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 September 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
Nine Months Ended September 30, 1999
Index
Page No.
-------
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Profit and Loss Accounts
Three months and nine months ended September 30, 1999
and 1998 3
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Cash Flow Statement
Nine months ended September 30, 1999 and 1998 5
Reconciliation of net cash flow to movement in debt
Three months and nine months ended September 30, 1999
and 1998 6
Consolidated Statement of Total Recognised Gains and Losses
Three months and nine months ended September 30, 1999
and 1998 7
Reconciliation of Movements in Shareholders' Funds
Three months and nine months ended September 30, 1999
and 1998 8
Notes to Condensed Consolidated Financial Statements 9-11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-20
PART II Other Information
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits - Reports on Form 8-K 21
-2-
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(Pounds Sterling In Thousands)
Unaudited
--------------------------------------------------
Nine months ended Three months ended
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
------- ------- ------- -------
Sales turnover 90,432 84,311 29,499 24,732
Cost of sales (59,523) (55,026) (19,517) (16,329)
------- ------- ------- -------
Gross profit 30,909 29,285 9,982 8,403
Selling, general and
administrative expenses (21,313) (19,649) (6,993) (5,443)
------- ------- ------- -------
Operating profit 9,596 9,636 2,989 2,960
Profit on the disposal
of fixed assets - 1,000 - 1,000
Interest receivable 420 117 176 74
Interest payable and similar charges (8,555) (7,853) (3,071) (2,760)
------- ------- ------- -------
Profit on ordinary activities before
taxation 1,461 2,900 94 1,274
Taxation on profit on ordinary
activities (805) (750) (306) (99)
------- ------- ------- -------
Profit on ordinary activities after
taxation 656 2,150 (212) 1,175
Minority equity interests (156) (83) (46) (22)
------- ------- ------- -------
Net profit for the financial period 500 2,067 (258) 1,153
Other finance charges in respect of non
equity shares (2,810) (2,633) (937) (878)
------- ------- ------- -------
Retained (loss)/profit for the period
for equity shareholders (2,310) (566) (1,195) 275
------- ------- ------- -------
-3-
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(Pounds Sterling In Thousands)
Unaudited Restated
as at September December 31,
Notes 30, 1999 1998
(pound) (pound)
--------------- ------------
FIXED ASSETS
- - ------------
Goodwill 12,076 672
Tangible assets 21,034 13,116
Investment 14 0
------- -------
33,124 13,788
CURRENT ASSETS
- - --------------
Stocks 2 20,649 15,781
Debtors due within one year 24,598 17,579
Debtors due after one year 2,209 2,058
Cash at bank and in hand 1,110 721
--------- ---------
48,566 36,139
CREDITORS
Amounts falling due within one year (37,983) (28,349)
--------- ---------
NET CURRENT ASSETS 10,583 7,790
--------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 43,707 21,578
- - ------------------------------------
CREDITORS
Amounts falling due after more than
one year (99,532) (84,477)
Provisions for liabilities and charges (7,199) (7,642)
--------- --------
(63,024) (70,541)
========= ========
CAPITAL AND RESERVES
- - --------------------
Called up share capital 9,120 9,120
Share premium 46,800 46,800
Profit and loss account (125,865) (130,449)
Other reserves 6,320 3,510
--------- --------
Shareholders' deficit
Equity interests (121,945) (126,529)
Non-equity interests 58,320 55,510
--------- --------
(63,625) (71,019)
Minority equity interests 601 478
--------- --------
(63,024) (70,541)
========= ========
-4-
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(Pounds Sterling, In Thousands)
Unaudited
------------------------
Nine months ended
September September
30, 30,
1999 1998
(pound) (pound)
---------- ----------
Cash inflow from operating activities 14,430 2,929
Returns on investments and servicing of finance (10,589) (14,809)
Taxation (1,341) (711)
Capital expenditure and financial investment (2,468) (1,147)
Acquisitions and disposals (19,982) (24,000)
-------- --------
Cash outflow before financing (19,950) (37,738)
Financing - increase in debt 18,639 38,628
-------- --------
(Decrease)/increase in cash and overdrafts in
the period (1,311) 890
-------- -------
-5-
TEXON INTERNATIONAL plc
Reconciliation of net cash flow to movement in net debt
(Pounds Sterling, In Thousands)
Unaudited
------------------------
Nine months ended
September September
30, 30,
1999 1998
(pound) (pound)
--------- ---------
(Decrease)/increase in cash and overdrafts in
the period (1,311) 890
Cash outflow from debt and lease financing (18,639) (38,628)
--------- --------
Change in net debt resulting from cash flows (19,950) (37,738)
Loans and finance leases acquired with subsidiary (5,580) -
Non cash movements in debt 360 5,324
Translation difference 7,896 (5,049)
--------- ---------
Movement in net debt in the period (17,274) (37,463)
--------- ---------
Net debt at the opening date (91,063) (64,162)
--------- ---------
Net debt at the closing date (108,337) (101,625)
--------- ---------
-6-
TEXON INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
(Pounds Sterling, In Thousands)
Unaudited Restated
--------------------------------------------------
Nine months ended Three months ended
----------------------- -----------------------
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
--------- --------- --------- ---------
Net profit/(loss) for the financial period 500 2,067 (258) 1,153
Currency translation differences
on foreign currency 9,704 (4,928) 4,967 (6,339)
------ ------ ----- ------
Total recognized gains/(losses) in
the period 10,204 (2,861) 4,709 (5,186)
------ ------ ----- ------
-7-
TEXON INTERNATIONAL plc
RECONCILIATION OF MOVEMENTS IN TOTAL SHAREHOLDERS' FUNDS
(Pounds Sterling, In Thousands)
Unaudited
---------------------------------------------------
Nine months ended Three months ended
---------------------------------------------------
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
--------- --------- --------- ----------
Retained profit for the period for
equity shareholders of the Company 500 2,067 (258) 1,153
Other finance charges in respect of
non equity shares (2,810) (2,633) (937) (878)
-------- -------- ------- -------
(2,310) (566) (1,195) 275
New share capital issued - 306 - -
Goodwill purchased during
the period - (582) - -
Foreign exchange adjustments 9,704 (4,928) 4,967 (6,339)
-------- -------- -------- -------
Net decrease/(increase) to
shareholders' deficit 7,394 (5,770) 3,772 (6,064)
Opening shareholders' deficit (71,019) (68,629) (67,397) (68,335)
-------- -------- -------- --------
Closing shareholders' deficit (63,625) (74,399) (63,625) (74,399)
-------- -------- -------- --------
-8-
Texon International plc
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 1999, September 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 nine 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.
Where necessary comparatives are adjusted to ensure consistency with
current periods.
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 :
September 30, December 31,
1999 1998
(Pounds sterling in thousands)
(pound) (pound)
Finished goods and goods for resale 13,841 12,406
Work in progress 2,612 1,269
Raw materials 4,196 2,106
------ ------
20,649 15,781
------ ------
Included within the above inventory figures for September 30, 1999 is
an inventory reserve of (pound)1,507,000 ((pound)1,115,000 December 31,
1998). Inventory has increased during the nine months ended September
30, 1999 mainly due to the inclusion of (pound)0.8 million for Cornwell
Industries Ltd and (pound)2.8 million for Esjot. In addition, on
September 4, 1999, Texon UK Ltd, a subsidiary of Texon International
plc, purchased the assets and inventory of Chamberlain Phipps in the UK
and this has led to a stock increase of (pound)1.1 million at September
30, 1999.
-9-
3 The terms of the redeemable cumulative preference shares and changes to
those terms are described below:
At December 31, 1998 the redeemable cumulative preference shares (shown
as non-equity interests in the balance sheet) carried a fixed
cumulative dividend, calculated as a percentage of the redemption value
of (pound)52.0 million, payable semi-annually at a rate exclusive of
any associated tax credit. On March 11, 1999 a Special Resolution was
passed by the Shareholders to amend the Articles of Association of the
Company to reflect a change in the dividend percentage. The new
Articles state that for periods ending on or prior to December 31,
2000, the preference dividend would accrue at the rate of 6.75% per
annum rather than at 15% as shown by the previous agreement. This
change was retrospective and any entitlement to the higher rate in
historic periods was waived by the Shareholders. There was no change
made to the period post January 1, 2001 where, in the absence of a sale
or listing of the Company the preference dividend would accrue at the
rate of 15% per annum through to September 30, 2002, and at 25%
thereafter. The payment of a 5% per annum dividend on or prior to the
due date was deemed to satisfy the full 6.75% rate for periods up to
December 31, 2000 - provided that arrears of accrued but unpaid
dividends in respect of previous periods had been paid by this date. In
the event that the dividend was not paid on the due date it was to
accumulate at a rate of 6.75%. The Directors believed that it was
improbable that the Company would actually bear the higher rates and so
they were not 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 from the date of issue of the preference shares. 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.
The redemption premium has been calculated by the Company at 6.75% and
has been reflected in the consolidated financial statements as if it
had begun to accumulate on January 1,1998, the date which the original
preference dividend began to accrue.
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; and disclosure of tangible fixed assets. It eliminates
`cherry-picking' valuations by requiring valuation and updating by
entire classes of asset where a policy of valuation is adopted. 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-
5 Esjot Acquisition
The goodwill relating to acquisitions during the period has been
calculated using provisional estimates of costs and the fair values of
the assets and liabilities acquired. The estimates may be adjusted as
further information becomes available.
The following unaudited proforma information has been prepared as if
the Esjot acquisition occurred on January 01, 1998. In addition to
aggregating the results of Esjot with those of Texon International plc
proforma adjustments have been made to reflect the amortization of
goodwill arising on the acquisition and interest costs incurred on the
funding taken out.
Unaudited
---------------------------------------------------
Nine months ended Three months ended
----------------------- ------------------------
September September September September
30, 30, 30, 30,
1999 1998 1999 1998
(pound) (pound) (pound) (pound)
--------- --------- --------- ---------
Trade sales 101,590 97,671 30,029 28,427
Net profit/(loss) for the financial
period 1,037 2,586 (570) 899
------- ------ ------ ------
In accordance with the policies adopted by the Company goodwill of
(pounds)11.2 million arising on acquisitions in the period has been
capitalised in the balance sheet and is being amortized over 20 years.
-11-
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. Management believes Esjot is the world
leader in the manufacture of steel toe caps and mid soles for safety shoes.
Esjot has factories near Strasbourg - France, Milan - Italy and Dortmund -
Germany 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 Texon International plc the leading supplier of
structural components to the safety footwear market, a growing market where
customers rely on the performance of the product.
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 1, 2004 by way of semi-annual instalments, the
first being due on January 1, 2000.
2. Five year revolving credit facility in a maximum aggregate amount
not exceeding Euro 15,000,000 or its equivalent in optional
currencies.
The above facilities bear interest at a rate of LIBOR plus 2% per annum, subject
to certain reductions based on financial performance.
-12-
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.
During September 1999 Texon UK Ltd, a wholly owned subsidiary of Texon
International plc acquired the Leicester, UK based business of Chamberlain
Phipps Materials for a consideration of (pound)1.2 million cash. Chamberlain
Phipps employs 68 people and manufactures shoe stiffeners which will complement
Texon's existing product range. The factory in Leicester also produces
polyurethane mouldings for the healthcare market.
On October 4, 1999 Texon Australia Pty Ltd, a wholly owned subsidiary of Texon
International plc completed the acquisition of Claravon Ltd. Claravon Ltd which
has annual sales in excess of (pound)7 million and employs approximately 110
employees, manufactures lasts, insoles and shanks and plastic injection-moulded
soles, heels and units. Claravon has three manufacturing sites located in
Australia in Geelong, Melbourne and Adelaide.
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 sixteen manufacturing facilities in the U.K., the
United States, Germany, Italy, France, Australia and China.
During the nine months of 1999 sales of insoles, stiffeners, other footwear
materials, industrial products, Cornwell products and Esjot products accounted
for 39%, 19%, 16%, 10%, 7% and 9% of total sales, respectively. In the same
period, through the Company's extensive marketing and distribution network, 49%
of sales were made to Europe, 31% to Asia and the Pacific, 15% to the Americas
and 5% to the rest of the world.
Results of Operations
- - ---------------------
Comparison of the Three Months Ended September 30, 1999 to the Three Months
Ended September 30, 1998.
Sales turnover. Sales increased (pound)4.8 million or 19.3%, to (pound)29.5
million during the three months ended September 30, 1999 from (pound)24.7
million in the comparable period of 1998. This increase was primarily due to the
recent acquisitions by the Company of Cornwell, Esjot, and Chamberlain Phipps.
Cornwell Industry's sales for the quarter ended September 30, 1999 were
(pound)2.1 million. The sales by Chamberlain Phipps since its acquisition in
September were (pound)0.2 million and by Esjot since its acquisition on July 22,
1999 were (pound)2.6 million. After subtracting the sales made by the Company's
recent acquisitions, sales for the three months ended September 30, 1999 were
equal to those of the similar period in 1998.
-13-
Sales of insoles, decreased by 5% during the third 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 September 30, 1999, sales of stiffeners increased
30% from the comparable period in 1998. This increase is primarily the result of
the Company increasing its' market share in sales to major athletic footwear
manufacturers in Asia.
During the three months ended September 30, 1999, sales of industrial products
increased 2% from the comparable period in 1998.
Sales of other footwear materials, decreased by 13% in the three months ended
September 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 September 30, 1999,
increased in Europe by 19%, Asia by 31% and Australasia by 5%, and the rest of
the world by 190% and decreased in North America by 9%, and South America by
10%, each from the comparable period in 1998.
Although the Company believes that footwear production in Europe continues to
decline due to the transfer of production to the Far East, European sales were
(pound)2.3 million higher than the comparable period in 1998. This increase is
due to the inclusion of the sales in Europe from the recent acquisitions.
Asian sales increased by (pound)1.9 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.
Sales to the rest of the world increased by (pound)1.0 million from the
comparable period in 1998 due primarily to sales in India where the Company has
appointed a new distributor to support the warehouse operation which commenced
activity in 1998.
In North America, although market share gains were made, the overall market was
soft due to weak retail sales. Sales were (pound)0.4 million lower in the third
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 September 30, 1999
increased by (pound)1.6 million to (pound)10.0 million compared to (pound)8.4
million in the comparable period in 1998. When expressed as a percentage of
sales, gross profit was 33.8% for the three months ended September 30, 1999 an
decrease of 0.2% points from the comparable period in 1998. Excluding the
acquisitions completed in 1999 the gross profit margin was 35.3% in the three
months ended September 30, 1999, an increase of 1.3% points over the comparable
period in 1998. The decrease in overall margin as compared to last year is due
to the Cornwell and Esjot acquisitions which generate gross profit margins of
25-26% and 30% respectively compared to Texon at around 35%.
-14-
Selling, General and Administrative Costs. Selling, general and administrative
costs ("S G + A"), for the three months ended September 30, 1999 were (pound)7.0
million compared with (pound)5.4 million for the same period in 1998.
The S G + A costs for the three months ended September 30, 1999 have increased
compared with the same period in 1998 principally due to the expenses of the
acquired businesses and the rental costs incurred with respect to the Leicester
site.
Operating Profit. Operating profit for the three months ended September 30, 1999
was (pound)3.0 million, which is an increase of 1% from the comparable period in
1998.
Excluding the one-time gain from the disposal of the Leicester site earnings
before depreciation and amortization for the three months ended September 30,
1999 were (pound)4.0 million compared with (pound)3.4 million for the same
period in 1998.
Interest payable and similar charges has increased by (pound)0.3 million to
(pound)3.1 million for the three months ended September 30, 1999 from (pound)2.8
million from the comparable period in 1998. This increase is due to the new debt
incurred to finance the acquisition of Esjot during the period. Included in the
(pound)3.1 million charge is amortization of debt issuance costs of (pound)0.2
million.
Taxation. The tax charge for the three months ended September 30, 1999 is based
on the estimated percentage tax rate the Company will incur for the full year.
Comparison of the Nine Months Ended September 30, 1999 to the Nine Months Ended
September 30, 1998.
Sales turnover. Sales increased (pound)6.1 million or 7.3%, to (pound)90.4
million during the nine months ended September 30, 1999 from (pound)84.3 million
in the comparable period of 1998. Cornwell Industry's sales during the nine
months ended September 30, 1999 were (pound)5.6 million, and Esjot since it's
acquisition on July 22, 1999 were (pound)2.6 million. Sales for the nine months
ended September 30, 1999 after removing the sales made by the Company's recent
acquisitions decreased by (pound)2.4 million or 2.8% compared to the comparable
period in 1998.
On a constant currency basis, total sales increased by (pound)5.0 million or
5.7% during the nine months ended September 30, 1999 from the comparable period
in 1998.
Gross Profit. Gross profit for the nine months ended September 30, 1999 was
(pound)30.9 million which was an increase of (pound)1.6 million compared with
the same period in 1998. When expressed as a percentage of sales, gross profit
was 34.2% for the nine months ended September 30, 1999 compared to a gross
profit of 34.7% for the same period in 1998. This is due as noted above to the
gross profit margins of Cornwell Industries and Esjot.
-15-
Selling, General and Administrative Costs. Selling, general and administrative
costs ("S G + A"), increased by (pound)1.7 million or 8.5% to (pound)21.3
million for the nine months ended September 30, 1999 from (pound)19.6 million
from the comparable period in 1998.
Operating Profit. Operating profit for the nine months ended September 30, 1999
was (pound)9.6 million, which is comparable with the nine months ended September
30, 1998.
Earnings before depreciation and amortization for the nine months ended
September 30, 1999 was (pound)12.1 million excluding reorganisation costs and
property gains as compared to (pound)11.7 million for the comparable period in
1998.
Interest. Interest receivable has increased by (pound)0.3 million to (pound)0.4
million for the nine months ended September 30, 1999 from (pound)0.1 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 both a payable and receivable for the
Company since that date.
Interest payable and similar charges has increased by (pound)0.7 million to
(pound)8.6 million for the nine months ended September 30, 1999 from (pound)7.9
million from the comparable period in 1998.
Taxation. The tax charge for the nine months ended September 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, Term loan
and Revolving Facility, from working capital needs and from the funding of
capital expenditures. The total liabilities at September 30, 1999 were
(pound)144.7 million including consolidated indebtedness of (pound)109.4 million
which compares to total assets of (pound)81.7 million. The excess of liabilities
over assets of (pound)63.0 million is due to the elimination of goodwill in
1997.
The shareholders' deficit as at September 30, 1999 of (pound)63.6 million has
been reduced by (pound)7.4 million from (pound)71.0 million as at December 31,
1998. This has primarily occurred due to foreign currency translation
differences and also due to the change in the rights of preference shareholders.
Under the new rights the shareholders receive a redemption premium at 6.75%
(which is accrued in other reserves) instead of a preference dividend at 5%
(which was previously included in creditors, but was reversed out as a result of
its' retrospective replacement by the redemption premium). This has resulted in
a decrease of (pound)6.3 million in the shareholders' deficit.
The Company's primary sources of liquidity are cash flows from operations and
borrowings under the Company's (euro)15.0 million Revolving Credit Facility and
several local facilities in Germany, Italy, Spain, France, China, Australia, New
Zealand and the UK.
-16-
The net cash inflow from operating activities for the nine months ended
September 30, 1999 was (pound)14.4 million compared to (pound)2.9 million for
the comparable period in 1998. This increase of (pound)11.5 million is
attributed to the decrease in operating assets (pound)12.4 million as a result
of active balance sheet management.
Inventories as at September 30, 1999 were (pound)20.6 million compared to
(pound)15.8 million at December 31, 1998 The 1999 inventories include (pound)0.8
million for Cornwell Industries and (pound)2.8 million for Esjot. Texon UK Ltd a
subsidiary of Texon International plc has acquired Chamberlain Phipps in the UK
and this has led to a stock increase of (pound)1.1 million at September 30,
1999.
Trade receivables at September 30, 1999 were (pound)22.7 million compared to
(pound)16.0 million at December 31,1998. The 1999 trade receivables include
(pound) 1.8 million for Cornwell Industries and (pound)5.9 million for Esjot.
Returns on investments and servicing of finance for the nine months ended
September 30, 1999 are (pound)10.6 million which includes (pound)1.3 million
relating to the previously accrued issuance costs of the Senior Secured Notes
and the issuance costs of the new debt on the 22 July 1999. The comparable
period in 1998 was (pound)14.8 million which included issuance costs of the
Senior Secured Notes of (pound)4.6 million.
Capital expenditure, in the third quarter was (pound)1.1 million, as compared to
(pound)0.8 million for the comparable period in 1998. Capital expenditure during
the quarter related primarily to plant and equipment acquisitions and the global
implementation of an enterprise resource planning system utilising BaaN
software.
Acquisitions and disposals cash outflow for the nine months ended September 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 of the
purchase of the additional 30% of the ordinary shares in Foshan Texon Cellulose
Board Manufacturing Co. Limited, the operation in China. On July 22, 1999 Esjot
was acquired with a cash outflow of (pound)20.8 million including acquired debt
of (pound)3.5 million and during September 1999 Chamberlain Phipps was acquired
for (pound)1.2 million cash. During the nine months ended September 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.
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 nine months of
1999, Sterling depreciated 0.7% 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.
-17-
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.
On January 29, 1999 the Company paid interest on it's Senior Secured Notes
primarily in Deutsche Marks but on July 30, 1999 the Company paid interest on
these Notes in Euros. Due to the Deutsche Mark being a legacy currency of the
Euro the Company can value the Senior Secured Notes in Deutsche Marks or Euros
without any exchange variance. 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 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 January 2000 and July 2000 in Euros.
-18-
The Euro has been used as a trading currency by the Company during the nine
months ended September 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, France,
Australia 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 that 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 completed
during the third 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)25,000 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.
-19-
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 1.61 1.65
Euro 1.50 1.55
-20-
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
10.75 Agreement for Sale of Certain Parts of the Business
and Assets, by and among Chamberlain Phipps Materials
Limited, as seller, Texon (UK) Limited, as buyer, and
Newgrange Group, L.L.C., as guarantor, dated
September 4, 1999 P
10.76 Share Sale Agreement, by and among Clarks Shoes
Australia Limited, as vendor, and Texon Australia
Pty Limited, as purchaser, dated October 11, 1999 P
99.1 Press Release relating to the Chamberlain Phipps
acquisition P
99.2 Press Release relating to the Clarks Shoes
acquisition P
99.3 Earnings Release for the quarter ended
September 30, 1999 P
P This exhibit has been filed in paper form with the
Securities and Exchange Commission under cover of
Form SE on November 19, 1999.
-21-
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: November 19, 1999 By /s/ J. Neil Fleming
------------------ -----------------------------
J. Neil Fleming
Finance Director and
Chief Accounting Of
ficer
-22-