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, 1998
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
2
TABLE OF CONTENTS
Page
General Introduction......................................................... 4
PART I
Item 1. Description of Business............................................ 5
Item 2. Description of Property............................................ 11
Item 3. Legal Proceedings.................................................. 12
Item 4. Control of Registrant.............................................. 12
Item 5. Nature of Trading Market........................................... 12
Item 6. Exchange Controls and Other Limitations Affecting Security Holders. 13
Item 7. Taxation........................................................... 13
Item 8. Selected Financial Data............................................ 18
Item 9. Management's Discussion and Analysis of Financial Condition
and Results...................................................... 23
Item 9A. Quantitative and Qualitative Disclosures About Market Risk......... 30
Item 10. Directors and Officers of Registrant............................... 34
Item 11. Compensation of Directors and Officers............................. 35
Item 12. Options to Purchase Securities from Registrant or Subsidiaries..... 36
Item 13. Interest of Management in Certain Transactions..................... 36
PART II
Item 14. Description of Securities to be Registered......................... 38
PART III
Item 15. Defaults Upon Senior Securities.................................... 39
Item 16. Changes in Securities and Changes in Security for Registered
Securities....................................................... 39
PART IV
Item 17. Financial Statements............................................... 40
Item 18. Financial Statements............................................... 40
Item 19. Financial Statements and Exhibits.................................. 40
3
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,
1998. 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 therefore, prepared consolidated accounts as at
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 Period End
Rate(1) High Low Rate
1994 1.54 1.64 1.46 1.57
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
(1) The average of the Noon Buying Rates on the last business day of each month
during the relevant period. On April 27, 1999, the Noon Buying Rate was
$1.61 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.
4
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
products used in the manufacture of footwear, such as linings, tacks, nails,
steel shanks 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 1998 approximately 89% 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 6,000 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 six manufacturing sites strategically located in Europe, the
United States and China and sells its products in more than 90 countries through
an extensive marketing and distribution network. In 1998 sales of insoles,
stiffeners, other footwear and industrial products accounted for 50%, 17%, 22%
and 11% of total sales, respectively. In 1998, 49% of the Company's sales were
made to Europe, 28% to Asia and the Pacific, 18% to the Americas and 5% to the
rest of the world.
Foshan Texon Cellulose Manufacturing Board Company Limited
On April 30, 1998 the Company acquired an additional 30% of the shares in Foshan
Texon Cellulose Manufacturing Board Company Limited, its operation in China. The
consideration paid for the acquisition was $2.6 million, which is payable in
three annual installments. After giving effect to this acquisition, the Company
owns 87.6% of the operation.
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 and tacks and nails for
footwear. The Company's products are marketed under brand names which enjoy
extremely wide recognition within the footwear industry, such as
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"Texon", "Tufflex", "Formo", and "Unifast". 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.
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 six manufacturing plants in five
countries and 27 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 1998 no
single customer accounted for more than 5% of sales, and the top ten customers
represented 18% 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.
6
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 1998. 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 Company's German facility achieved
ISO 9001 accreditation and similar plans are now in place for its Chinese plant.
Cost competitiveness programs were successful in 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. As for the innovative development of new
products, the Company launched two important new products during the year as
well as a variety of modified products developed to meet specific customer
requirements. Programs are in place to accelerate the rate of new product
development in the immediate future.
The Company has also developed its 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. 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 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 2000 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
7
from 61% in 1991 to 71% in 1997, the last year for which data is available. The
Company is well positioned with its production and marketing presence in the
region.
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, steel shanks,
tacks, nails, adhesives and other small footwear components, together with
certain niche industrial products unrelated to the footwear manufacturing
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
1998, total sales of insoles were (pound)55.5 million, representing 50% 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 1998
total sales of stiffeners were (pound)18.9 million, representing 17% 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 1998, total sales of these
footwear materials products were (pound)21.8 million, representing 20% 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
8
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, in speciality medical dressings and
"no-dig" installed-pipe repair liners, which permit the repair of installed
pipes without excavation. The Unifast division utilizes its tack and nail
manufacturing capacity to produce machine-applied carpet gripper pins and
ballistic nails for industrial use. In 1998, total sales of industrial products
were (pound)12.7 million, representing 11% of sales.
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 1998, this
activity contributed sales of (pound)2.0 million representing 2% 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.
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 300
marketing, distribution and technical support personnel and uses over 115 agents
and over 50 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 27 field warehouses.
Distributors and agents are supported by regionally-based sales and technical
9
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.
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 occassionally 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 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.
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, filtration products and pipelining systems.
10
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'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 believes that, as the loan note does not have a fixed
repayment date, it would not be 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, 1998, representing
management's estimate of net realisable value of the loan notes at this date.
The Company pays an annual rent of (pound)0.5 million for the use of its offices
and factory located on this site.
In addition to its executive offices in Leicester, U.K. the Company operates six
major facilities in five countries with a total of approximately 81,394 square
meters, of which the Company currently owns approximately 46,742 square meters
and leases 34,652 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
Skelton, U.K. 18,652 Leased Non-woven materials
Mockmuhl. Germany 19,150 Owned Cellulose products
Ripatransone, Italy 5,630 Owned Cellulose products
United States
Russell, Massachusetts 14,220 Owned Cellulose products
Asia
Foshan, China 7,742 Owned Cellulose products
In order to achieve benefits from manufacturing efficiencies, on October 22,
1998, the Company ceased production in its non-woven facility at Ontinyent in
Spain and relocated the production plant to the main non-woven production site
at Skelton, U.K.
11
The Company continues to invest for the future with capital expenditures of
(pound)2.0 million and research and development expenditures of (pound)1.5
million during the year ended December 31, 1998.
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.
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 directors disclaim 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.
12
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".
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 whom
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.
13
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 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).
14
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
15
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 interest into U.S.
dollars at a single spot exchange rate, as set forth in Treasury regulations
section 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
16
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.
17
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, Texon International plc for the years ended December
31, 1997 and 1998 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, 1998 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, 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 29 to the Consolidated
Financial Statements of the Company included elsewhere in this document.
18
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA
USM (Holdings) Limited United Texon Limited
------------------------------ ------------------------------------------------
Historical
---------------------------------------------------------------------------------
Period from
Year Ended Period from April 25, to Year ended Year ended
December 31, January 1 to December 31, December 31, December 31,
1994(b) April 24, 1995 1995 1996 1997
-------------------------------------------------------------------------------------------
(unaudited)
(Pounds sterling in thousands)
Statement of Operations
Data:
Amounts in accordance
with U.K. GAAP:
Sales turnover(a) ....................... 109,847 38,401 77,295 128,602 122,343
Cost of goods sold ...................... 73,121 26,064 54,645 84,321 79,802
Gross Profit ............................ 36,726 12,337 22,650 44,281 42,541
Operating Expenses(c) ................... 24,458 8,409 16,717 28,001 32,932
Income from Continuing operations ....... 12,268 3,928 5,933 16,280 9,609
Exceptional items(d) .................... 463 -- 1,634 -- --
Income before taxes and interest ........ 11,805 3,928 4,299 16,280 9,609
Interest expense, net ................... 8,307 2,972 7,106 10,044 10,199
Amortization of deferred
financing costs ....................... -- -- -- -- --
Income before taxes and
minority interests .................... 3,498 956 (2,807) 6,236 (590)
Income tax expense ...................... 921 367 682 2,387 1,492
Income before minority Interests ........ 2,577 589 (3,489) 3,849 (2,802)
Minority interests in
(earnings)/losses(h)................... 238 68 (109) (293) (305)
Net income/(loss)
Continuing operations ................. 2,815 657 (3,380) 3,556 (2,387)
Net income/(loss)
discontinued operations ............... 450 307 (11,672) (4,285) (1,931)
net income/(loss) ..................... 3,265 964 (15,052) (729) (4,318)
Other Data:
Amounts in accordance With U.K GAAP:
Depreciation and amortization ........... 1,902 805 1,424 2,161 2,355
Capital expenditures .................... 1,770 496 1,455 3,188 1,722
Ratio of earnings to fixed charges(f).... 1.4x 1.3x 0.6x 1.6x 0.9x
Shortfall of earnings to fixed
charges .............................. -- -- (2,807) -- (590)
=======================================================TABLE HAS BEEN SPLIT========================================================
Texon International plc
-----------------------
Historical
----------------------
Year ended
December 31,
1998
-----------------
(Pounds sterling thousands)
Statement of Operations
Data:
Amounts in accordance
with U.K. GAAP:
Sales turnover(a) ....................... 110,880
Cost of goods sold ...................... 72,193
Gross Profit ............................ 38,687
Operating Expenses(c) ................... 26,106
Income from Continuing operations ....... 12,581
Exceptional items(d) .................... (957)
Income before taxes and interest ........ 13,538
Interest expense, net ................... 9,147
Amortization of deferred
financing costs ....................... 682
Income before taxes and
minority interests .................... 3,709
Income tax expense ...................... 1,303
Income before minority
Interests ............................. 2,406
Minority interests in
(earnings)/losses(h)................... (184)
Net income/(loss)
Continuing ............................ 2,222
operations
Net income/(loss)
discontinued operations ............... --
net income/(loss) ....................... 2,222
Other Data:
Amounts in accordance With U.K GAAP:
Depreciation and
amortization .......................... 1,910
Capital expenditures .................... 2,038
Ratio of earnings to
fixed charges(f)....................... 1.5x
Shortfall of earnings to
fixed charges ......................... --
See notes to Selected Historical Consolidated Financial Information and Other
Data.
19
Texon International plc
------------------------------------------------------
Historical Historical Historical
-------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
-------------------------------------------
(Pounds sterlin in thousands)
-------------------------------------------
Statement of Operations Data:
Amounts in accordance with U.S. GAAP:
Sales turnover(a) ........................ 128,602 122,343 110,880
Cost of goods ............................ 84,321 79,802 72,193
Gross profit ............................. 44,281 42,541 38,687
Operating expenses (including
amortization of goodwill)(c)............ 32,318 36,183 27,435
32,318
Income from continuing operations(e) ..... 11,963 6,358 11,252
Interest expense, net .................... 10,044 10,199 9,147
Amortization of deferred financing costs . -- -- 682
Income before taxes and minority interests 1,919 (3,841) 1,423
Income tax expense ....................... 2,657 1,508 1,277
Income before taxes, extraordinary
items and minority interests ........... (738) (5,349) 146
Minority interests in (earnings) losses(h) (293) (305) (184)
Net loss from continuing operations ...... (1,031) (5,654) (38)
Other Data:
Amounts in accordance with U.S. GAAP:
Depreciation and amortization ............ 6,647 6,412 5,850
Capital expenditures ..................... 3,188 1,722 2,038
Ratio of earnings to fixed charges(f) .... 1.2x 0.6x 1.1x
Shortfall of earnings to fixed charges ... -- (3,841) --
See Notes to Selected Historical Consolidated Financial Information and Other Data.
20
SELECTED HISTORICAL AND CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
USM (Holdings) Limited United Texon Limited Texon International plc
--------------------------- ------------------------ ----------------------------
Historical Historical
----------------------------------------------------- ----------------------------
As of As of As of As of As of As of
December 31, April 24, December 31, December 31, December 31, December 31,
1994(b) 1995 1995 1996 1997 1998
----------------------------------------------------- -----------------------------
(unaudited)
(Pounds sterling in thousands)
Consolidated Balance
Sheet Data:
Amounts in accordance
with U.K. GAAP:
Total assets ........ 118,447 121,770 114,628 99,386 54,315 49,927
Total debt(g) ....... 98,812 92,967 104,059 87,221 87,660 90,539
Obligations under
finance lease ...... 616 581 509 1,092 922 1,245
Total shareholder's
deficit ............ (51,724) (51,613) (70,588) (66,066) (68,629) (73,619)
Texon International plc
------------------------------------------------------
Historical Historical
---------------- ------------------------------------
As of As of As of
December 31, December 31, December 31,
1996 1997 1998
-------------- ------------------ ----------------
(Pounds sterling in thousands)
Consolidated Balance Sheet Data:
Amounts in accordance with
U.S. GAAP:
Total assets ................ 128,600 121,346 121,250
Total debt(g) ............... 87,221 87,660 90,539
Total shareholders' (deficit) (26,964) (1,792) (10,336)
See Notes to Selected Historical Consolidated Financial Information and Other Data.
21
NOTES TO SELECTED HISTORICAL AND UNAUDITED PRO FORMA 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) The Consolidated Statement of Operations Data and Other Data presented for
the year ended December 31, 1994 contains unaudited information that
reflects the operating results of the Materials business only. The audited
financial statements for these periods do not reflect the segregation of
the Materials business and the Machinery business.
c) 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, 1998 include (pound)0.8 million of costs in connection with
reorganisation of the business.
d) Exceptional items under U.K. GAAP for the period from April 25, 1995 to
December 31, 1995 and the year ended December 31, 1994 relate to
restructuring costs for employee severance costs of (pound)1,634,000 and
aborted initial public offering costs of (pound)463,000, respectively.
The exceptional item for the period ended December 31, 1998 refers 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.
e) 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, 1998, 1997 and 1996 amount
to (pound)3,940,000,(pound)4,057,000 and(pound)4,486,000 respectively. The
continuing operations portion of the difference relating to pensions and
post-retirement benefits for the years ended December 31, 1998, 1997 and
1996 amounts to(pound)(2,649,000),(pound)162,000 and(pound)169,000
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.
22
f) 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.
g) 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.
h) The minority interest calculation is based on the income before tax
(earnings) of the Foshan operation.
Item 9. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
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.
23
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.
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
activiites 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
24
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 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.
25
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.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
For the purposes of discussing the 1995 results the financial information for
year ended December 31, 1995 represents the aggregation of the results of USM
(Holdings) Limited for the period from January 1, 1995 to April 24, 1995 and for
United Texon Limited for the period from January 1, 1995 to December 31, 1995,
as though the 1995 Acquisition had occurred on January 1, 1995. On a pro forma
basis, net interest expense would have been increased by (pound)0.6 million,
representing the additional interest expense associated with the 1995
Acquisition.
Sales turnover. Sales increased (pound)12.9 million, or 11.1%, to (pound)128.6
million in 1996 from (pound)115.7 million in 1995. On a constant currency basis,
sales increased by 10.5%, or essentially by the same amount as on a nominal
basis, reflecting the lack of overall foreign exchange distortions during the
period. Sales of insoles increased (pound)8.9 million, or 15.8%, to (pound)65.1
million in 1996 from (pound)56.2 million in 1995. The insole product line
benefited from the acceptance and increased usage in the Asian market of a new
line of non-woven insoles especially designed for athletic shoes. Sales of
stiffeners increased (pound)3.1 million, or 18.6%, to (pound)19.8 million in
1996 from (pound)16.7 million in 1995, primarily as a result of the acquisition
of a new extrusion line which increased capacity significantly, and the
acquisition of a new non-woven fabric plant in Spain. Sales of other footwear
materials increased (pound)1.7 million, or 5.8%, to (pound)31.2 million in 1996
from (pound)29.5 million in 1995, primarily due to an increase in sales of shoe
liners. Sales of industrial products decreased (pound)0.8 million, or 6.0%, to
(pound)12.5 million in 1996 from (pound)13.3 million in 1995.
Gross Profit. Gross profit increased (pound)9.3 million, or 26.6%, to
(pound)44.3 million in 1996 from (pound)35.0 million in 1995. Gross profit
margin increased to 34.4% in 1996 from 30.2% in 1995. The increase resulted from
the stabilization in global prices of pulp used in the cellulose manufacturing
process, the increased price of which in 1995 negatively impacted gross margins
for that year. In addition, the Chinese cellulose plant concentrated on margin
improvement after the success of its initial market penetration in 1995.
Marketing and administrative expenses. Marketing and administrative expenses
increased (pound)2.9 million, or 11.6% to (pound)28.0 million in 1996, from
(pound)25.1 million in 1995. Marketing and administrative expenses remained
constant at 21.7% of sales over the two periods. The increase in marketing and
administrative expenses was due to increased expenses of the Chinese plant and
higher distribution costs as a result of increased sales volume. In addition,
1995 expenses were reduced as a result of the refund to the Company of a U.K.
property tax payment.
Operating Profit. Operating profit increased (pound)6.4 million, or 64.6%, to
(pound)16.3 million in 1996, from (pound)9.9 million in 1995. Operating profit
increased to 12.7% of sales in 1996 from 8.5% in 1995, primarily for the reasons
discussed above.
Interest. Interest expense decreased by(pound)0.7 million or 6.5% to(pound)10.0
million in 1996 from(pound)10.7 million in 1995. The decrease in interest
expense was mainly due to the decrease in debt during the period.
Taxation. The tax charge increased by(pound)1.4 million to(pound)2.4 million in
1996. The increase was due to higher taxable profits in overseas subsidiaries.
26
Net income/(loss). There was net income in 1996 from continuing operations of
(pound)3.6 million compared to a net loss in 1995 of (pound)3.3 million. The
increase was due to a combination of increased sales with higher margins and the
exceptional items in 1995.
Discontinued operations. Sales decreased (pound)4.3 million from (pound)82.6
million in 1995 to (pound)78.2 million in 1996 this reduction was principally
due to the continued weakness of demand in European and North American markets
where the business has a high market share.
Gross profit in 1996 was (pound)24.6 million, similar to that achieved in 1995,
however, cost of goods sold in 1995 included exceptional expenses of (pound)4.3
million relating to the restructuring program announced at the end of 1995.
Excluding these exceptional expenses gross profit fell from 35% of sales in 1995
to 32% in 1996 mainly due to underutilization of the production facilities as a
result of lower sales volumes.
Marketing and administrative expenses decreased by (pound)6.1 million to
(pound)28.4 million in 1996, however, 1995 included exceptional expenses of
(pound)4.2 million. Therefore, the net reduction was (pound)1.9 million,
principally in administrative and research and development expenses as the
restructuring program reduced employees and costs.
Net loss for 1996 was (pound)4.3 million as compared to (pound)11.4 million in
1995. Excluding the exceptional charge taken for restructuring the business in
1995 the net loss was (pound)2.9 million. The deterioration in profitability
during 1996 was principally due to the reduction in turnover offset by reduced
expense levels and the underutilization of the production facilities.
During 1995, in connection with the acquisition of United Texon Limited by Apax
Partners & Co., the Company paid acquisition fees and expenses to Apax Partners
& Co. of (pound)0.9 million and strategic advice fees to Bankers Trust Co., a
former shareholder of the Company, of (pound)1.5 million.
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
Facility, working capital needs and the funding of capital expenditures. The
total liabilities at December 31, 1998 were (pound)123.1 million including
consolidated indebtedness of (pound)91.8 million which compares to total assets
of (pound)49.9 million. The excess of liabilities over assets of (pound)73.1
million is due to the writing off of goodwill.
The shareholders deficit as at December 31, 1998 was (pound)73.6 million
compared with (pound)68.3 million as at December 31, 1997.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the Company's (pound)15.0 million Revolving Facility. The net
cash flow from operating activities for the year ending December 31, 1998 was
(pound)10.1 million with unused available banking facilities at that date of
(pound)11.9 million.
For the year ended December 31, 1998 the Company had a cash outflow of
(pound)3.4 million after payment of interest of (pound)9.7 million, Senior Notes
issuance costs of (pound)5.1 million and taxation of (pound)1.4 million. Sales
of assets, primarily the Company's property in Leicester, U.K., generated
(pound)4.2 million. Investment in capital expenditure of (pound)2.0 million was
made during the period and the first instalment of (pound)0.5 million was paid
for the acquisition of an additional 30% of the shares for the Company's
operation in Foshan, China.
27
International Operations
The Company conducts operations in countries around the world including through
manufacturing facilities in the UK, the United States, Germany, Italy 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.
Although 28% of the Company's sales are to Asia and the Pacific, these sales are
to major footwear companies' subcontractors located in the region who export the
substantial majority of their production. As such management estimates that less
than 5% of their sales are used in footwear which is sold in Asia. Therefore the
Company believes that the recent economic and banking problems experienced by
some of the Asian countries should not have a material impact on the Company's
results of operations and revenues.
The devaluation of certain Asian currencies has benefited some of the Company's
competitors who manufacture their products in the region. However, as labor and
overhead relative to raw materials which are substantially denominated in US
dollars represent a small proportion of the cost of goods sold, management does
not expect a material impact on the operations of the Company.
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 a comprehensive review of the Company's computer systems and plant and
equipment which incorporate microprocessors, the Company is in the process of
formulating and implementing a program designed to ensure that the software used
in connection with the Company's business and operations will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
dates. This program includes both updating existing software and the
implementation of new software at various locations and will be substantially
completed during the second quarter of 1999. The Company currently estimates
that the costs incurred to date of dealing with the Year 2000 problem, that are
not related to ongoing systems updates, are not material. It also estimates that
the additional costs to be incurred in connection with the Year 2000 program
shall be approximately (pound)200,000 although there can be no assurance that
this will be the case or that the Company will not incur additional costs in
connection with such a program. All costs are expensed when incurred. To date no
significant issues have been identified that management has not addressed.
The general expectation by those who have studied best practice in managing the
Year 2000 problem is that even the best run projects will face some Year 2000
compliance failures. There can be no assurance that Year 2000 projects will be
successful or that the date change from 1999 to 2000 will not materially affect
an organization's operations and financial results. Businesses, including the
Company, may also be affected by the inability of third parties to manage the
Year 2000 problem.
28
Euro
The management have reviewed the implications of the single European Currency on
our business and have 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.
29
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 1998 and 1999.
Exchange Rate Sensitivity
The table below provides information 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. These notional amounts generally are used to calculate the
contractual payments to be exchanged under the contract.
30
As at December 31, 1998
Expected maturity date
1999 Fair Value
---------------------- ----------
(GBP Equivalent in thousands)
(Liabilities)/Assets
GBP Functional Currency :
Interest on debt (DEM) ...... (8,527) (8,813)
Short term affiliate loans
(EUR) ................ (721) (721)
(USD) ................ (557) (557)
Trading transactions
(EUR) ................ 1,346 1,346
(USD) ................ 995 995
AUD Functional Currency:
Trading transactions
(EUR) ................ (116) (116)
(GBP) ................ (153) (153)
(USD) ................ (147) (147)
EUR Functional Currency :
Trading transactions
(GBP) ................ (618) (618)
HKD Functional Currency:
Trading transactions
(GBP) ................ (244) (244)
(USD) ................ 330 330
NTD Functional Currency :
Trading transactions
(GBP) ................ 263 263
(USD) ................ (420) (420)
MXP Functional Currency :
Trading transactions
(GBP) ................ (283) (283)
(USD) ................ (255) (255)
USD Functional Currency :
Trading transactions
(EUR) ................ (59) (59)
31
The Company's exposures are covered on a net basis and the following contracts
were in place at December 31, 1998.
Expected maturity date
1999 Fair Value
---------------------- ----------
(GBP Equivalent in thousands)
Forward Exchange Agreements
(Receive DEM/Pay GBP)
Contract amount 8,527 8,813
Average contractual exchange rate 2.87
(Receive EUR/Pay GBP)
Contract amount 718 725
Average contractual exchange rate 1.43
(Receive USD/Pay GBP)
Contract amount 554 557
Average contractual exchange rate 1.67
(Receive HKD/Pay GBP)
Contract amount 723 725
Average contractual exchange rate 12.87
(Receive GBP/Pay DEM)
Contract amount (1,953) (1,953)
Average contractual exchange rate 2.77
(Receive GBP/Pay AUD)
Contract amount (409) (404)
Average contractual exchange rate 2.67
(Receive GBP/Pay USD)
Contract amount (1,907) (1,917)
Average contractual exchange rate 1.67
Interest Rate Sensitivity
The table below provides information about the Company's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps and debt obligations. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. The information is presented
in Sterling equivalents, which is the Company's reporting currency.
32
As at December 31, 1998
Expected maturity date
1999 Fair Value
---------------------- ----------
(Liabilities)
(GBP Equivalent in thousands)
Debt :
Fixed Rate (EUR) (2,006) (2,006)
Average interest rate 5.56%
Variable Rate (GBP) (547) (547)
Average interest rate 7.25%
Variable Rate (EUR) (6,378) (6,378)
Average interest rate 4.75%
Variable Rate (USD) (1,145) (1,145)
Average interest rate 8.76%
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 26.3% of the Company's raw materials costs in 1998 and 17.0% of
the Company's total cost of sales in that year. Additionally, significant
increase 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 1999 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.
33
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, 1998 :
Directors and Executive Officers
Name Age Position
- ---- --- --------
Peter Selkirk 43 Chief Executive and Director
Neil Fleming 43 Finance Director and Director
Kevin Cochrane 54 Director of Sales
Neil Eastwood 62 Director of Cellulose Operations
Tony Freeman 50 Director of Marketing
Terry Pee 55 Director of Non-Woven and Unifast Operations
David Gamble 52 Company Secretary
Timothy Wright 35 Non-executive Director
Shahan Soghikian 40 Non-executive Director
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.
34
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 Freeman has had 30 years of experience in the Company's business, having been
employed by a predecessor of the Company in 1968. Mr Freeman has in that time
held various positions including General Manager of the Unifast division and of
non-woven products and is now the Company's Director of Marketing having been
appointed in January 1998. Mr Freeman has a Technical Diploma in Mechanical
Engineering from the City & Guilds of London Institute, a diploma from the
Institute of Industrial Management at Leicester Polytechnic and a diploma in
International Marketing from IMD in Lausanne.
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 Gamble has been with the group since 1972. From 1976 to 1987, he was the
European Tax Manager and Director of International Taxes for Emhart Corporation,
the then US parent of the Company. Since 1987 he has been Deputy Finance
Director, and since 1989, Company Secretary of the Group, managing all tax,
treasury and corporate finance matters of the Group. Mr Gamble is a Chartered
Accountant.
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 eight years since 1990. Mr Wright is a non-executive
director of a number of private equity companies associated with certain funds
advised by Apax.
Mr Soghikian is the general partner of Chase Capital Partners responsible for
Europe and is based in London. He has been with Chase Capital Partners since
1990 and has been a non-executive director of the Company since 1995. Prior to
joining Chase Capital Partners, Mr Soghikian was a member of the mergers and
acquisitions group of Bankers Trust and Prudential Securities Inc. Mr Soghikian
is a non-executive director of a number of private companies associated with
Chase Capital Partners, including Drilltec Patents & Technologies Company Inc
and American Floral Services. Mr Soghikian is also a member of the Advisory
Board of Baring Communications Equity Ltd.
Item 11. Compensation of Directors and Officers.
For the year ended December 31, 1998 the aggregate compensation, including
bonuses, of all directors and executive officers of the Company names above was
(pound)1,051,446. For the year ended December 31, 1998, 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.
35
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.
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 is also a shareholder.
Transactions with related parties during the period (excluding interest paid in
the normal course of business) including fees are as follows :
Period from
December 31, 1997
to Year ended
December 31, December 31,
1997 1998
----------- -------------
000 000
Fees for director's services........ - 36
Banking and strategic advice........ 500 161
Debt issuance....................... - 3,094
----- -----
500 3,291
----- -----
Amounts included within creditors in respect of related parties at December 31,
1998 totalled (pound)450,000 (December 31, 1997:(pound)519,000). Included within
prepayments in respect of related parties at December 31, 1998 was an amount of
(pound)nil (December 31, 1997:(pound)14,000).
During the year in the event described in Note 14 Texon International plc paid
to related parties, Chase Manhattan Bank, (pound)3,086,000 and Apax Partners
(pound)8,000 in respect of debt issuance costs. The Group also incurred agency
fees of (pound)161,000 which were payable to Chase Manhattan Bank as the group
corporate banker.
Peter Selkirk and Neil Fleming, who are directors of the company, have an
agreement with the holders of the A ordinary shares in Texon International plc
whereby they each may acquire from those shareholders 80,000 A ordinary shares
at a price of (pound)8.75 per share. The options will lapse on December 21, 2004
if not exercised prior to that date. In addition, a further 240,000 A ordinary
shares are available for allocation, on a basis to be determined by the
Remuneration Committee, to Officers of the Company on the same terms as those
described above.
During the year ended December 31, 1997, the then Chairman of United Texon
Limited held a directorsip of SATRA (Shore and Allied Trades Research
Associates) and a subsidiary of United Texon Limited, Bristish United Shoe
Machinery Limited made payments to SATRA of (pound)28,078 ((pound)61,884 in
1996).
36
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.
The company has taken advantage of the exemption allowed in FRS 8 not to
disclose transactions between group companies.
37
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities.
None
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
None
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.*
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.*
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. PPL*
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.*
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, No. 377 Leicester
Limited and Texon UK Limited dated June 30, 1998 P
10.69 Sale and Purchase Agreement between Texon UK Limited and USM Texon
Limited dated June 30, 1998 P
10.70 Lease between No. 337 Leicester Limited, Texon UK Limited and Anglo
Irish Bank Corporation plc dated October 9, 1998 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.
P These exhibits have been filed in paper format with the Securities and
Exchange Commission under cover of Form SE on April 30, 1999.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and the Shareholders of Texon International plc:
We have audited the consolidated financial statements for the year ended
December 31, 1998 excluding the proforma information described in note 1, on
pages F-2 to F-54. 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, 1998, and the
consolidated results of operations and cash flows of Texon International plc for
the year ended 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 year ended December
31, 1998 and shareholders' equity as of December 31, 1998, to the extent
summarized in Note 30 to the consolidated financial statements.
/s/ Deloitte & Touche
Deloitte & Touche
Chartered Accountants and Registered Auditors
Leicester
England
The Shareholders and Board of Directors
Texon International plc
30 April 1999
Dear Sirs
We have audited the accompanying consolidated balance sheets of United Texon
Limited and subsidiaries as of December 31, 1997, and of Texon International plc
and subsidiaries as of December 31, 1997, and the related consolidated profit
and loss accounts, cash flow statements, statements of total recognised gains
and losses and reconciliation of movements in shareholders' funds of United
Texon Limited for the years ended 31 December 1996 and 1997, and of Texon
International plc for December 31, 1997, being both the date it acquired United
Texon Limited and the end of its financial reporting period. 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom which standards are substantially equivalent to auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the consolidated financial position of United
Texon Limited and subsidiaries as of December 31, 1997, and of Texon
International plc and subsidiaries as of December 31, 1997, and the consolidated
results of operations and cash flows of United Texon Limited for the years ended
31 December 1996 and 1997, and of Texon International plc for December 31, 1997,
being both the date it acquired United Texon Limited and the end of its
financial reporting period, 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, 1997 and
shareholders' equity as of December 31, 1997, to the extent summarised in Note
30 to the consolidated financial statements.
Yours sincerely
/s/ KPMG Peat Marwick
TEXON INTERNATIONAL PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Texon
International plc
United Texon Limited
---------------------------- -----------------
Year ended Year ended Year ended
December 31, December 31, December 31,
Notes 1996 1997 1998
----- ------------- ------------- -----------------
(pound)000 (pound)000 (pound)000
Sales turnover
Continuing operations ................... 3 127,887 121,556 110,880
Discontinued operations ................. 77,074 66,255 --
------------- ------------- -----------------
204,961 187,811 110,880
Cost of sales
Continuing operations ................... (83,606) (79,015) (72,193)
Discontinued operations ................. (52,446) (44,322) --
------------- ------------- -----------------
(136,052) (123,337) (72,193)
Gross profit
Continuing operations ................... 44,281 42,541 38,687
Discontinued operations ................. 24,628 21,933 --
------------- ------------- -----------------
68,909 64,474 38,687
Marketing and administrative expenses ......... 4,5
Continuing operations ................... (28,001) (32,932) (26,106)
Discontinued operations ................. (28,401) (24,552) --
------------- ------------- -----------------
(56,402) (57,484) (26,106)
Operating profit/(loss) ....................... 4,5
Continuing operations ................... 16,280 9,609 12,581
Discontinued operations ................. (3,773) (2,619) --
------------- ------------- -----------------
12,507 6,990 12,581
Profit on sale of discontinued activities ..... 5b -- 1,602 --
Profit on disposal of property ................ 5a -- -- 957
------------- ------------- -----------------
Profit/(loss) before interest and taxation .... 6
Continuing operations ................... 16,280 9,609 13,583
Discontinued operations ................. (3,773) (1,017) --
------------- ------------- -----------------
12,507 8,592 13,538
Interest receivable and similar income ........ 229 298 160
Interest payable and similar charges .......... 7 (11,267) (10,915) (9,989)
------------- ------------- -----------------
Profit/(loss) on ordinary activities before
taxation ................................ 1,469 (2,025) 3,709
Taxation on profit on ordinary activities ..... 9 (1,905) (1,988) (1,303)
------------- ------------- -----------------
Profit/(loss) on ordinary activities after
taxation ................................ (436) (4,013) 2,406
Minority equity interests ..................... 20 (293) (305) (184)
------------- ------------- -----------------
Net (loss)/profit for the financial year ...... 19 (729) (4,318) 2,222
------------- ------------- -----------------
(Accretion)/waiver of dividend and
redemption premium on non-equity
preference shares ....................... (3,767) 5,217 --
Non-equity preference dividend ................ -- -- (2,600)
------------- ------------- -----------------
Retained (loss)/profit for the period
for equity shareholders ................. (4,496) 899 (378)
============= ============= =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
TEXON INTERNATIONAL PLC
CONSOLIDATED BALANCE SHEETS
United Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
Year ended Year ended Year ended
December 31, December 31, December 31,
Notes 1997 1997 1998
----- ------------- ------------- -----------------
(pound)000 (pound)000 (pound)000
FIXED ASSETS
Goodwill ................................. 11 -- -- 672
Tangible assets .......................... 10 15,841 17,098 13,116
------------- ------------- -----------------
15,841 17,098 13,788
CURRENT ASSETS
Stocks ................................... 12 16,716 16,716 15,781
Debtors due within one year .............. 13 18,483 18,483 17,579
Debtors due after one year ............... 13 862 862 2,058
Cash at bank and in hand ................. 1,143 1,156 721
------------- ------------- -----------------
37,204 37,217 36,139
CREDITORS
Amounts falling due within one year ...... 14 (113,734) (114,393) (30,949)
------------- ------------- -----------------
NET CURRENT (LIABILITIES)/ASSETS .............. (76,530) (77,176) 5,190
------------- ------------- -----------------
TOTAL ASSETS LESS CURRENT
LIABILITIES .............................. (60,689) (60,078) 18,978
CREDITORS
Amounts falling due after more than one
year ................................. 14 (698) (698) (84,477)
Provisions for liabilities and charges ... 16 (6,422) (6,422) (7,642)
------------- ------------- -----------------
NET LIABILITIES ............................... (67,809) (67,198) (73,141)
------------- ------------- -----------------
CAPITAL AND RESERVES
Called up share capital ....................... 18 29,050 13 9,120
Share premium ................................. 19 4,950 -- 46,800
Share capital to be issued (including share
premium) ................................. -- 55,600 --
Profit and loss account ....................... 19 (103,240) (124,242) (129,539)
------------- ------------- -----------------
Shareholders' deficit
Equity interests ......................... (98,240) (68,629) (78,819)
Non-equity interests ..................... 18 29,000 -- 5,200
------------- ------------- -----------------
(69,240) (68,629) (73,619)
Minority equity interests ..................... 20 1,431 1,431 478
------------- ------------- -----------------
(67,809) (67,198) (73,141)
============= ============= =================
================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
TEXON INTERNATIONAL PLC
CONSOLIDATED CASH FLOW STATEMENTS
United Texon Limited Texon International plc
----------------------------- -----------------------------
Period from
December 31,
Year ended Year ended 1997 to Year ended
December 31, December 31, December 31, December 31,
Notes 1996 1997 1997 1998
----- ----------- ------------ ------------ --------------
(pound)000 (pound)000 (pound)000 (pound)000
Net Cash Inflow from Operating
Activities ....................... (25a) 27,329 4,976 -- 10,144
Returns on Investments and Servicing
of Finance ....................... (25b) (6,459) (5,665) -- (14,767)
Taxation ............................ (564) (2,678) -- (1,420)
Capital Expenditure and Financial
Investment ....................... (25b) (3,298) 5,990 -- 2,211
Acquisitions and Disposals:
Acquisition of United Texon
Limited ........................ (25b) -- -- (64,175) (23,455)
Acquisition of Minority
Interest ....................... (25b) -- -- -- (545)
----------- ------------ ------------ --------------
Cash Inflow/(Outflow) before use of
liquid resources ................. 17,008 2,623 (64,175) (27,832)
Financing
(Decrease)/Increase in debt ...... (25b) (17,499) (4,029) 64,175 24,462
Shares issued .................... (25b) -- -- 13 --
----------- ------------ ------------ --------------
(17,499) (4,029) 64,188 24,462
----------- ------------ ------------ --------------
(Decrease)/Increase in Cash ......... (491) (1,406) 13 (3,370)
=========== ============ ------------ --------------
======================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
TEXON INTERNATIONAL PLC
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
United Texon Limited Texon International plc
----------------------------- -----------------------------
Period from
December 31,
Year ended Year ended 1997 to Year ended
December 31, December 31, December 31, December 31,
Notes 1996 1997 1997 1998
----- ----------- ------------- ------------ --------------
(pound)000 (pound)000 (pound)000 (pound)000
(Decrease)/increase in cash in the
period ........................... (25c) (491) (1,406) 13 (3,370)
Cash inflow/(outflow) from debt and
lease financing .................. (25b) 17,499 4,029 -- (24,462)
----------- ------------- ------------ --------------
Change in net debt resulting from
cash flows ....................... 17,008 2,623 13 (27,832)
Non cash movements in debt .......... -- (3,434) -- 5,223
New finance leases .................. (3,925) -- -- --
Translation differences ............. 2,899 (106) -- (4,292)
Loans and finance leases acquired
with subsidiary .................. -- -- (64,175) --
----------- ------------- ------------ --------------
Movement in net debt in the
period ........................... 15,982 (917) (64,162) (26,901)
Net debt brought forward ............ (102,504) (86,522) -- (64,162)
----------- ------------- ------------ --------------
Net debt carried forward ............ (25c) (86,522) (87,439) (64,162) (91,063)
=========== ============= ============ ==============
======================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
TEXON INTERNATIONAL PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
United Texon Limited Texon International plc
----------------------------- -----------------------------
Period from
December 31,
Year ended Year ended 1997 to Year ended
December 31, December 31, December 31, December 31,
1996 1997 1997 1998
----------- ------------- ------------ --------------
(pound)000 (pound)000 (pound)000 (pound)000
(Loss)/profit for the financial period....... (729) (4,318) - 2,222
Exercised share options...................... - 2,803 - -
Currency translation differences on foreign
currency.................................. 5,251 (1,659) - (4,924)
----------- ------------- ------------ --------------
Total recognized gains/(losses) in the
period.................................... 4,522 (3,174) - (2,702)
=========== ============= ============ ==============
======================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
TEXON INTERNATIONAL PLC
RECONCILIATION OF MOVEMENTS IN TOTAL SHAREHOLDERS' DEFICIT
United Texon Limited Texon International plc
----------------------------- -----------------------------
Period from
December 31,
Year ended Year ended 1997 to Year ended
December 31, December 31, December 31, December 31,
1996 1997 1997 1998
----------- ------------- ------------ --------------
(pound)000 (pound)000 (pound)000 (pound)000
Profit attributable to members of the Company
(4,496) 899 -- 2,222
Preference dividend ........................... 3,767 (5,217) -- (2,600)
----------- ------------- ------------ --------------
(729) (4,318) -- (378)
New share capital issued ...................... -- -- 13 307
New share capital to be issued ................ -- -- 55,600 --
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) --
Other recognized losses relating to the
year ....................................... 5,251 (1,659) -- (4,924)
----------- ------------- ------------ --------------
Net increase/(decrease) to shareholder funds... 4,522 (3,174) (68,629) (4,990)
Opening shareholders' deficit ................. (70,588) (66,066) -- (68,629)
----------- ------------- ------------ --------------
Closing shareholders' deficit ................. (66,066) (69,240) (68,629) (73,619)
=========== ============= ============ ==============
================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
TEXON INTERNATIONAL PLC
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 footware industry world-wide.
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 prepared consolidated accounts for the year
ended December 31, 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.
Consolidated profit and loss accounts have been included for United
Texon Limited for the years ended December 31, 1996 and 1997 as well as
a consolidated balance sheet 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 year ended December 31,
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. United Texon Limited is also referred to
collectively as ("the Group") in these consolidated financial
statements.
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
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, and 1997 and of
United Texon Limited and all its subsidiary undertakings for the years
ended December 31, 1997 and 1996. As the acquisition was only effective
from 18:00 hours on December 31, 1997, a consolidated balance sheet for
United Texon Limited as of that date has been included for reference
purposes only.
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) Foreign exchange
The closing assets and liabilities of subsidiaries 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 assets and
liabilities and the results for the year denominated in overseas
currencies are taken to reserves along with 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.
To reduce the effect of fluctuating currency exchange rates, foreign
currency forward contracts are entered into to hedge firm commitments.
The Group does not enter into speculative foreign exchange contracts.
Differences arising on the translation of foreign currency forward
contracts to hedge these commitments are recognized when the commitment
matures.
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
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 shorter of
useful life or term
of the lease
Leased Machinery....................... 5 to 10
Plant and Equipment.................... 5 to 15
Office Equipment....................... 3 to 10
Motor Vehicles......................... 3 to 5
i) Lease commitments
Where leases are entered into which entails 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 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
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In order to provide financial information for the Machinery division
for the periods prior to January 1, 1997 management have made
reasonable estimates and judgements based on their knowledge of the
business. The information has been compiled as follows:
Gross profit
Gross profit has historically been analyzed by product line and
accordingly can be analyzed by division. Segmental information included
in the Group's audited consolidated statutory accounts has historically
disclosed the divisional split of revenues and gross profit.
Operating income/(loss)
Research and development and distribution and marketing costs can
predominately be directly associated with a specific division and have
been allocated accordingly. Common costs, including administration
costs, have been allocated by management on a category by category
basis dependent on the type of income or cost on an appropriate basis.
Pension costs have been analyzed between divisions based on the
divisional employee numbers on a demerged basis.
Interest and tax
Interest on substantially all of the borrowings has been allocated to
the Materials division in accordance with the Materials division
assuming the debt following the sale of the Machinery division.
Taxation charges have been allocated between divisions based on the
post sale Group structure.
F-11
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 Accounting policies (continued)
o) Goodwill
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 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 has not been reinstated as allowed by FRS 10, however it has
been deducted from the profit and loss account reserve to comply with
the new Standard. As a result the analysis of reserves in the
comparative balance sheet has been restated.
p) 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 three year
revolving credit facility are to be amortized to the profit and loss
account over its life.
Unamortized debt issuance costs are netted off the debt within
creditors according to FRS 4.
F-12
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 Analysis of turnover, operating profit, and capital employed
Texon International plc is the continuing operation of the Materials
business and the 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.
Texon
International
United Texon Limited plc
---------------------------- ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Turnover analyzed by major business segment:
Continuing operations ............................... 128,602 122,343 110,880
Discontinued operations ............................. 78,227 67,048 --
------------- ------------- --------------
206,829 189,391 110,880
Sales between operations ............................ (1,868) (1,580) --
------------- ------------- --------------
External turnover ................................... 204,961 187,811 110,880
------------- ------------- --------------
Operating profit/(loss) analyzed by major business
segment:
Continuing operations ............................... 16,280 9,609 12,581
Discontinued operations ............................. (3,773) (2,619) --
------------- ------------- --------------
12,507 6,990 12,581
------------- ------------- --------------
Capital expenditures :
Continuing operations ............................... 3,188 1,722 2,038
Discontinued operations ............................. 2,959 1,538 --
------------- ------------- --------------
6,147 3,260 2,038
------------- ------------- --------------
Depreciation:
Continuing operations ............................... 2,161 2,355 1,910
Discontinued operations ............................. 3,671 2,583 --
------------- ------------- --------------
5,832 4,938 1,910
============= ============= ==============
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 operator profit is the primary financial
measure.
F-13
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 Analysis of turnover, operating profit, and capital employed (continued)
Texon
International
United Texon Limited plc
---------------------------- ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Operating assets/(liabilities)
employed by major
business segment:
Continuing operations . 23,800 25,057 21,284
Discontinued operations -- -- --
------------- ------------- --------------
23,800 25,057 21,284
Cash .................. 1,143 1,156 721
Borrowings ............ (87,660) (64,396) (90,539)
Taxes ................. (975) (975) (998)
Accrued bank interest . (4,117) (4,117) (3,609)
Non-operating accruals -- (23,923) --
------------- ------------- --------------
(91,609) (92,255) (94,425)
------------- ------------- --------------
Net liabilities ....... (67,809) (67,198) (73,141)
============= ============= ==============
Geographical analysis of continuing operations is as follows:
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Turnover analysis by company location:
Europe ........................................ 83,725 80,413 73,991
Americas ...................................... 24,473 23,652 22,549
Asia .......................................... 11,567 11,167 9,643
Other ......................................... 8,837 7,111 4,697
------------- ------------- --------------
128,602 122,343 110,880
------------- ------------- --------------
Export sales from the UK ...................... 19,954 16,825 14,872
------------- ------------- --------------
Turnover analysis by destination :
Europe ........................................ 65,029 59,178 54,784
Americas ...................................... 21,564 21,658 20,436
Asia .......................................... 24,752 26,398 25,857
Other ......................................... 17,257 15,109 9,803
------------- ------------- --------------
128,602 122,343 110,880
------------- ------------- --------------
Operating profit analysis by Company location :
Europe ........................................ 12,782 6,449 8,669
Americas ...................................... 1,918 1,665 2,033
Asia .......................................... 940 1,135 1,997
Other ......................................... 640 360 (118)
------------- ------------- --------------
16,280 9,609 12,581
============= ============= ==============
F-14
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Europe ........................................ 10,591 11,848 9,174
Americas....................................... 2,943 2,943 2,983
Asia........................................... 7,950 7,950 7,132
Other.......................................... 2,316 2,316 1,995
------------- ------------- --------------
23,800 25,057 21,284
============= ============= ==============
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.
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
5% of sales in 1998, 1997 and 1996.
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
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 Operating profit
Operating profit/(loss) is stated after charging:
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Marketing and distribution costs.............. 36,328 33,235 17,602
Research and development costs................ 4,037 3,810 1,481
Administrative expenses
Operating expenses ........................ 11,397 9,838 5,406
Other expenses ............................ 4,640 10,601 1,617
------------- ------------- --------------
56,402 57,484 26,106
============= ============= ==============
Operating profit relating to continuing operations is stated after
charging:
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Marketing and distribution costs.............. 18,923 19,428 17,602
Research and development costs................ 1,312 1,351 1,481
Administrative expenses:
Operating expenses......................... 5,725 5,285 5,406
Other expenses............................. 2,041 6,868 1,617
------------- ------------- --------------
28,001 32,932 26,106
============= ============= ==============
F-16
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 Exceptional items
a) Exceptional items included within operating profit:
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Operating profit before exceptional items..... 12,507 12,649 13,400
Exceptional administrative expenses:
Costs of abortive sale........................ i) - (1,712) -
Refinancing costs............................. ii) - (1,144) -
Share options.................................iii) - (2,803) -
Restructuring costs........................... iv) - - (819)
------------- ------------- --------------
Operating profit for the period................ 12,507 6,990 12,581
============= ============= ==============
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 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
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(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 ............................... 5,702 4,768 1,744
Leased .............................. 130 170 140
Amortization of goodwill ............ -- -- 26
Operating lease charges :
Hire of plant & machinery ........... 1,376 1,360 539
Other lease charges ................. 1,745 1,657 798
Finance lease charges :
Plant and machinery ................. 59 77 66
Leased machinery .................... 488 322 --
Pension costs ......................... 3,145 2,959 1,034
Profit on sale of properties .......... -- (386) (957)
Loss/(profit) on sale of other assets . (51) (251) (51)
Net foreign exchange losses ........... 66 51 19
Provision for doubtful debtors ........ 672 558 469
Continuing operations
Depreciation of tangible fixed assets :
Owned ............................... 2,031 2,213 1,744
Leased .............................. 130 142 140
Amortization of goodwill ............ -- -- 26
Operating lease charges :
Hire of plant & machinery ........... 840 546 539
Other lease charges ................. 1,170 742 798
Finance lease charges :
Plant and machinery ................. 59 68 66
Pension costs ......................... 1,246 1,144 1,034
Profit on sale of properties .......... -- (386) (957)
Loss/(profit) on sale of other assets . (3) (266) (51)
Net foreign exchange losses ........... 45 (53) 19
Provision for doubtful debtors ........ 467 378 469
F-18
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 Interest payable and similar charges
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Interest payable and similar charges in respect of :
Bank loans and overdrafts ........................... (8,629) (7,874) (2,109)
Debentures .......................................... (2,638) (3,041) --
Senior notes ........................................ -- -- (7,662)
Gain on repurchase of loan notes .................... -- -- 530
Finance charges allocated for the year in respect of
finance leases ................................... -- -- (66)
Debt issuance costs amortized ....................... -- -- (682)
------------- ------------- --------------
(11,267) (10,915) (9,989)
============= ============= ==============
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, December 31, December 31, December 31,
1996 1997 1997 1998
------------- ------------- -------------- --------------
Manufacturing .................... 1,142 1,021 603 577
Selling, distribution and
administration ................ 1,174 1,058 468 460
------------- ------------- -------------- --------------
2,316 2,079 1,071 1,037
------------- ------------- -------------- --------------
Total number of employees as at
31 December ................... 2,259 1,071 1,071 993
============= ============= ============== ==============
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, December 31, December 31, December 31,
1996 1997 1997 1998
------------- ------------- -------------- --------------
(pound)000 (pound)000 (pound)000
Wages.............................. 45,672 43,980 - 20,740
Social security costs.............. 5,768 5,342 - 3,170
Other pension costs................ 3,145 2,959 - 1,031
Health and other payroll
costs.............................. 2,130 2,033 - 1,026
------------- ------------- -------------- --------------
56,715 54,314 - 25,967
============= ============= ============== ==============
F-19
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, December 31, December 31, December 31,
1996 1997 1997 1998
------------- ------------- -------------- --------------
(pound)000 (pound)000 (pound)000 (pound)000
Fees............................... 60 60 - 36
Other emoluments................... 1,090 1,146 - 402
Pensions........................... 37 117 - 59
------------- ------------- -------------- --------------
1,187 1,323 - 497
============= ============= ============== ==============
Included within other emoluments for the years ended December 31, 1996
and 1997, is (pound)306,000 and (pound)375,000, respectively, paid as
compensation to Directors and past Directors for loss of office.
Directors of United Texon Limited who were compensated during 1996 for
loss of office were, Mr Bates (resigned May 31, 1996), Mr Burton
(resigned June 28, 1996), and Mr Price (resigned August 6, 1996). The
directors compensated for loss of office 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.
Pensions of the year ended December 31, 1996 includes a contribution of
(pound)26,361 paid on behalf of two directors as compensation for loss
of office. Pension contributions of the highest paid Director were
(pound)28,000 for the year ended December 31, 1998. There were two
directors with benefits accruing under money purchase pension schemes.
Directors' emoluments:
Directors' emoluments including pension contributions were paid by
United Texon Limited for the year's ended 31 December 1998, 1997 and
1996.
The emoluments of the Chairman were(pound)201,000 and(pound)545,000
for the years ended December 31, 1996 and 1997 respectively.
Emoluments of the highest paid Director were
(pound)211,000, (pound)545,000 and (pound)224,000 for the years
ended December 31, 1998, 1997 and 1996 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 17.
F-20
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 Taxation
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Taxable income/(loss):
UK ................................................ (1,949) (11,590) (3,682)
Overseas .......................................... 3,418 9,565 7,391
------------- ------------- --------------
1,469 (2,025) 3,709
------------- ------------- --------------
The tax charge is made up as follows:
UK taxation
Corporation Tax at 31% (1997:31.5% and
1996:33%)
Deferred Tax ...................................... -- (247) (15)
Overseas taxation
Corporation Tax ................................... (2,324) (1,796) (1,389)
Withholding Tax ................................... (195) (3) (127)
Deferred Taxation ................................. (69) 36 (8)
------------- ------------- --------------
(2,588) (2,010) (1,539)
Prior Year Adjustments
Corporation Tax ................................... (13) 22 236
Deferred Tax ...................................... 696 -- --
------------- ------------- --------------
(1,905) (1,988) (1,303)
------------- ------------- --------------
Continuing Operations ............................... (2,387) (1,492) (1,303)
Discontinued Operations ............................. 482 (496) --
------------- ------------- --------------
(1,905) (1,988) (1,303)
============= ============= ==============
For the year ending December 31, 1998 the charge for UK Corporation Tax
at 31% (1997:31.5% and 1996:33%) is stated after double tax relief of
(pound)382,000 (1997 : (pound)512,000 and 1996 : (pound)177,000).
At December 31, 1998, Texon International plc and its subsidiaries had
carried forward tax losses available for continuing operations of
(pound)15,273,000, with (pound)3,889,000 expiring between December 31,
1998 and December 31, 2004 and (pound)11,384,000 being unlimited.
The taxable profits generated by the Foshan Texon Cellulose Board
Manufacturing Co Limited were subject to a tax holiday until December
31, 1997, and at half the standard rate for the following three years
(the current standard rate is 24%).
The table below reconciles the expected UK statutory charge to the
actual taxes:
F-21
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 Taxation (continued)
Texon
International
United Texon Limited plc
------------------------------ ---------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Expected taxation charge/(benefit) at UK corporation
tax rates (1998:31%,
1997:31.5% and 1996:33%) ............................ 485 (638) 1,150
Current year tax losses not relieved ................ 1,743 4,043 1,137
Benefit of prior year losses ........................ (441) (2,922) (1,024)
Withholding tax ..................................... 195 3 127
Overseas tax rates .................................. 836 1,469 48
Prior year tax adjustment ........................... (683) (22) (236)
Benefit of overseas tax holiday ..................... (230) (229)
Non-taxable gain on disposal of discontinued
operations ........................................ -- (1,024) --
Non-deductible expenses ............................. -- 1,308 101
------------- ------------- --------------
Actual taxes on income .............................. 1,905 1,988 1,303
============= ============= ==============
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.
F-22
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 Consolidated tangible fixed assets
Plant Machinery
Land and and Office Motor Leased to
Buildings Machinery Equipment Vehicles Customers Total
--------- --------- --------- -------- ---------- -------
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000
Cost
At January 1, 1998 ..... 7,613 9,007 249 176 53 17,098
Exchange adjustment .... 44 38 8 3 (4) 89
Additions .............. 15 1,640 323 41 19 2,038
Disposals .............. (4,086) (7) (101) -- (26) (4,220)
------- ------- ------- ------- ------- -------
At December 31, 1998 ... 3,586 10,678 479 220 42 15,005
======= ======= ======= ======= ======= =======
Accumulated depreciation
At January 1, 1998 ..... -- -- -- -- -- --
Exchange adjustment .... 4 21 2 1 (1) 27
Provided during the year 254 1,463 90 37 40 1,884
Disposals .............. (20) (1) (1) -- -- (22)
------- ------- ------- ------- ------- -------
At December 31, 1998 ... 238 1,483 91 38 39 1,889
======= ======= ======= ======= ======= =======
Net book value
At December 31, 1998 ... 3,348 9,195 388 182 3 13,116
======= ======= ======= ======= ======= =======
At December 31, 1997 ... 7,613 9,007 249 176 53 17,098
======= ======= ======= ======= ======= =======
Included in the total net book value of plant and machinery at December
31, 1998 is (pound)871,000 (December 31, 1997:(pound)1,005,000) in
respect of assets held under finance leases and similar hire purchase
contracts. Depreciation charged during the year ended December 31, 1998
related to such plant and machinery is (pound)140,000 (December
31,1997:(pound)142,000).
Included in the net book value of machinery leased to customers as of
December 31, 1998 is (pound) nil (December 31, 1997:(pound)24,000) in
respect of assets sold to finance companies on terms whereby the assets
may be re-acquired at the end of the primary lease period under a
re-marketing agreement with such finance companies.
Land and Buildings comprise :
Short
Freehold Leasehold Total
----------- ---------- -----------
(pound)000 (pound)000 (pound)000
Cost
At January 1, 1998.......................................... 7,605 8 7,613
Exchange adjustment......................................... 44 - 44
Additions................................................... - 15 15
Disposals................................................... (4,086) - (4,086)
----------- ---------- -----------
At December 31,1998......................................... 3,563 23 3,586
----------- ---------- -----------
F-23
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 Tangible fixed assets of the group (continued)
Short
Freehold Leasehold Total
----------- ---------- -----------
(pound)000 (pound)000 (pound)000
Depreciation
At January 1, 1998.......................................... - - -
Exchange adjustment......................................... 4 - 4
Provided during the year.................................... 246 8 254
Disposals................................................... (20) - (20)
----------- ---------- -----------
At December 31, 1998........................................ 230 8 238
----------- ---------- -----------
Net book value
At December 31, 1998........................................ 3,333 15 3,348
----------- ---------- -----------
At December 31, 1997........................................ 7,605 8 7,613
----------- ---------- -----------
11 Goodwill
1997 1998
---------- -----------
(pound)000 (pound)000
Cost
At January 1, 1998.......................................... - -
Purchased Goodwill.......................................... - 698
---------- -----------
At December 31, 1998........................................ - 698
========== ===========
Amortization
At January 1, 1998.......................................... - -
Provided in the year........................................ - 26
---------- -----------
At December 31, 1998........................................ - 26
========== ===========
Net Book Value
At December 31, 1998........................................ - 672
---------- -----------
At December 31, 1997........................................ - -
========== ===========
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 operation. 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 being paid upon
execution of the agreement.
The purchased goodwill arising on this transaction has been capitalized
and classified as an asset in accordance with FRS 10. The Company's
accounting policy is to amortize the purchased goodwill to the profit
and loss account over 20 years.
F-24
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 Stocks
United Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Raw materials................................... 2,283 2,283 2,106
Work in progress................................ 1,148 1,148 1,269
Finished goods and goods for resale............. 13,285 13,285 12,406
------------- ------------- --------------
16,716 16,716 15,781
============= ============= ==============
13 Debtors
United Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Amounts falling due within one year:
Trade Debtors, net of (pound)1,261,000
(1997: (pound)1,529,000) allowance
for doubtful debtors ........................... 16,868 16,868 16,028
Other debtors .................................... 1,288 1,288 1,046
Prepayments and accrued income ................... 327 327 505
------------- ------------- --------------
18,483 18,483 17,579
============= ============= ==============
Amounts falling due after more than one year:
Other debtors .................................... 862 862 2,058
------------- ------------- --------------
Total debtors .................................... 19,345 19,345 19,637
============= ============= ==============
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:
United Texon
Limited Texon International plc
------------- --------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Balance at beginning of year....................... 1,626 - 1,529
Charge for the year................................ 558 - 469
Utilized during the year........................... (576) - (181)
Utilized on pre-demerger debts..................... - - (533)
Allowance acquired................................. - 1,529 -
Exchange adjustment................................ (79) - (23)
------------- ------------- --------------
Balance at end of year............................. 1,529 1,529 1,261
============= ============= ==============
F-25
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 Creditors
United Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Amounts falling due within one year:
Debenture loans.................................... 27,214 3,950 -
Bank loans and overdrafts.......................... 60,446 60,446 6,935
Obligations under finance leases................... 224 224 372
Payments received on account....................... 81 81 119
Trade creditors.................................... 9,460 9,460 7,744
Taxation and social security....................... 2,333 2,333 2,690
Other creditors.................................... 871 871 1,231
Accruals........................................... 13,105 37,028 11,858
------------- ------------- --------------
113,734 114,393 30,949
============= ============= ==============
Included within accruals at December 31, 1997 were the deep discounted
bonds held by the Company's shareholders which were purchased from the
shareholders by Texon International plc in connection with its
acquisition of United Texon Limited.
United Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Amounts falling due after more one year:
Bank loans and overdrafts.......................... - - 3,215
Obligations under finance leases................... 698 698 873
Senior Notes....................................... - - 80,389
------------- ------------- --------------
698 698 84,477
============= ============= ==============
15 Borrowings
Unites Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Amounts falling due within one year:
Senior Secured Loans............................... 48,122 48,122 -
Mezzanine debt..................................... 6,854 6,854 -
Other loans and overdrafts......................... 5,470 5,470 6,935
Obligations under finance leases................... 224 224 372
60,670 60,670 7,307
Amounts falling due between one and two years:
Obligations under finance leases................... 242 242 404
Amounts falling due between two and five years:
Senior secured loans............................... - - 2427
Other bank loans................................... - - 788
Obligations under finance leases................... 456 456 469
------------- ------------- --------------
456 456 3,684
============= ============= ==============
F-26
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 Borrowings (continued)
United Texon
Limited Texon International plc
------------- --------------------------------
As of As of As of
December 31, December 31, December 31,
1997 1997 1998
------------- ------------- --------------
(pound)000 (pound)000 (pound)000
Amounts falling due after five years:
Senior notes - - 80,389
------------- ------------- --------------
Total borrowings 61,368 61,368 91,784
============= ============= ==============
Following the acquisition of United Texon Limited by Texon
International plc on December 31, 1997 the senior secured loans,
mezzanine debt and loan notes became repayable on demand and were
repaid on January 30, 1998. As a part of the same transaction Texon
International plc acquired the deep discounted bonds from the
shareholders of United Texon Limited and entered into a new Credit
Agreement.
Senior secured loans
On January 30, 1998 Texon International plc entered into a new Credit
Agreement with Chase Manhattan and other institutions. The Credit
Agreement provides a multi-currency revolving facility (the "Revolving
Facility") in a maximum amount not exceeding (pound)15.0 million.
Letters of credit and bank guarantees may be issued as part of the
Revolving Facility. The Revolving Facility will be used to refinance a
portion of the senior bank facilities and provide for the working
capital and general corporate purposes of the Company. The availability
of the Revolving Facility will be subject to various conditions
precedent customary for facilities of this nature.
The Revolving Facility bears interest at a rate of 2% per annum plus
LIBOR, subject to certain reductions based on financial performance.
The Revolving Facility is a three year facility expiring on January 30,
2001. A commitment fee of 0.75% per annum will be paid by Texon
International plc on the undrawn portion of the Revolving Facility.
Each lender which issues a letter of credit or bank guarantee under the
Revolving Facility will receive an issuing bank fee of 0.125% per annum
in respect of its contingent liability for such letter of credit or
bank guarantee. Each lender will receive a letter of credit fee
calculated on a day to day basis in respect of issued letters of credit
or bank guarantees at a rate equal to the margin payable in respect of
the facilities and based on each lender's contingent liability in
respect of such letters of credit or bank guarantees.
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 on consolidations, or amending other debt instruments.
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 revolving facility is secured on the shares in United Texon Ltd.
F-27
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 Borrowings (continued)
Under the revolving facility the Group has unused available bank
facilities as of December 31, 1998 of (pound)11.9 million under the
facilities in place at (December 31, 1997: (pound)3.5 million).
Senior notes financing
On January 30, 1998 the Company issued DM 245,000,000 (approximately
(pound)82.2 million) of 10% Series A Senior notes due February 1, 2008.
On October 23, 1998 the Company purchased, at a discount, DM 7,000,000
of these loan 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 August 1, 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)5,223,000 and
these are being amortized over the life of the notes, that being 10
years.
Other financing
Other loans and overdrafts represent credit facilities of subsidiaries
with third parties.
16 Provisions for liabilities and charges
Deferred Other
Pensions Taxation Provisions Total
---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000
At January 1, 1998......................................... 3,694 (216) 2,944 6,422
Exchange adjustment........................................ 216 3 308 527
Provided................................................... 335 - 1,746 2,081
(Utilised)/Applied......................................... (431) 8 (965) (1,388)
---------- ---------- ---------- ----------
At December 31, 1998....................................... 3,814 (205) 4,033 7,642
========== ========== ========== ==========
At December 31,1997........................................ 3,694 (216) 2,944 6,422
========== ========== ========== ==========
Pensions:
Pensions are discussed in note 26.
F-28
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16 Provisions for liabilities and charges (continued)
Deferred Taxation:
Texon International plc
------------------------------------
Year ended Year ended
December 31, 1997 December 31, 1998
------------------ -----------------
(pound)000 (pound)000
Deferred taxation is represented by
Excess of capital allowances over accumulated depreciation..... (51) (51)
Intercompany profit contained in stock......................... (262) (262)
Other provisions and timing differences........................ 97 108
------------------ -----------------
(216) (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)285,000 (1997:(pound)1.7 million) 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 nil (1997 : nil).
Other provisions
Other provisions at December 31, 1998 includes (pound)586,000 (1997 :
(pound)606,000) for post retirement medical and life insurance benefits
of retired employees and certain current employees in the United
States. (See Note 27).
17 Dividends
1997 1998
------------------ -----------------
(pound)000 (pound)000
5% Cumulative preference dividend proposed
on non-equity shares.................................. - 2,600
================== =================
F-29
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18 Share capital
Texon International plc
As of As of
December 31, December 31,
Number of 1997 Number of 1998
Shares (Pounds) Shares (Pounds)
------------- ----------- ------------ ------------
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,
Number of 1997 Number of 1998
Shares (Pounds) Shares (Pounds)
------------- ----------- ------------ ------------
Called up, allotted and fully paid share capital
Ordinary A voting shares of(pound)1 each....................... - - 3,436,277 3,436,277
Ordinary A non-voting shares of(pound)1 each................... - - 163,723 163,723
Ordinary B voting shares of(pound)1 each....................... 1 1 320,000 320,000
Redeemable cumulative preference
shares of 10p each............................................. - - 52,000,000 5,200,000
Partly paid share capital
Ordinary B voting shares of(pound)1 each....................... 49,999 12,501 - -
----------- ------------
12,502 9,120,000
=========== ============
United Texon Limited
Details of the issued share capital including the mandatorily
redeemable cumulative preference shares acquired by Texon International
plc at December 31, 1997 are given below:
As of December 31, 1997
Number of
shares ((pound))
----------- ------------
Authorized share capital
Ordinary voting shares of 1p each.............................. 4,999,568 49,996
Ordinary non-voting shares of 1p each.......................... 250,327 2,503
Mandatorily redeemable cumulative preference shares
of(pound)1 each................................................ 29,000,000 29,000,000
----------- ------------
29,052,499
=============
F-30
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18 Share capital (continued)
As of December 31, 1997
Number of Consideration
shares Par Value Paid
----------- ----------- ------------
(pound) (pound)
Issued share capital
Ordinary voting shares of 1p each.................. 4,749,673 47,497 4,749,673
Ordinary non-voting shares of 1p each............ 250,327 2,503 250,327
Mandatorily redeemable cumulative preference
shares of(pound)1 each......................................... 29,000,000 29,000,000 29,000,000
----------- ----------- ------------
29,050,000 34,000,000
=========== =========== ============
On December 31, 1997 Texon International plc acquired the entire share
capital including preference shares of United Texon Limited. On January
30, 1998, further shares were issued in connection with the acquisition
of United Texon Limited.
The above shares were issued to effect the acquisition of United Texon
Limited as follows:
i) 2,855,298 Redeemable preference shares of 10p each
issued at a premium of 90p in part consideration for
the acquisition of 100% of the deep discounted bond
issued by United Texon Limited.
ii) 29,000,000 Redeemable preference shares of 10p each
issued at a premium of 90p included in share capital
to be issued to purchase 100% of the mandatorily
redeemable preference shares of United Texon Limited.
iii) 20,144,702 Redeemable preference shares of 10p each
issued at a premium of 90p, 3,436,277 voting A
ordinary shares of (pound)1 each issued at par and
163,723 non-voting ordinary shares of (pound)1 each
issued at par all included in share capital to be
issued to purchase of 87.62% of the voting and 100%
of the non-voting ordinary shares of United Texon
Limited.
320,000 voting B ordinary shares of (pound)1 each issued at par, 50,000
of these were issued on acquisition on December 31, 1997 (49,999 were
partly paid with 25p per share as consideration, on January 30, 1998,
the balance of 75p per share on 49,999 partly paid B ordinary shares
was paid in cash).
Cash consideration of (pound)2,810,000 was paid to members of the
management in satisfaction of the liability for the purchase of 12.38%
of the voting ordinary shares of United Texon Limited issued upon
exercise of the share options and (pound)20,600,000 was paid as part
consideration for the acquisition of 100% of the deep discounted bond.
Under the terms of the revolving credit facility and the 10% Series A
Notes due 2008, Texon International plc is prevented from paying a
dividend on preference shares and ordinary shares until certain
financial ratios have been met.
F-31
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18 Share capital (continued)
The redeemable cumulative preference shares carry 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 state that for periods ending on or prior to December 31,
2000, the preference dividend will accrue at the rate of 6.75% per
annum rather than at 15% as shown by the previous agreement. This
change is retrospective and any entitlement to the higher rate in
historic periods has been waived by the Shareholders. 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 preference dividend will accrue at
the rate of 15% per annum through to September 30, 2002, and at 25%
thereafter. At present, payment of a 5% per annum dividend on or prior
to the due date shall be 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 have been paid until
this date. In the event that the dividend is not paid on the due date
it shall accumulate at a rate of 6.75%. The Directors believe that it
is improbable that the Company will actually bear the higher rates and
so they have not been taken into account for the purposes of
calculating the finance charge.
The redeemable cumulative preference shares may be redeemed by the
Company in multiples of 100,000 or as a whole by serving notice on the
Preference Shareholders specifying the number of Preference shares to
be redeemed. The redemption is at the option of the Company and no
redemption premium is payable.
P. E. Selkirk and J. N. Fleming have an agreement with the other
shareholders to acquire up to 80,000 ordinary voting shares at a price
of (pound)8.75 per share. The options will lapse on December 21, 2004
if not exercised prior to that date. In addition, a further 240,000 A
ordinary shares are available for allocation, on a basis to be
determined by the Remuneration Committee, to Officers of the Company on
the same terms as those described above.
Mandatorily redeemable cumulative preference shares:
The mandatorily redeemable cumulative preference shares are
redeemable at United Texon Limited's option but in any event not later
than the earlier of the date of sale or flotation of the company or
September 30, 2002, at par together with premium of 7 1/2% per annum
from date of redemption. In addition, the mandatorily redeemable
cumulative preference shares carry the right to a preference dividend
that accrues at the rate of 5% per annum from January 1, 1996, to dat
of redemption. The accretion of the preference dividend and redemption
premium has been included as an appropriation in the profit and loss
account and a transfer made for the amounts involved between equity and
non-equity interests within the total of shareholders' equity.
On October 6, 1997, United Texon Limited's shareholders waived their
entitlement to the premium on redemption in respect of the period from
January 1, 1996, to December 31, 1997, together with additional amounts
representing interest on the preference dividend for the same period.
The premium payable on the redemption of the preference shares form the
date of issue to December 31, 1997, was also waived. From January 1,
1998, the original rights and entitlements are restored.
As a result of the waiver the redemption premium, preference
dividend and interest charges transferred from equity to non-equity
interests in prior periods has been reversed in 1997.
Non-equity interests are comprised of the following:
((pound))
Non-equity interests
Preference shares of (pound)1 each (at issue).................... 29,000,000
Acretion of redemption premium for the period ................... 1,450,000
------------
Non-equity interest at December 31, 1996......................... 30,450,000
Acretion of redemption premium for the period ................... 2,284,000
Accrued preference dividend and interest
on accrued preference dividend ................................. 1,483,000
------------
Non-equity interest at December 31, 1996......................... 34,217,000
Reversal of redemption premium................................... (3,734,000)
Waiver of accrued preference dividend and
interest on accrued preference dividend......................... (1,483,000)
------------
Non-equity interest at December 31, 1997......................... 29,000,000
============
Shares options-United Texon Limited
Share options over 62,500 ordinary shares and 150,000 ordinary shares
were previously granted to Directors in 1995 and 1996 at an exercise price of
(pound)1 per share. The exercise price exceeded the fair value of the share at
the date of grant, there were no conditions for exercise and no expiration date
for the options. No options were exercise or forfeited in 1995 and 1996. The
share options for the 212,500 ordinary shares were forfeited during 1997 in
connection with the establishment of a new share option scheme.
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 Untied Texon Limited by Texon
International pic triggered the exercise of the options. The shares were issued
on January 30, 1998, effective as at December 31, 1997.
The total compensation cost included in the results of Unite 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.
F-32
TEXON INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18 Share capital (continued)
Summary of Share Capital Movement
Movements in share capital are summarized below:
United Texon Limited
Share capital
------------------------------------------------------------------------------------------------------
Mandatorily Mandatorily Mandatorily Mandatorily
redeemable redeemable redeemable redeemable
cumulative cumulative cumulative cumulative
preference preference Ordinary preference preference Ordinary
shares of shares of 1 shares of 1 shares of shares of 1 shares of 1
(pound)1 each pence each pence each (pound) 1 each pence each pence each Total
------------- ----------- ----------- -------------- ----------- ----------- ----------
(Number) (Number) (Number) (pound)000 (pound)000 (pound)000) (pound)000
Authorized:
December 31, 1997.. 29,000,000 - 5,249,895 29,000 - 52 29,052
Issued :
December 31, 1997.. 29,000,000 - 5,000,000 29,000 - 50 29,050
------------- ----------- ----------- -------------- ----------- ----------- ----------
----------------------------------------------------------------------------------------------------------------------------
Texon International plc
Share capital
Redeemable Redeemable
cumulative cumulative
preference preference Ordinary
shares of 10 Ordinary shares of 10 shares of (pound)1
pence each Shares of(pound)1 pence each each Total
------------- ----------------- -------------- ------------------ ----------
(Number) (Number) (pound)000 (pound)000 (pound)000
Authorized :
December 31, 1997................... 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.................. - 320,000 - 307 307
------------- ----------------- -------------- ------------------ ----------
52,000,000 3,920,000 5,200 3,613 9,120
F-33
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19 Reserves
Share Goodwill Profit
Premium write-off & Loss
Account Reserve Account Total
------------ ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000
United Texon Limited
Balance at January 1, 1996 as previously
stated........................................ 4,950 (89,677) (14,911) (99,638)
Goodwill eliminated in reserves - 89,677 (89,677) -
Retained loss for the year..................... - - (729) (729)
Exchange adjustments........................... - - (5,251) 5,251
------------ ---------- ---------- ----------
Balance at December 31, 1996................... 4,950 (81,809) (18,257) (95,116)
------------ ---------- ---------- ----------
Balance at January 1, 1997..................... 4,950 (81,809) (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 (79,462) (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)
============ ========== ========== ==========
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-34
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20 Minority equity interests
United Texon Limited Texon International plc
Year ended Year ended Year ended Year ended
December 31, 1996 December 31, 1997 December 31, 1997 December 31, 1998
----------------- ----------------- ----------------- -----------------
(pound)000 (pound)000 (pound)000 (pound)000
Balance at beginning of 890 1,221 - 1,431
period..........................
Acquisition of United Texon
Limited......................... - - 1,431 -
- -
Minority interest in the profit
on ordinary activities after
tax............................. 293 305 - 184
Exchange adjustments............... 38 (95) - (75)
Minority interest purchased
30% - (1,062)
----------------- ----------------- ----------------- -----------------
Balance at December 31..... 1,221 1,431 1,431 478
================= ================ ================== =================
The minority interests relate to the Group's operation in China.
The Company owns 96% of USM (China Holdings) Limited, which in turn
holds 60% of Foshan Texon Cellulose Board Manufacturing Co Limited. 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. The total share holding in Foshan Texon
Cellulose Board Manufacturing Co Limited held by the Texon
International plc Group is 87.6%.
21 Acquisitions
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 11 and 20.
The net assets acquired in 1998 were as follows:
Fair Value
--------------
(pound)000
Net 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.
F-35
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21 Acquisitions (continued)
Year ended December 31, 1997
On December 31, 1997 the company acquired the materials business from
United Texon Limited. The acquisition has been accounted for by the
acquisition method of accounting. See Note 25.
The net assets acquired at December 31, 1997 were as follows:
22 Contingent liabilities
Subsidiary undertakings have contingent liabilities amounting to
approximately (pound)847,000 (December 31, 1997:(pound)681,000) 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 proceeding 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
1997 1998
---------- ----------
(pound)000 (pound)000
Contracted for but not provided...................... 16 143
========== ==========
F-36
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23 Financial commitments (continued)
Other financial commitments
Operating lease commitments of the Group for future minimum lease
payments as at December 31, 1998 were as follows :
Property Other
---------- ----------
(pound)000 (pound)000
Leases expiring within 1 year...................................... 131 186
Leases expiring in the second to fifth years inclusive............. 566 333
Leases expiring over 5 years....................................... 122 9
---------- ----------
819 528
========== ==========
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 is a shareholder.
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 Year ended 1997 to
December 31, December 31, December 31, Year ended
1996 1997 1997 December 31, 1998
----------------- ---------------- -------------- -------------------
(pound)000 (pound)000 (pound)000 (pound)000
Fees for directors' services.. 45 45 - 36
Banking and strategic
advice...................... 80 155 500 161
Debt issuance.................. - 700 - 3,094
----------------- ---------------- -------------- -------------------
125 900 500 3,291
================= ================ ============== ===================
Amounts included within creditors in respect of related parties at
December 31, 1998 totalled (pound)450,000 (December 31,
1997:(pound)519,000). Included within prepayments in respect of related
parties at December 31, 1998 was an amount of (pound) nil (December 31,
1997:(pound)14,000).
During the year in the event described in Note 15 Texon International
plc paid to related parties, Chase Manhattan Bank. (pound)3,086,000 and
Apax Partners (pound)8,000 in respect of debt issuance costs. The Group
also incurred agency fees of (pound)161,000 which were payable to Chase
Manhattan Bank as the group corporate banker.
F-37
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24 Related party transactions (continued)
Peter Selkirk and Neil Fleming, who are directors of the company, have
an agreement with the holders of the A ordinary shares in Texon
International plc whereby they each may acquire from those shareholders
80,000 A ordinary shares at a price of (pound)8.75 per share. The
options will lapse on December 21, 2004 if not exercised prior to that
date. In addition, a further 240,000 A ordinary shares are available
for allocation, on a basis to be determined by the Remuneration
Committee, to Officers of the Company on the same terms as those
described above.
During the year ended December 31, 1997, the then Chairman of United
Texon Limited held a directorship of SATRA (Shoe and Allied Trades
Research Associates) and a subsidiary of United Texon Limited, British
United Shoe Machinery Limited made payments to SATRA of (pound)28,078
((pound)61,884 in 1996).
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. See Note 26.
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 Year ended 1997 to Year ended
December 31, December 31, December 31 , December 31,
1996 1997 1997 1998
----------------- ---------------- -------------- -------------------
(pound)000 (pound)000 (pound)000 (pound)000
Operating profit....................... 12,507 8,592 - 13,538
Depreciation and amortization
charges.............................. 5,832 4,938 - 1,910
Cash flow relating to restructuring
charge .............................. (4,234) (3,693)
Decrease in stocks..................... 2,228 18,362 - 982
Decrease in debtors.................... 2,208 14,233 - 1,020
Decrease in creditors.................. 8,839 (39,622) - (6,298)
Profit on sale of tangible fixed
assets............................... (51) (637) - (1,008)
Management share option expense........ - 2,803 - -
----------------- ---------------- -------------- -------------------
Net cash inflow from operating
activities........... 27,329 4,976 - 10,144
================= ================ ============== ===================
F-38
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Year ended 1997 to Year ended
December 31, December 31, December 31, December 31,
1996 1997 1997 1998
----------------- ---------------- -------------- -------------------
(pound)000 (pound)000 (pound)000 (pound)000
Returns on investments and
servicing of finance
Interest received ................ 229 298 -- 160
Interest paid .................... (6,141) (5,564) -- (9,749)
Interest element of finance lease
payments ....................... (59) (77) -- (66)
Interest element of finance
leased machinery ............... (488) (322) -- --
Expenses incurred in issuance of
the senior notes ............... -- -- -- (5,112)
----------------- ---------------- -------------- -------------------
Net cash outflow for returns on
investments and servicing of
finance ........................ (6,459) (5,665) -- (14,767)
----------------- ---------------- -------------- -------------------
Capital expenditure and financial
investment
Purchase of tangible fixed (5,321) (3,260) -- (2,038)
assets
Sale of tangible fixed
assets ......................... 2,023 9,250 -- 4,249
----------------- ---------------- -------------- -------------------
Net cash (outflow)/inflow for
capital expenditure and
financial investment ........... (3,298) 5,990 -- 2,211
----------------- ---------------- -------------- -------------------
Acquisitions and disposals
Net debt acquired ................ -- -- (64,175) --
Purchase/Sale of subsidiary
undertaking .................... -- -- -- (24,000)
----------------- ---------------- -------------- -------------------
Net cash outflow for
acquisitions ................... -- -- (64,175) (24,000)
----------------- ---------------- -------------- -------------------
Financing
Issue of ordinary share
capital ........................ -- -- 13 --
Debt redeemed .................... (17,256) (3,859) -- (57,368)
Debt issued ...................... -- -- 64,175 81,507
Capital element of finance lease
rental payments ................ (243) (170) -- 323
----------------- ---------------- -------------- -------------------
Net cash (outflow/inflow from
financing ...................... (17,499) (4,029) 64,188 24,462
================= ================ ============== ===================
F-39
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25 Notes to the consolidated cash flow statement (continued)
c) Analysis of net debt
Debt due Debt due
Over within after one Finance
Cash drafts one year year leases Total
---------- ---------- ---------- ---------- ---------- ----------
(pound)000 (pound)000 (pound)000 (pound)000 (pound)000 (pound)000
United Texon Limited
As at January 1, 1996 ..... 2,064 (2,741) (73,783) (27,535) (509) (102,504)
Cash flow ................. 32 (523) 17,256 -- 243 17,008
Other non-cash charges .... -- -- -- (3,099) (826) (3,925)
Foreign exchange
movement ................ (305) 350 2,854 -- -- 2,899
---------- ---------- ---------- ---------- ---------- ----------
As at December 31, 1996 ... 1,791 (2,914) (53,673) (30,634) (1,092) (86,522)
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)
========== ========== ========== ========== ========== ==========
Other non cash charges relate to unamortized debt issuance costs.
d) Cash flow relating to exceptional items
United Texon Limited Texon International plc
-------------------------------------- ------------------------------------
Period from
December 31,
Year ended Year ended 1997 to Year Ended
December 31, December 31, December 31, December 31,
1996 1997 1997 1998
------------ ----------- ------------ -------------
(pound)000 (pound)000 (pound)000 (pound)000
Provision at beginning of
period ........................... 9,374 5,140 - --
Spend ............................ (4,234) (3,693) - (819)
Income............................ -- -- - 3,788
Discontinued operations .......... -- (1,447) - --
------------ ----------- ------------ -------------
Provision at end of period ....... 5,140 -- - --
============ =========== ============ =============
F-40
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Year ended 1997 to Year Ended
December 31, December 31, December 31, December 31,
1996 1997 1997 1998
------------ ----------- ------------ -------------
(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 - --
------------ ----------- ------------ -------------
Profit on disposal.......... -- (3,250) - --
-- 3,250 - --
============ =========== ============ =============
f) Major non cash transactions
(i) During the period December 31, 1996 United Texon Limited
entered into finance lease arrangements in respect of
assets with a total capital value of (pound)826,000.
Interest on the debentures of (pound)2,638,000 and
interest on the mezzanine debt of (pound)461,000, which
was not paid, has been added to the debt during the year.
(ii) During the period to December 31, 1997, (pound)30,634,000
of debt classified as due after one year has been
reclassified as due within one year. Interest on the
debentures of (pound)3,071,000 and interest on the
mezzanine debt of (pound)363,000, which was not paid, has
been added to the debt during the period.
(iii) During the period to December 31, 1998, the total fair
value of the consideration for the additional shareholding
in Foshan was (pound)1,759,000, of this (pound)545,000 was
paid during the year, the balance is payable in
installments over the following two years.
F-41
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25 Notes to the consolidated cash flow statement (continued)
g) Purchase of subsidiary undertaking
United Texon Limited Texon International plc
-------------------------------------- ------------------------------------
Period from
December 31,
Year ended Year ended 1997 to Year Ended
December 31, December 31, December 31, December 31,
1996 1997 1997 1998
------------ ----------- ------------ -------------
(pound)000 (pound)000 (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) --
============ =========== ============ =============
F-42
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26 Pension costs
The majority of the Group's employees participate 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 are externally funded within trusts, other are financed via
internal book reserves. For all these schemes contributions are paid or
pension costs charged based on advice received from qualified
actuaries.
The major funded pension schemes are in the UK and the US.
The UK pension scheme covers employees of the Group and of the former
Machinery business of United Texon Limited, and is to be split
following the demerger. The precise basis of the split has yet to be
finalized and the pension liabilities and costs have been calculated in
accordance with the current intentions, which will require the
agreement of the Pension Schemes Office (a branch of the Inland
Revenue). While the precise basis for sharing assets has yet to be
finalized, it is not expected that future contributions paid into the
plans and related pension costs will be materially different from those
applicable to separate businesses in the recent past. See note (b)
below.
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 are as follows:
United Kingdom United States
---------------------- ------------------
Date of last actuarial valuation................. September 30, 1996 January 1,1998
Actuarial method.................................. Projected Unit Projected Unit
Assumed excess of investment
return over salary increases......... 3% 2.7%
Assumed rate of pension increases......... 2.25% Nil
Value of assets at date of latest valuation.. (pound)35.7 million $6.1 million
Level of funding................................... 96% 103%
Actuaries............................................ Watson Wyatt Partners Buck Consultants
The deficit in the UK pension fund is being remedied by increased
company contributions.
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, Spain, Italy, and the US as at December 1998 and 1997 have
been described in the following tables. The 1997 and 1998 disclosures
relate to the continuing operations only.
F-43
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26 Pension costs (continued)
Texon
International
United Texon Limited plc
--------------------------------------- ------------------
Year ended Year ended Year ended
December 31, 1996 December 31, 1997 December 31, 1998
-------------------- ----------------- -----------------
(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........................................... 1,401 687 1,093
Interest cost on projected benefit obligations ...... 4,812 2,178 2,319
Expected return on plan assets ...................... (6,616) (3,534) (2,252)
Net amortization and deferral ....................... 2,836 1,493 114
-------------------- ----------------- -----------------
Net periodic pension cost ........................... 2,433 824 1,274
Expected EE contributions ........................... -- -- (200)
-------------------- ----------------- -----------------
FAS87 Net periodic pension cost ..................... 2,433 824 1,074
==================== ================= ==================
Texon
International
United Texon Limited plc
-------------------------------- -------------
As of As of As of
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ -------------
% % %
Assumptions
Weighted average discount rate ............ 8.4 7.1 5.7
Long term rate of increases in remuneration 2-6 2-5.5 2.25-6
Expected long term rate of return on assets 8-9.5 -- 4-8
Texon International plc
----------------------------------------
As of As of
December 31, 1997 December 31, 1998
----------------- ------------------
(pound)000 (pound)000
Actuarial present value of:
Accumulated benefit obligations ......... 28,130 29,345
----------------- ------------------
Projected benefit obligations (see a) ... 33,258 36,686
Plan assets at fair value (see a) ....... 26,064 21,984
----------------- ------------------
Funded status ........................... (7,194) (14,702)
Unrecognized net (gain) or loss ......... 1,275 9,318
Unrecognized prior service cost ......... (19) (17)
Unrecognized net transitional obligation 422 382
Fourth quarter contribution ............. 159 165
----------------- ------------------
Net amount recognized ................... (5,357) (4,854)
Adjustment to recognize minimum liability (3) (3,449)
Intangible asset ........................ -- (403)
Accumulated other comprehensive income .. -- (3,046)
----------------- ------------------
Prepaid pension costs (pension liability) (5,360) (8,303)
================= ==================
F-44
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26 Pension costs (continued)
Texon International plc
-----------------------------------------
Year ended Year ended
December 31, 1997 December 31, 1998
------------------ ------------------
(pound)000 (pound)000
Change in projected benefit obligation:
Projected benefit obligation at beginning of year .............. 28,380 33,258
Change to obligation at beginning of year (see b) .............. -- (6,839)
Service cost ................................................... 792 1,093
Interest cost .................................................. 2,255 2,319
Plan net (gains)/losses ........................................ 4,126 7,920
Foreign exchange impact ........................................ (342) 195
Benefits paid .................................................. (1,953) (1,260)
------------------ ------------------
Projected benefit obligation at end of year .................... 33,258 36,686
------------------ ------------------
Change in plan assets:
Fair value of plan assets at beginning of year ................. 23,832 26,064
Change to fair value of plan assets at beginning of year (see b) -- (5,325)
Actual return on plan assets ................................... 3,567 1,532
Company contributions .......................................... 663 800
Employee contributions ......................................... 200 200
Foreign exchange impact ........................................ (245) (36)
Benefits paid .................................................. (1,953) (1,252)
------------------ ------------------
Fair value of plan assets at end of year ....................... 26,064 21,983
================== ==================
a)
As of December 31, 1997 As of December 31, 1998
-------------------------------- ---------------------------------
Assets Assets
exceed Accumulated exceed Accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
-------------- --------------- -------------- --------------
(pound)000 (pound)000 (pound)000 (pound)000
Actuarial present value of:
Accumulated benefit obligations..... 25,195 3,489 3,729 25,616
Projected benefit
obligations ...................... 29,443 3,815 4,497 32,189
Plan assets at fair value .......... 26,064 -- 4,183 17,800
-------------- --------------- -------------- --------------
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 discrepancy
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-45
TEXON INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27 Post retirement medical benefit plan
The US subsidiary of Texon International plc sponsors a defined benefit
post-retirement plan that covers 93 employees and 28 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 post-retirement death benefits
for current retirees only. The following table sets forth the plan's
funded status at December 31, 1998.
Net periodic post-retirement benefit cost included the following
components:
Texon
International
United Texon Limited plc
------------------------------------- ------------------
Year ended Year ended Year ended
December 31, 1996 December 31, 1997 December 31, 1998
----------------- ----------------- ------------------
(pound)000 (pound)000 (pound)000
Service cost .................................. 25 18 --
Interest cost on accumulated post-retirement
benefit obligation ............................ 586 41 35
Amortization of transitional obligation/(asset) (166) 1 (16)
----------------- ----------------- ------------------
Net periodic post-retirement benefit cost ..... 445 60 19
================= ================= ==================
Texon International plc
--------------------------------------
As of As of
December 31, 1997 December 31, 1998
----------------- -----------------
Funded status
Projected benefit obligation .................... 545 578
Plan assets at fair value ....................... -- --
----------------- -----------------
Funded status ................................... (545) (578)
Unrecognized net (gain)/loss .................... (43) (8)
Unrecognized net transitional obligation ........ 14 --
----------------- -----------------
Accrued post-retirement benefit cost ............ (574) (586)
----------------- -----------------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year 402 545
Service cost .................................... 18 --
Interest cost ................................... 41 35
Plan net (gains)/losses ......................... 109 33
Foreign exchange impact ......................... -- (3)
Benefit paid .................................... (25) (32)
----------------- -----------------
Projected benefit obligation at end of year ..... 545 578
----------------- -----------------
Change in plan assets:
Fair value of plan assets at beginning of year .. -- --
Employee contributions .......................... 25 32
Benefits paid ................................... (25) (32)
----------------- -----------------
Fair value of plan assets at end of year ........ -- --
----------------- -----------------
F-46
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27 Post retirement medical benefit plan (continued)
For measurement purposes, an 11% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998,
reducing to 5% in 2006. 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, 1998, by 8%
((pound)46,000) and the aggregate of service and interest cost
components of net periodic post-retirement benefit cost for the year
then ended by 32% ((pound)6,000).
Medical trend rates (initial rate)...............11.0% per annum
Assumed discount.................................6.75% per annum
28 New UK Accounting Standards
In September 1998, the Accounting Standards Board issued two Financial
Reporting Standard's (FRS) 12 and 13. FRS's 12 and 13 are effective for
all accounting periods ending on or after March 23 1999. The new
requirements must be applied prospectively from the period of adoption.
Comparative information is not required for FRS 12 but is encouraged
for FRS 13 unless it is not practical to disclose it.
a). FRS 12 provides accounting and reporting standards for provisions,
contingent liabilities and contingent assets. Its objective is to
ensure that appropriate recognition criteria and measurement bases are
applied to provisions, contingent liabilities and contingent assets and
that sufficient information is disclosed in the notes to the financial
statements to enable users to understand their nature, timing and
amount. The Company will apply the provisions of FRS 12 in 1999. FRS 12
will provide increased disclosure in the financial statements of the
Company and it will ensure that a provision may only be recognized
where at the period-end a liability exists that can be measured
reliably. This will have no significant effects on the Company.
b). FRS 13 provides accounting and reporting standards for derivatives
and other financial instruments. Its objective is to provide via
additional disclosures, information about the impact of financial
instruments on the entity's risk profile, how the risks arising from
the financial instruments might affect the entity's performance and
financial condition, and how these risks are being managed. The Company
will apply the provisions of FRS 13 prospectively in 1999. FRS 13 will
require the Company to provide;
1. narrative disclosures describing the role that the
financial instruments have in creating or changing the
risks that the entity faces, including its objectives and
policies in using financial instruments to manage these
risks and,
2. numerical disclosures showing how these objectives and
policies were implemented in the period and provide
supplementary information for evaluating significant or
potentially significant exposures.
Together these disclosures will provide a broad overview of the
Company's financial instruments and of the risk positions created by
them, focusing on those risks and instruments that are of the greatest
significance.
F-47
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28 New UK Accounting Standards (continued)
The Accounting Standards Board has also 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.
29 Post balance sheet events
a) Non-executive Directors
On February 23, 1999 Mr SD Soghikan resigned as non-executive Director
of Texon International plc.
b) Redeemable cumulative preference shares
The redeemable cumulative preference shares carry 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 the 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 state that for periods ending on or prior to December 31,
2000, the preference dividend will accrue at the rate of 6.75% per
annum rather than at 15% as shown by the previous agreement. This
change is retrospective and any entitlement to the higher rate in
historic periods has been waived by the Shareholders. 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 preference dividend will accrue at
the rate of 15% per annum through to September 30, 2002 and at 25%
thereafter. At present, payment of a 5% per annum dividend on or prior
to the due date shall be 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 have been paid until
this date. In the event that the dividend is not paid on the due date
it shall accumulate at a rate of 6.75%. The Directors believe that it
is improbable that the Company will actually bear the higher rates and
so they have not been taken into account for the purposes of
calculating the finance charge.
c) Acquisition of Cornwell Industries Ltd
On the March 10, 1999 Texon UK Ltd, a wholly owned subsidiary, acquired
the share capital of Cornwell Industries Ltd with effect from March 1,
1999. The consideration paid for the acquisition was approximately
(pound)3 million.
F-48
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 writes off goodwill arising on consolidation
prior to January 1, 1998 directly to the profit and loss account
reserve and 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, 1998 and December 31, 1997
of goodwill is approximately (pound)81,527,000 and (pound)79,775,000,
respectively. Accumulated amortization under US GAAP at December 31,
1998 and December 31, 1997 of goodwill is (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, 1998 the unamortized costs were (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-49
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)18,907,000 and
(pound)16,482,000 at December 31, 1998 and 1997 respectively. The
unrealized gain on the foreign exchange contracts was (pound)169,000
and (pound)14,000 at December 31, 1998 and 1997 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)85,612,000 at December
31,1998. In the opinion of the directors the fair value of the Notes at
December 31, 1998 would be (pound)71,914,000 based on their trading
value at that date.
e) 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, 1998 and 1997 can be
reconciled as follows to the US GAAP net deferred asset:
1998
UK GAAP UK GAAP
Provided Unprovided US GAAP
---------- ---------- -----------
(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) (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 --
======== ======= =======
F-50
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
1997
UK GAAP UK GAAP
Provided Unprovided US GAAP
---------- ---------- -----------
(pound)000 (pound)000 (pound)000
Deferred tax liabilities:
Property plant and equipment ............. 97 -- 97
Other temporary differences .............. -- 560 560
Liabilities not provided under UK GAAP ... -- 1,700 1,700
------- ------- -------
97 2,260 2,357
======= ======= =======
Deferred tax assets:
Intercompany profit ...................... (262) -- (262)
Deferred interest ........................ -- (3,974) (3,974)
Net operating losses ..................... -- (4,216) (4,216)
Property plant and equipment ............. (51) (745) (796)
Pensions and long-term retirement benefits -- (1,208) (1,208)
Intangible assets ........................ -- (1,418) (1,418)
Other (including receivables provision) .. -- (209) (209)
------- ------- -------
(313) (11,770) (12,083)
Less valuation allowance ................. -- 9,726 9,726
------- ------- -------
(313) (2,044) (2,357)
======= ======= =======
Net deferred tax (asset)/liability ....... (216) 216 --
======= ======= =======
f) Net loss per ordinary share
The net loss per ordinary share for the year ended December 31, 1998 is
(pound)0.79. Historical net earnings/(loss) per share is not shown for
December 31, 1997 and 1996 as the historical arrangement is not
indicative of the continuing capital structure.
g) 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 periods ended December 31, 1995 and
1996 it was determined that on the date of the grant, the current
market price was lower than the exercise price and no compensation cost
was recognized. 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.
F-51
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
h) 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.
i) 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 for the
Group under US GAAP.
United United Texon
Texon Texon International
Limited Limited plc
--------------------------- -------------
Year ended Year ended Year ended
Decmeber 31, December 31, December 31,
1996 1997 1998
---------- ---------- -----------
(pound)000 (pound)000 (pound)000
Net cash provided by/(used in) operating activities 20,306) (2,325) (931)
Net cash (used in)/provided by investing activities (3,298) 6,092 1,666
Net cash provided by financing activities ......... (17,499) (5,173) (4,105)
---------- ---------- -----------
Net increase/(decrease) in cash and cash equivalent
under US GAAP ..................................... (491) (1,406) (3,370)
========== ========== ===========
F-52
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
j) 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.
Year ended Year ended Year ended
1996 1997 1998
------------ ------------ -----------
(pound)000 (pound)000 (pound)000
Net (loss)/profit in accordance with UK GAAP ................... (729) (4,318) 2,222
Adjustments to conform with US GAAP:
United Texon Limited acquisition costs ................. -- (500) --
Gain on disposal of Machinery business ................. -- (3,250) --
Amortization of goodwill ............................... (4,486) (4,057) (3,940)
Gain on sale of property ............................... -- -- 1,257
Restructuring costs .................................... (5,924) -- --
Pensions and other post-retirement benefits ............ 333 1,210 397
Effect of differences on policy for recognition of
deferred tax costs and liabilities .................. (626) 211 26
------------ ------------ -----------
Total net loss in accordance with US GAAP ...................... (11,432) (10,704) (38)
------------ ------------ -----------
Net (loss)/profit from continuing operations in accordance with
US GAAP .................................................. (1,031) (5,654) (38)
Net (loss)/profit of discontinued operations in accordance with
US GAAP .................................................. (10,401) (3,906) --
Extraordinary item-debt extinguishment ......................... -- (1,144) --
------------ ------------ -----------
(11,432) (10,704) (38)
Accretion costs of non-equity preference shares ................ (3,767) (3,001) --
------------ ------------ -----------
Retained (loss)/profit for the period for equity shareholders in
accordance with US GAAP .................................. (15,199) (13,705) (38)
============ ============ ===========
Texon International plc
----------------------------------
As of As of
December 31, December 31,
1997 1998
------------ -------------
(pound)000 (pound)000
Shareholders' deficit in accordance with UK GAAP ...... (68,629) (73,619)
Adjustments to conform with US GAAP:
Fair value adjustment arising upon UK property (1,257) --
Goodwill ..................................... 68,288 66,100
Pension and other post-retirement benefits ... 22 (2,627)
Taxation ..................................... (216) (190)
------------ -------------
Shareholders' deficit in accordance with US GAAP ...... (1,792) (10,336)
============ =============
F-53
TEXON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 Summary of significant differences between UK and US generally accepted
accounting principles (continued)
k) 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.
l) 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.
m) New US Accounting Standards
SFAS No. 133 In June 1998, The Financial Accounting Standards Board
issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management has not determined the
effect of the adoption of SFAS 133.
n) SFAS No. 130
Comprehensive income under SFAS No. 130 is shown below:
Texon
International
United Texon Limited plc
--------------------------- -------------
Year ended Year ended Year ended
Decmeber 31, December 31, December 31,
1996 1997 1998
---------- ---------- -----------
(pound)000 (pound)000 (pound)000
Net income......................................... (11,432) (13,705) (3,084)
Other comprehensive income, net of income tax:
Foreign currency translation adjustment.......... (2,637) 4,006 (3,167)
Minimum pension liability adjustment............. -- -- (3,046)
---------- ---------- -----------
Comprehensive income............................. (14,069) (14,397) (6,251)
========== ========== ===========
Accumulated comprehensive net income as of
December 31.................................... (14,069) (28,466) (34,717
========== ========== ===========
There is no tax associated with the amounts included in other
comprehensive income.
Foreign Pension Other
Currency Liability Comprehensive
Items Adjustment Income
-------- ---------- -------------
Balance as of January 1, 1996...................... 0 0 0
Change during 1996................................. (2,637) 0 (2,637)
-------- ---------- -------------
Balance as of December 31, 1996.................... (2,637) 0 (2,637)
Change during 1997................................. (3,693) 0 (3,693)
-------- ---------- -------------
Balance as of December 31, 1997.................... (6,330) 0 (6,330)
Change during 1998................................. (3,167) (3,046) (6,213)
-------- ---------- -------------
Balance as of December 31, 1998.................... (9,497) (3,046) (12,543)
======== ========== =============
The accumulated other comprehensive income balance as of January 1,
1996 is stated as zero as the cumulative information as of that date is
not available.
F-54
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 April 30, 1999 By /s/ J. Neil Fleming
..............................
J. Neil Fleming
Finance Director and
Chief Accounting Officer