SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999.
Texon International plc
(Translation of Registrant's Name Into English)
SEC File Number: 1058980
100 Ross Walk
Leicester LE4 5BX England
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or
will file annual reports under cover of Form 20-F or
Form 40-F.)
Form 20-F [X] Form 40-F [ ]
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 by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes [ ] No [X]
TEXON INTERNATIONAL plc
Six Months Ended June 30, 1999
Index
Page No.
--------
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Profit and Loss Accounts
Three months and six months ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Cash Flow Statement
Six months ended June 30, 1999 and 1998 5
Reconciliation of net cash flow to movement in debt
Three months and six months ended June 30, 1999 and 1998 6
Consolidated Statement of Total Recognised Gains and Losses
Three months and six months ended June 30, 1999 and 1998 7
Reconciliation of Movements in Shareholders' Funds
Three months and six months ended June 30, 1999 and 1998 8
Notes to Condensed Consolidated Financial Statements 9-10
Item 2 Management's Discussion and Analysis of Financial Condition
And Results of Operations 11-18
PART II Other Information
Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits - Reports on Form 8-K 19
-2-
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(Pounds Sterling In Thousands)
Unaudited
--------------------------------------------------
Six months ended Three months ended
June June June June
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
Sales turnover 60,933 59,579 32,618 30,727
Cost of sales (40,006) (38,697) (21,358) (19,613)
-------- -------- -------- ---------
Gross profit 20,927 20,882 11,260 11,114
Selling, general and
administrative expenses (14,320) (14,206) (7,422) (7,454)
-------- -------- -------- ---------
Operating profit 6,607 6,676 3,838 3,660
Interest receivable 244 43 51 6
Interest payable and similar charges (5,484) (5,093) (2,689) (2,813)
-------- -------- -------- ---------
Profit on ordinary activities before
taxation 1,367 1,626 1,200 853
Taxation on profit on ordinary activities (499) (651) (451) (375)
-------- -------- -------- ---------
Profit on ordinary activities after
taxation 868 975 749 478
Minority equity interests (110) (61) (67) (28)
-------- -------- -------- ---------
Net profit for the financial period 758 914 682 450
Non-equity preference dividend (1,300) (1,300) (650) (650)
-------- -------- -------- ---------
Retained (loss)/profit for the period
for equity shareholders (542) (386) 32 (200)
======== ======== ======== =========
-3-
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(Pounds Sterling In Thousands)
Unaudited
as at June December 31,
Notes 30, 1999 1998
(pound) (pound)
FIXED ASSETS
Goodwill 845 672
Tangible assets 15,941 13,116
Investment 14 0
---------- ---------
16,800 13,788
CURRENT ASSETS
Stocks 2 16,525 15,781
Debtors due within one year 22,005 17,579
Debtors due after one year 2,073 2,058
Cash at bank and in hand 812 721
---------- ---------
41,415 36,139
CREDITORS
Amounts falling due within one year (37,318) (30,949)
---------- ---------
NET CURRENT ASSETS 4,097 5,190
---------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 20,897 18,978
========== =========
CREDITORS
Amounts falling due after more than
one year (80,547) (84,477)
Provisions for liabilities and charges (6,575) (7,642)
---------- ----------
(66,225) (73,141)
========== ==========
CAPITAL AND RESERVES
Called up share capital 9,120 9,120
Share premium 46,800 46,800
Profit and loss account (122,743) (129,539)
---------- ----------
Shareholders' deficit
Equity interests (118,823) (125,619)
Non-equity interests 52,000 52,000
---------- ----------
(66,823) (73,619)
Minority equity interests 598 478
---------- ----------
(66,225) (73,141)
========== ==========
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TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(Pounds Sterling, In Thousands)
Unaudited
----------------------
Six months ended
June June
30, 30,
1999 1998
(pound) (pound)
Cash inflow from operating activities 9,195 5,202
Returns on investments and servicing of finance (5,140) (9,402)
Taxation (826) (195)
Capital expenditure and financial investment (1,393) (352)
Acquisitions and disposals (1,466) (24,000)
-------- --------
Cash inflow /(outflow) before financing 370 (28,747)
Financing - (decrease)/increase in debt (295) 28,755
------- --------
Increase in cash in the period 75 8
======= ========
-5-
TEXON INTERNATIONAL plc
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Pounds Sterling, In Thousands)
Unaudited
----------------------
Six months ended
June June
30, 30,
1999 1998
(pound) (pound)
Increase in cash in the period 75 8
Cash inflow/(outflow) from debt and lease financing 295 (28,755)
----- --------
Change in net debt resulting from cash flows 370 (28,747)
Loans and finance leases acquired with subsidiary (2,039) -
Non cash movements in debt (202) 4,748
Translation difference 6,901 101
-------- --------
Movement in net debt in the period 5,031 (23,898)
-------- --------
Net debt at the opening date (91,063) (64,162)
-------- --------
Net debt at the closing date (86,033) (88,060)
======== ========
-6-
TEXON INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
(Pounds Sterling, In Thousands)
Unaudited
---------------------------------------------------
Six months ended Three months ended
June June June June
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
Net profit for the financial period 758 914 682 450
Currency translation differences
on foreign currency 7,338 1,411 3,318 (1,590)
----- ----- ----- -------
Total recognized gains/(losses) in
the period 8,096 2,325 4,000 (1,140)
===== ===== ===== =======
-7-
TEXON INTERNATIONAL plc
RECONCILIATION OF MOVEMENTS IN TOTAL SHAREHOLDERS' FUNDS
(Pounds Sterling, In Thousands)
Unaudited
--------------------------------------------------
Six months ended Three months ended
June June June June
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
Retained profit for the period for
equity shareholders of the Company 758 914 682 450
Non-equity preference dividend (1,300) (1,300) (650) (650)
------- ------- ------ ------
(542) (386) 32 (200)
New share capital issued - 306 - -
Goodwill purchased during
the period - (582) - (582)
Foreign exchange adjustments 7,338 1,411 3,318 (1,590)
-------- -------- -------- --------
Net decrease/(increase) to
shareholders' deficit 6,796 749 3,350 (2,372)
Opening shareholders' deficit (73,619) (68,629) (70,173) (65,508)
-------- -------- -------- --------
Closing shareholders' deficit (66,823) (67,880) (66,823) (67,880)
======== ======== ======== ========
-8-
TEXON INTERNATIONAL plc
Notes to the Unaudited Condensed Consolidated Financial Statements
June 30, 1999, June 30, 1998 and December 31, 1998
1. The accompanying unaudited condensed consolidated financial statements have
been prepared by Texon International plc and its subsidiaries ("the
Company") in accordance with UK generally accepted accounting principles.
The unaudited condensed consolidated financial statements and condensed
notes are presented in accordance with Form 10-Q and do not contain all the
information required in the Company's annual consolidated financial
statements and notes. The operating results for the three to six month
periods are not necessarily indicative of the results which may be expected
for the full year. In the opinion of management, all material adjustments,
consisting of items of a normal recurring nature, considered necessary for
a fair presentation of the results of operations, the financial position
and the cash flows for each period shown, have been included.
2. Inventory is valued by the Company at the lower of cost or market value
using the first-in, first-out (FIFO) method. Inventories are summarised as
follows :
June 30, December 31,
1999 1998
(Pounds sterling in thousands)
(pound) (pound)
Finished goods and goods for resale 11,975 12,406
Work in progress 1,985 1,269
Raw materials 2,565 2,106
------ ------
16,525 15,781
====== ======
Included within the above inventory figures for June 30, 1999 is an
inventory reserve of (pound)1,178,000 ((pound)1,115,000 December 31, 1998).
Inventory has increased during the six months ended June 30, 1999 mainly
due to the inclusion of (pound)0.7 million for Cornwell Industries Ltd.
3. Preference dividends
The terms of the redeemable cumulative preference dividends are as follows:
The redeemable cumulative preference shares (shown as non-equity interests
in the balance sheet) 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
-9-
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, an 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.
In connection with the Company's refinancing on July 22, 1999, the
preference shareholders have agreed to retrospectively waive their right to
receive a semi-annual preference dividend and in its place accepted an
additional redemption premium of 6.75%, compounding annually. The
redemption premium will become payable to the preference shareholders on
the earlier of:
1. a sale of the Company or,
2. an initial public offering of the Company's equity securities.
Had the change in the terms of the preference shares occurred by June 30,
1999 then creditors due within one year would have been reduced by
(pounds)3.9 million being the unpaid dividends. The profit and loss account
reserve would have been decreased by (pounds)0.23 million and other
reserves would have increased by (pounds)4.13 million being the unpaid
redemption premium.
4. Changes in UK Accounting Standards
The Accounting Standards Board has issued FRS 15, which is effective for
all accounting periods ending on or after March 23, 2000. FRS 15 provides
accounting and reporting standards for tangible fixed assets and replaces
Statement of Standard Accounting Practice ("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; an 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.
-10-
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in this report, in
the Registration Statement on Form F-4 filed by the Company with the Securities
and Exchange Commission (the "Commission") on May 27, 1998 and in the Company's
periodic reports filed with the Commission.
Except for the historical data set forth herein, the following discussion
contains certain forward-looking information. The Company's actual results may
differ significantly from the projected results. Factors that could cause or
contribute to such differences include, but are not limited to, levels of sales
to customers, actions by competitors, fluctuations in the price of primary raw
materials, foreign currency exchange rates and political and economic
instability in the Company's markets.
The forward-looking statements contained herein are qualified by the cautionary
statements appearing on pages 4 and 5 of the Company's annual report, a copy of
which is available on request.
Recent Developments
- -------------------
On July 22, 1999 Texon Mockmuhl GmbH, a wholly owned subsidiary of the Company,
completed the acquisition of Esjot. Esjot is the world leader in the manufacture
of steel toe caps and mid soles for safety shoes. Esjot has factories near
Strasbourg - France, Milan - Italy and Dortmund - Germany and has approximately
200 employees. The consideration paid for the acquisition was approximately DM60
million in cash. The Company believes that the acquisition will make the Texon
International Group the leadin supplier of structural components to the safety
footwear segment - a growing market where customers rely on the performance of
the product.
In order to fund the acquisition of Esjot, Texon International plc refinanced
it's Senior Secured Loans. The Company replaced its existing three year
revolving credit facility of (pound)15,000,000, with the following facilities;
1. Euro term loan facility of Euro 30,000,000 (proceeds used specifically
to fund the purchase price of Esjot). This is repayable by July 01,
2004 by way of semi-annual instalments, the first being due
on January 01, 2000.
2. Five year revolving credit facility in a maximum aggregate amount not
exceeding Euro 15,000,000 or its equivalent in optional currencies.
The above facilities bear interest at a rate of LIBOR plus 2% per annum, subject
to certain reductions based on financial performance.
In connection with the above refinancing the preference shareholders have agreed
to retrospectively waive their right to receive a semi-annual preference
dividend and in its place accepted an additional redemption premium of 6.75%,
compounding annually. The redemption premium will become payable to the
preference shareholders on the earlier of:
1. a sale of the Company or,
2. an initial public offering of the Company's equity securities.
-11-
General
- -------
The Company is the world's largest manufacturer and marketer of structural
materials essential for the manufacture of footwear. The Company operates a
global business, with sales that are widely diversified by geographic region and
product line and operates six manufacturing facilities in the U.K., the United
States, Germany, Italy and China.
During the first six months of 1999 sales of insoles, stiffeners, other footwear
materials, industrial products and Cornwell products accounted for 45%, 19%,
19%, 11% and 6% of total sales, respectively. In the same period, through the
Company's extensive marketing and distribution network, 48% of sales were made
to Europe, 32% to Asia and the Pacific, 15% to the Americas and 5% to the rest
of the world.
Results of Operations
- ---------------------
The global footwear market has continued to be depressed and provides a tough
environment in which to operate. Footwear retailers in the US and Europe have
reported slightly higher sales from last year but well below those recorded in
1996 and 1997. Similarly, problems in South America and Russia have all led to a
reduction in demand for the Company's products. Against this background the
Company has significantly increased its sales in Asia.
Comparison of the Three Months Ended June 30, 1999 to the Three Months Ended
June 30, 1998.
Sales turnover. Sales increased (pound)1.9 million or 6.2%, to (pound)32.6
million during the three months ended June 30, 1999 from (pound)30.7 million in
the comparable period of 1998. Cornwell Industry's sales for the quarter ended
June 30, 1999 were (pound)2.6 million. On a constant currency basis, sales
increased by (pound)1.5 million or 4.5% during the three months ended June 30,
1999 from the comparable period in 1998.
Sales of insoles, decreased by 10% during the second quarter of 1999 from the
comparable period in 1998 reflecting the difficult market conditions in Europe
and North America where the Company has the majority of its insole sales.
During the three months ended June 30, 1999, sales of stiffeners increased 19%
from the comparable period in 1998. This increase is the result of the Company's
continuing sales program to major athletic footwear manufacturers in Asia.
During the three months ended June 30, 1999, sales of industrial products
increased 4% from the comparable period in 1998 which is in line with the recent
growth trend the Company has experienced in these markets.
Sales of other footwear materials, decreased by 5% in the three months ended
June 30, 1999 from the comparable period in 1998. These products, although sold
throughout the world, hold strong positions in the UK and some European
countries where footwear production has declined as a result of the weak market
conditions noted above.
On a geographical basis sales for the three months ended June 30, 1999 were
higher in Europe by 3%, Asia by 25% and Australasia by 2%, and lower in North
America by
-12-
14%, South America by 7%, and the rest of the world by 14%, each from the
comparable period in 1998.
European sales were (pound)0.6 million higher than the comparable period in
1998. Excluding Cornwell industries sales would be (pound)2.0 million or 13.2%
lower than the comparable period in 1998. The decrease has been principally in
the UK where footwear production continues to decline and in Eastern Europe as a
result of significantly lower demand in Russia.
Asian sales increased by (pound)1.2 million from the comparable period in 1998
due to the sales initiatives for stiffner products as well as strong market
share gains made in China for insoles.
In North America, although market share gains were made, the overall market was
soft due to weak retail sales. Sales were (pound)0.6 million lower in the second
quarter of 1999 as against the comparable period in 1998.
South American sales were approximately (pound)0.1 million lower from the
comparable period in 1998, predominantly in Brazil where the devaluation of the
real weakened the Company's competitive position as compared to local
manufacturers.
Gross Profit. Gross profit for the three months ended June 30, 1999 increased by
(pound)0.2 million to (pound)11.3 million compared to (pound)11.1 million in the
comparable period in 1998. When expressed as a percentage of sales, gross profit
was 34.5% for the three months ended June 30, 1999 an decrease of 1.7% from the
comparable period in 1998. The decrease in margin as compared to last year is
partially due to the Cornwell acquisition which generates gross profit margins
of 25-26% compared to Texon at around 35%.
Selling, General and Administrative Costs. Selling, general and administrative
costs ("S G + A"), for the three months ended June 30, 1999 were comparable with
the same period in 1998 at (pound)7.4 million.
The S G + A costs for the three months ended June 30, 1999 included an expense
of (pound)0.6 million at Cornwell as well as an increase in rent in Leicester
following the sale of the site in October 1998 of (pound)0.1 million. Therefore
S G + A costs on an equal cost basis have decreased by (pound)0.7 million or
9.5% to (pound)6.7 million compared with the same period in 1998.
Operating Profit. Operating profit for the three months ended June 30, 1999 was
(pound)3.8 million, which is an increase of 4.9% from (pound)3.7 million for the
comparable period in 1998.
Earnings before depreciation and amortization for the three months ended June
30, 1999 was (pound)4.7 million (excluding reorganisation costs of (pound)0.1
million for the three months ended June 30, 1999 and (pound)0.5 million for the
same period in 1998) and this is comparable with the three months ended June 30,
1998.
Interest payable and similar charges has decreased by (pound)0.1 million to
(pound)2.7 million for the three months ended June 30, 1999 from (pound)2.8
million from the comparable period in 1998.
-13-
Taxation. The tax charge for the three months ended June 30, 1999 is based on
the estimated percentage tax rate the Company will incur for the full year.
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998.
Sales turnover. Sales increased (pound)1.4 million or 2.3%, to (pound)60.9
million during the six months ended June 30, 1999 from (pound)59.5 million in
the comparable period of 1998. Cornwell Industry's sales for the six months
ended June 30, 1999 were (pound)3.4 million.
On a constant currency basis, sales increased by (pound)0.2 million or 0.3%
during the six months ended June 30, 1999 from the comparable period in 1998.
Gross Profit. Gross profit for the six months ended June 30, 1999 was
(pound)20.9 million which was comparable with the same period in 1998. When
expressed as a percentage of sales, gross profit was 34.3% for the six months
ended June 30, 1999 compared to a gross profit of 35.0% for the same period in
1998. This is due as noted above to the gross profit margins of Cornwell
Industries.
Selling, General and Administrative Costs. Selling, general and administrative
costs ("S G + A"), increased by (pound)0.1 million or 0.8% to (pound)14.3
million for the six months ended June 30, 1999 from (pound)14.2 million from the
comparable period in 1998.
Operating Profit. Operating profit for the six months ended June 30, 1999 was
(pound)6.6 million, a decrease of (pound)0.1 million from (pound)6.7 million for
the comparable period in 1998.
Earnings before depreciation and amortization for the six months ended June 30,
1999 was (pound)8.1 million (excluding reorganisation costs (pound)0.2 million
for the six months ended June 30, 1999 and (pound)0.5 million for the same
period in 1998) as compared to (pound)8.3 million for the comparable period in
1998.
Interest. Interest receivable has increased by (pound)0.2 million to (pound)0.24
for the six months ended June 30, 1999 from (pound)0.04 million from the
comparable period in 1998. This is mainly due to the Company repurchasing
(Deutsche Marks)7 million of its senior secured notes in October 1998 and the
interest therefore being payable and receivable for the Company since that date.
Interest payable and similar charges has increased by (pound)0.4 million to
(pound)5.5 million for the six months ended June 30, 1999 from (pound)5.1
million from the comparable period in 1998. The Company restructured its debt on
January 30, 1998 by the issuance of Senior Secured Notes, which led to higher
debt within the Company, but the Company simultaneously faces a lower average
rate of interest.
-14-
Taxation. The tax charge for the six months ended June 30, 1999 is based on the
estimated percentage tax rate the Company will incur for the full year.
Financial Condition and Liquidity
- ---------------------------------
The Company's liquidity needs arise primarily from debt service obligations on
the indebtedness incurred in connection with the Senior Secured Notes and
Revolving Facility, from working capital needs and from the funding of capital
expenditures. The total liabilities at June 30, 1999 were (pound)124.4 million
including consolidated indebtedness of (pound)86.8 million which compares to
total assets of (pound)58.2 million. The excess of liabilities over assets of
(pound)66.2 million is due to the elimination of goodwill.
The shareholders' deficit as at June 30, 1999 of (pound)66.8 million compares
with (pound)73.6 million as at December 31, 1998.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the Company's (pound)15.0 million Revolving Facility and
several local facilities in Germany, Italy, China and the UK
The net cash flow from operating activities for the Six months ended June 30,
1999 was (pound)9.2 million compared to (pound)5.2 million for the comparable
period in 1998. This increase of (pound)4.0 million can be attributed to the
combination of a decrease in operating assets (pound)4.2 million as a result of
active balance sheet management offset by lower profits (pound)0.2 million.
Inventories as at June 30, 1999 were (pound)16.5 million compared to (pound)15.8
million at December 31, 1998, while trade receivables at June 30, 1999 were
(pound)20.4 million compared to (pound)16.0 million at December 31,1998. The
1999 figures include Cornwell inventories and trade receivables of (pound)0.7
million and (pound)2.0 million respectively.
Returns on investments and servicing of finance for the six months ended June
30, 1999 are (pound)5.1 million which includes (pound)0.5 million relating to
the previously accrued issuance costs of the Senior Secured Notes. The
comparable period in 1998 was (pound)9.4 million which included issuance costs
of the Senior Secured Notes of (pound)4.0 million.
Capital expenditure, in the second quarter was (pound)0.4 million, as compared
to (pound)0.3 million for the comparable period in 1998. Investments included
(pound)0.1 million as part of a (pound)0.6 million program to increase capacity
and flexibility in the non-woven factory in Skelton, UK and other investments
related primarily to small acquisitions made during the quarter and the global
implementation of an enterprise resource planning system utilising BaaN
software.
Acquisitions and disposals cash outflow for the six months ended June 30, 1999
consisted of (pound)0.8 million for the purchase of Cornwell Industries Ltd on
March 1, 1999 and (pound)0.7 million for the second instalment for the purchase
of the additional 30% of the ordinary shares in Foshan Texon Cellulose Board
Manufacturing Co Limited, the operation in China. During the six months ended
June 30, 1998 (pound)23.5 million was paid to the shareholders of United Texon
Limited as part of the acquisition of United Texon Limited by Texon
International plc and the subsequent restructuring of the debt on January 30,
1998 and (pound)0.5 million was paid as the first instalment for the purchase of
the additional 30% of the Foshan operation noted above.
-15-
Financial Instruments and Market Risks
- --------------------------------------
The Company's operations are conducted by entities in many countries, and
accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the financial condition and results of operations of each of
these entities is reported in the relevant local currency and then translated
into Sterling at the applicable currency exchange rate for inclusion in the
Company's financial statements. The depreciation of Sterling against such
currencies will have a positive impact on the reported sales and operating
margin. Based on average exchange rates throughout the first half of 1999,
Sterling depreciated 2.0% against the Deutsche Mark compared to the similar
period in 1998. For this purpose the Deutsche Mark is taken as representative of
the currencies which are members of the European Monetary System ("EMS").
Conversely, the appreciation of Sterling against certain European currencies
will have a negative impact on the reported sales and operating margin.
Fluctuations in the exchange rate between Sterling and other currencies may also
affect the book value of the Company's assets and the amount of the Company's
shareholders' equity.
In addition to currency translation risk, the Company incurs currency
transaction risk because the Company's operations involve transactions in a
variety of currencies. Fluctuations in currency exchange rates may significantly
affect the Company's results of operations because many of its subsidiaries'
costs are incurred in currencies different from those that are received from the
sale of their products, and there is normally a time lag between the incurrence
of such costs and collection of the related sales proceeds. Currency hedging is
generally used by businesses to protect against transaction risk. The Company
engages in hedging its transaction exposure through the use of foreign exchange
forward contracts to cover exposures arising on outstanding purchase and sales
invoices. It has not covered outstanding purchase or sales orders unless they
are firm commitments. The Company may cover such exposures in the future if it
is within its financing ability. The present hedging covers all traded
currencies to which the Company is exposed, which include Deutsche Mark and US
dollar, as well as other major European currencies, the Hong Kong and Taiwan
dollar and the Australian and New Zealand dollar. Given the volatility of
currency exchange rates, there can be no assurance that the Company will be able
to effectively manage its currency transaction risks or that any volatility in
currency exchange rates will not have a material adverse effect on the Company's
financial condition or results of operations.
A significant portion of the Company's revenues and expenses will be denominated
in currencies other than the Deutsche Mark, the currency in which interest on
and the principal of the Company's Senior Secured Notes must be paid.
Significant increases in the value of the Deutsche Mark relative to other
currencies in which the Company conducts its operations could have an adverse
effect on the Company's ability to meet interest and principal obligations on
foreign currency denominated debt, including the Senior Secured Notes.
Under the treaty on the European Economic and Monetary Union (the "Treaty"), to
which the Federal Republic of Germany is a signatory, from January 1, 1999, the
"Euro" can be used concurrently with some of the currencies of the Member states
of the European Union (the "EU") including the Deutsche Mark.
During the six months ended June 30, 1999 the Company has paid interest on and
has continued to value the Senior Secured Notes in Deutsche Marks. The Company
does however anticipate the Deutsche Mark being replaced by the Euro pursuant to
the Treaty, and the payment of principal of, and interest on, the Senior Secured
Notes will be effected in Euro in conformity with legally applicable measures
taken pursuant to, or
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by virtue of, the Treaty. In addition, the regulations of the EU relating to the
Euro will apply to the Senior Secured Notes and the Indenture governing the
terms of the Senior Secured Notes. Foreign exchange forward contracts have been
used by the Company to cover interest payments due for July 1999 in Deutsche
Marks and January 2000 and July 2000 in Euros.
The Euro has been used as a trading currency by the Company during the six
months ended June 30, 1999 and there have been no material costs to the business
other than through exchange rate effects.
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 date exchange rate and statement of
operations accounts are translated at the average rate prevailing during the
relevant period.
Although 31% 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 sales are used in footwear which is sold in Asia. Therefore, the
Company believes that the 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 adversely 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 has been 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
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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 b 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.
Exchange Rate Information
- -------------------------
The table below shows the major exchange rates, expressed per Pound Sterling,
used in the preparation of the condensed consolidated financial statements
included herewith.
1999 Average Rate Period End Rate
----------------- ---------------
US Dollar 1.62 1.58
Deutschemark 2.92 3.01
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Part II Other Information
Item 1 Legal Proceedings
From time to time, the Company is involved in routine litigation
incidental to its business. The Company is not a party to any
threatened legal proceedings which the Company believe would have a
material adverse effect on the Company's results or operations or
financial condition.
Item 2 Changes in Securities and Use of Proceeds
None.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5 Other Information
None.
Item 6 Exhibits and Report on Form 8 - K
10.72 Sale and Purchase Agreement between Rosenkranz & Krause GmbH
& Co., as vendor, Texon Mockmuhl, as purchaser, and the
Company, as guarantor, dated July 22, 1999 P
10.73 Term and Revolving Facilities Agreement, dated July 22,
1999, among the Company, United Texon Limited, certain other
companies in the Texon Group, Chase Manhattan Bank plc, The
Chase Manhattan Bank, BHF Bank AG and Chase Manhattan
International Limited P
10.74 Composite Debenture, dated July 22, 1999, among United Texon
Limited, certain other companies in the Texon Group and
Chase Manhattan International Limited P
99 Press Release, dated July 28, 1999, relating to the
acquisition of the Esjot Group P
P This exhibit has been filed in paper form with the
Securities and Exchange Commission under cover of Form SE on
August 16, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Texon International plc
-----------------------
(Registrant)
Date: August 13, 1999 By /s/ J. Neil Fleming
-----------------------------
J. Neil Fleming
Finance Director and
Chief Accounting Officer