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 March 31, 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]
<PAGE>
Texon International plc
Three Months Ended March 31, 1999
Index
<TABLE>
<CAPTION>
Page No
-------
<S> <C> <C>
PART I Financial Information
Item 1 Financial Statements
Condensed Consolidated Profit and Loss Accounts
Three months ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 4
Condensed Consolidated Cash Flow Statement
Three months ended March 31, 1999 and 1998 5
Reconciliation of net cash flow to movement in debt
Three months ended March 31, 1999 and 1998 6
Consolidated Statement of Total Recognised Gains and Losses
Three months ended March 31, 1999 and 1998 7
Reconciliation of Movements in Shareholders' Funds
Three months ended March 31, 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 12-18
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
</TABLE>
2
<PAGE>
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(Pounds Sterling In Thousands)
<TABLE>
<CAPTION>
Unaudited
----------------------
Three months ended
March March
31, 31,
1999 1998
(pound) (pound)
<S> <C> <C>
Sales turnover 28,315 28,852
Cost of sales (18,648) (19,084)
-------- -------
Gross profit 9,667 9,768
Selling, general and
administrative expenses (6,898) (6,752)
-------- -------
Operating profit 2,769 3,016
Interest receivable 193 37
Interest payable and similar charges (2,795) (2,280)
-------- -------
Profit on ordinary activities before
taxation 167 773
Taxation on profit on ordinary
activities (48) (276)
-------- -------
Profit on ordinary activities after
taxation 119 497
Minority equity interests (43) (33)
-------- -------
Net profit for the financial period 76 464
Non-equity preference dividend (650) (650)
----- -----
Retained loss for the period
for equity shareholders (574) (186)
-------- -------
</TABLE>
3
<PAGE>
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(Pounds Sterling In Thousands)
<TABLE>
<CAPTION>
Unaudited
as at March December 31,
31, 1999 1998
Notes (pound) (pound)
FIXED ASSETS ----- ----------- ------------
<S> <C> <C> <C>
Goodwill 846 672
Tangible assets 16,229 13,116
Investment 14 0
----------- ------------
17,089 13,788
CURRENT ASSETS
Stocks 2 16,961 15,781
Debtors due within one year 19,852 17,579
Debtors due after one year 2,025 2,058
Cash at bank and in hand 1,056 721
----------- ------------
39,894 36,139
CREDITORS
Amounts falling due within one year (32,819) (30,949)
----------- ------------
NET CURRENT ASSETS 7,075 5,190
----------- ------------
TOTAL ASSETS LESS CURRENT
LIABILITIES 24,164 18,978
----------- ------------
CREDITORS
Amounts falling due after more than
one year (86,765) (84,477)
Provisions for liabilities and charges (7,052) (7,642)
----------- ------------
(69,653) (73,141)
=========== ============
CAPITAL AND RESERVES
Called up share capital 9,120 9,120
Share premium 46,800 46,800
Profit and loss account (126,093) (129,539)
----------- ------------
Shareholders' deficit
Equity interests (75,373) (78,819)
Non-equity interests 5,200 5,200
----------- ------------
(70,173) (73,619)
Minority equity interests 520 478
----------- ------------
(69,653) (73,141)
=========== ============
</TABLE>
4
<PAGE>
TEXON INTERNATIONAL plc
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
(Pounds Sterling, In Thousands)
<TABLE>
<CAPTION>
Unaudited
---------------------
Three months ended
March March
31, 31,
1999 1998
(pound) (pound)
<S> <C> <C>
Cash flow from operating activities 5,512 3,516
Returns on investments and servicing of finance (4,580) (8,768)
Taxation (390) 66
Capital expenditure and financial investment (967) (66)
Acquisitions and disposals (1,262) (23,455)
-------- --------
Cash outflow before financing (1,687) (28,707)
Financing - Increase in debt 2,009 30,128
-------- --------
Increase in cash in the period 322 1,421
-------- --------
</TABLE>
5
<PAGE>
TEXON INTERNATIONAL plc
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Pounds Sterling, In Thousands)
<TABLE>
<CAPTION>
Unaudited
-----------------------
Three months ended
March March
31, 31,
1999 1998
(pound) (pound)
--------- ---------
<S> <C> <C>
Increase in cash in the period 322 1,421
Cash outflow from debt and lease financing (2,009) (30,128)
--------- ---------
Change in net debt resulting from cash flows (1,687) (28,707)
Loans and finance leases acquired with subsidiary (2,039) -
Non cash movements in debt (179) 3,955
Translation difference 3,696 162
--------- ---------
Movement in net debt in the period (209) (24,590)
--------- ---------
Net debt at the opening date (91,063) (64,162)
--------- ---------
Net debt at the closing date (91,272) (88,752)
--------- ---------
</TABLE>
6
<PAGE>
TEXON INTERNATIONAL plc
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
(Pounds Sterling, In Thousands)
<TABLE>
<CAPTION>
Unaudited
-----------------------
Three months ended
March March
31, 31,
1999 1998
(pound) (pound)
--------- ---------
<S> <C> <C>
Net profit for the financial period 76 464
Currency translation differences
on foreign currency 4,020 3,001
--------- ---------
Total recognized gains in the period 4,096 3,465
--------- ---------
</TABLE>
7
<PAGE>
TEXON INTERNATIONAL plc
RECONCILIATION OF MOVEMENTS IN TOTAL SHAREHOLDERS' FUNDS
(Pounds Sterling, In Thousands)
<TABLE>
<CAPTION>
Unaudited
-----------------------
Three months ended
March March
31, 31,
1999 1998
(pound) (pound)
--------- ---------
<S> <C> <C>
Retained profit for the period for
equity shareholders of the Company 76 464
Non-equity preference dividend (650) (650)
--------- ---------
(574) (186)
New share capital issued - 306
Foreign exchange adjustments 4,020 3,001
--------- ---------
Net decrease to shareholders' deficit 3,446 3,121
Opening shareholders' deficit (73,619) (68,629)
--------- ---------
Closing shareholders' deficit (70,173) (65,508)
--------- ---------
</TABLE>
8
<PAGE>
TEXON INTERNATIONAL plc
Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 1999, March 31, 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 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 :
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Pounds sterling in thousands)
(pound) (pound)
------- -------
<S> <C> <C> <C>
Finished goods and goods for resale 12,902 12,406
Work in progress 1,407 1,269
Raw materials 2,652 2,106
------- -------
16,961 15,781
------- -------
</TABLE>
Included within the above inventory figures for March 31, 1999 is an
inventory reserve of (pound)1,053,000 ((pound)1,115,000 December 31,
1998). Inventory has increased during the quarter ended March 31, 1999
mainly due to the inclusion of (pound)0.8 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 the March 11, 1999 a Special Resolution was passed by
the Shareholders to amend the Articles of Association of the Company to
reflect a change in the dividend percentage. The new Articles state
that for periods ending on or prior to December 31, 2000, the
preference dividend will accrue at the rate of 6.75% per annum rather
than at 15% as shown by the previous agreement. This change is
retrospective and any entitlement to the higher rate in historic
periods has been waived by the Shareholders. There has been no change
made to the period
9
<PAGE>
post January 1, 2001 where, in the absence of a sale or listing of the
Company the preference dividend will accrue at the rate of 15% per
annum through to September 30, 2002, and at 25% thereafter. At present,
payment of a 5% per annum dividend on or prior to the due date shall be
deemed to satisfy the full 6.75% rate for periods up to December 31,
2000 - provided that arrears of accrued but unpaid dividends in respect
of previous periods have been paid until this date. In the event that
the dividend is not paid on the due date it shall accumulate at a rate
of 6.75%. The Directors believe that it is improbable that the Company
will actually bear the higher rates and so they have not been taken
into account for the purposes of calculating the finance charge.
4 Changes in UK Accounting Standards
In September 1998, the Accounting Standards Board issued two Financial
Reporting Standard's (FRS) 12 and 13. FRS's 12 and 13 are effective for
all accounting periods ending on or after March 23 1999. For FRS 12 the
new requirements are retrospective, however for FRS 13 the new
requirements can be applied prospectively from the period of adoption.
Comparative information is not required for FRS 13 but is encouraged
unless it is not practical to disclose it.
a). FRS 12 provides accounting and reporting standards for provisions,
contingent liabilities and contingent assets. Its objective is to
ensure that appropriate recognition criteria and measurement bases are
applied to provisions, contingent liabilities and contingent assets and
that sufficient information is disclosed in the notes to the financial
statements to enable users to understand their nature, timing and
amount. The Company has applied the provisions of FRS 12 in 1999. FRS
12 will lead to increased disclosure in the financial statements of the
Company and it will ensure that a provision may only be recognized
where at the period-end a liability exists that can be measured
reliably. This Standard has been adopted by the Company in presenting
the results and financial position included herewith and has had no
significant effects on the Company.
b). FRS 13 provides accounting and reporting standards for derivatives
and other financial instruments. Its objective is to provide via
additional disclosures, information about the impact of financial
instruments on the entity's risk profile, how the risks arising from
the financial instruments might affect the entity's performance and
financial condition, and how these risks are being managed. The Company
will apply the provisions of FRS 13 prospectively in the 1999 statutory
financial statements. FRS 13 will require the Company to provide;
1. narrative disclosures describing the role that the financial
instruments have in creating or changing the risks that the
entity faces, including its objectives and policies in using
financial instruments to manage these risks and,
2. numerical disclosures showing how these objectives and
policies were implemented in the period and provide
supplementary information for evaluating significant or
potentially significant exposures.
Together these disclosures will provide a broad overview of the
Company's financial instruments and of the risk positions created by
them, focusing on those risks and instruments that are of the greatest
significance.
10
<PAGE>
The Accounting Standards Board has also issued FRS 15, which is
effective for all accounting periods ending on or after March 23, 2000.
FRS 15 provides accounting and reporting standards for tangible fixed
assets and replaces 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. 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.
11
<PAGE>
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 upon request.
Recent Developments
- -------------------
On March 10, 1999 Texon UK Ltd, a wholly owned subsidiary, acquired the share
capital of Cornwell Industries Ltd with effect from March 1, 1999. Cornwell
industries Ltd is the UK market leader in footwear components and insole
assemblies. The consideration paid for the acquisition was approximately
(pound)3.2 million including (pound)2 million of assumed debt. This has been
consolidated in the accounting period ending March 31, 1999. The Company
believes that the acquisition will produce the following benefits for the Group:
o A wider range of products being available through the Texon distribution
network;
o A route to the shoe designer thereby strengthening the Company's ability to
obtain product specification;
o A product range consistent with the Texon brand and image.
On February 23, 1999 Mr SD Soghikan resigned as non-executive Director of Texon
International plc.
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 three months of 1999 sales of insoles, stiffeners, other
footwear materials, industrial products and Cornwell products accounted for 47%,
18%, 20%, 12% and 3% of total sales, respectively. In the same period, through
the Company's extensive marketing and distribution network, 49% of sales were
made to Europe, 29% to Asia and the Pacific, 16% to the Americas and 6% to the
rest of the world.
12
<PAGE>
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 Asia, South America and Russia have all
led to a reduction in demand for the Company's products.
Comparison of the Three Months Ended March 31, 1999 to the Three Months Ended
March 31, 1998.
Sales turnover. Sales decreased (pound)0.5 million or 2%, to (pound)28.3 million
during the three months ended March 31, 1999 from (pound)28.8 million in the
comparable period of 1998.Cornwell Industry's sales from the date of acquisition
to March 31, 1999 were (pound)0.8 million. On a constant currency basis, sales
decreased by (pound)1.3 million or 4% during the three months ended March 31,
1999 from the comparable period in 1998.
The decrease in sales from the comparable period in 1998 should be seen in
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 North America, economic uncertainty in Asia and unusual weather
patterns in many parts of the world.
Sales of insoles, on a constant currency basis, decreased by 9% during the first
quarter of 1999 from the comparable period in 1998 reflecting the difficult
market conditions in the global footwear industry as noted above.
During the three months ended March 31, 1999, on a constant currency basis,
sales of stiffeners increased 3% from the comparable period in 1998. This
increase is the result of the Company's sales program to major athletic footwear
manufacturers in Asia.
Sales of other footwear materials, on a constant currency basis, decreased by
15% in the three months ended March 31, 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 March 31, 1999 were
lower in Europe by 5%, North America by 20%, South America by 21%, and the rest
of the world by 13%, and higher in Asia by 12% and Australasia by 9%, each from
the comparable period in 1998.
European sales were (pound)0.7 million lower from the comparable period in 1998,
principally in the UK where footwear production continues to decline and in
Eastern Europe as a result of significantly lower demand in Russia.
In North America, although market share gains were made, the overall market was
soft due to weak retail sales. Sales were (pound)0.9 million lower in the first
quarter of 1999 as against the comparable period in 1998.
13
<PAGE>
South American sales were approximately (pound) 0.2 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.
Asian sales increased by (pound)0.8 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.
Gross Profit. Gross profit for the three months ended March 31, 1999 decreased
by (pound)0.1 million to (pound)9.7 million compared to (pound)9.8 million in
the comparable period in 1998. When expressed as a percentage of sales, gross
profit was 34.1% for the three months ended March 31, 1999 an increase of 0.2%
from the comparable period in 1998.
The improvement in gross profit margins is due to continuing cost saving
programs being implemented in all of the Company's manufacturing facilities.
These efforts have more than offset the adverse impact of lower production
volumes in the plants and price erosions caused by competitors discounts to
mitigate the Company's market share gains.
Selling, General and Administrative Costs. Selling, general and administrative
costs ("S G + A"), increased by (pound)0.1 million or 2% to (pound)6.9 million
for the three months ended March 31, 1999 from (pound)6.8 million from the
comparable period in 1998.
This increase can be explained by the following :
For the three months ended March 31, 1999 S, G + A included an expense of
(pound)0.2 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.
Included in the three months ended March 31, 1998 is a release of a provision
(pound)0.2 million related to the payment of sales taxes in China and exchange
rate variances between the two years account for (pound)0.2 million of S G + A.
Therefore, on a constant currency basis, and excluding the specific one-time
items S G + A costs are similar in the first quarter of 1999 as compared to the
similar period in 1998.
Operating Profit. Operating profit for the three months ended March 31, 1999 was
(pound)2.8 million, which is a decrease of 8% from (pound)3.0 million for the
comparable period in 1998.
Earnings before depreciation and amortization for the three months ended March
31, 1999 was (pound)3.5 million (excluding reorganisation costs) as compared to
(pound)3.6 million for the comparable period in 1998.
Interest. Interest receivable has increased by (pound)0.15 million to
(pound)0.19 for the three months ended March 31, 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)0.5 million to
(pound)2.8 million for the three months ended March 31, 1999 from (pound)2.3
million from the comparable period in 1998. The Company restructured its debt on
January 30, 1998
14
<PAGE>
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.
Taxation. The tax charge for the three months ended March 31, 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 March 31, 1999 were (pound)126.6 million
including consolidated indebtedness of (pound)92.3 million which compares to
total assets of (pound)57 million. The excess of liabilities over assets of
(pound)69.6 million is due to the elimination of goodwill.
The shareholders' deficit as at March 31, 1999 of (pound)70.2 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 three months ended March 31,
1999 was (pound)5.5 million compared to (pound)3.5 million for the comparable
period in 1998. This increase of (pound)2 million can be attributed to the
combination of lower profits (pound)0.2 million and a decrease in operating
assets (pound)2.2 million as a result of active balance sheet management.
Inventories as at March 31, 1999 were (pound)17.0 million compared to
(pound)15.8 million at December 31, 1998, while trade receivables at March 31,
1999 were (pound)16.4 million compared to (pound)16.0 million at December
31,1998.The 1999 figures include Cornwell inventories and trade receivables of
(pound)0.8 million and (pound)1.8 million respectively.
Returns on investments and servicing of finance for the quarter ended March 31,
1999 are (pound)4.6 million which includes (pound)0.3 million relating to the
issuance costs of the Senior Secured Notes. The comparable period in 1998 was
(pound)8.8 million which included issuance costs of the Senior Secured Notes of
(pound)4.0 million.
Capital expenditure, in the quarter were (pound)1.0 million, as compared to
(pound) 0.1 million for the comparable period in 1998. Investments included
(pound)0.3 million as part of a (pound)0.6 million program to increase capacity
and flexibility in the non-woven factory in Skelton, UK. 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 three months ended March 31,
1999 consisted of (pound)0.8 million for the purchase of Cornwell Industries Ltd
on March 1, 1999 and (pound)0.5 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 three months
ended March 31, 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.
15
<PAGE>
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 three months to March 31,
1999, Sterling depreciated 4.7% 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.
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 three months ended March 31, 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
16
<PAGE>
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 July
1999 in Deutsche Marks and January 2000 in Euros.
The Euro has been used as a trading currency by the Company during the three
months ended March 31, 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 exchange rate and statement of operations
accounts are translated at the average rate prevailing during the relevant
period.
Although 29% 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 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.
Year 2000 Compliance
- --------------------
Following a comprehensive review of the Company's computer systems and plant and
equipment which incorporate microprocessors, the Company is in the process of
formulating and implementing a program designed to ensure that the software used
in connection with the Company's business and operations will manage and
manipulate data involving the transition of dates from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
dates. This program includes both updating existing software and the
implementation of new software at various locations and will be substantially
completed during the second quarter of 1999. The Company currently estimates
that the costs incurred to date of dealing with
17
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the Year 2000 problem, that are not related to ongoing systems updates, are not
material. It also estimates that the additional costs to be incurred in
connection with the Year 2000 program shall be approximately (pound)200,000
although there can be no assurance that this will be the case or that the
Company will not incur additional costs in connection with such a program. All
costs are expensed when incurred. To date no significant issues have been
identified that management has not addressed.
The general expectation by those who have studied best practice in managing the
Year 2000 problem is that even the best run projects will face some Year 2000
compliance failures. There can be no assurance that Year 2000 projects will be
successful or that the date change from 1999 to 2000 will not materially affect
an organization's operations and financial results. Businesses, including the
Company, may also be affected by the inability of third parties to manage the
Year 2000 problem.
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 1.63 1.61
Deutschemark 2.86 2.90
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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 believes 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
10.71 Sale and Purchase Agreement among David J. Grier and others
as Vendors and Texon UK Limited as Purchaser, dated March
12, 1999. P
P This exhibit has been filed in paper format with the
Securities and Exchange Commission under cover of Form SE
on May 27, 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 May 26, 1999 By /s/ J. Neil Fleming
----------------- -----------------------------
J. Neil Fleming
Finance Director and
Chief Accounting Officer
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