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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission file number
December 31, 1998 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, 1999 amounted to $8,052,000.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date, March 2, 1999: 2,523,261
shares, Common Stock, $1.00 par value.
Documents incorporated by reference: Portions of the registrant's proxy
statement dated April 27, 1999 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.
The Company is 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
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.
The Company makes approximately 30% of its domestic core material product sales
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 1998, approximately 42% 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 1998, 1997 or
1996.
Backlog
As of December 31, 1998 and 1997, the Company had a backlog of orders
believed to be firm in the amounts of $12,488,000 and $8,367,000, respectively.
The 1998 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
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 $609,000 during 1998 for
research and development, compared to expenditures of $331,000 in 1997 and
$350,000 in 1996. 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 1,153 employees in Ecuador, 152 in the
United States and 10 in Europe, aggregating 1,315 employees.
Seasonality
The Company's business is not seasonal.
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 each of the three years
in the period ended December 31, 1998 (dollars in thousands):
Year Core Materials Shrimp Total
---- -------------- ------ -----
1998 $53,600 $14,095 $67,695
79% 21% 100%
1997 $44,004 $12,136 $56,140
78% 22% 100%
1996 $38,630 $9,736 $48,366
80% 20% 100%
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 15,580 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.
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 Leased
Company's principal offices, manufacturing plant and
warehouse space, 85,000 square feet on 4-1/2 acres.
(Northvale, New Jersey)
Approximately 58,000 square feet of warehouse and office Leased
space in three buildings. (Norwood and Northvale, New
Jersey)
Woodworking plant housed in several wood, concrete and steel Owned
buildings, approximately 180,000 square feet. (Guayaquil,
Ecuador)
Woodworking plant housed in several wood, concrete and steel Owned
buildings, approximately 30,000 square feet on 7 acres of
land. (Guayaquil, Ecuador)
15,580 acres of timberland in Ecuador. Owned
2,000 acres of land for shrimp farming in Ecuador, including Owned
10 wood buildings and one concrete building totaling
approximately 11,000 square feet.
444 acres of land for shrimp farming in Ecuador, including 4 Leased
concrete buildings and 4 wood buildings totaling
approximately 4,357 square feet.
Shrimp hatchery housed in several concrete buildings on 3.7 Owned
acres of land. (San Pablo, Ecuador)
Shrimp packing plant housed in three concrete and steel Owned
buildings on 2.6 acres of land. (Duran, Ecuador)
Woodworking plant housed in four concrete and steel Owned
buildings, 165,000 square feet on approximately 28 acres of
land. (Santo Domingo de los Colorados, Ecuador)
Woodworking plant housed in four concrete and steel Owned
buildings, 62,000 square feet on approximately 7 acres of
land. (Manta, Ecuador)
Woodworking plant housed in one wood building, 26,000 square Owned
feet on approximately 8 acres of land. (Quevedo, Ecuador)
Maintenance facilities for the Balsa Raw Material Department Owned
in a concrete and wood building, 16,875 square feet.
(Quevedo, Ecuador)
Office space in concrete building, 8,489 square feet. Owned
(Guayaquil, Ecuador)
Office space in concrete building, 1,000 square feet. Leased
(Croydon, U.K.).
Office space in stone and wood building, 2,000 square feet. Leased
(Paris, France)
All of the above properties, except the shrimp farming land, hatchery
and packing plant, are used in the core materials business.
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 1998.
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.
1998 1997
------------------ ------------------
HIGH LOW HIGH LOW
1st Quarter $10.50 $7.63 $8.13 $6.75
2nd Quarter 12.00 8.75 7.88 6.25
3rd Quarter 10.81 8.53 9.75 7.50
4th Quarter 11.75 9.75 10.25 7.25
The Company had approximately 157 stockholders of record as of March 2,
1999.
No cash dividends were paid during the past two years.
Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Net sales ..................... $ 67,695 $ 56,140 $ 48,366 $ 45,784 $ 40,130
Net income .................... 3,259 1,841 450 1,962 1,212
Earnings per common share
1.29 .73 .18 .78 .48
Total assets .................. 46,077 41,755 39,315 38,816 34,541
Long-term obligations ......... 1,581 3,015 1,957 1,993 2,170
Cash dividends declared per
common share ............ -- -- -- -- --
Average shares outstanding .... 2,523,261 2,523,261 2,523,261 2,523,261 2,523,261
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity historically have been and are
expected to continue to be cash flow generated from operations and available
borrowings under short-term lines of credit. In 1996, this was supplemented by a
$400,000 five-year term loan used to finance equipment purchases. If the Company
continues to expand at a rate similar to 1998, this is expected to require a
higher level of capital expenditures than has been experienced in the past to
support such growth. The Company may, accordingly, seek long-term financing for
significant capital expenditures in the future.
The Company's financial position remains strong. At December 31, 1998,
the Company had working capital of $13.8 million compared to $14.6 million at
December 31, 1997. Cash was provided and used in varying amounts during the
two-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 both years due to new products, particularly foam
products in 1997, 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.
The Company had unused lines of credit of approximately $2.2 million
with a domestic bank, approximately $1.3 million with Ecuadorian banks and
approximately $0.7 million with European banks for working capital purposes. 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.
RESULT OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996
Total sales increased 21%, 16% and 6% in 1998, 1997 and 1996,
respectively. The gains in all three years were due to increased core materials
and shrimp sales.
Core material sales were $53,600,000, $44,004,000 and $38,630,000 in
1998, 1997 and 1996, respectively. The continued robust economy has resulted in
strong demand in all industries that use core materials, including the largest
customer group, the boating industry. 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 1998 are also attributable to sales of foam products that were
introduced in 1996. The increase in core material sales in 1998 compared to 1997
was attributable to improved pricing and volume.
Shrimp sales were $14,095,000, $12,136,000 and $9,736,000 in 1998, 1997
and 1996, respectively. The increases in all three years were the result of
higher volume of shrimp shipped; the average selling price decreased slightly in
1998 compared to 1997.
The gross margin increased in 1998 and 1997. In 1998 and 1997, the
margins for the Company's core products improved, primarily due to improved
pricing. The gross margin from shrimp sales decreased in 1998 and 1997. The
decrease in both years 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.
Selling, general and administrative expenses as a percentage of sales
declined in 1998 and 1997. 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. In 1998, the Company
continued to borrow money for working capital purposes 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 1998 as compared to 1997 but created a corresponding foreign
exchange gain. The Company's interest rate on U.S. loans was lower in 1998 and
its average borrowings were slightly higher in 1998 as compared to 1997. The
level of borrowing in all periods is related to the Company's working capital
needs and cash flows generated from operations.
The Company had a foreign exchange gain of $814,000 in 1998 compared to
losses of $84,000 and $514,000 in 1997 and 1996, respectively. In March and
September of 1998, the Ecuadorian government weakened its currency's trading
band against the dollar effectively devaluing the local currency. Translation
gains and 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
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.
The effective income tax rate amounted to 26% in 1998, 28% in 1997 and
31% in 1996. Reconciliation of the effective rate with the U.S. statutory rate
is detailed in Note 8 to the Notes to Consolidated Financial Statements.
Conversion to the Euro Currency
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency, the "Euro". Primarily through its European
sales offices, the Company conducts business in member countries. The transition
period for the introduction of the Euro will be between January 1, 1999 and June
30, 2002. The Company is addressing the issues involved with the introduction of
the Euro, including converting information technology systems, currency risk and
processing tax and accounting issues. Based upon its review to date, the Euro is
not expected to have a significant impact on the Company's business operations
and therefore will not have a material effect on the Company's financial
condition or results of operations.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any
program software and hardware, as well as certain equipment and machinery, that
are date sensitive may recognize a date using "00" as the Year 1900 rather than
the Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities for both the
Company and its customers who rely on its products.
The Company has divided the Year 2000 issue into two main areas:
internal information technology ("IT") and non-IT systems, including embedded
technology such as microprocessors; and external agents including critical
suppliers, customers and other third parties the Company utilizes for various
processing functions.
The Company is in the process of installing a new, fully integrated
Enterprise Resource Planning ("ERP") system purchased from a third party vendor.
The ERP software is Year 2000 compliant. Implementation of mission-critical
systems is expected to be completed in the second quarter of 1999; other
non-critical systems are scheduled to be completed during the first and second
quarters of 1999. The decision to invest in a new ERP system was driven by the
need for a fully integrated management information system to support the planned
growth of the Company and not specifically to address Year 2000 compliance
issues. To fully utilize the capabilities of the ERP software and modernize its
existing systems the Company has invested approximately $272,000 in new computer
hardware and networking hardware and software in 1998. An investment of this
size in hardware is not expected on an annual basis hereafter, although
additional investments will be required in the future to enhance the Company's
use of information technology and computer hardware.
Efforts to implement the ERP system and address certain Year 2000
issues are being accomplished concurrently. It is not practical therefore to
distinguish and estimate certain Year 2000 compliance costs, especially as they
relate to the Company's information technology. Total internal and external
costs in 1998 to implement the ERP system, purchase new computer hardware and
upgrade its existing network was approximately $341,000. Additional external
costs to implement the mission-critical and certain other modules are expected
to be approximately $150,000 in 1999. Hardware costs have been capitalized;
internal costs and nearly all external costs have been expensed as incurred.
Certain expenditures will be required in the future to maintain the technology
base of the Company; such expenditures in the future are not expected to be
material. The Company may decide to utilize additional capabilities of its ERP
system and make use of other information technologies as they become available
in the marketplace. These expenditures will be largely discretionary in that
they are not mission-critical systems and will be evaluated using a methodology
similar to that used by the Company to evaluate other capital expenditures.
Current plans call for the ERP system to be implemented in the U.S.
only, not in the Company's European or Ecuadorian subsidiaries. The Company has
identified all significant IT and non-IT applications that will require
modification at these locations. Completion of the modifications is expected by
the end of March 1999 in Ecuador and by June 1999 in Europe.
The Company is in the process of assessing its Year 2000 exposure as it
pertains to non-IT systems, including manufacturing process control and key
third party relationships, such as vendors and customers. This includes the
process of identifying and prioritizing critical suppliers and customers and
communicating with them about their plans and progress in addressing the Year
2000 problem. The Company also utilizes third-party vendors for processing data
and payments, e.g., payroll services, 401(k) plan administration, check
processing, medical benefits processing, etc. The Company has initiated
communications with these vendors to determine the status of their systems.
Should these vendors not be compliant in a timely manner, the Company may be
required to process transactions manually or delay processing until such time as
the vendors are Year 2000 compliant. The review of non-IT systems and key third
party relationships is expected to be completed by the end of March 1999.
Although the Company anticipates that minimal business disruption will
occur as a result of Year 2000 issues, there is no guarantee that possible
"worst case" Year 2000 issues of third party vendors and suppliers would not
impact the Company. To date the Company has not developed a formal contingency
plan for non-compliance and will develop such plans as necessary based on
information obtained from third parties, as well as the evaluation of its IT and
non-IT systems.
The future costs of the Company's Year 2000 efforts are expected to be
funded through existing cash resources and future operating cash flows. The
requirements for the correction of Year 2000 issues and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's current best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that may cause such
material differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and collect all relevant
computer data and similar uncertainties.
* * * * *
Forward Looking Statements - Cautionary Factors
The foregoing discussion and analysis contains forward-looking
statements regarding the Company. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, economic
conditions in the United States, Europe and Ecuador that affect relative
interest rates, foreign exchange rates and other costs and prices related to the
Company's business.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
commodity prices, foreign currency fluctuations and interest rates. To manage
the volatility associated with foreign currency purchases of materials created
in the normal course of business, the Company enters into a limited number of
derivative hedging transactions. Gains and losses related to qualifying hedges
of foreign currency firm commitments are deferred and included in the basis of
the underlying transactions. The deferred gains and losses on these instruments
at December 31, 1998 were not material. The Company does not hold or issue
derivative financial instruments for speculative purposes.
In addition, in order to hedge currency exposures related to the net
investments in foreign subsidiaries, the Company utilizes local currency and
U.S. dollar denominated financing entered into by the subsidiaries. The Company
manages interest rate cost relating to these financings by using variable
interest rates. Although the use of variable interest rate bearing debt
instruments has the potential for market risk, the Company's overall interest
rate exposure as of and during the year ended December 31, 1998 would not be
materially affected by a near-term change in interest rates.
For quantitative disclosure regarding the Company's derivative
instruments see Note 12 to the Consolidated Financial Statements.
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.
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, 1998, 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
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, 1999
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 W. Kohn By /s/ William F. Nicklin
--------------- ----------------------
Margot W. Kohn, William F. Nicklin
Director Director
By /s/ Henri-Armand Kohn
---------------------
Henri-Armand Kohn,
Director
By /s/ Bernard J. Wald
-------------------
Bernard J. Wald
Director
Dated March 18, 1999
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
AS OF DECEMBER 31, 1998 AND 1997 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
PREPARED FOR FILING AS PART OF THE
ANNUAL REPORT (FORM 10-K)
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1998
**********
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, 1998
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT......................................... 1
Consolidated Balance Sheets as of December 31, 1998 and 1997...... 2
Consolidated Statements of Income for Each of the Three Years
in the Period Ended December 31, 1998..................... 3
Consolidated Statements of Stockholders' Equity for Each of the
Three Years in the Period Ended December 31, 1998............. 4
Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 1998......................... 5
Notes to Consolidated Financial Statements for Each of the Three
Years in the Period Ended December 31, 1998................... 6-16
FINANCIAL STATEMENT SCHEDULE AS OF AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1998:
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, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 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 8, 1999
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
December 31,
ASSETS 1998 1997
------- -------
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 1,056 $ 1,177
Accounts receivable (less allowance for doubtful
accounts - 1998, $144; 1997, $73) ............................. 6,942 5,103
Inventories ........................................................ 14,667 14,599
Prepaid expenses ................................................... 425 298
Other .............................................................. 1,148 1,326
------- -------
Total current assets ........................................... 24,238 22,503
PROPERTY, PLANT AND EQUIPMENT - Net ................................... 13,114 11,738
TIMBER AND TIMBERLANDS ................................................ 8,186 7,021
OTHER ASSETS .......................................................... 539 493
------- -------
TOTAL ASSETS .......................................................... $46,077 $41,755
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ...................................................... $ 4,681 $ 1,550
Accounts payable ................................................... 2,438 3,071
Income taxes payable ............................................... 216 57
Accrued salaries, wages and bonuses payable ........................ 1,440 1,040
Accrued expenses and other liabilities ............................. 876 909
Current portion of long-term debt .................................. 449 964
Current portion of obligation under capital lease .................. 381 337
------- -------
Total current liabilities .................................... 10,481 7,928
OBLIGATION UNDER CAPITAL LEASE ........................................ 961 1,343
LONG-TERM DEBT ........................................................ 620 1,672
UNION EMPLOYEE TERMINATION BENEFITS ................................... 235 291
------- -------
Total liabilities .......................................... 12,297 11,234
------- -------
-2-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
December 31,
1998 1997
------- -------
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 2,523
Additional paid-in capital ......................................... 2,157 2,157
Retained earnings .................................................. 29,100 25,841
------- -------
Total stockholders' equity .................................. 33,780 30,521
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $46,077 $41,755
======= =======
See notes to consolidated financial statements.
-3-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share data)
Year Ended December 31,
1998 1997 1996
-------- -------- --------
NET SALES ................................ $ 67,695 $ 56,140 $ 48,366
COST OF PRODUCTS SOLD .................... 50,607 42,322 36,986
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................ 11,954 10,423 9,617
-------- -------- --------
Operating income .............. 5,134 3,395 1,763
-------- -------- --------
OTHER INCOME (EXPENSES):
Interest expense ....................... (1,554) (760) (602)
Foreign exchange gain (loss) ........... 814 (84) (514)
Interest income ........................ 4 3 5
Other, net ............................. 5 2 2
-------- -------- --------
Total ......................... (731) (839) (1,109)
-------- -------- --------
INCOME BEFORE TAXES ...................... 4,403 2,556 654
INCOME TAX PROVISION ..................... 1,144 715 204
-------- -------- --------
NET INCOME ............................... $ 3,259 $ 1,841 $ 450
======== ======== ========
EARNINGS PER COMMON SHARE ................ $ 1.29 $ 0.73 $ 0.18
======== ======== ========
See notes to consolidated financial statements.
-4-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Common Additional
Stock, Paid-in Retained
$1 Par Capital Earnings
------- ------- -------
BALANCE, JANUARY 1, 1996 .......... $ 2,523 $ 2,157 $23,550
Net income - 1996 ............... -- -- 450
------- ------- -------
BALANCE, DECEMBER 31, 1996
2,523 2,157 24,000
Net income - 1997 ............... -- -- 1,841
------- ------- -------
BALANCE, DECEMBER 31, 1997
2,523 2,157 25,841
Net income - 1998 ............... -- -- 3,259
------- ------- -------
BALANCE, DECEMBER 31, 1998 ........ $ 2,523 $ 2,157 $29,100
======= ======= =======
See notes to consolidated financial statements.
-4-
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
1998 1997 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 3,259 $ 1,841 $ 450
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 2,492 2,324 2,330
Foreign exchange (gain) loss ............................. (814) 84 514
Deferred taxes ........................................... (93) (59) (8)
Changes in assets and liabilities, net of the effect
of foreign currency translation and acquisition:
Accounts receivable .................................. (1,829) (555) 572
Income tax payable/receivable ........................ 206 129 (46)
Inventories .......................................... (67) (832) (838)
Prepaid expenses and other current assets ............ 17 207 (122)
Other assets ......................................... (2) 184 13
Accounts payable and accrued expenses ................ (405) 626 662
Other ................................................ (72) (17) 1
------- ------- -------
Net cash provided by operating activities ......... 2,692 3,932 3,528
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisitions of property, plant and equipment .......... (3,296) (1,681) (1,245)
Increase in timber and timberlands ......................... (1,737) (1,338) (812)
Acquisition of shrimp farm-net of cash acquired ............ -- (68) --
------- ------- -------
Net cash used in investing activities ............. (5,033) (3,087) (2,057)
------- ------- -------
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
1998 1997 1996
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable ....................... 1,529 (2,050) (825)
Borrowings of long-term debt ............................... 1,428 2,528 400
Payments of long-term debt ................................. (1,756) (535) (96)
Principal payments under capital lease ..................... (337) (295) (188)
------- ------- -------
Net cash provided by (used in) financing activities 864 (352) (709)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... 1,356 (431) (488)
------- ------- -------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS .................................. (121) 62 274
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR .......................................... 1,177 1,115 841
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR ................................................ $ 1,056 $ 1,177 $ 1,115
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................. $ 1,292 $ 472 $ 449
======= ======= =======
Income taxes ............................................. $ 1,025 $ 684 $ 256
======= ======= =======
See notes to consolidated financial statements.
-5-
BALTEK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 $25 million at December 31, 1998. 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 speculative 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 $609,000, $331,000 and $350,000 in 1998,
1997 and 1996, respectively.
Earnings per Common Share - 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
instruments; therefore, the reporting of diluted earnings per share is not
applicable.
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 (amounts in thousands):
1998 1997
Raw materials ........ $ 6,407 $ 5,289
Work-in-process ...... 4,476 4,300
Finished goods ....... 3,784 5,010
------- -------
Inventories .......... $14,667 $14,599
======= =======
Included in the above amounts are inventories relating to the Company's
shrimp operations of $1,566,000 and $1,658,000 at December 31, 1998 and
1997, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following (amounts in
thousands):
Estimated
Useful Lives 1998 1997
Land $ 125 $ 125
Shrimp properties 5-20 years 17,694 16,332
Buildings and improvements 20 years 1,826 1,573
Machinery and equipment 5-10 years 11,202 9,782
Leasehold improvements 890 836
Assets under capital lease 2,499 2,499
Construction-in-progress 6 94
--------- --------
Total 34,242 31,241
Less accumulated depreciation and amortization 21,128 19,503
--------- --------
Property, plant and equipment -net $ 13,114 $ 11,738
========= ========
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, 1998 and 1997 was $1,707,000 and
$1,457,000, respectively.
-8-
5. TIMBER AND TIMBERLANDS
Timber and Timberlands are comprised of the following (amounts in
thousands):
1998 1997
Timberlands $ 3,813 $ 3,312
Timber-deferred cultivation costs 4,373 3,709
---------- ----------
Timber and Timberlands $ 8,186 $ 7,021
========== ==========
6. NOTES PAYABLE
Notes payable under various agreements consist of the following (amounts
in thousands):
1998 1997
U.S. Bank loan, with interest at prime less 3/4% in 1998 and
prime less 1/2% in 1997 (7% and 8% at December 31, 1998 and 1997,
respectively) $ 2,800 $ 1,550
Ecuadorian bank loans, payable in U.S. dollars, due within one year from
the origination date, with interest rates between 7.88% and 15.43% (see
also Note 7) 1,881 --
--------- ---------
Notes payable $ 4,681 $ 1,550
=========== =========
The U.S. Bank loan, which is renewable annually, represents borrowings
under an unsecured revolving line of credit with a domestic bank. The
maximum credit limit under the line is $5,000,000. This line of credit,
which was renewed on July 31, 1998, expires on May 31, 1999. The Company
was in compliance with all related loan covenants at December 31, 1998.
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, 1998 and 1997 was approximately
8.2% and 8.0%, respectively.
-9-
7. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
1998 1997
Equipment loan, payable in equal monthly principal installments of $7
through January 2001, plus interest at prime (7.75% and 8.5% at December
31, 1998 and 1997, respectively) $ 173 $ 253
Ecuadorian bank loans, payable in sucres 827 2,301
Other notes, with interest rates between 4.4% and 6.0%, due at
various dates through 2002 69 82
---------- ----------
1,069 2,636
Less current portion (449) (964)
---------- ----------
Long-term debt $ 620 $ 1,672
========== ==========
The equipment loan payable is secured by certain machinery and equipment
at the Company's Northvale, New Jersey facilities.
At December 31, 1998, the Company had a line of credit available under
Ecuadorian borrowing arrangements of $4,000,000, of which approximately
$1,292,000 was unused. Borrowings under the line are secured by a mortgage
on certain land and buildings and a negative pledge against certain
machinery.
Included in the outstanding line of credit are dollar denominated short
term loans (see Note 6) and sucre denominated term loans. The term loans
require principal payments every three or six months and interest payments
every three months. The interest rates on sucre denominated loans at
December 31, 1998 were approximately 69.1% and 63.8%, and are adjustable
quarterly. Final payments on both loans are 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, 1998 are as
follows (amounts in thousands):
1999 $ 449
2000 585
2001 29
2002 6
--------
$ 1,069
========
-10-
8. INCOME TAXES
Income before income taxes is comprised of (amounts in thousands):
1998 1997 1996
Domestic ................... $2,697 $1,753 $ 990
Foreign .................... 1,706 803 (336)
------ ------ ------
Total ...................... $4,403 $2,556 $ 654
====== ------ ======
The provision for income taxes consists of the following (amounts in
thousands):
1998 1997 1996
Federal:
Current ................ $ 966 $ 666 $ 172
Deferred ............... (93) (59) (8)
State .................... 142 100 33
Foreign .................. 129 8 7
------- ------- -------
Total .................... $ 1,144 $ 715 $ 204
======= ======= =======
The reconciliation between the Company's effective tax rate and the
statutory Federal tax rate is as follows:
1998 1997 1996
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 (12.0) (9.6) 11.4
Refunds and change in current valuation allowance 0.0 (2.5) (17.6)
State taxes, net of Federal income tax benefit 2.0 2.5 3.3
Foreign tax credits (2.5) 0.0 0.0
Other - net 3.5 2.6 (0.9)
----- ---- -----
Effective tax rate 26.0% 28.0% 31.2%
===== ==== =====
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.
-11-
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.
Significant components of the Company's deferred tax assets and
liabilities are as follows (amounts in thousands):
1998 1997
Current assets (liabilities):
Inventory capitalization ......................... $ 105 $ 96
Unexpired insurance .............................. (127) (77)
Reserve amounts not currently deductible ......... 116 39
Other - net ...................................... 39 25
----- -----
Total current asset, net ........................... $ 133 $ 83
===== =====
Noncurrent assets:
Capital lease .................................... $ 182 $ 210
Other ............................................ 71 --
Foreign tax loss carryforwards ................... 91 3
Less valuation allowance ......................... (91) (3)
----- -----
Total noncurrent asset, net ........................ $ 253 $ 210
===== =====
As of December 31, 1998 and 1997, 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 $8,154,000 at December 31, 1998, 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
$350,000, $313,000 and $180,000 in 1998, 1997 and 1996, respectively.
Additionally, the plan allows for all participants to defer between 2
percent and 10 percent of their 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
-12-
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 $54,000, $75,000 and $64,000
were charged to income during 1998, 1997 and 1996, respectively.
The Company participates in a multiemployer pension plan for the union
employees at the Northvale, New Jersey facility. Provisions of
approximately $174,000, $139,000 and $112,000 were charged to income
during 1998, 1997 and 1996, respectively.
10. LEASES
The Company leases its primary 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 has operating lease agreements for warehouse and office
space in the United States and Europe. The longest lease obligation
extends to 2008. Certain leases contain renewal options and generally
require the Company to pay other facility related costs such as taxes,
maintenance and insurance. Rent expense under these operating leases
amounted to $361,000, $204,000 and $122,000 in 1998, 1997 and 1996,
respectively.
Future minimum lease payment obligations, as of December 31, 1998, for the
capital lease described above, as well as operating leases, are as follows
(amounts in thousands):
Capital Operating
Year Lease Leases
1999 $ 466 $ 278
2000 470 278
2001 488 278
2002 82 204
2003 - 44
Thereafter - 170
----- ------
Minimum lease payments 1,506 $1,252
======
Less amounts representing interest (164)
-------
Capital lease obligation $ 1,342
=======
-13-
11. SEGMENT INFORMATION
In 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131, which the Company
adopted in 1998, supercedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise." SFAS No. 131 requires the Company to report
segment information in line with the information used by management for
making operating decisions and assessing performance. SFAS No. 131 also
requires disclosures about products and services, geographic areas, and
major customers. All information previously presented under SFAS No. 14
has been modified to conform to the provisions of SFAS No. 131.
The Company and its subsidiaries operate in two segments, as a
manufacturer and supplier of core materials to various composite
industries, and in the shrimp farming business. The segments are managed
and reported separately because of the difference in products they produce
and markets they serve. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
The Company evaluates performance based on operating income, i.e. results
of operations before interest, income taxes and foreign exchange gains and
losses. There are no intersegment sales.
No single customer provided more than 10% of the Company's revenue in
1998, 1997 or 1996.
Information about the Company's operations by segment is as follows:
(In Thousands)
1998 1997 1996
Net sales to unaffiliated customers
Core materials segment .................. $53,600 $44,004 $38,630
Shrimp segment .......................... 14,095 12,136 9,736
------- ------- -------
Total net sales ......................... $67,695 $56,140 $48,366
======= ======= =======
Operating income
Core materials segment .................. $ 3,721 $ 1,635 $ 167
Shrimp segment .......................... 1,413 1,760 1,596
------- ------- -------
Total operating income .................. $ 5,134 $ 3,395 $ 1,763
======= ======= =======
Identifiable assets
Core materials segment .................. $35,105 $31,387 $30,318
Shrimp segment .......................... 10,972 10,368 8,997
------- ------- -------
Total identifiable assets ............... $46,077 $41,755 $39,315
======= ======= =======
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Capital expenditures, net, including timberlands
and capital leases
Core materials segment ......................... $3,641 $2,305 $1,524
Shrimp segment ................................. 1,392 737 579
------ ------ ------
Total capital expenditures ..................... $5,033 $3,042 $2,103
====== ====== ======
Information pertaining to the Company's operations in different geographic
areas is as follows:
(In Thousands)
1998 1997 1996
Net sales to unaffiliated customers
United States - domestic ................ $49,399 $38,835 $33,473
United States - export .................. 11,289 11,642 8,856
Ecuador ................................. 131 116 123
Europe .................................. 6,876 5,547 5,914
------- ------- -------
Total net sales ......................... $67,695 $56,140 $48,366
======= ======= =======
Identifiable assets
United States .......................... $16,973 $15,457 $14,264
Ecuador ................................ 25,217 22,672 21,543
Europe ................................. 3,887 3,626 3,508
------- ------- -------
Total identifiable assets .............. $46,077 $41,755 $39,315
======= ======= =======
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12. FINANCIAL INSTRUMENTS
The table below presents the carrying values and estimated fair values for
the Company's financial instruments (amounts in thousands).
1998 1997
Carrying Estimated Fair Value Carrying Estimated Fair Value
Value Value
------- --------------------- ------- ---------------------
Cash and cash equivalents $ 1,056 $ 1,056 $ 1,177 $ 1,177
Accounts receivable $ 6,942 $ 6,942 $ 5,103 $ 5,103
Notes payable $ 4,681 $ 4,681 $ 1,550 $ 1,550
Long term debt $ 1,069 $ 1,069 $ 2,636 $ 2,636
Capital lease obligation $ 1,342 $ 1,342 $ 1,680 $ 1,680
Estimated fair values were determined based on the terms of the various
instruments. 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 based
upon the borrowing rates and other terms and conditions currently
available to the Company for loans with similar terms and maturities.
At December 31, 1998, the Company held forward foreign currency exchange
contracts for the purchase of French francs with a notional amount of
approximately $269,000 and maturity dates of March 31, 1999 and April 30,
1999. 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.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, thus it becomes effective for the Company during the
fiscal year ending December 31, 2000 and is applicable to interim periods
during that fiscal year. The Company is currently evaluating the impact of
this new standard 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, 1998
Dollars in Thousands
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful
accounts receivable $ 73 $ 74 $ 3 $ 144
=========== =========== ============= ==========
Inventory $ 90 $ 176 $ - $ 266
=========== =========== ============= ==========
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts receivable $ 63 $ 30 $ 20 $ 73
=========== =========== ============= ==========
Inventory $ - $ 90 $ - $ 90
========== =========== ============= ==========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $ 93 $ 70 $ 100 $ 63
=========== ============ ============= ==========