UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-44764
BALTEK CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2646117
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Fairway Court, P.O. Box 195, Northvale, New Jersey 07647
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
201-767-1400
------------
Registrant's telephone number, including area code
(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Common shares of stock outstanding as of November 9, 1998: 2,523,261 shares
<PAGE>
BALTEK CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1998 and December 31,
1997
Consolidated Statements of Income and Retained Earnings for the Three
and Nine Months Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
<TABLE>
<CAPTION>
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 747,846 $ 1,177,003
Accounts receivable, net ........................................... 7,058,853 5,102,719
Inventories ........................................................ 14,181,007 14,599,348
Prepaid expenses ................................................... 376,169 298,398
Other .............................................................. 1,528,044 1,325,572
----------- -----------
Total current assets ...................................... 23,891,919 22,503,040
PROPERTY, PLANT AND EQUIPMENT, Net ................................... 12,736,856 11,737,754
TIMBER AND TIMBERLANDS ............................................... 7,667,265 7,021,392
OTHER ASSETS ......................................................... 454,595 493,371
----------- -----------
Total assets .............................................. $44,750,635 $41,755,557
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ...................................................... $ 4,140,231 $ 1,550,000
Accounts payable ................................................... 2,343,958 3,071,482
Income tax payable ................................................. 205,441 56,712
Accrued salaries, wages and bonuses payable ........................ 1,173,802 1,040,388
Accrued expenses and other liabilities ............................. 1,202,841 908,581
Current portion of long-term debt .................................. 428,068 964,354
Current portion of obligation under capital lease .................. 368,991 336,791
----------- -----------
Total current liabilities ................................. 9,863,332 7,928,308
OBLIGATION UNDER CAPITAL LEASE ....................................... 1,058,414 1,343,199
LONG-TERM DEBT ....................................................... 901,484 1,671,647
UNION EMPLOYEE TERMINATION BENEFITS .................................. 266,302 290,763
----------- -----------
Total liabilities ......................................... 12,089,532 11,233,917
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)(continued)
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par; 5,000,000 shares authorized and unissued --- ---
Common stock, $1.00 par; 10,000,000 shares authorized,
2,523,261 shares issued and outstanding .......................... 2,523,261 2,523,261
Additional paid-in capital ......................................... 2,157,492 2,157,492
Retained earnings .................................................. 27,980,350 25,840,887
----------- -----------
Total stockholders' equity ................................ 32,661,103 30,521,640
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,750,635 $41,755,557
============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ..................... $ 16,365,737 $ 14,048,124 $ 50,081,620 $ 41,707,847
COST OF PRODUCTS SOLD ......... 12,147,085 10,690,368 37,692,601 31,891,959
SELLING , GENERAL AND
ADMINISTRATIVE EXPENSES ..... 2,783,199 2,442,727 8,673,250 7,650,055
------------ ------------ ------------ ------------
Operating income .. 1,435,453 915,029 3,715,769 2,165,833
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ........... (470,284) (172,027) (1,162,519) (472,749)
Foreign exchange gain (loss) 322,571 (63,067) 499,131 (213,054)
Other, net ................. 1,557 2,365 3,946 3,400
------------ ------------ ------------ ------------
Total ............. (146,156) (232,729) (659,442) (682,403)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .... 1,289,297 682,300 3,056,327 1,483,430
INCOME TAX PROVISION .......... 386,180 190,159 916,864 414,787
------------ ------------ ------------ ------------
NET INCOME .................... 903,117 492,141 2,139,463 1,068,643
RETAINED EARNINGS,
BEGINNING OF PERIOD ......... 27,077,233 24,576,741 25,840,887 24,000,239
------------ ------------ ------------ ------------
RETAINED EARNINGS,
END OF PERIOD ............... $ 27,980,350 $ 25,068,882 $ 27,980,350 $ 25,068,882
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING .... 2,523,261 2,523,261 2,523,261 2,523,261
============ ============ ============ ============
BASIC AND FULLY DILUTED
EARNINGS PER COMMON SHARE .. $ 0.36 $ 0.19 $ 0.85 $ 0.42
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months
Ended September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 2,139,463 $ 1,068,643
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,826,509 1,955,127
Foreign exchange (gain)loss ........................... (499,131) 213,054
Deferred taxes ........................................ 24,318 12,566
Changes in assets and liabilities, net of the effect of
foreign currency translation:
Accounts receivable ............................... (1,906,091) (567,826)
Income taxes ...................................... 172,020 112,569
Inventories ....................................... 418,341 648,978
Prepaid expenses and other current assets ......... (332,806) (339,655)
Other assets ...................................... 14,945 151,403
Accounts payable and accrued expenses ............. (315,409) (567,884)
Other ............................................. (25,227) 38,097
----------- -----------
Net cash provided by operating activities ...... 1,516,932 2,725,072
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisitions of property, plant and equipment ....... (2,428,325) (1,125,495)
Increase in timber and timberlands ...................... (1,043,159) (676,824)
----------- -----------
Net cash used in investing activities .......... (3,471,484) (1,802,319)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable, net ............... 2,592,581 (94,602)
Borrowings of long-term debt ............................ 559,851 1,434,377
Payments of long-term debt .............................. (1,904,366) (1,519,799)
Principal payments under capital lease .................. (252,585) (221,084)
----------- -----------
Net cash provided by (used in) financing
activities ..................................... 995,481 (401,108)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................... 529,914 (254,625)
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALTEK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (continued)
Nine Months
Ended September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS ............................... (429,157) 267,020
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ..................................... 1,177,003 1,114,659
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ........................................... $ 747,846 $ 1,381,679
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................. $ 890,396 $ 338,129
=========== ===========
Income taxes .......................................... $ 720,098 $ 311,479
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
BALTEK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The information included in the accompanying interim financial statements
is unaudited. In the opinion of management, all adjustments, consisting of
normal recurring accruals necessary for a fair presentation of the results
of operations, financial position and cash flows for the interim periods
presented have been reflected herein. The results of operations for the
interim periods are not necessarily indicative of the results to be
expected for the entire year. The statements should be read in conjunction
with the accounting policies and notes to consolidated financial
statements included in the Company's 1997 Annual Report on Form 10-K.
2. INVENTORIES
Inventories are summarized as follows:
September 30, December 31,
1998 1997
----------- -----------
Raw materials ...................... $ 5,640,644 $ 5,288,736
Work-in-process .................... 4,319,939 4,300,532
Finished goods ..................... 4,220,424 5,010,080
----------- -----------
$14,181,007 $14,599,348
=========== ===========
3. NOTES PAYABLE
During the quarter ended September 30, 1998 the Company renewed its
domestic credit facilty at substantially the same terms as the expiring
facility. The line of credit, which expires on May 31, 1999, bears
interest at the bank's prime rate less 3/4%. The maximum borrowing under
the line is $5,000,000.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which revised existing guidelines
for financial reporting of segment information. SFAS No. 131 is required
to be adopted for the year ending December 31, 1998. The Company has not
determined what effect, if any, this pronouncement will have on its
financial statements.
<PAGE>
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative under SFAS 133 depends on the intended use of the derivative
and its hedging designation. SFAS 133 is required to be adopted for the
Company's year ending December 31, 2000. The Company has not yet
determined the impact SFAS 133 will have on its results of operations or
financial position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Liquidity and Capital Resources
The Company's working capital ratio of 2.42:1 at September 30, 1998,
decreased from the ratio of 2.84:1 at December 31, 1997 due primarily to
fluctuations in accounts receivable, notes payable and inventories. Unused lines
of bank credit and the Company's working capital are considered by management to
be sufficient to support operations and fixed asset acquisitions for the
immediate future.
Results of Operations
Total sales increased 16% and 20% during the three and nine-month
periods ended September 30, 1998 as compared to the same periods in 1997. The
increase was due to improved core materials and shrimp sales.
Core material sales were $13,192,000 and $10,868,000 for the three
months ended September 30, 1998 and 1997, respectively, and $39,685,000 and
$32,913,000 for the nine months ended September 30, 1998 and 1997, respectively.
The continued robust economy has resulted in strong demand in all industries
that use core materials, including the largest customer group: the boating
industry. Many of the Company's end user markets, including boating, are highly
cyclical. Demand within those industries is dependent upon, among other factors,
inflation, interest rates and consumer confidence. Fluctuating interest rates
and other changes in economic conditions make it difficult to forecast short or
long range trends. Increases in core material sales in 1998 are also
attributable to sales of foam products that were introduced in 1996. The
increase in core material sales in 1998 compared to 1997 was attributable to
improved pricing and volume increases.
Shrimp sales were $3,173,000 and $3,180,000 for the three months ended
September 30, 1998 and 1997, respectively, and $10,397,000 and $8,795,000 for
the nine months ended September 30, 1998 and 1997, respectively. The increase is
due to higher volume of shrimp shipped; the average selling price for the nine
month periods ended September 30, 1998 and 1997 was about the same.
The gross margin improved for the three and nine months ended September
30, 1998 compared to the same periods in 1997. The margins for the Company's
core products improved in 1998, primarily due to improved pricing. Additionally,
margins during the nine months in 1997 were negatively affected by competitive
pricing pressure on the Company's balsa and foam products. The gross margin from
shrimp sales decreased in 1998 compared to 1997. The decrease is attributable to
a higher volume of shrimp purchased from outside suppliers, which have lower
margins than shrimp grown at the Company's own farms.
Selling, general and administrative expenses as a percentage of sales
declined in the first nine months of 1998 as compared to 1997. The decline was
due primarily to a better absorption of certain fixed expenses, as a result of
increased sales, partially offset by increases required in certain areas as a
result of the Company's growth.
Interest expense increased in 1998 as compared to 1997. In 1998 the
Company continued to borrow money for working capital purposes in Ecuador in
local currency (sucre) denominated loans as a natural hedge of the net
investment in Ecuador. Although these loans bear higher interest rates than U.S.
dollar loans, the Company expects to partially offset these higher interest
<PAGE>
rates with gains resulting from the expected devaluation of the sucre. This
practice increased interest expense in 1998 as compared to 1997 and created a
foreign exchange gain. The Company's interest rate on U.S. loans was lower in
1998 and its average borrowings were slightly lower in 1998 as compared to 1997.
The level of borrowing in all periods is related to the Company's working
capital needs and cash flows generated from operations.
The Company had a foreign exchange gain of $499,000 for the nine month
period ended September 30, 1998 as compared to a loss of $213,000 for the
comparable 1997 period. In March and September of 1998, the Ecuadorian
government weakened its currency's trading band against the dollar, effectively
devaluing the local currency by a similar amount. Translation gains and losses
are mainly caused by the relationship of the U.S. dollar to the foreign
currencies in the countries where the Company operates, and arise when
translating foreign currency balance sheets into U.S. dollars. The Company
utilizes foreign exchange contracts to hedge certain inventory purchases and may
also employ certain strategies whose objective is to reduce earnings and cash
flow volatility associated with foreign exchange rate changes. The Company has
not and does not intend to enter into foreign currency transactions for
speculative purposes. Management is unable to forecast the impact of translation
gains or losses on future periods due to the unpredictability in the fluctuation
of foreign exchange rates.
The provision for income taxes was at the rate of 30% and 28% of
pre-tax earnings for the three and nine-month periods ended September 30, 1998
and 1997, respectively.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any
computer programs and hardware as well as software products and certain
equipment and machinery that are date sensitive may recognize a date using "00"
as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.
The Company has divided the Year 2000 issue into two main areas:
internal information technology ("IT") and non-IT systems, including embedded
technology such as microprocessors; and external agents including critical
suppliers, customers and other third parties the Company utilizes for various
processing functions.
The Company is in the process of installing a new, fully integrated
Enterprise Resource Planning (ERP) system purchased from a third party vendor.
The ERP software is Year 2000 compliant. Implementation of mission-critical
systems is expected to be completed in the first quarter of 1999; other
non-critical systems are scheduled to be completed during the first and second
quarters of 1999. The decision to invest in a new ERP system was driven by the
need for a fully integrated management information system to support the planned
growth of the Company and not specifically to address Year 2000 compliance
issues. To fully utilize the capabilities of the ERP software and modernize its
existing systems the Company has invested approximately $280,000 in new computer
hardware and networking hardware and software in 1998. An investment of this
size in hardware is not expected on an annual basis hereafter, although
additional investments will be required in the future to enhance the Company's
use of information technology and computer hardware.
<PAGE>
Efforts to implement the ERP system and address certain Year 2000
issues are being accomplished concurrently. It is not practical therefore to
distinguish and estimate certain Year 2000 compliance costs, especially as they
relate to the Company's information technology. Total internal and external
costs in 1998 to implement the ERP system, purchase new computer hardware and
upgrade its existing network is expected to be approximately $300,000. Hardware
costs have been capitalized; internal costs and nearly all external costs have
been expensed as incurred. Certain expenditures will be required in the future
to maintain the technology base of the Company; such expenditures in the future
are not expected to be material. The Company may decide to utilize additional
capabilities of its ERP system and make use of other information technologies as
they become available in the marketplace. These expenditures will be largely
discretionary in that they are not mission-critical systems and will be
evaluated using a methodology similar to that used by the Company to evaluate
other capital expenditures.
Current plans call for the ERP system to be implemented in the U.S.
only, not in the Company's European or Ecuadorian subsidiaries. The Company has
identified all significant IT and non-IT applications that will require
modification at these locations. Completion of the modifications is expected by
the end of 1998 in Ecuador and by June 1999 in Europe.
The Company is in the process of assessing its Year 2000 exposure as it
pertains to non-IT systems, including manufacturing process control and key
third party relationships, such as vendors and customers. This includes the
process of identifying and prioritizing critical suppliers and customers and
communicating with them about their plans and progress in addressing the Year
2000 problem. The Company also utilizes third-party vendors for processing data
and payments, e.g., payroll services, 401(k) plan administration, check
processing, medical benefits processing, etc. The Company has initiated
communications with these vendors to determine the status of their systems.
Should these vendors not be compliant in a timely manner, the Company may be
required to process transactions manually or delay processing until such time as
the vendors are Year 2000 compliant. The review of non-IT systems and key third
party relationships is expected to be completed by the end of 1998.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
<PAGE>
The future costs of the Company's Year 2000 efforts are expected to be
funded through existing cash resources and future operating cash flows. The
requirements for the correction of Year 2000 issues and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's current best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that may cause such
material differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and collect all relevant
computer data and similar uncertainties.
Forward Looking Statements - Cautionary Factors
The foregoing discussion and analysis contains forward-looking
statements regarding the Company. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, economic
conditions in the United States, Europe and Ecuador that affect relative
interest rates, foreign exchange rates and other costs and prices related to the
Company's business.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
11. An exhibit showing the computation of per-share earnings is
omitted because the computation can be clearly determined from
the material contained in this Quarterly Report on Form 10-Q.
27. Financial Data Schedule.
(B) Reports on Form 8-K:
No report has been filed during the nine months ended September 30,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALTEK CORPORATION
(Registrant)
Date: November 9, 1998 /s/Jacques Kohn
---------------
Jacques Kohn
President
Date: November 9, 1998 /s/Ronald Tassello
------------------
Ronald Tassello
Chief Financial Officer and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Baltek Corporation and
subsidiaries consolidated financial statements and related exhibits for the nine
months ended September 30, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 747,846
<SECURITIES> 0
<RECEIVABLES> 7,188,210
<ALLOWANCES> 129,357
<INVENTORY> 14,181,007
<CURRENT-ASSETS> 23,891,919
<PP&E> 33,424,528
<DEPRECIATION> 20,687,672
<TOTAL-ASSETS> 44,750,635
<CURRENT-LIABILITIES> 9,863,332
<BONDS> 0
0
0
<COMMON> 2,523,261
<OTHER-SE> 30,137,842
<TOTAL-LIABILITY-AND-EQUITY> 44,750,635
<SALES> 50,081,620
<TOTAL-REVENUES> 50,081,620
<CGS> 37,692,601
<TOTAL-COSTS> 46,365,851
<OTHER-EXPENSES> 659,442
<LOSS-PROVISION> 56,721
<INTEREST-EXPENSE> 1,162,519
<INCOME-PRETAX> 3,056,327
<INCOME-TAX> 916,864
<INCOME-CONTINUING> 2,139,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,139,463
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
