TI Group plc - KU LeuvenENGINEERED SEALING SYSTEMS John Crane is a world leader in the design,...

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Annual Report 1999 Global Business – Global Markets TI Group plc Annual Report 1999 TI Group Inc. 375 Park Avenue New York NY 10152-0222 USA Telephone +1 212 319 3101 Facsimile +1 212 319 3199 Visit our website on www.tigroup.com TI Asia Pacific 16 International Business Park #03-05/06 Mannesmann Centre Singapore 609929 Telephone +65 222 9161 Facsimile +65 223 5085 TI Latin America Rua Bandeira Paulista 600/Conj.23 São Paulo SP 04532-001 Brazil Telephone +55 11 820 4146 Facsimile +55 11 829 8270 TI Group plc Lambourn Court Abingdon Oxon OX14 1UH UK Telephone +44 (0)1235 705555 Facsimile +44 (0)1235 705570

Transcript of TI Group plc - KU LeuvenENGINEERED SEALING SYSTEMS John Crane is a world leader in the design,...

Page 1: TI Group plc - KU LeuvenENGINEERED SEALING SYSTEMS John Crane is a world leader in the design, manufacture and distribution of engineered sealing systems. Focused on delivering high

Annual Report 1999

Global Business – Global Markets

TI Group plc A

nnual Report 1999

TI Group Inc.

375 Park Avenue New York NY 10152-0222 USATelephone +1 212 319 3101Facsimile +1 212 319 3199

Visit our website on www.tigroup.com

TI Asia Pacific

16 International Business Park#03-05/06 Mannesmann CentreSingapore 609929Telephone +65 222 9161Facsimile +65 223 5085

TI Latin America

Rua Bandeira Paulista 600/Conj.23 São Paulo SP 04532-001 BrazilTelephone +55 11 820 4146Facsimile +55 11 829 8270

TI Group plc

Lambourn Court Abingdon Oxon OX14 1UH UKTelephone +44 (0)1235 705555Facsimile +44 (0)1235 705570

Page 2: TI Group plc - KU LeuvenENGINEERED SEALING SYSTEMS John Crane is a world leader in the design, manufacture and distribution of engineered sealing systems. Focused on delivering high

printed by perivan colour print UK

Contents

1 Five year financial highlights

Summary of results

2 Statement by the Chairman

4 Chief Executive’s Review

6 Operating Review

TI Group Structure

10 John Crane

16 TI Group Specialty Polymer Products

22 TI Group Automotive Systems

28 Dowty

34 Financial Review

38 Directors

40 Report of the Directors

46 Remuneration Report

50 Statements of the Directors

51 Auditors’ Report

52 Accounting Policies

54 Consolidated Profit and Loss Account

55 Balance Sheets

56 Cash Flow Statement

57 Statement of Total Recognised Gains and Losses

Movements in TI Shareholders’ Funds

58 Notes to the Financial Statements

85 Principal Subsidiaries

87 Group Financial History

88 Group Addresses, Registrars and ADR Depositary

Financial Calendar

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.

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TI Group plc 82 TI Group plc 7 TI Group plc

ENGINEERED SEALING SYSTEMS

John Crane is a world leader in the design, manufacture and distribution of engineered sealing systems. Focused on delivering high quality products for safety critical applications, the business uses an unrivalled infrastructure of sales, engineering and service facilities, dedicated to customer support.

KEY MARKETS SERVED

Industrial

John Crane Mechanical Seals provides a wide range of sealing solutions to the process industry. Strong brand namessuch as John Crane, Sealol®, Flexibox®, Metastream® andSafematic®, combined with market leading engineering and service capabilities, help a wide range of customers solve their sealing problems, wherever in the world they may be.John Crane serves all of the leading oil and gas, chemical, pulp and paper, food and beverage and power generationcompanies, as well as pump and compressor OEMs around the world.

Marine

John Crane-Lips serves the sealing and propulsion requirements of the marine industry, providing total onboard propulsion and sealing services for the commercialand naval fleets of the world. John Crane’s leading range of marine seals, combined with Lips’ propellers, shafts, waterjets, thrusters and control systems, offer an unrivalledpackage of knowledge and service.

POLYMER SEALING SOLUTIONS

TI Group Specialty Polymer Products is a world leader in polymer technology – elastomer, thermoplastic and PTFE –for the industrial, automotive and aerospace markets. Usingworld class capability in design, materials and process engineering, it focuses on products and applications with exacting environmental and service demands.

The strong brand names of the new division address customer demands for engineered solutions for new and challenging sealing problems. High performance engineeredpolymers are increasingly used in everyday applications.

KEY MARKETS SERVED

Industrial

A wide range of industrial customers’ uses include heavy duty diesel engines, construction and agricultural equipment,process plant, pipeline systems and railway rolling stock.

Automotive

Global automotive manufacturers and Tier 1 suppliers usepolymers in many areas, including seals for engines, fuelinjectors, brakes, air conditioning units, transmissions, axlesand power steering.

Aerospace

Commercial and military aerospace OEMs and engine manufacturers use polymers to seal control surfaces, doors,hatches and in hydraulics and actuation systems on wheels,brakes, landing gear and other hydraulic controls.

AEROSPACE SYSTEMS

Dowty is a world leader in specialised aerospace systems formajor civil and military aircraft programmes throughout theworld and provides a range of specialist aerospace and defenceproducts and services.

KEY MARKETS SERVED

Aircraft Engine

Dowty’s Turbine Engine Components, Tubular Systems,Hydraulics & Actuation, Aerostructures and Propeller businessesall support the aero engine market from intake to exhaust, witha wide range of high performance components. These includeflash-welded and cold-rolled rings, combustion equipment, hotsection components, nacelle fabrications and structures,precision machined products, thrust reverser actuators, rigidand flexible tubular assemblies, and advanced compositepropeller systems.

All the major engine manufacturers are supplied by Dowty, including GE, Pratt & Whitney, Rolls-Royce, and CFM International.

Airframe

Dowty’s Hydraulics & Actuation, Tubular Systems andAerostructures businesses provide world leading productsincluding primary flight control and high lift actuation systems,utility and sub-system hydraulics, rigid and flexible tubularassemblies, and wing and tail structures.

Dowty’s equipment is fitted to every major large civilaircraft including all Boeing and Airbus programmes and a wide range of regional and military platforms including BAe Systems, Boeing, Raytheon, Bombardier and Lockheed Martin programmes.

FLUID STORAGE & DELIVERY SYSTEMS

TI Group Automotive Systems is a world leader in fluid storage and delivery systems, serving the global automotivemarket in the fields of fuel, brake and powertrain.

Formed following the acquisition of Walbro Corporation,the new grouping brings together two powerful brand names– Walbro fuel storage and delivery systems and Bundy fluidcarrying systems. Together these have created the only independent designer and manufacturer of integrated fuelstorage and delivery systems on a global basis and complementthe continuing Bundy brake and powertrain systems expertise.

KEY MARKETS SERVED

Automotive

Fully integrated systems are designed, manufactured anddelivered to the customer using a global network of ‘just intime’ satellite sites.

Tighter emissions legislation, more demanding consumerexpectations and ever higher safety and performance requirements drive the market. Innovative technologies in multi-layer composite tanks, rigid tube, flexible hose, connectors, pumps and modules offer complete solutionsto the world’s automotive industry.

Engineering and commercial teams work in partnershipwith all major vehicle manufacturers to ensure design problems are solved first time, anywhere in the world.

Related business

Sharing a related technology base, TI Group AutomotiveSystems includes two smaller businesses. Bundy Refrigerationis a world leading supplier of cooling systems for the refrigeration industry and Walbro Engine Management isforemost in small carburettor and ignition systems for thegarden, marine and two-wheeled vehicle market.

AerospaceAutomotiveIndustrial

Statement by the Chairman

“1999 was another successful year for

TI Group. Our businesses outperformed

their markets and significant investments

were put in place to underpin the

Company’s future growth. The Board

remains confident that TI Group is well

positioned to achieve double digit profit

growth, increased sales and to generate

continued strong cash flow.”

TI Group had another successful year in 1999. A strong performance

by our underlying businesses, despite challenging conditions in

some markets, has again brought record sales, profits and strong

cash flow. We also took significant steps to strengthen the

businesses with strategic acquisitions.

Sales increased by 26% and pre-tax profits (before goodwill

and exceptional items) were £257.1m, up from £238.6m in 1998,

representing growth of 8%. Before goodwill and exceptional items,

earnings per share were 35.4p (1998: 34.3p), an increase of 3%.

The dividend has been increased by 3% from 17.2p to 17.8p and is

covered 2.0 times by earnings, supported by strong cash flow.

These good results are due to the efforts of a strong global

management team, led by Bill Laule, Chief Executive, and the hard

work of all our employees worldwide. Benefits are also coming

through from lean manufacturing initiatives throughout the

Company, increasing our focus on customers’ needs and

successfully generating the benefits from the integration of

our recent acquisitions.

Following the extensive preparations and necessary investment

put into our detailed Year 2000 planning, I am pleased to report

that the Company experienced no “Y2K” difficulties. Arrangements

to deal with transactions in euros were successfully put into place

in good time for the new currency’s introduction in January 1999.

Strategic Acquisitions In order to enhance our growth prospects in the three key markets

we serve – Industrial, Automotive and Aerospace – we have invested

£1.5bn in acquisitions in the past two years. While keeping a

consistent strategy and a clear focus on these three key markets,

these acquisitions have delivered a wider portfolio of products and

services, a stronger market presence, and have doubled the size

of the markets we address to some £18bn, creating scope for

accelerated growth.

TI Group is now positioned to focus on those segments of the

markets where there are significant growth opportunities, well

above and beyond underlying market growth rates.

A distinctive feature of TI Group’s strategy since 1986, when

it began its transformation into a global specialised engineering

business, has been an emphasis on knowledge and service. All

our acquisitions have enhanced TI Group’s ability to provide an

increasing degree of engineering solutions and support across global

markets, drawing on our extensive base of applications skills and

using our worldwide infrastructure of facilities. Such capability will

be a key element in TI Group’s future growth.

As major global customers consolidate, focus their operations

on core activities and outsource non-core but critical functions of

design and manufacture, the importance of the value added services

provided by their suppliers has increased significantly. TI Group is

well positioned to capitalise on this trend. The management in our

key businesses are actively developing e-commerce capabilities and,

in particular, e-business to business and e-procurement capabilities,

both to serve the needs of our customers and to run the businesses

more effectively.

Two key acquisitions by TI Group last year were Walbro

Corporation, a leader in automotive fuel storage and delivery

systems, and Busak+Shamban, one of the world’s leading

polymer sealing businesses. Both expanded our exposure to

high growth niches in the automotive and industrial markets

and the benefits have already begun to flow through in important

contract wins.

Sir Christopher Lewinton, Chairman

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TI Group plc 9 10 TI Group plc

John CraneOPERATING REVIEW

Sales £685m (US$1,110m)

Unrivalled global sales and service network

Some 9,000 employees

Over 200 facilities in some 47 countries

Cryogenic fluids – gases so cold that they have turnedinto a liquid – comprise a $30 billion global market.Industrial gases such as argon, oxygen and nitrogenfind ever wider use in chemical processing, foodprocessing and medical applications.

The most effective way totransport and store thesegases is to keep them ina liquid phase in a tankertruck; but pumping liquidgas from tanker trucksto storage units poses major challenges.

Pump shafts use mechanical seals to preventleakage. Friction between the rotating andstationary components of conventional mechanicalseals causes cryogenic fluids to “flash”, turningliquid into gas at the pointof contact. Such flashingleads to severe wear of the seal faces and quickerfailure, as well as costlyproduct loss.

The ProblemThe Solution

Engineered customer solutions

Conventional seals may last only afew weeks in these conditions. Sealfailure is potentially very expensivesince it may mean a lengthy journeyback to the gas plant with a tankertruck half-full of undelivered liquidgas. Slower running of pumps tomake the conventional seals lastlonger only means longer deliverytimes and higher costs.

JOHN CRANE

76 76

Operating Profit £ million

98

586

99

685

Turnover £ million

Operating Assets £ million

98

232

99

233

TI GROUP SPECIALTY POLYMER PRODUCTS

3439

98

248

99

285

9884

99

118

TI GROUP AUTOMOTIVE SYSTEMS

98

794

99

1,191

91

124

98

279

99

509

DOWTY

98

451

99

98 99 98 99 98 99 98 99

568

59

72

184

98

174

99

Continental Europe

20%

27%

North America

7%

United Kingdom

46%

Rest of World

Distribution of sales by industry

37%

Aerospace

44%Automotive

19%

Industrial

Distribution of sales by geographic origin

TI Group plc 1

Summary of results1999 1998

£ million £ million

Turnover 2,728.8 2,168.1

Profit before taxation 185.9 226.7

Profit before taxation* 257.1 238.6

Free cash flow excluding exceptional items 243.1 229.5

Net debt 1,161.3 512.7

TI shareholders’ funds 717.8 601.0

% %

Operating margin* 11.3 12.2

p p

Earnings per Ordinary share 23.1 30.4

Earnings per Ordinary share* 35.4 34.3Dividends per Ordinary share 17.8 17.2

* Before goodwill and exceptional items

Five year financial highlights

* Before goodwill and exceptional items

Total sales £ million

3,000

2,400

1,800

1,200

600

95 96 97 98 990

Profit before taxation* £ million

300

240

180

120

60

95 96 97 980

99

Free cash flow* £ million

240

180

120

60

0

Free cash flow Interest, tax and dividend payments

95 96 97 98 9995 96 97 98 99

36Ł

27

18

Earnings per share

* Before goodwill and exceptional items

Dividends per share

18

13.5

9

4.5

0

9

0

* Before exceptional items

Earnings*/Dividends pence EPS DPS

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TI Group plc 3

Following the acquisitions, and to simplify and streamline

TI Group, we formed two new business divisions that integrated

the newly acquired companies with existing TI Group businesses.

TI Group Automotive Systems brought together Walbro with

our Bundy fluid carrying business to create the only independent

designer and manufacturer of integrated fuel storage and

delivery systems in the marketplace, alongside the existing

brake and powertrain businesses. This increases still further the

value per vehicle we supply and expands the size of the market

we serve from £4bn to £7bn.

TI Group Specialty Polymer Products combined Busak+Shamban

with our Forsheda polymer business to create the world’s second

largest provider of specialty polymer sealing solutions in a growing

£4bn market with significant opportunities to expand rapidly.

Board and ManagementIn May Henry Kravis, of Kohlberg Kravis Roberts & Co (KKR),

joined the Board as a non-executive Director. His experience and

knowledge of international business opportunities has proved to

be of considerable value to the Board. KKR is a major shareholder

in TI Group, currently holding 4.6% of the Company’s shares.

Two Directors stepped down from the Board last year. In April

Lord Fanshawe of Richmond retired as a non-executive Director.

Lord Fanshawe joined the Board in 1990 and his wide experience

in foreign affairs and international business has served TI Group

well. James Roe, Director, Strategic Development, retired from the

Board in December. James, who joined the main Board in 1994,

played a significant role in the development of TI Group after his

appointment as Director, Strategic Development, in 1986. On

behalf of the Board, I should like to thank them both for their

valuable contribution.

Allan Welsh, who joined the Board in January 1999, was

appointed Chief Executive of TI Group Automotive Systems in June.

John Langston, also a TI Group main Board Director and formerly

Chief Executive of Forsheda, became Chief Executive of TI Group

Specialty Polymer Products in October. Both Allan and John

have made an important contribution during their first year as

TI Directors.

The Company is also investing in the development of its

managers of the future, particularly those able to operate

internationally, with leadership programmes and overseas

assignments playing an important part.

The senior management team continues to demonstrate its

commitment to the Company through personal share ownership.

Today, executives own around 1.6m shares compared with some

0.5m shares five years ago.

Outlook1999 was another successful year for TI Group. Our businesses

outperformed their markets and significant investments were put

in place to underpin the Company’s future growth.

Our recent acquisitions are bringing clear benefits. They have

improved our already strong market positions and have added

value by increasing the scope of the systems that we supply to

our customers.

Looking forward, TI is a company that makes unique

differentiated engineering products with a significant knowledge

and service content which positions it ideally to service our

customers on a global basis. Furthermore the growth of e-business

to business and e-procurement provides us with a significant

opportunity. In fact we believe the real benefits of these emerging

technologies will over time accrue not just to IT and internet

companies but also to companies such as TI.

We have made an encouraging start to 2000 with a good first

two months’ trading, healthy order books and the benefits of recent

acquisitions coming through on plan. The Board remains confident

that TI Group is well positioned to achieve double digit profit

growth, increased sales and to generate continued strong cash flow.

Sir Christopher Lewinton, Chairman

2nd March 2000

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4 TI Group plc

Chief Executive’s Review

“Substantial progress was made over the last

year in enhancing the IT capabilities of our

businesses in the areas of supply chain

management and e-commerce. With £3bn of

sales in addressable markets of £18bn and

with none of our world leading businesses

having greater than a 20% share, we clearly

have significant growth opportunities.”

I am pleased to report that 1999 was another successful year for

TI Group. Our businesses continued to outperform their markets and

revenue growth, assisted by the key strategic acquisitions, was up

26%. Profit before tax, goodwill and exceptional items grew by

8% to £257.1m, an improvement generated from the established

businesses as well as from the recently acquired companies which

are being successfully integrated.

The £1.5bn we have invested in acquisitions in the last two

years has strengthened our global market share and doubled our

addressable markets to over £18bn. During1999 we completed a

total of five important acquisitions. The two most significant were

Walbro Corporation, the leading automotive fuel systems supplier,

and Busak+Shamban, a world leading specialist in engineered

polymer materials. Their purchase allowed us to form TI Group

Automotive Systems and TI Group Specialty Polymer Products, as

outlined in the Statement by the Chairman.

TI Group Automotive Systems now has product in use on over

half the world’s car production while TI Group Specialty Polymer

Products offers one of the most comprehensive portfolios of polymer

sealing materials and solutions currently available. Both are strongly

positioned in growth segments in their respective markets.

Another important acquisition in 1999 was Tri-Industries. This

added further engine components to our Dowty aerospace

portfolio and took us nearer to being a “one-stop shop” for the

major jet engine manufacturers.

In addition to the £745m spent on acquisitions, the Group

continued to invest aggressively in programmes to support new

product development, additional capacity and new efficiency

programmes. Total investment rose from £136m to £157m.

During the year, John Crane gained share in difficult industrial

markets. Following the completion of a £15m investment in

acquisition integration across 34 countries, eliminating duplicated

facilities, rationalising sales forces and globalising the acquired

products and services, John Crane is well positioned for an upturn

in its markets. TI Group Specialty Polymer Products maintained

an improving trend throughout the year, despite mixed trading

conditions in its industrial markets. The new management team has

introduced a stronger marketing and lean manufacturing culture,

placing the business in a strong position to realise significant

benefits, going forward. TI Group Automotive Systems performed

strongly and the integration of Bundy and Walbro is well under way.

The business has won important new contracts for complete fuel

storage and delivery systems and is well positioned for growth.

Dowty performed well at this point of the aerospace cycle. Its

presence on a wide range of civil and military programmes, supplying

both OEM and aftermarket, puts it in a strong position going forward.

Growth Dynamics TI Group businesses have strong market positions and have identified

growth segments of those markets where the rate of expansion will be

well above the underlying trend. There are several key drivers which

are providing growth opportunities, including environmental demands

on our customers’ products and ever more challenging engineering

applications; industry consolidation and globalisation; and outsourcing

of the design and development of integrated, higher value systems to

full-service suppliers. e-business is a valuable new driver.

Automotive fuel storage and delivery systems that meet stricter

US regulations on emissions and in-car air conditioning and climate

control are both examples where growth in certain markets will be

well ahead of the underlying automotive production rates. A recently

won contract, worth $120m, to supply a major manufacturer with

a complete, fully integrated fuel storage and delivery system,

highlights this point.

The recent co-operation agreement between Wärtsilä NSD and

William J Laule, Chief Executive

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TI Group plc 5

John Crane-Lips, the marine arm of John Crane, offers significant

outsourcing opportunities. By bringing together Wärtsilä NSD’s world

leading marine engines with John Crane-Lips’ propulsion systems, the

agreement capitalises on the market’s demand for sophisticated total

marine power and propulsion systems, where growth is set to outstrip

the underlying shipbuilding market trend.

Customer Culture TI Group businesses are Tier 1 or top Tier 2 suppliers and most of

our customers are household names, recognised across the world.

TI Group has forged close relationships with its customers and

supports them on a global basis. We set up satellite plants, for

example, near to our customers’ own facilities and support them in

the field with our global network of sales and service centres. Most

recently, TI Group Automotive Systems won the contract to provide

all brake and fuel lines to every BMW German manufacturing facility

from local satellite plants.

We are able to use our significant base of engineering

applications knowledge to propose cost-effective solutions for our

customers. These customers, across the Industrial, Automotive and

Aerospace markets, continue to consolidate and are looking to deal

with a smaller number of full service, global suppliers to whom

they can outsource non-core but critical design and manufacturing

aspects of their activities. TI Group businesses are strongly placed

to benefit from these trends.

I am pleased that our success in developing a customer culture

in TI Group has been recognised in the high level of awards for

quality and efficiency won last year across all our businesses.

TI Group Automotive Systems, for example, was named as an

“Optima” supplier by Renault while VW gave it its “Leading Edge”

award for performance and innovation. Hamble, part of Dowty,

was selected as a “Best of British” supplier by Boeing.

Lean ManufacturingLean manufacturing initiatives are playing a key role in the success of

TI Group. Originating in our automotive business, these techniques

have now been successfully introduced across all divisions. Lean

manufacturing helps us to reduce costs, lower inventory levels,

free up space for further expansion and improve margins in a

competitive marketplace while serving our customers better.

Good examples are the significant improvement in profitability in

our Hamble aerostructures business, where operating margins are

now approaching 10%, and a substantial rise in profits within

the Lips marine propulsion operation.

The impact of TI Group businesses on the environment is

another priority. I am pleased to report that during the year a further

20 TI operations were certified under the stringent ISO14001, the

international standard on environmental management.

e-businessSubstantial progress was made over the last year in enhancing the

IT capabilities of our businesses in the areas of supply chain

management, inventory, logistics and e-commerce. All of our

businesses are working closely with their customers to maximise

the benefits of e-business, which we believe offers significant

growth opportunities.

In John Crane, installation of advanced IT business and

engineering systems in North America and Latin America was

completed in 1999, enhancing levels of customer service. This will

evolve into a more extensive e-business system. Busak+Shamban,

within TI Group Specialty Polymer Products, has an established

e-commerce interface with its industrial customers and we intend

to leverage it across the division. TI Group Automotive Systems is

already well advanced in Electronic Data Interchange, deals with its

key customers through the Internet and will participate in industry

initiatives on e-procurement. Dowty is developing sales growth

opportunities from e-business, particularly from wider aftermarket

applications. Building on this extensive experience, we intend

to move on and identify the most appropriate means of using

e-commerce more widely to secure efficiencies in procurement

and to enhance our sales in the future.

OutlookOur key businesses are world leaders in their markets. They are

focused on growth segments and on increasing value through

the provision of more complex systems with a higher content of

knowledge and service. This focus strengthens our already close

relationships with customers and has been enhanced by recent

strategic acquisitions.

Management has been strengthened by the appointment

of a Chief Information Officer to help drive forward our

e-business initiatives.

We are seeing increasing benefits as a result of our acquisitions

and efficiency programmes. With £3bn of sales in addressable

markets of £18bn and with none of our world leading businesses

having greater than a 20% share, we clearly have significant growth

opportunities. I am confident that these opportunities will be fully

exploited by TI Group’s global management team going forward.

William J Laule, Chief Executive

2nd March 2000

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6 TI Group plc

Operating Review

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 40,000

people at more than 450 manufacturing and customer service facilities in over 45 countries.

TI Group’s four world leading business groups are John Crane, TI Group Specialty Polymer

Products, TI Group Automotive Systems and Dowty.

From left to right;

Roger L Fix CEO, John Crane Mechanical Seals

John Langston CEO, TI Group Specialty Polymer Products

William J Laule Chief Executive, TI Group

John F Cousins CEO, John Crane-Lips

T Allan Welsh CEO, TI Group Automotive Systems

Geoff F Smith CEO, Dowty

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TI Group plc 11

John Crane’s Type 285 seal is the first non-contacting metal bellows seal to be applied tocryogenic applications. It combines John Crane’sworld leadership in spiral groove technology withthe metal bellowsexpertise of Sealol, acompany acquired by TI Group in April 1998.

Spiral grooves, cut into the rotating seal face,capture the vaporised liquid gas and compress itto form a cushion of vapour between the rotatingand stationary seal faces. Sealol® edge weldedmetal bellows act as a spring to ensure that the two seal faces are perfectly aligned. Sincethere is no seal face contact, thetemperature during pumping rises by only a few degrees,virtually eliminating flashing and wear on the seal faces.

Over 700 Type 285 seals have been installedand end users in the liquid gas market havealready seen significant benefits. Withconventional contacting seals, the MeanTime Between Pump Maintenance can be as short as a few weeks. Because there isvirtually no seal face wear, the Type 285 canrun up to five times longer. Global solutionsserving the needs of global businesses.

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12 TI Group plc

Tynan Carroll, John Crane Reliability Engineer, demonstrates to Peter Wray, Maintenance Manager for Rohm & Haas, Jarrow, UK the significantextension of Mean Time Between Failure achieved by John Crane mechanical seals. In 1999 John Crane received the Rohm & Haas Talucci Award.

John Crane last year strengthened its worldleading position in the supply of sealingsolutions for process, marine and generalindustrial applications and outperformed its markets. Overall sales grew by 17% andprofits were similar to 1998. Excluding acquisitions, organic sales fell by 6% andorganic profits fell by 7%, reflecting challenging process industry conditionspartially offset by good growth in marine markets.

IndustrialJohn Crane demonstrated its underlyingstrengths last year in very challengingprocess industry markets. It increased its market share still further while rationalising its operations to place it ina strong position to take advantage whenthe upturn in trading conditions occurs.

John Crane is the world leader inmechanical seals with a market share more than twice the size of its nearestcompetitor. It manufactures a range of

John Crane, a world leader in engineered sealing solutions, last year

outperformed its markets in challenging process industry conditions

that were partly offset by good growth in marine markets.

Sales were up 17% at £685.6m (1998: £585.6m) as a result of

acquisition activity, with operating profit similar to last year at £76.4m

(1998: £76.0m). On an organic basis, sales were 6% lower with operating

profit down 7%. John Crane's overall margins were down to 11.1%

(1998: 13.0%), held back by lower margins on businesses acquired over

the last two years. It is expected that continuing management actions

in the acquired businesses will result in improved margins.

John Crane is the world leader in mechanical seals with a market share

more than twice the size of its nearest competitor. It manufactures a range

of safety critical products essential to the safe and efficient operation

of rotating equipment in demanding conditions. Last year John Crane

rationalised its operations to place it in a strong position for the expected

upturn in process industry markets.

In February 2000, John Crane-Lips, the marine arm of John Crane,

announced a co-operation agreement with Wärtsilä NSD, the world’s

leading supplier of marine engines, to offer customers total marine

propulsion systems, from the engine room through to the ship’s propeller.

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TI Group plc 13

safety critical products essential to the safe and efficient operation of rotatingequipment in demanding conditions.About 40% of sales are made to OEMmanufacturers, principally of pumps, mixers and compressors, and the remaining 60% are direct sales to End Users or operators of oil and gas,chemical, petrochemical and pulp andpaper process plants. Among End Usersthere is a significant replacement demandand requirement for aftermarket services.

Trading conditions last year in theprocess industries, the principal marketsaddressed by John Crane, were the mostdifficult for two decades. Sales revenues atmajor pump and compressor OEMs fell bybetween 10% and 30%. A significantfall in demand for final product and theeconomic setback in Asia and LatinAmerica exacerbated excess capacity inthe process industries and sent prices ofcrude oil, basic chemicals and pulp totheir lowest levels in years.

In response, End Users cut back oncapital spending projects and reduced current expense budgets, including maintenance. Purchases by End Users inthe process industries were down by over10%. Further consolidation last year inthe oil and gas and chemical industries,although offering significant opportunitiesto a key supplier like John Crane in themedium term, added to the need forindustry cost-saving measures and led to some reductions in overall processindustry capacity.

In 1999, John Crane successfully carried out a £15m investment programmeacross 34 countries to integrate the four new businesses acquired in 1998 –Safematic, Sealol, Flexibox and Vacuum & Filtration – and to rationalise its operations. The benefits of this investmentwill become increasingly evident.

The acquisitions made in 1998 broadened the range of products offeredto customers, created exciting globalisation

opportunities and increased the sizeof the markets addressed by John Craneto £4.5bn. The purchase of Safematic created a global leader in seals and lubrication systems for the paper and pulpmarket; Sealol brought in a strong brandname in high temperature metal bellowsseals; Flexibox, formerly with EIS, addedMetastream, a leading mechanical coupling product, to John Crane’s offeringto OEM pump manufacturers and the EISVacuum & Filtration businesses created an entry into new growth markets.

The main elements of the integrationinvestment were: a reduction in headcountin high labour cost locations by over 1000,although 150 new manufacturing jobs werecreated in Mexico and the Czech Republic;closure of more than 50 sales offices andservice facilities; and the closure of some 16 manufacturing facilities. The £15minvestment last year achieved significantimmediate cost savings and is well on trackto achieving an 18 month payback.

Metastream® TLGE high performance couplings are dynamically balanced in Houston, Texas beforeshipment to customers. This coupling will be installed between a turbine and compressor at a refinery.

The Safematic Flowline Lubrication Systemat UPM Kymmene Oy’s Tervasaari paper millin Finland improved operating efficiency by over 90%.

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Delivering a leaner and fitter operation, the programme heralds a permanent change in the way in which John Crane will operate going forward.

A key achievement following on fromthe EIS acquisition has been the creationof a new company, comprising HickHargreaves, Hibon and Wilhelm Klein within the Vacuum & Filtration business.This new company, directed by a globalmanagement team, will provide customerswith an integrated product offeringin blowers and associated systems. In addition to creating a global product line, a manufacturing facility has beenestablished in the Czech Republic, positioning this company for growth.

An integrated John Crane businesssystem, linking finance, manufacturing and distribution functions with a globalengineering system, was substantiallyimplemented in North America, Brazil,Mexico, Venezuela and Finland. The total investment, which integrates sales channels

and all business processes in these countries, was £20m. The global engineering system is a powerful IT toolin the hands of John Crane engineers,allowing them to find sealing solutionsfrom an unmatched database of applications.

Alliances, backed by teams of on-siteJohn Crane engineers, reduce downtimeand improve efficiency for customersthrough improved seal performance in the form of longer Mean Time BetweenFailure and lower maintenance costs, while strengthening John Crane’s marketposition further.

Alliances with OEM and End User customers increased again last year andhave helped John Crane to strengthen further its close relationships with its customers. In the US, new alliances were signed with a BP Amoco NorthAmerican refinery and with UltramarDiamond Shamrock for its Three Riversrefinery. A further eight alliances weresigned in the Europe, Middle East and

14 TI Group plc

Final check of a John Crane-Lips controllable pitch propeller installed on a container ship at a Dutch shipyard. The propeller is part of a fully integrated system which includes shaft seals and controls.

Asia regions, including arrangements withShell and Chemoxy. Further significantalliances are under negotiation.

John Crane won a £28m four year, preferred supplier contract with SulzerRoteq, one of the largest pump and compressor manufacturers in the world.Sulzer Roteq is a major supplier to thepower generation, oil refining, and oil and gas extraction markets and a leadingproducer of turbo compressors.

In the past 18 months, through strategicacquisitions, John Crane has strengthenedits market leading position and created themost complete portfolio of products andtechnology in its marketplace. The businessretains the largest and most extensiveglobal sales and service infrastructure inthe industry. With its depth of knowledgeof rotating equipment systems and longhistory of solving application problems,John Crane has taken a significant steptowards establishing itself as a serviceprovider rather than solely a supplier of

products and technology. Coupled with the£15m investment in integration and rationalisation, this has transformed thebusiness and placed it in a strong position forthe expected upturn in market conditions.

John Crane-LipsJohn Crane-Lips, a world leader in the supply of integrated marine propulsion andsealing systems, had another successfulyear, showing good organic growth in both sales and profits and outperformingits markets. New shipbuilding marketsremained firm, fuelled partly by a strong market for cruise ships, and worldcommercial ship order books maintainedthe high levels reached in 1998. Defencemarkets were generally flat but continuedto offer opportunities in new construction,retrofits and the upgrading of existing fleets.

Integration of the Lips propulsion business, acquired in 1998, is progressingwell. The combination of Lips’ propellers,shafts, thrusters, waterjets and electronic

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TI Group plc 15

controls with John Crane’s world leadingposition in marine seals created a one-stoppoint of design and supply for all marinepropulsion requirements.

Sales and service organisations inEurope, North America and Singaporewere integrated to provide a completepropulsion and service package. JohnCrane also introduced major changes inproduction methods at Lips, incorporatingrobotics technology, which together with an increased emphasis on servicelevels, led to a marked improvement inperformance and substantial sales andprofits growth.

The benefits of the new John Crane-Lips combination were reflected in a significant integrated propulsion package order worth £1.3m for Transworld.Leveraging propulsion systems into the veryimportant Asia Pacific market, through the business’ publicly quoted Japanese company, resulted in major contracts withNKK and Hitachi Shipbuilding Corporation.

John Crane-Lips continued expandinginto the growing fast ferry market. A propulsion package worth £1.5m wasordered by P&O for its fast passenger/carferry vessel and significant contracts for integrated propulsion systems werereceived from the Italian Orlando shipyardalong with waterjet contracts from Incat of Australia.

Implementation of John Crane’s financial controls, lean manufacturinginitiatives and a greater emphasis on theservice element in the propulsion businessgenerated a strong increase in profits.Aftermarket demand for seals and bearings was affected by lower freightrates, which delayed refits and refurbishments by shipowners, butthis was offset by other business.

John Crane-Lips’ underwater cable laying business performed strongly on theback of rising demand for new capacityfrom the telecommunications industry,driven by rapid growth in voice and data

traffic and burgeoning use of the Internet.A significant contract, worth in excess of£8m, was won from Global Marine Systems,a division of Global Crossing, to fit fiveships with John Crane-Lips’ cable layingequipment. John Crane-Lips’ expertise inelectric cable handling systems, which aresuperior to older hydraulic systems, givesthe business a significant advantage.

In February 2000, John Crane-Lips andWärtsilä NSD, a world leading supplier ofmarine engines, announced the signing of a Letter of Intent to provide shipownersand shipbuilders with total marinepower systems. Under the brand name,Wärtsilä-Lips, the two companies will meet increasing customers’ demands fora single source for total marine systems,integrating all aspects of propulsion andmanoeuvring systems from the engine,through the gear box to the ship’s propeller and all controls. The agreementwill provide significant growth opportunities to John Crane-Lips.

An AC drive cable drum engine manufactured by Dowty Precision Handling, Wolverhampton, UK, part of an £8m contract for John Crane-Lips from Global MarineSystems, which is increasing its fleet of cable ships to meet the ever growing demand for global submarine telecommunications and Internet cable networks.

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16 TI Group plc

TI Group Specialty Polymer ProductsOPERATING REVIEW

Proforma Sales £400m (US$650m)

World leading advanced polymer technology –

elastomer, thermoplastic and PTFE

7,000 employees in over 80 facilities in 33 countries

35 manufacturing sites (including 2 joint ventures in Japan)

Engineered customer solutions

The Problem The SolutionThe Airbus 3XX and other new generation, large civil

aircraft plan to carry more passengers and to fly higher,

for longer. This places heavy new demands on all aspects

of aircraft design and in particular on the efficient

sealing of safety critical

control systems. The higher

the altitude, the lower the

temperature of the air around

the aircraft. Elastomer-based

seals will in future be required

to retain their resilience

and high performance at

temperatures down to

-60˚C and beyond.

To seat more people, more space is needed inside and

the weight of the aircraft must be reduced. This means

that the size of hydraulic units that operate control

surfaces, landing gear and doors have to be more

compact; and smaller hydraulic units require

higher pressures

and greater

precision to

work effectively.

The low density fluids used at these

higher pressures are chemically

more aggressive and require

sophisticated elastomers to resist

damage to the materials which

would lead inevitably to failure.

Aircraft manufacturers, keen to cut

the cost of maintenance to fleet

operators, are also seeking “zero

leakage” in sealed hydraulic units

for periods as long as 25 years.

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TI Group plc 17

TI Group Specialty Polymer Products equips the

world’s leading global aircraft manufacturers

with key products including airframe sealing

for control surfaces, doors and hatches

together with hydraulic and actuation

sealing for wheel,

brake, landing gear

and hydraulic

control applications.

Forsheda and Busak+Shamban have over

50 years combined experience in elastomer,

thermoplastic and PTFE technology and

seal design. In six research and

development centres around

the world, their technologists

find new solutions for customers’

sealing problems in the most

demanding of environments.

TI Group Specialty Polymer Products drew on its

extensive knowledge base of material formulations

and seal design, using computer based Finite Element

Analysis, to optimise solutions for high altitude,

low temperature, high pressure hydraulic and

actuation sealing.

It has successfully developed materials for aircraft

manufacturers that can operate safely at higher

altitudes and resist more aggressive hydraulic fluids.

The materials exceed the requirements of NAS 1613,

the new industry standard, and enhanced seal

designs satisfy customers’ long life and low leakage

targets. Global solutions serving the needs of

global businesses.

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18 TI Group plc

The addition of Busak+Shamban’s expertise in the design and manufacture of high performance PTFE seals enables TI Group Specialty Polymer Products to provide a total polymer sealing solution. Manufacture of these seals in North America, Europe and Asia Pacific creates strong global growth opportunities in the industrial, aerospace and automotive markets.

TI Group Specialty Polymer Products is a leading supplier to industrial,

aerospace and automotive markets, including key growth sectors such as

process, semiconductor, robotics, off-highway, diesel, pipe and rail. By market,

sales are currently 60% industrial, 30% automotive and 10% aerospace.

TI Group Specialty Polymer Products achieved a strong performance last

year in mixed markets. Sales were up 15% at £284.7m (1998: £248.5m) and

operating profit was up 16% at £39.3m (1998: £33.8m). On an organic basis,

sales were flat, largely reflecting rationalisation of the product portfolio, but

operating profit grew by 8%. This was achieved through new performance

programmes and lean manufacturing initiatives introduced by the new

management. The margin remained strong at 14%.

The acquisition of Busak+Shamban has strengthened the market position

of TI Group Specialty Polymer Products and increased the size of the market it

addresses from £3bn to £4bn. With a comprehensive portfolio of polymer sealing

solutions and the ability to supply global support, the division is well placed to

grow strongly in an expanding market.

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TI Group plc 19

TI Group Specialty Polymer Products wasformed in October following the acquisitionby TI Group of Busak+Shamban forDM746m. Busak+Shamban has a strongstrategic fit with Forsheda, TI Group’sexisting polymer business. It has broughtin a range of products in PTFE and other thermoplastic technologies thatclosely complement Forsheda’s mainlyelastomer-based technologies.

The new business is going forwardunder the leadership of John Langston,formerly Chief Executive of Forsheda, who was appointed Chief Executive of TI Group Specialty Polymer Products inOctober 1999.

TI Group Specialty Polymer Products is a leading supplier to industrial, aerospace and automotive markets,including key growth sectors such asprocess, semiconductor, robotics, off-highway, diesel, pipe and rail. The acquisition of Busak+Shamban has enabled TI Group Specialty Polymer

Products to strengthen market share andhas increased the addressable market for polymer products from £3bn to £4bn.The combination of technologies and global capabilities of the two companieswill enable the new division to growstrongly in this expanded market.

After a slow start to the year, during a period of management transition, the performance of TI Group Specialty Polymer Products improved over theremainder of 1999 despite continuing difficult trading conditions in some markets. Overall sales and profit grew by15% and 16% respectively. An 8% risein organic profits and a rise in underlyingmargins were achieved through new performance programmes and lean manufacturing initiatives introduced by the new management.

In Europe, automotive sales benefitedfrom strong markets in France andGermany, which helped offset the decline in Scandinavia and the UK.

Aerospace also experienced growthdespite a slow down in the commercialsector. General industrial sales remaineddifficult, particularly in the process markets, but were buoyed by strong performance in the pipe and rail gangways businesses where significantcontract wins were achieved.

In North America, sales reflected a similar picture, with industrial salesimpacted by the downturn in the processindustry. However, TI Group SpecialtyPolymer Products’ leading position in automotive seals, especially for sport utility vehicles, ensured strong sales, with axle shaft seals and turbo chargerdiaphragms performing particularly well.

Both Latin America and Asia Pacifichave shown signs of growth for polymerproducts. In Brazil, the company investedin a manufacturing facility to provideregional support to a number of globalcustomers, which will help to acceleratesales in the region. In Asia, the additional

The oil and gas industries rely upon TI Group Specialty Polymer Products’ Variseal® for lifetime secure sealing of equipment such as this oil rig sub-surface valve for Bell Valves. Manufactured in North America and Europe, Variseal® is one of a range of advanced polymer sealing systems increasingly specified for safety critical and environmental applications.

network of Busak+Shamban has greatlystrengthened manufacturing and servicecapabilities, creating a very strong platform for future growth in this region.

TI Group Specialty Polymer Productshas over 80 facilities, including 35 specialist manufacturing operations,in 33 countries. This ensures the globalcapability to provide customers with highlevel technical support and world classtechnology at a local level.

The product range provides one of theworld’s strongest portfolios of elastomerand thermoplastic seals and bearings,ensuring that customers obtain the mostadvanced solution and the best optionavailable. This capability is backed by six R&D centres that, together with 11 materials laboratories and 17 designand application centres, specialise in thedevelopment of safety critical solutions,using a wide range of specialty polymerproducts including O Rings, rotary shaftseals, integrated hydraulic sealing systems,

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20 TI Group plc

gaskets and diaphragms. This technologicalleadership has resulted in a number of contract awards.

In the chemical and process sectors,the high performance Isolast™ O Ring product range has continued to gain sharewithin Europe, North America and Asia.

In the semiconductor market, therenewed upturn has enabled TI GroupSpecialty Polymer Products to gain newground with its range of PTFE sealing for vacuum applications. The companysupplies most pump manufacturers in this sector including the market leaderBOC Edwards, where orders have been won for their new range of semiconductorvacuum pumps.

The division has also seen success inthe domestic appliance sector. In LatinAmerica, TI Group Specialty PolymerProducts won a key contract to supplyoven gaskets to Vitro Whirlpool in Mexico,and is now the leading supplier in theregion. In Italy, Whirlpool has awarded

new rotary shaft seal business for its latest range of washing machines for the US and European markets.

In other industrial sectors such as off-highway, the addition ofBusak+Shamban’s hydraulic sealing expertise has enabled TI Group SpecialtyPolymer Products to gain additional business with equipment manufacturers,such as Caterpillar and John Deere. It has also strengthened its position in newmarkets such as food processing, whereBusak+Shamban has been selected as thepreferred global supplier to Tetrapak forits food and packaging machinery.

The rail gangways business continuedits expansion from a strong Europeanbase, having won significant new contractsin the key markets of North America andAsia. It is now the second largest supplierof rail gangways in the world. In NorthAmerica, new gangway business was won with Bombardier Canada for theVancouver Sky Train Rapid Transit System.

In Asia, TI Group Specialty PolymerProducts won the Hong Kong Mass TransitContract, awarded by Hyundai Precisionand Industrial Co, one of the largest train manufacturers in Korea.

In pipe sealing, where TI GroupSpecialty Polymer Products is the pan-European leader, new business withDiamond Plastics in North America hasenabled the penetration of the world’sbiggest market for plastic pipe, throughthe range of high integrity Powerlock®pipe sealing systems. The latest newDinlock® products will strengthen therange further, opening up a new marketarea for this family of non corroding, non toxic seals.

In aerospace, a number of new contractshave been won for airframe seals and wingslot seals for major fighter aircraft includingEFA, Hawk and Tornado. Wing slot sealcontracts have also been won with theAustralian and US airforces. In the commercial sector, new approvals have been

TI Group Specialty Polymer Products’ unique computer vision technology, shown here in Malta,ensures that over 500 million fuel system O Rings p.a. are supplied defect free, allowing automotivecustomers to support extended warranties and to enhance product and environmental safety.

Busak+Shamban’s new generation of sealing systems for automotive ride controlequipment enables car manufacturers such as Mercedes-Benz to raise levels of passenger comfort. Low friction and compactdesigns make these systems a preferred solution as ride control is increasingly specified worldwide.

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TI Group plc 21

achieved for the supply of hydraulic sealingsystems for Boeing and further business has been won with Airbus in Europe.

In automotive markets, the business isstrongly positioned in a variety of niche,growth markets that require added valuesealing system solutions. Contracts includethe supply of advanced sealing technologyfor Mercedes-Benz latest generation of air suspension and Active Body Controlsystems on the new S Class models.

New business has also been won for TI Group Specialty Polymer Products’ new range of bonded seals for automotiveair conditioning applications, where it has secured significant contracts in conjunction with Bundy S&H, part ofTI Group Automotive Systems. The sealswill ultimately be used on many globalplatforms launched by a leading US automotive manufacturer.

TI Group Specialty Polymer Products’airbag business experienced strong marketgrowth driven by the rapid increase in

demand for side and passenger airbagsand it continues to win significant contracts for Fiat, VW and Mercedes.

TI Group Specialty Polymer Products’largest single contract win in NorthAmerica, a $20m deal with SiemensAutomotive, is for high performance polymer sealing for a new leak detectionsystem designed to monitor fuel storagesystems for vapour leakage. Leak detectionand control of emissions are key to meeting the ever more stringent environmental requirements for automotive manufacturers.

TI Group Specialty Polymer Productsalso strengthened its global support tocustomers by transferring axle seal andgasket technology from Europe to NorthAmerica. This has won new business withcustomers such as Dana Corporation, John Deere and Ford.

Throughout the year, the division has continued its commitment to improve efficiency and quality and

almost all of its manufacturing sites arenow certified to ISO9000, QS – 9000 or Ford Q1 level. In addition, four newsites have recently received ISO14001environmental accreditation.

These achievements have resulted in improved quality, delivery and responsiveness and have won widespread recognition from many key customers including Borg Warner,Visteon and Delphi.

The current year will be an excitingone for TI Group Specialty PolymerProducts. By the end of 1999, the activities of Forsheda andBusak+Shamban were fully integrated.The division is now well positioned toreap the benefits of this powerful newcombination and to take full advantageof the opportunities it has brought togenerate sustainable top and bottomline growth.

TI Group Specialty Polymer Products’ rotary shaft seals, incorporating advanced PTFE materials, are fitted to vacuum pumps at BOC Edwards, Shoreham,UK, a world leading supplier to the semiconductor industry. This high growth market relies on advanced integrated sealing solutions that will withstandhostile gases and liquids, ensuring a contamination free environment.

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22 TI Group plc

TI Group Automotive SystemsOPERATING REVIEW

Proforma Sales £1,400m (US$2,270m)

Some 150 facilities in 29 countries on 5 continents

Over 50 customer focused satellites offering

‘just in time’ delivery

20,000 employees providing worldwide

customer service

The ProblemIn the United States, government regulations

on vehicle evaporative emissions are tough and

they are getting tougher. Since 1995, vehicles

in the US have been required to emit no

more than 2 grams a day of evaporated

hydrocarbons. Where the

US leads, Europe and the

rest of the world follow.

From 2000, European

vehicle makers must meet

the 2 grams a day limit.

The Solution

But US rules are becoming even tighter.

Between 2004 and 2006 new US legislation,

known as LEV II (Low Emission Vehicle II),

will reduce that 2 grams limit to 0.5 grams

a day. Even before any fuel is put into its

tank, a vehicle will emit about 0.3 grams

of evaporated hydrocarbons a day. So the

most that the vehicle’s fuel system itself

can emit by 2004 is just 0.2 grams; a

reduction of around 90%.

Anyone hoping to export vehicles into

the US will have to hit the same target.

Engineered customer solutions

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Helping our global customers to meet tough

emissions limits is a significant opportunity

for TI Group Automotive Systems. Our fuel

storage and delivery

systems anticipate

and meet all global

emission targets, even

the very strict LEV II

requirements in the US.

TI Group plc 23

For Bundy fuel lines, connecting the tank with the vehicle’s

engine, TI Group Automotive Systems engineers have

developed a range of NyMet coatings for rigid tubing

together with multi-layer Permblok™ flexible

hose that have unmatched resistance to

permeation, corrosion and abrasion.

TI Group Automotive Systems also offers

its customers state of the art testing facilities

at Auburn Hills, Michigan USA and Rastatt,

Germany. These provide the most advanced

testing capabilities available anywhere in

the world for on-vehicle fuel storage and

delivery systems.

This helps customers of TI Group Automotive

Systems to stay ahead of the game. Global

solutions serving the needs of global businesses.

Walbro multi-layer, composite fuel tanks

contain an integral vapour barrier that

meets the strictest emissions standards.

Walbro modules, incorporating an electric

fuel pump, reservoir and level sensors,

have reduced leak paths and permeation.

Together they make up the Walbro

2000X Smart Tank™, a complete,

electronically managed fuel storage

and delivery system, meeting LEV II

targets and representing the next

generation of features for fuel systems.

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24 TI Group plc

Unloading a Dodge Durango fuel tank from a blow moulding machine at Ossian, Indiana. TI Group Automotive Systems supplies the fuel tank, fuelmodule and underbody fuel lines for the Durango. Bundy and Walbro technologies complement each other to form fully integrated fuel systems.

TI Group Automotive Systems, the only independent designer and manufacturer

of integrated fuel storage and delivery systems on a global basis, had another

successful year. The fuel systems business supplements the continuing

automotive brake and powertrain systems expertise.

TI Group Automotive Systems continued to perform strongly. Sales increased

by 50% to £1,190.7m (1998: £794.0m) and operating profit in 1999 increased

by 37% to £124.1m (1998: £90.9m). On an organic basis, sales grew by 8% and

profit grew by 14%. TI Group Automotive Systems’ margin remained strong at

10.4% (1998: 11.4%), slightly down on the previous year as a result of the

initial impact of acquisitions.

Focus on three core strategies has generated growth: concentration on

segments in the market experiencing growth above the underlying car-build

increase, adding value to products coupled with developing full systems supply

and globalisation of technologies.

TI Group Automotive Systems’ presence on strongly growing programmes

and valuable new contract wins is an encouraging indicator for the future.

Its identification of high growth segments and the ability to provide integrated

systems will lead to further outperformance of underlying markets and

increasing added value.

TI Group Automotive Systems was formedfollowing the acquisition of WalbroCorporation by TI Group for $553m inJune. The new grouping brings togethertwo powerful brand names – Walbro fuel storage and delivery systems andBundy fluid carrying systems – to providecustomers with the only independentdesigner and manufacturer of integratedfuel storage and delivery systems, fromfiller cap to engine fuel rail, on a globalbasis. This business supplements the automotive brake and powertrain fluidhandling systems in which TI GroupAutomotive Systems already holds a strong market position.

In October 1999, TI Group completed the acquisition of the remaining 51% of Marwal, a joint venture betweenMagneti Marelli and Walbro. Headquarteredin Châlons-en-Champagne, France, Marwal manufactures fuel pumps and modules and has a high reputation for technological

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TI Group plc 25

and service excellence among its international customer base. In additionto its French operation, Marwal has facilities in Mexico and Brazil. With 100%control of Marwal, TI Group AutomotiveSystems completed the fuel product range,gained control of proprietary technologyand put itself in a position to supply complete fuel storage and delivery systems worldwide.

TI Group Automotive Systems, withsales of over £1.19bn ($1.93bn), has a15% share of fuel storage and deliverysystems, about 40% of the brake and20% of the air conditioning fluid carryingworldwide markets. Operating from a network of over 150 sites in 29 countries,half of this business is in North America,35% in Europe, with the remainder in Asia Pacific and Latin America.

Integration of Walbro’s managementand products with those of Bundy is proceeding to plan. Key aspects of Bundy’s proven management model

have been applied throughout TI GroupAutomotive Systems. Building upon theglobal sales structure and in recognition of the added scope of the company, twokey commercial managers have beenappointed. They have responsibility for the global activities of customers headquartered in their regions and formaintaining customer relationships worldwide. Sales and applications engineers are also structured into theseglobal business units, dedicated to individual customers, with as muchemphasis on the final design and launchstage of OEM contracts as winning them.

TI Group Automotive Systems hadanother successful year in 1999. Overallsales and profits increased by 50% and37% respectively. Excluding acquisitions,profits grew organically by 14% on anunderlying 8% increase in sales.Performance was driven by the buoyantNorth American automotive market inwhich TI Group Automotive Systems has a

strong presence in the fastest growing segment – light trucks and recreationalvehicles – where the value of TI Groupproduct per vehicle is above average. InEurope, performance was strong relative to local markets and new platforms, whilein Latin America TI Group AutomotiveSystems coped well with the economicproblems which surfaced in the first quarter.Asia Pacific performed well as marketssuch as Korea and India started to recover.

Growth has been sustained through focus on three core strategies:concentration on segments in the marketexperiencing growth above the underlyingcar-build increase, adding value to products coupled with developing full systems supply and globalisation of technologies. Margins have grown throughfurther moves up the added value chainand from efficiencies brought about by lean manufacturing initiatives. Thecompany is well positioned to win globalcontracts arising from the trend towards

Leak testing air conditioning receiver driers at the Cisliano, Italy facility acquired by TI Group Automotive Systems in early 1999. Rapid transfer of itsleading spin weld technology to North America helped secure the air conditioning accumulator contract for the GM Jimmy/Blazer sports utility vehicle.

full systems supply in a consolidating vehicle manufacturing industry.

The acquisition of Walbro and the formation of TI Group Automotive Systemsextends our penetration of high growthmarket segments. This time directed at thefuel sector, it is a continuation of the samestrategy that lay behind the acquisitions of S&H in 1998 and Kenmore Italianain March 1999, both of which opened upnew markets for TI Group AutomotiveSystems in automotive air conditioning.

OEMs increasingly require integratedsystems from their suppliers. Althoughalso true in brake and powertrain, thisrequirement is particularly strong in thecase of fuel systems, because of everstricter emissions legislation. TI GroupAutomotive Systems is uniquely placedto provide complete fuel systems.

In Europe, around 80% of cars haveplastic tanks, but the majority of these aresingle layer. This creates significant growthpotential for the advanced, multi-layer

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26 TI Group plc

composite fuel tanks supplied by Walbro,capable of meeting higher emissions standards. Opportunities are also substantial in North America, where as yet only 40% of fuel tanks are plastic,and in Asia Pacific where the proportionis less than 10%.

The trend towards the supply of integrated systems enables TI GroupAutomotive Systems to increase considerably the value per vehicle itsupplies. Before the acquisitions of S&Hand Walbro, the average value of contractswas about $30 a car. TI Group AutomotiveSystems is now winning contracts with avalue per car of $200 or more.

In a key contract win, which underlinesthe success of its integrated systems strategy, TI Group Automotive Systemsis to supply one of the world’s top automotive manufacturers with a completefuel tank system for its small car platform.The fuel system, due to go into production

in 2003, is designed to meet the US mandated LEV II standards on evaporative emissions. These are currentlythe strictest in the world and will becomethe global standard. The entire fuel tankassembly will be supplied to five customerfacilities across North America and Europe.

The trend towards high pressure, rapidresponse braking systems has also broughtnew opportunities to add greater valuein the braking systems market. TI GroupAutomotive Systems has successfullyfound design solutions to the demands ofABS and Electronic Stability Programmesoffering lower cost assembly as well asreduced noise, vibration and harshness. Asa result the value of product per vehiclefor models such as the Audi TT and VWPolo has been significantly enhanced.

There were several examples of atransfer of TI Group Automotive Systems’air conditioning technology from NorthAmerica to Europe. These include thelaunches of the GM Zafira and Astra and

new business wins for the successor to the GM/Renault MiniVan/Trafic. In theother direction, technology obtained in the purchase of Kenmore Italiana earlier in the year was transferred to NorthAmerica in a contract to supply the GMJimmy/Blazer sports utility vehicle with air conditioning accumulators from 2001.

TI Group Automotive Systems includes three related businesses. BundyRefrigeration is a world leading supplier of cooling systems for the refrigerationindustry, Walbro Engine Managementis foremost in small carburettor and ignition systems for the garden, marineand two-wheeled vehicle markets and VARI-FORM is a leader in hydro-formingtechnology for vehicle structural components.

Bundy Refrigeration benefited fromstable markets in North America andEurope. The impact of the Latin Americanslowdown was restricted by a rapid costreduction programme and revised pricing

Prototype hydro-forming die rig at VARI-FORM’s Technical Centre, Woodstock, Canada. This state ofthe art facility, opened in 1999, houses VARI-FORM’s advanced engineering and prototype facilities.

Testing the Optimizer no-frost evaporator system to be manufactured at the newMonterrey, Mexico facility, a major investment.This revolutionary product, up to 70% morethermally efficient than other evaporators, will help customers meet 2001 and 2004 energy legislation.

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TI Group plc 27

to cover currency devaluation. BundyRefrigeration recently completed a state ofthe art plant in Monterrey, Mexico, whichfrom 2000 will reposition the company in the key North American market withinnovative new products. A new facility inHungary was also completed in Septemberto support Bundy Refrigeration’s European manufacturing strategy.

Walbro Engine Management is enjoying considerable growth in the outdoor power equipment markets, driven by emissions and noise controllegislation in the US. Significant, profitable expansion in the two-wheelvehicle market in Asia, notably in China,is further adding to growth.

During the year VARI-FORM won a major contract to supply a front endstructure to a major North American manufacturer, which will contribute to adoubling of sales by 2003. VARI-FORMreceived DaimlerChrysler’s Quality Role

Model Award in recognition of its leadershipin hydro-formed components and assembliesfor automotive structural components.

Quality is a fundamental customerrequirement in all markets. The number ofsites within TI Group Automotive Systemsto achieve QS – 9000 certification hasnow risen to over 70. Last year customers continued to recognise TI GroupAutomotive Systems’ commitment to quality with a number of awards.

Renault named TI Group AutomotiveSystems as an “Optima” supplier, effectively making it a member of theinner circle of Renault’s most valued Tier 1 suppliers.

Volkswagen presented TI GroupAutomotive Systems with a “LeadingEdge” award in recognition of outstandingworldwide performance and innovation. TI Group Automotive Systems suppliesover 30 VW models manufactured in 19 plants in 11 countries.

The Smart Tank™ is a complete electronically managed fuel storage and delivery system designed to meet stringent evaporative emissions requirements. It introduces the next generation of features for fuel systems.

TI Group Automotive Systems places great emphasis on managing theenvironmental impact of its operations. In the year, 11 additional sites achievedISO14001, the international standard forenvironmental management, bringing thetotal number of certified sites to 24 in ten countries. Furthermore many TI GroupAutomotive Systems products make a considerable contribution to the environment through the reduction of noise, emissions and particulates.

TI Group Automotive Systems’ presence on high growth programmesand its valuable new contract wins are encouraging indicators for the future.Its identification of high growth segmentsand ability to provide integrated systemswill lead to further outperformance of underlying markets and increasingadded value.

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28 TI Group plc

DowtyOPERATING REVIEW

Proforma Sales of £550m (US$890m)

Some 6,500 employees at over 35 facilities

in Europe and North America

Supporting 450 airlines and 150 military

operators in 90 countries

The US Government, facing substantial pressure fromenvironmental groups and populations living around airports,has introduced legislation that requires a progressive andsubstantial reduction in noise levels emitted by aircraft.

Under the US GovernmentStage 3 noise standards, all aircraft, whether newlymanufactured or alreadyoperating, must now meettough noise reduction targets.

A huge number of older aircraft, from smallbusiness jets to large civil aircraft, do notcomply with these noise limits. This is asignificant global problem since, by the year2002, most of the world’s major airports may ban non compliant aircraft.

Aircraft operators have been facing up to a number of expensive options. They range from engine modifications, involving costlyinstallation downtime and the potential threatof poorer performance, through to the purchaseof new engines or even entire new aircraft.

The Problem The Solution

Engineered customer solutions

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TI Group plc 29

Dowty is helping to pioneer two “hush kit” solutions –one for large civil aircraft and the other for business jets.

Firstly, Dowty Aerospace Yakima has helped RaisbeckCommercial Air Group to come up with a unique solutionto enable Boeing 727 aircraft to meet the new noisestandards by reducingthe downward angle of the aircraft’s leadingwing edge, cutting dragand reducing enginenoise, without affectingperformance.

Secondly, Dowty Aerospace Los Angeles has teamed up with another US company, Really Quiet LLC, tohelp develop a unique hush kit for Gulfstream II and III business jet aircraft. Thehush kit is mounted at the rear ofthe engine housing in the form of a retractable ejector shroud, andis designed to tackle engine noise.

Really Quiet faced two design problems. A rivalmechanical, gear-driven ejector shroud already inuse was too heavy and too costly. Dowty designeda single, linear hydraulic actuator with an ejectorcontrol valve that was lighter and less expensive.

At the same time, installation of the hush kitmeant that the engine’s thrust reverser (brakingsystem) had to be redesigned. Dowty proposed a new reverser actuator, using the ejector controlvalve itself to control the thrust reverser, savingthe customer more money in the process. Globalsolutions serving the needs of global businesses.

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30 TI Group plc

Dowty’s total capability to supply turbine engine systems and components, from intake to exhaust,was demonstrated powerfully in this display for the Paris Air Show 1999.

Dowty, a world leader in the supply of specialised systems to the aerospace

industry, performed well in 1999 as trading conditions began to reflect a

levelling off in the aerospace cycle after the upswing in recent years.

Dowty’s sales increased by 26% to £567.8m (1998: £451.2m) and operating

profit grew by 22% to £72.1m (1998: £59.3m). On an organic basis, sales were

slightly down by 4% reflecting the anticipated slow down in early cycle turbine

engine component activity, but operating profit grew by 8%. Dowty maintained

its strong underlying margin although the reported margin softened to 12.7%

(1998: 13.1%) as a result of acquisitions over the last two years. Aerostructures,

the largest of the EIS businesses acquired in 1998, showed significant

improvements in profitability and is on track to achieve double digit margins.

Dowty has a good position on a wide range of aerospace programmes in large

civil aircraft, regional and business jets and defence markets. It is well placed

to take advantage of new programme opportunities and further outsourcing

by its customers.

Dowty’s position has been strengthened by its enhanced ability to offer

packaged solutions ranging from complete rigid and flexible tubing systems

through to aerospace structures with integrated hydraulic and actuation controls.

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TI Group plc 31

Tri-Industries’ fabricator Dan Wilkinson de-burring an exhaust mixing duct for the CFM56 enginewhich powers Airbus A340 aircraft. Tri-Industries, based in Indiana, USA and acquired in 1999,widens the market available to Dowty in turbine engine components.

Dowty is a world leader in hydraulics andactuation, turbine engine components, specialist aerostructures, tubular systemsand advanced propeller systems for thecivil and military aerospace industry. It ispresent on every major Boeing and Airbusaircraft and every major engine programme.

Dowty employs some 6,500 peoplein over 35 facilities in Europe and NorthAmerica. It supplies 40 of the world’s leading aircraft and engine manufacturers,supports some 450 airlines and 150military operators in 90 countries aroundthe world and has equipment flying on200 current types of aircraft.

Dowty performed well in 1999 as trading conditions in its markets began to anticipate a levelling off in the aerospace cycle, after the upswing in recentyears. Overall sales and profits grew by26% and 22% respectively. After excludingthe contribution from acquisitions, Dowtyachieved organic profits growth of 8%despite a small reduction in underlying

sales – this following strong growth in previous years. Dowty maintained goodmargins on a like for like basis but thereported margin softened because of thedilutive impact of a full year of lower margin EIS businesses acquired in 1998, although these improved ahead of expectations.

Dowty’s Hydraulics & Actuation businesses made further progress, reflecting the high aircraft build rate,strong demand for spares and costimprovement programmes. Propellers also had a good year and Aerostructures, the largest of the companies acquiredfrom EIS, performed ahead of initial expectations, driven by improved volumesand cost reduction initiatives. Demandfrom aircraft engine manufacturers for turbine engine components, whichhistorically leads the aerospace cycle, fell back as expected from previously high levels in the course of the year.

The acquisition in March 1999 of

Tri-Industries from GE for $48m was animportant step, extending Dowty’s productrange into the fabrication of jet engine hotsection components. It moved DTEC furtherup the engine value added chain and gavethe business substantially increased valueson a range of major engine programmes,including the CFM56-5C on the AirbusA340, GE90 on the Boeing 777 and F119 for the Lockheed Martin/BoeingF-22 Raptor.

At the start of the year, Titeflex Corp(from Bundy) and Lewis & Saunders (from DTEC) were brought together to form Dowty Tubular Systems. This createda world leading supplier of fluid carryingsystems, integrating rigid and flexible tubing packages.

Dowty’s comprehensive engine productportfolio, enhanced by the acquisition ofTri-Industries and the formation of DowtyTubular Systems, was well demonstrated byan engine exhibit at the Paris Air Show inJune (see picture on page 30).

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32 TI Group plc

William Hellyer-Kinch, quality controller at Hamble, Hampshire, UK checks a composite wingcomponent for a Boeing 737NG aircraft. In 1999 Hamble won a $150m contract extension on the737NG and Silver Suppliers’ Award for outstanding performance on the Boeing C-17 programme.

practice ideas and experiences has beenencouraged through workshops. Around200 week-long Kaizen events, which focus on one selected area of processimprovement, were held by Dowty businesses, producing many significant gains.

In Hydraulics & Actuation, DowtyAerospace Wolverhampton has seen inventory reductions of up to 90% in somecomponents and cuts in batch sizes fromas many as 120 to single piece flow. DowtyYakima achieved a five-fold increase inthe output of hydraulic fuses and DowtyAerospace Hydraulics secured a 50%reduction in lead times in finishing operations for critical components. Thethrust reverser actuation system cylinderfabrication cell at Dowty Aerospace Los Angeles has achieved a 70% reductionin work in progress and cut lead times byover 60%.

At Tri-Industries a major physicalreorganisation was completed, providingspace and capacity for future growth

as well as delivering results ahead ofexpectations. AIT, formerly an EIS company, transformed its machine shop and achieved significant cost andinventory level reductions. At Hamble, the accelerated improvement workshopapproach enabled turnover to be increased by over 20% with no increasein headcount.

A number of significant contract winsconfirmed Dowty’s strong position on awide range of aircraft programmes.

Dowty Aerospace Los Angeles won new contract extensions worth over $100mon the Boeing 737, 747, 757 and 767 aircraft to supply a broad range of hydro-mechanical equipment, includingthrust reverser actuation systems, flightspoiler control units, utility steering andlanding gear door actuators through to the year 2006. Hamble negotiated a follow-on contract to supply fixed leadingwing edge structures for the best sellingBoeing Next Generation 737 aircraft,

In February 1999, the remaining EISAerospace businesses were restructured.Dowty Defence & Engineering Systemswas created to manage AB Precision, AGI,Air-Log and Horstman Defence. DowtySpecial Products was formed to manageDavall Gear, Mollart Universal Joints, C&FMillier and Cambridge Vacuum Engineering.These businesses have benefited frombeing part of a smaller managementgrouping that has enabled a betterunderstanding and support of the range of markets which they service.

In July, most of the Aviation Supportand Electronic Distribution businesses that were acquired with EIS were sold to Umeco and disposal of the remainder was completed in September.

The further spread of lean manufacturing initiatives has continuedto yield efficiency gains throughout Dowty. Hamble and each of the DowtyAerospace businesses have dedicated lean managers, and networking of best

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TI Group plc 33

Dowty Tubular Systems’ operations in the USA and Europe bring together strengths in complex rigid tubular fabrications and flexible hose technology to provide total fluidcarrying solutions.

running through to 2003 and worth morethan $150m. Both contracts provide goodorder visibility, underpin Dowty’s strongrelationship with Boeing and reflect the improving performance of Hamblesince its acquisition by TI Group.

Dowty increased its position onthe latest Airbus Industrie aircraft, the A340-500/600, with contracts to supplyhydraulic fuses and pitch trimmers for boththe main and centre-line landing gears. Thewins followed earlier contracts to supply the flap actuation system and wing trailingedge ribs. Dowty also secured another contract win in the small aircraft sector asLewis & Saunders was selected to supply all the rigid tubular assemblies, 600 in all, for the new Sino-Swearingen SJ30–2 business jet.

In the aerospace defence market,Dowty benefited from contracts to supplycomponents for 28 Gripen advanced light fighters and 24 Hawk 100 lead-in

fighter trainers ordered by the SouthAfrican government, representing businessworth in excess of $20m. This followed acontract to supply hydraulic componentsfor Anglo/French Jaguar military aircraft,which are to be built under licence by Hindustan Aeronautics for the Indian Airforce.

Meanwhile, Hamble Aerostructures continued its record of excellent supporton the C–17 Globemaster programme. Thiswas publicly recognised in Boeing’s decision to cite Hamble as an example ofthe “Best of British” in its advertising campaign.

Defence markets, which provide a focusfor about 25% of Dowty’s business, holdexcellent growth prospects. Dowty has astrong position on the Eurofighter and is a member of both the Lockheed Martinand Boeing Joint Strike Fighter teams. InDecember, Boeing unveiled its JSF conceptdemonstrator aircraft for which Dowty

designed and supplied the flight controlactuators, landing gear control hydraulicsand nozzle sidewalls on the developmentengine. During the year, Dowty AerospacePropellers delivered the 250th Hercules C–130J propeller system and won animportant contract covering worldwiderepair and overhaul. Lockheed Martinarranged a C–130J visit to Gloucester as a “thank you” to the DAP team.

Awards received during the year by Dowty businesses recognise the commitment throughout Dowty to highquality and customer satisfaction and environmentally aware processes.

Dowty Aerospace Los Angeles gainedregistration to ISO9001, the internationalquality management system standard,adding to the long list of Dowty’s accredited businesses. Dowty AerospaceWolverhampton also won the UK CivilAviation Authority JAR–21 Approval, the new code of common design and production procedures, following theaccreditation of Dowty AerospacePropellers and Hamble.

Since the end of the financial year, all12 Dowty facilities in North America havegained registration to ISO14001, the international standard for environmentalmanagement systems. This is a significantachievement and places Dowty, as an environmental manager, in the top rank of businesses operating in North America.

Looking forward, deliveries of large civilaircraft are set to decline from their peakover the next two years and then flatten out.In the meantime, there will be continuinggrowth in the regional and business jet sectors and a stable defence market.

Dowty has a good position on a widerange of programmes in all of these marketsectors, with a mixture of airframe andengine products and strong aftermarketsales. This good position is strengthened byDowty’s enhanced ability to offer packagedsolutions, ranging from complete rigid and flexible tubing systems through toaerospace structures with integratedhydraulic and actuation controls.

With world class technology and manufacturing techniques and an excellent reputation for quality and service, Dowty is well placed to takeadvantage of new programme and outsourcing opportunities and to

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Analysis of resultsTI Group has again achieved strong results with sales up 26% and

profit before tax, goodwill and exceptional items increased by 8%

to £257.1m (1998: £238.6m). Earnings per share before goodwill

and exceptional items increased to 35.4p (1998: 34.3p).

Total sales for the year were £2,729m (1998: £2,168m), a

26% increase over 1998. Adjusting for portfolio and exchange

rate changes, underlying sales were unchanged, with the Group’s

strong performance in automotive markets being offset by difficult

industrial markets and a slow down in some early cycle aerospace

activities. All four world leader businesses continued to outperform

their underlying markets.

Total sales £ million

3,000

2,400

1,800

1,200

600

95 96 97 98 990

Financial Review

The Group’s accounting policies and the format of the segmental

analysis are unchanged from last year.

However, year-on-year comparison is affected by the significant

acquisition activity, which is set out in detail in note 1 on pages 58

to 60 and described in the Statement by the Chairman and the

Chief Executive’s Review on pages 2 to 5, and, where appropriate,

the effect of acquisitions is explained in the analysis which follows.

Comparisons between 1999 and 1998 were not significantly

distorted by the effect of changes in exchange rates on the

translation of the results of the Group’s overseas subsidiaries for

accounting purposes: sales reduced by £3.3m and profit before

taxation, goodwill and exceptional items increased by £1.5m. 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 1998 and 1999

average and year-end exchange rates for the US dollar, the

Deutschmark and the euro/ECU.

34 TI Group plc

“1999 was another successful year, with

good sales and profit growth supported

by strong cash flow and increased

investment. The recent acquisitions are

being integrated successfully and are

performing on plan. Going forward the

Group is well positioned for growth.”

Average for year £1=US$ £1=DM £1=euro/ECU

1999 average 1.62 2.97 1.52

1998 average 1.66 2.92 1.48

£ stronger/(weaker) (2)% 2% 3%

Period end

31 December 1999 1.61 3.14 1.61

31 December 1998 1.66 2.77 1.42

£ stronger/(weaker) (3)% 13% 13%

Martin Angle, Group Finance Director

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The performance of all four businesses is described in more

detail in the Chief Executive’s Review on pages 4 and 5 and the

Operating Review on pages 6 to 33.

Total profit before interest, goodwill and exceptional items was

£307.0m, up £41.7m or 16% from last year. Adjusting for portfolio

and exchange rate changes, organic profit growth was 6%.

Group operating margin was down slightly at 11.3%

(1998: 12.2%) reflecting the impact of lower margin businesses

acquired during 1998 and 1999. Underlying margins, however,

remained strong in all four businesses. Although the businesses

face some pricing pressure, TI Group management continue to

take actions to improve margins.

Return on investment (profit before interest, goodwill,

exceptional items and tax as a percentage of investment, including

all goodwill) decreased to 12% (1998: 14%) due to the initial

effect of acquisitions. All the businesses acquired in 1998 and

1999 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 full year of ownership.

Net interest expense increased to £49.9m (1998: £26.7m),

reflecting the significant acquisition activity. The interest charge

was covered over 6 times (1998: 10 times) by profit before

interest, goodwill and exceptional items.

Profit before taxation, goodwill and exceptional items was

£257.1m, up £18.5m or 8% from last year. The effective tax rate

on profit before goodwill and exceptional items was 31%,

unchanged from 1998.

In line with FRS10, goodwill on acquisitions completed since

1st January 1998 is being amortised over 20 years, resulting in

a non-cash charge of £37.7m in 1999 (1998: £15.1m), with the

increase reflecting the recent substantial acquisition activity.

Total goodwill capitalised in 1999 was £537.6m

(1998: £539.2m) principally relating to Walbro (£250.9m) and

Busak+Shamban (£217.1m). This included adjustments totalling

£174.2m to the balance sheets of acquired companies to restate

net assets acquired to their fair values, of which £157.7m related

to Walbro. Goodwill arising on the Walbro acquisition has increased

by £33.6m since the 1999 Interim Announcement, principally

due to incorporating the results of external professional asset

valuations completed since August. The Directors believe that

these fair value adjustments, and resulting goodwill, are more than

outweighed by the significant strategic and financial opportunities

which Walbro brings to the Group’s automotive activities.

Exceptional charges against operating profit totalled £30m

in line with announcements made during the course of the year.

Of this, £15m related to the cost of the integration investment

in John Crane, which is now complete, and £15m to the integration

of recent acquisitions in other divisions. The Group also incurred

£3m of exceptional costs relating to property disposals. The

balance of the exceptional integration investment announced

during the year of £11m will be taken, as planned, during 2000.

Earnings per share before goodwill and exceptional items were

35.4p (1998: 34.3p), up 3%, a smaller increase than the 8% rise

in profit before taxation, goodwill and exceptional items due to

the issue of new shares during the year.

DividendThe Board is recommending a final dividend of 12.0p payable on

26th May 2000 to shareholders on the register at the close of

business on 17th March 2000. This gives a total dividend per

Ordinary share for the year of 17.8p (1998: 17.2p), an increase of

3% over the previous year. The dividend is covered 2.0 times by

earnings before goodwill and exceptional items (1998: 2.0 times).

Cash flow and debtCash flow from operations was again strong at £337m

(1998: £293m). After capital investment, free cash flow was

£223m, 2% ahead of the previous year. Excluding exceptional

items this represents a surplus over the Group’s net interest,

tax and dividends of over 25%.

TI Group plc 35

Profit before taxation, goodwill

and exceptional items £ million

300

240

180

120

60

95 96 97 980

99

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Capital and revenue investment increased by 15% to £157m

(1998: £136m). Within this, capital expenditure was £119m

(1998: £93m) and revenue investment, excluding the integration

investments of £30m referred to above, was £38m (1998: £43m).

The Group continues to focus on working capital management,

particularly in the newly acquired businesses, and as a percentage

of sales, average Group working capital reduced to 11% (1998: 12%).

Net debt at 31st December 1999 was £1,161.3m compared

with £512.7m at 31st December 1998. This increase principally

reflects the net cash outflow on acquisitions offset partially by the

receipt of £94.4m from the issue of 23.6m new shares to KKR.

TI Group shareholders’ funds were £717.8m at 31st December

1999 (31st December 1998: £601.0m), reflecting retained profit

for the year and the share issue. The impact of exchange

translation on TI shareholders’ funds was not significant.

TreasuryTI Group operates a central treasury function providing services

to the whole Group by arranging borrowings, managing cash 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

36 TI Group plc

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 policy is over 80% across all currencies and at

31st December 1999 the overall level of hedging was over 90%.

The Group’s gross debt at 31st December 1999 totalled

£1,303.7m (1998: £685.8m) with £451.6m denominated in

US and Canadian dollars, reflecting the Group’s strong North

American presence, and £303.2m denominated in Continental

European currencies. The principal components of this debt are

centrally managed bank loans totalling £1,063.7m in a mix of

currencies and two private placements of US$140m in total

outstanding. The Group has committed bank facilities of £76m

maturing in 2000 and a further £1,285m maturing in 2001 or

later. In January 2000, committed facilities totalling £210m

were extended for a further 12 months.

Year end cash and deposits totalled £142.4m (1998:

£173.1m). 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

to provide efficient cash management. In addition, the Group

arranges significant intra-Group loans for cost effective core

funding of its worldwide operating businesses.

Interest rate exposures on borrowings and deposits are

monitored carefully and hedging actions taken when market

conditions are considered appropriate. Normally, at least one

half 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. In 2000, some

75% of the annual interest cost is hedged in order to minimise

the impact of further interest rate increases in some of the

currency zones in which the Group trades. In US$ and sterling,

Financial Review continued

Net Debtat 1.1.99

Operating

Activities

Cash from share

issue

Net Capital

Expenditure

Finance Charges,

Tax & Dividends

Acquisitions, Disposals & other

Net Debt at 31.12.99

(513)

337

94 (115)

(184)

(780)

(1,161)0

(250)

(500)

(750)

(1000)

(1250)

Change in Net Debt £ million

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TI Group plc 37

which are the two most important currencies to the Group,

interest rate hedging for 2000 is over 85%.

Exchange translation exposures arising on the consolidation

of overseas operating profits are partially offset by interest charges

on foreign currency borrowings. Residual exposures are monitored

but are not normally hedged, and no such hedging was

undertaken in 1999.

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 business

units hedge their net exposures through or at the direction of

Group Treasury.

There was no use of options during 1999.

Millennium compliance and the euroThe Group’s millennium compliance programme was completed on

time. No material disruption has arisen from the non-compliance

of either a business critical system or third party since the year end.

Following the introduction of the euro on 1st January 1999

the Group’s operations transact in euro as appropriate. Business

systems in the euro zone will progressively be euro-based during

the transition period. The estimated costs of this programme are

not significant.

Summary1999 was another successful year, with good sales and profit

growth supported by strong cash flow and increased investment.

The recent acquisitions are being integrated successfully and are

performing on plan. Going forward the Group is well positioned

for growth.

Martin D Angle, Group Finance Director

2nd March 2000

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38 TI Group plc

Directors

John M Hignett * † ‡

Deputy Chairman

Joined the Board in 1989, becoming Deputy Chairman in 1993. Chairman, Organisation and Remuneration Committee. Chairman ofSchroder Income Growth Fund. Formerly a Director of Glaxo Holdings, a Managing Director of Lazard Brothers & Co and Director General of the Takeover Panel. Age 65.

Henry R Kravis

(American citizen)Joined the Board in May 1999. A senior partner of Kohlberg Kravis Roberts & Co. Member of the Council on Foreign Relations and Chairman of the Board of the New York City Investment Fund. A Director of Gillette Co, Primedia and Borden. Age 56.

Sir Nigel Broomfield KCMG * †

Joined the Board in February 1998. Director of the Ditchley Foundation and an adviser to ArthurAndersen. Trustee of the Dresden Trust. A retireddiplomat; British Ambassador to the FederalRepublic of Germany until 1997. Age 62.

John M Harris * † ‡

(American citizen)Joined the Board in 1991. Senior Vice President and Managing Director of Booz Allen & Hamiltonbased in Boston, United States. Formerly Presidentand CEO, The Forum Corporation and President and CEO, Rockefeller Financial Services Inc. Age 59.

Rudolf G Mueller CBE * †

(Swiss citizen)Joined the Board in 1996. Chairman, AuditCommittee. Chairman of Chiltern Group 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 wasChairman of UBS Group until 1997. Formerly a Director of the London Stock Exchange. Age 65.

Sir Christopher Lewinton ‡Chairman

Joined the Board in 1986 as Chief Executive andDeputy Chairman, becoming Chairman in 1989 andrelinquishing the role of Chief Executive in January1998. Wide international experience; based in theUnited States for many years. A Director of Young & Rubicam Inc. Age 68.

Sir Colin Chandler * †

Joined the Board in 1992. Chairman of RacalElectronics and Vickers Defence Systems. Vice President, Engineering Employers’ Federation.Member of the National Defence IndustriesCouncil. Formerly Chairman of Vickers and Headof Defence Export Services, Ministry of Defence.Age 60.

Non-Executive Directors

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TI Group plc 39

* Member, Organisation and

Remuneration Committee

† Member, Audit Committee

‡ Member, Nominations Committee

William J LauleChief Executive

(American citizen)Joined the Board in 1995 becoming Chief Executive, TI Group in January 1998. Previously Chief Executive,Bundy. A Director, National Association ofManufacturers of the USA. Senior managementexperience gained with Rockwell International in the United States and Europe. Age 51.

John Langston Chief Executive, TI Group Specialty Polymer Products

Joined the Board in October 1998. PreviouslyChief Executive, Bundy Automotive. Internationaloperating and management experience gained inglobal companies whilst based in the UK, Franceand Germany. Age 50.

Martin D Angle Group Finance Director

Joined the Board in 1997. Wide international business experience gained in senior positions withSG Warburg, Morgan Stanley and the DresdnerKleinwort Benson Group, based in the United Statesand the UK. A Chartered Accountant. Age 49.

David P LillycropDirector & General Counsel

Joined the Board in June 1998. General Counsel since 1997 and Group Secretary since 1991.Chairman, TI Pension Trustee Ltd. Legal andmanagement experience gained in British andAmerican companies. Member, ManagementCommittee, Industry and Parliament Trust. A Barrister. Age 43.

T Allan Welsh Chief Executive, TI Group Automotive Systems

Joined the Board in January 1999. Wideexperience of managing automotive and other manufacturing businesses in international markets. Formerly a Directorof T&N plc. Age 48.

Executive Directors

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40 TI Group plc

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 85 and 86. The Chairman’sstatement 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 37, and the profit and loss account on page 54.

DividendThe Board recommends a final dividend of 12.0p per Ordinary share of 25p payable on 26th May 2000 to Ordinary shareholdersregistered on the books of the Company at the close of business on 17th March 2000. When taken with the interim dividend of 5.8p per Ordinary share paid on 13th October 1999 this makes a total of 17.8p per Ordinary share for the year ended 31st December 1999 (1998 17.2p per Ordinary share).

Employment PoliciesDue to the spread of TI Group’s constituent businesses and the devolution of responsibility to local management, thearrangements 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 DevelopmentTI Group has a continuing commitment to a strategy of market leadership through investment in customer-focused appliedtechnology. Each of the Group’s core businesses maintains self-sufficiency in applied technology geared to new productdevelopment and world-class manufacturing practice. Expenditure on maintaining the Group’s applied technology base issignificantly greater than the amount disclosed in note 3 to the financial statements using the strict accounting definition in SSAP13.

EnvironmentTI Group is maintaining its commitment to conserving natural resources and protecting the global environment. We continueto shape our operations, processes, products and procedures to bring sustainable social and ecological benefits wherever theCompany operates.

TI Group’s policy statement is approved and supported by the Board, and its contents reaffirmed across our businesses. Our policies and objectives are reviewed and updated regularly. TI Group environmental management continues to beimplemented by the Group Environmental Manager and the Regional Environmental Co-ordinators’ panel both of whichreport to Mr T A Welsh, a member of the Board who has responsibility for the Group’s environmental management.

TI Group’s implementation of effective environmental management systems to the ISO14001 standard has beenongoing, and at December 1999 34 sites in 14 countries had achieved certification. The global nature of this commitmentis demonstrated by the fact that sites in locations as widely spread as Australia, Brazil, Korea, US, UK and mainland Europe have achieved ISO14001 certification. Implementation and training programmes are now in place to add more sites to this list in 2000.

We monitor our environmental performance closely and third party verification audits are conducted annually. With these aids we can assess our achievements and review our targets on a regular basis. Our continuous improvement philosophy is ongoing, assisted by regular advances in the collection and analysis of environmental measurements.

All TI Group operations worldwide take on our commitment to developing and marketing products which benefit theenvironment. Our development of environmental management systems enables us to respond positively to customerenvironmental programmes and encourage our suppliers to adopt similar good practices to those which we employ.

The Group’s approval procedures require environmental assessments of all major capital expenditure projects. This ensures that we evaluate, in advance, the environmental impact of all new products and processes across our global operations.

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TI Group plc 41

We respond to and communicate with external environmental bodies, which in turn allows us to benchmark against otherpeer companies and share with others the environmental expertise developed within the Group. This sharing of expertise isdemonstrated by the fact that the Company is a member of the UK body “Business in the Environment” and a member of the Board represents the Company on the BIE leadership team.

Our continuous improvement on environmental management has also shown good results in the UK Index of CorporateEnvironmental Engagement over the past 3 years. This Index of Corporate Environmental Engagement Audit is carried outannually by Business in the Environment and is viewed as the leading benchmark of environmental engagement for the FTSE 350 companies. In the most recent index TI Group is Number 1 in the engineering sector of the FTSE 250 companies.

Health and SafetyOur commitment to safeguarding the health and safety of employees, contractors and others who are affected by our activities continues.

Over the past years focus has been maintained on improving the health and safety of our employees, our continuing objective being to develop and refine responsible, cost effective health and safety standards and practices. Training and education programmes are ongoing throughout our operations as our continuous improvement philosophy seeks to eliminate all work related injury and illness. Health and safety issues are incorporated into business decisions, capital investment and planning activities.

We continue to communicate openly with other companies, our employees, and contractors in order to share with others the health and safety expertise we have developed.

Our focus on implementing effective health and safety management systems at all of our sites is ongoing.

DirectorsMr H R Kravis was appointed to the Board on 13th May 1999. Lord Fanshawe and Mr J L Roe retired from the Board on 21st Apriland 17th December 1999 respectively.

In accordance with the Articles, Messrs Angle, Harris, Kravis, Laule and Mueller will retire at the Annual General Meeting and,being eligible, will offer themselves for re-appointment. Messrs Harris, Kravis and Mueller do not have service contracts with theCompany. Messrs Angle and Laule have service contracts with the Company determinable on 2 years’ notice.

The present constitution of the Board is set out on pages 38 and 39.

Adoption of Replacement Senior Executive Share Incentive Plan and Notice of Annual General MeetingThe Board proposes that a new Senior Executive Share Incentive Plan be approved to replace the current three-year shareincentive plan.

Shareholders will receive with this Report a separate circular containing details of the proposed Plan. The circular includesNotice of the Annual General Meeting to be held on 11th May 2000.

Share SchemesAt 31st December 1999, the total number of Ordinary shares in TI Group plc under option was 22,533,215. The holders of these options are members of TI Group plc schemes and/or the Dowty Group Executive Share Option Scheme operated by Dowty Group PLC prior to its acquisition by TI Group in 1992. In the latter case these options were obtained, following theacquisition, in exchange for options over shares in Dowty Group.

There are 4,638 participants in the TI Group schemes and 7 participants in the Dowty Group Executive Scheme. Details ofOrdinary shares under option are shown in note 23 on page 77. The interests of Directors of the Company who are participantsin the above schemes are shown in the table on page 66.

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42 TI Group plc

Corporate GovernanceThe Board is satisfied that, with the one exception mentioned on page 43, under ‘Area of Non-Compliance with the Code’, the Company has complied throughout 1999 with the Combined Code (“the Code”) appended to the Listing Rules of theLondon Stock Exchange. The report of the Company’s auditors, PricewaterhouseCoopers, concerning the Company’s compliancewith the Code, appears on page 51. Compliance with the provisions of the Code relating to Directors’ remuneration is covered by the Remuneration Report on pages 46 to 49.

Statements by the Directors concerning their responsibilities in relation to financial statements, the adoption of the goingconcern basis for the preparation of accounts and the Group’s system of internal control appear on page 50, opposite theauditors’ report. The Board has appointed a Committee and has established procedures to implement the document prepared bythe Turnbull Committee – ”Internal Control: Guidance for Directors on the Combined Code“. The transitional approach, permittedby the London Stock Exchange, for complying with the internal control provisions of the Code has been adopted by the Board.Accordingly, the Directors’ review of the Group’s system of internal control has been restricted to internal financial controls andhas been performed in accordance with the guidance for directors issued by the Rutteman Working Group.

The following relates to the Company’s application during 1999 of the principles and detailed provisions of the Code.

The Board and ManagementSir Christopher Lewinton and Mr W J Laule continued throughout the year in their respective roles of Chairman and Chief Executive. The Board, which meets formally around nine times a year, is broadly balanced with the Chairman supported by a non-executive Deputy Chairman, who is the senior non-executive Director, five other non-executive Directors and five executiveDirectors. The Board includes US, Swiss and UK nationals, reflecting the international nature of the Company’s activities. Thenon-executives, all of whom are considered by the Board to be independent within the meaning of the Code, are appointedinitially for a three year term, renewable by mutual agreement. The business reserved to the Board includes matters of policy,approval of the strategic and financial plans, major expenditure proposals and acquisitions and disposals. The Board receivesfrom management in a timely manner all appropriate information, such as monthly management accounts, to enable theDirectors to lead and control the Company.

The key committees referred to below contribute to effective corporate governance. The Audit and Organisation &Remuneration Committees consist wholly of non-executive Directors who are responsible, on behalf of the Board, for thebusiness undertaken.

Audit CommitteeThe Audit Committee, which was established in 1987, is comprised wholly of non-executive Directors and normally meets three times per year. Currently five non-executive Directors are members and the Committee is chaired by Mr R G Mueller.

Its objective is to give formal support to the Board in fulfilling its obligations to shareholders to maintain standards ofmanagement 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.

Report of the Directors continued

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The external auditors attend the meetings of the Audit Committee. They are entitled to and do meet with the AuditCommittee privately and have direct access to the Chairman of the Committee.

Organisation and Remuneration CommitteeThis 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. 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 46 to 49 a separate report to shareholders on Directors’ remuneration.

Nominations CommitteeThis Committee currently comprises the TI Group Chairman, the Deputy Chairman and Mr J M Harris.

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.

Relations with ShareholdersThe Company enters into a dialogue at appropriate times with its institutional shareholders whilst having regard to LondonStock Exchange guidance on the dissemination of price sensitive information. Full use is made of the Annual General Meeting to communicate with private investors.

Area of Non-Compliance with the CodeThe Company has not complied during 1999 with the Code in one respect. The Code provides that boards should have theobjective of reducing to one year or less notice or contract periods in relation to directors’ contracts of service. However, the Code recognises that it may not be possible to achieve this immediately. As stated in the Remuneration Report on page 48,the Board continues to believe that a two year notice period for executive Directors is appropriate and is in line with market practice.

Year 2000 and the euroThe Board initiated in 1996 a programme to address the Year 2000 computer issue and since then has received regular Group wide progress reports. A report for both Year 2000 and the euro is contained in the Financial Review on page 37.

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44 TI Group plc

Interests in ContractsDuring 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 SharesThe Company was authorised at the Annual General Meeting held in 1999 to purchase in the market Ordinary shares representingup to approximately 10% of the then issued share capital. This authority has not been used and expires at the conclusion of theAnnual General Meeting. In accordance with the Directors’ intention to seek annual renewal, resolution 6 will be proposed as aSpecial Resolution at the Annual General Meeting to renew this authority until the earlier of 10th August 2001 and the nextAnnual General Meeting.

The Directors have no current intention of using this authority and, in relation to any decision to purchase, will take intoaccount 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 unissuedshare capital and will be available for re-issue subject to the Directors being authorised pursuant to section 80 of the CompaniesAct 1985.

Share CapitalDetails of shares issued during the year are set out in note 23 on page 77.

At the Annual General Meeting held in 1999 shareholders authorised the Directors, pursuant to section 80 of the CompaniesAct 1985, to allot Ordinary shares without the prior consent of shareholders for a period of five years. In accordance with theDirectors’ intention to seek annual renewal, resolution 8 will be proposed as an Ordinary Resolution at the Annual GeneralMeeting to extend this authority until 10th May 2005. The £42,000,000 nominal amount of relevant securities to which theauthority relates, including Ordinary shares that are subject to options, represents approximately 33% of the nominal amount ofissued Ordinary share capital of the Company as at 2nd March 2000. Except pursuant to the exercise of options, the Directorshave 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, empoweringthe Directors to allot equity securities for cash without first being required to offer such shares to existing shareholders. Resolution 9 will be proposed as a Special Resolution to renew this power until 10th May 2005. The £6,320,000 nominal amount of equity securities to which this authority relates represents approximately 5% of the issued Ordinary share capital of the Company as at 2nd March 2000.

Interests in Share CapitalAs at 1st March 2000 the Company had been notified under section 198 of the Companies Act 1985 of the following personswho are interested in 3% or more of the issued share capital of the Company:

Number of Percentage ofHolder Shares Issued Capital

The Capital Group Companies, Inc 75,889,894 15.00An affiliate of Kohlberg Kravis Roberts & Co 23,600,000 4.67

Apart from the shareholdings detailed above, there are no notifiable interests appearing in the Company register maintainedunder 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 66. There were no changes inthese interests between 1st January 2000 and 2nd March 2000 other than those shown in note 10. The register recording theDirectors’ interests in the share capital will be open for inspection at the Annual General Meeting.

Report of the Directors continued

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Payment PolicyThe Group is a registered supporter of the CBI’s Prompt Payers Code of Good Practice, copies of which are available from theConfederation 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 theyoperate, and to abide by such terms where suppliers have also met their obligations.

Charitable and Political ContributionsDuring the year the UK companies in the Group made charitable donations totalling £275,000 gross. The annual donationsbudget 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, engineeringor 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.

AuditorsThe Company’s auditors, PricewaterhouseCoopers, are willing to continue in office and resolutions proposing their re-appointmentand authorising the Directors to fix their remuneration will be put to the Annual General Meeting.

By order of the Board DAVID P LILLYCROPDirector and Secretary2nd March 2000

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46 TI Group plc

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 Nigel Broomfield, Sir Colin Chandler, Mr J M Harris and Mr RG Mueller.

Remuneration Policy - Executive DirectorsPolicyThe 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 inparticular around 45% in North America, its remuneration policies must be internationally competitive and flexible. This helps toattract and retain 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 proportionof 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 valueat some time in the past. However, such incentives, which stimulate enhanced performance and lead to enhanced shareholdervalue, are considered to be in the best interests of shareholders, customers, suppliers and employees alike. This philosophy hasbeen 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 two TI Group Employee Share Trusts which were established in 1995 and 1999. It is the well established policy ofthe Committee that executive Directors should acquire and retain a valuable shareholding in the Company, thereby aligning their interests with those of other shareholders. It is proposed to strengthen the Company’s share ownership policy: details appear on page 47.

Remuneration PackageThe remuneration package of the executive Directors comprises four components:i Base salary and benefits Salaries are determined within the international marketplace and reflect experience and responsibility. Salaries are reviewedannually as at 1st January. Principal benefits include use of a motor car, fuel, medical expenses insurance, life cover andrelocation expenses.ii Annual bonusFor headquarters staff executive Directors the annual bonus is based partly on Group performance against plan, and partly onachievement of individual objectives. The annual bonus for executive Directors with line responsibility for operations is basedpartly 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 1999 the maximum potential cash bonus for executiveDirectors was 60% or 80% of base salary, with the maximum amount normally achievable only if performance exceeds plan by a clear margin. Subject to the approval of the proposed Senior Executive Share Incentive Plan (”SESIP”), mentioned on page 41, a possible further element, deferred for three years, may be achievable. Details of the proposed SESIP, which will be submitted for shareholder approval at the Annual General Meeting on 11th May 2000, are contained in the Circular dated 7th April 2000which shareholders will receive with this Report.

Payments in respect of 1999, comprising shares and/or cash, are shown in the table on page 49. The share element reflectsDirectors’ individual elections to be paid annual bonus in TI shares at market value at time of transfer rather than cash.

Remuneration Report

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iii Long term incentivesThe 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 demandingperformance criteria.a. Three-year share performance planThe three-year share performance plan has been in place since 1995. Its purpose has been to encourage senior executives to think longer term and to focus on performance achievements beyond the normal one year horizon.

The plan rewards performance measured by reference to TI’s share price compared with the share prices of approximately 20 comparator companies.

As mentioned on page 41, it is proposed to replace the plan with a Senior Executive Share Incentive Plan, the performancerequirements of which will be based on growth in TI’s earnings per share. The Committee believes that this is better suited to theachievement of the purpose described above. The reasons for the proposed change and details of the Plan are contained in theCircular dated 7th April 2000 which shareholders will receive with this Report.b. Share optionsThe TI Group, TI Group (1990) and TI Group 1999 Executive Share Option Schemes link reward to added shareholder value andencourage executives to align their longer term career aspirations with the longer term interests of the Group. Subject toperformance requirements being fulfilled the Schemes enable executives to participate in share price growth, options normallybecoming exercisable between three and ten years after grant.

Options granted since 1987 under the TI Group and TI Group (1990) Schemes have been exercisable only if the percentageincrease in earnings per share over a three year period has exceeded the percentage increase in the UK Retail Prices Index overthat period. Starting in 1996, options granted to executive Directors under the TI Group (1990) Scheme were subject to aminimum performance requirement equal to the increase in the Retail Prices Index plus 2% per annum. Options granted to all participants under the TI Group 1999 Executive Share Option Scheme are subject to a minimum performance requirementequal to the increase in the UK Retail Prices Index plus 9% over a three year period.

Details of options held by Directors are set out in the table on page 66.iv PensionsPension 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 theexecutive 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 executiveDirectors during the year ended 31st December 1999.

Share Ownership PolicyUpon the introduction of the Senior Executive Share Incentive Plan mentioned on page 41, the Committee intends to strengthenits policy of encouraging long term holding of TI shares by executives.

Executive Directors will, in future, be expected progressively to build up their shareholdings over a period to a value equal to1.5 times their annual base salary. Other executives participating in the Plan will be similarly expected to achieve a holding ofshares with a value equal to their annual base salary.

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Pensions

Executive DirectorsCash

Increase in equivalentaccrued pension of increase Total accrued

(excluding (excluding Members’ pension atinflation) members’ contributions 31st December

during 1999 contributions) in 1999 1999£’000 £’000 £’000 £’000

William J Laule 18 226 4 48Martin D Angle 16 218 4 37John Langston 21 299 4 63David P Lillycrop 26 275 4 64James L Roe (retired 17th December 1999) 10 162 12 137T Allan Welsh (appointed 1st January 1999) 9 113 4 10O Aronson (resigned 28th May 1998)

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 1999 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 1st February 1997. His accrued pension at 31st December 1999 and 1998, whichincludes benefits transferred into the Scheme, was £348,000 per annum. He is not accruing further benefits, and his pension will increase each year until drawn to reflect deferredpayment.

4. Sir Christopher Lewinton also participates in a US Defined Contribution pension arrangement; during the period, contributions amounted to £75,699 (1998 £35,733).5. Mr W J Laule is also a member of Bundy Corporation’s US Defined Contribution arrangement; during the period, contributions amounted to £5,440 (1998 £6,832).6. Pensionable salaries do not include annual bonuses or long term incentive payments. Members’ contributions shown above do not include AVCs.

Service ContractsThe Company’s policy in relation to contracts of service for executive Directors is to provide notice or contract periods notexceeding two years. Each of the executive Directors, including Messrs Angle and Laule who offer themselves for re-appointmentat 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 applicableto 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 withpractice in the marketplace and is in fact necessary to enable the Company to attract and retain the highest calibre ofmanagement. 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 in control of the Company.

Remuneration Policy – Non-Executive DirectorsThe remuneration of the non-executive Directors is determined by the Board of Directors. Non-executive Directors absentthemselves 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 orChairmanship 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.

Remuneration Report continued

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Summary Remuneration Table

Executive Directors

– Salary, Annual Bonus and BenefitsAs 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 theform of TI shares. Details of such elections appear in the table below.

Annual BonusElected

Share 1998 1999 Benefits Allocation 1999 1998

Base Salary Base Salary (Note 1) Cash (Note 2) Total Total£’000 £’000 £’000 £’000 £’000 £’000 £’000

Sir Christopher Lewinton 725 730 50 0 580 1,360 1,348William J Laule 431 531 136 0 382 1,049 925Martin D Angle 350 400 38 113 112 663 677John Langston (appointed 20th October 1998) 44 250 29 69 79 427 76David P Lillycrop (appointed 24th June 1998) 103 253 28 78 111 470 171James L Roe (retired 17th December 1999) G 225 231 13 32 75 351 363T Allan Welsh (appointed 1st January 1999) 225 – 300 16 0 180 496 –

Notes:1. Benefits include provision of a motor car, fuel, medical expenses insurance, unapproved life cover, relocation expenses and accommodation (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 Trusts, the numbers of shares thus

acquired are included in the holdings as at 2nd March 2000 shown in the summary of Directors’ share interests on page 66.3. The following were Directors and received emoluments during part of 1998: G O Aronson, £106,000; L A Edwards, £399,000; R J M Fisher, £423,000; J W Potter, £357,000.

Messrs Aronson and Potter also received during 1998 the following respective sums by way of compensation for loss of office: £307,000 and £216,000.

– Long Term Incentives (Three-Year Plan)The Directors and former Director listed in the above table are participants in the Three-Year Share Performance Plan for the measurement periods 1997-2000 to 1999-2002. Contingentinterests 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 £nil (1998 £nil) has been charged to the profit and loss account.

In respect of the three year measurement period 1996-1999, the Committee awarded qualitative discretionary bonuses calculated to take account of anomalies arising from performancecomparisons for that measurement period. The shares awarded and their equivalent cash value based on the TI share price at the date of award of 458p are detailed below and havebeen charged to the profit and loss account during 1999. The equivalent cash value shown in respect of the measurement period 1995-1998 arose from awards made under the Three-YearShare Performance Plan.

1995-98No. of Equivalent Equivalent

shares Cash Value Cash Value£’000 £’000

Sir Christopher Lewinton 24,304 111 343William J Laule 10,694 49 129James L Roe (retired 17th December 1999) 7,388 34 103A Edwards 2R JPotter 24,800124B A Walsh 19,178 163Notes:4. During the year, the Chairman did not exercise any options over TI shares. During 1998, the Chairman exercised options over 6,400 TI Ordinary shares and the notional aggregate gain

resulting from the exercise was £10,432.1999 1998

Non-Executive Directors Total Total£’000 £’000

John M Hignett 73 73Sir Nigel Broomfield (appointed 18th February 1998) 50 32Sir Colin Chandler 40 40Lord Fanshawe (retired 21st April 1999) 28 52John M Harris 30 40Henry R Kravis (appointed 13th May 1999) 19 –Rudolf G Mueller 3958 39

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50 TI Group plc

Directors’ Responsibilities in Relation to Financial StatementsCompany 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 financialstatements, the Directors are required to:• select suitable accounting policies and then apply them consistently;• make judgments and estimates that are reasonable and prudent; and• 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 thefinancial position of the Company and the Group and to enable them to ensure that the financial statements comply with theCompanies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for takingreasonable steps for the prevention and detection of fraud and other irregularities.

The Directors confirm that these financial statements comply with these requirements.

Going ConcernThe Directors are confident, after making appropriate enquiries, that the Group has adequate resources to continue in operationfor the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the accounts.

Financial ControlThe 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 andeffective control over strategic, financial, organisational and compliance issues. Policies and procedures, for such matters as thedelegation of authority to management, are distributed to executive management and are regularly updated. Responsibility forimplementing 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 onexpectations 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 Groupmanagement to monitor actual performance. As part of this process major business risks are identified and appropriate plansdeveloped 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.

Statements of the Directors

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TI Group plc 51

Report to the Shareholders of TI Group plcWe have audited the financial statements on pages 48, 49 and 52 to 86 which have been prepared under the historical cost

convention and the accounting policies set out on pages 52 and 53.

Respective responsibilities of directors and auditors

The Directors are responsible for preparing the Annual Report. As described on page 50, this includes responsibility for

preparing the financial statements, in accordance with applicable United Kingdom accounting standards. Our responsibilities,

as independent auditors, are established in the United Kingdom 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 United Kingdom 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 42 reflects the Company’s compliance with the seven 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 consider

whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of

the Group’s corporate governance procedures or its risk and control procedures.

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 1999 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

2nd March 2000

Auditors’ Report

1 Embankment PlaceLondon WC2N 6NN

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52 TI Group plc

There have been no changes in accounting policies during the year.

Basis of ConsolidationThe consolidated financial statements set out on pages 48, 49 and 52 to 86, which are prepared under the historical costconvention 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 subsidiariesidentified at acquisition as held for resale are not included in the consolidated financial statements. The results of subsidiariesdisposed of during the year are included to the date of disposal.

Year End DatesThe financial year end date of the Group is 31st December, except for some overseas companies in respect of which the use of adifferent year end date does not have a material effect on the consolidated financial statements.

Foreign CurrenciesProfit and loss items are translated into sterling at average exchange rates and assets and liabilities are translated at the exchangerates ruling on 31st December.

Exchange differences arising from the translation into sterling of the net equity interest in overseas subsidiary and associatedundertakings are treated as movements in reserves together with exchange differences on translation of foreign currencyborrowings 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. Theexchange translation movement arising from this process is taken to the profit and loss account.

Financial InstrumentsFinancial instruments used to hedge foreign currency transactions and interest rates are valued at cost. Gains or losses oninstruments 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 GoodwillFrom 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 statementsinvestments in subsidiary and associated undertakings are stated at cost less provisions for permanent diminution in value.

Associated UndertakingsTreatment 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.

TurnoverTurnover represents the amounts receivable in the ordinary course of business for goods sold and services provided after deductingsales taxes and eliminating turnover within the Group. Turnover relating to long term contracts represents the value of workcompleted during the year.

Accounting Policies

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TI Group plc 53

Research and DevelopmentExpenditure on research and development is written off in the year in which it is incurred except where a major project is undertakenand it is reasonably anticipated that costs will be recovered through future commercial activity. Such costs are written off over thelife of the project, subject to a maximum of seven years.

DepreciationDepreciation 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 71

⁄ 2 % and 10% per annum– data processing installations, equipment and software between 121

⁄ 2 % and 331⁄ 3% per annum

– tooling and test rigs between 10% and 331⁄ 3% per annum.

Investment GrantsInvestment grants received to fund the purchase of fixed tangible assets are included within creditors as deferred income and arecredited to the profit and loss account on a straight line basis over the expected lives of the related assets.

Leased AssetsFixed assets acquired under finance leasing contracts are recorded in the balance sheet as fixed tangible assets at their equivalentcapital value and are depreciated over the useful life of the asset. The corresponding liability is recorded as a creditor and theinterest element of the finance charge is charged to the profit and loss account over the primary lease period.

StocksStocks and work in progress are valued at the lower of cost, including an appropriate proportion of overheads, and net realisablevalue, less payments on account. Profit is taken on long term contracts by reference to the work completed.

Pensions and Other Post-Retirement ObligationsThe 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 inrespect of which contributions become payable.

Deferred TaxationDeferred 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 isrecognised in full.

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1999 1998

Before goodwill Before goodwill

amortisation amortisation

and exceptional Goodwill Exceptional and exceptional Goodwill Exceptional

items amortisation items Total items amortisation items Total

Notes £m £m £m £m £m £m £m £m

Turnover 2

Total Group and share of joint venture 2,728.8 – – 2,728.8 2,168.1 – – 2,168.1Less share of joint venture (discontinued) – – – – (68.8) – – (68.8)

Continuing operations 2,366.0 – – 2,366.0 2,079.3 – – 2,079.3Acquisitions 362.8 – – 362.8 – – – –

Discontinued operations – – – – 20.0 – – 20.0Group 2,728.8 – – 2,728.8 2,099.3 – – 2,099.3Costs less other income 3 (2,424.2) (37.7) (30.2)(2,492.1) (1,843.5) (15.1) (11.5) (1,870.1)

Operating profit 2

Continuing operations 290.0 (26.2) (15.4) 248.4 254.3 (15.1) (11.5) 227.7Acquisitions 14.6 (11.5) (14.8) (11.7) – – – –

Discontinued operations – – – – 1.5 – – 1.5304.6 (37.7) (30.2) 236.7 255.8 (15.1) (11.5) 229.2

Joint venture and associates 2

Continuing operations 2.1 – – 2.1 1.8 – – 1.8Acquisitions 0.3 – – 0.3 – – – –

Discontinued operations – – – – 7.7 – – 7.72.4 – – 2.4 9.5 – – 9.5

Operating profit and joint venture and associates 307.0 (37.7) (30.2) 239.1 265.3 (15.1) (11.5) 238.7

Exceptional net profit on disposal of operations 4 – – – – – – 14.7 14.7

Exceptional loss on disposal of fixed assets 4 – – (3.3) (3.3) – – – –

Profit before interest 307.0 (37.7) (33.5) 235.8 265.3 (15.1) 3.2 253.4Interest 5 (49.9) – – (49.9) (26.7) – – (26.7)

Profit on ordinary activities before taxation

Before exceptional items 257.1 (37.7) – 219.4 238.6 (15.1) – 223.5Exceptional items (as above) – – (33.5) (33.5) – – 3.2 3.2

257.1 (37.7) (33.5) 185.9 238.6 (15.1) 3.2 226.7Taxation 6 (79.7) – 9.6 (70.1) (74.0) – (6.7) (80.7)

Profit on ordinary activities after taxation 177.4 (37.7) (23.9) 115.8 164.6 (15.1) (3.5) 146.0Minority interests (0.5) – – (0.5) (0.4) – – (0.4)

Profit for the financial year 176.9 (37.7) (23.9) 115.3 164.2 (15.1) (3.5) 145.6Dividends 7 (89.1) – – (89.1) (82.6) – – (82.6)

Retained profit 87.8 (37.7) (23.9) 26.2 81.6 (15.1) (3.5) 63.0

EARNINGS PER SHARE 8

Before goodwill amortisation andexceptional items 35.4p – – 35.4p 34.3p – – 34.3pGoodwill amortisation – (7.5)p – (7.5)p – (3.2)p – (3.2)pExceptional items (after tax) – – (4.8)p (4.8)p – – (0.7)p (0.7)p

On profit for the financial year 35.4p (7.5)p (4.8)p 23.1p 34.3p (3.2)p (0.7)p 30.4p

Diluted earnings per share 35.4p (7.5)p (4.8)p 23.1p 34.3p (3.2)p (0.7)p 30.4p

54 TI Group plc

Consolidated Profit and Loss Account for the year ended 31st December 1999

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The Group The Company

1999 1998 1999 1998Notes £m £m £m £m

Fixed assetsIntangible assets – goodwill 11 1,024.0 524.1 – –Tangible assets 12 696.5 478.8 – –Investments 13

– associates 16.0 6.8 – –– other 24.8 4.3 1,344.1 1,324.6

1,761.3 1,014.0 1,344.1 1,324.6

Current assetsStocks 14 348.9 303.6 – –Assets held for disposal 15 – 21.8 – –Debtors and prepayments – falling due within one year 16 621.6 464.2 188.1 159.5– falling due after one year 16 139.3 123.3 987.0 588.3Cash and deposits 17 142.4 173.1 156.7 66.9

1,252.2 1,086.0 1,331.8 814.7

Creditors falling due within one yearShort term borrowings 18 (200.1) (128.3) (20.2) (171.4)Other creditors 18 (710.3) (559.6) (89.0) (90.5)

Net current assets 341.8 398.1 1,222.6 552.8

Total assets less current liabilities 2,103.1 1,412.1 2,566.7 1,877.4

Creditors falling due after more than one yearLoans and other borrowings 19 (1,103.6) (557.5) (730.8) (232.2)Other creditors 19 (10.0) (14.7) (715.8) (602.4)

(1,113.6) (572.2) (1,446.6) (834.6)Provisions for liabilities and charges 22 (266.3) (233.4) – –

723.2 606.5 1,120.1 1,042.8

Capital and reservesCalled up equity share capital 23 126.5 120.3 126.5 120.3Share premium account 24 160.4 68.6 160.4 68.6Capital reserve 24 – – 596.6 596.6Profit and loss account 24 430.9 412.1 236.6 257.3

TI shareholders’ funds 717.8 601.0 1,120.1 1,042.8Equity interests of minority shareholders 5.4 5.5 – –

Total shareholders’ funds 723.2 606.5 1,120.1 1,042.8

Signed on behalf of the Board on 2nd March 2000Sir Christopher Lewinton

DirectorsM D Angle

TI Group plc 55

Balance Sheets as at 31st December 1999

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56 TI Group plc

1999 1998Notes £m £m

Net cash inflow from operating activities 25 336.9 292.8

Dividends received from joint venture and associates 25 0.2 7.3

Returns on investments and servicing of finance 26 (48.4) (21.9)

Taxation 27 (51.3) (91.2)

Capital expenditure and financial investment 28 (135.2) (77.2)

Acquisitions and disposals 29 (473.4) (449.1)

Equity dividends paid (84.8) (78.4)

Management of liquid resources 30 65.5 206.6

Cash flow before financing (390.5) (211.1)

Financing 31 396.3 194.2

Increase/(decrease) in cash 5.8 (16.9)

Movement in Group net debt

Increase/(decrease) in cash 5.8 (16.9)

Decrease in short term deposits 30 (65.5) (206.6)

Increase in loans (301.0) (192.8)

Short term deposits acquired with new subsidiaries 29 8.4 1.8

Loans acquired with new subsidiaries 29 (294.0) (37.2)

Loan notes issued as consideration for new subsidiary 29 – (16.0)

Finance leases (11.6) (4.1)

Exchange translation 30 9.3 (3.0)

Movement in Group net debt (648.6) (474.8)

Net debt at start of year 30 (512.7) (37.9)

Net debt at end of year 30 (1,161.3) (512.7)

Cash Flow Statementfor the year ended 31st December 1999

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TI Group plc 57

The Group The Company

1999 1998 1999 1998£m £m £m £m

Profit for the financial year 115.3 145.6 68.4 114.6

Exchange translation (7.4) (2.5) – –

Total recognised gains and losses for the year 107.9 143.1 68.4 114.6

Movements in TI Shareholders’ Fundsfor the year ended 31st December 1999

The Group The Company

1999 1998 1999 1998Notes £m £m £m £m

At start of year 601.0 392.6 1,042.8 999.4

Profit for the financial year 115.3 145.6 68.4 114.6

Exchange translation 24 (7.4) (2.5) – –

Goodwill written back on disposals 24 – 136.5 – –

Dividends 7 (89.1) (82.6) (89.1) (82.6)

Issue of shares 23

For cash 98.0 2.8 98.0 2.8

Consideration for new subsidiary – 8.6 – 8.6

At end of year 717.8 601.0 1,120.1 1,042.8

Statement of Total Recognised Gains and Lossesfor the year ended 31st December 1999

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58 TI Group plc

1 Acquisitions and Disposals

Principal acquisitions and disposals completed during 1999 were:

February Disposal of EIS Industrial Machinery capital goods businesses for £2.0m cash.March Acquisition of Tri-Industries for £30.0m cash.

Acquisition of Bundy KMP (Kenmore Italiana) for £18.0m cash.June Acquisition of Walbro Corporation for £112.3m cash plus £259.4m debt acquired.June/September Disposal of EIS Aviation Support and Electronic Distribution businesses for £15.0m cash

plus future receipts of £2.0m in both March 2001 and September 2002.October Acquisition of the outstanding 51% of Marwal, a joint venture of Walbro, for £38.7m cash.

Acquisition of Busak+Shamban for £212.5m cash plus £30.0m debt acquired, plus a further £10.8m consideration payable by August 2001.

The acquisitions were all accounted for by the acquisition method.

Goodwill arising1999 acquisitions

Busak+ 1998Walbro Shamban Other acquisitions Total

£m £m £m £m £m

Consideration (including deferred) 112.3 223.3 92.8 (4.0) 424.4Professional fees and other deal costs 11.8 4.5 3.5 – 19.8Fair value of net assets acquired (below) 126.8 (10.7) (16.7) (6.0) 93.4

Goodwill arising (note 11) 250.9 217.1 79.6 (10.0) 537.6

Provisional fair value of net assets acquired – WalbroProvisional fair value adjustments

Book Conformity Provisionalvalues with TI Pensions fair

prior to accounting and other Onerous values toacquisition Revaluations policies liabilities contracts TI Group

£m £m £m £m £m £m

Fixed intangible assets 42.3 – (42.3) – – –Fixed tangible assets 159.1 (32.4) 11.8 – – 138.5

Investments 22.9 – – – – 22.9

Stocks 41.3 – (3.4) – – 37.9Debtors 96.5 – – – – 96.5Creditors (99.0) – (9.9) – (27.2) (136.1)

Pensions and other post-retirement obligations (7.9) – – (0.2) – (8.1)

Environmental, warranty and legal provisions – – – (7.1) (20.8) (27.9)Deferred taxation 7.5 – – – 2.3 9.8Minority interests (1.0) – 0.1 – – (0.9)

Net debt (230.8) (18.6) (10.0) – – (259.4)

Net assets/(liabilities) 30.9 (51.0) (53.7) (7.3) (45.7) (126.8)

Notes to the Financial Statements

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TI Group plc 59

Provisional fair value adjustments comprise the following:

Revaluations: Fair values for land, buildings, plant and machinery were based upon external professional valuations on an openmarket existing use basis. Fixed term debt was revalued to its fair value based on market rates at the date of acquisition.

Conformity with TI accounting policies: Adjustments were made to align accounting policies principally affecting fixedintangible assets including goodwill, capitalisation of finance leases, stock and debtor provisions and accruals.

Pensions and other liabilities: Adjustments were made to recognise estimated pension, environmental, warranty and legalliabilities at the date of acquisition.

Onerous contracts: Provisions were made for the cost of termination of employee service contracts arising from change incontrol clauses and for expected future losses on specific customer contracts.

The Directors believe that these fair value adjustments and resulting goodwill are more than outweighed by the significantstrategic and financial opportunities which Walbro brings to the Group’s automotive activities. All fair value adjustments will be reviewed during 2000; any revisions made will be adjustments to goodwill.

Trading results of Walbro

The trading results of Walbro for the year to 31st December 1998 and for the period from 1st January 1999 to the date ofacquisition were as follows:

12 months Period fromended 31st 1st JanuaryDecember 1999 to date

1998 of acquisition£m £m

Summarised profit and loss account

Turnover 408.9 214.0Operating profit 25.8 10.6Profit/(loss) before taxation 4.3 (0.1)Taxation (1.9) (0.2)Minority interests (0.2) (0.2)Profit/(loss) for the financial period 2.2 (0.5)

Statement of total recognised gains and losses

Profit/(loss) for the financial period 2.2 (0.5)Exchange translation 2.4 (17.2)Total recognised gains and losses 4.6 (17.7)

Results for the 12 months ended 31st December 1998 were extracted from the Walbro Corporation 1998 Annual Report, translated from US$.

Results for the period from 1st January 1999 to the date of acquisition were extracted from Walbro’s unaudited management accounts, translated from US$.

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60 TI Group plc

Notes to the Financial Statements continued

1 Acquisitions and Disposals continued

Provisional fair value of net assets acquired – Busak+Shamban Book Provisionalvalues Provisional fair

prior to fair value values toacquisition adjustments TI Group

£m £m £m

Fixed intangible assets 4.0 (4.0) –Fixed tangible assets 38.6 (6.2) 32.4Investments 0.3 – 0.3Stocks 20.5 (5.9) 14.6Debtors 25.1 (1.2) 23.9Creditors (22.9) (5.0) (27.9)Pensions and other post-retirement obligations (1.2) – (1.2)Environmental, warranty and legal provisions (0.1) – (0.1)Deferred taxation 3.6 (3.7) (0.1)Minority interests (1.2) – (1.2)Net debt (43.8) 13.8 (30.0)

Net assets 22.9 (12.2) 10.7

Provisional fair value adjustments were made to conform with TI accounting policies, principally affecting fixed intangible andtangible assets, stock and debtor provisions, accruals and finance leases. The carrying value of land and buildings at acquisitionwas reviewed and no material adjustment was required to restate to open market existing use value. All fair value adjustmentswill be reviewed during 2000; any revisions made will be adjustments to goodwill.

The unaudited after tax profit of Busak+Shamban for the period from 1st March 1999 to the date of acquisition was £2.2m andfor the year to 28th February 1999 was £6.6m.

Provisional fair value of net assets acquired – other acquisitions Book Provisionalvalues Provisional fair

prior to fair value values toacquisition adjustments TI Group

£m £m £m

Fixed tangible assets 24.8 (0.8) 24.0Investments (conversion to subsidiary) (14.8) – (14.8)Stocks 18.7 (0.5) 18.2Debtors 34.1 (1.1) 33.0Creditors (29.5) – (29.5)Pensions and other post-retirement obligations (0.8) – (0.8)Environmental, warranty and legal provisions (0.9) (1.5) (2.4)Deferred taxation – (0.1) (0.1)Minority interests 2.2 – 2.2Net debt (12.8) (0.3) (13.1)

Net assets 21.0 (4.3) 16.7

Provisional fair value adjustments were made to conform with TI accounting policies, principally affecting depreciation, stockand debtor provisions, accruals and warranty. Onerous contract provisions were made for expected future losses on specificcustomer contracts.

1998 acquisitionsGoodwill arising on 1998 acquisitions was reduced by settlement of deferred consideration at less than the amount provided,and by finalisation of fair values of net assets acquired, principally taxation.

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2 Segment AnalysisTurnover Operating Profit Operating Assets

1999 1998 1999 1998 1999 1998£m £m £m £m £m £m

By class of business

John Crane 685.6 585.6 76.4 76.0 233.4 231.9

Specialty Polymer Products 284.7 248.5 39.3 33.8 118.2 83.6

Automotive Systems 1,190.7 794.0 124.1 90.9 508.7 279.1

Dowty 567.8 451.2 72.1 59.3 184.0 174.1

Parent and other – – (4.9) (3.9) 53.7 16.7

Continuing operations 2,728.8 2,079.3 307.0 256.1 1,098.0 785.4

Discontinued operations – 88.8 – 9.2 – –

Less: joint venture and associates – (68.8) (2.4) (9.5) (16.0) (6.8)

2,728.8 2,099.3 304.6 255.8 1,082.0 778.6

Goodwill amortisation (note 11) (37.7) (15.1)

Exceptional items (note 4) (30.2) (11.5)

236.7 229.2

By geographical origin

United Kingdom 542.5 433.8 53.5 46.4 166.7 166.6

Continental Europe 744.8 587.9 83.8 77.4 270.5 214.6

North America 1,251.8 965.5 162.8 137.7 480.4 302.0

Rest of World 189.7 180.9 11.8 7.7 126.7 85.5

Parent and other – – (4.9) (3.9) 53.7 16.7

2,728.8 2,168.1 307.0 265.3 1,098.0 785.4

Less: joint venture and associates – (68.8) (2.4) (9.5) (16.0) (6.8)

2,728.8 2,099.3 304.6 255.8 1,082.0 778.6

Goodwill amortisation (37.7) (15.1)

Exceptional items (30.2) (11.5)

236.7 229.2

By geographical destination

United Kingdom 334.2 264.6

Continental Europe 810.4 655.0

North America 1,253.6 956.7

Rest of World 330.6 291.8

2,728.8 2,168.1

Less: joint venture and associates – (68.8)

2,728.8 2,099.3

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.

TI Group plc 61

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62 TI Group plc

2 Segment Analysis continued

As described in the Operating and Financial Review, the results of each business segment, with the exception of John Crane, were

affected by the acquisitions made during 1999. Following the acquisition of Walbro in June 1999 TI Group Automotive Systems

was formed by combining the Bundy and Walbro businesses, and following the acquisition of Busak+Shamban in October 1999

TI Group Specialty Polymer Products was formed by combining Forsheda with Busak+Shamban.

Sales between business and geographical segments are not material, other than for sales from the United Kingdom toContinental Europe of £98.0m (1998 £92.8m), and from the United Kingdom to North America of £91.9m (1998 £59.8m).

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:1999 1998

Operating OperatingTurnover Profit Turnover Profit

£m £m £m £m

John Crane – associates – 0.6 – 1.2

Automotive Systems – associates – 1.8 – 0.6

Messier-Dowty – joint venture (discontinued) – – 68.8 7.7

– 2.4 68.8 9.5

3 Costs Less Other Income1999 1998

Continuing Acquisitions Total Continuing Discontinued Total

£m £m £m £m £m £m

Change in stocks of finished goods

and work in progress 1.6 (13.9) (12.3) 1.0 – 1.0

Raw materials and consumables 856.3 192.1 1,048.4 754.9 3.9 758.8

Other external charges 357.8 98.9 456.7 307.9 5.7 313.6

Staff costs (note 9) 812.3 71.5 883.8 719.6 7.9 727.5

Depreciation of fixed tangible assets 63.4 14.4 77.8 53.1 1.0 54.1

Goodwill amortisation 26.2 11.5 37.7 15.1 – 15.1

2,117.6 374.5 2,492.1 1,851.6 18.5 1,870.1

Notes to the Financial Statements continued

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TI Group plc 63

Costs charged in arriving at operating profit include:

1999 1998£m £m

Goodwill amortisation (note 11) 37.7 15.1

Exceptional items (note 4) 30.2 11.5

Research and development expenditure 42.4 38.4

Property rents 20.9 16.2

Hire of plant and machinery 15.5 11.6

Amounts paid to PricewaterhouseCoopers

As auditors – including the Company £0.2m (1998 £0.2m) 2.9 2.9

Non audit work – of which £0.7m in UK (1998 £0.6m) 2.5 1.3

The amounts shown above for research and development expenditure are stated in accordance with the definition containedin SSAP13. This strict accounting definition does not include the significant investment in application engineering and relateddevelopment 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 Items1999 1998

£m £m

Restructuring costs:

John Crane (15.4) –

Specialty Polymer Products (6.3) –

Automotive Systems (7.3) (5.5)

Dowty (1.2) –

Dowty Woodville Polymer ‘whistleblower’ action – (7.0)

Release of unutilised litigation provision – 1.0

Costs less other income (30.2) (11.5)

Net profit on disposal of operations – 14.7

Loss on disposal of fixed assets (3.3) –

(33.5) 3.2

Restructuring costs arose during 1999 in all business segments from the integration of acquisitions made in 1998 and 1999. In John Crane the integration of Safematic, Sealol, Flexibox and the EIS Vacuum & Filtration businesses with the existing Mechanical Seals businesses was completed during 1999. In Specialty Polymer Products the integration of Busak+Shamban with the existing Forsheda operations was completed in 1999. In Automotive Systems the integration of Walbro and Marwal with Bundy was started during 1999 and will be completed in 2000. In Dowty the integration of Tri-Industries was completed during 1999.

The gain on disposal of operations in 1998 arose from the sales of Messier-Dowty, Belfab and Thermal Processing Group.

The loss on disposal of fixed assets arose principally from the disposal of a surplus UK property.

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64 TI Group plc

Notes to the Financial Statements continued

5 Interest1999 1998

£m £m

Overdrafts and other short term borrowings (4.5) (7.5)

Loans (49.6) (31.0)

Finance leases (0.7) (0.2)

Interest payable (54.8) (38.7)

Interest receivable 5.0 13.0

Net Group interest payable (49.8) (25.7)

Share of joint venture’s interest – (0.7)

Share of associates’ interest (0.1) (0.3)

(49.9) (26.7)

6 Taxation1999 1998

£m £m

UK corporation tax at 30.25% (1998 31%) (5.1) (57.9)

Advance corporation tax – 6.2

Relief in respect of overseas taxes 0.2 39.6

Total UK taxation (4.9) (12.1)

Overseas taxation (64.5) (66.8)

Total Group taxation (69.4) (78.9)

Share of joint venture’s taxation – (1.5)

Share of associates’ taxation (0.7) (0.3)

(70.1) (80.7)

The above includes deferred taxation charged of £4.9m (1998 £3.7m credited). Deferred taxation is provided for 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 (1998 – unchanged).

The exceptional items gave rise to an exceptional tax credit of £9.6m (1998 £6.7m charged).

7 Dividends of TI Group plc1999 1998

£m £m

Interim paid of 5.8p per 25p share (1998 5.6p) 29.0 26.8

Proposed final of 12.0p per 25p share (1998 11.6p) 60.1 55.8

89.1 82.6

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8 Earnings per ShareEarnings per share are calculated on a weighted average basis using earnings of £115.3m (1998 £145.6m) on an FRS3 basis.

Earnings before goodwill amortisation and exceptional items, which provides a consistent measure of operating performance,

were £176.9m (1998 £164.2m). The weighted average number of shares in issue was 499.2m (1998 478.9m). The weighted

average number of shares on a fully diluted basis, calculated in accordance with FRS14 ‘Earnings per Share’, was 500.2m

(1998 479.0m), reflecting the effect of outstanding share options.

9 Employee Information1999 1998

Continuing Acquisitions Total Continuing Discontinued Total

Staff costs £m £m £m £m £m £m

Wages and salaries 651.7 61.0 712.7 571.4 6.8 578.2

Social security costs 123.9 9.1 133.0 117.2 0.8 118.0

Pensions and other

post-retirement obligations 36.7 1.4 38.1 31.0 0.3 31.3

812.3 71.5 883.8 719.6 7.9 727.5

The total for pensions and other post-retirement obligations is before deducting a net credit of £4.2m (1998 £3.6m) 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:

1999 1998

Continuing Acquisitions Total Continuing Discontinued Total

UK 8,350 100 8,450 6,400 75 6,475

Overseas 25,575 4,275 29,850 24,250 200 24,450

33,925 4,375 38,300 30,650 275 30,925

10 Emoluments and Interests of Directors1999 1998

Details of Directors’ emoluments are as follows: £’000 £’000

Aggregate emoluments (including fees, benefits and annual performance-related payments) 5,113 5,123

Aggregate notional gains on the exercise of share options – 15

Company contributions to defined contribution pension schemes 81 43

Compensation for loss of office – 767

A detailed statement of Directors’ emoluments, which forms part of these financial statements, appears on pages 48 and 49.

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.

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66 TI Group plc

Notes to the Financial Statements continued

Summary of TI Directors’ Share Interests

Sir Christopher 642,844 585,023 442,356 226,000 22/08/94 - - 226,000 373.50 - 22/08/97 22/08/04Lewinton* 22,000 11/04/95 - - 22,000 376.50 - 11/04/98 11/04/05

35,000 15/04/96 - - 35,000 520.50 - 15/04/99 15/04/0616,000 09/09/96 - - 16,000 551.50 - 09/09/00 09/09/0659,000 02/04/97 - - 59,000 540.00 - 02/04/00 02/04/07

172,500 02/04/97 - - 172,500 540.00 - 02/04/01 02/04/07215,000 08/09/97 - - 215,000 600.00 - 08/09/00 08/09/07205,500 13/03/98 - - 205,500 505.00 - 13/03/01 13/03/08

93,000 11/03/99 - 93,000 - 464.00 - 11/03/02 11/03/09437,500 24/05/99 - 437,500 - 446.25 - 24/05/02 24/05/09

** 2,754 27/08/98 - - 2,754 354.00 - 01/10/01 31/03/02

William J Laule* 190,641 155,715 63,556 80,000 22/08/94 - - 80,000 373.50 - 22/08/97 22/08/0451,000 11/04/95 - - 51,000 376.50 - 11/04/98 11/04/0562,000 15/04/96 - - 62,000 520.50 - 15/04/99 15/04/0623,500 02/04/97 - - 23,500 540.00 - 02/04/00 02/04/0780,000 08/09/97 - - 80,000 600.00 - 08/09/00 08/09/07

168,000 13/03/98 - - 168,000 505.00 - 13/03/01 13/03/0831,000 06/08/98 - - 31,000 418.00 - 06/08/01 06/08/08

227,000 11/03/99 - 227,000 - 464.00 - 11/03/02 11/03/09290,000 24/05/99 - 290,000 - 446.25 - 24/05/02 24/05/09

** 4,872 27/08/98 - - 4,872 354.00 - 01/10/03 31/03/04

Martin D Angle* 58,567 37,861 16,837 222,000 02/04/97 - - 222,000 540.00 - 02/04/00 02/04/0752,500 08/09/97 - - 52,500 600.00 - 08/09/00 08/09/0776,000 13/03/98 - - 76,000 505.00 - 13/03/01 13/03/08

160,000 11/03/99 - 160,000 - 464.00 - 11/03/02 11/03/09220,000 24/05/99 - 220,000 - 446.25 - 24/05/02 24/05/09

Sir Nigel Broomfield 226 226 - - - - - - - - - -

Sir Colin Chandler 19,083 19,083 7,783 - - - - - - - - -

John M Harris 6,046 6,046 6,046 - - - - - - - - -

John M Hignett 142,905 142,905 102,149 - - - - - - - - -

Henry R Kravis 23,600,000 23,600,000 23,600,000 - - - - - - - - - (see note 6 below)

John Langston* 38,623 34,437 15,855 67,000 22/08/94 - - 67,000 373.50 - 22/08/97 22/08/0447,000 11/04/95 - - 47,000 376.50 - 11/04/98 11/04/0529,000 02/04/97 - - 29,000 540.00 - 02/04/00 02/04/0738,000 08/09/97 - - 38,000 600.00 - 08/09/00 08/09/0730,000 13/03/98 - - 30,000 505.00 - 13/03/01 13/03/0810,000 06/08/98 - - 10,000 418.00 - 06/08/01 06/08/08

104,500 11/03/99 - 104,500 - 464.00 - 11/03/02 11/03/09125,000 24/05/99 - 125,000 - 446.25 - 24/05/02 24/05/09

** 5,088 31/08/95 - - 5,088 339.00 - 01/10/00 31/03/01

David P Lillycrop* 53,176 50,236 25,205 20,000 08/04/93 - - 20,000 301.50 - 08/04/96 08/04/035,000 19/04/94 - - 5,000 416.50 - 19/04/97 19/04/045,000 15/04/96 - - 5,000 520.50 - 15/04/99 15/04/06

22,500 09/09/96 - - 22,500 551.50 - 09/09/00 09/09/0631,000 02/04/97 - - 31,000 540.00 - 02/04/00 02/04/0740,000 08/09/97 - - 40,000 600.00 - 08/09/00 08/09/0747,500 13/03/98 - - 47,500 505.00 - 13/03/01 13/03/0836,500 06/08/98 - - 36,500 418.00 - 06/08/01 06/08/0873,500 11/03/99 - 73,500 - 464.00 - 11/03/02 11/03/09

125,500 24/05/99 - 125,500 - 446.25 - 24/05/02 24/05/09** 2,464 29/08/96 - - 2,464 420.00 - 01/10/01 31/03/02** 1,582 28/08/97 - - 1,582 436.00 - 01/10/02 31/03/03

Rudolf G Mueller 20,000 20,000 20,000 - - - - - - - - -

T Allan Welsh* 42,903 26,781 12,529 258,500 11/03/99 - 258,500 - 464.00 - 11/03/02 11/03/09 100,000 24/05/99 - 100,000 - 446.25 - 24/05/02 24/05/09

* Denotes Executive Director**Denotes SAYE Options

Ordinary Shares Ordinary Shares Under OptionBalance Balance

as at as at31 Dec 98 31 Dec 98 Market Date from

Balance Balance or date of Balance or date of Exercise price at whichDirector as at as at appointment as at Date of appointment Price Date of Normally Expiry

2 March 2000 31 Dec 99 if later 31 Dec 99 Grant Exercised Granted if later (p) Exercise Exercisable Date

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 1999 was 475p. The highest mid-market price during the year was 563.25p and the lowest mid-market price was 310p.2. TI Group Employee Share Trusts The two TI Group Employee Share Trusts, which were established in 1995 and 1999, are discretionary and were created to encourage employees to hold shares in the

Company. During the year Trustees of the two trusts purchased 4,800,000 (1998 420,000) TI Ordinary shares; 5,000,529 shares remained in ownership of the trusts at 2nd March 2000. 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 shares, representing the maximum aggregate number of shares to which he could become entitled (in respect of one or more periods 1997-2000, 1998-2001 and 1999-2002) under the three-year share performance plan described on page 47.Sir Christopher Lewinton 420,276 J Langston 102,503W J Laule 245,331 D P Lillycrop 105,972M D Angle 209,478 T A Welsh 67,679

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 withthe rules of the scheme concerned) over a period of three years prior to exercise, in the case of options granted:– before 1st January 1996, has exceeded the increase in the United Kingdom Retail Prices Index over the corresponding period,– beftween 1st January 1996 and 13th May 1999, has exceeded the increase in RPI by at least 2% per annum over the corresponding period,– after 13th May 1999, has exceeded the increase in RPI by at least 9% over the three year period.

5. Lapsed Options No options lapsed during the year.6. Kohlberg Kravis Roberts & Co. As a senior partner of KKR, Mr Henry R Kravis is deemed to be interested in the 23.6m TI Ordinary shares held by an affliate of KKR (note 23 on page 77).

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11 Fixed Intangible Assets – GoodwillIntangible assets comprise purchased goodwill arising from the acquisition of businesses since 1st January 1998:

1999 1998The Group £m £m

Cost at 1st January 539.2 –

Acquisitions during year (note 1) 537.6 539.2

Cost at 31st December 1,076.8 539.2

Amortisation at 1st January 15.1 –

Charge for year 37.7 15.1

Amortisation at 31st December 52.8 15.1

Net book amount 1,024.0 524.1

The amortisation charge for the year is analysed by class of business as follows: John Crane £13.2m (1998 £7.4m), Specialty

Polymer Products £3.2m (1998 £0.2m), Automotive Systems £16.4m (1998 £5.6m) and Dowty £4.9m (1998 £1.9m).

12 Fixed Tangible AssetsPlant, Assets in

Land & Machinery & Course ofBuildings Equipment Construction Total

The Group £m £m £m £m

Cost

At 31st December 1998 220.0 756.1 31.6 1,007.7

Exchange rate adjustments (5.0) (18.9) (1.1) (25.0)

New subsidiaries 79.6 264.8 14.6 359.0

Capital expenditure 4.7 76.6 37.4 118.7

Disposals and adjustments 0.4 (21.6) (23.8) (45.0)

At 31st December 1999 299.7 1,057.0 58.7 1,415.4

Depreciation

At 31st December 1998 62.6 466.3 – 528.9

Exchange rate adjustments (2.1) (11.9) – (14.0)

New subsidiaries 18.0 146.1 – 164.1

Charge for year 6.9 70.9 – 77.8

Disposals and adjustments (1.8) (36.1) – (37.9)

At 31st December 1999 83.6 635.3 – 718.9

Net book amount 1999 216.1 421.7 58.7 696.5

Net book amount 1998 157.4 289.8 31.6 478.8

Freehold land and buildings included above have a cost of £275.8m (1998 £206.2m) and depreciation of

£75.4m (1998 £56.0m).

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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

1999 1998 1999 1998 1999 1998£m £m £m £m £m £m

Cost 8.0 3.9 15.9 9.9 22.7 14.0

Depreciation (2.4) (1.7) (5.8) (4.9) (12.4) (7.7)

Net book amount 5.6 2.2 10.1 5.0 10.3 6.3

The depreciation charge for the year for leased assets was £2.4m (1998 £2.0m).

13 InvestmentsOther

Associated Participating OwnUndertakings Interests Shares Total

The Group £m £m £m £m

Shares at valuation

At 31st December 1998 6.8 0.6 3.7 11.1

Exchange rate adjustments 0.1 – – 0.1

Acquisitions 22.5 0.7 23.0 46.2

Disposals and conversion to subsidiaries (14.8) (0.7) (2.5) (18.0)

Movement during the year 1.4 – – 1.4

At 31st December 1999 16.0 0.6 24.2 40.8

Associated undertakings

The principal associated undertakings are: ClassCountry of operation % Held of Share

John Crane (Japan) Inc Japan 49 Ordinary

Korea Bundy Corp South Korea 39 Ordinary

Mitsuba Walbro Inc Japan 50 Ordinary

Vitec LLC USA 47.5 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 1999

amounted to £2.7m (1998 £1.0m).

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 1999 amounted to £1.6m (1998 £2.0m). Sales by the associates to TI Group were not

material to either party in either year.

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Other participating interests

The principal other participating interest is a 3% shareholding in the ordinary issued capital of Tube Investments of India Ltd which

operates in India.

Participating interests are shareholdings in listed companies stated at Directors’ valuation and with a market value at 31st

December 1999 of £1.8m (1998 £0.8m).

Own shares

The TI Group Employee Share Trust, established in 1995, and the TI Group Jersey Employee Share Trust, established in 1999,

hold shares in the Company for subsequent transfer to employees under various incentive schemes. In accordance with UITF13

the Trusts’ accounts are incorporated into the Company and Group accounts.

At 31st December 1999 the Trusts held 5,256,410 shares in the Company (1998 1,134,355) with a market value of

£25.0m (1998 £3.7m). Dividends on the shares have been waived. Costs of administration are included in the profit and loss

account as they accrue.

The Company £m

Shares in subsidiaries at cost and own shares

At 31st December 1998 1,324.6

Acquisitions 32.6

Disposals (13.3)

Exchange rate adjustments 0.2

At 31st December 1999 1,344.1

Provisions for diminution in value included in the above at 31st December 1999 amounted to £67.5m (1998 £67.5m).

A list of the Group’s principal subsidiaries is set out on pages 85 and 86.

14 StocksThe Group

1999 1998£m £m

Raw materials and consumables 114.4 82.7

Work in progress 106.5 120.0

Finished goods and goods for resale 135.8 106.6

Payments on account (7.8) (5.7)

348.9 303.6

The current replacement cost of stocks does not materially exceed the historical cost stated above.

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Notes to the Financial Statements continued

15 Assets held for DisposalAssets held for disposal at 31st December 1998 comprised certain businesses acquired with EIS Group which were sold during

1999. Transactions and balances between these businesses and other Group companies were not material; no dividends were

received from these businesses.

16 Debtors and PrepaymentsThe Group The Company

1999 1998 1999 1998£m £m £m £m

Amounts falling due within one year

Trade debtors 573.0 401.2 – –

Amounts owed by Group undertakings – – 186.3 138.8

Amounts owed by associates 1.4 0.4 – –

Other debtors 9.6 9.6 1.7 2.0

Prepayments and accrued income 29.9 25.7 0.1 0.7

Corporate taxation 7.7 27.3 – 18.0

621.6 464.2 188.1 159.5

Amounts falling due after more than one year

Amounts owed by Group undertakings – – 987.0 587.4

Prepaid pension contributions (note 32) 89.0 83.8 – –

Other debtors 15.4 7.8 – 0.9

Deferred taxation 34.9 31.7 – –

139.3 123.3 987.0 588.3

Total debtors 760.9 587.5 1,175.1 747.8

The deferred tax asset relates to provisions for post-retirement medical and welfare benefit schemes, principally in the USA.

17 Cash and DepositsThe Group The Company

1999 1998 1999 1998£m £m £m £m

Cash at bank and in hand 95.4 70.7 149.7 1.1

Short term bank deposits 47.0 102.4 7.0 65.8

142.4 173.1 156.7 66.9

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18 Creditors falling due within one yearThe Group The Company

1999 1998 1999 1998£m £m £m £m

Bank overdrafts 64.3 40.9 13.7 139.2Other short term borrowings 12.2 13.0 – –

Short term borrowings – repayable on demand 76.5 53.9 13.7 139.2Loan notes 2.5 16.0 2.5 16.0Current portion of loans 117.8 54.7 4.0 16.2 Finance leases 3.3 3.7 – –

Short term borrowings 200.1 128.3 20.2 171.4

Trade creditors 337.1 241.5 – –Bills of exchange payable 6.5 4.5 – – Amounts owed to Group undertakings – – 15.9 14.6 Amounts owed to associates 0.2 0.2 – –Corporate taxation 32.7 51.0 0.6 8.7Other taxation and social security 51.7 39.1 – – Other creditors 54.4 20.3 0.1 1.1 Accruals and deferred income 167.6 147.2 12.3 10.3Proposed final dividend 60.1 55.8 60.1 55.8

Other creditors 710.3 559.6 89.0 90.5

Short term borrowings of subsidiaries amounting to £12.4m (1998 £7.3m) are secured by charges over certain assets of thesubsidiaries concerned.

£16.0m of unsecured loan notes were issued in 1998 as part consideration for the acquisition of EIS Group of which £2.5mwere outstanding at 31st December 1999. 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 (1998 $50m) of the Group’s private placement debt (see note 20).

19 Creditors falling due after more than one yearThe Group The Company

1999 1998 1999 1998£m £m £m £m

Repayable wholly or partly after five yearsSecured loans 10.2 0.4 – –Unsecured bank and other loans 19.6 21.1 18.0 –Finance leases 5.9 0.2 – –Repayable wholly within five yearsSecured loans 3.1 0.9 – –Unsecured bank and other loans 1,057.3 533.3 712.8 232.2Finance leases 7.5 1.6 – –

Loans and other borrowings 1,103.6 557.5 730.8 232.2

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Notes to the Financial Statements continued

19 Creditors falling due after more than one year continued

The Group The Company

1999 1998 1999 1998£m £m £m £m

Amounts owed to Group undertakings – – 715.8 602.4

Corporate taxation 1.9 2.6 – –

Other creditors 8.1 12.1 – –

Other creditors 10.0 14.7 715.8 602.4

The security for loans, 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 Borrowings1999 1998

£m £m

Short term borrowings (note 18) (200.1) (128.3)

Loans and other borrowings falling due after more

than one year (note 19) (1,103.6) (557.5)

Total borrowings (1,303.7) (685.8)

Cash and deposits (note 17) 142.4 173.1

Net borrowings (1,161.3) (512.7)

Cash and overdraft balances are offset only where the Group has a legal right of offset with a bank.

Maturity of borrowings and facilities 1999 1998£m £m

Within one year 200.1 128.3

Between one and two years 66.9 250.8

Between two and five years 1,019.6 300.0

After five years 17.1 6.7

Total borrowings 1,303.7 685.8

Maturity dates above are based on term loans and committed lending facilities. The maturity profile based on the next rollover

date would result in £1,198.0m being repayable within one year, and £105.7m after 12 months the principal element of which

relates to the US private placements.

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TI Group plc 73

The Group had the following unused committed borrowing facilities: 1999 1998£m £m

Expiring within one year 29.9 24.1

Expiring between one and two years 205.0 41.2

Expiring after two years 82.1 397.8

317.0 463.1

Facilities expiring between one and two years comprise £205.0m subject to annual review at which time the banks may extend

them for a further 12 months or the Group may draw down the facility as a loan for one year.

Currency and interest rate analysis of net borrowings at 31st December 1999Fixed

Floating Fixed interest Time Currencies Category Total rate rate rate fixed

£m £m £m % years

Sterling Bank loans and finance leases (489.3) (236.3) (253.0) 7.0 2.5

US $ US private placements (86.8) – (86.8) 8.9 3.0

US & Canadian $ Bank loans and finance leases (364.8) (149.3) (215.5) 6.3 2.3

European Bank loans and finance leases (303.2) (101.3) (201.9) 4.3 1.9

Rest of World Bank loans and finance leases (59.6) (45.4) (14.2) 1.7 1.2

Total borrowings (1,303.7) (532.3) (771.4)

Sterling Cash and deposits 23.4 23.4 –

US & Canadian $ Cash and deposits 36.7 36.7 –

European Cash and deposits 49.6 49.6 –

Rest of World Cash and deposits 32.7 32.7 –

Cash and deposits 142.4 142.4 –

Net borrowings (1,161.3) (389.9) (771.4)

Currency and interest rate analysis of net borrowings at 31st December 1998Fixed

Floating Fixed interest Time Currencies Category Total rate rate rate fixed

£m £m £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) (169.0)

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74 TI Group plc

Notes to the Financial Statements continued

20 Net Borrowings continued

The tables on page 73 take 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.

The Group has two US private placement debts. The first has an outstanding principal of $60m (1998 $90m), of which $30m

is repayable in December 2000, with a coupon of 8.52%; final maturity is in December 2001. The other has an outstanding

principal of $80m (1998 $100m), of which $20m is repayable in October 2000, 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.

Currency analysis of net assets at 31st December 1999

1999 1998

Net Assets Excluding Total Net Assets Excluding TotalTotal Borrowings Borrowings Total Borrowings Borrowings

Currencies £m £m £m £m

Sterling 101.3 (489.3) 199.2 (187.8)

US and Canadian $ 430.0 (451.6) 280.1 (280.3)

European 301.7 (303.2) 190.7 (180.5)

Rest of World 164.5 (59.6) 92.7 (37.2)

997.5 (1,303.7) 762.7 (685.8)

Intangible assets – goodwill (denominated in sterling) 1,024.0 – 524.1 –

2,021.5 (1,303.7) 1,286.8 (685.8)

There are no material foreign currency transaction exposures, since to the extent practicable all Group companies use forwardcontracts 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 instrumentsset out in the Treasury section of the Financial Review on pages 36 and 37 form part of these financial statements.

The Group held the following categories of financial instruments at 31st December 1999:

1999 1998

Book Values Fair Values Book Values Fair Values£m £m £m £m

Assets/(liabilities)

Cash and deposits 142.4 142.4 173.1 173.1Short term borrowings (200.1) (200.1) (128.3) (128.3)Loans and other borrowings falling due after more than one year (1,103.6) (1,110.9) (557.5) (568.0)Interest rate swaps and forward rate agreements – 3.0 – (1.4)Debtors falling due after one year 15.4 15.4 7.8 7.8Creditors falling due between one and two years (8.1) (8.1) (12.1) (12.1)Provisions for liabilities and charges

falling due between one and two years (6.6) (6.6) (0.2) (0.2)falling due between two and five years (10.9) (10.9) (0.7) (0.7)falling due after five years (1.4) (1.4) (7.0) (7.0)

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TI Group plc 75

The Group has taken advantage of the exemption in FRS13 and not included details of other financial instruments relating to

debtors, creditors and provisions falling due within one year.

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 36 and 37. 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 1999. The value at that date was determined by market interest rates, which fluctuate over time.

At 31st December 1999 and at 31st December 1998 gains and losses on forward exchange contracts taken out as hedges

of sales and purchase transactions were not material.

The table below shows the extent to which the Group has off balance sheet (unrecognised) gains and losses in respect of

financial instruments used as hedges at the beginning and end of the year.

Total netGains Losses gain/(loss)

£m £m £m

On hedges at 1st January 1999 12.4 (13.9) (1.5)

Arising in previous years included in 1999 income (9.3) 11.1 1.8

Not included in 1999 income:

Arising before 1st January 1999 3.1 (2.8) 0.3

Arising in 1999 10.7 (8.0) 2.7

On hedges at 31st December 1999 13.8 (10.8) 3.0

Of which:

Expected to be included in 2000 income 8.6 (7.4) 1.2

Expected to be included in 2001 income or later 5.2 (3.4) 1.8

22 Provisions for Liabilities and Charges

Pensions Productand Other Warranty

Post- andRetirement Onerous Deferred OtherObligations Contracts Taxation Liabilities Group Total

£m £m £m £m £m

At 31st December 1998 150.3 26.5 42.4 14.2 233.4

Exchange rate adjustments (0.4) (0.5) (0.2) – (1.1)

New subsidiaries 10.1 24.9 (9.6) 7.7 33.1

Utilised (10.3) (9.6) – (27.5) (47.4)

Profit and loss account 10.7 2.5 4.9 30.2 48.3

At 31st December 1999 160.4 43.8 37.5 24.6 266.3

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76 TI Group plc

Notes to the Financial Statements continued

22 Provisions for Liabilities and Charges continued

Provisions for liabilities and charges include provisions for:

• 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);

• Future product warranty costs arising in the normal course of business from prior period sales, and onerous contract

liabilities;

• Deferred taxation;

• Other liabilities include provisions for committed reorganisation expenditure in 2000, environmental and legal liabilities.

Provisions relating to new subsidiaries are described in note 1.

Amounts utilised represent cash spent or assets written off during 1999. No provisions arising from acquisitions were released

to the profit and loss account. The impact of discounting in 1999 has not been material.

Where appropriate provisions for post-retirement benefits have been made based on actuarial advice.

Deferred taxation 1999 1998

Full Full Amount Potential Amount PotentialProvided Liability Provided Liability

£m £m £m £m

Accelerated capital allowances 43.7 48.6 28.0 28.6

Other timing differences (20.5) (15.1) (0.7) 11.3

Unremitted overseas income 14.3 14.3 15.1 15.1

37.5 47.8 42.4 55.0

Deferred taxation is calculated under the liability method using a UK tax rate of 30% (1998 31%) and appropriate overseas rates.

Provision has been made for potential taxation which could arise on the remittance of retained overseas earnings 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 plcAuthorised Issued

1999 1998 1999 1998£m £m £m £m

Ordinary shares of 25p each 169.5 169.5 126.5 120.3

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TI Group plc 77

Shares issued during the yearThe principal movement in the Company’s called up equity share capital arose from the subscription on 23rd March 1999

of £94.4m cash for 23.6m Ordinary shares by an affliate of Kohlberg Kravis Roberts & Co, the global investment firm.

Five TI Group share option schemes and two Dowty Group share option schemes operated during the year.

The five TI Group share option schemes were: The TI (1981) Savings-Related Share Option Scheme, 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 and The TI Group 1999 Executive Share Option Scheme (together “The

Executive Schemes”). During the year 1,102,474 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 £3.7m (1998 £2.6m).

The two Dowty Group Share Option Schemes - 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 54,105 TI Group Ordinary shares were issued following the exercise of options under these schemes. The aggregate

consideration received in respect of these allotments was £0.1m (1998 £0.2m).

Shares under Option

At 31st December 1999 the total number of TI Group plc Ordinary shares under option was 22,533,215 as follows:

Number Option of 25p Dates Price

Ordinary Normally per Ordinary Scheme Date of Grant shares Exercisable share (p)

The SAYE Schemes 26 June 1992 28,336 August 1997/January 2000 281.0

25 June 1993 34,818 August 1998/January 2001 269.5

24 June 1994 120,728 August 1999/January 2002 309.0

31 August 1995 501,913 October 2000/March 2003 339.0

29 August 1996 430,953 October 1999/March 2004 420.0

28 August 1997 733,079 October 2000/March 2005 436.0

27 August 1998 3,002,333 October 2001/March 2006 354.0

2 September 1999 1,799,706 October 2002/March 2007 396.0

The Executive Schemes 9 October 1990 275,000 October 1993/October 2000 204.0

27 March 1991 10,000 March 1994/March 2001 270.0

21 August 1991 62,000 August 1994/August 2001 289.5

6 April 1992 101,000 April 1995/April 2002 314.0

27 August 1992 76,000 August 1995/August 2002 265.5

8 April 1993 262,000 April 1996/April 2003 301.5

14 September 1993 74,000 September 1996/September 2003 352.5

19 April 1994 278,000 April 1997/April 2004 416.5

22 August 1994 721,000 August 1997/August 2004 373.5

11 April 1995 259,000 April 1998/April 2005 376.5

31 August 1995 258,000 August 1998/August 2005 430.5

15 April 1996 521,000 April 1999/April 2006 520.5

9 September 1996 491,000 September 1999/September 2006 551.5

2 April 1997 1,205,500 April 2000/April 2007 540.0

8 September 1997 2,230,900 September 2000/September 2007 600.0

13 March 1998 1,777,500 March 2001/March 2008 505.0

6 August 1998 1,226,000 August 2001/August 2008 418.0

11 March 1999 1,373,500 March 2002/March 2009 463.5

24 May 1999 3,342,000 May 2002/May 2009 446.0

12 August 1999 1,290,000 August 2002/August 2009 543.0

The Dowty Group Executive 16 July 1990 16,000 July 1993/July 2000 423.75

Share Option Scheme 4 January 1991 26,083 January 1994/January 2001 311.25

20 December 1991 5,866 December 1994/December 2001 275.625

As at 31st December 1999 there were no outstanding options that were granted pursuant to the rules of the Dowty Group Share Savings Scheme (1991).

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78 TI Group plc

Notes to the Financial Statements continued

24 ReservesShare Profit and

Premium Account Loss Account TotalThe Group £m £m £m

At 31st December 1998 68.6 412.1 480.7

Total recognised gains and losses

Profit for the financial year – 115.3 115.3

Exchange translation – (7.4) (7.4)

Dividends – (89.1) (89.1)

Issues of shares for cash 91.8 – 91.8

At 31st December 1999 160.4 430.9 591.3

At 31st December 1999 the profit and loss account reserve included goodwill written off of £935.3m (1998 £897.6m),

comprising goodwill arising prior to 1998 of £882.5m and capitalised goodwill amortised of £52.8m (1998 £15.1m).

Exchange translation included within total recognised gains and losses comprised negative movements in respect of overseas

investments of £16.7m (1998 £0.5m positive) and positive movements of £9.3m (1998 £3.0m negative) 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 andPremium Account Reserve Loss Account Total

£m £m £m £m

At 31st December 1998 68.6 596.6 257.3 922.5

Profit for the financial year – – 68.4 68.4

Dividends – – (89.1) (89.1)

Issues of shares for cash 91.8 – – 91.8

At 31st December 1999 160.4 596.6 236.6 993.6

As permitted by section 230 of the Companies Act 1985, TI Group plc has not presented its own profit and loss account.

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25 Net Cash Inflow from Operating Activities1999 1998

£m £m

Operating profit 236.7 229.2

Depreciation of fixed tangible assets 77.8 54.1

Amortisation of goodwill 37.7 15.1

Operating working capital movement

Decrease/(increase) in stocks 18.4 (11.3)

Increase in debtors (36.7) (4.7)

Increase in creditors 8.0 10.4

(10.3) (5.6)

Movement in pensions and related balances (5.0) –

Net cash inflow from operating activities 336.9 292.8

Dividends received from joint venture – 7.1

Dividends received from associates 0.2 0.2

Dividends received from joint venture and associates 0.2 7.3

Capital expenditure (net) (114.5) (82.0)

Free cash flow 222.6 218.1

Free cash flow excluding exceptional items 243.1 229.5

26 Returns on Investments and Servicing of Finance1999 1998

£m £m

Interest received 5.0 11.2

Interest paid (52.9) (32.7)

Interest paid (net) (47.9) (21.5)

Dividends paid to minority interests of subsidiaries (0.5) (0.4)

(48.4) (21.9)

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80 TI Group plc

Notes to the Financial Statements continued

27 Taxation Cash Flows1999 1998

£m £m

UK corporation tax 4.9 (14.7)

Overseas taxes (56.2) (76.5)

(51.3) (91.2)

Overseas taxes paid in 1999 were net of recoveries of £2.1m in respect of exceptional items (1998 included £8.3m paid).

28 Capital Expenditure and Financial Investment1999 1998

£m £m

Capital expenditure (118.3) (84.0)

Sale of plant, machinery and equipment 4.0 2.7

Sale of surplus properties 0.4 6.0

Sale of other participating interests 1.7 –

Purchase of own shares (23.0) (1.9)

(135.2) (77.2)

29 Acquisitions and Disposals1999 1998

£m £m

Acquisitions of subsidiaries (480.6) (656.8)

Net short term borrowings acquired with new subsidiaries (2.2) (20.4)

Cash flows arising from acquisitions (482.8) (677.2)

Disposals of businesses 9.4 98.6

Disposal of interest in joint venture – 129.5

(473.4) (449.1)

Disposals of businesses included net cash flows of assets held for disposal.

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Net assets acquired and disposed of

1999 1998

Acquisitions Disposals Acquisitions Disposals£m £m £m £m

Fixed intangible assets – goodwill 537.6 – 539.2 –

Fixed tangible assets 194.9 (1.0) 107.2 (21.7)

Investments 8.4 – 0.7 (25.6)

Stocks 70.7 (0.1) 99.6 (10.4)

Assets held for disposal – (21.8) 35.6 (15.1)

Debtors 153.6 9.2 140.9 (5.7)

Creditors (159.6) 2.5 (135.8) (6.7)

Pensions and other post-retirement obligations (10.1) – (27.7) –

Other provisions (22.6) 1.5 (30.3) –

Deferred taxation 9.7 – 6.7 –

Minority interests 0.2 – 5.9 –

782.8 (9.7) 742.0 (85.2)

Exceptional items – – – (6.4)

Issue of Ordinary shares – – (8.6) –

Goodwill previously written off – – – (136.5)

782.8 (9.7) 733.4 (228.1)

1999 1998

Acquisitions Disposals Acquisitions Disposals£m £m £m £m

Satisfied by

Cash (paid)/received (480.6) 9.4 (656.8) 228.1

Net short term borrowings acquired (2.2) – (20.4) –

Total cash flows (482.8) 9.4 (677.2) 228.1

Short term deposits acquired 8.4 – 1.8 –

Loans acquired (294.0) – (37.2) –

Loan notes issued – – (16.0) –

Finance leases (14.4) 0.3 (4.8) –

Total movement in net debt (782.8) 9.7 (733.4) 228.1

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82 TI Group plc

Notes to the Financial Statements continued

29 Acquisitions and Disposals continued

Businesses acquired during the year made the following contributions to the Group’s cash flows:

£m

Net cash flow from operating activities 27.2

Returns on investments and servicing of finance (4.2)

Taxation (4.6)

Capital expenditure and financial investment (24.0)

(5.6)

Businesses sold during the year made no contribution to the Group’s cash flows.

30 Net DebtExchange

Acquisitions Other Rate1998 Cash Flows & Disposals Movements Adjustments 1999

£m £m £m £m £m £m

Cash at bank and in hand 70.7 24.9 5.5 – (5.7) 95.4

Short term borrowings –

repayable on demand (53.9) (16.9) (7.7) – 2.0 (76.5)

Cash 16.8 8.0 (2.2) – (3.7) 18.9

Short term bank deposits 102.4 (65.5) 8.4 – 1.7 47.0

Debt due within one year (74.4) 290.7 (278.0) (59.9) (2.0) (123.6)

Debt due after one year (557.5) (589.0) (30.1) 59.7 13.3 (1,103.6)

Net debt (512.7) (355.8) (301.9) (0.2) 9.3 (1,161.3)

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.

31 Financing1999 1998

£m £m

Increase in loans 301.0 192.8

Issue of shares for cash (note 23) 98.0 2.8

Capital element of finance lease payments (2.7) (1.4)

396.3 194.2

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TI Group plc 83

32 Pensions and Other Post-Retirement BenefitsThe Group operates a number of pension schemes, the majority being defined benefit arrangements the assets of which are heldindependently of the Group’s finances. Gross pension costs of £32.2m (1998 £26.3m) included £15.3m (1998 £12.2m) for overseasschemes. These costs were offset by a credit of £4.2m (1998 £3.6m) in respect of a net actuarial surplus in the TI Group pensionschemes. At 31st December 1999 there were balances included within debtors and prepayments (note 16) of £89.0m (1998 £83.8m)in respect of pensions and within provisions for liabilities and charges (note 22) of £71.5m (1998 £67.6m) in respect of pensions and £88.9m (1998 £82.7m) in respect of post-retirement healthcare benefits.

UK Pension SchemesThe Group’s UK pension schemes are valued by independent actuaries at not more than three-yearly intervals. The valuation methodsused and assumptions made by the actuaries take into account the differing membership profiles and benefit promises of theschemes.

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 5th April 1999 using the projected unit method with broadlymatching assets being held for the majority of benefits of former members and pensioners.

The principal actuarial assumptions used for current members for accounting purposes were:

Long term annual rate of return on investments 8.5%Annual dividend increase 5.5%Average annual increase in pensionable salaries 6.5-7.0%(inclusive of promotion and merit increases)Average annual increase in pensions in payment 3.75-4.0%

The actuarial value of the assets of the Scheme on this basis was sufficient to cover 110% of the benefits that had accrued tomembers after allowing for expected future increases in pensionable pay. As in previous years, for accounting purposes the actuarialsurplus is spread forward over the average remaining service lives of employees at a level amount each year (‘the mortgage method’).

For funding purposes the actuaries in their report to the Trustees and members of the Scheme used alternative assumptions incalculating the cost of providing pension benefits. For this purpose the actuaries calculated the pension cost using the method set out above but with a long term annual rate of return on investments of 8.25% and annual dividend increases of 5.0%. At the date of the valuation, the actuarial surplus was £65.4m and the market value of the assets was £1,319.8m.

EIS Group P.L.C., acquired during 1998, operates two principal UK pension schemes, the assets of which are held in separate trustee-administered funds. A formal actuarial valuation as at April 1999 is being performed for reporting to the Trustees during 2000. Basedon an interim actuarial review using valuation methods consistent with those applied to the TI Group Pension Scheme a provision of£21m was made at the date of the acquisition of EIS representing the actuarial estimate of the schemes’ deficits at that date.

Overseas Pension SchemesThe main overseas schemes are in the USA. The assets of the schemes are held in separate trustee-administered funds. The latestvaluation of the majority of the US schemes was carried out by independent actuaries as at 31st December 1999 using the projectedunit method. The principal actuarial assumptions adopted for the main US schemes were that the long term annual rate of return on investments would be 10% to 10.5% and the average annual increase in pensionable salaries would be 4.5% to 5.0%. Thecombined actuarial value of the assets of these schemes was sufficient to cover 104% of the benefits that had accrued to membersafter allowing for expected future increases in pensionable salaries. The market value of the assets of these schemes as at the date ofthe actuarial valuations was £174m.

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84 TI Group plc

32 Pensions and Other Post-Retirement Benefits continued

Other Post-Retirement BenefitsThe Group operates a number of unfunded post-retirement medical and welfare benefit schemes principally in the USA. The methodof accounting for these is similar to that used for defined benefit pension schemes. The US arrangements were actuarially valued as at 1st January 1999; the principal actuarial assumptions were a long term rate of increase in healthcare costs of 5% and a discountrate of 7%. The cost of these benefits charged to the profit and loss account in 1999 was £5.9m (1998 £5.0m); cash payments madein the year were £4.6m (1998 £3.8m).

33 CommitmentsLand and Plant andBuildings Machinery

£m £m

At 31st December 1999 there were annual commitments under

non-cancellable operating leases which expire as follows:

Within one year 3.4 4.1

Between one and five years 8.5 10.3

After five years 9.3 0.7

21.2 15.1

Contracts placed against capital expenditure sanctioned by the Board and not provided for in these accounts amounted

to £27.9m (1998 £22.8m).

34 Contingent LiabilitiesAt 31st December 1999 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. Certain UK freehold properties have been pledged as security for unfunded UK pension obligations.

The Company has given guarantees which amount to £420.4m (1998 £331.4m) on borrowings by subsidiary undertakings,

represented mainly by unsecured bank and other loans.

35 Related Party TransactionsDuring the year the Group purchased minority shareholdings in the following subsidiary companies:

– Flexibox BV (49%) from the former partner Venes BV for £2.8m;

– Flexibox Co Ltd (Thailand) (49%) from the former partner Goldcrest Supreme Ltd for £0.3m;

– Corporacion Flexibox de Venezuela CA (33%) from the former partner W Renner for £0.1m;

– Forsheda Sealing Parts Srl (20%) from the minority shareholders L Bosco and V Signorino for £1.5m (taking the Group’s

shareholding to 95%).

On 8th October 1999 the Group purchased 51% of Marwal (companies incorporated in Brazil, France and Mexico) from the

joint venture partner Magneti Marelli SpA for £38.7m, taking its shareholding to 100%.

Notes to the Financial Statements continued

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TI Group plc 85

John Crane

Americas

John Crane Inc USAJohn Crane Sealol Inc USAPlenty Products Inc USAStokes Vacuum Inc USAHibon Inc CanadaJohn Crane Canada Inc CanadaIndustrias John Crane de Mexico

SA de CV MexicoJohn Crane Venezuela CA Venezuela

Europe

John Crane UK Ltd UKDeep Sea Seals Ltd UKFlexibox Ltd UKHick Hargreaves Ltd UKPlenty Ltd UKJohn Crane Ireland Ltd EireSafematic Oy FinlandCyclam SA FranceHibon SAS FranceJohn Crane France SA FranceJohn Crane GmbH GermanyJohn Crane Italia SpA ItalyJohn Crane Holland BV NetherlandsLips United BV NetherlandsJohn Crane Iberica SA SpainJohn Crane Sverige AB Sweden

Asia Pacific and Africa

John Crane Australia Pty Ltd AustraliaJapan Marine Technologies Ltd (92%) JapanJohn Crane Pty Ltd South Africa

TI Group Specialty Polymer Products

Americas

Busak+Shamban Inc USADowty O Rings North America Inc USAForsheda Palmer-Chenard Inc USAForsheda Pipe Seal Corp USA

Europe

Busak+Shamban Ltd UKForsheda Ltd UKWoodville Polymer Engineering Ltd UKBusak+Shamban SA FranceForsheda SA France

Busak+Shamban Beteiligungs-GmbH GermanyForsheda GmbH GermanyForsheda Engineered Seals GmbH GermanyForsheda Polypac SpA ItalyForsheda (Malta) Ltd MaltaForsheda BV Netherlands Forsheda AB SwedenSkega Seals AB Sweden

Asia Pacific

Busak+Shamban KK Japan

TI Group Automotive Sytems

Americas

TI Group Automotive Systems Corp USAWalbro Engine Management Corp USAVARI-FORM Inc CanadaTI Brasil Industria e Comercio Ltda BrazilAlunosa S de RL de CV MexicoMarwal de Mexico SA MexicoWalbro de Mexico SA Mexico

Europe

TI Group Automotive Systems (Deeside) Ltd UKTI Group Automotive Systems (UK) Ltd UKTI Group Automotive Systems SA BelgiumWalbro Automotive NV BelgiumBundy Danmark A/S DenmarkBundy SNC FranceMarwal Systems SNC FranceTI Group Automotive Systems (Cergy) SA FranceTechnoflow Fuel Systems GmbH GermanyTI Group Automotive Systems

(Ettlingen) GmbH GermanyTI Group Automotive Systems

(Heidelberg) GmbH GermanyBundy KMP Srl ItalyTI Group Automotive Systems SpA ItalyWalbro Automotive AS NorwayTechnoflow Iberica SA SpainTI Group Automotive Systems SA SpainTI Group Automotive Systems

(Pamplona) SA SpainBundy AB Sweden

Asia Pacific

Bundy Tubing Co (Australia) Pty Ltd AustraliaBundy Fluid Systems Co Ltd (90%) ChinaTianjin Walbro Industries Ltd China

Principal Subsidiariesas at 31st December 1999

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86 TI Group plc

Bundy India Ltd (92%) IndiaWalbro Japan Ltd JapanBundy Systems Ltd South Korea

Dowty

Americas

Dowty Decoto Inc USAHydraulic Units Inc USAKing Fifth Wheel Co USALewis & Saunders Inc USATiteflex Corp USATri-Industries Inc USA

Europe

AB Precision (Poole) Ltd UKAero and Industrial Technology Ltd UKAeronautical & General Instruments Ltd UKAerostructures Hamble Ltd UKAir-Log Ltd UK Beagle Aircraft Ltd UKDavall Gears Ltd UKDowty Aerospace Gloucester Ltd UKDowty Boulton Paul Ltd UKHorstman Defence Systems Ltd UKTI Reynolds Rings Ltd UKTiteflex Europe SA FranceIloman Engineering Ltd Isle of Man

Parent and Other

TI & Dowty Pensions Ltd UKTI Corporate Services Ltd UKTI Group Inc USATI Group Insurance Ltd UKTI Holdings (Netherlands) BV NetherlandsTI International Holdings Ltd UK

Principal Subsidiaries continued

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. Thevoting 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 68 and 69 and aboveexclude 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.

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TI Group plc 87

1995 1996 1997 1998 1999

TURNOVER – BY SEGMENTJohn Crane £m 410 424 411 586 685Specialty Polymer Products £m 136 169 244 248 285Automotive Systems £m 718 718 740 794 1,191Dowty £m 189 218 275 451 568

Continuing operations £m 1,453 1,529 1,670 2,079 2,729Discontinued operations £m 250 228 200 89 –

£m 1,703 1,757 1,870 2,168 2,729

TURNOVER – GEOGRAPHICAL DESTINATIONUK % 15 13 13 12 12Continental Europe % 33 30 30 30 30North America % 40 43 43 44 46Rest of World % 12 14 14 14 12

PROFIT AND LOSS ACCOUNT SUMMARYProfit before interest* £m 194.8 219.7 237.0 265.3 307.0Interest £m (13.2) (8.6) (14.5) (26.7) (49.9)Profit before tax (FRS3 basis) £m 184.8 232.2 220.6 226.7 185.9Profit before tax* £m 181.6 211.1 222.5 238.6 257.1Earnings per share (FRS3 basis) p 26.5 34.1 31.6 30.4 23.1Earnings per share* p 25.8 30.0 32.0 34.3 35.4Dividends per share p 13.1 14.5 15.9 17.2 17.8

BALANCE SHEET SUMMARYShareholders’ funds £m 419 336 404 607 723Net cash/(debt) £m 10 (68) (38) (513) (1,161)

CASH FLOWFree cash flow £m 179 173 192 218 223Interest, tax and dividends £m (111) (121) (156) (192) (184)

Net cash flow £m 68 52 36 26 39Acquisitions, disposals, share issues

and translation £m 27 (130) (6) (501) (687)

Movement in net cash/(debt) £m 95 (78) 30 (475) (648)

KEY RATIOSOperating margin* % 11.4 12.5 12.7 12.2 11.3Interest cover* times 14.8 25.5 16.3 9.9 6.2Dividend cover* times 2.0 2.1 2.0 2.0 2.0

* Before goodwill amortisation and exceptional items.

Group Financial History

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88 TI Group plc

Group Addresses, Registrars and ADR Depositary

Operating HeadquartersTI Group plcLambourn Court Abingdon Oxon OX14 1UHTelephone +44 (0)1235 705555Facsimile +44 (0)1235 705570

Corporate/Registered OfficeTI Group plc50 Curzon StreetLondon W1Y 7PNTelephone +44 (0)20 7560 5700Facsimile +44 (0)20 7560 5701

Registered Number156641 England

Websitewww.tigroup.com

Regional OfficesTI Group Inc. 375 Park Avenue New York NY 10152-0222 USATelephone +1 212 319 3101Facsimile +1 212 319 3199

RegistrarsLloyds TSB RegistrarsThe CausewayWorthingWest Sussex BN99 6DA

US ADR DepositaryCitibank N.A.111 Wall StreetNew York NY 10043USA

TI Asia Pacific16 International Business Park#03-05/06 Mannesmann CentreSingapore 609929Telephone +65 222 9161Facsimile +65 223 5085

TI Latin AmericaRua Bandeira Paulista 600/Conj.23 São Paulo SP 04532-001 BrazilTelephone +55 11 820 4146Facsimile +55 11 829 8270

Financial Calendar

Publication of Results

Unaudited interim statement for half year to 30th June AugustPreliminary announcement of results for year to 31st December MarchReport and financial statements for year to 31st December April

Dividends on Ordinary Shares

Interim dividend October (announced August)Final dividend May (announced March)