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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934
For the fiscal year ended Commission File Number
December 31, 1997 2-44764
BALTEK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2646117
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Fairway Court
P.O. Box 195 07647
Northvale, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (201) 767-1400
Securities Registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates on
March 2, 1998 amounted to $7,142,000.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date, March 2, 1998: 2,523,261
shares, Common Stock, $1.00 par value.
Documents incorporated by reference: Portions of the registrant's proxy
statement dated April 27, 1998 for use in connection with its 1998 annual
meeting of stockholders are incorporated by reference in Part II of this Annual
Report on Form 10-K to the extent set forth in items 10, 11, and 12 hereof.
PART I
Item 1. BUSINESS
Principal Products
The registrant and its subsidiaries (hereinafter collectively referred
to as the "Company") is a multinational manufacturing and marketing company. The
Company operates in two lines of business: 1) supplying core materials,
primarily balsa wood and balsa wood products, linear and cross-linked PVC foam
products, and non-woven polyester mat, and 2) aquaculture, the farming and
processing of shrimp. The foam and mat products, together with the Company's
balsa products, position the Company as a complete supplier to the composite
structural core market. The core materials are typically used by the Company's
customers to manufacture a variety of products by laminating metal or fiberglass
reinforced plastic skins to both sides of the core material, thereby creating a
sandwich structure. The products manufactured by the Company's customers include
fiberglass boats, aircraft cargo pallets, aircraft flooring, fiberglass storage
and processing tanks and fiberglass tub and shower bottoms. Balsa lumber is used
mostly by the hobby industry to manufacture model airplanes.
The Company mills and sells graded and finished balsa lumber in standard
sizes and balsa wood strips and blocks. "Standard sizes" of balsa lumber are
measured in boardfeet (12" x 12" x 1') for the English system of measure or in
cubic meters for the metric system of measure. Shipments to Europe (except the
U.K.) and Japan are made in cubic meters while shipments to the U.S. and the
U.K. are in boardfeet. The Company, for production and statistical purposes,
converts all metric measurements into boardfeet, thus the Company's "standard"
is boardfeet. The Company also manufactures and sells custom-made bonded panels,
bonded blocks of balsa wood, and a flexible balsa wood block mat called
"Contourkore." Glued-up balsa blocks are marketed in two ways. Part is sold
directly to customers in block or panel form, the balance is shipped to the
Company's factory in Northvale, NJ for further processing into Contourkore and
other products.
The Company's mat products are imported from Holland and Japan and
resold without further manufacturing. This product is marketed as "Coremat" and
"BaltekMat," principally to the pleasure boat industry.
In September 1995, the Company entered into an agreement with Alusuisse
Airex AG of Sins Switzerland, a division of Alusuisse, to become the sole North
American source and nonexclusive distributor in Central and South America of
Airex(R) (a registered trademark of Alusuisse Airex AG) and Airlite(TM),
structural PVC foam products. The foam is purchased from Airex for further
processing in the U.S. and is sold to customers as rigid or flexible panels in
various thicknesses.
The Company is also in the aquaculture business, specifically shrimp
farming in Ecuador, South America. This operation consists of a hatchery, two
farms and a packing plant. Shrimp larvae are supplied by the hatchery to the
farms, and after harvest, transferred to the packing plant for processing and
shipment to customers in the United States and Europe.
All the Company's balsa and shrimp are produced in Ecuador. The
dependence on foreign countries for raw materials represents some inherent
risks. However, the Company, or its predecessors, have maintained operations in
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Ecuador since 1940. The Company does not consider its reliance on Ecuador to
represent an undue business risk; in fact, the Company believes that operating
in Ecuador is one of its strengths, where quality raw materials are produced at
a reasonable cost in a politically stable atmosphere conducive to business.
Principal Markets and Methods of Distribution
The Company's products are sold throughout the United States, Canada,
Europe, Japan, Australia and Latin America to approximately 1,600 ultimate
users. The Company's salesmen are used extensively in the sale of its products.
Approximately 40% of its core material product sales are made by the Company
directly. The remainder of the sales are handled through regional distributors
in the United States, Europe, Canada, and the Pacific Rim. Sales of Contourkore
to customers outside the United States are handled through a wholly-owned
Foreign Sales Corporation.
In 1997, approximately 32% of all the shrimp production was sold to the
U.S. market through food brokers; the balance was sold to the European market.
Competitive Conditions
As part of their overall business, other companies, with aggregate
facilities and financial resources substantially greater than those of the
Company, manufacture and sell various natural and synthetic products for nearly
all the purposes for which balsa, foam and mat products are sold by the Company.
Some of these competitive products are produced and sold at a lower price than
the Company's products, and sales of these competing products are substantially
greater than the Company's sales of core materials.
In North America and Europe the Company also directly competes with
companies, some with greater resources than the Company, that manufacture and
sell balsa and foam products at prices which may be lower than those offered by
the Company.
The Company's shrimp business competes against many larger companies
which produce shrimp through similar methods in addition to fishing for shrimp
in the traditional method of trawling.
Material Customer
No customer accounted for more than 10% of revenues in 1997 and 1996.
In 1995 the Company had sales to one customer in excess of 10%.
Backlog
As of December 31, 1997 and 1996, the Company had a backlog of orders
believed to be firm in the total amounts of $8,367,000 and $7,465,000,
respectively. The 1997 backlog is reasonably expected to be filled within the
current fiscal year.
Sources and Availability of Raw Materials
The Company acquires, partly from its own plantations and partly from
others, substantially all of its balsa wood from western and coastal Ecuador,
accessible by roads so that the balsa lumber can be transported by truck to its
sawmills. The Company considers the timber presently standing in this area,
combined with its planned plantation expansion program, to be ample to supply
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all the Company's requirements in the foreseeable future. The Company also
receives small quantities of balsa from other Latin American countries. The
Company has experienced no difficulties in purchasing its foam and mat materials
and anticipates that the manufacturers will be able to produce adequate
quantities to meet demand. The resins, fiberglass and other materials used in
the Company's manufacturing processes are available from numerous commercial
sources. To date the Company has experienced no difficulty in obtaining such
materials needed for its operations.
The Company owns and operates two shrimp farms and a shrimp hatchery in
Ecuador for the production of a steady and plentiful supply of shrimp. The
hatchery supplies substantially all the larvae required by the Company's ponds.
The Company also owns a shrimp packing plant in Ecuador, thereby achieving
complete vertical integration of the shrimp business.
Patents, Trademarks and Licenses
The Company features its registered trademark "Belcobalsa(R)" for
lumber, dimension stock, and bonded panels and blocks, "Contourkore(R)",
"LamPrep(R)" and "AL-600/10(R)" for the flexible wood block mat, "Durakore(R)",
a balsa hardwood composite, "D100(R)" for end-grain panels and "Decolite(R)" a
balsa composite panel used as an alternative to plywood, and low-density
laminate bulkers, marketed as "BaltekMat(R)".
The Company also features "Airlite(TM)", a cross-linked PVC foam,
"AIREX(R)"(registered trademark of Alusuisse Airex AG), a linear foam and "Firet
Coremat(R)", also a low-density laminate bulker.
Estimated Research Costs
The Company has incurred approximately $331,000 during 1997 for
research and development, compared to expenditures of $350,000 in 1996 and
$415,000 in 1995. All expenditures are related to the core materials segment.
The Company continues to actively explore possible new applications of its core
materials and new processes to improve the manufacturing of those products.
Environmental Impact
The Company has experienced no material impact upon its capital
expenditures, earnings or competitive position as a result of its compliance
with federal, state or local provisions relating to the protection of the
environment. Balsa is not a rainforest species, nor does it grow in the
rainforest. It is usually harvested within five years. The fast growth rate
makes balsa similar to short-cycle agricultural crops and an ideal tree species
for forest plantations.
Employees
The Company has approximately 1,138 employees in Ecuador, 131 in the
United States and 10 in Europe, aggregating 1,279 employees.
Seasonality
The Company's business is not seasonal.
-3-
Classes of Products
The following table sets forth the amount and percentage of net sales
represented by each of the Company's product classes in the three years ended
December 31, 1997 (dollars in thousands):
Year Core Materials Shrimp Total
---- -------------- ------ -----
1995 $36,420 $ 9,364 $45,784
80% 20% 100%
1996 $38,630 $ 9,736 $48,366
80% 20% 100%
1997 $44,004 $12,136 $56,140
78% 22% 100%
-4-
Segment Information
The Company is engaged in two lines of business, that of manufacturing
and supplying products which are used principally as the core material in
various industries, and in the aquaculture business, namely, shrimp farming in
Ecuador.
Reference is made to the information set forth in Note 11 to the Notes
to Consolidated Financial Statements, Part II, Item 8 hereof, with respect to
assets and operating results for different business segments.
Foreign Operations
The Company, through its Ecuadorian subsidiaries, owns and operates
five woodworking plants and approximately 14,727 acres of forest land in
Ecuador. In addition, the Company owns and operates two shrimp farms on
approximately 2,500 acres, a shrimp hatchery and a shrimp packing plant.
At the Company's woodworking plants, rough balsa lumber is received
from plantations or independent loggers and then processed into finished lumber
and other manufactured products.
The Company's shrimp ponds are stocked with larvae. After feeding,
controlling the pond environment and monitoring the growth of the shrimp for a
period of approximately six months, the shrimp are harvested, frozen, packed and
sold for export.
The Company, through its European subsidiaries, operates sales offices
in France, the United Kingdom and Denmark.
Reference is made to the information set forth in Note 11 to the Notes
to Consolidated Financial Statements, Part II, Item 8 hereof, with respect to
assets and operating results by geographic areas.
No prediction can be made as to any future increase or decrease of the
Company's foreign business. The Company has experienced differences in
profitability between foreign and domestic sales due to the changing value of
the U.S. dollar in relation to the foreign currencies of countries where its
products are sold.
-5-
Item 2. PROPERTIES
The Company owns or leases the properties indicated in the following
table:
Property and Location Status
- --------------------- ------
One-story concrete and steel building containing the Company's principal
offices, manufacturing plant and warehouse space, 85,000 square feet on 4-1/2
acres (Northvale, New Jersey). Leased
Approximately 54,000 square feet of warehouse space in two buildings (Norwood,
NJ). Leased
Woodworking plant housed in several wood, concrete and steel buildings,
approximately 180,000 square feet (Guayaquil, Ecuador). Owned
Woodworking plant housed in several wood, concrete and steel buildings,
approximately 30,000 square feet on 7 acres of land (Guayaquil, Ecuador). Owned
14,727 acres of timberland in Ecuador. Owned
2,000 acres of land for shrimp farming in Ecuador, including 10 wood buildings
and one concrete building totaling approximately 11,000 square feet. Owned
444 acres of land for shrimp farming in Ecuador, including 4 concrete buildings
and 4 wood buildings totaling approximately 4,357 square feet. Leased
Shrimp hatchery housed in several concrete buildings on 3.7 acres of land (San
Pablo, Ecuador). Owned
Shrimp packing plant housed in three concrete and steel buildings on 2.6 acres
of land (Duran, Ecuador). Owned
Woodworking plant housed in four concrete and steel buildings, 165,000 square
feet on approximately 28 acres of land (Santo Domingo de los Colorados,
Ecuador). Owned
Woodworking plant housed in four concrete and steel buildings, 62,000 square
feet on approximately 7 acres of land (Manta, Ecuador). Owned
Woodworking plant housed in one wood building, 26,000 square feet on d
approximately 8 acres of land (Quevedo, Ecuador) Owned
-6-
Maintenance facilities for the Balsa Raw Material Department in a concrete and
wood building, 16,875 square feet (Quevedo, Ecuador). Owned
Office space in concrete building, 8,489 square feet (Guayaquil, Owned
Ecuador)
Office space in concrete building, 1,000 square feet (Croydon, U.K.). Leased
Office space in stone and wood building, 2,000 square feet (Paris, Leased
France).
All of the above properties except the shrimp farming land, hatchery and packing
plant are used in the core materials business.
The lease of the property at Northvale, New Jersey, continues until
February 28, 2002, at an average annual rental of approximately $469,000. The
warehouse space in Norwood, New Jersey continues until September 1, 2002 at an
average rental of approximately $283,000. The lease of the Company's office
space in Paris continues until March 31, 1998 at an annual rental equivalent to
approximately $27,000. The lease of the Company's office in Croydon, U.K.
runs until December 25, 2008 at an annual rental of approximately $14,000.
All of the Company's properties, plants and equipment are considered to
be presently sufficient for their respective purposes.
Item 3. LEGAL PROCEEDINGS
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during
the fourth quarter of 1997.
-7-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the Symbol: BTEK. The following is the range of high and low prices for
the last two years.
1997 1996
----------------- ------------------
HIGH LOW HIGH LOW
1st Quarter $8.13 $6.75 $11.25 $8.25
2nd Quarter 7.88 6.25 11.13 8.63
3rd Quarter 9.75 7.50 9.50 7.63
4th Quarter 10.25 7.25 8.00 6.50
The Company had approximately 174 stockholders of record as of March 2,
1998.
No cash dividends were paid during the past two years.
-8-
Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net sales ............. $ 56,140 $ 48,366 $ 45,784 $ 40,130 $ 32,270
Net income ............ 1,841 450 1,962 1,212 113
Basic earnings per
common share ........ .73 .18 .78 .48 .04
Total assets .......... 41,756 39,315 38,816 34,541 33,385
Long-term
obligations ......... 3,015 1,957 1,993 2,170 2,379
Cash dividends declared
per common share .... -- -- -- -- --
Average shares
Outstanding ......... 2,523,261 2,523,261 2,523,261 2,523,261 2,523,261
-9-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio (current assets divided by current
liabilities) increased in 1997 to 2.84:1 from 2.56:1 in 1996 and 2.50:1 in 1995.
Cash was provided and used in varying amounts during the three-year
period, principally as a result of changes in the elements of current assets and
current liabilities and in the amount of cash provided by net income.
Inventories increased in all three years due to new products, particularly foam
products in 1997 and 1996, and buildup for anticipated increases in sales.
Cash used in investing activities for the three-year period was due to
increased investments in balsa plantations, replacement of old equipment,
structural improvements of the shrimp ponds and purchase of new equipment
required for the manufacture of the Company's new products. The Company has no
material commitments for capital expenditures.
In 1996, the Company borrowed $400,000 in the form of a five-year term
loan to finance equipment purchases. The Company may continue to seek financing
for significant capital expenditures in the future. The Company's working
capital borrowings decreased in 1997 and 1996 due to improved cash flow from
operations. The working capital debt increased in 1995 due to working capital
and investment requirements.
The Company had unused lines of credit of approximately $3.0 million
with a domestic bank, approximately $1.7 million with Ecuadorian banks and
approximately $0.7 million with European banks for working capital purposes and
lines of credit totaling $1.5 million for equipment purchases. The Company
expects that future operations and its unused lines of credit will provide
sufficient resources to support its planned expansion and maintain its favorable
liquid position.
Year 2000
The Company began implementation of a new Enterprise Resource Planning
(ERP) computer system in 1997. The implementation costs incurred in 1997, which
are included in S,G&A, accounted for a small amount of the dollar increase in
1997 as compared to 1996. The ERP system is Year 2000 compliant. The
implementation is expected to be completed in 1998; the Company therefore does
not anticipate any material Year 2000 compliance costs. The Company is not yet
able to estimate the status of Year 2000 compliance with respect to customers
and suppliers; based on a preliminary review, management does not expect that
noncompliance by customers and suppliers will have a material adverse effect on
the future consolidated results of operations of the Company. The Company will
utilize internal and external resources to ensure compliance of the customers
and suppliers with respect to the Year 2000 issue.
RESULT OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995
Total sales increased 16%, 6% and 14% in 1997, 1996 and 1995,
respectively. The gains in all three years were due to increased core materials
sales together with substantial increases in shrimp sales.
Core material sales were $44,004,000, $38,630,000 and $36,420,000 in
1997, 1996 and 1995, respectively. The robust economy in 1997 resulted in strong
-10-
demand in all industries that use core materials, including the largest customer
group: the boating industry. The boating industry represents approximately 40%
of the Company's core material sales. Many of the Company's end user markets,
including boating, are highly cyclical. Demand within those industries is
dependent upon, among other factors, inflation, interest rates and consumer
confidence. Fluctuating interest rates and other changes in economic conditions
make it difficult to forecast short or long range trends. Increases in core
material sales in 1997 and 1996 are also attributable to sales of foam products
which were introduced in 1996. A portion of the increase in 1997 compared to
1996 was attributable to increased pricing and, to a lesser extent, volume
increases.
Shrimp sales were $12,136,000, $9,736,000 and $9,364,000 in 1997, 1996
and 1995, respectively. The increases in all three years were the result of
increased yield at the Company's shrimp farm and increased worldwide prices in
1997 and 1995. The increase in 1997 is also attributable to a higher volume of
shrimp which was purchased from outside suppliers, then processed and sold by
the Company.
The gross margin increased in 1997 after decreasing in 1996 from the
1995 amount. In 1997, the margins for the Company's core products improved
compared to 1996. This was primarily due to improved pricing especially during
the second half of the year. Additionally, the results for 1996 were negatively
affected by start-up expenses of the new foam product line, competitive pricing
pressure on the Company's Balsa and Foam products and inflationary pressures on
costs at the Company's facilities in Ecuador. The gross margin from shrimp sales
decreased in 1997 compared to 1996 and in 1996 compared to 1995. The decrease in
1997 is attributable to a higher volume of shrimp purchased from outside
suppliers, which have lower margins than shrimp grown at the Company's own
farms. The decrease in 1996 is due to significantly lower worldwide prices.
Selling, general and administrative expenses as a percentage of sales
declined in 1997 and 1996. The decline in both years was due primarily to a
better absorption of fixed expenses, primarily general and administrative
expenses, as a result of increased sales.
Sales and expenses were affected in all three years by the different
exchange rates applied in translating the books of accounts of the Company's
foreign subsidiaries.
Interest expense increased all three years. During 1997, the Company
began borrowing in Ecuador in local currency (sucre) denominated loans as a
natural hedge of the net investment in Ecuador. Although these loans bear higher
interest rates than U.S. dollar loans, the Company expects to partially offset
these higher interest rates with gains resulting from the expected devaluation
of the sucre. This practice increased interest expense in 1997 and reduced the
Company's foreign exchange losses. The Company's interest rate on U.S. loans
decreased in 1997 and its average borrowings were also lower in 1997 after
increasing in 1996. The level of borrowing in all years is related to the
Company's working capital needs and cash flow generated from operations.
Translation losses varied greatly during the three-year period.
Translation losses are mainly caused by the relationship of the U.S. dollar to
the foreign currencies in the countries where the Company operates, and arise
when translating foreign currency balance sheets into U.S. dollars. The Company
utilizes foreign exchange contracts to hedge certain inventory purchases and may
also employ certain strategies whose objective is to reduce earnings and cash
-11-
flow volatility associated with foreign exchange rate changes. The Company has
not and does not intend to enter into foreign currency transactions for
speculative purposes. Management is unable to forecast the impact of translation
gains or losses on future periods due to the unpredictability in the fluctuation
of foreign exchange rates.
The effective income tax rate amounted to 28% in 1997, 31% in 1996 and
21% in 1995. Reconciliation of the effective rate with the U.S. statutory rate
is detailed in Note 8 to the Notes to Consolidated Financial Statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board Issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both standards for the
Company are effective beginning in 1998. The Company is currently evaluating
the impact of these new standards on its financial statements.
-12-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and
subsidiaries, and supplemental schedule are annexed hereto and made part hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted from this Report since a definitive Proxy Statement, pursuant
to Regulation 14A containing the required information, will be filed with the
Commission not later than 120 days after the close of registrant's fiscal year.
Item 11. EXECUTIVE COMPENSATION
Omitted from this Report since a definitive Proxy Statement, pursuant
to Regulation 14A containing the required information, will be filed with the
Commission not later than 120 days after the close of registrant's fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Omitted from this Report since a definitive Proxy Statement, pursuant
to Regulation 14A containing the required information, will be filed with the
Commission not later than 120 days after the close of registrant's fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
-13-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) and (2) Consolidated Financial Statements and
Financial Statement Schedule
See Index to Consolidated Financial
Statements and Financial Statement
Schedule annexed hereto and made part
hereof.
(b) Reports on Form 8-K
No reports on form 8-K were filed by or
on behalf of the registrant for the
quarter ended December 31, 1997, the
last quarter in the period covered by
this Annual Report on Form 10-K.
(c) List of Exhibits
Exhibit No. Item Filing
----------- ---- ------
3 Articles of Incorporation (Bylaws) Pre-Filed
10 Material Contracts None
21 Subsidiaries of Registrant Filed Herewith
27 Financial Data Schedule Filed Herewith
-14-
SIGNATURES
Pursuant to the requirements of Section 13 of 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, thereunto duly authorized.
BALTEK CORPORATION
Registrant
By /s/ Jacques Kohn
------------
Jacques Kohn,
President
Director
By /s/ Ronald Tassello
---------------
Ronald Tassello,
Controller (Principal
Financial Officer and
Principal Accounting
Officer)
Dated: March 18, 1998
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 date indicated:
By /s/ Jacques Kohn By /s/ Benson J. Zeikowitz
---------------- -----------------------
Jacques Kohn, Benson J. Zeikowitz
Director Director
By /s/ Margot Kohn
---------------
Margot Kohn,
Director
By /s/ Henri-Armand Kohn
---------------------
Henri-Armand Kohn,
Director
By -------------
Theodore Ness,
Director
Dated March 18, 1998
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
AS OF DECEMBER 31, 1997 AND 1996 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
PREPARED FOR FILING AS PART OF THE
ANNUAL REPORT (FORM 10-K)
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1997
**********
BALTEK CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PREPARED FOR FILING AS PART OF THE ANNUAL REPORT
(FORM 10-K) TO THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
Consolidated Balance Sheets as of December 31, 1997 and 1996 2
Consolidated Statements of Income for Each of the Three Years
in the Period Ended December 31, 1997 3
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended December 31, 1997 4
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 1997 5
Notes to Consolidated Financial Statements for Each of the Three
Years in the Period Ended December 31, 1997 6-16
FINANCIAL STATEMENT SCHEDULE AS OF AND FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997:
II - Valuation and Qualifying Accounts 17
All other schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission have been omitted because of the absence
of the conditions under which they are required or because the required
information called for is set forth in the consolidated financial statements or
notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Baltek Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Baltek
Corporation and subsidiaries (the "Corporation") as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedule listed in the
accompanying index. These financial statements and financial statement schedule
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Baltek Corporation and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also, 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.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 18, 1998
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ----------------------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 1,177,003 $ 1,114,659
Accounts receivable (less allowance for doubtful
accounts - 1997, $72,963; 1996, $62,611) ................ 5,102,719 4,820,544
Inventories (Note 3) ...................................... 14,599,348 13,713,660
Prepaid expenses .......................................... 298,398 308,850
Other ..................................................... 1,325,572 1,487,121
----------- -----------
Total current assets ............................. 22,503,040 21,444,834
PROPERTY, PLANT AND EQUIPMENT - Net (Notes 4 and 10) ........ 11,737,754 10,759,258
TIMBER AND TIMBERLANDS (Note 5) ............................. 7,021,392 6,445,828
OTHER ASSETS ................................................ 493,371 665,495
----------- -----------
TOTAL ASSETS ................................................ $41,755,557 $39,315,415
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 6) .................................... $ 1,550,000 $ 3,600,000
Accounts payable .......................................... 3,071,482 2,860,363
Income taxes payable ...................................... 56,712 --
Accrued salaries, wages and bonuses payable ............... 1,040,388 596,139
Accrued expenses and other liabilities .................... 908,581 911,243
Current portion of long-term debt (Note 7) ................ 964,354 108,922
Current portion of obligation under capital lease (Note 10) 336,791 294,784
----------- -----------
Total current liabilities ........................ 7,928,308 8,371,451
OBLIGATION UNDER CAPITAL LEASE (Note 10) .................... 1,343,199 1,679,985
LONG-TERM DEBT (Note 7) ..................................... 1,671,647 276,620
UNION EMPLOYEE TERMINATION BENEFITS (Note 9) ................ 290,763 306,367
----------- -----------
Total liabilities ................................ 11,233,917 10,634,423
----------- -----------
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- ----------------------------------------------------------------------------------------------
1997 1996
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par; 5,000,000 shares
authorized and unissued ................................. -- --
Common stock, $1.00 par; 10,000,000 shares authorized,
2,523,261 shares issued and outstanding ................. 2,523,261 2,523,261
Additional paid-in capital ................................ 2,157,492 2,157,492
Retained earnings ......................................... 25,840,887 24,000,239
----------- -----------
Total stockholders' equity ....................... 30,521,640 28,680,992
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................. $41,755,557 $39,315,415
=========== ===========
See notes to consolidated financial statements.
-2-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------
1997 1996 1995
NET SALES ............................ $ 56,140,303 $ 48,366,127 $ 45,783,629
COST OF PRODUCTS SOLD ................ 42,322,546 36,986,131 32,759,376
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ............ 10,422,947 9,617,327 9,743,221
------------ ------------ ------------
Operating income .......... 3,394,810 1,762,669 3,281,032
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (Notes 6, 7 and 10) (759,791) (602,254) (530,231)
Foreign exchange loss .............. (84,470) (514,035) (307,716)
Interest income .................... 3,630 5,064 36,669
Other, net ......................... 1,707 2,513 10,969
------------ ------------ ------------
Total ..................... (838,924) (1,108,712) (790,309)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ........... 2,555,886 653,957 2,490,723
INCOME TAX PROVISION (Note 8) ........ 715,238 204,014 528,470
------------ ------------ ------------
NET INCOME ........................... $ 1,840,648 $ 449,943 $ 1,962,253
============ ============ ============
BASIC EARNINGS PER COMMON SHARE ...... $ 0.73 $ 0.18 $ 0.78
============ ============ ============
See notes to consolidated financial statements.
-3-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Additional
Common Stock, Paid-in Retained
$1 Par Capital Earnings
----------- ----------- -----------
BALANCE, JANUARY 1, 1995 ....... $ 2,523,261 $ 2,157,492 $21,588,043
Net income - 1995 ............ -- -- 1,962,253
----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 ..... 2,523,261 2,157,492 23,550,296
Net income - 1996 ............ -- -- 449,943
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 ..... 2,523,261 2,157,492 24,000,239
Net income - 1997 ............ -- -- 1,840,648
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 ..... $ 2,523,261 $ 2,157,492 $25,840,887
=========== =========== ===========
See notes to consolidated financial statements.
-4-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 1,840,648 $ 449,943 $ 1,962,253
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 2,324,482 2,330,124 1,905,415
Foreign exchange loss .................................... 84,470 514,035 307,716
Deferred taxes ........................................... (59,268) (8,399) (68,107)
Changes in assets and liabilities,
net of the effect of foreign
currency translation and acquisition:
Accounts receivable .................................. (555,485) 572,203 (432,057)
Income tax payable/receivable ........................ 128,788 (46,121) (702,623)
Inventories .......................................... (831,826) (838,457) (3,471,987)
Prepaid expenses and other current assets ............ 207,047 (122,416) (124,577)
Other assets ......................................... 183,756 12,705 (12,050)
Accounts payable and accrued expenses ................ 626,215 661,564 324,813
Other ................................................ (17,290) 1,329 100,011
----------- ----------- -----------
Net cash provided by (used in) operating activities 3,931,537 3,526,510 (211,193)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisitions of property, plant and equipment .......... (1,680,905) (1,245,208) (1,626,255)
Increase in timber and timberlands ......................... (1,338,327) (811,893) (1,205,006)
Acquisition of shrimp farm-net of cash acquired ............ (67,854) -- --
----------- ----------- -----------
Net cash used in investing activities ............. (3,087,086) (2,057,101) (2,831,261)
----------- ----------- -----------
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 (continued)
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in notes payable ....................... (2,050,000) (824,911) 2,691,892
Borrowings of long-term debt ............................... 2,527,995 400,000 --
Payments of long-term debt ................................. (535,269) (95,658) (23,863)
Principal payments under capital lease ..................... (294,779) (188,064) (174,517)
----------- ----------- -----------
Net cash (used in) provided by financing activities (352,053) (708,633) 2,493,512
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... (430,054) (487,173) (306,217)
----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS .................................. 62,344 273,603 (855,159)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR .......................................... 1,114,659 841,056 1,696,215
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR ................................................ $ 1,177,003 $ 1,114,659 $ 841,056
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................. $ 471,557 $ 448,863 $ 268,808
=========== =========== ===========
Income taxes ............................................. $ 683,636 $ 256,379 $ 1,388,134
=========== =========== ===========
See notes to financial statements.
-5-
BALTEK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Baltek Corporation and subsidiaries (the "Company") is a multinational
manufacturing and marketing company. The Company operates in two lines of
business: supplying core materials, principally balsa wood and balsa wood
products, linear and cross-linked PVC Foam and non-woven polyester mat to
various composite industries; and farming and processing shrimp.
Approximately 80% of Baltek's revenues are derived from its core materials
segment and 20% from the shrimp segment.
The principal market for the Company's core materials is in the United
States, while the shrimp market is divided between the United States and
Europe.
The balsa and shrimp products are produced in Ecuador, South America. The
supply of raw materials has been without interruption for over 50 years.
The balsa and shrimp identifiable assets located at various facilities in
Ecuador are included in the Company's consolidated balance sheet and total
approximately $23 million at December 31, 1997. Foam and mat products are
purchased from outside vendors; the foam products are further processed by
the Company for sale to customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash equivalents consist of short-term highly
liquid investments with maturities of three months or less when purchased.
Cash flows from Baltek's operations in foreign countries are calculated
based on their reporting currencies. As a result of this, amounts related
to changes in assets and liabilities reported on the consolidated
statement of cash flows will not necessarily agree to changes in the
corresponding balances on the consolidated balance sheets. The effect of
exchange rate changes on cash balances held in foreign currencies is
reported on a separate line below cash flows from financing activities.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined by use of the first-in, first-out (FIFO) method.
Property - Property, plant and equipment is stated at cost. Depreciation
is provided for depreciable assets over their estimated useful lives using
various accepted depreciation methods. The asset under capital lease and
leasehold improvements are amortized over their estimated useful lives, or
the life of the lease, whichever is shorter.
-6-
Income Taxes - Taxes on current income are provided by the Company and
each subsidiary as prescribed by local tax laws. 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.
Timber and Timberlands - Timberlands are carried at cost. Timber-deferred
cultivation costs represent the cost of preparing, clearing and seeding
the Company's balsa wood plantations. Amortization of deferred cultivation
costs is based on units of production. Timber carrying costs, which
include the regular maintenance and overseeing of timberlands, are
expensed as incurred.
Foreign Currency Translation - The financial statements of the Company's
foreign subsidiaries are remeasured into U.S. dollars, the Company's
functional currency.
Foreign Currency Risk Management - The Company uses forward foreign
currency exchange contracts to reduce currency exchange rate risk on firm
commitment purchases denominated in foreign currencies. Gains or losses
resulting from these contracts are deferred and are included in the
purchase price of the materials. The maximum term of these contracts is
less than one year. The Company does not intend to enter into derivative
financial instruments for trading purposes.
Common Stock - Holders of the Company's Common Stock have full voting,
dividend and liquidation preferences in the Company.
Concentrations of Credit Risk - Baltek's core material products, as well
as shrimp products, are sold to a number of markets, including boating,
transportation, military, hobby, and the retail food industry. Baltek's
products are sold throughout the United States, Canada, Europe, Japan and
Australia to approximately 1,600 ultimate users. Credit risk related to
Baltek's trade receivables is limited due to the large number of customers
in differing industries and geographic areas.
Research and Development - Research and development costs are charged to
expense as incurred. Research and development expenditures charged to
operations were approximately $331,000, $350,000 and $415,000 in 1997,
1996 and 1995, respectively.
Basic Earnings per Common Share - In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings per Share". This
standard revises the methodology for computing earnings per common share
and requires the reporting of two earnings per share figures: basic
earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income by the weighted-average number of
common shares outstanding. The weighted-average number of common shares
outstanding for all periods presented is 2,523,261. The Company does not
have any potentially dilutive common shares; therefore, the reporting of
diluted earnings per share is not applicable. This new standard did not
have a material effect on prior year amounts disclosed herein.
Use of Estimates - The Company's financial statements include the use of
estimates and assumptions which have been developed by management based on
available facts and information. Actual results could differ from those
estimates.
Reclassifications - Certain amounts in prior year financial statements
have been reclassified to conform with the current year presentation.
-7-
3. INVENTORIES
Inventories of the core materials and shrimp segments are summarized as
follows:
1997 1996
----------- -----------
Raw materials . $ 5,288,736 $ 4,718,296
Work-in-process 4,300,532 4,250,538
Finished goods 5,010,080 4,744,826
----------- -----------
Inventories ... $14,599,348 $13,713,660
=========== ===========
Included in the above amounts are inventories relating to the Company's
shrimp operations of $1,657,960 and $1,159,914 at December 31, 1997 and
1996, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
Estimated
Useful Lives 1997 1996
------------ ---- ----
Land ......................................... $ 125,311 $ 125,311
Shrimp properties ............................ 5-20 years 16,332,199 14,745,215
Buildings and improvements ................... 20 years 1,572,708 1,334,589
Machinery and equipment ...................... 5-10 years 9,782,483 9,146,164
Leasehold improvements ....................... 835,867 793,956
Assets under capital lease ................... 2,498,719 2,498,719
Construction-in-progress ..................... 93,527 173,954
Total ........................................ 31,240,814 28,817,908
Less accumulated depreciation and amortization 19,503,060 18,058,650
----------- -----------
Property, plant and equipment - net .......... $11,737,754 $10,759,258
=========== ===========
On October 1, 1997, the Company acquired a 444-acre shrimp farm in Ecuador
for approximately $436,000, including liabilities assumed. The acquisition
was accounted for as a purchase with the purchase price being allocated to
the assets and liabilities acquired based upon their fair values at the
date of acquisition. The results of operations of the acquired farm are
included in the statement of income from the date of acquisition. Due to
the immateriality of the acquisition, pro-forma information is not
presented herein.
Shrimp properties consist principally of shrimp ponds, a hatchery and a
packing plant. Accumulated amortization related to the asset under capital
lease at December 31, 1997 and 1996 was $1,457,603 and $1,207,727,
respectively.
-8-
5. TIMBER AND TIMBERLANDS
Timber and Timberlands are comprised of the following:
1997 1996
---------- ----------
Timberlands ..................... $3,311,782 $2,839,820
Timber-deferred cultivation costs 3,709,610 3,606,008
---------- ----------
Timber and Timberlands .......... $7,021,392 $6,445,828
========== ==========
6. NOTES PAYABLE
Notes payable under various agreements consist of the following:
1997 1996
---------- ----------
U.S. Bank loan, with interest at prime less 1/2% in 1997 and
prime in 1996 (8% and 8.25% at 1997 and 1996,
respectively) ............................................ $1,550,000 $2,150,000
Ecuadorian bank loans, payable in U.S. dollars, due within
one year from the origination date, with interest rates
between 8% and 9% ....................................... -- 1,450,000
---------- ----------
Notes payable .............................................. $1,550,000 $3,600,000
========== ==========
The U.S. Bank loan represents borrowings under an unsecured revolving line
of credit with a domestic bank. The maximum credit limit under the line is
$4,600,000, with interest at the bank's prime rate less 1/2%. This line of
credit, which is renewable annually, expires on May 31, 1998. The Company
was in compliance with all related loan covenants at December 31, 1997.
The credit facilities discussed above do not require compensating balances
or the payment of commitment fees. The weighted average interest rate on
borrowings outstanding at December 31, 1997 and 1996 was 8.0% and 8.5%,
respectively.
The Company also has lines of credit with two banks for equipment
financing totalling $1,500,000. One of the lines, in the amount of
$1,000,000, expires June 1, 1998 and contains affirmative covenants and a
negative covenant related to net worth. No amounts were outstanding at
December 31, 1997 related to these lines.
-9-
7. LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
----------- -----------
Equipment loan, payable in equal monthly
principal installments of $6,667 through
January 2001, plus interest at prime .................. $ 253,333 $ 333,333
(8.5% and 8.25% at 1997 and 1996, respectively)
Ecuadorian bank loans payable in sucres, bearing interest 2,300,925 --
rates between 31.3% and 35.0%
Other notes, with interest rates between
4.4% and 6.0%, due at various dates through 2001 ...... 81,743 52,209
----------- -----------
2,636,001 385,542
Less current portion .................................... (964,354) (108,922)
----------- -----------
Long-term debt .......................................... $ 1,671,647 $ 276,620
=========== ===========
The equipment loan payable is secured by certain machinery and equipment
at the Company's Northvale, New Jersey facilities.
At December 31, 1997, the Company had a line of credit available under
Ecuadorian borrowing arrangements amounting to approximately $4,000,000,
of which approximately $1,700,000 was unused. Included in the outstanding
line of credit are sucre denominated unsecured 90 day bank loans and a
term loan. The bank loans contain renewable terms every 90 days and only
require payment of 10% of the original principal loan amount at the end of
each term. The Company intends to pay only the required minimum principal
payments in accordance with the renewal terms. The portion not due within
one year has been classified as long term. The Company also has an
unsecured Ecuadorian term loan, which requires principal and interest
payments of approximately $245,000 every six months commencing March 1998,
with a final payment due in September 2000.
Additionally, the Company has unused lines of credit under European
borrowing arrangements amounting to approximately $700,000.
The aggregate maturities of long-term debt at December 31, 1997 are as
follows:
1999 $ 1,024,961
2000 623,244
2001 23,442
-----------
$ 1,671,647
===========
-10-
8. INCOME TAXES
Income (loss) before income taxes is comprised of:
1997 1996 1995
---------- ---------- ----------
Domestic $1,752,410 $ 989,628 $1,717,492
Foreign 803,476 (335,671) 773,231
---------- ---------- ----------
Total .. $2,555,886 $ 653,957 $2,490,723
========== ========== ==========
The provision (benefit) for income taxes consists of the following:
1997 1996 1995
--------- --------- ---------
Federal:
Current $ 665,893 $ 171,716 $ 519,517
Deferred (59,268) (8,399) (68,107)
State .... 99,724 33,081 87,885
Foreign .. 8,889 7,616 (10,825)
--------- --------- ---------
Total .... $ 715,238 $ 204,014 $ 528,470
========= ========= =========
The reconciliation between the Company's effective tax rate and the
statutory Federal tax rate is as follows:
1997 1996 1995
---- ---- ----
Statutory Federal tax rate ........................ 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Foreign income - effect of rates
differing from statutory rates, effect
of nontaxable exchange gains and losses,
and foreign losses producing no current benefit . (9.6) 11.4 (11.8)
Refunds and reversal of current valuation allowance (0.7) (17.6) (6.4)
State taxes, net of Federal income
tax benefit ..................................... 2.5 3.3 2.3
Other - net ....................................... 0.8 (0.9) 2.1
---- ----- -----
Effective tax rate ................................ 28.0% 31.2% 21.2%
==== ==== ====
In 1997, the Company utilized foreign tax loss carryforwards, for which a
full valuation allowance had been recorded in prior years. In 1996, the
Company included the income from the reversal of a current valuation
allowance in the tax provision. In 1995, the Company utilized foreign tax
credit carryforwards of $140,000, for which a full valuation allowance had
been recorded in prior years.
As a result of various incentives provided by the Ecuadorian government,
the effective foreign tax rate is lower than the U.S. Federal statutory
tax rate.
-11-
Significant components of the Company's deferred tax assets and
liabilities are as follows:
1997 1996
--------- ---------
Current assets (liabilities):
Inventory capitalization ............... $ 96,349 $ 91,727
Unexpired insurance .................... (76,995) (86,626)
Reserve amounts not currently deductible 39,156 3,456
Other - net ............................ 24,881 (1,188)
--------- ---------
Total current asset, net ................. $ 83,391 $ 7,369
========= =========
Noncurrent assets:
Capital lease .......................... 210,245 226,999
Foreign tax loss carryforwards ......... 3,027 67,352
Less valuation allowance ................. (3,027) (67,352)
--------- ---------
Total noncurrent asset, net .............. $ 210,245 $ 226,999
========= =========
As of December 31, 1997 and 1996, the Company had a full valuation
allowance recorded against its foreign tax loss carryforwards related to
certain European locations. Management believes that it is more likely
than not that the remaining carryforwards will expire unutilized.
The total current and noncurrent amounts presented above are included in
other assets (current and noncurrent) in the consolidated balance sheet.
The Company has not accrued federal income taxes on the equity in the
undistributed earnings of its foreign subsidiaries, which amounted to
approximately $6,682,000 at December 31, 1997, because such earnings are
permanently reinvested. It is not practicable to estimate the tax
liability that might arise if these earnings were remitted.
9. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan under which an annual contribution
may be paid from accumulated profits at the discretion of the Board of
Directors for the benefit of eligible employees upon their retirement.
Contributions to this plan by the Company amounted to approximately
$313,000, $180,000 and $327,000 in 1997, 1996 and 1995, respectively.
Additionally, the plan allows for all participants to defer between 2
percent and 10 percent of salary. Amounts deferred are paid to the trustee
of the plan. The plan does not provide for matching Company contributions.
Certain employees of the Company's Ecuadorian subsidiary companies are
covered by termination and retirement plans incorporated under statutory
requirements of labor laws and collective bargaining agreements. Included
in the accompanying consolidated balance sheets are union employee
termination benefits which approximate unpaid vested benefits under such
plans. The amount of benefits to be received by an employee is established
by the collective bargaining agreements and is based on length of service
and compensation. Provisions of approximately $75,000, $64,000 and
$111,000 were charged to income during 1997, 1996 and 1995, respectively.
The Company participates in a multiemployer pension plan for the union
employees at the Northvale, New Jersey facility. Provisions of
approximately $139,000, $112,000 and $101,000 were charged to income
during 1997, 1996 and 1995, respectively.
-12-
10. LEASES
The Company leases its office space and plant facilities in Northvale, New
Jersey under a long-term capital lease agreement which expires in 2002.
The lease provides that the Company pay all real estate taxes, maintenance
and insurance relating to the facilities.
The Company also leases warehouse space under a five-year lease agreement
which expires in 2002. The lease requires that the Company pay real estate
taxes and certain maintenance and insurance costs related to the facility.
The Company also leases warehouse space under a month-to-month lease.
Rent expense under operating leases relates principally to warehouse space
and office buildings and amounted to $204,000, $122,000 and $53,000 in
1997, 1996 and 1995, respectively.
Future minimum lease payment obligations, as of December 31, 1997, for the
capital lease described above, as well as operating leases, are summarized
below. The operating leases are for space at the Company's offices in
England and France and warehouse space in New Jersey.
Capital Operating
Year Lease Leases
- ---- ----- ------
1998 $ 448,565 $ 229,373
1999 466,365 207,655
2000 469,926 207,655
2001 487,726 207,655
2002 81,886 143,129
Remainder - 84,462
----------- -----------
Minimum lease payments 1,954,468 $ 1,079,929
===========
Less amounts representing interest (274,478)
-----------
Capital lease obligation $ 1,679,990
===========
11. SEGMENT INFORMATION
The Company and its subsidiaries operate primarily in two segments, as a
manufacturer and supplier of core materials to various composite
industries, and in the shrimp farming business. Information about the
Company's operations by segment is as follows:
(In Thousands)
1997 1996 1995
-------- -------- --------
Sales to unaffiliated customers
Core materials segment ........ $ 44,004 $ 38,630 $ 36,420
Shrimp segment ................ 12,136 9,736 9,364
-------- -------- --------
Total sales ................... $ 56,140 $ 48,366 $ 45,784
======== ======== ========
Operating income
Core materials segment ........ $ 3,905 $ 2,383 $ 2,776
Shrimp segment ................ 1,380 999 2,327
General corporate expenses .... (1,890) (1,619) (1,822)
-------- -------- --------
Total operating income ........ $ 3,395 $ 1,763 $ 3,281
======== ======== ========
-13-
(In Thousands)
1997 1996 1995
-------- -------- --------
Income before income taxes
Core materials segment ......................... $ 3,688 $ 1,947 $ 2,608
Shrimp segment ................................. 1,512 921 2,187
General corporate expenses ..................... (1,890) (1,619) (1,822)
-------- -------- --------
Operating income after foreign exchange loss ... 3,310 1,249 2,973
Interest expense ............................... (760) (602) (530)
Other income - net ............................. 6 7 48
-------- -------- --------
Income before income taxes ..................... $ 2,556 $ 654 $ 2,491
======== ======== ========
Identifiable assets
Core materials segment ......................... $ 31,388 $ 30,318 $ 29,647
Shrimp segment ................................. 10,368 8,997 9,170
-------- -------- --------
Total identifiable assets ...................... $ 41,756 $ 39,315 $ 38,817
======== ======== ========
Capital expenditures, net, including timberlands
and capital leases
Core materials segment ......................... $ 2,305 $ 1,524 $ 2,169
Shrimp segment ................................. 737 579 694
-------- -------- --------
Total capital expenditures ..................... $ 3,042 $ 2,103 $ 2,863
======== ======== ========
Depreciation expense
Core materials segment ......................... $ 882 $ 851 $ 778
Shrimp segment ................................. 680 760 736
-------- -------- --------
Total depreciation expense ..................... $ 1,562 $ 1,611 $ 1,514
======== ======== ========
Information pertaining to the Company's operations in different geographic
areas is as follows:
(In Thousands)
1997 1996 1995
------- ------- -------
Sales to unaffiliated customers
United States - domestic ......... $38,835 $33,473 $32,453
United States - export ........... 11,642 8,856 7,534
Ecuador .......................... 116 123 87
Europe ........................... 5,547 5,914 5,710
------- ------- -------
Total sales ...................... $56,140 $48,366 $45,784
======= ======= =======
Transfers between geographic areas
United States .................... $ 2,264 $ 2,248 $ 2,167
Ecuador .......................... 21,506 18,083 17,781
------- ------- -------
Total transfers .................. $23,770 $20,331 $19,948
======= ======= =======
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(In Thousands)
Operating income ........ 1997 1996 1995
United States ........... $ 2,658 $ 1,762 $ 2,422
Ecuador ................. 499 107 1,055
Europe .................. 238 (106) (196)
-------- -------- --------
Total operating income .. $ 3,395 $ 1,763 $ 3,281
======== ======== ========
Identfiable assets
United States ........... $ 15,458 $ 14,264 $ 12,576
Ecuador ................. 22,672 21,543 22,732
Europe .................. 3,626 3,508 3,509
-------- -------- --------
Total identifiable assets $ 41,756 $ 39,315 $ 38,817
======== ======== ========
Transfers between geographic areas are at prices which permit the recovery
of manufacturing costs and a reasonable operating profit. The majority of
export sales from the Company's United States operations were to
unaffiliated customers in Europe.
No customer accounted for more than 10% of revenues in 1997 and 1996.
Sales to one customer from the core materials segment amounted to
approximately 13% of total revenues in 1995.
12. FINANCIAL INSTRUMENTS
The table below presents the carrying values and estimated fair values for
the Company's financial instruments. Estimated fair values were determined
based on the terms of the various instruments.
1997 1996
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- ----- -------------- -----
Cash and cash equivalents $1,177,003 $1,177,003 $1,114,659 $1,114,659
Notes payable ........... 1,550,000 1,550,000 3,600,000 3,600,000
Long term debt .......... 2,636,001 2,636,001 385,542 385,542
The carrying amount of the notes payable approximates their fair value
based on the short term nature and the terms of the loans.
The carrying amount of the long term debt approximates their fair value
since a majority of the amounts contain 90 day renewal clauses.
At December 31, 1997, the Company held forward foreign currency exchange
contracts for the purchase of French francs with a notional amount of
approximately $341,000 and maturity dates ranging from March 31, 1998
through September 30, 1998. Firm commitments exist which correlate to the
maturity dates of the forward exchange contracts. The amount of deferred
gains and losses at year-end are not material. At December 31, 1996, no
forward exchange contracts were outstanding.
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13. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board Issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Both standards for the
Company are effective beginning in 1998. The Company is currently
evaluating the impact of these new standards on its consolidated financial
statements.
******
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Schedule II
BALTEK CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
- ----------- ------- -------- ---------- -------
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts receivable $ 62,611 $ 30,127 $ 19,775 $ 72,963
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $ 92,759 $ 70,380 $100,528 $ 62,611
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $ 75,985 $ 97,176 $ 80,402 $ 92,759
See notes to consolidated financial statements.
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