10-Q 1 dec10q01.txt FORM 10-Q FOR DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2001 Commission File No. 0-5200 BONTEX, INC. (Exact name of registrant as specified in its charter) VIRGINIA 54-0571303 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE BONTEX DRIVE, BUENA VISTA, VIRGINIA 24416-1500 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 540-261-2181 Indicate by checkmark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate the description and number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding at February 12, 2002 Common Stock - $.10 par value 1,572,824 BONTEX, INC. FORM 10-Q FOR THE SECOND QUARTER ENDED DECEMBER 31, 2001 INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS December 31, 2001 and June 30, 2001...................................3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) AND CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Six Months and Three Months Ended December 31, 2001 and 2000..........4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 2001 and 2000...........................5 CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..........................................................6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................8-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................................12-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................13-14 Item 6. Exhibits and Reports on Form 8-K.........................14-15 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements BONTEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data) DECEMBER 31, 2001 JUNE 30, 2001 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 590 $ 320 Trade accounts receivable, less allowance for doubtful accounts of $163 ($96 at June '01) 9,187 10,700 Other receivables 533 629 Inventories 5,217 5,444 Deferred income taxes 88 35 Other current assets 367 166 --------------------- ------------------ TOTAL CURRENT ASSETS 15,982 17,294 --------------------- ------------------ Property, plant and equipment: Land and land improvements 278 276 Buildings and building improvements 5,510 5,259 Machinery, furniture and equipment 18,756 17,691 Construction in progress 427 387 --------------------- ------------------ 24,971 23,613 Less accumulated depreciation and amortization 14,816 14,020 --------------------- ------------------ Net property, plant and equipment 10,155 9,593 Other assets, net 513 552 --------------------- ------------------ TOTAL ASSETS $ 26,650 $ 27,439 ===================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 7,435 $ 8,788 Capital lease obligation - current 128 - Long-term debt due currently 1,150 578 Accounts payable 7,613 6,808 Accrued expenses 1,929 1,869 Income taxes payable 361 368 --------------------- ------------------ TOTAL CURRENT LIABILITIES 18,616 18,411 Long-term debt, less current portion 1,302 1,568 Capital lease obligation 351 - Deferred income taxes 36 9 Other long-term liabilities 554 476 --------------------- ------------------ TOTAL LIABILITIES 20,859 20,464 --------------------- ------------------ 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 4,632 5,935 Accumulated other comprehensive income (loss) (549) (668) --------------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 5,791 6,975 --------------------- ------------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 26,650 $ 27,439 ===================== ================== See accompanying condensed notes to unaudited condensed consolidated financial statements.
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BONTEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) AND CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands, Except Per Share Data) (Unaudited) CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS): SIX MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 Net Sales $ 17,444 $ 19,896 $ 9,210 $ 10,768 Cost of Sales 13,575 15,241 7,071 8,248 --------- --------- ---------- ---------- Gross Profit 3,869 4,655 2,139 2,520 Selling, General and Administrative Expenses 4,874 5,088 2,540 2,695 --------- --------- ---------- ---------- Operating Income (Loss) (1,005) (433) (401) (175) --------- --------- ---------- ---------- Other (Income) Expense: Interest expense 387 437 190 220 Interest income - (6) - (6) Foreign currency exchange (gain) loss - (4) (8) 26 Other, net 8 (796) (12) (798) --------- --------- ---------- ---------- Total Other (Income)Expense, Net 395 (369) 170 (558) --------- --------- ---------- ---------- Income (Loss) Before Income Taxes (1,400) (64) (571) 383 Income Tax Expense (Benefit) (97) (10) 27 147 --------- --------- ---------- ---------- Net income (loss) (1,303) (54) (598) 236 Other Comprehensive Income (Loss) Foreign currency translation adjustment 119 (106) (93) 244 --------- --------- ---------- ---------- Comprehensive Income (Loss) $ (1,184) $ (160) $ (691) $ 480 ========= ========= ========== ========== Net income (loss) per share $ (.83) $ (.03) $ (.38) $ .15 ========= ========= ========== ========== CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY: Stockholders' Equity beginning balance $ 6,975 $ 8,948 $ 6,482 $ 8,308 Net income (loss) (1,303) (54) (598) 236 Other comprehensive income (loss) Foreign currency translation adjustment 119 (106) (93) 244 --------- --------- ---------- ---------- Stockholders' Equity, ending balance $ 5,791 $ 8,788 $ 5,791 $ 8,788 ========= ========= ========== ========== See accompanying condensed notes to unaudited condensed consolidated financial statements.
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BONTEX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) SIX MONTHS ENDED DECEMBER 31, 2001 2000 Cash Flows from Operating Activities: Cash received from customers $ 18,978 $ 20,364 Cash paid to suppliers and employees (16,487) (20,498) Interest received 1 6 Interest paid (402) (467) Income taxes paid, net of refunds 35 (31) --------- ---------- Net cash provided by (used in) operating activities 2,125 (626) --------- ---------- Cash Flows from Investing Activities: Proceeds from sale of property, plant and equipment - 863 Acquisition of property, plant and equipment (542) (360) --------- ---------- Net cash used in investing activities (542) (503) --------- ---------- Cash Flows from Financing Activities: Increase (decrease) in short-term borrowings, net (1,522) 674 Long-term debt incurred 574 52 Principal payments on long-term debt (355) (329) --------- ---------- Net cash provided by (used in) financing activities (619) 397 --------- ---------- Effect of Exchange Rate Changes on Cash (10) 9 --------- ---------- Net increase in Cash and Cash Equivalents 270 283 Cash and Cash Equivalents at Beginning of Period 320 457 --------- ---------- Cash and Cash Equivalents at End of Period $ 590 $ 740 ========= ========== Reconciliation of Net Loss to Net Cash Provided by (used in) Operating Activities: Net loss $ (1,303) $ (54) Adjustments to reconcile net loss to net cash provided by (used in) Operating activities: Depreciation and amortization 659 647 Gain on Sale of Property, Plant and Equipment - (803) Provision for bad debts 87 15 Deferred income taxes 35 (35) Change in assets and liabilities: Decrease in trade accounts and other receivables 1,896 441 (Increase) decrease in inventories 169 (501) Increase in other assets (83) (209) Increase (decrease) in accounts payable and accrued expenses 512 (135) Decrease in income taxes (75) (61) Increase in other liabilities 228 69 --------- ---------- Net cash provided by (used in) operating activities $ 2,125 $ (626) ========= ========== See accompanying condensed notes to unaudited condensed consolidated financial statements.
5 BONTEX, INC. AND SUBSIDIARIES CONDENSED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 AND JUNE 30, 2001 (Unaudited) (Dollars in Thousands) 1. The accompanying unaudited condensed consolidated financial statements have been prepared by Bontex, Inc. and its subsidiaries ("Bontex" or the "Company") in accordance with generally accepted accounting principles for interim financial reporting information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material reclassifications and adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the results of operations, financial position and cash flows for each period shown, have been included. Operating results for interim periods are not necessarily indicative of the results for the full year. The unaudited condensed consolidated financial statements and condensed notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and notes. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2001. 2. The last-in, first-out (LIFO) method of inventory pricing is used by the Company in the United States. Inventories of the European subsidiaries are valued at the lower of cost or market using the first-in, first- out (FIFO) and weighted average bases. Inventories are summarized as follows:
December 31, June 30, 2001 2001 Finished goods $ 3,783 $ 4,020 Raw Materials 1,081 1,180 Supplies 669 659 ----------- ------------- Inventories at FIFO and weighted average cost 5,533 5,859 LIFO reserves 316 415 ----------- ------------- $ 5,217 $ 5,444 =========== =============
3. Business segment information related to the North American and European operations follows:
North American European Eliminations Consolidated Operations Operations Six Months Ended December 31, 2001 Net Sales $ 6,944 $ 11,643 $ (1,143) $ 17,444 Net Loss (769) (534) - (1,303) Six Months Ended December 31, 2000 Net Sales $ 8,468 $ 11,649 $ (221) $ 19,896 Net Income (Loss) (58) 4 - (54)
6 BONTEX, INC. AND SUBSIDIARIES CONDENSED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 AND JUNE 30, 2001 (Unaudited) 4. Net loss per share has been computed on the basis of the weighted average number of common shares outstanding during each period (1,572,824 shares). Diluted earnings per share is not presented because the effect of stock options is anti-dilutive. 5. On January 15, 2002, the Company's Belgian subsidiary settled its tax dispute with the Belgian tax authority for a total amount of approximately $397,000 or 447,000 Euros. The Company had previously accrued a liability for these tax items totaling $239,000 or 250,000 Euros. The additional $158,000 or 197,000 Euros not previously accrued was recorded in December 2001, as additional tax expense. During the quarter ended December 31, 2001, the Company reversed related commissions to distributors which will not require payment as a result of this tax settlement. 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. 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 approximated $820,000. The Company believed, based in part on written opinion of external counsel, it had meritorious legal defenses to many of the claims and the Company intended to defend such claims. The Company's best estimate of the most likely amount payable for the foregoing tax matters was $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 US dollar, the amount reported translated to $212,000 at June 30, 2001. 6. The Company has a loan and security agreement with Congress Financial Corporation/First Union providing for a secured credit facility and a term loan. This 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. This credit facility also requires Bontex USA to maintain a specified adjusted tangible net worth. At December 31, 2001, Bontex USA is in compliance with the debt covenant ratio. The lending availability fluctuates daily, and at December 31, 2001, Bontex USA had $1.7 million available, all of which is borrowed and outstanding under this credit facility. This credit facility with Congress was scheduled to expire in January 2002, and in January 2002, Congress extended the maturity date to February 26, 2002. Congress does not intend to renew its credit facility with the Company. Accordingly, the entire amount of the term loan portion of this debt, $417,000, is classified as current. The Company is seeking to refinance these loans. If the Company is unable to refinance the Debt or is unable to pay its indebtedness to Congress in full by the maturity date, it would cause a material adverse impact on the Company's business, financial condition, liquidity and/or results of operations. 7. Included in Other Income for the three months and six months ended December 31, 2000, is a gain of $803,000 from the sale of Bontex, Inc.'s warehouse facility in Newark, New Jersey. The New Jersey Institute of Technology purchased the facility for $863,000. The Company's net book value in the property was approximately $60,000. 7 BONTEX, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 2001 (Unaudited) 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 The results of operations for the second quarter and six months ended December 31, 2001 reflect lower operating results compared to the same periods last year. During the second quarters ended December 31, 2001 and 2000, the Company generated consolidated operating losses of $401,000 and $175,000, respectively. The consolidated net loss for the quarter ended December 31, 2001 was $598,000 or $0.38 per share as compared to the prior year's second quarter net income of $236,000 or $.15 per share. For the six months ended December 31, 2001, operating losses increased from $433,000 to $1,005,000, and consolidated net losses increased from $54,000 to a consolidated net loss of $1,303,000. The increase in operating losses as compared to last year is mainly due to the decrease in consolidated sales and gross profit. The increase in net losses is also impacted by the one-time net gain after the impact of taxes of $482,000 or $.31 per share from the sale in the prior year of the Company's warehouse facility in Newark, New Jersey. As described in further detail in note 5 to the financial statements and in Item 3 below, the Company has settled its tax dispute with the Belgian tax authorities resulting in additional tax expense during the quarter ended December 31, 2001of approximately $158,000. Consolidated net sales decreased $1.6 million or almost 15 percent to $9.2 million for the second quarter ended December 31, 2001, compared to consolidated net sales of $10.8 million for the second quarter ended December 31, 2000. For the six months ended December 31, 2001, consolidated net sales decreased $2.5 million or 12 percent to $17.4 million. The Company's sales declines are a result of lower sales to Asia, which continues to experience economic problems, as well as lower sales to certain Asian contractors manufacturing footwear for export to the U.S. market for domestic retailers and leading branded footwear, who have reduced orders because of economic uncertainty in the U.S. market, particularly after the September 11, 2001 terrorist attacks. 8 Seasonality generally exists in that the first half of each fiscal year is typically lower in volume than the second half, which is largely due to customer's scheduled vacations, shutdowns, holidays and purchasing cycles. Gross profit as a percentage of net sales (i.e., Gross Margin) for the second quarter of fiscal year 2002 remained relatively stable at 23.2 percent as compared to 23.4 last year, and for the six months ended December 31, 2001, the gross profit percentage decreased from 23.4 percent to 22.2 percent. The overall decrease in profit margins is primarily attributed to lower sales volumes. As with all manufacturers, the cost structure of Bontex products is directly impacted by volumes, with lower volumes resulting in higher per unit costs. Overall costgs of raw materials remained relatively stable. 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. 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. 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. Compared to the same second quarter and six months last year, Selling General & Administrative (SG&A) expenses decreased slightly, although SG&A expenses increased as a percent of net sales. The decrease in SG&A spending is mainly due to cost control efforts and lower sales. The increase as a percentage of net sales is due to sales decreasing at a higher rate than the overall decrease in SG&A expenses. For the quarter and six months ended December 31, 2001, interest expense decreased $30,000 and $50,000, respectively. The decrease in interest expense is due to reduced debt and lower interest rates. Other comprehensive income, which consists of foreign currency translation adjustments, totaled $119,000 for the six months ended December 31, 2001, compared to a loss of $106,000 for the six months ended December 31, 2000. Changes in this account are primarily the result of the fluctuation of the Euro versus the US Dollar. Income tax expense during the quarter ended December 31, 2001 reflects certain tax adjustments totaling $158,000 relating to the settlement of the Belgian tax issues, as described in Note 5 above and Item 3 below. The income tax benefit for the six months ended December 31, 2001 was $97,000, as compared to $10,000 for the same period last year. This year's tax provision represents the net tax provision for Bontex Belgium and Italy. Because of the recurring losses at Bontex USA over the past several years, deferred tax assets arising from the Company's operating losses are not being recorded at Bontex USA. FINANCIAL CONDITION Consolidated stockholders' equity decreased $1,184,000 from June 30, 2001, and totaled $5.8 million at the end of December 2001. Financial ratios at December 31, 2001 generally decreased from June 30, 2001 because of the negative operating results. Cash increased by $270,000 because of the timing of customer cash receipts. Trade accounts receivable decreased by $1.5 million to $9.2 million, primarily because of the seasonal decrease in consolidated net sales from the fourth quarter of the prior fiscal year to the first half of fiscal year 2002; however, as compared to the same period last year, trade accounts receivable decreased $2.1 million because of the decrease in sales. The $227,000 decrease in inventories to $5.2 million is mainly because of lower raw material inventories resulting from lower sales. 9 Other current assets increased $201,000 to $367,000 at December 31, 2001 from June 30, 2001, primarily due to prepaid insurance for fiscal year 2002. The level of other current assets is comparable with last year's December 31, 2000 balance of $365,000. The $562,000 increase in net property, plant and equipment is due to fixed asset additions, which were partially offset by depreciation for the six-month period. These fixed asset additions, primarily at the Company's European manufacturing subsidiaries in Belgium and Italy, relate largely to certain manufacturing and lamination equipment to improve production capabilities and efficiencies. Additionally, approximately $480,000 of these fixed asset additions were structured as capital leases. Accounts payable, accrued expenses and short-term borrowings at December 31, 2001 decreased $487,000 as compared to June 30, 2001. However, in comparison to December 31, 2000 to December 31, 2001, accounts payable, accrued expenses and short-term borrowings decreased $3.1 million, which primarily corresponds to the decrease in trade account receivables and inventories. Long-term debt increased because of a new mortgage on the Company's facility in Italy and an additional fixed rate loan at Bontex SA in Belgium. The Company has a loan and security agreement with Congress Financial Corporation/First Union providing for a secured credit facility and a term loan (the "Debt"). This 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. This credit facility also requires Bontex USA to maintain a specified adjusted tangible net worth. At December 31, 2001, Bontex USA was in compliance with the debt covenant ratio. The lending availability fluctuates daily, and at December 31, 2001, Bontex USA had $1.7 million available and borrowed under this credit facility. This credit facility with Congress expired in January 2002, and in January 2002, Congress extended the maturity date to February 26, 2002. Congress does not intend to renew its credit facility with the Company. Accordingly, the entire amount of the term loan portion of this debt, $417,000, is classified as current. The Company is seeking to refinance these loans. The Company has reduced the amount of indebtedness outstanding under the secured credit facility and term loan from approximately $2.7 million as of June 30, 2001, to approximately $1.7 million as of January 22, 2002. As of January 22, 2002, approximately $4.0 million of current assets, consisting of accounts receivable and inventory, serve as collateral for the secured credit facility. Additionally, all of the Company's other assets, current and non- current, serve as the total collateral securing the term loan. Under the Company's overall current financing and debt structure, the Company's wholly-owned subsidiaries, Bontex SA (Belgium), Bontex Italia Srl and Bontex Hong Kong, each have separate credit facilities with no cross- collateralization of assets. Management is focused on obtaining alternative financing to repay the Debt and provide an ongoing credit facility sufficient to meet the Company's future operating and capital requirements. Management is currently negotiating with several potential lenders to obtain alterative financing. In addition, the Company has retained an outside consulting firm to provide strategic assessment and related advice. If the Company is unable to refinance the Debt or is unable to pay its indebtedness to Congress in full by the maturity date, it would cause a material adverse impact on the Company's business, financial condition, liquidity and/or results of operations. 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 million. During the first six months of fiscal 2002, the Company's public float was within the Nasdaq SmallCap market requirements, but since January 2, 2002, the Company's public float has been below the $1 million requirement. If the closing bid price of the Company's common stock trades at a 10 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. 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. PRODUCT DEVELOPMENT Bontex has recently developed several new innovative products for footwear and nonfootwear applications, including a wall cover base material. The Company has also concluded a new marketing agreement for the wall cover product. The Company has a strategy to locate new technologies and bring them to the marketplace, but it is not possible to predict their level of sales potential or profitability at this time. During the past two months, the Company has generated sales of $95,000 from one of these new products. Also, in December the Company received the initial purchase orders for two more of these products. RECENT ACCOUNTING PRONOUNCEMENTS 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. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. 11 SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, and entity would recognize a gain or loss on settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on the financial position, results of operations or liquidity of the Company. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of., however, it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either ; has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management's ability to provide information that helps the financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Early application is encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The adoption of SFAS No. 144 is not expected to have a material effect on the financial position, results of operations or liquidity of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain risks related to interest rates, foreign currency 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. There is no expected material foreign exchange risk for the Company's debt, as these amounts are denominated in the local operating currencies of the respective operations. 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. 12 Financial Instruments held for other than trading purposes at December 31, 2001 (dollars in thousands):
EXPECTED MATURITY DATE THERE- FAIR 2002 2003 2004 2005 2006 AFTER TOTAL VALUE LIABILITIES Long-term debt Fixed Rate $246 $493 $493 $330 - - $ 1,562 $ 1,275 Average interest rate 5.16% 5.16% 5.19% 5.40% - - 5.21% Variable Rate $637 $ 40 $ 40 $ 40 $ 40 $ 93 $ 890 $ 890 Average Interest Rate 5.01% 5.01% 5.01% 5.01% 5.01% 5.01% 5.01%
At December 31, 2001, the Company had no outstanding interest rate swap agreements. Therefore, approximately $7.7 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 the 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. PART II. OTHER INFORMATION BONTEX, INC. FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2001 ITEM 1. LEGAL PROCEEDINGS TAX On January 15, 2002, the Company's Belgian subsidiary settled its tax dispute with the Belgian tax authority for a total amount of approximately $397,000 or 447,000 Euros. The Company had previously accrued a liability for these tax items totaling $239,000 or 250,000 Euros. The additional $158,000 or 197,000 Euros not previously accrued was recorded in December 2001, as additional tax expense. During the quarter ended December 31, 2001, the Company reversed related commissions to distributors which will not require payment as a result of this tax settlement. 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. 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 approximated $820,000. The Company believed, based in part on written opinion of external counsel, it had meritorious legal defenses to many of the claims and the Company intended to defend such claims. The Company's best estimate of the most likely amount payable for the foregoing tax matters was $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 13 to fluctuations in the value of the Euro relative to the US dollar, the amount reported translated to $212,000 at June 30, 2001. ENVIRONMENTAL Bontex USA received a renewal of its 5-year wastewater discharge permit on April 2, 2001. The new permit required the Company to expand its wastewater treatment facility to increase the capacity of its equalization tank. The Company completed this expansion during December 2001. Prior to receiving the new permit, the Company had received a Notice of Violation (NOV) from the Virginia Department of Environmental Quality (DEQ). In general, the DEQ stated in the NOV that it had reason to believe that the Company's plant in Buena Vista, Virginia, may be out of compliance with whole effluent toxic limits. In addition, the Company has received two other NOV's from the DEQ. The first NOV alleges 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 second NOV alleges, among other things, that the Company's plant in Buena Vista, Virginia in November and December 2001, had experienced a series of irregular wastewater discharges and the Company had not provided the DEQ advanced notice for the use of ammonia in the treatment process. The Company submitted detailed information to the DEQ relating to the NOV. At this stage, it is too early for the Company to make a reasonable estimate of the aggregate potential financial impact, if any, of these NOV's. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's Annual Meeting of Shareholders was held on November 7, 2001. The matter voted upon at the meeting was as follows: The election of Jeffrey C. Kostelni, and Joseph Raffetto as Class B Directors, to serve until the 2004 Annual Meeting. All nominees for director named above were elected. Election of Directors AUTHORITY FOR WITHHELD Jeffrey C. Kostelni 625,802 13,840 Joseph Raffetto 632,030 7,612 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number Description 10 (xvii) *Executive Compensation Agreement by and between Charles W. J. Kostelni and Bontex, Inc. dated as of November 7, 2001 *Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-Q pursuant to Item 14 (c). 14 (b) Reports on Form 8-K: Form 8-K filed December 21, 2001, reporting under Item 5 the notification from Congress Financial Corporation regarding the non-renewal of the secured term loan and credit facility with Bontex, Inc. Form 8-K filed January 25, 2002, reporting under Item 5 the notification from Congress Financial Corporation for a one month extension to the secured term loan and credit facility with Bontex, Inc. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BONTEX, INC. (Registrant) February 14, 2002 /s/James C. Kostelni ----------------------------- -------------------------------- (Date) James C. Kostelni Chairman of the Board and President February 14, 2002 /s/Charles W. J. Kostelni ----------------------------- ------------------------------ (Date) Charles W. J. Kostelni Corporate Controller and Secretary 16 Exhibit Index Number Description 10 (xvii) *Executive Compensation Agreement by and between Charles W. J. Kostelni and Bontex, Inc. dated as of November 7, 2001 *Management contract or compensatory plan or agreement required to be filed as an Exhibit to this Form 10-Q pursuant to Item 14 (c).