-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OmALCs3W1OmUf867hUANOLb8swc9Q0oyFXfZJJPDuRt/Xp9Wj1gViTbAlyecVfWi oGlfiBqXEgqOmZsYPPTnoQ== /in/edgar/work/0000906504-00-000039/0000906504-00-000039.txt : 20001009 0000906504-00-000039.hdr.sgml : 20001009 ACCESSION NUMBER: 0000906504-00-000039 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20001006 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONTEX INC CENTRAL INDEX KEY: 0000041052 STANDARD INDUSTRIAL CLASSIFICATION: [2670 ] IRS NUMBER: 221427551 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: ARS SEC ACT: SEC FILE NUMBER: 000-05200 FILM NUMBER: 736197 BUSINESS ADDRESS: STREET 1: ONE BONTEX DR CITY: BUENA VISTA STATE: VA ZIP: 24416-0500 BUSINESS PHONE: 5402612181 MAIL ADDRESS: STREET 1: PO BOX 751 CITY: BUENA VISTA STATE: VA ZIP: 24416 FORMER COMPANY: FORMER CONFORMED NAME: GEORGIA BONDED FIBERS INC DATE OF NAME CHANGE: 19920703 ARS 1 0001.txt AMENDED ANNUAL REPORT TO STOCKHOLDERS [FRONT COVER] [Picture of a soccer player kicking a soccer ball] [Bontex logo] BONTEX [R] CONTENTS [Bontex Symbol] BONTEX [R] Consolidated 2000 Annual Report "With over 50 years of experience, Bontex is a global leader in our core industries we serve. Almost all the branded footwear in the world use Bontex, and during 2000, Bontex continued to develop and introduce more new and advanced products." 2 Mission Statement, Corporate and 5 Management's Discussion and Product Profile Analysis 3 Message to Shareholders 11 Consolidated Financial Statements and Notes 4 Financial Highlights 26 Independent Auditors' Report CORPORATE HIGHLIGHTS
1946 Bontex was originally established as a leather 1996 The Company restructures and officially processing operation in Newark, New Jersey. operates globally as Bontex, Inc., formerly Georgia Bonded Fibers, Inc. 1954 Bontex elastomeric wet web cellulose materials were first produced in Buena Vista, Virginia. 1997 Bontex export sales from USA exceed $10 million. Bontex establishes Bontex Hong 1959 Bontex goes public with stock issuance and listing Kong to further expand export sales. on NASDAQ stock market. Bontex enters into a key strategic partnership to market nonwoven materials. 1969 Bontex begins Bontex SA investment in Belgium, Bontex becomes the first global then and today, one of the world's largest and manufacturer in our industry to be ISO highest capacity factories manufacturing elastomeric 9001 certified, SATRA accredited wet web fiberboard products. laboratory certified and SATRA Quality Mark approval for several products. 1986 Bontex establishes a base of operations in Italy, as Bontex Italia begins sales, marketing, and 1999-2000 Bontex begins long-term repositioning as a converting operations. multi-dimensional Company. Bontex introduces a broader range of footwear 1995 Bontex sales exceed $50 million. Bontex materials, including Bontex 90 Insole establishes Bontex de Mexico to expand export Seatboard, economical insole products, sales. Bon-Stitch linings, and Bon-Stitch next generation nonwoven insoles. Bontex embarks on an advanced material systems for footwear and non-footwear applications.
1 MISSION STATEMENT Our Mission is to be the global leader in the markets we serve, by providing customers with world class quality products and service. CORPORATE PROFILE Bontex, Inc. was originally founded in June 1946 under the laws of the State of New Jersey as a leather processing operation. Today Bontex is a leading worldwide manufacturer and distributor of uncoated and coated elastomeric wet web impregnated fiberboard products, generally described by the trademark BONTEX(R). BONTEX(R) is primarily used as an insole material in footwear, as well as visorboard in headwear, dielectric sealing base in automotive door panels, backing substrate, stiffener and laminating base in luggage, leathergoods, and allied products. All BONTEX(R) fiberboard products are designed to be "environmentally-friendly," because Bontex uses recycled and primary cellulose fibers originally derived from trees, a renewable resource. The Company maintains global headquarters, manufacturing and converting facilities at Bontex USA, One Bontex Drive, Buena Vista, Virginia; European headquarters and manufacturing at Bontex S.A., Stembert, Belgium; a distribution and converting operation at Bontex Italia S.r.l., Villafranca, Verona, Italy; and marketing organizations at Bontex de Mexico, S.A. de C.V., in Leon, Mexico, Bontex Vietnam, Hochiminh City Vietnam, and Bontex Hong Kong R.O.C. Bontex also maintains a network of liaison offices and distributors globally to market Bontex products. PRODUCT PROFILE Bontex manufactures uncoated and coated BONTEX(R) fiberboard products; breathable cushion foams, that are marketed under the trademarks BON-FOAM(R), MAXXON(R) and SURE-FOAM(R), and are sold in a variety of grades for use as shock absorbing insole material; BON-PEL(R), a wet web nonwoven substrate, which is exceptionally strong and flexible; BONTEX(R) 48 MA, an uncoated visorboard for use in military headwear, which has been approved by NATICK military laboratory. Bontex also combines certain products, such as foams, fabrics, and vinyls, with BONTEX(R) fiberboard. Additionally, Bontex is the exclusive distributor globally to the footwear industry of an expanded polyurethane material manufactured by Aearo Company-E.A.R. Specialty Composites, trademarked MAXXON(R) LS and CONFOR(R). Bontex also markets to the footwear industry a range of nonwoven products under the Company's trademark Bon-stitch(R), primarily used as an insole and vamp lining. Registered trademarks under which the Company markets products include: BONTEX(R) SUPERTEX(R) BON-PEL(R)nonwoven MORI-FLEX(R) BON-FOAM(R)cushion BON-STITCH(R) MAXXON(R)cushion VINTEX(R) SUR-V-LON(R)vinyl coated Bontex BON-DOE(R) SIR-PEL(R) BONTEX(R)200 RECYCLED MORIMER(R) SURTEX(R) BONTEX(R)300 RECYCLED CONTOUR(R) ASTRAL(R)foam Bontex is embarking on repositioning the Company to manufacture and supply a range of advanced material systems to both footwear and non-footwear applications. During the next year, the Company anticipates introducing several new products. 2 MESSAGE TO SHAREHOLDERS (Bontex Symbol) BONTEX [R] ONE BONTEX DRIVE BUENA VISTA, VIRGINIA 24416-1500 email: 74313.2761@compuserve.com http://www.bontex.com Dear Fellow Shareholder: I am pleased to report to you that Bontex, Inc. and its subsidiaries increased sales and returned to profitability during the second half of fiscal 2000, reversing a trend which started over two and half years ago. Overall, sales volume (tons sold) for the year increased almost 10%, and consequently, if foreign currency exchange rates had remained unchanged from the prior year, consolidated net sales would have increased by $2.6 million or 7%. However, the positive results from the second half were not enough to offset the losses incurred during the first half of the fiscal year, as detailed in the financial review in Management's Discussion and Analysis. We are hopeful that the momentum from the second half of the year will continue into the next fiscal year. While the increase in sales reflects positively on our marketing efforts to grow sales of our core footwear products, in spite of extremely challenging market conditions, we remain focused on repositioning the Company for future sales growth and profitability from a wider range of revenue sources. Simply stated, the future success of Bontex remains with developing and marketing new products. To that end, our fundamental areas of focus at this time are: * Footwear: Expanding our product line within our core footwear segment in order to leverage our existing global market position as an industry leader. * Advanced Material Systems: Developing through a series of complementary strategic alliances, Advanced Material Systems (AMS) for specifically targeted applications. * Cost Control: Implementing additional measures to control costs. For over half a century, Bontex has been dependent primarily on Bontex cellulose products for use as an insole in footwear, as well as for headwear, luggage, leathergoods and allied industries. We believe that the various initiatives which we have implemented over the course of the past two years will be significant in repositioning the Company for long-term growth and profitability. Maintaining our position in the footwear industry is crucial to providing a revenue base from which to build upon for both footwear and non-footwear products. In order to strengthen our position in supplying footwear materials, we have added several new footwear products to our line-up: Bontex 90G (patent pending), an insole seat-board; Bontex 347 FF and Bontex 60 FF, a series of high volume economical cellulose insoling materials, and a range of new Bon-Stitch nonwoven materials for insoling and linings. Sales of the new footwear products have not yet been significant, but based on the positive results of recent testing and trials by several major branded footwear companies, we would expect sales of these products to increase during fiscal 2001. Bontex has what we believe to be the most efficient and highest capacity machine in the world manufacturing elastomeric fiberboard products. To capitalize on this significant asset located at Bontex S.A., Bontex has begun to target a market category that we really did not service before: the high volume economical cellulose insole products. We believe this market represents the largest and fastest growing segment for Bontex-type products. Our efforts to develop new non-footwear products also remain an important priority. Although much progress has been made, significant work continues to be ahead of us in order to develop new and viable specialty materials. We will continue to utilize consultants with the technical knowledge to enable Bontex to develop these new materials. Some of our initial responses to address the situation at Bontex over the past couple of years have been several major cost control initiatives. We have made significant cost reductions in many areas of operations, including fibers, purchase contracts for primary raw materials to provide pricing stability, staff reductions, decreased salaries, and other restructuring of operations. We have listed our Newark, New Jersey warehouse for sale for $860,000. We anticipate selling it next year and using the proceeds to pay down debt. These cost cutting measures plus realizing sales from new products will be crucial to the long-term profitability of the Company. As outlined in my letter to you last year, after an analysis of our business model for the past fifty years, we realized that the long-term success of the Company depends on changing into a multi-dimensional company. This entails an inherently long process that requires the engagement of the entire Company. We have begun the process and remain focused on our key initiatives, but this major effort will take much time. Over the past few years, Bontex has been confronted with several challenges, including pricing pressures, environmental mandates, volatile raw material prices, increased usage of alternative materials, and a contraction of the domestic market. We will always face such challenges, but your management team is attempting to establish a framework for growing Bontex into a more diverse company, which will not be as vulnerable to these issues. We greatly appreciate our shareholders support of our efforts to develop Bontex into a multi-dimensional company, as well as the commitment and invaluable role of our Board of Directors, employees and distributors globally, and the loyalty and trust from our customers. We look forward to strengthening our relationships as we embark on the next century. s/James C. Kostelni James C. Kostelni Chairman and Chief Executive Officer See accompanying safe harbor disclosure on page 5 - ------------------------------------------------------------------------------ Bontex, Inc., One Bontex Drive, Buena Vista, VA 24416-1500 Telephone:(540)261-2181 o Fax: (540)261-3784 o Email: bontex@bontex.com o http://www.bontex.com Bontex SA (Belgium), Bontex S.r.l. (Italy), Bontex Hong Kong, Bontex de Mexico 3 BONTEX, INC. AND SUBSIDIARIES Summary of Selected Ten Year Data (In Thousands, Except Per Share Data and Ratios)
Years Ended June 30, 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Net sales $ 39,455 $ 39,325 $ 43,483 $ 50,333 $ 47,618 $ 50,998 $ 47,729 $ 46,710 $ 46,534 $ 44,734 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Income (loss) before cumulative effect of change in accounting principles $ (659) $ (778) $ (446) $ 1,733 $ (602) $ (1,458) $ 935 $ 193 $ 942 $ 212 Cumulative effect of change in accounting principles - - - - - - 400 - - 99 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) $ (659) $ (778) $ (446) $ 1,733 $ (602) $ (1,458) $ 1,335 $ 193 $ 942 $ 311 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Income (loss) per share: Before cumulative effect of change in accounting principles $ (.42) $ (.49) $ (.28) $ 1.10 $ (.38) $ (.93) $ .60 $ .12 $ .60 $ .14 Cumulative effect of change in accounting principles - - - - - - .25 - - .06 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss) $ (.42) $ (.49) $ (.28) $ 1.10 $ (.38) $ (.93) $ .85 $ .12 $ .60 $ .20 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Total assets $ 30,885 $ 31,164 $ 32,513 $ 32,906 $ 33,181 $ 39,527 $ 31,032 $ 28,840 $ 28,669 $ 22,753 Total stockholders' equity $ 8,948 $ 9,893 $ 10,891 $ 11,515 $ 10,308 $ 11,186 $ 12,080 $ 10,521 $ 10,825 $ 9,313 Capital expenditures $ 854 $ 1, 067 $ 2,334 $ 2,389 $ 2,157 $ 1,704 $ 1,868 $ 1,226 $ 1,787 $ 1,591 Cash flows provided by (used in) operating activities $ 1,608 $ 122 $ 57 $ 3,037 $ 1,180 $ (2,073) $ 1,078 $ (122) $ 215 $ 2,024 Long-term debt, noncurrent $ 2,327 $ 2,601 $ 2,256 $ 2,761 $ 2,330 $ 1,364 $ 1,511 $ 1,056 $ 1,493 $ 964 Book value per share $ 5.69 $ 6.29 $ 6.92 $ 7.32 $ 6.55 $ 7.11 $ 7.68 $ 6.69 $ 6.88 $ 5.92 Cash dividends per common share $ - $ - $ - $ - $ - $ - $ - $ .05 $ - $ - Current ratio .98 1.02 1.05 1.16 1.06 1.07 1.30 1.26 1.34 1.43 Total debt to equity ratio 2.45 2.15 1.99 1.86 2.22 2.53 1.57 1.74 1.65 1.44 Capital structure $ 11,756 $ 13,006 $ 13,791 $ 14,570 $ 12,819 $ 12,703 $ 14,162 $ 12,224 $ 12,991 $ 10,950
Common Stock and Dividend Data The stock of Bontex, Inc. was previously traded over the counter on the Nasdaq National Market. Effective July 23, 1998, the stock of Bontex, Inc. was listed on the Nasdaq SmallCap Market under the symbol BOTX. At September 8, 2000 there were approximately 688 stockholders of record. No cash dividends were declared or paid during fiscal years 1996 through 2000.
2000 1999 1998 1997 1996 -------- ------- ------ ------ ------- High Low High Low High Low High Low High Low ------ ------ ------- ------ ------- ------- ------- ------- ------- ------ First Quarter $ 2.75 $ 1.75 $ 3.38 $ 2.25 $ 9.63 $ 4.25 $ 4.00 $ 3.13 $ 4.25 $ 2.75 Second Quarter 2.63 1.50 2.62 1.50 8.50 4.50 5.13 3.50 3.88 2.38 Third Quarter 5.47 1.75 4.00 1.00 5.25 3.25 5.38 4.50 3.25 2.38 Fourth Quarter 3.75 1.75 3.00 1.50 4.25 2.88 5.00 4.25 4.38 2.88
4 Bontex, Inc. and Subsidiaries Management's Discussion and Analysis GENERAL The lack of profits in fiscal year 2000 was attributable to the increased cost of primary raw materials, latex and pulp, and extreme competition within the cellulose markets we serve. Bontex has continued to work to mitigate raw materials costs and has additional expectations for improved technologies in this area. Low sales volumes in the first part of the year also hindered the return to overall profitability. Several new products mentioned in last year's report are nearing the marketability stage and could add volume to our operations. It is not possible to accurately predict the viability of any of these products at this time. The Company's consolidated financial statements and notes to the consolidated financial statements should be read as an integral part of this discussion. Except for historical data set forth herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements include, for example, statements about future results of operations or market conditions and involve certain risks, uncertainties and assumptions. Actual results may differ materially from these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, excessive worldwide footwear inventories, a shrinking domestic market for Bontex products, decreased sales to key customers, increased competition from non-woven materials, the reduction of prices by competitors, the increase in the relative prices of Bontex's products due to foreign currency devaluations, increased pulp and latex prices, capital illiquidity, unexpected foreign tax liabilities, and decreases in the Company's borrowing base. RESULTS OF OPERATIONS Overview In fiscal 2000, market share gains exceeded losses resulting in higher net sales of $39.5 million or an increase of $130,000 as compared to the prior year. If the currency exchange rates had remained unchanged for the current year, net sales would be higher by $2.6 million as compared to a $600,000 translation increase in the prior year. The Company's footwear business continues to exhibit increased competition and lower margins. Management expects continued pressure on our profit margins as a result of competition and rising prices for our primary raw materials. The Company's development efforts to optimize products and formulations should further mitigate some of the negative trends mentioned. Management also recognizes the need to further diversify product lines and has embarked on a plan to accomplish this goal. Sales Consolidated net sales were $39.5 million, $39.3 million, and $43.5 million, for fiscal years 2000, 1999, and 1998, respectively. Bontex succeeded in maintaining its position in specification footwear sales. Some declines were experienced during 2000 for Bontex insole materials due mainly to competition from non-wovens, particularly in the athletic footwear sector. Lower selling prices, caused by competitive pressures and the loss of sales volume in certain markets, offset the success of 2000 sales initiatives in Asia and South America. 5 The cellulose insole market, in particular, continues to be affected by low quality competition, especially in Far East markets. In China for instance, oversupply of low quality materials creates abnormal downward pressure on prices. Although most of these low-end producers are not in direct competition with Bontex, their impact on the market is pervasive. Bontex hopes to benefit, in upcoming years, from improved trade relations between the U.S. and China. Bontex continues to allocate increased resources to our marketing network in China. We have reorganized our personnel and added staff in key areas in order to continue the momentum initiated last year in this increasingly important market. Bontex has recently developed several new innovative products for footwear that it believes, based on early marketing efforts, to have good sales potential. The Company has also solidified its marketing relationships for stitch-bonded non-wovens, foams, thermoplastics, and other advanced materials. Each of these projects brings advanced technology to the footwear industry. Bontex management believes the key to success in these areas relies upon bringing added value to our customers. We have an aggressive strategy to locate such technologies and rapidly bring them to the marketplace. Sales from these projects were expected to occur during fiscal year 2000, but development was slower than anticipated. To date, the Company has incurred a minor amount of research and development expenses related to development of these new products. It is impossible to accurately predict the level of sales potential or profitability at this time. However, it is reasonable to expect one or more of these projects to generate sales during fiscal year 2001. Costs Cost of sales were 72.5 percent of net sales in 2000, 74.1 percent of net sales in 1999, and 71.5 percent of net sales in 1998. The decrease in costs as a percentage of sales from 1999 was mainly due to improved efficiency from prior investments and other cost control measures taken by management. The Company's United States operations use the last in, first out (LIFO) method of inventory accounting. For comparison with other companies, if the first-in, first-out, (FIFO) method of accounting had been used, reported gross profit would have been higher by $28,000 in 2000, and lower by $93,000 in 1999, and lower by $96,000 in 1998. Net income would have been higher by $18,000 or $.01 per share in 2000, lower by $60,000 or $.04 per share in 1999 and lower by $61,000 or $.04 per share in 1998. Footwear production in North America continued to decline as more companies closed domestic production facilities in favor of lower labor cost markets such as China. While Bontex has a strong export program, selling and third party costs tend to be higher for exports than for domestic sales. The Company continues to pursue remaining opportunities for footwear and non-footwear sales in the United States. As a percent of sales, selling, general and administrative (SG&A) expenses over the previous three years were 26.1 percent in 2000, 26.0 percent in 1999, and 27.4 percent in 1998. The higher percentage in fiscal year 1998 is directly related to sales decreasing at a higher rate than SG&A costs as opposed to 1999 and 2000 where cost reductions took stronger effect. In 1999, legal costs associated with certain lawsuits against the Company and some of its officers significantly increased SG&A costs. These expenses did not recur in this magnitude during 2000, but increased shipping costs, new employees for future growth and flat sales kept the percentage and amount approximately the same. The decrease in interest expense over the past year was due primarily to a decrease in long and short-term borrowing offset somewhat by higher interest rates. Bontex has implemented more control over capital spending for the next fiscal year with the budgeted amount being less than $250,000. The company anticipates certain proceeds from the sale of the Newark, New Jersey facility. These proceeds are expected 6 to reduce the Company's debt and should decrease interest expense during fiscal year 2001 as well as reduce operating costs when the Company relocates to a less costly location. The consolidated income tax expense for the Company was $335,000 in 2000, as compared to an income tax benefit of $208,000 in 1999 and $137,000 in 1998. The tax expense in 2000 is significantly higher due to a $239,000 tax accrual established with respect to a prior years tax examination of one of the Company's foreign subsidiaries. During fiscal year 2000, the Ministere Des Finances, the Belgian tax authority, completed an examination of Bontex S.A.'s, the Company's Belgian subsidiary, tax returns for 1997, 1998 and 1999 and extended the tax examination to 1995 and 1996 based on certain items. Bontex S.A. has received notices of proposed tax adjustments to these tax returns. The proposed tax adjustments arise from items which are considered disallowed expenses by tax authorities, including commissions paid to certain distributors and clients, certain travel expenses and various smaller items including allowances for doubtful receivables and certain insurance premiums. The proposed tax adjustments by the Belgian authorities approximate $820,000. The Company believes, based in part on written opinion of external counsel, it has meritorious legal defenses to many of the claims and the Company intends to defend such claims. The Company's best estimate of the most likely amount payable for the foregoing tax matters is $239,000, and accordingly, a provision for this amount has been accrued at June 30, 2000. Similar deductions relating to the year ended June 30, 2000 that in light of the current information may be disallowed have been treated as disallowed expenses in the calculation of the current year's tax provision. The Company's actual liability pursuant to the foregoing examination may exceed $239,000, and such excess liability could adversely affect the Company's financial condition. Profitability The net loss of $659,000 or $.42 per share generated in 2000 compares favorably to $778,000 or $.49 per share net loss in 1999, and unfavorably to the loss of $446,000 or $.28 per share in 1998. The unprofitable results are of major concern to management. Typically, the financial performance of Bontex is related directly to cycles in key raw materials, particularly pulp and latex. The lower sales volumes of Bontex's cellulose materials have induced management to pursue process efficiencies that better enable the Company to cope with fluctuations in volume and raw material costs in the future. However, as previously noted, selling price reductions offset some of the cost reductions. Management expects its recent cost reduction and control measures, product development efforts, and Bontex's strong market position to provide a platform for future profitability. Nevertheless, there can be no assurances that increased raw materials prices or decreased volume of sales will not have an adverse impact on the Company's operations or competitive position in the future. INTERNATIONAL SALES AND OPERATIONS Bontex continues to export a predominant portion of its production to countries globally. The Far East, where an estimated 70 percent of global shoe production occurs, is the largest market for Bontex products. Sales to the Far East are denominated in US dollars, which serves to limit the Company's exposure to foreign exchange risk in relation to these countries. As the US domestic market for footwear materials decreases, Bontex is pursuing non-footwear sales and additional export opportunities. However, some foreign 7 exchange exposure remains, and Bontex continues to have some gains and losses due to currency fluctuation. The exchange losses during 1999 and 1998 are mainly due to declines in value of the Mexican peso, Canadian dollar and the overall strength of the US dollar during that period. On January 1, 1999, the EURO became the official currency of the European Economic and Monetary Union (EMU). The EURO has had an impact on the Company's operations, as approximately 24.6 percent of the Company's consolidated sales are to customers in the European Union. Refer to Notes 1 and 7 of the Notes to the Consolidated Financial Statements for further details regarding currencies, market risks, and financial instruments, as well as the following section of this Management Discussion and Analysis titled, Market Risk of Financial Instruments. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources have decreased over the past year, due to the net loss and investments in facility improvements deemed necessary by management. Management believes that the Company's capital structure is sufficient to finance short and long-term operations and objectives. Cash flows from operations totaled $1.6 million, $122,000 and $57,000 in 2000,1999 and 1998, respectively. In 2000, cash flows were primarily effected by an increase of $1,693,000 in accounts payable and accrued expenses which were partially offset by an increase in trade accounts receivable and other receivables. In 1999 and 1998, cash flows were effected from reductions in inventory in 1999 and a decrease in trade accounts receivable in 1998, both offset by lower profits. Trade accounts receivable increased $422,000 to $12.2 million at June 30, 2000 as compared to last year due primarily to improved sales. Inventories at June 30, 2000 are lower by $333,000 over 1999 due mainly to increased efforts to improve turnover and global stock requirements. The Company's cash conversion efficiency, cash flows from operations divided by net sales, increased from less than one percent in 1999 to 4.1 percent this year. The Company's current ratio has decreased slightly from 1.02 in 1999 to .98 this year. Capital expenditures for property, plant and equipment of $854,000 in 2000 is the lowest in three years due to tight controls in this area. Through targeted capital and other investments, the Company believes that Bontex Belgium's facility has developed into one of the most efficient and highest capacity operation of its type in the world. Bontex USA has invested in facility improvements that further enhance its reliability as a supplier to the markets the Company serves. Bontex has also invested heavily in environmental equipment at both manufacturing facilities to protect the environment and help ensure compliance with government mandates. Capital investments during 2000 primarily relate to non-recurring items in production and the environment. These projects are expected to help establish Bontex as an industry leader in quality, efficiency, and reliability and as a responsible corporate citizen. The Company continues to pursue plans for the sale of the Newark, New Jersey facility. The Newark property is for sale with negotiations in progress. Bontex anticipates completion of the Newark sale during calendar year 2001 and the Company does not expect material costs related to this sale. Bontex plans to continue service of its customers in the New York metropolitan area utilizing rented space. On June 30, 2000, the Company had loans of $11.2 million outstanding consisting of $8.2 million short-term and $3.0 million long-term. Short-term borrowings decreased by $1 million while accounts payable and accrued expenses increased by $1.7 million compared to 1999 amounts. The decrease in short-term 8 borrowings relates to cash flow from operations. The weighted average interest rate on short-term borrowings during 2000 and 1999 was 7.3 and 6.0 percent, respectively. Financial instruments and market risk are discussed in more detail below under Market Risk and Sensitivity. On January 26, 2000, Bontex paid off and terminated its credit facility with Wachovia Bank, N.A., and entered into a loan and security agreement with Congress Financial Corporation providing for a credit facility and a term loan. The new credit facility provides for a revolving loan in an amount up to $4 million, based on a lending formula that evaluates, among other items, the current accounts receivable and inventory of Bontex. The lending availability fluctuates daily. Based on the lending formula, from the inception of the loan through June 30, 2000, an average amount of approximately $3.1 million has been available to Bontex under the revolving loan. Further, on five days notice to Bontex, Congress may change the lending formula and in effect reduce the amount available to Bontex under the revolving loan. The new credit facility also requires Bontex to maintain a specified adjusted tangible net worth. During 2000 and 1999, Bontex was subject to various loan covenants under its secured debt agreements and has pledged certain assets as collateral. Bontex was in compliance with the applicable covenants at June 30, 2000 and 1999. Please refer to Note 4 of Notes to the Consolidated Financial Statements for further details on Bontex's indebtedness. Year 2000 Over the past two years Bontex has invested approximately $200,000 in modern information systems to improve data efficiency. Bontex did not experience any material disruptions due to the year 2000 computer issue. MARKET RISK AND SENSITIVITY As previously discussed, the Company is exposed to certain risks related to interest rates and commodity positions. Market risk is defined as the risk of loss arising from adverse changes in market rates and prices. The following disclosures provide certain forward-looking data concerning potential exposures to market risk. The Company has risk associated with its international sales or foreign exchange risk, interest rate risk and commodity prices. In general, our policy is not to speculate on interest rates and commodities in the markets. Fair Value of Financial Instruments (dollars in thousands):
Face Amount/ Carrying Amount Fair Value June 30, 2000 Interest Rate Exposure: Long-term debt $ 2,953 $ 2,695 Short-term debt $ 8,251 $ 8,251 June 30, 1999 Interest Rate Exposure: Long-term debt $ 3,382 $ 3,382 Short-term debt $ 9,215 $ 9,215 Interest rate swap $ 1,000 $ (8)
9 The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. Financial Instruments held for other than trading purposes at June 30, 2000 (dollars in thousands).
Expected Maturity Date There- Fair 2001 2002 2003 2004 2005 after Total Value Liabilities Long-term debt: Fixed Rate $ 426 $ 425 $ 425 $ 424 $ 336 --- $ 2,036 $ 1,778 Average Interest Rate 4.97% 4.97% 4.97% 4.97% 5.27% --- 5.02% Variable Rate $ 200 $ 200 $ 200 $ 200 $ 117 --- $ 917 $ 917 Average Interest Rate 10.5% 10.5% 10.5% 10.5% 10.5% --- 10.5%
Approximately $9.2 million of variable rate debt is not covered by interest rate swaps and is subject to the risk of interest rate changes. The market risk sensitivity analysis above does not fully reflect the potential net market risk exposure, because other market risk exposures may exist in other transactions. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was to be effective for periods beginning after June 15, 1999, but implementation has been delayed by the Financial Accounting Standards Board to be effective for periods beginning after June 15, 2000. This statement requires that the Company recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. At June 30, 2000, the Company did not have any derivative instruments or hedging. Because the Company has used in the past and continues to consider in the future the use of derivative instruments and hedging activities this statement could have an impact on the Company's future financial statements. 10
BONTEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) and COMPREHENSIVE INCOME (LOSS) and CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended June 30, 2000, 1999 and 1998 (In Thousands, Except Per Share Data) Consolidated Statements of Income (Loss) and Comprehensive Income (Loss): 2000 1999 1998 NET SALES $ 39,455 $ 39,325 $ 43,483 COST OF SALES 28,598 29,152 31,080 ----------- ----------- ------------ Gross Profit 10,857 10,173 12,403 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,293 10,224 11,903 ----------- ----------- ------------ Operating income (loss) 564 (51) 500 ----------- ----------- ------------ OTHER (INCOME) EXPENSES: Interest expense 834 923 1,056 Interest income (2) (3) (76) Foreign currency exchange (gain) loss (29) 40 115 Other - net 85 (25) (12) ----------- ----------- ------------ 888 935 1,083 ----------- ----------- ------------ LOSS BEFORE INCOME TAXES (324) (986) (583) INCOME TAX EXPENSE (BENEFIT) 335 (208) (137) ----------- ----------- ------------ NET LOSS (659) (778) (446) ----------- ----------- ------------ OTHER COMPREHENSIVE LOSS Foreign currency translation adjustment (286) (220) (178) ----------- ----------- ------------ COMPREHENSIVE LOSS $ (945) $ (998) $ (624) =========== =========== ============ NET LOSS PER SHARE $ (.42) $ (.49) $ (.28) =========== =========== ============ Consolidated Statements of Changes in Stockholders' Equity: 2000 1999 1998 Stockholders' Equity, beginning balance $ 9,893 $ 10,891 $ 11,515 Net loss (659) (778) (446) Other comprehensive loss Foreign currency translation adjustment (286) (220) (178) ----------- ----------- ------------ Stockholders' Equity, ending balance $ 8,948 $ 9,893 $ 10,891 =========== =========== ============ See accompanying notes to consolidated financial statements
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BONTEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2000 and 1999 (In Thousands, Except Per Share Data) 2000 1999 ASSETS CURRENT ASSETS: Cash $ 457 $ 336 Trade accounts receivable, less allowance for doubtful accounts of $170 ($128 at 1999) 12,187 11,765 Other receivables 378 278 Inventories 5,465 5,798 Deferred income taxes 135 124 Income taxes refundable 49 67 Other current assets 120 152 ----------- ------------ Total current assets 18,791 18,520 ----------- ------------ PROPERTY, PLANT AND EQUIPMENT: Land and land improvements 350 361 Building and building improvements 5,525 5,953 Machinery, furniture and equipment 17,797 17,885 Construction in progress 526 239 ----------- ------------ 24,198 24,438 Less accumulated depreciation and amortization 13,491 12,915 ----------- ------------ Net property, plant and equipment 10,707 11,523 Deferred income taxes 736 599 Other assets, net 651 522 ----------- ------------ Total assets $ 30,885 $ 31,164 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 8,251 $ 9,215 Long-term debt due currently 626 781 Accounts payable 7,756 6,375 Accrued expenses 1,902 1,590 Income taxes payable 594 197 ----------- ------------ Total current liabilities 19,129 18,158 Long-term debt, less current portion 2,327 2,601 Deferred income taxes 42 48 Other long-term liabilities 439 464 ----------- ------------ Total liabilities 21,937 21,271 ----------- ------------ STOCKHOLDERS EQUITY: Preferred stock of no par value. Authorized 10,000,000 shares; none issued - - Common stock of $.10 par value. Authorized 10,000,000 shares; issued and outstanding 1,572,824 shares 157 157 Additional capital 1,551 1,551 Retained earnings 7,461 8,120 Accumulated other comprehensive income (221) 65 ----------- ------------ Total stockholders' equity 8,948 9,893 ----------- ------------ Total liabilities and stockholders' equity $ 30,885 $ 31,164 =========== ============
See accompanying notes to consolidated financial statements. 12
BONTEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2000, 1999 and 1998 (In Thousands) 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 37,378 $ 39,152 $ 44,499 Cash paid to suppliers and employees (34,886) (38,237) (43,245) Interest received 4 10 76 Interest paid (814) (931) (1,063) Income taxes received (paid), net (74) 128 (210) ----------- ----------- ------------ Net cash provided by operating activities 1 ,608 122 57 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment - - 15 Purchases of property, plant and equipment (854) (1,067) (2,334) ----------- ----------- ------------ Net cash used in investing activities (854) (1,067) (2,319) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term borrowings, net (404) 898 888 Long-term debt incurred 545 547 1,000 Principal payments on long-term debt (752) (669) (594) ----------- ----------- ------------ Net cash provided by (used in) financing activities (611) 776 1,294 ----------- ----------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (22) (12) 112 ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH 121 (181) (856) CASH AT BEGINNING OF YEAR 336 517 1,373 ----------- ----------- ------------ CASH AT END OF YEAR $ 457 $ 336 $ 517 =========== =========== ============ RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (659) $ (778) $ (446) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,322 1,372 1,272 Gain on sale of property, plant and equipment - - (8) Provision for bad debts 92 (39) 252 Deferred income taxes (154) (191) (271) Change in assets and liabilities: (Increase) decrease in trade accounts and other receivables (1,226) (522) 1,495 (Increase) decrease in inventories (5) 547 (1,290) (Increase) decrease in other assets (186) 146 (322) Increase (decrease) in accounts payable and accrued expenses 1,988 (367) (856) Increase (decrease) in income taxes payable 421 143 (77) Increase (decrease) in other liabilities 15 (189) 308 ----------- ----------- ------------ Net cash provided by operating activities $ 1,608 $ 122 $ 57 =========== =========== ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Construction in progress accrued in accounts payable - - 122 $ =========== $ =========== $ ============
See accompanying notes to consolidated financial statements. 13 BONTEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000, 1999 and 1998 (All amounts in thousands, except share data) [1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation - The accounts of Bontex, Inc. and its wholly-owned subsidiaries, Bontex S.A., Belgium, Bontex Italia, S.r.l., Italy and Bontex de Mexico C.V., Mexico, and its majority-owned subsidiary, Bontex Hong Kong Limited, (the Company) are included in the consolidated financial statements after elimination of significant intercompany accounts and transactions. Bontex Hong Kong Limited's minority interest is not presented separately because it is not material to the Company's consolidated financial statements. Foreign Currency Translation - The financial statements of the Company's subsidiaries outside the United States are measured using the local currency as the functional currency. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars at the rates of exchange as of the balance sheet date. The resulting translation adjustments are included in other comprehensive income as foreign currency translation adjustment and in accumulated other comprehensive income. Income and expense items are translated at weighted average monthly exchange rates in effect during the year. Gains and losses from foreign currency transactions are included in net income (loss). Cash Equivalents - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost of inventories maintained in North America is determined on the last-in, first-out (LIFO) method and in Europe on the first-in, first-out (FIFO) and weighted average methods. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the related assets. Estimated useful lives are 10 to 40 years for buildings and building improvements, and 3 to 25 years for machinery, furniture and equipment. Other Assets - Other assets consist principally of cash surrender value of life insurance, trademarks and various deposits. Trademark costs are amortized on a straight-line basis over five years. Revenue Recognition - Sales and cost of sales are recognized at the time of product shipment or delivery to the customer, based on sales terms. Stock Options - The Company uses the disclosure provisions of SFAS No. 123, "Accounting for Stock Based Compensation" (Note 6). The Company continues to measure compensation expense for its stock-based compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." 14 Earnings Per Share - Net loss per share has been computed on the basis of the weighted average number of common shares outstanding during each year (1,572,824 shares). Diluted earnings per share is not presented because the effect of stock options is anti-dilutive. See note 6 for information relating to stock options that could potentially dilute basic earnings per share in the future. Derivative Instruments and Hedging Activities - When appropriate, the Company enters into interest rate swap transactions to manage its interest rate exposure. Income or expense arising from these transactions is accounted for as an adjustment to interest expense over the term of the agreements. On a limited basis, the Company manages its exposure to pulp price changes with pulp futures. In accordance with hedge accounting, gains or losses are recorded as a component of the underlying inventory purchase, since these contracts effectively meet the risk reduction and correlation criteria. Gains or losses on hedges that are terminated prior to the execution of the inventory purchase are recorded in inventory until the inventory is sold. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998. This Statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The Statement, as amended, will be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Because the Company has used in the past and continues to consider in the future the use of derivative instruments and hedging activities this statement could have an impact on the Company's future financial statements. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell. Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 15 [2] INVENTORIES Cost of inventories of approximately $1,873 in 2000 and $1,740 in 1999, is determined by the last-in, first-out method (LIFO). Replacement cost for LIFO inventories approximated $2,187 in 2000 and $2,082 in 1999. Inventories of approximately $3,592 in 2000 and $4,058 in 1999, are determined by the first-in, first-out (FIFO) and weighted average bases. Inventories are summarized as follows:
2000 1999 Finished goods $ 3,849 $ 3,341 Raw materials 1,222 2,025 Supplies 708 774 ---------- ---------- Inventories at FIFO and weighted average cost 5,779 6,140 LIFO reserves 314 342 ---------- ---------- $ 5,465 $ 5,798 ========== ==========
During 1999 and 1998, LIFO layers were reduced resulting in charging lower inventory costs to cost of sales of $255 and $55, respectively. In 2000, LIFO layers were not reduced. [3] BUSINESS SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS Bontex, Inc. and all majority-owned subsidiaries are predominantly engaged in the manufacturing and distribution of uncoated and coated BONTEX(R) elastomeric fiberboard products. The Company operates manufacturing facilities at Bontex USA in North America and Bontex S.A. in Belgium. BONTEX(R) products are primarily used as an insole material in footwear, as well as visorboard in headwear, stiffener and laminating base for luggage, leathergoods and allied industries globally. Information related to net sales by geographic area follows:
North America Asia/Pacific Europe/Middle East Latin America Total 2000 $ 6,731 $ 16,366 $ 14,264 $ 2,094 $ 39,455 1999 7,086 15,301 15,315 1,623 39,325 1998 7,790 18,115 16,473 1,105 43,483
No single customer accounts for 10 percent or more of the Company's consolidated net sales for 2000, 1999 and 1998. One distributor accounted for 19.2 percent in 2000, 15.2 percent in 1999 and 10.8 percent in 1998 of the Company's consolidated net sales. Information related to the North American and European operations follows:
North American European Operations Operations Eliminations Consolidated 2000: Total assets $ 16,046 $ 16,904 $ 2,065 $ 30,885 Net loss (508) (151) - (659) Operating income (loss) (733) 1,297 - 564 Net sales 16,861 22,990 (396) 39,455 Interest expense 372 462 - 834 Depreciation and amortization 815 507 - 1,322 Income tax expense (benefit) (151) 486 - 335 Total expenditures for additions to property, plant and equipment 381 473 - 854
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1999: Total assets $ 14,817 $ 18,345 $ (1,998) $ 31,164 Net income (loss) (829) 51 - (778) Operating income (loss) (1,327) 1,276 - (51) Net sales 15,661 23,954 (290) 39,325 Interest expense 308 615 - 923 Depreciation and amortization 794 578 - 1,372 Income tax expense (benefit) (402) 194 - (208) Total expenditures for additions to property, plant and equipment 389 678 - 1,067 1998: Total assets $ 16,550 $ 17,961 $ (1,998) $ 32,513 Net income (loss) (789) 343 - (446) Operating income (loss) (1,524) 2,024 - 500 Net sales 18,382 25,560 (459) 43,483 Interest expense 286 770 - 1,056 Depreciation and amortization 763 509 - 1,272 Income tax expense (benefit) (444) 307 - (137) Total expenditures for additions to property, plant and equipment 1,175 1,159 - 2,334
Retained earnings of foreign operations not available for distribution amounted to approximately $757 and $763 at June 30, 2000 and 1999, respectively. [4] LONG-TERM DEBT AND FINANCING AGREEMENTS The following long-term debt was outstanding as of June 30, 2000 and 1999:
2000 1999 10.5%(prime rate plus 1%) loan payable to a United States bank in monthly installments of $17 through January 2005; collateralized by property and equipment located in the U.S. and subject to various loan covenants. $ 917 $ - 8.50%loan payable to a United States bank in quarterly installments of $80 through July 2001; collateralized by accounts receivable, inventory and other noncurrent assets in the U.S. and subject to various loan covenants. Refinanced January 2000. - 720 4.70% loan payable to a Belgian bank in quarterly installments of $8 through June 2005. 166 215 4.70% loan payable to a Belgian bank in quarterly installments of $15 through June 2005. 296 384 5.20% loan payable to a Belgian bank in quarterly installments of $30 through June 2005. 592 768 5.50% loan payable to a Belgian bank in quarterly installments of $7 through June 2005. 148 192
17
5.85% loan payable to a Belgian bank in quarterly installments of $23 through June 2005. $ 455 $ 591 3.95% loan payable to a Belgian bank in quarterly installments of $24 through April 2004. 379 512 ------------ -------------- 2,953 3,382 Less long-term debt due currently 626 781 ------------ -------------- Long-term debt $ 2,327 $ 2,601 ============ ==============
The principal payments of long-term debt are as follows: 2001 $ 626 2002 625 2003 625 2004 624 2005 453 ---------- Total $ 2,953 ========== The loans payable to a Belgian bank are collateralized with a mortgage on Bontex S.A.'s buildings and the right to request a second mortgage on the buildings. European operations have short-term credit facilities totaling approximately $7,186 and $8,633 at June 30, 2000 and 1999, respectively. As of June 30, borrowings under these facilities were as follows:
2000 1999 Short-term bank loans with variable interest rates, ranging from 4.77% to 7.45% at June 30, 2000 $ 5,100 $ 6,642 Overdrafts - 2 -------- --------- $ 5,100 $ 6,644 ======== =========
18 Three banks in Belgium share a security interest in most of the assets of Bontex S.A. for 37.5 percent of the credit facilities granted, and the right to request additional security interest of another 37.5 percent of the credit facilities granted. As of June 30, 2000 and 1999 one of the banks under these facilities had the right to request a security interest up to $1,184 and $1,280, respectively. Bontex S.A. committed to one of the banks to maintain certain covenants which were met at June 30, 2000. Bontex USA has a line of credit arrangement whereby Bontex USA may borrow up to $4,000, based on the value of certain assets, at prime plus 1.00 percent (10.5 percent at June 30, 2000). At June 30, 2000, Bontex USA had borrowings of $3,151 outstanding under this line of credit. The secured line of credit is collateralized by trade accounts receivable, inventory and other noncurrent assets. At June 30, 1999, Bontex USA had a line of credit arrangement whereby Bontex USA could borrow up to $ 2,750 at prime plus 1.25 percent (9.0 percent at June 30, 1999). At June 30, 1999, Bontex USA had borrowings of $2,750 outstanding under this line of credit. Consolidated weighted average interest rates on short-term borrowings at June 30, 2000 and 1999 are 6.9 and 6.0 percent, respectively. During 2000 and 1999, Bontex USA was subject to various loan covenants under its secured debt agreements and has pledged certain current and noncurrent assets as collateral. Bontex USA was in compliance with the applicable covenants at June 30, 2000 and 1999. In January 2000, Bontex USA refinanced its previous long and short-term debt with a new secured debt agreement. [5] INCOME TAXES The U.S. and foreign components of income tax expense (benefit) are as follows:
Current Deferred Total 2000: Federal $ - $ (136) $ (136) State - (15) (15) Foreign 489 (3) 486 ----------- ----------- ---------- $ 489 $ (154) $ 335 =========== =========== ========== 1999: Federal $ (151) $ (210) $ (361) State (17) (24) (41) Foreign 151 43 194 ----------- ----------- ---------- $ (17) $ (191) $ (208) =========== =========== ========== 1998: Federal $ (72) $ (334) $ (406) State (18) (41) (59) Foreign 224 104 328 ----------- ----------- ---------- $ 134 $ (271) $ (137) =========== =========== ==========
19 Income tax expense (benefit) differs from the expected tax expense (benefit), computed by applying the U.S. Federal corporate rate to loss before income taxes, as follows:
2000 1999 1998 Federal income tax at statutory rate (34%) $ (110) $ (334) $ (198) Increase (reduction) in income taxes resulting from: Foreign income at other than U.S. rates 82 25 33 State and local taxes, net of federal income tax benefit (10) (27) (27) Accrual for tax examination 239 - - Other differences, net 134 128 55 ---------- --------- ---------- Income tax expense (benefit) $ 335 $ (208) $ (137) ========== ========= ==========
During fiscal year 2000, the Ministere Des Finances, the Belgian tax authority, completed an examination of Bontex S.A.'s, the Company's Belgian subsidiary, tax returns for 1997, 1998 and 1999 and extended the tax examination to 1995 and 1996 based on certain items. Bontex S.A. has received notices of proposed tax adjustments to these tax returns. The proposed tax adjustments arise from items which are considered disallowed expenses by tax authorities, including commissions paid to certain distributors and clients, certain travel expenses and various smaller items including allowances for doubtful receivables and certain insurance premiums. The proposed tax adjustments by the Belgian authorities approximate $820,000. The Company believes, based in part on written opinion of external counsel, it has meritorious legal defenses to many of the claims and the Company intends to defend such claims. The Company's best estimate of the most likely amount payable for the foregoing tax matters is $239,000, and accordingly, a provision for this amount has been accrued at June 30, 2000. Similar deductions relating to the year ended June 30, 2000 that in light of the current information may be disallowed have been treated as disallowed expenses in the calculation of the current year's tax provision. The components of deferred tax assets and liabilities at June 30, 2000 and 1999 are presented below:
2000 1999 Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 15 $ 10 Inventories, principally due to additional costs capitalized for tax purposes 101 95 Other assets, due to difference in amortization of trademarks 170 161 Accrued pension and retirement benefits 117 119 Net operating loss carryforwards 1,263 1,077 Alternative minimum tax credit carryforwards 36 36 Other 81 90 --------- ---------- Total gross deferred tax assets 1,783 1,588 --------- ---------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capital gain recognition (942) (900) Other (12) (13) --------- ---------- Total gross deferred tax liabilities (954) (913) --------- ---------- Net deferred tax assets $ 829 $ 675 ========= ==========
20 The U.S. and foreign components of the net deferred tax asset at June 30, 2000 and 1999 are presented below:
Current Noncurrent Total 2000: U.S. Operations $ 103 $ 736 $ 839 European Operations 32 (42) (10) ---------- -------------- ----------- $ 135 $ 694 $ 829 ========== ============== =========== 1999: U.S. Operations $ 92 $ 599 $ 691 European Operations 32 (48) (16) ---------- -------------- ----------- $ 124 $ 551 $ 675 ========== ============== ===========
At June 30, 2000, in addition to an alternative minimum tax credit carryforward of $36 at Bontex USA, the Company had approximately $3,473 at Bontex USA in net operating loss carryforwards to offset future taxable income, of which $258, $361, $851, $1,491 and $512 at Bontex USA expire in 2010, 2011, 2013, 2019 and 2020, respectively. At June 30, 2000, the Company has not recognized a deferred tax liability of $106 for the cumulative amount of undistributed income of its foreign subsidiaries, because there are no plans to pay dividends in the foreseeable future. As of June 30, 2000, undistributed income of the foreign subsidiaries was approximately $2,122, of which approximately $757 is not available for distribution. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the level of historical taxable income, anticipation of future taxable income over the periods which the deferred tax assets are deductible, reversal of the temporary differences and available tax planning strategies, management believes it is more likely than not the Company will realize these deferred tax assets. [6] RETIREMENT AND COMPENSATION PLANS The Company has pension plans covering substantially all full-time domestic employees and certain foreign employees. The benefits from the Company's domestic contributory defined benefit plan are based upon years of service and the employee's average earnings for the five highest consecutive years of compensation during the ten years immediately preceding retirement. Participant contributions to the plan were 3.5 percent of employee annual earnings for fiscal years ending June 30, 2000, 1999 and 1998. The Company's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, and any such additional amounts as the Company may determine to be appropriate from time to time. Annual provisions for accrued pension costs are based on independent actuarial valuations. 21 The Plan's change in benefit obligation, change in plan assets, funded status and amounts recognized in the Company's consolidated financial statements at June 30 for its United States pension plan are as follows:
2000 1999 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits (2000, $4,436 and 1999, $4,289) $ 4,491 $ 4,351 ========== ========== Change in Benefit Obligation: Benefit obligation at beginning of year $ 5,240 $ 5,582 Service cost 111 110 Interest cost 381 384 Plan participants' contributions 68 83 Actuarial (gain) loss (91) (476) Benefits paid (438) (443) ---------- ---------- Benefit obligation at end of year $ 5,271 $ 5,240 ========== ========== Change in Plan Assets: Fair value of plan assets at beginning of year $ 5,710 $ 5,553 Actual return on plan assets 89 517 Plan participants' contributions 68 83 Benefits paid (438) (443) ---------- ---------- Fair value of plan assets at end of year $ 5,429 $ 5,710 ========== ========== Funded status $ 158 $ 470 Unrecognized net actuarial loss (533) (847) Unrecognized prior service cost 118 132 Unrecognized transition obligation (65) (82) ---------- ---------- Accrued benefit costs $ (322) $ (327) ========== ==========
The Company's net periodic benefit costs for its United States pension plan for the years ended June 30, 2000, 1999 and 1998 include the following components:
2000 1999 1998 Service cost $ 179 $ 193 $ 182 Interest cost 381 384 397 Expected return on plan assets (496) (517) (766) Net amortization and deferral (29) (20) 330 ----------- ----------- ----------- Net periodic benefit cost $ 35 $ 40 $ 143 =========== =========== ===========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.75 percent for 2000, 1999 and 1998. The rate of increase for future compensation levels used in determining the obligation was 5.0 percent for 2000, 1999, and 1998. The expected long-term rate of return on plan assets in 2000, 1999 and 1998 was 9.0 percent. Pension assets are held under a group annuity contract with an insurance company. Certain amounts are commingled with the general assets of the insurance company and the remainder is invested in separate accounts, managed by the insurance company, which include domestic equity, domestic government, corporate and private placement bonds and domestic real estate equity. The pension expense relating to the foreign subsidiary's insured pension and disability plan amounted to $96, $62, and $45 in 2000, 1999 and 1998, respectively. Benefits are based on years of service and the average of the last five years annual earnings. 22 The Company provides a tax deferred compensation benefit plan for certain executives. The plan allows the employee to defer up to four percent of his compensation with a Company match of up to one percent of compensation. The Company's contribution funds life insurance policies on each executive, with the Company as owner and beneficiary. The Company's expense for the plan in 2000, 1999 and 1998 was $3, $4, and $6, respectively. The Company provides certain supplemental retirement benefits to the President of the Company. Expenses related to these benefits were approximately $49 in 1999 and $112 in 1998. There was no expense for 2000. The agreement contains a change in control provision that would accelerate the payment of these benefits. The maximum liability under this agreement, in such event, would be approximately $226. The Company has granted stock options to certain key executives to purchase shares of the Company's common stock. These options generally vest in six months or less and expire 10 years from the grant date. Additional information with respect to stock option activity is as follows:
Number Weighted Average Of Shares Exercise Price Outstanding at June 30, 1998 - $ - Granted 112,000 4.90 -------------- Outstanding at June 30, 1999 112,000 4.90 Granted 59,997 2.00 Cancelled (60,000) 4.90 -------------- Outstanding at June 30, 2000 111,997 3.35 ============== Options exercisable at June 30, 1999 112,000 4.90 ============== Options exercisable at June 30, 2000 52,000 4.90 ==============
The following table summarizes information about stock options outstanding and exercisable at June 30, 2000:
Stock Options Outstanding Weighted Average Range of Number of Remaining Weighted Exercise Options Contractual Average Prices Outstanding Life in Years Exercise Price $ 2.00 - $5.63 111,997 8.75 $ 3.35
Stock Options Exercisable Range of Number of Weighted Exercise Shares Average Prices Exercisable Exercise Price $4.50 - $5.63 52,000 $ 4.90
The Company applies APB Opinion No. 25 in accounting for its stock-based compensation and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had compensation cost for the stock options been determined consistent with SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts shown below:
2000 1999 Net Loss: As reported $ 659 $ 778 Pro forma $ 709 $ 826 Net Loss Per Share: As Reported $ .42 $ .49 Pro forma $ .46 $ .52
23 The weighted average fair value of stock options granted during 2000 and 1999 was $1.29 and $.67 per share, respectively. These amounts were determined using the Black-Scholes option-pricing model. The assumptions used in the model were as follows for stock options granted in 2000 and 1999:
2000 1999 Risk-free interest rate 6.30% 5.93% Expected volatility of common stock 55.3% 44.5% Dividend yield - - Expected life of options 10 8 to 8.8 years
[7] FINANCIAL INSTRUMENTS The Company uses various financial instruments in the normal course of business. By their nature, all such instruments involve risk, and the Company's maximum potential loss may exceed amounts recorded in the balance sheet. As is customary for these types of instruments, the Company does not require collateral or other security from other parties to these instruments. However, because the Company manages exposure to credit risk through credit approvals, credit limits and monitoring procedures, the Company believes that reserves for losses are adequate. The Company has periodically used derivative instruments for the purpose of hedging commodity and interest rate exposures. As a policy, the Company does not engage in speculative transactions, nor does the Company hold or issue financial instruments for trading purposes. Interest Rate Swaps - At June 30, 2000, the Company had no outstanding interest rate swap agreements. At June 30, 1999, the Company had one outstanding interest rate swap agreement with a bank having a notional amount of $1,000, which terminated January 20, 2000. This swap agreement provided for the payment of interest based on a fixed rate of 6.35 percent, and remained unchanged over the term of the agreement. The floating rate of the swap agreement was based on the London Inter Bank Offered Rate (LIBOR) and was reset every 90 days based on market conditions. The nature of the swap agreement changed variable rate debt to fixed rate debt. The interest rate differential paid or received under a swap is recognized over the term of the contract as adjustments are made to the effective yield of the underlying debt. An interest premium of $6, $44, and $41 was paid during 2000, 1999, and 1998, respectively. The contract or notional amounts and estimated fair value of the Company's interest rate swaps at June 30, 2000 and 1999 are as follows:
2000 1999 Contract or Notional Estimated Contract or Notional Estimated Amount Fair Value Amount Fair Value Interest rate swap $ - $ - $ 1,000 $ (8)
As of June 30, 2000, approximately $9.2 million of variable rate debt is not covered by interest rate swaps and is therefore subject to market risk of rate changes. Commodities - During the first quarter of fiscal year 1998, the Company began on a limited basis to manage its exposure to pulp price changes with pulp futures. In accordance with hedge accounting, gains or losses are recorded as a component of the underlying purchase, since these contracts effectively meet the risk reduction and correlation criteria. Gains or losses on hedges that are terminated prior to the execution of the inventory purchase are recorded in inventory until the inventory is sold. During fiscal years 2000 and 1999, the Company did not hold any related derivatives for pulp futures. Fair Value of Financial Instruments - The following assumptions were used by the Company to estimate the fair value of its financial instruments: The carrying amounts reported in the balance sheets for cash, cash equivalents, trade accounts receivable, other receivables, short-term borrowings, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments. The fair value of long-term debt is estimated using discounted cash flows based on the Company's incremental borrowing rates, and approximates $2,695 at June 30, 2000. Unrealized gains or losses on the fair value of interest rate swap agreements are estimated based on current interest rates. 24 [8] COMMITMENTS AND CONTINGENCIES Regulatory and Environmental Matters - As with other related manufacturers, the Company is subject to regulations by various federal, state, foreign and local agencies concerning compliance with environmental control statutes. These regulations impose limitations on the use of chemicals in manufacturing processes and discharge of effluent and emissions into the environment, and establish standards for solid and hazardous waste disposal, treatment, and storage, as well as require the Company to obtain and operate in compliance with the conditions of environmental permit. The Company believes that it is in substantial compliance with such existing domestic and foreign environmental statues and regulations. Failure to comply with applicable environmental control standards could result in interruption of operations or could require additional expenditures at these facilities. In recent years, various agencies have increased their screening and testing the effects of chemicals or mixtures, including those that occur naturally. The Company's product formulations, in some instances, may include compounds that are or will be subject to these tests. The Company continually devotes significant resources to improve product formulation for, among other things, comfort, health, cost, quality and other performance features. The Company has made and intends to continue to make capital investments, operating expenditures, and production adjustments in connection with compliance with environmental laws and regulations. Since the Company is essentially comprised of two fiberboard plants, Bontex USA and Bontex S.A., water quality discharge remains the primary environmental concern. Both plants are operating new waste water treatment facilities, which the Company believes to be operating within compliance of applicable environmental requirements. The actual costs of future environmental compliance may differ from projected costs due to, among other things, continued emergence of newer environmental laws and regulations and improving efficiencies in environmental control or process technology developments. Litigation - In the normal course of business, the Company is subject to proceedings, lawsuits and other claims which are subject to many uncertainties, for which their outcomes are not predictable with assurance. There are no legal proceedings, lawsuits or other claims pending, other than those discussed in note 5, against or involving the Company that, in the opinion of management, will have a material adverse impact upon the financial condition of the Company. Purchase Commitments - In connection with purchasing certain commodities (pulps and latex) for future manufacturing requirements, the Company enters into a number of purchase commitments, as deemed appropriate, to manage the effects of market price fluctuations and to secure adequate raw material supplies. These purchase commitments have limited terms and the Company expects future sales will be sufficient to meet these requirements. Refer to Note 7 of the Notes to Consolidated Financial Statements for further details regarding commodities. EURO Currency Conversion - On January 1, 1999, the EURO became the official currency of the Economic and Monetary Union (EMU). Accordingly, the EURO had a significant affect on the Company's operations, as approximately 25 percent of the Company's consolidated sales are to customers located in the Europe Union. Additionally, a large portion of the Company's manufacturing and marketing operations are based in Belgium and Italy. The Company has implemented a change over plan which convert, among other things, pricing, financial reporting, banking facilities, financing, currency hedging, and information systems. Leases - Rental expenses for all operating leases amounted to $106, $117 and $127 in 2000, 1999 and 1998, respectively. The Company anticipates future rental expenses for operating leases to approximate $130 each year for the next five years. 25 INDEPENDENT AUDITORS' REPORT KPMG LLP [logo] 10 S. Jefferson Street, Suite 1710 Roanoke, VA 24011-1331 The Board of Directors and Stockholders of Bontex, Inc.: We have audited the accompanying consolidated balance sheets of Bontex, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of income (loss) and comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bontex, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP August 25, 2000
- ---------------------------------------------------- DIRECTORS, EXECUTIVES & OFFICERS - ---------------------------------------------------- James C. Kostelni + Chairman of the Board, President, Chief Executive Officer and Director William J. Binnie +* Director Michael J. Breton Director of International Operations William B. D'Surney Director David A. Dugan Controller and Assistant Corporate Secretary Charles W. J. Kostelni Senior Vice President, Corporate Controller, Corporate Secretary and Director Jeffrey C. Kostelni Senior Vice President, Treasurer, Chief Financial Officer and Director Frank B. Mayorshi +* Director Larry E. Morris Technical Sales Director and Director Dr. Joseph F. Raffetto Director Patricia S. Tischio Director Robert J. Weeks +* Director +Member of Executive Committee *Member of Audit Committee - ---------------------------------------------------- COUNSEL - ---------------------------------------------------- Woods, Rogers & Hazlegrove, P.L.C. Attorneys at Law Roanoke, Virginia - ---------------------------------------------------- INDEPENDENT AUDITORS - ---------------------------------------------------- KPMG LLP Certified Public Accountants Roanoke, Virginia - ---------------------------------------------------- TRANSFER AGENT - ---------------------------------------------------- Registrar & Transfer Company Cranford, New Jersey
- ------------------------------------------------------- ----------------------------------------------------- LOCATIONS STOCKHOLDERS' INFORMATION - ------------------------------------------------------- ----------------------------------------------------- World Headquarters and North American Annual Meeting Manufacturing 10:30 a.m. November 2, 2000 Bontex, Inc. Best Western Inn at Hunt Ridge One Bontex Drive Willow Springs Drive Buena Vista, Virginia 24416-1500 U.S.A. Lexington, Virginia 24450 800-733-4234 / 540-261-2181 E-mail: bontex@bontex.com Website: http://www.bontex.com European Headquarters and Manufacturing Independent Auditors Bontex S. A. KPMG LLP Rue Slar 10 S. Jefferson Street, Suite 1710 4801 Stembert, Belgium Roanoke, Virginia 24011-1331 E-mail: bontexsa@mail.att.net Website: http://www.bontex.be Sales and Distribution Centers Registrar and Transfer Agent Bontex Italia s.r.l. Registrar and Transfer Company Via Francia 10 Commerce Drive 37069 Villafranca (Verona) Post Office Box 1010 Italy Cranford, New Jersey 07106 Bontex De Mexico, S. A. De C. V. Form 10-K Boulevard Mariano Excobedo #801 Interior 2 A copy of the Company's 10-K filed with the Colonia Andrade, C. P. 37370 Securities and Exchange Commission is Leon, Guanajuato available without charge to any stockholder. Mexico Requests should be sent to the attention of: Bontex Hong Kong Corporate Controller 301 International Trade Centre Bontex, Inc. 11 Sha Tsui Road, Tsuen Wan One Bontex Drive Hong Kong Buena Vista, Virginia 24416-1500 Bontex Vietnam Floor 2, Room 204, 99 Pasteur St. Dist.1, HCMC Vietnam International Liaison Offices Bontex logo Bontex Australia 20 Munro Street The Bontex(R) logo is a registered trademark of Macleod VIC 3085 Bontex, Inc. Australia Bontex, Inc. is an equal opportunity employer. Bontex Korea Rm. 601, Songnam Bldg. Accepted by the American Podiatric Medical 76-1, 4Ga, Chung Angdong Association (LOGO) Chung-Gu, Busan, 600-014, Korea Bontex Taiwan BS EN ISO 9001 Registered Company SATRA 8FL., No. 52, Sec. 2 (Logo) Chung Shan N. Rd. National Accreditation of Certification Bodies Taipei, 10419, Taiwan (Logo) North American Warehouse Facilities SATRA - Footwear Technology Centre (Logo) Paterson, New Jersey St. Louis, Missouri Cambridge, Ontario, Canada Montreal, Quebec, Canada (RECYCLE LOGO) Recycled Paper
[BACK COVER] [Bontex Logo] BONTEX [R] One Bontex Drive, Buena Vista, Virginia 24416-1500 Telephone: 540-261-2181 Fax: 540-261-3784 e-mail: bontex@bontex.com http://www.bontex.com Manufactured by: BONTEX [R] Buena Vista, VA BONTEX S.A., Stembert, Belgium Distributed and Converted by: BONTEX [R] Italia S.R.L., Villafranca, Verona, Italy. BONTEX [R] de Mexico, Leon, Mexico, BONTEX [R] Hong Kong -----END PRIVACY-ENHANCED MESSAGE-----