SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998.
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 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
--- ---
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TEXON INTERNATIONAL plc
Six Months Ended June 30, 1998
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, 1998 and 1997 4
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 5
Condensed Consolidated Cash Flow Statement
Six months ended June 30, 1998 6
Reconciliation of net cash flow to movement in debt 7
Consolidated Statement of Total Recognized Gains and Losses
Three months and six months ended June 30, 1998 and 1997 8
Reconciliation of Movements in Shareholders Funds
Three months and six months ended June 30, 1998 and 1997 9
Notes to Condensed Consolidated Financial Statements 10
Item 2 Management's Discussion and Analysis of
Financial Condition And Results of Operations 11-16
PART II Other Information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
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Item 5 Other Information 17
Item 6 Exhibits - Reports on Form 8-K 17
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TEXON INTERNATIONAL plc
- -----------------------
CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNTS
- -----------------------------------------------
(Pounds Sterling in Thousands)
- ------------------------------
Unaudited
---------
Six months ended Three months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
(pound) (pound) (pound) (pound)
------- ------- ------- -------
Sales turnover 59,579 64,307 30,727 33,393
Cost of sales (38,697) (41,650) (19,613) (21,927)
------- ------- ------- -------
Gross profit 20,882 22,657 11,114 11,466
Selling, marketing and
administrative Expenses (14,206) (14,697) (7,454) (7,656)
------- ------- ------- -------
Operating profit 6,676 7,960 3,660 3,810
Interest receivable 43 59 6 30
Interest payable
and similar charges (5,093) (4,915) (2,813) (2,462)
------- ------- ------- -------
Profit on ordinary
activities before taxation 1,626 3,104 853 1,378
Taxation on profit
on ordinary activities (651) (818) (375) (484)
------- ------- ------- -------
Profit on ordinary
activities after taxation 975 2,286 478 894
Minority equity interests (61) (163) (28) (115)
------- ------- ------- -------
Net profit for the
financial period 914 2,123 450 779
Preference dividend (1,300) 0 (650) 0
------- ------- ------- -------
Retained profit/(loss)
for the period
for equity shareholders (386) 2,123 (200) 779
------- ------- ------- -------
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TEXON INTERNATIONAL plc
-----------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Pounds Sterling in Thousands)
------------------------------
Unaudited
as at December 31,
June 30, 1998 1997
Notes (pound) (pound)
FIXED ASSETS
Tangible Assets 16,167 17,098
CURRENT ASSETS
Stocks 2 16,653 16,716
Debtors 21,388 19,345
Cash at bank and in hand 1,375 1,156
----- -----
39,416 37,217
CREDITORS
(amounts falling
due within one year) (32,557) (114,393)
------- --------
NET CURRENT ASSETS/(LIABILITIES)
Due within one year 5,950 (78,038)
Debtors due after one year 909 862
TOTAL NET CURRENT ASSET/(LIABILITIES) 6,859 (77,176)
TOTAL ASSETS LESS CURRENT LIABILITIES 23,026 (60,078)
------ -------
CREDITORS
(amounts falling
due after more than one year) 83,483 698
Provisions for Liabilities and Charges 6,947 6,422
CAPITAL AND RESERVES
Called Up Share Capital 3,920 13
Preference Shares 5,200
Share premium 46,800 -
Shares to be issued
(including share premium) - 55,600
Profit and loss account reserve (123,880) (124,242)
Shareholders' deficit
Equity interest (119,880) (68,629)
Non-equity interests 52,000 -
(67,880) (68,629)
Minority equity interests 476 1,431
--- -----
(67,404) (67,198)
------- -------
23,026 (60,078)
------ --------
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TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Pounds Sterling, in Thousands)
Unaudited
(pound)
Cash flow from operating activities 5,202
Returns on investments and servicing of finance (9,402)
Taxation (195)
Capital expenditure and financial investment (352)
Acquisitions and disposals (24,000)
--------
Cash (outflow) before financing (28,747)
Financing - increase in debt 28,755
--------
Increase in cash in the period 8
--------
The Condensed Consolidated Cashflow statement is shown only for the six months
ended June 30, 1998 with no comparative data for 1997 due to the recent demerger
and acquisition of the business.
Texon International plc acquired the Materials business of United Texon Limited
on December 31, 1997. In May 1997 United Texon Limited had separated its two
businesses, Materials and Machinery and on December 31, 1997 demerged them into
two groups, retaining the Materials business, with the Machinery business being
sold to a new company formed by the shareholders of United Texon Limited.
Prior to May 1997, United Texon Limited operated common treasury functions which
historically handled cash management, accounts payable, billing and collections
for both the Materials and Machinery businesses. This management decision was
intended to reduce administrative overheads at a time when businesses were under
common ownership.
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RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Pounds Sterling, In Thousands)
Unaudited
---------
(pound)
Increase in cash in the period 8
Cash (outflow) from debt and lease financing (28,755)
--------
Change in net debt resulting from cash flows (28,747)
Non cash movements in debt 4,748
Translation difference 101
--------
Movement in net debt in the period (23,898)
--------
Net debt at the opening date (64,162)
--------
Net debt at the closing date (88,060)
--------
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TEXON INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
(Pounds Sterling, In Thousands)
Unaudited
---------
Six Months ended Three months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
(pound) (pound) (pound) (pound)
Net profit for the period 914 2,123 450 779
Currency translation
differences on foreign
currency working
capital/net tangible assets
and goodwill (1,618) (2,810) (2,126) (345)
Currency translation
differences on foreign
currency borrowings 1,301 (9) 1,328 (738)
Elimination of
currency translation
differences on goodwill
included in the
profit and loss
account reserves 1,728 1,631 (792) (2,064)
----- ----- ---- ------
Total recognized gains/(losses)
in the period 2,325 935 (1,140) 1,760
----- --- ------ -----
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TEXON INTERNATIONAL plc
RECONCILIATION OF MOVEMENTS IN TOTAL SHAREHOLDERS' FUNDS
(Pounds Sterling, In Thousands)
Unaudited
---------
Six Months ended Three months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
(pound) (pound) (pound) (pound)
------- ------- ------- -------
Retained profit
for the period for equity
shareholders of the Company 914 2,123 450 779
Preference dividend (1,300) 0 (650) 0
------- ------- ------- -------
(386) 2,123 (200) 779
New share capital issued/paid 306 0 0 0
Goodwill purchased
during the period (582) 0 (582) 0
Foreign exchange adjustments 1,411 (1,188) (1,590) 981
------- ------- ------- -------
Net (decrease)/increase
to shareholders' deficit 749 935 (2,372) 1,760
Opening shareholders' deficit (68,629) (60,223) (65,508) (61,048)
------- ------- ------- -------
Closing shareholders' deficit (67,880) (59,288) (67,880) (59,288)
------- ------- ------- -------
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TEXON INTERNATIONAL plc
Notes to the Unaudited Condensed Consolidated
Financial Statements June 30, 1998, June 30,
1997 and December 31, 1997
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 normal recurring accruals, considered necessary for a fair
presentation of the results of operations, financial position and 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 summarized as
follows :
June 30, 1998 December 31, 1997
(Pounds sterling in thousands)
(pound) (pound)
Finished goods and goods for resale 13,239 13,285
Work in progress 1,440 1,148
Raw materials 1,920 2,283
------ ------
16,653 16,716
Included within the above inventory figures for June 30, 1998 is an
inventory reserve of (pound)1,291,000 ((pound)1,296,000 December 31, 1997).
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the six months and three months ended June 30, 1998
(Unaudited)
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in this report and
in the Registration Statement on form F-4 filed by the Company with the
Securities and Exchange Commission on May 27, 1998.
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, level of sales
to customers, actions by competitors, fluctuations in the price of primary raw
materials and foreign currency exchange rates and political and economic
instability in the Company's markets.
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. During the first half of 1998 sales of insoles, stiffeners, other
footwear materials and industrial products accounted for 50%, 17%, 21% and 12%
of total sales, respectively. In the same period, through the Company's
extensive marketing and distribution network, 49% of sales were made to Europe,
27% to Asia and the Pacific, 18% to the Americas and 6% to the rest of the
World.
On April 30, 1998 the Company acquired a further 30% of the shares in Foshan
Texon Cellulose Board Manufacturing Co Limited, its joint venture in China. The
consideration was $2.6 million payable in three annual instalments. The Company
now owns 87.6% of the joint venture. This has been consolidated in both
accounting periods.
Results of Operations
- ---------------------
Comparison of the six months ended June 30, 1998 to the six months ended June
30, 1997.
Sales Turnover. Sales decreased (pound)4.7 million, or 7.4%, to (pound)59.6
million during the first half of 1998 from (pound)64.3 million in the comparable
period in 1997. On a constant currency basis, however, sales decreased 2.8% from
the comparable period in 1997. During the six month period ended June 30, 1998,
on a constant currency basis, sales of insoles decreased by 4.3% from the
comparable period in 1997, reflecting the difficult market conditions in the
global footwear industry. During the six month period ended June 30, 1998, sales
of stiffeners increased by 4.8% from the comparable period in 1997, mainly as a
result, the Company believes, of footwear manufacturers replacing solvent
stiffeners with thermoplastic stiffeners.
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During the six month period ended June 30, 1998, sales of other footwear
materials decreased by 9.6% from the comparable period in 1997 primarily , the
Company believes, as a result of the decline in the sale of tacks and a decrease
in adhesive sales to athletic footwear producers. Sales of industrial products
increased by 8% for the six months ended June 30, 1998 from the comparable
period in 1997 as the Company continues to develop this range of products.
The decrease in sales from the comparable period in 1997 should be seen in the
context of a soft footwear market. The Company believes that this market has
been depressed for a number of reasons, including reduced athletic footwear
sales in the key North American market, economic uncertainty in Asia and unusual
weather patterns in many parts of the World.
Despite these factors the Company has increased its sales in Asia by 2.3 % and
has maintained sales in America and Europe at levels similar to last year. The
Company has suffered a decline in sales particularly in Australasia. The Company
believes that this decline is a consequence of the reduction in import tariffs
which has damaged local shoe production. The Company has also experienced a
decline in sales in the Middle East compared to the same period in 1997.
Gross Profit. Gross profit for the six months to June 30, 1998 decreased by
(pound)1.8 million to (pound)20.9 million compared to (pound)22.7 million in the
comparable period 1997. When expressed as a percentage of sales, gross profit
remained at approximately 35.0% for the comparable six month period in 1998 and
1997. However, gross profit for the second quarter of 1998 was 36.2% compared to
34.3% for the comparable period in 1997. The Company believes that this increase
is due primarily to manufacturing costs efficiencies in the Company's plants,
strict cost control and an increase in labor productivity.
Selling, Marketing and Administrative Costs. To further align the Company's cost
structure and organization to the current level of sales the Company has
included an exceptional charge of (pound)0.5 million in the second quarter of
1998. The charge, which has been included in selling, marketing and
administration costs within the profit and loss account, is due to a reduction
in the workforce at its UK headquarters and a reduction in costs at its sales
offices around the world.
Selling, marketing and administrative costs, excluding the restructuring charge
of (pound)0.5 million, decreased by (pound)1.0 million or 6.7% to (pound)13.7
million for the six month period in 1998, from (pound)14.7 million for the
comparable period in 1997. This represents a small increase from 22.9% to 23.0%
when expressed as a percentage of sales.
Operating Profit. Operating profit excluding the restructuring charge, decreased
(pound)0.8 million to (pound)7.2 million for the six months ended June 30, 1998
compared to the similar period in 1997. On a quarterly basis operating profit
for the first quarter fell by (pound)1.1 million compared to the first quarter
of 1997 to (pound)3.1 million due to weaker sales and margin pressure in the
global footwear industry. The second quarter's operating profit was (pound)4.1
million, an increase of (pound)0.3 million over the operating profit earned in
the second quarter of 1997. The Company believes that this
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improvement was due primarily to lower sales and improved margins and costs as a
result of the Company's cost reduction program implemented during the first half
of 1998.
Interest. Interest expense increased by (pound)0.2 million or 4% for the six
months ended June 30, 1998 compared to the similar period in 1997. No direct
comparison can be made to the comparable period in 1997 due to the restructuring
of the Company's debt through the issuance of senior notes (the "Senior Notes")
in January 1998.
Taxation. The tax charge for the six months ended June 30, 1998 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 will arise primarily from debt service obligations
on the indebtedness incurred in connection with the Senior Notes and Revolving
Facility (as defined below), working capital needs and the funding of capital
expenditures. The total liabilities at June 30, 1998 were (pound)123.0 million
including consolidated indebtedness of (pound)89.4 million which compares to
total assets of (pound)55.6 million. The excess of liabilities over assets of
(pound)67.4 million is principally owing to the writing off of goodwill.
The shareholders deficit as at June 30, 1998 of (pound)67.9 million compares
with (pound) 68.6 million as at December 31, 1997.
The Company's primary sources of liquidity will be 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 six months ended June 30, 1998
was (pound)5.2 million as compared to our operating profit of (pound)6.7 million
for the same period. The investment was principally in working capital where
trade accounts receivable at the end of June 1998 was (pound)1.9 million higher
than at the end of December 1997, reflecting higher sales in May and June
compared with in November and December. Inventories as at June 30, 1998 were
similar to those at December 31, 1997 at (pound)16.7 million.
Included in returns on investments and servicing of finance is (pound)4.0
million relating to the issuance costs of the Senior Notes.
Acquisitions and disposals cash outflow consist of (pound)23.5 million paid to
the shareholders of United Texon Limited and (pound)0.5 million for the
additional 30% interest in the Foshan Texon Cellulose Board Manufacturing Co
Limited, the Company's joint venture in China.
As of June 30, 1998 the Company had (pound)7.5 million availability under its
(pound)15.0 million revolving credit facility which has a term of three years as
from January 31, 1998 (the "Revolving Facility").
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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 appreciation of Sterling against certain
European currencies will have a negative impact on the reported sales and
operating margin. Based on average exchange rates throughout the first half of
1998, Sterling appreciated 8.4% against the Deutsche Mark compared to the
similar period in 1997. For this purpose the Deutsche Mark is taken as
representative of the currencies which are members of the European Monetary
System ("EMS"). Conversely, the depreciation of Sterling against such currencies
will have a positive impact. 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 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 Notes.
Under the treaty on the European Economic and Monetary Union (the "Treaty"), to
which the Federal Republic of Germany is a signatory, on or before January 1,
1999, and subject to the
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fulfillment of certain conditions, the "Euro" may replace all or some of the
currencies of the Member states of the European Union (the "EU") including the
Deutsche Mark. If, pursuant to the Treaty, the Deutsche Mark is replaced by the
Euro, the payment of principal of, and interest on, the Senior 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 Notes and the Indenture.
International Operations
- ------------------------
The Company conducts operations in countries around the World including through
manufacturing facilities in the UK, the United States, Germany, Italy, Spain 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 27% 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 recent 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.
Inflation
- ---------
The Company does not believe that inflation has had a material impact on its
financial position or results of operations during the periods covered by the
Consolidated Financial Statements and the related notes thereto included
elsewhere herein.
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Year 2000 Compliance
- --------------------
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. The Company currently estimates that the
additional costs to be incurred in connection with such a 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.
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.
1998 Average Rate Period End Rate
----------------- ---------------
US Dollar 1.65 1.66
Deutschemark 2.98 3.02
Changes in UK Accounting Standards
- ----------------------------------
Financial Reporting Standard 10 "Goodwill and Intangible Assets" is regarded as
standard in respect of financial statements relating to accounting periods
ending on or after 23 December 1998. This standard specifies, "eliminated
goodwill should not be shown as a debit balance on a separate goodwill write off
reserve but should be offset against the profit and loss account or another
appropriate reserve. The amount by which the reserve has been reduced by the
elimination of goodwill (or increased by the addition of negative goodwill)
should not be shown separately on the face of the balance sheet". The Company
has adopted this standard in the presentation of the balance sheet included
herewith.
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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
None.
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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 28, 1998 By /s/ J. Neil Fleming
-------------------------------- ------------------------------------
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