SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT 1934
For the fiscal year ended December 31, 1999
Commission file number: 1058980
Texon International plc
(Exact Name of Registrant as Specified in its Charter )
Not Applicable
(Translation of Registrant's name into English)
England and Wales
(Jurisdiction of incorporation or organization)
100 Ross Walk
Leicester LE4 5BX England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act
None
Securities registered or to be registered pursuant to Section 12(g) of the Act
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
10% Series A Senior Notes due 2008
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes No
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [X]Item 18
TABLE OF CONTENTS
Page
General Introduction.................................................... 1
PART I
Item 1. Description of Business.................................... 3
Item 2. Description of Property.................................... 10
Item 3. Legal Proceedings.......................................... 11
Item 4. Control of Registrant...................................... 12
Item 5. Nature of Trading Market................................... 12
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders........................................ 12
Item 7. Taxation................................................... 13
Item 8. Selected Financial Data.................................... 16
Item 9. Management's Discussion and Analysis of
Financial Condition and Results............................ 21
Item 9A. Quantitative and Qualitative Disclosures About Market Risk. 27
Item 10. Directors and Officers of Registrant......................... 31
Item 11. Compensation of Directors and Officers....................... 32
Item 12. Options to Purchase Securities from
Registrant or Subsidiaries................................... 32
Item 13. Interest of Management in Certain Transactions............... 33
PART II
Item 14. Description of Securities to be Registered................. 35
PART III
Item 15. Defaults Upon Senior Securities............................ 36
Item 16. Changes in Securities and Changes in Security
for Registered Securities.................................. 36
PART IV
Item 17. Financial Statements....................................... 37
Item 18. Financial Statements....................................... 37
Item 19. Financial Statements and Exhibits.......................... 37
Signatures
GENERAL INTRODUCTION
Texon International plc (the "Company") is a public limited company incorporated
in England and Wales, which conducts its operations through its subsidiaries.
The Company was incorporated on October 9, 1997 and on December 23, 1997 entered
into an acquisition agreement (the "Acquisition Agreement") with the
shareholders of United Texon Limited under which the Company agreed to acquire
the entire issued share capital of United Texon Limited (the "Acquisition"). The
Acquisition was conditional upon (i) consummation of the offering by the Company
of Senior Notes due 2008 (the "Offering") and (ii) a Revolving Facility being
made available unconditionally. These conditions were duly fulfilled on January
30, 1998.
The Company has prepared consolidated accounts for the year ended December 31,
1999. Under the terms of the Acquisition Agreement, the Company had control of
the financial and operational management of United Texon Limited effective from
December 31, 1997. The Company had no previous operating history and therefore
had no consolidated profit or loss for the period from its incorporation on
October 9, 1997 to December 31, 1997.
The Company prepares its consolidated financial statements in accordance with
generally accepted accounting principles of the United Kingdom ("U.K. GAAP")
which differs in certain material respects to generally accepted accounting
principles in the United States ("U.S. GAAP"). These differences are summarized
in Note 30 of the Notes to the Consolidated Financial Statements of the Company
included in this Report.
The Company publishes its financial statements in Pounds Sterling. The following
table sets forth, for the periods indicated, certain information concerning the
Noon Buying Rate for Sterling expressed in dollars per Pound Sterling. Such
rates are provided solely for the convenience of the reader and should not be
construed as a representation that Sterling amounts actually represent such
dollar amounts or that such Sterling amounts could have been, or could be,
converted into dollars at that rate or at any other rate. Such rates are not
used by the Company in preparation of its consolidated financial statements
included elsewhere herein.
Fiscal Year
Ended December 31, Average Rate High Low Period End Rate
1995 1.58 1.64 1.53 1.55
1996 1.57 1.71 1.50 1.71
1997 1.64 1.71 1.58 1.64
1998 1.66 1.72 1.61 1.66
1999 1.61 1.68 1.55 1.62
(1) The average of the Noon Buying Rates on the last business day of each month
during the relevant period. On April 26, 1999, the Noon Buying Rate was $1.58 to
(pound)1.00
This Report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding the Company's expected future financial
position, results of operations, cash flows, financing plans, business strategy,
budgets, projected costs and capital expenditures, competitive positions, growth
opportunities, plans and objectives of management for future operations and
words such as "anticipate", "believe", "plan", "estimate", "expect", "intend"
and other similar expressions are forward-looking statements. Such
forward-looking statements are inherently uncertain, and actual future results
and trends for the Company may differ materially depending on a variety of
factors. Factors that may affect the plans or results of the Company include,
without limitation level of sales to customers, actions by competitors,
fluctuations in the price of raw materials and foreign currency exchange rates
and political and economic instability in the Company's markets.
2
PART I
Item 1. Description of Business
Overview
The Company believes it is the world's largest, in terms of sales, manufacturer
and marketer of structural materials that are essential in the manufacture of
footwear. The Company operates a global business, which generates sales that are
widely diversified by geographic region and product line. The Company's primary
products include materials for insoles, which form the structural foundation of
shoes; stiffeners, which support and shape the toe and heel of shoes; and other
component products used in the manufacture of footwear, such as linings, lasts,
tacks, nails, steel shanks, steel toe caps, midsoles and adhesives. The world's
largest manufacturer of insole materials, the Company also commands leading
positions in the markets for its other footwear products. While the products
sold by the Company represent a small percentage of the total cost of materials
contained in footwear, they are critical to the performance and manufacture of
footwear and are not fashion sensitive. In 1999 approximately 90% of sales were
to the footwear manufacturing industry. By leveraging its expertise in the
manufacture of these structural materials, the Company has developed several
related niche industrial products such as carpet gripper pins and cellulose air
freshener material. These industrial products are sold to a wide range of
industries.
The Company supplies most of the major footwear manufacturers in the world and
believes that its global presence gives it a unique competitive advantage to
exploit industry trends favoring suppliers who provide footwear companies with a
"global partner". The Company supplies over 7,500 customers worldwide, servicing
global athletic footwear companies such as Nike and Adidas, designers and
producers of casual shoes including Timberland and R. Griggs & Co (Dr Martens)
and manufacturers of men's and women's formal shoes such as Church's and Bally.
The Company has seventeen manufacturing sites strategically located in Europe,
the United States, Brazil, China and Australia and sells its products in more
than 90 countries through an extensive marketing and distribution network. In
1999 sales of insoles, stiffeners, other footwear materials, industrial
products, component products and shoe machinery products accounted for 42%, 18%,
17%, 10%, 12% and 1% of total sales, respectively. In 1999, 49% of the Company's
sales were made to Europe, 32% to Asia and the Pacific, 14% to the Americas and
5% to the rest of the world.
Acquisitions
During the year the Company made several strategic acquisitions as follows;
a) On March 10, 1999 Texon UK Ltd, a wholly owned subsidiary, acquired the
share capital of Cornwell Industries Ltd with effect from March 1,
1999. Cornwell industries Ltd is the UK market leader in footwear
components and insole assemblies. The Company believes that the
acquisition will produce the following benefits for the Group:
o A wider range of products being available through the Texon
distribution network;
o A route to the shoe designer thereby strengthening the
Company's ability to obtain product specification;
o A product range consistent with the Texon brand and image.
b) On July 22, 1999 Texon Mockmuhl GmbH, a wholly owned subsidiary,
completed the acquisition of Esjot-Werk Schiermeister und Junker GmbH &
Co. KG (`Esjot'). Management believes Esjot is the world leader in the
manufacture of steel toe caps and mid soles for safety shoes. Esjot has
factories near Strasbourg-France, Milan-Italy and Dortmund - Germany
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and has approximately 200 employees. The Company believes that the
acquisition will make Texon International plc the leading supplier of
structural components to the safety footwear market, a growing market
where customers rely on the performance of the product.
c) During September 1999 Texon UK Ltd, a wholly owned subsidiary, acquired
the Leicester, UK based business of Chamberlain Phipps Materials.
Chamberlain Phipps employs 68 people and manufactures shoe stiffeners
which will complement Texon's existing product range. The factory in
Leicester also produces polyurethane mouldings for the healthcare
market.
d) On October 4, 1999 Texon Australia Pty Ltd, a wholly owned subsidiary
completed the acquisition of Claravon Ltd. Claravon Ltd which has
annual sales in excess of (pound)7 million and employs approximately
110 employees, manufactures lasts, insoles and shanks and plastic
injection-moulded soles, heels and units. Claravon has three
manufacturing sites located in Australia in Geelong, Melbourne and
Adelaide.
The Company has continued to acquire new businesses in 2000 with the following;
a) On February 29, 2000 Texon UK Ltd, a wholly owned subsidiary, acquired
the Leicester, UK based business of Crispin Dynamics for a
consideration of approximately (pound)2.5 million cash including
deferred payments of (pound)1.5 million to be paid during 2000. The net
cash payment was (pound)1.0 million and was met from new equity of
(pound)0.7 million from Texon's investors and management and the
remainder from its current bank facilities. Management believes Crispin
Dynamics is the global market leader in computer aided design software
for the footwear industry. Crispin has approximately 40 employees based
in its UK headquarters and its other facilities in Asia and Europe.
b) On March 23, 2000 Texon Italia SpA, a wholly owned subsidiary of Texon
International plc acquired a 50% shareholding in Boxflex Componentes
Para Calcados Ltda. The Company was then renamed Boxflex Texon
Componentes Para Calcados Ltda (`Boxflex'). Boxflex is a leading
manufacturer of stiffener and insole materials in Brazil and is located
in the main footwear production area near Porto Allegre.
Competitive Advantages
The Company believes that it benefits from the following competitive advantages
which have enabled it to increase sales and operating profitability and maintain
its leadership position in the structural footwear materials industry.
Leading Market Position Driven by Strong Brands and High Quality Products. The
Company is recognized in the footwear industry for high standards of quality
across its full range of products and for providing innovative technical
solutions and support to its customers worldwide. The Company believes it is the
world's largest producer of insole material, stiffeners, tacks and nails and
steel toe caps and midsoles for footwear. The Company's products are marketed
under brand names which enjoy extremely wide recognition within the footwear
industry, such as "Texon", "Tufflex", "Formo", "Unifast", "Esjot" and "Crispin".
The Company believes that its leading market position is due to successful
branding of its products, reliability and high performance. As a U.K. based
global enterprise, the Company also benefits from the reputation of the U.K.
footwear industry for quality production and technological leadership.
4
Global Presence. The Company supplies most of the world's footwear manufacturing
industry across Europe, the Americas and Asia through its direct presence in
each of these markets. The Company has seventeen manufacturing plants in eight
countries and 57 strategically located field warehouses. An extensive marketing
and distribution network enhances the Company's ability to provide high quality,
local service to its customers and to global branded footwear companies'
worldwide sourcing networks. The Company believes that it is uniquely positioned
to benefit from the continuing globalization within the footwear industry.
Strong Relationships with a Diverse Customer Base. The Company benefits from
long-established relationships with many of the most important footwear
companies in the world. The Company has been supplying products for Nike since
its entry into the footwear market and for R. Griggs & Co (Dr Martens) and
Church's for nearly a century. The Company believes that its customer
relationships are strengthened by its high quality products, brand names,
leading market position, and the high level of technical support it provides to
its clients. The Company's customer base is geographically diverse and covers a
wide spectrum of footwear (athletic, traditional and safety; men's, women's and
children's), minimizing the Company's exposure to individual markets. In 1999 no
single customer accounted for more than 7.5% of sales, and the top ten customers
represented 22% of sales.
Diverse and Customized Products. The Company offers a broad range of products,
many of which are customized to meet the needs of individual footwear
manufacturers. By satisfying its customer's preference to a "one-stop-shop", the
Company's broad and comprehensive product range contributes to its leading
market position. The Company continually develops and evolves its product lines
to meet the precise and changing requirements of footwear manufacturers. The
Company believes that no competitor produces or provides as broad a range of
products.
Attractive Ancillary Businesses. The Company leverages its global distribution
channels to distribute products it does not produce itself and utilizes its
manufacturing capacity to manufacture related industrial products. The Company
manufactures and distributes products not related to the footwear industry but
which employ the Company's core manufacturing techniques, such as air filters,
materials for air fresheners and machine-applied nails. The Company believes it
is the market leader in materials for automotive air fresheners in the United
States and carpet gripper pins in Europe.
Technological Leadership. The Company believes it was the first to develop
cellulose insole material and non-woven insole material. These are now the two
most commonly used types of insole material in the world. The Company seeks to
be at the forefront of product development and to maintain a technological
advantage over its competitors through continued improvements in product
performance, manufacturing, techniques and efficiency. For example, the Company
employs specialized technology to assist anti-counterfeiting programs that are
especially important to branded athletic shoe manufacturers.
Experienced and Incentivized Management Team. Many of the Company's senior
managers have more than a decade of experience with the Company. Individually
the Company's managers have established track records in delivering revenue and
profit growth, developing new products, penetrating new markets, improving
production efficiency and streamlining supply chains. Senior management has a
significant equity stake in the Company.
5
Business Strategy
The Company's strategy continues to focus on its core footwear business. Texon
seeks to become the world's leader in bringing materials technology to the
footwear market.
The Company aims to achieve this primarily by achieving excellence in customer
service in its core product areas. The Company measures this excellence in terms
of quality, cost, delivery and development. Significant improvements were made
in each of these areas in 1999. For example in terms of quality the Company
believes its products are generally regarded by the industry to be of superior
quality. The Company has stated its intention to achieve ISO 9001/2 in all of
its manufacturing plants. During 1997 the German facility achieved ISO 9001
accreditation and similar plans are now in place for its Chinese plant. Cost
competitiveness programs were successful in 1999 and 1998 and as a result
margins were maintained in the face of tough price competition. Also, overhead
reductions, particularly in the UK have enabled the Company to trim its cost
base and mitigate the effect of reduced volumes. In terms of delivery, the
Company's UK plants dramatically improved their reliability in meeting promised
delivery times during the year. Programs are in place to accelerate the rate of
new product development in the immediate future.
The Company has also developed it's strategy for future growth along three key
dimensions :
First by offering the best global supply chain capability to the world's shoe
manufacturers and specifiers. In this regard the Company began implementation of
a Company-wide enterprise resource planning system in 1998 and this has
continued in 1999. This facility will uniquely allow the Company to partner
global footwear brands as well as offering enhanced local service by leveraging
the global resources available to the Company.
Second, by using new materials technologies to develop products with perceivable
consumer benefits, particularly in the areas of `comfort' and `fit'. Efforts
have been focussed on developing innovative new product concepts aimed, at the
first instance, in strengthening the Company's image as an innovator in the eye
of shoe designers worldwide.
Third, by acquiring "bolt-on" business to accelerate the growth of the Company.
The Company believes there is significant potential to add value by acquiring
smaller companies with complementary products which can then grow through by
accessing the Company's global customer base and support capabilities.
The Industry
SATRA, the leading trade association in the footwear industry, projects that the
industry will continue to enjoy steady growth at a compound annual growth rate
of approximately 3% through 2005 due to favorable demographic trends, including
continued population and economic growth, which increase the demand for and
consumption of shoes. The Company believes that the growth rate for its products
is higher, as footwear manufacturers produce more footwear that utilizes
structural materials to improve the quality and durability of shoes. In
addition, the Company believes that manufacturers increasingly utilize
structural products such as the Company's, which allow for environmentally
conscious production processes.
As the worldwide footwear industry has grown, there has been a shift in
production capacity to Asia, primarily to capitalize on low labor costs. Asia's
share of global production increased from 61% in 1991 to 72% in 1999, and it is
projected by SATRA to increase to 75% in 2005. Asia currently has around 57% of
the worlds population. The Company is well positioned with its production and
marketing presence in the region.
6
The structural footwear materials industry is highly fragmented, with very few
companies operating beyond a national or regional level. While the footwear
manufacturing industry is also fragmented, there is a growing trend towards
globalization as shoe designers and branded footwear companies, which outsource
the manufacturing of their footwear, increasingly seek a global solution to
their supply and specification requirements. The Company has been able, and
believes it is well poised to continue, to take advantage of this trend by
providing its customers with high quality, state-of-the-art products and
servicing their requirements in each significant market through its worldwide
distribution network.
Products and Markets
The Company's products are designed to meet its customers' needs for structural
footwear material. The Company offers technical support, materials design and
customized production spanning the complete process from specification of
materials to the production of high volume products.
The Company's principal products are materials for the production of insoles and
stiffeners. The Company also produces or distributes linings, lasts, steel
shanks, tacks, nails, adhesives, steel toe caps, midsoles and other small
footwear components, together with certain niche industrial products unrelated
to the footwear manufacturing industry. On February 29, 2000 the Company
acquired Crispin Dynamics a UK based company. Management believe Crispin
Dynamics is the global market leader in computer aided design software for the
footwear industry.
Insoles. Insoles are manufactured either from wood pulp ("cellulose insoles") or
synthetic fibres ("non-woven insoles") both of which are combined with latex in
a saturation process. The "Strobel" method is particularly suited to the
manufacture of athletic shoes where the sole itself provides structural support
and allows minimal wastage of costly upper material. As a result, sales of
non-woven insoles, which are particularly suited to the Strobel method have
grown significantly over the last few years, and are expected to continue to
increase at a higher rate than the cellulose insole market. Nevertheless, sales
of everyday footwear, which typically use cellulose insoles, remain close to 60%
of the overall market, driving demand for one of the Company's core products. In
1999, total sales of insoles were (pound)52.7 million, representing 42% of
sales, with the substantial majority of such sales representing cellulose
insoles.
Stiffeners. Toe and heel stiffeners are designed to provide a range of different
stiffness, shape, support and feel characteristics for the toe and heel area of
a shoe, known as "toe puffs" or "box toes" and "counters". Stiffeners are among
the most technically complex components of a shoe, with the products being made
from a wide range of raw material and process combinations, utilizing most of
the Company's core manufacturing technologies. The Company's more
environmentally sound thermoplastic stiffeners are more attractive to
manufacturers than a chemical solvent based alternative. The Company's
stiffeners are also ideal for more complex athletic shoes, which require
sophisticated stiffeners given certain sports' needs for rigid footwear. In 1999
total sales of stiffeners were (pound)22.9 million, representing 18% of sales.
Other Footwear Materials. The Company also produces or distributes a wide range
of other shoe construction materials. These include shoe lining material sold
under the "Aquiline" brand name and products produced by the Unifast division
which sells steel shanks, tacks, nails, shoe consumables and accessories, such
as reinforcing tapes, eyelets and adhesives. In 1999, total sales of these
footwear materials products were (pound)19.8 million, representing 17% of sales.
Industrial Products. The Company manufactures products for applications which
are not associated with the footwear industry but which require similar
manufacturing processes to the Company's core technologies. These niche products
span the cellulose, non-woven and
7
Unifast production areas. Industrial products produced using cellulose
technology include materials for automotive air fresheners and stiffeners for
baseball caps. The non-woven production process has been adapted for use in high
performance air filtration applications and in speciality medical dressings. The
Unifast division utilizes its tack and nail manufacturing capacity to produce
machine-applied carpet gripper pins and ballistic nails for industrial use. In
1999, total sales of industrial products were (pound)13.2 million, representing
10% of sales.
Component Products. The Company acquired Esjot during the year, a company that
manufactures steel toe caps and midsoles for the safety footwear market. As well
as the steel toe caps and midsoles `metal products' the component division has
sales of outer soles, lasts, heels and toe pieces and crepe `plastic products'
manufactured by Cornwell Industries Ltd. In 1999, the total sales of component
products were (pound)16.3 million, representing 12% of sales. Management
believes that sales by this division will grow in the year 2000, primarily as a
result of the acquisitions made during 1999.
Shoe Machinery Products. In Australia, Mexico and New Zealand the Company
distributes shoe manufacturing machinery and associated products produced
primarily by the Company's former shoe Machinery business. In 1999, this
activity contributed sales of (pound)1.7 million representing 1% of sales.
Customers and Markets Served
The Company has three primary customer types: branded footwear companies, major
manufacturers producing footwear under contract for other firms, and smaller,
independent producers. The Company also sells its products to distributors and
converters (companies that convert the Company's products to the actual product
specification and layout required by the end shoe manufacturer) as well as
customers for the Company's niche market industrial products.
The materials manufactured by the Company can be found in footwear produced by
the world's leading branded footwear companies. Branded footwear companies
generally produce a detailed specification for their shoes including a list of
approved materials suppliers. Large footwear manufacturers, manufacturing under
contract for these branded footwear companies, select their preferred footwear
materials supplier from the specified list. As a global partner to many branded
footwear companies, the Company supplies its products as the preferred supplier
for that customer. In other cases, the Company's products are supplied to
subcontractors in circumstances where the branded shoe company is unaware of the
origin of the materials being used. When footwear is not required to be produced
according to a prescribed specification, manufacturers will source independently
from materials suppliers. The Company seeks to develop close relationships with
its customers and, in particular, to become involved in assisting customers in
the design of new end-products where this is a feature of the customer's
business.
The Company believes that it is included on its customer's specification lists
due to its reputation for a consistently high quality product. The Company's
local presence and support is essential to its developing strong relationships
with both major and smaller manufacturers, and to ensuring that local factory
manufacturers follow the specifications of their customers. The Company believes
that the strength of its customer relationships is a key competitive advantage
at all levels. The ability to push demand for its products from branded shoe
companies, while also pulling demand from individual shoe factories, is another
competitive advantage which the Company believes would require considerable
investment on the part of competitors to replicate.
8
Sales and Distribution
The Company believes that it is uniquely placed in the highly fragmented
footwear materials industry in having a truly global presence with both branded
shoe companies and direct users of its products. The Company employs over 330
marketing, distribution and technical support personnel and uses over 150 agents
and over 65 distributors. This extensive distribution network allows the Company
to sell its products effectively throughout more than 90 countries, and to cover
all of the world's major footwear manufacturing regions. The Company supports
its strong distribution capability through its network of 57 field warehouses.
Distributors and agents are supported by regionally-based sales and technical
specialists allowing the Company to deliver high levels of customer service
locally in its significant markets. The Company's global presence enables it to
provide price, quality and delivery on a world-wide basis.
Manufacturing
The Company has an expertise in tailoring a variety of distinct manufacturing
processes to produce innovative technical products for the footwear industry.
The Company's primary manufacturing process is the treatment of cellulose and
synthetic fibres with latex to produce insoles. The Company further processes
the synthetic products to produce stiffeners. The Company also processes metal
strip and wire to produce shanks, tacks and nails and has now acquired a company
that manufacturers steel toe caps and midsoles from steel.
The large majority of the Company's insole and stiffener material is produced in
sheet or roll form to facilitate transport and shipment. This material then
requires further conversion before use in footwear manufacture. Such conversion
consists of cutting or molding the product to specification. The labor-intensive
conversion process is typically carried out by third party converters. The
Company converts a small proportion of its material itself as a service to its
customers.
Cellulose Manufacturing Process. The cellulose manufacturing process is used
primarily for the production of insole material. In a process similar to the
manufacture of paper, pulp is combined with synthetic latex into a saturated
board which is then dried and cured so that the latex acts as a binder for the
board. Trace additives and coatings are used to develop the required properties
for different grades of product. Cellulose insole material may require further
treatment with coatings of polymeric film or laminating with layers of foam to
enhance waterproofing, comfort and other characteristics. The Company does not
perform these processes in-house, but rather outsources them or sells its
cellulose products on for further processing.
Synthetic Non-Woven Manufacturing Process. Stiffeners and a portion of the
Company's insoles and other products are produced using synthetic, non-woven
materials. The primary production begins with the processing of polyester and
other synthetic fibres to produce felt of various grades and thickness. As a
non-woven process, the synthetic fibres are intertwined rather than woven. In
some cases, this is followed by heat treatment. Further stages involve
impregnation with synthetic rubbers and may include coloring and finishing,
which includes printing, splitting and sueding. The reels of felt are
impregnated and rolled to the correct gauge and an adhesive coating is added to
one or both sides. The material is then cut into sheets or rolls.
Specific, non-woven processes are occasionally outsourced to supplement in-house
production, particularly in the area of fabric manufacturing. All outsourcing
takes place with established supplier links and is usually for short periods
only.
Manufacturing of Tacks, Nails and Shanks. The Unifast division manufactures
tacks, nails and steel shanks. Tacks and nails are made from rolls of wire which
are punched by a die
9
and then cut to form the tacks and nails. A sophisticated manufacturing process
is required to make the tacks and nails suitable for usage in high speed
machines. Further processing may include threading, heat treating or plating.
Shanks are stamped and formed from rolls of sheet steel in thousands of
different shapes, heat treated, washed and packed.
Steel Toe Caps and midsoles manufacturing process. These products are a new
addition in 1999 to those already supplied by Texon. The toe caps are made from
steel, which is stamped by machine into caps suitable for both left and right
feet. This stamping process involves cutting the steel, drawing it deep and
flanging it. After stamping, the caps are hardened by furnace, then shot blast
to provide a suitable surface for an epoxy coating. Midsoles are also cut from
steel, then deburred, tempered and coated for strength and stiffness.
Manufacturing of Other Industrial Products. The Company has developed expertise
within its core technologies which has enabled it to make a number of unique
products for industrial applications outside of footwear manufacturing. These
products utilize the Company's manufacturing skills and technical expertise to
engineer innovative solutions for other industries. Products include materials
for vehicle air fresheners, imitation leather goods, speciality medical
dressings and filtration products.
Intellectual Property
The Company utilizes trademarks on nearly all of its products, and believes
having such distinctive trademarks is an important factor in creating and
maintaining the strong market position for its goods and services. This further
serves to identify the Company and distinguish its goods from those of its
competitors. The Company considers the "Texon", "Aquiline", "Tufflex", "Formo",
"IVI", "Unifast", and "Implus" trademarks to be among its most valuable assets,
and has registered trademarks in over 80 countries. The Company is currently
registering other trademarks as a result of its acquisitions in 1999. On
February 29, 2000 the Company acquired the assets and business of Crispin
Dynamics along with the "Crispin" registered trademark. The Company's policy is
to protect vigorously its trademarks against infringement. The Company does not
believe it is dependent to any significant extent upon any single or related
group of patents, licenses or concessions.
Item 2. Description of Property
Land Disposal
The land and buildings owned by Texon UK Ltd (a wholly owned subsidiary) and
situated in Leicester, UK were sold to a property developer on October 9, 1998.
The terms of the sale include a sale price of (pound)8.0 million, consisting of
(pound)4.0 million paid in cash and a (pound)4.0 million interest bearing loan
note issued by the developer. As an incentive to the Company's tenant to sign a
long term rental agreement (pound)1.0 million of the loan note has been assigned
to them. The Company believed that, as the loan note did not have a fixed
repayment date, it was not prudent to recognize the full (pound)3.0 million gain
on disposal immediately. As such, (pound)1.0 million has been included in the
Company's results for the year ended December 31, 1999, and (pound)1.0 million
was recognized in 1998, representing management's estimate of net realizable
value of the loan notes at these dates. The Company pays an annual rent of
(pound)0.5 million for the use of its offices and factory located on this site.
10
In addition to its executive offices in Leicester, U.K. the Company operates
seventeen major facilities in eight countries with a total of approximately
170,814 square meters, of which the Company currently owns approximately 63,406
square meters and leases 107,408 square meters. These facilities are as follows:
Size Description of
Location (approx sq.mtrs) Owned/Leased Products Manufactured
---------------- ------------ ---------------------
Europe
Leicester, U.K. 16,000 Leased Tack and nails; steel shanks;
Conversion of stiffeners;
Industrial product components
12,728 Leased Component products
6,131 Leased Non-woven materials
Component products
Skelton, U.K. 18,652 Leased Non-woven materials
Mockmuhl. Germany 19,150 Owned Cellulose products
Ripatransone, Italy 5,630 Owned Cellulose products
Saverne, France 9,887 Owned Component products
17,075 Leased Component products
Dortmund, Germany 784 Owned Component products
33,922 Leased Component products
Milan, Italy 4,693 Owned Component products
United States
Russell, Massachusetts 14,220 Owned Cellulose products
Asia
Foshan, China 7,742 Owned Cellulose products
Australasia
Geelong, Australia 2,900 Leased Component products
Adelaide, Australia 1,300 Owned Component products
The Company leased a manufacturing site in Melbourne, Australia with the
acquisition of Claravon Limited but this was terminated at the year ended
December 31, 1999.
The Company continues to invest for the future with capital expenditures of
(pound)3.7 million and research and development expenditures of (pound)1.7
million during the year ended December 31, 1999.
Item 3. Legal Proceedings
From time to time, the Company is involved in routine litigation incidental to
its business. The Company is not party to any pending or threatened legal
proceeding which the Company believes would have a material adverse effect on
the Company's results of operations or financial condition.
11
Item 4. Control of Registrant
PRINCIPAL SHAREHOLDERS
The following table furnishes information as to the beneficial ownership of the
outstanding Voting Ordinary Shares by (i) each person known by the Company to
beneficially own more than 10% of the outstanding Voting Ordinary Shares and
(ii) all directors and officers of the Company as a group.
Amount of Beneficial
Ownership
-----------------------
Number of Percentage
Shares Owned
---------- ----------
Principal Shareholders
Apax Funds Nominees Ltd 2,852,776 75.95
All directors and officers as a group(1) (3 persons) 3,172,776 84.47
(1) Includes 2,852,776 Voting Ordinary Shares owned by funds advised by
Apax. A non executive director of the Company is a director of Apax
Partners & Co. Strategic Investors Limited and Apax Partners & Co.
Ventures Limited. The non executive director disclaimed beneficial
ownership of the shares held by funds advised by Apax.
Item 5. Nature of Trading Market
The Company's Series A Senior Notes due 2008 (the "Notes") are eligible for
trading in the Private Offering, Resale and Trading through Automated Linkages
(PORTAL) Market, the National Association of Securities Dealers' screenbased,
automated market for trading of securities eligible for resale under Rule 144A.
The Company does not intend to list the Notes on any national securities
exchange other than the Luxembourg Stock Exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation System. Accordingly, no assurance can be given that an active market
will develop for any of the Notes or as to the liquidity of the trading market
for any of the Notes. If a trading market does not develop or is not maintained,
holders of the Notes may experience difficulty in reselling such Notes or may be
unable to sell them at all. If a market for the Notes develops, any such market
may be discontinued at any time. If a trading market develops for the Notes,
future trading prices of such Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition of the Company, the Notes may trade at a discount from
their principal amount.
Item 6. Exchange Control and Other Limitations Affecting Security Holders.
There are no limitations under UK law, decrees or regulations, as currently in
effect, that would affect the transfer of capital, interest or other payments to
non-UK resident holders of the Senior Notes, except as set forth in "Item 7 -
Taxation".
12
Item 7. Taxation
The following discussion is a summary of certain U.S. federal income tax
consequences of the ownership of Notes by U.S. Holders (as defined below). The
summary is not a complete analysis or description of all potential tax
consequences to such holders and does not address all tax considerations that
may be relevant to all categories of potential purchasers (such as dealers in
securities or commodities, tax-exempt investors, investors whose functional
currency is not the U.S. dollar and other investors subject to special rules,
including investors holding Notes as part of the currency hedge, a straddle, a
"synthetic security", or other integrated investment (including a "conversion
transaction") comprised of a Note and one or more other investments).
Holders of Notes are urged to consult their own tax advisors concerning the U.S.
federal, state and local tax consequences of the purchase, ownership and
disposition of Notes.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), judicial decisions, administrative pronouncements, and existing and
proposed Treasury regulations, changes to any of which after the date hereof
could apply on a retroactive basis and affect the tax consequences described
herein.
Taxation of Interest. While the Notes continue to be in bearer form and are
listed on a recognized stock exchange (as defined by section 841 Taxes Act 1988)
interest on the Notes may be paid without withholding for income tax provided:
(a) the person by or through whom the payment is made is not in
the U.K.;
(b) the payment is made by or through a person who is in the U.K.
and either of the following requirements is met
(i) the person receiving the interest is beneficially
entitled to the interest, beneficially owns the Notes
and is not resident in the U.K. for tax purposes; or
(ii) the Notes are held within a recognized clearing
system within the meaning of section 841A Taxes Act
1988 (The Euroclear Operator and Cedel have each been
designated as a recognized clearance system for this
purpose).
and the person by or through the payment is made has received a
declaration to that effect in the form required by law and the Inland
Revenue has not issued a notice to the person by or through the payment
is made stating that they consider that the above conditions have not
been satisfied.
If the above requirements are not satisfied, interest will be paid under
deduction of income tax at the lower rate subject to any direction to the
contrary by the Inland Revenue in respect of any relief which may be available
pursuant to the provisions of any applicable double taxation treaty.
The interest on a Note is derived from the U.K. and accordingly will be
chargeable to U.K. tax by direct assessment even if the interest is paid without
deduction. Interest on the Notes received without deduction or withholding will
not be chargeable to U.K. income tax in the hands of a holder of a Note who is
not resident in the U.K. unless the holder of the Note
13
carries on a trade, profession or vocation within the U.K. through a UK branch
or agency in connection with which the interest is received or to which the
Notes are attributable.
Where interest on the Notes has been paid under deduction of lower rate income
tax. Noteholders who are not resident in the U.K. may be able to recover all or
part of the tax deducted if there is an appropriate provision under an
applicable double taxation treaty between the country in which they are resident
for tax purposes and the U.K. A U.S holder who is entitled to the benefit of the
U.S./U.K. double taxation treaty would normally be able to recover in full any
tax withheld by making the appropriate claim. A claim may be made by a United
States holder prior to the interest being paid and if accepted the Inland
Revenue will authorize subsequent payments to be made without withholding. In
the case of an advance claim such a claim should be made well in advance of the
interest payment date and in the case of a claim for repayment well before the
end of the appropriate limitation period (six years after the end of the U.K.
year of assessment to which the interest relates).
The term "U.S. Holder" means a beneficial owner of a Note that (a) purchased the
Note in the offering, (b) holds the Note as a capital asset and (c) is, for U.S.
federal income tax purposes, (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or under
the laws of the United States or any political subdivision thereof or (iii)
otherwise subject to U.S. federal income tax on a net income basis in respect of
the Notes.
Payments of Interest. The gross amount of interest paid on a Note will be
includible in the gross income of a U.S. Holder at the time it is received or
accrued, depending on the Holder's method of accounting for U.S. federal income
tax purposes, under the rules described below. The Notes are not anticipated to
be issued at a discount that is not treated as de minimis for U.S. federal
income tax purposes, and therefore the Notes are not anticipated to be issued
with any original issue discount. This treatment is based upon the assumption
that no liquidated damages will be paid on account of a Registration Default.
The United States Internal Revenue Service could, however, assert a different
position, which could result in the Notes being treated as issued with original
issue discount, and thereby affecting the timing and character of interest
income of U.S. Holders.
In the case of a cash method U.S. Holder, the amount of interest income in
respect of any interest payment will be determined by translating such payment
into U.S. dollars at the spot exchange rate in effect on the date such interest
payment is received. No exchange gain or loss will be realized with respect to
the receipt of such interest payment, other than exchange gain or loss that is
attributable to any difference between the exchange rate utilized to translate
the Deutsche Mark payment into U.S. dollars by the Paying Agent and the spot
exchange rate in effect on the date such interest payment is received or, in the
case of a U.S. Holder that elects to receive payments on the Notes in Deutsche
Marks, that is attributable to the actual disposition of the Deutsche Marks
received. Any such exchange gain or loss will generally be treated as ordinary
income or loss. In the case of an accrual method U.S. Holder, the amount of any
interest income accrued during any accrual period will generally be determined
by translating such accruals into U.S. dollars at the average exchange rate
applicable to the accrual period (or, with respect to an accrual period that
spans two taxable years, at the average exchange rate for the partial period
within the taxable year). Such a U.S. Holder will additionally realize exchange
gain or loss with respect to any interest income accrued on the date such
interest income is received (or on the date the Note is disposed of) in an
amount equal to the difference between (x) the U.S dollars received in respect
of such interest payment or, in the case of a U.S. Holder that elects to receive
payments on the Notes in Deutsche Marks, the amount determined by converting the
amount of the payment received into U.S. dollars at the spot exchange rate in
effect on the date such payment is received and (y) the amount of interest
income accrued in respect of such payment according to the rule set forth in the
prior sentence. Notwithstanding the rules described above, an accrual method
U.S. Holder may alternatively make an election to apply a "spot accrual
convention" that effectively allows such U.S. Holder to translate accrued
14
interest into U.S. dollars at a single spot exchange rate, as set forth in
Treasury regulations ss. 1.988-2(b)(2)(iii)(B). The amount of interest income
received by a U.S. Holder as set forth in this paragraph will generally be
treated as "passive income" or, in the case of certain U.S. Holders, "financial
services income", from sources outside the United States, and any foreign
currency exchange gain or loss as set forth in this paragraph will generally be
treated as realized from sources within the United States.
Sale, Retirement and Other Disposition of the Notes. Upon the sale, exchange or
retirement of a Note, a U.S. Holder will generally recognize a taxable gain or
loss equal to the difference between the amount realized (not including any
amounts received that are attributable to accrued and unpaid interest, which
will be taxable as interest income, and exchange gain or loss as set forth above
and in this paragraph) and the U.S. Holder's tax basis in the Note. A U.S.
Holder's tax basis in a Note generally will be its cost, which generally will be
calculated by reference to the spot exchange rate for Deutsche Marks in effect
on the date of purchase. The value of any amount received by a U.S. Holder on
retirement of the Note generally will be determined by reference to the spot
exchange rate for Deutsche Marks in effect on the date the Note is retired. Gain
or loss recognized on the sale or retirement of a Note (determined as described
above) will be capital gain or loss and will be long-term gain or loss if the
Note was held for more than one year at the time of the disposition. U.S.
Holders that are individuals may be eligible for preferential treatment for net
capital gains, particularly with respect to capital assets that are held for
more than 18 months at the time of disposition. Gain recognized by a U.S. Holder
generally will be treated as U.S. source income. U.S. Holders should consult
their tax advisors regarding the source of loss recognized on the sale, exchange
or retirement of a Note. Notwithstanding the foregoing, gain or loss recognized
by a U.S. Holder on the sale, exchange or retirement of a Note generally will be
treated as ordinary income or loss to the extent that the gain or loss is
attributable to changes in Deutsche Mark exchange rates during the period in
which the U.S. Holder held the Note or, in the case of a U.S. Holder that does
not elect to receive payments on the Notes in Deutsche Marks, to the extent of
any difference between the amount realized on retirement of the Note calculated
by reference to the spot exchange rate for Deutsche Marks in effect on the date
of retirement and the actual amount of U.S. dollars received. In general, such
foreign currency gain or loss will be treated by a U.S. Holder as realized from
sources within the United States.
Information Reporting and Backup Withholding. In general, information reporting
requirements will apply to certain payments of principal and interest paid in
respect of the Notes and to the sales proceeds of Notes paid to U.S. Holders,
other than certain exempt U.S. Holders (such as corporations). A 31% backup
withholding tax will apply to such payments if the U.S. Holder fails to provide
a taxpayer identification number or certification of foreign or other exempt
status or to comply with applicable requirements of the backup withholding
rules. Any amounts withheld under the backup withholding rules will be eligible
for credit against such U.S. Holder's U.S. federal income tax liability,
provided the required information is furnished to the Internal Revenue Service.
15
Item 8. Selected Historical Consolidated Financial Information and Other Data
The following table presents as of the dates and for the periods indicated
selected historical consolidated financial information of the Company. The
historical consolidated financial information of USM (Holdings) Limited for the
period from January 1, 1995 to April 24, 1995, and of United Texon Limited for
the period from April 25,1995 to December 31, 1995, and for the years ended
December 31, 1996 and 1997 and of Texon International plc for the years ended
December 31, 1997, 1998 and 1999 has been derived from the audited consolidated
financial statements of the Company (including the Machinery business) included
elsewhere herein.
The information contained in the following tables should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's historical Consolidated Financial Statements and
related notes included elsewhere in this document.
The selected historical consolidated statement of operations data for the five
year period ended December 31, 1999 reflects the results of operations of the
Materials business only. Historical consolidated information set forth in the
table under "Other Data" for these periods also reflects the results of the
Materials business only. The Texon International plc historical consolidated
balance sheet data as of December 31, 1999, 1998 and 1997 reflects the financial
position of the Materials business only. Historical consolidated balance sheet
data for all other periods reflect the financial position of both the Materials
business and the Machinery business as U.K. GAAP does not require the
restatement of prior year balance sheets for discontinued operations.
The Company was incorporated on October 9, 1997 and on December 23, 1997 entered
into an acquisition agreement with the shareholders of United Texon Limited
under which the Company agreed to acquire the entire issued share capital of
United Texon Limited. Under the terms of the agreement, the Company had control
of the financial and operational management of United Texon Limited effective
December 31, 1997. The Company had no operations from its incorporation on
October 9, 1997 to December 31, 1997 consequently there was no consolidated
profit and loss account for that period.
United Texon Limited was incorporated on January 5, 1995. On April 24, 1995
United Texon Limited acquired USM (Holdings) Limited. In 1995, Apax Partners &
Co. Strategic Investors Limited and Apax Partners & Co. Ventures Limited
(together "Apax"), led an institutional buy-out of USM (Holdings) Limited and
its subsidiaries, which at that time operated both the footwear materials
business carried on by the Company and a machinery business which sells and
services machines used to manufacture shoes. During 1997, the Materials business
and the Machinery business were separated into two groups and, as of December
31, 1997, were demerged.
The Company prepares its Consolidated Financial Statements in accordance with
U.K. GAAP which differs in certain material respects from U.S. GAAP. These
differences have a material effect on net income/(loss) and the composition of
shareholder's deficit and are summarized in Note 30 to the Consolidated
Financial Statements of the Company included elsewhere in this document.
16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA
USM United Texon Limited Texon International plc
(Holdings)
Limited
------------ --------------------------------------- -----------------------
Historical Historical
----------------------------------------------------- -----------------------
Period from Period from Year Ended Year Ended Year ended Year ended
January 1, April 25, December December December December
to April to December 31, 1996 31, 1997 31, 1998 31, 1999
24, 1995 31, 1995
---------- ---------- ---------- ---------- ---------- ----------
(Pounds sterling in thousands)
Statement of Operations Data:
Amounts in accordance
with U.K. GAAP:
Sales turnover(a)........... 38,401 77,295 128,602 122,343 110,880 126,627
Cost of goods sold.......... 26,064 54,645 84,321 79,802 72,193 84,083
Gross profit................ 12,337 22,650 44,281 42,541 38,687 42,544
Operating expenses(b)&(c)... 8,409 16,717 28,001 32,932 26,106 29,688
Income from
continuing operations..... 3,928 5,933 16,280 9,609 12,581 12,856
Exceptional items(c)........ - 1,634 - - (957) (1,000)
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes
and interest.............. 3,928 4,299 16,280 9,609 13,538 13,856
Interest expense, net....... 2,972 7,106 10,044 10,199 9,147 10,532
Amortization of
deferred financing
costs(f).................. - - - - 682 788
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes
and minority interests.... 956 (2,807) 6,236 (590) 3,709 2,536
Income tax expense.......... 367 682 2,387 1,492 1,303 1,754
---------- ---------- ---------- ---------- ---------- ----------
Income before minority
Interests................. 589 (3,489) 3,849 (2,082) 2,406 782
Minority interests in
(earnings)/losses(g)...... 68 (109) (293) (305) (184) (206)
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss)
continuing operations..... 657 (3,380) 3,556 (2,387) 2,222 576
Net income/(loss)
discontinued operations... 307 (11,672) (4,285) (1,931) - -
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss)........... 964 (15,052) (729) (4,318) 2,222 576
========== ========== ========== ========== ========== ==========
Other Data:
Amounts in accordance
With U.K GAAP:
Depreciation and
amortization.............. 805 1,424 2,161 2,355 1,910 3,500
Capital expenditures........ 496 1,455 3,188 1,722 2,038 3,720
Ratio of earnings to
fixed charges(e).......... 1.3x 0.6x 1.6x 0.9x 1.5x 1.3x
Shortfall of earnings to
fixed charges............. - (2,807) - (590) - -
See notes to Selected Historical Consolidated Financial Information and Other
Data.
17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA (CONTINUED)
Texon International plc
------------------------------------------
Historical
------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
---------- ---------- ----------
(Pounds sterling in thousands)
Statement of Operations Data:
Amounts in accordance with U.S. GAAP:
Sales turnover(a)................................... 122,343 110,880 126,627
Cost of goods....................................... 79,802 72,193 84,083
---------- ---------- ----------
Gross profit........................................ 42,541 38,687 42,544
Operating expenses (including amortization of
goodwill)(b) and (c)................................... 36,183 27,435 29,942
---------- ---------- ----------
Income from continuing operations(d)................ 6,358 11,252 12,602
Interest expense, net............................... 10,199 9,147 10,532
Amortization of deferred financing costs(f)......... - 682 788
---------- ---------- ----------
Income before taxes and minority interests.......... (3,841) 1,423 1,282
Income tax expense.................................. 1,508 1,277 1,783
---------- ---------- ----------
Income before taxes, extraordinary items and
minority interests..................................... (5,349) 146 (501)
Minority interests in (earnings) losses(g).......... (305) (184) (206)
---------- ---------- ----------
Net loss from continuing operations................. (5,654) (38) (707)
========== ========== ==========
Other Data:
Amounts in accordance with U.S. GAAP:
Depreciation and amortization....................... 6,412 5,850 7,547
Capital expenditures................................ 1,722 2,038 3,720
Ratio of earnings to fixed charges(e)............... 0.6x 1.1x 1.1x
Shortfall of earnings to fixed charges.............. (3,841) - -
See Notes to Selected Historical Consolidated Financial Information and Other
Data.
18
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA (CONTINUED)
USM United Texon Limited Texon International plc
(Holdings)
Limited
---------- ------------------------- ---------------------------------------
Historical Historical
-------------------------------------- ---------------------------------------
As of April As of As of As of As of As of
24, 1995 December December December December December 31,
31, 1995 31, 1996 31, 1997 31, 1998 1999
---------- ---------- ---------- ---------- ---------- ----------
Restated
(Note 16)
(Pounds sterling in thousands) (Pounds sterling in thousands)
Consolidated Balance Sheet
Data:
Amounts in accordance with
U.K. GAAP:
Total assets...................... 121,770 114,628 99,386 54,315 49,927 86,024
Total debt........................ 92,967 104,059 87,221 87,660 90,539 107,608
Obligations under finance lease... 581 509 1,092 922 1,245 1,487
Total shareholder's deficit....... (51,613) (70,588) (66,066) (68,629) (71,019) (59,882)
Texon International plc
---------------------------------------
Historical
---------------------------------------
As of As of As of
December December December 31,
31, 1997 31, 1998 1999
---------- ---------- ----------
(Pounds sterling in thousands)
Consolidated Balance Sheet Data:
Amounts in accordance with U.S. GAAP:
Total assets......................................................... 121,346 121,250 148,668
Total debt........................................................... 87,660 90,539 112,656
Total shareholders' (deficit)........................................ (1,792) (10,336) (2,350)
See Notes to Selected Historical Consolidated Financial Information and Other
Data.
19
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
(a) Sales turnover includes amounts from transactions with the discontinued
business to reflect the total sales of the Materials business. These
amounts have been eliminated in the consolidated financial statements.
(b) Operating expenses for the year ended December 31, 1997 include certain
non-recurring expenses totalling (pound)5.6 million. These expenses
include (pound)1.7 million relating to fees incurred in connection with
a contemplated sale of the Materials business, the sale was abandoned
by the shareholders in October 1997, (pound)1.1 million in refinancing
costs and (pound)2.8 million as the cost of the exercise of management
share options on completion of the Offering. Operating expenses for
year ended December 31, 1999 include (pound)0.3 million (1998
(pound)0.8 million) of costs in connection with reorganisation of the
business.
(c) Exceptional items under U.K. GAAP for the period from April 25, 1995 to
December 31, 1995 relate to restructuring costs for employee severance
costs of (pound)1,634,000. The exceptional items for the periods ended
December 31, 1999 and 1998 refer to the profit on disposal of property
in Leicester, U.K. net of costs. This item is discussed in more detail
under Item 2 of this report.
In addition exceptional restructuring costs of (pound)266,000 (1998
(pound)819,000) have been charged to operating profit.
(d) Income from continuing operations under U.S. GAAP is arrived at after
taking into account the differences relating to the amortization of
goodwill, the treatment of pensions and other post-retirement benefits,
the calculation of property profits, the United Texon Limited
acquisition costs and the extraordinary debt extinguishment costs as
set out in Note 30 to the Consolidated Financial Statements included
elsewhere herein. The continuing operations portion of the goodwill
amortization differences for the years ended December 31, 1999, 1998
and 1997 amount to (pound)4,047,000, (pound)3,940,000 and
(pound)4,057,000 respectively. The continuing operations portion of the
difference relating to pensions and post-retirement benefits for the
years ended December 31, 1999, 1998 and1997 amounts to
(pound)2,782,000, (pound)(2,649,000) and (pound)162,000 respectively.
The continuing operations portion of the difference relating to United
Texon Limited acquisition costs for the year ended December 31, 1997
amounts to (pound)500,000. The continuing operations portion of the
difference relating to the extraordinary debt extinguishment costs for
the year ended December 31, 1997 amounts to (pound)1,144,000.
(e) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as net income before provision for income taxes,
plus fixed charges. Fixed charges consist of interest expense on all
indebtedness and one-third of rental expense on operating leases,
representing that portion of rental expenses deemed by the Company to
be attributable to interest.
(f) Under U.K. GAAP, costs associated with the issuance of debt are
deducted from the amounts raised for the purposes of balance sheet
presentation and amortized over the life of the debt.
(g) The minority interest calculation in based on the income before tax
(earnings) of the Foshan operation.
20
Item 9. Managements Discussion And Analysis Of Financial Condition And Results
Of Operations.
Comparison of Year ended December 31, 1999 to year ended December 31, 1998
Sales Turnover. Sales for the year ending December 31, 1999 were (pound)126.6
million, an increase of (pound)15.7 million or 14.2% when compared to the same
period in 1998. On a constant currency basis sales increased by 13.8% in 1999
compared to 1998. Management believes this increase was primarily due to the
recent acquisitions by the Company of Cornwell, Esjot, Chamberlain Phipps, and
Claravon. Cornwell Industry's sales from the date of acquisition to the period
ended December 31, 1999 were (pound)7.6 million. The sales by Esjot since its
acquisition on July 22, 1999 were (pound)7.3 million, sales by Chamberlain
Phipps since its acquisition in September, 1999 were (pound)1.0 million and
Claravon had sales of (pound)1.4 million since its acquisition on October 4,
1999. After subtracting the sales made by the Company's recent acquisitions,
sales for the year ended December 31, 1999 were 1.4% lower than those of the
similar period in 1998.
Although the Company believes that footwear production in Europe continues to
decline due to the transfer of production to the Far East, sales in Europe
increased by 13.8% to (pound)62.3 million mainly as a result of the recent
acquisitions. Cornwell Industries, Esjot and Chamberlain Phipps are all based in
Europe and predominately sell to that market. Sales in Asia increased by 30.3%
to (pound)33.7 million due to the sales initiatives for stiffener products as
well as strong market share gains made in China for insoles. In the Americas,
sales declined by 12.1% to (pound)18.2 million, predominantly in Brazil where,
Management believes, the devaluation of the Real weakened the Company's
competitive position as compared to local manufacturers. Sales in Australasia
increased by 38.6% or (pound)1.8 million, primarily due to the acquisition of
Claravon on October 4, 1999 with sales of (pound)1.4 million. Sales to the rest
of the world increased by (pound)0.8 million from the comparable period in 1998
due primarily to sales in India where the Company has appointed a new
distributor to support the warehouse operation which commenced activity in 1998.
The Company experienced difficult trading conditions in the footwear industry
during the first half of the year ended December 31,1999. However, during the
second half sales levels improved with sales growth, excluding acquisitions, of
1%. Insole sales decreased by 4.9% to (pound)52.7 million for the year
reflecting the difficult market conditions in Europe and North America where the
Company has the majority of its insole sales. Stiffeners sales increased to
(pound)22.9 million from (pound)18.9 million for the same period in 1998. This
increase is primarily the result of the Company increasing its' market share in
sales to major athletic footwear manufacturers in Asia. Other footwear product
sales declined by 9.9% to (pound)21.5 million during 1999. These products,
although sold throughout the world, hold strong positions in the UK and some
European countries where footwear production has declined as a result of the
weak market conditions noted above. In contrast industrial product sales
increased by 3.7% to (pound)13.2 million for the year ending December 31, 1999.
Gross Profit. Gross Profit increased to (pound)42.5 million for the year ended
December 31, 1999 from (pound)38.7 million for the same period in 1998. The
increase in gross profit was primarily a result of the higher sales from recent
acquisitions made by the Company, which offset the severe price competition the
Company experienced in several markets.
Marketing and Administrative expenses. Marketing and administrative expenses
increased to (pound)29.7 million for the year ended December 31, 1999 from
(pound)26.1 million for the same period in 1998. However, these costs have
increased principally due to the expenses of the acquired businesses and the
rental costs incurred with respect to the Leicester site. During the year ended
December 31, 1999, (pound)0.3 million was included
21
for exceptional reorganisation costs as compared to (pound)0.8 million for the
same period in 1998.
Profit on ordinary activities before interest. Operating profit, after
exceptional items, increased from (pound)13.5 million for the year ended
December 31, 1998 to (pound)13.9 million for the year ended December 31, 1999.
As a percentage of sales, profit on ordinary activities before interest
excluding exceptional restructuring costs decreased from 12.9% in 1998 to 11.2%
in 1999.
Interest Expense. Interest expense including amortization of deferred financing
costs increased from (pound)9.8 million for the year ended December 31, 1998 to
(pound)11.3 million for the year ended December 31, 1999. This increase is
primarily due to the new debt incurred to finance the acquisition of Esjot
during the year. Included in the interest charge is amortization of debt
issuance costs of (pound)0.8 million for 1999 (pound)0.7 million for 1998.
Taxation. The tax charge increased by (pound)0.5 million to (pound)1.8 million
for the year ended December 31, 1999, as a result of the tax position of
companies acquired during the year, and tax losses in the United States that
have now been consumed.
Net Income/(Loss). The net income of (pound)0.6 million for the year ended
December 31, 1999, compares to a net income of (pound)2.2 million for the same
period of 1998. The variance was a result of the factors described above.
Comparison of Year ended December 31, 1998 to year ended December 31, 1997.
Sales Turnover. Sales for the year ending December 31, 1998 were (pound)110.9
million, a decline of (pound)11.4 million or 9.4% when compared to the same
period in 1997. On a constant currency basis the sales decreased by 7.1% in 1998
compared to 1997. The Company believes there are several reasons for the
decline. Sales in Europe declined by 7.4% to (pound)54.8 million partly as a
result of a reduction of European footwear production exported to Russia and a
retail sales drop in the UK, which has particularly affected UK footwear
production. Sales in Asia declined by 2.1% to (pound)25.9 million resulting from
a continuing slowdown in the global athletic footwear market and economic
uncertainty in the region. In the Americas, sales declined by 5.6% to
(pound)20.4 million, predominantly in Brazil where the Company believes that a
major footwear co-operative purchased excessive quantities in 1997 and has been
consuming the excess inventory throughout 1998. Australasia saw sales fall by
19.7% or (pound)1.3 million, on a constant currency basis, which the Company
believes is a result of the reduction in import tariffs which has damaged the
local footwear industry. Further evidence of the difficult trading conditions in
the footwear industry during the year ended December 31,1998 is apparent by
analyzing the sales by product group. Insole sales decreased by 9.8% to
(pound)55.5 million for the year. Stiffeners sales declined to (pound)18.9
million from (pound) 20.5 million for the same period in 1997, and other
footwear product sales declined by 14.7% to (pound)23.8 million during 1998. In
contrast industrial product sales increased by 2.7% to (pound)12.7 million for
the year ending December 31, 1998.
Gross Profit. Gross Profit decreased to (pound)38.7 million for the year ended
December 31, 1998 from (pound)42.5 million for the same period in 1997. As a
percentage of sales however the gross profit increased from 34.8% for 1997 to
34.9% in 1998. This increase was primarily due to continuing manufacturing
efficiencies in the production of cellulose products and the stability of the
price of pulp, the main raw material used in the production of cellulose, during
1998, more than offsetting the severe price competition the Company experienced
in several markets.
22
Marketing and Administrative expenses. At (pound)26.1 million for the year ended
December 31, 1998 marketing and administrative expenses decreased by (pound)6.8
million from the same period in 1997. However, 1998 included (pound)0.8 million
of exceptional reorganisation costs and 1997 included (pound)5.7 million of
exceptional expenses relating to fees incurred in connection with a contemplated
sale of the business, the cost of exercise of management options and refinancing
costs. Excluding these exceptional costs marketing and administrative costs
decreased by (pound)1.9 million during 1998, primarily due to the reorganisation
plan implemented in the second half of 1998.
Profit on ordinary activities before interest and taxation. Profit on ordinary
activities before interest and taxation increased from (pound)9.6 million for
the year ended December 31, 1997 to (pound)13.5 million for the year ended
December 31, 1998. When excluding the exceptional items, profit on ordinary
activities before interest and taxation decreased by (pound)0.9 million, from
the same period last year. As a percentage of sales, profit on ordinary
activities before interest excluding exceptional items increased from 12.5% in
1997 to 12.9% in 1998.
Interest Expense. Interest expense including amortization of deferred financing
costs decreased from (pound)10.2 million for the year ended December 31, 1997 to
(pound)9.8 million for the year ended December 31, 1998. However, there is no
direct comparison between these two periods due to the restructuring of the
Company's debt through the issuance of Notes in January 1998.
Taxation. The tax charge decreased by (pound)0.2 million to (pound)1.3 million
for the year ended December 31, 1998. The decrease is in part due to lower
overseas tax charges.
Net Income/(Loss). The net income of (pound)2.2 million for the year ended
December 31, 1998, compares to a net loss of (pound)2.4 million for the same
period of 1997. The variance was a result of the factors described above.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Sales turnover. Sales decreased (pound)6.3 million, or 4.9%, to (pound)122.3
million in 1997 from (pound)128.6 million in 1996. On a constant currency basis,
however, sales increased by 4.5% during 1997 from the comparable period in 1996.
Sales of insoles decreased (pound)3.6 million, or 5.5% to (pound)61.5 million in
1997 from (pound)65.1 million in 1996. On a constant currency basis, however,
insole sales increased 5.4% due to an increase in the volume of cellulose
insoles sold in the Middle East and an increase in sales of non-woven insoles in
Asia. Sales of stiffeners increased (pound)0.7 million, or 3.7%, to (pound)20.5
million in 1997 from (pound)19.8 million in 1996. On a constant currency basis,
however, sales of stiffeners increased 10.5%, mainly as a result of additional
sales volume in Asia following the Company's marketing initiative to replace
solvent stiffeners with the thermoplastic stiffeners in which the Company
specializes. Sales of other footwear materials decreased (pound)3.3 million, or
10.6%, to (pound)27.9 million in 1997 from (pound)31.2 million in 1996. On a
constant currency basis, sales volume of other footwear materials decreased by
2.0% primarily as a result of a decline in sales of tacks. Sales of industrial
products remained constant at (pound)12.4 million in both periods.
Gross Profit. Gross profit decreased to (pound)42.5 million during 1997 compared
with (pound)44.3 million in 1996. Gross profit increased to 34.8% of sales for
1997 from 34.4% for 1996. The increase was primarily due to the result of
increased manufacturing efficiency in the production of cellulose products and
increased sales volumes of higher-margin, non-woven materials to Asia for resale
into western markets.
Marketing and administrative expenses. Marketing and administrative expenses
increased by (pound)4.9 million or 17.6% to (pound)32.9 million during 1997,
from (pound)28.0 million
23
in 1996. However, marketing and administrative expenses include exceptional
expenses relating to fees of (pound)1.7 million incurred in connection with a
contemplated sale of the Materials business, which sale was abandoned by the
Company's shareholders in October 1997, and (pound)1.1 million in refinancing
costs. In addition, (pound)2.8 million, representing the cost of the exercise of
the management share options on completion of the Offering is also included in
marketing and administrative expenses. Excluding these exceptional items
marketing and administrative expenses would have been (pound)27.3 million or
22.3% of sales. The increase in marketing and administrative expenses in 1997
was primarily due to higher costs associated with selling and marketing expenses
for the distribution of non-woven products in the Asian market.
Operating Profit. Operating profit after exceptional items decreased (pound)6.7
million to (pound)9.6 million for the year ended December 31, 1997 compared to
1996. Excluding the exceptional expenses noted above, operating profit would
have been (pound)15.2 million or 12.4% of sales as compared to (pound)16.3
million or 12.7% of sales in 1996. The variance was primarily the result of the
factors discussed above as well as the negative impact on operating margins from
the strength of Sterling against the major European currencies.
Interest. Interest expense increased by (pound)0.2 million or 2.0% to
(pound)10.2 million for the year ended December 31, 1997 compared to 1996,
reflecting a similar amount of debt in each period.
Taxation. The tax charge decreased by (pound)0.9 million to (pound)1.5 million
for the year ended December 31, 1997. The decrease is in part due to lower
overseas tax charges.
Net income/(loss). There was a net loss in the year to December 31, 1997 of
(pound)2.4 million as compared to net income in 1996 of (pound)3.6 million. The
variance was primarily the result of the factors discussed above.
Discontinued operations. Sales decreased (pound)11.2 million to (pound)67.0
million for the year ended December 31, 1997 as compared to the same period in
1996. The primary reasons for this fall in revenue was the sale of the South
African operation in June 1997, (which resulted in a loss on sale of
(pound)233,000), the run-down and factory closure in Taiwan, and the continuing
strength of sterling.
Gross profit decreased from (pound)24.6 million in 1996 to (pound)21.9 million
in 1997, mainly as a result of lower sales volume. When expressed as a
percentage of sales gross profit increased from 32% to 33%.
Marketing and administrative expenses in 1997 were (pound)24.6 million, a
decrease of (pound)3.8 million from the (pound)28.4 million in 1996. The
reduction is the result of the restructuring program implemented in 1995 to
reduce the number of employees and cut costs.
Net loss in 1997 was (pound)1.9 million as against (pound)4.3 million in 1996.
The improvement principally is due to the above decrease in operating expenses
and the inclusion of the net profit on disposal of the Machinery business of
(pound)1.6 million.
Marketing and administrative expenses when expressed as a percentage of sales
for the Materials business are significantly lower than for the Machinery
business (discontinued operations). The two principal reasons are that the
Machinery business incurs both the employment costs of servicemen and the cost
of spare parts used by the servicemen, reflecting the capital goods nature of
its business, and its main operating facilities are located in high cost
countries such as Germany and the UK.
During 1997, as part of the demerger process, the Company entered into the
Credit Agreement with Chase Manhattan Bank, an affiliate of one of the Company's
stockholders.
Chase Manhattan Bank received fees for banking and strategic advice totalling
(pound)0.8 million. Additionally, (pound)0.5 million is payable to Apax partners
& Co., a stockholder of the Company, as an advisory fee.
24
Liquidity and Capital Resources
The Company's liquidity needs will arise primarily from debt service obligations
on the indebtedness incurred in connection with the Notes and Revolving Credit
Facility, working capital needs and the funding of capital expenditures. Total
liabilities at December 31, 1999 were (pound)145.3 million as compared to
(pound)120.5 million at December 31, 1998, including consolidated indebtedness
of (pound)109.1 million as compared to (pound)91.8 million at December 31, 1998
which compares to total assets of (pound)86.0 million at December 31, 1999 and
(pound)49.9 million at December 31, 1998. The excess of liabilities over assets
of (pound)59.2 million at December 31, 1999 as compared to (pound)70.5 million
at December 31, 1998 is due to the writing off of goodwill in earlier periods.
The shareholders deficit as at December 31, 1999 was (pound)59.9 million
compared with (pound)71.0 million as at December 31, 1998. This has primarily
occurred due to foreign currency translation differences and also due to the
change in the rights of preference shareholders. Under the new rights the
shareholders receive a redemption premium at 6.75% (which is accrued in other
reserves) instead of a preference dividend at 5% (which was previously included
in creditors, but was reversed out as a result of its' retrospective replacement
by the redemption premium). This has resulted in a decrease of (pound)7.3
million in the shareholders' deficit.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the Company's (euro)15.0 million Revolving Credit Facility and
several local facilities in Germany, Italy, Spain, France, China, Australia, New
Zealand and the UK.
The net cash inflow from operating activities for the year ended December 31,
1999 was (pound)15.1 million compared to (pound)10.1 million for the comparable
period in 1998. This increase of (pound)5.0 million is attributed to the
decrease in operating assets (pound)4.6 million as a result of active balance
sheet management. The Company had unused available banking facilities for the
year ended December 31, 1999 of (pound)5.1 million as compared to (pound)11.9
million for the comparable period in 1998.
For the year ended December 31, 1999 the Company had a cash inflow of (pound)1.5
million after net interest paid of (pound)9.8 million, Senior Notes issuance
costs of (pound)1.3 million and taxation of (pound)2.5 million. Purchase of
assets, primarily plant and equipment acquisitions and the global implementation
of an enterprise resource planning system utilising BaaN software led to a net
cash outflow of (pound)3.3 million. Acquisitions of businesses including the
second installment of (pound)0.5 million, for an additional 30% of the shares
for the Company's joint venture in Foshan, China led to an overall cash outflow
of (pound)24.1 million.
International Operations
The Company conducts operations in countries around the world including through
manufacturing facilities in the UK, the United States, France, Germany, Italy,
Australia, Brazil and China. The Company's global operations may be subject to
some volatility because of currency fluctuations, inflation and changes in
political and economic conditions in these countries.
The financial position and results of operations of the Company's businesses
outside the UK are measured using the local currency as the functional currency.
Most of the revenues and expenses of the Company's operations are denominated in
local currencies whereas the majority of raw material purchases are denominated
in US dollars. Assets and liabilities of the Company's subsidiaries outside the
UK are translated at the balance sheet exchange rate and statement of operations
accounts are translated at the average rate prevailing during the relevant
period.
25
The Company's financial performance in future periods may be impacted as a
result of changes in the above factors which are largely beyond the control of
the Company.
Year 2000 Compliance
Following their initial review, Management continues to be alert to the
potential risks and uncertainties surrounding the year 2000 issue. As at the
date of this report, Management is not aware of any significant factors which
have arisen, or that may arise, which will affect the activities of the
business; however, the situation is still being monitored. Any future costs
associated with this issue cannot be quantified but are not expected to be
significant.
Euro
Management has reviewed the implications of the single European Currency on our
business and has assessed that the introduction of the Euro as a trading
currency will have no material cost to our business other than through exchange
rate effects.
26
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.
Disclosures about market risk
The Company's operations are conducted by entities in many countries and the
primary market risk exposures of the Company are interest rate risk and foreign
currency exchange risk. The exposure to market risk for changes in interest
rates relates to its debt obligations, upon which interest is paid at both
short-term fixed and variable rates, and local bank borrowings, upon which
interest is paid at variable rates. The Company does not use any instruments by
which to hedge against fluctuations in interest rates as it is believed that
interest rates are low in the currencies in which debt is denominated and that
the risk of major fluctuations in such interest rates is low.
The results of the Company's operations are subject to currency translation risk
and currency transaction risk. Regarding currency translation risk, the
operating results and financial position of each entity is reported in the
relevant local currency and then translated into Sterling at the applicable
exchange rate for inclusion in the financial statements of the Company. The
fluctuation of Sterling against foreign currencies will therefore have an impact
upon the reported profitability of the Company and may also affect the value of
the Company's assets and the amount of the Company's shareholders equity.
Regarding currency transaction risk, fluctuations in exchange rates may affect
the operating results of the Company because many of each entities costs are
incurred in currencies different from the revenue currencies and there is also a
time lag between incurrence of costs and the collection of related revenues. To
protect against currency transaction risk the Company engages in hedging its net
transaction exposure by the use of foreign exchange forward contracts to cover
exposures arising from outstanding sales and purchase invoices. It has not
covered outstanding sales or purchase orders unless they are firm commitments.
At present hedging covers all traded currencies to which the Company is exposed
and in which forward contracts may be undertaken. This includes the Euro and the
U.S., Hong Kong, Australian and New Zealand Dollar. In addition the Company
hedges against certain non-trading exposures by using foreign exchange forward
contracts, these exposures being short-term loans between entities and interest
payable (within one year) on the Senior Notes. Short-term loans may fluctuate in
value depending upon the daily cash position of the various entities and may be
denominated in any of the currencies stated above. Interest on the Senior Notes
is payable in Euros and the Company has covered this exposure for payments due
in 1999 and 2000.
Exchange Rate Sensitivity
The table below provides information as at December 31, 1999 about the Company's
derivative financial instruments and other financial instruments by functional
currency and presents such information in Sterling equivalents. The table
summarizes information on instruments and transactions that are sensitive to
foreign currency exchange rates, including foreign currency forward exchange
agreements and foreign currency denominated credit and debt obligations. For
credit and debt obligations, the table presents principal cash flows by expected
maturity dates. For foreign currency forward exchange agreements, the table
presents the notional amounts and weighted average exchange rates by expected
(contractual) maturity dates all of which are in 2000. These notional amounts
generally are used to calculate the contractual payments to be exchanged under
the contract.
27
Book or contract
----------------
Value Fair Value
----- ----------
(GBP Equivalent in thousands)
(Liabilities)/Assets
GBP Functional Currency :
Interest on debt (DEM) (8,377) (7,778)
Short term affiliate loans
(EUR) (1,201) (1,201)
(USD) (2,293) (2,293)
(NZD) (180) (180)
Trading transactions
(EUR) 2,582 2,582
(USD) 1,711 1,711
AUD Functional Currency:
Trading transactions
(EUR) (33) (33)
(GBP) (201) (201)
(USD) (145) (145)
EUR Functional Currency :
Trading transactions
(GBP) (204) (204)
(USD) (1) (1)
HKD Functional Currency:
Trading transactions
(GBP) 125 125
(USD) 629 629
(NTD) (442) (442)
NTD Functional Currency :
Trading transactions
(USD) 169 169
MXP Functional Currency :
Trading transactions
(GBP) (338) (338)
(USD) (394) (394)
USD Functional Currency :
Trading transactions
(EUR) (80) (80)
(GBP) (128) (128)
28
The Company's exposures are covered on a net basis and the following contracts
were in place at December 31, 1999, all of which are expected to mature in the
year 2000.
Contract Value Fair Value
-------------- ----------
(GBP Equivalent in thousands)
Forward Exchange Agreements
(Receive DEM/Pay GBP)
Contract amount 8,377 7,778
Average contractual exchange rate 2.92
(Receive EUR/Pay GBP)
Contract amount 1,231 1,201
Average contractual exchange rate 1.57
(Receive USD/Pay GBP)
Contract amount 2,322 2,293
Average contractual exchange rate 1.60
(Receive HKD/Pay GBP)
Contract amount 296 294
Average contractual exchange rate 12.46
(Receive GBP/Pay DEM)
Contract amount (2,419) (2,391)
Average contractual exchange rate 1.59
(Receive GBP/Pay AUD)
Contract amount (633) (637)
Average contractual exchange rate 2.50
(Receive GBP/Pay USD)
Contract amount (2,837) (2,812)
Average contractual exchange rate 1.61
(Receive GBP/Pay CAD)
Contract amount (126) (128)
Average contractual exchange rate 2.38
Interest Rate Sensitivity
The table below provides information as at December 31, 1999 about the Company's
derivative financial instruments and other financial instruments that are
sensitive to changes in interest rates, including debt obligations. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates all of which are during 2000.
The information is presented in Sterling equivalents, which is the Company's
reporting currency.
29
Book Value Fair Value
---------- ----------
(Liabilities)
(GBP Equivalent in thousands)
Debt :
Variable Rate (GBP) (6,384) (6,384)
Average interest rate 7.99%
Variable Rate (EUR) (26,773) (26,773)
Average interest rate 4.72%
Variable Rate (USD) (1,349) (1,349)
Average interest rate 9.07%
Variable Rate (AUD) (2,391) (2,391)
Average interest rate 6.72%
Variable Rate (NZD) (3) (3)
Average interest rate 11.65%
No instruments used.
Impact of Price Fluctuations of Raw Materials on Results of Operations.
The Company purchases most of the raw materials for its products on the open
market, and the Company's sales may be affected by changes in the market price
of such raw materials. The Company does not generally engage in commodity
hedging transactions for such raw materials. There can be no assurance that the
Company will be able to pass on increases in the price of raw materials to its
customers in the future, on a timely basis or at all. The results of the
operations of the Company have in the past been affected by fluctuations in the
price of the primary raw material, wood pulp, for its cellulose insoles. Wood
pulp represented 21.1% of the Company's raw materials costs in 1999 as compared
to 26.3% in 1998 and 13.1% in 1999 as compared to 17.0% in 1998 of the Company's
total cost of sales. Additionally, significant increases in the price of the
Company's products, due to increases in the cost of raw materials, could have a
negative effect on demand for its products and a material adverse effect on the
Company's business, financial condition and results of operations.
Risks of Environmental Liabilities.
The Company's facilities, several of which have been operated as industrial
establishments for long periods of time, are subject to comprehensive
environmental laws and requirements, including those governing discharges to the
air and water, the handling of disposal of solid and hazardous substances and
wastes and remediation of contamination associated with the release of hazardous
substances at the Company's facilities and offsite disposal locations. The
Company has made, and will continue to make, expenditures to comply with such
laws and requirements. The Company believes that it will not require material
capital expenditures to comply with applicable environmental laws during 2000 or
in the foreseeable future. However, future events, such as changes in existing
laws and regulations or the discovery of contamination at the Company's
facilities, adjacent sites or offsite waste disposal locations, may give rise to
additional compliance or remediation costs which could have a material adverse
effect on the Company's results of operations or financial condition. Moreover,
the nature of the Company's business exposes it to some risk of claims with
respect to environmental matters, and there can be no assurance that the
material costs or liabilities will not be incurred in connection with any such
claims.
30
Item 10. Management
Directors and Executive Officers of the Company
The Company's executive directors and other executive officers hold office on
such terms as are approved by the Remuneration Committee of the Board of
Directors or by the Board of Directors. The Company's non-executive directors
hold office in accordance with the Shareholders Agreement entered into among the
Company's shareholders and the Company.
The following sets forth the names and ages of each of the Company's directors
and executive officers and the positions they hold as of December 31, 1999 :
Directors and Executive Officers
Name Age Position
- ---- --- --------
Peter Selkirk 44 Chief Executive and Director
Neil Fleming 44 Finance Director and Director
Kevin Cochrane 55 Director of Sales
Neil Eastwood 63 Director of Cellulose Operations
Terry Pee 56 Director of Non-Woven and Unifast Operations
David Grier 43 Director of Component Operations
David Gamble 53 Company Secretary
Timothy Wright 36 Non-executive Director
On March 31, 2000 Mr. Gamble retired and Mr. Fleming was appointed as Company
Secretary.
Set forth below is a brief description of the business experience of each
director and executive officer :
Mr. Selkirk joined the Company as Managing Director in January 1996 after a
career in technical materials based companies in the packaging, automotive and
electronics sectors including Raychem Corporation and Courtaulds. He was
previously employed by Raychem Corporation as manager of one of its European
divisions, having been appointed in January 1993. Mr. Selkirk has an
international background, having worked in the United States and throughout
Europe. Mr. Selkirk has managed operations in the United States and Europe and
has experience in sales, marketing, logistics and manufacturing. He has a
Masters degree in Natural Sciences from Cambridge University and an MBA from the
London Business School.
Mr. Fleming joined the Company as Finance Director in June 1996 after holding
various financial and general management positions at companies in capital
goods, engineering and general industrial sectors, including APV plc and the
Norton Company. Between February 1991 and February 1994, Mr. Fleming was group
financial controller of APV plc and from February 1994 to June 1996, he was
managing director and then president of one of APV's divisions. He has an
international background, having worked in the United States, Germany, France,
Denmark and Luxembourg. Mr. Fleming has a Bachelor of Science Degree in Physics
from Edinburgh University and is a Chartered Accountant with the Institute of
Chartered Accountants in Scotland.
Mr. Cochrane joined the Company in 1967 and has worked in various sales and
marketing and managerial positions before being appointed as Director of Sales
in January 1998. Mr. Cochrane has a Bachelors degree in Economics from Holy
Cross College, Massachusetts and an MBA from the Wharton Business School.
31
Mr. Eastwood joined the Company in 1980 and is responsible for the Company's
cellulose operations as General Manager. He was appointed Director of Cellulose
Operations in February 1997. He has previously been employed in operational and
production control capacities in the textile industry. Mr. Eastwood has a
Bachelor of Sciences degree in Textile Technology from Manchester University.
Mr. Pee joined the Company in September 1997, when he was appointed Operations
Director of the Unifast division and non-woven products. Prior to joining the
Company, Mr. Pee held positions both within the UK and abroad, with various
manufacturing and engineering companies, including GEC. From 1988 to 1995, he
was managing director of one of the product groups of APV plc involved in global
manufacturing and, until September 1996 to September 1997, he held the position
of managing director of GEA in South Africa.
Mr. Grier joined the Company in March 1999 as the Director of Component
Operations when the Group acquired Cornwell Industries Ltd of which he was a
stakeholder. Prior to this he had been involved in a Company called M130 from
1985 which was sold in 1990 and then carried out consultancy work on senior
financial and management roles in different industries.
Mr. Wright has been a non-executive director of the Company since 1995. He is a
director of both Apax Partners & Co Strategic Investors Limited and Apax
Partners & Co Ventures Limited where he has been employed in private equity
investing for the last nine years since 1990. Mr. Wright is a non-executive
director of a number of private equity companies associated with certain funds
advised by Apax.
Item 11. Compensation of Directors and Officers.
For the year ended December 31, 1999 the aggregate compensation, including
bonuses, of all directors and executive officers of the Company names above was
(pound)943,887. For the year ended December 31, 1998 (pound)1,051,446, and for
the year ended December 31, 1997, the aggregate amount set aside by the Company
to provide pension, retirement or similar benefits to those directors and
executive officers was approximately (pound)95,714.
Item 12. Options to Purchase Securities From Registrant or Subsidiaries
Senior Management holds approximately 8.5% of the outstanding Voting Ordinary
Shares of the Company. Senior Management have been granted options to acquire a
further 4.3% of the outstanding Voting Ordinary Shares from the Company's
institutional investors. The options have been granted in respect of 160,000 A
Shares of (pound)1 at an exercise price of (pound)8.75 per A Share. The options
will lapse on December 21, 2004 if not exercised prior to that date. All of the
options have been granted to Senior Management. Furthermore, certain employees
of the Company, including Senior Management, may be allotted (i) options to
acquire up to 240,000 A Shares from institutional investors and (ii) 80,000
Voting Ordinary Shares that are authorized but are not currently outstanding.
32
Item 13. Interest of Management in Certain Transactions.
Certain Texon International plc Shareholders have had commercial relations with
group companies. As a consequence, fees have been paid to the Shareholders for
providing the services of directors, banking services and strategic advice. The
Chase Manhattan Bank is the Group corporate banker and a Shareholder. Apax
Partners & Co. Strategic Investors Limited and Apax Partners & Co. Ventures
Limited are a shareholder.
Transactions with related parties during the period (excluding interest paid in
the normal course of business) including fees are as follows :
Year ended Year ended
December 31, December 31,
1998 1999
------------ ------------
(pound)000 (pound)000
Fees for director's services..... 36 20
Banking and strategic advice..... 161 202
Debt issuance.................... 3,094 557
Rent paid........................ - 13
------------ ------------
3,291 792
============ ============
Amounts included within creditors in respect of related parties totalled at
December 31, 1999 (pound)46,000 and (pound)450,000 at December 31, 1998. There
are no prepayments in respect of related parties at December 31, 1999 or
December 31, 1998.
As more fully described in Note 14 to the financial statements, Texon
International plc paid the following amounts to related parties: Chase Manhattan
Bank ((pound)557,000 in 1999 and (pound)3,086,000 in 1998) and Apax Partners
((pound)nil in 1999 and (pound)8,000 in 1998) in respect of debt issuance costs.
The Group also incurred agency, guarantee and commitment fees of (pound)202,000
in 1999 and (pound)161,000 in 1998 which were payable to Chase Manhattan Bank as
the Group's corporate banker.
The Group acquired Cornwell Industries Ltd during the year, Parker Thorne Ltd a
wholly owned business of Cornwell Industries Ltd occupies a property site in
Kettering. The annual rent due for this site (pound)13,000 is paid to a company
of which Mr. Grier is a director. Mr. Grier is also a director of Cornwell
Industries Ltd. Loan notes were issued as part of the consideration for Cornwell
Industries (as more fully described in Note 19 to the financial statements) some
of which were payable to Mr Grier. Interest paid on these loan notes to Mr.
Grier totalled (pound)5,000 and an additional (pound)4,000 was accrued for the
year ended December 31, 1999.
P. E. Selkirk and J. N. Fleming, who are directors of the company, have an
agreement with the other shareholders whereby each may acquire from the other
shareholders up to 80,000 A ordinary voting shares at a price of (pound)8.75 per
share. The options are only exercisable only in anticipation of and conditional
upon a sale of the Company or an initial public offering of the Company's equity
securities, and will lapse on December 21, 2004 if not exercised prior to that
date. In addition, options over a further 240,000 A ordinary shares are
available for allocation, on a basis to be determined by the Remuneration
Committee, to employees or prospective employees of the Group on the same terms
as those described above.
33
Continuing relationship with a business owned by the Shareholders
Warranties given by United Texon Limited regarding the shares being sold and
provisions regulating aspects of the ongoing relationship between United Texon
Limited and USM Group Holdings Limited. These include (i) provisions dealing
with the sharing of historic insurance coverage, (ii) mutual undertakings not to
compete for three years, and (iii) an undertaking by the parties to determine an
appropriate mechanism for splitting the UK pension scheme which has now been
satisfactorily resolved.
The company has taken advantage of the exemption allowed in FRS 8 not to
disclose transactions between group companies.
34
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
35
PART III
Item 15. Defaults Upon Senior Securities.
None.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
None.
36
PART IV
Item 17. Financial Statements
Not Applicable.
Item 18. Financial Statements
See Page F-1
Item 19. Financial Statements and Exhibits
(a) The following financial statements are filed as part of this Form 20-F:
(1) Consolidated profit and loss accounts.........................F-2
(2) Consolidated balance sheets...................................F-3
(3) Consolidated cash flow statements.............................F-4
(4) Reconciliation of net cash flow to movement in net debt.......F-5
(5) Consolidated statement of total recognized gains and losses...F-6
(6) Reconciliation of movements in total shareholders' deficit....F-7
(7) Notes to the consolidated financial statements................F-8
(b) The following exhibits are filed as part of this Form 20-F
Exhibit Description
- ------- -----------
1.1 Purchase Agreement between the Company and the Initial Purchasers dated
January 27, 1998.*
3.1 Memorandum and Articles of Association of Texon International plc.*
4.1 Indenture, dated as of January 30, 1998, among Texon International plc
and the Chase Manhattan Bank as Trustee.*
4.2 Form of 10% Senior Notes due 2008 (included in Exhibit 4.1 hereto).*
4.3 Form of 10% Series A Senior Notes due 2008 (included in Exhibit 4.1
hereto).*
4.4 Exchange and Registration Rights Agreement between the Company and the
Initial Purchasers dated January 27, 1998.*
4.5 Note Depositary Agreement dated January 30, 1998 between Texon
International plc and The Bank of New York, as Book-Entry Depositary.*
10.1 Shareholders Agreement dated December 23, 1997, between the Company and
the shareholders of the Company.*
10.2 Agreement for Sale of USM Group Limited, dated December 23, 1997.*
10.3 Agreement for Sale of United Texon Limited, dated December 23, 1997.*
10.4 Credit Agreement, dated January 28, 1998, among the Company, Chase
Manhattan plc, The Chase Manhattan Bank and the other Lenders party
thereto.*
10.5 Employment Agreement, dated January 30, 1998, between the Company and
Peter Selkirk.*
37
10.6 Employee Agreement, dated January 30, 1998, between the Company and
Neil Fleming.*
10.7 Employment Agreement, dated July 29, 1997, between the Company and
Kevin Cochrane.*
10.8 Employment Agreement, dated July 29, 1997, between the Company and Neil
Eastwood.*
10.9 Employment Agreement, dated as of September 2, 1997, between the
Company and Terry Pee.*
10.10 Employment Agreement, dated May 26, 1998 between the Company and Terry
Pee.*
10.11 Option Agreement of Peter Selkirk relating to the A Shares dated
December 23, 1997.*
10.12 Option Agreement of Peter Selkirk and Neil Fleming relating to the B
Shares dated December 23, 1997.*
10.13 Business Acquisition Agreement between British United Shoe Machinery
Limited and DMWSL 189 Limited and related agreements dated July 29,
1997.*
10.14 Business Sale Agreement between Deutsche Vereinigte Schumaschinen GmbH
& Co and DVSG Engineering und Patentverwaltungs GmbH dated July 29,
1997.*
10.15 Business Sale Agreement between DVSG Engineering und Patentverwaltungs
GmbH and DVSG Service GmbH dated July 29, 1997.*
10.16 Business Sale Agreement between USM Espana S.L. and Maquinaria USM S.L.
dated July 29, 1997.*
10.17 Business Acquisition Agreement between USM Taiwan Limited and Texon
Taiwan Limited dated December 1997.*
10.18 Bill of Sale, Assignment and Assumption Agreement between USM Texon
Materials Inc. and United Shoe Machinery Corporation and related
agreements dated July 29, 1997.*
10.19 Assets Sale Agreement between USM Asia Limited and Texon (H.K.) Limited
dated July 29, 1997.*
10.20 Share Purchase Agreement between DVSG Holding GmbH and DVSG
Beteiligungs und Verwaltungs GmbH dated July 29, 1997.*
10.21 Share Sale Agreement between USM Holding GmbH and Texon Verwaltungs
GmbH Gr. Dated July 29, 1997.*
10.22 Share Sale Agreement between USM Texon Limited and Texon Verwaltungs
GmbH. Gr dated July 29, 1997.*
10.23 Share Sale Agreement between USM International Limited and DVSG
Administration GmbH relating to the entire issued share capital of DVSG
Service GmbH.*
10.24 Share Sale Agreement between USM International Limited and DVSG
Administration GmbH. Relating to the entire issued share capital of
DVSG Beteilgungs und Verwaltungs GmbH.*
10.25 Share Sale Agreement between USM Benelux B.V. and USM Texon Limited
relating to the entire issued share capital of USM Holding GmbH dated
December 23, 1997.*
10.26 Share Transfer Agreement between Texon France S.A. and USM
International Limited dated December 24, 1997 and related agreement.*
10.27 Share Purchase Agreement between USM Benelux B.V and USM International
Limited relating to the issued share capital of USM Asia Limited dated
July 29, 1997.*
10.28 Share Transfer Agreement between USM Benelux B.V. and USM International
Limited related to the entire issued share capital of USM Taiwan
Limited dated July 29, 1997.*
10.29 Share Transfer Agreement between USM Benelux B.V and USM Texon Limited
dated December 23, 1997.*
38
10.30 Share Transfer Agreement between USM International Limited and Texon
Materiales S.L.*
10.31 Share Transfer Agreement between USM Texon Limited and El Manto de
Elias S.L.*
10.32 Share Transfer Agreement between Texon Overseas and USM International
Limited relating to the entire holding of Texon Overseas in USM Far
East Australia Pty Limited dated July 29, 1997.*
10.33 Share Transfer Agreement between United Texon plc and USM International
Limited relating to the entire issued share capital of 3138933 Canada
Inc. dated July 29, 1997.*
10.34 Share Transfer Agreement between USM Texon Limited and USM
International Limited relating to the entire issued share capital of
Samco Strong Limited dated July 29, 1997.*
10.35 Share Transfer Agreement between United Texon plc and USM International
Limited relating to the entire issued share capital of USM Corporation
and related agreements dated July 29, 1997.*
10.36 Share Transfer Agreement between USM Benelux B.V. and United Texon plc
relating to the entire issued share capital of USM Corporation and
related agreements dated July 29, 1997.*
10.37 Share Transfer Agreement between Texon Overseas and USM International
Limited relating to the entire issued share capital of USM Korea
Limited dated July 29, 1997.*
10.38 Share Transfer Agreement between USM Benelux B.V. and USM International
Limited relating to the entire issued share capital of USM Asia Limited
dated July 29, 1997.*
10.39 Share Transfer Agreement between USM Benelux B.V. and USM International
Limited relating to the entire issued share capital of USM do Brasil
Industria e Comercio SA dated July 29, 1997.*
10.40 Exclusive Distributor Agreement between British United Shoe Machinery
Co. Limited and United Shoe Machinery of Australia Pty. Ltd dated July
29, 1997.
10.41 Exclusive Distributor Agreement between British United Shoe Machinery
Limited and USM Korea Limited dated July 29, 1997.*
10.42 Exclusive Distributor Agreement between Texon (H.K.) Limited and USM
Korea Limited.*
10.43 Exclusive Distributor Agreement between British United Shoe Machinery
Limited and United Shoe Machinery (Thailand) Co. Ltd. Dated July 29,
1997.*
10.44 Non-Exclusive Distributor Agreement between USM Texon Materials Inc.
and USM Canada Ltd. Dated August 8, 1997.*
10.45 Non-Exclusive Distributor Agreement between Texon France S.A. and USM
France S.A. dated July 29, 1977.*
10.46 Non-Exclusive Distributor Agreement between DVSG Engineering und
Patentverwaltungs GmbH and Deutsche Vereinigte Schumaschinen GmbH & Co.
dated July 29, 1997.*
10.47 Non-Exclusive Distributor Agreement between United Shoe Machinery
Corporation and USM Texon Mexico S.A.*
10.48 Non-Exclusive Distributor Agreement between Texon Materiales S.L. and
Maquinaria USM, S.L. dated July 29, 1997.*
10.49 Non-Exclusive Distributor Agreement between Samco Strong Limited and
United Shoe Machinery of Australia Pty. Ltd. Dated July 29, 1997.*
10.50 Non-Exclusive Distributor Agreement between Texon Taiwan Limited and
USM Taiwan Limited.*
10.51 Sole Agency Agreement between Texon (H.K.) Limited and USM Far East
Australia (PTY) Limited dated July 29, 1997.*
10.52 Cost Sharing Agreement between Texon France S.A. and USM France S.A.*
10.53 Cost Sharing Agreement between USM Taiwan Limited and Texon Taiwan
Limited dated December 10, 1997.*
39
10.54 Services Agreement between USM Texon Oesterreich Gesellschaft M.b.H and
USM Oesterreich Maschinenhandelsgesellschaft dated December 1, 1997.*
10.55 Service Agreement between DMWSL 189 and British United Shoe Machinery
Limited dated July 29, 1997.*
10.56 Services Agreement between DVSG Engineering und Patentverwaltungs GmbH
and Deutsche Vereinigte Schumaschinen GmbH & Co. relating to the
provision of services/premises at Pirmasens dated July 29, 1997.*
10.57 Services Agreement between Deutsche Vereinigte Schumaschinen GmbH & Co.
and DVSG Engineering und Patentverwaltungs GmbH relating to the
provision of services/premises at Frankfurt am Main dated July 29,
1997.*
10.58 Services Agreement between Texon Materiales S.L. and Maquinaria USM,
S.L. dated July 29, 1997.*
10.59 Services Agreement between USM Texon Materials Inc. and United Shoe
Machinery Corporation dated June 30, 1997.*
10.60 Computing Services Agreement between USM Texon Materials Inc. and
United Shoe Machinery Corporation dated June 30, 1997.*
10.61 Services Agreement between USM Asia Limited and Texon (H.K.) Limited.*
10.62 Services Agreement between USM Far East Australia Pty Ltd. And Texon
(H.K.) Limited.*
10.63 Sub-Lease Agreement between USM Texon Materials Inc. and USM
Corporation dated May 1, 1997.*
10.64 Contribution and Assumption Agreement between USM Corporation and USM
Texon Materials Inc. dated June 27, 1997.*
10.65 Joint Venture Contract between Foshan Arts & Crafts Industry
Corporation and USM (China Holdings) Ltd.*
10.66 Agreement between USM Texon Limited and British United Shoe Machinery
Co. Limited relating to the surrender of group relief, dated December
23, 1997.*
10.67 Agreement between USM Texon Limited and Samco Strong Limited relating
to the surrender of group relief dated December 23, 1997.*
10.68 Sale and Lease Agreement between USM Texon Limited, 377 Leicester
Limited and Texon UK Limited dated June 30, 1998***
10.69 Sale and Purchase Agreement between Texon UK Limited and USM Texon
Limited dated June 30, 1998***
10.70 Lease between 337 Leicester Limited, Texon UK Limited and Anglo Irish
Bank Corporation plc dated October 9, 1998***
10.71 Sale and Purchase Agreement among David J Grier and others as vendors
and Texon UK Limited as purchaser, dated March 12, 1999****
10.72 Sale and Purchase Agreement between Rosenkranz & Krause GmbH & Co., as
vendor, Texon Mockmuhl, as purchaser, and the Company, as guarantor,
dated July 22, 1999*****
10.73 Term and Revolving Facilities Agreement, dated July 22, 1999, among the
Company, United Texon Limited , certain other companies in the Texon
Group, Chase Manhattan Bank plc, The Chase Manhattan Bank, BHF Bank AG
and Chase Manhattan International Limited*****
10.74 Composite Debenture, dated July 22, 1999, among United Texon Limited,
certain other companies in the Texon Group and Chase Manhattan
International Limited*****
10.75 Agreement for Sale of Certain Parts of the Business and Assets, by and
among Chamberlain Phipps Materials Limited, as seller, Texon (UK)
Limited, as buyer, and Newgrange Group, L.L.C., as guarantor, dated
September 4, 1999******
10.76 Share Sale Agreement, by and among Clarks Shoes Australia Limited, as
vendor, and Texon Australia Pty Limited, as purchaser, dated October
11, 1999******
40
10.77 Business sale Agreement, by and amoung British United Shoe Machinery
Co. Limited, as seller, USM Group Limited, as guarantor, and Texon UK
Limited, as purchaser, dated February 29, 2000.P
10.78 Quotas Purchase Agreement, by and amoung Texon Italia S.P.A., as
purchaser, and Fleckstan Participacoes Ltda., Martinho Fleck and Iloide
Fleck, as sellers, dated as of March 20, 2000.P
16 Letter re Change in Certifying Accountant**
21 List of Subsidiaries of the Registrant*
* Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form F-4 (No. 333-49619)
** Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 6-K filed with the Securities and Exchange
Commission on January 15, 1999.
*** Incorporated by reference to the exhibits filed with the Company's
Annual Report on Form 20-F filed with the Securities and Exchange
Commission on April 30, 1999.
**** Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 6-K filed with the Securities and Exchange
Commission on May 26, 1999.
***** Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 6-K filed with the Securities and Exchange
Commission on August 13, 1999.
****** Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 6-K filed with the Securities and Exchange
Commission on November 19, 1999.
P This exhibit has been filed in paper format with the Securities and
Exchange Commission under cover of Form SE on May 2, 2000.
41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and the Shareholders of Texon International plc:
We have audited the consolidated financial statements for the years ended
December 31, 1999 and December 31, 1998 on pages F-2 to F-60. These consolidated
financial statements are the responsibility of the management of Texon
International plc. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United Kingdom, which are substantially the same as auditing standards
generally accepted in the United Sates. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements
and of whether the accounting policies are appropriate to the Group's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
In our opinion the consolidated financial statements, referred to above present
fairly in all material respects the consolidated financial position of Texon
International plc and its subsidiaries as of December 31, 1999 and December 31,
1998 and the consolidated results of operations and cash flows of Texon
International plc for the two years ended December 31, 1999 and December 31,
1998 in conformity with Generally Accepted Accounting Principles in the United
Kingdom.
Generally Accepted Accounting Principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of Generally Accepted Accounting Principles in the United
States would have affected the results of operations for the years ended
December 31, 1999 and December 31, 1998 and shareholders' equity as of December
31, 1999, and December 31, 1998 to the extent summarized in Note 30 to the
consolidated financial statements.
Deloitte & Touche
Chartered Accountants and Registered Auditors
Leicester
F-1
CONSOLIDATED PROFIT AND LOSS ACCOUNT
United Texon
Limited Texon International plc
------- -----------------------
Year ended
Year ended December 31, Total
Year ended Year ended December 31, 1999 year ended
December 31, December 31, 1999 Continuing December 31,
Notes 1997 1998 Acquisitions operations 1999
---------- ---------- ---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000
Sales turnover
Continuing operations.......... 3 121,556 110,880 17,261 109,366 126,627
Discontinued operations........ 66,255 - - - -
---------- ---------- ---------- ---------- ----------
187,811 110,880 17,261 109,366 126,627
Cost of sales
Continuing operations.......... (79,015) (72,193) (12,624) (71,459) (84,083)
Discontinued operations........ (44,322) - - - -
---------- ---------- ---------- ---------- ----------
(123,337) (72,193) (12,624) (71,459) (84,083)
Gross profit
Continuing operations.......... 42,541 38,687 4,637 37,907 42,544
Discontinued operations........ 21,933 - - - -
---------- ---------- ---------- ---------- ----------
64,474 38,687 4,637 37,907 42,544
Marketing and administrative expenses 4,5
Continuing operations.......... (32,932) (26,106) (3,456) (26,232) (29,688)
Discontinued operations........ (24,552) - - - -
---------- ---------- ---------- ---------- ----------
(57,484) (26,106) (3,456) (26,232) (29,688)
Operating profit/(loss) 4,5
Continuing operations.......... 9,609 12,581 1,181 11,675 12,856
Discontinued operations........ (2,619) - - - -
---------- ---------- ---------- ---------- ----------
6,990 12,581 1,181 11,675 12,856
Profit on sale of discontinued
activities...................... 5b 1,602 - - - -
Profit on disposal of property..... 5a - 957 - 1,000 1,000
---------- ---------- ---------- ---------- ----------
Profit/(loss) before interest and
taxation........................ 6
Continuing operations........... 9,609 13,538 1,181 12,675 13,856
Discontinued operations......... (1,017) - - - -
---------- ---------- ---------- ---------- ----------
8,592 13,538 1,181 12,675 13,856
Interest receivable and similar
income.......................... 298 160 336
Interest payable and similar
charges......................... 7 (10,915) (9,989) (11,656)
---------- ---------- ----------
(Loss)/profit on ordinary activities
before taxation........ (2,025) 3,709 2,536
Taxation on (loss)/profit on ordinary
activities...................... 9 (1,988) (1,303) (1,754)
---------- ---------- ----------
(Loss)/profit on ordinary activities
after taxation.................. (4,013) 2,406 782
Minority equity interests.......... 20 (305) (184) (206)
---------- ---------- ----------
Net (loss)/profit for the financial
year............................ 19 (4,318) 2,222 576
---------- ---------- ----------
Waiver of dividend and redemption
premium on non-equity preference
shares.......................... 5,217 - -
Non-equity preference dividend. (18) - (2,600) -
Other finance charges in respect of
non-equity shares............... (18) - - (4,657)
---------- ---------- ----------
Retained profit/(loss) for the period
for equity shareholders 899 (378) (4,081)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CONSOLIDATED BALANCE SHEETS
Texon International plc
---------------------------------------
As of December 31, As of December 31,
Notes 1998 1999
----- ------------------ -----------------
(pound)000 (pound)000
FIXED ASSETS
Goodwill........................ 11 672 12,707
Tangible assets................. 10 13,116 20,973
Investments..................... 12 - 14
------ ------
13,788 33,694
CURRENT ASSETS
Stocks.......................... 13 15,781 21,466
Debtors due within one year..... 14 17,579 26,491
Debtors due after one year...... 14 2,058 3,348
Cash at bank and in hand........ 721 1,025
------ ------
36,139 52,330
CREDITORS
Amounts falling due within
one year...................... 15 (30,949) (40,391)
------ ------
NET CURRENT ASSETS 5,190 11,939
------ ------
TOTAL ASSETS LESS CURRENT
LIABILITIES..................... 18,978 45,633
CREDITORS
Amounts falling due after more
than on year................ 15 (84,477) (97,832)
Provisions for liabilities and
charges....................... 17 (7,642) (7,038)
------ ------
NET LIABILITIES...................... (73,141) (59,237)
====== ======
CAPITAL AND RESERVES
Called up share capital.............. 18 9,120 9,120
Share premium........................ 19 46,800 46,800
Profit and loss account.............. 19 (129,539) (123,059)
Premium on redemption reserve........ 19 - 7,257
------ ------
Shareholders' deficit
Equity interests................. (125,619) (119,139)
Non-equity interests............. 52,000 59,257
(73,619) (59,882)
Minority equity interests............ 20 478 645
------ ------
(73,141) (59,237)
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONSOLIDATED CASH FLOW STATEMENTS
United Texon
Limited Texon International plc
---------- --------------------------------------------------
Period from
December 31, 1997
Year ended to December 31, Year ended Year ended
Notes December 31, 1997 1997 December 31, 1998 December 31, 1999
---------- ---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000
Net Cash Inflow from Operating
Activities............................ (25a) 4,976 - 10,144 15,099
Returns on Investments and Servicing
of Finance............................ (25b) (5,665) - (14,767) (11,029)
Taxation................................. (2,678) - (1,420) (2,538)
Capital Expenditure and Financial
Investment............ (25b) 5,990 - 2,211 (3,263)
Acquisitions and Disposals:
Acquisition of United Texon
Limited............................... (25b) - (64,175) (23,455) -
Acquisitions of businesses............... (25b) - - (545) (24,077)
---------- ---------- ---------- ----------
Cash Inflow/(Outflow) before use of
liquid resources...................... 2,623 (64,175) (27,832) (25,808)
Financing
(Decrease)/Increase in debt.............. (25b) (4,029) 64,175 24,462 25,468
Shares issued............................ (25b) - 13 - -
---------- ---------- ---------- ----------
(4,029) 64,188 24,462 25,468
---------- ---------- ---------- ----------
(Decrease)/Increase in Cash.............. (1,406) 13 (3,370) (340)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
United Texon
Limited Texon International plc
---------- --------------------------------------------------
Period from
December 31, 1997
Year ended to December 31, Year ended Year ended
Notes December 31, 1997 1997 December 31, 1998 December 31, 1999
---------- ---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000
(Decrease)/increase in cash in the
period................................ (25c) (1,406) 13 (3,370) (340)
Cash inflow/(outflow) from debt and
lease financing....................... (25b) 4,029 - (24,462) (25,468)
---------- ---------- ---------- ----------
Change in net debt resulting from
cash flows............................ 2,623 13 (27,832) (25,808)
Non cash movements in debt............... (3,434) - 5,223 146
Translation differences.................. (106) - (4,292) 12,040
Loans and finance leases acquired
with subsidiary....................... - (64,175) - (3,386)
---------- ---------- ---------- ----------
Movement in net debt in the
period................................ (917) (64,162) (26,901) (17,008)
Net debt brought forward................. (86,522) - (64,162) (91,063)
---------- ---------- ---------- ----------
Net debt carried forward................. (87,439) (64,162) (91,063) (108,071)
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
United Texon
Limited Texon International plc
---------- --------------------------------------------------
Period from
December 31, 1997
Year ended to December 31, Year ended Year ended
December 31, 1997 1997 December 31, 1998 December 31, 1999
---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000
(Loss)/profit for the financial period........ (4,318) - 2,222 576
Exercised share options....................... 2,803 - - -
Currency translation differences on foreign
currency................................... (1,659) - (4,924) 10,561
---------- ---------- ---------- ----------
Total recognized (losses)/gains in the
period..................................... (3,174) - (2,702) 11,137
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
RECONCILIATION OF MOVEMENTS IN TOTAL SHAREHOLDERS' DEFICIT
United Texon
Limited Texon International plc
---------- --------------------------------------------------
Period from
December 31, 1997
Year ended to December 31, Year ended Year ended
December 31, 1997 1997 December 31, 1998 December 31, 1999
---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000
Profit attributable to members of the Company 899 - 2,222 576
Preference dividend........................... (5,217) - (2,600) -
Other finance charges in respect of non-equity
shares..................................... - - - (4,657)
(4,318) - (378) (4,081)
New share capital issued...................... - 13 307 -
New share capital to be issued................ - 55,600 - -
Preference dividends transferred to
reserves................................... - - - 2,600
Exercised share options....................... 2,803 - - -
Goodwill relating to disposal of Turbel
Ltd........................................ - - 5 -
Goodwill and costs relating to acquisition of
United Texon Limited written off during
period..................................... - (124,242) - -
Premium on redemption reserve................. - - - 4,657
Other recognized losses relating to the
year....................................... (1,659) - (4,924) 10,561
Net increase/(decrease) to shareholders'
funds...................................... (3,174) (68,629) (4,990) 13,737
Opening shareholders' deficit................. (66,066) - (68,629) (73,619)
------- ------- -------
Closing shareholders' deficit................. (69,240) (68,629) (73,619) (59,882)
------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Business activity and basis of presentation
The Group formed by Texon International plc and its subsidiaries ("the
Group") is engaged in manufacturing and supplying shoe materials and
machinery to the footwear industry worldwide.
Texon International acquisition
The Company was incorporated on October 9, 1997 and on December 23,
1997 entered into an acquisition agreement (the "Acquisition
Agreement") with the shareholders of United Texon Limited under which
Texon International plc agreed to acquire the entire issued share
capital of United Texon Limited (the "Acquisition"). The Acquisition
was conditional upon (i) consummation of the offering by Texon
International plc of Senior Notes due 2008 (the "Offering") and (ii) a
Revolving Facility being made available unconditionally. These
conditions were duly fulfilled on January 30, 1998.
Texon International plc has prepared consolidated accounts for the
years ended December 31, 1999 and 1998. Under the terms of the
Acquisition Agreement, Texon International plc had control of the
financial and operational management of United Texon Limited effective
from December 31, 1997 and Texon International plc therefore prepared
consolidated accounts as at December 31, 1997. The Company did not
trade previously and Texon International plc had no consolidated profit
or loss for the period from its incorporation on October 9, 1997 to
December 31, 1997. The consolidated profit and loss account has been
included for United Texon Limited for the year ended December 31, 1997.
Machinery Disposal
On December 31, 1997, United Texon Limited disposed of the group of
companies operating the shoe machinery business through a sale to a new
company formed by the shareholders of United Texon Limited ("the
Machinery Disposal"). The Machinery Disposal is treated as a disposal
in the 1997 financial statements of United Texon Limited and the
comparative figures have been reanalyzed to show the Machinery business
as a discontinued operation.
Consolidated financial information
The consolidated financial information for the years ended December 31,
1999 and 1998 relates to Texon International plc. The consolidated
financial information presented herein for the periods prior to Texon
International plc's acquisition of United Texon Limited relates to
United Texon Limited.
2 Accounting policies
The following accounting policies were adopted by the Directors and
have been applied consistently in dealing with items which are
considered material in relation to the Group financial statements.
a) Basis of preparation
The consolidated financial statements have been prepared in pounds
sterling and in accordance with generally accepted accounting
principles in the UK ("UK GAAP"). These accounting principles differ in
certain significant respects from accounting principles generally
accepted in the United States ("US GAAP"). Note 30 sets out a
description and the related effect on net income/(loss) and
shareholders' deficit of the significant differences.
F-8
2 Accounting policies (continued)
b) Accounting convention
The financial statements are prepared under the historical cost
convention.
c) Basis of consolidation
The consolidated financial statements incorporate the financial
statements of Texon International plc and all its subsidiary
undertakings for the years ended December 31, 1999 and 1998 and a
profit and loss account of United Texon Limited and all its subsidiary
undertakings for the year ended December 31, 1997.
The consolidated financial statements incorporate the results and
assets and liabilities of each company and its subsidiaries after
eliminating intercompany balances and transactions.
d) Sales turnover
Sales turnover comprises the invoiced value (excluding value added tax)
for the sale of products sold from stock, the provision of machine
servicing and the leasing of machines. Sales turnover is recognized at
the time of shipment of products, the date of provision of service, or
over the life of the lease.
e) Financial instruments and Foreign exchange
The derivative instruments utilized by the Group are forward exchange
contracts. These instruments are used for hedging purposes to alter the
risk profile of an existing underlying exposure of the Group in line
with the Group's risk management policies. The Group does not enter
into speculative derivative contracts or interest rate swaps.
Termination payments made or received are spread over the life of the
underlying exposure in cases where the underlying exposure continues to
exist. In other cases termination payments are taken to the profit and
loss account.
Transactions denominated in foreign currencies are recorded at the
rates ruling on the date of the transaction, unless matching forward
foreign exchange contracts have been entered into, in which case the
rate specified in the relevant contract is used. At the balance sheet
date unhedged monetary assets and liabilities denominated in foreign
currencies are translated at the rate of exchange ruling at that date.
The closing assets and liabilities of companies in the Group
denominated in overseas currencies have been translated at the exchange
rates ruling at the balance sheet date. The results for the year of
overseas companies have been translated at the average exchange rate
relevant for the period. Differences arising on the translation of net
assets and the results for the year denominated in overseas currencies
are taken to reserves net of the effect of foreign exchange contracts
and foreign currency borrowings entered into for the purpose of hedging
those exposures. All other profits or losses on exchange are dealt with
in the profit and loss account.
f) Stock
Stock is stated at the lower of cost, including factory overheads where
applicable, and net realizable value on a first in first out basis.
Provision is made for slow-moving and obsolete items.
F-9
2 Accounting policies (continued)
g) Research and development
Research, development and patent expenditure is written off in the year
in which it is incurred.
h) Depreciation of tangible fixed assets
Depreciation of tangible fixed assets is provided on the cost of the
assets so as to write off the cost less the estimated residual value of
the assets over their estimated useful lives by equal annual
installments over the following periods:
Years
-----
Freehold Buildings................... 20 to 45
Leasehold Improvements............... Over the period of
tenure of the lease
Leased Machinery..................... 5 to 10
Plant and Equipment.................. 5 to 15
Office Equipment..................... 3 to 10
Motor Vehicles....................... 3 to 5
Depreciation is not provided on freehold land.
i) Lease commitments
Where leases are entered into which entail taking substantially all the
risks and rewards of ownership of an asset, the lease is treated as a
'finance lease'. Other leases are treated as operating leases.
An asset subject to a finance lease is recorded in the consolidated
balance sheet as a tangible fixed asset and is depreciated over its
estimated useful life or the term of the lease, whichever is shorter.
Future installments under such leases, net of finance charges, are
included within creditors. Rentals payable are apportioned between the
finance element, which is charged to the profit and loss account, and
the capital element which reduces the outstanding obligation for future
installments.
Operating lease payments are charged to the consolidated profit and
loss accounts on a straight-line basis over the life of the lease.
j) Machinery leased to customers
Leased Machinery retained by the Group, is included in tangible fixed
assets at cost to the Group less accumulated depreciation. Cost
includes factory overheads and, where applicable, costs of importation.
Leases to third parties are treated as operating leases and income from
them is recognized over the lease period.
k) Taxation
The charge for taxation is based on the profit/(loss) for the year and
takes into account taxation deferred because of timing differences
between the treatment of certain items for taxation and accounting
purposes. Provision is made for deferred tax only to the extent that it
is probable that an actual liability will crystallize.
F-10
2 Accounting policies (continued)
l) Pensions and other post retirement benefits
Pension schemes are operated in the UK and in overseas countries. The
expected cost of defined benefit pension schemes is charged to the
consolidated profit and loss accounts so as to spread the cost of
pensions over the remaining service lives of employees in the scheme.
Variations from the regular cost are spread over the expected remaining
service lives of current employees in the scheme. The pension cost is
assessed in accordance with the advice of qualified actuaries.
Provision is also made for post retirement medical and life assurance
benefits of retired employees and certain current employees in the USA.
m) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expense during the reporting period. Actual results could differ
from those estimates.
n) Discontinued operations
United Texon Limited carried out its activities through two divisions:
the Machinery division and the Materials division. On December 31,
1997, the group of companies comprising the Machinery division was
disposed of and accordingly the results of this division have been
separately disclosed for this year.
o) Acquisitions and Goodwill
On the acquisition of a business, fair values are attributed to the
Group's share of net separable assets.
Any excess of the fair value of purchase consideration of investment
including acquisition costs, over the fair value of net assets is held
on the balance sheet as purchased goodwill and amortized to the profit
and loss account over 20 years, its estimated useful life in compliance
with FRS 10. Any negative goodwill will be recognized as a `negative
asset' and will be shown immediately below purchased goodwill and
written back through the statement of total recognized gains and
losses.
Goodwill written off to a goodwill reserve under the Group's previous
policy was not reinstated as allowed by FRS 10, however it was deducted
from the profit and loss account reserve to comply with the new
Standard.
The results and cash flows relating to the businesses acquired are
included in the consolidated profit and loss account and the
consolidated cash flow statement from the date of the acquisition.
p) Concentration of Credit Risk
Financial instruments which potentially subject Texon International plc
to concentrations of credit risk consist principally of accounts
receivable. Texon International plc sells the majority of its products
through distributors, retailers and resellers. Credit risk with respect
to accounts receivable is generally diversified due to the number of
entities comprising Texon International plc's customer base and their
dispersion across different geographies. Texon International plc
generally sells on open account and performs periodic credit
evaluations of its customers' financial condition.
F-11
2 Accounting policies (continued)
q) Debt Issuance Costs
Finance costs incurred by the group on issuance of the senior notes are
amortized to the profit and loss account over the life of the finance,
that being ten years.
Finance costs incurred by the group on issuance of the January 1998,
three year revolving credit facility were to be amortized to the profit
and loss account over its life. On July 22, 1999 the revolving credit
facility was changed (see note 16) and debt issuance costs are now
amortized over five years.
Finance costs incurred by the group on issuance of the Term loan are
amortized to the profit and loss account over the life of the finance,
that being five years.
Unamortized debt issuance costs are netted off the debt within
creditors according to FRS 4.
F-12
3 Analysis of turnover, operating profit, and capital employed
Texon International plc is the continuing operation of the Materials
business and the 1999 and 1998 results reflect this.
In 1997 operations were divided into two reportable segments: Materials
and related products and Machinery and related products. As discussed
in Note 1, the Materials and Machinery business is separated and the
Machinery business sold with effect from December 31, 1997.
Consequently, the following analyses show the activities of each of the
businesses split between "continuing" and "discontinued" operations.
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Turnover analyzed by major business segment:
Continuing operations............................... 122,343 110,880 126,627
Discontinued operations............................. 67,048 - -
------- ------- -------
189,391 110,880 126,627
Sales between operations............................ (1,580) - -
------- ------- -------
External turnover................................... 187,811 110,880 126,627
======= ======= =======
Operating profit/(loss) analyzed
by major business segment:
Continuing operations............................... 9,609 12,581 12,856
Discontinued operations............................. (2,619) - -
------- ------- -------
6,990 12,581 12,856
======= ======= =======
Capital expenditures:
Continuing operations............................... 1,722 2,038 3,720
Discontinued operations............................. 1,538 - -
------- ------- -------
3,260 2,038 3,720
======= ======= =======
Depreciation and amortization:
Continuing operations............................... 2,355 1,910 3,500
Discontinued operations............................. 2,583 - -
------- ------- -------
4,938 1,910 3,500
======= ======= =======
Information as to the operations of the Group in these two business
segments is presented below. The Group evaluates performance based on
several factors, of which operating profit is the primary financial
measure.
F-13
3 Analysis of turnover, operating profit, and capital employed
(continued)
Texon International plc
Year ended Year ended
December 31, 1998 December 31, 1999
----------------- -----------------
(pound)000 (pound)000
Operating assets/(liabilities)
employed by major business segment:
Continuing operations............... 21,284 52,130
Discontinued operations............. - -
-------- ---------
21,284 52,130
Cash................................ 721 1,025
Borrowings.......................... (90,539) (107,608)
Taxes............................... (998) (389)
Accrued bank interest............... (3,609) (4,395)
Non-operating accruals.............. - -
-------- ---------
(94,425) (111,367)
-------- ---------
Net liabilities..................... (73,141) (59,237)
======== =========
Geographical analysis of continuing operations is as follows:
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Turnover analysis by company location:
Europe.......................................... 80,413 73,991 87,968
Americas........................................ 23,652 22,549 20,825
Asia............................................ 11,167 9,643 11,431
Other........................................... 7,111 4,697 6,403
------- ------- -------
122,343 110,880 126,627
======= ======= =======
Export sales from the UK........................ 16,825 14,872 21,988
======= ======= =======
Turnover analysis by destination :
Europe.......................................... 59,178 54,784 62,327
Americas........................................ 21,658 20,436 18,180
Asia............................................ 26,398 25,857 33,702
Other........................................... 15,109 9,803 12,418
------- ------- -------
122,343 110,880 126,627
======= ======= =======
Operating profit analysis by Company location :
Europe.......................................... 6,449 8,669 8,789
Americas........................................ 1,665 2,033 2,174
Asia............................................ 1,135 1,997 1,800
Other........................................... 360 (118) 93
------- ------- -------
9,609 12,581 12,856
======= ======= =======
F-14
3 Analysis of turnover, operating profit, and capital employed (continued)
Geographical operating assets employed analyzed by Company location for
Continuing Operations is as follows:
Texon International plc
-----------------------
As of December As of December
31, 1998 31, 1999
-------------- --------------
(pound)000 (pound)000
Europe........................... 9,174 38,833
Americas......................... 2,983 2,702
Asia............................. 7,132 6,947
Other............................ 1,995 3,648
------ ------
21,284 52,130
====== ======
Operating assets have been analyzed above, rather than net assets, as
it more appropriately reflects the Groups' operations by excluding cash
balances and amounts falling due in one year for bank loans and
overdrafts, obligations under finance leases and accrued interest and
the accrued consideration for the Acquisition in 1997.
The customer base is diverse both in its geographical spread, types of
footwear companies (athletic and traditional, men's and women's) and
across the spectrum of branded shoe companies, manufacturers,
converters and distributors. No single customer accounted for more than
7.5% of sales in 1999, 1998, and 1997.
The Company purchases most of the raw materials for its products on the
open market, and sales may be affected by changes in the market price
of such raw materials.
The Company does not engage in commodity hedging transactions for raw
materials. Although the Company has generally been able to pass on
increases in the price of raw materials to its customers, there can be
no assurance that it will be able to do so in the future, on a timely
basis or at all. The results of operations have in the past been
affected by fluctuations in the price of the primary raw material, wood
pulp, for its cellulose products. Additionally, significant increases
in the price of the Company's products due to increases in the cost of
raw materials, could have a negative effect on demand for its products
and a material adverse effect on the Company's business, financial
condition and results of operation.
F-15
4 Operating profit
Operating profit/(loss) is stated after charging:
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Marketing and distribution costs..... 33,235 17,602 19,002
Research and development costs....... 3,810 1,481 1,729
Administrative expenses
Operating expenses................ 9,838 5,406 6,423
Other expenses.................... 10,601 1,617 2,534
------ ------ ------
57,484 26,106 29,688
====== ====== ======
Operating profit relating to continuing operations is stated after charging:
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Marketing and distribution costs...... 19,428 17,602 19,002
Research and development costs........ 1,351 1,481 1,729
Administrative expenses:
Operating expenses.................. 5,285 5,406 6,423
Other expenses...................... 6,868 1,617 2,534
------ ------ ------
32,932 26,106 29,688
====== ====== ======
F-16
5 Exceptional items
a) Exceptional items included within operating profit:
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Operating profit before exceptional items... 12,649 13,400 13,122
Exceptional administrative expenses:
Costs of abortive sale......................i) (1,712) - -
Refinancing costs...........................ii) (1,144) - -
Share options...............................iii) (2,803) - -
Restructuring costs.........................iv) - (819) (266)
----- ------ ------
Operating profit for the period............. 6,990 12,581 12,856
===== ====== ======
In addition to the above exceptional items the exceptional property
profit disclosed on the face of the profit and loss account arose from
the sale of the Groups' property in Leicester.
None of the exceptional items had an effect on the tax charge.
i) Costs of abortive sale
In October 1997, the shareholders of United Texon Limited aborted a
proposed sale of its shares. The costs of this abortive sale, amounting
to (pound)1,712,000, have been treated as an exceptional item.
ii) Refinancing costs
In July 1997, United Texon Limited refinanced its Senior Loan
facilities with a syndicate of banks led by Chase Manhattan Bank plc.
The cost of this refinancing, amounting to (pound)1,144,000, has been
treated as an exceptional item.
iii) Share options
On October 22, 1997 United Texon Limited issued share options to five
senior employees. The excess of market value over the exercise price of
the options, estimated at (pound)2,803,000, has been treated as an
exceptional item.
iv) Restructuring costs
Following the demerger that occurred in 1997 (see note 1) the Group has
undergone a restructuring program which has led to costs in 1999 of
(pound)266,000 and 1998 of (pound)819,000.
b) Profit on sale of discontinued operation
Effective December 31, 1997, the entire Machinery division ("Machinery Group")
was sold by United Texon Limited for a nominal consideration to a new company
owned principally by United Texon Limited's shareholders. The net gain on the
sale of the Machinery Group amounted to (pound)1,602,000. The total profit on
disposal being (pound)3,250,000 with (pound)1,648,000 of costs associated with
the demerger. The net gain has been treated as an exceptional item.
F-17
5 Exceptional items (continued)
The exceptional items relating to the discontinued operations had no
effect on United Texon Limited's tax charge or minority interest.
6 Profit/(loss) on ordinary activities before interest and taxation
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Profit on ordinary activities before
interest is stated after
charging/(crediting):
Combined group
Depreciation of tangible fixed assets :
Owned................................ 4,768 1,744 2,874
Leased............................... 170 140 326
Amortization of goodwill............. - 26 300
Operating lease charges :
Hire of plant & machinery............ 1,360 539 797
Other lease charges.................. 1,657 798 1,044
Finance lease charges :
Plant and machinery.................. 77 66 153
Leased machinery..................... 322 - -
Profit on sale of properties........... (386) (957) (1,000)
Loss/(profit) on sale of other assets.. (251) (51) (3)
Net foreign exchange losses............ 51 19 (36)
Provision for doubtful debtors......... 558 469 263
Continuing operations
Depreciation of tangible fixed assets :
Owned................................ 2,213 1,744 2,874
Leased............................... 142 140 326
Amortization of goodwill............. - 26 300
Operating lease charges :
Hire of plant & machinery............ 546 539 797
Other lease charges.................. 742 798 1,044
Finance lease charges :
Plant and machinery.................. 68 66 153
Profit on sale of properties........... (386) (957) (1,000)
Loss/(profit) on sale of other assets.. (266) (51) (3)
Net foreign exchange losses............ (53) 19 (36)
Provision for doubtful debtors......... 378 469 263
F-18
7 Interest payable and similar charges
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Interest payable and similar
charges in respect of :
Bank loans and overdrafts.......... (7,874) (2,109) (1,431)
Debentures......................... (3,041) - -
Term loan.......................... - - (437)
Senior notes....................... - (7,662) (8,847)
Gain on repurchase of loan notes... - 530 -
Finance charges allocated
for the year in respect of
finance leases.................. - (66) (153)
Debt issuance costs amortized...... - (682) (788)
------- ------ -------
(10,915) (9,989) (11,656)
====== ===== ======
8 Directors and employees
The average number of employees of the Group (including directors) was
made up as follows:
United Texon
Limited Texon International plc
----------------- ----------------------------------------------------------
Year ended Year ended Year ended Year ended
December 31, 1997 December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- ----------------- -----------------
Manufacturing........................ 1,021 603 577 792
Selling, distribution and
administration.................... 1,058 468 460 488
----- ----- ----- -----
2,079 1,071 1,037 1,280
===== ===== ===== =====
Total number of employees as at
31 December....................... 1,071 1,071 993 1,575
===== ===== ===== =====
Payments in respect of these employees were as follows:
United Texon
Limited Texon International plc
----------------- ----------------------------------------------------------
Year ended Year ended Year ended Year ended
December 31, 1997 December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000 (pound)000
Wages............................ 43,980 - 20,740 25,496
Social security costs............ 5,342 - 3,170 3,123
Other pension costs.............. 2,959 - 1,031 1,362
Health and other payroll
costs............................ 2,033 - 1,026 1,612
------ ------ ------ ------
54,314 - 25,967 31,593
====== ====== ====== ======
F-19
8 Directors and employees (continued)
Directors' emoluments including pension contributions comprise:
United Texon
Limited Texon International plc
----------------- ----------------------------------------------------------
Year ended Year ended Year ended Year ended
December 31, 1997 December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000 (pound)000
Fees......................... 60 - 36 20
Other emoluments............. 1,146 - 402 335
Pensions..................... 117 - 59 60
------ ------ ------ ------
1,323 - 497 415
====== ====== ====== ======
Included within other emoluments for the year ended December 31, 1997,
is (pound)375,000, paid as compensation to Directors and past Directors
for loss of office. Directors of United Texon Limited who were
compensated during 1997 were Dr Coutts who resigned from United Texon
Limited on December 31, 1997 and Mr Fleming, who following the sale of
the Machinery business, resigned from the Machinery division on
December 31, 1997 and was compensated by British United Shoe Machinery
Co Limited, a subsidiary within the Machinery division.
Pension contributions of the highest paid Director were (pound)31,000
for the year ended December 31, 1999 (1998:(pound)28,000). There were
two directors with benefits accruing under money purchase pension
schemes (1998: two).
Directors' emoluments:
Directors' emoluments including pension contributions were paid by
United Texon Limited for the year's ended 31 December 1999, 1998 and
1997.
The emoluments of the Chairman were (pound)545,000 for the year ended
December 31, 1997.
Emoluments of the highest paid Director were (pound)175,000,
(pound)211,000, and (pound)545,000 for the years ended December 31,
1999, 1998 and 1997 respectively.
The remuneration of the executive Directors is authorized by the
Remuneration Committee of the Board, which consists of non-executive
Directors only. Additional information relating to Directors share
options is located in Note 18.
F-20
9 Taxation
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Taxable income/(loss)::
UK................................... (11,590) (3,682) (4,526)
Overseas............................. 9,565 7,391 (7,062)
------ ------ ------
(2,025) 3,709 2,536
====== ====== ======
The tax charge is made up as follows:
UK taxation
Corporation Tax at 30.25% (1998:31% and
1997:31.5%)....................... - - -
Deferred Tax......................... (247) (15) 24
Overseas taxation......................
Corporation Tax...................... (1,796) (1,389) (1,763)
Withholding Tax...................... (3) (127) -
Deferred Taxation.................... 36 (8) 25
------ ------ ------
(2,010) (1,539) (1,714)
Prior Year Adjustments
Corporation Tax...................... 22 236 -
Overseas Taxation.................... - - (40)
------ ------ ------
(1,988) (1,303) (1,754)
====== ====== ======
Continuing Operations.................. (1,492) (1,303) (1,754)
Discontinued operations................ (496) - -
------ ------ ------
(1,988) (1,303) (1,754)
====== ====== ======
For the year ending December 31, 1999 the charge for UK Corporation Tax
at 30.25% (1998:31% and 1997:31.5%) is stated after double tax relief
of (pound)588,000 (1998:(pound)382,000 and 1997:(pound)512,000).
At December 31, 1999, Texon International plc and its subsidiaries had
carried forward tax losses available for continuing operations of
(pound)16,214,000, with (pound)3,901,000 expiring between December 31,
1999 and December 31, 2006 and (pound)12,313,000 being unlimited.
The taxable profits generated by the Foshan Texon Cellulose Board
Manufacturing Co Limited are subject to half the standard rate for the
three years ending December 2000 (the current standard rate is 24%).
F-21
9 Taxation (continued)
The table below reconciles the expected UK statutory charge to the
actual taxes:
United Texon
Limited Texon International plc
------- -----------------------
Year ended Year ended Year ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000
Expected taxation charge/(benefit)
at UK corporation
tax rates (1999:30.25%, 1998:31%
and 1997:31.5%)...................... (638) 1,150 767
Current year tax losses not relieved... 4,043 1,137 2,872
Benefit of prior year losses........... (2,922) (1,024) (1,323)
Withholding tax........................ 3 127 -
Overseas tax rates..................... 1,469 48 (360)
Prior year tax adjustment.............. (22) (236) 40
Benefit of overseas tax holiday........ (229) - -
Non-taxable gain on disposal of
discontinued operations.............. (1,024) - -
Non-deductible expenses................ 1,308 101 (242)
------ ------ ------
Actual taxes on income................. 1,988 1,303 1,754
====== ====== ======
To the extent that dividends remitted from overseas subsidiaries and
associated undertakings are expected to result in additional taxes,
appropriate amounts have been provided. No taxes have been provided for
unremitted earnings of subsidiaries and associated undertakings when
such amounts are considered permanently re-invested.
10 Consolidated tangible fixed assets
Land and Plant Machinery
Buildings and Office Motor Leased to
Machinery Equipment Vehicles Customers Total
------ ------ ------ ------ ------ ------
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000
Cost
At January 1, 1999........ 3,586 10,678 479 220 42 15,005
Exchange adjustment....... (260) (140) (44) - 2 (442)
Additions.................. 362 2,634 648 76 - 3,720
Disposals................. (3) (714) (127) (104) - (948)
Acquisition of businesses. 2,578 5,077 208 65 - 7,928
----- ----- ----- ----- ----- ------
At December 31, 1999...... 6,263 17,535 1,164 257 44 25,263
===== ===== ===== ===== ===== ======
Accumulated depreciation
At January 1, 1999........ 238 1,483 91 38 39 1,889
Exchange adjustment....... (14) (76) (7) (1) 2 (96)
Provided during the year.. 320 2,589 227 62 2 3,200
Disposals................. (3) (548) (107) (45) - (703)
----- ----- ----- ----- ----- ------
At December 31, 1999...... 541 3,448 204 54 43 4,290
===== ===== ===== ===== ===== ======
Net book value
At December 31, 1999...... 5,722 14,087 960 203 1 20,973
===== ===== ===== ===== ===== ======
At December 31, 1998...... 3,348 9,195 388 182 3 13,116
===== ===== ===== ===== ===== ======
Included in the total net book value of plant and machinery at December
31, 1999 is (pound)2,153,000 (December 31, 1998:(pound)871,000) in
respect of assets held under finance leases and similar hire purchase
contracts.
Depreciation charged during the year ended December 31, 1999 related to
such plant and machinery is (pound)326,000 (December
31,1998:(pound)140,000).
Land and Buildings comprise:
Short
Freehold Leasehold Total
---------- ---------- ----------
(pound)000 (pound)000 (pound)000
Cost
At January 1, 1999........... 3,563 23 3,586
Exchange adjustment.......... (262) 2 (260)
Additions.................... 350 12 362
Disposals.................... - (3) (3)
Acquisition of businesses.... 2,561 17 2,578
---------- ---------- ----------
At December 31,1999.......... 6,212 51 6,263
========== ========== ==========
F-23
10 Consolidated tangible fixed assets (continued)
Short
Freehold Leasehold Total
-------- --------- -----
(pound)000 (pound)000 (pound)000
Depreciation
At January 1, 1999.......... 230 8 238
Exchange adjustment......... (14) - (14)
Provided during the year.... 308 12 320
Disposals................... - (3) (3)
----- ----- -----
At December 31, 1999........ 524 17 541
===== ===== =====
Net book value
At December 31, 1999........ 5,688 34 5,722
===== ===== =====
At December 31, 1998........ 3,333 15 3,348
===== ===== =====
11 Goodwill
1999
----
(pound)000
Cost
At January 1, 1999..................... 698
Additions (note 21).................... 13,080
Foreign exchange....................... (745)
-------
At December 31, 1999................... 13,033
=======
Amortization
At January 1, 1999..................... 26
Provided in the year................... 300
------
At December 31, 1999................... 326
Net Book Value
At December 31, 1999................... 12,707
=======
At December 31, 1998................... 672
=======
12 Investments
During the year the Group acquired unlisted investments of
(pound)14,000.
13 Stocks
As of December As of December
31, 1998 31, 1999
(pound)000 (pound)000
Raw materials............................ 2,106 5,055
Work in progress......................... 1,269 1,442
Finished goods and goods for resale...... 12,406 14,969
------ ------
15,781 21,466
====== ======
F-24
14 Debtors
As of December As of December
31, 1998 31, 1999
-------------- -------------
(pound)000 (pound)000
Amounts falling due within one year:
Trade Debtors, net of(pound)1,149,000
(1998:(pound)1,261,000) allowance
for doubtful debtors................... 16,028 24,498
Other Debtors............................ 1,046 1,239
Prepayments and accrued income........... 505 754
------ ------
17,579 26,491
====== ======
Amounts falling due after more than
one year:
Other debtors............................ 2,058 3,348
Total debtors............................ 19,637 29,839
Other debtors falling due after more than one year relates to deposits
on leased assets, bonds and cash surrender insurance. The movement on
the allowance for doubtful debts may be analyzed as follows:
Year ended Year ended
December 31, December 31,
1998 1999
------------ ------------
(pound)000 (pound)000
Balance at beginning of year....... 1,529 1,261
Charge for the year................ 469 263
Utilized during the year........... (181) (669)
Utilized on pre-demerger debts..... (533) -
Businesses acquired................ - 341
Exchange adjustment................ (23) (47)
Balance at end of year............. 1,261 1,149
F-25
15 Creditors
As of As of
December 31, December 31,
1998 1999
----------- -----------
(pound)000 (pound)000
Amounts falling due within one year:
Bank loans and overdrafts............... 6,935 10,631
Obligations under finance leases........ 372 632
Payments received on account............ 119 134
Trade creditors......................... 7,744 14,521
Taxation and social security............ 2,690 2,960
Other creditors......................... 1,231 641
Accruals................................ 11,858 10,872
------ ------
30,949 40,391
====== ======
As of As of
December 31, December 31,
1998 1999
----------- -----------
(pound)000 (pound)000
Amounts falling due after more one year:
Bank loans and overdrafts.................. 3,215 25,168
Obligations under finance leases........... 873 855
Senior Notes............................... 80,389 71,281
Loan Notes................................. - 528
------ ------
84,477 97,832
====== ======
16 Borrowings and Derivatives
Senior Secured Notes and Term Loan
At January 1, 1999 Texon International plc held a Credit Agreement with
Chase Manhattan and other institutions for a multi-currency revolving
facility of (pound)15.0 million. This was replaced in order to fund the
acquisition of Esjot on 22 July 1999 with the following facilities;
1. Euro term loan facility of Euro 30,000,000 (proceeds used
specifically to fund the purchase price of Esjot). This is
repayable by July 1, 2004 by way of semi-annual installments, the
first being due on January 1, 2000.
2. Five year revolving credit facility in a maximum aggregate amount
not exceeding Euro 15,000,000 or its equivalent in optional
currencies.
The above facilities bear interest at a rate of LIBOR plus 2% per
annum, subject to certain reductions based on financial performance.
Texon International plc will be required to make mandatory prepayments
of all outstanding loans under the Revolving Facility upon the
occurrence of a flotation, debt refinancing or change of control of the
Company.
The Credit Agreement contains customary covenants including
restrictions on disposal of assets, incurring additional indebtedness
or contingent liabilities, making acquisitions or investments, engaging
in mergers or consolidations, or amending other debt instruments.
F-26
16 Borrowings and Derivatives (continued)
In addition, the Company is required to comply with specified financial
ratios, including a total net interest cover ratio, a fixed charge
ratio and a total debt to EBITDA ratio, calculated on a rolling 12
month basis. The Credit Agreement also contains customary events of
default including payment default, covenant default, cross-default and
certain events of insolvency.
The Euro Term Loan Facility and the Revolving Credit Facility are
secured by way of a fixed and floating charge over the assets of Texon
UK Ltd and a share pledge on the share capital of Texon Italia SpA.
Amounts outstanding under the term loan and revolving credit facility
are shown net of related expenses of (pound)774,070 (1998
(pound)419,184) and these are being amortized over their respective
lives, those being 5 years.
Under the revolving facility the Group has unused available bank
facilities as of 31 December 1999 of (pound)5.1 million (31 December
1998 (pound)11.9 million).
Senior Notes Financing
On 30 January 1998 the Company issued DM 245,000,000 (approximately
(pound)82.2 million) of 10% Series A Senior notes (the 'Notes') due 1
February 2008. On 23 October 1998 the Company purchased, at a discount,
DM 7,000,000 of these Notes, for DM 5,681,944 (approximately
(pound)2.05 million). Interest is payable on 1 February and 1 August of
each year commencing on 1 August 1998.
The Notes are subjected to restrictive covenants similar to those in
the Credit Agreement. The Company may be required to redeem the Notes
at 101% of the principal amount, together with accrued and unpaid
interest upon a change of control.
The Notes are shown net of related expenses of (pound)4,274,123 (1998
(pound)4,803,816) and these are being amortized over the life of the
Notes, that being 10 years.
Other Financing
Other loans and overdrafts which are not significant represent credit
facilities of subsidiaries with third parties. In addition the Group
has a number of finance lease obligations. The finance lease
obligations are secured on the assets to which they relate.
Financial Instruments
The group does not trade in financial instruments.
Short term debtors and creditors have been omitted from all
disclosures.
F-27
16(a) Maturity Profile of Financial Liabilities
As of As of
December 31, December 31,
1998 1999
----------- -----------
(pound)000 (pound)000
Amounts falling due within one year
or less or on demand:
Euro Term Loan............................ - 2,105
Other Bank Loans and Overdrafts........... 6,935 8,526
Obligations under Finance Leases.......... 372 632
------ ------
7,307 11,263
====== ======
Amounts falling due in more than one
year but not more than two years:
Euro Term Loan............................. - 3,130
Obligations under Finance Leases........... 404 713
Other Bank Loans and Overdrafts............ - 148
------ ------
404 3,991
====== ======
Amounts falling due in more than two
years but not more than five years:
Euro Term Loan............................. - 12,914
Other Bank Loans........................... 3,215 8,886
Obligations under Finance Leases........... 469 142
Loan Notes................................. - 328
------ ------
3,684 22,270
====== ======
Amounts falling due in more than five
years:
Other Bank Loans........................... - 90
Loan Notes................................. - 200
Senior Notes............................... 80,389 71,281
------ ------
80,389 71,571
====== ======
Total Borrowings........................... 91,784 109,095
====== =======
The group had the following undrawn borrowing facilities at 31 December:
As of As of
December 31, December 31,
1998 1999
----------- -----------
(pound)000 (pound)000
Expiry date
In one year or less.............. 976 2,318
In more than one year but not
more than two years.............. - -
In more than two years........... 10,959 2,787
------- -----
Total............................ 11,935 5,105
======= ======
In addition the Group holds DM7.0 million of Senior Notes that could be
sold in the market (1998:DM7.0 million).
F-28
16(b) Interest Rate Profile
The following is an interest rate and currency profile of the group's
financial liabilities and assets. The group has not entered into any
interest rate swaps for the year ended December 31, 1999.
Financial liabilities
Fixed rate financial
liabilities
Currency Floating Non-interest
Total rate Fixed rate bearing Weighted Weighted
financial Financial Financial average average
liabilities Liabilities Liabilities interest period for
rate which the
rate is
fixed
(pound)000 (pound)000 (pound)000 (pound)000 % Years
At 31 December 1999
Sterling .................. 7,993 6,384 1,409 200 7.9 4.3
Euro ...................... 97,359 26,000 71,359 - 10.0 10
US$ ....................... 1,349 1,349 - - - -
Other ..................... 2,394 2,394 - - - -
------- ------- ------- ------- ---- ----
Total ..................... 109,095 36,127 72,768 200 10.0 9.9
======= ======= ======= ======= ==== ===
At 31 December 1998
Sterling .................. 1,792 547 1,245 - 7.3 4.2
Euro ...................... 88,773 8,384 80,389 - 10.0 10
US$ ....................... 1,145 1,145 -- - - -
Other ..................... 74 74 -- - - -
------- ------- ------- ------- ---- ----
Total ..................... 91,784 10,150 81,634 - 10.0 9.9
======= ======= ======= ======= ==== ====
The non-interest bearing financial liability in 1999 is a loan acquired
with Cornwell Industries Ltd that has no fixed maturity date. Interest
on floating rate liabilities is based on the relevant national inter
bank rates.
The information in this table is shown net of unamortized debt issuance
costs. In addition the Company has in issue (pound)52 million
((pound)5.2 million nominal value plus (pound)46.8 million share
premium) of redeemable cumulative preference shares with a redemption
premium rate of 6.75% per annum, see note 18.
F-29
16(b) Interest Rate Profile (continued)
Financial assets
Non-interest bearing
assets
Currency Total Floating rate Fixed rate Fixed asset Other non-
Financial Financial investments interest
Assets Assets bearing
financial
assets
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000
At 31 December 1999
Sterling ................................. 2,025 - 2,000 14 11
Euro ..................................... 538 51 - - 487
US$ ...................................... 936 137 - - 799
Other .................................... 888 451 - - 437
----- ----- ----- ----- -----
Total .................................... 4,387 639 2,000 14 1,734
----- ----- ----- ----- -----
At 31 December 1998
Sterling ................................. 1,071 3 1,000 - 68
Euro ..................................... 408 102 - - 306
US$ ...................................... 605 43 - - 562
Other .................................... 695 155 - - 540
----- ----- ----- ----- -----
Total .................................... 2,779 303 1,000 - 1,476
----- ----- ----- ----- -----
Financial assets comprise cash at bank and in hand of (pound)1.0m (1998
- (pound)0.7m), fixed asset investments of (pound)14,000 (1998 -
(pound)nil) and other debtors due in more than one year of (pound)3.3m
(1998 - (pound)2.1m). Non-interest bearing assets, other than
(pound)14,000 (1998 - (pound)nil) of fixed asset investments have no
maturity period.
Interest on floating rate bank deposits is based on the relevant
national inter bank rate. The weighted average rate and period for the
fixed rate deposits are 5.0% and 3.8 years (1998 - 5.0% and 4.8 years).
16(c) Fair values of financial assets and liabilities
The carrying values of the financial assets, financial liabilities and
redeemable cumulative preference shares shown below are not materially
different from the fair values, except for the Senior Secured Notes.
The fair value of the Senior Secured Notes less debt issuance costs was
(pound)59.9 million (1998:(pound)67.1 million). This has been
calculated by reference to market rates at the year end. The fair
values of the other financial assets and liabilities match the carrying
amount shown in the financial statements as the group has not entered
into any swaps or foreign currency contracts during the years ended 31
December 1999 and 1998.
Market values have been used to determine the fair values of all
foreign currency contracts and listed instruments issued or held.
F-30
16(c) Fair values of financial assets and liabilities (continued)
The following tables set out carrying values of financial assets and
liabilities.
Primary financial instruments held or issued to finance the Group's
Operations:
As of As of
December 31, December 31,
1998 1999
----------- -----------
Carrying Carrying
Amount Amount
(pound)000 (pound)000
Cash at bank, in hand and other
liquid investments ..................... 721 1,025
Fixed asset investments ................ - 14
Trade debtors due in more than one
year ................................... 2,058 3,348
----- -----
Gross financial assets ................. 2,779 4,387
===== =====
As of As of
December 31, December 31,
1998 1999
----------- -----------
Carrying Carrying
Amount Amount
(pound)000 (pound)000
Bank loans and overdrafts......... 10,150 35,799
Finance leases.................... 1,245 1,487
Senior secured notes.............. 80,389 71,281
Loan notes........................ - 528
------ ------
Gross financial liabilities....... 91,784 109,095
====== =======
Redeemable cumulative preference
shares issued by Texon
International plc......... 52,000 59,257
====== ======
The redeemable cumulative preference shares are shown above at their
nominal value plus share premium and premium on redemption.
Derivative financial instruments held to manage the currency profile:
As of December 31, 1998 As of December 31, 1999
----------------------- -----------------------
Book Estimated fair Book Estimated fair
value value value value
(pound)000 (pound)000 (pound)000 (pound)000
Forward foreign exchange
contracts................. - (286) - (613)
====== ====== ====== ======
16(d) Hedging
Gains and losses on instruments used for hedging are not recognized
until the exposure that is being hedged is itself recognized.
Unrecognized gains and losses on instruments used for hedging, and the
movements therein, are as follows:
F-31
16(d) Hedging (continued)
1998 1999
------------ ----------------------------------------------
Total net Gains Losses Total net
gains/ gains/
(losses) (losses)
(pound)000 (pound)000 (pound)000 (pound)000
Unrecognized gains and losses at 1
January .............................. - 124 - 124
Gains and losses arising in
previous years that were
recognized in the year ............... - 124 - 124
---- ---- ---- ----
Gains and losses arising before 1
January that were not recognized
in the year .......................... - - - -
Gains and losses arising in the
year that were not recognized in
the year ............................. 124 - (458) (458)
---- ---- ----
Unrecognized gains and losses on
hedges at 31 December ................ 124 - (458) (458)
==== ==== ==== ====
Gains and losses expected to be
recognized in the next financial
year ................................. 124 - (458) (458)
Gains and losses expected to be
recognized after the next
financial year ....................... - - - -
==== ==== ==== ====
------------------------------------
There were no losses for 1998.
16(e) Currency Profile
The main functional currencies of the Group are Sterling, US$ and
various European currencies now participating in the Euro. The
following analysis of net monetary assets and liabilities shows the
Group's currency exposures after the effects of forward contracts and
other derivatives used to manage currency exposure. The amounts shown
represent the transactional (or non-structural) exposures that give
rise to the net currency gains and losses recognized in the profit and
loss account. Such exposures comprise the monetary assets and monetary
liabilities of the Group that are not denominated in the operating (or
`functional') currency of the operating unit involved, other than
certain non-sterling borrowings treated as hedges of net investments in
overseas operations.
As of As of
December 31, December 31,
1998 1999
----------- -----------
(pound)000 (pound)000
Euros............................. (973) (27)
AU $.............................. 8 (125)
HK $.............................. 582 4
US $.............................. (536) (324)
------------ ------------
Total.............................. (919) (472)
============ ============
16(f) The year end borrowings position and exposure to derivatives was, with
the exception of differences outlined above, typical of the pattern
that existed in the year. There has been no change in the role of
financial instruments in the Group between the year end and the date of
approval of the financial statements.
F-32
17 Provisions for Liabilities and Charges
Group
Deferred Other
Pensions Taxation Provisions Total
---------- -------- ---------- --------
(pound)000 (pound)000 (pound)000 (pound)000
At 1 January 1999 .......... 3,814 (205) 4,033 7,642
Exchange adjustment ........ (437) 35 (84) (486)
Provided ................... 221 (49) 1,043 1,215
Utilised ................... (88) - (1,245) (1,333)
------ ------ ------ ------
At 31 December 1999 ........ 3,510 (219) 3,747 7,038
====== ====== ====== ======
Pensions
Pensions are discussed in note 26.
Deferred Taxation
1999 1998
------ ------
(pound)000 (pound)000
Deferred Taxation is represented by:
Excess of Capital Allowances over
accumulated depreciation.................. (41) (51)
Intercompany profit contained in stock....... (271) (262)
Other Provisions and timing differences...... 93 108
----- -----
(219) (205)
===== =====
Properties included in the accounts at more than their historical cost
in the local books of Group companies could give rise to a tax
liability of approximately (pound)254,000 (1998:(pound)285,000) if sold
at net book value. Provision for this liability has not been made in
the accounts as in some cases there is no intention of selling the
properties and in others any tax liability would be extinguished by
available tax losses. Otherwise the total potential liability for
deferred tax, not shown in the accounts, is (pound)nil (1998:
(pound)nil).
Other provisions
Other provisions at December 31, 1999 relate principally to employee
costs including post retirement medical and life insurance benefits and
unfunded pension liabilities. There is no set payment date for these
liabilities.
F-33
18 Dividends and Share capital
a) Dividends
1998 1999
------ ------
(pound)000 (pound)000
5% Cumulative preference dividend proposed
on non-equity shares..................... 2,600 -
===== =====
b) Share capital
Texon International plc
As of As of
December 31, December 31,
1998 1999
Number of (pound) Number of (pound)
shares shares
--------- ---------- --------- -----------
AUTHORIZED SHARE CAPITAL
Ordinary A voting shares of(pound)1 each ... 3,436,277 3,436,277 3,436,277 3,436,277
Ordinary A non-voting shares of(pound)1 each 163,723 163,723 163,723 163,723
Ordinary B voting shares of(pound)1 each ... 400,000 400,000 400,000 400,000
Redeemable cumulative preference shares
of 10p each ................................ 52,000,000 5,200,000 52,000,000 5,200,000
---------- ----------
9,200,000 9,200,000
========= =========
As of As of
December 31, December 31,
1998 1999
Number of (pound) Number of (pound)
shares shares
--------- ---------- --------- -----------
CALLED UP, ALLOTTED AND FULLY PAID SHARE CAPITAL
Ordinary A voting shares of(pound)1 each ....... 3,436,277 3,436,277 3,436,277 3,436,277
Ordinary A non-voting shares of(pound)1 each 163,723 163,723 163,723 163,723
Ordinary B voting shares of(pound)1 each ....... 320,000 320,000 320,000 320,000
Redeemable cumulative preference
shares of 10p each ........................... 52,000,000 5,200,000 52,000,000 5,200,000
---------- ----------
9,120,000 9,120,000
========== ==========
At December 31, 1998 the redeemable cumulative preference shares (shown
as non-equity interests in the balance sheet) carried a fixed
cumulative dividend, calculated as a percentage of the redemption value
of (pound)52.0 million, payable semi-annually at a rate exclusive of
any associated tax credit. On March 11, 1999 a Special Resolution was
passed by the Shareholders to amend the Articles of Association of the
Company to reflect a change in the dividend percentage. The new
Articles stated that for periods ending on or prior to December 31,
2000, the preference dividend would accrue at the rate of 6.75% per
annum rather than at 15% as shown by the previous agreement. This
change was retrospective and any entitlement to the higher rate in
historic periods was waived by the Shareholders. There was no change
made to the period post January 1, 2001 where, in the absence of a sale
or listing of the Company the preference dividend would accrue at the
rate of 15% per annum through to September 30, 2002, and at 25%
thereafter.
F-34
18 Dividends and Share Capital (continued)
The new articles also provided that the payment of a 5% per annum
dividend on or prior to the due date was deemed to satisfy the full
6.75% rate for periods up to December 31, 2000 - provided that arrears
of accrued but unpaid dividends in respect of previous periods had been
paid by this date. In the event that the dividend was not paid on the
due date it was to accumulate at a rate of 6.75%.
In connection with the Company's refinancing on July 22, 1999, see note
14, the preference shareholders agreed to waive retrospectively their
right to receive a semi-annual preference dividend and in its place
accepted an additional redemption premium of 6.75% (excluding any
associated tax credit), compounding annually from the date of issue of
the preference shares. The redemption premium will become payable to
the preference shareholders on the earlier of:
o a sale of the Company; or
o an initial public offering of the Company's equity securities.
The redemption premium has been calculated by the Company at 6.75% and
has been reflected in the consolidated financial statements as if it
had begun to accumulate on January 1,1998, the date which the original
preference dividend began to accrue. It will remain at this rate for
periods ending on or prior to December 31, 2000. There has been no
change made to the period post January 1, 2001, where in the absence of
a sale or listing of the Company the redemption premium will accrue at
the rate of 15% per annum (excluding any associated tax credit) through
to September 30, 2002, at 25% thereafter. The Directors believe that it
is improbable that the Company will actually bear any of the higher
rates and so they are not taken into account for the purposes of
calculating the finance charge.
The redeemable cumulative preference shares may be redeemed at the
option of the Company in multiples of 100,000 or as a whole at par plus
the share premium plus the redemption premium referred to above by
serving notice on the Preference Shareholders specifying the number of
Preference shares to be redeemed.
P. E. Selkirk and J. N. Fleming have an agreement with the other
shareholders whereby each may acquire from the other shareholders up to
80,000 A ordinary voting shares at a price of (pound)8.75 per share.
The options are exercisable only in anticipation of and conditional
upon a sale of the Company or an initial public offering of the
Company's equity securities, and will lapse on 21 December 2004 if not
exercised prior to that date. In addition, options over a further
240,000 A ordinary shares are available for allocation, on a basis to
be determined by the Remuneration Committee, to employees or
prospective employees of the Group on the same terms as those described
above.
The Directors have authority under Section 80 of the Companies Act 1985
to issue a further 80,000 B Ordinary shares to employees or prospective
employees of the Group, at an issue price of not less than (pound)1
each.
Share options-United Texon Limited
Under the 1997 share option scheme 925,273 share options were granted
to directors and officers at a weighted average exercise price per
share of 1p. In 1997 671,123 were exercised with the remaining 254,150
being forfeited.
The options were granted in October 1997, and were only exercisable on
the occurrence of a capital event (i.e., a sale or listing). The number
of shares to which individuals were entitled was determined in relation
to the capital value of the Company. The acquisition of United Texon
Limited by Texon International plc triggered the exercise of the
options. The shares were issued on January 30, 1998, effective as at
December 31,1997.
F-35
18 Dividends and Share Capital (continued)
The total compensation cost included in the results of United Texon
Limited in the year ended December 31, 1997 in respect of the 1997
share option scheme was (pound)2.8 million. The weighted average grant
date fair value of options granted during the year was (pound)4.18.
Summary of Share Capital Movement
Movements in share capital are summarized below:
Texon International plc
Share capital
-------------------------------------------------------------------------------
Redeemable Redeemable
cumulative cumulative
preference Ordinary preference Ordinary
shares of 10 Shares of(pound)1 shares of 10 shares of(pound)1
pence each each pence each each Total
------------ ----------------- ------------ ---------------- -------
(Number) (Number) (pound)000) (pound)000) (pound)000)
Authorized:
December 31, 1998 and 1999 .................... 52,000,000 4,000,000 5,200 4,000 9,200
========== ========== ===== ===== =====
Issued:
Issued partly paid ............................ - 50,000 - 13 13
Share capital to be issued for the
Acquisition ................................... 52,000,000 3,600,000 5,200 3,600 8,800
December 31, 1997 ............................. 52,000,000 3,650,000 5,200 3,613 8,813
Share Capital issued .......................... - 270,000 - 307 307
December 31, 1998 and 1999 .................... 52,000,000 3,920,000 5,200 3,920 9,120
Non-equity interests represent the nominal value of the redeemable
cumulative preference shares together with the share premium account
and the premium on redemption reserve.
F-36
19 Reserves
Share Goodwill Premium on Profit
Premium write-off Redemption & Loss
Account Reserve Reserve Account Total
-------- --------- ---------- --------- ------
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000
United Texon Limited
Balance at January 1, 1997 ..................... 4,950 - - (100,066) (95,116)
Retained loss for the year ..................... - - - (4,318) (4,318)
Exercised share options ........................ - - - 2,803 2,803
Exchange adjustments ........................... - - - (1,659) (1,659)
-------- -------- -------- -------- --------
Balance at December 31, 1997 ................... 4,950 - - (103,240) (98,290)
-------- -------- -------- -------- --------
Texon International plc
Balance at incorporation ....................... - - - - -
Goodwill written-off during the period ......... - (124,242) - - (124,242)
Share capital to be issued ..................... 46,800 - - - 46,800
-------- -------- -------- -------- --------
Balance at December 31, 1997 ................... 46,800 (124,242) - - (77,442)
-------- -------- -------- -------- --------
At December 31, 1997 as previously
stated ....................................... 46,800 (124,242) - - (77,442)
Goodwill eliminated in reserves ................ - 124,242 - (124,242) -
-------- -------- -------- -------- --------
At December 31, 1997 as restated ............... 46,800 - - (124,242) (77,442)
Share capital to be issued (cancelled) ......... (46,800) - - - (46,800)
Share premium in year .......................... 46,800 - - - 46,800
Retained loss for the year ..................... - - - (378) (378)
Goodwill on disposal of Turbel Ltd. ............ - - - 5 5
Exchange adjustments ........................... - - - (4,924) (4,924)
-------- -------- -------- -------- --------
Balance at December 31, 1998 ................... 46,800 - (129,539) (82,739)
-------- -------- -------- -------- --------
At January 1, 1999 ............................. 46,800 - - (129,539) (82,739)
Retained loss for the year ..................... - - - (4,081) (4,081)
Premium on Redemption - other finance
charge ....................................... - - 4,657 - 4,657
Exchange adjustments ........................... - - - 10,561 10,561
Preference dividend transferred to
Reserves ....................................... - - 2,600 - 2,600
-------- -------- -------- -------- --------
Balance at December 31, 1999 ................... 46,800 - 7,257 (123,059) (69,002)
====== ======== ===== ======= ======
As explained in note 18 the terms of the redeemable cumulative
preference shares were retrospectively amended during the year. As a
result (pound)2.6 million of preference dividends previously accrued at
December 31, 1998 were credited back to reserves in 1999 and the
additional (pound)0.91 million representing the redemption premium that
would have accrued by December 31, 1998 was charged as an exceptional
item to the profit and loss account in 1999.
Goodwill of approximately (pound)124 million was eliminated against a
goodwill reserve as a matter of accounting policy. In accordance with
FRS 10 this goodwill has now been netted off against the profit and
loss account reserve and the opening balance restated to reflect the
comparative balance sheet. Goodwill written off to reserves of
approximately (pound)128 million will be charged or credited in the
profit and loss account on subsequent disposal of the businesses to
which it relates.
F-37
20 Minority equity interests
United Texon
Limited Texon International plc
-------------- --------------------------------------------------
Year ended Year ended Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1997 1998 1999
------------ ----------- ------------ ------------
(pound)000 (pound)000 (pound)000
Balance at beginning of period...... 1,221 - 1,431 478
Acquisition of United Texon
Limited......................... - 1,431 - -
Minority interest in the profit
on ordinary activities after
tax............................... 305 - 184 206
Exchange adjustments....... (95) - (75) (39)
Minority interest purchased
30%............................... (1,062) -
----- ----- ----- ---
Balance at December 31............... 1,431 1,431 478 645
===== ===== ===== ===
The minority interests relate to the Group's operation in China.
The Company owns 96% of USM (China Holdings) Ltd, which in turn holds
60% of Foshan Texon Cellulose Board Manufacturing Co Ltd. In April
1998, an agreement was entered into by Texon Overseas (a wholly owned
subsidiary) to acquire a further 30% of the Foshan Texon Cellulose
Board Manufacturing Co Limited. The price of US$2,625,000 is to be paid
in three annual installments, the first one was paid upon execution of
the agreement and the second installment was paid on 31 March 1999 and
the third is due on 31 March 2000. The total share holding in Foshan
Texon Cellulose Board Manufacturing Co Limited held by the Texon
International plc Group is 87.6%.
21 Purchase of Subsidiary Undertakings
All acquisitions have been accounted for using the acquisition method.
For all acquisitions with the exception of Cornwell Industries Ltd the
fair values assigned to assets and liabilities are provisional because
the Directors have not been able to finalize the adjustments required
prior to the date of signing these financial statements.
Year ended December 31, 1999
Esjot
On July 22, 1999 Texon Mockmuhl GmbH, a wholly owned subsidiary of the
Company, completed the acquisition of Esjot-Werk Schiermeister und
Junker GmbH & Co. KG and its subsidiaries (`Esjot').
The profits after taxation of Esjot were as follows:
Profit after
Tax
(pound)000
Results prior to acquisition
1 January 1999 to the date of acquisition................... 1,396
Preceding financial year ended 31 December 1998............. 733
The following table explains the adjustments made to the book values of
the major categories of assets and liabilities acquired to arrive at
the fair values included in the consolidated financial statements at
the date of acquisition.
F-38
21 Purchase of Subsidiary Undertakings (continued)
Esjot Book Alignment of Revaluation Fair value to
amount accounting the group
policies
(pound)000 (pound)000 (pound)000 (pound)000
NET ASSETS ACQUIRED:
Tangible fixed assets......... 3,962 - 354 4,316
Stocks........................ 3,845 (152) (271) 3,422
Debtors....................... 6,108 - (17) 6,091
Cash at bank and in hand...... 131 - - 131
Creditors..................... (4,091) - 10 (4,081)
Taxation...................... (473) - - (473)
Bank overdraft................ (2,194) - - (2,194)
Provisions.................... (231) - - (231)
Loans and finance leases...... (1,345) - - (1,345)
-------- -------- -------- --------
5,712 (152) 76 5,636
Goodwill...................... 11,789
--------
17,425
========
SATISFIED BY:
Cash.......................... 17,172
Acquisition expenses.......... 253
--------
17,425
========
The subsidiary undertaking acquired during the year contributed
(pound)3,308,000 (excluding adverse exchange adjustments of
(pound)3,530,000) to the group's net operating cash flows, paid
(pound)111,000 in respect of net returns on investment and servicing
of finance, paid (pound)35,000 in respect of taxation and utilized
(pound)169,000 for investing activities.
Other Acquisitions
During the year the Group acquired three other businesses:
1. On March 10, 1999 Texon UK Ltd, a wholly owned subsidiary,
acquired the share capital of Cornwell Industries Ltd with effect
from March 1, 1999.
2. During September 1999 Texon UK Ltd, a wholly owned subsidiary,
acquired the Leicester, UK based business of Chamberlain Phipps
Materials.
3. On October 4, 1999 Texon Australia Pty Ltd, a wholly owned
subsidiary, completed the acquisition of Claravon Ltd.
As none of these acquisitions were either material or significant to
the Group they have been combined for the purposes of the disclosures
required by Financial Reporting Standard 6 and the Companies Act 1985.
F-39
21 Purchase of Subsidiary Undertakings (continued)
The (losses)/profits after taxation for Cornwell Industries Ltd and
Claravon Ltd were as follows:
(Loss)/profit
after tax
(pound)000
Results prior to acquisition
1 January 1999 to the date of acquisition.................. (192)
Preceding financial year ended 31 December 1998........... 243
The Group acquired only a part of the Chamberlain's business. As such
it is not possible to obtain any information regarding its
pre-acquisition trading. The (losses)/profits shown above have been
taken from the Companies, statutory accounts and where these have not
been available they are from the Companies, management accounts.
The following table explains the adjustments made to the book value of
the major category of assets and liabilities acquired to arrive at the
fair values included in the consolidated financial statements at the
date of acquisition for Cornwell Industries Ltd, Chamberlain Phipps
Materials and Claravon Ltd.
Book amount Alignment of Revaluation Fair value to
accounting the Group
policies
(pound)000 (pound)000 (pound)000 (pound)000
Net assets acquired:
Tangible fixed assets.......... 3,959 (347) - 3,612
Investments.................... 14 - - 14
Stocks......................... 2,520 - (330) 2,190
Debtors........................ 2,945 - (108) 2,837
Cash at bank and in hand....... 2 - - 2
Creditors...................... (2,744) - - (2,744)
Taxation....................... 57 - - 57
Bank overdraft................. (707) - - (707)
Provisions..................... (548) - - (548)
Loans and finance leases.... (1,333) - - (1,333)
Deferred tax................... (30) - - (30)
-------- -------- -------- --------
4,135 (347) (438) 3,350
Goodwill....................... 1,291
--------
4,641
========
Satisfied by:
Cash........................... 4,159
Loan stock issued.............. 328
Acquisition expenses........... 154
--------
4,641
========
Cornwell Industries Ltd, and Claravon Ltd contributed (pound)187,000
(excluding favorable exchange adjustments of (pound)522,000) to the
Group's net operating cash flows, paid (pound)134,000 in respect of net
returns on investment and servicing of finance, paid (pound)nil in
respect of taxation and utilized (pound)431,000 for investing
activities.
F-40
21 Purchase of Subsidiary Undertakings (continued)
Year ended December 31, 1998
In April 1998, an agreement was entered into by Texon Overseas (a
wholly owned subsidiary) to acquire a further 30% of the Foshan Texon
Cellulose Board Manufacturing Co Limited see notes 12 and 20. The fair
value of consideration was US$ 2,931,000 (approximately
(pound)1,759,000 and is to be paid in three annual installments, the
first one was paid upon execution of the agreement.
The net assets acquired in 1998 were as follows:
Fair Value
----------
(pound)000
Net Tangible Assets Acquired*............................ 1,061
Goodwill................................................. 698
------
Cost of Net Assets Acquired............................... 1,759
=====
* Net assets acquired were 30% of the total net assets of the Foshan
Texon Cellulose Board Manufacturing Co Limited.
22 Contingent liabilities
Subsidiary undertakings have contingent liabilities amounting to
approximately (pound)597,000 (December 31, 1998:(pound)847,000) in
respect of guarantees given for commitments in the normal course of
trade.
From time to time, the Company is involved in routine litigation
incidental to its business. The Company is not a party to any pending
or threatened legal proceedings which the Company believes would have a
material adverse effect on the Company's results of operations or
financial condition.
23 Financial commitments
Capital Commitments
1998 1999
----- ----
(pound)000 (pound)000
Contracted for but not provided......... 143 -
=== ===
Other financial commitments
Operating lease commitments of the Group for future minimum lease
payments as at December 31, 1999 were as follows:
Property Other
-------- -----
(pound)000 (pound)000
Leases expiring within 1 year............... 212 143
Leases expiring in the second to
fifth years inclusive..................... 438 541
Leases expiring over 5 years................ 434 15
--- ---
1,084 699
===== ===
F-41
24 Related party transactions
Certain Texon International plc Shareholders have had commercial
relations with group companies. As a consequence, fees have been paid
to the Shareholders for providing the Services of directors, banking
services and strategic advice. The Chase Manhattan Bank is the Group
corporate banker and a Shareholder. Apax Partners & Co. Strategic
Investors Limited and Apax Partners & Co. Ventures Limited are
shareholders.
Transactions with related parties during the period (excluding interest
paid in the normal course of business) including fees are as follows:
United Texon
Limited Texon International plc
------- -----------------------
Period from
December 31,
Year ended 1997 to Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1997 1998 1999
---- ---- ---- ----
(pound)000 (pound)000 (pound)000 (pound)000
Fees for directors' services.. 45 - 36 20
Banking and strategic
advice.......................... 155 500 161 202
Debt issuance...................... 700 - 3,094 557
--- ----- ---
900 500 3,291 779
=== === ===== ===
Amounts included within creditors in respect of related parties at
December 31, 1998 totalled (pound)46,000 (December 31,
1998:(pound)450,000). There are no prepayments in respect of related
parties at 31 December 1999 (31 December 1999 (pound)nil).
During the years ended December 31, 1999 and 1998 in the events
described in Note 16 Texon International plc paid to related parties,
Chase Manhattan Bank (pound)557,000 and (pound)3,086,000 and Apax
Partners (pound)nil and (pound)8,000 in respect of debt issuance costs.
The Group also incurred agency, guarantee and commitment fees of
(pound)202,000 (1998:(pound)161,000) which were payable to Chase
Manhattan Bank as the Group corporate banker.
P. E. Selkirk and J. N. Fleming, who are directors of the company, have
an agreement with the other shareholders whereby each may acquire from
the other shareholders up to 80,000 A ordinary voting shares at a price
of (pound)8.75 per share. The options are exercisable only in
anticipation of and conditional upon a sale of the Company or an
initial public offering of the Company's equity securities, and will
lapse on 21 December 2004 if not exercised prior to that date. In
addition, options over a further 240,000 A ordinary shares are
available for allocation, on a basis to be determined by the
Remuneration Committee, to employees or prospective employees of the
Group on the same terms as those described above.
F-42
24 Related party transactions (continued)
Continuing relationship with a business owned by the Shareholders
Warranties given by United Texon Limited regarding the shares being
sold and provisions regulating aspects of the ongoing relationship
between United Texon Limited and USM Group Holdings Limited. These
include (i) provisions dealing with the sharing of historic insurance
coverage, (ii) mutual undertakings not to compete for three years, and
(iii) an undertaking by the parties to determine an appropriate
mechanism for splitting the UK pension scheme, which has now been
satisfactorily resolved.
The company has taken advantage of the exemption allowed in FRS 8 not
to disclose transactions between Group companies.
25 Notes to the consolidated cash flow statement
a) Reconciliation of operating profit to net cash inflow from operating
activities
United Texon
Limited Texon International plc
------- -----------------------
Period from
December 31,
Year ended 1997 to Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1997 1998 1999
---- ---- ---- ----
(pound)000 (pound)000 (pound)000 (pound)000
Operating profit................. 8,592 - 12,581 12,856
Depreciation and amortization
charges........ 4,938 - 1,910 3,500
Cash flow relating to
restructuring charge......... (3,693) - - -
Decrease in stocks............ 18,362 - 982 (385)
Decrease in debtors........... 14,233 - 1,020 (2,462)
Decrease in creditors......... (39,622) - (5,341) 1,498
Profit on sale of tangible fixed
assets................... (637) - (1,008) 92
Share options exercised..... 2,803 - - -
-----
Net cash inflow from operating
activities........... 4,976 - 10,144 15,099
===== ====== ======
Cash flow relating to exceptional restructuring costs detailed in note
5 iv were (pound)266,000 for the year ended December 31, 1999
(1998:(pound)819,000).
F-43
25 Notes to the consolidated cash flow statement (continued)
b) Analysis of cash flows for headings netted in the cash flow
United Texon
Limited Texon International plc
------- -----------------------
Period from
December 31,
Year ended 1997 to Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1997 1998 1999
---- ---- ---- ----
(pound)000 (pound)000 (pound)000 (pound)000
Returns on investments and
servicing of finance
Interest received............... 298 - 160 336
Interest paid................... (5,564) - (9,749) (9,613)
Interest element of finance lease
payments...................... (77) - (66) (153)
Interest element of finance
leased machinery.............. (322) - - -
Expenses incurred in issuance of
the senior notes.............. - - (5,112) (1,263)
------ ------ ------ ------
Net cash outflow for returns on
investments and servicing of
finance....................... (5,665) - (14,767) (11,029)
====== ====== ======= =======
Capital expenditure and financial
investment
Purchase of tangible fixed
assets........................ (3,260) - (2,038) (3,511)
Sale of tangible fixed
assets........................ 9,250 - 4,249 248
----- ------ ----- ---
Net cash (outflow)/inflow for
capital expenditure and
financial investment.......... 5,990 - 2,211 (3,263)
===== ====== ===== ======
Acquisitions and disposals
Net debt acquired............... - (64,175) - -
Purchase of subsidiary
undertaking.................... - - (24,000) (22,015)
Cash and bank loans acquired with
business....................... - - - (2,062)
------ ------ ------ ------
Net cash outflow for
acquisitions................... - (64,175) (24,000) (24,077)
====== ====== ======= =======
Financing
Issue of ordinary share
capital........................ - 13 - -
Debt redeemed.................... (3,859) - (57,368) (6,372)
Debt issued...................... - 64,175 81,507 32,298
Capital element of finance lease
rental payments................ (170) - 323 (458)
----- ------ ------ ------
Net cash (outflow)/inflow from
financing...................... (4,029) 64,188 24,462 25,468
===== ====== ====== ======
F-44
25 Notes to the consolidated cash flow statement (continued)
c) Analysis of net debt
Debt
due
within Debt due
Over- one after one Finance
Cash drafts year year leases Total
---------- ---------- --------- --------- ---------- ---------
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000
United Texon Limited
....................................
As at January 1, 1997 .................. 1,791 (2,914) (53,673) (30,634) (1,092) (86,522)
Cash flow .............................. 987 (1,227) 3,859 -- 170 3,789
Other non-cash charges ................. -- -- (34,068) 30,634 -- (3,434)
Cash sold in disposal .................. (1,577) 411 -- -- -- (1,166)
Foreign exchange movement .............. (58) 366 (414) -- -- (106)
------- ------- ------- ------- ------- ---------
As at December 31, 1997 ................ 1,143 (3,364) (84,296) -- (922) (87,439)
Texon International plc
Debt acquired December 31, 1997 ........ 1,143 (3,364) (61,032) -- (922) (64,175)
Proceeds from share issue .............. 13 -- -- -- -- 13
------- ------- ------- ------- ------- ---------
As at December 31,1997 ................. 1,156 (3,364) (61,032) -- (922) (64,162)
As at January 1,1998 ................... 1,156 (3,364) (61,032) -- (922) (64,162)
Reclassification ....................... -- (405) 405 -- -- --
Cash flow .............................. (443) (2,927) 57,368 (81,507) (323) (27,832)
Other non-cash charges ................. -- -- 3,215 2,008 -- 5,223
Foreign exchange
movement ............................. 8 (239) 44 (4,105) -- (4,292)
------- ------- ------- ------- ------- ---------
As at December 31, 1998 ................ 721 (6,935) -- (83,604) (1,245) (91,063)
------- ------- ------- ------- ------- ---------
As at January 1, 1999 .................. 721 (6,935) -- (83,604) (1,245) (91,063)
Cash flow .............................. 313 (653) (2,521) (23,405) 458 (25,808)
Acquisitions excluding cash ............ -- -- (1,270) (1,416) (700) (3,386)
Other non-cash charges ................. -- -- -- 146 -- 146
Foreign exchange movement .............. (9) 696 52 11,301 -- 12,040
------- ------- ------- ------- ------- ---------
As at December 31,1999 ................. 1,025 (6,892) (3,739) (96,978) (1,487) (108,071)
======= ======== ======== ======== ======= =========
Other non cash charges relate to unamortized debt issuance costs net of
(pound)328,000 of loan notes issued as part of the acquisition of
Cornwell Industries Limited.
d) Cash flow relating to exceptional items
United Texon
Limited Texon International plc
---------- --------------------------------------------------
Period from
December 31,
Year ended 1997 to Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1997 1998 1999
------------ ------------ ------------ ------------
(pound)000 (pound)000 (pound)000 (pound)000
Provision at beginning of
period........................... 5,140 - - 2,969
Spend............................ (3,693) - (819) (266)
Income........................... - - 3,788 -
Discontinued operations...... (1,447) - - -
------- ----- ----- ------
Provision at end of period.... - - 2,969 2,703
------- ----- ----- -----
F-45
25 Notes to the consolidated cash flow statement (continued)
e) Cash flow relating to sale of business
United Texon
Limited Texon International plc
---------- --------------------------------------------------
Period from
December 31,
Year ended 1997 to Year ended Year ended
December 31, December 31, December 31, December 31,
1997 1997 1998 1999
------------ ------------ ------------ ------------
(pound)000 (pound)000 (pound)000 (pound)000
Net assets disposed
Fixed Assets.................. 6,238 - - -
Stock........................... 16,034 - - -
Debtors........................ 13,462 - - -
Creditors....................... (40,150) - - -
Overdraft....................... (411) - - -
Cash............................ 1,577 - - -
----- ----- ----- -----
(3,250) - - -
Profit on disposal 3,250 - - -
===== ===== ===== =====
f) Major non cash transactions
The Group holds a loan note of (pound)4 million as part of the
consideration received from the sale of the property at head
office in Leicester. The Company issued a loan note of (pound)1
million to Busm Co. Ltd as an inducement to remain a tenant on the
property and this is shown netted of the Company's loan note to
leave (pound)3 million. This was valued during the year ended 31
December 1999 at (pound)2 million (1998 : (pound)1 million).
F-46
25 Notes to the consolidated cash flow statement (continued)
g) Purchase of United Texon Limited
United Texon Texon
Limited International plc
------------- -----------------
Period from
December 31,
Year ended 1997 to
December 31, December 31,
1997 1997
------------ ------------
(pound)000 (pound)000
Net assets acquired:.................
Tangible fixed assets................ - 17,098
Stock................................ - 16,716
Debtors.............................. - 19,345
Cash at bank and in hand............. - 1,143
Creditors............................ - (32,272)
Overdrafts acquired.................. - (3,364)
Loans and finance leases............. - (61,954)
Minority shareholders' interests..... - (1,431)
----------- -----------
- (44,719)
Goodwill............................. - 123,742
----------- -----------
- 79,023
=========== ===========
Satisfied by:
Cash payable in January 1998......... - 23,423
Shares to be issued in January 1998.. - 55,600
----------- -----------
- 79,023
=========== ===========
Analysis of net outflow of cash
in respect of the purchase of
the subsidiary undertaking:
Cash consideration................... - -
Net cash and overdrafts.............. - -
----------- -----------
- -
Acquisition costs - (500)
----------- -----------
Total costs of acquisition........... - (500)
=========== ===========
Details of the acquisitions in 1999 and 1998 are shown in note 21.
F-47
26 Pension costs
At the year ended 31 December 1999, the majority of the Group's
employees participated in pension schemes of the defined benefit type
that determine retirement pensions based on an employee's years of
service and a final pay definition. Some of these schemes were
externally funded within trusts, others were financed via internal book
reserves. For all these schemes contributions were paid or pension
costs charged based on advice received from qualified actuaries.
The Company's defined benefit pension scheme in the UK has been closed
to new contributions and has been replaced with a money purchase scheme
as from 1 April 2000. The information provided below is for the major
funded pension schemes in the UK and the US. It is as the actuaries
reported during 1999 and the changes to the UK scheme are not reflected
in these figures.
The UK pension scheme originally covered employees of the Group and of
the former Machinery business of United Texon Limited but has now been
split following the demerger. The pension liabilities and costs
following this split have been agreed with the Pension Schemes Office
(a branch of the Inland Revenue).
In Germany, Austria, and Spain there are defined benefit pension
arrangements, which are not separately funded, in accordance with local
practice, and provision for the pension liability is made in the
Group's consolidated balance sheet.
The Group has other defined contribution pension arrangements in the
various countries in which it operates, in accordance with local
conditions and regulations.
Details of the actuarial valuations for the two most significant funded
schemes for the Texon International plc Group are as follows:
United Kingdom United States
-------------- --------------
Date of last actuarial valuation .............. March 31, 1999 January 1,1999
Actuarial method .............................. Projected Unit Projected Unit
Assumed excess of investment
return over salary increases ......... 1.5% 2.7%
Assumed rate of pension increases ............. 2.5% Nil
Value of assets at date of latest valuation.. (pound)20.5 million (pound)4.0 million
Level of funding .............................. 90% 94%
Actuaries ..................................... Watson Wyatt Partners Buck Consultants
For the purposes of the disclosure in accordance with US GAAP (SFAS
132), the funded status and pension cost of the major plans in Austria,
Germany, UK, and the US as at December 1999, 1998 and 1997 have been
described in the following tables. The 1999 and 1998 disclosures relate
to the continuing operations only.
F-48
26 Pension costs (continued)
United Texon
Limited Texon International plc
------------ --------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
The net periodic pension costs for the
major retirement plans under SFAS No.
132 comprises:
Service cost-present value of benefits
earned during the year......................... 687 1,093 1,649
Interest cost on projected benefit obligations... 2,178 2,319 2,001
Expected return on plan assets.................... (3,534) (2,252) (1,717)
Net amortization and deferral....................... 1,493 114 498
------- ------- -------
Net periodic pension cost............................ 824 1,274 2,431
Expected EE contributions........................... - (200) (200)
------- ------- -------
FAS87 Net periodic pension cost.................. 824 1,074 2,231
======= ======= =======
United Texon
Limited Texon International plc
------------ --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1998 1999
----------- ------------ -----------
% % %
Assumptions
Weighted average discount rate................ 7.1 5.7 6.3
Long term rate of increases in remuneration... 2-5.5 2.25-6 3-4.8
Expected long term rate of return on assets... - 4-8 7-7.5
Texon International plc
---------------------------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
Actuarial present value of:
Accumulated benefit obligations................... 28,130 29,345 27,673
------- ------- -------
Projected benefit obligations (see a)............. 33,258 36,686 31,527
Plan assets at fair value (see a)................. 26,064 21,984 26,104
------- ------- -------
Funded status..................................... (7,194) (14,702) (5,423)
Unrecognized net (gain) or loss................... 1,275 9,318 (254)
Unrecognized prior service cost................... (19) (17) -
Unrecognized net transitional obligation.......... 422 382 308
Fourth quarter contribution....................... 159 165 -
------- ------- -------
Net amount recognized............................. (5,357) (4,854) (5,369)
Adjustment to recognize minimum liability....... (3) (3,449) (11)
Intangible asset.................................. - (403) -
Accumulated other comprehensive income..... - (3,046) (11)
------- ------- -------
------- ------- -------
Prepaid pension costs (pension liability)......... (5,360) (8,303) (5,380)
======= ======= =======
F-49
26 Pension costs (continued)
Texon International plc
---------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
Change in projected benefit obligation:
Projected benefit obligation at beginning of year.. 28,380 33,258 36,686
Change to obligation at beginning of year (see b). - (6,839) (785)
Service cost............................................ 792 1,093 1,649
Interest cost........................................... 2,255 2,319 2,001
Plan net (gains)/losses................................. 4,126 7,920 (6,171)
Foreign exchange impact................................. (342) 195 (303)
Benefits paid........................................... (1,953) (1,260) (1,550)
-------- -------- --------
Projected benefit obligation at end of year............. 33,258 36,686 31,527
======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year...... 23,832 26,064 21,983
Change to fair value of plan assets at beginning of
year (see b).......................................... - (5,325) (209)
Actual return on plan assets............................ 3,567 1,532 4,737
Company contributions................................... 663 800 776
Employee contributions.................................. 200 200 269
Foreign exchange impact................................ (245) (36) 98
Benefits paid........................................... (1,953) (1,252) (1,550)
-------- -------- --------
Fair value of plan assets at end of year................ 26,064 21,983 26,104
======== ======== ========
a)
As of December 31, 1998 As of December 31, 1999
--------------------------------- ---------------------------------
Assets exceed Accumulated Assets exceed Accumulated
accumulated benefits exceed accumulated benefits exceed
benefits assets benefits assets
------------- --------------- ------------- ---------------
(pound)000 (pound)000 (pound)000 (pound)000
Actuarial present value of:
Accumulated benefit
obligations..................... 3,729 25,616 24,794 2,879
Projected benefit obligations 4,497 32,189 28,312 3,215
Plan assets at fair value...... 4,183 17,800 26,104 -
======= ======= ======= =======
b) A reassessment of the division of obligations of the UK plan
following demerger was carried out in 1998. This revealed that
approximately 38% of the liabilities related to the Company, rather
than the 50% assumed in 1997. In addition the allowance for
discretionary increases to pensions in payment was removed following
the decision not to grant an increase in 1998. Consequently the
obligation at the beginning of the year and the corresponding assets
have been changed.
F-50
27 Post retirement medical benefit plan
The US subsidiary of Texon International plc sponsors an unfunded
employee post-retirement plan that covers 91 employees and 25 retirees
including their dependants. The plan provides post-retirement medical
benefits in the form of a contribution to the retiree's health
insurance premium as well as managed care programs. There are no
post-retirement death benefits for current retirees. The following
table sets forth the plan's funded status at December 31, 1999.
Net periodic post-retirement benefit cost included the following
components:
United Texon
Limited Texon International plc
------------ --------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
Service cost........................................... 18 - -
Interest cost on accumulated post-retirement
benefit obligation................................... 41 35 36
Amortization of transitional obligation/(asset)........ 1 (16) (16)
--- --- ---
Net periodic post-retirement benefit cost.............. 60 19 20
=== === ===
Texon International plc
-----------------------------------------------------
As of December As of December As of December
31, 1997 31, 1998 31, 1999
-------------- -------------- --------------
Funded status
Projected benefit obligation........................... 545 578 617
Plan assets at fair value.............................. - - -
---------- ----------- ----------
Funded status.......................................... (545) (578) (617)
Unrecognized net (gain)/loss........................... (43) (8) 28
Unrecognized net transitional obligation............... 14 - -
---------- ----------- ----------
Accrued post-retirement benefit cost................... (574) (586) (589)
========== =========== ==========
Change in projected benefit obligation:
Projected benefit obligation at beginning of year...... 402 545 578
Service cost........................................... 18 - -
Interest cost.......................................... 41 35 36
Plan net (gains)/losses................................ 109 33 20
Foreign exchange impact................................ - (3) 14
Benefit paid........................................... (25) (32) (31)
Projected benefit obligation at end of year............ 545 578 617
Change in plan assets:
Fair value of plan assets at beginning of year......... - - -
Employer contributions................................. 25 32 31
Benefits paid.......................................... (25) (32) (31)
---------- ----------- ----------
Fair value of plan assets at end of year............... - - -
========== =========== ==========
F-51
27 Post retirement medical benefit plan (continued)
For measurement purposes, a 5% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999
(1998:11%). The health care cost trend assumption has an effect on the
amounts reported.
To illustrate, increasing the assumed health care cost trend rates by 1
percentage point each year would increase the accumulated
post-retirement benefit obligation as of December 31, 1999, by 17%
((pound)106,000) and the aggregate of service and interest cost
components of net periodic post-retirement benefit cost for the year
then ended by 17% ((pound)6,000).
Medical trend rates (initial rate)........ 5.0% per annum
Assumed discount.......................... 7.5% per annum
28 New UK Accounting Standards
The Accounting Standards Board (`ASB') has issued FRS 15, which is
effective for all accounting periods ending on or after March 23, 2000.
FRS 15 provides accounting and reporting standards for tangible fixed
assets and replaces SSAP 12 on depreciation. Its objective is to change
and/or clarify: initial measurement (i.e., cost), and subsequent
expenditure on maintaining or part-replacing; valuation, and treatment
of consequent gains/losses; depreciation; and disclosure of tangible
fixed assets. It eliminates `cherry-picking' valuations by requiring
valuation and updating by entire classes of asset. It clarifies in
particular the circumstances in which depreciation may be regarded as
immaterial, and the consequences for accounting. The Company will apply
the provisions of FRS 15 prospectively in 2000. FRS 15 will ensure by
codifying and enforcing that the Company follows the existing best
practice.
The ASB has also issued FRS 16, which is effective for all accounting
periods ending on or after March 23, 2000. FRS 16 provides an
accounting and reporting standard for Current tax. Its objective is to
require tax to be reported using enacted tax rates, and excluding any
notional tax charges or credits. It will mean that the grossing up for
`tax credit' on incoming or outgoing UK dividends will cease, and
amounts paid or received subject to withholding tax continue to be
grossed up. The Company will apply the provisions of FRS 16
prospectively in 2000.
F-52
29 Post balance sheet events
a) Company Secretary
On March 31, 2000 David Gamble resigned as Company Secretary of Texon
International plc.
b) Acquisition of Crispin Dynamics
On February 29, 2000, Texon UK Ltd, a wholly owned subsidiary of Texon
International plc acquired the Leicester, UK based business of Crispin
Dynamics for a consideration of approximately (pound)2.5 million cash
including deferred payments of (pound)1.5 million to be paid during
2000. The net cash payment was (pound)1.0 million and was met from new
equity of (pound)0.7 million from Texon's investors and management and
the remainder from its current bank facilities. Management believes
Crispin Dynamics is the global market leader in computer aided design
software for the footwear industry. Crispin has approximately 40
employees based in its UK headquarters and its other facilities in Asia
and Europe.
Crispin Dynamics is a related party of Texon International plc as they
are owned by common shareholders Apax Partners & Co. Strategic
Investors Limited and Apax Partners & Co. Ventures Limited. The
acquisition was conducted on arms length terms.
c) Acquisition of Boxflex
On March 23, 2000, Texon Italia SpA, a wholly owned subsidiary of Texon
International plc acquired a 50% shareholding in Boxflex Componentes
Para Calcados Ltda. The Company was then renamed Boxflex Texon
Componentes Para Calcados Ltda (`Boxflex'). Boxflex is a leading
manufacturer of stiffener and insole materials in Brazil and is located
in the main footwear production area near Porto Allegre.
F-53
30 Summary of significant differences between UK and US generally accepted
accounting principles
The consolidated financial statements are prepared in conformity with
accounting principles accepted in the UK ("UK GAAP") which differ in
certain respects from those generally accepted in the United States
("US GAAP"). The significant areas of difference affecting the
consolidated financial statements of the Company are described below.
a) United Texon Limited acquisition
Under UK GAAP, the acquisition of United Texon Limited by Texon
International plc on December 31, 1997 has been accounted for as an
acquisition and the assets and liabilities of United Texon Limited have
been recorded at their fair values as of that date with the excess
consideration paid charged directly to reserves as goodwill. Under US
GAAP, purchase accounting does not apply with respect to this
transaction because there has been no change in control. Accordingly,
for US GAAP purposes, all assets and liabilities are recorded at their
historical United Texon Limited cost basis. In addition, any excess
consideration paid is treated as a capital transaction and any costs
incurred in connection with the acquisition are expensed. As a result
when assets that were revalued on acquisition under UK GAAP are
disposed of, an adjustment is required under US GAAP to adjust the
profit/(loss) on disposal to reflect historic cost.
b) Goodwill
Under UK GAAP, the Group
o Writes off goodwill arising on consolidation prior to January 1,
1998 directly to the profit and loss account reserve;
o Capitalizes goodwill arising on consolidation relating to
acquisitions after January 1,1998 in the balance sheet.
Under US GAAP, goodwill arising on consolidation is capitalized on the
consolidated balance sheet and then amortized over its useful life,
which Texon International plc has estimated to be 20 years.
The gross cost under US GAAP at December 31, 1999, December 31, 1998
and December 31, 1997 of goodwill is approximately (pound)77,069,000,
(pound)81,527,000 and (pound)79,775,000, respectively. Accumulated
amortization under US GAAP at December 31,1999, December 31, 1998 and
December 31, 1997 of goodwill is (pound)19,473,000, (pound)15,427,000
and (pound)11,487,000, respectively. (Texon International plc assumed
operational control of United Texon Limited as at December 31, 1997 -
see note 1).
c) Pensions and other post-retirement benefits
The Group accounts for the costs of pensions and other post-retirement
benefits under the rules set out in UK accounting standards. US GAAP is
more prescriptive in respect of actuarial assumptions and the
allocation of costs to accounting periods. (See Notes 26 and 27).
d) Debt Issuance Costs
Under UK GAAP debt is stated net of unamortized issue costs. Under US
GAAP unamortized issue costs are presented as a separate asset. As at
December 31, 1999 the unamortized costs were (pound)5,048,000
(1998:(pound)5,223,000).
e) Financial Instruments
The fair values of cash, accounts receivable and accounts payable
approximate to the book value due to the short-term nature of these
assets and liabilities.
F-54
30 Summary of significant differences between UK and US generally
accepted accounting principles (continued)
With the exception of the Senior Notes (see below), the Group's
financial instruments are generally short-term in nature and in the
case of debt bear variable interest rates. Accordingly, the carrying
value of such short-term financial instruments approximates their fair
value. The fair value of foreign exchange contracts is estimated by
published market quotes and amounted to (pound)19,844,000 and
(pound)18,907,000 at December 31, 1999 and December 31, 1998
respectively. The unrealized (loss)/gain on the foreign exchange
contracts was ((pound)11,000) and (pound)169,000 at December 31, 1999
and December 31, 1998 respectively. All gains or losses on foreign
exchange contracts have been expensed rather than deferred. Gains and
losses arising on foreign currency forward contracts to hedge
commitments are recognized in the consolidated profit and loss accounts
in the same periods as the gains and losses on the commitments.
The Senior Notes have a book value of (pound)75,555,000, at December
31, 1999, (1998:(pound)85,193,000). In the opinion of the directors the
fair value of the Notes at December 31, 1999 would be (pound)64,222,000
(1998:(pound)71,914,000) based on their trading value at that date.
f) Deferred taxation
Under UK GAAP, Texon International plc provides for deferred taxation
using the partial liability method on all material timing differences
to the extent that it is considered probable that the liabilities will
crystallize in the foreseeable future. Under US GAAP, deferred taxation
is provided for all temporary differences on a full liability basis.
Deferred tax assets are also recognized to the extent that it is more
likely than not that the benefit will be realized.
The UK Deferred tax asset as at December 31, 1999 and 1998 can be
reconciled as follows to the US GAAP net deferred asset:
1999
----
UK GAAP UK GAAP US GAAP
Provided Unprovided
---------- ---------- ----------
(pound)000 (pound)000 (pound)000
Deferred tax liabilities:
Property plant and equipment........................... 93 - 93
Liabilities not provided under UK GAAP................. - - -
---- ----- -----
93 - 93
==== ===== =====
Deferred tax assets:
Intercompany profit..................................... (271) - (271)
Deferred interest....................................... - (1,648) (1,648)
Net operating losses.................................... (41) (5,238) (5,279)
Property plant and equipment............................ - (1,495) (1,495)
Pensions and long-term retirement benefits.............. - (1,032) (1,032)
Intangible assets....................................... - (877) (877)
---- ------- -------
(312) (10,290) (10,602)
Less valuation allowance................................ - 10,509 10,509
---- ------- -------
(312) 219 (93)
===== ======= =======
Net deferred tax (asset)/liability...................... (219) 219 -
==== ======== ========
F-55
30 Summary of significant differences between UK and US generally
accepted accounting principles (continued)
1998
-----
UK GAAP UK GAAP US GAAP
Provided Unprovided
---------- ---------- ----------
(pound)000 (pound)000 (pound)000
Deferred tax liabilities:
Property plant and equipment.............................. 108 - 108
Liabilities not provided under UK GAAP.................... - 285 285
----- ---- ----
108 285 393
===== ==== ====
Deferred tax assets:
Intercompany profit....................................... (247) - (247)
Deferred interest......................................... - (1,932) (1,932)
Net operating losses...................................... (51) (5,171) (5,222)
Property plant and equipment.............................. - (1,680)
Pensions and long-term retirement benefits................ - (1,176) (1,176)
Intangible assets......................................... - (1,090) (1,090)
---- ------- -----
(298) (11,049) (11,347)
Less valuation allowance.................................. - 10,954 10,954
---- ------- -------
(298) (95) (393)
==== ======= ======
Net deferred tax (asset)/liability........................ (190) 190 -
===== ====== ======
g) Net loss per ordinary share
The net loss per ordinary share for the year ending December 31, 1999
is (pound)0.18 (1998:(pound)0.79). Historical net earnings/(loss) per
share is not shown for December 31, 1997 as the historical arrangement
is not indicative of the continuing capital structure.
h) Share option schemes
The Group adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", on January 1, 1996 which permits entities to recognize
as an expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro-forma net income/(loss) and pro-forma earnings/(loss) per
share disclosures for share option grants made in 1995 and future years
as if the fair-value based method defined in SFAS No. 123 had been
applied. Management has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro-forma disclosure provisions of
SFAS No. 123. Accordingly, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. In the year ended December 31, 1997 it was
determined that on the date of grant, the current market price exceeded
the exercised price by (pound)2.8 million and the compensation cost was
recognized.
i) Extraordinary items
Under UK GAAP refinancing costs associated with the extinguishment of
the old debt in 1997 are recorded as operating expenses. Under US GAAP
such refinancing costs are treated as an extraordinary item.
F-56
30 Summary of significant differences between UK and US generally
accepted accounting principles (continued)
j) Statement of cash flows
Under UK GAAP, cash flows are presented separately for operating
activities, returns on investments and servicing of finance, taxation,
capital investment and financial investment, acquisitions and disposals
and financing activities. Under US GAAP, cash flow activities are
reported as operating activities, investing activities and financing
activities. Cash flows from taxation and returns on investments and
servicing of finance would, with the exception of dividends paid, be
included as operating activities. The payment of dividends and debt
issue costs would be included under financing activities.
Set out below, is a summary combined statement of cash flows under US
GAAP.
United Texon
Limited Texon International plc
------------ --------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
Net cash provided by/(used in) operating
activities........................................... (2,325) (931) 2,795
Net cash provided/(utilized) by investing
activities......................................... 6,092 1,666 (27,340)
Net cash provided by financing activities......... (5,173) (4,105) 24,205
Net decrease in cash and cash equivalents --------- --------- ---------
under US GAAP..................................... (1,406) (3,370) (340)
========= ========= =========
F-57
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
k) Reconciliations
The following is a summary of the material adjustments to net income
and shareholders' equity which would have been required if US GAAP had
been applied instead of UK GAAP.
United Texon
Limited Texon International plc
------------ --------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
Net (loss)/profit in accordance with UK GAAP.......... (4,318) 2,222 576
Adjustments to conform with US GAAP:
United Texon Limited acquisition costs.............. (500) - -
Gain on disposal of Machinery business.............. (3,250) - -
Amortization of goodwill............................ (4,057) (3,940) (4,047)
Gain on sale of property............................ - 1,257 -
Restructuring costs................................. - - -
Pensions and other post-retirement benefits. 1,210 397 2,793
Effect of differences on policy for recognition of
deferred tax costs and liabilities............... 211 26 (29)
--------- -------- --------
Total net loss in accordance with US GAAP............. (10,704) (38) (707)
========= ======== ========
Net loss from continuing operations in accordance
with US GAAP........................................ (5,654) (38) (707)
Net loss of discontinued operations in accordance
with US GAAP........................................ (3,906) - -
Extraordinary item-debt extinguishment................ (1,144) - -
--------- -------- --------
(10,704) (38) (707)
Accretion costs of non-equity preference
shares.............................................. (3,001) - -
--------- -------- --------
Retained loss for the period for equity shareholders
in accordance with US GAAP.. (13,705) (38) (707)
========= ======== ========
Texon International plc
----------------------------------
As of December As of December
31, 1998 31, 1999
-------------- --------------
(pound)000 (pound)000
Shareholders' deficit in accordance with UK GAAP................. (73,619) (59,882)
Adjustments to conform with US GAAP:
Fair value adjustment arising upon UK property................. - -
Goodwill....................................................... 66,100 57,596
Pension and other post-retirement benefits..................... (2,627) 155
Taxation....................................................... (190) (219)
--------- --------
Shareholders' deficit in accordance with US GAAP................. (10,336) (2,350)
========= ========
F-58
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
l) Machinery Group disposal
Under UK GAAP, the sale of the Machinery Group to shareholders on
December 31, 1997 resulted in a gain on disposal being recognized in
the consolidated profit and loss accounts. Since the sale was to
existing shareholders of the Group, this transaction would be accounted
for as a spin-off under US GAAP with the difference between the net
book value of assets sold and consideration received treated as a
capital transaction. In addition, any costs incurred in connection with
the sale would be expensed under US GAAP.
m) Redeemable preference shares
Under UK GAAP, preference shares with mandatory redemption features or
redeemable at the option of the security holder are classified as
non-equity interests as a component of total shareholders' deficit.
Under US GAAP such mandatorily redeemable preference shares are
classified outside of shareholders' deficit. In addition, under US GAAP
the waiver of the dividend on preference shares is deemed to be capital
contribution and excluded from net income attributable to ordinary
shareholders.
n) New US Accounting Standards
SFAS No. 133. In June 1998, The Financial Accounting Standards Board
(FASB) issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", this was amended by SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133 in June 1999. These statements establish
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the
use of the derivative and whether it qualifies for hedge accounting.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Management believes that the adoption of
these statements will not have a significant impact on Texon
International plc's financial results.
o) SFAS No. 130
Comprehensive income under SFAS No. 130 is shown below:
Texon International plc
---------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ----------- -----------
(pound)000 (pound)000 (pound)000
Net income...................................... (10,704) (38) (707)
Other Comprehensive Income, net of income tax:
Foreign currency translation adjustment...... (3,693) (3,167) 6,104
Minimium pension liability adjustment........ - (3,046) (11)
--------- --------- --------
Comprehensive income............................ (14,397) (6,251) 5,386
========= ========= ========
Accumulated comprehensive net income as at
December 31.................................. (28,466) (34,717) (29,331)
========= ========= ========
There is no tax associated with the amounts included in other
comprehensive income.
F-59
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
Minimum Accumulated
Pension Other
Foreign Liability Comprehensive
currency items Adjustment Income
--------------- ---------- -------------
(pound)000 (pound)000 (pound)000
Balance as at December 31, 1996.......... (2,637) - (2,637)
Change during 1997....................... (3,693) - (3,693)
------- ------ -------
Balance as at December 31, 1997.......... (6,330) - (6,330)
Change during 1998....................... (3,167) (3,046) (6,213)
------- ------ -------
Balance as at December 31,1998........... (9,497) (3,046) (12,543)
======= ====== =======
Change during 1999....................... 6,104 (11) 6,093
------- ------ -------
Balance as at December 31, 1999.......... 3,393 (3,057) (6,450)
======= ====== =======
The accumulated other comprehensive income balance as at January 1,
1996 is stated as zero as the cumulative information as of that date is
not available.
p) Esjot Acquisition
The following unaudited proforma information has been prepared as if
the Esjot acquisition occurred on January 01, 1998 and is in accordance
with US GAAP. Information has been provided for Esjot as it was deemed
a substantial acquisition, Cornwell Industries Limited, Claravon
Limited and Chamberlain Phipps have not been included.
In addition to aggregating the results of Esjot with those of Texon
International plc proforma adjustments have been made to reflect the
amortization of goodwill arising on the acquisition and interest costs
incurred on the funding taken out. There have been no extraordinary
items incurred during the periods shown below and therefore only net
(loss)/profit has been disclosed.
Unaudited
----------------------
Twelve months ended
December December
31, 31,
1999 1998
(pound) (pound)
Thousands
Trade sales........................... 137,901 129,826
Net (loss)/profit for the financial
Period................................ (38) 355
------ ------
Net (loss)/profit per ordinary
share................................. (0.18) 0.09
F-60
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act 1934,
the registrant certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused this registration statement annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Texon International plc
-----------------------------------
(Registrant)
Date May 01, 2000 By: /s/ J. Neil Fleming
-----------------------------------
J. Neil Fleming
Finance Director and
Chief Accounting Officer