10% of the then issued share capital. This authority has not been used and expires at the conclusion of the Annual General Meeting. In accordance with the Directors' intention to seek annual renewal, resolution 6 will be proposed as a Special Resolution at the Annual General Meeting to renew this authority until the earlier of 13th August 1999 and the next Annual General Meeting. The Directors have no current intention of using this authority and, in relation to any decision to purchase, will take into account the Company's gearing levels and general financial position, and the effect of any purchase on earnings per share. Any shares purchased by the Company pursuant this authority will form part of the Company's authorised but unissued share capital and will be available for re-issue subject to the Directors being authorised pursuant to Article 17 of the Company's Articles of Association. 34 TI GROUP INTERESTS IN SHARE CAPITAL As at 10th March 1998 the Company had been notified under section 198 of the Companies Act 1985 of the following persons who are interested in 3% or more of the issued share capital of the Company: NUMBER OF PERCENTAGE OF HOLDER SHARES ISSUED CAPITAL - ----------------------------------------------- ---------- -------------- The Capital Group Companies, Inc 24,152,300 5.05 Scottish Widows Fund and Life Assurance Society 20,434,761 4.27 Prudential Corporation plc 17,522,225 3.68 Apart from the shareholdings detailed above, there are no other notifiable interests appearing in the Company register maintained under the provisions of section 211 of the Companies Act 1985. The interests of the Directors in the share capital of the Company are shown in note 10 on page 54. There were no changes in these interests between 1st January 1998 and 11th March 1998 other than those shown in note 10. The register recording the Directors' interests in the share capital will be open for inspection at the Annual General Meeting. INTERESTS IN CONTRACTS During the year no Director was materially interested in any contract which was significant in relation to the Company's business. PAYMENT POLICY The Group is a registered supporter of the CBI's Prompt Payers Code of Good Practice, copies of which are available from the Confederation of British Industry, Centre Point, 103 New Oxford Street, London WC1A 1DU. It is the Group's policy to agree with its suppliers terms of settlement which are appropriate for the markets in which they operate, and to abide by such terms where suppliers have also met their obligations. CHARITABLE AND POLITICAL CONTRIBUTIONS During the year the UK companies in the Group made charitable donations totalling (pound)275,000 gross. The annual donations budget is administered by the Charitable Donations Committee. The Group's policy on donations is to direct its support primarily towards assisting charities with selected medical, engineering or educational objectives, as well as objectives connected with the Group's business and role in the community. A contribution of (pound)50,000 was made to the Conservative Party during the year. INCOME AND CORPORATION TAXES ACT 1988 The close company provisions of this Act do not apply to the Company. AUDITORS The Company's auditors, Price Waterhouse, are willing to continue in office and a resolution proposing their re-appointment and authorising the Directors to fix their remuneration will be put to the Annual General Meeting. By order of the Board DAVID P LILLYCROP Secretary 11th March 1998 TI GROUP 35 REPORT OF THE ORGANISATION AND REMUNERATION COMMITTEE On behalf of the Board, the Organisation and Remuneration Committee ("the Committee") presents this report to shareholders pursuant to the recommendations of the Study Group on Directors' Remuneration (the Greenbury Report) as now incorporated in the listing requirements of the London Stock Exchange. In framing its policy on executive Directors' remuneration the Committee has given full consideration to section B of the Best Practice provisions annexed to the Listing Rules. The members of the Committee are Lord Fanshawe (Chairman), Mr J M Hignett. Sir Colin Chandler, Mr J M Harris and Mr R C Mueller. REMUNERATION POLICY - EXECUTIVE DIRECTORS Policy The remuneration of the executive Directors is determined by the Committee, in consultation with the Chairman of the Company (save in respect of his own remuneration) and after obtaining appropriate independent professional advice reflecting the international nature of the Company. Since the Company has 80% of its business outside the United Kingdom and in particular around 44% in North America, its remuneration policies must be internationally competitive and flexible. This both attracts and retains high quality management as well as facilitating global management succession. The philosophy of the Committee is to offer internationally competitive total compensation packages, a significant proportion of which is performance-related and set against challenging objectives. It is inherent in this approach that significant elements of the package may prove to have no value at the end of the life of a particular scheme even though they have had a paper value at some time in the past. However, such incentives, which stimulate enhanced performance and lead to enhanced shareholder value, are considered to be in the best interests of shareholders, customers, suppliers and employees alike. This philosophy has been successfully applied since 1987. A large part of the performance-related elements of the package is paid in the form of TI shares transferred from the TI Group Employee Share Ownership Trust which was established in 1995. Remuneration Package The remuneration package of the executive Directors comprises four components: i Basic salary and benefits Salaries are determined within the international marketplace and reflect experience and responsibility. Salaries are reviewed annually as at 1st January. Principal benefits include use of a motor car, fuel, and medical expenses insurance. ii Annual bonus For headquarters staff executive Directors the annual bonus is based partly on Group performance against plan, and partly on achievement of individual objectives. The annual bonus for executive Directors with line responsibility for operations is based partly on a combination of Group performance and business area performance against annual plan and partly on achievement of individual objectives. The annual plan includes specific cash targets. The maximum potential bonus for executive Directors for 1997 was 60% of basic salary (100% for the Chairman), with the maximum amount normally achievable only if performance exceeds plan by a clear margin. The Committee retains the right to exercise an overview with regard to the quality of achievement. Payments in respect of 1997, comprising cash and shares, are shown in the table on page 39. The share element reflects the general policy of encouraging executives to invest in the Company. For 1998 a similar scheme is in force. iii Long term Incentives The committee considers that it is appropriate to provide the long term component of executive Directors' compensation through a combination of share options and long term bonus plans. In each case, as set out below, there are demanding performance criteria. 36 TI GROUP a. Three-year share performance plan There is a three-year share performance plan in place covering measurement periods from 1995-98 onwards. The purpose of the plan is to encourage senior executives to think longer term and to develop an affinity with performance achievements beyond the normal one year horizon. This benefits both shareholders and management. Benefits under these plans do not vest on an annual basis; participants do not have any entitlement until cumulative performance over the three-year period is ascertained. The share performance plan rewards performance measured by growth in Total Shareholder Return (share price and reinvested dividends) against the performance of a group of more than 20 comparator companies. The comparator companies have been chosen with regard to size, complexity and overall relevance, after consultation by the Committee with independent advisers. Maximum potential bonus is achieved only if TI is in the top 10% ranking of comparator companies. No award is made for performance below the median level. Under the plan the potential bonus is itself expressed by reference to a number of TI shares which could be purchased at a certain time during the first year of the relevant three-year period for an amount equal to the basic salary for that year, rather than a cash sum. It is intended that the shares to which participants in the plan will become entitled will be provided from the TI Group Employee Share Ownership Trust. b. Share options The TI Group and TI Group (1990) Executive Share Option Schemes link reward to added shareholder value and encourage executives to align their longer term career aspirations with the longer term interests of the Group. Subject to performance requirements being fulfilled the Schemes enable executives to participate in share price growth, options normally becoming exercisable between three and ten years after grant. Participants are encouraged to build up an equity interest in the Group. Options granted since 1987 have been exercisable only if the percentage increase in earnings per share over a three year period has exceeded the percentage increase in the Retail Prices Index over that period. Starring in 1996, options granted to executive Directors are subject to a minimum performance requirement equal to the increase in the Retail Prices Index plus 2% per annum. The legislative changes effected by the Finance Act 1996 had the effect of reducing the individual limit for Inland Revenue approved share options. In order to maintain the value to the Company of the 1990 scheme the Committee has granted subsequent options under the existing unapproved international section of the scheme. Details of options held by Directors are set out in the table on page 54. iv Pensions Pension and life assurance arrangements are consistent with those provided by other leading companies. The executive Directors are members of the TI Group and Executive (1992) pension schemes and Mr Laule is also a member of Bundy Corporation's defined benefits plan. They are entitled to earn pension benefits, dependent on their length of service, as agreed by the Group. In some circumstances, the taxation authorities will not permit the schemes to meet the executive Directors full pension entitlement, in which case the Group has promised to make good any shortfall by means of unapproved arrangements. Set out on the next page are details of the pension benefits earned by each of the executive Directors during the year ended 31st December 1997. TI GROUP 37 REPORT OF THE ORGANISATION AND REMUNERATION COMMITTEE continued Cash Increase in equivalent accrued pension of increase Total accrued (excluding (excluding Members' pension at inflation) members' contributions 31 December during 1997 contributions) in 1997 1997 (pound)'000 (pound)'000 (pound)'000 (pound)'000 --------------- -------------- ------------- ------------- W J Laule 4 9 -- 21 M D Angle 8 89 3 8 G O Aronson 6 59 4 6 LA Edwards 12 157 4 55 R J M Fisher 17 240 4 85 J W Potter 20 271 16 122 J L Roe 13 171 10 109 B A Walsh 18 201 1 59 Notes: 1. The Cash equivalent of increase", which has been calculated on the basis of actuarial advice in accordance with GN11, is the same as the "transfer value of the increase" and does not represent a sum payable to individual Directors. It cannot therefore meaningfully be added to annual remuneration. 2. The pension entitlement shown is that which would be paid annually on retirement based on service to 31st December 1997, except in the case of Mr B A Walsh. The figure shown for Mr B A Walsh is the pension accrued at retirement date (1st June 1997). 3. Sir Christopher Lewinton is not shown in the above table. He did not accrue any additional pension (excluding inflation) under the UK arrangements during the period having reached Normal Pension Date on 1st February 1997. His accrued pension at 31st December 1997, which includes benefits transferred into the scheme, was (pound)348,000 p.a. He is not accruing further benefits, but his pension will increase each year until drawn to reflect deferred payment. 4. Sir Christopher Lewinton also participates in a US defined contribution pension arrangement; during the period contributions amounted to (pound)25,460 (1996 (pound)11,058). 5. Mr W J Laule is also a member of Bundy Corporation's US defined contribution arrangements; during the period contributions amounted to (pound)10,955 (1996 (pound)26,157). 6. Pensionable salary does not include annual bonuses or long term incentive scheme payments. Members' contributions shown above do not include AVCs. Service Contracts The Company's policy in relation to contracts of service for executive Directors is to provide notice or contract periods not exceeding two years. Each of the executive Directors, including Sir Christopher Lewinton who offers himself for re-election at this year's Annual General Meeting, is accordingly employed under a contract entitling him to two years' notice of termination. As previously reported, the then executive Directors agreed in 1994, without compensation, to reduce the notice period applicable to their contracts of service from three years to two years. The Committee has again reviewed the situation this year and continues to believe that this period of notice is in line with practice in the marketplace and is in fact necessary to enable the Company to attract and retain the highest calibre of management. The Company takes account of the legal duty to mitigate damages. The contracts of the executive Directors do, however, contain provision for payment based on two years' salary and benefits on termination following a change of control of the Company. REMUNERATION POLICY -- NON-EXECUTIVE DIRECTORS The remuneration of the non-executive Directors is determined by the Board of Directors. Non-executive Directors absent themselves from any discussion or decisions relating to their own remuneration. The remuneration reflects both the amount of time given and the contribution made by the non-executive Directors to the Company's affairs, including membership or Chairmanship of Board committees, and is on the basis of advice taken by the Board from independent consultants. The non-executive Directors do not receive any bonuses related to the Company's performance nor do they participate in any share option values. 38 TI GROUP SUMMARY REMUNERATION TABLE Executive Directors - -- Salary, Annual Bonus and Benefits
Annual Bonus -------------------------- 1996 1997 Benefits TI Shares 1997 1996 Basic Salary Basic Salary (Note 1) Cash (Note 2) Total Total (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Sir Christopher Lewinton 625 675 50 216 216 1,157 1,131 W J Laule 272 294 31 87 88 500 396 M D Angle -- 259 83 62 63 467 -- G O Aronson -- 174 13 38 37 262 -- L A Edwards 300 315 17 78 79 489 424 R J M Fisher 260 300 79 48 47 474 434 J W Potter 300 330 22 25 25 402 447 J L Roe 190 210 12 38 39 299 293 B A Walsh 300 124 8 -- -- 132 452
Notes: 1. Benefits include provision of a motor car, fuel, medical expenses insurance, unapproved life cover, relocation expenses and accommodation (net of contributions). 2. The bonus award has been allocated between cash and TI shares from the TI Group Employee Share Ownership Trust. The numbers of shares thus acquired, calculated after deduction of an amount in respect of personal tax, are included in the holdings as at 11th March 1998 shown in the summary of Directors' share interests on page 54. 3. Messier-Dowty International Ltd, a joint venture, bears 60% of the amount shown in respect of Mr Edwards' salary and annual performance-related bonus. 4. Mr M D Angle and Mr G O Aronson became Directors on 19th February and 1st February 1997 respectively. Mr Walsh retired on 1st June 1997. - -- Long Term Incentives (Three-Year Plans) The Directors and former Director, Mr B A Walsh, listed below are participants in the Three-Year Share Performance Plan for the measurement periods 1995-98, 1996-99 and (except Mr Walsh) 1997-2000. In addition Mr Angle and Mr Aronson both participate in the Three-Year Share Performance Plan for the measurement period 1997-2000. As explained on page 55 contingent interests under the Share Performance Plan in respect of the periods commencing in 1995 and subsequent years do not vest until the end of the relevant measurement period; in respect of each period it will not be known what, if any, entitlement has actually accrued until after the announcement of the Company's results for the relevant year. However, as required by UITF 17, a prudent estimate has been made of the anticipated costs in respect of the Three-Year Share Performance plan and, for the above periods, a provision of (pound)900,000 has been charged to the profit and loss account (1996 (pound)482,000). Details of the payments made in 1997 in respect of the three-year period 1994-96 (estimates of which were disclosed in the 1996 Annual Report) were as follows: 1994-96 Cash TI Shares Total (pound)'000 (pound)'000 (pound)'000 ----------- ----------- ----------- Sir Christopher Lewinton 178 179 357 W J Laule -- -- -- L A Edwards 78 78 156 R J M Fisher 75 75 150 J W Potter 62 62 124 J L Roe 49 49 98 B A Walsh 82 81 163 Notes: 5. As reported in last year's Annual Report, during 1996 the Chairman exercised notional stock options arising under his US employment over 41,800 TI Ordinary shares and a payment of (pound)132,500 was made. There was no exercise or payment during 1997 and the Chairman holds no further notional stock options. During the year the Chairman exercised options over 282,000 (1996 442,000) TI Ordinary shares, the notional aggregate gain resulting from the exercise was (pound)756,855 (1996 (pound)1,366,996). Further details are set out on page 54. 6. Details of share options held by the Directors are set out on page 54. Non-Executive Directors 1997 1996 Total Total (pound)'000 (pound)'000 J M Hignett 77 75 Sir Colin Chandler 29 27 Lord Fanshawe 52 50 J M Harris 39 37 R G Mueller 39 27 TI GROUP 39 STATEMENTS OF THE DIRECTORS DIRECTORS' RESPONSIBILITIES IN RELATION TO FINANCIAL STATEMENTS Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit of the Group for that period. In preparing those financial statements, the Directors are required to: o select suitable accounting policies and then apply them consistently; o make judgements and estimates that are reasonable and prudent; and o state whether applicable accounting standards have been followed. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that these financial statements comply with these requirements. GOING CONCERN The Directors are confident, after making appropriate enquiries, that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the accounts. FINANCIAL CONTROL The Directors have overall responsibility for the Group's system of internal financial control. Such a system can provide reasonable, though not absolute, assurance against material misstatement or loss. The Board has a schedule of matters which are required to be brought to it for decision, ensuring that it maintains full and effective control over strategic, financial, organisational and compliance issues. Policies and procedures, for such matters as the delegation of authority to management, are distributed to executive management and are regularly updated. Responsibility for implementing a system of internal financial control is delegated to executive management. The management process of the Group includes monthly performance reviews for each major business, which focus on expectations and actual performance. These reviews are considered monthly by the Executive Board and are summarised for the Board. An annual budget is prepared for each operating company. This is updated quarterly and is used by divisional and Group management to monitor actual performance. As part of this process major business risks are identified and appropriate plans developed to address any financial implications. Significant treasury and investment matters are reviewed directly by the Board or a committee thereof. The system of internal financial control is monitored through the work of internal and external auditors who report to the Audit Committee on matters identified in the course of their work. By these means the Directors have reviewed the effectiveness of the Group's system of internal financial control. 40 TI GROUP AUDITORS' REPORTS Price Waterhouse Southwark Towers [LOGO] 32 London Bridge Street London SE1 9SY REPORT TO THE SHAREHOLDERS OF TI GROUP plc We have audited the financial statements on pages 38, 39 and 42 to 73 which have been prepared under the historical cost convention and the accounting policies set out on pages 42 and 43. Respective responsibilities of Directors and Auditors As described on page 40 the Company's Directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. Basis of opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinions we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31st December 1997 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Price Waterhouse Chartered Accountants and Registered Auditors 11th March 1998 REPORT TO THE DIRECTORS ON CORPORATE GOVERNANCE MATTERS In addition to our audit of the financial statements we have reviewed your statements on pages 32 and 40 concerning the Group's compliance with the paragraphs of the Cadbury Code of Best Practice specified for our review by the London Stock Exchange and the adoption of the going concern basis in preparing the financial statements. The objective of our review is to draw attention to non-compliance with Listing Rules 12.43(j) and 12.43(v), if not otherwise disclosed. Basis of opinion We carried out our review having regard to guidance issued by the Auditing Practices Board. That guidance does not require us to perform the additional work necessary to, and we do not, express any opinion on the effectiveness of either the Group's system of internal financial control or corporate governance procedures, nor on the ability of the Group to continue in operational existence. Opinion In our opinion, your statements on internal financial control and going concern on page 40 have provided the disclosures required by the Listing Rules referred to above and are consistent with the information which came to our attention as a result of our audit work on the financial statements. In our opinion, based on enquiry of certain Directors and Officers of the Company and examination of relevant documents, your statement on page 32 appropriately reflects the Group's compliance with the other aspects of the Code specified for our review by Listing Rule 12.43(j). Price Waterhouse Chartered Accountants 11th March 1998 TI GROUP 41 ACCOUNTING POLICIES There have been no changes in accounting policies during the year. BASIS OF CONSOLIDATION The consolidated financial statements set out on pages 38, 39 and 44 to 73, which are prepared under the historical cost convention and which comply with applicable Accounting Standards, incorporate the financial statements of TI Group plc and its subsidiaries. New subsidiaries are included from their respective dates of acquisition during the year. The results of subsidiaries disposed of during the year are included to the date of disposal. YEAR END DATES The financial year end date of the Group is 31st December, except for some overseas companies in respect of which the use of a different year end date does not have a material effect on the consolidated financial statements. TURNOVER Turnover represents the amounts receivable in the ordinary course of business for goods sold and services provided after deducting sales taxes and eliminating turnover within the Group. Turnover relating to long term contracts represents the value of work completed during the year. ASSOCIATED UNDERTAKINGS Treatment of a company as an associated undertaking has regard to the Group's holding of at least 20% of the equity capital, representation on its Board of Directors and participation in policy-making, including dividend policy. FOREIGN CURRENCIES Profit and loss items are translated into sterling at average exchange rates and assets and liabilities are translated at the exchange rates ruling on 31st December. Exchange differences arising from the translation into sterling of the net equity interest in overseas subsidiary and associated undertakings are treated as movements in reserves together with exchange differences on translation of foreign currency borrowings which finance overseas investments. Exchange differences arising in respect of foreign exchange instruments taken out as hedges of overseas investments are also treated as movements in reserves. The results of businesses operating in hyper-inflationary economies are translated into a stable functional currency. The exchange translation movement arising from this process is taken to the profit and loss account. RESEARCH AND DEVELOPMENT Expenditure on research and development is written of in the year in which it is incurred except where a major project is undertaken and it is reasonably anticipated that costs will be recovered through future commercial activity. Such costs are written off over the life of the project, subject to a maximum of seven years. OTHER INTANGIBLE ASSETS Expenditures on patents, trade marks and goodwill is written off in the year in which it is incurred. COST OF ACQUISITIONS In the Parent Company investments in subsidiary companies are stated at cost less provisions for diminution in value. In the Group financial statements the difference between the cost of shares and the fair value of net assets attributable to such shares at the date of acquisition of subsidiary and associated undertakings is written of to reserves as goodwill. 42 TI GROUP INVESTMENT GRANTS Investment grants received to fund the purchase of fixed tangible assets are included within creditors as deferred income and are credited to the profit and loss account on a straight line basis over the expected lives of the related assets. DEPRECIATION Depreciation of fixed tangible assets is on the straight line basis and is charged as follows: - -- freehold land nil - -- freehold buildings between 2% and 3% per annum - -- leasehold land and buildings 2% per annum, or over the period of the lease if less than 50 years - -- plant, machinery and equipment mainly between 7 1/2% and 10% per annum - -- data processing installations, equipment and software between 12 1/2% and 33 1/3% per annum - -- tooling and test rigs between 10% and 33 1/3% per annum. DEFERRED TAXATION Deferred taxation relating to capital allowances and other timing differences is provided in the financial statements only in so far as a liability is expected to crystallise. Deferred taxation on pension balances and provisions for post-retirement obligations is recognised in full. Advance corporation tax paid and payable in respect of dividends is set off against UK corporation tax to the extent possible, otherwise it is written off to the profit and loss account. PENSIONS AND OTHER POST-RETIREMENT OBLIGATIONS The cost of providing pensions through defined benefit schemes and other post-retirement benefits, principally US healthcare. is charged to the profit and loss account so as to spread the regular cost over the service lives of employees in accordance with the advice of qualified actuaries. Actuarial surpluses and deficits are spread forward over the average remaining service lives of employees. The cost of providing pensions through defined contribution schemes is charged to the profit and loss account in the year in respect of which contributions become payable. REPAIRS AND RENEWALS Repairs and renewals are charged to revenue in the year in which the expenditure is incurred. STOCKS Stocks and work in progress are valued at the lower of cost, including an appropriate proportion of overheads, and net realisable value, less payments on account. Profit is taken on long term contracts by reference to the work completed. LEASED ASSETS Fixed assets acquired under finance leasing contracts are recorded in the balance sheet as fixed tangible assets at their equivalent capital value and are depreciated over the useful life of the asset. The corresponding liability is recorded as a creditor and the interest element of the finance charge is charged to the profit and loss account over the primary lease period. TI GROUP 43 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER 1997
1997 1996 Notes (pound)m (pound)m Turnover 2 Total Group and share of joint ventures 1,870.4 1,756.6 Less share of joint ventures (166.0) (264.1) Group 1,704.4 1,552.5 Costs, less other income 3 (1,485.6) (1,351.5) Operating profit 2 218.8 201.0 Joint ventures and associates 2 18.2 18.7 Profit before interest and exceptional items 2 237.0 219.7 Exceptional profit on disposal of operations 4 -- 19.6 Exceptional (loss)/profit on disposal of fixed assets 4 (1.9) 1.5 Profit before interest 235.1 240.8 Interest 5 (14.5) (8.6) Profit on ordinary activities before taxation Before exceptional items 222.5 211.1 Exceptional items (as above) (1.9) 21.1 220.6 232.2 Taxation 6 (68.8) (66.9) Exceptional items 6 -- (2.2) (68.8) (69.1) Profit on ordinary activities after taxation 151.8 163.1 Minority interests (1.3) (2.1) Profit for the financial year 150.5 161.0 Dividends 7 (76.0) (69.0) Retained profit 74.5 92.0 ======== ======== EARNINGS PER SHARE: 8 On profit for the financial year 31.6p 34.1p Effect of exceptional items (after tax) 0.4p (4.1)p On profit before exceptional items 32.0p 30.0p ======== ========
The Group has adopted FRS 9 'Associates and Joint Ventures' and accordingly the comparative figures for Joint ventures and Interest and related notes have been reanalysed. 44 TI GROUP BALANCE SHEETS AS AT 31ST DECEMBER 1997
Notes The Group The Company 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m Fixed assets Tangible assets 11 361.6 342.7 -- -- Investments 12 - -- joint venture 28.0 29.8 -- -- share of gross assets 112.9 112.9 share of gross liabilities (84.9) (83.1) - -- associates 3.7 9.9 -- -- - -- other 6.7 3.6 1,174.4 1.193.0 400.0 386.0 1,174.4 1,193.0 ======= ======= ======= ======= Current assets Stocks 13 200.9 187.0 -- -- Debtors and prepayments - --falling due within one year 14 305.4 277.4 121.6 96.3 - --falling due after one year 14 119.7 108.3 361.0 379.4 Cash and deposits 15 368.9 298.6 259.5 200.1 994.9 871.3 742.1 675.8 Creditors falling due within one year Short term borrowings 16 (145.3) (74.7) (134.1) (14.3) Other creditors 16 (424.6) (400.5) (84.0) (76.5) Net current assets 425.0 396.1 524.0 585.0 Total assets less current liabilities 825.0 782.1 1,698.4 1,778.0 Creditors falling due after more than one year Loans and other borrowings 17 (261.5) (291.9) (17.6) (17.6) Other creditors 17 (16.9) (10.9) (681.4) (768.1) (278.4) (302.8) (699.0) (785.7) Provisions for liabilities and charges 20 (142.6) (143.6) -- -- 404.0 335.7 999.4 992.3 ======= ======= ======= ======= Capital and reserves Called up equity share capital 21 119.7 119.1 119.7 119.1 Share premium account 22 57.8 52.6 57.8 52.6 Capital reserve 22 596.6 596.6 596.6 596.6 Profit and loss account 22 637.5 596.3 225.3 224.0 TI shareholders' funds - gross 1,411.6 1.364.6 999.4 992.3 Goodwill written off 22 (1,019.0) (1,040.1) -- -- TI shareholders' funds - net 392.6 324.5 999.4 992.3 Equity interests of minority shareholders 11.4 11.2 -- -- Total shareholders' funds 404.0 335.7 999.4 992.3 ======= ======= ======= =======
Signed on behalf of the Board on 11th March 1998 Sir Christopher Lewinton M D Angle Directors TI GROUP 45 CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 1997
1997 1996 Notes (pound)m (pound)m Net cash inflow from operating activities 23 241.4 218.1 Dividends received from joint ventures and associates 23 10.6 11.6 Returns on investments and servicing of finance 24 (13.3) (4.7) Taxation 25 (73.5) (61.5) Capital expenditure and financial investment 26 (59.6) (50.0) Acquisitions and disposals 27 (13.7) (175.4) Equity dividends paid (69.6) (55.2) Management of liquid resources 28 (94.0) 60.8 Cash flow before financing (71.7) (56.3) Issue of shares 5.8 12.8 Capital element of finance leases (0.4) (0.7) Increase in loans 26.7 64.2 Financing 32.1 76.3 (Decrease)/increase in cash (39.6) 20.0 ===== ===== Movement in Group net debt (Decrease)/increase in cash (39.6) 20.0 Increase/(decrease) in short term deposits 28 94.0 (60.8) Increase in loans (26.7) (64.2) Short term deposits acquired with new subsidiaries 27 -- 11.9 Loans acquired with new subsidiaries 27 -- (9.9) Finance leases 0.4 (1.8) Exchange translation 28 2.0 27.2 Movement in Group net debt 30.1 (77.6) Net (debt)/cash at start of year 28 (68.0) 9.6 Net debt at end of year 28 (37.9) (68.0) ===== =====
The Group has adopted FRS 9 'Associates and Joint Ventures' and accordingly dividends received from joint ventures and associates are now shown separately. 46 TI GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31ST DECEMBER 1997
The Group The Company -------------------- -------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Profit for the financial year 150.5 161.0 76.1 92.2 Exchange translation (34.5) (102.9) -- -- Total recognised gains and losses for the year 116.0 58.1 76.1 92.2 ====== ====== ====== ======
MOVEMENTS IN NET TI SHAREHOLDERS' FUNDS
Notes The Group The Company -------------------- --------- ----------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- At start of year 324.5 400.9 992.3 947.8 Profit for the financial year 150.5 161.0 76.1 92.2 Exchange translation on gross TI shareholders' funds 22 (34.5) (102.9) on goodwill 22 22.4 88.9 on net TI shareholders' funds (12.1) (14.0) -- -- Goodwill written off in current year 1 (1.3) (175.7) -- -- Dividends 7 (76.0) (69.0) (76.0) (69.0) Issue of shares 21 For cash 5.8 12.8 5.8 12.8 Scrip dividends 1.2 8.5 1.2 8.5 At end of year 392.6 324.5 999.4 992.3 ===== ===== ===== =====
TI GROUP 47 NOTES TO THE FINANCIAL STATEMENTS 1 ACQUISITIONS AND DISPOSALS Acquisitions and disposals completed during 1997 were: January Disposal of 20% interest in Valti SA for (pound)2.9m. May Acquisition of a further 40% of Hua Yan Bundy Tubing Corp (Bundy North China) for (pound)1.7m, increasing TI Group's interest to 90%. October Acquisition of a further 15% of Bundy India through a rights issue, increasing TI Group's Interest to 71%. Consideration in these transactions was cash. The acquisitions were accounted for by the acquisition method. Other acquisitions and disposals announced during 1997 but not completed at the year end are set out in note 33. Goodwill written off (pound)m -------- Consideration (1.7) Professional fees and other deal costs (0.4) Fair value of net assets acquired 0.2 -------- Goodwill arising on acquisitions (1.9) Goodwill written back -- unutilised provisions 0.6 -------- (1.3) ========= No fair value adjustments were made to the book values of net assets acquired. Goodwill written back relates to estimated provisions set up on the acquisition of Forsheda AB in November 1996 in respect of five specific legal and environmental issues. Four of these have been determined and, after charging costs where appropriate, the unutilised provisions have been released. The fifth issue is in arbitration, which has not yet been concluded, and accordingly the original provision remains. Messier-Dowty In addition to the transactions set out above, comparison between the Group's 1996 and 1997 results was affected by the reduced share of the profit before tax of Messier-Dowty International Ltd (`Messier-Dowty'). Messier-Dowty, a 50:50 joint venture between TI Group and Snecma of France, was formed in 1995 by combining the Dowty and Messier aircraft landing gear businesses which operate primarily in Canada, France and the UK. Messier-Dowty pursues a policy of fully distributing its profit after tax by way of cash dividend. In each of the first three years of the joint venture TI Group was entitled to a share of its dividends in excess of 50%. For 1995 the proportion was 90%, for 1996 it was 80%, and for 1997 it was 62.5% after which dividends will be shared equally. The Group's share of Messier-Dowty's profit before tax reflects these entitlements (see note 2). On 10th December 1997 TI Group announced that a letter of intent had been signed with Snecma, agreeing, subject to contract, to sell its landing gear interests to Snecma for an aggregate gross consideration of (pound)207.5m, before adjustment for the net debt in Messier-Dowty. TI Group's landing gear interests consist of its 50% stake in Messier-Dowty and its 100% owned landing gear repair and overhaul business, which primarily services Messier-Dowty's product range. 48 TI GROUP 2 SEGMENT ANALYSIS
Turnover Operating Profit Operating Assets ----------------- ---------------- ---------------- 1997 1996 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- -------- -------- By class of business John Crane 654.9 592.5 99.0 97.1 193.5 199.2 Bundy 740.0 717.9 78.2 79.3 247.4 231.3 Dowty Aerospace 275.1 218.1 42.0 24.2 74.1 63.9 Messier-Dowty/Repair and Overhaul 200.4 228.1 19.5 19.3 53.4 54.4 Parent and other -- -- (1.7) (0.2) 23.0 10.0 -------- -------- -------- -------- -------- -------- 1,870.4 1,756.6 237.0 219.7 591.4 558.8 Less: joint ventures and associates (166.0) (204.1) (18.2) (18.7) (31.7) (39.7) -------- -------- -------- -------- -------- -------- 1,704.4 1,552.5 218.8 201.0 559.7 519.1 ======== ======== ======== ======== ======== ======== By geographical origin United Kingdom 357.0 334.9 48.3 49.3 76.8 75.4 Continental Europe 489.7 473.3 58.8 50.6 147.3 159.1 North America 827.4 774.7 117.0 101.8 260.3 241.3 Rest of World 196.3 173.7 14.6 18.2 84.0 73.0 Parent and other -- -- (1.7) (10.2) 23.0 10.0 -------- -------- -------- -------- -------- -------- 1,870.4 1,756.6 237.0 219.7 591.4 558.8 Less: joint ventures and associates (166.0) (204.1) (18.2) (18.7) (31.7) (39.7) -------- -------- -------- -------- -------- -------- 1,704.4 1,552.5 218.8 201.0) 559.7 519.1 ======== ======== ======== ======== ======== ======== By geographical destination United Kingdom 235.2 221.2 Continental Europe 560.2 536.2 North America 809.4 750.8 Rest of World 265.6 248.4 -------- ------- 1,870.4 1,756.6 Less: joint ventures and associates (166.0) (204.1) -------- ------- 1,704.4 1,552.5 ======== =======
On 10th December 1997 TI Group announced that it had agreed, subject to contract, to sell its landing gear interests to Snecma of France. TI Group's landing gear interests consist of its 50% stake in Messier-Dowty and its 100% owned repair and overhaul business, which primarily services Messier-Dowty's product range. The businesses to be disposed of have been shown separately in the segment analysis above in order to assist comparison. TI GROUP 49 NOTES TO THE FINANCIAL STATEMENTS continued 2 SEGMENT ANALYSIS continued Sales between business and geographical segments are not material, other than for sales from the United Kingdom to Continental Europe of (pound)94.7m (1996 (pound)86.6m). Operating assets are defined as total assets less current liabilities, excluding cash and deposits, short term borrowings, prepaid pension contributions, corporate and deferred taxation, and dividends. This includes the Group's investment in the Messier-Dowty's joint venture net of its borrowings and taxation balances. Joint ventures and associates The Group's attributable turnover and operating profit of its joint ventures and associates are incorporated into the segment analysis as follows:
1997 1996 -------------------- --------------------- Operating Operating Turnover Profit Turnover Profit (pound)m (pound)m (pound)m (pound)m -------- --------- -------- --------- John Crane -- associate -- 0.4 -- 0.3 Bundy -- joint venture -- -- 6.3 0.1 Bundy -- associates -- 1.0 -- 0.5 Messier-Dowty/Repair and Overhaul-- joint venture 166.0 16.8 197.8 17.8 166.0 18.2 204.1 18.7 ===== ==== ===== ====
Bundy for 1996 included 50% of the results of the Bundy Asia Pacific joint venture until it became wholly-owned from November of that year. Messier-Dowty/Repair and Overhaul for 1997 includes 62.5% (1996 80%) of the results of Messier-Dowty, in line with the Group's dividend entitlement (see note 1). 3 COSTS LESS OTHER INCOME 1997 1996 (pound)m (pound)m -------- -------- Change in stocks of finished goods and work in progress (2.9) (2.0) Raw materials and consumables 598.8 535.6 Other external charges 244.2 213.2 Staff costs (see note 9) 599.9 564.0 Depreciation of fixed tangible assets 45.6 40.7 1,485.6 1,351.5 ======== ======= 50 TI GROUP Costs charged in arriving at operating profit include:
1997 1996 (pound)m (pound)m -------- -------- Research and development expenditure By subsidiaries, net of external funding 39.0 37.4 By subsidiaries and Messier-Dowty and externally funded expenditure 60.0 62.7 Property rents 13.3 13.1 Hire of plant and machinery 10.9 10.2 Amounts paid to Price Waterhouse As auditors -- including the Company (pound)0.2m (1996 (pound)0.2m) 2.2 2.1 Non audit work -- of which (pound)0.2m in UK (1996 (pound)0.2m) 0.4 0.4
The amounts shown above for research and development expenditure are stated in accordance with the definition contained in SSAP 13. This strict accounting definition does not include the significant investment in application engineering and related development costs to support customer needs and external investment to obtain new technology through acquisitions. Details of the Group's total investment are set out in the operating and financial review. 4 EXCEPTIONAL ITEMS Exceptional items all arose in continuing operations. The loss on disposal of fixed assets in 1997 arose from the sale of surplus properties, mainly in the UK, and related costs. The profit on disposal of operations in 1996 comprised (pound)21.6m arising from the sale on 31st January 1996 of Desford Tubes, Hollow Extrusions and Matrix Engineering for (pound)44.2m in cash, offset by a loss on the disposals in September 1996 of the Accles & Pollock and Apollo businesses. No goodwill was attributable to these disposals. The profit on disposal of fixed assets in 1996 arose from the sale of the 20% investment in Usui Bundy Tubing (Japan) offset by losses on property disposals. 5 INTEREST 1997 1996 (pound)m (pound)m -------- -------- Overdrafts and other short term borrowings (5.1) (3.1) Loans (24.0) (24.5) Finance leases (0.2) (0.3) Interest payable (29.3) (27.9) Interest receivable 16.8 22.9 Net Group interest payable (12.5) (5.0) Share of joint ventures interest (1.6) (3.5) Share of associates' interest (0.4) (0.1) (14.5) (8.6) ===== ==== TI GROUP 51 NOTES TO THE FINANCIAL STATEMENTS continued 6 TAXATION 1997 1996 (pound)m (pound)m -------- -------- UK corporation tax at 31.5% (1996 33%) (41.2) (49.0) Advance corporation tax 4.1 10.0 Relief in respect of overseas taxes 25.1 17.4 Total UK taxation (12.0) (21.6) Overseas taxation (51.6) (40.3) Total Group taxation (63.6) (61.9) Share of joint ventures' taxation (4.8) (4.9) Share of associates' taxation (0.4) (0.1) (68.8) (66.9) ===== ===== The above includes deferred taxation credited of (pound)0.7m (1996 charged (pound)4.8m). Provision for deferred taxation is made only in respect of liabilities likely to arise in the foreseeable future. Had provision for deferred taxation been made on the full liability method, the Group tax charge would have been unchanged (1996 -- unchanged). The disposal of Usui Bundy Tubing gave rise to an exceptional tax charge of (pound)2.2m in 1996. 7 DIVIDENDS OF TI GROUP plc 1997 1996 (pound)m (pound)m -------- -------- Interim paid of 5.1p per 25p share (1996 4.75p) 24.4 22.6 Proposed final of 10.8p per 25p share (1996 9.75p) 51.6 46.4 ---- ---- 76.0 69.0 ==== ==== As a consequence of changes to the rules concerning the taxation of dividends announced in the UK Budget Statement of 2nd July 1997 TI Group's interim dividend for 1997 was paid as a Foreign Income Dividend (FID) and the final dividend for 1997 will also be paid as a FID. 8 EARNINGS PER SHARE Earnings per share are calculated on a weighted average basis using the earnings for each month, which total (pound)150.5 (1996 (pound)161.1m), and the weighted average number of shares in issue, 476.7m (1996 472.8m). Earnings per share before exceptional items, which provide a consistent measure of operating performance, are calculated in the same way using the earnings for each month excluding exceptional items, which were a net (pound)1.9m charge in 1997 (1996 net (pound)18.9m gain). 52 TI GROUP 9 EMPLOYEE INFORMATION 1997 1996 (pound)m (pound)m -------- -------- Staff costs: Wages and salaries 471.8 443.5 Social security costs 101.7 94.9 Pensions and other post-retirement obligations 26.4 25.6 ----- ----- 599.9 564.0 ===== ===== The total for pensions and other post-retirement obligations is before deducting a net credit of (pound)4.1m (1996 (pound)4.8m) in respect of an actuarial surplus in the main UK pension scheme (see note 29). The average number of persons employed by the Group during the year was: 1997 1996 ------ ------ UK 4,550 4,650 Overseas 20,950 18,000 ------ ------ 25,500 22,650 ====== ====== 10 EMOLUMENTS AND INTERESTS OF DIRECTORS Details of Directors' emoluments are as follows:
1997 1996 (pound) 000 (pound) 000 ----------- ----------- Aggregate emoluments (incl. fees, benefits and annual performance-related payments) 4,418 3,793 Aggregate notional gains on the exercise of share options 1,812 3,341 Company contributions to defined contribution pension schemes 36 37
A detailed statement of Directors' emoluments. which forms part of these financial statements, appears on pages 38 and 39. This includes details of the emoluments of Sir Christopher Lewinton, Highest Paid Director. and details of long term incentive plans and defined benefit pension arrangements. TI GROUP 53 NOTES TO THE FINANCIAL STATEMENTS continued SUMMARY OF TI DIRECTORS' SNARE INTERESTS
Ordinary Shares Ordinary Share Under Option Balance Balance as at as at 31 Dec 95 31 Dec 95 Balance Balance or date of Balance or date of as at as at appointment as at Date of appointment Director 11 Mar 98 31 Dec 97 if later 31 Dec 97 Grant Exercised Granted if later Sir Christopher 347,245 321,698 267,013 -- 27/03/91 96,000 -- 96,000 Lewinton* -- 21/08/91 186,000 -- 186,000 226,000 22/08/94 -- -- 226,000 22,000 11/04/95 -- -- 22,000 35,000 15/04/96 -- -- 35,000 16,000 09/09/96 -- -- 16,000 59,000 02/04/97 -- 59,000 -- 172,500 02/04/97 -- 172,500 -- 215,000 08/09/97 -- 215,000 -- **6,400 25/06/93 -- -- 6,400 W J Laule* 40,164 26,893 24,268 -- 14/09/93 82,500 -- 82,500 80,000 22/08/94 -- -- 80,000 51,000 11/04/95 -- -- 51,000 62,000 15/04/96 -- -- 62,000 23,500 02/04/97 -- 23,500 -- 80,000 08/09/97 -- 80,000 -- M D Angle* 16,837 9,500 -- 222,000 02/04/97 -- 222,000 -- 52,500 08/09/97 -- 52,500 -- G 0 Aronson* 7,270 2,868 -- 72,000 02/04/97 -- 72,000 -- 61,800 08/09/97 -- 61,800 -- **2,236 28/08/97 -- 2,236 -- Sir Nigel Broomfield -- -- -- -- -- -- -- -- Sir Colin Chandler 2,783 2,783 4,238 -- -- -- -- -- L A Edwards* 57,094 47,850 32,631 90,000 08/04/93 -- -- 90,000 45,000 22/08/94 -- -- 45,000 8,000 11/04/95 -- -- 8,000 10,000 15/04/96 -- -- 10,000 19,500 02/04/97 -- 19,500 -- 71,500 08/09/97 -- 71,500 -- **6,400 25/06/93 -- -- 6,400 Lord Fanshawe 3,239 3,239 3,186 -- -- -- -- -- R J M Fisher* 65,525 59,949 38,672 -- 27/09/91 56,000 -- 56,000 -- 08/04/93 35,000 -- 35,000 33,000 19/04/94 -- -- 33,000 40,000 22/08/94 -- -- 40,000 7,000 11/04/95 -- -- 7,000 13,000 15/04/96 -- -- 13,000 47,500 09/09/96 -- -- 47,500 25,500 02/04/97 -- 25,500 -- 73,600 08/09/97 -- 73,600 -- ** -- 26/06/92 6,672 -- 6,672 **2,236 28/08/97 -- 2,236 -- J M Harris 3,046 3,046 2,046 -- -- -- -- -- J M Hignett 50,232 50,232 39,130 -- -- -- -- -- R Q Mueller 10,000 10,000 -- -- -- -- -- -- J W Potter* 86,139 83,204 58,767 -- 27/08/92 85,000 -- 85,000 40,000 08/04/93 -- -- 40,000 7,000 19/04/94 -- -- 7,000 7,000 19/04/94 -- -- 7,000 45,000 22/08/94 -- -- 45,000 12,000 11/04/95 -- -- 12,000 46,000 15/04/96 -- -- 46,000 6,000 09/09/96 -- -- 6,000 90,500 02/04/97 -- 90,500 -- 75,000 08/09/97 -- 75,000 -- ** -- 26/06/92 6,672 -- 6,672 **2,236 28/08/97 -- 2,236 -- J L Roe* 60,735 56,216 45,915 -- [ILLEGIBLE] 29,000 -- 29,000 -- 06/04/92 50,000 -- 50,000 14,000 19/04/94 -- -- 14,000 28,000 19/04/94 -- -- 28,000 30,000 22/08/94 -- -- 30,000 7,000 11/04/95 -- -- 7,000 19,000 15/04/96 -- -- 19,000 30,000 12/04/97 -- [ILLEGIBLE] -- [ILLEGIBLE] [ILLEGIBLE] -- [ILLEGIBLE] -- [ILLEGIBLE] [ILLEGIBLE] -- -- [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] -- -- [ILLEGIBLE] Market Price at Date from Exercise Date of which Price Exercise Normally Expiry Director (p) (p) Exercisable Date Sir Christopher 270.0 551.25 27/03/94 27/03/01 Lewinton* 289.5 551.25 21/08/94 21/08/01 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 551.5 -- 09/09/00 09/09/06 540.0 -- 02/04/00 02/04/07 540.0 -- 02/04/01 02/04/07 600.0 -- 08/09/01 08/09/07 269.5 -- 01/08/98 31/04/99 W J Laule* 352.5 588.25 14/09/96 14/09/03 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 M D Angle* 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 G 0 Aronson* 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 436.0 -- 01/10/00 31/03/01 Sir Nigel Broomfield -- -- -- -- Sir Colin Chandler -- -- -- -- L A Edwards* 301.5 -- 08/04/96 08/04/03 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/04/00 08/09/07 269.5 -- 01/08/98 31/01/99 Lord Fanshawe -- -- -- -- R J M Fisher* 270.0 581.0 27/09/94 27/09/01 301.5 581.0 08/04/96 08/04/03 416.5 -- 19/04/97 19/04/04 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 551.5 -- 09/09/00 09/09/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 281.0 607.0 01/08/97 31/01/98 436.0 -- 01/10/00 31/03/01 J M Harris -- -- -- -- J M Hignett -- -- -- -- R Q Mueller -- -- -- -- J W Potter* 265.5 598.75 27/08/97 27/08/02 301.5 -- 08/04/96 08/04/03 416.5 -- 19/04/97 19/04/04 416.5 -- 19/04/99 19/04/04 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 551.5 -- 09/09/00 09/09/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 281.0 607.0 01/08/97 31/01/98 436.0 -- 01/10/00 31/03/01 J L Roe* 226.5 613.25 10/04/93 10/04/00 314.0 613.25 06/04/97 06/04/02 416.5 -- 19/04/97 19/04/04 416.5 -- 19/04/99 19/04/04 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 269.5 -- 01/08/98 31/01/99 339.0 -- 01/10/00 31/03/01
* Denotes Executive Director ** Denotes SAYE Options See next page for notes relating to the above table 54 TI GROUP NOTES TO THE SUMMARY OF TI DIRECTORS' SHARE INTERESTS 1. Mid-Market Share Price The mid-market price of TI Group shares as at 31st December 1997 was 464p. The highest mid-market price during the year was 690.5p and the lowest price was 439.5p. 2. TI Group Employee Share Ownership Trust On 10th April 1995 the TI Group Employee Share Ownership Trust was established. The trust is discretionary and was created to encourage employees to hold shares in the Company. During the year TI Group Trustees Ltd purchased 631,000 (1996, 340,000) TI Ordinary shares 911,594 shares remained in ownership of the trust at 11th March 1998. Under paragraph 2 of Schedule 13 of the Companies Act 1985, each of the executive Directors of the Company is deemed to be interested in the remaining shares. 3. Contingent Interests Each executive Director (detailed below) has notified the Company that, for the purposes of Section 324 of the Companies Act 1985, he has a contingent interest in the following number of TI Ordinary shares, representing the maximum aggregate number of shares to which he could become entitled (in respect of one or more of the measurement periods, 1995-98, 1996-99, and 1997-2000) under the three-year share performance plan described on page 37. Sir Christopher Lewinton 409,114 L A Edwards 195,389 W J Laule 163,660 R J M Fisher 175,683 MD Angle 54,426 J W Potter 187,088 G O Aronson 34,470 J L Roe 124,641 As explained on page 37, contingent interests under the plan do not vest until the end of the relevant measurement period in respect to each period it will not be known what, if any entitlement has actually accrued until after the announcement of the Company's results for the relevant year. 4. Performance Criteria Executive share options are normally exercisable between three and ten years from the date of grant provided that the increase in the earnings per share of the Company (calculated in accordance with the rules of the scheme concerned) over a period of three years prior to exercise has exceeded the increase in the United Kingdom Retail Price Index over a corresponding period. In the case of options granted after 1st January 1996 the increase in earnings per share must exceed the increase in RPI by at least 2% per annum. 5. Lapsed Options No options Lapsed during the year. 11 FIXED TANGIBLE ASSETS Plant, Assets in Land & Machinery & Course of Buildings Equipment Construction Total (Pound)m (Pound)m (Pound)m (Pound)m -------- -------- -------- -------- The Group Cost At 31st December 1996 167.5 522.3 20.6 710.4 Exchange rate adjustments (3.0) (11.7) 0.1 (14.6) New subsidiaries 0.9 4.0 -- 4.9 Capital expenditure 3.1 42.4 26.2 71.7 Disposals and adjustments (2.2) 6.7 (23.7) (19.2) ----- ----- ---- ----- At 31st December 1997 166.3 563.7 23.2 753.2 ----- ----- ---- ----- Depreciation At 31st December 1996 42.8 324.9 -- 367.7 Exchange rate adjustments (1.1) (7.4) -- (8.5) New subsidiaries 0.2 1.2 -- 1.4 Charge for year 3.8 41.8 -- 45.6 Disposals and adjustments (0.4) (14.2) -- (14.6) ----- ----- ---- ----- At 31st December 1997 45.3 346.3 -- 391.6 ----- ----- ---- ----- Net book amount 1997 121.0 217.4 23.2 361.6 ===== ===== ==== ===== Net book amount 1996 124.7 197.4 20.6 342.7 ----- ----- ---- ----- Freehold land and buildings included above have a cost of (pound)149.9m (1996 (pound)152.6m) and depreciation of (pound)38.5m (1996 (pound)36.6m). Leased assets included above comprise:
Land & buildings --------------------------------------------- Plant, Long Leasehold Short Leasehold Machinery & Equipment ------------------ ---------------------- ----------------------- 1997 1996 1997 1997 1997 1996 (Pound)m (Pound)m (Pound)m (Pound)m (Pound)m (Pound)m -------- -------- -------- -------- -------- -------- Cost 2.5 1.7 13.9 13.2 6.7 6.1 Depreciation (1.0) (0.9) (5.8) (5.3) (5.0) (4.4) Net book amount 1.5 0.8 8.1 7.9 1.7 1.7 --- --- --- --- --- ---
The depreciation charge for the year for leased assets was (pound)1.5m (1996 (pound)1.5m). TI GROUP 55 NOTES TO THE FINANCIAL STATEMENTS continued 12 INVESTMENTS
Other Joint Associated Participating Own Venture Undertakings Interests Shares Total (Pound)m (Pound)m (Pound)m (Pound)m (Pound)m -------- -------- -------- -------- -------- The Group Shares at valuation At 31st December 1996 29.8 9.9 1.0 2.6 43.3 Exchange rate adjustments (1.8) (1.8) -- -- (3.6) Additions -- -- -- 3.5 3.5 Conversion to subsidiary and disposals -- (4.8) -- (0.4) (5.2) Movement during the year -- 0.4 -- -- 0.4 ---- --- --- --- ---- At 31st December 1997 28.0 3.7 1.0 5.7 38.4 ==== === === === ====
Joint venture The Group's only joint venture is Messier-Dowty International Ltd. established on 1st January 1995 by combining the aircraft landing gear businesses of TI Group and Snecma of France, which each hold 50% of the ordinary share capital. The business operates primarily in Canada, France and the UK. For 1997 Messier-Dowty's total sales were (pound)265.6m (1996 (pound)247.2m) including (pound)9.5m (1996 (pound)10.3m) to TI Group, depreciation was (pound)9.3m (1996 (pound)10.7m) and profit before taxation was (pound)24.4m (1996 (pound)18.3m). Sales by TI Group to Messier-Dowty were (pound)25.5m (1996 (pound)25.3m). At 31st December 1997 Messier-Dowty's consolidated summary balance sheet comprised: 1997 1996 (Pound)m (Pound)m -------- -------- Fixed assets 66.2 71.1 Net current assets excluding net cash 63.4 67.4 Other creditors falling due after more than one year (23.7) (22.6) Net borrowings (49.9) (55.6) ----- ----- Total shareholders' funds 56.0 60.3 ===== ===== On 10th December 1997 it was announced that TI Group had agreed, subject to contract, to sell its investment in Messier-Dowty to Snecma. Associated undertakings The principal associated Undertakings are: Class Country of Operation % Held of Share John Crane Japan Inc Japan 49 Ordinary Korea Bundy Corp South Korea 39 Ordinary 56 TI GROUP The interest in associated undertakings is shown in the Group balance sheet at a valuation being the proportion of net assets attributable to TI Group at the date of acquisition, plus TI Group's share of post-acquisition losses which at 31st December 1997 amounted to (pound)0.2m (1996 earnings of (pound)2.8m). The Group purchased a further 40% of the shares in Hua Yan Bundy Tubing Corp (Bundy North China) in May 1997, from which time it has been accounted for as a subsidiary. The Group sold its investment in Valti SA in January 1997. The financial year end of John Crane Japan Inc is 31st March; the Group's share of its results is for the calendar year using management accounts for the unaudited period. Sales by TI Group to its associates in 1997 amounted to (pound)2.2m (1996 (pound)2.0m). Sales by the associates to TI Group were not material to either party in either year. Other participating Interests The principal other participating interest is Tube Investments of India Ltd of which the Group holds 3% of the ordinary shares. Participating interests are all listed companies stated at Directors' valuation with a market value at 31st December 1997 of (pound)0.8m (1996 (pound)1.5m). Own shares The TI Group Employee Share Ownership Trust was established in 1995 with the purpose of holding shares in the Company for subsequent transfer to employees under various incentive schemes. In accordance with UITF 13 the Trust's accounts are incorporated into the Company and Group accounts. At 31st December 1997 the Trust held 1,079,210 shares in the Company (1996 541,611) with a market value of (pound)5.0m (1996 (pound)3.2m). Costs of administration are included in the profit and loss account as they accrue. The Company (Pound)m -------- Shares In subsidiaries at cost and own shares At 31st December 1996 1,193.0 Acquisitions 6.9 Disposals (23.7) Exchange rate adjustments (1.8) At 31st December 1997 1,174.4 ------- The amounts shown include the movements in own shares referred to above. Provisions for diminution in value included in the above at 31st December 1997 amounted to (pound)65.4m (1996 (pound)65.4m). A list of the Group's principal subsidiaries, associated undertakings and other participating interests is set out on pages 72 and 73. TI GROUP 57 NOTES TO THE FINANCIAL STATEMENTS continued 13 STOCKS The Group ---------------------- 1997 1996 (pound)m (pound)m -------- -------- Raw materials and consumables 60.1 52.4 Work in progress 68.1 63.9 Finished goods and goods for resale 77.0 73.5 Payments on account (4.3) (2.8) ----- ----- 200.9 187.0 ===== ===== The current replacement cost of stocks does not materially exceed the historical cost stated above. 14 DEBTORS AND PREPAYMENTS
The Group The Company ----------------------- ----------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Amounts falling due within one year Trade debtors 263.9 236.1 -- -- Amounts owed by Group undertakings -- -- 113.3 94.7 Amounts owed by joint ventures and associates 4.3 4.2 -- -- Other debtors 5.5 7.7 0.1 0.1 Prepayments and accrued income 22.0 24.2 2.0 1.5 Corporate taxation 9.7 5.2 6.2 -- ----- ----- ----- ---- 305.4 277.4 121.6 96.3 ===== ===== ===== ==== Amounts falling due after more than one year Amounts owed by Group undertakings -- -- 361.0 379.4 Prepaid pension contributions (see note 29) 81.8 76.7 -- -- Other debtors 8.4 3.4 -- -- Corporate taxation -- 0.1 -- -- Deferred taxation 29.5 28.1 -- -- ----- ----- ----- ---- 119.7 108.3 361.0 379.4 ----- ----- ----- ---- Total debtors 425.1 385.7 482.6 475.7 ===== ===== ===== ====
The deferred tax asset relates to provisions for post-retirement medical and welfare benefit schemes, principally in the USA. 58 TI GROUP 15 CASH AND DEPOSITS
The Group The Company ----------------------- ----------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Cash at bank and in hand 62.6 85.4 38.5 23.4 Short term bank deposits 306.3 213.2 221.0 176.7 ----- ----- ----- ----- 368.9 298.6 259.5 200.1 ===== ===== ===== =====
16 CREDITORS FALLING DUE WITHIN ONE YEAR
The Group The Company ----------------------- ----------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Bank overdrafts 20.2 10.0 134.1 14.3 Other short term borrowings 10.8 3.4 -- -- ----- ----- ----- ---- Short term borrowings -- repayable on demand 31.0 13.4 134.1 14.3 Commercial paper 69.8 40.2 -- -- Current portion of loans 44.1 20.7 -- -- Finance leases 0.4 0.4 -- -- ----- ----- ----- ---- Short term borrowings 145.3 74.7 134.1 14.3 ===== ===== ===== ==== Trade creditors 164.5 142.5 -- -- Bills of exchange payable 5.3 6.1 -- -- Amounts owed to Group undertakings -- -- 10.4 11.6 Amounts owed to joint ventures and associates 1.5 1.3 -- -- Corporate taxation 59.4 64.3 20.8 16.4 Other taxation and social security 30.3 32.1 -- -- Other creditors 7.9 22.9 0.4 1.6 Accruals and deferred income 104.1 84.9 0.8 0.5 Proposed final dividend 51.6 46.4 51.6 46.4 ----- ----- ----- ---- Other creditors 424.6 400.5 84.0 76.5 ===== ===== ===== ====
Short term borrowings of subsidiaries amounting to (pound)1.5m (1996 (pound)2.0m) are secured by charges over certain of the assets of the subsidiaries concerned. Commercial paper is short term borrowing raised in the commercial paper market in the USA. The paper is guaranteed by TI Group plc. Current portion of loans includes $30m (1996 $30m) of the Group's private placement debt (see note 18). TI GROUP 59 NOTES TO THE FINANCIAL STATEMENTS continued 17 CREDITORS PALLING DUE AFTER MORE THAN
The Group The Company ----------------------- ----------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Repayable wholly or partly after five years Secured loans of overseas subsidiaries 0.2 0.2 -- -- Unsecured bank and other loans 60.8 68.7 -- -- Finance leases 0.5 0.6 -- -- Repayable wholly within five years Secured loans of overseas subsidiaries 0.8 0.9 -- -- Unsecured bank and other loans 198.9 220.9 17.6 17.6 Finance leases 0.3 0.6 -- -- ----- ----- ----- ---- Loans and other borrowings 261.5 291.9 17.6 17.6 ===== ===== ===== ==== Amounts owed to Group undertakings -- -- 681.4 768.1 Corporate taxation 2.4 2.3 -- -- Other creditors 14.5 8.6 -- -- ----- ----- ----- ---- Other creditors 16.9 10.9 681.4 768.1 ===== ===== ===== ====
The security for loans of overseas subsidiaries, where given, mainly comprises charges on specific assets of the subsidiaries concerned. Amounts owed by the Company to Group undertakings are governed by loan agreements, the majority of which expire between two and five years. 18 NET BORROWINGS 1997 1996 (pound)m (pound)m -------- -------- Short term borrowings (note 16) (145.3) (74.7) Loans and other borrowings falling due after more than one year (note 17) (261.5) (291.9) ------ ------ Total borrowings (406.8) (366.6) Cash and deposits (note 15) 368.9 298.6 ------ ------ Net borrowings (37.9) (68.0) ====== ====== Maturity of borrowings 1997 1996 (pound)m (pound)m -------- -------- Within one year 145.3 74.7 Between one and two years 48.8 32.1 Between two and five years 200.3 225.7 After five years 12.4 34.1 406.8 366.6 ====== ====== Maturity dates are based on term loans and committed lending facilities. 60 TI GROUP The Group had the following unused committed borrowing facilities: 1997 1996 (pound)m (pound)m -------- -------- Expiring within one year 12.5 -- Expiring after one year 113.3 81.6 ----- ---- 125.8 81.6 ===== ==== Currency and interest rate analysis of net borrowings at 31st December 1997
Fixed Floating Fixed interest Time Currencies Category Total rate rate rate fixed (pound)m (pound)m (pound)m % yrs - --------------- ----------------------------- -------- -------- -------- -------- -------- US$ US private placements (133.7) -- (133.7) 10.2 1.3 US$ US commercial paper (69.8) (69.8) -- -- -- US & Canadian $ Bank loans (53.2) (23.9) (29.3) 4.9 1.4 European Bank loans and finance leases (119.2) (75.3) (43.9) 4.6 1.4 Rest of World Bank loans (30.9) (30.9) -- -- -- ------ ------ ------ Total borrowings (406.8) (199.9) (206.9) ------ ------ ------ Sterling Cash and deposits 309.4 Other Cash and deposits 59.5 ------ Cash and deposits 368.9 ------ Net borrowings (37.9) ======
The table above takes account of interest rate swaps and forward rate agreements. Floating rates on borrowings based on appropriate local market rates. Fixed rate loans are those for which the interest rate was fixed for 12 months or more as at 31st December 1997. The Group has two US private placement debts. The first has an outstanding principal of$120m, of which $30m is repayable in 1998, with a coupon of 8.52%; final maturity is in 2001. The other has an outstanding principal of $100m with a coupon of 8.853% and final maturity in 2003. Both debts are placed by TI Group Inc with major institutional investors and are guaranteed by TI Group plc. Canadian dollar debt includes a (pound)20m bank loan swapped into Canadian dollars. TI GROUP 61 NOTES TO THE FINANCIAL STATEMENTS continued 18 NET BORROWINGS continued Currency analysis of net assets at 31st December 1997 Net Assets Excluding Total Total Borrowings Borrowings Currencies (pound)m (pound)m -------- -------- Sterling 355.3 (0.6) US and Canadian $ 273.3 (256.7) European 122.2 (118.6) Rest of World 48.6 (30.9) ----- ------ 799.4 (406.8) ===== ====== 19 FINANCIAL INSTRUMENTS The Group's policies on financial risk management and the related use of financial instruments are described in the financial review on pages 6 to 9. The Group held the following categories of financial instruments at 31st December 1997: Book Values Fair Values Assets/(liabilities) (pound)m (pound)m ----------- ----------- Trade debtors 268.2 268.2 Trade creditors (171.3) (171.3) Cash and deposits 368.9 368.9 Short term borrowings (145.3) (145.3) Loans and other borrowings falling due after more than one year (261.5) (261.5) Interest rate swaps and forward rate agreements -- (4.1) ------ ------ 59.0 54.9 ====== ====== The Group uses interest rate swaps and forward rate agreements to manage its interest rate exposures, as described on page 9. As in previous years, interest is charged to the profit and loss account over the lives of these instruments and based on their contracted interest rates. To determine the fair value of interest rate swaps and forward rate agreements for inclusion in the above table, a calculation was made of the net gain or loss which would have arisen if these contracts had been terminated on 31st December 1997. The value at that date was determined by market interest rates, which fluctuate over time. As at 31st December 1997 gains and losses on forward exchange contracts taken out as hedges of sales and purchase transactions were not material. 62 TI GROUP 20 PROVISIONS FOR LIABILITIES AND CHARGES
Pensions and Other Post-Retirement Deferred Obligations Taxation Group Total (pound)m (pound)m (pound)m -------- -------- -------- At 31st December 1996 111.8 31.8 143.6 Exchange rate adjustments (0.3) (0.7) (1.0) Utilised (6.0) -- (6.0) Profit and loss account 6.7 (0.7) 6.0 ----- ---- ----- At 31st December 1997 112.2 30.4 142.6 ===== ==== =====
Deferred taxation
1997 1996 ----------------------- ----------------------- Full Full Amount Potential Amount Potential Provided Liability Provided Liability (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Accelerated capital allowances 27.9 31.0 20.5 22.6 Other timing differences 11.4 22.4 20.2 32.0 Unremitted overseas income 13.0 13.0 13.0 13.0 Advance corporation tax (21.9) (23.3) (21.9) (23.1) ---- ---- ---- ---- 30.4 43.1 31.8 44.5 ==== ==== ==== ====
Deferred taxation is calculated under the liability method using a UK tax rate of 31% (1996 33%) and appropriate overseas rates. In addition to UK advance corporation tax of (pound)21.9m set off against deferred taxation above, the Group has unrecovered UK advance corporation tax of (pound)6.1m (1996 (pound)10.2m) which is available for set off against UK tax on future profits. Provision has been made for potential taxation which could arise on the remittance of retained overseas earnings only to the extent that there is currently an intention to remit such earnings. The deferred tax asset in respect of post-retirement obligations is included within debtors and prepayments (note 14). TI GROUP 63 NOTES TO THE FINANCIAL STATEMENTS continued 21 SHARE CAPITAL OF TI GROUP plc
Authorised Issued ----------------------- ----------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Ordinary shares of 25p each 169.5 169.5 119.7 119.1 ===== ===== ===== =====
Shares Issued during the year During the year 197,755 Ordinary shares of 25p each were issued in lieu of cash of (pound)1.2m (1996 (pound)8.5m) in respect of the final dividend for the year ended 31st December 1996. Four TI Group share option schemes and three Dowty Group share option schemes operated during the year. The four TI Group share option schemes were: The TI (1981) Savings-Related Share Option Scheme and the TI Group (1994) Savings Related Share Option Scheme (together "The SAYE Schemes") and the TI Group Executive Share Option Scheme and The TI Group (1990) Executive Share Option Scheme (together "The Executive Schemes"). During the year 1,705,452 Ordinary shares of 25p each were issued following the exercise of options under these schemes. The aggregate consideration received in respect of these allotments was (pound)5.0m (1996 (pound)12.2m). The three Dowty Group share option schemes - the Dowty Group Share Savings Scheme, and the Dowty Group Share Savings Scheme (1991) (together "The Dowty Share Savings Schemes"), and the Dowty Group Executive Share Option Scheme continued to be governed by rules adopted by Dowty Group although certain options granted thereunder were converted into options over TI Group plc Ordinary shares following the acquisition of Dowty Group. During the year 416,160 TI Group Ordinary shares were issued following the exercise of options under these schemes. The aggregate consideration received in respect of these allotments was (pound)0.8m (1996 (pound)0.6m). Shares under option At 31st December 1997 the total number of TI Group Ordinary shares under option was 13,351,538 as follows:
Number Option of 25p Dates Price per Ordinary Normally Ordinary Scheme Date of Grant Shares Exercisable Share --------------------------------------------- -------------- --------- ------------------------ --------- The SAYE Schemes 15 June 1990 58,328 August 1995/January 1998 181.5p 21 June 1991 100,036 August 1996/January 1999 201.5p 26 June 1992 148,676 August 1997/January 2000 281.0p 25 June 1993 596,039 August 1998/January 2001 269.5p 24 June 1994 873,755 August 1999/January 2002 309.0p 31 August 1995 921,140 October 2000/March 2003 339.0p 29 August 1996 977,660 October 2001/March 2004 420.0p 28 August 1997 1,434,801 October 2002/March 2005 436.0p
64 TI GROUP
Number Option of 25p Dates Price per Ordinary Normally Ordinary Scheme Date of Grant Shares Exercisable Share ------------------------------------------ ----------------- --------- ----------------------------- --------- The Executive Schemes 10 April 1990 20,000 April 1993/April 2000 226.5p 9 October 1990 361,000 October 1993/October 2000 204.0p 27 March 1991 60,000 March 1994/March 2001 270.0p 21 August 1991 62,000 August 1994/August 2001 289.5p 6 April 1992 145,000 April 1995/April 2002 314.0p 27 August 1992 91,000 August 1995/August 2002 265.5p 8 April 1993 317,000 April 1996/April 2003 301.5p 14 September 1993 104,000 September 1996/September 2003 352.5p 19 April 1994 323,000 April 1997/April 2004 416.5p 22 August 1994 829,000 August 1997/August 2004 373.5p 11 April 1995 296,000 April 1998/April 2005 376.5p 31 August 1995 301,000 August 1998/August 2005 430.5p 15 April 1996 563,000 April 1999/April 2006 520.5p 9 September 1996 546,500 September 1999/September 2006 551.5p 2 April 1997 1,405,000 April 2000/April 2007 540.0p 8 September 1997 2,470,700 September 2000/September 2007 600.0p The Dowty Share 15 March 1991 56,693 May 1996/October 1998 255.0p Savings Schemes 13 March 1992 117,997 May 1997/October 1999 180.0p The Dowty Group 7 January 1988 19,198 January 1991/January 1998 337.5p Executive Share Option 20 January 1989 6,400 January 1992/January 1999 440,625p Scheme 18 December 1989 52,000 December 1992/December 1999 455,625p 16 July 1990 21,333 July 1993/July 2000 423.75p 4 January 1991 46,083 January 1994/January 2001 311.25p 20 December 1991 27,199 December 1994/December 2001 275.625p
22 RESERVES
Share Capital Retained Goodwill The Group Premium Account Reserve Earnings Written Off Total (pound)m (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- -------- At 31st December 1996 52.6 596.6 596.3 (1,040.1) 205.4 Total recognised gains and losses Profit for the financial year -- -- 150.5 -- 150.5 Exchange translation -- -- (34.5) -- (34.5) Goodwill Exchange translation -- -- -- 22.4 22.4 Written off in current year -- -- -- (1.3) (1.3) Dividends -- total -- -- (76.0) -- (76.0) Less scrip element -- -- 1.2 -- 1.2 Issues of shares for cash 5.2 -- -- -- 5.2 At 31st December 1997 57.8 596.6 637.5 (1,019.0) 272.9 ==== ===== ===== ======== =====
Currency translation included within total recognised gains and losses comprised negative movements in respect of overseas investments, inclusive of goodwill, of (pound)36.5m (1996 (pound)130.1m) and positive movements of (pound)2.0m (1996 (pound)27.2m) in respect of foreign currency financing of those investments. Earnings retained in overseas subsidiary and associated undertakings would be subject to further tax on distribution. TI GROUP 65 NOTES TO THE FINANCIAL STATEMENTS continued 22 RESERVES continued
Share Capital Retained The Company Premium Account Reserve Earnings Total (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- At 31st December 1996 52.6 596.6 224.0 873.2 Profit for the financial year -- -- 76.1 76.1 Dividends -- total -- -- (76.0) (76.0) Less scrip element -- -- 1.2 1.2 Issues of shares for cash 5.2 -- -- 5.2 ---- ----- ----- ----- At 31st December 1997 57.8 596.6 225.3 879.7 ==== ===== ===== =====
As permitted by section 230 of the Companies Act 1985, TI Group plc has not presented its own profit and loss account. 23 NET CASH INFLOW FROM OPERATING ACTIVITIES
1997 1996 (pound)m (pound)m -------- -------- Operating profit 218.8 201.0 Depreciation of fixed tangible assets 45.6 40.7 Operating working capital movement ----- ----- Increase in stocks (18.0) (11.1) Increase in debtors (36.3) (8.7) Increase in creditors 33.0 4.2 ----- ----- (21.3) (15.6) Movement in pensions and related balances (1.7) (8.0) ----- ----- Net cash inflow from operating activities 241.4 218.1 ----- ----- Dividends received from joint ventures 10.4 11.4 Dividends received from associates 0.2 0.2 ----- ----- Dividends received from joint ventures and associates 10.6 11.6 Capital expenditure (net) (60.0) (56.5) ----- ----- Free cash flow 192.0 173.2 ===== =====
66 TI GROUP 24 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
1997 1996 (pound)m (pound)m -------- -------- Interest received 13.3 23.9 Interest paid (25.8) (27.8) ----- ---- Interest paid (net) (12.5) (3.9) Dividends received from other participating interests -- 0.1 Dividends paid to minority interests of subsidiaries (0.8) (0.9) ----- ---- (13.3) (4.7) ===== ====
25 TAXATION CASH FLOWS
1997 1996 (pound)m (pound)m -------- -------- UK corporation tax (18.3) (12.2) Overseas taxes (55.2) (49.3) ----- ----- (73.5) (61.5) ===== =====
Overseas taxes paid in 1997 included (pound)2.2m in respect of the 1996 exceptional disposal of the investment in Usui Bundy Tubing. 26 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
1997 1996 (pound)m (pound)m -------- -------- Capital expenditure (61.2) (56.9) Sale of plant, machinery and equipment 1.2 1.1 Sale of surplus properties 3.9 1.2 Sale of other participating interests -- 6.4 Purchase of own shares (3.5) (1.8) ----- ----- (59.6) (50.0) ===== =====
TI GROUP 67 20 PROVISIONS FOR LIABILITIES AND CHARGES
Pensions and Other Post-Retirement Deferred Obligations Taxation Group Total (pound)m (pound)m (pound)m -------- -------- -------- At 31st December 1996 111.8 31.8 143.6 Exchange rate adjustments (0.3) (0.7) (1.0) Utilised (6.0) -- (6.0) Profit and loss account 6.7 (0.7) 6.0 ----- ---- ----- At 31st December 1997 112.2 30.4 142.6 ===== ==== =====
Deferred taxation
1997 1996 ----------------------- ----------------------- Full Full Amount Potential Amount Potential Provided Liability Provided Liability (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Accelerated capital allowances 27.9 31.0 20.5 22.6 Other timing differences 11.4 22.4 20.2 32.0 Unremitted overseas income 13.0 13.0 13.0 13.0 Advance corporation tax (21.9) (23.3) (21.9) (23.1) ---- ---- ---- ---- 30.4 43.1 31.8 44.5 ==== ==== ==== ====
Deferred taxation is calculated under the liability method using a UK tax rate of 31% (1996 33%) and appropriate overseas rates. In addition to UK advance corporation tax of (pound)21.9m set off against deferred taxation above, the Group has unrecovered UK advance corporation tax of (pound)6.1m (1996 (pound)10.2m) which is available for set off against UK tax on future profits. Provision has been made for potential taxation which could arise on the remittance of retained overseas earnings only to the extent that there is currently an intention to remit such earnings. The deferred tax asset in respect of post-retirement obligations is included within debtors and prepayments (note 14). TI GROUP 63 NOTES TO THE FINANCIAL STATEMENTS continued 21 SHARE CAPITAL OF TI GROUP plc
Authorised Issued ----------------------- ----------------------- 1997 1996 1997 1996 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Ordinary shares of 25p each 169.5 169.5 119.7 119.1 ===== ===== ===== =====
Shares Issued during the year During the year 197,755 Ordinary shares of 25p each were issued in lieu of cash of (pound)1.2m (1996 (pound)8.5m) in respect of the final dividend for the year ended 31st December 1996. Four TI Group share option schemes and three Dowty Group share option schemes operated during the year. The four TI Group share option schemes were: The TI (1981) Savings-Related Share Option Scheme and the TI Group (1994) Savings Related Share Option Scheme (together "The SAYE Schemes") and the TI Group Executive Share Option Scheme and The TI Group (1990) Executive Share Option Scheme (together "The Executive Schemes"). During the year 1,705,452 Ordinary shares of 25p each were issued following the exercise of options under these schemes. The aggregate consideration received in respect of these allotments was (pound)5.0m (1996 (pound)12.2m). The three Dowty Group share option schemes - the Dowty Group Share Savings Scheme, and the Dowty Group Share Savings Scheme (1991) (together "The Dowty Share Savings Schemes"), and the Dowty Group Executive Share Option Scheme continued to be governed by rules adopted by Dowty Group although certain options granted thereunder were converted into options over TI Group plc Ordinary shares following the acquisition of Dowty Group. During the year 416,160 TI Group Ordinary shares were issued following the exercise of options under these schemes. The aggregate consideration received in respect of these allotments was (pound)0.8m (1996 (pound)0.6m). Shares under option At 31st December 1997 the total number of TI Group Ordinary shares under option was 13,351,538 as follows:
Number Option of 25p Dates Price per Ordinary Normally Ordinary Scheme Date of Grant Shares Exercisable Share --------------------------------------------- -------------- --------- ------------------------ --------- The SAYE Schemes 15 June 1990 58,328 August 1995/January 1998 181.5p 21 June 1991 100,036 August 1996/January 1999 201.5p 26 June 1992 148,676 August 1997/January 2000 281.0p 25 June 1993 596,039 August 1998/January 2001 269.5p 24 June 1994 873,755 August 1999/January 2002 309.0p 31 August 1995 921,140 October 2000/March 2003 339.0p 29 August 1996 977,660 October 2001/March 2004 420.0p 28 August 1997 1,434,801 October 2002/March 2005 436.0p
64 TI GROUP
Number Option of 25p Dates Price per Ordinary Normally Ordinary Scheme Date of Grant Shares Exercisable Share ------------------------------------------ ----------------- --------- ----------------------------- --------- The Executive Schemes 10 April 1990 20,000 April 1993/April 2000 226.5p 9 October 1990 361,000 October 1993/October 2000 204.0p 27 March 1991 60,000 March 1994/March 2001 270.0p 21 August 1991 62,000 August 1994/August 2001 289.5p 6 April 1992 145,000 April 1995/April 2002 314.0p 27 August 1992 91,000 August 1995/August 2002 265.5p 8 April 1993 317,000 April 1996/April 2003 301.5p 14 September 1993 104,000 September 1996/September 2003 352.5p 19 April 1994 323,000 April 1997/April 2004 416.5p 22 August 1994 829,000 August 1997/August 2004 373.5p 11 April 1995 296,000 April 1998/April 2005 376.5p 31 August 1995 301,000 August 1998/August 2005 430.5p 15 April 1996 563,000 April 1999/April 2006 520.5p 9 September 1996 546,500 September 1999/September 2006 551.5p 2 April 1997 1,405,000 April 2000/April 2007 540.0p 8 September 1997 2,470,700 September 2000/September 2007 600.0p The Dowty Share 15 March 1991 56,693 May 1996/October 1998 255.0p Savings Schemes 13 March 1992 117,997 May 1997/October 1999 180.0p The Dowty Group 7 January 1988 19,198 January 1991/January 1998 337.5p Executive Share Option 20 January 1989 6,400 January 1992/January 1999 440,625p Scheme 18 December 1989 52,000 December 1992/December 1999 455,625p 16 July 1990 21,333 July 1993/July 2000 423.75p 4 January 1991 46,083 January 1994/January 2001 311.25p 20 December 1991 27,199 December 1994/December 2001 275.625p
22 RESERVES
Share Capital Retained Goodwill The Group Premium Account Reserve Earnings Written Off Total (pound)m (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- -------- At 31st December 1996 52.6 596.6 596.3 (1,040.1) 205.4 Total recognised gains and losses Profit for the financial year -- -- 150.5 -- 150.5 Exchange translation -- -- (34.5) -- (34.5) Goodwill Exchange translation -- -- -- 22.4 22.4 Written off in current year -- -- -- (1.3) (1.3) Dividends -- total -- -- (76.0) -- (76.0) Less scrip element -- -- 1.2 -- 1.2 Issues of shares for cash 5.2 -- -- -- 5.2 At 31st December 1997 57.8 596.6 637.5 (1,019.0) 272.9 ==== ===== ===== ======== =====
Currency translation included within total recognised gains and losses comprised negative movements in respect of overseas investments, inclusive of goodwill, of (pound)36.5m (1996 (pound)130.1m) and positive movements of (pound)2.0m (1996 (pound)27.2m) in respect of foreign currency financing of those investments. Earnings retained in overseas subsidiary and associated undertakings would be subject to further tax on distribution. TI GROUP 65 NOTES TO THE FINANCIAL STATEMENTS continued 22 RESERVES continued
Share Capital Retained The Company Premium Account Reserve Earnings Total (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- At 31st December 1996 52.6 596.6 224.0 873.2 Profit for the financial year -- -- 76.1 76.1 Dividends -- total -- -- (76.0) (76.0) Less scrip element -- -- 1.2 1.2 Issues of shares for cash 5.2 -- -- 5.2 ---- ----- ----- ----- At 31st December 1997 57.8 596.6 225.3 879.7 ==== ===== ===== =====
As permitted by section 230 of the Companies Act 1985, TI Group plc has not presented its own profit and loss account. 23 NET CASH INFLOW FROM OPERATING ACTIVITIES
1997 1996 (pound)m (pound)m -------- -------- Operating profit 218.8 201.0 Depreciation of fixed tangible assets 45.6 40.7 Operating working capital movement ----- ----- Increase in stocks (18.0) (11.1) Increase in debtors (36.3) (8.7) Increase in creditors 33.0 4.2 ----- ----- (21.3) (15.6) Movement in pensions and related balances (1.7) (8.0) ----- ----- Net cash inflow from operating activities 241.4 218.1 ----- ----- Dividends received from joint ventures 10.4 11.4 Dividends received from associates 0.2 0.2 ----- ----- Dividends received from joint ventures and associates 10.6 11.6 Capital expenditure (net) (60.0) (56.5) ----- ----- Free cash flow 192.0 173.2 ===== =====
66 TI GROUP 24 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
1997 1996 (pound)m (pound)m -------- -------- Interest received 13.3 23.9 Interest paid (25.8) (27.8) ----- ---- Interest paid (net) (12.5) (3.9) Dividends received from other participating interests -- 0.1 Dividends paid to minority interests of subsidiaries (0.8) (0.9) ----- ---- (13.3) (4.7) ===== ====
25 TAXATION CASH FLOWS
1997 1996 (pound)m (pound)m -------- -------- UK corporation tax (18.3) (12.2) Overseas taxes (55.2) (49.3) ----- ----- (73.5) (61.5) ===== =====
Overseas taxes paid in 1997 included (pound)2.2m in respect of the 1996 exceptional disposal of the investment in Usui Bundy Tubing. 26 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
1997 1996 (pound)m (pound)m -------- -------- Capital expenditure (61.2) (56.9) Sale of plant, machinery and equipment 1.2 1.1 Sale of surplus properties 3.9 1.2 Sale of other participating interests -- 6.4 Purchase of own shares (3.5) (1.8) ----- ----- (59.6) (50.0) ===== =====
TI GROUP 67 NOTES TO THE FINANCIAL STATEMENTS continued 27 ACQUISITIONS AND DISPOSALS
1997 1998 (pound)m (pound)m -------- -------- Acquisitions of subsidiaries (14.7) (226.8) Net cash acquired with new subsidiaries (1.9) 7.4 Purchase of interests in associated undertakings -- (3.2) -------- -------- Cash flows arising from acquisitions (16.6) (222.6) Disposals of businesses -- 47.2 Disposal of interest in associated undertaking 2.9 -- -------- -------- (13.7) (175.4) ======== ======== Net assets acquired and disposed of 1997 1996 --------------------------- --------------------------- Acquisitions Disposals Acquisitions Disposals (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Fixed tangible assets 3.5 -- 46.6 (15.2) Investments (1.9) (2.9) 2.4 -- Stocks 0.8 -- 16.1 (14.5) Debtors 3.0 -- 28.4 (14.4) Creditors 10.0 -- (43.9) 16.5 Pensions and other post--retirement obligations -- -- (6.1) -- Deferred taxation -- -- (4.5) -- Minority interests (0.7) -- 5.9 -- -------- -------- -------- -------- 14.7 (2.9) 44.9 (27.6) Exceptional profit on disposals -- -- -- (19.6) Goodwill written off 1.9 -- 175.7 -- -------- -------- -------- -------- 16.6 (2.9) 220.6 (47.2) ======== ======== ======== ======== Satisfied by Cash (paid)/received (14.7) 2.9 (230.0) 47.2 (Short term borrowings)/cash acquired (1.9) -- 7.4 -- -------- -------- -------- -------- Total cash flows (16.6) 2.9 (222.6) 47.2 Short term deposits acquired -- -- 11.9 -- Loans acquired -- (9.9) -- -------- -------- -------- -------- Total movement in net debt (16.6) 2.9 (220.6) 47.2 ======== ======== ======== ========
Cash flows arising from acquisitions in 1997 included (pound)8.4m deferred consideration in respect of Bundy Brazil Refrigeration, acquired in 1996. 68 TI GROUP 28 NET DEBT
Exchange Other Rate 1996 Cash Flows Acquisitions Movements Adjustments 1997 (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m -------- ---------- ------------ --------- ----------- -------- Cash at bank and in hand 85.4 (23.1) 1.4 -- (1.1) 62.6 Short term borrowings -- repayable on demand (13.4) (14.6) (3.3) -- 0.3 (31.0) -------- -------- -------- -------- -------- -------- Cash 72.0 (37.7) (1.9) -- (0.8) 31.6 Short term bank deposits 213.2 94.0 -- -- (0.9) 306.3 Debt due within one year (61.3) (20.1) -- (32.0) (0.9) (114.3) Debt due after one year (291.9) (6.2) -- 32.0 4.6 (261.5) -------- -------- -------- -------- -------- -------- Net debt (68.0) 30.0 (1.9) -- 2.0 (37.9) ======== ======== ======== ======== ======== ========
Other movements comprise finance leases and transfers between categories of debt, principally $30m of private placement. Management of liquid resources shown in the cash flow statement comprises movements in short term bank deposits, which have maturity dates of up to one year. 29 PENSIONS AND OTHER POST-RETIREMENT BENEFITS The Group operates a number of pension schemes, the majority being defined benefit arrangements the assets of which are held independently of the Group's finances. Gross pension costs of (pound)21.5m (1996 (pound)20.9m) included (pound)10.7m (1996 (pound)11.8m) for overseas schemes. These costs were offset by a credit of (pound)4.1m (1996 (pound)4.8m) in respect of a net actuarial surplus in the TI Group pension schemes. At 31st December 1997 there was a balance included within debtors and prepayments (note 14) in respect of pensions of (pound)81.8m (1996 (pound)76.7m) and a provision for post-retirement healthcare benefits of (pound)81.3m (1996 (pound)77.4m) was included within provisions for liabilities and charges (note 20). UK Pension Schemes The Group's 13K pension schemes are normally valued by independent actuaries at not more than three-yearly intervals. The valuation methods used and assumptions made by the actuaries take into account the differing membership profiles and benefit promises of the schemes. The Group's principal UK pension scheme is the TI Group Pension Scheme, the assets of which are held in a separate trustee-administered fund. The latest actuarial valuation was carried out as at 31st May 1996 using the projected unit method for current members and allocating sufficient assets for former members and pensioners to cover the cost of purchasing their benefits in the insurance market. TI GROUP 69 NOTES TO THE FINANCIAL STATEMENTS continued 29 PENSIONS AND OTHER POST-RETIREMENT BENEFITS continued The principal actuarial assumptions used for current members for accounting and funding purposes were: Long term annual rate of return on investments 9.5% Annual dividend increases 5.0% Average annual increase in pensionable salaries (inclusive of promotion and merit increases) 7.5% Average annual increase in pensions in payment 4.5% to 5.0% The actuarial value of the assets of the schemes on this basis was sufficient to cover 117% of the benefits that had accrued to members after allowing for expected future increases in pensionable pay. At the date of the valuations, actuarial surpluses amounted to /131m and the market value of the assets was (pound)955m. As in previous years, for accounting purposes actuarial surpluses are spread forward over the average remaining service lives of employees as a level amount each year ('the mortgage method'). Overseas Pension Schemes The main overseas schemes are in the USA. The assets of these schemes are held in separate trustee-administered funds. The latest actuarial valuation of the majority of the US schemes was carried out by independent actuaries as at 1st January 1997 using the projected unit method. The principal actuarial assumptions adopted for the main US schemes were that the long term annual rate of return on investments would be 9.0% to 10.0% and the average annual increase in pensionable salaries would be 4.5% to 5.5%. The combined actuarial value of the assets of these schemes was sufficient to cover 88% of the benefits that had accrued to members after allowing for expected future increases in pensionable salaries. The market value of the assets of these schemes as at the date of the actuarial valuation was (pound)111m. Other Post-Retirement Benefits The Group operates a number of unfunded post-retirement medical and welfare benefit schemes principally in the USA. The method of accounting for these is similar to that used for defined benefit pension schemes. The US arrangements were actuarially valued as at 1st January 1996; the principal actuarial assumptions were that the long term increase in health costs would be 5.0% and a discount rate of 7.5%. The cost of these benefits charged to the profit and loss account in 1997 was (pound)4.9m (1996 (pound)4.7m); cash payments made in the year were (pound)3.5m (1996 (pound)3.7m). 30 COMMITMENTS
Land and Plant and Buildings Machinery (pound)m (pound)m --------- --------- At 31st December 1997 there were annual commitments under non-cancellable operating leases which expire as follows: Within one year 2.2 1.9 Between one and five years 4.3 4.6 After five years 5.9 0.1 --------- -------- 12.4 6.6 ========= ========
Contracts placed against capital expenditure sanctioned by the Board and not provided for in these accounts amounted to (pound)14.3m (1996 (pound) 14.0m). 70 TI GROUP 31 CONTINGENT LIABILITIES At 31st December 1997 the Group had contingent liabilities, in respect of bank and other guarantees and other matters arising in the ordinary course of business, from which it is anticipated that no material liabilities will arise. In addition, the Company has given guarantees which amount to (pound)350.7m (1996 (pound)322.1m) on borrowings by subsidiary undertakings, represented mainly by unsecured bank and other loans. The present status of litigation involving Dowty Woodville Polymer is described on page 9. 32 RELATED PARTY TRANSACTIONS On 30th January 1997 TI International Holdings Ltd sold its 20% investment in Valti SA (France) to Vallourec SA, which owned the balance of the shares, for FFR26.5m. On 31st May 1997 Bundy Tubing Co (Australia) Pty Ltd acquired 40% of the equity in Hua Yan Bundy Tubing Co Ltd (Bundy North China) from its joint venture partner, Hua Yan Special Steel Technology Development Corporation, for CNY23.8m, taking the Group's holding to 90%. TI Group provides administration services to Messier-Dowty, including office premises and a computer accounting system. Messier-Dowty provides sales and technical services to TI Group customers, the costs of which are charged to TI Group. In addition TI Group provides repair and overhaul services to Messier-Dowty customers. The charges for all of these services are on arms-length, fair value bases and are not material individually or in total to either company. 33 POST BALANCE SHEET EVENTS On 3rd February 1998 TI Group acquired Safematic Oy of Finland, a supplier of sealing and lubrication systems to the global pulp and paper industry, for (pound)17m initial cash consideration, with additional payments to be made over the next three years dependent upon operating performance. Also on 3rd February 1998 TI Group acquired 30% of Lips United BV of the Netherlands, a supplier of advanced marine propulsion systems, for (pound)6.6m cash based on the value of shareholders' funds at 31st December 1996. The agreement provides TI with an option, exercisable until 30th June 1998, to purchase the remainder of Lips. The payment on exercising the option will be based on a multiple of forecast profits for the business. On 6th February 1998 TI Group sold Thermal Processing Group Ltd to Bodycote International plc for (pound)18.5m cash including debt assumed of (pound)3.4m. On 25th February 1998 TI Group acquired the Sealol marine seal product line from EG&G Inc of the USA for $4.2m in cash. The business supplies marine seals predominantly to the US Navy's submarine fleet. The following transactions were announced in 1997, subject to contract and/or regulatory approval in 1998: a. The disposal of TI's landing gear interests to Snecma for an aggregate gross consideration of (pound)207.5m before adjustment for the net debt in Messier-Dowty. TI's landing gear interests consist of its 50% stake in Messier-Dowry and its 100% owned landing gear repair and overhaul business. b. The acquisition of the Sealol Industrial Division of EG&G Inc for $100m, and the sale of John Crane Belfab to EG&G for $45m, to be settled in cash. Sealol is a manufacturer of mechanical seals particularly for the high temperature segment of the petroleum and chemical industries in the USA. TI GROUP 71 PRINCIPAL SUBSIDIARIES, ASSOCIATED UNDERTAKINGS AND OTHER PARTICIPATING INTERESTS AS AT 31ST DECEMBER 1997 - -------------------------------------------------------------------------------- JOHN CRANE GROUP Americas John Crane Inc USA Dowty O Rings North America Inc USA Dowty Palmer-Chenard Inc USA Forsheda Pipe Seal Corp USA Forsheda Shaft Seal Corp USA John Crane Belfab USA John Crane Caribe Ltd USA John Crane Lemco USA John Crane Marine USA USA Dowty Silcofab Canada Canada John Crane Canada Inc Canada John Crane Argentina SA Argentina John Crane Brasil Brazil John Crane Colombia SA Colombia Industrias John Crane de Mexico SA de CV Mexico John Crane Venezuela CA Venezuela Europe John Crane UK Ltd UK Deep Sea Seals Ltd UK Dowty Seals Ltd UK Dowty Woodville Polymer Ltd UK Forsheda Ltd UK Lapmaster International Ltd UK John Crane Belgium SA Belgium John Crane Sigma as Czech Republic Forsheda A/S Denmark Cyclam SA France Forsheda SA France John Crane France SA France Dowty Seals GmbH Germany Forsheda Stefa GmbH Germany John Crane GmbH Germany Dowty Polypac SpA Italy John Crane Italia SpA Italy Sealing Parts SpA (75%) Italy Stefa Srl Italy Dowty (Malta) Ltd Malta Dowty Tecmold Ltd Malta FINT BV Netherlands John Crane Holland BV Netherlands John Crane Marine - LIPS VOF (66.67%) Netherlands Stefa BV Netherlands Forsheda AS Noway Forsheda SA Spain John Crane Iberica SA Spain Forsheda AB Sweden John Crane Sverige AB Sweden Skega Seals AB Sweden Forsheda AG Switzerland John Crane (Switzerland) AG Switzerland Asia Pacific and Africa John Crane Singapore Pty Ltd Singapore John Crane Australia Pty Ltd Australia John Crane Tianjin Ltd (67%) China Forsheda Concrete Seals Asia Co Ltd (60%) Hong Kong John Crane Engineered Sealing Systems Ltd (85%) India PT John Crane Indonesia (70%) Indonesia Japan Marine Technologies Ltd (50.14%) Japan *John Crane Japan Inc (49%) Japan Chuwac Engineering Pte Ltd (50.14%) Singapore John Crane Pty Ltd South Africa John Crane (Korea) Co Ltd South Korea John Crane Taiwan Inc Taiwan BUNDY GROUP Americas Bundy Corporation USA Huron Products USA Titeflex Corporation USA Bundy of Canada Canada Titeflex Canada Ltd Canada Bundy Argentina SA Argentina Bundy Brazil Brazil Bundy Colombia SA Colombia Bundy Mexico SA Mexico Bundy Venezolana CA Venezuela 72 TI GROUP - -------------------------------------------------------------------------------- Europe Bundy UK Ltd UK Bundy SA Belgium Bundy Danmark A/S Denmark Bundy SNC France Titeflex Europe SA France Bundy GmbH Germany Technoflow Tube-Systems GmbH Germany Bundy Kft Hungary Bundy SpA Italy Bundy SA Spain Technoflow Iberica SA Spain Bundy AB Sweden Asia Pacific and Africa Bundy Tubing Co (Australia) Pty Ltd Australia Foshan Hua Nan Bundy Tubing Co Ltd (80%) China Hua Yan Bundy Tubing Corp (90%) China Wuhan Bundy Fluid Systems Co Ltd (75%) China Bundy India Ltd (71%) India Bundy Japan Ltd Japan Bundy Tubing (New Zealand) Ltd New Zealand Bundy South Africa South Africa Bundy Systems Ltd South Korea *Korea Bundy Corp (39%) South Korea Smaller Engineering Companies VARI-FORM Inc Canada Cambridge Vacuum Engineering Ltd UK Lewis & Saunders Inc USA DOWTY GROUP Americas oMessier-Dowty Inc Canada Dowty Aerospace Aviation Services Sterling - Dowty Aerospace Corp Inc USA Dowty Aerospace Yakima - Dowty Decoto Inc USA Dowty Aerospace Los Angeles - Hydraulic Units Inc USA King Fifth Wheel Co USA NCI Inc USA Tru-Form Inc USA Valley Manufacturing Corp USA Ebtec Corporation USA Europe Dowty Aerospace Propellers Dowty Aerospace Hydraulics Dowty Aerospace Aviation Services Gloucester - Divisions of Dowty Aerospace Gloucester Ltd UK Dowty Aerospace Wolverhampton - Dowty Boulton Paul Ltd UK @ Messier-Dowty International Ltd (50%) UK o Messier-Dowty Ltd UK o Messier-Dowty SA France Iloman Engineering Ltd Isle of Man TI Reynolds Rings Ltd UK Thermal Processing Group Ltd UK Asia Pacific Dowty Aerospace Aviation Services Pte Ltd Singapore PARENT and OTHER TI Corporate Services Ltd UK Dowty Group PLC UK TI International Holdings Ltd UK TI & Dowty Pensions Ltd UK TI Holdings (Netherlands) BV Netherlands TI Group Inc USA + Tube Investments of India Ltd (3%) India @ joint venture o subsidiary of Messier-Dowty International Ltd * associated undertaking + other participating interest All companies are wholly-owned directly or indirectly by TI Group plc unless otherwise stated, and are incorporated and operate principally in the country indicated. The voting rights in respect of each subsidiary are in the same proportion as the shares held. In order to avoid particulars of excessive length the lists on pages 56 and 57 and above exclude a number of small subsidiaries, associates and other participating interests whose contribution to the profits and assets of the Group is not material. The auditors of TI Group plc, Price Waterhouse, audit all the subsidiaries in the Group. TI GROUP 73 GROUP FINANCIAL HISTORY
- --------------------------------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------ ------ ------ ------ ------ TURNOVER - BY SEGMENT John Crane (pound)m 448 491 546 593 655 Bundy (pound)m 571 630 718 718 740 Dowty (pound)m 304 299 439 446 475 ------ ------ ------ ------ ------ Continuing operations (pound)m 1,323 1,420 1,703 1,757 1,870 Discontinued operations (pound)m 70 -- -- -- -- ------ ------ ------ ------ ------ (pound)m 1,393 1,420 1,703 1,757 1,870 ====== ====== ====== ====== ====== TURNOVER - GEOGRAPHICAL DESTINATION UK % 21 16 15 13 13 Continental Europe % 27 29 33 30 30 North America % 40 43 40 43 43 Rest of World % 12 12 12 14 14 ====== ====== ====== ====== ====== PROFIT AND LOSS ACCOUNT SUMMARY Profit before interest (pre-exceptionals) (pound)m 138.3 160.6 194.8 219.7 237.0 Interest (pound)m (13.1) (12.8) (13.2) (8.6) (14.5) Profit before tax* (pound)m 125.2 153.0 184.8 232.2 220.6 Profit before tax (pre-exceptionals) (pound)m 125.2 147.8 181.6 211.1 222.5 Earnings per share* p 18.1 22.5 26.5 34.1 31.6 Earnings per share (pre-exceptionals) p 18.1 21.4 25.8 30.0 32.0 Dividends per share p 11.25 12.0 13.1 14.5 15.9 ====== ====== ====== ====== ====== BALANCE SHEET SUMMARY Shareholders' funds - gross (pound)m 1,259 1,289 1,372 1,376 1,423 Goodwill written off (pound)m (959) (933) (953) (1,040) (1,019) Shareholders' funds - net (pound)m 300 356 419 336 404 Net cash/(debt) (pound)m (182) (85) 10 (68) (38) ====== ====== ====== ====== ====== CASH FLOW Free cash flow (pound)m 97 156 179 173 192 Interest, tax and dividends (pound)m (88) (96) (111) (121) (156) ------ ------ ------ ------ ------ Net cash flow (pound)m 9 60 68 52 36 Acquisitions, disposals, share issues and translation (pound)m 42 37 27 (130) (6) ------ ------ ------ ------ ------ Movement in net cash/(debt) (pound)m 51 97 95 (78) 30 ====== ====== ====== ====== ====== KEY RATIOS Operating margin % 9.9 11.3 11.4 12.5 12.7 Interest cover (pre-exceptionals) times 10.6 12.5 14.8 25.5 16.3 Gearing, TI gross shareholders' funds % 14.5 6.6 nil 5.0 2.7 Gearing, TI net shareholders' funds % 62.8 24.7 nil 21.0 9.7 Dividend cover (pre-exceptionals) times 1.6 1.8 2.0 2.1 2.0 ====== ====== ====== ====== ======
* Profit before tax and earnings per share are on an FRS 3 basis 74 TI GROUP NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the seventy-eighth Annual General Meeting of TI Group plc will be held at Glaziers Hall, 9 Montague Close, London Bridge, London SE1 9DD on Thursday 14th May 1998 at 12 noon for the following purposes: 1 To receive and adopt the Company's financial statements for the year ended 31st December 1997 and the Reports of the Directors and of the Auditors. 2 To declare a final dividend on the Ordinary shares. 3 To re-elect Directors. 4 To re-appoint the Auditors and to authorise the Directors to fix their remuneration. As special business to consider and, if thought fit, to pass the following resolutions of which resolutions 5 and 7 will be proposed as Ordinary Resolutions and resolutions 6 and 8 as Special Resolutions. 5 That approval be and is hereby given to the exercise by the Directors of the power conferred upon them by Article 134 of the Articles of Association of the Company and that such approval shall relate to any dividend or dividends paid or declared before the conclusion of the Annual General Meeting to be held in the year 2003. 6 That in accordance with Article 10 of its Articles of Association and the Companies Act 1985, the Company is generally and unconditionally authorised to make market purchases (within the meaning of section 163 of the Companies Act 1985) of Ordinary shares of 25p each in the capital of the Company ("Ordinary shares") on such terms and in such manner as the Directors of the Company may from time to time determine provided that: a. the maximum number of Ordinary shares that may be purchased pursuant to this authority is 47,800,000; b. the maximum price which may be paid for an Ordinary share purchased pursuant to this authority is an amount equal to 105% of the average of the middle market quotation of the Company's Ordinary shares as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that share is purchased and the minimum price which may be paid is 25p per Ordinary share (in each case exclusive of expenses and advance corporation tax (if any) payable by the Company); and c. this authority will expire on 13th August 1999 or if earlier at the conclusion of the Annual General Meeting of the Company to be held in 1999 unless renewed before that time, but the Company may make a contract to purchase its Ordinary shares under this authority before its expiry which will or may be executed wholly or partly after the expiry of this authority, and may make a purchase of Ordinary shares in pursuance of any such contract. 7 That subject to and in accordance with Article 17 of the Company's Articles of Association the Directors be authorised to allot relevant securities of up to a maximum nominal amount (pound)39,8000,000 such authority to expire on 13th May 2003 and all previous authorities under section 80 of the Companies Act 1985 be revoked. TI GROUP 75 NOTICE OF ANNUAL GENERAL MEETING continued 8 That subject to and in accordance with Article 18 of the Company's Articles of Association the Directors be empowered to allot equity securities for cash and that, for the purposes of the limitation of the said power referred to in paragraph (b) of Article 18, the nominal amount therein mentioned shall be (pound)5,900,000; and this power shall expire on 13th May 2003. By order of the Board DAVID P LILLYCROP Secretary 8th April 1998 The Company, pursuant to Regulation 34 of the Uncertificated Securities Regulations 1995, specifies that only those shareholders registered in the register of members of the Company as at 6.00 pm on 12th May 1998 shall be entitled to attend or vote at the Annual General Meeting in respect of the number of shares registered in their name at that time. Changes to entries on the relevant Register of Securities after 6.00 pm on 12th May 1998 shall be disregarded in determining the rights of any person to attend or vote at the meeting. A member entitled to attend and vote may appoint one or more proxies to attend and vote instead of him. A proxy need not also be a member. To be effective, proxy forms must be delivered to the Company's Registrars, Lloyds Bank Registrars, 54 Pershore Road South, Kings Norton, Birmingham B30 1BR not later than 12 noon on Tuesday 12th May 1998. Copies of the following documents will be available for inspection at the registered office and at the offices of Allen & Overy, One New Change, London EC4M 9QQ during usual business hours until the date of the meeting and at Glaziers Hall, London from 11.45 am until the conclusion of the meeting on Thursday 14th May 1998: a. Directors' contracts of service. b. The Memorandum and Articles of Association of the Company. Registered Office: 50 Curzon Street, London W1Y 7PN Registered Number: 156641 England 76 TI GROUP GROUP ADDRESSES, REGISTRARS AND ADR DEPOSITARY HEAD OFFICE TI Group plc Lambourn Court Abingdon Oxon OX14 1UH REGISTERED OFFICE TI Group plc 50 Curzon Street London W1Y 7PN REGISTERED NUBMER 156641 England REGISTRARS Lloyds Bank Registrars 54 Pershore Road South Kings Norton Birmingham B30 3EP US ADR DEPOSITARY Citibank, N.A. 111 Wall Street New York NY 10043 USA FINANCIAL CALENDAR PUBLICATION OF RESULTS Unaudited interim statement for half year to 30th June July Preliminary announcement of results for year to 31st December March Report and financial statements for year to 31st December April DIVIDENDS ON ORDINARY SHARES Interim dividend October (announced July) Final dividend May (announced March) EX-99.(G)(2) 15 TI GROUP PLC'S ANNUAL REPORT DEC 1998 EXHIBIT (G)(2) Top Title Page Page 1 of 1 1998 ANNUAL REPORT Main Content Page Page 1 of 1 TI Group's strategy is to be an international engineering group concentrating specialised engineering businesses, operating in selected niches on a global basis. Key businesses must be able to command positions of sustainable technological and market share leadership. They will have a high knowledge and service content and will be able to anticipate and meet customers' needs. Side Navigation Template Page 1 of 1 Home Chairman's Statement Chief Executive Review Operating Review Financial Review Directors Reports & Financial Statements Summary of Results 5yr Financial Highlights Group Addresses Financial Calendar TI Group Page 1 of 1 [TI Group Letterhead] Main Content Page Page 1 of 3 STATEMENT BY THE CHAIRMAN [GRAPHIC] Sir Christopher Lewinton, Chairman "1998 was another successful year for TI Group. Our consistent strategy of creating world leading specialised engineering businesses has again resulted in record profits and good growth, coupled with strong cash generation, in a challenging economic environment. I am confident that 1999 will see continued growth and enhanced shareholder value." TI Group has enjoyed another record year in terms of sales and profits despite a softening in some markets. We have taken a number of strategic initiatives while maintaining our investment programme in our existing businesses. TI is well positioned to generate continued growth. Pre-tax profits (before goodwill and exceptional items) were (pound)238.6m, up from (pound)222.5m in 1997, reflecting organic profit growth of 10%. Before goodwill and exceptional items earnings per share were 34.3p (32.Op), an increase of 7% or, at constant exchange rates, a rise of 10%. The dividend has been increased by 8% from 15.9p to 17.2p and is covered 2.0 times by earnings, supported by strong cash flow. This good performance is a tribute to the successful execution of a consistent strategy, reflected in the quality of our portfolio of world leader businesses and the broad spread of global markets in which they operate. It illustrates the strength of an underlying TI Group culture based on strong management and close attention to the needs of our customers around the world. Such success is not new as a look at the recent overall business performance of TI Group clearly shows. Over the past five years earnings and dividends per share have grown at a compound rate of 13% and 9%, respectively. The return on investment in TI Group has increased from 10% to 14% and free cash flow, after deducting the cash cost of capital expenditure, has improved further, covering interest, tax and dividend payments 1.25 times. All of this gives me confidence that the Company will continue to move forward successfully. Consistent strategy Our success is the direct consequence of a clear and consistent strategy which has contributed to the creation of four world leader businesses. These are all capable of both continuing organic growth and providing opportunities for bolt-on acquisitions which fit our established strategy. A key feature of TI Group's record of organic growth is our ability to outperform our underlying markets. In 1998 we again achieved this goal, as Bill Laule reports in his first Chief Executive's Review, and we also took significant steps to enhance our commitment to growth with some (pound)750m of core bolt-on acquisitions all of which will contribute to earnings in their first full year. In each case the new companies acquired have brought in complementary products that expand significantly the markets we address and open up new Main Content Page Page 2 of 3 avenues for growth. All the acquisitions have been consistent with our global strategy and will enable us to respond to the needs of our customers while we enhance the quality of our portfolio of businesses. Where we have identified businesses that do not fit in with this strategy, we have made disposals to the value of (pound)225m. In July our involvement in the Messier-Dowty landing gear joint venture came to a successful conclusion with the sale of our interest to our partner Snecma on attractive terms, realising substantial value for TI shareholders. We decided to sell because, as a consequence of French national policy, we could not secure 100% ownership. Without this it was unlikely that the returns being obtained, although improving, would meet TI Group's demanding requirements in the future. The trend towards consolidation in many of the industries whose customers we serve is continuing. It provides new growth opportunities for leading global suppliers like TI Group but it also places even greater demands on management at all levels to meet the often rapidly changing needs of customers. Management The process of strengthening TI Group's senior management has continued and the separation of the roles of Chairman and Chief Executive is evolving very successfully. Bill Laule has made a major contribution to the effective running of the Company and to the achievement of good results along with ensuring the further development of a strong management team. The Chairman's Committee, comprising myself, Bill and Martin Angle, Group Finance Director, is working well in its task of maintaining the strategic direction of the Group. Our international management team has been strengthened considerably at all levels in the course of the year. I confidently expect that these initiatives will accelerate the already high levels of drive and leadership within the Company. Board changes Further steps were taken to strengthen the main Board during the year. David Lillycrop, TI Group's General Counsel and Group Secretary, was appointed a Director of the Company on 24th June. This appointment reflects the increasingly important role which the General Counsel plays in a global business like TI. John Langston, formerly Chief Executive of Bundy Automotive, was appointed Chief Executive of Forsheda in October and joined the Group's main Board at that time. His task will be to accelerate the globalisation of Forsheda, which towards the end of 1997 became the Group's fourth leg. Allan Welsh joined TI Group as Chief Executive of Bundy in December and was appointed a Director of the Company on 1st January 1999. Allan was a main board director of T&N plc and has wide international experience of managing both automotive and other manufacturing businesses. Towards the end of the year three Directors stepped down from the Board. Tony Edwards, formerly chairman of TI Group's aerospace interests, moved to the Ministry of Defence as Head of Defence Export Services. TI Group was pleased to be able to serve British interests by releasing him for this important role. Bob Fisher and John Potter both resigned from the Board; they will continue to have a close association with the Company and we wish them well as they retire to their Main Content Page Page 3 of 3 homes in the United States. I would like to thank them all for their long and distinguished service and their important contribution to the development of TI Group. Sir Nigel Broomfield joined the Board as a non-executive Director on 18th February. As reported last year, Sir Nigel was until 1997 the British Ambassador to the Federal Republic of Germany and previously to the German Democratic Republic. He brings extensive experience of international affairs which is already proving valuable to the Group. Outlook 1995 was a successful year for TI Group. Despite a softening in some of our markets, the global spread and balance of our activities, which is a key strength of the Group, demonstrated its great value and allowed us to report record profits and organic growth in a challenging economic environment. As well as producing organic growth we took important steps to increase our exposure to new but related markets with a series of bolt-on acquisitions that will enable us to offer even better service to our global customers. Management was strengthened throughout the Group and this will provide accelerated drive and leadership going forward. TI Group will increasingly benefit from the investment programmes undertaken in 1998 and from the integration of our acquisitions. Coupled with the strength of our worldwide activities, in particular our strong position in the robust economies of the US and Europe, these benefits will lead to continued growth in our businesses. We are particularly pleased by the decision of KKR to invest in TI Group and, with Henry Kravis agreeing to join the main Board as a non-executive Director, we believe that this is the start of a relationship that will bring considerable benefits to the Group. With order books ahead of last year and the first two months' trading on plan, and although 1999, much like 1998, will be a demanding year, we are confident that TI Group's successful strategy will continue to meet the needs of its customers and generate improved returns to its shareholders. /s/ Christopher Lewinton Sir Christopher Lewinton Chairman 5th March 1999 Top Title Page Page 1 of 1 CHAIRMAN'S STATEMENT Side Navigation Template Page 1 of 1 Home Chairman's Statement Chief Executive Review Operating Review Financial Review Directors Reports & Financial Statements Main Content Page Page 1 of 3 CHIEF EXECUTIVE'S REVIEW [GRAPHIC] William J Laule, Chief Executive "We are pleased to present another set of record TI Group results. Healthy growth from our four world leader businesses, along with the successful integration of strategic bolt-on acquisitions, has strengthened the Group's market leading positions. These achievements make me confident that the Group will continue its strong record of growth." I am pleased to report that in 1998 - my first year as Chief Executive - TI Group put in another strong year. Our four world leader businesses, John Crane, Forsheda, Bundy and Dowty, all performed well despite some adverse developments in the world economy. These results reflect the strength of our global spread and balance and continued improvements in cost control and operating efficiency, driven by our initiatives in lean manufacturing. During 1998, TI successfully completed (pound)750m of significant bolt-on acquisitions, all, as the Chairman writes in his Statement, consistent with our well established and focused global strategy. These acquisitions will widen our "footprint" and further strengthen our leading position as a full service global supplier, able to respond to the needs of our customers and to the factors that drive their businesses. All the acquired businesses have performed in line with or beyond our expectations. Our senior management team, some of which is pictured in the Management Team section of the Operating Review, has performed very successfully. This team was significantly strengthened during the year, enhancing our ability to integrate the acquisitions we have made. We were particularly pleased to be able to fill a number of these senior posts through internal promotion. The largest of our acquisitions, EIS Group, bought for (pound)334m in July, is going well and created significant opportunities for both John Crane and Dowty. The integration of the fluid technologies businesses of EIS is progressing as planned and has opened up new growth markets for John Crane, while the aerospace side of EIS has brought Dowty the aerostructure business of Hamble Group and defence-related speciality products. At the time of acquisition we stated our intention to dispose of non core EIS businesses and the sale programme is proceeding. The strength of our acquisition strategy was also clearly illustrated by the integration into Bundy of S&H, a privately owned US automotive supplier bought for $350m in May. This has created important new markets for Bundy in automotive air conditioning and power steering fluid carrying applications. Both are forecast to grow faster than underlying car markets and will bring significant globalisation opportunities outside the US. Benefits from S&H have come through quickly with important new contract wins in Europe. These, and other acquisitions made during the year, are described in greater detail in the Operating Review. Main Content Page Page 2 of 3 Business performance Underlying business performance was good. Adjusting for exchange rate movements and portfolio changes, sales and profit on an organic basis grew by 9% and 10% respectively as underlying margins remained strong. In addition to the (pound)750m spent on bolt-on acquisitions revenue and capital investment to support growth initiatives in all our business groups ran at high levels again last year. Total investment rose from (pound)106m to (pound)136m including a rise in capital investment from (pound)72m to (pound)93m. Cash flow from operations was once again strong at (pound)292.8m (1997 (pound)241.1m). John Crane, a world leader in the supply of sealing solutions, once again outperformed its markets and generated organic growth in sales and profits despite mixed trading conditions. It is responding well to the leadership of Roger Fix, Chief Executive, John Crane Mechanical Seals, and John Cousins, Chief Executive, John Crane Marine. Mechanical Seals continued to capture share in flat to softening markets. In addition to the fluid technology businesses of EIS, management integrated two other significant acquisitions during the year. Safematic made John Crane a global leader in mechanical seals for the pulp and paper industry while the purchase of EG&G's Sealol business introduced strong brands in specialised high temperature applications. Marine took full advantage of a firm commercial shipbuilding market and with the acquisition of Lips United established itself as one of the world leaders in the supply of integrated marine propulsion systems, an area where demand is likely to exceed the underlying shipbuilding trend. With firm order books John Crane should continue to outperform its markets and generate strong growth. Forsheda, which serves the automotive and industrial markets and has a developing aerospace segment, responded well to progressively more challenging markets in 1998 and showed growth overall. John Langston was promoted to Chief Executive and will provide strong leadership going forward. Automotive markets remained strong in North America and Europe but the turmoil in Asia Pacific and Latin America affected the market for construction and agricultural machinery. Demand for plastic construction pipes in Western Europe remained subdued. Last year Forsheda made good headway with plans to globalise its product range and manufacturing technology. Many key products, including Isolast(TM) "O" rings, axle shaft seals and automotive radiator gaskets, were successfully transferred from Europe to North America. With this momentum Forsheda, despite demanding trading conditions, is well placed for continued growth. Bundy, the leading supplier of fluid carrying systems for the world's automotive and refrigeration industries, last year demonstrated the value of the strong relationships it enjoys with global customers with another year of organic growth in sales and profits. Allan Welsh has joined Bundy as Chief Executive and his leadership will build on this success. Bundy Automotive achieved strong results and significantly outperformed its markets, owing to its presence on several major new vehicle launches in North America and Europe, including the highly successful Peugeot 206, Fiat's Seicento and GM's Pickup and Suburban utility vehicles. Bundy also won many significant customer awards in 1998, including "Supplier of the Year" from GM for the fourth year running, along with a series of valuable new contracts for future product platforms. Bundy Refrigeration enjoyed a good year in Europe, North America was stable but Latin American markets were lower. Strengthened by the benefits of integrating the acquisition of S&H and by its key positions on new launches and future product platforms, the outlook for Bundy is for continued growth. Main Content Page Page 3 of 3 Dowty, with a position on all the major aerospace programmes, saw sales and profitability rise strongly in 1998 as the civil aerospace cycle continued upwards, military markets remained robust and sales of spares were buoyant. Turbine Engine Components businesses, which tend to lead the aerospace cycle, grew overall and reached a peak in the fourth quarter. Hydraulics and Actuation activities continued to perform well. In July Geoff Smith was promoted to the role of Chief Executive and has played a key role in integrating the aerospace and defence businesses of EIS. This is going well and will result in improved margins in the acquired businesses. Order books remain strong even though a gradual softening in aerospace markets is expected. Quality and performance In 1998 I began to increase our focus on the customer, supported by the widespread adoption throughout the Group of lean manufacturing techniques. Our successful initiatives in these areas helped us to win outside recognition as the number of awards for quality and performance received across TI Group more than doubled in 1998. Our continued commitment to the environment brought 14 ISO 14001 major site awards and we received over 80 quality awards from key customers worldwide, an achievement about which I am particularly pleased. Outlook We go forward with four world leader businesses each strongly positioned for growth in its chosen markets. The strong management team that has been established is committed to reductions in costs and to improved efficiency in all our processes in order to drive the Company forward in what may be a less buoyant world economy. Together with the key strategic investments that are under way and the integration of our bolt-on acquisitions, this will result in continued growth across the Group and another year of progress. /s/ William J Laule William J Laule Chief Executive 5th March 1999 Main Content Page Page 1 of 1 If Group's strategy is to be an international engineering group concentrating on specialised engineering businesses, operating in selected niches on a global basis. Key businesses must be able to command positions of sustainable technological and market share leadership. They will have a high knowledge and service content and will be able to anticipate and meet customers' needs. Main Content Page Page 1 of 3 STATEMENT BY THE CHAIRMAN [GRAPHIC] Sir Chirstopher Lewinton, Chairman "1998 was another successful year for TI Group. Our consistent strategy of creating world leading specialised engineering businesses has again resulted in record profits and good growth, coupled with strong cash generation, in a challenging economic environment. I am confident that 1999 will see continued growth and enhanced shareholder value." TI Group has enjoyed another record year in terms of sales and profits despite a softening in some markets. We have taken a number of strategic initiatives while maintaining our investment programme in our existing businesses. TI is well positioned to generate continued growth. Pre-tax profits (before goodwill and exceptional items) were (pound)238.6m, up from (pound)222.5m in 1997, reflecting organic profit growth of 10%. Before goodwill and exceptional items earnings per share were 34.3p (32.Op), an increase of 7% or, at constant exchange rates, a rise of 10%. The dividend has been increased by 8% from 15.9p to 17.2p and is covered 2.0 times by earnings, supported by strong cash flow. This good performance is a tribute to the successful execution of a consistent strategy, reflected in the quality of our portfolio of world leader businesses and the broad spread of global markets in which they operate. It illustrates the strength of an underlying TI Group culture based on strong management and close attention to the needs of our customers around the world. Such success is not new as a look at the recent overall business performance of TI Group clearly shows. Over the past five years earnings and dividends per share have grown at a compound rate of 13% and 9%, respectively. The return on investment in TI Group has increased from 10% to 14% and free cash flow, after deducting the cash cost of capital expenditure, has improved further, covering interest, tax and dividend payments 1.25 times. All of this gives me confidence that the Company will continue to move forward successfully. Consistent strategy Our success is the direct consequence of a clear and consistent strategy which has contributed to the creation of four world leader businesses. These are all capable of both continuing organic growth and providing opportunities for bolt-on acquisitions which fit our established strategy. A key feature of TI Group's record of organic growth is our ability to outperform our underlying markets. In 1998 we again achieved this goal, as Bill Laule reports in his first Chief Executive's Review, and we also took significant steps to enhance our commitment to growth with some (pound)750m of core bolt-on acquisitions all of which will contribute to earnings in their first full year. In each case the new companies acquired have brought in complementary products that expand significantly the markets we address and open up new Main Content Page Page 2 of 3 avenues for growth. All the acquisitions have been consistent with our global strategy and will enable us to respond to the needs of our customers while we enhance the quality of our portfolio of businesses. Where we have identified businesses that do not fit in with this strategy, we have made disposals to the value of (pound)225m. In July our involvement in the Messier-Dowty landing gear joint venture came to a successful conclusion with the sale of our interest to our partner Snecma on attractive terms, realising substantial value for TI shareholders. We decided to sell because, as a consequence of French national policy, we could not secure 100% ownership. Without this it was unlikely that the returns being obtained, although improving, would meet TI Group's demanding requirements in the future. The trend towards consolidation in many of the industries whose customers we serve is continuing. It provides new growth opportunities for leading global suppliers like TI Group but it also places even greater demands on management at all levels to meet the often rapidly changing needs of customers. Management The process of strengthening TI Group's senior management has continued and the separation of the roles of Chairman and Chief Executive is evolving very successfully. Bill Laule has made a major contribution to the effective running of the Company and to the achievement of good results along with ensuring the further development of a strong management team. The Chairman's Committee, comprising myself, Bill and Martin Angle, Group Finance Director, is working well in its task of maintaining the strategic direction of the Group. Our international management team has been strengthened considerably at all levels in the course of the year. I confidently expect that these initiatives will accelerate the already high levels of drive and leadership within the Company. Board changes Further steps were taken to strengthen the main Board during the year. David Lillycrop, TI Group's General Counsel and Group Secretary, was appointed a Director of the Company on 24th June. This appointment reflects the increasingly important role which the General Counsel plays in a global business like TI. John Langston, formerly Chief Executive of Bundy Automotive, was appointed Chief Executive of Forsheda in October and joined the Group's main Board at that time. His task will be to accelerate the globalisation of Forsheda, which towards the end of 1997 became the Group's fourth leg. Allan Welsh joined TI Group as Chief Executive of Bundy in December and was appointed a Director of the Company on 1st January 1999. Allan was a main board director of T&N plc and has wide international experience of managing both automotive and other manufacturing businesses. Towards the end of the year three Directors stepped down from the Board. Tony Edwards, formerly chairman of TI Group's aerospace interests, moved to the Ministry of Defence as Head of Defence Export Services. TI Group was pleased to be able to serve British interests by releasing him for this important role. Bob Fisher and John Potter both resigned from the Board; they will continue to have a close association with the Company and we wish them well as they retire to their Main Content Page Page 3 of 3 homes in the United States. I would like to thank them all for their long and distinguished service and their important contribution to the development of TI Group. Sir Nigel Broomfield joined the Board as a non-executive Director on 18th February. As reported last year, Sir Nigel was until 1997 the British Ambassador to the Federal Republic of Germany and previously to the German Democratic Republic. He brings extensive experience of international affairs which is already proving valuable to the Group. Outlook 1998 was a successful year for TI Group. Despite a softening in some of our markets, the global spread and balance of our activities, which is a key strength of the Group, demonstrated its great value and allowed us to report record profits and organic growth in a challenging economic environment. As well as producing organic growth we took important steps to increase our exposure to new but related markets with a series of bolt-on acquisitions that will enable us to offer even better service to our global customers. Management was strengthened throughout the Group and this will provide accelerated drive and leadership going forward. TI Group will increasingly benefit from the investment programmes undertaken in 1998 and from the integration of our acquisitions. Coupled with the strength of our worldwide activities, in particular our strong position in the robust economies of the US and Europe, these benefits will lead to continued growth in our businesses. We are particularly pleased by the decision of KKR to invest in TI Group and, with Henry Kravis agreeing to join the main Board as a non-executive Director, we believe that this is the start of a relationship that will bring considerable benefits to the Group. With order books ahead of last year and the first two months' trading on plan, and although 1999, much like 1998, will be a demanding year, we are confident that TI Group's successful strategy will continue to meet the needs of its customers and generate improved returns to its shareholders. /s/ Christopher Lewinton Sir Christopher Lewinton Chairman 5th March 1999 Main Content Page Page 1 of 1 MANAGEMENT TEAM [GRAPHIC] 1 William J Laule Chief Executive, TI Group 2 Martin D Angle Group Finance Director 3 Roger L Fix CEO, JOHN CRANE MECHANICAL SEALS 4 John F Cousins CEO, JOHN CRANE MARINE 5 John Langston CEO, FORSHEDA 6 T Allan Welsh CEO, BUNDY 7 Geoff F Smith CEO, DOWTY 8 David P Lillycrop Director & General Counsel 9 James L Roe Director, Strategic Development [GRAPHIC] Main Content Page Page 1 of 6 FINANCIAL REVIEW [GRAPHIC] Martin Angle, Group Finance Director "In 1998, TI Group achieved good organic growth and maintained a strong cash flow with increased investment to support future growth. The acquisitions made during the year are all performing in line with plan and the Group goes forward in a strong financial position." The 1998 financial statements incorporate the new accounting and disclosure requirements of FRS10 `Goodwill and Intangible Assets', FRS11 `Impairment of Fixed Assets and Goodwill' and FRS14 `Earnings Per Share'. In addition, in line with recommended practice, the financial statements also incorporate the early adoption of FRS12 `Provisions, Contingent Liabilities and Contingent Assets' and FRS13 `Derivatives and Other Financial Instruments: Disclosures'. In accordance with FRS10, goodwill arising on acquisitions completed since 1st January 1998 of (pound)539.2m has been capitalised as an intangible fixed asset. This goodwill is being amortised over 20 years, resulting in a non-cash charge of (pound)15.1m in the year. Goodwill on earlier acquisitions remains written off against reserves. The Group's accounting policies have been revised to reflect the changes in the accounting treatment of goodwill. The presentation of balance sheet reserves has been amended to comply with the requirements of FRS10. The other new Standards have not resulted in changes in accounting policies but the presentation of certain items, particularly provisions, has been amended and the scope of some detailed disclosures has been increased. Year-on-year comparisons of results are affected by the significant number of acquisitions and disposals during 1998 which are set out in detail in notes to accounts and are described in the Operating Review. For clarity, the analysis of results by business segment set out in notes to accounts identifies separately the contribution of the Group's 50% share of Messier-Dowty which, together with the related wholly-owned landing gear repair and overhaul businesses, was sold on 30th June 1998. Three small businesses previously reported as part of the Bundy business segment have been transferred to the Dowty business segment with effect from 1st January 1998, as their principal products are aerospace related and they are now managed by the Dowty team. In addition to the corporate activity, comparisons with 1997 are also affected by the continued strengthening of sterling during 1998 which had an adverse effect on the translation of the results of the Group's overseas subsidiaries for accounting purposes, reducing sales by (pound)52m and profit before tax by (pound)5.8m. However, as a global specialised engineering group with 80% of its sales made in the country of origin, TI Group has no material foreign currency transaction exposure. The table below shows the 1997 and 1998 average and year end exchange rates for the US dollar and the Deutschmark, the movement of which against sterling was representative of other major European currencies. Main Content Page Page 2 of 6 Average for year (pound)1=US$ (pound)1=DM 1998 average 1.66 2.92 1997 average 1.64 2.84 (pound) stronger/(weaker) 1% 3% Period end 31 December 1998 1.66 2.77 31 December 1997 1.65 2.96 (pound) stronger/(weaker) 1% (6)% Analysis of results TI Group has again achieved a strong performance with organic growth in sales of 9% and in profit before interest, goodwill and exceptional items of 10%. Earnings per share excluding goodwill and exceptional items increased by 7%, or 10% after adjusting for changes in exchange rates. Cash flow from operations was again strong and, after adjusting for exceptional items, represented a surplus over the Group's net interest, tax and dividend payments of 25%. Total sales for the year, including the Group's share of joint ventures, were (pound)2,168m (1997: (pound)1,870m), a 16% increase over 1997. All four of the Group's world leader businesses achieved organic sales growth ahead of their underlying markets and continued to increase market share. Their performance is described in more detail in the Chief Executive's Review and the Operating Review. Profit before interest, goodwill and exceptional items was (pound)265.3m, up (pound)28.3m or 12% from last year. Included within this total, income from joint ventures and associated undertakings was (pound)9.5m, down from (pound)18.2m in 1997 due to the sale of the Group's share of the Messier-Dowty joint venture in June. Adjusting for exchange rate movements and portfolio changes, all four world leader businesses reported organic growth in operating profit. Group operating margin was 12.2% (1997: 12.7%) reflecting the impact of the acquisitions completed during 1998, where overall margins were below the Group average. All four of the business groups sustained strong underlying margins. The Group's Return on Investment (profit before interest, goodwill, exceptional items and tax as a percentage of investment, including all goodwill) decreased slightly to 14% (1997: 16%) due to the initial effect of acquisitions. All the businesses acquired in 1998 are performing in line with expectations and are expected to exceed the Group's minimum objective of a 15% pre-tax Return on Investment by the third year of ownership. Net interest expense increased to (pound)26.7m (1997: (pound)14.5m), principally as a result of acquisition expenditure. Interest costs remain well covered at 10 times (1997: 16 times) by profit before interest, goodwill and exceptional items. Profit before taxation, goodwill and exceptional items was (pound)238.6m, up (pound)16.1m or 7% from 1997. The effective tax rate on profit before goodwill and exceptional items of 31% was unchanged from 1997. As described above, amortisation of goodwill arising on acquisitions completed since 1st January 1998 resulted in a non-cash charge of (pound)15.1m in the year. The goodwill capitalised includes adjustments to the balance sheets of acquired companies of (pound)93m, of which (pound)90m relates to EIS. Of this, approximately (pound)60m was foreseen at the time of the acquisition of EIS and the balance represents a Main Content Page Page 3 of 6 shortfall in the value now anticipated in the proceeds of certain non core assets held for disposal. The EIS businesses retained within the Group have responded positively under our management and now demonstrate a potential which exceeds our initial expectations. Any shortfall in the value of the non core businesses, as against original expectations, is consequently more than offset by the enhanced value of the businesses retained. Before a related tax charge of (pound)6.7m, there was a net exceptional gain of (pound)3.2m, comprising a net gain on business disposals of (pound)14.7m and a charge to operating profit of (pound)11.5m which included principally the settlement of the Dowty Woodville Polymer "whistleblower" litigation for (pound)7.0m and restructuring of Bundy's Heidelberg operation in Germany costing (pound)5.5m. This restructuring reflected a structural and one-off change to the way in which Bundy does business in Germany to meet the challenging outsourcing needs of its customers. The principal manufacturing site at Heidelberg has been scaled down leaving only the basic tube manufacturing operations there. All other activities are now carried out in satellites located close to customers' operations. Elsewhere in the Group, redundancies of (pound)5.5m (1997: (pound)3.5m) were incurred and charged against operating profit. Earnings per share before goodwill and exceptional items were 34.3p (1997: 32.Op), an increase of 7%, or 10% after adjusting for the effect of changes in exchange rates. On an FRS3 basis earnings per share, after goodwill and exceptional items, were 3O.4p (1997: 31.6p). Dividend The Directors are recommending a final dividend of 11.6p giving a total dividend per Ordinary share for the year of 17.2p (1997: 15.9p), an increase of 8% over the previous year. The dividend is covered 2.0 times by earnings before goodwill and exceptional items (1997: 2.0 times). The July 1997 Budget abolished Advance Corporation Tax and Foreign Income Dividends with effect from 6th April 1999 and as a result this year's final dividend will be paid as a normal dividend. Cash flow and debt Cash flow from operations was again strong at (pound)292.8m (1997: (pound)241.4m). After capital investment and dividends received from joint ventures and associates, free cash flow was (pound)218.1m, 14% ahead of the same period last year. After adjustment for exceptional items this represents a surplus over the Group's net interest, tax and dividend payments of 25%. The Group maintained its investment programmes in all businesses. Capital and revenue investment increased by 28% to (pound)136m (1997: (pound)106m). Of this, capital investment was (pound)93m (1997: (pound)72m) and revenue investment was (pound)43m (1997: (pound)34m). Investment, which must meet strict financial criteria, has generally been made to support the additional capacity requirements of new programmes, to improve efficiency in existing facilities and to upgrade and replace information systems. Main Content Page Page 4 of 6 The Group maintained a strong focus on working capital management and, as a percentage of sales, average Group working capital reduced further to 10% across its existing businesses. The ratio for acquired businesses was around 16% and these operations are already responding to management initiatives to move towards the Group average over time. Including the net cash flow on acquisitions and disposals of businesses of (pound)505.3m, net debt at 31st December 1998 increased to (pound)512.7m (31st December 1997: (pound)37.9m). TI shareholders' funds were (pound)601.Om at 31st December 1998 (31st December 1997: (pound)392.6m) after writing back (pound)136.5m of goodwill on disposals. Goodwill arising on acquisitions completed prior to 1998 of (pound)882.5m (31st December 1997: (pound)1,019.Om) remains written off against reserves. The impact of exchange translation on TI shareholders' funds was not significant. Change In net debt [GRAPHIC] Treasury TI operates a central treasury function providing services to the whole Group by arranging borrowings, investing surplus funds and managing and reducing financial risks. Group Treasury is not a profit centre and no speculative transactions are permitted. It operates within specific Board policies with compliance confirmed regularly in formal reports to the Audit Committee; there was no change in policies during 1998. There are extensive written control procedures in place and Group Treasury is subject to regular reviews by the financial control function, and by internal and external audit. Treasury systems, including disaster recovery arrangements, are also reviewed and updated regularly. Prudent use is made of financial instruments, mainly forward rate agreements, interest rate swaps, and forward foreign exchange contracts, with relationship banks as the counterparty. Such instruments may also include the purchase, but not the writing, of options in specific circumstances. Main Content Page Page 5 of 6 The Group's principal exposures to exchange rate fluctuations arise on the translation of overseas net assets and profits into sterling for accounting purposes. Translation exposures arising on consolidation of the Group's overseas net assets are minimised by broadly matching assets with borrowings in each major foreign currency. The level of hedging cover required by Group policy is over 80% across all currencies and TI is fully hedged in all relevant major currencies. The Group's gross debt at 31st December 1998 totalled (pound)685.8m (1997: (pound)406.8m) with (pound)280.3m in US and Canadian dollars, reflecting the Group's strong North American presence, and (pound)180.5m denominated in Continental European currencies. The principal components of this debt are two private placements of US$190m in total outstanding, and centrally managed bank loans totalling (pound)502.4m. The Group also has a US commercial paper programme rated A1/P1 by Standard and Poor's Corporation and Moody's Investor Services respectively. To support the commercial paper programme and to provide medium term liquidity, the Group has committed bank facilities of (pound)60m maturing in 1999 and a further (pound)870m maturing in 2000 or later. In January 1999, further committed facilities totalling (pound)200m were arranged. Year end cash and deposits totalled (pound)173.1m (1997: (pound)368.9m). The Group adopts a conservative investment policy for its surplus funds, most of which are pooled and managed centrally, with deposits limited by amount and maturity across highly-rated banks. Counterparty risk limits are established for all banks used by the Group, depending on the credit standing of the bank. Extensive use is made of country cash pooling arrangements and intra-Group loans to provide, respectively, efficient cash management and cost effective core funding to operating businesses worldwide. Interest rate exposures on borrowings and deposits are monitored carefully and hedging actions taken when market conditions are considered appropriate. Normally, at least one third of borrowings in each major currency is hedged at fixed rates for the next 12 months, using long dated drawings, forward rate agreements, interest rate swaps or collars. Exchange translation exposures arising on the consolidation of overseas operating profits are partially offset by interest charges on foreign currency borrowings. These exposures are monitored but are not normally hedged, and no such hedging was undertaken in 1998. There was no use of options during 1998. Exposures to movements in exchange rates on transactions are minimised using forward foreign exchange contracts, normally up to 12 months forward, on a rolling basis. Some aerospace businesses may hedge exposures up to four years into the future, reflecting the nature of commitments in that industry. All TI business units hedge their net exposures through or at the direction of Group Treasury. Year 2000 and euro The Group-wide programme initiated in 1996 to address the Year 2000 computer problem is well advanced. This programme is designed to address the business critical risks and uncertainties, including an assessment and testing of communication networks, business and infrastructure systems and, in particular, control systems in shop floor equipment. There has also been significant work, including detailed correspondence and site visits, to minimise the potential disruption caused by non-compliance of third parties including major customers and suppliers. Main Content Page Page 6 of 6 It is widely recognised and accepted, however, that the nature and complexity of the problem means that there cannot be any guarantee that problems will not arise. Whilst the Group expects all its business critical systems to be millennium compliant before the end of 1999, contingency plans are being prepared to cope with any potential disruption, particularly from external events outside the Group's control. Action has also been taken to address the systems and business issues associated with the introduction of the euro from 1st January 1999. The actions for both the Year 2000 and euro form part of TI's continuing investment in electronic systems and there has been significant expenditure on such projects during the period. An estimate of expenditure incurred to date on projects with a significant Year 2000 element is (pound)17m, with additional estimated costs of (pound)8m to be incurred in 1999. Approximately 70% of these amounts are the capital costs of new and replacement hardware; the balance is revenue expenditure which is charged to the profit and loss account as incurred. The estimated costs of achieving euro compliance are not significant. Summary In 1998, TI Group achieved good organic growth and maintained a strong cash flow with increased investment to support future growth. The acquisitions made during the year are all performing in line with plan and the Group goes forward in a strong financial position. Martin D Angle Group Finance Director Main Content Page Page 1 of 3 DIRECTORS [GRAPHIC] Sir Christopher Lewinton (++) o Chairman Joined the Board in 1986 as Chief Executive and Deputy Chairman, becoming Chairman in 1989 and relinquishing the role of Chief Executive in January 1998. Wide international experience; based in the United States for many years. A non-executive Director of Reed Elsevier and a member of the Supervisory Board of Mannesmann AG. Age 67 NON-EXECUTIVE DIRECTORS [GRAPHIC] John M Hignett * + (++) Deputy Chairman Joined the Board in 1989, becoming Deputy Chairman in 1993. Chairman, Audit & Organisation and Remuneration Committees. Chairman of Schroder Income Growth Fund. Formerly a Director of Glaxo Holdings, a Managing Director of Lazard Brothers & Co and Director General of the Takeover Panel. Age 64 [GRAPHIC] Sir Cohn Chandler * + Joined the Board in 1992. Chairman, Vickers and Director of Guardian Royal Exchange. Vice President, Engineering Employers' Federation. A Member of the National Defence Industries Council. Formerly Head of Defence Export Services, Ministry of Defence. Age 59 [GRAPHIC] Lord Fanshawe of Richmond KCMG * + (++) Joined the Board in 1990. A Director of Xerox UK. Member, Pratt & Whitney European Advisory Board. Chairman of Sedgwick Group until 1997. Formerly a Foreign Office Minister. Age 71 [GRAPHIC] John M Harris * Joined the Board in 1991. Managing Director, formerly President, The Forum Corporation based in Boston. Previously President and CEO, Rockefeller Financial Services Inc and President of the European operations of Booz Allen & Hamilton. An American citizen. Age 58 [GRAPHIC] Rudolf G Mueller CBE * Main Content Page Page 2 of 3 Joined the Board in 1996. Chairman of Chiltern Group and Chelveton Properties. Chairman of Lend Lease Europe and a Member of the Boards of Lend Lease Corporation and IMI Kiev. Previously held senior positions with UBS in Zurich, Singapore and London, where he was Chairman of the UBS Group until 1997. Formerly a Director of the London Stock Exchange. A Swiss citizen. Age 64 [GRAPHIC] Sir Nigel Broomfield KCMG + Joined the Board in February 1998. A non-executive Director of Foreign & Colonial German Investment Trust. Director Designate of the Ditchley Foundation and an adviser to Arthur Andersen. Trustee of the Dresden Trust. A retired diplomat; British Ambassador to the Federal Republic of Germany until 1997. Age 61 EXECUTIVE DIRECTORS [GRAPHIC] William J Laule o Chief Executive Joined the Board in 1995 becoming Chief Executive, TI Group in January 1998. Previously Chief Executive, Bundy. A Director, National Association of Manufacturers of the USA. Senior management experience gained with Rockwell International in the United States and Europe. An American citizen. Age 50 [GRAPHIC] Martin D Angle o Group Finance Director Joined the Board in 1997. Wide international business experience gained in senior positions with SG Warburg, Morgan Stanley and the Dresdner Kleinwort Benson Group, based in the United States and the UK. A Chartered Accountant. Age 48 [GRAPHIC] David P Lillycrop Director & General Counsel Joined the Board in June 1998. General Counsel since 1997 and Group Secretary since 1991. Chairman, TI Pension Trustee Ltd. Legal and management experience gained in British and American companies. Member, Management Committee, Industry and Parliament Trust. A Barrister. Age 42 [GRAPHIC] James L Roe Director, Strategic Development Joined the Board in 1994. Director, Strategic Development since 1986. Previously Senior Vice-President, John Crane International. Experience outside TI includes management consultancy. Age 54 [GRAPHIC] John Langston Main Content Page Page 3 of 3 Chief Executive, Forsheda Joined the Board in October 1998. Previously Chief Executive, Bundy Automotive. International operating and management experience gained in global companies whilst based in the UK, France and Germany. Age 49 [GRAPHIC] T Allan Welsh Chief Executive, Bundy Joined the Board in January 1999. Wide experience of managing automotive and other manufacturing businesses in international markets. Formerly a Director of T&N plc. Age 47 * Member, Organisation and Remuneration Committee + Member. Audit Committee (++) Member. Nominations Committee o Member, Chairman's Committee TI Group's strategy is to be an international engineering group concentrating on specialised engineering businesses, operating in selected niches on a global basis. Key businesses must be able to command positions of sustainable technological and market share leadership. They will have a high knowledge and service content and will be able to anticipate and meet customers' needs. SUMMARY OF RESULTS 1998 1997 - -------------------------------------------------------------------------------- (pound)million (pound) million Turnover 2,168.1 1,870.4 Turnover - subsidiary undertakings 2,099.3 1,704.4 Profit before taxation 226.7 220.6 Profit before taxation* 238.6 222.5 Net debt 512.7 37.9 TI shareholders' funds 601.0 392.6 - -------------------------------------------------------------------------------- % % Operating margin* 12.2 12.7 - -------------------------------------------------------------------------------- p p Earnings per Ordinary share 30.4 31.6 Earnings per Ordinary share* 34.3 32.0 Dividends per Ordinary share 17.2 15.9 - -------------------------------------------------------------------------------- * Before goodwill and exceptional items FIVE YEAR FINANCIAL HIGHLIGHTS TI Group is one of the world's leading specialised engineering companies and is quoted on the London Stock Exchange. The Group operates on a global basis and employs over 35,000 people at more than 400 manufacturing and customer sevice facilities in over 45 countries. TI Group's four world leading business groups are John Crane, Forsheda, Bundy and Dowty. [GRAPHIC] Total Sales (pound) million [GRAPHIC OMITTED] Earnings*/Dividends EPS pence DPS pence [GRAPHIC OMITTED] Profit Before Taxation* (pound) million [GRAPHIC OMITTED] Free Cash Flow (pound) million [GRAPHIC OMITTED] 1 TI Group STATEMENT BY THE CHAIRMAN [GRAPHIC] Sir Christopher Lewinton, Chairman "1998 was another successful year for TI Group. Our consistent strategy of creating world leading specialized engineering businesses has again resulted in record profits and good growth, coupled with strong cash generation, in a challenging economic environment. I am confident that 1999 will see continued growth and enhanced shareholder value." TI Group has enjoyed another record year in terms of sales and profits despite a softening in some markets. We have taken a number of strategic initiatives while maintaining our investment programme in our existing businesses. TI is well positioned to generate continued growth. Pre-tax profits (before goodwill and exceptional items) were (pound)238.6m, up from (pound)222.5m in 1997, reflecting organic profit growth of 10%. Before goodwill and exceptional items earnings per share were 34.3p (32.Op), an increase of 7% or, at constant exchange rates, a rise of 10%. The dividend has been increased by 8% from 17.9p to 1.2p and is covered 2.0 times by earnings, supported by strong cash flow. This good performance is a tribute to the successful execution of a consistent strategy, reflected in the quality of our portfolio of world leader businesses and the broad spread of global markets in which they operate. It illustrates the strength of an underlying TI Group culture based on strong management and close attention to the needs of our customers around the world. Such success is not new as a look at the recent overall business performance of TI Group clearly shows. Over the past five years earnings and dividends per share have grown at a compound rate of 13% and 9%, respectively. The return on investment in TI Group has increased from 10% to 14% and free cash flow, after deducting the cash cost of capital expenditure, has improved further, covering interest, tax and dividend payments 1.25 times. All of this gives me confidence that the company will continue to move forward successfully. Consistent strategy Our success is the direct consequence of a clear and consistent strategy which has contributed to the creation of four world leader businesses. These are all capable of both continuing organic growth and providing opportunities for bolt-on acquisitions which fit our established strategy. A key feature of TI Group's record of organic growth is our ability to outperform our underlying markets. In 1998 we again achieved this goal, as Bill Laule reports in his first chief Executive's Review, and we also took significant steps to enhance our commitment to growth with some (pound)750m of core bolt-on acquisitions all of which will contribute to earnings in their first full year. In each case the new companies acquired have brought in complementary products that expand significantly the markets we address and open up new avenues for growth. All the acquisitions have been consistent with our global strategy and will enable us to respond to the needs of our customers while we enhance the quality of our portfolio of businesses. Where we have identified businesses that do not fit in with this strategy we have made disposals to the value of (pound)225m. In July our involvement in the Messier-Dowty landing gear joint 2 TI Group venture came to a successful conclusion with the sale of our interest to our partner Snecma on attractive terms, realising substantial value for TI shareholders. We decided to sell because, as a consequence of French national policy, we could not secure 100% ownership. Without this it was unlikely that the returns being obtained, although improving, would meet TI Group's demanding requirements in the future. The trend towards consolidation in many of the industries whose customers we serve is continuing. It provides new growth opportunities for leading global suppliers like TI Group but it also places even greater demands on management at all levels to meet the often rapidly changing needs of customers. Management The process of strengthening TI Group's senior management has continued and the separation of the roles of chairman and Chief Executive is evolving very successfully. Bill Laule has made a major contribution to the effective running of the Company and to the achievement of good results along with ensuring the further development of a strong management team. The Chairman's Committee, comprising myself, Bill and Martin Angle, Group Finance Director, is working well in its task of maintaining the strategic direction of the Group. Our international management team has been strengthened considerably at all levels in the course of the year. I confidently expect that these initiatives will accelerate the already high levels of drive and leadership within the Company. Board changes Further steps were taken to strengthen the main Board during the year. David Lillycrop, TI Group's General Counsel and Group Secretary, was appointed a Director of the Company on 24th June. This appointment reflects the increasingly important role which the General Counsel plays in a global business like TI. John Langston, formerly Chief Executive of Bundy Automotive, was appointed Chief Executive of Forsheda in October and joined the Group's main Board at that time. His task will be to accelerate the globalisation of Forsheda, which towards the end of 1997 became the Group's fourth leg. Allan Welsh joined TI Group as Chief Executive of Bundy in December and was appointed a Director of the Company on 1st January 1999. Allan was a main board director of T&N plc and has wide international experience of managing both automotive and other manufacturing businesses. Towards the end of the year three Directors stepped down from the Board. Tony Edwards, formerly chairman of TI Group's aerospace interests, moved to the Ministry of Defence as Head of Defence Export Services. TI Group was pleased to be able to serve British interests by releasing him for this important role. Bob Fisher and John Potter both resigned from the Board; they will continue to have a close association with the Company and we wish them well as they retire to their homes in the united States. I would like to thank them all for their long and distinguished service and their important contribution to the development of TI Group. Sir Nigel Broomfield joined the Board as a non-executive Director on 18th February. As reported last year, Sir Nigel was until 1997 the British Ambassador to the Federal Republic of Germany and previously to the German Democratic Republic. He brings extensive experience of international affairs which is already proving valuable to the Group. Outlook 1998 was a successful year for TI Group. Despite a softening in some of our markets, the global spread and balance of our activities, which is a key strength of the Group, demonstrated its great value and allowed us to report record profits and organic growth in a challenging economic environment. As well as producing organic growth we took important steps to increase our exposure to new but related markets with a series of bolt-on acquisitions that will enable us to offer even better service to our global customers. Management was strengthened throughout the Group and this will provide accelerated drive and leadership going forward. TI Group will increasingly benefit from the investment programmes undertaken in 1998 and from the integration of our acquisitions. Coupled with the strength of our worldwide activities, in particular our strong position in the robust economies of the us and Europe, these benefits will lead to continued growth in our businesses. We are particularly pleased by the decision of KKR to invest in TI Group and, with Henry Kravis agreeing to join the main Board as a non-executive Director, we believe that this is the start of a relationship that will bring considerable benefits to the Group. With order books ahead of last year and the first two months' trading on plan, and although 1999, much like 1998, will be a demanding year, we are confident that TI Group's successful strategy will continue to meet the needs of its customers and generate improved returns to its shareholders. /s/ Christopher Lewinton Sir Christopher Lewinton Chairman 5th March 1999 3 TI Group CHIEF EXECUTIVE'S REVIEW [GRAPHIC] William J Laule, Chief Executive "We are pleased to present another set of record TI Group results. Healthy growth from our four world leader businesses, along with the successful integration of strategic bolt-on acquisitions, has strengthened the Group's market leading positions. These achievements make me confident that the Group will continue its strong record of growth." I am pleased to report that in 1998 - my first year as Chief Executive - TI Group put in another strong year. Our four world leader businesses, John Crane, Forsheda, Bundy and Dowty, all performed well despite some adverse developments in the world economy. These results reflect the strength of our global spread and balance and continued improvements in cost control and operating efficiency, driven by our initiatives in lean manufacturing. During 1998, TI successfully completed (pound)750m of significant bolt-on acquisitions, all, as the Chairman writes in his Statement, consistent with our well established and focused global strategy. These acquisitions will widen our "footprint" and further strengthen our leading position as a full service global supplier, able to respond to the needs of our customers and to the factors that drive their businesses. All the acquired businesses have performed in line with or beyond our expectations. Our senior management team, some of which is pictured on page 6 of this Annual Report, has performed very successfully. This team was significantly strengthened during the year, enhancing our ability to integrate the acquisitions we have made. We were particularly pleased to be able to fill a number of these senior posts through internal promotion. The largest of our acquisitions, EIS Group, bought for (pound)334m in July, is going well and created significant opportunities for both John Crane and Dowty. The integration of the fluid technologies businesses of EIS is progressing as planned and has opened up new growth markets for John Crane, while the aerospace side of EIS has brought Dowty the aerostructure business of Hamble Group and defence-related speciality products. At the time of acquisition we stated our intention to dispose of non core EIS businesses and the sale programme is proceeding. The strength of our acquisition strategy was also clearly illustrated by the integration into Bundy of S&H, a privately owned US automotive supplier bought for $350m in May. This has created important new markets for Bundy in automotive air conditioning and power steering fluid carrying applications. Both are forecast to grow faster than underlying car markets and will bring significant globalisation opportunities outside the US. Benefits from S&H have come through quickly with important new contract wins in Europe. These, and other acquisitions made during the year, are described in greater detail in the Operating Review which begins on page 6. Business performance Underlying business performance was good. Adjusting for exchange rate movements and portfolio changes, sales and profit on an organic basis grew by 9% and 10% respectively as underlying margins remained strong. In addition to the (pound)75Om spent on bolt-on acquisitions revenue and capital investment to support growth initiatives in all our business groups ran at high levels again last year. Total investment rose from (pound)106m to (pound)136m 4 TI Group including a rise in capital investment from (pound)72m to (pound)93m. Cash flow from operations was once again strong at (pound)292.8m (1997 (pound)241.1m). John Crane, a world leader in the supply of sealing solutions, once again outperformed its markets and generated organic growth in sales and profits despite mixed trading conditions. It is responding well to the leadership of Roger Fix, Chief Executive, John Crane Mechanical seals, and John Cousins, Chief Executive, John Crane Marine. Mechanical Seals continued to capture share in flat to softening markets. In addition to the fluid technology businesses of EIS, management integrated two other significant acquisitions during the year. Safematic made John Crane a global leader in mechanical seals for the pulp and paper industry while the purchase of EG&G's Sealol business introduced strong brands in specialised high temperature applications. Marine took full advantage of a firm commercial shipbuilding market and with the acquisition of tips united established itself as one of the world leaders in the supply of integrated marine propulsion systems, an area where demand is likely to exceed the underlying shipbuilding trend. With firm order books John Crane should continue to outperform its markets and generate strong growth. Forsheda, which serves the automotive and industrial markets and has a developing aerospace segment, responded well to progressively more challenging markets in 1998 and showed growth overall. John Langston was promoted to Chief Executive and will provide strong leadership going forward. Automotive markets remained strong in North America and Europe but the turmoil in Asia Pacific and Latin America affected the market for construction and agricultural machinery. Demand for plastic construction pipes in Western Europe remained subdued. Last year Forsheda made good headway with plans to globalise its product range and manufacturing technology. Many key products, including Isolast(TM) "O" rings, axle shaft seals and automotive radiator gaskets, were successfully transferred from Europe to North America. With this momentum Forsheda, despite demanding trading conditions, is well placed for continued growth. Bundy, the leading supplier of fluid carrying systems for the world's automotive and refrigeration industries, last year demonstrated the value of the strong relationships it enjoys with global customers with another year of organic growth in sales and profits. Allan Welsh has joined Bundy as Chief Executive and his leadership will build on this success. Bundy Automotive achieved strong results and significantly outperformed its markets, owing to its presence on several major new vehicle launches in North America and Europe, including the highly successful Peugeot 206, Fiat's Seicento and GM's Pickup and Suburban utility vehicles. Bundy also won many significant customer awards in 1998, including "Supplier of the Year" from GM for the fourth year running, along with a series of valuable new contracts for future product platforms. Bundy Refrigeration enjoyed a good year in Europe, North America was stable but Latin American markets were lower. Strengthened by the benefits of integrating the acquisition of S&H and by its key positions on new launches and future product platforms, the outlook for Bundy is for continued growth. Dowty, with a position on all the major aerospace programmes, saw sales and profitability rise strongly in 1998 as the civil aerospace cycle continued upwards, military markets remained robust and sales of spares were buoyant. Turbine Engine Components businesses, which tend to lead the aerospace cycle, grew overall and reached a peak in the fourth quarter. Hydraulics and Actuation activities continued to perform well. In July Geoff Smith was promoted to the role of Chief Executive and has played a key role in integrating the aerospace and defence businesses of EIS. This is going well and will result in improved margins in the acquired businesses. Order books remain strong even though a gradual softening in aerospace markets is expected. Quality and performance In 1998 I began to increase our focus on the customer, supported by the widespread adoption throughout the Group of lean manufacturing techniques. Our successful initiatives in these areas helped us to win outside recognition as the number of awards for quality and performance received across TI Group more than doubled in 1998. Our continued commitment to the environment brought 14 ISO 14001 major site awards and we received over 80 quality awards from key customers worldwide, an achievement about which I am particularly pleased. Outlook We go forward with four world leader businesses each strongly positioned for growth in its chosen markets. The strong management team that has been established is committed to reductions in costs and to improved efficiency in all our processes in order to drive the Company forward in what may be a less buoyant world economy. Together with the key strategic investments that are under way and the integration of our bolt-on acquisitions, this will result in continued growth across the Group and another year of progress. /s/ William J Laule William J Laule Chief Executive 5th March 1999 5 TI Group OPERATING REVIEW [PHOTO] 1 William J Laule Chief Executive, TI Group 2 Martin D Angle Group Finance Director 3 Roger L Fix CEO, JOHN CRANE MECHANICAL SEALS 4 John F Cousins CEO, JOHN CRANE MARINE 5 John Langston CEO, FORSHEDA 6 T Allan Welsh CEO, BUNDY 7 Geoff F Smith CEO, DOWTY 8 David P Lillycrop Director & General Counsel 9 James L Roe Director Strategic Development [GRAPHIC] 6 TI Group TI GROUP STRUCTURE - -------------------------------------------------------------------------------- John Crane[LOGO] world leader in engineered sealing systems - -------------------------------------------------------------------------------- Mechanical Seals - -------------------------------------------------------------------------------- Marine - -------------------------------------------------------------------------------- John Crane is a world leader in the design, manufacture and distribution of engineered sealing systems. Through its divisions, John Crane provides a wide range of sealing solutions which satisfies customers' needs for knowledge and service in the process, marine and general industrial markets of the world. - -------------------------------------------------------------------------------- FORSHEDA[LOGO] world leader in engineered elastomer seals - -------------------------------------------------------------------------------- Engineered Seals - -------------------------------------------------------------------------------- Pipe Seals - -------------------------------------------------------------------------------- Speciality Products - -------------------------------------------------------------------------------- Forsheda is a world leader in engineered elastomer seals for the industrial, automotive and aerospace industries. It has a world-class capability in design, materials and process engineering and focuses on products and applications with exacting environmental and service demands. - -------------------------------------------------------------------------------- BUNDY[LOGO] world leader in fluid carrying systems - -------------------------------------------------------------------------------- Automotive - -------------------------------------------------------------------------------- Refrigeration - -------------------------------------------------------------------------------- Bundy is a world leader in specialised small diameter fluid carrying systems for the automotive and refrigeration industries, Through its unrivalled capability in design, development and manufacturing, Bundy supplies systems to satisfy the global needs of its customers in both the automotive and refrigeration markets. - -------------------------------------------------------------------------------- DOWTY[LOGO] world leader in aerospace systems - -------------------------------------------------------------------------------- Dowty Aerospace - -------------------------------------------------------------------------------- Hamble Group - -------------------------------------------------------------------------------- Defence Systems and Special Products - -------------------------------------------------------------------------------- Dowty, through its Dowty Aerospace business units, is one of the world's leaders in hydraulic and actuation systems, turbine engine components and propellers. Through Hamble it is a leading supplier of aircraft structures and Dowty also provides a niche range of specialist aerospace and defence products and services. - -------------------------------------------------------------------------------- Distribution of sales by geographic origin - -------------------------------------------------------------------------------- [GRAPHIC] United Kingdom (20%) Continental Europe (27%) North America (45%) Rest of World (8%) - -------------------------------------------------------------------------------- Distribution of sales by business segment - -------------------------------------------------------------------------------- [GRAPHIC] John Crane (28%) Forsheda (12%) Bundy (38%) Dowty (22%) 7 TI Group world leader in engineered sealing systems JOHN CRANE OPERATING REVIEW [GRAPHIC] - -------------------------------------------------------------------------------- ------------------------------------------------ (pound)million 1998 1997 ------------------------------------------------ Turnover 585.6 411.1 ------------------------------------------------ Profit Before Interest 76.0 65.4 ------------------------------------------------ Net Assets 231.9 111.5 ------------------------------------------------ o Unrivaled global service capacity o 9,000 employees at over 250 locations in 46 countries Mechanical Seals Designs, manufactures and distributes a comprehensive range of mechanical seals and sealing systems for the process industries of the world. o Strong brands o Mechanical seals: John Crane, Safematic, Lemco, Flexibox and Sealol o Couplings; Metastream, Fluidrive, Sime o Vacuum & Filtration: Plenty, Stokes, Hick Hargreaves, Hibon, Airpel, Oil Plus Marine Provides a total on-board sealing service for the commercial and naval fleets of the world. o World leadership in marine propulsion systems o Hull, propeller shaft and on-board sealing systems o Lips propellers, shafts, waterjets, thrusters and control systems o Niche leadership in precision cable handling systems - -------------------------------------------------------------------------------- JOHN CRANE[LOGO] ----------------------------------------- Type 2800MB Seal for Process Industry Pumps The first seal to combine John Crane spiral groove technology with Sealol(R) metal bellows technology ----------------------------------------- 8 TI Group John Crane is a world leader in engineered seals and sealing systems with a comprehensive range of products that meet demanding technical requirements in the process, marine and general industrial markets. It operates a support service infrastructure, backed by advanced information technology, that offers an unparalleled level of knowledge and service to its customers. Last year John Crane continued to outperform in the face of mixed markets as process industry customers adjusted to changed world economic conditions but marine markets remained firm. In 1998 five acquisitions were integrated into John Crane. Sealol, Safematic and the couplings, vacuum and filtration businesses of EIS, acquired by TI Group, have provided significant new opportunities for John Crane seals. The Sealol marine product line strengthened John Crane's position with the US Navy and the acquisition of Lips by TI Group made John Crane one of the leading independent providers in the growing market for fully integrated propulsion systems. - -------------------------------------------------------------------------------- John Crane products applied in a typical process plant [GRAPHIC] John Crane Cartridge Split Seal Metastream(R) Drive Coupling Safematic(R) Lubrication & Control System Lemco Reservoir John Crane Non-Contacting Seal Sealol(R) Metal Bellows Seal Flexibox(R) Bearing Isolator Seal John Crane Universal Cartridge(TM) Seal John Crane Gas Seal - -------------------------------------------------------------------------------- John Crane, underlining its position as a world leader in the supply of sealing solutions for process, marine and general industrial customers, had another successful year despite mixed trading in some of its markets. Organic sales grew by 5% and profits by 3%, slightly less than sales because of weaker process markets and adverse economic conditions in Asia Pacific and Latin America. There was also further significant investment in information technology and John Crane's sales and service infrastructure. During the year five acquisitions by TI Group began to be integrated into John Crane. In each case the acquisitions have enhanced opportunities for organic growth by extending John Crane's "footprint", introducing complementary products and opening up new markets for future expansion. The acquisitions respond to the demand for higher levels of worldwide service and support from global customers as they consolidate and to their requirement for greater systems content. These are key market drivers, along with increasingly stringent environmental regulation in the process, industrial and marine industries, that offer significant value added opportunities and play to John Crane's technological and service strengths. Mechanical Seals John Crane Mechanical Seals continued its strong record of progress in 1998. It achieved organic increases in sales and profits last year in the face of mixed markets among process industry customers who make up a significant element in its customer base. During the year Mechanical Seals began to integrate three significant acquisitions: Safematic, Sealol and the fluid technology businesses of EIS. All increased the range of products and services that can be offered to John Crane's customer base and provided significant new growth opportunities. John Crane is the world leader in mechanical seals, critical components in the safe and efficient operation of rotating equipment, and is more than twice the size of its nearest competitor. About 40% of sales are made to OEM manufacturers, principally of pumps, mixers and compressors, and the remaining 60% - -------------------------------------------------------------------------------- [PHOTO] [PHOTO] - ---------------------------------- ---------------------------------- Flexibox(R) Coupling Safematic(R) Lubrication Systems - and Mechanical Seal Oil Flow Meters Star Petroleum Refinery Company, Australian Paper Maryvale Mill, Map Ta Phut, Thailand Victoria, Australia - ---------------------------------- ---------------------------------- - -------------------------------------------------------------------------------- 10 TI Group John Crane Operating Review continued - -------------------------------------------------------------------------------- [PHOTO] ------------------------------------------- Flexibox Metastream(R) Coupling for Turbine Nuovo Pignone, Florence, Italy ------------------------------------------- - -------------------------------------------------------------------------------- are bought by End Users with significant replacement demand from the oil and gas and petrochemical industry. Activity among pump manufacturers fell markedly during 1998 but demand for compressor gas seals was robust, particularly in the first half of the year. Excess capacity and weak prices in chemicals and pulp and paper, a slump in oil prices and economic turmoil in Asia Pacific and Latin America have held back investment in new capacity, impacting John Crane's OEM business. However, John Crane continues to outperform its underlying markets and gain market share by a combination of organic growth and the extension of its "footprint" by bolt-on acquisitions into new growth areas. The strategy is driven by the needs of John Crane's process industry customers. As they become increasingly global, they expect their suppliers to help them standardise and reduce the cost of their processes, to take on responsibility for non core activities such as maintenance and to carry all this out to the highest standards, everywhere in the world. Major customers also want to deal with fewer suppliers which presents John Crane with the opportunity to improve its position still further. Alliances with OEM and End User customers continue to increase as their benefits become apparent and now make up 8% of John Crane's business covering the petroleum, chemical and pulp and paper industries. With the help of on-site teams of John Crane engineers these alliances reduce downtime and improve efficiency for customers through improved seal performance in the form of longer Mean Time Between Failure and lowered maintenance costs. At the same time they give John Crane increased market share and greater competitive advantage. Investment in ISIS, our proprietary integrated sealing information system designed to help the customer choose the right product, continued in 1998. This state of the art software, a powerful tool in the hands of John Crane salesmen and part of the continuous improvement offered to customers, has been supplemented by the installation of an integrated global engineering system. Introduced initially in the US but due for a global roll-out in 1999, the system will result in a major improvement in response times to customers, a reduction in manufacturing cycle times and greater overall efficiency. Acquisitions in 1998 were a strategic highlight. The purchase of Safematic created a global leader in seals for the pulp and paper market. It doubled John Crane's market share to 20%, opened up significant globalisation opportunities in North America, Asia Pacific and Latin 11 TI Group - -------------------------------------------------------------------------------- [PHOTO] - ------------------------------------------ Azimuthing Thruster for a Semi-Submersible Drilling Rig Lips, Drunen, Netherlands - ------------------------------------------ - -------------------------------------------------------------------------------- America and also brought in a strong portfolio of lubrication products. Sealol introduced strong brand names in high temperature metal bellows seals as well as advanced split seal technology. Integration of the fluid technologies businesses of EIS provided a range of complementary mechanical seals, together with a leading mechanical coupling product that can now be offered to OEM pump customers. In addition EIS' vacuum pump and filtration products gave an entry point into new growth markets alongside mechanical seals. In total, new complementary products introduced into the business have increased the size of the total market available to John Crane to around (pound)4.5 bn. Through its established customer service network the opportunities for growth can be quickly realised. Despite the likelihood of challenging conditions in some areas during the current year, John Crane Mechanical Seals has a clear strategy to meet all its customers' needs and is well placed to continue to outperform its underlying markets. Marine John Crane Marine took significant steps during the year to establish itself as one of the world leaders in the supply of integrated marine propulsion systems with the staged acquisition of Lips United, completed in June. Further momentum was provided by the purchase of Sealol and the marine couplings business of EIS together with an increase in the shareholding in Japan Marine Technologies to over 90%. Commercial shipbuilding activity remained robust in 1998. Rising world trade, environmental pressures and the emergence of a strong leisure market have sustained demand for new ships. Against this background John Crane Marine achieved organic growth in sales and profits. The economic difficulties in Asia Pacific created an opportunity for John Crane Marine as shipowners took advantage of the weaker currencies to order new and replacement vessels. Outside Asia Pacific various other important contracts were won including systems for 7 new cruise ships due for construction in Europe. Defence markets, although in gradual decline as a result of the scaling down of defence budgets, continue to offer opportunities in new construction, retrofits and the upgrading of existing fleets. Increased product complexity and advances in ship design are driving shipyards to demand fully integrated propulsion systems rather than individual components. John Crane Marine was already a world leader in the supply of marine seals. It has now positioned itself to exploit new opportunities for growth as a 12 TI Group John Crane Operating Review continued leading force in the much larger market for integrated propulsion systems. Lips is a leading maker of propellers, shafts, thrusters, waterjets and electronic controls. Its purchase has transformed John Crane Marine into a one-stop point of supply and design for all marine propulsion requirements and expands the market it addresses from (pound)200m to (pound)1 bn. The purchase of Sealol brought new technologies in propeller shaft and torpedo sealing systems. It also gave access to the US submarine fleet and established John Crane Marine as the leading supplier of submarine seals in addition to its existing role as the major supplier to the US Navy's surface fleet. The increase in the shareholding in Japan Marine Technologies from just over 50% to more than 90% strengthens John Crane Marine's foothold in the key Asia Pacific new construction market and will allow some rationalisation of manufacturing facilities. The integration of Dowty Precision Handling into John Crane Marine has been a success. An expanding global telecommunications market has increased demand for underwater cable laying and John Crane Marine succeeded in winning a (pound)2m contract from Japan for a cable handling system for the world's latest purpose built cable ship. John Crane Marine should continue to perform well in 1999. New shipbuilding orders remain firm and the integration of the acquisitions made in 1998 will provide the opportunity for efficiency improvements and new sources of growth. [PHOTO] ----------------------------------------- John Cousins, Chief Executive, John Crane Marine, with Roger Fix, Chief Executive, John Crane Mechanical Seals ----------------------------------------- - -------------------------------------------------------------------------------- John Crane Marine Products [GRAPHIC] Cable Handling Systems Rudderstock Seals Propellers Stabiliser Seals Forward Sternshaft Seals, Sternshaft & Aft Sternshaft Seals Bulkhead Seals, Thrust & Lineshaft Bearings Control Systems Thruster Seals - -------------------------------------------------------------------------------- world leader in engineered elastomer seals FORSHEDA OPERATING REVIEW [GRAPHIC] - -------------------------------------------------------------------------------- ------------------------------------------------ (pound)million 1998 1997 ------------------------------------------------ Turnover 248.5 243.8 ------------------------------------------------ Profit Before Interest 33.8 33.6 ------------------------------------------------ Net Assets 83.6 82.0 ------------------------------------------------ o Some 40 locations in 16 countries o 23 manufacturing sites o Serving customers in global markets o Over 5,000 employees Engineered Seals Leading supplier of polymer products to automotive, aerospace and industrial markets, focused on exacting environmental and service applications. o Diaphragms o Gaskets o Hydraulic Seals o O-Rings o Rotary Shaft Seals Pipe Seals A world leader in sealing systems for the water and construction industries where leak-free long-life applications demand the highest quality. o Concrete Pipe Seals o Connector Seals o Manhole Seals o Plastic Pipe Seals Speciality Products A range of niche polymer engineering activities serving specialised applications. o Airbag Cushions o Airframe Seals o Industrial Rubber Components o Military Vehicle Track Pads o Protective Masks o Rail Gangways o Resonance Dampers - -------------------------------------------------------------------------------- FORSHEDA[LOGO] ----------------------------------- Manifold Gasket and PTFE Shaft Seal for automotive industry ----------------------------------- 14 TI Group At the beginning of 1998 Forsheda was formed to bring together the polymer engineering interests of TI Group and to establish its fourth world leader business alongside John Crane, Bundy and Dowty. Forsheda is a market and technical leader in engineered elastomer seals, serving the industrial, automotive, aerospace, water and construction markets, and holds strong positions in niche speciality polymer applications such as rail gangways. Forsheda faced softening markets in the second half of 1998 but succeeded in showing progress overall. Globalisation of the Forsheda product range from its sound base in Western Europe to North America and the rest of the world is a strategic priority. In 1998 a strong start was made to this process of globalisation which will accelerate in the current year under strengthened senior management. - -------------------------------------------------------------------------------- Forsheda Products for the Aerospace and Automotive Industries [GRAPHIC] Aerospace sealing solutions including: o flight controls o engines & fuel systems o wheel & brake systems o landing gear o hydraulics systems o wings & fuselage Sealing solutions for key vehicle systems including: o engines o radiators o air conditioning o fuel o braking o axles o emission control o airbags - -------------------------------------------------------------------------------- - -------------------------------------- [PHOTO] - -------------------------------------- Prototype Diesel Engine Cylinder Rings Skega Seals, Ersmark, Sweden - -------------------------------------- - -------------------------------------------------------------------------------- Forsheda, a world leader in engineered elastomer seals, has had a successful first year as a separate business within TI Group and made good progress with plans to globalise its activities. Its strategy for growth is to build on a prime position in Western Europe, firstly through expansion in North America and then to expand further into other regions of the world. Key elements of this strategy are the globalisation of Forsheda's product range combined with the transfer of manufacturing technology. Late in 1998 John Langston, formerly Chief Executive of Bundy Automotive, took over as Chief Executive of Forsheda. His task will be to accelerate the implementation of its globalisation strategy. He is supported by Fred DeCusatis, Finance Director, who joined Forsheda from Messier-Dowty. Forsheda supplies engineered seals, including "O" rings, shaft seals, diaphragms and gaskets, to a wide range of customers in the industrial, automotive and aerospace markets. Forsheda pipe seals are at the heart of sealing systems for concrete and plastic pipes used mainly by the water and construction industries where plastic continues to replace other materials. Both seal ranges have a high knowledge and service content and are designed to meet exacting environmental demands. Forsheda's speciality products span a range of niche polymer applications including rail gangways, automotive airbags and resonance dampers. Strong automotive markets and firm order books led to good growth in sales in the first half of 1998 but overall trading conditions became increasingly mixed as the year went on. For 1998 as a whole organic sales growth was 4% while underlying profits rose by 3% as revenue investment was made in strengthening the global sales infrastructure. Automotive markets in North America, France and Germany remained buoyant into the second half but elsewhere the wider impact of Asia's economic problems took its toll on our industrial customers' exports to the region. Sales to Forsheda's customers in the petroleum processing industry have also been affected by the fall in oil prices while demand from UK industrial customers, including the automotive industry, has been restrained. Construction demand for concrete pipe seals in North America returned to more normal levels in the second half but infrastructure spending in Europe remained subdued. Aerospace has been flat as a decline in military demand offset gains in civil markets where growth has been good following the upturn in the civil aerospace cycle. About 75% of Forsheda's sales are currently in Europe, with a further 20% in North America. Globalisation, with the 16 TI Group Forsheda Operating Review continued object of securing a broader spread and balance of markets and customers, is a strategic priority. It has begun strongly, building on Forsheda's established reputation for technological excellence and quality. Last year there were many notable examples of product and technology transfers across regions to support global customers. Isolast(TM), a patented Forsheda elastomer developed in the UK that offers almost universal chemical resistance and operates across an extremely wide range of temperatures, began production in the US at Forsheda Palmer-Chenard in Somersworth, New Hampshire. Vedabras, the largest Brazilian distributor of industrial sealing components, placed its first order for Isolast(TM) "O" rings with Forsheda Brazil. Forsheda's radiator gasket products, designed in Europe, were introduced into the North American market in 1997 and have since continued to gain share, supported by an expansion in local manufacturing facilities in the US. Patented axle shaft seals, whose technology was developed in Sweden and transferred during the year to the US, have made significant gains especially in the popular four wheel drive vehicle segment. PDR rotary shaft seals, designed and developed in the UK by Dowty Rotary Seals, are being supplied by Forsheda Polypac in Italy to VM Motori, an Italian diesel engine maker owned by Detroit Diesel Group. In another example of successful globalisation, Dowty O-Rings, from its plant in Malta, is supplying Bosch and Magnetti Marelli in Sao Paolo with fuel injector "O" rings until a new manufacturing facility for Forsheda Brazil, intended to support its global customers, comes on stream during 1999. Powerlock(R) is a patented plastic pipe seal, developed by Forsheda in Sweden for the European market, that will now be manufactured and sold in North America. Forsheda Pipe Seals in South Carolina has already won an order to supply a specially adapted Powerlock(R) pipe seal to Uponor, one of the biggest PVC pipe manufacturers in North America. Forsheda's technical strengths are well known. To optimise this reputation the drive to improve manufacturing techniques, - -------------------------------------------------------------------------------- [PHOTO] ----------------------------------------- Axle Seal Production for Dana Corporation Forsheda, Vandalia, Illinois, USA ----------------------------------------- - -------------------------------------------------------------------------------- 17 TI Group [PHOTO] [PHOTO] - ----------------------------- Woodville Rail Gangway Airport Express, Oslo, Norway - ----------------------------- - -------------------------------------------------------------------------------- customer service and quality has accelerated during the year. Lean manufacturing began to be introduced throughout Forsheda in 1998. In order to co-ordinate these efforts implementation facilitators have been appointed in all the manufacturing units with specific responsibility for promoting lean manufacturing techniques. One significant example of the successful application of lean manufacturing principles was an initiative by Woodville Polymer Engineering to begin Direct Line Feed deliveries of Aileron and Trailing Edge Panel Seals to British Aerospace, Samlesbury, for its A320 Airbus programme. Well established in the automotive sector, DLF is still a rarity in aerospace. Lean manufacturing at WPE has led to a cut in inventory from an average of 20 weeks to 4 weeks, a reduction in lead times from 29 weeks to 48 hours and the elimination of delivery shortfalls stemming from inaccurate planning systems. DLF will be expanded to cover the supply of other high added value components to British Aerospace. Improvements in quality were reflected in an increase in the number of fully accredited manufacturing and sales facilities in Forsheda, under either ISO9000, QS - 9000 or Ford Q1 standards, to 33 out of a possible 37. Success in raising quality and manufacturing standards at Forsheda has been recognised in a number of valuable performance awards from leading customers. Forsheda North America achieved the highest possible performance rating for a supplier by becoming a Partner with John Deere, the world's top manufacturer of agricultural equipment. In addition Lucas Varity Heavy Braking Systems selected Dowty Engineered Seals as the "Supplier of the Year" for its high level of achievement on quality, delivery, 18 TI Group Forsheda Operating Review continued cost evaluation and overall commitment to the customer. Improved performance in turn generated some significant contract wins in 1998. Woodville Polymer Engineering is to supply GEC Metro Cammel with inter vehicle gangways for its new Juniper train which is aimed at the post-privatisation market for new rolling stock. The contract, requiring the delivery of more than 200 units a year over five years, is worth around (pound)7.5m. Adtranz Kalmar also awarded Woodville Polymer Engineering the contract to supply 48 gangway units for the Norwegian Express Train, a high specification tilting train, and two other contracts to support the rail service through the tunnel and bridge that link Sweden with Denmark. Dowty 0-Rings in North America won a $1m order to supply Siemens Automotive with fuel rail "O" rings made from a specialised Dowty fluorocarbon elastomer. Forsheda Engineered Seals - Vandalia, already a leading supplier of radiator gaskets to Ford, won additional contracts on the company's Taurus, Escort, Lincoln and Contour models. Forsheda Palmer-Chenard won its first order for high integrity diaphragms from Denso of Japan and Woodville Polymer Engineering secured orders for side impact airbags totalling more than (pound)6.2m and passenger bag orders in excess of (pound)3.3m. Trading conditions in some markets remain challenging but Forsheda is positioned in several exciting growth markets. A strengthened senior ---------------------------------------- [PHOTO] ---------------------------------------- John Langston, Chief Executive, Forsheda ---------------------------------------- management team will capitalise on these strengths and, coupled with the drive to globalisation throughout its businesses, the exposure to growth markets provides Forsheda with considerable potential for the future. - -------------------------------------------------------------------------------- [PHOTO] ------------------------------------- Pipe Seal for Flood Control Reservoir Cologne, Germany ------------------------------------- - -------------------------------------------------------------------------------- 19 TI Group world leader in fluid carrying systems BUNDY OPERATING REVIEW [GRAPHIC] - -------------------------------------------------------------------------------- - ------------------------------------------------ (pound)million 1998 1997 - ------------------------------------------------ Turnover 794.0 740.0 - ------------------------------------------------ Profit Before Interest 90.9 78.2 - ------------------------------------------------ Net Assets 279.1 247.4 - ------------------------------------------------ o Over 100 facilities in 27 countries on 5 continents o Over 50 satellite facilities offering "just-in-time" delivery to customers o 15,000 employees providing worldwide customer service Automotive Leading global supplier of small diameter fluid carrying systems for brake, fuel and powertrain applications. The combination of Bundy's technologies in rigid tube, flexible hoses and quick connectors offers complete solutions for fluid carrying systems to the world's automotive industry. o Fully integrated systems for brake, fuel and powertrain Multi-layer low permeation fuel hose o Quick Connect technology o VARI-FORM - innovative hydro-forming process Refrigeration World leader in the design, manufacture and supply of a comprehensive range of cooling systems, including condensers, evaporators, freezer shelves and heat exchangers, thereby offering a global capability to supply the world's refrigeration manufacturers. o Heat exchange systems including all types of condensers, evaporators and freezer shelves o Roll-Bond(TM) and new Waveline(TM) technology o Compressor components o Door warmers BUNDY[LOGO] ------------------------------- Fluid Carrying System for automotive air conditioning ------------------------------- 20 TI Group Bundy, the leading global supplier of specialised small diameter fluid carrying systems for the automotive and refrigeration industries, had another successful year. It generated strong organic growth despite short term difficulties in some regions and continued to outperform its markets. Strong relationships with key global customers are an important element in Bundy's success. These relationships are founded on a firm commitment to anticipating and meeting market needs through customer focus and continued improvements in manufacturing efficiency. This approach has generated a large number of quality and service awards from customers in 1998 along with valuable new contracts for future product platforms. Opportunities for future organic growth were significantly enhanced last year by the purchase of S&H, a US based automotive supplier, which opened up important new markets for Bundy in air conditioning and power steering around the world. - -------------------------------------------------------------------------------- Bundy Products for the Automotive Industry [GRAPHIC] - -------------------------------------------------------------------------------- In 1998 Bundy reinforced its role as the leading supplier of fluid carrying systems for the world's automotive and refrigeration industries with another successful year. Overall Bundy achieved strong organic sales growth of 10% matched by a 10% rise in underlying profits. The strength of its relationships with a wide spread of global customers, across its markets, more than offset short term difficulties in some regional areas. Key drivers in both the automotive and refrigeration industries continue to be the globalisation and consolidation of major OEMs and the outsourcing of non core activities as part of their search for lower costs. Bundy has anticipated and responded to these developments by seeking to add value to its products and by meeting customers' needs in all areas. It has achieved this by enhanced customer focus in its organisation, productivity gains through the introduction of lean manufacturing principles and by continuous improvement in the areas of quality, delivery and applications engineering. The success of this overall approach is demonstrated by the abundance of customer accolades and awards received by Bundy during the year. General Motors named Bundy "Supplier of the Year" for the fourth year running while Chrysler awarded gold Pentastars to seven Bundy plants and in November also named VARI-FORM as one of only nine Quality Role Models from its supplier base of eleven thousand. Meanwhile during 1998 Bundy Refrigeration was named as "Best Supplier" by Electrolux and given a "Worldwide Excellence Certificate" by Multibras, a Whirlpool company. Alongside Bundy's close attention to its customers, substantial efforts have been made to improve efficiencies further by the widespread adoption of lean manufacturing techniques. Average inventory levels in Bundy North America have been reduced by 25% in less than six months after the introduction of these techniques. Further examples of efficiency improvements can be found in individual manufacturing cells. In Bundy UK, the Jaguar Underfloor manufacturing cell cut work in progress by 50% and reduced floor - -------------------------------------------------------------------------------- [PHOTO] - ----------------------------------------------- Prototype Liquid Line - Air conditioning System Bundy, Walled Lake, Michigan, USA - ----------------------------------------------- 22 TI Group Bundy Operating Review continued - -------------------------------------------------------------------------------- [PHOTO] ------------------------------------------ Multi-Layer Fuel Line - A4 Global Platform Volkswagen, Puebla, Mexico ------------------------------------------ space utilisation by 30%, releasing valuable resources. In one cell at Bundy's Washington (UK) satellite plant, productivity has been increased by 60% and floor space cut by 20%. In this case enough floor area has been freed to accommodate additional business from Nissan at no extra cost in new space. Managing the environmental impact of its operations was also a strong theme throughout 1998, with 13 or over 10% of Bundy's facilities achieving ISO14001, the internationally recognised environmental management standard. Bundy Automotive, reporting record results, has been particularly successful. The North American automotive market was broadly flat, but Bundy benefited from its strong position with light trucks and recreational vehicles, which outperformed the car market. European markets were strong, despite weaker Italian demand following the withdrawal of government incentives. Latin American markets were down significantly, but weakness in the Asia Pacific region had no impact on overall results. Important management changes occurred during the year. John Langston, Chief Executive of Bundy Automotive, was promoted to the Board of TI Group and transferred from Bundy to Forsheda in December. Allan Welsh, formerly a main board director at T&N plc, joined Bundy as Chief Executive. Chris Kinsella joined as Bundy Automotive Finance Director. A highlight of the year was the acquisition of S&H Fabricating and Engineering, a privately owned supplier of automotive air conditioning systems. This strategic initiative has opened up significant new markets for Bundy in air conditioning and power steering fluid carrying applications. Both are closely related to Bundy's existing leading positions in brake and fuel lines and both have great potential for globalisation outside North America, offering significant new growth opportunities. For example, the penetration of air conditioning in Western European cars is expected to rise from 56% to 75% in the next five years, implying compound growth of more than 8% a year, far in excess of the expected rate of new car construction. As already described, a key driver of the world automotive industry continues to be cost saving and consolidation among OEMs, a trend well illustrated by the formation during the year of the pan Atlantic DaimlerChrysler grouping. These changes exert pressure on component suppliers to help customers to reduce their costs through improved design or new systems, wherever they operate in the world. Bundy, in line with its role as a truly global supplier, has responded to these challenges. The process, begun in 1997, of 23 TI Group - -------------------------------------------------------------------------------- [PHOTO] ----------------------------------- New High Pressure Quick Connector For high pressure automotive fluid application such as brake and power steering systems, Bundy, New Haven, Michigan, USA ----------------------------------- structuring Bundy's sales and applications engineers into global business units, dedicated to individual customers, has been backed up with further new investment. This has put Bundy in a powerful position to keep pace with changes among the OEMs with emphasis on both the winning and the fulfilling of contracts. Success in winning business through focused investment and by anticipating its customers' needs is demonstrated by Bundy's presence on a number of new vehicle launches and also by extensive future platform wins during the year. Significant new launches included the General Motors' Pickup and Suburban and the Ford Econoline in North America. In Europe the Peugeot 206 stood out in view of its enthusiastic reception in the marketplace and its significant volumes. New programmes, for example the Fiat Seicento and Ford Ranger, were also launched in Eastern Europe and Latin America respectively. Important new business wins included brake and fuel lines for the worldwide GM Corsa platform, set to be manufactured in nine countries, the Chrysler Dodge Ram in the North American market and the Renault Clio and Scenic in Latin America, among many others. Bundy also established itself as China's market leader in fuel and brake lines with a $23m lifetime contract to supply General Motors' new Buick Regal, due to be manufactured in Shanghai from 1999 onwards. Bundy has developed an engineering centre in Shanghai, at the heart of the Chinese automotive industry. The outlook for Bundy Automotive is promising. The forecast growth in ABS, vehicle stability systems and air conditioning will exceed that of the new vehicle build, allowing Bundy to continue to outperform its underlying markets. Emissions legislation will drive the use of ever more sophisticated fuel systems offering Bundy greater sales and added value potential. Bundy has a strong order book because of its success in winning future platforms, laying the foundations for positive performance in potentially flat markets. New investment continued in all operations with emphasis on developing economies. Bundy Refrigeration also enjoyed an excellent year in Europe where markets were strong and both sales and margins increased. North American markets were solid. Affected by the economic turmoil in Asia Pacific, Latin America had a volatile year and the market fell significantly. A major restructuring took place mid year, putting in place a number of measures to protect business performance in the short term, while retaining the ability to respond positively to the market in future. Overall Bundy Refrigeration sales were up, but 24 TI Group Bundy Operating Review continued profits were impacted by the downturn in Latin America. During the year Bundy took a number of initiatives to strengthen its position as the only truly global supplier of refrigeration systems. Here again globalisation and cost reduction in OEMs are driving the market. In part they are seeking to achieve this by outsourcing non core but important aspects of manufacture and forming partnerships with key suppliers. Bundy has invested much time and effort during the past year into building new, long term relationships with manufacturers. It has succeeded in forging three to five year partnership agreements with Electrolux, Whirlpool and Bosch Siemens. Bundy has also enhanced its reputation as a systems specialist by playing a greater part in the design of new refrigeration products at an early stage in the development process. One of the most significant contracts was the decision by Electrolux to outsource all its wire on tube condensers and door warmers to Bundy. Electrolux also became the first manufacturer to place an order for Bundy's unique patented Waveline(TM) condenser. Further significant contract wins have been made with Gram, the leading Danish manufacturer, and Whirlpool in India amongst others. The outlook for refrigeration in Europe and North America is encouraging. Latin America should show positive results following the prompt management action taken to stabilise volumes during 1998 [PHOTO] ----------------------------------- Allan Welsh, Chief Executive, Bundy ----------------------------------- while Bundy Refrigeration's limited exposure in Asia Pacific will protect it from the expected volatility in those markets during 1999. - -------------------------------------------------------------------------------- [PHOTO] ------------------------------------- Bundy Chest Freezer Evaporator System Lehel-Electrolux, Iaszbereny, Hungary ------------------------------------- 25 TI Group world leader in aerospace systems DOWTY OPERATING REVIEW [GRAPHIC] - -------------------------------------------------------------------------------- - ------------------------------------------------ (pound)million 1998 1997 - ------------------------------------------------ Turnover 451.2 275.1 - ------------------------------------------------ Profit Before Interest 59.3 42.0 - ------------------------------------------------ Net Assets 174.1 74.1 - ------------------------------------------------ o Over 6,000 employees at 55 facilities o Supporting 450 airlines and 150 military operators in 90 countries Dowty Aerospace Specialized aerospace systems for major civil and military aircraft programmes throughout the world. o World leader in - Hydraulics and actuation - Turbine engine components - Advanced propeller systems - Tubular systems o On all current Airbus and Boeing civil aircraft Hamble Group Design, tooling and manufacture of aircraft structures for the world's major aircraft manufacturers. o Aircraft structures o Advanced composites and metal bonded assemblies o Aircraft canopies and windscreens o Acrylics and elastomerics Defence Systems and Special Products Niche market businesses offering specialist aerospace, defence and other engineered products and services. o Helicopter landing aids o Suspension systems o Universal joints o Missile containers o Aircraft maintenance tooling DOWTY[LOGO] ---------------------------------- Power Drive Unit - Boeing 777 Dowty Aerospace, Wolverhampton, UK ---------------------------------- 26 TI Group Dowty is a world leader in the supply of specialised systems to the aerospace industry with equipment flying on more than 200 types of aircraft. Its broad portfolio includes leading positions in hydraulics and actuation, turbine engine components and advanced propeller systems. Dowty had an excellent year in a buoyant civil aerospace and robust military aircraft market thanks to its presence on all the major programmes. New civil aircraft build rates grew and spares demand also rose. A major expansion of Dowty took place during the year with the integration of the aerospace and defence businesses of EIS, acquired by TI Group. The purchase almost doubled Dowty's turnover base and opened up new, complementary markets in aerostructures and specialised defence products. Dowty goes forward with a strong order book, world leading technologies, an excellent reputation and a management team well equipped to capitalise on market changes. - -------------------------------------------------------------------------------- Dowty Products for the Aerospace Industry [GRAPHIC] - -------------------------------------------------------------------------------- Dowty enjoyed strong trading in 1998. On an organic basis sales grew by 14% and operating profit by 24% as civil aircraft build rates grew strongly while military markets remained robust. Full advantage has been taken of Dowty's presence on every major Boeing and Airbus programme and its strong position with the major engine manufacturers. Dowty is moving forward with a strong order book and an enviable reputation as a global supplier to the aerospace industry. It does so under the leadership of Geoff Smith, formerly Deputy Chief Executive, who was appointed Chief Executive in July. In November Tony Edwards, previously Chairman of TI Group's aerospace interests, was seconded to the UK Ministry of Defence, becoming Head of Defence Export Services. At the end of June TI Group completed the disposal of its 50% interest in the Messier-Dowty landing gear joint venture together with the related, wholly-owned repair and overhaul business to Snecma of France. Earlier in the year the Thermal Processing group of businesses was sold. A major highlight of the year was the start of the integration into Dowty of the aerospace and defence businesses of EIS, acquired by TI Group in July. The purchase almost doubled the turnover base of Dowty, bringing in complementary products and opening up entirely new markets, in line with TI Group's strategy for bolt-on acquisitions. For the initial period following the acquisition Dowty has been managed as three divisions. Dowty Aerospace has been joined by Hamble Group, a leading aerostructure manufacturer, and Aircraft and Precision Engineering, primarily a defence supplier, which comprise the former EIS businesses. Dowty, a world leader in hydraulics and actuation, turbine engine components, specialist aerostructures and advanced propeller systems, employs more than 6,000 people in 55 facilities in Europe and North America. It supplies 40 of the world's leading aircraft and engine manufacturers, supports some 450 airlines and 150 military operators in 90 countries around the world and has equipment flying on 200 current types of aircraft. In common with other global industries served by TI Group, aerospace is following - -------------------------------------------------------------------------------- - ----------------------------------------- Turbine Nozzle Components - Allied Signal D-TEC, Mountaintop. Pennsylvania, USA - ----------------------------------------- [PHOTO] - -------------------------------------------------------------------------------- 28 TI Group Dowty Operating Review continued - -------------------------------------------------------------------------------- [PHOTO] -------------------------------------- Lockheed Martin C-130J Hercules Propeller Dowty Aerospace Propellers, Gloucester, UK -------------------------------------- - -------------------------------------------------------------------------------- a path of business consolidation, shorter development cycles and, as a result, an increased focus on core activities. As in other industries this is presenting outsourcing opportunities for a smaller number of preferred suppliers who have positioned themselves to meet customers' needs in non core but critically important activities. Dowty is well placed to capitalise on these developments in the aerospace industry. It has significant competitive strengths linked to its world leadership position in niche markets, systems capability, a global spread of activities, an ability to manufacture to the highest standards and renowned skills in advanced technology solutions. Dowty had an excellent year. Its strategic position on successful programmes produced good volume gains which, coupled with a higher proportion of spares sales, boosted profitability. This was underpinned by an even greater focus on improved manufacturing techniques, efficiency gains and selective capital investment. The Dowty Aerospace Hydraulics and Actuation (H&A) businesses, located in the UK and US, supply hydraulic and mechanical primary flight control, secondary flight control and engine thrust reverser actuation systems, together with a range of niche speciality products. 1998 saw a further improvement in their financial performance reflecting a buoyant aerospace market and strong demand for spares from both military and civil customers. Dowty Aerospace Los Angeles had a particularly good year, benefiting from strong military aircraft sales and its significant presence on the highly popular and successful Boeing 737 family. All the H&A businesses made good progress in implementing a lean manufacturing culture. Cell manufacturing is widespread and there is a high degree of employee training and participation together with a commitment to the principles of continuous improvement. Dowty Aerospace Wolverhampton has established a particularly good reputation which has helped it to win several important contracts, including equipment for the new Airbus A340-500/600 and Boeing 767-400ER. A valuable position has also been secured on the Eurofighter (Typhoon) aircraft which has now entered its first phase of production. The Dowty Turbine Engine Components businesses (D-TEC) also performed well and enjoyed continued success in winning work that had previously been undertaken in-house by customers or by competitors. Headquartered in Pennsylvania, USA, D-TEC is a world leader in flash-welded and Tru-Form(R) rings for gas turbine aircraft engines and a leader in cold form rolled rings and precision machined components. 29 TI Group Its customers include every major engine manufacturer and D-TEC products are used on all leading engine programmes. Capital investment in these businesses has continued throughout 1998 including expansions to buildings at both NCI and Valley. During the year new orders were received from General Electric and Volvo Aerospace and they, together with AlliedSignal and Lockheed Martin, all conferred awards in recognition of the businesses' growing reputation for service and quality. A new grouping, Dowty Tubular Systems, has been formed with effect from 1st January 1999, to take responsibility for Titeflex Corporation, previously part of Bundy, and to manage it alongside Lewis & Saunders, formerly a D-TEC business. This combination will enable Dowry to leverage more effectively the individual strengths of each business unit and to offer a comprehensive rigid and flexible tubing solution to a wide range of customers. Dowty's propeller business has been restructured in order to reflect a reassessment by some manufacturers of the market for turboprop aircraft. Dowty, however, remains a world leader in propellers through its involvement on successful programmes including the Lockheed Martin C-130J Hercules military transport aircraft and the de Havilland Dash 80-400 regional aircraft. Last year it also became the first organisation to achieve UK Civil Aviation Authority JAR-21 approval for both design and production. - -------------------------------------------------------------------------------- - ------------------------------------ Assembling Boeing 737 Flight Spoiler Actuators Dowty Aerospace Los Angeles, California, USA - ------------------------------------ [PHOTO] - -------------------------------------------------------------------------------- At the time of the acquisition it was explained that several EIS businesses did not fit TI Group's strategy and, as a result, would be sold. In September C F Taylor, the aircraft galleys business, was sold to Florida based B/E Aerospace Inc and negotiations on other disposals are continuing. The remaining EIS aerospace businesses have been reorganised into more focused strategic units. The largest of these is Hamble Group. It is a major supplier of aerostructures to Boeing with important positions on the best selling 737 civil aircraft and also the C-17 Globemaster military transport aircraft, a major programme for the US forces. Airbus is another important customer. During the year a major success was Hamble's selection by British Aerospace Airbus to supply structural components for the new A340-500/600 wing trailing edge. In addition to aircraft structures, Hamble supplies a variety of acrylic and elastomeric components including cockpit canopies for the British Aerospace Hawk which continues to enjoy great success in export markets. The other EIS businesses were grouped together at the time of acquisition as the Aerospace & Precision Engineering division and traded in that form for the rest of 1998. This arrangement has now been replaced by two new groupings. Dowty Defence Systems has been formed to bring together businesses that concentrate on the supply of defence related equipment for which the UK Ministry of Defence is a prime customer. Products range from helicopter landing aids to missile containers, remote control bomb disposal vehicles and military vehicle suspension systems. The other grouping, Dowty Special Products, is made up of a number of 30 TI Group Dowty Operating Review continued - -------------------------------------------------------------------------------- [PHOTO] [PHOTO] ---------------------------------- Airbus A300-600 Super Transporter Cargo Door Aerostructures Hamble, ---------------------------------- - -------------------------------------------------------------------------------- specialist engineering businesses with products ranging from vacuum furnaces through precision aircraft components to aircraft ground handling equipment. In 1998 Boeing and Airbus announced orders for more than 1,000 aircraft between them for the third year in succession. They both reported record aircraft deliveries and revealed plans for further increases in 1999. Looking ahead, a gradual downturn in the civil aerospace market is in prospect and the turbine engine components businesses, always early in the cycle, have already experienced a slowdown in the rate of demand from engine manufacturers. However, a repeat of the sharp decline experienced in the early nineties is not expected because aircraft manufacturers have reacted more promptly this time to the prospect of a weaker market. Dowty is well placed through its presence on successful programmes, a strong order book, a range of world leading technologies, improved manufacturing techniques and an excellent reputation. It has built up strong management teams well equipped to capitalise on market changes and remains focused on winning profitable new business and on satisfying the customer whatever the requirement. [PHOTO] ----------------------------------- Geoff Smith, Chief Executive, Dowry ----------------------------------- 31 TI Group - -------------------------------------------------------------------------------- FINANCIAL REVIEW [PHOTO] Martin Angle, Group Finance Director "In 1998, TI Group achieved good organic growth and maintained a strong cash flow with increased investment to support future growth. The acquisitions made during the year are all performing in line with plan and the Group goes forward in a strong financial position." - -------------------------------------------------------------------------------- The 1998 financial statements incorporate the new accounting and disclosure requirements of FRS10 'Goodwill and Intangible Assets', FRS 'Impairment of Fixed Assets and Goodwill' and FRS14 'Earnings Per Share'. In addition, in line with recommended practice, the financial statements also incorporate the early adoption of FRS12 'Provisions, Contingent Liabilities and Contingent Assets' and FRS13 'Derivatives and Other Financial Instruments: Disclosures'. In accordance with FRS10, goodwill arising on acquisitions completed since 1st January 1998 of (pound)539.2m has been capitalised as an intangible fixed asset. This goodwill is being amortised over 20 years, resulting in a non-cash charge of (pound)15.1m in the year. Goodwill on earlier acquisitions remains written off against reserves. The Group's accounting policies have been revised to reflect the changes in the accounting treatment of goodwill. The presentation of balance sheet reserves has been amended to comply with the requirements of FRS10. The other new Standards have not resulted in changes in accounting policies but the presentation of certain items, particularly provisions, has been amended and the scope of some detailed disclosures has been increased. Year-on-year comparisons of results are affected by the significant number of acquisitions and disposals during 1998 which are set out in detail in note 1 on pages 56 to 58 and are described in the Operating Review on pages 6 to 31. For clarity, the analysis of results by business segment set out in note 2 on page 59 identifies separately the contribution of the Group's 50% share of Messier-Dowty which, together with the related wholly-owned landing gear repair and overhaul businesses, was sold on 30th June 1998. Three small businesses previously reported as part of the Bundy business segment have been transferred to the Dowty business segment with effect from 1st January 1998, as their principal products are aerospace related and they are now managed by the Dowty team. In addition to the corporate activity, comparisons with 1997 are also affected by the continued strengthening of sterling during 1998 which had an adverse effect on the translation of the results of the Group's overseas subsidiaries for accounting purposes, reducing sales by (pound)52m and profit before tax by (pound)5.8m. However, as a global specialised engineering group with 80% of its sales made in the country of origin, TI Group has no material foreign currency transaction exposure. The table below shows the Average for year (pound)1=US$ (pound)1=DM 1998 average 1.66 2.92 1997 average 1.64 2.84 (pound)stronger/(weaker) 1% 3% Period end 31 December 1998 1.66 2.77 31 December 1997 1.65 2.96 (pound)stronger/(weaker) 1% (6)% 32 TI Group 1997 and 1998 average and year end exchange rates for the US dollar and the Deutschmark, the movement of which against sterling was representative of other major European currencies. Analysis of results TI Group has again achieved a strong performance with organic growth in sales of 9% and in profit before interest, goodwill and exceptional items of 10%. Earnings per share excluding goodwill and exceptional items increased by 7%, or 10% after adjusting for changes in exchange rates. Cash flow from operations was again strong and, after adjusting for exceptional items, represented a surplus over the Group's net interest, tax and dividend payments of 25%. Total sales for the year, including the Group's share of joint ventures, were (pound)2,168m (1997: (pound)1,870m), a l6% increase over 1997. All four of the Group's world leader businesses achieved organic sales growth ahead of their underlying markets and continued to increase market share. Their performance is described in more detail in the Chief Executive's Review on pages 4 and 5 and the Operating Review on pages 6 to 31. Profit before interest, goodwill and exceptional items was (pound)265.3m, up (pound)28.3m or 12% from last year. Included within this total, income from joint ventures and associated undertakings was (pound)9.5m, down from (pound)18.2m in 1997 due to the sale of the Group's share of the Messier-Dowty joint venture in June. Adjusting for exchange rate movements and portfolio changes, all four world leader businesses reported organic growth in operating profit. Group operating margin was 12.2% (1997: 12.7%) reflecting the impact of the acquisitions completed during 1998, where overall margins were below the Group average. All four of the business groups sustained strong underlying margins. The Group's Return on Investment (profit before interest, goodwill, exceptional items and tax as a percentage of investment, including all goodwill) decreased slightly to 14% (1997: 16%) due to the initial effect of acquisitions. All the businesses acquired in 1998 are performing in line with expectations and are expected to exceed the Group's minimum objective of a 15% pre-tax Return on Investment by the third year of ownership. Net interest expense increased to (pound)26.7m (1997: (pound)14.5m), principally as a result of acquisition expenditure. Interest costs remain well covered at 10 times (1997: 16 times) by profit before interest, goodwill and exceptional items. Profit before taxation, goodwill and exceptional items was (pound)238.6m, up (pound)16.1m or 7% from 1997. The effective tax rate on profit before goodwill and exceptional items of 31% was unchanged from 1997. As described above, amortisation of goodwill arising on acquisitions completed since 1st January 1998 resulted in a non-cash charge of (pound)15.1 m in the year. The goodwill capitalised includes adjustments to the balance sheets of acquired companies of (pound)93m, of which (pound)90m relates to EIS. Of this, approximately (pound)60m was foreseen at the time of the acquisition of EIS and the balance represents a shortfall in the value now anticipated in the proceeds of certain non core assets held for disposal. The EIS businesses retained within the Group have responded positively under our management and now demonstrate a potential which exceeds our initial expectations. Any shortfall in the value of the non core businesses, as against original expectations, is consequently more than offset by the enhanced value of the businesses retained. Before a related tax charge of (pound)6.7m, there was a net exceptional gain of (pound)3.2m, comprising a net gain on business disposals of (pound)14.7m and a charge to operating profit of (pound)11.5m which included principally the settlement of the Dowty Woodville Polymer "whistleblower" litigation for (pound)7.0m and restructuring of Bundy's Heidelberg operation in Germany costing (pound)5.5m. This restructuring reflected a structural and one-off change to the way in which Bundy does business in Germany to meet the challenging outsourcing needs of its customers. The principal manufacturing site at Heidelberg has been scaled down leaving only the basic tube manufacturing operations there. All other activities are now carried out in satellites located close to customers' operations. Elsewhere in the Group, redundancies of (pound)5.5m (1997: (pound)3.5m) were incurred and charged against operating profit. Earnings per share before goodwill and exceptional items were 34.3p (1997: 32.0p), an increase of 7%, or 10% after adjusting for the effect of changes in exchange rates. On an FRS3 basis earnings per share, after goodwill and exceptional items, were 30.4p (1997: 31.6p). Dividend The Directors are recommending a final dividend of 11.6p giving a total dividend per Ordinary share for the year of 17.2p (1997: 15.9p), an increase of 8% over the previous year. The dividend is covered 2.0 times by earnings before goodwill and exceptional items (1997: 2.0 times). The July 1997 Budget abolished Advance Corporation Tax and Foreign Income Dividends with effect from 6th April 1999 and as a result this year's final dividend will be paid as a normal dividend. Cash flow and debt Cash flow from operations was again strong at (pound)292.8m (1997: (pound)241 .4m). After capital investment and dividends received 33 TI Group FINANCIAL REVIEW continued from joint ventures and associates, free cash flow was (pound)218.1 m, 14% ahead of the same period last year. After adjustment for exceptional items this represents a surplus over the Group's net interest, tax and dividend payments of 25%. The Group maintained its investment programmes in all businesses. Capital and revenue investment increased by 28% to (pound)136m (1997: (pound)106m). Of this, capital investment was (pound)93m (1997: (pound)72m) and revenue investment was (pound)43m (1997: (pound)34m). Investment, which must meet strict financial criteria, has generally been made to support the additional capacity requirements of new programmes, to improve efficiency in existing facilities and to upgrade and replace information systems. The Group maintained a strong focus on working capital management and, as a percentage of sales, average Group working capital reduced further to 10% across its existing businesses. The ratio for acquired businesses was around 16% and these operations are already responding to management initiatives to move towards the Group average over time. Including the net cash flow on acquisitions and disposals of businesses of (pound)505.3m, net debt at 31st December 1998 increased to (pound)512.7m (31st December 1997: (pound)37.9m). TI shareholders' funds were (pound)601.0m at 31st December 1998 (31st December 1997: (pound)392.6m) after writing back (pound)13-6.5m of goodwill on disposals. Goodwill arising on acquisitions completed prior to 1998 of (pound)882.5m (31st December 1997: (pound)1,019.0m) - -------------------------------------------------------------------------------- Change in net debt [GRAPHIC] - -------------------------------------------------------------------------------- remains written off against reserves. The impact of exchange translation on TI shareholders' funds was not significant Treasury TI operates a central treasury function providing services to the whole Group by arranging borrowings, investing surplus funds and managing and reducing financial risks. Group Treasury is not a profit centre and no speculative transactions are permitted. It operates within specific Board policies with compliance confirmed regularly in formal reports to the Audit Committee; there was no change in policies during 1998. There are extensive written control procedures in place and Group Treasury is subject to regular reviews by the financial control function, and by internal and external audit. Treasury systems, including disaster recovery arrangements, are also reviewed and updated regularly. Prudent use is made of financial instruments mainly forward rate agreements, interest rate swaps, and forward foreign exchange contracts, with relationship banks as the counterparty. Such instruments may also include the purchase, but not the writing, of options in specific circumstances. The Group's principal exposures to exchange rate fluctuations arise on the translation of overseas net assets and profits into sterling for accounting purposes. Translation exposures arising on consolidation of the Group's overseas net assets are minimised by broadly matching assets with borrowings in each major foreign currency. The level of hedging cover required by Group policy is over 80% across all currencies and TI is fully hedged in all relevant major currencies. The Group's gross debt at 31st December 1998 totalled (pound)685.8m (1997: (pound)406.8m) with (pound)280.3m in US and Canadian dollars, reflecting the Group's strong North American presence, and (pound)180.5m denominated in Continental European currencies. The principal components of this debt are two private placements of US$l90m in total outstanding, and centrally managed bank loans totalling (pound)502.4m. The Group also has a US commercial paper programme rated A1/P1 by Standard and Poors Corporation and Moody's Investor Services respectively. To support the commercial paper programme and to provide medium term liquidity, the Group has committed bank facilities of (pound)60m maturing in 1999 and a further (pound)870m maturing in 2000 or later. In January 1999, further committed facilities totalling (pound)200m were arranged. Year end cash and deposits totalled (pound)173.1m (1997: (pound)368.9m). The Group adopts a conservative investment policy for its surplus funds, most of which are pooled and managed centrally, with deposits limited by amount and maturity across highly-rated banks. Counterparty risk limits are established for all banks used by the Group, depending on the credit standing of the bank. Extensive 34 TI Group use is made of country cash pooling arrangements and intra-Group loans to provide, respectively, efficient cash management and cost effective core funding to operating businesses worldwide. Interest rate exposures on borrowings and deposits are monitored carefully and hedging actions taken when market conditions are considered appropriate. Normally, at least one third of borrowings in each major currency is hedged at fixed rates for the next 12 months, using long dated drawings, forward rate agreements, interest rate swaps or collars. Exchange translation exposures arising on the consolidation of overseas operating profits are partially offset by interest charges on foreign currency borrowings. These exposures are monitored but are not normally hedged, and no such hedging was undertaken in 1998. There was no use of options during 1998. Exposures to movements in exchange rates on transactions are minimised using forward foreign exchange contracts, normally up to 12 months forward, on a rolling basis. Some aerospace businesses may hedge exposures up to four years into the future, reflecting the nature of commitments in that industry. All TI business units hedge their net exposures through or at the direction of Group Treasury. Year 2000 and euro The Group-wide programme initiated in 1996 to address the Year 2000 computer problem is well advanced. This programme is designed to address the business critical risks and uncertainties, including an assessment and testing of communication networks, business and infrastructure systems and, in particular, control systems in shop floor equipment. There has also been significant work, including detailed correspondence and site visits, to minimise the potential disruption caused by non-compliance of third parties including major customers and suppliers. It is widely recognised and accepted, however, that the nature and complexity of the problem means that there cannot be any guarantee that problems will not arise. Whilst the Group expects all its business critical systems to be millennium compliant before the end of 1999, contingency plans are being prepared to cope with any potential disruption, particularly from external events outside the Group's control. Action has also been taken to address the systems and business issues associated with the introduction of the euro from 1st January 1999. The actions for both the Year 2000 and euro form part of TI's continuing investment in electronic systems and there has been significant expenditure on such projects during the period. An estimate of expenditure incurred to date on projects with a significant Year 2000 element is (pound)17m, with additional estimated costs of (pound)8m to be incurred in 1999. Approximately 70% of these amounts are the capital costs of new and replacement hardware; the balance is revenue expenditure which is charged to the profit and loss account as incurred. The estimated costs of achieving euro compliance are not significant. Summary In 1998, TI Group achieved good organic growth and maintained a strong cash flow with increased investment to support future growth. The acquisitions made during the year are all performing in line with plan and the Group goes forward in a strong financial position. Martin D Angle Group Finance Director 35 TI Group DIRECTORS * Member, Organisation and Remuneration committee + Member, Audit committee ++ Member, Nominations Committee s Member, Chairman's Committee [PHOTO] Sir Christopher Lewinton ++ s Chairman Joined the Board in 1986 as Chief Executive and Deputy Chairman, becoming Chairman in 1989 and relinquishing the role of Chief Executive in January 1998. wide international experience; based in the United States for many years. A non-executive Director of Reed Elsevier and a member of the Supervisory Board of Mannesmann AG. Age 67 NON-EXECUTIVE DIRECTORS [PHOTO] John M Hignett * + ++ Deputy Chairman Joined the Board in 1989, becoming Deputy Chairman in 1993. Chairman, Audit & Organisation and Remuneration Committees. Chairman of Schroder Income Growth Fund. Formerly a Director of Glaxo Holdings, a Managing Director of Lazard Brothers & Co and Director General of the Takeover Panel. Age 64 [PHOTO] Sir Colin Chandler * + Joined the Board in 1992. Chairman, Vickers and Director of Guardian Royal Exchange. Vice President, Engineering Employers' Federation. A Member of the National Defence Industries Council. Formerly Head of Defence Export Services, Ministry of Defence. Age 59 [PHOTO] Lord Fanshawe of Richmond KCMG * + ++ Joined the Board in 1990. A Director of Xerox UK. Member, Pratt & Whitney European Advisory Board. Chairman of Sedgwick Group until 1997. Formerly a Foreign Office Minister. Age 71 [PHOTO] John M Harris * Joined the Board in 1991. Managing Director, formerly President, The Forum Corporation based in Boston. Previously President and CEO. Rockefeller Financial Services Inc and President of the European operations of Booz Allen & Hamilton. An American citizen. Age 58 [PHOTO] Rudolf G Mueller CBE * Joined the Board in 1996. Chairman of Chiltern Group and Chelveton Properties. Chairman of Lend Lease Europe and a Member of the Boards of Lend Lease Corporation and IMI Kiev. Previously held senior positions with UBS in Zurich, Singapore and London, where he was Chairman of the UBS Group until 1997. formerly a Director of the London Stock Exchange. A Swiss citizen. Age 64 [PHOTO] Sir Nigel Broomfield KCMG + Joined the Board in February 1998. A non-executive Director of Foreign & Colonial German Investment Trust Director Designate of the Ditchley Foundation and an adviser to Arthur Andersen. Trustee of the Dresden Trust. A retired diplomat, British Ambassador to the Federal Republic of Germany until 1997. Age 61 36 TI Group 36 TI Group EXECUTIVE DIRECTORS [PHOTO] William J Laule * Chief Executive Joined the Board in 1995 becoming Chief Executive, TI Group in January 1998. Previously Chief Executive, Bundy. A Director, National Association of Manufacturers of the USA. Senior management experience gained with Rockwell International in the United States and Europe. An American citizen. Age 50 [PHOTO] Martin D Angle s Group Finance Director Joined the Board in 1997. Wide international business experience gained in senior positions with SG Warburg. Morgan Stanley and the Dresdner Kleinwort Benson Group, based in the United States and the UK. A Chartered Accountant. Age 48 [PHOTO] David P Lillycrop Director & General Counsel Joined the Board in June 1998. General Counsel since 1997 and Group Secretary since 1991. Chairman, TI Pension Trustee Ltd. Legal and management experience gained in British and American companies. Member, Management Committee, Industry and Parliament Trust. A Barrister. Age 42 [PHOTO] James L Roe Director Strategic Development Joined the Board in 1994. Director Strategic Development since 1986. Previously Senior Vice-President, John Crane International. Experience outside TI includes management consultancy. Age 54 [PHOTO] John Langston Chief Executive, Forsheda Joined the Board in October 1998. Previously Chief Executive, Bundy Automotive. International operating and management experience gained in global companies whilst based in the UK, France and Germany. Age 49 [PHOTO] T Allan Welsh Chief Executive, Bundy Joined the Board in January 1999. Wide experience of managing automotive and other manufacturing businesses in international markets. Formerly a Director of T&N plc. Age 47 37 TI Group REPORT OF THE DIRECTORS TI Group is an international engineering group concentrating on products In specialised niches on a global basis. A summary of the businesses in each segment with the names of the principal Group companies appears on pages 84 and 85. The Chairman's statement is set out on pages 2 and 3, the Chief Executive's review on pages 4 and 5, the operating and financial review on pages 6 to 35, and the profit and loss account on page 52. DIVIDEND The Board recommends a final dividend of 11.6p per Ordinary share of 25p payable on 28th May 1999 to Ordinary shareholders registered on the books of the Company at the close of business on 19th March 1999. When taken with the interim dividend of 5.6p per Ordinary share paid on 7th October 1998 this makes a total of 17.2p per Ordinary share for the year ended 3lst December 1998 (1997 15.9p per Ordinary share). EMPLOYMENT POLICIES Due to the spread of TI Group's constituent businesses and the devolution of responsibility to local management, the arrangements for involving employees in the business vary considerably. Nevertheless the overriding objective - to achieve a shared commitment by all employees to the success of the business in which they work - applies throughout the Group. Team briefings, management conferences and house newspapers are some of the methods used to ensure that employees are well informed. Employees in the UK are encouraged to be financially involved in the Group through participation in Savings-Related Share Option Schemes. Member participation in the affairs of the TI Group Pension Scheme is provided in the form of member and pensioner representation on the trustee body. The employment, training, career development and promotion of disabled persons receive positive consideration by Group companies. RESEARCH AND DEVELOPMENT TI Group has a continuing commitment to a strategy of market leadership through investment in customer-focused applied technology. Each of the Group's core businesses maintains self-sufficiency in applied technology geared to new product development and world-class manufacturing practice. Expenditure on maintaining the Group's applied technology base is significantly greater than the amount disclosed in note 3 to the accounts using the strict accounting definition in SSAP 13. ENVIRONMENT TI Group is committed to conserving natural resources and protecting the global environment, seeking to go beyond legal compliance and striving to shape its operations, processes and products to bring sustainable social and ecological benefits wherever the Company operates. TI Group's environmental policies are implemented by its Environmental Co-ordination Panel which reports to Mr T A Welsh, a main Board Director. It is tasked with ensuring that all TI businesses execute the Group's environmental policies through the implementation of environmental management systems. Specific objectives include introducing the international environmental standard ISO 14001 throughout the Group over time and incorporating sensitivity to environmental issues into all business decisions. Performance is reviewed on a regular basis, environmental targets are assessed and revised annually and employees are trained in environmental awareness. The Company is committed to developing and marketing products which are environmentally friendly, responding positively to customer environmental programmes and encouraging its suppliers to apply standards compatible with its own. TI Group's achievements are bench-marked against other market leaders with enlightened environmental policies. 38 TI GROUP HEALTH and SAFETY The Company is committed to safeguarding the health and safety of its employees, contractors and others who are affected by its activities. Implementation of health and safety policies is a primary management objective. Specific objectives include developing responsible, cost-effective health and safety regulations and standards, establishing appropriate Safety Management Systems throughout the Group, training and educating employees and seeking to eliminate all work-related injury and illness through continuous improvement of practices and standards. Health and safety considerations are incorporated into business decisions and planning activities, the performance of the Company's operations is reviewed on a regular basis and contractors are required to apply standards compatible with those adopted by TI Group. The Company shares with others the health and safety expertise which it develops. DIRECTORS Messrs D P Lillycrop, J Langston and T A Welsh were appointed to the Board on 24th June 1998, 20th October 1998 and 1st January 1999 respectively. Each of them has a service contract with the Company determinable on 2 years' notice. In accordance with the Articles, Messrs Lillycrop, Langston and Welsh will retire at the Annual General Meeting and members will be invited to re-elect them. The Directors retiring by rotation are Mr J M Hignett and Mr J L Roe who, being eligible, offer themselves for re-election. Mr Hignett does not have a service contract with the Company. Mr Roe has a service contract with the Company determinable on 2 years' notice. Messrs G O Aronson and LA Edwards resigned from the Board on 28th May 1998 and 10th November 1998 respectively and Messrs R J M Fisher and JW Potter both resigned from the Board on 2nd December 1998.The present constitution of the Board is set out on pages 36 and 37. The appointment of Mr Henry R Kravis to the Board, announced on 5th March 1999 and mentioned in the Chairman's Statement on page 3, will take effect from the conclusion of the Annual General Meeting on 13th May 1999. ADOPTION OF NEW ARTICLES OF ASSOCIATION and NEW EXECUTIVE SHARE OPTION SCHEME AND NOTICE OF ANNUAL GENERAL MEETING The Board proposes that new Articles of Association be adopted, in order to comply with current best practice and the Listing Rules of the London Stock Exchange, and that a new Executive Share Option Scheme be approved to replace the current scheme which expires in 2000. Shareholders will receive with this Report a separate circular describing the principal differences between the existing Articles and the proposed new Articles and containing details of the new Executive Share Option Scheme. The circular includes Notice of the Annual General Meeting to be held on 13th May 1999. SHARE SCHEMES At 31st December 1998, the total number of Ordinary shares in TI Group plc under option was 17,493,363. The holders of these options are members of TI Group plc schemes and/or either or both schemes operated by Dowty Group PLC prior to its acquisition by TI Group in 1992. In the latter case these options were obtained, following the acquisition, in exchange for options over shares in Dowty Group. There are 4,339 participants in the TI Group schemes and 85 participants in the Dowty Group schemes. Details of Ordinary shares under option are shown in note 23 on pages 74 and 75. The Interests of Directors of the Company who are participants in the above schemes are shown in the table on page 64. 39 TI GROUP REPORT OF THE DIRECTORS continued CORPORATE GOVERNANCE The Board is satisfied that, with the three exceptions mentioned on page 41, under 'Areas of Non-Compliance with the Code', the Company has complied throughout 1998 with the Combined Code ("the Code") appended to the Listing Rules of the London Stock Exchange. The report of the Company's auditors, PricewaterhouseCoopers, concerning the Company's compliance with the Code appears on page 49. Compliance with the provisions of the Code relating to Directors' remuneration is covered by the Remuneration Report on pages 44 to 47. Statements by the Directors concerning their responsibilities in relation to financial statements, the adoption of the going concern basis for the preparation of accounts and the Group's system of internal financial control appear on page 48, opposite the auditors' report. Detailed guidance for directors conducting a review of the effectiveness of systems of internal control, including financial, operational and compliance controls and risk management, has not yet been published. The Directors' review of the Group's system of internal control has, therefore, been restricted to internal financial controls and has been performed in accordance with the guidance for directors issued by the Rutteman Working Group. The following relates to the Company's application during 1998 of the principles and detailed provisions of the Code. The Board and Management With effect from 1st January 1998 the roles of Chairman and Chief Executive were separated on the appointment of Mr W J Laule as Chief Executive with Sir Christopher Lewinton continuing as Chairman. The Board, which meets formally ten times a year, is broadly balanced with the Chairman supported by a non-executive Deputy Chairman and five other non-executive Directors and six executive Directors. The Board includes US, Swiss and UK nationals, reflecting the international nature of the Company's activities. The non-executives, all of whom are considered by the Board to be independent within the meaning of the Code, are appointed initially for a three year term and may be re-appointed for a further three year term. The business reserved to the Board includes, in particular, matters of policy, approval of the strategic and financial plans, major expenditure proposals and acquisitions and disposals. The Board receives from management in a timely manner all appropriate information, such as monthly management accounts, to enable the Directors to lead and control the Company. A number of key committees referred to below contribute to an effective check and balance on the operations. The Audit and Organisation and Remuneration Committees consist wholly of non-executive Directors who are responsible, on behalf of the Board, for the business undertaken. Audit Committee The Audit Committee, which was established in 1987, is comprised wholly of non-executive Directors and normally meets three times per year. Currently four non-executive Directors are members and the Committee is chaired by Mr J M Hignett. Its objective is to give formal support to the Board in fulfilling its obligations to shareholders to maintain standards of management and financial control and reporting throughout the Group consistent with regulatory requirements and current best practice. Its terms of reference include: 1. The review of such written reports from the auditors as the Committee may from time to time require, including for example a report on the quality of TI Group's financial accounting and operational controls worldwide and on any significant areas of vulnerability in control, accounting or financial management resource which the audit process has identified. 2. The review of the work and the effectiveness of the Internal Audit function and its relationship with the external audit. 3. The review prior to publication and to submission to the TI Board of the TI Group published accounts for the half year and full year to ensure the presentation of a balanced assessment of the Company's position and prospects. 40 TI GROUP The external auditors attend the meetings of the Audit Committee. They are entitled to and do meet with the Audit Committee privately and have direct access to the Chairman of the Committee. Organisation and Remuneration Committee This Committee, which was also set up in 1987, comprises not less than three non-executive Directors. Currently five non-executive Directors are members and the Committee is chaired by Mr J M Hignett who succeeded Lord Fanshawe as chairman in October 1998. The powers and terms of reference of the Committee include the following: a. to approve the organisation of the Company's top management structure and succession planning; b. to determine the terms of appointment and total remuneration of members of the Board; c. to approve annual and longer term incentive plans and to administer any Group share option schemes or related arrangements; d. to determine policy and maintain governance over any Group pension schemes or related arrangements. There is set out on pages 44 to 47 a separate report to shareholders on Directors' remuneration. Nominations Committee This Committee currently comprises the TI Group Chairman, the Deputy Chairman, and Lord Fanshawe. Its objective is to provide a forum at which the TI Group Chairman may seek general counsel and advice in relation to matters which may not have reached a stage where formal consideration by the Board is appropriate. The Committee has responsibility for initial consideration of all Board appointments, which are subsequently referred to the Board. The Committee also has responsibility for considering and if appropriate approving the obtaining of independent external advice by either a Director or a Board committee in accordance with standing guidelines adopted by the Board. Chairman's Committee The Chairman's Committee is chaired by the TI Group Chairman, with Mr Laule and Mr Angle as members. The Committee is responsible, on behalf of the Board, for maintaining the strategic direction of the Group. Relations with Shareholders The Company enters into a dialogue at appropriate times with its institutional shareholders whilst having regard to London Stock Exchange guidance on the dissemination of price sensitive information. Full use is made of the Annual General Meeting to communicate with private investors. Areas of Non-Compliance with the Code The Company has not complied during 1998 with the Code in three respects: 1. The Code provides that, at its Annual General Meeting, a company should indicate the level of proxies lodged on each resolution, and the balance for and against the resolution, after it has been dealt with on a show of hands. This was not done at the 1998 Annual General Meeting, but will be done in the future; 2. The Code provides that boards should have the objective of reducing to one year or less notice or contract periods in relation to directors' contracts of service. The Code recognises that it may not be possible to achieve this immediately. As stated in the Remuneration Report on page 46, the Board continues to believe that a two year notice period for executive Directors is appropriate and is in line with market practice; 41 TI GROUP REPORT OF THE DIRECTORS continued 3. The Code provides for all directors to submit themselves for re-election at least every three years. Although the Company complied with the current Articles of Association, the Company did not comply with the Code in 1998, but is proposing that new Articles of Association be adopted at the Annual General Meeting to ensure compliance in the future. YEAR 2000 AND THE EURO The Board initiated in 1996 a programme to address the Year 2000 computer issue and since then has received regular Group-wide progress reports. A full report for both Year 2000 and the euro is contained in the Financial Review on page 35. INTERESTS IN CONTRACTS During the year no Director was materially interested in any contract which was significant in relation to the Company's business. PURCHASE BY THE COMPANY OF ITS OWN SHARES The Company was authorised at the Annual General Meeting held in 1998 to purchase in the market Ordinary shares representing up to approximately 10% of the then issued share capital. This authority has not been used and expires at the conclusion of the Annual General Meeting. In accordance with the Directors' intention to seek annual renewal, resolution 6 will be proposed as a Special Resolution at the Annual General Meeting to renew this authority until the earlier of 12th August 2000 and the next Annual General Meeting. The Directors have no current intention of using this authority and, in relation to any decision to purchase, will take into account the Company's gearing levels and general financial position, and the effect of any purchase on earnings per share. Any shares purchased by the Company pursuant to this authority will form part of the Company's authorised but unissued share capital and will be available for re-issue subject to the Directors being authorised pursuant to section 80 of the Companies Act 1985. SHARE CAPITAL Details of shares issued during the year are set out in note 23 on page 74. At the Annual General Meeting held in 1998 shareholders authorised the Directors, pursuant to section 80 of the Companies Act 1985, to allot Ordinary shares without the prior consent of shareholders for a period of five years. In accordance with the Directors' intention to seek annual renewal, resolution 9 will be proposed as an Ordinary Resolution at the Annual General Meeting to extend this authority until 12th May 2004. The (pound)40,000,000 nominal amount of relevant securities to which the authority relates, including Ordinary shares that are subject to options, represents approximately 33% of the nominal amount of issued Ordinary share capital of the Company as at 5th March 1999. Except pursuant to the exercise of options, the Directors have no present intention of exercising this authority. Also at last year's meeting a Special Resolution was passed, pursuant to section 95 of the Companies Act 1985, empowering the Directors to allot equity securities for cash without first being required to offer such shares to existing shareholders. Resolution 10 will be proposed as a Special Resolution to renew this power until 12th May 2004. The (pound)6,000,000 nominal amount of equity securities to which this authority relates represents approximately 5% of the issued Ordinary share capital of the Company as at 5th March 1999. As mentioned on page 43 under 'Interests in Share Capital' the Directors intend to use the authority granted at last year's meeting. 42 TI GROUP INTERESTS IN SHARE CAPITAL As at 4th March 1999 the Company had been notified under section 198 of the Companies Act 1985 of the following persons who are interested in 3% or more of the issued share capital of the Company: NUMBER OF PERCENTAGE OF HOLDER SHARES ISSUED CAPITAL - -------------------------------- ---------- -------------- The Capital Group Companies, Inc 56,837,448 11.82 Prudential Corporation plc 21,969,586 4.56 On 5th March 1999 an affiliate of Kohlberg Kravis Roberts & Co agreed to subscribe for 23,600,000 new Ordinary shares of 25p each in the capital of the Company representing 4.9% of the issued share capital. It is expected that the subscription will take place during March 1999. Apart from the shareholdings detailed above, there are no other notifiable interests appearing in the Company register maintained under the provisions of section 211 of the Companies Act 1985. The interests of the Directors in the share capital of the Company are shown in note 10 on page 64. There were no changes in these interests between 1st January 1999 and 5th March 1999 other than those shown in note l0. The register recording the Directors' interests in the share capital will be open for inspection at the Annual General Meeting. PAYMENT POLICY The Group is a registered supporter of the CBI's Prompt Payers Code of Good Practice, copies of which are available from the Confederation of British Industry, Centre Point, 103 New Oxford Street, London WC1A 1DU. It is the Group's policy to agree with its suppliers terms of settlement which are appropriate for the markets in which they operate, and to abide by such terms where suppliers have also met their obligations. CHARITABLE AND POLITICAL CONTRIBUTIONS During the year the UK companies in the Group made charitable donations totalling (pound)240,000 gross. The annual donations budget is administered by the Charitable Donations Committee. The Group's policy on donations is to direct its support primarily towards assisting charities with selected medical, engineering or educational objectives, as well as objectives connected with the Group's business and role in the community. No payments were made to political parties during the year. INCOME AND CORPORATION TAXES ACT 1988 The close company provisions of this Act do not apply to the Company. AUDITORS Following the merger of Price Waterhouse and Coopers & Lybrand, Price Waterhouse resigned as the Company's auditors and the Directors appointed PricewaterhouseCoopers to fill the casual vacancy in the office of auditors. PricewaterhouseCoopers have expressed their willingness to continue in office as auditors and resolutions proposing their re-appointment and authorising the Directors to fix their remuneration will be put to the Annual General Meeting. By order of the Board DAVID P LILLYCROP Director and Secretary 5th March 1999 43 TI GROUP REMUNERATION REPORT The Board presents this report to shareholders pursuant to the Combined Code appended to the Listing Rules of the London Stock Exchange. The members of the Organisation and Remuneration Committee ("the Committee") are Mr J M Hignett (Chairman), Sir Colin Chandler, Lord Fanshawe, Mr J M Harris and Mr R G Mueller. REMUNERATION POLICY - EXECUTIVE DIRECTORS Policy The remuneration of the executive Directors is determined by the Committee, in consultation with the Chairman of the Company (save in respect of his own remuneration) and after obtaining appropriate independent professional advice reflecting the international nature of the Company. Since the Company has 80% of its business outside the United Kingdom and in particular around 45% in North America, its remuneration policies must be internationally competitive and flexible. This both attracts and retains high quality management as well as facilitating global management succession. The philosophy of the Committee is to offer internationally competitive total compensation packages, a significant proportion of which is performance-related and set against challenging objectives. It is inherent in this approach that significant elements of the package may prove to have no value at the end of the life of a particular scheme even though they have had a paper value at some time in the past. However, such incentives, which stimulate enhanced performance and lead to enhanced shareholder value, are considered to be in the best interests of shareholders, customers, suppliers and employees alike. This philosophy has been successfully applied since 1987. A significant part of the performance-related elements of the package is paid in the form of TI shares transferred from the TI Group Employee Share Ownership Trust which was established in 1995. It is the well established policy of the Committee that executive Directors should acquire and retain a valuable shareholding in the Company thereby aligning their interests with those of other shareholders. Remuneration Package The remuneration package of the executive Directors comprises four components: i Basic salary and benefits Salaries are determined within the international marketplace and reflect experience and responsibility. Salaries are reviewed annually as at 1st January. Principal benefits include use of a motor car, fuel, and medical expenses insurance. ii Annual bonus For headquarters staff executive Directors the annual bonus is based partly on Group performance against plan, and partly on achievement of individual objective. The annual bonus for executive Directors with line responsibility for operations is based partly on a combination of Group performance and business area performance against annual plan and partly on achievement of individual objectives. The annual plan includes specific cash targets. In 1998 the maximum potential cash bonus for members of the Chairman's Committee was 80% of basic salary and for the other executive Directors 60% of basic salary, with the maximum amount normally achievable only if performance exceeds plan by a clear margin. The Committee retains the right to exercise an overview with regard to the quality of achievement. For 1999 a similar scheme is in force. Payments in respect of 1998, comprising shares and/or cash, are shown in the table on page 47. The share element reflects Directors' Individual elections to be paid annual bonus in TI shares rather than cash. 44 TI GROUP iii Long term Incentives The Committee considers that it is appropriate to provide the long term component of executive Directors' compensation through a combination of share option and share performance plans. In each case, as set out below, there are demanding performance criteria. a. Three-year share performance plan There is a three-year share performance plan in place covering measurement periods from 1995-98 onwards. The purpose of the plan is to encourage senior executives to think longer term and to develop an affinity with performance achievements beyond the normal one year horizon. This benefits both shareholders and management. Benefits under these plans do not vest on an annual basis; participants do not have any entitlement until cumulative performance over the three-year period is ascertained. The share performance plan rewards performance measured by growth in Total Shareholder Return (share price and reinvested dividends) against the performance of a group of more than 20 comparator companies. The comparator companies have been chosen with regard to size, complexity and overall relevance, after consultation by the Committee with independent advisers. Maximum potential bonus is achieved only if TI is in the top 10% ranking of comparator companies. No award is made for performance below the median level. Under the plan the potential bonus is itself expressed by reference to a number of TI shares which could be purchased at a certain time during the first year of the relevant three-year period for an amount equal to the basic salary for that year, rather than a cash sum. It is intended that the shares to which participants in the plan will become entitled (if any) will be provided from the TI Group Employee Share Ownership Trust. b. Share options The TI Group and TI Group (1990) Executive Share Option Schemes link reward to added shareholder value and encourage executives to align their longer term career aspirations with the longer term interests of the Group. Subject to performance requirements being fulfilled the Schemes enable executives to participate in share price growth, options normally becoming exercisable between three and ten years after grant. Participants are encouraged to build up an equity interest in the Group. Options granted since 1987 have been exercisable only if the percentage increase in earnings per share over a three year period has exceeded the percentage increase in the Retail Prices Index over that period. Starting in 1996, options granted to executive Directors are subject to a minimum performance requirement equal to the increase in the Retail Prices Index plus 2% per annum. The legislative changes effected by the Finance Act 1996 had the effect of reducing the individual limit for Inland Revenue approved share options; in order to maintain the value to the Company of the 1990 scheme the Committee has granted subsequent options under the existing unapproved international section of the scheme. The 1990 scheme will expire in 2000 and a new scheme will accordingly be submitted for approval at the 1999 Annual General Meeting. Details of options held by Directors are set out in the table on page 64. iv Pensions Pension and life assurance arrangements are consistent with those provided by other leading companies. The executive Directors, with the exception of the Chairman, are members of the TI Group and Executive (1992) pension schemes and Mr Laule is also a member of Bundy Corporation's defined benefits plan. They are entitled to earn pension benefits, dependent on their length of service, as agreed by the Group. In some circumstances, the taxation authorities will not permit the schemes to meet the executive Director's full pension entitlement, in which case the Group has promised to make good any shortfall by means of unapproved arrangements. Set out on the next page are details of the pension benefits earned by each of the executive Directors during the year ended 31st December 1998. 45 TI GROUP REMUNERATION REPORT continued PENSIONS Executive Directors
Cash Increase in equivalent accrued pension of increase Total accrued (excluding (excluding Members pension at inflation) members' contributions 31 December during 1998 contributions) in 1998 1998 (pound)'000 (pound)'000 (pound)'000 (pound)'000 --------------- -------------- ------------- ------------- W J Laule 8 122 4 29 M D Angle (appointed 19th February 1997) 13 147 4 21 J Langston (appointed 20th October 1998) 3 33 1 41 D P Lillycrop (appointed 24th June 1998) 5 39 2 36 J L Roe 10 132 11 123 Former Directors: G O Aronson (resigned 28th May 1998) 3 34 2 9 L A Edwards (resigned 10th November 1998) 10 141 4 66 R J M Fisher (resigned 2nd December 1998) 16 255 4 104 J W Potter (resigned 2nd December 1998) 7 107 15 133
Notes: 1. The "cash equivalent of increase", which has been calculated on the basis of actuarial advice in accordance with GN11, is the same as the "transfer value of the increase" and does not represent the sum payable to individual Directors. It cannot therefore meaningfully be added to annual remuneration. 2. The pension entitlement shown is that which would be paid annually on retirement based on service to 31st December 1998 or date of resignation if earlier. 3. Sir Christopher Lewinton is not shown in the above table. He did not accrue any additional pension benefits (excluding inflation and an actuarial increase to allow for deferred retirement) under the UK arrangement during the period having reached Normal Pension Date on in February 1997. His accrued pension at 31st December 1998 and 1997, which includes benefits transferred into the Scheme, was (pound)348,000 per annum. He is not accruing further benefits, and his pension will increase each year until drawn to reflect deferred payment. 4. Sir Christopher Lewinton also participates in the US Defined Contribution pension arrangement; during the period, contributions amounted to (pound)35,733 (1997 (pound)25,460). 5. Mr W J Laule is also a member of Bundy Corporations US Defined Contribution arrangement; during the period, contributions amounted to (pound)6,832 (1997 (pound)10,955). 6. On his resignation, TI committed to grant Mr J W Potter a pension enhancement with a capital value of (pound)244,000. The capital value of this enhancement and the additional pension provided in respect of it ((pound)12,000 per annum,) are in addition to those in the above table. 7. Pensionable salaries do not include annual bonuses or long term incentive payments. Members' contributions shown above do not include AVCs. Service Contracts The Company's policy in relation to contracts of service for executive Directors is to provide notice or contract periods not exceeding two years. Each of the executive Directors, including Messrs Langston, Lillycrop, Roe and Welsh who offer themselves for re-election at this year's Annual General Meeting, is accordingly employed under a contract entitling him to two years' notice of termination. As previously reported, the then executive Directors agreed in 1994, without compensation, to reduce the notice period applicable to their contracts of service from three years to two years. The Committee has again reviewed the situation this year and continues to believe that this period of notice is in line with practice in the marketplace and is in fact necessary to enable the Company to attract and retain the highest calibre of management. The Company takes account of the legal duty to mitigate damages. The contracts of the executive Directors do, however, contain provision for payment based on two years' salary and benefits on termination following a change of control of the Company. REMUNERATION POLICY - NON-EXECUTIVE DIRECTORS The remuneration of the non-executive Directors is determined by the Board of Directors. Non-executive Directors absent themselves from any discussion or decisions relating to their own remuneration. The remuneration reflects both the amount of time given and the contribution made by the non-executive Directors to the Company's affairs, including membership or Chairmanship of Board committees, and is on the basis of advice taken by the Board from independent consultants. The non-executive Directors do not receive any bonuses related to the Company's performance nor do they participate in any share option schemes. 46 TI GROUP SUMMARY REMUNERATION TABLE Executive Directors - - Salary, Annual Bonus and Benefits As in prior years the annual performance-related bonus is an amount determined in cash. Executive Directors may elect to receive a proportion of this bonus in the form of TI shares. Details of such elections appear in the table below.
Annual Bonus 1997 1998 Benefits ------------ Basic Salary Basic Salary (Note 1) Cash (pound)'000 (pound)'000 (pound)'000 (pound)'000 ----------- ----------- ----------- ------------ Sir Christopher Lewinton 675 725 46 0 W J Laule 294 431 156 0 M D Angle (appointed 19th February 1997) 259 350 67 121 J Langston (appointed 20th October 1998) -- 44 8 11 D P Lillycrop (appointed 24th June 1998) -- 103 9 27 J L Roe 210 225 13 75 Former Directors: G 0 Aronson (resigned 28th May 1998) 174 90 16 -- L A Edwards (resigned 10th November 1998) 315 284 16 99 R J M Fisher (resigned 2nd December 1998) 300 284 29 110 J W Potter (resigned 2nd December 1998) 330 302 18 37 Annual Bonus ------------ Elected Share Compensation Allocation for loss 1998 1997 (Note 2) of office Total Total (pound)'000 (pound)'000 (pound)'000 (pound)'000 ------------ ----------- ----------- ----------- Sir Christopher Lewinton 577 -- 1,348 1,157 W J Laule 338 -- 925 500 M D Angle (appointed 19th February 1997) 139 -- 677 467 J Langston (appointed 20th October 1998) 13 -- 76 -- D P Lillycrop (appointed 24th June 1998) 32 -- 171 -- J L Roe 50 -- 363 299 Former Directors: G 0 Aronson (resigned 28th May 1998) -- 307 413 262 L A Edwards (resigned 10th November 1998) 0 -- 399 489 R J M Fisher (resigned 2nd December 1998) 0 -- 423 474 J W Potter (resigned 2nd December 1998) 0 216 573 402
Notes: 1. Benefits include provision of a motor car, fuel, medical expenses insurance, unapproved life cover, relocation expenses and accomodation (net of contributions). 2. Where the Directors have elected to receive an element of annual bonus in TI shares from the TI Group Employee Share Ownership Trust, the numbers of shares thus acquired included in the holdings as at 5th March 1999 shown in the summary of Directors' share interests on page 64. 3. Messier-Dowty International Ltd. formerly a joint venture, bore 60% (1997 60%) of the amount shown in respect of Mr Edward's salary and annual performance-related bonus for the period up to 30th June 1998. 4. Mr B A Walsh was a Director during part of 1997 in respect of which his emoluments were (pound)132,000. - - Long Term IncentIves (Three-Year Plan) The Director and former Directors listed above are participants in the Three-Year Share Performance Plan for the measurement periods 1996-99 (except Messrs Angle, Langston and Lillycrop), 1997-2000 and 1998-2001. Another former Director, Mr B A Walsh, is also a participant for the 1996-99 period. As explained on page 45 contingent interests under the Share Performance Plan do not vest until the end of the relevant measurement period; in respect of each period it will not be known what, if any, entitlement has actually accrued until after the announcement of the Company's results for the relevant year. However, as required by UITF17, a prudent estimate has been made of the anticipated costs in respect of the Three-Year Share Performance Plan and, for the above periods a provision of (pound)nil (1997 (pound)900,000) has been charged to the profit and loss account. The Three-Year Share Performance Plan awards made during 1998, which reflected the performance of the Group's businesses, are detailed below. No cash was paid. The shares awarded and their equivalent cash value based on the TI share price at the date of award of 577p are in respect of the three-year measurement period 1995-98. No. of Equivalent 1994-96 shares Cash Value Plan (pound)'000 (pound)'000 ------ ----------- ----------- Sir Christopher Lewinton 59,518 343 357 W J Laule 22,320 129 -- L Roe 17,856 103 98 Former Directors: L A Edwards 28,767 166 156 R J M Fisher 24,800 143 150 J W Potter 24,800 143 124 B A Walsh 19,176 111 163 Notes: 5. Mr Aronson had been a participant for the l997-2000 measurement period. His participation ended following his resignation and resulted in no award. 6. During the year, the Chairman exercised options over 6,400 (1997 282,000) TI Ordinary shares; the notional aggregate gain resulting from the exercise was (pound)10,432 (1997 (pound)756,855). Further details are set out in the table on page 64. 1998 1997 Total Total Non-Executive Directors (pound)'000 (pound)'000 ----------- ----------- I M Hignett 73 77 Sir Nigel Broomfield (appointed 19th February 1998) 32 -- Sir Colin Chandler 40 29 Lord Fanshawe 52 52 J M Harris 40 39 R C Mueller 39 39 47 TI GROUP STATEMENTS OF THE DIRECTORS DIRECTORS' RESPONSIBILITIES IN RELATION TO FINANCIAL STATEMENTS Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit of the Group for that period. In preparing those financial statements, the Directors are required to: o select suitable accounting policies and then apply them consistently; o make judgments and estimates that are reasonable and prudent; and o state whether applicable accounting standards have been followed. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that these financial statements comply with these requirements. GOING CONCERN The Directors are confident, after making appropriate enquiries, that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the accounts. FINANCIAL CONTROL The Directors have overall responsibility for the Group's system of internal financial control. Such a system can provide reasonable, though not absolute, assurance against material misstatement or loss. The Board has a schedule of matters which are required to be brought to it for decision, ensuring that it maintains full and effective control over strategic, financial, organisational and compliance issues. Policies and procedures, for such matters as the delegation of authority to management, are distributed to executive management and are regularly updated. Responsibility for implementing a system of internal financial control is delegated to executive management. The management process of the Group includes monthly performance reviews for each major business, which focus on expectations and actual performance. These reviews are considered monthly by senior management and are summarised for the Board. An annual budget is prepared for each operating company. This is updated quarterly and is used by divisional and Group management to monitor actual performance. As part of this process major business risks are identified and appropriate plans developed to address any financial implications. Significant treasury and investment matters are reviewed directly by the Board or a committee thereof. The system of internal financial control is monitored through the work of internal and external auditors who report to the Audit Committee on matters identified in the course of their work. By these means the Directors have reviewed the effectiveness of the Group's system of internal financial control. 48 TI GROUP AUDITORS' REPORT PRICEWATERHOUSECOOPERS [LOGO] - -------------------------------------------------------------------------------- Southwark Towers 32 London Bridge Street London SE1 95Y REPORT TO THE SHAREHOLDERS OF TI GROUP plc We have audited the financial statements on pages 46, 47 and 50 to 85 which have been prepared under the historical cost convention and the accounting policies set out on pages 50 and 51. Respective responsibilities of Directors and Auditors The Directors are responsible for preparing the Annual Report, including as described on page 48 the financial statements. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the Listing Rules of the London Stock Exchange and our profession's ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors' remuneration and transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. We review whether the statement on page 40 reflects the Company's compliance with those provisions of the Combined Code specified for our review by the London Stock Exchange, and we report if it does not. We are not required to form an opinion on the effectiveness of the Group's corporate governance procedures or its internal controls. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31st December 1998 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors 5th March 1999 49 TI GROUP ACCOUNTING POLICIES The following new Financial Reporting Standards have been adopted in the 1998 financial statements: FRS10 'Goodwill and Intangible Assets', FRS11 'Impairment of Fixed Assets and Goodwill', FRS12 'Provisions, Contingent Liabilities and Contingent Assets', FRS13 'Derivatives and Other Financial Instruments: Disclosures' and FRS14 'Earnings per Share'. The Group's Accounting Policies have been revised where appropriate to comply with the requirements of these Standards. BASIS OF CONSOLIDATION The consolidated financial statements set out on pages 46, 47 and 50 to 85, which are prepared under the historical cost convention and which comply with applicable Accounting Standards, incorporate the financial statements of TI Group plc and its subsidiaries. New subsidiaries are included from their respective dates of acquisition during the year. The results of subsidiaries identified at acquisition as held for resale are not included in the consolidated financial statements. The results of subsidiaries disposed of during the year are included to the date of disposal. YEAR END DATES The financial year end date of the Group is 31st December, except for some overseas companies in respect of which the use of a different year end date does not have a material effect on the consolidated financial statements. FOREIGN CURRENCIES Profit and loss items are translated into sterling at average exchange rates and assets and liabilities are translated at the exchange rates ruling on 31st December. Exchange differences arising from the translation into sterling of the net equity interest in overseas subsidiary and associated undertakings are treated as movements in reserves together with exchange differences on translation of foreign currency borrowings which finance overseas investments. Exchange differences arising in respect of foreign exchange instruments taken out as hedges of overseas investments are also treated as movements in reserves. The results of businesses operating in hyper-inflationary economies are translated into a stable functional currency. The exchange translation movement arising from this process is taken to the profit and loss account. FINANCIAL INSTRUMENTS Financial instruments used to hedge foreign currency transactions and interest rates are valued at cost. Gains or losses on instruments are matched in the profit and loss account to the gains or losses on the transactions and to the interest to which they relate. Premiums and fees are amortised at a constant rate of interest over the life of the underlying instruments. COST OF ACQUISITIONS AND GOODWILL From 1st January 1998, the difference between the fair values of consideration given and net assets acquired is capitalised in the consolidated financial statements as goodwill. Goodwill arising in foreign currency is translated into sterling at the exchange rates ruling at the date of acquisition. Capitalised goodwill is amortised using the straight line method over its useful life, typically 20 years. Goodwill which arose prior to 1998 remains written off to reserves. In the Parent Company financial statements investments in subsidiary and associated undertakings are stated at cost less provisions for permanent diminution in value. ASSOCIATED UNDERTAKINGS Treatment of a company as an associated undertaking has regard to the Group's holding of at least 20% of the equity capital, representation on its Board of Directors and participation in policy-making, including dividend policy. TURNOVER Turnover represents the amounts receivable in the ordinary course of business for goods sold and services provided after deducting sales taxes and eliminating turnover within the Group. Turnover relating to long term contracts represents the value of work completed during the year. 50 TI GROUP RESEARCH AND DEVELOPMENT Expenditure on research and development is written off in the year in which it is incurred except where a major project is undertaken and it is reasonably anticipated that costs will be recovered through future commercial activity. Such costs are written off over the life of the project, subject to a maximum of seven years. DEPRECIATION Depreciation of fixed tangible assets is on the straight line basis and is charged as follows: - -- freehold land nil - -- freehold buildings between 2% and 3% per annum - -- leasehold land and buildings 2% per annum, or over the period of the lease if less than 50 years - -- plant, machinery and equipment mainly between 7 1/2% and 10% per annum - -- data processing installations, equipment and software between 12 1/2% and 33 1/3% per annum - -- tooling and test rigs between 10% and 33 1/3% per annum. INVESTMENT GRANTS Investment grants received to fund the purchase of fixed tangible assets are included within creditors as deferred income and are credited to the profit and loss account on a straight line basis over the expected lives of the related assets. LEASED ASSETS Fixed assets acquired under finance leasing contracts are recorded in the balance sheet as fixed tangible assets at their equivalent capital value and are depreciated over the useful life of the asset. The corresponding liability is recorded as a creditor and the interest element of the finance charge is charged to the profit and loss account over the primary lease period. STOCKS Stocks and work in progress are valued at the lower of cost, including an appropriate proportion of overheads, and net realisable value, less payments on account. Profit is taken on long term contracts by reference to the work completed. PENSIONS AND OTHER POST-RETIREMENT OBLIGATIONS The cost of providing pensions through defined benefit schemes and other post-retirement benefits, principally US healthcare, is charged to the profit and loss account so as to spread the regular cost over the service lives of employees in accordance with the advice of qualified actuaries. Actuarial surpluses and deficits are spread forward over the average remaining service lives of employees. The cost of providing pensions through defined contribution schemes is charged to the profit and loss account in the year in respect of which contributions become payable. DEFERRED TAXATION Deferred taxation relating to capital allowances and other timing differences is provided in the financial statements only in so far as a liability is expected to crystallise. Deferred taxation on pension balances and provisions for post-retirement obligations is recognised in full. Advance corporation tax paid and payable in respect of dividends is set off against UK corporation tax to the extent possible, otherwise it is written off to the profit and loss account. 51 TI GROUP CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER 1998
------------------------------------------------------ ---------- 1998 1997 Before goodwill amortization and exceptional Goodwill Exceptional Items amortisation items Total Total Notes (pound)m (pound)m (pound)m (pound)m (pound)m -------------------------------------------------------------------------------- Turnover 2 Total Group and share of joint venture 2,168.1 -- -- 2,168.1 1,870.4 Less share of joint venture (discontinued) (68.8) -- -- (68.8) (166.0) ------------------------------------------------------ ---------- ------------------------------------------------------ ---------- Continuing operations 1,736.4 -- -- 1,736.4 1,670.0 Acquisitions 342.9 -- -- 342.9 -- Discontinued operations 20.0 -- -- 20.0 34.4 ------------------------------------------------------ ---------- Group 2,099.3 -- -- 2,099.3 1,704.4 Costs less other income 3 (1,843.5) (15.1) (11.5) (1,870.1) (1,485.6) ------------------------------------------------------ ---------- Operating profit 2 ------------------------------------------------------ ---------- Continuing operations 224.2 -- (11.5) 212.7 216.1 Acquisitions 30.1 (15.1) -- 15.0 -- Discontinued operations 1.5 -- -- 1.5 2.7 ------------------------------------------------------ ---------- 255.8 (15.1) (11.5) 229.2 218.8 Joint venture and associates 2 ------------------------------------------------------ ---------- Continuing operations 0.5 -- -- 0.5 1.4 Acquisitions 1.3 -- -- 1.3 -- Discontinued operations 7.7 -- -- 7.7 16.8 ------------------------------------------------------ ---------- 9.5 -- -- 9.5 18.2 ------------------------------------------------------ ---------- Operating profit and joint venture and associates 265.3 (15.1) (11.5) 238.7 237.0 Exceptional net profit on disposal of operations 4 -- -- 14.7 14.7 -- Exceptional loss on disposal of fixed assets 4 -- -- -- -- (19) ------------------------------------------------------ ---------- Profit before Interest 265.3 (15.1) 3.2 253.4 235.1 Interest 5 (26.7) -- -- (26.7) (14.5) ------------------------------------------------------ ---------- Profit on ordinary activities before taxation Before exceptional items 238.6 (15.1) -- 223.5 222.5 Exceptional items (as above) -- -- 3.2 3.2 (1.9) ------------------------------------------------------ ---------- 238.6 (15.1) 3.2 226.7 220.6 Taxation 6 (74.0) -- (6.7) (80.7) (68.8) ------------------------------------------------------ ---------- Profit on ordinary activities after taxation 164.6 (15.1) (3.5) 146.0 151.8 Minority interests (0.4) -- -- (0.4) (1.3) ------------------------------------------------------ ---------- Profit for the financial year 164.2 (15.1) (3.5) 145.6 150.5 Dividends 7 (82.6) -- -- (82.6) (76.0) ------------------------------------------------------ ---------- Retained profit 81.6 (15.1) (3.5) 63.0 ------------------------------------------------------ ---------- EARNINGS PER SHARE 8 Before goodwill amortisation and exceptional items 34.3p -- -- 34.3p 32.Op Goodwill amortisation -- (3.2)p -- (3.2)p -- Exceptional items (after tax) -- -- (O.7)p (O.7)p (0.4)p ------------------------------------------------------ ---------- On profit for the financial year 34.3p (3.2)p (O.7)p 30.4p 31.6p ------------------------------------------------------ ---------- Diluted earnings per share 34.3p (3.2)p (O.7)p 30.4p 31.4p ------------------------------------------------------ ----------
52 TI GROUP BALANCE SHEETS AS AT 31ST DECEMBER 1998
Notes The Group The Company ----- ----------------------- ----------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Fixed assets Intangible assets - goodwill 11 524.1 -- -- -- Tangible assets 13 478.8 361.6 -- -- Investments 12 - - joint venture -- 28.0 -- -- -------- -------- share of gross assets -- 112.9 share of gross liabilities -- (84.9) -------- -------- - - associates 6.8 3.7 -- -- - - other 4.3 6.7 1,324.6 1,174.4 -------- -------- -------- -------- 1,014.0 400.0 1,324.6 1,174.4 -------- -------- -------- -------- Current assets Stocks 14 303.6 200.9 -- -- Assets held for disposal 15 21.8 -- -- -- Debtors and prepayments - - falling due within one year 16 464.2 305.4 159.5 121.6 - - falling due after one year 16 123.3 119.7 588.3 361.0 Cash and deposits 17 173.1 368.9 66.9 259.5 -------- -------- -------- -------- 1,086.0 994.9 814.7 742.1 Creditors falling due within one year Short term borrowings 18 (128.3) (145.3) (171.4) (134.1) Other creditors 18 (559.6) (424.6) (90.5) (84.0) -------- -------- -------- -------- Net current assets 398.1 425.0 552.8 524.0 -------- -------- -------- -------- Total assets less current liabilities 1,412.1 825.0 1,877.4 1,698.4 -------- -------- -------- -------- Creditors falling due after more than one year Loans and other borrowings 19 (557.5) (261.5) (232.2) (17.6) Other creditors 19 (14.7) (16.9) (602.4) (681.4) -------- -------- -------- -------- (572.2) (278.4) (834.6) (699.0) Provisions for liabilities and charges 22 (233.4) (142.6) -- -- -------- -------- -------- -------- 606.5 404.0 1,042.8 999.4 -------- -------- -------- -------- Capital and reserves Called up equity share capital 23 120.3 119.7 120.3 119.7 Share premium account 24 68.6 57.8 68.6 57.8 Capital reserve 24 -- -- 506.6 596.6 Profit and loss account 24 412.1 215.1 257.3 225.3 -------- -------- -------- -------- TI shareholders' funds 601.0 392.6 1,042.8 999.4 Equity interests of minority shareholders 5.5 11.4 -- -- -------- -------- -------- -------- Total shareholders' funds 606.5 404.0 1,042.8 999.4 -------- -------- -------- --------
The presentation of Capital and reserves has been amended following the adoption of FRS10 'Goodwill and Intangible Assets'. Signed on behalf of the Board on 5th March 1999 Sir Christopher Lewinton M D Angle Directors 53 TI GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 1998
1998 1997 Notes (pound)m (pound)m Net cash inflow from operating activities 25 292.8 241.4 Dividends received from joint venture and associates 25 7.3 10.6 Returns on investments and servicing of finance 26 (21.9) (13.3) Taxation 27 (91.2) (73.5) Capital expenditure and financial investment 28 (77.2) (59.6) Acquisitions and disposals 29 (449.1) (13.7) Equity dividends paid (78.4) (69.6) Management of liquid resources 30 206.6 (94.0) ----- ----- Cash flow before financing (211.1) (71.7) Financing 31 194.2 32.1 ----- ----- Decrease in cash (16.9) (39.6) ----- ----- Movement in Group net debt Decrease in cash (16.9) (39.6) (Decrease)/increase in short term deposits 30 (206.6) 94.0 Increase in loans (192.8) (26.7) Short term deposits acquired with new subsidiaries 29 1.8 -- Loans acquired with new subsidiaries 29 (37.2) -- Loan notes issued as consideration for new subsidiary 29 (16.0) -- Finance leases (4.1) 0.4 Exchange translation 30 (3.0) 2.0 ----- ----- Movement in Group net debt (474.8) 30.1 Net debt at start of year 30 (37.9) (68.0) ----- ----- Net debt at end of year 30 (512.7) (37.9) ----- -----
54 TI GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED 31ST DECEMBER 1998
The Group The Company ---------------------- ---------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Profit for the financial year 145.6 150.5 114.6 76.1 Exchange translation (2.5) (34.5) -- -- -------- -------- -------- -------- Total recognised gains and losses for the year 143.1 116.0 114.6 76.1 ======== ======== ======== ========
MOVEMENTS IN TI SHAREHOLDERS' FUNDS
Notes The Group The Company ----- ---------------------- ---------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- At start of year 392.6 324.5 999.4 992.3 Profit for the financial year 145.6 150.5 114.6 76.1 Exchange translation 24 (2.5) (34.5) -- -- Goodwill 24 Exchange translation -- 22.4 -- -- Written off on acquisitions -- (1.3) -- -- Written back on disposals 136.5 -- -- -- Dividends 7 (82.6) (76.0) (82.6) (76.0) Issue of shares 23 For cash 2.8 5.8 2.8 5.8 Consideration for new subsidiary 8.6 -- 8.6 -- Scrip dividends -- 1.2 -- 1.2 ------- ------- ------- ------- At end of year 601.0 392.6 1,042.8 999.4 ------- ------- ------- -------
55 TI GROUP NOTES TO THE FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 ACQUISITIONS AND DISPOSALS Acquisitions and disposals completed during 1998 were: February Acquisition of Safematic for (pound)18.4m cash: additional payments of approximately (pound)7m may be due, dependent on the performance of the business prior to 31st December 1999. Disposal of Thermal Processing Group for (pound)18.5m cash. Acquisition of Sealol Marine Products for (pound)2.5m cash. April Acquisition of Sealol Industrial for (pound)60.Om cash. Disposal of Belfab for (pound)27.3m cash. May Acquisition of S&H for (pound)202.8m cash. Acquisition of 41.2% of Japan Marine Technologies for (pound)1O.1m cash, increasing the Group's shareholding to 91.3%. June Acquisition of Lips United for (pound)97.3m cash. Disposal of the 50% stake in Messier-Dowty and the 100% owned landing gear repair and overhaul business for (pound)168.Om cash after adjustment for the net debt in Messier-Dowty. July Acquisition of EIS Group P.L.C. for (pound)27O.3m, comprising 1.4m Ordinary shares of 25p each of the Company, (pound)16.Om of loan notes of the Company and (pound)245.7m cash. September Disposal of CF Taylor Aircraft Galleys for (pound)14.Om cash. The acquisitions were all accounted for by the acquisition method. Goodwill arising on acquisitions
Other EIS Group S&H acquisitions Total (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- Consideration (including deferred) 270.3 202.8 195.7 668.8 Professional fees and other deal costs 10.0 0.7 6.4 17.1 Fair value of net assets acquired (below) (68.5) (34.1) (44.1) (146.7) -------- -------- -------- -------- 211.8 169.4 158.0 539.2 -------- -------- -------- --------
Provisional fair value of net assets acquired - EIS Group
Provisional fair value adjustments ---------------------------------------------- Book Transfer Conformity Provisional values to assets with TI Pensions fair prior to held for accounting & other Onerous values to acquisition disposal policies liabilities contracts TI Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m ----------- -------- -------- ----------- --------- -------- Fixed tangible assets 93.7 (16.8) (3.4) -- (1.9) 71.6 Investments 0.7 -- -- -- -- 0.7 Stocks 113.5 (45.1) (3.1) -- (0.2) 65.1 Assets held for disposal -- 35.6 -- -- -- 35.6 Debtors 130.0 (31.5) (3.0) -- -- 95.5 Creditors (110.5) 25.1 (0.3) -- (1.2) (86.9) Pensions and other post- retirement obligations (6.4) 0.6 -- (20.7) -- (26.5) Other provisions (4.3) -- -- (14.5) (9.0) (27.8) Deferred taxation 6.5 (0.1) (6.5) 6.0 -- 5.9 Minority interests (1.3) -- -- -- (1.3) Net debt (63.4) -- -- -- -- (63.4) ----- ----- ----- ----- ----- ---- Net assets 158.5 (32.2) (16.3) (29.2) (12.3) 68.5 ----- ----- ----- ----- ----- ----
56 TI GROUP - -------------------------------------------------------------------------------- Provisional fair value adjustments comprise the following: Transfers to assets held for disposal: Businesses identified at acquisition as being held for disposal in the short term were valued at their actual or estimated disposal proceeds, discounted to their present values as at the date of the acquisition of EIS Group. Conformity with TI accounting policies: Adjustments were made to align accounting policies principally affecting tooling capitalisation, and stock, debtor and deferred taxation provisions. Pensions and other liabilities: As anticipated at the time of acquisition an adjustment of (pound)21.Om was made to recognise the initial estimate of a deficit in the principal EIS Group UK pension schemes, which will be the subject of a full actuarial valuation during 1999. Provisions of (pound)14.5m were made for the estimated costs of disputes and claims, actual and potential, principally related to businesses discontinued by EIS Group prior to its acquisition by TI Group. Onerous contracts: Provisions of (pound)9.Om and asset write downs of (pound)2.1m were made for expected future losses on specific customer contracts. Fixed rate borrowings were revalued to their fair values, based on market rates at the date of acquisition, resulting in an increase in creditors of (pound)1.2m. All fair value adjustments will be reviewed during 1999; any revisions made will be adjustments to goodwill. The carrying value of land and buildings at acquisition was reviewed and no material adjustment was required to restate to open market existing use value. The after tax profit of EIS Group for the period from lst January 1998 to the date of acquisition was (pound)5.4m and for the year to 31st December 1997 was (pound)7.6m.As referred to in the Financial Review on page 33 the Directors believe that the value of the continuing EIS Group businesses supports the acquisition price. Fair value of net assets acquired - S&H
Fair value adjustments ---------------------------------------------------- Book Conformity values with TI Pensions Fair prior to accounting & other Onerous values to acquisition Revaluations policies liabilities contracts TI Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m ----------- ------------ -------- ---------- --------- -------- Fixed tangible assets 12.2 3.2 -- -- -- 15.4 Stocks 8.4 -- (0.3) -- -- 8.1 Debtors 18.0 -- (0.4) -- -- 17.6 Creditors (7.9) -- (1.6) (0.1) -- (9.6) Cash 2.6 -- -- -- -- 2.6 ---- ---- ---- ---- ---- ---- Net assets 33.3 3.2 (2.3) (0.1) -- 34.1 ---- ---- ---- ---- ---- ----
Fair values attributed to land and buildings were based upon professional valuations on the basis of their open market existing use. Adjustments for conformity with TI accounting policies related principally to alignment of policies for stocks, debtors and accruals. The after tax profit of S&H for the period from lst January 1998 to the date of acquisition was (pound)9.8m and for the year to 3lst December 1997 was (pound)23.9m. 57 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued - -------------------------------------------------------------------------------- Fair value of net assets acquired - other acquisitions
Fair value adjustments Book Conformity values with TI Pensions Fair price so accounting & other Onerous values to acquisition Revaluations policies liabilities contracts TI Group (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m ----------- ------------ -------- ----------- --------- -------- Fixed tangible assets 19.1 1.0 0.1 -- -- 20.2 Investments 0.7 (0.7) -- -- -- -- Stocks 27.7 -- (1.3) -- -- 26.4 Debtors 29.3 -- (0.4) -- -- 28.0 Creditors (34.3) -- (1.2) (0.4) -- (35.9) Pensions and other post- retirement obligations (0.2) -- -- (1.0) -- (1.2) Other provisions (2.0) -- -- (0.5) -- (2.5) Deferred taxation (0.2) -- 1.0 -- -- 0.8 Minority interests 7.2 -- -- -- -- 7.2 Net cash 0.2 -- -- -- -- 0.2 ---- ---- ---- ---- ---- ---- Net assets 47.5 0.3 (1.8) (1.9) -- 44.1 ---- ---- ---- ---- ---- ----
Fair values attributed to land and buildings were based upon depreciated replacement cost to approximate the open market existing use. The book values of quoted overseas participating interests were adjusted to current market values; the book values of certain unlisted associated undertakings were adjusted to their underlying net worth. Adjustments for conformity with TI accounting policies related principally to alignment of policies for stock and debtor provisions, accruals and deferred taxation. Provisions were established for pension obligations in accordance with SSAP24 in certain overseas businesses acquired, and also for the estimated cost of customer disputes. 58 TI GROUP 2 SEGMENT ANALYSIS
Turnover Operating Profit Operating Assets ---------------------- ---------------------- ---------------------- 1998 1997 1998 1997 1998 1997 (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- --------- --------- By class of business John Crane 585.6 411.1 76.0 65.4 231.9 111.5 Forsheda 248.5 243.8 33.8 33.6 83.6 82.0 Bundy 794.0 740.0 90.9 78.2 279.1 247.4 Dowty 451.2 275.1 59.3 42.0 174.1 74.1 Parent and other -- -- (3.9) (1.7) 16.7 23.0 --------- --------- --------- --------- --------- --------- Continuing operations 2,079.3 1,670.0 256.1 217.5 785.4 538.0 Messier-Dowty/Repair and Overhaul 88.8 200.4 9.2 19.5 -- 53.4 Less: joint venture and associates (68.8) (166.0) (9.5) (18.2) (6.8) (31.7) Goodwill amortisation -- -- (15.1) -- -- -- Exceptional items (note 4) -- -- (11.5) -- -- -- --------- --------- --------- --------- --------- --------- 2,099.3 1,704.4 229.2 218.8 778.6 559.7 ========= ========= ========= ========= ========= ========= By geographical origin United Kingdom 433.8 357.0 46.4 48.3 166.6 76.8 Continental Europe 587.9 489.7 77.4 58.8 214.6 147.3 North America 965.5 827.4 137.7 117.0 302.0 260.3 Rest of World 180.9 196.3 7.7 14.6 85.5 84.0 Parent and other -- -- (3.9) (1.7) 16.7 23.0 --------- --------- --------- --------- --------- --------- 2,168.1 1,870.4 265.3 237.0 785.4 591.4 Less: joint venture and associates (68.8) (166.0) (9.5) (18.2) (6.8) (31.7) Goodwill amortisation -- -- (15.1) -- -- -- Exceptional items (note 4) -- -- (11.5) -- -- -- --------- --------- --------- --------- --------- --------- 2,099.3 1,704.4 229.2 218.8 778.6 559.7 ========= ========= ========= ========= ========= ========= By geographical destination United Kingdom 264.6 235.2 Continental Europe 655.0 560.2 North America 956.7 809.4 Rest of World 291.8 265.6 --------- --------- 2,168.1 1,870.4 Less: Joint venture and associates (68.8) (166.0) ========= ========= 2,099.3 1,704.4 --------- ---------
Operating assets are defined as total assets less current liabilities, excluding intangible assets, assets held for disposal, cash and deposits, short term borrowings, prepaid pension contributions, corporate and deferred taxation, and dividends. In 1997 operating assets included the Group's investment in the Messier-Dowty joint venture net of its borrowings and taxation balances. 59 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 2 SEGMENT ANALYSIS continued As described in the Operating and Financial Review, the results of each business segment, with the exception of Forsheda, were affected by the acquisitions made during 1998. There were no material acquisitions in 1997. As from 1st January 1998 the polymer engineering businesses of John Crane were separated to form a fourth business segment, which trades as Forsheda. 1997 figures have been restated accordingly. Titeflex, Lewis & Saunders and Cambridge Vacuum Engineering, three businesses previously reported as part of Bundy, were transferred to Dowty with effect from 1st January 1998, as their principal products are aerospace related and they are now managed by Dowty. Their 1997 sales and operating profit reported in Bundy were (pounds)67.9m and (pounds)5.4m respectively, and have not been restated. TI Group sold its landing gear interests, comprising its 50% stake in Messier-Dowty and its 100% owned repair and overhaul business, to Snecma on 30th June 1998. The businesses disposed of are shown separately in the segment analysis above. Sales between business and geographical segments are not material, other than for sales from the United Kingdom to Continental Europe of (pounds)92.8m (1997 (pounds)94.7m). Joint venture and associates The Group's attributable turnover and operating profit of its joint venture and associates are incorporated into the segment analysis as follows:
1998 1997 --------------------- --------------------- Operating Operating Turnover Profit Turnover Profit (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- John Crane - associates -- 1.2 -- 0.4 Bundy - associates -- 0.6 -- 1.0 Messier-Dowty - joint venture 68.8 7.7 166.0 16.8 --------- --------- --------- --------- 68.8 9.5 166.0 18.2 ========= ========= ========= =========
In 1998 Messier-Dowty included 50% of the results of the joint venture up to 30th June 1998, the date of its disposal; in 1997 it included 62.5% of the joint venture's results for the year in line with the Group's dividend entitlement. 3 COSTS LESS OTHER INCOME
1998 1997 ----------------------------------------------------- -------------------------------------- Continuing Acquisitions Discontinued Total Continuing Discontinued Total (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m ---------- ------------ ------------ --------- ---------- ------------ --------- Change in stocks of finished goods and work in progress 2.5 (1.5) -- 1.0 (2.9) -- (2.9) Raw materials and consumables 635.2 119.7 3.9 758.8 592.1 6.7 598.8 Other external charges 233.9 74.0 5.7 313.6 234.4 9.8 244.2 Staff costs (note 9) 607.0 112.6 7.9 727.5 586.4 13.5 599.9 Depreciation of fixed tangible assets 45.1 8.0 1.0 54.1 43.9 1.7 45.6 Goodwill amortisation -- 15.1 -- 15.1 -- -- -- ---------- ------------ ------------ --------- ---------- ------------ --------- 1,523.7 327.9 18.5 1,870.1 1,453.9 31.7 1,485.6 ========== ============ ============ ========= ========== ============ =========
60 TI GROUP Costs charged in arriving at Operating profit include:
1998 1997 (pounds)m (pounds)m --------- --------- Research and development expenditure 38.4 39.0 Property rents 16.2 13.3 Hire of plant and machinery 11.6 10.9 Amounts paid to PricewaterhouseCoopers As auditors - including the Company (pounds)0.2m (1997 (pounds)0.2m) 2.9 2.2 Non audit work - of which (pounds)0.6m in UK (1997 (pounds)0.2m) 1.3 0.4
The amounts shown above for research and development expenditure are stated in accordance with the definition contained in SSAP 13. This strict accounting definition does not include the significant investment in application engineering and related development costs to support customer needs and external investment to obtain new technology through acquisitions. Details of the Group's total investment are set out in the Operating and Financial Review. Non audit fees paid to PricewaterhouseCoopers in 1998 included (pounds)0.6m (1997 (pounds)0.4m) paid to Price Waterhouse and (pounds)nil (1997 (pounds)nil) paid to Coopers & Lybrand prior to the date of appointment of PricewaterhouseCoopers. 4 EXCEPTIONAL ITEMS
1998 1997 (pounds)m (pounds)m --------- --------- Dowty Woodville Polymer 'whistleblower' action (7.0) -- Bundy Germany restructuring (5.5) -- Release of unutilised litigation provision 1.0 -- --------- --------- Costs less other income (11.5) -- Profit on disposal of Messier-Dowty/Repair and Overhaul 2.7 -- Net profit on disposal of other operations 12.0 -- Loss on disposal of fixed assets -- (1.9) --------- --------- 3.2 (1.9) ========= =========
The USA 'whistleblower' action against Dowty Woodville Polymer, a Forsheda business, was settled without admission of liability. The exceptional charge relates to its financial settlement and associated costs, net of insured expenses. An exceptional charge was incurred in Bundy's German operations which underwent a structural and one-off restructuring; the principal manufacturing site at Heidelberg was scaled down to leave only basic manufacturing operations there with all other activities now carried out in satellites located close to customers' operations. The unutilised litigation provision was created on the acquisition of Forsheda AB in November 1996 in respect of a specific claim which was settled by arbitration during 1998. The exceptional net profit on disposal of operations in 1998 arose from the disposals of Messier-Dowty/Repair and Overhaul, Belfab, and Thermal Processing Group. Total proceeds were (pounds)213.8m cash. The net gain is stated after writing back goodwill previously written off of (pounds)136.5m. The exceptional loss on disposal of fixed assets in 1997 arose from the sale of surplus properties, mainly in the UK, and related costs. Disposals of surplus properties in 1998 gave rise to neither profit nor loss. 61 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 5 INTEREST
1998 1997 (pounds)m (pounds)m --------- --------- Overdrafts and other short term borrowings (7.5) (5.1) Loans (31.0) (24.0) Finance leases (0.2) (0.2) --------- --------- Interest payable (38.7) (29.3) Interest receivable 13.0 16.8 --------- --------- Net Group interest payable (25.7) (12.5) Share of joint venture's interest (0.7) (1.6) Share of associates' interest (0.3) (0.4) --------- --------- (26.7) (14.5) ========= =========
6 TAXATION
1998 1997 (pounds)m (pounds)m --------- --------- UK corporation tax at 31% (1997 31.5%) (57.9) (41.2) Advance corporation tax 6.2 4.1 Relief in respect of overseas taxes 39.6 25.1 --------- --------- Total UK taxation (12.1) (12.0) Overseas taxation (66.8) (51.6) --------- --------- Total Group taxation (78.9) (63.6) Share of joint venture's taxation (1.5) (4.8) Share of associates' taxation (0.3) (0.4) --------- --------- (80.7) (68.8) ========= =========
The above includes deferred taxation credited of (pounds)3.7m (1997 (pounds)0.7m charged). Provision for deferred taxation is made only in respect of liabilities likely to arise in the foreseeable future. Had provision for deferred taxation been made on the full liability method, the Group tax charge would have been unchanged (1997 -- unchanged). The net exceptional items gave rise to a net exceptional tax charge of (pounds)6.7m (1997 (pounds)nil), including (pounds)8.3m in respect of the net profit on disposal of operations. 7 DIVIDENDS OF TI GROUP plc
1998 1997 (pounds)m (pounds)m --------- --------- Interim paid of 5.6p per 25p share (1997 5.1p) 26.8 24.4 Proposed final of 11.6p per 25p share (1997 10.8p) 55.8 51.6 --------- --------- 82.6 76.0 ========= =========
62 TI GROUP 8 EARNINGS PER SHARE Earnings per share are calculated on a weighted average basis using the earnings for each month, which total (pounds)145.6m (1997 (pounds)150.5m) on a FRS3 basis. Earnings before goodwill amortisation and exceptional items, which provides a consistent measure of operating performance, were (pounds)164.2m (1997 (pounds)152.4m). The weighted average number of shares in issue was 478.9m (1997 476.7m).The weighted average number of shares on a fully diluted basis, calculated in accordance with FRS14, was 479.0m (1997 479.7m), reflecting the effect of outstanding share options. 9 EMPLOYEE INFORMATION
1998 1997 ------------------------------------------------------ ---------------------------------------- Continuing Acquisitions Discontinued Total Continuing Discontinued Total Staff costs (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m --------- ------------ ------------ --------- ---------- ------------ --------- Wages and salaries 478.2 93.2 6.8 578.2 460.4 11.4 471.8 Social security costs 101.5 15.7 0.8 116.0 100.2 1.5 101.7 Pensions and other post-retirement obligations 27.3 3.7 0.3 31.3 25.8 0.6 26.4 --------- ------------ ------------ --------- ---------- ------------ --------- 607.0 112.6 7.9 727.5 586.4 13.5 599.9 ========= ============ ============ ========= ========== ============ =========
The total for pensions and other post-retirement obligations is before deducting a net credit of (pounds)3.6m (1997 (pounds)4.1m) in respect of an actuarial surplus in the main UK pension scheme (see note 32). The average number of persons employed by the Group during the year was:
1998 1997 ------------------------------------------------- ---------------------------------- Continuing Acquisitions Discontinued Total Continuing Discontinued Total ---------- ------------ ------------ ----- ---------- ------------ ----- UK 4,400 2,000 75 6,475 4,400 150 4,550 Overseas 20,775 3,475 200 24,450 20,550 400 20,950 ---------- ------------ ------------ ------ ---------- ------------ ------ 25,175 5,475 275 30,925 24,950 550 25,500 ========== ============ ============ ====== ========== ============ ======
10 EMOLUMENTS AND INTERESTS OF DIRECTORS
1998 1997 Details of Directors' emoluments are as follows: (pounds)'000 (pounds)'000 ------------ ------------ Aggregate emoluments (incl. fees, benefits and annual performance-related payments) 5,123 4,418 Aggregate notional gains on the exercise of share options 15 1,812 Company contributions to defined contribution pension schemes 43 36 Compensation for loss of office 767 --
A detailed statement of Directors' emoluments, which forms part of these financial statements, appears on pages 46 and 47. This includes details of the emoluments of Sir Christopher Lewinton, Highest Paid Director, and details of long term incentive plans and defined benefit pension arrangements. 63 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued SUMMARY OF TI DIRECTORS' SHARE INTERESTS
Ordinary Shares Ordinary Shares Under Option Balance Balance as at as at 31 Dec 97 31 Dec 97 Balance Balance or date of Balance or date of Director as at as at appointment as at Date of appointment 5 Mar 99 31 Dec 98 if later 31 Dec 98 Grant Exercised Granted if later - ------------------------------------------------------------------------------------------------------------------------------- Sir Christopher 529,457 442,356 321,698 226,000 22/08/94 -- -- 226,000 Lewinton* 22,000 11/04/95 -- -- 22,000 35,000 15/04/96 -- -- 35,000 16,000 09/09/06 -- -- 16,000 59,000 02/04/97 -- -- 59,000 172,509 02/04/97 -- -- 172,500 2l5,500 08/09/97 -- -- 215,000 205,500 13/03/98 -- 205,500 -- ** -- 25/06/93 6,400 -- 6,400 ** 2.754 27/06/98 -- 2,754 -- W J Laule* 114,615 63,556 29,893 80,000 22/08/94 -- -- 80,000 51,000 11/04/95 -- -- 51,000 62,000 15/04/96 -- -- 62,000 23,500 02/04/97 -- -- 23,500 80,000 08/09/97 -- -- 80,000 168,000 13/03/98 -- 168,000 -- 31,000 06/08/98 -- 31,000 -- ** 4,872 27/08/98 -- 4,872 -- M D Angle* 37,861 16,837 9,500 222,000 02/04/97 -- -- 222,000 52,500 08/09/97 -- -- 52,500 76,000 13/03/98 -- 76,000 -- Sir Nigel Broomfield -- -- -- -- -- -- -- -- Sir Colin Chandler 7,783 7,783 2,783 -- -- -- -- -- Lord Fanshawe 3,239 3,239 3,239 -- -- -- -- -- J M Harris 6,046 6,046 3,046 -- -- -- -- -- J M Hignett 140,701 102,149 50,232 -- -- -- -- -- J Langston* 25,774 15,855 15,855 67,000 22/08/94 -- -- 67,000 47,000 11/04/95 -- -- 47,000 29,000 02/04/97 -- -- 29,000 38,000 08/09/97 -- -- 38,000 30,000 13/03/98 -- -- 30,000 10,000 06/08/98 -- -- 10,000 ** 5,088 31/06/95 -- -- 5,088 D P Lillycrop* 34,372 25,205 16,587 20,000 08/04/93 -- -- 20,000 5,000 19/04/94 -- -- 5,000 5,000 15/04/96 -- -- 5,000 22,500 09/09/96 -- -- 22,500 31,000 02/04/97 -- -- 31,000 40,000 08/09/97 -- -- 40,000 47,500 13/03/98 -- -- 47,500 36,500 06/08/98 -- 36,500 -- ** 2,464 29/08/96 -- -- 2,464 ** 1,582 28/06/97 -- -- 1,582 R G Mueller 20,000 20.000 10,000 -- -- -- -- -- J L Roe* 86,572 79,009 56,216 14,000 19/04/94 -- -- 14,000 28,000 19/04/94 -- -- 28,000 30,000 22/08/94 -- -- 30,000 7,000 11/04/95 -- -- 7,000 19,000 15/04/96 -- -- 19,000 30,000 02/04/97 -- -- 30,000 71,300 08/09/97 -- -- 71,300 51,500 13/03/98 -- 51,500 -- ** -- 25/06/93 2,560 -- 2,560 ** 3,053 31/08/95 -- -- 3,053 ** 1,101 27/08/98 -- 1,101 -- T A Welsh* 12,529 12,529 -- -- -- -- -- -- (appointed 1st January 1999) Ordinary Shares Under Option Market Price at Date from Excerise Date of which Director Price Exercise Normally Expriy (p) (p) Excerisable Date - ------------------------------------------------------------------------------ Sir Christopher 373.5 -- 22/08/97 22/06/04 Lewiston* 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 551.5 -- 09/09/00 09/09/06 540.0 -- 02/04/00 02/04/07 540.0 -- 02/04/01 02/04/07 600.0 -- 08/09/01 08/09/07 505.0 -- 13/03/03 13/03/08 269.5 432.5 01/08/98 31/01/99 354.0 -- 01/10/01 31/03/02 W J Laule* 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 505.0 -- 13/03/01 13/03/08 418.0 -- 06/08/01 06/08/08 354.0 -- 01/10/03 31/03/04 M D Angle* 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 505.0 -- 13/03/01 13/03/08 Sir Nigel Broomfield -- -- -- -- Sir Colin Chandler -- -- -- -- Lord Fanshawe -- -- -- -- J M Harris -- -- -- -- J M Hignett -- -- -- -- J Langston* 373.5 -- 22/08/97 22/08/04 376.5 -- 11/04/98 11/04/05 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 505.0 -- 13/03/01 13/03/08 418.0 -- 06/08/01 06/08/08 339.0 -- 01/10/00 31/03/01 D P Lillycrop* 301.5 -- 08/04/96 08/04/03 416.5 -- 19/04/97 19/04/04 520.5 -- 15/04/99 15/04/06 551.5 -- 09/09/00 09/09/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 505.0 -- 13/03/01 13/03/08 418.0 -- 06/08/01 06/08/08 420.0 -- 01/10/01 31/03/02 436.0 -- 01/10/02 31/03/03 R G Mueller -- -- -- -- J L Roe* 416.5 -- 19/04/97 19/04/04 416.5 -- 19/04/99 19/04/04 373.5 -- 22/08/97 22/06/04 376.5 -- 11/04/98 11/04/05 520.5 -- 15/04/99 15/04/06 540.0 -- 02/04/00 02/04/07 600.0 -- 08/09/00 08/09/07 505.0 -- 13/03/01 13/03/08 269.5 432.5 01/08/98 31/01/99 339.0 -- 01/10/00 31/03/01 354.0 -- 01/10/01 31/03/02 T A Welsh* -- -- -- --
* Denotes Executive Director ** Denotes SAYE Options NOTES TO THE SUMMARY OF TI DIRECTORS' SHARE INTERESTS 1. Mid-Market Share Price The mid-market price of TI Group shares as at 30th December 1998 was 323.75p. The highest mid-market price during the year was 621p and the lowest mid-market price was 306p. 2. TI Group Employee Share Ownership Trust The TI Group Employee Share Ownership Trust, established in 1995, is discretionary and was created to encourage employees to hold shares in the Company. During the year TI Group Trustees Ltd purchased 420,000 (1997 631,000) TI Ordinary shares; 755,237 shares remained in ownership of the trust at 5th March 1999. Under paragraph 2 of Schedule 13 of the Companies Act 1985, each of the executive Directors of the Company is deemed to be interested in these remaining shares. 3. Contingent Interests Each executive Director (detailed below) has notified the Company that, for the purposes of Section 324 of the Companies Act 1985, he has a contingent interest in the following number of TI Ordinary shares, representing the maximum aggregate number of shares to which he could become entitled (in respect of one or more of the measurement periods 1996-99, 1997-2000 and 1998-2001) under the three-year share performance plan described on page 45. Sir Christopher Lewinton 378,043 J Langston 46,104 W J Laule 180,363 D P Lillycorp 47,137 M D Angle 119,240 J L Roe 116,707 As explained on page 47, contingent interest under the plan do not vest until the end of the relevant measurement period; in respect of each period it will not be known what, if any, entitlement has actually accrued until after the announcement of the Company's results for the relevant year. 4. Performance Criteria Executive share options are normally exercisable between three and ten years from the date of grant provided that the increase in the earnings per share of the Company (calculated in accordance with the rules of the scheme concerned) over a period of three years prior to exercise has exceeded the increase in the United Kingdom Retail Prices Index over a corresponding period. In the case of options granted after 1st January 1996 the increase in earnings per share must exceed the increase in RPI by at least 2% per annum. 5. Lapsed Options No options lapsed during the year. 64 TI GROUP 11 FIXED INTANGIBLE ASSETS - GOODWILL Intangible assets comprise purchased goodwill arising from the acquisition of the following businesses during 1998: The Group (pounds)m --------- At 31st December 1997 -- EIS Group P.L.C 211.8 S&H 169.4 Safematic, Sealol, Lips United and other acquisitions 158.0 --------- Cost at 31st December 1998 539.2 Less amortisation (15.1) --------- Net book amount 1998 524.1 ========= 12 FIXED TANGIBLE ASSETS
Plant, Assets in Land & Machinery & Course of Buildings Equipment Construction Total The Group (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- Cost At 31st December 1997 166.3 563.7 23.2 753.2 Exchange rate adjustments 1.0 2.2 (0.3) 2.9 New subsidiaries 67.3 161.6 2.5 231.4 Subsidiaries disposed of (12.3) (29.8) (0.5) (42.6) Capital expenditure 2.4 59.8 31.1 93.3 Disposals and adjustments (4.7) (1.4) (24.4) (30.5) --------- --------- --------- --------- At 31st December 1998 220.0 756.1 31.6 1,007.7 --------- --------- --------- --------- Depreciation At 31st December 1997 45.3 346.3 -- 391.6 Exchange rate adjustments 1.0 2.7 -- 3.7 New subsidiaries 15.2 109.0 -- 124.2 Subsidiaries disposed of (2.7) (18.2) -- (20.9) Charge for year 4.8 49.3 -- 54.1 Disposals and adjustments (1.0) (22.8) -- (23.8) --------- --------- --------- --------- At 31st December 1998 62.6 466.3 -- 528.9 --------- --------- --------- --------- Net book amount 1998 157.4 289.8 31.6 478.8 ========= ========= ========= ========= Net book amount 1997 121.0 217.4 23.2 361.6 --------- --------- --------- ---------
Freehold land and buildings included above have a cost of (pounds)206.2m (1997 (pounds)149.9m) and depreciation of (pounds)56.0m (1997 (pounds)38.5m). 65 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 12 FIXED TANGIBLE ASSETS continued Leased assets included above comprise:
Land & Buildings ------------------------------------------------ Plant, Long Leasehold Short Leasehold Machinery & Equipment ---------------------- ---------------------- ---------------------- 1998 1997 1998 1997 1998 1997 (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- --------- --------- Cost 3.9 2.5 9.9 13.9 14.0 6.7 Depreciation (1.7) (1.0) (4.9) (5.8) (7.7) (5.0) --------- --------- --------- --------- --------- --------- Net book amount 2.2 1.5 5.0 8.1 6.3 1.7 ========= ========= ========= ========= ========= =========
The depreciation charge for the year for leased assets was (pounds)2.0m (1997 (pounds)1.5m). 13 INVESTMENTS
Other Joint Associated Participating Own Venture Undertakings Interests Shares Total The Group (pounds)m (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- --------- Shares at valuation At 31st December 1997 28.0 3.7 1.0 5.7 38.4 Exchange rate adjustments (0.8) 1.0 -- -- 0.2 Acquisitions -- 1.1 (0.4) 1.9 2.6 Disposals (25.6) -- -- (1.8) (27.4) Movement during the year (1.6) 1.0 -- (2.1) (2.7) --------- --------- --------- --------- --------- At 31st December 1998 -- 6.8 0.6 3.7 11.1 ========= ========= ========= ========= =========
Joint venture The Group's only joint venture, the 50% stake in Messier-Dowty, was sold to Snecma on 30th June 1998. Associated undertakings The principal associated undertakings are: Class Country of operation % Held of Share -------------------- ------ -------- John Crane (Japan) Inc Japan 49 Ordinary Korea Bundy Corp South Korea 39 Ordinary The interest in associated undertakings is shown in the Group balance sheet at a valuation being the proportion of net assets attributable to TI Group at the date of acquisition, plus TI Group's share of post-acquisition earnings which at 31st December 1998 amounted to (pounds)1.0m (1997 (pounds)0.2m losses). Lips United has 50% owned associated undertakings in France, Greece, Italy, Portugal and Spain. EIS Group has 50% owned associates in Argentina, Canada and India and a 40% owned associate in the USA. The financial year end of John Crane (Japan) Inc is 31st March; the Group's share of its results is for the calendar year using management accounts for the unaudited period. Sales by the Group to its associates in 1998 amounted to (pounds)2.0m (1997 (pounds)2.2m). Sales by the associates to TI Group were not material to either party in either year. 66 TI GROUP Other participating interests The principal other participating interest is Tube Investments of India Ltd of which the Group holds 3% of the ordinary shares. Participating interests are all listed companies stated at Directors' valuation with a market value at 31st December 1998 of (pound)0.8m (1997 (pounds)0.8m). Own shares The TI Group Employee Share Ownership Trust was established in 1995 with the purpose of holding shares in the Company for subsequent transfer to employees under various incentive schemes. In accordance with UITF13 the Trust's accounts are incorporated into the Company and Group accounts. At 31st December 1998 the Trust held 1,134,355 shares in the Company (1997 1,079,210) with a market value of (pounds)3.7m (1997 (pounds)5.0m). Costs of administration are included in the profit and loss account as they accrue. The Trust retains dividend income for reinvestment. The Company (pounds)m --------- Shares in subsidiaries at cost and own shares At 31st December 1997 1,174.4 Acquisitions 310.7 Disposals (158.4) Other movements (2.1) --------- At 31st December 1998 1,324.6 ========= Provisions for diminution in value included in the above at 31st December 1998 amounted to (pounds)67.5m (1997 (pounds)65.4m). A list of the Group's principal subsidiaries, associated undertakings and other participating interests is set out on pages 84 and 85. 14 STOCKS The Group ---------------------- 1998 1997 (pounds)m (pounds)m --------- --------- Raw materials and consumables 82.7 60.1 Work in progress 120.0 68.1 Finished goods and goods for resale 106.6 77.0 Payments on account (5.7) (4.3) --------- --------- 303.6 200.9 ========= ========= The current replacement cost of stocks does not materially exceed the historical cost stated above. 67 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 15 ASSETS HELD FOR DISPOSAL The following businesses acquired with EIS Group were identified for sale: CF Taylor Aircraft Galleys (sold 4th September 1998),the Industrial Machinery division (sold 23rd February 1999) and the Aircraft Spares and Distribution division. These businesses were valued at the discounted value at acquisition of their estimated or actual proceeds. Transactions and balances between these businesses and other Group companies were not material; no dividends were received from these businesses since acquisition nor are receivable. 16 DEBTORS AND PREPAYMENTS
The Group The company --------------------- --------------------- 1998 1997 1998 1997 (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- Amounts falling due within one year Trade debtors 401.2 263.9 -- -- Amounts owed by Group undertakings -- -- 138.8 113.3 Amounts owed by joint venture and associates 0.4 4.3 -- -- Other debtors 9.6 5.5 2.0 0.1 Prepayments and accrued income 25.7 22.0 0.7 2.0 Corporate taxation, including UK advance corporation tax recoverable 27.3 9.7 18.0 6.2 --------- --------- --------- --------- 464.2 305.4 159.5 121.6 ========= ========= ========= ========= Amounts falling due after more than one year Amounts owed by Group undertakings -- -- 587.4 361.0 Prepaid pension contributions (note 32) 83.8 81.8 -- -- Other debtors 7.8 8.4 0.9 -- Deferred taxation 31.7 29.5 -- -- --------- --------- --------- --------- 123.3 119.7 588.3 361.0 --------- --------- --------- --------- Total debtors 587.5 425.1 747.8 482.6 ========= ========= ========= =========
The deferred tax asset relates to provisions for post-retirement medical and welfare benefit schemes, principally in the USA. 17 CASH AND DEPOSITS The Group The company --------------------- --------------------- 1998 1997 1998 1997 (pounds)m (pounds)m (pounds)m (pounds)m --------- --------- --------- --------- Cash at bank and in hand 70.7 62.6 1.1 38.5 Short term bank deposits 102.4 306.3 65.8 221.0 --------- --------- --------- --------- 173.1 368.9 66.9 259.5 ========= ========= ========= ========= 68 TI GROUP 18 CREDITORS FALLING DUE WITHIN ONE YEAR
The Group The Company ------------------- ------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m --------- --------- --------- --------- Bank overdrafts 40.9 20.2 139.2 134.1 Other short term borrowings 13.0 10.8 -- -- ----- ----- ----- ----- Short term borrowings -- repayable on demand 53.9 31.0 139.2 134.1 Commercial paper -- 69.8 -- -- Loan notes 16.0 -- 16.0 -- Current portion of loans 54.7 44.1 16.2 -- Finance leases 3.7 0.4 -- -- ----- ----- ----- ----- Short term borrowings 128.3 145.3 171.4 134.1 ===== ===== ===== ===== Trade creditors 241.6 164.5 -- -- Bills of exchange payable 4.5 5.3 -- -- Amounts owed to Group undertakings -- -- 14.6 10.4 Amounts owed to joint venture and associates 0.2 1.5 -- -- Corporate taxation 51.0 59.4 8.7 20.8 Other taxation and social security 39.1 30.3 -- -- Other creditors 20.3 7.9 1.1 0.4 Accruals and deferred income 147.2 104.1 10.3 0.8 Proposed final dividend 55.8 51.6 55.8 51.6 ----- ----- ----- ----- Other creditors 559.6 424.6 90.5 84.0 ===== ===== ===== =====
Short term borrowings of subsidiaries amounting to (pound)7.3m (1997 (pound)1.5m) are secured by charges over certain of the assets of the subsidiaries concerned. (pound)l6.0m of unsecured loan notes were issued in 1998 as part consideration for the acquisition of EIS Group. The interest rate is 1% below 6 month LIBOR and is payable 6 monthly in arrears. The notes are redeemable at par by holders on any interest payment date at 30 days' notice. The final redemption date is 1st June 2008. Current portion of loans includes $50m (1997 $30m) of the Group's private placement debt (see note 20). 19 CREDITORS FALLING DUE AFTER MORE THAN ONE YEAR
The Group The Company ------------------- ------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m --------- --------- --------- --------- Repayable wholly or partly after five years Secured loans of overseas subsidiaries 0.4 0.2 -- -- Unsecured bank and other loans 21.1 60.8 -- -- Finance leases 0.2 0.5 -- -- Repayable wholly within five years Secured loans of overseas subsidiaries 0.9 0.8 -- -- Unsecured bank and other loans 533.3 198.9 232.2 17.6 Finance leases 1.6 0.3 -- -- ----- ----- ----- ----- Loans and other borrowings 557.5 261.5 232.2 17.6 ===== ===== ===== ====
69 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 19 CREDITORS FALLING DUE AFTER MORE THAN ONE YEAR continued The Group The Company ------------------- ------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m --------- --------- --------- --------- Amounts owed to Group undertakings -- -- 602.4 681.4 Corporate taxation 2.6 2.4 -- -- Other creditors 12.1 14.5 -- -- ---- ---- ----- ----- Other creditors 14.7 16.9 602.4 681.4 ==== ==== ===== ===== The security for loans of overseas subsidiaries, where given, mainly comprises charges on specific assets of the subsidiaries concerned. Amounts owed by the Company to Group undertakings are governed by loan agreements, the majority of which expire between two and five years. 20 NET BORROWINGS 1998 1997 (pound)m (pound)m --------- --------- Short term borrowings (note 18) (128.3) (145.3) Loans and other borrowings falling due after more than one year (note 19) (557.5) (261.5) ------- ------- Total borrowings (685.8) (406.8) Cash and deposits (note 17) 173.1 368.9 ------- ------- Net borrowings (512.7) (37.9) ======= ======= Cash and overdraft balances are offset only where a legal right of offset exists with a bank. Maturity of borrowings and facilities 1998 1997 (pound)m (pound)m --------- --------- Within one year 128.3 145.3 Between one and two years 250.8 48.8 Between two and five years 300.0 200.3 After five years 6.7 12.4 ------- ------- Total borrowings 685.8 406.8 ======= ======= Maturity dates above are based on term loans and committed lending facilities. The maturity profile based on the earliest repayment date would result in (pound)577.3m being repayable within one year, and (pound)108.5m repayable after 12 months the principal element of which relates to the US private placements. 70 TI GROUP The Group had the following unused committed borrowing facilities: 1998 1997 (pound)m (pound)m --------- --------- Expiring within one year 24.1 12.5 Expiring between one and two years 41.2 113.3 Expiring after two years 397.8 -- ------ ------ 463.1 125.8 ====== ====== Facilities expiring after two years include (pound)315m subject to annual review at which time either the banks may extend them for a further 12 months or the Group may draw down the facility as a loan for two years. Currency and interest rate analysis of net borrowings at 31st December 1998
Fixed Floating Fixed interest Time Currencies Category Total rate rate rate fixed (pound)m (pound)m (pound)m % years --------------- ----------------------------- --------- --------- --------- -------- ----- Sterling Bank loans and finance leases (187.8) (162.6) (25.2) 9.3 6.1 US $ US private placements (114.2) -- (114.2) 9.1 3.9 US & Canadian $ Bank loans and finance leases (166.1) (152.0) (14.1) 5.6 1.1 European Bank loans and finance leases (180.5) (165.0) (15.5) 4.0 1.3 Rest of World Bank loans and finance leases (37.2) (37.2) -- -------- -------- -------- Total borrowings (685.8) (516.8) (169.0) -------- -------- -------- Sterling Cash and deposits 85.2 85.2 -- US & Canadian $ Cash and deposits 36.5 36.5 -- European Cash and deposits 27.2 27.2 -- Rest of World Cash and deposits 24.2 24.2 -- -------- -------- -------- Cash and deposits 173.1 173.1 -- -------- -------- -------- Net borrowings (512.7) (343.7) (160.0) ======== ======== ========
The table above takes account of interest rate swaps and forward rate agreements. Floating rates on borrowings are based on appropriate local market rates. Fixed rate loans are those for which the interest rate was fixed for 12 months or more as at 31st December 1998. Since the year end the Group has entered into a zero cost interest rate collar of (pound)50m for 12 months with a ceiling at 6.0% and a floor at 4.4%. The Group has two US private placement debts. The first has an outstanding principal of $90m, of which $30m is repayable in December 1999, with a coupon of 8.52%; final maturity is in December 2001. The other has an outstanding principal of $100m, of which $20m is repayable in October 1999, with a coupon of 8.853% and final maturity in October 2003. Both debts are placed by TI Group Inc with major US institutional investors and are guaranteed by TI Group plc. Canadian dollar debt includes a (pound)20m bank loan swapped into Canadian dollars, settled in January 1999. 71 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 20 NET BORROWINGS continued Currency analysis of net assets at 31st December 1998 Net Assets Excluding Total Total Borrowings Borrowings Currencies (pound)m (pound)m ----------------- -------------------- ---------- Sterling 199.2 (187.8) US and Canadian $ 280.1 (280.3) European 190.7 (180.5) Rest of World 92.7 (37.2) ------- ------ 762.7 (685.8) Intangible assets-- goodwill (denominated in sterling) 524.1 -- ------- ------ 1,286.8 (685.8) ======= ====== There are no material foreign currency transaction exposures, since to the extent practicable all Group companies use forward contracts to hedge transactions that are not denominated in their functional currency. 21 FINANCIAL INSTRUMENTS The Group's policies in respect of foreign currency and interest rate risk management and the related use of financial instruments set out in the Treasury section of the Financial Review on pages 34 and 35 form part of these financial statements. The Group held the following categories of financial instruments at 3lst December 1998: Book Values Fair Values Assets/(liabilities) (pound)m (pound)m ----------- ----------- Cash and deposits 173.1 173.1 Short term borrowings (128.3) (128.3) Loans and other borrowings falling due after more than one year (557.5) (568.0) Interest rate swaps and forward rate agreements -- (1.4) The fair value of loans and other borrowings falling due after more than one year represents the cost which the Group would incur if it elected to repay these borrowings before their maturity dates, calculated by discounting future cash flows at prevailing interest rates. The Group uses interest rate swaps and forward rate agreements to manage its interest rate exposures, as described on pages 34 and 35. Interest is charged to the profit and loss account over the lives of these instruments and based on their contracted interest rates. To determine the fair value of interest rate swaps and forward rate agreements for inclusion in the above table, a calculation was made of the net gain or loss which would have arisen if these contracts had been terminated on 31st December 1998. The value at that date was determined by market interest rates, which fluctuate over time. At 3lst December 1998 and at 31st December 1997 gains and losses on forward exchange contracts taken out as hedges of sales and purchase transactions were not material. 72 TI GROUP 22 PROVISIONS FOR LIABILITIES AND CHARGES
Pensions Product and Other Warranty Post- and Retirement Onerous Deferred Other Obligations Contracts Taxation Liabilities Group Total (pound)m (pound)m (pound)m (pound)m (pound)m ----------- --------- --------- ----------- ----------- At 31st December 1997 112.2 -- 30.4 -- 142.6 Exchange rate adjustments 1.0 0.3 0.1 -- 1.4 Transferred from creditors 6.7 11.6 -- 0.9 19.2 Transferred to debtors falling due within one year -- -- 21.9 -- 21.9 New subsidiaries 27.7 14.6 (6.7) 15.7 51.3 Utilised (6.9) (3.5) -- (7.9) (18.3) Profit and loss account 9.6 3.5 (3.3) 5.5 15.3 ------ ----- ----- ----- ------ At 31st December 1998 150.3 26.5 42.4 14.2 233.4 ====== ===== ===== ===== ======
Provisions for liabilities and charges include provisions for: o Unfunded post-retirement medical and welfare benefit schemes, unfunded pension arrangements, principally overseas, and the actuarially estimated deficit in the EIS Group UK pension schemes (see note 32); o Future product warranty costs arising in the normal course of business from prior period sales, and onerous contract liabilities; o Deferred taxation; o Other liabilities, which include actual and potential legal claims where resolution is anticipated during 1999 and committed reorganisation expenditure. Following the adoption of FRS12 `Provisions, Contingent Liabilities and Contingent Assets', certain balances relating to the above items, previously reported within Creditors, have been reclassified as Provisions with effect from 1st January 1998, 1997 comparatives have not been restated. Advance corporation tax recoverable, previously offset against deferred taxation liabilities, has been transferred to Debtors falling due within one year to reflect its recoverability during 1999 as a result of Foreign Income Dividend payments in 1998. Provisions relating to new subsidiaries are described in note 1. Amounts utilised represent cash spent or assets written off during 1998. No excess provisions were released to the profit and loss account. The impact of discounting in 1998 has not been material. Where appropriate provisions for post-retirement benefits have been made based on actuarial advice. 73 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 22 PROVISIONS FOR LIABILITIES AND CHARGES continued Deferred taxation 1998 1997 -------------------- -------------------- Full Full Amount Potential Amount Potential Provided Liability Provided Liability (pound)m (pound)m (pound)m (pound)m --------- --------- --------- --------- Accelerated capital allowances 28.0 28.6 27.9 31.0 Other timing differences (0.7) 11.3 11.4 22.4 Unremitted overseas income 15.1 15.1 13.0 13.0 Advance corporation tax -- -- (21.9) (23.3) ----- ----- ----- ----- 42.4 55.0 30.4 43.1 ===== ===== ===== ===== Deferred taxation is calculated under the liability method using a UK tax rate of 31% (1997 31%) and appropriate overseas rates. Provision has been made for potential taxation which could arise on the remittance of retained overseas earnings only to the extent that there is currently an intention to remit such earnings. The deferred tax asset in respect of post-retirement obligations is included within debtors and prepayments (note 16). 23 SHARE CAPITAL OF TI GROUP plc Authorised Issued --------------------- --------------------- 1998 1997 1998 1997 (pound)m (pound)m (pound)m (pound)m --------- --------- --------- --------- Ordinary shares of 25p each 169.5 169.5 120.3 119.7 ======= ======= ======= ======= Shares Issued during the year During the year 1,428,347 Ordinary shares of 25p each were issued in consideration for the acquisition of EIS Group P.L.C. (note 1). Four TI Group share option schemes and three Dowty Group share option schemes operated during the year. The four TI Group share option schemes were: The TI (1981) Savings-Related Share Option Scheme and the TI Group (1994) Savings Related Share Option Scheme (together "The SAYE Schemes") and the TI Group Executive Share Option Scheme and The TI Group (1990) Executive Share Option Scheme (together "The Executive Schemes"). During the year 894,875 Ordinary shares of 25p each were issued following the exercise of options under these schemes. The aggregate consideration received in respect of these allotments was (pound)2.6m (1997 (pound)5.0m). The three Dowty Group share option schemes - the Dowty Group Share Savings Scheme, the Dowty Group Share Savings Scheme (1991) and the Dowty Group Executive Share Option Scheme - continued to be governed by rules adopted by Dowty Group although certain options granted thereunder were converted into options over TI Group plc Ordinary shares following the acquisition of Dowty Group. During the year 96,451 TI Group Ordinary shares were issued following the exercise of options under these schemes. The aggregate consideration received in respect of these allotments was (pound)0.2m (1997 (pound)0.8m). 74 TI GROUP Shares under option At 3lst December 1998 the total number of TI Group plc Ordinary shares under option was 17,493,363 as follows:
Number Option of 25p Dates Price per Ordinary Normally Ordinary Scheme Date of Grant Shares Exercisable Share --------------------- --------------- --------- ---------------------------- --------- The SAVE Schemes 21 June 1991 25,178 August 1996/January 1999 201.5p 26 June 1992 116,397 August 1997/January 2000 281.0p 25 June 1993 199,358 August 1998/January 2001 269.5p 24 June 1994 553,566 August 1999/January 2002 309.0p 31 August 1995 580,091 October 2000/March 2003 339.0p 29 August 1996 589,949 October 1999/March 2004 420.0p 28 August 1997 675,799 October 2000/March 2005 436.0p 27 August 1998 3,628,887 October 2001/March 2006 354.0p The Executive Schemes 10 April 1990 20,000 April 1993/April 2000 226.5p 9 October 1990 295,000 October 1993/October 2000 204.0p 27 March 1991 44,000 March 1994/March 2001 270.0p 21 August 1991 62,000 August 1994/August 2001 280.5p 6 April 1992 131,000 April 1995/April 2002 314.0p 27 August 1992 9l,000 August 1995/August 2002 265.5p 8 April 1993 302,000 April 1996/April 2003 301.5p 14 September 1993 74,000 September 1996/September 2003 352.5p l9 April 1994 298,000 April 1997/April 2004 416.5p 22 August 1994 817,000 August 1997/August 2004 373.5p 11 April 1995 282,000 April 1998/April 2005 376.5p 31 August 1995 278,000 August 1998/August 2005 430.5p 15 April 1996 563,000 April 1999/April 2006 520.5p 9 September 1996 526,000 September 1999/September 2006 551.5p 2 April 1997 1,377,599 April 2000/April 2007 540.0p 8 September 1997 2,382,700 September 2000/September 2007 600.0p 13 March 1998 1,930,500 March 2001/March 2008 505.0p 6 August 1998 1,266,000 August 2001/August 2008 418.0p The Dowty Share Savings Scheme (1991) 13 March 1992 57,623 May 1997/October 1999 180.0p The Dowty Group 18 December 1989 52,000 December 1992/December 1999 455.625p Executive Share Option 16 July 1990 31,333 July 1993/July 2000 423.75p Scheme 4 January 1991 26,083 January 1994/January 2001 311.25p 20 December 1991 27,199 December 1994/December 2001 276.625p
Note As at 31st December 1999 there were no outstanding options that were granted pursuant to the rules of the Dowty Group Share Savings Scheme. 75 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 24 RESERVES
The Group Share Capital Profit and Goodwill Premium Account Reserve Loss Account Written Off Total (pound)m (pound)m (pound)m (pound)m (pound)m --------- --------- ------------ ----------- --------- At 3lst December 1997 57.8 596.6 637.5 (1,019.0) 272.9 Reclassification -- (596.6) (422.4) 1,019.0 -- ----- ------ ------ -------- ------ At 31st December 1997 restated 57.8 -- 215.1 -- 272.9 Total recognised gains and losses Profit for the financial year -- -- 145.6 -- 145.6 Exchange translation -- -- (2.5) -- (2.5) Goodwill written back on disposals -- -- 136.5 -- 136.5 Dividends -- -- (82.6) -- (82.6) Issues of shares For cash 2.6 -- -- -- 2.6 EIS Group P.L.C. acquisition 8.2 -- -- -- 8.2 ----- ------ ------ -------- ------ At 31st December 1998 68.6 -- 412.1 -- 480.7 ===== ====== ====== ======== ======
From 1st January 1998, under FRS10, it is no longer permissible to show goodwill written off within reserves in the balance sheet. Accumulated goodwill written off at 1st January 1998 of (pound)1,019.0m has been applied firstly to the capital reserve of (pound)596.6m, reducing it to nil, and the balance to the profit and loss account reserve. Goodwill totalling (pound)136.5m was written back on the disposals of Messier-Dowty, Belfab and Thermal Processing Group. At 31st December 1998 reserves included goodwill written off of (pound)897.6m, comprising goodwill arising prior to 1998 of (pound)882.5m and capitalised goodwill amortised of (pound)15.1m. Exchange translation included within total recognised gains and losses comprised positive movements in respect of overseas investments of (pound)0.5m (1997 (pound)36.5m negative, inclusive of goodwill) and negative movements of (pound)3.0m (1997 (pound)2.0m positive) in respect of foreign currency financing of those investments. Earnings retained in overseas subsidiary and associated undertakings would be subject to further tax on distribution. The Company Share Capital Profit and Premium Account Reserve Loss Account Total (pound)m (pound)m (pound)m (pound)m -------- --------- ------------ --------- At 31st December 1997 57.8 596.6 225.3 879.7 Profit for the financial year -- -- 114.6 114.6 Dividends -- -- (82.6) (82.6) Issues of shares For cash 2.6 -- -- 2.6 EIS Group P.L.C. acquisition 8.2 -- -- 8.2 ----- ------ ------ ------ At 31st December 1998 68.6 596.6 257.3 922.5 ===== ====== ====== ====== As permitted by section 230 of the Companies Act 1985, TI Group plc has not presented its own profit and loss account. 76 TI GROUP 25 NET CASH INFLOW FROM OPERATING ACTIVITIES 1998 1997 (pound)m (pound)m --------- --------- Operating profit 229.2 218.8 Depreciation of fixed tangible assets 54.1 45.6 Amortisation of goodwill 15.1 -- Operating working capital movement ------- ------ Increase in stocks (11.3) (18.0) Increase in debtors (4.7) (36.3) Increase in creditors 10.4 33.0 ------- ------ (5.6) (21.3) Movement in pensions and related balances -- (1.7) Net cash inflow from operating activities 202.8 241.4 ------- ------ Dividends received from joint venture 7.1 10.4 Dividends received from associates 0.2 0.2 ------- ------ Dividends received from joint venture and associates 7.3 10.6 Capital expenditure (net) (82.0) (60.0) ------- ------ Free cash flow 218.1 192.0 ======= ====== Free cash flow includes cash expenditure related to exceptional items of (pound)11.4m (1997 (pound)nil). 26 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 1998 1997 (pound)m (pound)m --------- --------- Interest received 11.2 13.3 Interest paid (32.7) (25.8) ------ ------ Interest paid (net) (21.5) (12.5) Dividends paid to minority interests of subsidiaries (0.4) (0.8) ------ ------ (21.9) (13.3) ====== ====== 77 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 27 TAXATION CASH FLOWS 1998 1997 (pound)m (pound)m --------- --------- UK corporation tax (14.7) (18.3) Overseas taxes (76.5) (55.2) ------ ------ (91.2) (73.5) ====== ====== Overseas taxes paid in 1998 included exceptional payments of (pound)8.3m in respect of disposals of operations (1997 (pound)2.2m, disposal of investment). 28 CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT 1998 1997 (pound)m (pound)m --------- --------- Capital expenditure (84.0) (61.2) Sale of plant, machinery and equipment 2.7 1.2 Sale of surplus properties 6.0 3.9 Purchase of own shares (1.9) (3.5) ------ ------ (77.2) (59.6) ====== ====== 29 ACQUISITIONS AND DISPOSALS 1998 1997 (pound)m (pound)m --------- --------- Acquisitions of subsidiaries (656.8) (14.7) Net short term borrowings acquired with new subsidiaries (20.4) (1.9) ------ ------ Cash flows arising from acquisitions (677.2) (16.6) Disposals of businesses 98.6 -- Disposal of interest in joint venture 129.5 -- Disposal of interest in associated undertaking -- 2.9 ------ ------ (449.1) (13.7) ====== ====== Disposals of businesses include net cash flows of assets held for disposal from the date of acquisition to the earlier of the date of disposal or 31st December 1998. 78 TI GROUP Net assets acquired and disposed of
1998 1997 ----------------------- ----------------------- Acquisitions Disposals Acquisitions Disposals (pound)m (pound)m (pound)m (pound)m ------------ --------- ------------ --------- Fixed intangible assets -- goodwill 539.2 -- -- -- Fixed tangible assets 107.2 (21.7) 3.5 -- Investments 0.7 (25.6) (1.9) (2.9) Stocks 99.6 (10.4) 0.8 -- Assets held for disposal 35.6 (15.1) -- -- Debtors 140.9 (5.7) 3.0 -- Creditors (135.8) (6.7) 10.0 -- Pensions and other post-retirement obligations (27.7) -- -- -- Other provisions (30.3) -- -- -- Deferred taxation 6.7 -- -- -- Minority interests 5.9 -- (0.7) -- ------- ------ ----- ----- 742.0 (85.2) 14.7 (2.9) Exceptional items -- (6.4) -- -- Issue of Ordinary shares (8.6) -- -- -- Goodwill previously written off -- (136.5) 1.9 -- ------- ------ ----- ----- 733.4 (228.1) 16.6 (2.9) ======= ====== ===== =====
1998 1997 ----------------------- ----------------------- Acquisitions Disposals Acquisitions Disposals (pound)m (pound)m (pound)m (pound)m ------------ --------- ------------ --------- Satisfied by Cash (paid) /received (656.8) 228.1 (14.7) 2.9 Net short term borrowings acquired (20.4) -- (1.9) -- ------- ------ ----- ----- Total cash flows (677.2) 228.1 (16.6) 2.9 Short term deposits acquired 1.8 -- -- -- Loans acquired (37.2) -- -- -- Loan notes issued (16.0) -- -- -- Finance leases acquired (4.8) -- -- -- ------- ------ ----- ----- Total movement in net debt (733.4) 228.1 (16.6) 2.9 ======= ====== ===== =====
79 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 29 ACQUISITIONS AND DISPOSALS continued Businesses acquired and sold during the year made the following contributions to the Group's cash flows: Businesses Businesses acquired sold (pound)m (pound)m ---------- ---------- Net cash flow from operating activities 52.6 3.6 Dividends received from joint venture (discontinued) -- 7.1 Returns on investments and servicing of finance (1.6) -- Taxation (4.2) (0.5) Capital expenditure and financial investment (11.4) (0.1) ------ ----- 35.4 10.1 ====== ===== 30 NET DEBT
Exchange Other Rate 1997 Cash Flows Acquisitions Movements Adjustments 1998 (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m --------- ---------- ------------ --------- ----------- --------- Cash at bank and in hand 62.6 3.0 4.7 -- 0.4 70.7 Short term borrowings -- repayable on demand (31.0) 0.5 (25.1) -- 1.7 (53.9) ------- ------- ------ ------ ----- ------ Cash 31.6 3.5 (20.4) -- 2.1 16.8 Short term bank deposits 306.3 (206.6) 1.8 -- 0.9 102.4 Debt due within one year (114.3) 110.7 (20.3) (51.9) 1.4 (74.4) Debt due after one year (261.5) (302.1) (37.7) 51.2 (7.4) (557.5) ------- ------- ------ ------ ----- ------ Net debt (37.9) (394.5) (76.6) (0.7) (3.0) (512.7) ======= ======= ====== ====== ===== ======
Other movements comprise finance leases and transfers between categories of debt, principally $50m of private placement. Management of liquid resources shown in the cash flow statement comprises movements in short term bank deposits, which have maturity dates of up to one year. 80 TI GROUP 31 FINANCING 1998 1997 (pound)m (pound)m --------- --------- Increase in loans 192.8 26.7 Issue of shares for cash 2.8 5.8 Capital element of finance lease payments (1.4) (0.4) ------ ----- 194.2 32.1 ====== ===== 32 PENSIONS AND OTHER POST-RETIREMENT BENEFITS The Group operates a number of pension schemes, the majority being defined benefit arrangements the assets of which are held independently of the Group's finances. Gross pension costs of (pound)26.3m (1997 (pound)21.5m) included (pound)12.2m (1997 (pound)10.7m) for overseas schemes. These costs were offset by a credit of (pound)3.6m (1997 (pound)4.1 m) in respect of a net actuarial surplus in the TI Group pension schemes. At 31st December 1998 there was a balance included within debtors and prepayments (note 16) in respect of pensions of (pound)83.8m (1997 (pound)81.8m) and a provision for post-retirement healthcare benefits of (pound)82.7m (1997 (pound)81.3m) was included within provisions for liabilities and charges (note 22). UK Pension Schemes The Group's UK pension schemes are normally valued by independent actuaries at not more than three-yearly intervals. The valuation methods used and assumptions made by the actuaries take into account the differing membership profiles and benefit promises of the schemes. The Group's principal UK pension scheme is the TI Group Pension Scheme, the assets of which are held in a separate trustee-administered fund. The latest actuarial valuation was carried out as at 31st May 1996 using the projected unit method for current members and allocating sufficient assets for former members and pensioners to cover the cost of purchasing their benefits in the insurance market. The principal actuarial assumptions used for current members for accounting and funding purposes were: Long term annual rate of return on investments 9.5% Annual dividend increases 5.0% Average annual increase in pensionable salaries (inclusive of promotion and merit increases) 7.5% Average annual increase in pensions in payment 4.5% to 5.0% The actuarial value of the assets of the schemes on this basis was sufficient to cover 117% of the benefits that had accrued to members after allowing for expected future increases in pensionable pay. 81 TI GROUP NOTES TO THE FINANCIAL STATEMENTS continued 32 PENSIONS AND OTHER POST-RETIREMENT BENEFITS continued At the date of the valuations, actuarial surpluses amounted to (pound)131m and the market value of the assets was (pound)955m. As in previous years, for accounting purposes actuarial surpluses are spread forward over the average remaining service lives of employees as a level amount each year ('the mortgage method'). EIS Group P.L.C. operates two principal UK pension schemes, the assets of which are held in independent trustee-administered funds. As reported in the EIS Group 1997 Annual Report, the market value of the schemes' assets at the last actuarial valuations, carried out at dates between April 1995 and April 1996, was (pound)147.2m. Based on an actuarial review using valuation methods consistent with those applied to the TI Group Pension Scheme, a provisional fair value adjustment of (pound)21m was made at the date of acquisition, representing the actuarial estimate of the schemes' deficits at that date (notes 1 and 22). A formal valuation will be carried out during 1999. Overseas Pension Schemes The main overseas schemes are in the USA. The assets of these schemes are held in separate trustee-administered funds. The latest actuarial valuation of the majority of the US schemes was carried out by independent actuaries as at 1st January 1998 using the projected unit method. The principal actuarial assumptions adopted for the main US schemes were that the long term annual rate of return on investments would be 9.0% to 10.0% and the average annual increase in pensionable salaries would be 4.5% to 5.5%. The combined actuarial value of the assets of these schemes was sufficient to cover 93% of the benefits that had accrued to members after allowing for expected future increases in pensionable salaries. The market value of the assets of these schemes as at the date of the actuarial valuation was (pound)135m. Other Post-Retirement Benefits The Group operates a number of unfunded post-retirement medical and welfare benefit schemes principally in the USA. The method of accounting for these is similar to that used for defined benefit pension schemes. The US arrangements were actuarially valued as at 1st January 1996; the principal actuarial assumptions were that the long term increase in health costs would be 5.0% and a discount rate of 7.5%. The cost of these benefits charged to the profit and loss account in 1998 was (pound)5.0m (1997 (pound)4.9m); cash payments made in the year were (pound)3.8m (1997 (pound)3.5m). 82 TI GROUP 33 COMMITMENTS
Land and Plant and Buildings Machinery (pound)m (pound)m --------- --------- At 31st December 1998 there were annual commitments under non-cancellable operating leases which expire as follows: Within one year 3.2 3.0 Between one and five years 5.9 6.2 After five years 7.1 -- ----- ---- 16.2 9.2 ----- ----
Contracts placed against capital expenditure sanctioned by the Board and not provided for in these accounts amounted to (pound)22.8m (1997 (pound)14.3m). 34 CONTINGENT LIABILITIES At 31st December 1998 the Group had contingent liabilities, in respect of bank and other guarantees, reversionary interests in leasehold properties, and other matters arising in the ordinary course of business, from which it is anticipated that no material liabilities will arise. In addition, the Company has given guarantees which amount to (pound)331.4m (1997 (pound)350.7m) on borrowings by subsidiary undertakings, represented mainly by unsecured bank and other loans. 35 RELATED PARTY TRANSACTIONS On 30th June 1998 the Company sold its 50% stake in Messier-Dowty International Ltd to Snecma of France, the joint venture partner. Also included in the transaction was TI's wholly owned landing gear repair and overhaul business. The total proceeds were (pound)l68.0m after adjustment for the net debt in Messier-Dowty, Sales by TI Group to Messier-Dowty were (pound)8.9m and by Messier-Dowty to TI Group were (pound)4.6m. On 2nd February 1998 TI Group acquired 30% of the issued share capital of Lips United BV. Lips United is the parent company of Lips Seals BV, the minority partner with John Crane Holland BV in John Crane Marine Lips vof. TI Group acquired the remainder of the shares in Lips United on 30th June 1998. The total consideration for Lips United was DF1326m. 83 TI GROUP PRINCIPAL SUBSIDIARIES, ASSOCIATED UNDERTAKINGS AND OTHER PARTICIPATING INTERESTS AS AT 31ST DECEMBER 1998 JOHN CRANE Americas John Crane Inc USA Flexibox Inc USA John Crane Sealol Inc USA Lips Propellers Inc USA Lips USA Inc USA Plenty Products Inc USA Safematic Inc USA Stokes Vacuum Inc USA Hibon Inc Canada John Crane Canada Inc Canada * Flexibox Argentina SA (50%) Argentina John Crane Argentina SA Argentina Flexibox do Brasil Industria e Commercio Ltda Brazil Industrias John Crane de Mexico SA de CV Mexico John Crane Caribe Ltd Puerto Rico John Crane Venezuela CA Venezuela Sealol SA Venezuela Europe John Crane UK Ltd UK Airpel Filtration Ltd UK Deep Sea Seals Ltd UK ETA Process Plant Ltd UK Flexibox Ltd UK Flexibox (Northern Ireland) Ltd UK Hick Hargreaves Ltd UK Lapmaster International Ltd UK Oil Plus Ltd UK Plastic Constructions Fabrications Ltd UK Plenty Ltd UK Bepac SC Belgium Hibon International NV Belgium SA John Crane Belgium NV Belgium John Crane Sigma as Czech Republic John Crane Ireland Ltd Eire Safematic Oy Finland Cyclam SA France Flexibox SA France Hibon SAS France John Crane France SA France Sealol France SA France Flexibox GmbH Germany John Crane GmbH Germany John Crane Sealol GmbH Germany Wilhelm Klein GmbH Germany Flexibox SpA Italy John Crane Italia SpA Italy Flexibox BV (51%) Netherlands Golden Super BV Netherlands John Crane Holland BV Netherlands John Crane Marine Lips vof Netherlands Lips United BV Netherlands Flexibox Iberia SA Spain John Crane Iberia SA Spain Flexibox AB Sweden John Crane Sverige AB Sweden John Crane (Switzerland) AG Switzerland Asia Pacific and Africa Flexibox Pty Ltd Australia John Crane Australia Pty Ltd Australia Plenty Uniquip Pty Ltd Australia John Crane Tianjin Ltd (67%) China John Crane Engineered Sealing Systems Ltd (85%) India PT John Crane Indonesia (70%) Indonesia Flexibox KK Japan Japan Marine Technologies Ltd (91%) Japan * John Crane (Japan) Inc (49%) Japan Chuwac Engineering Pte Ltd (91%) Singapore Flexibox Pte Ltd Singapore John Crane Singapore Pte Ltd Singapore Flexibox (Pty) Ltd South Africa John Crane Pty Ltd South Africa John Crane (Korea) Co Ltd South Korea John Crane Taiwan Inc Taiwan FORSHEDA Americas Dowty O Rings North America Inc USA Forsheda Palmer-Chenard Inc USA Forsheda Pipe Seal Corp USA Forsheda Shaft Seal Corp USA Dowty-Mexus International SA de CV Mexico Europe Forsheda Ltd UK Woodville Polymer Engineering Ltd UK Forsheda A/S Denmark Forsheda SA France Forsheda Engineered Seals GmbH Germany Forsheda GmbH Germany Forsheda Polypac SpA Italy Forsheda Sealing Parts SpA (75%) Italy Forsheda Stefa Sri Italy Forsheda (Malta) Ltd Malta Forsheda Tecmold Ltd Malta Forsheda BV Netherlands Forsheda Stefa BV Netherlands Forsheda AS Norway Forsheda AB Sweden Skega Seals AB Sweden Forsheda AG Switzerland 84 TI GROUP BUNDY Americas Bundy Corp USA S&H Fabricating and Engineering Inc USA S&H Fabricating of Canada Co Canada Titeflex Canada Ltd Canada VARI-FORM Inc Canada Bundy Argentina SA Argentina TI Brasil Industriae e Commercio Ltda Brazil Bundy Colombia SA Colombia Alunosa S de RL de CV Mexico Bundy Mexico SA Mexico Bundy Venezolana CA Venezuela Europe Bundy (UK) Ltd UK Bundy SA Belgium Bundy SRO Czech Republic Bundy Danmark A/S Denmark Bundy SNC France Bundy GmbH Germany Technoflow Tube-Systems GmbH Germany Bundy Kft Hungary Bundy SpA Italy TI Poland Sp zo o Poland Bundy SA Spain Technoflow Iberica SA Spain Bundy AB Sweden Asia Pacific and Africa Bundy Tubing Co (Australia) Pty Ltd Australia Foshan Hus Nan Bundy Tubing Co Ltd (80%) China Hua Yan BundyTubing Corp (90%) China Bundy India Ltd (74%) India Bundy Japan Ltd Japan Bundy Systems Ltd South Korea * Korea Bundy Corp (39%) South Korea DOWTY Americas Dowty Aerospace Corp USA Dowty Decoto Inc USA Ebtec Corp USA Hydraulic Units Inc USA King Fifth Wheel Co USA Lewis & Saunders Inc USA Titeflex Corp USA Tru-Form Inc USA Europe AB Precision (Poole) Ltd UK Aero and Industrial Services Ltd UK Aero and Industrial Technology Ltd UK Aeronautical & General Instruments Ltd UK Aerostructures Hamble Ltd UK Air-Log Ltd UK Beagle Aircraft Ltd UK Beagle Aircraft (Wokingham) Ltd UK C & F Millier Ltd UK Cambridge Vacuum Engineering Ltd UK Davall Gears Ltd UK Dowty Aerospace Gloucester Ltd UK Dowty Boulton Paul Ltd UK Hamble Computing Ltd UK Horstman Defence Systems Ltd UK Kontak Manufacturing Ltd UK Mollart Universal Joints Ltd UK Specialised Elastomers Ltd UK TI Reynolds Rings Ltd UK Titeflex Europe SA France Iloman Engineering Ltd Isle of Man PARENT and OTHER Dowty Group PLC UK EIS Group P.L.C. UK TI & Dowty Pensions Ltd UK TI Corporate Services Ltd UK TI Group Inc USA TI Group Insurance Ltd UK TI Holdings (Netherlands) BV Netherlands TI International Holdings Ltd UK * Tube Investments of India Ltd (3%) India * associated undertaking # other participating interest All companies are wholly-owned directly or indirectly by TI Group plc unless otherwise stated, and are incorporated and operate principally in the country indicated. The voting rights in respect of each subsidiary are in the same proportion as the shares held. In order to avoid particulars of excessive length the lists on page 66 and 67 and above exclude a number of small subsidiaries, associates and other participating interests whose contribution to the profits and assets of the Group is not material. The auditors of TI Group plc, PricewaterhouseCoopers, audit all the above subsidiaries in the Group. 85 TI GROUP GROUP FINANCIAL HISTORY
1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ TURNOVER - BY SEGMENT John Crane (pound)m 383 410 424 411 586 Forsheda (pound)m 108 136 169 244 248 Bundy (pound)m 630 718 718 740 794 Dowty (pound)m 172 189 218 275 451 ------ ------ ------ ------ ------ Continuing operations 1,293 1,453 1,529 1,670 2,070 Discontinued operations 127 250 228 200 89 ------ ------ ------ ------ ------ 1,420 1,703 1,757 1,870 2,168 ====== ====== ====== ====== ====== TURNOVER - GEOGRAPHICAL DESTINATION UK % 16 15 13 13 12 Continental Europe % 29 33 30 30 30 North America % 43 40 43 43 44 Rest of World % 12 12 14 14 14 ====== ====== ====== ====== ====== PROFIT AND LOSS ACCOUNT SUMMARY Profit before interest* (pound)m 160.6 194.8 219.7 237.0 265.3 Interest (pound)m (12.8) (13.2) (8.6) (14.5) (26.7) Profit before tax (FRS3 basis) (pound)m 153.0 184.8 232.2 220.6 226.7 Profit before tax* (pound)m 147.8 181.6 211.1 222.5 238.5 Earnings per share (FRS3 basis) p 22.5 26.5 34.1 31.6 30.4 Earnings per share* p 21.4 25.8 30.0 32.0 34.3 Dividends per share p 12.0 13.1 14.5 15.9 17.2 ====== ====== ====== ====== ====== BALANCE SHEET SUMMARY Shareholders' funds (pound)m 356 419 336 404 607 Net cash/(debt) (pound)m (85) 10 (68) (38) (513) ====== ====== ====== ====== ====== CASH FLOW Free cash flow (pound)m 156 179 173 192 218 Interest, tax and dividends (pound)m (96) (111) (121) (156) (192) ------ ------ ------ ------ ------ Net cash flow (pound)m 60 68 52 36 26 Acquisitions, disposals, share issues and translation (pound)m 37 27 (130) (6) (501) ------ ------ ------ ------ ------ Movement in net cash/ (debt) (pound)m 97 95 (78) 30 (475) ====== ====== ====== ====== ====== KEY RATIOS Operating margin % 11.3 11.4 12.5 12.7 12.2 Interest cover* times 12.5 14.8 25.5 16.3 9.9 Dividend cover* times 1.8 2.0 2.1 2.0 2.0 ====== ====== ====== ====== ======
* Before goodwill amortisation and exceptional items. 86 TI GROUP GROUP ADDRESSES, REGISTRARS AND ADR DEPOSITARY HEAD OFFICE REGISTRARS TI Group plc Lloyds TSB Registrars Lombourn Court 54 Persirore Road South Abingdon Birmingham B22 1AD Oxon 0X14 1UH REGISTERED OFFICE US ADR DEPOSITARY TI Group plc Citibank N.A. 50 Curzon Street 111 Wall Street London W1Y 7PN New York NY 10043 USA REGISTERED NUMBER 156641 England INTERNET www.Tigroup.com FINANCIAL CALENDAR PUBLICATION OF RESULTS Unaudited interim for half year to 30th June August Preliminary announcement of results for year to 31st December March Report and financial statements for year to 31st December April DIVIDENDS ON ORDINARY SHARES Interim dividend October (announced August) Final dividend May (announced March) -----END PRIVACY-ENHANCED MESSAGE-----