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 Quarter Ended September 30, 1998
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: 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 November 10, 1998
Common Stock - $.10 par value 1,572,824
1
BONTEX, INC.
FORM 10-Q
FOR THE FIRST QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997, June 30, 1998.............................3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS) AND CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
First Quarter Ended September 30, 1998 and 1997........................5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Quarter Ended September 30, 1998 and 1997........................7
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......8, 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................10-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................14
Item 5. Other Information............................................14
Item 6. Exhibits and Reports on Form 8-K.............................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)
September 30, June 30,
(unaudited)
1998 1997 1998
ASSETS
Current assets:
Cash and cash equivalents $ 475 $ 1,088 $ 517
Trade accounts receivable, less allowance for
doubtful accounts of $285 ($116 at
September '97; $268 at June '98) 10,392 11,874 11,618
Other receivables 449 753 417
Inventories 7,059 6,370 6,436
Deferred income taxes 442 219 347
Income taxes refundable 58 6 56
Other current assets 671 332 338
----------- ----------- -----------
TOTAL CURRENT ASSETS 19,546 20,642 19,729
----------- ----------- -----------
Property, plant and equipment:
Land and land improvements 381 377 369
Buildings and building improvements 5,810 5,291 5,575
Machinery, furniture and equipment 18,057 16,224 17,199
Construction in progress 711 1,291 781
----------- ----------- -----------
24,959 23,183 23,924
Less accumulated depreciation and amortization 12,547 11,877 11,882
----------- ----------- -----------
Net property, plant and equipment 12,412 11,306 12,042
----------- ----------- -----------
Deferred income taxes 187 - 187
Other assets, at cost less applicable amortization 509 543 555
----------- ----------- -----------
TOTAL ASSETS $ 32,654 $ 32,491 $ 32,513
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Short-term borrowings $ 9,393 $ 8,563 $ 8,664
Accounts payable 6,312 6,193 7,133
Accrued expenses 1,719 2,083 1,520
Income taxes payable 41 137 41
Long-term debt due currently 1,337 598 1,364
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 18,802 17,574 18,722
Long-term debt 2,329 2,839 2,256
Deferred income taxes 54 235 50
Other long-term liabilities 628 224 594
----------- ----------- -----------
TOTAL LIABILITIES 21,813 20,872 21,622
----------- ----------- -----------
3
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 157 157 157
Additional capital 1,551 1,551 1,551
Retained earnings 8,518 9,501 8,898
Accumulated other comprehensive income 615 410 285
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,841 11,619 10,891
----------- ----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 32,654 $ 32,491 $ 32,513
=========== =========== == ========
See accompanying condensed notes to unaudited condensed consolidated financial
statements.
4
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)
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss):
First Quarter Ended
September 30,
1998 1997
Net Sales $ 8,717 $ 10,533
Cost of Sales 6,577 7,321
----------- ----------
Gross Profit 2,140 3,212
Selling, General and Administrative Expenses 2,339 2,650
----------- ----------
Operating Income (Loss) (199) 562
------------ ----------
Other (Income) Expense:
Interest expense 243 256
Interest income (3) (18)
Foreign currency exchange (gain)loss (58) (635)
Interest income (1) (32)
Foreign currency exchange loss 30 55
Other, net 5 1
----------- ----------
Total Other (Income) Expense 277 280
----------- ----------
Income (Loss) Before Income Taxes (476) 282
Income Taxes (96) 125
----------- ----------
Net income (Loss) (380) 157
----------- ----------
Other Comprehensive Income (Loss)
Foreign currency translation adjustment 330 (53)
----------- ----------
Comprehensive Income (Loss) $ (50) $ 104
=========== ==========
Net income (loss) per share $ (.24) $ .10
============ ==========
5
Condensed Consolidated Statements of Changes in Stockholders' Equity:
Stockholders' Equity, beginning balance $ 10,891 $ 11,515
Net income (loss) (380) 157
Other comprehensive income (loss)
Foreign currency translation adjustment 330 (53)
----------- ----------
Stockholders' Equity, ending balance $ 10,841 $ 11,619
=========== ==========
See accompanying condensed notes to unaudited condensed consolidated financial
statements.
6
BONTEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
First Quarter Ended
September 30,
1998 1997
Cash Flows from Operating Activities:
Cash received from customers $ 10,577 $ 12,136
Cash paid to suppliers and employees (10,418) (12,386)
Interest received 2 43
Interest paid (266) (289)
Income taxes paid, net of refunds 35 163
------------ -----------
Net cash used in operating activities (70) (333)
------------ -----------
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment (262) (636)
----------- -----------
Net cash used in investing activities (262) (636)
----------- -----------
Cash Flows from Financing Activities:
Increase in short-term borrowings, net 283 640
Long-term debt incurred 350 200
Principal payments on long-term debt (390) (80)
----------- -----------
Net cash provided by financing activities 243 760
----------- -----------
Effect of Exchange Rate Changes on Cash 47 (76)
----------- -----------
Net decrease in Cash and Cash Equivalents (42) (285)
Cash and Cash Equivalents at Beginning of Year 517 1,373
----------- -----------
Cash and Cash Equivalents at End of Year $ 475 $ 1,088
=========== ===========
Reconciliation of Net Income (Loss) to Net Cash Used In
Operating Activities:
Net income (loss) $ (380) $ 157
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 336 321
Provision for bad debts 10 15
Deferred income taxes (128) 180
Change in assets and liabilities:
Decrease in trade accounts and other receivables 1,631 1,317
Increase in inventories (216) (1,048)
Increase in other assets (379) (247)
Decrease in accounts payable and accrued expenses (976) (1,168)
Increase in income taxes - 126
Increase in other liabilities 32 14
----------- -----------
Net cash used in operating activities $ (70) $ (333)
=========== ===========
See accompanying condensed notes to unaudited condensed consolidated financial
statements.
7
BONTEX, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND JUNE 30, 1998
(Unaudited)
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, 1998.
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:
September 30, June 30,
1998 1997 1998
(Dollars in Thousands)
Finished goods $ 3,893 $ 3,266 $ 3,782
Raw Materials 2,617 2,840 2,117
Supplies 798 623 786
--------- --------- ---------
Inventories at FIFO and weighted average cost 7,308 6,729 6,685
LIFO reserves 249 359 249
--------- --------- ---------
$ 7,059 $ 6,370 $ 6,436
========= ========= =========
3. Business segment information related to the North American and European
operations follows:
North American European Eliminations Consolidated
Operations Operations
First Quarter Ended September 30, 1998
Net Sales $ 3,886 $ 4,918 $ (87) $ 8,717
Net Income (Loss) (239) (141) - (380)
First Quarter Ended September 30, 1997
Net Sales $ 4,365 $ 6,255 $ (87) $ 10,533
Net Income (Loss) (98) 255 - 157
8
BONTEX, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 AND JUNE 30, 1998
(Unaudited)
4. Net income per share calculations are based on the weighted average
number of shares outstanding of 1,572,824 shares for all periods.
9
BONTEX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998
(Unaudited)
Except for historical data set forth herein, the following discussion contains
certain forward-looking information. The Company's actual results may differ
significantly from the projected results. Factors that could cause or contribute
to such differences include, but are not limited to, overall global economic
conditions, level of sales to key customers, actions by competitors, and
fluctuations in the price of primary raw materials and foreign currency exchange
rates.
RESULTS OF OPERATIONS
The results of operations for the first quarter of fiscal 1999 reflect a
decrease in profitability. During the first quarter, the Company generated a
consolidated operating loss of $199,000, and a net loss of $380,000 or $.24 per
share. Consolidated net sales decreased $1.8 million or 17.2 percent to $8.7
million for the first quarter ended September 30, 1998. The fluctuation in
foreign currency exchange rates resulted in a $175,000 translation increase in
net sales.
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. Over
the past fifteen years, the Company has generated net income during the first
quarter only six times, the most recent being in 1997.
Gross profit as a percentage of net sales (i.e., Gross Margin) for the first
quarter of fiscal 1999 decreased from the same quarter last year 30.5 percent to
24.5 percent. This decrease in profit margins is primarily attributed to the
decline in sales, which is mainly the result of the financial situation in Asia
and the overall decline in footwear sales, especially in the athletic category.
Competitive pricing pressures have resulted in lower selling prices, which also
have had a negative impact on profit margins.
The cost of pulp is expected to remain stable during the remainder of calendar
1998 and the first part of 1999. This outlook differs from the Company's reports
a year ago when higher pulp prices were anticipated. The price of pulp appears
to be declining (consistent with other commodities) due to, among other things,
the economic situation in Asia, which has resulted in higher inventory levels
because of lower demand. It is difficult to predict future raw material costs,
and there can be no assurance that raw material prices will not have an adverse
impact on the Company's operations or competitive position in the future.
Selling General & Administrative (SG&A) expenses as a percent of net sales
increased from 25.2 percent to 26.8 percent, as compared to the corresponding
prior year. The increased SG&A percentage is mainly due to higher professional
fees and the decrease in sales. Overall, consolidated SG&A expenses declined
$311,000 or 11.7 percent, while sales decreased 17.2 percent.
Other comprehensive income, foreign currency translation adjustment, $330,000 at
September 30, 1998, is primarily the result of the strengthening of the US
Dollar verses the Belgian Franc since June 30, 1998.
FINANCIAL CONDITION
Consolidated equity decreased from June 30, 1998 and totaled $10.8 million at
the end of September 1998. Financial ratios at September 30, 1998 generally
decreased from June 30, 1998 because of the negative operating
10
results. The fluctuation in foreign currency exchange rates resulted in a
translation increase of $1.0 million in consolidated total assets as compared to
September 30, 1997.
Cash balances reflect financing and hedging positions at European Operations.
Trade Accounts Receivables decreased by $1.2 million to $10.4 million, and is
primarily because of the decrease in consolidated net sales. Consistent with the
Company's policies, the allowance for doubtful accounts increased mainly due to
a larger balance in the over 90-day category.
The $623,000 increase in inventories to $7.1 million mainly corresponds to the
closure of pulp future contracts during June, and higher finished goods
inventory levels.
Other current assets increased $333,000 to $671,000 from June 30, 1998 primarily
due to increased pulp future contract deposits.
The $370,000 increase in PP&E is largely due to the additions relating to dryer
can replacement at European Operations.
Accounts Payable, accrued expenses and short-term borrowings increased $107,000
which primarily corresponds to increased current liabilities resulting from
negative operating cash flows. Management believes that existing credit
facilities will be sufficient to meet future operating and capital requirements.
As a result of the decrease in various financial ratios relating to $720,000 of
long-term debt at June 30, 1998, Bontex USA obtained a waiver from such
requirements. As of September 30, 1998, there was no assurance Bontex USA would
be able to amend the ratios or obtain a future waiver from such requirements,
and accordingly, $640,000 of long-term debt was classified as current.
Subsequently on November 12, 1998, management renegotiated the various financial
ratios with the bank which included a waiver to December 31, 1998 and revised
ratios effective December 31, 1998 and thereafter.
FINANCIAL INSTRUMENTS
The Company utilizes derivatives and other 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.
The Company is exposed to a variety of market risks, including the effects of
changes in foreign currency exchange rates, interest rates and commodity prices.
In the past, the Company has primarily used such derivative financial
instruments for the purpose of hedging only currency and interest rates
exposures. For further information concerning the aforementioned financial
instruments, 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,
1998.
As part of the Company's Risk Management Program, the Company has explored
various alternatives to manage its exposure to highly volatile pulp prices, the
primary raw material for the Company's products. Historically, the Company's
primary and only available method of hedging its exposure to pulp price changes
was through forward purchasing and other purchase contracts. In connection with
purchasing pulp for future manufacturing requirements, the Company has entered
into a number of pulp futures, as deemed appropriate, to reduce the effects of
price fluctuations.
The Company, on a limited basis, manages its exposure to pulp price changes with
pulp futures. In accordance with hedge accounting, gains or losses are recorded
as a component of the underlying inventory purchase, since these contracts
effectively meet the risk reduction and correlation criteria. Gains or losses on
hedges that are terminated
11
prior to the execution of the inventory purchase are recorded in inventory until
the inventory is sold. The table below provides certain information regarding
the Company's pulp inventory and futures contracts that are sensitive to changes
in pulp prices. For inventory, the table presents the carrying amount and
estimated fair value at September 30, 1998. For futures contracts, all of which
mature within the next year, the table presents the notional amounts and
estimated fair value at September 30, 1998.
Balance Sheet Commodity Pulp Position and Related Derivatives Held for Other
Than Trading (dollars in thousands) at September 30, 1998:
Carrying Amount Estimated Fair Value
Pulp Inventory $ 1,751 $ 1,751
Related Derivatives Expected Maturity Estimated Fair Value
Pulp Futures $ 1,677 $ 1,327
Market risk is defined as the risk of loss arising from adverse changes in
market rates and prices. The disclosures provide certain forward looking
information concerning potential exposures to market risk. By its nature, such
forward looking information is an estimate of what could occur in the future and
is dependent on model characteristics and assumptions. As a result, actual gains
or losses will differ from those reported. The above value at risk (VAR)
disclosure does not fully reflect the potential net market risk exposure because
other market risk exposures may exist in other transactions and other financial
instruments.
FINANCIAL SITUATION IN ASIA
The financial situation in Asia relates to the recent Asian currency and
economic crisis. During the previous several months, the currencies of a number
of key Asian countries, including Korea, Indonesia and Thailand, have devalued,
resulting in an economic slowdown. Asia is the largest market for Bontex type
products, as over 70 percent of the world's footwear is manufactured in Asia.
Over the previous three years, approximately a third of the Company's
consolidated sales have been derived from customers in Asia. The overall
strength of the U.S. dollar and the currency devaluations in Asia have resulted
in additional pressure on earnings. Accordingly, the deteriorating situation in
Asia will continue to negatively impact the Company's operations.
In assessing the overall impact of the situation in Asia, management believes
sales and profits will decrease in the near term, because of, among other
things, falling demand for footwear products sold in Asia. Management cannot at
this time accurately quantify the adverse impact of the situation in Asia on the
Company's sales and profitability. Management's assessment is based on a number
of relevant sources, including information from key customers, current sales
trends, and other industry sources.
YEAR 2000 ISSUE
Over the past two years Bontex has invested approximately $175,000 in modern
information systems to improve data efficiency and address the Company's year
2000 data systems exposure. The year 2000 issue relates to computer programs
using two digits rather than four to define the applicable year. Inability to
process data properly due to this phenomenon may result in systems failures. The
project is substantially complete with approximately $25,000 remaining to be
invested. The information and non-information systems conversions and testing
are expected to be completed, utilizing internal and external resources, during
fiscal 1999. Bontex is in the process of assessing the year 2000 readiness of
its major customers and vendors. The review is substantially complete with no
material risks identified. The Company is developing a contingency plan which
should be completed during fiscal 1999, to the extent practicable. There can be
no assurances that the date change from 1999 to 2000 will not materially affect
the Company's operations and financial results.
12
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998. This
Statement addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. Future adoption of this Statement could have a
material impact on the Company's consolidated financial position, or results of
operations. The Company is currently in process of reviewing the impacts of this
Statement.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for periods after December 15, 1997. Interim
information for SFAS No. 131 is presented in Note 3 of Condensed Notes to
Condensed Consolidated Financial Statements.
13
PART II. OTHER INFORMATION
BONTEX, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Item 1. Legal Proceedings
On March 11, 1998, a civil complaint was filed in the Superior Court of
New Jersey, Law Division, Essex County, by Patricia Surmonte Tischio, a director
of Bontex (the "Company") against the Company, James C. Kostelni, the President
and Chief Executive Officer of the Company, and Mr. Kostelni's spouse. Both Mrs.
Tischio and Mrs. Kostelni are daughters of the Company's founder and serve as
co-executors and co-trustees of, and are designated beneficiaries under, an
estate and certain trusts, which in the aggregate beneficially own approximately
43 percent of the Company's outstanding common stock. The case has been
transferred to the United States District Court for the Western District of
Virginia.
Mrs. Tischio's civil lawsuit sets out various counts relating to the
defendants' alleged breach of and/or interference with an alleged contract
relating to Mrs. Tischio's employment with the Company and seeks unspecified
damages and declaratory and other relief.
On September 15, 1998, defendants filed a Motion for Judgment on the
Pleadings requesting dismissal of the complaint as a matter of law. On November
2, 1998, Mrs. Tischio filed a Motion for Leave to Amend the Complaint by
dropping the previously asserted claim of a violation of the New Jersey Law
Against Discrimination and adding two new claims for common law conspiracy and
wrongful discharge in violation of public policy.
The Company believes that Mrs. Tischio's claims are without merit and
intends to vigorously defend the lawsuit. See the discussion under "Legal
Proceedings" in Part I, Item 3 of the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
On September 28, 1998, a civil complaint was filed in the United States
District Court for the District of Massachusetts, by Texon USA, Inc., against
the Company and James C. Kostelni, the President and Chief Executive Officer of
the Company.
Texon's civil lawsuit alleges in various counts that defendants
misappropriated trade secrets and confidential and proprietary business
information, and engaged in conversion, trespass and unfair competition. The
lawsuit seeks injunctive relief and monetary damages in an amount to be
determined.
On October 6, 1998, the parties agreed to a Consent Temporary
Restraining Order, which was entered by the Court.
The Company believes that Texon's claims are without merit and intends
to vigorously defend the lawsuit.
Item 5. Other Information
The Company's Annual Meeting of Shareholders, originally scheduled to be
held on October 22, 1998, has been adjourned to January 28, 1999, in
order for the Board to consider issues raised by the Company's largest
shareholders, The Estate of Marie G. Surmonte, which hold approximately
43 percent of the Company's voting stock, with respect to the proposal
to grant stock options to certain officers of the Company. The Company
will contact each shareholder of record individually with respect to the
adjourned Annual Meeting and the voting of proxies.
14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
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)
November 13, 1998 /s/James C. Kostelni
(Date) James C. Kostelni
Chairman of the Board
and President
November 13, 1998 /s/Charles W. J. Kostelni
(Date) Charles W. J. Kostelni
Corporate Controller
and Secretary
16