SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of August 1999.
DENISON INTERNATIONAL plc
(Translation of registrant's name into English)
Masters House
107 Hammersmith Road
London W14 0QH
England
(Address of principal executive offices)
1
DENISON INTERNATIONAL plc
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations for 4
the three and six months ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows 5
for the six months ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 10
Financial Condition And Results of Operations
2
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data)
June 30, December 31,
1999 1998
-------- --------
(Unaudited)
Current assets:
Cash and cash equivalents $27,076 $35,799
Accounts receivable, less allowances of
$1,465 and $2,395 at June 30, 1999
and December 31, 1998 respectively 28,609 29,716
Inventories 34,162 38,236
Other current assets 3,982 4,513
-------- --------
Total current assets 93,829 108,264
Property, plant and equipment, net 25,536 24,726
Other assets 1,383 2,013
Goodwill, net of accumulated amortization of
$283 and $145 at June 30, 1999 and December
31, 1998 respectively 7,369 8,454
-------- --------
Total assets $128,117 $143,457
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 5,486 $ 12,532
Accounts payable 9,338 10,973
Other accrued liabilities 14,315 18,016
Current portion of capital lease obligations 142 311
-------- --------
Total current liabilities 29,281 41,832
Noncurrent liabilities:
Capital lease obligations, less
current portion 20 38
Pension accrual 10,483 10,785
Other noncurrent liabilities 4,541 5,921
Negative goodwill, net of accumulated
amortization of $5,513 and $4,823 at
June 30, 1999 and December 31, 1998
respectively 5,368 6,354
-------- --------
20,412 23,098
Shareholders' equity:
`A' ordinary shares (pound)8.00 par value;
7,125 shares authorized, and 7,015
issued and outstanding at June 30, 1999
and December 31, 1998 86 86
Ordinary shares $0.01 par value;
15,000,000 shares authorized, and
11,113,950 and 11,097,450 issued and outstanding
at June 30, 1999 and December 31, 1998 111 111
Additional paid-in capital 5,479 5,453
Capital redemption reserve 1,090 1,090
Retained earnings 80,164 74,405
Accumulated other comprehensive income (loss) (8,506) (2,618)
-------- --------
Total shareholders' equity 78,424 78,527
-------- --------
Total liabilities and shareholders' equity $128,117 $143,457
======== ========
The accompanying notes are an integral part of these statements.
3
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(U.S. dollars in thousands, except share data)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------------------ ------------------
Net sales $34,593 $35,343 $71,062 $72,714
Cost of sales 22,182 21,263 46,090 44,772
------- ------- ------- -------
Gross profit 12,411 14,080 24,972 27,942
Selling, general and
administrative expenses 8,221 7,788 16,846 16,328
------- ------- ------- -------
Operating income 4,190 6,292 8,126 11,614
Other income (181) -- (181) --
Interest (expense)
income, net 64 334 135 492
------- ------- ------- -------
Income before taxes 4,073 6,626 8,080 12,106
Provision for income taxes 1,200 1,796 2,321 3,399
------- ------- ------- -------
Net income $ 2,873 $ 4,830 $ 5,759 $ 8,707
======= ======= ======= =======
Basic earnings per share $ .26 $ .44 $ .52 $ .79
======= ======= ======= ========
Diluted earnings per share $ .26 $ .43 $ .52 $ .78
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
4
DENISON INTERNATIONAL plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
Six months ended
June 30,
1999 1998
------- -------
Net cash provided by
operating activities $5,355 $5,032
------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property, plant
and equipment (4,471) (3,463)
Proceeds from disposal of
property, plant and
equipment 5 --
------- -------
Net cash used in investing
activities (4,466) (3,463)
------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayment)
on lines of credit (7,027) (390)
Repayment of capital lease
obligations (180) (328)
Proceeds from exercise of
Stock options 26 30
------- -------
Net cash used in financing
activities (7,181) (688)
------- -------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (2,431) (361)
------- -------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (8,723) 520
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR/
PERIOD 35,799 30,337
------- -------
CASH AND CASH EQUIVALENTS
AT END OF YEAR/PERIOD $27,076 $30,857
======= =======
The accompanying notes are an integral part of these statements.
5
DENISON INTERNATIONAL plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Financial Statements
Interim Financial Information
The financial information at June 30, 1999 and for the six months ended
June 30, 1999 and June 30, 1998 is unaudited but includes all adjustments which
Denison International plc (the "Company") considers necessary for a fair
presentation of financial position at such date and the operating results and
cash flows for those periods. All adjustments made were of a normal, recurring
nature. Results for the interim period are not necessarily indicative of results
that may be expected for the entire year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with United States generally accepted accounting principles have been condensed
or omitted pursuant to the Securities and Exchange Commission Rules and
Regulations. These condensed consolidated financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1998 included in the Company's Annual Report on Form 20-F.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
United States generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from these estimates.
2. Inventories
Inventories consisted of the following:
(U.S. dollars in thousands)
June 30, December 31,
1999 1998
------- -------
Finished goods $11,238 $22,486
Work-in-progress 3,238 3,343
Raw materials and supplies 19,686 12,407
------- -------
$34,162 $38,236
======= =======
3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(U.S. dollars and shares in Three months ended Six months ended
thousands except per share data) June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
Numerator:
Net income $ 2,873 $ 4,830 $ 5,759 $ 8,707
======= ======= ======= =======
Denominator:
Denominator for basic
earnings per share
weighted-average shares 11,110 11,086 11,107 11,075
Effect of dilutive stock options 16 67 15 65
------- ------- ------- -------
6
Denominator for diluted
earnings per share -
adjusted weighted-average shares 11,126 11,153 11,122 11,140
======= ======= ======= =======
Basic earnings per share $ .26 $ .44 $ .52 .79
======= ======= ======= =======
Diluted earnings per share .26 $ .43 $ .52 .78
======= ======= ======= =======
4. Comprehensive Income
The Company's total comprehensive income was as follows (U.S. dollars in
thousands):
Three month ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 2,873 $ 4,830 $ 5,759 $ 8,707
Foreign currency translation
adjustment, net of tax
benefit (1,641) (40) (5,888) (738)
------- ------- ------- -------
Comprehensive net income (loss) $(1,232) $ 4,790 $(129) $ 7,969
======= ======= ======= =======
The components of accumulated other comprehensive income, net of related tax, at
December 31, 1998 and June 30, 1999 are as follows:
Accumulated
Pension Foreign Other
Liability Currency Comprehensive
Adjustment Translation Income
---------- ----------- -------------
Balance at December 31, 1998 $ (43) $ (2,575) $ (2,618)
Current period other
comprehensive income -- (5,888) (5,888)
-------- -------- --------
Balance at June 30, 1999 $ (43) $ (8,463) $ (8,506)
======== ======== ========
5. Segment Information
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company's reportable segments are based
on geographic area.
A summary of the Company's operations by geographic area follows:
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
Sales to unaffiliated companies:
United Kingdom $ 2,311 $ 2,973 $ 4,793 $ 5,615
France 4,354 4,275 8,829 8,761
Germany 2,721 3,173 5,835 6,367
Rest of Europe 10,233 7,879 20,877 16,078
------- ------- ------- -------
Total Europe 19,619 18,300 40,334 36,821
United States 9,368 11,424 19,076 23,470
Canada 1,332 1,886 3,408 4,196
------- ------- ------- -------
Total N. America 10,700 13,310 22,484 27,666
Asia-Pacific 4,274 3,733 8,244 8,227
------- ------- ------- -------
Total consolidated $34,593 $35,343 $71,062 $72,714
======= ======= ======= =======
7
Transfers between geographic areas:
United Kingdom $ 18 $ 12 $ 31 $ 25
France 5,865 6,603 12,219 13,922
Germany 3,600 4,156 7,903 8,699
Rest of Europe 62 59 106 117
------- ------- ------- -------
Total Europe 9,545 10,830 20,259 22,763
United States 2,046 3,156 4,803 6,511
Canada -- -- -- --
------- ------- ------- -------
Total N. America 2,046 3,156 25,062 6,511
Asia-Pacific 15 16 33 32
------- ------- ------- -------
Total transfers 11,606 14,002 25,095 29,306
Elimination's (11,606) (14,002) (25,095) (29,306)
------- ------- ------- -------
Total consolidated $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
Operating income (loss):
United Kingdom $ 507 $ 762 $ 909 $ 1,075
France 2,057 2,012 3,938 3,928
Germany 63 1,061 249 1,450
Rest of Europe 1,062 607 2,503 1,204
------- ------- ------- -------
Total Europe 3,689 $ 4,442 7,599 7,657
United States 474 1,592 432 3,439
Canada 65 339 277 637
------- ------- ------- -------
Total N. America 539 1,931 709 4,076
Asia-Pacific (38) (81) (182) (119)
------- ------- ------- -------
Total consolidated $ 4,190 $ 6,292 $ 8,126 $11,614
======= ======= ======= =======
June 30, 1999 December 31, 1998
------------- -----------------
Identifiable assets:
United Kingdom $14,831 $ 9,211
France 20,743 33,035
Germany 14,611 17,615
Rest of Europe 32,372 36,308
------- -------
Total Europe 82,557 96,169
United States 28,183 29,007
Canada 3,742 3,950
------- -------
Total N. America 31,925 32,957
Asia-Pacific 13,635 14,331
------- -------
Total consolidated $128,117 $143,457
======== ========
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Although the Company reports its financial results in U.S. dollars,
approximately 76% of the Company's revenues and expenses are incurred in foreign
currencies. The fluctuation of the functional currencies earned by the Company
against the U.S. dollar has had the effect of increasing or decreasing (as
applicable) U.S. dollar reported net sales, as well as the cost of goods sold,
gross profit, selling, general and administrative expenses denominated in such
foreign currencies when translated into U.S. dollars as compared to prior
periods.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared with Three Months Ended June 30, 1998
The Company's net sales decreased 2.1% to $34.6 million in the three month
period ended June 30, 1999 from $35.3 million in the comparable period in 1998.
During the same period, net sales in North America decreased 19.6% to $10.7
million from $13.3 million; net sales in Europe increased 7.2% to $19.6 million
from $18.3 million; and net sales in the Asia-Pacific region increased 14.5% to
$4.3 million from $3.7 million. The decrease in net sales is attributed to the
slow North American market, particularly in the oil and gas exploration markets
and de-stocking by the Company's North American distributors. Partially
offsetting these factors was the full quarter results of Lokomec Oy, a company
acquired late in 1998, combined with strong sales in the rest of the Company's
European operations and the recovery of sales in the Asia-Pacific markets.
Restated (at average exchange rates for the three month period ended June
30, 1998), net sales for the three month period ended June 30, 1999, were $35.0
million, a 0.9% decrease over the comparable 1998 period. The increased sales
revenue for the period attributable to the exchange rate differences was $0.4
million. Restated (at average exchange rates for the three month period ended
June 30, 1998), net sales for the three month period ended June 30, 1999 for the
Company's European operations increased 10.9% to $20.3 million from $18.3
million, and net sales for the Asia-Pacific increased 6.7% to $4.0 million from
$3.7 million.
The Company's gross profit decreased 11.8% to $12.4 million in the three
month period ended June 30, 1999 from $14.1 million in the comparable 1998
period. Gross profit as a percentage of net sales decreased to 35.9% in the
three months ended June 30, 1999 from 39.8% in the comparable period in 1998.
The decrease in gross profit was the result of the impact of planned production
curtailments to reduce inventories in the quarter, combined with the effects of
a labor strike at the Company's Marysville Ohio facility that began in June. The
Company reduced inventories by $2.2 million in the quarter and the associated
impact on costs is reflected in the reduced gross earnings. Also impacting gross
profit in the quarter were the reversal of certain reserves and accruals that
were deemed unnecessary. These included a reserve for warranty, established for
a specific customer complaint that was resolved in favor of the Company, and
adjustments to certain employee benefit reserves, reduced due to the production
curtailments discussed.
Gross profit in Europe decreased 3.9% to $8.5 million in the three months
ended June 30, 1999 from $8.8 million in the comparable 1998 period, while gross
profit in North America decreased 36.7% to $2.6 million in the three months
ended June 30, 1999 from $4.1 million in the comparable 1998 period. Gross
profit in the Asia-Pacific region increased 14.8% to $1.3 million in the three
months ended June 30, 1999 from $1.2 million in the comparable period in 1998.
The decline in gross profit in North America was due primarily to the lower
sales revenues recorded combined with the effects of the inventory reduction and
work stoppage, while the decline in the gross profits in the European region
resulted from lower production volume to reduce inventories, partially offset by
the full quarter results of Lokomec Oy. In Asia-Pacific the increase in gross
profit resulted from the increased sales volume achieved.
Restated (at average exchange rates for the three months ended June 30,
1998), gross profit in Europe was $8.8 million, equal to the comparable 1998
period, and gross profit in the Asia-Pacific region was $1.3 million, or a 6.6%
increase over the comparable 1998 period. The total increased gross profit
9
for the period attributable to the exchange rate differences was $0.2 million.
On a consolidated basis restated gross profit decreased by 10.4%, or $1.5
million, to $12.6 million from $14.1 million in the same period 1998. Restated,
gross profit as a percentage of net sales decreased to 36.0% for the three
months ended June 30, 1999 compared to 39.8% for the comparable period in 1998.
Selling, general and administrative ("SG&A") expense increased 5.6% to $8.2
million in the three month period ended June 30, 1999 from $7.8 million in the
comparable 1998 period. These expenses as a percentage of net sales increased to
23.8% in the three month period ended June 30, 1999 compared to 22.0% in the
comparable 1998 period. The increase in these expenses for the three month
period ended June 30, 1999 as compared to the same 1998 period, resulted from
the addition of Lokomec Oy in 1999, while the increase as a percentage of net
sales is due generally to the reduction in revenues recorded.
Operating income decreased by 33.4% to $4.2 million in the three months
ended June 30, 1999 from $6.3 million in the comparable 1998 period. Operating
income as a percentage of net sales decreased to 12.1% in 1999 from 17.8% in the
comparable 1998 period. Restated (at average exchange rates for the three months
ended June 30, 1998), operating income decreased 31.7% to $4.3 million (12.2% of
net sales) in 1999, from $6.3 million (17.8% of net sales) in 1998.
Net interest income was $0.1 million in the three month period ended June
30, 1999 compared to $0.3 million of interest income in the comparable 1998
period. The decrease in net interest income was primarily due to lower
investable balances of cash on hand versus the comparable period in 1998,
combined with the interest charges on short term debt obligations.
The effective tax rate for the three month period ended June 30, 1999 was
29.5% compared to 27.1% for the comparable 1998 period. The increase in the
effective tax rate reflects an increased profit contribution from those
countries with a higher effective tax rate than the contribution mix in 1998.
The provision for taxes decreased 33.1% to $1.2 million for 1999 compared to
$1.7 million for the same 1998 period. This provision as a percentage of net
sales decreased to 3.5% in 1999 from 5.1% in the same 1998 period.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
The Company's net sales decreased 2.3% to $71.1 million in the six months
ended June 30, 1999 from $72.7 million in the comparable period in 1998. During
the same period, net sales in North America decreased 18.7% to $22.5 million
from $27.7 million; net sales in Europe increased 9.5% to $40.3 million from
$36.8 million; and net sales in the Asia-Pacific region were equal to 1998
results of $8.2 million. The decrease in net sales is attributed to the slow
North American market, particularly in the oil and gas exploration markets and
de-stocking by the Company's North American distributors. Partially offsetting
these factors were strong year to date results of Lokomec Oy, a company acquired
late in 1998, combined with stable sales in the rest of the Company's European
operations.
Restated (at average exchange rates for the six months ended June 30,
1998), net sales for the six months ended June 30, 1999, were $70.9 million, a
2.5% decrease over the comparable 1998 period. The decreased sales revenue for
the period attributable to the exchange rate differences was $0.2 million.
Restated (at average exchange rates for the six month period ended June 30,
1998), net sales for the six months ended June 30, 1999 for the Company's
European operations increased 9.8% to $40.4 million from $36.8 million, while
net sales for the Asia-Pacific decreased 4.7% to $7.8 million from $8.2 million.
The Company's gross profit decreased 10.6% to $25.0 million in the six
months ended June 30, 1999 from $27.9 million for the same period in 1998. Gross
profit as a percentage of net sales decreased to 35.1% in the six months ended
June 30, 1999 from 38.4% for year to date 1998. The decrease in gross profit was
the result of the impact of planned production curtailments to reduce
inventories in 1999, combined with the effects of a labor strike at the
Company's Marysville Ohio facility that began in June and lower sales volume.
The Company reduced inventories by $4.1 million to date in 1999, compared to
inventory balances at December 31, 1998, and the associated impact on the
Company's costs are reflected in the reduced gross earnings.
10
Gross profit in Europe increased 4.7% to $17.5 million in the six months
ended June 30, 1999 from $16.7 million for the six months ended June 30, 1998,
while gross profit in North America decreased 43.7% to $5.0 million in the six
months ended June 30, 1999 from $8.8 million in the comparable 1998 period.
Gross profit in the Asia-Pacific region increased 3.9% to $2.6 million in the
six months ended June 30, 1999 from $2.5 million in the comparable period in
1998. The decline in gross profit in North America was due primarily to the
lower sales revenues recorded combined with the effects of the inventory
reduction and work stoppage, while the increase in gross profits in the European
region resulted from the results of Lokomec Oy, partially offset by the impact
of planned production curtailments to reduce inventories. In Asia-Pacific the
increase in gross profit resulted from cost reductions implemented in 1998.
Restated (at average exchange rates for the six months ended June 30,
1998), gross profit in Europe was $17.5 million, an increase of 4.9%, or $0.8
million versus the comparable 1998 period, and gross profit in the Asia-Pacific
region was $2.5 million, equal to year to date June 1998. The total increased
gross profit for the period attributable to the exchange rate differences was
less than $0.1 million. On a consolidated basis restated gross profit decreased
by 10.8%, or $3.0 million, to $24.9 million from $27.9 million in the same
period 1998. Restated (at average exchange rates for the six months ended June
30, 1998), gross profit as a percentage of net sales decreased to 35.2% for the
six months ended June 30, 1999 compared to 38.4% for the comparable period in
1998.
Selling, general and administrative ("SG&A") expense increased 3.2% to
$16.8 million in the six months ended June 30, 1999 from $16.3 million for the
six months ended June 30, 1998. These expenses as a percentage of net sales
increased to 23.7% in the six months ended June 30, 1999 compared to 22.5% in
the comparable 1998 period. The increase in these expenses for the six months
ended June 30, 1999 as compared to the same 1998 period, resulted from the
addition of Lokomec Oy in 1999, partially offset by the impact of cost
reductions implemented in 1998, while the increase as a percentage of net sales
is due generally to the reduction in revenues recorded.
Operating income decreased by 30.0% to $8.1 million in the six months ended
June 30, 1999 from $11.6 million in the comparable 1998 period. Operating income
as a percentage of net sales decreased to 11.4% in 1999 from 16.0% for 1998.
Restated (at average exchange rates for the six months ended June 30, 1998),
operating income decreased 29.7% to $8.2 million (11.5% of net sales) in 1999,
from $11.6 million (16.0% of net sales) in 1998.
Net interest income was $0.1 million in the six months ended June 30, 1999
compared to $0.5 million of net interest income in the comparable 1998 period.
The decrease in interest income was primarily due to lower investable balances
of on hand cash versus the comparable period in 1998, combined with the interest
charges on short term debt obligations primarily utilized to purchase Lokomec
Oy.
The effective tax rate for the six months ended June 30, 1999 was 28.7%
compared to 28.1% for the comparable 1998 period. The provision for taxes
decreased 31.6% to $2.3 million for 1999 compared to $3.4 million for the same
1998 period. This provision as a percentage of net sales decreased to 3.2% in
1999 from 4.7% in the same 1998 period.
11
LIQUIDITY AND CAPITAL RESOURCES
Six Months Ended and At June 30,
----------------------------------
1999 1998
----------------------------------
(Dollars in thousands)
Cash & cash equivalents 27,076 30,857
Net cash provided by operating activities 5,355 5,032
Net cash used in investing activities (4,466) (3,463)
Net cash used in financing activities (7181) (688)
Effect of exchange rate changes on cash (2,431) (361)
Net cash provided by operating activities for the six months ended June 30,
1999 increased to $5.4 million from $5.0 million as compared to the same 1998
period. The increase in the Company's cash generated from operations reflects
the decreases achieved in working capital requirements, partially offset by the
lower profits realized. The $0.3 million increase in net cash provided by
operating activities for the six months ended June 30, 1999 as compared to the
same 1998 period was attributable to a $6.0 million net decrease in cash used
for inventories, a $0.4 million net decrease in cash used for receivables, and a
$6.1 million increase in cash provided by accrued expenses and other
liabilities. The Company anticipates that operating cash and capital expenditure
requirements will continue to be funded by cash flow from operations, cash on
hand and bank borrowings.
Net cash used in investing activities increased to $4.5 million for the six
months ended June 30, 1999 from $3.5 million in the comparable 1998 period.
Investing activities consisted primarily of investments in manufacturing
machinery and equipment for the Company's four production facilities. A majority
of the investment in machinery and equipment for the six months ended June 30,
1999 related to projects initiated in 1998.
Net cash used in financing activities increased to $7.2 million for the six
months ended June 30, 1999 from $0.7 million in the comparable 1998 period. The
increase of $6.5 million in net cash used in financing activities was primarily
attributable to a reduction in the short term debt utilized for the Lokomec Oy
acquisition.
The effect of exchange rate changes on cash and cash equivalents was a
negative impact of $2.4 million and $0.4 million for the six months ended June
30, 1999 and 1998, respectively. As approximately two thirds of the Company's
business is transacted in currencies other than the U.S. dollar, foreign
currency fluctuations had a significant adverse impact on dollar reported
balances for the six months ended June 30, 1999 compared to the same period in
1998. The $2.0 million increase in the exchange rate impact on cash and cash
equivalents was attributable to a strengthening U.S. dollar against most of the
functional currencies earned by the Company in its European and Asia-Pacific
operations.
In December 1998, the Company's U.S. subsidiary entered into an
unsecured time note with a bank that provided $12.0 million for working capital
and acquisitions. In April 1999 the unsecured time note was converted into a
revolving line of credit. Borrowings under the credit line are secured by a
guarantee by the Company. Interest on the line, which is based on LIBOR plus
0.875%, is payable monthly. At June 30, 1999, $3.5 million was outstanding under
the line.
Short-term borrowings outside the United States under available informal
credit facilities are typically a result of overdrafts. At June 30, 1999, the
Company had $1.5 million of foreign debt outstanding. The Company also has an
additional $1.8 million of unused foreign credit facilities. The banks may
withdraw these facilities at any time.
Year 2000 (Millennium) Issues
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems
12
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company and third parties with which the Company does business
rely on numerous computer programs in their day to day operations. The Company
is evaluating the Year 2000 issue, and as it relates to the Company's internal
computer systems and third party computer systems with which the Company
interacts. The following describes the Company's status regarding these issues.
The Company's State of Readiness
- --------------------------------
The Company has been formally addressing its year 2000 issues over the past
several fiscal years. These efforts involve assessments, conversion plans,
conversion implementations and testing of all internal systems running on a
variety of computer platforms ranging from mainframe computers to programmable
logic controllers.
All mainframe computer systems have been assessed, action plans have been
established and required conversion or reinstallation of computer programs is
approximately 85% complete. Full conversion and implementation is expected to be
completed by September 1999. In addition, assessment of all non-mainframe
applications has been completed with conversion action plans developed.
In summary the Company believes that its internal systems will be year 2000
compliant in all material aspects by December 1999. However, the Company's
ability to execute its plan in a timely manner may be adversely affected by a
variety of factors, some of which are beyond the Company's control, including
turnover of key employees, availability and continuity of consultants and the
potential for unforeseen implementation problems.
In addition to these efforts with respect to internal systems, the Company
has begun the process of assessing the state of readiness of its major
suppliers. These suppliers include raw material, energy and production supply
providers as well as providers of communication and logistics services. While
analysis of the responses received leads the Company to believe that it will not
incur any major problems, there can be no assurance that these suppliers will be
compliant or that the Company will not be adversely affected by their state of
readiness. The Company plans to continue this assessment effort and plans to
have this effort completed by September 1999.
The Company has a large, diverse world wide customer base. No customer
represents a majority of the Company's sales. While the Company has not begun an
assessment of the state of readiness of its customers, many customers have
requested from the Company information regarding its year 2000 issues. Major
customers will be contacted within the next three months to determine if any
significant loss of business would be expected because of their inability to
correct their year 2000 issues on a timely basis.
Costs to Address the Company's Year 2000 Issues
- -----------------------------------------------
The following is a summary of the past and expected future costs to
remediate the Company's year 2000 issues:
1997 1998 1999 and Total
Future
--------------------------------------------
(In Millions)
Costs Charged to Income Before Taxes (1) $ 0.2 $ 0.3 $ 0.3 $ 0.8
Capitalized Software and Hardware (2) 0.3 0.3 0.3 0.9
------- ------- ------- -------
Total Year 2000 Costs $ 0.5 $ 0.6 $ 0.6 $ 1.7
======= ======= ======= =======
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(1) The majority of these costs are for outside consultants and programmers,
were in addition to the normal operating budget for information systems,
and were paid currently. No major systems projects have been deferred to
future periods.
(2) Costs to replace non-Year 2000 compliant systems.
Risk of Year 2000 Issues and Contingency Plans
- ----------------------------------------------
As previously stated, the Company expects that its systems will be fully
operational and will not cause any material disruptions resulting from
unresolved year 2000 issues. Because of the uncertainties associated with
assessing customers and suppliers, there is a risk of adverse effects on the
Company's future results of operations if the Company's customers and suppliers
are not capable of correcting their year 2000 issues, if any. The Company plans
to continue assessing these risks by reviews with customers and suppliers.
Contingency plans will be developed to deal with any potential year 2000 issues
that may arise as a result of these reviews. Contingency plans relating to
suppliers, if necessary, will be developed by September 1999. Any necessary
contingency plans relating to customers will be developed by September 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DENISON INTERNATIONAL plc
By: /s/ Bruce A. Smith
------------------------------
Bruce A. Smith
Chief Financial Officer
Date: August 16, 1999
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