BONTEX INC, 10-K, 1997-09-29

BONTEX INC
10-K, 1997-09-29
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year Commission File
ended June 30, 1997 Number 0-5200

BONTEX, INC.
Exact name of Registrant as specified in its charter

VIRGINIA 54-0571303
State of Incorporation IRS Employer No.

ONE BONTEX DRIVE, BUENA VISTA, VIRGINIA 24416-1500
Address of principal executive offices Zip code

Registrant's telephone number (540) 261-2181

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Title of Class
$.10 par value common stock

Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months with the
Commission, and (2) has been subject to the filing requirements for at least
the past 90 days:
( x ) Yes ( ) No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K ( )

Aggregated market value of the voting stock held by non-affiliates of the
Registrant: $3,484,309 at August 29, 1997

On August 29, 1997, the Registrant had 1,572,824 shares of $.10 par value
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Portions of the Registrant's Annual Report to Stockholders are
incorporated by reference into Parts I and II hereof.

(2) Portions of the Registrant's Proxy Statement dated September 18, 1997
issued in connection with the annual meeting of shareholders to be held
October 14, 1997 are incorporated by reference into Part III hereof.

<PAGE>
TABLE OF CONTENTS

PART I

ITEM PAGE

1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 10
4. Submission of Matters to a Vote of Security Holders . . . . . . . . 10

PART II

5. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 12
8. Financial Statements and Supplementary Data . . . . . . . . . . . . 12
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 13

PART III

10. Directors and Executive Officers of the Registrant. . . . . . . . . 13
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . 13
12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13. Certain Relationships and Related Transactions. . . . . . . . . . . 13

PART IV

14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

<PAGE>
PART I

ITEM 1. BUSINESS

On January 2, 1997, the Company completed a reorganization plan which
changed, among several items, its name to Bontex, Inc. from Georgia Bonded
Fibers, Inc. For further information see General Business below.

Except for the historical data set forth herein, the following
discussion contains forward-looking information. The Company's actual
results may differ materially from these projected results because of
inherent limitations with such model characteristics and assumptions.
Factors that could cause or contribute to such differences include, but are
not limited to, level of sales to key customers, actions of competitors,
fluctuations in the prices of primary raw materials and foreign currency
exchange rates.

GENERAL BUSINESS
- ----------------

Bontex, Inc. (all references hereinafter to the "Registrant," "Company"
or "Bontex" refer collectively to Bontex, Inc. and its wholly-owned
subsidiaries unless otherwise indicated by context) was incorporated in June
1946 under the laws of the State of New Jersey. The Company originally began
as a leather processing operation, and today, Bontex is a leading worldwide
manufacturer and distributor of uncoated and coated elastomeric wet web
impregnated fiberboard products. The Company's products are generally
described by the trademark BONTEX, and are marketed to various industries,
including footwear, headwear, luggage, leathergoods, allied, belt backing,
gasketing, furniture, electronic integrated component packaging, and
automotive industries. Bontex is a market leader in many of the areas in
which the Company competes.

On January 2, 1997, the Company received the final State regulatory
approvals of its proposal, which was adopted by the Company's stockholders at
the Annual Meeting of Stockholders held on November 7, 1996, to change the
state of incorporation of the Company to Virginia and effect Amended and
Restated Articles of Incorporation (the "Reorganization").

As a result of the Reorganization, the Company is now a Virginia
corporation, with its principal place of business at One Bontex Drive, Buena
Vista, Virginia 24416-1500, and the name of the Company has been changed to
"Bontex, Inc." The Company's common stock continues to be traded on the
Nasdaq-NMS under the symbol "BOTX." The Reorganization did not result in any
change in the business, management, assets, liabilities, or net worth of the
Company. For further information, refer to Report on Form 8-K,
Reorganization of Georgia Bonded Fibers, Inc., dated January 2, 1997, and
Proxy Statement for meeting of Shareholders held on November 7, 1996.
<PAGE>
ORGANIZATION
- ------------

The Company maintains corporate headquarters, manufacturing,
converting, sales office, and a warehouse facility in Buena Vista, Virginia;
a wholly-owned manufacturing subsidiary, Bontex S.A., Stembert, Belgium; a
wholly-owned distribution and converting subsidiary, Bontex Italia S.r.l.,
Villafranca, Verona, Italy; a wholly-owned distribution subsidiary, Bontex de
Mexico, S.A. de C.V., Leon, Mexico, and a majority owned distribution
subsidiary, Bontex Hong Kong Limited, Hong Kong; and sales office and
warehouse in Newark, New Jersey, which the Company plans to sell during
fiscal year 1998. See the discussion under Item 2. Properties, below. The
Company utilizes a wholly-owned foreign sales corporation organized and
existing under the laws of the Virgin Islands to facilitate export sales.
Additionally, Bontex maintains a network of liaison offices, Bontex Korea,
Bontex Taiwan, Bontex China, Bontex Indonesia, Bontex Philippines, and Bontex
Australia to service Asian markets.

The Company employs 98 full-time and 2 part-time people in Buena Vista,
Virginia; 2 full-time employees in Newark, New Jersey; 81 full-time and 2
part-time employees in Belgium; 9 employees in Italy; 1 full-time and 1 part-
time employee in Mexico and 1 full-time employee in Hong Kong. Revenue per
employee was approximately $257,000 and $249,000 in fiscal years 1997 and
1996, respectively.

There is no labor union at the United States operations and management
knows of no union activity at the present time. There are labor unions at
the Company's European operations. Although the Company believes that
relations with its employees are positive, there can be no assurance that the
Company will not experience work stoppages in the future.

PRODUCTS
- --------

BONTEX elastomeric wet web fiberboard materials are primarily used as
an insole material in footwear, as well as visorboard in headwear, dielectric
sealing base in automotive door panels, backing substrate, stiffener and
laminating base in luggage, leathergoods, and allied products. All BONTEX
fiberboard products are designed to be "environmentally-friendly," because
Bontex uses recycled and primary cellulose fibers originally derived from
trees, a renewable resource. Bontex has the American Podiatric Medical
Association (APMA) Seal of Acceptance for BONTEX elastomeric wet web
products, BONFOAM, SUREFOAM, and MAXXON, cushion insole materials. BONFOAM,
SUREFOAM, and MAXXON trademarks are the sole property of the Registrant. The
podiatric seal of acceptance is granted after stringent clinical and
laboratory tests have been carried out on approved products which demonstrate
conformity to APMA guidelines, and assist in foot health and comfort. The
APMA Seal of Acceptance for approved BONTEX products should enhance product
acceptance in the marketplace.

Bontex USA manufactures uncoated and coated BONTEX fiberboard products;
PVC breathable (moisture vapor transmission) cushion foams, that are marketed
under trademarks BON-FOAM, MAXXON and SURE-FOAM, and are sold in a variety of
grades for use as shock absorbing insole material; BONTEX 200 RECYCLED and
BONTEX 300 RECYCLED, which are produced from 100 percent recovered paper with
a minimum 80 percent "post-consumer waste" for use in footwear, visorboard in
headwear, a backing substrate, stiffener pieces and laminating base; BON-PEL,
a hybrid nonwoven substrate, which is exceptionally strong and flexible;
<PAGE>
BONTEX 48 MA, an uncoated visorboard for use in military headwear, which has
been approved by NATICK military laboratory. Bontex USA also combines
certain products, such as foams, fabrics, and vinyls, with BONTEX fiberboard.
Additionally, Bontex USA is the exclusive distributor globally to the
footwear industry of an expanded polyurethane material manufactured by Aero
E.A.R. Specialty Composites, under the trademarks MAXXON LS and CONFOR.
MAXXON LS and CONFOR have moisture vapor transmission characteristics and are
used for sock-linings and cushion insoles in various types of footwear.
CONFOR is a trademark of E.A.R. Specialty Composites.

Bontex S.A., Stembert, Belgium, manufactures uncoated BONTEX products.
Bontex Italia, S.r.l. is a distribution company and operates converting
equipment primarily servicing the Italian market.

The Company's converting facilities continue to show increased volume
and open new market areas in coated and composite items converted on BONTEX
substrates. The Company's marketing emphasis is to capitalize on the
positive performance of these products. Management believes that Bontex is
well positioned for growth due to the high quality and market acceptance of
our products, as well as our significant market penetration in developed and
developing markets.

RESEARCH AND DEVELOPMENT
- ------------------------

The Company's research efforts are directed primarily toward developing
new products, processing techniques, and improving product performance, often
in close association with customers.

The Company has also dedicated much of its efforts to customizing many
composite products with BONTEX fiberboard products. These products have
increased sales of combination packages, primarily designed to take advantage
of the current increased emphasis on comfort in footwear products. A series
of dual-density (two-layer) foam packages have been designed, and sales of
these products have been positive since their introduction.

Bontex has completed implementation of the International Organization
for Standardization quality assurance system ISO 9001 at both the United
States and Belgium manufacturing facilities. Bontex SA was certified ISO
9001 during 1996, and Bontex USA during 1997. The impact of ISO 9001 on
sales is anticipated to be minimal; however, management regards ISO 9001 with
significant importance in maintaining a competitive edge in quality globally.

COMPETITION
- -----------

The industry in which the Company operates is highly competitive.
Participants in the industry compete through quality and price, including the
ability to control costs, risk management, innovation, and customer service.
Presently, it is management's opinion that the Company offers superior
product quality and customer service in major markets globally. In the
United States, there is one other manufacturer of BONTEX type material.
There are, however, other materials which may be substituted for the same
applications. The Company estimates that during the last fiscal year, its
products were in approximately 45 to 50 percent of non-rubber footwear
manufactured in the United States. This estimate is based on Footwear
Industries of America (FIA) data as to total sales.
<PAGE>
There are manufacturers who purchase BONTEX type materials for coating,
laminating, and converting into innersoles for footwear, visors for headwear,
and dielectric sealing base in automotive door panels. There is more
competition in these segments, and no comparative market statistics are
available.

In Europe, there are five major manufacturers of material similar to
BONTEX. These competitors are located in Germany, Italy, Finland, Slovenia
and the former USSR. The Company estimates that it sells approximately 45
percent of the BONTEX type materials sold in the European Union. These
estimates are based on SATRA Common Market statistics as to total sales, and
other generally available industry information.

There are a number of manufacturers of elastomeric fiberboard materials
in Asia; however, there are fourteen major competitors operating in Taiwan
and the Peoples Republic of China, which has a tendency to impact selling
prices. There is a 5 percent duty on BONTEX products going into Taiwan. The
Company has petitioned the US trade representatives to eliminate these
duties. Bontex has received notification that the Republic of China (R.O.C.)
has agreed to reduce and phase-out these duties, but no definitive time-frame
has been announced.

As there are many customers globally who purchase BONTEX and convert it
into innersoles and other application components, the actual total worldwide
market penetration is difficult to estimate.

RISK MANAGEMENT PROGRAM
- -----------------------

The Company is exposed to the inherent risks associated with conducting
business globally. These risks include export duties, quotas, restrictions
on the transfer of funds, political instability, and foreign currency
exchange rate fluctuations. The Company closely monitors its method of
operating in each country and adopts strategies responsive to changing
economic and political environments.

During fiscal 1995, the Company experienced extreme volatility in the
foreign currency markets. The foreign currency exchange losses in fiscal
1995 totaled approximately $1.5 million, of which approximately $500,000 was
recovered during fiscal 1996. The higher than normal exchange losses were
the result of the large decreases in the value of the US dollar, Italian
lire, and Mexican peso. During the twelve months leading up to June 30,
1995, the Italian lire and US dollar decreased in value relative to the
Belgian franc by 13 and 12 percent, respectively, and the Mexican peso
reduced in value by more than 100 percent relative to the US dollar. The
largest portion of these exchange losses occurred at Bontex S.A., the Belgium
subsidiary. A significant portion of the Belgium subsidiary's sales are
denominated in US dollars and Italian lire, and consequently, subject to the
risk of foreign exchange rate fluctuations.

Management has implemented a revised Risk Management Program (RMP) as a
coordinated approach to managing the Company's exposure to foreign currency
exchange rate fluctuations. The overall policy of the RMP is to match
currency denominations of assets with liabilities, in a manner intended to
reduce the Company's foreign currency exposure. Foreign Exchange gains and
losses were reduced to an immaterial level in 1997 and through the use of the
RMP are expected to continue at an immaterial level under anticipated
circumstances. Additionally, Bontex S.A. has utilized forward exchange
contracts and other approved hedging instruments to manage currency risks.
<PAGE>
Since the full implementation of the revised RMP, the effects of exchange
volatility have been ameliorated to some extent. Management cannot predict
the likelihood of such developments occurring again in the future. All
transactions denominated in foreign currencies are not hedged (i.e., Mexican
peso, Canadian dollar, etc.) since the volume of such transactions is limited
and therefore the cost to hedge is considered prohibitive. These
international markets are regarded as excellent opportunities for future
growth and profits, and management will continue to monitor the situation and
evaluate various alternatives to manage exposure to such risks.

The Company also manages interest rate risk to protect the Company's
margins and financial position from future rate increases by participating in
interest rate swaps. The interest rate swap arrangements provide for the
payment of interest based on fixed rates of interest rather than variable
rates. The Company seeks to mitigate the possible impact of interest rate
fluctuations on its short-term variable rate debt.

At June 30, 1995, the total notional amount of the Company's foreign
currency exchange contracts totaled $5.0 million. At June 30, 1997 and 1996,
the Company did not have any such foreign currency exchange contracts. The
total notional amount of the Company's interest rate swap contracts totaled
$1.9 million and $2.9 million at June 30, 1997 and 1996, respectively. The
notional amount of these contracts does not represent the direct credit
exposure. Rather, credit exposure may be defined as the market value of the
contract and the ability of the counter-party to perform its payment
obligations under the agreement. The Company's interest rate swap agreements
require the Company to pay a fixed rate. Therefore, this risk is increased
in a declining interest rate environment as the Company is generally in a
payable position, and this risk is reduced in rising interest rate
environment as the Company is generally in a receivable position. The
Company seeks to control the credit risk of its interest rate swap agreements
and other financial instruments through credit exposure limits and monitoring
procedures. A portion of variable rate debt is not protected by interest
rate swaps. Financial instruments are by nature subject to the risk of loss
arising from adverse changes in market rates and prices. Refer to Note 7 of
the Notes to the Consolidated Financial Statements in the Company's Annual
Report to Stockholders for information regarding interest rates, financial
instruments, and market risk. All interest rate swaps and foreign exchange
contracts are with established banks, and the Company does not anticipate
such nonperformance. As a matter of policy, the Company does not engage in
speculative transactions, nor does the Company hold or issue financial
instruments for trading purposes.

TRADEMARKS
- ----------

Bontex utilizes trademarks on nearly all of its products, and believes
having such distinctive trademarks which are readily identifiable is an
important factor in creating and maintaining a market for its goods and
services. This further serves to identify the Company and distinguish its
goods from goods of others. The Company considers its BONTEX trademark and
other trademarks to be among its most valuable assets, and has registered
these trademarks in over 70 countries. Bontex continues to vigorously
protect its trademarks against infringement. The Company's operations are
not dependent to any significant extent upon any single or related group of
patents, licenses or concessions.
<PAGE>
PRODUCTION AND SALES
- --------------------

Refer to Note 3 of Notes to the Consolidated Financial Statements in
the Company's Annual Report to Stockholders wherein information is provided
regarding foreign and domestic operations and export sales for the last three
fiscal years. Such information is incorporated herein by reference, pursuant
to General Instruction G(2).

Historically, Bontex has had a significant global presence, and one of
its major strategic objectives is to continue to expand this presence. The
Company's sales are diversified among a large customer base, as well as
numerous geographic regions. The Company has one of the largest customer
bases in the industries we serve. The Company offers a wide range of
elastomeric products for use in a variety of applications. However, the
majority of the Company's sales are to the footwear industry. The Company
intends to continue its strategy of developing and broadening non-footwear
sales.

Credit terms offered by the Company to meet competition have been
longer than terms normally available to the Company from its vendors. Some
seasonality exists in that the second half of each fiscal year is usually
more productive and consequently more profitable than the first half. This
seasonality is largely because of customers' buying cycles with scheduled
vacations, shutdowns, and holidays, which normally occur during the first
half of each fiscal year. Substantially all sales to Asia are denominated in
US dollars, negotiated letters of credit and sight drafts, and are covered by
foreign credit insurance. During the past three years sales to one customer
ranged between six and nine percent of consolidated net sales.

Foreign operations, principally in Belgium and Italy, constitute a
significant portion of the Company's business. Production of BONTEX
elastromeric fiberboard products is allocated between the United States and
Belgium manufacturing facilities based on such factors as availability of
capacity, production efficiencies, logistical considerations, and foreign
currency exchange rates. The Company is currently operating moderately near
full capacity. During the past three fiscal years, approximately 40 percent
of total production was manufactured in the United States. The backlog of
firm orders in the United States at the end of the fiscal year was about five
weeks production or approximately $1.7 million in sales. The current backlog
at Bontex USA is approximately four weeks. In Europe, the backlog at the end
of the fiscal year was four weeks production or approximately $1.8 million in
sales. The present backlog at Bontex S.A. is four weeks. The Company
expects all the orders in the backlog will be manufactured and shipped during
the next fiscal year.

The Company sells most of its products directly to customers through
its own sales force and commissioned sales representatives throughout the
United States. The Company also sells products through distributors and
other intermediaries who may convert and resell these products to others.
Bontex USA mainly services North and South America, as well as certain Asian
markets. Over the past three years, Bontex USA's export sales to markets
outside of the United States have increased from 43% to over 60%. This
primarily reflects the decline of the domestic market and continued emphasis
on overseas markets. Bontex USA maintains leased bonded warehouses in St.
Louis, Missouri; Leon, Mexico; Cambridge, Ontario, Canada; and Montreal,
Quebec, Canada. The Company established Bontex de Mexico, S.A. de C.V., as a
marketing distribution company in Leon, Mexico to directly facilitate sales
in Mexico. Currently, sales in Mexico are not significant and have not grown
as planned due to the devaluation of the peso. Bontex continues to view the
Mexican market with guarded optimism for future growth.<PAGE>

Bontex S.A. markets its products through distributors and sales
representatives in most countries in Europe, Central and Eastern Europe,
Africa, the Middle East, as well as certain Asian markets. The Company's
wholly-owned subsidiary, Bontex Italia S.r.l., services the Italian market
directly, and through localized converters and commissioned representatives.
Over the past few years a greater portion of footwear, especially athletic,
shoes, is strobel stiched using non woven materials in place of Bontex type
products. The Company will begin in 1998 marketing a range of non woven
materials. While a positive impact on sales is expected, this cannot be
assured and it is not possible to quantify the impact at this time.

The Company maintains six Bontex liaison offices in select Asian
markets, a network of sales representatives in various countries where BONTEX
is marketed, as well as leased bonded warehouses in Korea, Taiwan, and the
Peoples Republic of China. For certain of its foreign markets, the Company
uses individual distributors. One distributor represents approximately 13.5
percent of the Company's net consolidated sales, and the Company believes
that it is well positioned to replace any of these distributors without
materially impacting the Company's marketing or financial operations. The
Bontex liaison office in Australia continues to perform well through the
coordination of Asian operations covering, among others, Japan, Korea,
Taiwan, Hong Kong, Philippines, Indonesia, New Zealand, Australia, Singapore
and Malaysia. The Company has established a sales subsidiary, Bontex Hong
Kong Limited, in Hong Kong, to replace a distributor for Hong Kong and the
PRC New Territories.

STATUS OF PROPOSED PROJECT IN MALAYSIA
- --------------------------------------

On July 27, 1994, the Company's Board of Directors authorized
management to investigate the establishment of a manufacturing facility in
Malaysia. The Company's plans to establish a manufacturing facility in Asia
remains an important priority. Bontex Sdn Bhd was incorporated during fiscal
1996, and is being considered not only as a way of enabling the Company to
strengthen its presence in Asia, but also to expand its global manufacturing
network. The project has been delayed so that management can focus on
immediate issues and return the Company to profitability, as well as monitor
industry and market trends. Construction and completion of the proposed
project are subject to a number of significant conditions, including the
profitability of the Company, final approval by the Company's Board of
Directors, procurement of capital, and Malaysian regulatory approvals.
Management projects that the proposed costs for Bontex Sdn Bhd is estimated
to be approximately $10 million. At the time of this filing, management
cannot provide a more definitive schedule or projected financial information
for the proposed project since such timing and projections may vary
significantly based on ultimate circumstances.

MATERIALS AND SUPPLIES
- ----------------------

The Company purchases a broad range of raw materials sourced throughout
the world in connection with its manufacturing activities. More than one
supplier is available for all major raw materials. Bontex S.A. appears to
have available and receives adequate quantities of water for processing. The
manufacturing facility in the United States has an adequate supply of
processing water from wells and river sources.
<PAGE>
The Company attempts to minimize the effects of cyclical changes in raw
material costs through purchase contracts, forward purchasing, and the
application of technologies to improve process efficiencies. Principal cost
factors include the cost of raw materials, specifically pulp and latex, two
primary raw materials for the Company's products. The price of pulp and
latex increased by approximately 100 percent and 56 percent, respectively,
during the eighteen months leading up to December 31, 1995. In January 1996,
pulp prices declined to $500 per ton. Since then, pulp prices have recovered
and trends toward higher prices are expected to continue. Management has
implemented various measures in an attempt to manage the situation, including
raising selling prices, capital enhancements to improve production
efficiencies and several cost control measures through better utilization of
existing resources. Management intends to continue to prudently apply
technology to manufacture high quality products while attempting to reduce
costs in all areas of operations in an effort to maintain competitive selling
prices. There can be no assurance, however, that increased raw material
prices will not continue to have an adverse effect on the Company's
operations or competitive position in the future.

Bontex USA maintains a limited private fleet of tractors and trailers
for long haul delivery of its products to customers throughout the United
States and Canada and to east coast ports for export shipments, in addition
to back-hauling of certain raw materials to reduce operating costs. The
Company also participates in numerous equipment interchange agreements for
containers with steamship lines to facilitate exports.

REGULATORY AND ENVIRONMENTAL MATTERS
- ------------------------------------

As with all related manufacturers, the Company is subject to
regulations by various federal, state, foreign and local agencies concerning
compliance with environmental control statutes. These regulations impose
limitations on the discharge of effluent and emissions into the environment,
and establish standards for solid and hazardous waste disposal, treatment,
and storage, as well as require the Company to obtain and operate in
compliance with the conditions of environmental permit. The Company believes
that it is in substantial compliance with such existing domestic and foreign
environmental statutes and regulations. Failure to comply with applicable
environmental control standards could result in interruption of operations or
could require additional expenditures at these facilities.

The Company has made and intends to continue to make capital
investments, operating expenditures, and production adjustments in connection
with compliance with environmental laws and regulations. Since the Company
is essentially comprised of two fiberboard plants, water quality discharge
remains a primary environmental concern. Over the past two years, the
Company completed two waste water treatment facilities at an aggregate cost
of over $ 4 million. The waste water treatment plant in the USA has been
operational since 1996, and the plant in Belgium became operational in 1997.

The facility in the USA is also impacted by regulations concerning air
emissions relating to the operation of certain coating and converting
equipment. The Company has entered into a Consent Order with DEQ to which
the Company has committed to take appropriate corrective action with respect
to air quality emissions and to achieve compliance by December 31, 1997. An
air quality consultant has completed an extensive analysis to characterize
and verify mill wide air emissions. The cost of the air control technologies
based on current information is expected to be approximately $250,000. The
Company has installed the required equipment and has been operating it
effectively since September 10, 1997, and is awaiting final DEQ approval.
<PAGE>
Estimates of the costs of future environmental compliance may differ
from projected costs due to, among other things, continued emergence of new
environmental laws and regulations and improving efficiencies in
environmental control or process technology developments. At the present
time, based on preliminary estimates, the Company anticipates that
consolidated capital expenditures for environmental compliance in fiscal 1998
will aggregate approximately $400,000; however, this estimate could change
due to ultimate circumstances.

ITEM 2. PROPERTIES

For information about interest and security interests held by banks in
the Company's properties, see Note 4 of Notes to Consolidated Financial
Statements contained in the Company's 1997 Annual Report to Stockholders.
Such information is incorporated herein by reference, pursuant to General
Instruction G(2).

The properties of the Company consist primarily of wholly-owned plant
and equipment to manufacture and distribute the Company's products. The
Company's corporate headquarters, manufacturing and converting facility in
Buena Vista, Virginia continue to be modernized, upgraded, and expanded. In
Stembert, Belgium, the subsidiary's plant is one of the most modern in the
world for producing BONTEX type products, and the Company continues to invest
in new equipment to maintain its level of efficiency. Bontex Italia S.r.l.
operates from a modern distribution facility with new converting equipment.
During fiscal 1997, the Company spent approximately $954,000, $1.4 million
and $44,000 to refurbish, upgrade and install equipment at Bontex USA, Bontex
S.A., and Bontex Italia S.r.l., respectively.

In Newark, New Jersey, the Company owns an office building and
warehouse. A sales office is maintained at the Newark building, and the
warehouse is used for the distribution of the Company's products in the
northeastern region of the United States. In June 1997, the Company's Board
of Directors, in response to decreasing demand in the domestic markets,
approved a plan to restructure the Company's operations in the Northeast.
The restructuring plan focuses on the Company's Newark, New Jersey operation
and will involve closing the Company's current Newark warehouse facility.
The Company expects the restructuring to generate significant operating
efficiency improvements which should contribute to the long-term
profitability of the Company. Net pretax savings are projected to be
significant, and principally consist of reduced salaries, operating and
overhead costs for the Newark facility. The Company plans to dispose of the
warehouse facility within the next year. The related restructuring charges
at June 30, 1997 are immaterial to the financial statements, because the net
realizable value of the Newark warehouse facility exceeds the net carrying
amount. Future cash outlays and expenditures for the restructuring are not
expected to be material.

The total cost of capital expenditures, including the capital
expenditures planned for environmental regulations at both Bontex USA and
Bontex S.A. as discussed in the previous section regarding regulations, is
estimated not to exceed $400,000 for fiscal year 1998. The Company believes
that cash generated from operations and current credit facilities will be
sufficient to meet these capital requirements.

The Company continues to manage the utilization of its assets in order
to meet global growth objectives, marketplace forces, productivity and
technology changes. The Company considers all its properties well
maintained, and adequate for present and future requirements.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

To the Company's knowledge, there are no legal proceedings, lawsuits,
and other claims pending against or involving the Company which, in the
opinion of management, would have a material adverse impact upon the results
of operations, liquidity or financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

Executives of the Registrant:

Pursuant to General Instruction G(3) of Form 10-K, the following list
is included as an unnumbered Item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on October 14, 1997.

The names, ages and positions of the executives of the Company as of
September 19, 1997 are listed below with their business experience with the
Company for the past five years. Executive officers are appointed annually
by the Board of Directors at the annual meeting of stockholders. There is no
agreement or understanding between any executive and any other pursuant to
which the executive was selected. Mr. James C. Kostelni is the brother-in-
law to Mrs. Patricia S. Tischio. Mr. Jeffrey C. Kostelni and Mr. Charles W.
J. Kostelni are the sons of Mr. James C. Kostelni.

Previous and present duties and responsibilities:
<TABLE>
<CAPTION>

Position and Business
Name and Age Experience for Past Five Years
------------ ------------------------------
<S> <C>
James C. Kostelni, 62 Chairman of the Board, President, and
Chief Executive Officer of the Company
(since 1994), President and Chief
Operating Officer (since 1971). Mr.
Kostelni has a Bachelor of Science Degree
in Business Administration. Director.

Jeffrey C. Kostelni, 31 Chief Financial Officer and Treasurer
(since 1994); General Sales Manager of
Bontex S.A., a subsidiary of the Company
(since 1995) and Assistant Controller
(1993-1994) of the Company. Mr. Kostelni
has a Bachelor of Science Degree in
Accountancy and is a Certified Public
Accountant. Director.

Charles W. J. Kostelni, 33 Corporate Controller (since 1996); prior
thereto, Assistant Controller (since
1994); prior thereto, Assistant Vice
President, Union Bank of Switzerland, New
York and Associate Investment Banker,
Chase Manhattan Bank, New York. Mr.
Kostelni has a Bachelor of Science Degree
in Accountancy and is a Certified Public
Accountant.<PAGE>

David A. Dugan, 50 Controller (since 1988) and Corporate
Secretary (since 1993) of the Company;
prior thereto, Assistant Corporate
Secretary of the Company (1991-93). Mr.
Dugan has a Masters in Business
Administration and is a Certified Public
Accountant.

Patricia S. Tischio, 58 Assistant Corporate Secretary (since
1994) and Office Manager (since 1989) of
the Company. Mrs. Tischio has a Bachelor
of Arts Degree in English. Director.

Larry E. Morris, 51 Technical Director (since 1983) and Sales
Director (since 1993); prior thereto,
Manufacturing Director of the Company
(1983-1993). Mr. Morris has a Bachelor
of Science Degree in Chemical
Engineering. Director.

Michael J. Breton, 57 Corporate Director of International
Operations of the Company (since 1993),
and General Manager of Bontex S.A., a
subsidiary of the Company (since 1987);
prior thereto, Director of European
Operations (1987-1993). Mr. Breton has a
Bachelor of Science Degree in Paper
Technology. Director.

</TABLE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The information set forth under the caption "Common Stock and Dividend
Data" on page 5 of the Company's 1997 Annual Report to Stockholders is
incorporated herein by reference, pursuant to General Instruction G(2).

The following lists the securities sold by Bontex within the past three
years which were not registered under the Securities Act of 1933:

On January 22, 1997, as part of the Executive Compensation Agreement
between Bontex, Inc. and James C. Kostelni, President and Chief Executive
Officer of the Company, Mr. Kostelni was granted stock options to purchase
80,000 shares of the Company's common stock at an option price of $4.50 per
share, which was the fair market value of the shares on the date of grant.
The options are exercisable on the date of grant and have a maximum term of
ten years. The options were granted in a private placement in reliance on
Section 4(2) under the Securities Act of 1933. No options have been
exercised as of the date hereof.

ITEM 6. SELECTED FINANCIAL DATA

The five year data for the fiscal years 1997, 1996, 1995, 1994, and
1993 are included in the "Summary of Selected Ten Year Data" on page 5 of the
Company's 1997 Annual Report to Stockholders and is incorporated herein by
reference, pursuant to General Instruction G(2).
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

"Management's Discussion and Analysis" on pages 6 through 11 of the
Company's 1997 Annual Report to Stockholders is incorporated herein by
reference, pursuant to General Instruction G(2).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Registrant and
the independent auditors' report included on pages 12 through 26 of the 1997
Annual Report to Stockholders, are herein incorporated by reference, pursuant
to General Instruction G(2):

1. Consolidated Statements of Income (Loss) for the Years Ended
June 30, 1997, 1996 and 1995

2. Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended June 30, 1997, 1996, and 1995

3. Consolidated Balance Sheets as of June 30, 1997 and 1996

4. Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1996, and 1995

5. Notes to Consolidated Financial Statements

6. Independent Auditors' Report

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in independent auditors and no disagreements
with independent auditors on any matter of accounting principles or
practices, financial statement disclosure, or auditor's scope or procedure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information with respect to the executives of the Registrant, see
"Executives of the Registrant" at the end of Part I of this Report. For
information with respect to the Directors of the Registrant, see "Election of
Directors" at pages 4 through 6 of the Proxy Statement for the Annual Meeting
of Stockholders to be held October 14, 1997, which information is
incorporated herein by reference. The information with respect to compliance
with Section 16(a) of the Exchange Act, which is set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" at page 15 of the
Proxy Statement for the Annual Meeting of Stockholders to be held October 14,
1997, is incorporated herein by reference pursuant to General Instruction
G(3).

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the captions "Executive Compensation,"
"Compensation Committee Report on Executive Compensation" and "Stock
Performance" at pages 7 through 14 of the Proxy Statement for the Annual
Meeting of Stockholders to be held October 14,1997, is incorporated herein by
reference pursuant to General Instruction G(3).
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information pertaining to stockholders beneficially owning more
than five percent of the Registrant's common stock and the security ownership
of management, which is set forth under the captions "Stock Ownership of
Certain Beneficial Owners" and "Stock Ownership of Management" on pages 2
through 3 of the Proxy Statement for the Annual Meeting of Stockholders to be
held on October 14, 1997, is incorporated herein by reference pursuant to
General Instruction G(3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) List of documents filed as part of this report:

1. Financial Statements: All financial statements of the Registrant
as set forth under Item 8 of this Report on Form 10-K.

2. Financial statement schedules and the location in this Form 10-K
are as follows:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION PAGE
<S> <C> <C>
(a) Independent Auditors' Report
on Financial Statement 18
Schedule

(d) II Valuation and Qualifying Accounts for the 19
years ended June 30, 1997, 1996 and 1995

All other schedules are omitted, as the required information is
inapplicable, or the information is presented in the consolidated
financial statements or related notes.

3. Exhibits to this Form 10-K are as follows:

EXHIBIT
NUMBER DESCRIPTION

3 (i) Amended and Restated Articles of Incorporation of the
Company, as amended (incorporated herein by reference to
Exhibit No. (iii) of Form 10-Q for the fiscal quarter ended
December 31, 1996)

10 (i) *Executive Compensation Agreement dated January 22, 1997,
between Bontex, Inc. and and James C. Kostelni
(incorporated herein by reference to Exhibit 10(i) of
Form 10-Q for quarter ended March 31, 1997)
<PAGE>
10 (ii) *Life Insurance Agreement between Georgia Bonded Fibers,
Inc. and James C. Kostelni (incorporated herein by
reference to Exhibit 10.4 of Form 10-Q for quarter ended
December 31, 1993)

10 (iii) *Bontex S.A. Pension Plan (incorporated herein by reference
to Exhibit No. 10(iv) of Form 10-K for the fiscal year
ended June 30, 1994)

10 (iv) *Georgia Bonded Fibers, Inc. Annual Incentive Plan
(incorporated herein by reference to Exhibit No. 10(v) of
Form 10-K for the fiscal year ended June 30, 1994)

10 (v) *Supplemental Executive Compensation Agreement dated
May 26, 1994, between Georgia Bonded Fibers, Inc. and
James C. Kostelni (incorporated herein by reference to
Exhibit No. of Form 10-K for the fiscal year ended June 30,
1994)

10 (vi) Special Consent Order between the Company and the State
Water Control Board dated July 22, 1994 (incorporated
herein by reference to Exhibit No. 10(vii) of Form 10-K for
the fiscal year ended June 30, 1994)

10 (vii) Amended Consent Order between the Company and the
Commonwealth of Virginia, Department of Environmental
Quality dated January 10, 1997 (incorporated herein by
reference to Exhibit No. 10(iv) of Form 10-Q for the
quarter ended December 31, 1996)

10 (viii) *Georgia Bonded Fibers, Inc. 1996-1997 Senior Management
Incentive Plan

13 1997 Annual Report to Stockholders (such report, except to
the extent incorporated herein by reference, is being
furnished for the information of the Commission only and is
not to be deemed filed as part of this Report on Form 10-K)

21 Subsidiaries of the Company

27 Financial Data Schedule

* Management contract or compensatory plan or agreement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14 (c).

(b) Reports on Form 8-K: None

(d) Financial statement schedules required by Regulation S-X are
submitted as separate section of this report.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized on this 26th day
of September, 1997.

BONTEX, INC.

By /s/James C. Kostelni
--------------------
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Date

/s/James C. Kostelni September 26, 1997
- -------------------- ------------------
James C. Kostelni
Chairman of the Board, President and
Chief Executive Officer
Director

/s/Jeffrey C. Kostelni September 26, 1997
- ---------------------- ------------------
Jeffrey C. Kostelni
Treasurer and
Chief Financial Officer
Director

/s/Charles W. J. Kostelni September 26, 1997
- ------------------------- ------------------
Charles W. J. Kostelni
Corporate Controller and
Assistant Treasurer

/s/David A. Dugan September 26, 1997
- ----------------- ------------------
David A. Dugan
Controller and Corporate Secretary

/s/Michael J. Breton September 26, 1997
- -------------------- ------------------
Michael J. Breton
Corporate Director of International
Operations and General Manager, Bontex
S.A.
Director

/s/Larry E. Morris September 26, 1997
- ------------------ ------------------
Larry E. Morris
Technical Director and Director of
Marketing/Sales
Director
<PAGE>
/s/Patricia S. Tischio September 26, 1997
- ---------------------- ------------------
Patricia S. Tischio
Assistant Corporate Secretary
Director

/s/William J. Binnie September 26, 1997
- -------------------- ------------------
William J. Binnie
Director

/s/William B. D'Surney September 26, 1997
- ---------------------- ------------------
William B. D'Surney
Director

/s/Frank Mayorshi September 26, 1997
- ----------------- ------------------
Frank Mayorshi
Director

/s/Joseph F.Raffetto September 26, 1997
- -------------------- ------------------
Joseph F. Raffetto
Director

/s/Robert J. Weeks September 26, 1997
- ------------------ ------------------
Robert J. Weeks
Director

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
and Stockholders of Bontex, Inc.:

Under date of August 13, 1997, we reported on the consolidated balance sheets
of Bontex, Inc.(formerly Georgia Bonded Fibers, Inc.) and subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of income
(loss), changes in stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 1997, as contained in the 1997 annual
report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the accompanying annual
report on Form 10-K for the year 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as set forth under Item 14(a)2 of
the accompanying annual report on Form 10-K for the year 1997. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Roanoke, Virginia
August 13, 1997

<PAGE>

</TABLE>
<TABLE>
<CAPTION>
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
BONTEX, INC. (formerly Georgia Bonded Fibers, Inc.) AND SUBSIDIARIES

Balance at Charges to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts* Deductions** Period
----------- --------- -------- --------- ------------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997
Reserves and allowances
deducted from asset accounts:
Allowances for doubtful accounts $134,000 $75,000 $(7,000) $83,000 $119,000

YEAR ENDED JUNE 30, 1996
Reserves and allowances
deducted from asset accounts:
Allowances for doubtful accounts $156,000 $66,000 $(6,000) $82,000 $134,000

YEAR ENDED JUNE 30, 1995
Reserves and allowances
deducted from asset accounts:
Allowances for doubtful accounts $183,000 $42,000 $12,000 $81,000 $156,000

</TABLE>

*Foreign currency translation gain (loss)
**Uncollectable accounts written off, net of recoveries

<PAGE>

Exhibit Index

3 (i) Amended and Restated Articles of Incorporation of the
Company, as amended (incorporated herein by reference to
Exhibit No. (iii) of Form 10-Q for the fiscal quarter ended
December 31, 1996)

10 (ii) *Life Insurance Agreement between Georgia Bonded Fibers,
Inc. and James C. Kostelni (incorporated herein by
reference to Exhibit 10.4 of Form 10-Q for quarter ended
December 31, 1993)

10 (iii) *Bontex S.A. Pension Plan (incorporated herein by reference
to Exhibit No. 10(iv) of Form 10-K for the fiscal year
ended June 30, 1994)

10 (iv) *Georgia Bonded Fibers, Inc. Annual Incentive Plan
(incorporated herein by reference to Exhibit No. 10(v) of
Form 10-K for the fiscal year ended June 30, 1994)

10 (viii) *Georgia Bonded Fibers, Inc. 1996-1997 Senior Management
Incentive Plan

21 Subsidiaries of the Company

27 Financial Data Schedule

* Management contract or compensatory plan or agreement required to be
filed as an Exhibit to this Form 10-K pursuant to Item 14 (c).
<PAGE>

GEORGIA BONDED FIBERS, INC.
1996-1997 SENIOR MANAGEMENT INCENTIVE PLAN

The 1996 - 1997 Senior Management Incentive Plan is designed to promote the
interests of Georgia Bonded Fibers, Inc. (GBF) by providing an incentive to
Senior Managers whose decisions and actions significantly affect the growth
and profitability of GBF.

1. PARTICIPANTS
------------

Participation in the plan will be limited to Senior Managers of GBF and
subsidiaries whose decisions and actions significantly affect the
Company's growth, new product development, expanded markets, cost
containment, and profitability.

Each year the Compensation Committee shall recommend for approval by
the Board all employees selected for participation, including the
amount of their maximum incentive award.

2. AWARD AND OBJECTIVES FOR 1996-1997
----------------------------------

A. For the year ending June 30, 1996, Georgia Bonded Fibers, Inc. will pay
a bonus to James C. Kostelni, CEO; Jeffrey Kostelni, CFO; David Dugan,
Controller/Corporate Secretary; Patricia Tischio, Assistant Corporate
Secretary; Charles Kostelni, Corporate Controller/Assistant Treasurer;
Larry Morris, Technical/Sales Director; Harmonson Floyd, Chief
Engineer/Director of Manufacturing; Mike Breton, Director of
International Operations, Bontex S.A.; Pierre Pallage, Technical/Plant
Manager, Bontex S.A.; Hadelin Mothet, Financial Director/Assistant
General Manager, Bontex S.A.; Tarcisio Pasquali, General Manager,
Bontex Italia. Should sales and earnings of Georgia Bonded Fibers
exceed specified amounts for the year ending June 30, 1997, as
presented in the Fiscal 1997 Budget dated 6/16/96, each participant
will receive 10 percent of their base salary:
<TABLE>
<CAPTION>

Consolidated
------------
<S> <C>
Net Sales $49,500,000
Operating Profit $ 3,099,465
</TABLE>

The above financial targets for revenues and profitability are based on
the Fiscal 1997 Budget with the following exchange rates: US$/BF 31;
US$/ITL 1585; and BF/ITL 2.00. The impact of material changes in
foreign currency exchange rates on the translation of the financial
statements will be excluded from the comparison of these financial
objectives to actual results.

Furthermore, the Company must be in profitable position as determined
sufficient by the Compensation Committee after considering the impact
of the translation adjustments for the payment of any bonuses under the
Senior Management Incentive Plan.
<PAGE>
B. Each participant can earn an additional 10 percent of their base salary
for achieving measurable individual objectives assigned to them by
their immediate supervisor, as approved by the Chief Executive Officer
(CEO) or Compensation Committee.

3. MISCELLANEOUS
-------------

A. In the first quarter of the plan year, each selected participant will
be notified, in writing, of the amount and terms of the incentive
awards. The plan year begins the 1st of July and ends the 30th of June
of the following year.

B. Payment of each participant's award will be made as soon as possible or
within 90 days after the end of the plan year. Incentive awards will
be paid in dollars.

C. Each participant may earn their award based on an evaluation of the
individual's performance against specific objectives. The base salary
will be the annual amount paid the participant as of July 1, 1996.

D. In the event of death, retirement, or termination (except for cause), a
pro rata share of the participant's award, if earned, will be based on
an evaluation of the period of actual participation. Only the Board of
Directors, with the recommendation from the Compensation Committee, may
approve payment before the end of the plan year

E. At the end of the plan year, the Compensation Committee will make the
determination of the appropriate payment, or lack thereof. The
Committee will recommend to the Board of Directors an amount considered
appropriate; and that the Board of Directors authorize the payment of
the additional compensation. It may recommend to the Board of
Directors an increase or decrease in the amount of any or all incentive
awards if, in its sole judgment, extraordinary or unanticipated
circumstances warrant such action.

F. This plan may be terminated at any time effective July 1 of the
following year. This plan may be altered or amended at any time, with
the recommendation of the Compensation Committee and the approval of
the entire Board, as long as such revisions do not impair the rights of
any participant granted an award.

G. The terms of this plan do not constitute a contract or employment for a
defined period, and all participants continue as employees at will.
<PAGE>

50th Anniversary
(Bontex symbol) BONTEX
1997 ANNUAL REPORT

(Graphic: Concentric circles with explosion from center of circles and
continents of world at top of explosion.)
<PAGE>
BONTEX Cellulose Visorboard is More Environmentally Friendly Than Plastic

By using primary and recycled cellulose fibers, Bontex (registered trademark)
is an environmentally friendly product for visors, brims and size bands in
headwear and insoles for footwear.
BONTEX (registered trademark) visorboard, brims and size band materials
absorb perspiration during wear.
BONTEX (registered trademark) will wick and absorb perspiration on an ongoing
continuous basis. Headwear produced with BONTEX (registered trademark) and
worn during active sports or work in hot weather will contribute toward
comfort and performance.

(Left Photo appears here - Golfer outline)
(Center Photo appears here - 2 Bontex hats)
(Right Photo appears here - Worker using a chainsaw)

Besides coming from a renewable resource - trees, BONTEX (registered
trademark) has many practical qualities that make it more appealing than
plastic for retailers and manufacturers.

Stitches cleanly with less needle and thread breakage
MORI-FRESH (registered trademark) treated which retards the growth of harmful
bacteria, fungi and mold. Tight, flexible and versatile meets military
specifications.

- - washable, dry cleanable and is dimensionally stable
- - pliable and retains its shape
- - available in colors, sheets or rolls and in various degrees of rigidity
- - available worldwide

One Bontex Drive, Buena Vista, VA 24416-1500
Telephone : 540-261-2181 Fax: 540-261-3784
E-Mail: [email protected] http://www.bontex.com
Manufactured: Bontex (registered trademark) Buena Vista, VA Bontex
(registered trademark) S.A. Stembert, Belgium
Dist. and Converted by: Bontex (registered trademark) Italia S.r.l.
Villafranca, Verona, Italy.
Bontex (registered trademark) de Mexico, Leon, Mexico Bontex (registered
trademark) Hong Kong

(Bontex symbol) BONTEX (registered trademark)
<PAGE>
BONTEX (registered trademark)
Consolidated 1997 Annual Report

CONTENTS

2 Mission Statement, Corporate and Product Profile

3 Message to Shareholders

5 Financial Highlights

6 Management's Discussion and Analysis

12 Financial Statements and Notes

26 Independent Auditors' Report

CORPORATE HIGHLIGHTS - 50TH ANNIVERSARY

1946 Bontex was originally established as a leather processing operation in
Newark, New Jersey.

1954 Bontex elastomeric wet web cellulose materials were first produced in
Buena Vista, Virginia.

1959 Bontex goes public with stock issuance and listing on NASDAQ stock
market.

1969 Bontex begins Bontex SA investment in Belgium, then and today, the
world's largest and most efficient factory manufacturing elastomeric
wet web fiberboard products.

1982 Bontex sales surpass $30 million, and operating profits exceed $3.2
million. Bontex begins specification marketing program to expand sales
globally.

1986 Bontex establishes a base of operations in Italy, as Bontex Italia
begins sales, marketing, and converting operations.

1990 Bontex sales exceed $40 million.

1992 Bontex enters strategic partnership to market polyurethane foams.

1995 Bontex sales exceed $50 million. Bontex establishes Bontex de Mexico
to expand export sales.

1996 The Company reorganizes and officially operates globally as Bontex,
Inc., formerly Georgia Bonded Fibers, Inc.

1997 Bontex export sales from USA exceed $10 million. Bontex establishes
Bontex Hong Kong to further expand export sales. Bontex enters into a
key strategic partnership to market nonwoven materials. Bontex becomes
the first global manufacturer in our industry to be ISO 9001 certified.
<PAGE>
MISSION STATEMENT

Our Mission is to be the global leader in the markets we serve, by
providing customers with world class quality products and service.

CORPORATE PROFILE

Bontex, Inc. was originally founded in June 1946 under the laws of the
State of New Jersey. The Company originally began as a leather processing
operation, and today, Bontex is a leading worldwide manufacturer and
distributor of uncoated and coated elastomeric wet web impregnated fiberboard
products, generally described by the trademark BONTEX (registered trademark).
BONTEX (registered trademark) is primarily used as an insole material in
footwear, as well as visorboard in headwear, dielectric sealing base in
automotive door panels, backing substrate, stiffener and laminating base in
luggage, leathergoods, and allied products. All BONTEX (registered
trademark) fiberboard products are designed to be "environmentally-friendly,"
because Bontex uses recycled and primary cellulose fibers originally derived
from trees, a renewable resource.

The Company maintains global headquarters, manufacturing and converting
facilities at Bontex USA, One Bontex Drive, Buena Vista, Virginia; European
headquarters and manufacturing at Bontex S.A., Stembert, Belgium; a
distribution and converting operation at Bontex Italia S.r.l., Villafranca,
Verona, Italy; and distribution subsidiaries at Bontex de Mexico, S.A. de
C.V., in Leon, Mexico and Bontex Hong Kong R.O.C. Bontex also maintains a
network of liaison offices and distributors globally to market Bontex
products.

PRODUCT PROFILE

Bontex manufactures uncoated and coated BONTEX (registered trademark)
fiberboard products; PVC breathable cushion foams, that are marketed under
the trademarks BON-FOAM (registered trademark), MAXXON (registered trademark)
and SURE-FOAM (registered trademark), and are sold in a variety of grades for
use as shock absorbing insole material; BON-PEL (registered trademark), a wet
web nonwoven substrate, which is exceptionally strong and flexible; BONTEX
(registered trademark) 48 MA, an uncoated visorboard for use in military
headwear, which has been approved by NATICK military laboratory. Bontex also
combines certain products, such as foams, fabrics, and vinyls, with BONTEX
(registered trademark) fiberboard. Additionally, Bontex is the exclusive
distributor globally to the footwear industry of an expanded polyurethane
material manufactured by Aearo E.A.R. Specialty Composites, trademarked
MAXXON (registered trademark) LS and CONFOR (registered trademark). Bontex
also markets to the footwear industry a range of nonwoven products under the
company's trademark BON-STITCH (registered trademark), primarily used for
various stitch construction footwear. Registered trademarks under which the
Company markets products include:

BONTEX (registered trademark)

BON-PEL (registered trademark) nonwoven

BON-FOAM (registered trademark) cushion

MAXXON (registered trademark) cushion

SUR-V-LON (registered trademark) vinyl coated Bontex
<PAGE>
SIR-PEL (registered trademark)

MORIMER (registered trademark)

SURTEX (registered trademark)

SUPERTEX (registered trademark)

MORI-FLEX (registered trademark)

BON-STITCH (registered trademark)

VINTEX (registered trademark)

BON-DOE (registered trademark)

BONTEX (registered trademark) 200 RECYCLED

BONTEX (registered trademark) 300 RECYCLED

<PAGE>
MESSAGE TO SHAREHOLDERS

(Bontex letterhead)
(Bontex symbol) BONTEX (registered trademark)
ONE BONTEX DRIVE
BUENA VISTA, VIRGINIA 24416-1500
email: [email protected]
http://www.bontex.com

Dear Fellow Shareholder:

In 1997, we built upon the positive momentum established last year, as this
year's results reflect significant improvement. We are pleased to report to
you that Bontex, Inc. and its wholly-owned subsidiaries recorded consolidated
net sales of $50.3 million and generated consolidated operating profits of
$4.0 million and consolidated net income of $1.7 million or $1.10 per share
for the year ended June 30, 1997. This represents the second highest year on
record for net sales, and the highest level of net income and operating
profits in the history of the Company. Relative to the prior fiscal year,
net consolidated sales increased $2.7 million or 5.7 percent, operating
profits increased by $4.1 million, and net income improved from a loss of
$602,000 or $0.38 per share.

This past year marked a milestone for the Company, because it was a year of
transformation as we prepared for the future. Management implemented the
Reorganization Plan (the "Plan") approved last year by our shareholders. We
not only changed our name and logo, but we also further refined our strategic
plans for future growth, and most importantly, increased profitability and
shareholders' value. Many of the Plan's key initiatives, which are
described in this letter, symbolize the dynamism of the Company. We will
capitalize on the Bontex (registered trademark) brand name, which is one of
our most valuable assets. The corporate name change not only better links
the Company with its widely respected product lines, but also recognizes the
significant contribution of international operations and export sales of the
Company. All the Company's foreign subsidiaries have been known as Bontex
for many years.

The Company's international sales continue to be the largest portion of
sales, reflecting our strategic emphasis on developing international markets
and regrettably, the contraction of the US domestic market. The Company's
international subsidiaries have accounted for approximately 60 percent of net
consolidated sales over the past several years. To further expand our
international sales, the Company established a venture in Hong Kong to
directly market our products in China, the world's largest market for Bontex
(registered trademark) products. The Company's plan to establish a
manufacturing facility in Asia still remains an important priority; although
it has been delayed so that management can focus on immediate issues in
returning the Company to profitability, as well as monitor long-term market
and industry trends.

Since the founding of our Company fifty years ago, Bontex has developed into
the primary global manufacturer and distributor of high quality elastomeric
wet web fiber board products. Our mission is to be the global leader in our
industry, by providing customers with high quality Bontex (registered
trademark) products and services. To that end, we continue to develop new
products, improve existing products and innovate new applications. In 1997,
our R&D efforts resulted in the introduction of a number of new products,
including several new composite packages for, among other things, comfort,
cleated footwear and snowboarding. These measures, coupled with present and
future initiatives, should contribute to our Company's future growth and
profitability. <PAGE>

Quality has always been a cornerstone of the Company's identity, and further
demonstrating our quality leadership, during 1997 Bontex became the first
manufacturer in our industry to have ISO 9001 certified quality assurance
systems at all manufacturing facilities. Management regards ISO 9001 as
being crucial in maintaining a competitive advantage in quality globally;
however, ISO 9001 is only one part of our quality program; and it alone does
not guarantee our leadership. The best measure of quality is our ability to
deliver customer satisfaction. Bontex leads our industry in several
important areas and market segments, and we continue to expand our role as a
global market leader. Bontex remains focused on all our key strategic
objectives.

Another important development during 1997 was our strategic alliance with a
well known Italian manufacturer of quality nonwoven materials. Bontex will
market and distribute nonwoven products manufactured to Bontex specifications
under the Bontex (registered trademark) trademark BON-STITCH (registered
trademark). Over the past few years, an increasing portion of footwear,
especially athletic footwear, is strobel stitch constructed using nonwoven
insole materials. This additional product further enhances our market
position to effectively service the entire spectrum of footwear, provides an
added degree of product diversification and ultimately should lead to sales
growth.

As we stated in last year's annual report, the Company was well positioned as
we entered fiscal 1997, because of the positive impact of a number of key
measures previously implemented by management to increase sales and control
costs, as well as the favorable effect of moderated raw material costs. The
Company has generated profits consecutively over the previous six quarters.
We remain optimistic about fiscal 1998; however, the prices of pulp and other
raw materials have risen over the past several months and may continue to
rise. Management has implemented various measures in an attempt to manage
the situation, including purchasing forward, capital enhancements to improve
production efficiencies, and other cost control measures. Further to this,
management is exploring various alternatives that may enable the Company to
achieve more stability in profits and better management of cash flows, as
part of our Risk Management Program and financial plan.

The financial plan implemented last year to improve the Company's financial
position and enhance shareholders' value remains a crucial priority. This
plan includes a number of important measures to increase working capital,
reduce debt, invest judiciously in essential capital projects and reinvest
earnings. Much progress was made as these budgetary and financial controls
have contributed positively to enhancing shareholder value and improving the
Company's financial position. The Company's capital structure (total assets
less current liabilities) continues to finance short and long range business
objectives, and at June 30, 1997, capital structure totaled $14.6 million, an
increase of $1.8 million or 14.1 percent. An important measure of our
progress is reflected in the Company's share price and market capitalization.
As of June 30, 1997, the price of the Company's stock increased 34.4 percent,
representing an increase in market capitalization of $2.0 million.
<PAGE>
We continue to uphold high environmental standards. Protecting the
environment in which we all work and live is an important responsibility to
which the Company has dedicated significant resources over the years. The
Company has recycled for many years and continues to develop environmentally-
friendly products. Bontex (registered trademark) products are made from
recycled and primary cellulose fibers originally derived from trees, a
renewable resource. Bontex has invested several millions of dollars over the
past years to have one of the most environmentally-friendly manufacturing
facilities in our industry: We have converted our boilers from coal to
cleaner burning and more efficient natural gas; we have restored land
previously used for waste disposal and storage; and we have reduced the
amount of process water consumed. Over the past few years, Bontex has
invested over $4 million in waste water treatment plants utilizing state of
the art, cost effective and innovative technologies. Bontex is committed to
conducting business in a fashion that is not only good for business, but also
in a manner that will respect and preserve our environment.

We are proud of all our employees, representatives and distributors globally
for their outstanding teamwork. We are particularly grateful to all of our
customers for their trust placed in Bontex, and we greatly appreciate all of
our shareholders, for your continued support of the Company and its
management.

James C. Kostelni
Chairman of the Board and
Chief Executive Officer

Bontex, Inc., One Bontex Drive, Buena Vista, VA 24416-1500
Telephone: (540) 261-2181 Fax: (540) 261-3784 Email: [email protected]
http://www.bontex.com
Bontex SA (Belgium), Bontex S.r.l. (Italy), Bontex Hong Kong, Bontex de Mexico

<PAGE>
<TABLE>
<CAPTION>
BONTEX, INC. AND SUBSIDIARIES
Summary of Selected Ten Year Data
(In Thousands, Except Per Share Data and Ratios)

Years ended June 30,
--------------------

1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $50,333 $47,618 $50,998 $47,729 $46,710 $46,534 $44,734 $41,223 $39,676 $33,376
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principles 1,733 (602) (1,458) 935 193 942 212 167 143 313
Extraordinary item - - - - - - - - 212 -
Cumulative effect of
change in accounting
principles - - - 400 - - 99 - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1,733 $ (602) $(1,458) $ 1,335 $ 193 $ 942 $ 311 $ 167 $ 355 $ 313
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per share:
Before extraordinary item
and cumulative effect of
change in accounting
principles $ 1.10 $ (.38) $ (.93) $ .60 $ .12 $ .60 $ .14 $ .11 $ .09 $ .20
Extraordinary item - - - - - - - - .14 -
Cumulative effect of change
in accounting principles - - - .25 - - .06 - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 1.10 $ (.38) $ (.93) $ .85 $ .12 $ .60 $ .20 $ .11 $ .23 $ .20
======= ======= ======= ======= ======= ======= ======= ======= ======= =======

Total assets $32,906 $33,181 $39,527 $31,032 $28,840 $28,669 $22,753 $21,547 $20,598 $18,746
Total stockholders' equity $11,515 $10,308 $11,186 $12,080 $10,521 $10,825 $ 9,313 $ 9,254 $ 8,758 $ 8,574
Capital expenditures $ 2,389 $ 2,157 $ 1,704 $ 1,868 $ 1,226 $ 1,787 $ 1,591 $ 1,047 $ 642 $ 465
Cash flows provided by
(used in) operating
activities $ 3,037 $ 1,180 $(2,073) $ 1,078 $ (122) $ 215 $ 2,024 $ 30 $ 792 $ 55
Long-term debt $ 2,761 $ 2,330 $ 1,364 $ 1,511 $ 1,056 $ 1,493 $ 964 $ 193 $ 361 $ 524
Book value per share $ 7.32 $ 6.55 $ 7.11 $ 7.68 $ 6.69 $ 6.88 $ 5.92 $ 5.88 $ 5.57 $ 5.45
Cash dividends declared per
common share* $ - $ - $ - $ - $ .05 $ - $ - $ .10 $ - $ .09
Current ratio 1.16 1.06 1.07 1.30 1.26 1.34 1.43 1.46 1.53 1.63
Total debt to equity ratio 1.86 2.22 2.53 1.57 1.74 1.65 1.44 1.33 1.35 1.19
Capital structure $14,570 $12,819 $12,703 $14,162 $12,224 $12,991 $10,950 $10,146 $ 9,750 $ 9,740
</TABLE>

*A cash dividend of $.05,$.10, and $.09 was paid during the second quarter of
1993, 1990, and 1988, respectively.
<PAGE>

Common Stock and Dividend Data

The stock of Bontex, Inc. is traded over the counter on the NASDAQ
National Market under the symbol BOTX. At September 8, 1997 there were
approximately 692 shareholders of record. A cash dividend was paid during
fiscal year 1993. No cash dividends were declared or paid during fiscal
years 1994 through 1997. The table below sets forth the range of bid prices
for a share of Bontex common stock:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
High Low High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $4.00 $3.13 $4.25 $2.75 $6.00 $5.00 $4.75 $3.75 $7.75 $5.50
Second Quarter 5.13 3.50 3.88 2.38 6.50 5.50 5.25 4.50 6.63 4.25
Third Quarter 5.38 4.50 3.25 2.38 5.50 3.50 5.25 4.25 5.50 4.25
Fourth Quarter 5.00 4.25 4.38 2.88 4.13 2.98 5.50 4.50 5.50 4.00
</TABLE>
<PAGE>
BONTEX, INC. AND SUBSIDIARIES
(Formerly Georgia Bonded Fibers, Inc.)

MANAGEMENT'S DISCUSSION AND ANALYSIS

General

Overall business conditions during 1997 were favorable for the Company. The
global economy, particularly concerning sales of footwear products at the
retail level, grew at a moderate rate, with interest rates and inflation at
comparatively low levels. As stated in last year's annual review, the
Company's operating conditions during fiscal year 1997 were expected to
improve as compared to 1996, mainly reflecting lower raw material costs.
However, the Company's operating margins remain under constant pressure from,
among other things, increasing environmental related costs, competitive
pressures and higher prices for raw materials.

The Company's financial statements and notes to the financial statements
should be read as an integral part of this review. Except for the historical
data set forth herein, the following discussion contains certain forward-
looking information. The Company's actual results may differ materially from
these projected results because of inherent limitations with such model
characteristics and assumptions. Factors that could cause or contribute to
such differences include, but are not limited to, level of sales to key
customers, actions of competitors, fluctuations in the prices of primary raw
materials and foreign currency exchange rates.

Results of Operations

Consolidated net sales for 1997 totaled $50.3 million, an increase of $2.7
million or 5.7 percent as compared to the prior year's level of $47.6
million. The increase in 1997 sales is primarily due to higher average
selling prices and added sales volumes, demonstrating the positive impact of
the Company's marketing program and favorable economic conditions.

During fiscal 1996, the Company recorded consolidated net sales of $47.6
million, a decline of $3.4 million, as compared to the $51.0 million in 1995.
The decline in sales from 1995 to 1996 reflected a general global slowdown in
retail sales to the various industries the Company serves.

(Bar Graph Appears Here)
<TABLE>
Net Sales
(Millions of Dollars)

<S> <C>
1997 $ 50.3
1996 $ 47.6
1995 $ 51.0
1994 $ 47.7
1993 $ 46.7
</TABLE>
<PAGE>
The Company generated consolidated net income of $1.7 million or $1.10 per
share in 1997, as compared to the net losses of $602,000 or $.38 per share
and $1,458,000 or $.93 per share for 1996 and 1995, respectively. These
positive operating results reflect the continued impact of various measures
implemented by management to increase sales and improve profitability, as
well as the effect of lower pulp prices. The prior year operating losses
were primarily due to higher raw material costs. Cost of sales as a percent
of net sales was 68 percent in 1997; 77.1 percent in 1996; and 77.3 percent
in 1995.

The Company's goal is to mitigate the effects of cyclical changes in costs
through purchase contracts, forward purchasing, and application of
technologies to improve process efficiencies. Further to this, management is
exploring various alternatives that may enable the Company to create more
stability with pulp purchases as part of our Risk Management Program, in
addition to manufacturing and marketing products less sensitive to pulp
costs. Cost trends leading up to December 31, 1995 indicated increased
inflationary pressures.

(Bar Graph Appears Here)
<TABLE>
Gross Profit
(Millions of Dollars)
<S> <C>
1997 $ 16.1
1996 $ 10.9
1995 $ 11.6
1994 $ 12.8
1993 $ 11.5
</TABLE>

The cost of pulp and latex, two primary raw materials for the Company's
products, increased by more than 100 percent and 56 percent, respectively,
during the eighteen months leading up to December 31, 1995. In January 1996,
pulp prices declined considerably, from a high of $1,000 per ton to $500 per
ton. Since then, pulp prices have recovered and recent trends for higher
pulp prices are expected to continue in 1998. Furthermore, costs relating to
environmental controls continue to increase, resulting in continued pressure
on the Company's operating margins. Management has implemented various
measures in an attempt to manage the situation, including raising selling
prices, capital enhancements to improve production efficiencies, a revised
Risk Management Program and various cost control measures. The impact of the
preceding measures contributed to the Company's operating profits in 1997.
Management currently believes that the Company is well positioned as it
enters the next fiscal year; however, operating margins are expected to be
adversely impacted by increased costs. Management intends to continue to
prudently apply technology to manufacture high quality products while working
to reduce costs in all areas of operations in an effort to maintain
competitive selling prices. There can be no assurance, however, that
increased raw material prices will not have an adverse effect on the
Company's operations or competitive position in the future. It is difficult
to predict future raw material costs, as well as to implement timely selling
price increases for the Company's finished goods due to the globally
competitive environment in which the Company operates.
<PAGE>
The Company's United States operations use the last-in, first-out (LIFO)
method of inventory accounting; however, for comparison purposes with other
companies, if the first-in, first-out (FIFO) method of accounting had been
used, reported gross profit would have been lower by $285,000 in 1997, lower
by $147,000 in 1996, and higher by $342,000 in 1995. Net income would have
been lower by $181,000 or $.12 per share in 1997, lower by $95,000 or $.06
per share in 1996 and higher by $212,000 or $.13 per share in 1995.

As a percent of net sales, selling, general and administrative (SG&A)
expenses over the previous three years were relatively stable at 24 percent
in 1997; 23.1 percent in 1996; and 23.4 percent in 1995. The $1.1 million
increase in SG&A from 1996 to 1997 can be attributed to higher sales,
marketing, freight, advertising and compensation related costs.
Additionally, SG&A costs for 1996 were lower than normal because of the
reversal of a deferred compensation accrual of $159,000, as described in Note
6 of the Notes to the Consolidated Financial Statements. The decrease in
SG&A costs from 1995 to 1996 was due largely to various cost control measures
and the decline in sales.

The decrease in interest expense over the past year was primarily due to the
reduction of debt. The weighted-average interest rate on short-term
borrowings during 1997 and 1996 was 7.9 and 8.0 percent, respectively. The
higher interest expense during 1996 is mainly due to higher interest rates
and increased borrowings. Proceeds from credit facilities were utilized for
planned capital additions, such as mandated environmental projects, as well
as funding of operations. A large portion of the Company's debt consists of
short-term credit facilities with variable interest rates. To protect the
Company's financial position from future interest rate increases, the Company
entered into a number of interest rate swap agreements, to provide for fixed
interest payments and stable cash outflows. However, a portion of the
variable rate debt is not covered by interest rate swaps, and as such, is
subject to market risk of rate changes. Financial instruments, by their
nature, are exposed to such market risk, which is the risk of loss arising
from adverse changes in market rates and prices. Interest rate swap
agreements and market risks of financial instruments are described in Note 7
of the Notes to the Consolidated Financial Statements.

The consolidated effective income tax rate for the Company was 39.1 percent
in 1997; 23 percent in 1996; and 37.9 percent in 1995. The higher effective
tax rate in 1997 was principally due to higher taxable income, particularly
at the Company's European subsidiaries where income tax rates are higher.
The income tax benefit in 1996 and 1995 was attributed to the operating
losses, reflecting $317,000 and $781,000, respectively, in net operating loss
carryforwards. Refer to Note 5 of the Notes to Consolidated Financial
Statements for further details regarding income taxes.

International Sales & Operations

The Company's international sales continue to be the largest portion of
sales, reflecting management's strategic emphasis on developing international
markets and the contraction of the US market for Bontex (registered
trademark) products. Asian countries continue to be the largest sales market
for Bontex, as over 67 percent of the world's footwear are produced in the
Far East, per the 1997 SATRA World Report. The Company's international
subsidiaries represented approximately 60 percent of consolidated net sales
over the past three years. Export sales from the US in 1997, 1996 and 1995
were $13.8 million, $9.8 million and $9.2 million, respectively. US export
sales are generally denominated in US dollars.
<PAGE>
Foreign currency exchange rates have different effects from year to year on
the translation of the income statement and balance sheet. The impact of the
rate increase from 1996 to 1997 resulted in net sales being lower by
approximately $2 million, and the exchange rate decreases from 1995 to 1996
and 1994 to 1995 resulted in net sales being higher by approximately $600,000
and $3.2 million, respectively. On the balance sheet, foreign currency
exchange rates at June 30, 1997 were higher than the currency exchange rates
at June 30, 1996, which resulted in a translation decrease of approximately
$2.7 million in total assets, as compared to the translation decrease of
approximately $1.5 million last year.

International operations are subject to certain inherent risks, including
currency fluctuations, export duties, restrictions on transfer of funds and
political instability. Management continually monitors and assesses these
inherent risks, and evaluates various alternatives to manage exposure to such
risks. The exposure to foreign currency exchange losses represents the risk
that eventual net cash flows resulting from a sale or purchase will be
adversely affected by changes in exchange rates. During 1995, the Company
experienced extreme volatility in the foreign exchange markets. This unusual
volatility resulted in larger than normal currency exchange losses, and
accordingly, management revised its Risk Management Program (RMP). The
revised RMP is a coordinated approach in the management of foreign currency
risks: The overall policy of the RMP is to match currency denominations of
the Company's assets with those of its liabilities, in a manner intended to
reduce the Company's foreign currency exposure.

The revised RMP appears to be effectively managing the Company's exposure to
foreign currencies, as supported by the significant reduction of foreign
exchange gains and losses in 1997, and accordingly, such exchange gains and
losses in the future are not expected to be material. However, prior to
implementation of our revised RMP, total foreign currency exchange gains and
losses were a gain of $496,000 in 1996 and a loss in 1995 of $1.5 million.
The exchange gain in 1996 represents a recovery of a portion of the exchange
losses accrued during the prior year. The higher than normal exchange losses
in 1995 are mainly the result of the decrease in value of the US dollar,
Italian lire and Mexican peso. Management cannot assure that such exchange
losses will not occur again in the future. All transactions denominated in
foreign currencies are not hedged (i.e., Mexican peso, Canadian dollar, etc.)
since the volume of such transactions is limited and therefore the cost to
hedge is considered prohibitive. The Company regards these international
markets as excellent opportunities for future growth in revenues and profits,
and will continue to attempt to manage these risks in the most cost-effective
manner. Refer to Notes 1 and 7 of the Notes to Consolidated Financial
Statements for further details regarding currencies, market risks and
financial instruments.

Liquidity and Capital Resources

The Company's capital structure (total assets less current liabilities)
continues to finance short- and long-range business objectives, and at June
30, 1997 and 1996 totaled $14.6 million and $12.8 million, respectively. The
increase in capital structure is primarily due to the reduction of short-term
borrowings. The Company's capital structure primarily consists of
stockholders' equity, and over the past two years, long-term debt represented
approximately 19 percent of capital structure. The Company's requirements
for capital during the previous two fiscal years have principally been for
capital related expenditures and funding operations.
<PAGE>
The Company's Cash Conversion Efficiency (cash flows from operations/net
sales) improved considerably from 2.48% the prior year to 6.03% this year,
reflecting higher cash flows from operations resulting from, among other
things, improved profit margins. Cash flows from operations totaled $3.0
million and $1.2 million in 1997 and 1996, respectively. Cash flows used in
operations in 1995 totaled $2.1 million. Cash flows used in investing
activities mainly represent acquisition of property, plant and equipment.
These capital investments totaled $2.4 million, $2.2 million and $1.7 million
in 1997, 1996 and 1995, respectively. Net cash flows from financing
activities totaled $249,000 in 1997, net cash flows used in financing
activities totaled $2.3 million in 1996, and net cash flows from financing
activities were $5.7 million in 1995.

Cash and cash equivalents increased by $658,000 to $1.4 million, and largely
represent financing and hedging positions with respect to the Company's
European operations.

Trade accounts receivable decreased approximately $456,000 to $13.6 million
at June 30, 1997, as compared to last year, primarily because of improved
collections and currency translation adjustments. Inventory balances at June
30, 1997 were $5.3 million, down from $5.5 million the prior year. The
decrease in inventory is mainly because of the consumption of higher priced
inventories. Management continues to implement controls over finished goods
and raw material inventories to control costs through the reduction of stock,
seconds, and scrap.

The decrease in deferred income tax assets primarily reflects the utilization
of approximately $2.3 million or 75 percent of the net operating loss
carryforwards. At June 30, 1997, the Company had approximately $747,000 in
net operating loss carryforwards to offset future taxable income, of which
approximately $250,000 and $361,000 expire in 2010 and 2011, respectively.
Approximately $136,000 of the net operating loss carryforwards do not expire.
The ultimate realization of the alternative minimum tax credit and net
operating loss carryforwards is dependent upon the Company generating
approximately $1.0 million in future taxable income during the tax
carryforward period. Certain factors beyond management's control can affect
future levels of taxable income, including prices for primary raw materials
and foreign currency exchange rates. Management believes that it is more
likely than not that the Company will realize its deferred tax assets, as a
result of, among other things, the Company's tax planning strategies,
positive operating conditions and cost control measures implemented by
management, and based on the level of anticipated future taxable income.
Additionally, management currently believes that the existing net deductible
temporary differences will reverse during the periods in which the Company
generates net taxable income. Accordingly, no allowances are provided for
deferred tax assets.

The plant and equipment additions mainly represent capital expenditures for
mandated environmental controls, and various capital improvements to enhance
the productivity of manufacturing and converting facilities in the United
States, Belgium, and Italy. Capital expenditures for 1998 are projected not
to exceed $700,000.

Accounts payable decreased $526,000 to $7.5 million at June 30, 1997, as
compared to the prior year. The payable balances last year were higher than
normal mainly because of accruals relating to capital additions and higher
raw material inventory balances. Short-term borrowings decreased $1.4
million to $8 million at June 30, 1997 and primarily correspond to the
decrease in accounts receivable and inventories.
<PAGE>
The $431,000 increase in long-term debt was primarily due to the funding of
capital expenditures, partially offset by long-term debt principal payments.
These secured credit facilities contain various loan covenants, including the
maintenance of certain minimum financial ratios and borrowing base
requirements. The Company was in compliance with the applicable debt
covenants at June 30, 1997. Refer to Note 4 of the Notes to Consolidated
Financial Statements for further details regarding Long-term Debt and
Financing Agreements. The Company believes current credit facilities
combined with cash flows from operations will be sufficient to meet future
operating and capital requirements for the foreseeable future.

The Company's ratio of current assets to current liabilities improved from
1.06 at June 30, 1996 to 1.16 at June 30, 1997, and the Days of Working
Capital ratio (DWC) (working capital/(net sales/365 days)) more than doubled
from 9.65 last year to 21.86, primarily reflecting the $1.8 million increase
in working capital. The ratio of total liabilities to equity improved at
fiscal year end to 1.86 from 2.22 the prior year. These changes are
primarily attributed to positive operating results. Management has
implemented a financial plan to help continue to improve the Company's
financial condition. This financial plan includes measures to increase
working capital, reduce debt, invest in essential capital projects and retain
earnings for future expansion and operations.

Restructuring

In June 1997, the Company's Board of Directors, in response to decreasing
demand in the domestic markets, approved a plan to restructure the Company's
U.S. operations in the Northeast. The restructuring plan focuses on the
Company's Newark, New Jersey operation and will involve closing the Company's
current Newark warehouse facility. The Company expects the restructuring to
generate significant operating efficiency improvements which should
contribute to the long-term profitability of the Company. Net pretax savings
are projected to be significant, and principally consist of reduced salaries,
operating and overhead costs for the Newark facility. The Company plans to
dispose of the warehouse facility within the next year. The related
restructuring charges at June 30, 1997 are immaterial to the financial
statements, because the net realizable value of the Newark warehouse facility
exceeds the net carrying amount. Future cash outlays and expenditures for
the restructuring are not expected to be material.

Environment

As with all related manufacturers, the Company is subject to regulation by
various federal, state, foreign and local agencies concerning compliance with
environmental control statutes. These regulations impose limitations on the
discharge of effluent and emissions into the environment, and establish
standards for treatment, storage and disposal of hazardous wastes, as well as
require the Company to obtain and operate in compliance with the conditions
of permits and other governmental authorizations.

During fiscal 1997, the Company completed the construction of the waste water
treatment plant in Belgium at an aggregate cost over the past three years of
approximately $2 million. The Company in the USA is developing and
implementing certain air emission controls. The cost of the air control
technologies based on current information is projected to be approximately
$250,000. The Company believes that it is in substantial compliance with
applicable environmental laws and regulations.
<PAGE>
The Company has made and intends to continue to make substantial capital
investments and operating expenditures, as well as production adjustments, in
connection with compliance with environmental laws and regulations.
Estimates of future costs for environmental compliance may differ from final
costs due to, among other things, continued emergence of new environmental
laws and regulations, as well as technological developments. Refer to Note 8
of the Notes to the Consolidated Financial Statements for further details
regarding environmental matters.

Accounting Changes

In connection with the granting of stock options in 1997, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.

The Financial Accounting Standards Board issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets to be Disposed of" in March 1995 and SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" in June 1996, of which neither had a material
impact on the Company's consolidated financial position, results of
operations or liquidity. Refer to Note 1 of Notes to the Consolidated
Financial Statements for further details regarding SFAS No. 121 and 125.

Recently, the Financing Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," SFAS No. 129, "Disclosure of Information about Capital
Disclosure," SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
These statements are effective for fiscal years beginning after December 15,
1997. The Company does not anticipate the adoption of these statements to
have a material effect on its consolidated financial positions, results of
operations or liquidity.

<PAGE>
<TABLE>
<CAPTION>
BONTEX, INC. AND SUBSIDIARIES
(Formerly Georgia Bonded Fibers, Inc.)
CONSOLIDATED STATEMENTS OF INCOME (LOSS) and
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Years Ended June 30, 1997, 1996 and 1995
(In Thousands, Except Per Share Data)

<S> <C> <C> <C>
Consolidated Statements of Income (Loss):
1997 1996 1995

NET SALES $ 50,333 $ 47,618 $ 50,998
COST OF SALES 34,241 36,736 39,398
------- ------- -------
Gross profit 16,092 10,882 11,600

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 12,083 10,979 11,913
------- ------- -------
Operating income (loss) 4,009 (97) (313)
------- ------- -------
OTHER (INCOME) EXPENSES:
Interest expense 1,247 1,288 984
Interest income (45) (93) (219)
Foreign currency exchange (gain) loss (26) (496) 1,477
Other - net (13) (14) (209)
------- ------- -------
1,163 685 2,033
------- ------- -------

INCOME (LOSS) BEFORE INCOME TAXES 2,846 (782) (2,346)

INCOME TAXES 1,113 (180) (888)
------- ------- -------

NET INCOME (LOSS) $ 1,733 $ (602) $ (1,458)
======= ======= =======

NET INCOME (LOSS) PER SHARE $ 1.10 $ (.38) $ (.93)
======= ======= =======

Consolidated Statements of Changes in Stockholders' Equity:

1997 1996 1995

Stockholders' Equity, beginning balance $ 10,308 $ 11,186 $ 12,080
Net income (loss) 1,733 (602) (1,458)
Foreign currency translation adjustment (526) (276) 564
------- ------- -------
Stockholders' Equity, ending balance $ 11,515 $ 10,308 $ 11,186
======= ======= =======

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE><CAPTION>
BONTEX, INC. AND SUBSIDIARIES
(Formerly Georgia Bonded Fibers, Inc.)
CONSOLIDATED BALANCE SHEETS

June 30, 1997 and 1996
(In Thousands, Except Share and Per Share Data)

<S> <C> <C>
ASSETS 1997 1996
CURRENT ASSETS:
Cash $ 1,373 $ 715
Trade accounts receivable, less allowance
for doubtful accounts of $119 ($134 at 1996) 13,622 14,078
Other receivables 551 527
Inventories 5,276 5,495
Deferred income taxes 321 676
Income taxes refundable 76 14
Other current assets 131 116
------- -------
Total current assets 21,350 21,621
------- -------

PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 347 298
Building and building improvements 5,332 4,785
Machinery, furniture and equipment 16,176 15,755
Construction in progress 808 782
------- -------

22,663 21,620
Less accumulated depreciation and amortization 11,631 11,165
------- -------

Net property, plant and equipment 11,032 10,455

Deferred income taxes - 442
Other assets 524 663
------- -------

Total assets $ 32,906 $ 33,181
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 8,019 $ 9,416
Accounts payable 7,521 8,047
Accrued expenses 2,079 2,164
Income taxes payable 139 169
Long-term debt due currently 578 566
------- -------
Total current liabilities 18,336 20,362

Long-term debt 2,761 2,330
Deferred income taxes 108 -
Other long-term liabilities 186 181
------- -------

Total liabilities 21,391 22,873
------- -------
<PAGE>
STOCKHOLDERS' EQUITY:
Preferred stock of no par value. Authorized
10,000,000 shares; none issued - -
Common stock of $.10 par value. Authorized
10,000,000 shares; issued and outstanding
1,572,824 shares 157 157
Additional capital 1,551 1,551
Retained earnings 9,344 7,611
Foreign currency translation adjustment 463 989
------- -------
Total stockholders' equity 11,515 10,308
------- -------

Total liabilities and stockholders' equity $ 32,906 $ 33,181
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BONTEX, INC. AND SUBSIDIARIES
(Formerly Georgia Bonded Fibers, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997, 1996 and 1995
(In Thousands)

1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 48,846 $ 50,552 $ 50,133
Cash paid to suppliers and employees (44,283) (48,226) (51,227)
Interest received 45 98 212
Interest paid, net of amount capitalized (1,220) (1,330) (986)
Income taxes paid, net of refunds (351) 86 (205)
------- ------- -------
Net cash provided by (used in) operating activities 3,037 1,180 (2,073)
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments - - 123
Proceeds from sales of property, plant and equipment - 75 39
Acquisition of property, plant and equipment (2,389) (2,157) (1,704)
------- ------- -------
Net cash used in investing activities (2,389) (2,082) (1,542)
------- ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net (403) (1,740) 4,288
Long-term debt incurred 2,675 115 2,000
Principal payments on long-term debt and capital lease obligations (2,023) (694) (569)
------- ------- -------
Net cash provided by (used in) financing activities 249 (2,319) 5,719
------- ------- -------

EFFECT OF EXCHANGE RATE CHANGES ON CASH (239) (443) 913
------- ------- -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 658 (3,664) 3,017

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 715 4,379 1,362
------- ------- -------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,373 $ 715 $ 4,379
======= ======= =======

<PAGE>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 1,733 $ (602) $ (1,458)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,189 1,100 1,072
(Gain) loss on sale of property, plant and equipment 1 13 (15)
Provision for bad debts 75 66 42
Deferred income taxes 844 (387) (885)
Donated property - - (82)
Change in assets and liabilities:
(Increase) decrease in trade accounts and other receivables (807) 660 471
(Increase) decrease in inventories (261) 2,123 (2,360)
Decrease in other assets 16 22 70
Increase (decrease) in accounts payable and accrued expenses 320 (2,121) 1,493
Increase (decrease) in income taxes (78) 273 (159)
Increase (decrease) in other liabilities 5 33 (262)
------- ------- -------
Net cash provided by (used in) operating activities $ 3,037 $ 1,180 $ (2,073)
======= ======= =======

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Donated property $ - $ - $ 82
======= ======= =======
Construction in progress accrued in payables $ 49 $ 76 $ 178
======= ======= =======

</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BONTEX, INC. AND SUBSIDIARIES
(Formerly Georgia Bonded Fibers, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
(All amounts in thousands except share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation - The accounts of Bontex, Inc. (formerly Georgia Bonded Fibers,
Inc.) and its wholly-owned subsidiaries, Bontex S.A., Belgium, Bontex Italia,
S.r.l., Italy and Bontex de Mexico C.V., Mexico, and its majority-owned
subsidiary, Bontex Hong Kong Limited, (the Company) are included in the
consolidated financial statements after elimination of significant
intercompany accounts and transactions.

Foreign Currency Translation - The financial statements of the Company's
subsidiaries outside the United States are measured using the local currency
as the functional currency. Assets and liabilities of these foreign
subsidiaries are translated into U.S. dollars at the rates of exchange as of
the balance sheet date. The resulting translation adjustments are included
as a separate component of stockholders' equity. Translation gains or losses
for Bontex de Mexico C.V., a wholly-owned subsidiary located in a highly
inflationary country, are not material, and as such, are included as a
separate component of stockholders' equity. Income and expense items are
translated at weighted average monthly exchange rates in effect during the
year. Gains and losses from foreign currency transactions are included in
net income (loss).

Cash Equivalents - For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.

Inventories - Inventories are stated at the lower of cost or market. Cost of
inventories maintained in North America is determined on the last-in,
first-out (LIFO) and in Europe on the first-in, first-out (FIFO) and weighted
average bases.

Property, Plant and Equipment - Property, plant and equipment are stated at
cost. Machinery and equipment held under capital leases are stated at the
present value of minimum lease payments at the inception of the lease. The
Company capitalizes interest cost as a component of the cost of major
construction in progress. Capitalized interest during the years ended June
30, 1997, 1996 and 1995 totaled zero, $142 and $8, respectively.

Depreciation and Amortization - Depreciation is provided by the straight-line
method over the estimated useful lives of the related assets. Estimated
useful lives are 10 to 40 years for buildings and building improvements, and
3 to 25 years for machinery, furniture and equipment. Machinery and
equipment held under capital leases are amortized by the straight-line method
over the shorter of the lease term or estimated useful life of the asset.
Amortization of assets held under capital leases is included in depreciation
and amortization of property, plant and equipment.

Other Assets - Other assets consist principally of deferred loan costs,
trademarks and various deposits. The deferred loan costs are amortized over
the life of the loans. Trademark costs are amortized on a straight-line
basis over five years.
<PAGE>
Financial Instruments - The Company enters into interest rate swap
transactions to manage its interest rate exposure. Income or expense arising
from these transactions is accounted for as an adjustment to interest expense
over the life of the agreements. The Company has also entered into forward
foreign currency exchange contracts to manage the exposure of sales by Bontex
S.A. which are denominated in U.S. dollars to changes in foreign currency
exchange rates. The contracts mature at various dates, are valued at fair
value and the resulting gain or loss included in net income (loss).

Revenue Recognition - Sales and cost of sales are recognized at the time of
product shipment or delivery to the customer, based on shipping terms.

Use of Estimates and Forward-Looking Data - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Except for the historical
data set forth herein, certain forward-looking information is contained in
these disclosures. Actual amounts may differ from these projections.
Factors that could cause or contribute to such differences include inherent
limitations of model characteristics and assumptions.

Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - Statement of Financial Accounting Standards No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," was issued in June 1996, and is effective for transfers and
servicing of financial assets and extinguishment of liabilities after
December 31, 1996. Adoption of this statement did not have a material impact
on the Company's consolidated financial position, results of operations, or
liquidity.

Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of - The
Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of,"
on July 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on the Company's consolidated financial position, results of
operations, or liquidity.

Income Per Share - Income per share has been computed on the basis of the
number of shares outstanding during each year (1,572,824 shares). The
calculation of weighted average shares outstanding does not include the
effect of common stock options since their impact on the weighted average
shares outstanding is less than three percent.
<PAGE>
Stock Options - In connection with the granting of stock options in 1997, the
Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123. As such, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.

Reclassification - Certain reclassifications have been made to the 1996
consolidated financial statements to conform with the 1997 presentation.

2. INVENTORIES

Cost of inventories of approximately $2,517 in 1997 and $1,716 in 1996, is
determined by the last-in, first-out method (LIFO). Replacement costs for
LIFO inventories approximated $2,862 in 1997 and $2,346 in 1996. Inventories
of approximately $2,759 in 1997 and $3,779 in 1996, are determined by the
first-in, first-out (FIFO) and weighted average bases.

<TABLE>
Inventories are summarized as follows:

1997 1996
<S> <C> <C>
Finished goods $ 2,908 $ 3,731
Raw materials 2,067 1,791
Supplies 646 603
------ ------
Inventories at FIFO and
weighted average cost 5,621 6,125
LIFO reserves 345 630
------ ------

$ 5,276 $ 5,495
====== ======
</TABLE>

During 1997, 1996 and 1995, LIFO layers were reduced resulting in charging
lower inventory costs to cost of sales of $37, $91 and $173, respectively.

3. BUSINESS SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS

On January 2, 1997, Bontex, Inc. completed a reorganization plan which
changed, among other things, its name from Georgia Bonded Fibers, Inc. and
the state of incorporation to Virginia from New Jersey. The reorganization
did not result in any change in business, management, net worth, assets or
liabilities of the Company.
<PAGE>
Bontex, Inc. and all majority-owned subsidiaries are predominantly engaged in
the manufacturing and distribution of uncoated and coated BONTEX (registered
trademark) elastomeric fiberboard products. The Company operates
manufacturing facilities at Bontex USA in North America and Bontex S.A. in
Belgium. BONTEX (registered trademark) products are primarily used as an
insole material in footwear, as well as visorboard in headwear, stiffener and
laminating base for luggage, leathergoods and allied industries globally.

Export sales from Bontex USA totaled $13,776, $9,761 and $9,161 in 1997, 1996
and 1995, respectively. Sales to Asian countries represent approximately 48,
44 and 47 percent of total export sales for the Company in 1997, 1996 and
1995, respectively.

For the past three years, sales to one customer ranged from approximately 6
percent to 9 percent of consolidated net sales.

Information related to the North American and European operations follows:
<TABLE>
<CAPTION>

North American European
Operations Operations Eliminations Consolidated
<S> <C> <C> <C> <C>
1997:
Total assets $ 15,551 $ 19,801 $ (2,446) $ 32,906
Total liabilities 6,320 15,656 (585) 21,391
Net sales 21,141 29,709 (517) 50,333
Income before income taxes 1,105 1,741 - 2,846
Net income 784 949 - 1,733

1996:
Total assets $ 15,110 $ 20,412 $ (2,341) $ 33,181
Total liabilities 6,540 17,090 (757) 22,873
Net sales 18,486 29,507 (375) 47,618
Loss before income taxes (188) (585) (9) (782)
Net loss (60) (531) (11) (602)

1995:
Total assets $ 14,311 $ 27,426 $ (2,210) $ 39,527
Total liabilities 5,785 23,310 (754) 28,341
Net sales 19,735 31,541 (278) 50,998
Loss before income taxes (933) (1,424) 11 (2,346)
Net loss (615) (854) 11 (1,458)
</TABLE>

Retained earnings of foreign operations not available for distribution
amounted to approximately $846 and $579 at June 30, 1997 and 1996,
respectively.
<PAGE>
4. LONG-TERM DEBT AND FINANCING AGREEMENTS

The following long-term debt was outstanding as of June 30, 1997 and 1996:

1997 1996
<S> <C> <C>
8.50% loan payable to a bank in the
United States in quarterly installments
of $80 through July 2001; collateralized
by accounts receivable, inventory and
other noncurrent assets in the U.S. and
subject to various loan covenants $ 1,360 $ -

10.50% loan payable to a bank in the United
States in quarterly installments of $77
through June 2001; collateralized by accounts
receivable and inventory and other noncurrent
assets in the U.S. and subject to various loan
covenants. Refinanced August 1996 - 1,538

7.72% loan payable to an agency of the Belgian
government in ten annual installments beginning
May 15, 1992. Four annual installments of $78
are outstanding at June 30, 1997 311 447

7.72% loan payable to an agency of the Belgian
government in ten annual installments beginning
September 1995 to 2004. Eight annual installments
of $69 are outstanding at June 30, 1997 556 718

6.15% loan payable to an agency of the Belgian
government in ten annual installments of $111
beginning September 1997 to 2006 1,112 104

12.25% loan payable to a bank in Italy in monthly
installments of $10 through March 1997; collateralized
by plant and equipment in Italy - 89
------ ------

3,339 2,896

Less long-term debt due currently 578 566
------ ------

Long-term debt $ 2,761 $ 2,330
====== ======
</TABLE>
<PAGE>
The principal payments of long-term debt are as follows:

<TABLE>
<CAPTION>
<S> <C>
1998 $ 578
1999 578
2000 578
2001 578
2002 262
Thereafter 765
------

Total $ 3,339
======
</TABLE>

The loans payable to an agency of the Belgian government have a mortgage on
Bontex S.A.'s buildings and the right to request a second mortgage on the
buildings.

European operations have short-term credit facilities totaling approximately
$7,976 and $8,429 at June 30, 1997 and 1996, respectively. As of June 30,
borrowings under these facilities were as follows:
<TABLE>
<CAPTION>

1997 1996
<S> <C> <C>
Short-term bank loans with various interest
rates between 3.85% and 9.99% $ 6,588 $ 8,187
Overdrafts 233 242
------ ------

$ 6,821 $ 8,429
====== ======
</TABLE>

Five banks in Belgium share a security interest in most of the assets of
Bontex S.A. for half the amount of the credit facilities granted, and the
right to request a security interest in the amount of the other half of the
credit facilities granted. As of June 30, 1997 and 1996, one of the bankers
under these facilities had the right to request a security interest.

Bontex USA has secured lines of credit arrangements with a bank whereby
Bontex USA may borrow up to $1,750 at the one month London Inter Bank Offered
Rate (LIBOR) plus 2.50 percent (8.19 percent at June 30, 1997). At June 30,
1997 and 1996, Bontex USA had borrowings of $1,198 and $987, respectively,
outstanding under lines of credit. The secured lines of credit are
collaterized by the same security as the refinanced long-term debt discussed
below.

Consolidated weighted average interest rates on short-term borrowings at June
30, 1997 and 1996 are 7.9 and 8.0 percent, respectively.
<PAGE>
During 1997 and 1996, Bontex USA was subject to various loan covenants under
its secured debt agreements and has pledged certain current and noncurrent
assets as security. Bontex USA was in compliance with the applicable
covenants at June 30, 1997 and 1996, including the maintenance of certain
minimum financial ratios and borrowing base requirements. In August 1996,
Bontex USA refinanced its previous long-term debt with a new secured debt
agreement resulting in a $38 write-off of deferred financing costs related to
the early extinguishment of debt which was recognized during fiscal 1997.

5. INCOME TAXES

The U.S. and foreign components of the provision (benefit) for income taxes
are presented as follows:

<TABLE>
<CAPTION>
Current Deferred Total

<S> <C> <C> <C>
1997:
Federal $ 41 $ 246 $ 287
State (1) 29 28
Foreign 229 569 798
----- ------ -------
$ 269 $ 844 $ 1,113
===== ====== =======

1996:
Federal $ (91) $ (49) $ (140)
State - (5) (5)
Foreign 298 (333) (35)
----- ------ ------

$ 207 $ (387) $ (180)
===== ====== =======

1995:
Federal $(136) $ (174) $ (310)
State (1) (7) (8)
Foreign 134 (704) (570)
----- ------ ------

$ (3) $ (885) $ (888)
===== ====== =======
</TABLE>
<PAGE>
The provision (benefit) for income taxes differs from the expected tax
expense (benefit), computed by applying the U.S. Federal corporate rate to
income or loss before income taxes as follows:

<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal income tax at statutory rate $ 968 $ (265) $ (798)
Increase (reduction) in income taxes
resulting from:
Foreign Sales Corporation (96) - (23)
Foreign income(loss) at other than
U.S. rates 116 64 (115)
State and local taxes, net of federal
income tax benefit 18 (3) (5)
Other differences, net 107 24 53
------ ------ ------
Provision for income taxes $ 1,113 $ (180) $ (888)
====== ====== ======

Effective income tax rate 39% 23% 38%

U.S. Federal statutory income tax rate 34% 34% 34%

</TABLE>
The components of deferred tax assets and liabilities at June 30, 1997 and
1996 are presented below:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 22 $ 25
Inventories, principally due to additional costs
capitalized for tax purposes 101 97
Other assets, due to difference in amortization of
trademarks 136 118
Accrued pension and retirement benefits 144 144
Net operating loss carryforwards 277 1,130
Alternative minimum tax credit carryforwards 88 90
Other 159 90
------ ------
Total gross deferred tax assets 927 1,694
------ ------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capital gain recognition (690) (554)
Other (24) (22)
------ ------
Total gross deferred tax liabilities (714) (576)
------ ------
Net deferred tax asset $ 213 $ 1,118
====== ======
</TABLE>
<PAGE>
The U.S. and foreign components of the net deferred tax asset at June 30,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Current Noncurrent Total
<S> <C> <C> <C>
1997:
U.S. Operations $ 136 $ (54) $ 82
European Operations 185 (54) 131
---- ----- ------
$ 321 $ (108) $ 213
==== ===== ======

1996:
U.S. Operations $ 91 $ 266 $ 357
European Operations 585 176 761
---- ----- ------
$ 676 $ 442 $ 1,118
==== ===== ======
</TABLE>

At June 30, 1997, in addition to the alternative minimum tax credit
carryforward of $88 at Bontex USA, the Company had approximately $747 ($611
at Bontex USA and $136 at Bontex S. A.) in net operating loss carryforwards
to offset future taxable income, of which $250 and $361 at Bontex USA expire
in 2010 and 2011, respectively. The net operating loss carryforwards at
Bontex S.A. have no expiration date.

Deferred tax assets at June 30, 1997 include $311 related to the alternative
minimum tax credit and net operating loss carryforwards at Bontex USA, and
$54 related to net operating loss carryforwards at Bontex S.A. For 1996 and
1995 the Company experienced losses before income taxes of approximately $782
and $2,346, respectively. The Company realized $853 of the deferred tax
assets during 1997 as a result of generating taxable income. The Company
will need to generate future taxable income of $870 at Bontex USA and $136 at
Bontex S.A. during the tax carryforward periods to realize the alternative
minimum tax credit and net operating loss carryforwards.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon
the level of historical taxable income, anticipation of future taxable income
over the periods which the deferred tax assets are deductible, reversal of
the temporary differences and available tax planning strategies, management
believes it is more likely than not the Company will realize these deferred
tax assets.

At June 30, 1997, the Company has not recognized a deferred tax liability of
$90 for the cumulative amount of undistributed income of its foreign
subsidiaries, because there are no plans to pay dividends in the foreseeable
future. As of June 30, 1997, undistributed income of the foreign
subsidiaries was approximately $1,799, of which approximately $846 is not
available for distribution.
<PAGE>
6. RETIREMENT AND COMPENSATION PLANS

The Company has pension plans covering substantially all full-time domestic
employees and certain foreign employees. The benefits from the Company's
domestic defined benefit plan are based upon years of service and the
employee's average earnings for the five highest consecutive years of
compensation during the ten years immediately preceding retirement. The
Company's funding policy is to contribute amounts to the plan sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, and any such additional amounts as the Company
may determine to be appropriate from time to time. Annual provisions for
accrued pension costs are based on independent actuarial valuations.

The Plan's funded status and amounts recognized in the Company's consolidated
financial statements at June 30 for its United States pension plan are as
follows:

<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits (1997, $4,225 and 1996,
$4,021) $ (4,235) $ (4,044)
====== ======
Projected benefit obligation for service
rendered to date $ (5,242) $ (5,217)
Plan assets 4,868 4,346
------ ------
Plan assets less than projected benefit
obligation (374) (871)
Unrecognized prior service cost 162 177
Unrecognized net loss from past experience
different from that assumed (68) 429
Unrecognized net asset at July 1, 1996, net
of amortization (115) (131)
------ ------
Accrued pension cost $ (395) $ (396)
====== ======

</TABLE>
<PAGE>
The Company's net periodic pension expense for the years ended June 30, 1997,
1996 and 1995 include the following components:

<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned during
the period $ 175 $ 200 $ 243
Interest cost on projected benefit
obligation 370 366 344
Net amortization and deferral 190 2 180
---- ---- ----
735 568 767
Less actual return on assets and
employee contributions 620 407 530
---- ---- ----

Net pension cost $ 115 $ 161 $ 237
==== ==== ====
</TABLE>

The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations was 7.75 percent for 1997, 1996
and 1995. The rate of increase for future compensation levels used in
determining the obligation was 5.0 percent for 1997, 4.5 percent for 1996 and
5.5 for 1995. The expected long-term rate of return on plan assets in 1997,
1996 and 1995 was 9.0 percent.

Pension assets are held under a group annuity contract with an insurance
company. Certain amounts are commingled with the general assets of the
insurance company and the remainder is invested in separate accounts, which
include domestic equity, domestic government, corporate and private placement
bonds and domestic real estate equity, of the insurance company, at fair
value.

The pension expense relating to the foreign subsidiary's insured pension and
disability plan amounted to $69, $86, and $76 in 1997, 1996 and 1995,
respectively. Benefits are based on years of service and the average of the
last five years annual earnings.

The Company adopted a tax deferred compensation benefit plan for certain
executives during fiscal year 1997. The plan allows the employee to defer up
to four percent of his compensation with a Company match of up to one percent
of compensation. The Company's contribution funds life insurance policies on
each executive, with the Company as owner and beneficiary. The Company's
expense for the plan in 1997 totaled $3.

The Company provides certain supplemental executive compensation to the
President. Expenses related to these benefits were approximately $146 in
1997, $143 in 1996 and $132 in 1995. The agreement contains a change in
control provision that would accelerate the payment of these benefits. The
maximum liability under this agreement, in such event, would be approximately
$700.
<PAGE>
On October 3, 1994, the Board of Directors adopted a deferred compensation
agreement, with Hugo N. Surmonte, Chairman of the Board of Directors. The
deferred compensation agreement required the Company pay Mr. Surmonte $150
per year, after his retirement from the Company and during his lifetime, and
if Mr. Surmonte's death preceded his spouse's death, that such amounts shall
be paid to his spouse for the remainder of her life. On October 5, 1994, Mr.
Surmonte retired from the Company. On October 10, 1994, Mr. Surmonte died
and per the agreement his widow, Marie G. Surmonte,received the benefit until
her death on June 2, 1996. During fiscal year 1996, the Company paid $138 to
Mrs. Surmonte, and reversed the remaining balance of $159 for this accrued
liability.

During fiscal year 1997, the Company has granted stock options to a key
executive to purchase 80,000 shares of the Company's common stock. The
option price of $4.50 per share on all outstanding options is equal to the
fair market value of the stock at the date of grant. Options are exercisable
from the date of grant and have a term of 10 years.

The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. The per shares weighted-
average fair value of stock options granted during 1997 was $2.77 on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: no expected dividend yield, risk-free interest
rate of 6.6 percent expected volatility of 36.7 percent, and an expected life
of ten years. Had compensation cost for the granted options been determined
consistent with SFAS No. 123, the Company's net income and net income per
share for 1997 would have been reduced to the pro forma amounts indicated
below:

<S> <C>
Net income:
As reported $ 1,733
=======
Pro forma $ 1,592
=======

Net income per share:
As reported $ 1.10
=======
Pro forma $ 1.01
=======

</TABLE>

7. FINANCIAL INSTRUMENTS

The Company uses various financial instruments in the normal course of
business. By their nature, all such instruments involve risk, and the
Company's maximum potential loss may exceed amounts recorded in the balance
sheet. As is customary for these types of instruments, the Company does not
require collateral or other security from other parties to these instruments.
However, because the Company manages exposure to credit risk through credit
approvals, credit limits and monitoring procedures, the Company believes that
reserves for losses are adequate.
<PAGE>
The Company uses derivative financial instruments for the purpose of hedging
currency and interest rate exposures. As a policy, the Company does not
engage in speculative or leveraged transactions, nor does the Company hold or
issue financial instruments for trading purposes.

Foreign Exchange Contracts - Bontex S.A. entered into a $5,000 option
contract during 1995, to manage the exposure of sales denominated in U.S.
dollars to changes in foreign currency exchange rates. The contract matured
in 1996. The Company entered into no new foreign exchange contracts during
1997 and 1996.

Interest Rate Swaps - The Company has two outstanding interest rate swap
agreements with banks having an aggregate notional amount of $1,889, of which
$500 and $1,389 will terminate on January 20, 1998 and June 15, 1999,
respectively. These swap agreements provide for the payment of interest
based on fixed rates ranging from 5.80 percent to 6.55 percent, and remain
unchanged over the term of the agreements. The floating rates of the debt
agreements are based on the Brussels Inter Bank Offering Rate (BIBOR) or the
London Inter Bank Offered Rate (LIBOR) and are reset every 90 days based on
market conditions. The nature of the swap agreements changes certain
variable rate debt to fixed rate debt. Interest rate differentials paid or
received under these swaps are recognized over the life of the contracts as
adjustments are made to the effective yield of the underlying debt. An
interest premium of $67, $34 and $20 was paid during 1997, 1996 and 1995,
respectively. The Company may be exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreement.
However, the Company does not anticipate such nonperformance.

Fair Value of Financial Instruments - The following assumptions were used by
the Company to estimate the fair value of its financial instruments: The
carrying amounts reported in the balance sheet for cash, cash equivalents,
trade accounts receivable, other receivables, short-term borrowings, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of long-term debt is estimated
using discounted cash flows based on the Company's incremental borrowing
rates, and approximate the carrying amount in the balance sheets. Unrealized
gains or losses on the fair value of foreign exchange contracts and interest
rate swap agreements are estimated based on current interest and foreign
exchange rates.

The contract or notional amounts and estimated fair value of the Company's
material off balance sheet financial instruments at June 30, 1997 and 1996
are as follows:

1997 1996
Contract or notional Fair Value Contract or notional Fair Value
Amount Amount
<S> <C> <C> <C> <C>
Interest rate swaps $1,889 $ (76) $2,892 $ (108)
</TABLE>

The Company entered into an interest rate swap for $1 million subsequent to
June 30, 1997 which is not reflected in the above table, but included in the
following Market Risk of Financial Instruments disclosure. This interest
rate swap replaces the $500 agreement currently outstanding and will
terminate on January 20, 2000.
<PAGE>
Market Risk of Financial Instruments - Market risk is the risk of loss
arising from adverse changes in market rates and prices. The following
disclosures provide certain forward-looking data concerning potential
exposures to market risk. By its nature, such forward-looking information is
an estimate of what could occur in the future and is dependent on model
characteristics and assumptions. As a result, actual future gains and losses
will differ from those reported. These disclosures are not precise
indicators of expected future losses, but rather are indicators of remote or
reasonably possible losses.

The following table provides certain financial information concerning the
Company's derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates. For interest rate swaps,
the table presents expected notional amounts and weighted average interest
rates by expected (contractual) maturity dates. For debt obligations, the
table presents expected principal balances and related weighted average
interest rates by expected maturity dates.

<TABLE>
<CAPTION>
Derivative financial instruments (held for other than trading purposes):

Expected Balances and Rates (Unaudited)
Fair --------------------------------------------------
As of June 30, Value 1997 1998 1999 2000 2001 2002

<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Variable to fixed $ (76) $ 1,889 $ 2,389 $ 1,000 - - -
Average pay rate 6.38% 6.45% 6.40% - - -

Other financial instruments:

Expected Balances and Rates (Unaudited)
Fair --------------------------------------------------
As of June 30, Value 1997 1998 1999 2000 2001 2002

Lines of Credit, net of
Interest Rate Swaps
Variable rate debt $ 6,130 $ 6,130 $ 5,630 $ 7,019 $ 8,019 $ 8,019 $ 8,019
Average variable interest rate 7.90% 7.90% 7.90% 7.90% 7.90% 7.90%

Long-term Debt
Fixed rate debt $ 3,339 $ 3,339 $ 2,761 $ 2,183 $ 1,605 $ 1,027 $ 765
Average fixed interest 7.51% 7.44% 7.34% 7.15% 6.76% 6.58%
</TABLE>

The Company's interest rate swaps fix the rate of interest for $1.9 million
of $8 million total variable rate debt. In the event of lowering BIBOR or
LIBOR rates, the Company is exposed to higher fixed rates. The $6.1 million
variable rate debt not covered by the interest rate swaps is subject to
market risk of rate changes. In the above analysis, current rates are those
rates paid by the Company during the previous twelve months, and it assumes
that future interest rates will remain constant during the next four years.
Future variable interest rates are estimates of the Company's future cost of
capital, and are based on the Company's previous 3 years of interest rates.
The level of financing for the lines of credit are assumed to be the same for
all periods. The above market risk sensitive analysis does not fully reflect
the potential net market risk exposure, because other market risk exposures
may exist in other transactions, including commodity positions and other
financial instruments. <PAGE>

8. COMMITMENTS AND CONTINGENCIES

Regulatory and Environmental Matters - As with all related manufacturers, the
Company is subject to regulations by various federal, state, foreign and
local agencies concerning compliance with environmental control statutes.
These regulations impose limitations on the discharge of effluent and
emissions into the environment, and establish standards for solid and
hazardous waste disposal, treatment, and storage, as well as require the
Company to obtain and operate in compliance with the conditions of
environmental permit. The Company believes that it is in substantial
compliance with such existing domestic and foreign environmental statues and
regulations. Failure to comply with applicable environmental control
standards could result in interruption of operations or could require
additional expenditures at these facilities.

The Company has made and intends to continue to make capital investments,
operating expenditures, and production adjustments in connection with
compliance to environmental laws and regulations. Since the Company is
essentially comprised of two fiberboard plants, water quality discharge
remains the primary environmental concern. Construction of waste water
treatment facilities has been completed at both plants.

On July 22, 1994, the Company entered into a Special Consent Order with the
Virginia Department of Environmental Quality (DEQ) committing the Company to
construct a waste water treatment facility to address certain effluent
limitations in its Virginia Pollution Discharge Elimination Permit.
Construction of the USA waste treatment facility was completed during fiscal
1996 at an aggregate cost of almost $2.0 million. The waste water treatment
plant appears to be operating within compliance of applicable environmental
requirements.

The Belgium government has imposed new regulations requiring a formal water
treatment plant to be installed at Bontex S.A. The waste water treatment
plant at Bontex S.A. has been completed during fiscal 1997 and appears to be
operating within compliance of applicable environmental requirements.

Estimates of the costs of future environmental compliance are unaudited and
may differ from projected costs due to, among other things, continued
emergence of newer environmental laws and regulations and improving
efficiencies in environmental control or process technology developments. At
the present time, based on preliminary estimates, the Company anticipates
that consolidated capital expenditures for environmental compliance in fiscal
1998 will aggregate approximately $400; however, this estimate could change
due to ultimate circumstances.
<PAGE>
Litigation - In the normal course of business, the Company is subject to
proceedings, lawsuits and other claims. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. There are no
legal proceedings, lawsuits or other claims pending against or involving the
Company which, in the opinion of management, will have a material adverse
impact upon the consolidated results of operations or financial condition of
the Company.

Purchase Commitments - In connection with purchasing certain commodities
(pulps and latex) for future manufacturing requirements, the Company enters
into a number of purchase commitments, as deemed appropriate, to manage the
effects of market price fluctuations and to secure adequate raw material
supplies. These purchase commitments have limited terms and the Company
expects future sales will be sufficient to meet these requirements.

Leases - Rental expenses for all operating leases amounted to $113, $131 and
$112 in 1997, 1996 and 1995, respectively. The Company anticipates future
rental expense for operating leases to approximate $110 each year for the
next five years.
<PAGE>
Independent Auditors' Report

KPMG PEAT MARWICK LLP
10 S. Jefferson Street, Suite 1710
Roanoke, VA 24011-1331

Independent Auditors' Report

The Board of Directors and Stockholders
of Bontex, Inc.:

We have audited the accompanying consolidated balance sheets of Bontex, Inc.
(formerly Georgia Bonded Fibers, Inc.) and subsidiaries as of June 30, 1997
and 1996, and the related consolidated statements of income (loss), changes
in stockholders' equity, and cash flows for each of the years in the three-
year period ended June 30, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bontex,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

August 13, 1997

<PAGE>
- --------------------------------
DIRECTORS, EXECUTIVES & OFFICERS
- --------------------------------

James C. Kostelni # Chairman of the Board, President, Chief
Executive Officer, Director

William J. Binnie #* Director

Michael J. Breton Corporate Director of International
Operations, Director

William B. D'Surney Director

David A. Dugan Controller and Corporate Secretary

Charles W. J. Kostelni Corporate Controller

Jeffrey C. Kostelni Treasurer and Chief Financial Officer,
Director

Frank B. Mayorshi #* Director

Larry E. Morris Technical and Sales Director, Director

Dr. Joseph F. Raffetto Director

Patricia S. Tischio Assistant Corporate Secretary, Director

Robert J. Weeks #* Director

# Member of Executive Committee
* Member of Audit Committee

- -------
COUNSEL
- -------

Woods, Rogers & Hazlegrove, P.L.C. Roanoke, Virginia
Attorneys at Law

- --------------------
INDEPENDENT AUDITORS
- --------------------

KPMG Peat Marwick LLP Roanoke, Virginia
Certified Public Accountants

- --------------
TRANSFER AGENT
- --------------

Registrar & Transfer Company Cranford, New Jersey

<PAGE>
LOCATIONS North American Warehouse
- ------------------------------------------- Facilities
Newark, New Jersey
Global Headquarters and U. S. Manufacturing Franklin, Tennessee
Bontex, Inc. St. Louis, Missouri
One Bontex Drive Cambridge, Ontario, Canada
Buena Vista, Virginia 24416-1500 Montreal, Quebec, Canada
800-733-4234 Village Huron, Quebec, Canada
E-mail: bontex @ bontex.com
http://www.bontex.com SHAREHOLDERS'
INFORMATION
European Headquarters and Manufacturing ----------------------------
Bontex S. A.
Rue Slar Annual Meeting
4801 Stembert, Belgium 10:30 a.m. October 14, 1997
E-mail: bontexsa @ mail.att.net Best Western Inn at Hunt Ridge
Willow Springs Drive
Sales and Distribution Centers Lexington, Virginia 24450
Bontex Italia S.r.l.
Via Francia N. 1 Independent Auditors
37069 Villafranca KPMG Peat Marwick LLP
Verona, Italy 10 S. Jefferson Street
E-mail: bontexit @ ats.it Suite 1710
Roanoke, Virginia 24011-1331
Bontex de Mexico, S. A. de C. V.
Boulevard Mariano Escobedo #801 Registrar and Transfer Agent
Colonia Andrade, C. P. 37370 Registrar and Transfer Company
Leon, Guanajuato 10 Commerce Drive
Mexico Post Office Box 1010
Cranford, New Jersey 07106
Bontex Hong Kong Limited
2108 Mega Trade Centre
1-6 Mei Wan Street Form 10-K
Tsuen Wan, Hong Kong A copy of the Company's 10-K
filed with the Securities and
International Liaison Offices Exchange Commission is
Bontex Australia available without charge to
20 Munro Street any shareholder.
Macleod 3085
Victoria, Australia Requests should be sent to the
attention of:
Bontex Korea
Rm. 601, Songnam Bldg. Corporate Controller
76-1, 4GA, Chungang-Dong Bontex, Inc.
Chung-Gu, Busan, Korea One Bontex Drive
Buena Vista, Virginia 24416-1500
Bontex Taiwan
8F1, No. 52, Sec. 2
Chung Shan N. Rd. --------------------------------
Taipei, 10419, Taiwan Bontex (registered trademark)

The Bontex (registered
trademark) logo is a registered
trademark of Bontex, Inc.

Bontex, Inc, is an equal
opportunity employer
--------------------------------
(Recycled paper symbol)
Recycled Paper
<PAGE>
(Bontex symbol) BONTEX/BONFOAM

Cushion Insole Products

BONFOAM (registered trademark)/CONTOUR (registered trademark)/MAXXON
(registered trademark) dual density cushion insoles from BONTEX (registered
trademark) meet the challenge of providing comfort and protecting feet from
harsh environmental discomforts. Whether the footwear you manufacture is
bound for hard ground, wet and cold conditions, high impact and abrasive
conditions, or just leisure wear, BONFOAM (registered trademark)/CONTOUR
(registered trademark)/MAXXON (registered trademark) Dual or Tri-Density
cushion insoles combined with BONTEX (registered trademark) reduces internal
shoe discomforts.

BONFOAM (registered trademark)/CONTOUR (registered trademark)/MAXXON
(registered trademark) products can be combined with any BONTEX (registered
trademark) product to enable the shoe bottom to conform with the shape of the
foot and distribute pressure during any activity. The dynamic interaction
between the foot and weight transfer is accommodated and high pressure points
are minimized. Customers will see and feel the comfort the very first time
they try on your footwear.

MORI-FRESH (registered trademark) treated which retards the growth of harmful
bacteria fungi and mold.

(Photo appears here - Cowboy on horse)

(Bontex symbol) BONTEX (registered trademark)

<PAGE>
(Bontex symbol) BONTEX

Research and Development

BONTEX (registered trademark) has a SATRA certified laboratory.

BONTEX (registered trademark) is committed to total quality management as
demonstrated by certification ISO 9001 for the design, development and
manufacture of elastomeric saturated cellulose fiberboard products for
footwear, luggage, headwear, automotive and allied industries.

BONTEX (registered trademark) products receive the American Podiatrist
Medical Association (APMA) seal of acceptance after undergoing stringent
clinical and laboratory tests. The APMA seal of acceptance means BONTEX
(registered trademark) products conform to APMA guidelines and were found to
assist in foot health and comfort.

BONTEX (registered trademark) has a research and development interface
program available on a partnership basis with our customers. BONTEX
(registered trademark) welcomes the opportunity to explore new applications
and new formulations of elastomeric impregnated fiberboard products.

BONTEX (registered trademark) products are MORI-FRESH (registered trademark)
treated which retards the growth of harmful bacteria, fungi and mold.

(Photo appears here - Pyrex lab decanters)

(Bontex symbol) BONTEX (registered trademark)

<PAGE>

EXHIBIT 21
----------

LISTING OF SUBSIDIARIES

There are five active subsidiaries of the Company:
<TABLE>
<CAPTION>

Name Under which
Name of Subsidiary Jurisdiction of Incorporation Subsidiary Does Business
------------------ ----------------------------- ------------------------
<S> <C> <C>
Bontex S. A. Belgium Same

Bontex Italia S.r.l. Italy Same

Bontex, Inc. Virgin Islands Same

Bontex de Mexico Mexico Same

Bontex Hong Kong Limited Hong Kong Same
</TABLE>

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BONTEX,
INC.'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR
ENDED JUNE 30, 1997, AS SET FORTH IN THE COMPANY'S 1997 ANNUAL REPORT TO
STOCKHOLDERS AND ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,373
<SECURITIES> 0
<RECEIVABLES> 14,292
<ALLOWANCES> 119
<INVENTORY> 5,276
<CURRENT-ASSETS> 21,350
<PP&E> 22,663
<DEPRECIATION> 11,631
<TOTAL-ASSETS> 32,906
<CURRENT-LIABILITIES> 18,336
<BONDS> 2,761
157
0
<COMMON> 0
<OTHER-SE> 11,358
<TOTAL-LIABILITY-AND-EQUITY> 32,906
<SALES> 50,333
<TOTAL-REVENUES> 50,417
<CGS> 34,241
<TOTAL-COSTS> 46,324
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 1,247
<INCOME-PRETAX> 2,846
<INCOME-TAX> 1,113
<INCOME-CONTINUING> 1,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,733
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10

</TABLE>