0000906504-01-500027.txt : 20011009 0000906504-01-500027.hdr.sgml : 20011009 ACCESSION NUMBER: 0000906504-01-500027 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BONTEX INC CENTRAL INDEX KEY: 0000041052 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 221427551 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05200 FILM NUMBER: 1747793 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 10-K405 1 btx10k.txt FORM 10-K FOR BONTEX, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year Commission File ended June 30, 2001 Number 0-5200 BONTEX, INC. Exact name of Registrant as specified in its charter VIRGINIA 54-0571303 State of Incorporation IRS Employer No. ONE BONTEX DRIVE, BUENA VISTA, VIRGINIA 24416-1500 Address of principal executive offices Zip Code Registrant's telephone number (540) 261-2181 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class $.10 par value common stock Indicate by check mark whether the Registrant (1) has filed all annual, quarterly and other reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months with the Commission, and (2) has been subject to the filing requirements for at least the past 90 days: ( x ) Yes ( ) No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (X) Aggregated market value of the voting stock held by non-affiliates of the Registrant: $1.3 million at August 30, 2001 On August 30, 2001, the Registrant had 1,572,824 shares of $.10 par value common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: (1) Portions of the Registrant's Annual Report to Stockholders for fiscal year ended June 30, 2001 (the "Annual Report") are incorporated by reference into Parts I and II hereof. (2) Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934 (the "Proxy Statement") are incorporated by reference into Part III hereof. TABLE OF CONTENTS PART I ITEM PAGE 1. Business............................................................3 2. Properties..........................................................9 3. Legal Proceedings...................................................9 4. Submission of Matters to a Vote of Security Holders.................10 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters...........................................................11 6. Selected Financial Data.............................................11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................12 7A. Quantitative and Qualitative Disclosures About Market Risk..........12 8. Financial Statements and Supplementary Data.........................12 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................12 PART III 10. Directors and Executive Officers of the Registrant..................12 11. Executive Compensation..............................................13 12. Security Ownership of Certain Beneficial Owners and Management......13 13. Certain Relationships and Related Transactions......................13 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....13 2 PART I ITEM 1. BUSINESS On January 2, 1997, the Company completed a plan which changed, among several items, its name to Bontex, Inc. from Georgia Bonded Fibers, Inc. For further information, see General Business below. 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, without limitation, statements about financing plans, cash flows, availability of capital, growth opportunities, benefits from new technologies, financial condition, capital expenditures, future results of operations or market conditions and involve certain risks, uncertainties and assumptions. The words "estimate," "project," "intend," "expect," "believe," and similar expressions are intended to identify forward-looking statements. These and other forward-looking statements are found at various places throughout this report, and you are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements should, therefore, be considered in light of various relevant factors. 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 U.S. 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 price of Bontex's products due to foreign currency devaluations, increased pulp and latex prices, capital illiquidity, unexpected foreign tax liabilities, the impact of any unusual items resulting from ongoing evaluations of the Company's business strategies, decreases in the Company's borrowing base, trading of Bontex common stock at a level where closing bid prices are too low to remain listed on the Nasdaq SmallCap Market, increased funding requirements for the Company's pension plan, inability to recover deferred tax assets, an inability by Bontex to renew its current credit facilities or obtain alternative financing, a market shift in demand from higher-quality products to more economical grade products with lower profit margins, higher energy prices, and increased costs of complying with environmental laws, and the impact of changes in political, economic or other factors, legal and regulatory changes or other external factors over which the Company has no control. GENERAL BUSINESS Bontex, Inc. (all references hereinafter to the "Registrant," "Company" or "Bontex" refer collectively to Bontex, Inc. and its wholly-owned and majority-owned subsidiaries unless otherwise indicated by context) was incorporated in June 1946 under the laws of the State of New Jersey. The Company originally began as a leather processing operation, and today, Bontex is a leading worldwide manufacturer and distributor of uncoated and coated elastomeric wet web impregnated fiberboard products. The Company's products are generally described by the trademark BONTEX, and are marketed to various industries, including footwear, headwear, luggage, leathergoods, allied industries, belt backing, gasketing, furniture, electronic integrated component packaging, and automotive industries. Bontex is a market leader in many of the areas in which the Company competes. On January 2, 1997, the Company received the final state regulatory approvals of its proposal, which was adopted by the Company's stockholders at the Annual Meeting of Stockholders held on November 7, 1996, to change the state of incorporation of the Company to Virginia and effect Amended and Restated Articles of Incorporation. As a result of the restructuring, the Company was reincorporated as a Virginia corporation, with its principal place of business at One Bontex Drive, Buena Vista, Virginia 24416-1500, and the name of the Company was changed to "Bontex, Inc." The Company's common stock is traded on the Nasdaq SmallCap Market under the symbol "BOTX." The restructuring did not result in any material change in the business, management, assets, liabilities, or net worth of the Company. For further information, refer to Report on Form 8-K, Reorganization of 3 Georgia Bonded Fibers, Inc., dated January 2, 1997, and Proxy Statement for meeting of Annual Meeting of Stockholders held on November 7, 1996. Competitive pricing pressures have had a large negative impact on the Company's sales and profitability as noted in Management's Discussion and Analysis incorporated by reference in Part II, Item 7 of this report. Sales have also been negatively affected by, among other things, the shift in domestic footwear production primarily to Asia. Nonwoven materials, however, continue to erode sales of cellulose based products, particularly with athletic footwear. Bontex is placing greater emphasis on the marketing of nonwoven products, and working to develop new domestic and export markets for impregnated cellulose products in an effort to increase sales. Management also recognizes the need to further diversify it's product line and Bontex has embarked on an aggressive plan to accomplish this in the near term. ORGANIZATION The Company maintains corporate headquarters, manufacturing, converting, sales office, and a warehouse facility in Buena Vista, Virginia; a wholly-owned manufacturing subsidiary, Bontex S.A. in Stembert, Belgium; a wholly-owned distribution and converting subsidiary, Bontex Italia S.r.l. in Villafranca, Verona, Italy; a wholly- owned distribution subsidiary, Bontex de Mexico, S.A. de C.V. in Leon, Mexico; Bontex Vietnam (Representative office); and a majority owned distribution subsidiary, Bontex Hong Kong Limited in Hong Kong. See the discussion under "Item 2. Properties" below. The Company utilizes a wholly-owned foreign sales corporation (FSC) organized and existing under the laws of the Virgin Islands to facilitate export sales. The U.S. government is working with the World Trade Organization and European Community regarding the application of foreign sales corporations, and at a later date, the Company may have to change its tax strategies for export sales. The situation with our FSC is not expected to have significant impact on the Company's operations. Additionally, Bontex maintains a network of liaison offices, Bontex Korea, Bontex Taiwan, Bontex China, Bontex Indonesia, Bontex Philippines, and Bontex Australia to service Asian markets. The Company currently employs 81 full-time and 2 part-time employees in Buena Vista, Virginia; 76 full- time and 2 part-time employees in Belgium; 12 full-time and 1 part-time employee in Italy; 3 full-time and 1 part- time employees in Mexico and 2 full-time employees in Hong Kong. Revenue per employee was approximately $237,000 and $220,000 in fiscal years 2001 and 2000, respectively. There is no labor union at the United States operations, and management knows of no union activity at the present time. There are labor unions at the Company's European operations. Although the Company believes that relations with its employees are positive, there can be no assurance that the Company will not experience work stoppages in the future. PRODUCTS BONTEX elastomeric wet web fiberboard materials are 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 fiberboard products are designed to be "environmentally-friendly," because Bontex uses recycled and primary cellulose fibers originally derived from trees, a renewable resource. Bontex has the American Podiatric Medical Association (APMA) Seal of Acceptance for BONTEX elastomeric wet web products, BONFOAM, SUREFOAM, and MAXXON, cushion insole materials. BONFOAM, SUREFOAM, and MAXXON trademarks are the sole property of the Registrant. The podiatric seal of acceptance is granted after stringent clinical and laboratory tests have been carried out on approved products which demonstrate conformity to APMA guidelines, and assist in foot health and comfort. The APMA Seal of Acceptance for approved BONTEX products should enhance product acceptance in the marketplace. Bontex has the SATRA Quality mark and laboratory accreditation at its Belgium facility. 4 Bontex USA manufactures uncoated and coated BONTEX fiberboard products; breathable (moisture vapor transmission) cushion foams, that are marketed under trademarks BON-FOAM, MAXXON and SURE-FOAM, and are sold in a variety of grades for use as shock absorbing insole material; BONTEX 200 RECYCLED and BONTEX 300 RECYCLED, which are produced from 100 percent recovered paper with a minimum 80 percent "post-consumer waste" for use in footwear, visorboard in headwear, a backing substrate, stiffener pieces and laminating base; BON-PEL, a hybrid nonwoven substrate, which is exceptionally strong and flexible; BONTEX 48 MA, an uncoated visorboard for use in military headwear, which has been approved by NATICK military laboratory. Bontex USA also combines certain products, such as foams, fabrics, and vinyls, with BONTEX fiberboard. Additionally, Bontex USA is the exclusive distributor globally to the footwear industry of an expanded polyurethane material manufactured by Aero E.A.R. Specialty Composites, under the trademarks MAXXON LS and CONFOR. MAXXON LS and CONFOR have moisture vapor transmission characteristics and are used for sock-linings and cushion insoles in various types of footwear. CONFOR is a trademark of E.A.R. Specialty Composites. Bontex also markets a range of nonwoven products under the name Bon-stitch. During 1999 and 2000, Bontex introduced a broad range of footwear materials, including Bontex 90 Insole Seatboard, economical insole products, and Bon-Stitch linings and Bon-Stitch next generation nonwoven insoles. Sales of these new products showed promise, and the Company plans to introduce additional new products. Bontex S.A., Stembert, Belgium, manufactures uncoated BONTEX products. Bontex Italia, S.r.l. is a distribution company and operates converting equipment primarily servicing the Italian market. The Company's research efforts are directed primarily toward developing new products and processing techniques, and improving product performance, often in close association with customers. The Company customizes many composite products with BONTEX fiberboard, foam and nonwoven products. These products have increased sales of combination packages, primarily designed to take advantage of the current increased emphasis on comfort in footwear products. Bontex has completed implementation of the International Organization for Standardization quality assurance system ISO 9001 at both the United States and Belgium manufacturing facilities. Bontex SA was certified ISO 9001 during 1996, and Bontex USA during 1997. The impact of ISO 9001 on sales is anticipated to be minimal; however, management regards ISO 9001 qualification as important to maintaining a competitive edge in quality globally. COMPETITION The industry in which the Company operates is highly competitive. Participants in the industry compete through quality and price, including the ability to control costs, risk management, innovation, delivery and customer service. Presently, it is management's opinion that the Company offers superior product quality and customer service in major markets globally. Globally, there is one other primary competitor, but regionally, there are more than twenty five cellulose insole manufacturers with which Bontex competes. In the United States, there is one other manufacturer of BONTEX type material. There are, however, other materials which may be substituted for the same applications. The Company estimates that during fiscal year 2001, its products were in approximately 45 percent of non-rubber footwear manufactured in the United States. This estimate is based on Footwear Industries of America (FIA) data as to total sales. There are manufacturers who purchase BONTEX type materials for coating, laminating, and converting into innersoles for footwear, visors for headwear, and dielectric sealing base in automotive door panels. There is more competition in these segments, and no comparative market statistics are available. In Europe, there are six major manufacturers of material similar to BONTEX. These competitors are located in Germany, Italy, Finland, Slovenia, and the former USSR. The Company estimates that it sells approximately 40 percent of the BONTEX type materials sold in the European Union. These estimates are based on SATRA Common Market statistics as to total sales, and other generally available industry information. 5 There are a number of manufacturers of elastomeric fiberboard materials in Asia; however, there are an estimated fourteen competitors operating in the Peoples Republic of China, which negatively impacts selling prices. There are duties, currency, employment and environmental regulations that adversely impact the Company's sales position. For example, many Asian suppliers do not have to maintain as high environmental and employment regulations as Bontex in USA and employment in Belgium. As there are many customers globally who purchase BONTEX and convert it into innersoles and other application components, the actual total worldwide market penetration is difficult to estimate. However, Bontex has a strong market position globally as supported by Bontex supplying most of the world's leading branded footwear. TRADEMARKS Bontex utilizes trademarks on nearly all of its products, and believes having such distinctive trademarks that are readily identifiable is an important factor in creating and maintaining a market for its goods and services. This further serves to identify the Company and distinguish its goods from goods of others. The Company considers its BONTEX trademark and other trademarks to be among its most valuable assets, and has registered its trademarks in over 70 countries. Bontex continues to vigorously protect its trademarks against infringement. The Company's operations are not dependent to any significant extent upon any single or related group of patents, licenses or concessions. PRODUCTION AND SALES Refer to Note 3 of Notes to the Consolidated Financial Statements in the Company's Annual Report wherein information is provided regarding foreign and domestic operations and export sales for the last three fiscal years. Such information is incorporated in Part II, Item 8 of this report by reference. Historically, Bontex has had a significant global presence, and one of its major strategic objectives is to continue to expand this presence. The Company's sales are diversified with one of the largest customer bases in the industry we serve, as well as numerous geographic regions. Asia, where an estimated 70 percent of global shoe production occurs, is the largest market for Bontex products. The Company offers a wide range of elastomeric products for use in a variety of applications. However, the majority of the Company's sales are to the footwear industry. The Company intends to continue its strategy of developing and broadening non-footwear sales. Credit terms offered by the Company to meet competition have been longer than terms normally available to the Company from its vendors. Some seasonality exists in that the second half of each fiscal year is usually more productive and consequently more profitable than the first half. This seasonality is largely because of customers' buying cycles with scheduled vacations, shutdowns and holidays, which normally occur during the first half of each fiscal year. Substantially all export sales are denominated in US dollars, negotiated letters of credit and sight drafts, and are covered by foreign credit insurance. During the past three years, no single customer accounted for 10 percent or more of the Company's consolidated net sales. Foreign operations, principally in Belgium and Italy, constitute a significant portion of the Company's business. Production of BONTEX elastromeric fiberboard products is allocated between the United States and Belgium manufacturing facilities based on such factors as availability of capacity, production efficiencies, logistical considerations, and foreign currency exchange rates. The Company is currently operating at less than full capacity. During the past three fiscal years, approximately 40 percent of total production was manufactured in the United States. The backlog of firm orders in the United States at the end fiscal 2001 was about three weeks production or approximately $950,000 in sales. The current backlog at Bontex USA is approximately two weeks. In Europe, the backlog at the end of fiscal year 2000 was about three weeks production or approximately $1.2 million in sales. The current estimated backlog at Bontex S.A. is approximately two weeks. The Company expects all the orders in the backlog will be manufactured and shipped during the next fiscal year. 6 The Company sells most of its products directly to customers through its own sales force and commissioned sales representatives throughout the world. The Company also sells products through distributors and other intermediaries who may convert and resell these products to others. Bontex USA mainly services North and South America, as well as certain Asian markets. Over the past three years, Bontex USA's export sales to markets outside of the United States have increased from approximately 50 to over 70 percent. This primarily reflects the decline of the domestic market and continued emphasis on overseas markets. Bontex USA maintains leased bonded warehouses in Patterson, New Jersey; St. Louis, Missouri; Leon, Mexico; Cambridge, Ontario, Canada; Montreal, Quebec, Canada. The Company established Bontex de Mexico, S.A. de C.V., as a marketing distribution company in Leon, Mexico to directly facilitate sales in Mexico. Bontex S.A. markets its products through its own sales force, distributors and sales representatives in most countries in Europe, Central and Eastern Europe, Africa, the Middle East, as well as certain Asian markets. The Company's wholly-owned subsidiary, Bontex Italia S.r.l., services the Italian market directly and through localized converters and commissioned representatives. Over the past several years, sales of Bontex cellulose insole products, particularly to the athletic segment, have also declined because of the trend of increased usage of nonwoven insole materials, an alternative material and construction to cellulose board lasted construction. Nonwoven insole materials are used mainly in force last or strobel-stitch applications, whereas Bontex cellulose products are mainly used in cement or board lasted construction. The overall volume of nonwoven strobel constructed footwear has leveled off, and management believes board lasted footwear remains the predominant insole material and construction worldwide. As part of the Company's sales initiatives, Bontex has recently introduced a range of new nonwoven insole materials and linings, marketed under the Bontex trade name, Bon-Stitch, which are sourced from other manufacturers to further expand the Company's product base. The Company maintains six Bontex liaison offices in select Asian markets, a network of sales representatives in various countries where BONTEX is marketed, as well as leased bonded warehouses in Korea, Vietnam, Taiwan, and the Peoples Republic of China. For certain of its foreign markets, the Company uses individual distributors. One distributor represented approximately 25 percent of the Company's net consolidated sales. The Company believes that it is well positioned to replace any of these distributors without materially impacting the Company's marketing or financial operations. The Bontex liaison office in Australia continues to perform the coordination of Asian operations covering, among other countries, Japan, Korea, Taiwan, Hong Kong, Philippines, Indonesia, New Zealand, Australia, Singapore and Malaysia. The Company has established a sales subsidiary, Bontex Hong Kong Limited, in Hong Kong, to replace a distributor for Hong Kong and the PRC New Territories. In Vietnam, the Company has established a new sales representative office to directly service and facilitate sales in the Vietnam market. MATERIALS AND SUPPLIES The Company purchases a broad range of raw materials sourced throughout the world in connection with its manufacturing activities. More than one supplier is available for all major raw materials. Bontex S.A. appears to have available and receives adequate quantities of water and steam for processing in Belgium. However, Bontex S.A. in Belgium is exploring their option to generate their own steam, and Bontex S.A. may some day build a steam facility. The manufacturing facility in the United States has an adequate supply of processing water from wells and river sources. The Company attempts to minimize the effects of cyclical changes in raw material costs through purchase contracts, forward purchasing and the application of technologies to improve process efficiencies. Principal cost factors include the cost of raw materials, including pulp and latex, two primary raw materials for the Company's products. During fiscal 2001, the Company entered into a number of purchase commitments for certain commodities, including pulp, latex and natural gas, for future manufacturing requirements in an effort to manage the effects of market price fluctuations and to secure adequate raw material supplies. If these purchase 7 commitments for pulp and latex had been in effect during all of 2001, the Company would have had lower raw material prices. However, there is no guarantee that these purchase commitments will result in lower purchase prices for the Company. To the extent that these purchase commitments obligate the Company to purchase pulp or latex at higher than the prevailing market prices, they could result in higher costs. Please refer to Note 7 of the Notes to the Consolidated Financial statements in the Company's Annual Report, wherein information is provided regarding purchase commitments. Management intends to continue to prudently utilize technology to manufacture high quality products while attempting to reduce costs in all areas of operations in an effort to maintain competitive selling prices. There can be no assurance, however, that increased raw material prices will not continue to have an adverse effect on the Company's operations or competitive position in the future. Bontex USA maintains a limited private fleet of tractors and trailers for long haul delivery of its products to customers throughout the United States and Canada and to east coast ports for export shipments, in addition to back-hauling of certain raw materials to reduce operating costs. The Company also participates in numerous equipment interchange agreements for containers with steamship lines to facilitate exports. 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 permits. Except as described below, 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 or termination 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. Because 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, except as described below, the Company believes to be operating within compliance of applicable environmental requirements. Also, 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. Bontex USA received a renewal of its 5-year wastewater discharge permit on April 2, 2001. The new permit requires the Company to expand its wastewater treatment facility to increase the capacity of its equalization tank. The Company started the expansion this Summer and expects to complete it by the end of the calendar year. Prior to receiving the new permit, the Company had received a Notice of Violation from the Virginia Department of Environmental Quality (DEQ). In general, the DEQ stated in the Notice of Violation that it had reason to believe that the Company's plant in Buena Vista, Virginia, might be out of compliance with whole effluent toxics limits. In addition, the Company has received a Notice of Violation from the DEQ alleging that in June 2001 the Company's plant in Buena Vista, Virginia, discharged wastewater solids in violation of Virginia law and/or the Company's wastewater discharge permit. The Company has submitted detailed information to the DEQ relating to the Notices of Violation. At this stage, it is too early for the Company to make a reasonable estimate of the potential financial impact, if any, of these Notices of Violation. 8 ITEM 2. PROPERTIES For information about liens and security interests held by banks on the Company's properties, see Note 4 of Notes to Consolidated Financial Statements contained in the Company's Annual Report, incorporated in Part II, Item 8 of this Report by reference. The properties of the Company consist primarily of plant and equipment to manufacture and distribute the Company's products. The Company's corporate headquarters, manufacturing and converting facility in Buena Vista, Virginia continues to be modernized, upgraded, and expanded. In Stembert, Belgium, the subsidiary's plant is one of the most modern and highest capacity in the world for producing BONTEX type products, and the Company continues to invest in new equipment to maintain its high capacity and high level of efficiency. Bontex Italia S.r.l. operates from a modern distribution facility with new converting equipment. During fiscal 2001, the Company spent approximately $350,000, $275,000 and $130,000 to refurbish, upgrade and install equipment at Bontex USA, Bontex S.A., and other subsidiaries, respectively. During fiscal 2001, the Company sold the Newark, New Jersey office and warehouse facility to the New Jersey Institute of Technology for $863,000. Included in other income is a gain of $803,000 from this sale, as the Company's net book value was approximately $60,000. The total cost of capital expenditures, including the capital expenditures planned for environmental regulations at both Bontex USA and Bontex S.A. as discussed in the previous section regarding regulations, is estimated not to exceed $1.5 million for fiscal year 2002. The Company believes that cash generated from operations and credit facilities will be sufficient to meet these capital requirements. The Company continues to manage the utilization of its assets in an effort to meet global growth objectives, marketplace forces, productivity and technology changes. The Company considers all its properties well maintained, and adequate for present and future requirements. ITEM 3. LEGAL PROCEEDINGS 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 was accrued at June 30, 2000. Similar deductions relating to the year ended June 30, 2000 and 2001 that in light of the current information may be disallowed have been treated as disallowed expenses in the calculation of those year's tax provisions. Bontex USA received a renewal of its 5-year wastewater discharge permit on April 2, 2001. The new permit requires the Company to expand its wastewater treatment facility to increase the capacity of its equalization tank. The Company started the expansion this Summer and expects to complete it by the end of the calendar year. Prior to receiving the new permit, the Company had received a Notice of Violation from the DEQ. In general, the DEQ stated in the Notice of Violation that it had reason to believe that the Company's plant in Buena Vista, Virginia, might be out of compliance with whole effluent toxics limits. In addition, the Company has received a Notice of Violation from the DEQ alleging that in June 2001 the Company's plant in Buena Vista, Virginia, discharged wastewater solids in violation of Virginia law and/or the Company's wastewater discharge permit. The 9 Company has submitted detailed information to the DEQ relating to the Notices of Violation. At this stage, it is too early for the Company to make a reasonable estimate of the potential financial impact, if any, of these Notices of Violation. In the normal course of business, the Company is subject to proceedings, lawsuits and other claims that 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 described above, against or involving the Company that, in the opinion of management, will have a material adverse impact upon the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVES OF THE REGISTRANT: The following list is included as an unnumbered Item in Part I of this report in lieu of being included in the Proxy Statement. The names, ages and positions of the executives of the Company as of September 26, 2001 are listed below with their business experience with the Company for the past five years. Executive officers are appointed annually by the Board of Directors at the annual meeting of stockholders. There is no agreement or understanding between any executive and any other pursuant to which the executive was selected. Mr. Jeffrey C. Kostelni and Mr. Charles W. J. Kostelni are the sons of Mr. James C. Kostelni.
POSITION AND BUSINESS NAME AND AGE EXPERIENCE FOR PAST FIVE YEARS James C. Kostelni, 66 Chairman of the Board, President, and Chief Executive Officer (since 1994), Chief Operating Officer (since 1971) of the Company. Mr. Kostelni has a Bachelor of Science Degree in Business Administration. Director. Jeffrey C. Kostelni, 35 Senior Vice President (since 1999); Chief Financial Officer and Treasurer (since 1994) of the Company; General Sales Manager of Bontex S.A., a subsidiary of the Company in Belgium (1995-1999). Mr. Kostelni has a Bachelor of Science Degree in Accountancy and is a Certified Public Accountant. Director. 10 Charles W. J. Kostelni, 37 Senior Vice President (since 1999), General Manager (U.S. operations only) (since 1998), Corporate Secretary (since 1997), Corporate Controller (since 1996) of the Company and General Sales Manager of Bontex S.A., a subsidiary of the Company in Belgium (since 1999). Prior thereto, Assistant Controller (1994-1996) of the Company and Assistant Vice President, Union Bank of Switzerland, New York (1991-1995). Mr. Kostelni has a Bachelor of Science Degree in Accountancy and is a Certified Public Accountant. Director. Larry E. Morris, 55 Technical Sales Director (since 1998) of the Company; prior thereto, Technical Director (1983- 1998), Sales Director (1993-1998). Michael J. Breton, 61 Corporate Director of International Operations of the Company (since 1993), and General Manager of Bontex S.A., a subsidiary of the Company (since 1987). Mr. Breton has a Bachelor of Science Degree in Paper Technology. Hadelin Mothet, 57 Financial Director and Assistant General Manager (since 1985) of Bontex S.A. Mr. Mothet has a Bachelor Degree in Accountancy. Director.
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the caption "Common Stock and Dividend Data" on page 4 of the Company's Annual Report is incorporated herein by reference. The Company's common stock is listed on the Nasdaq SmallCap Market. In order to maintain its listing on the Nasdaq SmallCap Market, among other things, the Company must maintain a minimum market value of the public float of its common stock of at least $1,000,000. If the closing bid price of the Company's common stock trades at a level below that necessary to maintain this minimum market value of its public float for thirty consecutive business days, the Company's common stock could become subject to delisting from the Nasdaq SmallCap Market. If delisted, trading in the Company's common stock could be conducted on the OTC Bulletin Board or in the over-the-counter market in what is commonly referred to as the "pink sheets." In the event of delisting, holders of the Company's common stock might find it more difficult to trade their common stock promptly and at reasonable prices or to obtain accurate quotations as to its price. It could also adversely affect the Company's ability to raise additional equity or financing, which in turn could result in a material effect on the Company's business, financial condition, liquidity and/or results of operations. ITEM 6. SELECTED FINANCIAL DATA The five year data for the fiscal years 2001, 2000, 1999, 1998, and 1997 are included in the "Summary of Selected Ten Year Data" on page 4 of the Company's Annual Report and is incorporated herein by reference. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis" on pages 5 through 12 of the Company's Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk in "Market Risk and Sensitivity" on pages 11 and 12 of the Company's Annual Report to is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Registrant and the independent auditors' report included on pages 13 through 29 of the Annual Report is incorporated herein by reference. 1. Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Years Ended June 30, 2001, 2000 and 1999. 2. Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 2001, 2000, and 1999. 3. Consolidated Balance Sheets as of June 30, 2001 and 2000. 4. Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000, and 1999. 5. Notes to Consolidated Financial Statements 6. Independent Auditors' Report ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in independent auditors and no disagreements with independent auditors on any matter of accounting principles or practices, financial statement disclosure, or auditors' scope or procedure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the executives of the Registrant, see "Executives of the Registrant" at the end of Part I of this Report. For information with respect to the Directors of the Registrant, see "Election of Directors" at pages 4 through 6 of the Proxy Statement, which information is incorporated herein by reference. The information with respect to compliance with Section 16(a) of the Exchange Act, which is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" at page 17 of the Proxy Statement, is incorporated herein by reference. 12 ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Stock Performance" at pages 9 through 16 of the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information pertaining to stockholders beneficially owning more than five percent of the Registrant's common stock and the security ownership of management, which is set forth under the caption "Stockholdings of Certain Owners and Management" on pages 2 through 4 of the Proxy Statement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Related Party Transactions" on page 14 of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: 1. Financial Statements: All financial statements of the Registrant as set forth under Item 8 of this Report on Form 10-K. 2. Financial statement schedules and the location in this Form 10-K are as follows: SCHEDULE NUMBER DESCRIPTION PAGE (a) Independent Auditors' Report on Financial Statement Schedule 18 (d) II Valuation and Qualifying Accounts for the years ended June 30, 2001, 2000 and 1999 19 All other schedules are omitted, as the required information is inapplicable, or the information is presented in the consolidated financial statements or related notes. 13 3. Exhibits to this Form 10-K are as follows:
EXHIBIT NUMBER DESCRIPTION 3 (i) Amended and Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit No. (iii) of Form 10-Q for the fiscal quarter ended December 31, 1996) 3 (ii) Amended and Restated Bylaws of Bontex, Inc. (incorporated herein by reference to Exhibit No. 3(i) of Form 10-Q for quarter ended March 31, 1998) 10 (i) *Executive Compensation Agreement dated January 22, 1997, between Bontex, Inc. and James C. Kostelni (incorporated herein by reference to Exhibit 10(i) of Form 10-Q for quarter ended March 31, 1997) 10 (ii) *Life Insurance Agreement between Georgia Bonded Fibers Inc. and James C. Kostelni incorporated herein by reference to Exhibit 10.4 of Form 10-Q for quarter ended December 31, 1993) 10 (iii) *Bontex S.A. Pension Plan (incorporated herein by reference to Exhibit No. 10(iv) of Form 10-K for the fiscal year ended June 30, 1994) 10 (iv) *Georgia Bonded Fibers, Inc. Annual Incentive Plan (incorporated herein by reference to Exhibit No. 10(v) of Form 10-K for the fiscal year ended June 30, 1994) 10 (v) *Supplemental Executive Compensation Agreement dated May 26, 1994, between Georgia Bonded Fibers, Inc. and James C. Kostelni (incorporated herein by reference to Exhibit No. of Form 10-K for the fiscal year ended June 30, 1994) 10 (vi) Special Consent Order between the Company and the State Water Control Board dated July 22, 1994 (incorporated herein by reference to Exhibit No. 10(vii) of Form 10-K for the fiscal year ended June 30, 1994) 10 (vii) Amended Consent Order between the Company and the Commonwealth of Virginia, Department of Environmental Quality dated January 10, 1997. (incorporated herein by reference to Exhibit No. 10(iv) of Form 10-Q for the quarter ended December 31, 1996) 10 (viii) Related party Marketing Agreement between Bontex, Inc. and Maxcomm, Inc. dated February 16, 1999 10 (ix) *Bontex, Inc. Key Employee Stock Option Plan dated October 29, 1999 (incorporated herein by reference to Exhibit 4(c) of the Form S-8 filed on February 28, 2000). 10 (x) *Amendment to Executive Compensation Agreement between Jeffrey C. Kostelni and Bontex, Inc. dated January 27, 2000. 10 (xi) *Amendment to Executive Compensation Agreement between Charles W.J. Kostelni and Bontex, Inc. dated January 27, 2000. 14 10 (xii) *Part-Time Employment Agreement, Settlement Agreement, General Release and Non- Disclosure Agreement between Patricia S. Tischio and Bontex, Inc. dated April 30, 2000. 10 (xiii) **Pulp Supply Agreement No. 1 dated March 31, 2001. 10 (xiv) **Pulp Supply Agreement No. 2 dated March 31, 2001. 10 (xv) **Pulp Supply Agreement No. 3 dated March 31, 2001. 10 (xvi) Second Amendment to Loan and Security Agreement, dated September 12, 2001, by and between Congress Financial Corporation and Bontex, Inc. 13 2001 Annual Report to Stockholders (such report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not to be deemed filed as part of this Report on Form 10-K) 21 Subsidiaries of the Company
*Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c). **Portions of this Exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC. (b) Reports on Form 8-K: Form 8-K dated July 23, 2001 reporting under Item 5 thereof the resignation of Ms. Patricia Tischio. (c) Exhibits - The response to this section of Item 14 is submitted as a separate section of this report. (d) Financial statement schedules required by Regulation S-X are submitted as a separate section of this report. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized on this 26th day of September, 2001. BONTEX, INC. by /s/James C. Kostelni -------------------------------- Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date /s/James C. Kostelni September 26, 2001 -------------------------------------- ------------------ James C. Kostelni Chairman of the Board, President and Chief Executive Officer Director /s/Jeffrey C. Kostelni September 26, 2001 --------------------------------------- ------------------ Jeffrey C. Kostelni Treasurer and Chief Financial Officer Director /s/Charles W. J. Kostelni September 26, 2001 ------------------------------------ ------------------ Charles W. J. Kostelni Corporate Controller and Corporate Secretary Director /s/Hadelin Mothet September 26, 2001 ------------------------------------- ------------------ Hadelin Mothet Financial Director Director /s/William J. Binnie September 26, 2001 ------------------------------------- ------------------ William J. Binnie Director /s/William B. D'Surney September 26, 2001 ------------------------------------ ------------------ William B. D'Surney Director /s/Frank Mayorshi September 26, 2001 ------------------------------------- ------------------ Frank Mayorshi Director 16 /s/Joseph F. Raffetto September 26, 2001 --------------------------------------- ------------------ Joseph F. Raffetto Director /s/Robert J. Weeks September 26, 2001 --------------------------------------- ------------------ Robert J. Weeks Director 17 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of Bontex, Inc.: Under date of August 22, 2001, except as to Note 4, which is as of September 12, 2001, we reported on the consolidated balance sheets of Bontex, Inc. and subsidiaries as of June 30, 2001 and 2000, 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, 2001, as contained in the 2001 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the accompanying annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as set forth under Item 14(a)2 of the accompanying annual report on Form 10-K for the year 2001. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Roanoke, Virginia August 22, 2001, except as to Note 4, which is as of September 12, 2001 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS BONTEX, INC. AND SUBSIDIARIES
BALANCE AT CHARGES TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS* DEDUCTIONS** OF PERIOD YEAR ENDED JUNE 30, 2001 Reserves and allowances deducted from asset accounts: Allowances for doubtful accounts $170,000 $ (54,000) $ (8,000) $ 12,000 $ 96,000 YEAR ENDED JUNE 30, 2000 Reserves and allowances deducted from asset accounts: Allowances for doubtful accounts $ 128,000 $ 92,000 $ (15,000) $ 35,000 $ 170,000 YEAR ENDED JUNE 30, 1999 Reserves and allowances deducted from asset accounts: Allowances for doubtful accounts $ 268,000 $ (39,000) $ (7,000) $ 94,000 $ 128,000
*Foreign currency translation (loss) **Uncollectible accounts written off, net of recoveries.
EXHIBIT INDEX 3 (i) Amended and Restated Articles of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit No. (iii) of Form 10-Q for the fiscal quarter ended December 31, 1996) 3 (ii) Amended and Restated Bylaws of Bontex, Inc. (incorporated herein by reference to Exhibit No. 3(i) of Form 10-Q for quarter ended March 31, 1998) 10 (i) *Executive Compensation Agreement dated January 22, 1997, between Bontex, Inc. and James C. Kostelni (incorporated herein by reference to Exhibit 10(i) of Form 10-Q for quarter ended March 31, 1997) 10 (ii) *Life Insurance Agreement between Georgia Bonded Fibers Inc. and James C. Kostelni incorporated herein by reference to Exhibit 10.4 of Form 10-Q for quarter ended December 31, 1993) 10 (iii) *Bontex S.A. Pension Plan (incorporated herein by reference to Exhibit No. 10(iv) of Form 10-K for the fiscal year ended June 30, 1994) 10 (iv) *Georgia Bonded Fibers, Inc. Annual Incentive Plan (incorporated herein by reference to Exhibit No. 10(v) of Form 10-K for the fiscal year ended June 30, 1994) 10 (v) *Supplemental Executive Compensation Agreement dated May 26, 1994, between Georgia Bonded Fibers, Inc. and James C. Kostelni (incorporated herein by reference to Exhibit No. of Form 10-K for the fiscal year ended June 30, 1994) 10 (vi) Special Consent Order between the Company and the State Water Control Board dated July 22, 1994 (incorporated herein by reference to Exhibit No. 10(vii) of Form 10-K for the fiscal year ended June 30, 1994) 10 (vii) Amended Consent Order between the Company and the Commonwealth of Virginia, Department of Environmental Quality dated January 10, 1997. (incorporated herein by reference to Exhibit No. 10(iv) of Form 10-Q for the quarter ended December 31, 1996) 10 (viii) Related party Marketing Agreement between Bontex, Inc. and Maxcomm, Inc. dated February 16, 1999 10 (ix) *Bontex, Inc. Key Employee Stock Option Plan dated October 29, 1999 (incorporated herein by reference to Exhibit 4(c) of the Form S-8 filed on February 28, 2000). 10 (x) *Amendment to Executive Compensation Agreement between Jeffrey C. Kostelni and Bontex, Inc. dated January 27, 2000. 10 (xi) *Amendment to Executive Compensation Agreement between Charles W.J. Kostelni and Bontex, Inc. dated January 27, 2000. 10 (xii) *Part-Time Employment Agreement, Settlement Agreement, General Release and Non- Disclosure Agreement between Patricia S. Tischio and Bontex, Inc. dated April 30, 2000. 10 (xiii) **Pulp Supply Agreement No. 1 dated March 31, 2001. 10 (xiv) **Pulp Supply Agreement No. 2 dated March 31, 2001. 10 (xv) **Pulp Supply Agreement No. 3 dated March 31, 2001. 10 (xvi) Second Amendment to Loan and Security Agreement, dated September 12, 2001, by and between Congress Financial Corporation and Bontex, Inc. 13 2001 Annual Report to Stockholders (such report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not to be deemed filed as part of this Report on Form 10-K) 21 Subsidiaries of the Company
*Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-K pursuant to Item 14 (c). **Portions of this Exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the SEC. EX-10 3 btxex10xva.txt EXHIBIT 10 (XIII) Exhibit 10 (xiii) SUPPLY AGREEMENT No. 1 MARCH 31, 2001 This Agreement is made on the date as set out below BETWEEN *, a company duly organized and existing under the laws of Sweden, having its head offices at * (referred hereinafter * ) and its subsidiary *. AND Bontex Inc. and Bontex S.A., ( referred hereinafter Bontex) WHEREAS, * desires to sell and Bontex desires to purchase, on the terms and conditions hereinafter set forth, certain qualities of pulp to be manufactured by * at its pulp manufacturing facility in *. Now, therefore, the parties hereby agree as follows : 1. Definitions - " Delivery point U.S. " shall mean the facility at Bontex Inc. 1, Bontex Drive, Buena Vista 24416, Virginia, U.S.A. - " Delivery point Belgium " shall mean the facility at Bontex S.A. Rue Slar B-4801 Stembert, Belgium. - " Product or Products " shall mean Flashdried NBSK Pulp. - " USD " shall mean the lawful currency of the United States of America. - " ADMT " shall mean one thousand (1.000) kilograms of air-dry pulp. ---------------- * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 2. SUPPLY AND DELIVERY OF PRODUCTS 2.1 During the term of this Agreement * agrees to sell to Bontex and Bontex agrees to purchase from * 8,000 (eight thousand) ADMT of the Products annually. 2.2 Delivery terms: see Appendix no. 1. 3. PRICES AND PAYMENT 3.1 From January 1st to June 30th, 2001 the price is US $* per ADMT. From July 1st 2001, for a period of 5 years, the price is US$ * per ADMT. This figure is subject to revision according to FOEX/PIX index. If the NBSK index is more than US$ * above or below the agreed price, then shall the price be adjusted with * percent of the increase or the decrease. Any adjustment to the agreed base price because of index change will be made on the basis of the actual index rate on the day of invoicing. 3.2 Payment terms : see Appendix no 1. 4. FORECAST AND ORDERS 4.1 Bontex will provide before the 15th of each month the quantities to be delivered the following month. 5. PENALTY 5.1 If * fails to deliver the Product on the acknowledged delivery date and such failure is not caused by Bontex or by any force majeure event, * will purchase on open market equivalent pulp and supply Bontex at Supply Contract price. 6. QUALITY OF PRODUCT 6.1 * shall supply the Products to Bontex in accordance with the specifications in the Appendix 2 (technical data sheet quality 403). ---------------- 2 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 7. WARRANTY 7.1 Bontex warrants that it can lawfully enter into this Agreement and that it has complied and will continue to comply with all legal prerequisites and formalities or governmental laws or regulations, which are necessary for Bontex' performance of its obligations under this Agreement. 7.2 * warrants that it can lawfully enter into this Agreement and that is has complied and will continue to comply with all legal prerequisites and formalities or governmental laws or regulations, which are necessary for * performance of its obligations under this Agreement. 8. CONFIDENTIALITY 8.1 Each party shall retain all confidential information furnished by the disclosing party to the receiving party hereunder as strictly confidential, and shall refrain from disclosing the same to any third party, except for the information which : (i) is or falls within the public domain through no fault of the receiving party or its affiliate ; or (ii) is or has been known to the receiving party in good faith as evidenced by its written records or other competent proof before receipt of the said information from a disclosing party ; or (iii) is disclosed to the receiving party in good faith by a third party who has the right to make such disclosure. 8.2 Notwithstanding the above, a receiving party may disclose such information: a) to its employees who should have access to the information to safeguard that the receiving party pursuits according to this Agreement. b) as required by law; or c) to the extent such disclosure is necessary to achieve the purposes of this Agreement. 9. TERM, TERMINATION 9.1 This Agreement enters into force on January 1, 2001 and it shall remain in force for a period of five ( 5) years and six ( 6) months. ---------------- 3 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 9.2 Notwithstanding the above, this Agreement may be terminated at any time by either party sending a written notice to the other in the event of a material breach of any conditions of this Agreement by the other party continuing for a period of six (6) months after notice by the non-defaulting party specifying the default complained of, and failure of the defaulting party to remedy such default within the above six (6) months period. 10. FORCE MAJEURE 10.1 A force majeure event shall mean any event or condition, not existing as of the date hereof, not reasonably foreseeable as of such date and not reasonably within the control of either party, which prevents in whole or in material part the performance of one of the parties of its obligations hereunder. Without limiting the foregoing, the following shall constitute force majeure events: Acts of state or governmental action, epidemics, riots, war, strikes, lock outs, suspension, termination, or interruption of utilities, fire, flood, hurricane, earthquake, and explosion. 10.2 The party wishing to claim relief by reason of force majeure event shall notify the other party in writing without delay. 11. ENTIRE AGREEMENT 11.1 This Agreement sets out the entire understanding between the parties with regard to the subject matter hereof, and supersedes and replaces all previous understandings and agreements between the parties, whether oral or written, in connection with the subject matter hereof. 11.2 Any amendments or supplements to this Agreement shall only be valid if made in writing and duly executed by both parties hereto. 12. NOTICES 12.1 Any notice to the other party in connection with this Agreement shall be delivered in person or sent by registered letter or telefax. 13. GENERAL CONDITIONS AND GOVERNING LAW 13.1. To the extent not otherwise agreed the GENERAL TRADE RULES FOR WOODPULPS, 1975, shall apply for this Agreement. ---------------- 4 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 13.2 This Agreement and the legal relations between the parties should be governed by the laws of UK and in case of a dispute this should be settled under the Rules of Conciliation an Arbitration of the International Chamber of Commerce in London. IN WITNESS WHEREOF, this Agreement has been duly executed in two identical copies, one for each party. * BONTEX S.A. BONTEX Inc. ______/s/________ ________/s/________ ______/s/_________ Date 5/9/01 Date 5/9/01 Date 5/10/01 ------------------ * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. APPENDIX NO 1. DELIVERY TERMS: DDU Stembert Mill and DDU Buena Vista respectively. PAYMENT TERMS: Cash within 10 days from invoice date less 1,5 % discount for deliveries to Stembert mill and 60 days net for deliveries to Buena Vista mill. According to INCOTERMS 1990. ------------------ * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. * TYPICAL CHARACTERISTICS * BLEACHED KRAFT SOFTWOOD PULP (BLEACHED WITHOUT GASEOUOUS CHLORINE) PULP FROM THE * MILL Date: 98-12-07 Issued by: *, * PROCESS INFORMATION: Spruce and pine around 50% of each are used as wood supply, 70% arrives as logs, the rest is waste chips from sawmills. The chips are continuously digested in a Kamyr digester. After cleaning and washing follows an oxygen delignification stage. The final bleaching use the sequence D Eop DED, Chlorine dioxide, sodium hydroxide, oxygen and hydrogen peroxide are chemicals used. All pulp is flash dried. PULP CHARACTERISTICS: Brightness % ISO 90 SCAN-CM 11:95 Intrinsic Viscosity dm3/kg 900 SCAN-C 15:88 Ashes % 0.1 SCAN-C 6:62 Extractives (Acetone) % 0.05 SCAN-CM 93 Standards SCAN/ISO Testing climate 50% RH 23 "C Beating rev PFI 2 200 3100 4300 5200 6800 Drainage Resistance (Degree)SR 20 25 30 35 45 Tensile index Nm/g 81 90 97 101 103 Breaking length m 8300 9200 9900 10300 10500 Burst index kPa m2/g 6.2 7.1 7.6 7.9 8.2 Tear index mN m2/g 15.5 13.5 12.4 11.7 11.2 Folding endurance 101og 3.17 3.2 3.28 3.30 3.33 Light Scattering Coeff. m2/kg 20.8 19.3 18.6 18.1 17.6 Opacity % 63.0 50.8 59.3 58.6 57.9 Density kg/m3 705 730 745 755 765 Air permeability, Gurley mm/kPa 6 49.0 21.8 14.0 8.9 2.5 ------------------------------------------------------------------------- * Address Telephone Telefax * * * * * ------------------ * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. * TYPICAL CHARACTERISTICS * BLEACHED KRAFT SOFTWOOD PULP (BLEACHED WITHOUT CHLORINE COMPONENTS) PULP FROM THE * MILL Date: 98-12-07 Issued by: *, * PROCESS INFORMATION: Spruce and pine around 50% of each are used as wood supply, 70% arrives as logs, the rest is waste chips from sawmills. The chips are continuously digested in a Kamyr digester. After cleaning and washing follows an oxygen delignification stage. The final bleaching is totally chlorine free. Peracetic acid, complexing agents, hydrogen peroxide and sodium hydroxide are chemicals used. All pulp is flash dried. PULP CHARACTERISTICS: Brightness % ISO 88 SCAN-CM 11:95 Intrinsic Viscosity dm3/kg 750 SCAN-C 15:88 Ash % 0.1 SCAN-C 6:62 Extractives (Acetone) % 0.05 SCAN-CM 93 Standards SCAN/ISO Testing climate 50% RH 23 (Degree)C Beating rev PFI 2 000 3200 4100 4600 5900 Drainage Resistance (degree)SR 20 25 30 35 45 Tensile index Nm/g 79.5 89 93.5 96.5 100 Breaking length m 8100 9100 9500 9800 10200 Burst index kPa m2/g 6 6.8 7.3 7.6 8 Tear index mN m2/g 15.2 12.5 11.5 11.0 10.5 Folding endurance 101og 3.15 3.2 3.25 3.27 3.31 Light Scattering Coeff. m2/kg 20.8 19.0 18.5 17.5 16.8 Opacity % 63.0 61.6 60.0 59.0 57.5 Density kg/m3 700 730 745 755 765 Air permeability, Gurley mm/kPa 6 51.2 29.1 19.5 13.1 4.1 ------------------------------------------------------------------------- * Address Telephone Telefax * * * * * ------------------ * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. EX-10 4 btxex10xvb.txt EXHIBIT 10 (XIV) Exhibit 10 (xiv) SUPPLY AGREEMENT NO. 2 March 31, 2001 This Agreement is made on the date as set out below BETWEEN *, a company duly organized and existing under the laws of Sweden, having its head offices at * (referred hereinafter * ) and its subsidiary *. AND Bontex Inc. and Bontex S.A., ( referred hereinafter Bontex) WHEREAS, * desires to sell and Bontex desires to purchase, on the terms and conditions hereinafter set forth, certain qualities of pulp to be manufactured by * at its pulp manufacturing facility in *. Now, therefore, the parties hereby agree as follows : 1. DEFINITIONS - " Delivery point U.S. " shall mean the facility at Bontex Inc.1, Bontex Drive, Buena Vista 24416, Virginia, U.S.A. - " Delivery point Belgium " shall mean the facility at Bontex S.A. Rue Slar B-4801 Stembert, Belgium. - " Product or Products " shall mean Flashdried Unbleached Sulphite Pulp. - " USD " shall mean the lawful currency of the United States of America. - "ADMT " shall mean one thousand (1.000) kilograms of air-dry pulp. -------------------- * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 2. SUPPLY AND DELIVERY OF PRODUCTS 2.1 During the term of this Agreement * agree to sell and Bontex agrees to purchase from * 1200 (thousand two hundred) ADMT of the Products annually. 2.2 Delivery terms : see Appendix no 1. 3. PRICES AND PAYMENT 3.1 From January 1st to June 30th, 2001 the price is US$ * per ADMT. From July 1st 2001, for a period of 5 years, the price is US$ * per ADMT. This figure is subject to revision according to FOEX/PIX index. If the NBSK index is more than US$ * above or below the US$ * level, then shall the price be adjusted with * percent of the increase or the decrease. Any adjustment to the agreed base price because of index change will be made on the basis of the actual index rate on the day of invoicing. 3.2 Payment terms : see Appendix no 1. 4. FORECAST AND ORDERS 4.1 Bontex will provide before the 15th of each month the quantities to be delivered the following month. 5. PENALTY 5.1 If * fails to deliver the Product on the acknowleged delivery date and such failure is not caused by Bontex or by any force majeure event, * will purchase on open market equivalent pulp and supply Bontex at Supply Contract price. 6. QUALITY OF PRODUCT 6.1 * shall supply the Products to Bontex in accordance with the specifications in the Appendix 3 (technical data sheet *). -------------------- 2 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 7. WARRANTY 7.1 Bontex warrants that it can lawfully enter into this Agreement and that it has complied and will continue to comply with all legal prerequisites and formalities or governmental laws or regulations, which are necessary for Bontex' performance of its obligations under this Agreement. 7.2 * warrants that it can lawfully enter into this Agreement and that is has complied and will continue to comply with all legal prerequisites and formalities or governmental laws or regulations, which are necessary for * performance of its obligations under this Agreement. 8. CONFIDENTIALITY 8.1 Each party shall retain all confidential information furnished by the disclosing party to the receiving party hereunder as strictly confidential, and shall refrain from disclosing the same to any third party, except for the information which : (i) is or falls within the public domain through no fault of the receiving party or its affiliate ; or (ii) is or has been known to the receiving party in good faith as evidenced by its written records or other competent proof before receipt of the said information from a disclosing party ; or (iii) is disclosed to the receiving party in good faith by a third party who has the right to make such disclosure. 8.2 Notwithstanding the above, a receiving party may disclose such information: a) to its employees who should have access to the information to safeguard that the receiving party pursuits according to this Agreement. b) as required by law; or c) to the extent such disclosure is necessary to achieve the purposes of this Agreement. -------------------- 3 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 9. TERM, TERMINATION 9.1 This Agreement enters into force on January 1, 2001 and it shall remain in force for a period of five ( 5) years and six ( 6)months. 9.2 Notwithstanding the above, this Agreement may be terminated at any time by either party sending a written notice to the other in the event of a material breach of any conditions of this Agreement by the other party continuing for a period of six (6) months after notice by the non-defaulting party specifying the default complained of, and failure of the defaulting party to remedy such default within the above six (6) months period. 10. FORCE MAJEURE 10.1 A force majeure event shall mean any event or condition, not existing as of the date hereof, not reasonably foreseeable as of such date and not reasonably wi thin the control of either party, which prevents in whole or in material part the performance of one of the parties of its obligations hereunder. Without limiting the foregoing, the following shall constitute force majeure events: Acts of state or governmental action, epidemics, riots, war, strikes, lock outs, suspension, termination, or interruption of utilities, fire, flood, hurricane, earthquake, and explosion. 10.2 The party wishing to claim relief by reason of force majeure event shall notify the other party in writing without delay. 11. ENTIRE AGREEMENT 11.1 This Agreement sets out the entire understanding between the parties with regard to the subject matter hereof, and supersedes and replaces all previous understandings and agreements between the parties, whether oral or written, in connection with the subject matter hereof. 11.2 Any amendments or supplements to this Agreement shall only be valid if made in writing and duly executed by both parties hereto. 12. NOTICES 12.1 Any notice to the other party in connection with this Agreement shall be delivered in person or sent by registered letter or telefax. -------------------- 4 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 13. GENERAL CONDITIONS AND GOVERNING LAW 13.1. To the extent not otherwise agreed the GENERAL TRADE RULES FOR WOODPULPS, 1975, shall apply for this Agreement. 13.2 This Agreement and the legal relations between the parties should de governed by the laws of UK and in case of a dispute this should be settled under the Rules of Conciliation an Arbitration of the International Chamber of Commerce in London. IN WITNESS WHEREOF, this Agreement has been duly executed in two identical copies, one for each party. * BONTEX S.A. BONTEX Inc. ______/s/_______ _______/s/_________ __________________ Date _5/9/01___ Date ____5/11/01____ Date _____________ -------------------- 5 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. APPENDIX NO 1. DELIVERY TERMS: DDU Stembert Mill and DDU Buena Vista respectively. PAYMENT TERMS: Cash within 10 days from invoice date less 1,5 % discount for deliveries to Stembert mill and 60 days net for deliveries to Buena Vista mill. According to INCOTERMS 1990. -------------------- 6 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. * TYPICAL CHARACTERISTICS * UNBLEACHED MAGNEFITE SOFTWOOD PULP PULP FROM THE * MILL Date: 98-12-07 Issued by: *, * PROCESS INFORMATION: Spruce is used as wood supply. Logs are barked and chipped at the mill. The chips are digested with a magnelite process in batch digesters. Cleaning and washing follows. All pulp is flash dried.
PULP CHARACTERISTICS: Kappa number 40 SCAN-C1:77 Brightness % ISO 68 SCAN-CM 11:95 Intrinsic Viscosity dm3/kg 985 SCAN-C 15:88 Ash % 1.1 SCAN-C 6:62 Extractives (Acetone) % 0.9 SCAN-CM 93 Standards SCAN/ISO Testing climate 50% RH 23(degree)C Beating rev PFI 1050 1150 2250 2700 3350 Drainage Resistance (degree)SR 20 25 30 35 45 Tensile index Nm/g 75.5 84.5 89.5 91.5 94 Breaking length m 7700 8600 9100 9300 9600 Burst index kPa m2/g 4.95 5.6 6 6.15 6.25 Tear index mN m2/g 10.0 8.6 7.7 7.5 7.4 Light Scattering Coeff. m2/kg 17.7 15.9 14.6 14.0 13.4 Opacity % 73.1 70.5 68.4 67.0 65.4 Density kg/m3 720 755 770 780 795 Air permeability, Gurley mm/kPa 6 28.0 12.0 5.5 3.2 1.1 --------------------------------------------------------------------------- * Address Telephone Telefax * * * * *
- - - - - - * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. EX-10 5 btxex10xvc.txt EXHIBIT 10 (XV) Exhibit 10 (xv) SUPPLY AGREEMENT NO. 3 March 31, 2001 This Agreement is made on the date as set out below BETWEEN *, a company duly organized and existing under the laws of Sweden, having its head offices at * (referred hereinafter * ) and its subsidiary *. AND Bontex Inc. and Bontex S.A., ( referred hereinafter Bontex) WHEREAS, * desires to sell and Bontex desires to purchase, on the terms and conditions hereinafter set forth, certain qualities of pulp to be manufactured by * at its pulp manufacturing facility in *. Now, therefore, the parties hereby agree as follows : 1. DEFINITIONS - " Delivery point U.S. " shall mean the facility at Bontex Inc.1, Bontex Drive, Buena Vista 24416, Virginia, U.S.A. - " Delivery point Belgium " shall mean the facility at Bontex S.A. Rue Slar B-4801 Stembert, Belgium. - " Product or Products " shall mean Flashdried unbleached sulphite Pulp. - " USD " shall mean the lawful currency of the United States of America. - "ADMT " shall mean one thousand (1.000) kilograms of air-dry pulp. ----------------------- * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 2. SUPPLY AND DELIVERY OF PRODUCTS 2.1 During the term of this Agreement * agree to sell to Bontex and Bontex agrees to purchase from * 300 (three hundred) ADMT of the Products annually. 2.2 delivery terms : see Appendix no 1. 3. PRICES AND PAYMENT 3.1 From January 1st to June 30th, 2001 the price is US$ * per ADMT. From July 1st 2001, for a period of 5 years, the price is US$ * per ADMT. This figure is subject to revision according to FOEX/PIX index. If the NBSK index is more than US$ * above or below the US$ * level, then shall the price be adjusted with * percent of the increase or the decrease. Any adjustment to the agreed base price because of index change will be made on the basis of the actual index rate on the day of invoicing. 3.2 Payment terms : see Appendix no 1. 4. FORECAST AND ORDERS 4.1 Bontex will provide before the 15th of each month the quantities to be delivered the following month. 5. PENALTY 5.1 If * fails to deliver the Product on the acknowleged delivery date and such failure is not caused by Bontex or by any force majeure event, * will purchase on open market equivalent pulp and supply Bontex at Supply Contract price. 6. QUALITY OF PRODUCT 6.1 * shall supply the Products to Bontex in accordance with the specifications in the Appendix 4 (technical data sheet *). ----------------------- 2 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 7. WARRANTY 7.1 Bontex warrants that it can lawfully enter into this Agreement and that it has complied and will continue to comply with all legal prerequisites and formalities or governmental laws or regulations, which are necessary for Bontex' performance of its obligations under this Agreement. 7.2 * warrants that it can lawfully enter into this Agreement and that is has complied and will continue to comply with all legal prerequisites and formalities or governmental laws or regulations, which are necessary for * performance of its obligations under this Agreement. 8. CONFIDENTIALITY 8.1 Each party shall retain all confidential information furnished by the disclosing party to the receiving party hereunder as strictly confidential, and shall refrain from disclosing the same to any third party, except for the information which : (i) is or falls within the public domain through no fault of the receiving party or its affiliate ; or (ii) is or has been known to the receiving party in good faith as evidenced by its written records or other competent proof before receipt of the said information from a disclosing party ; or (iii) is disclosed to the receiving party in good faith by a third party who has the right to make such disclosure. 8.2 Notwithstanding the above, a receiving party may disclose such information: a) to its employees who should have access to the information to safeguard that the receiving party pursuits according to this Agreement. b) as required by law; or c) to the extent such disclosure is necessary to achieve the purposes of this Agreement. ----------------------- 3 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 9. TERM, TERMINATION 9.1 This Agreement enters into force on January 1, 2001 and it shall remain in force for a period of five ( 5) years and six ( 6)months. 9.2 Notwithstanding the above, this Agreement may be terminated at any time by either party sending a written notice to the other in the event of a material breach of any conditions of this Agreement by the other party continuing for a period of six (6) months after notice by the non-defaulting party specifying the default complained of, and failure of the defaulting party to remedy such default within the above six (6) months period. 10. FORCE MAJEURE 10.1 A force majeure event shall mean any event or condition, not existing as of the date hereof, not reasonably foreseeable as of such date and not reasonably within the control of either party, which prevents in whole or in material part the performance of one of the parties of its obligations hereunder. Without limiting the foregoing, the following shall constitute force majeure events: Acts of state or governmental action, epidemics, riots, war, strikes, lock outs, suspension, termination, or interruption of utilities, fire, flood, hurricane, earthquake, and explosion. 10.2 The party wishing to claim relief by reason of force majeure event shall notify the other party in writing without delay. 11. ENTIRE AGREEMENT 11.1 This Agreement sets out the entire understanding between the parties with regard to the subject matter hereof, and supersedes and replaces all previous understandings and agreements between the parties, whether oral or written, in connection with the subject matter hereof. 11.2 Any amendments or supplements to this Agreement shall only be valid if made in writing and duly executed by both parties hereto. 12. NOTICES 12.1 Any notice to the other party in connection with this Agreement shall be delivered in person or sent by registered letter or telefax. ----------------------- 4 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. 13. GENERAL CONDITIONS AND GOVERNING LAW 13.1. To the extent not otherwise agreed the GENERAL TRADE RULES FOR WOODPULPS, 1975, shall apply for this Agreement. 13.2 This Agreement and the legal relations between the parties should be governed by the laws of UK and in case of a dispute this should be settled under the Rules of Conciliation an Arbitration of the International Chamber of Commerce in London. IN WITNESS WHEREOF, this Agreement has been duly executed in two identical copies, one for each party. * BONTEX S.A. BONTEX Inc. ______/s/__________ ________/s/_______ __________________ Date 5/9/01 Date 5/9/01 Date _____________ ----------------------- 5 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. APPENDIX NO 1. DELIVERY TERMS: DDU Stembert Mill and DDU Buena Vista respectively. PAYMENT TERMS: Cash within 10 days from invoice date less 1,5 % discount for deliveries to Stembert mill and 60 days net for deliveries to Buena Vista mill. According to INCOTERMS 1990. ----------------------- 6 * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. * TYPICAL CHARACTERISTICS * UNBLEACHED KRAFT SOFTWOOD PULP PULP FROM THE * MILL Date: 98-12-07 Issued by: * , * PROCESS INFORMATION: Spruce and pine around 50% of each are used as wood supply. 70% arrives as logs, the rest is waste chips from sawmills. The chips are continuously digested in a Kamyr digester. After cleaning and washing of the pulp follows an extra super washing before drying. All pulp is flash dried.
PULP CHARACTERISTICS: Kappa number 28 SCAN-C 1:77 Brightness % ISO 29 SCAN-CM 11:95 Intrinsic viscosity dm3/kg 1150 SCAN-C 15:88 Ash Content % 0.20 SCAN-C 6:62 Extractives (Acetone) % 0.13 SCAN-CM 93 Standards SCAN/ISO Testing climate 50% RH 23 (degree)C Beating rev PFI 3500 5200 6200 7200 9000 Drainage Resistance (degree)SR 20 25 30 35 45 Tensile index Nm/g 95 99 102 102 104 Breaking length m 9700 10100 10350 10400 10600 Burst index kPa m2/g 7.3 7.6 7.8 8.0 8.4 Tear index mN m2/g 13.0 12.7 12.1 11.6 10.7 Folding endurance 401og 3.25 3.29 3.31 3.34 3.40 Light Scattering Coeff. M2/kg 16.0 15.1 14.4 14.0 13.6 Opacity % 93.6 93.1 92.4 92.1 91.6 Density kg/m3 717 750 759 770 780 Bulk cm3/g 1.39 1.33 1.32 1.30 1.28 Air permeability, Gurley mm/kPa s 18 9 4.3 2.4 1.1 ------------------------------------------------------------------------------------------------ * Address Telephone Telefax * * * * *
----------------- * Confidential Treatment Requested. The redacted material has been separately filed with the Commission. EX-10 6 btxex10xvi.txt EXHIBIT 10 (XVI) Exhibit 10 (xvi) SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT This Second Amendment to Loan and Security Agreement is made this 12th day of September, 2001 by and between CONGRESS FINANCIAL CORPORATION, a Delaware corporation ("Lender") and BONTEX, INC., a Virginia corporation ("Borrower"). RECITALS Borrower and Lender entered into a certain Loan and Security Agreement dated January 26, 2000 (together with all amendments, modifications, addenda and supplements, the "Loan Agreement") and related documents, evidencing certain financing arrangements between Lender and Borrower as more particularly described therein. Borrower and Lender entered into an Amendment to Loan and Security Agreement on November 13, 2000 (the "First Amendment"). Borrower has requested certain additional modifications to the terms and conditions of the Loan Agreement. Lender is willing to make the said modifications, subject to the terms and conditions of this Amendment ("Amendment"). In addition, Borrower is not in compliance with certain financial covenants in the Loan Agreement and has requested Lender to waive such noncompliance, and Lender has agreed to such waiver in accordance with the terms of this Amendment. NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree, as of the date hereof (unless an earlier date is specified herein), that the Loan Agreement is amended, as follows: 1. DELETED PROVISIONS. The following provisions of the Loan Agreement are hereby deleted: (a) Section 1.14 and all references in the Loan Agreement to "Eurodollar Rate Loans"; (b) Section 1.15, and all references in the Loan Agreement to "Eurodollar Rate"; (c) Section 1.22, and all references in the Loan Agreement to "Interest Period"; (d) Section 3.1(b) and 3.1(c); and (e) Section 3.5. 2. AMENDMENT TO REVOLVING LOAN PROVISIONS. (a) Section 2.1 of the Loan Agreement is hereby amended to read as follows: "2.1 Revolving Loans. (a) Subject to and upon the terms and conditions herein, Lender agrees to make Revolving Loans to Borrower from time to time in amounts requested by Borrower in an aggregate amount equal to the sum of: (i) eighty-five percent (85%) of the Net Amount of Eligible Accounts, plus (ii) eighty-five percent (85%) of the Net Amount of eligible Letter of Credit Accounts, plus (iii) the lesser of: (A) the sum of (I) the lesser of eighty-five percent (85%) of the net orderly liquidation value or fifty-six percent (56%) of the Value of Eligible Inventory consisting of finished goods (but not to exceed $750,000) plus (II) the lesser of eighty-five (85%) of the net orderly liquidation value or twelve percent (12%) of the Value of Eligible Inventory consisting of raw materials for such finished goods (but not to exceed $250,000); or (B) One Million Dollars ($1,000,000); less (iv) any Availability Reserves." (b) Section 2.3, as amended, of the Loan Agreement is hereby further amended by deleting the amount "$425,000", and substituting in lieu thereof the amount "$400,000". 3. INTEREST RATE. Section 1.23 of the Loan Agreement is hereby amended to read as follows: "1.23 "Interest Rate" shall mean, as to Prime Rate Loans, a rate of two percent (2.0%) per annum in excess of the Prime Rate, whether such rate is higher or lower than any rate previously quoted to Borrower." 4. AMENDMENT TO COLLATERAL REPORTING PROVISIONS (a) Subsection 7.3(d) of the Loan Agreement is hereby amended by deleting the word "once" and substituting in lieu thereof the word "twice". (b) Subsection 7.4(a) of the Loan Agreement is hereby amended to read as follows: "(a) upon Lender's request, Borrower shall, at its expense, no more than 2 once in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender;" 5. NET WORTH COVENANT. Section 9.14 of the Loan Agreement is hereby amended to read as follows: "9.14. Adjusted Tangible Net Worth. Borrower shall continuously maintain Adjusted Tangible Net Worth of not less than Five Million Dollars ($5,000,000) from July 1, 2001 through December 31, 2001, not less than Five Million Two Hundred Fifty Thousand Dollars ($5,250,000) from January 1, 2002 through March 31, 2002, and Five Million Five Hundred Thousand Dollars ($5,500,000) from April 1, 2002 and at all times thereafter." 6. FEE. This Amendment is conditioned on the payment by Borrower to Lender of a loan modification supplemental closing fee of $20,000, which shall be fully earned as of the date hereof. Borrower authorizes Lender to extend a Revolving Loan for such supplemental closing fee, subject to the terms and conditions contained in the Loan Agreement. 7. COVENANT NONCOMPLIANCE WAIVER. Borrower acknowledges that as of the date of this Amendment, Borrower is not in compliance with the requirements of Section 9.14 of the Loan Agreement. Effective upon payment in full of the amount set forth in Section 6 hereof, and in consideration thereof, Lender waives such noncompliance through June 30, 2001. Lender's agreement to waive such noncompliance shall not constitute a waiver of any other event which may constitute an Event of Default or obligate Lender to any future waiver of any Event of Default. 8. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to, and covenants with, Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, and the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a continuing condition of the making of Loans by Lender to Borrower: (a) No Event of Default exists, and, with the exception of those matters described in Schedule A attached hereto (which disclosure shall not be construed as Lender's waiver of such Event of Default), no act, condition or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred as of the date of this Amendment (after giving effect to the amendments to the Loan Agreement made by this Amendment); (b) This Amendment has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof and the agreements and obligations of Borrower contained herein constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms; 3 (c) Borrower has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment; (d) This Amendment is, or when executed by Borrower and delivered to Lender, will be, duly executed and constitute a valid and legally binding obligation of Borrower, enforceable against Borrower in accordance with its terms; and (e) The execution by Borrower and delivery to Lender of this Amendment is not and will not be in contravention of any order of any court or other agency of government, law or any other indenture or agreement to which wither Borrower is bound or the Articles of Incorporation or bylaws of Borrower to be in conflict with, or result in a breach of, or constitute (with due notice and/or passage of time) a default under any such indenture, agreement or undertaking or result in the imposition of any lien, charge, encumbrance of any nature on any property of Borrower. 9. Except as expressly amended herein, the terms and conditions of the Loan Agreement are hereby reaffirmed and ratified in all respects, and Borrower reaffirms each of the representations and warranties under the Loan Agreement made by it, as if said representations and warranties were made and given on and as of the date hereof. 10. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts (including by facsimile transmission of executed signature pages hereto), each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same agreement. This Amendment shall become effective upon the execution and delivery of a counterpart hereof by each of the parties hereof. IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be duly executed on and as of the date and year first above written. 4 LENDER BORROWER ------ -------- CONGRESS FINANCIAL BONTEX, INC. CORPORATION By: /s/ Cindy B. Denbaum By: /s/ Jeffrey C. Kostelni Title: VP Title: CFO Address: Address: ------- ------- 1133 Avenue of the Americas One Bontex Drive New York, NY 10036 Buena Vista, Virginia 24116 5 SCHEDULE A 1. Tax Issue at Bontex SA: 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, 2001 and 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. 2. Normal EPA 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 6 within compliance of applicable environmental requirements. Also, 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. Bontex USA received a renewal of its 5-year wastewater discharge permit on April 2, 2001. The new permit allows for an average of discharge limits that were previously point limits. In addition, the zinc limit was removed from the permit by the regulatory authorities as zinc was deemed not to be a component significantly contributing to wastewater impact. The new permit will require the Company to expand its wastewater treatment facility to increase the capacity of its equalization tank. The Company expects to start the expansion this Summer and complete it by the end of the calendar year. Prior to receiving the new permit, the Company had received a Notice of Violation from the Virginia Department of Environmental Quality (DEQ) dated March 14, 2001 regarding its discharge of wastewater. In general, DEQ stated in the Notice of Violation that it had reason to believe that the Company's plant in Buena Vista, Virginia, may be out of compliance with wastewater discharge limitations. The Company expects that this notice of Violation will result in a consent agreement with DEQ but will not result in monetary damages that would have a material adverse effect on the Company's financial condition, liquidity or results of operations. 7 EX-13 7 arsex13.txt EXHIBIT 13 Exhibit 13 [FRONT COVER] [Bontex logo] BONTEX [R] [2001 Annual Report] CONTENTS [BONTEX SYMBOL] BONTEX [R] CONSOLIDATED 2001 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 2001, 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 13 Consolidated Financial Statements and Notes 4 Financial Highlights 28 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 key strategic partnerships to market a range of 1969 Bontex begins Bontex SA investment in Belgium, nonwoven materials. Bontex becomes the then and today, one of the world's largest and first global manufacturer in our industry to highest capacity factories manufacturing be ISO 9001certified, SATRA accredited elastomeric 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- Three year transition as Bontex begins converting operations. 2001 long-term repositioning as a multi- dimensional company. Bontex introduced a 1995 Bontex sales exceed $50 million. Bontex broader range of materials, including establishes Bontex de Mexico to expand export Bontex 90 Insole Seat-board, economical sales. insole products, Bon-Stitch linings, and Bon-Stitch next generation nonwoven insoles. Bontex embarks on an advanced material system 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, Inc. ("Bontex" or the "Company") 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) CONTOUR(R) MORIMER(R) SURTEX(R) BONTEX(R)RECYCLED Bontex is continuing to embark on repositioning the Company to manufacture and supply a range of advanced material systems to both footwear and non-footwear applications. During the previous three years, the Company has successfully introduced several new products, and during the next year, the Company anticipates introducing several additional new products. 2 MESSAGE TO SHAREHOLDERS (Bontex Symbol) BONTEX [R] ONE BONTEX DRIVE BUENA VISTA, VIRGINIA 24416-1500 email: bontex@bontex.com http://www.bontex.com Dear Fellow Shareholder: As I write this letter, Bontex continues to work through one of the most challenging periods in the history of the Company. I am pleased to report that much progress has been made, and we are optimistic that fiscal 2002 will be a pivotal year in returning Bontex to profitability, but much work remains ahead of us. Our management team is committed to working aggressively to address the operating losses and their impact on our financial position. We will continue to evaluate all of our business strategies and we will take the necessary measures considered appropriate to ensure the long-term success and profitability of Bontex. We are not pleased with the losses incurred by Bontex, and my message to shareholders continues to focus on our efforts to return the Company to profitability. Therefore, I will refer you to our Management's Discussion and Analysis for further comments regarding the Company's financial performance and the detailed description of the challenging operating conditions confronting Bontex. In the near term, our returning to profitability depends on increasing sales of our core products and adjusting our cost structure so that Bontex can compete as a low-cost supplier of quality elastomeric wet web fiberboard products. 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 are well into the process and we remain focused on our key initiatives, but this major effort will take much time. We have been able to increase sales, in spite of the highly competitive environment in which the Company operates, through our focused efforts to maintain existing specification customers, add new specification and non- specification customers, and bring new products to the marketplace. Our sales volume increased by 17% this year, as compared to a 7% increase in volume last year. We are confident that this momentum in sales will continue, as we remained focused on all our sales initiatives. In addressing our cost structure, we continue to implement several measures that will contain costs, including new technologies for process controls and formulation in manufacturing, purchase commitments for primary raw materials with "partner" suppliers, which contribute to added stability in our purchase prices as well as secure adequate raw materials, reorganize and stream-line our sales network operations, staff reductions and other cost cutting measures. We expect when all these measures are fully implemented and realized, these efforts should contribute significantly to our annualized cost reductions. Today, Bontex manufactures the highest quality products we have ever made, and we will continue to be an improvement driven company. We are not only one of the world's largest manufacturers and distributors of cellulose and nonwoven insoling materials to the footwear industry, but we can boast that we are the global leader in supplying these products to the high-end market segment of our industry. We are also the leader in quality products, as supported by being the first global manufacturer in our industry to be ISO 9001 with the SATRA Quality Mark and a SATRA Accredited Laboratory. We cannot simply maintain our position in the footwear industry. It is crucial to increase our sales in order to provide a revenue and profit base from which to build upon for both footwear and non-footwear products. During the past two years, we have successfully increased our market share in our core footwear business relative to the overall market and relative to our primary global competitors through the introduction of our new products. Our new footwear products, including our Bontex 90 Seat-board and Bon-Stitch nonwoven materials, contributed over $2.0 million in sales last year. Furthermore, the introduction of a range of economical cellulose products, the largest market segment for Bontex type products, increased sales volume and contributed to better capacity utilization. The positive effects of greater economies are expected to enhance our competitive position in the future, especially with Bontex SA, our production facility in Belgium, which we regard as the highest capacity and most efficient factory in our industry worldwide. These sales increases were partially offset by the aggressive pricing of our primary global competitor, which has been costly to Bontex over the past few years. In spite of this competitive situation, we have not lost any major specification accounts, but the reduction in pricing and operating profits has been significant. 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. The emphasis on increasing sales for the Company, especially with Bontex USA, is an important priority, because the contraction of the US domestic market has resulted in a loss of an important volume of this business for the Company. As with all manufacturers, Bontex is volume sensitive, and the lower the volume, the higher our per unit costs. Sales from new products combined with cost cutting measures will be crucial to the profitability of the Company. Prior to closing my letter, a major event of historical significance has occurred, which will affect Bontex and much of the world. The United States of America has been attacked by terrorists with the devastation at the World Trade Center in New York and the Pentagon near Washington DC. The ramifications of these atrocities will be significant. We cannot predict with any certainty the full ultimate impact on Bontex or on us as individuals, but the world we all live in will be changed by this defining moment and tragedy. We can report that Bontex has not yet been directly affected, but we will eventually work through the resulting adversities. Our thoughts and prayers are with the victims of these horrendous and unprecedented attacks. We greatly appreciate our shareholders' support of our efforts to develop Bontex into a more diverse 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. s/James C. Kostelni James C. Kostelni Chairman and Chief Executive Officer See accompanying safe harbor disclosure on page 5 ------------------------------------------------------------------------------ Bontex, Inc., Bontex SA (Belgium), Bontex S.r.l. (Italy), Bontex Hong Kong, Bontex de Mexico, Bontex Vietnam 3
BONTEX, INC. AND SUBSIDIARIES Summary of Selected Ten Year Data1 (In Thousands, Except Per Share Data and Ratios) YEARS ENDED JUNE 30, 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 Net sales $ 42,504 $ 39,455 $ 39,325 $ 43,483 $ 50,333 $ 47,618 $ 50,998 $ 47,729 $ 46,710 $ 46,534 ======== ======= ======== ======== ======== ======= ======= ======== ======== ======== Income (loss) before cumulative effect of change in accounting principles $ (1,526) $ (659) $ (778) $ (446) $ 1,733 $ (602) $ (1,458) $ 935 $ 193 $ 942 Cumulative effect of change in accounting principles - - - - - - - 400 - - -------- ------- -------- -------- -------- ------- ------- -------- -------- -------- Net income (loss) $ (1,526) $ (659) $ (778) $ (446) $ 1,733 $ (602) $ (1,458) $ 1,335 $ 193 $ 942 ======== ======= ======== ======== ======== ======= ======= ======== ======== ======== Income (loss) per share: Before cumulative effect of change in accounting principles $ (.97) $ (.42) $ (.49) $ (.28) $ 1.10 $ (.38) $ (.93) $ .60 $ .12 $ .60 Cumulative effect of change in accounting principles - - - - - - - .25 - - -------- ------- -------- -------- -------- ------- ------- -------- -------- -------- Net income (loss) $ (.97) $ (.42) $ (.49) $ (.28) $ 1.10 $ (.38) $ (.93) $ .85 $ .12 $ .60 ======== ======= ======== ======== ======== ======= ======= ======== ======== ======== Total assets $ 27,439 $ 30,885 $ 31,164 $ 32,513 $ 32,906 $ 33,181 $ 39,527 $ 31,032 $ 28,840 $ 28,669 Total stockholders' equity $ 6,975 $ 8,948 $ 9,893 $ 10,891 $ 11,515 $ 10,308 $ 11,186 $ 12,080 $ 10,521 $ 10,825 Capital expenditures $ 747 $ 854 $ 1,067 $ 2,334 $ 2,389 $ 2,157 $ 1,704 $ 1,868 $ 1,226 $ 1,787 Cash flows provided by (used in) operating activities $ (774) $ 1,608 $ 122 $ 57 $ 3,037 $ 1,180 $ (2,073) $ 1,078 $ (122) $ 215 Long-term debt, noncurrent $ 1,568 $ 2,327 $ 2,601 $ 2,256 $ 2,761 $ 2,330 $ 1,364 $ 1,511 $ 1,056 $ 1,493 Book value per share $ 4.43 $ 5.69 $ 6.29 $ 6.92 $ 7.32 $ 6.55 $ 7.11 $ 7.68 $ 6.69 $ 6.88 Cash dividends per common share $ - $ - $ - $ - $ - $ - $ - $ - $ .05 $ - Current ratio .94 .98 1.02 1.05 1.16 1.06 1.07 1.30 1.26 1.34 Total debt to equity ratio 2.93 2.45 2.15 1.99 1.86 2.22 2.53 1.57 1.74 1.65
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 10, 2001 there were approximately 688 stockholders of record. No cash dividends were declared or paid during fiscal years 1997 through 2001.
2001 2000 1999 1998 1997 ------- ------ ----- ----- ------ HIGH Low High Low High Low High Low High Low ------ ------ -------- ----- ------- ----- ------ ------ ------- ----- First Quarter $ 2.25 $ 1.75 $ 2.75 $ 1.75 $ 3.38 $ 2.25 $ 9.63 $ 4.25 $ 4.00 $ 3.13 Second Quarter 2.00 1.25 2.63 1.50 2.62 1.50 8.50 4.50 5.13 3.50 Third Quarter 3.37 1.25 5.47 1.75 4.00 1.00 5.25 3.25 5.38 4.50 Fourth Quarter 2.70 1.75 3.75 1.75 3.00 1.50 4.25 2.88 5.00 4.25
4 BONTEX, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL 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, without limitation, statements about financing plans, cash flows, availability of capital, growth opportunities, benefits from new technologies, financial condition, capital expenditures, future results of operations or market conditions and involve certain risks, uncertainties and assumptions. The words "estimate," "project," "intend," "expect," "believe," and similar expressions are intended to identify forward-looking statements. These and other forward-looking statements are found at various places throughout this report, and you are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements should, therefore, be considered in light of various relevant factors. 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 U.S. 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 price of Bontex's products due to foreign currency devaluations, increased pulp and latex prices, capital illiquidity, unexpected foreign tax liabilities, the impact of any unusual items resulting from ongoing evaluations of the Company's business strategies, decreases in the Company's borrowing base, trading of Bontex common stock at a level where closing bid prices are too low to remain listed on the Nasdaq SmallCap Market, increased funding requirements for the Company's pension plan, inability to recover deferred tax assets, an inability by Bontex to renew its current credit facilities or obtain alternative financing, a market shift in demand from higher-quality products to more economical grade products with lower profit margins, higher energy prices, and increased costs of complying with environmental laws, and the impact of changes in political, economic or other factors, legal and regulatory changes or other external factors over which the Company has no control. RESULTS OF OPERATIONS OVERVIEW Bontex, Inc. is one of the world's largest global manufacturers and distributors of elastomeric wet web fiberboard products and nonwoven materials primarily used as an insole material in footwear and as a stiffener or laminating base in luggage and leather good applications. Management believes Bontex is the global leader in manufacturing and supplying such quality component materials to the high-end market segment, and furthermore, Bontex has one of the largest customer bases in the world for its industry. During fiscal 2001, management estimates the Company's overall market share increased relative to the Company's primary global competitors, and management believes this momentum for improving market position will continue. However, the increases in sales and sales volumes were not enough to offset the increases in costs and other negative operating conditions. The following discussion and analysis describes continued challenging operating conditions. The increase in operating losses can be attributed to a number of factors, including increased competition resulting in reduced prices for the Company's products, a major market shift from higher quality materials and composite packages to more economical grade products with lower gross profit margins, higher costs for primary raw materials, including pulps and latex, a declining U.S. domestic market for our core footwear products, and the usage of nonwoven materials as an insole material. In spite of the increased losses, Bontex has taken steps to mitigate higher raw materials and operating costs, for which the positive effects are expected to be 5 realized during the next fiscal year. Management maintains positive expectations for improved profitability because of lower raw material costs, higher sales and improved profit margins through the use of improved technologies, formulations and process controls. Sales of recently introduced new footwear products showed promise during the year, but there can be no assurances that these new products, or other new non-footwear products nearing the marketability stage, will contribute significantly to the Company's sales volume. It is not possible to accurately predict the viability of any of these products at this time, but Bontex has embarked on a major effort to identify, develop and promote a more broad range of advanced materials and technologies for domestic and export to footwear and non-footwear industries. SALES Consolidated net sales were $42.5 million, $39.5 million, and $39.3 million, for fiscal years 2001, 2000, and 1999, respectively. If the foreign currency exchange rates had remained unchanged from last year to the current year, consolidated net sales would have increased instead by $6.6 million or almost 17%, to $46 million, reflecting higher sales volumes. In other words, the increase in the value of the US dollar relative to the Euro during fiscal 2001 resulted in a $3.6 million translation decrease in net sales. For the prior year, there was a $2.6 million translation decrease in consolidated net sales in comparing 2000 to 1999. In spite of significant competition, Bontex has successfully increased the Company's overall market share and strengthened the Company's position in specification footwear sales, as well as increasing non-specification sales. Management considers specification sales to be sales to those branded footwear customers who specify Bontex materials to their contract factories. Non-specification sales are sales to those customers who do not specifically request Bontex products be used by their contract factories in the manufacturing of their footwear products. Competitive pricing pressures, especially from the Company's primary global competitor, have significantly reduced the Company's prices and operating profits to a number of key specification accounts. Management believes Bontex has not lost any specification accounts due to this price competition, but there has been a significant cost and there is no assurance that such competitive pricing will not further adversely affect the Company's future sales and profitability. The cellulose insole market continues to be affected by competition from nonwoven materials and low quality products, especially in Far East markets. For instance, there is an over-supply and over-capacity of low quality materials, especially acute in China, which creates 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 continues to allocate increased resources to the Company's marketing network in China, Vietnam and Thailand. Management has reorganized the Company's personnel and added staff in key areas in order to continue the momentum initiated in previous years in these increasingly important markets. Bontex has successfully introduced a range of quality economical products in response to competition from lower priced products, the largest market segment for cellulose insole products. These lower priced quality Bontex products have lower profit margins than the Company's high-end products, but contribute positively to capacity utilization, because these products are high volume. In addition, because Bontex believes the Company's factory in Belgium is the world's most efficient and highest capacity machine, management believes Bontex can profit from these lower-margin high volume products. Bontex has made significant efforts to maintain as high prices as possible, but the competitive nature of such commodity products has resulted in the increased volume of these economical products. Over the past several years, sales of Bontex cellulose insole products, particularly to the athletic category, have also declined because of the trend of increased usage of nonwoven insole materials, an alternative material and construction to cellulose board lasted construction. Nonwoven insole materials are used mainly in force last or strobel-stitch applications, whereas Bontex cellulose products are mainly used in cement or 6 board lasted construction. The overall volume of nonwoven strobel constructed footwear has leveled off, and management believes board lasted footwear remains the predominant insole material and construction worldwide. As part of the Company's sales initiatives, Bontex has recently introduced a range of new nonwoven insole materials and linings, marketed under the Bontex trade name, Bon-Stitch, which are sourced from other manufacturers to further expand the Company's product base. Also during the prior year, sales of the Company's recently introduced Bontex 90 Seat-board (patent pending) product continue to develop for high-end applications, such as golf, soccer and other footwear applications requiring a tuck-board. In 2001, sales of these new seat-board and nonwoven products totaled over $2.1 million. Because Bontex does not manufacture these nonwoven products, the Company's costing and prices are such that the Company's per unit margins are relatively low as compared to the Company's manufactured products, which has a tendency to lower the Company's overall margins. However, since the added cost of marketing these products is not considered to be significantly more, the Company's strategy is to have high volumes so that these added sales contribute positively to covering overhead costs and to the Company's overall profits. Bontex has an aggressive strategy to locate complimentary products and advanced technologies and rapidly bring them to the marketplace. Sales from a number of these new projects were expected to occur during fiscal year 2001, 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, management expects one or more of these projects to generate sales during fiscal year 2002. COSTS The increases in sales were not enough to offset the impact of higher costs: Cost of sales as a percent of net sales were 76.4 percent in 2001, 72.5 percent of net sales in 2000, and 74.1 percent of net sales in 1999. Overall, gross profits (net sales less cost of sales) declined from $10,857,000 in 2000 to $10,051,000 in 2001, a decrease of $806,000. The increase in costs and lower profit margins from 2000 to 2001 can be attributed mainly to higher raw material costs, especially pulp and latex, competitive pricing pressures lowering selling prices, lower priced product mix, including less converted or laminated products and more sourced and economical products, and higher operating costs, including higher natural gas prices used to generate steam for production, and higher costs for waste water treatment processing. For example, higher raw material costs in 2001 translated to an increase in operating costs and reduced operating income of over $1.6 million relative to 2000. However, several of the Company's cost control measures and higher sales volumes abated some of the higher raw material costs. The decrease in costs as a percentage of sales from 1999 to 2000 was mainly due to lower raw material costs, improved efficiency from prior investments and other cost control measures taken by management. The Company has entered into a number of purchase commitments for certain commodities, including pulp, latex and natural gas, for future manufacturing requirements in an effort to manage the effects of market price fluctuations and to secure adequate raw material supplies. If these purchase commitments for pulp and latex had been in effect during all of 2001, the Company would have had lower raw material prices. However, there is no guarantee that these purchase commitments will result in lower purchase prices for the Company. To the extent that these purchase commitments obligate the Company to purchase pulp, latex and natural gas at higher than prevailing market prices, they could result in higher costs. The Company's United States operations use the last in, first out (LIFO) method of inventory accounting. If the first-in, first-out, (FIFO) method of accounting had been used, reported gross profit would have been higher by $101,000 in 2001, higher by $28,000 in 2000, and lower by $93,000 in 1999. Net income would have been higher by $61,000 or $0.04 per share in 2001, higher by $18,000 or $.01 per share in 2000, and lower by $60,000 or $.04 per share in 1999. 7 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 opportunities for footwear and non-footwear sales in the United States. As a percent of net sales, selling, general and administrative (SG&A) expenses over the previous three years were 24.9 percent in 2001, 26.1 percent in 2000, and 26.0 percent in 1999. The lower SG&A percentage in 2001 as compared to 2000 reflects sales increasing at a higher rate than related costs because of the Company's continued efforts to control costs. In 2000 and 1999, the higher SG&A percentages were mainly due to lower sales volumes, and higher costs, due to among other things, higher legal costs associated with certain lawsuits against the Company and some of its officers. These legal expenses did not recur in this magnitude during 2000, but increased shipping costs, the addition of new sales employees, and other related selling and marketing costs kept the SG&A percentage from declining in 2000 relative to 1999. The impact of the cost structure described above resulted in operating income reversing from an operating income of $564,000 during 2000 to an operating loss of $541,000 for 2001. Decreases in profitability occurred at both Bontex USA and Bontex Belgium, but the largest portion of the operating losses was with Bontex USA. Over the past several years, the volume of business for Bontex USA has declined considerably because of several factors, including a contracting US domestic market. This decline in sales combined with competitive pricing pressures and higher operating costs for, among other things, raw materials, resulted in much higher operating losses. Management has implemented several initiatives as described in this discussion and analysis to address this situation, and progress has been made to reduce costs and increase sales, but there is no assurance that these steps will return Bontex USA to profitability. Interest expense remained relatively stable from 2000 to 2001, because the decline in interest rates during the year was offset by the increases in borrowing to fund higher sales and operating losses. The decrease in interest expense from 1999 to 2000 was due primarily to a decrease in long and short-term borrowing because of lower sales, which was offset somewhat by higher interest rates. The consolidated income tax expense for the Company was $901,000 in 2001, as compared to an income tax expense of $335,000 in 2000 and an income tax benefit of $208,000 in 1999. The income tax expense in 2001 is primarily due to the recording of a valuation allowance for the deferred tax assets of Bontex USA. Based on the evaluation of relevant factors, including the recurring losses at Bontex USA over the past several years, a valuation allowance of $1,022,000 was recorded at June 30, 2001. The income tax expense in 2000 was significantly higher than 1999 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 that 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, (or 250,000 Euros, the local reporting currency for Bontex SA), and, accordingly, a provision for this amount was accrued at June 30, 2000. The accrual amount in Euros remained at 250,000 at June 30, 2001, but due to fluctuations in the value of the Euro relative to the USA dollar, the amount reported translates to $212,000 at June 30, 2001. Similar deductions relating to the years ended June 30, 2001 and 2000 that in light of the current information may be 8 disallowed have been treated as disallowed expenses in the calculation of those year's tax provisions. The Company's actual liability pursuant to the foregoing examination may exceed $212,000, and such excess liability could adversely affect the Company's financial condition. PROFITABILITY The net loss of $1.5 million or $0.97 per share incurred in 2001 compares unfavorably to $659,000 or $0.42 per share net loss in 2000, and to the loss of $778,000 or $0.49 per share in 1999. The net loss during 2001 would have been higher by $482,000; however, during the year Bontex, Inc. sold the Company's warehouse facility in Newark, New Jersey, and recorded in Other Income/Expense - net a one-time gain of $803,000 or net gain of approximately $482,000 after considering the impact of taxes. Additionally, as previously described, the recording of the valuation allowance for deferred income tax assets of Bontex USA increased the current year net loss by $1,022,000. Management is working aggressively to reverse these unprofitable results. The coming year will be a pivotal year, and management will continually evaluate the Company's business strategies and all options, and if, circumstances warrant, management will take the necessary measures considered appropriate for the Company's long-term profitability. Historically, the financial performance of Bontex has been directly related to cycles in key raw materials, particularly pulp and latex. However, over the past few years, higher raw material costs combined with the lower sales volumes of the Company's Bontex cellulose materials, particularly for Bontex USA, have resulted in especially negative operating conditions. Management continues to pursue several measures, including process controls and formulation efficiencies, to better enable the Company to cope with fluctuations in volume and raw material costs in the future, as well as several initiatives to increase sales. However, as previously noted, selling price reductions due to the Company's competitive situation have offset a large portion of the Company's cost reductions. Management remains optimistic for the future, but there can be no assurances that increased raw materials prices or decreased volume of sales will not have an on-going 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, especially to the Far East, where an estimated 70 percent of global shoe production occurs. For instance, China is the single largest market in the world for Bontex type products, as it is estimated that approximately half of the world's footwear is manufactured in China. The Company's sales to the Far East are denominated in US dollars, which serves to limit the Company's exposure to foreign currency exchange gains and losses. However, there remains some foreign currency exchange exposure for the Company's sales in that Bontex USA continues to have limited level of sales denominated in other currencies, mostly with the Mexican peso and Canadian dollar. The exchange losses during 2001 and 1999 are mainly due to declines in value of the Mexican peso, Canadian dollar and the overall strength of the US dollar during that period. The relative strength of the US dollar makes Bontex products more expensive than locally sourced materials abroad, which has an adverse impact on the Company's competitive position. Bontex remains an international company. Almost 90 percent of the Company's sales are to customers outside of the United States, with Asia/Pacific representing over 48 percent of net sales. Europe and Middle East markets represent the next largest markets for Bontex products, representing approximately 32 percent of net sales. Furthermore, almost 60 percent of the Company's manufacturing is outside of the United States. No one customer represents more than 10 percent of the Company's total sales, and we have an extensive customer base. 9 LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources have decreased significantly over the past few years, due to net losses and investments in capital and 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. EBITDA, defined as operating income plus depreciation and amortization, is considered a primary measure of the Company's ability to generate cash flow. EBITDA remained positive but decreased from $1,886,000 in 2000 to $758,000 in 2001, mainly because of the operating losses. EBITDA margin, defined as EBITDA as a percent of net sales, was 1.8 percent in 2001, 4.8 percent in 2000 and 3.4 percent in 1999. The decline in EBITDA margin from 2000 to 2001 was mainly due to decreased profitability and increase in net sales, and the improvement in EBITDA margin from 1999 to 2000 was primarily due to the growth in operating income, partially offset by increases in sales. Cash flows provided by (used in) operations totaled $(774,000), $1.6 million, and $122,000 in 2001, 2000 and 1999, respectively. Operating cash flows were adversely affected by higher costs, reflected in proportionately higher payments to suppliers, higher inventory balances, and decreases in accounts payables and accrued expenses, which were partially offset by a decrease in trade receivables. In 2000, operating cash flows were primarily due to an increase in accounts payable and accrued expenses, which was partially offset by an increase in accounts receivable and other receivables. In 1999, operating cash flows were mainly due to reductions in inventory. Trade accounts receivable decreased $1.5 million to $10.7 million at June 30, 2001, as compared to last year due primarily to improved collections and aging, as well as a decrease due to fluctuations in foreign currencies resulting in a translation decrease of approximately $800,000. Inventories at June 30, 2001 are lower by $21,000 compared to 2000 balances due mainly to increased efforts to improve turnover and global stock requirements, as well as a foreign currency translation decrease. The Company's cash conversion efficiency, cash flows from operations divided by net sales, decreased from 4.1 percent in 2000 to (1.8) percent this year, as compared to a cash conversion efficiency ratio of less than 1.0 percent in 1999. The Company's current ratio has decreased slightly from .98 in 2000 to .94 this year, reflecting, among other things, funding of operating losses and capital additions through current debt. Capital expenditures for property, plant and equipment (PP&E) totaled $747,000 in 2001, $854,000 in 2000 and $1.1 million in 1999. The PP&E additions reflect the Company's commitment to invest in new technologies so that the Company can remain a global leader in manufacturing the highest quality products at the lowest cost. Competition is principally based on price, delivery and quality, and the Company's future success will depend on the Company's ability to maintain the Company's leadership position and to anticipate and to respond to various competitive factors affecting the industry, including pricing strategies, environmental mandates, and other such market trends. Capital expenditures in 2001 were lower than prior years due to controls to limit costs 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. Future capital investments will primarily relate to non-recurring items in process controls to improve production efficiencies and the environment. These projects are expected to help maintain Bontex as an industry leader in quality, efficiency, and reliability. As previously discussed, Bontex sold the Company's Newark, New Jersey warehouse facility during 2001, for proceeds of $863,000 resulting in a gain of $803,000 (after tax gain of $482,000). The proceeds from this 10 sale were utilized for operations and repayment of debt. Bontex continues to service its customers in the New York metropolitan area from a leased office and warehouse. On June 30, 2001, the Company had loans of $10.9 million outstanding consisting of $8.8 million short-term and $2.1 million long-term. The $537,000 increase in short-term borrowings principally corresponds to the $1 million decrease in accounts payable and accrued expenses and the funding of operating losses, which was partially offset by decreases in receivables. The weighted average interest rate on short-term borrowings during 2001 and 2000 was 6.6 and 7.3 percent, respectively. Financial instruments and market risk are discussed in more detail below under Market Risk and Sensitivity. On January 26, 2000, Bontex USA paid off and terminated its credit facility with Wachovia Bank, N.A., and entered into a loan and security agreement with Congress Financial Corporation/First Union providing for a secured 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 USA, which are pledged as collateral in addition to certain non-current assets. The lending availability fluctuates daily. Based on the lending formula, from the inception of the loan through June 30, 2001, an average amount of approximately $3.1 million has been available and borrowed by Bontex USA under the revolving loan. This credit facility with Congress expires in January 2002. Further, on five days notice to Bontex USA, Congress may change the lending formula and in effect reduce the amount available to Bontex USA under the revolving loan. The new credit facility also requires Bontex USA to maintain a specified adjusted tangible net worth. At June 30, 2001, Bontex USA was not in compliance with the debt covenant ratio, but the Company subsequently received a waiver for the non-compliance and a reset in the debt covenant ratio for which Bontex was within compliance, as well as increase the Bontex USA's interest rate by 1% to a rate of prime plus 2 percent. Management anticipates future compliance with the revised debt covenant ratio, but there can be no assurance the Company will remain in compliance. Bontex USA may not be able to renew its credit facility with Congress or to obtain alternative financing on acceptable terms, which could cause a material adverse impact on the Company's financial condition, liquidity and/or results of operations. Please refer to Note 4 of Notes to the Consolidated Financial Statements for further details regarding the Company's indebtedness. MARKET RISK AND SENSITIVITY As previously discussed, the Company is exposed to certain risks related to interest rates, foreign currencies 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. In general, the Company's policy is not to speculate on interest rates, foreign currencies and commodities in the markets. Fair Value of Financial Instruments (dollars in thousands):
FACE AMOUNT/ Estimated CARRYING AMOUNT Fair Value June 30, 2001 Interest Rate Exposure: Long-term debt $ 2,146 $ 2,023 Short-term debt $ 8,788 $ 8,788 June 30, 2000 Interest Rate Exposure: Long-term debt $ 2,953 $ 2,695 Short-term debt $ 8,251 $ 8,251
11 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, 2001 (dollars in thousands).
EXPECTED MATURITY DATE There- Estimated 2002 2003 2004 2005 after Total Fair Value LIABILITIES Long-term debt: Fixed Rate $ 378 $ 432 $ 396 $ 223 $ --- $ 1,429 $ 1,306 Average Interest Rate 5.99% 5.96% 5.96% 5.82% --- 6.03% Variable Rate $ 200 $ 200 $ 200 $ 117 $ --- $ 717 $ 717 Average Interest Rate 8.00% 8.00% 8.00% 8.00% --- 8.00%
At June 30, 2001, the Company had no outstanding interest rate swap agreements. Therefore, approximately $9.5 million of variable rate debt is subject to the risk of interest rate changes. Additionally, approximately $7.7 million of the Company's debt is denominated in Euro, and because the Euro is the operating currency for the Company's wholly-owned subsidiaries for which this debt pertains, this debt is not considered subject to the market risk associated with foreign currencies. The above market risk sensitivity analysis does not fully reflect the potential net market risk exposure, because other market risk exposures may exist in other transactions. RECENT ACCOUNTING PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company does not expect that the adoption of SFAS No. 140 will have a material impact on the Company's results of operations, financial position or cash flows. In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." Statement 141 specifies criteria intangibles assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their residual values, and reviewed for impairment in accordance with Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 is effective July 1, 2002. The adoption of Statement 141 did not have a material impact on the Company's results of operations, financial position or cash flows, and the adoption of Statement 142 is not expected to have a material impact on the Company's results of operations, financial position or cash flows. 12
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS): 2001 2000 1999 NET SALES $ 42,504 $ 39,455 $ 39,325 COST OF SALES 32,453 28,598 29,152 ----------- ----------- ------------ Gross Profit 10,051 10,857 10,173 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,592 10,293 10,224 ----------- ----------- ------------ Operating income (loss) (541) 564 (51) ----------- ----------- ------------ OTHER (INCOME) EXPENSES: Interest expense 853 834 923 Interest income (8) (2) (3) Foreign currency exchange (gain) loss 28 (29) 40 Other - net (789) 85 (25) ----------- ----------- ------------ 84 888 935 ----------- ----------- ------------ LOSS BEFORE INCOME TAXES (625) (324) (986) INCOME TAX EXPENSE (BENEFIT) 901 335 (208) ----------- ----------- ------------ NET LOSS (1,526) (659) (778) ----------- ----------- ------------ OTHER COMPREHENSIVE LOSS Foreign currency translation adjustment (447) (286) (220) ----------- ----------- ------------ COMPREHENSIVE LOSS $ (1,973) $ (945) $ (998) =========== =========== ============ NET LOSS PER SHARE $ (.97) $ (.42) $ (.49) =========== =========== ============ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY: 2001 2000 1999 Stockholders' Equity, beginning balance $ 8,948 $ 9,893 $ 10,891 Net loss (1,526) (659) (778) Other comprehensive loss Foreign currency translation adjustment (447) (286) (220) ----------- ----------- ------------ Stockholders' Equity, ending balance $ 6,975 $ 8,948 $ 9,893 =========== =========== ============
See accompanying notes to consolidated financial statements 13
BONTEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 ASSETS CURRENT ASSETS: Cash $ 320 $ 457 Trade accounts receivable, less allowance for doubtful accounts of $96 ($170 at 2000) 10,700 12,187 Other receivables 629 378 Inventories 5,444 5,465 Deferred income taxes 35 135 Income taxes refundable - 49 Other current assets 166 120 ---------- ------------ Total current assets 17,294 18,791 ---------- ------------ PROPERTY, PLANT AND EQUIPMENT: Land and land improvements 276 350 Building and building improvements 5,259 5,525 Machinery, furniture and equipment 17,691 17,797 Construction in progress 387 526 ---------- ------------ Less accumulated depreciation and amortization 14,020 13,491 ---------- ------------ Net property, plant and equipment 9,593 10,707 Deferred income taxes - 736 Other assets, net 552 651 ---------- ------------ Total assets $ 27,439 $ 30,885 ========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 8,788 $ 8,251 Long-term debt due currently 578 626 Accounts payable 6,808 7,756 Accrued expenses 1,869 1,902 Income taxes payable 368 594 ---------- ------------ Total current liabilities 18,411 19,129 Long-term debt, less current portion 1,568 2,327 Deferred income taxes 9 42 Other long-term liabilities 476 439 ---------- ------------ Total liabilities 20,464 21,937 ---------- ------------ 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 5,935 7,461 Accumulated other comprehensive income (668) (221) ---------- ------------ Total stockholders' equity 6,975 8,948 ---------- ------------ Total liabilities and stockholders' equity $ 27,439 $ 30,885 ========== ============
See accompanying notes to consolidated financial statements. 14
BONTEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2001, 2000 AND 1999 (IN THOUSANDS) 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers $ 42,968 $ 37,378 $ 39,152 Cash paid to suppliers and employees (42,632) (34,886) (38,237) Interest received 8 4 10 Interest paid (843) (814) (931) Income taxes received (paid), net (275) (74) 128 ----------- ----------- ------------ Net cash provided by (used in) operating activities (774) 1,608 122 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment 886 - - Purchases of property, plant and equipment (747) (854) (1,067) ----------- ----------- ------------ Net cash provided by (used in) investing activities 139 (854) (1,067) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term borrowings, net 1,133 (404) 898 Long-term debt incurred - 545 547 Principal payments on long-term debt (617) (752) (669) ----------- ----------- ------------ Net cash provided by (used in) financing activities 516 (611) 776 ----------- ----------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (18) (22) (12) ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH (137) 121 (181) CASH AT BEGINNING OF YEAR 457 336 517 ----------- ----------- ------------ CASH AT END OF YEAR $ 320 $ 457 $ 336 =========== =========== ============ RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $ (1,526) $ (659) $ (778) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,299 1,322 1,372 Gain on sale of property, plant and equipment (803) - - Provision for bad debts (54) 92 (39) Deferred income taxes 803 (154) (191) Change in assets and liabilities: (Increase) decrease in trade accounts and other receivables 674 (1,226) (522) (Increase) decrease in inventories (537) (5) 547 (Increase) decrease in other assets (113) (186) 146 Increase (decrease) in accounts payable and accrued expenses (394) 1,988 (367) Increase (decrease) in income taxes payable (175) 421 143 Increase (decrease) in other liabilities 52 15 (189) ----------- ----------- ------------ Net cash provided by (used in) operating activities $ (774) $ 1,608 $ 122 =========== =========== ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Construction in progress accrued in accounts payable $ 115 $ - $ - =========== =========== ============
See accompanying notes to consolidated financial statements. 15 BONTEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001, 2000 AND 1999 (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." 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. 16 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - When appropriate, the Company enters into interest rate swap transactions to manage its interest rate exposure, and on a limited basis, the Company has previously managed its exposure to pulp price changes with pulp futures. 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. On July 1, 2000, the Company adopted the provisions of this Statement. Since the Company did not have any derivatives during 2001, there was no impact on the Company's financial statements; however, the Company has used in the past and continues to consider in the future the use of derivative instruments and hedging activities, accordingly, 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 accounting principles generally accepted in the United States of America 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. [2] INVENTORIES Cost of inventories of approximately $1,325 in 2001 and $1,873 in 2000, is determined by the last-in, first-out method (LIFO). Replacement cost for LIFO inventories approximated $1,740 in 2001 and $2,187 in 2000. Inventories of approximately $4,119 in 2001 and $3,592 in 2000, are determined by the first-in, first-out (FIFO) and weighted average bases. Inventories are summarized as follows:
2001 2000 Finished goods $ 4,020 $ 3,849 Raw materials 1,180 1,222 Supplies 659 708 ---------- ---------- Inventories at FIFO and weighted average cost 5,859 5,779 LIFO reserves 415 314 ---------- ---------- $ 5,444 $ 5,465 ========== ==========
During 2001 and 1999, LIFO layers were reduced resulting in charging lower inventory costs to cost of sales of $57 and $255, respectively. In 2000, no LIFO layers were reduced. 17 [3] BUSINESS SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS Bontex, Inc. and all majority-owned subsidiaries are predominantly engaged in one business segment with 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 2001 $ 6,128 $ 20,493 $ 13,800 $ 2,083 $ 42,504 2000 6,731 16,366 14,264 2,094 39,455 1999 7,086 15,301 15,315 1,623 39,325
No single customer accounts for 10 percent or more of the Company's consolidated net sales for 2001, 2000 and 1999. One distributor accounted for 23.2 percent in 2001, 19.2 percent in 2000 and 15.2 percent in 1999 of the Company's consolidated net sales. Information related to the North American and European operations follows:
North American European Operations Operations Eliminations Consolidated 2001: Total assets $ 13,792 $ 15,726 $ (2,079) $ 27,439 Net income (loss) (1,545) 19 - (1,526) Operating income (loss) (1,470) 929 - (541) Net sales 16,880 26,028 (404) 42,504 Interest expense 335 518 - 853 Depreciation and amortization 806 493 - 1,299 Income tax expense 839 62 - 901 Total expenditures for additions to property, plant and equipment 339 408 - 747 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 18 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
Retained earnings of foreign operations not available for distribution amounted to approximately $243 and $757 at June 30, 2001 and 2000, respectively. [4] LONG-TERM DEBT AND FINANCING AGREEMENTS The following long-term debt was outstanding as of June 30, 2001 and 2000:
2001 2000 Loan payable to a United States bank in monthly installments of $17 through January 2005, at an interest rate of prime plus 1% (8% and 10.5% at June 30, 2001 and 2000, respectively); collateralized by property and equipment located in the U.S. and subject to various loan covenants. $ 717 $ 917 4.70% loan payable to a Belgian bank in quarterly installments of $7 through June 2005. 118 166 4.70% loan payable to a Belgian bank in quarterly installments of $13 through June 2005. 210 296 5.20% loan payable to a Belgian bank in quarterly installments of $26 through June 2005. 420 592 5.50% loan payable to a Belgian bank in quarterly installments of $7 through June 2005. 105 148 5.85% loan payable to a Belgian bank in quarterly installments of $20 through June 2005. 324 455 3.95% loan payable to a Belgian bank in quarterly installments of $21 through April 2004. 252 379 ---------- ------------- 2,146 2,953 Less long-term debt due currently 578 626 ---------- ------------- Long-term debt $ 1,568 $ 2,327 ========== =============
19 The principal payments of long-term debt are as follows:
2002 $ 578 2003 632 2004 596 2005 340 ---------- Total $ 2,146 ==========
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 $6,824 and $7,186 at June 30, 2001 and 2000, respectively. As of June 30, borrowings under these facilities were as follows:
2001 2000 Short-term bank loans with variable interest rates, ranging from 5.66% to 6.9% at June 30, 2001 and 4.77% to 7.45% at June 30, 2000 $ 6,263 $ 5,100 Overdrafts 7 - ---------- ---------- $ 6,270 $ 5,100 ========== ==========
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, 2001 and 2000, one of the banks under these facilities had the right to request a security interest up to $1,051 and $1,184, respectively. Bontex S.A. committed to one of the banks to maintain certain covenants which were met at June 30, 2001. 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 (8% at June 30, 2001 and 10.5% at June 30, 2000). At June 30, 2001 and 2000, Bontex USA had borrowings of $2,518 and $3,151, respectively, which is to the limit of availability based on the lending formula. There was no additional available credit on this facility at June 30, 2001 and 2000. The secured line of credit is collateralized by trade accounts receivable, inventory and other noncurrent assets. Consolidated weighted average interest rates on short-term borrowings at June 30, 2001 and 2000 are 6.6 and 6.9 percent, respectively. In January 2000, Bontex USA refinanced its previous long and short-term debt with a new secured debt agreement. The short-term debt agreement is subject to renewal and is scheduled to expire in January 2002. During 2001 and 2000, Bontex USA was subject to various loan covenants under its secured debt agreements and has pledged certain current and non-current assets as collateral. Bontex USA was in compliance with the applicable debt covenants at June 30, 2000, but Bontex USA was not in compliance with the applicable covenants at June 30, 2001. On September 12, 2001, Bontex USA received a waiver for this noncompliance, and the various debt covenants were reset to levels so that the Company was in compliance, as well as increased the Company's interest rate by 1 percent to prime plus 2 percent. 20 [5] INCOME TAXES The U.S. and foreign components of income tax expense (benefit) are as follows:
CURRENT Deferred Total 2001: Federal $ - $ 756 $ 756 State - 83 83 Foreign 98 (36) 62 ----------- ----------- ---------- $ 98 $ 803 $ 901 =========== =========== ========== 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) =========== =========== ==========
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:
2001 2000 1999 Federal income tax at statutory rate (34%) $ (213) $ (110) $ (334) Increase (reduction) in income taxes resulting from: Foreign income at other than U.S. rates (1) 82 25 State and local taxes, net of federal income tax benefit (12) (10) (27) Valuation allowance 1,022 - - Accrual for tax examination - 239 - Other differences, net 105 134 128 ----------- ----------- ---------- Income tax expense (benefit) $ 901 $ 335 $ (208) =========== =========== ==========
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, (or 250,000 Euros, the local reporting currency 21 for Bontex SA), and accordingly, a provision for this amount has been accrued at June 30, 2000. The accrual amount in Euros remained at 250,000 at June 30, 2001, but due to fluctuations in the value of the Euro relative to the USA dollar, the amount reported translates to $212,000 at June 30, 2001. Similar deductions relating to the years ended June 30, 2001 and 2000 that in light of the current information may be disallowed have been treated as disallowed expenses in the calculation of those year's tax provisions. The components of deferred tax assets and liabilities at June 30, 2001 and 2000 are presented below:
2001 2000 Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 22 $ 15 Inventories, principally due to additional costs capitalized for tax purposes 140 101 Other assets, due to difference in amortization of Trademarks 178 170 Accrued pension and retirement benefits 142 117 Net operating loss carryforwards 1,472 1,263 Alternative minimum tax credit carryforwards 36 36 Other 53 81 --------- ---------- Total gross deferred tax assets 2,043 1,783 --------- ---------- Less: Valuation allowance (1,022) - Net deferred tax assets 1,021 1,783 Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capital gain recognition (983) (942) Other (12) (12) --------- ---------- Total gross deferred tax liabilities (995) (954) --------- ---------- Net deferred tax asset $ 26 $ 829 ========= ==========
The U.S. and foreign components of the net deferred tax asset at June 30, 2001 and 2000 are presented below:
CURRENT NONCURRENT TOTAL 2001: U.S. Operations $ - $ - $ - European Operations 35 (9) 26 ---------- --------------- ----------- $ 35 $ (9) $ 26 ========== =============== =========== 2000: U.S. Operations $ 103 $ 736 $ 839 European Operations 32 (42) (10) ---------- --------------- ----------- $ 135 $ 694 $ 829 ========== =============== ===========
At June 30, 2001, in addition to an alternative minimum tax credit carryforward of $36 at Bontex USA, the Company had approximately $4,123 at Bontex USA in net operating loss carryforwards to offset future taxable income, of which $258, $361, $851, $1,491, $512 and $650 at Bontex USA expire in 2010, 2011, 2013, 2019, 2020, and 2021, respectively. 22 At June 30, 2001, 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, 2001, undistributed income of the foreign subsidiaries was approximately $1,969, of which approximately $243 is not available for distribution. In assessing the realizability 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/losses, anticipation of future taxable income over the periods for 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 not realize a portion of these deferred tax assets. Accordingly, based on the evaluation of relevant factors, a valuation allowance in the amount of $1,022 relating to the US component of the deferred tax assets was recorded at June 30, 2001. [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, 2001, 2000 and 1999. 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. 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:
2001 2000 Actuarial present value of benefit obligations: Accumulated benefit obligation $ 4,778 $ 4,491 ============= =========== CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 5,271 $ 5,240 Service cost 142 111 Interest cost 404 381 Plan participants' contributions 71 68 Actuarial (gain) loss 227 (91) Benefits paid (331) (438) ------------- ----------- Benefit obligation at end of year $ 5,784 $ 5,271 ============= =========== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 5,429 $ 5,710 Actual return on plan assets 204 89 Plan participants' contributions 71 68 Benefits paid (331) (438) ------------- ----------- Fair value of plan assets at end of year $ 5,373 $ 5,429 ============= =========== 23 Funded status $ (311) $ 158 Unrecognized net actuarial loss (gain) (134) (533) Unrecognized prior service cost 103 118 Unrecognized transition obligation (49) (65) ------------- ----------- Accrued benefit costs $ (391) $ (322) ============= ===========
The Company's net periodic benefit costs for its United States pension plan for the years ended June 30, 2001, 2000 and 1999 include the following components:
2001 2000 1999 Service cost $ 213 $ 179 $ 193 Interest cost 404 381 384 Expected return on plan assets (476) (496) (517) Net amortization and deferral (1) (29) (20) ----------- ----------- ----------- Net periodic benefit cost $ 140 $ 35 $ 40 =========== =========== ===========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.75 percent for 2001, 2000 and 1999. The rate of increase for future compensation levels used in determining the obligation was 5.0 percent for 2001, 2000, and 1999. The expected long-term rate of return on plan assets in 2001, 2000 and 1999 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 $66, $96, and $62, in 2001, 2000, and 1999, respectively. Benefits are based on years of service and the average of the last five years annual earnings. The Company provides certain supplemental retirement benefits to the President of the Company. Expenses related to these benefits were approximately $49 in 1999. There was no expense for 2001 and 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 during the year ended June 30, 1999 112,000 4.90 --------------- Outstanding at June 30, 1999 112,000 4.90 Granted during the year ended June 30, 2000 59,997 2.00 Cancelled during the year ended June 30, 2000 (60,000) 4.90 --------------- Outstanding at June 30, 2000 and 2001 111,997 3.35 =============== Options exercisable at June 30, 2000 52,000 4.90 =============== Options exercisable at June 30, 2001 111,997 3.35 ===============
24 The following table summarizes information about stock options outstanding and exercisable at June 30, 2001: STOCK OPTIONS OUTSTANDING AND EXERCISABLE: Weighted Average Weighted Range of Number of Remaining Average Exercise Options Contractual Exercise Prices Outstanding Life in Years Price $ 2.00 - $5.63 111,997 7.75 $ 3.35 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: 2001 2000 1999 Net Loss: As reported $ 1,526 $ 659 $ 778 Pro forma $ 1,526 $ 709 $ 826 Net Loss Per Share: As Reported $ .97 $ .42 $ .49 Pro forma $ .97 $ .46 $ .52 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 in years 10 8 to 8.8 [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, 2001 and 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 25 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 the swap was recognized over the term of the contract as adjustments are made to the effective yield of the underlying debt. An interest premium of $6, and $44, was paid during 2000 and 1999, respectively. As of June 30, 2001, approximately $9.5 million of variable rate debt is not covered by interest rate swaps and is therefore subject to market risk of rate changes. COMMODITIES - The Company has periodically managed its exposure to pulp price changes with pulp futures. During fiscal years 2001, 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 $2,023 at June 30, 2001. [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 permits. Except as described below, 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 or termination 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. Because 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, except as described below, the Company believes to be operating within compliance of applicable environmental requirements. Also, 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. Bontex USA received a renewal of its 5-year wastewater discharge permit on April 2, 2001. The new permit requires the Company to expand its wastewater treatment facility to increase the capacity of its equalization tank. The Company started the expansion this Summer and expects to complete it by the end of the calendar year. Prior to receiving the new permit, the Company had received a Notice of Violation from the Virginia Department of Environmental Quality (DEQ). In general, the DEQ stated in the Notice of Violation that it 26 had reason to believe that the Company's plant in Buena Vista, Virginia, might be out of compliance with whole effluent toxics limits. In addition, the Company has received a Notice of Violation from the DEQ alleging that in June 2001 the Company's plant in Buena Vista, Virginia, discharged wastewater solids in violation of Virginia law and/or the Company's wastewater discharge permit. The Company has submitted detailed information to the DEQ relating to the Notices of Violation. At this stage, it is too early for the Company to make a reasonable estimate of the potential financial impact, if any, of these Notices of Violation. 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 and this note 8 above, 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, latex and natural gas) 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 ranging from 1 to 5 years, and the Company expects future sales will be sufficient to meet these requirements. LEASES - Rental expenses for all operating leases amounted to $124, $106, and $117 in 2001, 2000, and 1999 respectively. The Company anticipates future rental expenses for operating leases to be no more than $130 each year for the next five years. [9] QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended June 30, 2001 and 2000:
QUARTER ENDED -------------------------------------------------------------------- YEAR ENDED JUNE 30, 2001 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 Net Sales $ 9,128 $ 10,768 $ 11,576 $ 11,032 Gross Profit 2,135 2,520 2,659 2,737 Other (income) expense, net 189 (558) 245 208 Income (loss) before income taxes (447) 383 (347) (214) Net Income (loss) (290) 236 (233) (1,239) Income (loss) per common share $ (.18) $ .15 $ (.15) $ (.79) QUARTER ENDED -------------------------------------------------------------------- YEAR ENDED JUNE 30, 2000 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 Net Sales $ 8,059 $ 9,954 $ 10,466 $ 10,976 Gross Profit 1,921 2,677 2,960 3,299 Other expense, net 192 216 217 263 Income (loss) before income taxes (683) (167) 107 419 Net Income (loss) (539) (111) 19 (28) Income (loss) per common share $ (.34) $ (.07) $ .01 $ (.02)
During the second quarter ended December 31, 2000, the Company sold its warehouse facility in Newark, New Jersey resulting in a non-recurring gain recorded in Other Income/Expense - net of $803 or a net gain of $482 or $0.31 per share after considering the impact of taxes. During the fourth quarter ended June 30, 2001, the Company recorded a $1,022 valuation allowance for the deferred income tax assets of Bontex USA, which increased the net loss by $1,022 or $0.65 per share. 27 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP August 22, 2001, except as to note 4, which is as of September 12, 2001 28
--------------------------------------------------- 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 Douglas Hamm Controller 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 Hadelin Mothet Financial Director and Director Dr. Joseph Raffetto 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 ---------------------------------------------------
29 LOCATIONS WORLD HEADQUARTERS AND NORTH AMERICAN MANUFACTURING Bontex, Inc. One Bontex Drive Buena Vista, Virginia 24416-1500 U.S.A. 800-733-4234 / 540-261-2181 E-mail: bontex@bontex.com Website: http://www.bontex.com EUROPEAN HEADQUARTERS AND MANUFACTURING Bontex S. A. Rue Slar 4801 Stembert, Belgium E-mail: bontexsa@mail.att.net Website: http://www.bontex.be INTERNATIONAL LIAISON OFFICES Bontex Australia 20 Munro Street Macleod VIC 3085 Australia Bontex Korea Rm. 601, Songnam Bldg. 76-1, 4Ga, Chung Angdong Chung-Gu, Busan, 600-014, Korea Bontex Taiwan 8FL., No. 52, Sec. 2 Chung Shan N. Rd. Taipei, 10419, Taiwan SALES AND DISTRIBUTION CENTERS Bontex Italia S.r.l. Via Francia 37069 Villafranca (Verona) Italy Bontex De Mexico, S. A. De C. V. Boulevard Mariano Excobedo #801 Interior 2 Colonia Andrade, C. P. 37370 Leon, Guanajuato Mexico Bontex Hong Kong 301 International Trade Centre 11 Sha Tsui Road, Tsuen Wan Hong Kong Bontex Vietnam Floor 2, Room 204, 99 Pasteur St. Dist.1, HCMC Vietnam 30 STOCKHOLDERS' INFORMATION ANNUAL MEETING 10:30 a.m. November 7, 2001 Best Western Inn at Hunt Ridge Willow Springs Drive Lexington, Virginia 24450 INDEPENDENT AUDITORS KPMG LLP 10 S. Jefferson Street, Suite 1710 Roanoke, Virginia 24011-1331 REGISTRAR AND TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Post Office Box 1010 Cranford, New Jersey 07106 FORM 10-K A copy of the Company's 10-K filed with the Securities and Exchange Commission is available without charge to any stockholder. Requests should be sent to the attention of: Corporate Controller Bontex, Inc. One Bontex Drive Buena Vista, Virginia 24416-1500 31 BONTEX logo The Bontex(R) logo is a registered trademark of Bontex, Inc. Bontex, Inc. is an equal opportunity employer. Accepted by the American Podiatric Medical Association (Logo) BS EN ISO 9001 Registered Company SATRA (Logo) National Accreditation of Certification Bodies (Logo) SATRA Footwear Technology Centre (Logo) Recycled Paper (Logo) 32 EX-21 8 btxex21.txt EXHIBIT 21
EXHIBIT 21 LISTING OF SUBSIDIARIES There are five active subsidiaries of the Company: Name Under which Name of Subsidiary Jurisdiction of Incorporation Subsidiary Does Business Bontex S.A. Belgium Same Bontex Italia S.r.l. Italy Same Bontex, Inc. Virginia Same Bontex de Mexico Mexico Same GB Bontex Hong Kong Limited Hong Kong Same