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BANGOR PUNTA CORPORATION Notes to Consolidated Financial Statements

(1968)

(1) Principles of Consolidation:

The consolidated financial statements include the accounts of Bangor Punta Corporation (Bangor Punta) and its subsidiaries, except for Bangor and Aroostook Railroad Company and its subsidiaries (the Railroad) and Prodco Finance Co. (Prodco). The statement of consolidated income of Bangor Punta and subsidiaries includes the equity in income of the Railroad and Prodco. The consolidated statement of financial position reflects the investment in the Railroad at an estimated value at September 30, 1968 which is approximately $11,465,000 less than the equity in net assets of the Railroad as shown by their books. Such carrying value is $32,443 greater than at September 30, 1967; the increase represents the cost of 120 shares of capital stock of the Railroad acquired from minority holders during the year plus the equity in 1968 earnings, less dividends received.

Condensed balance sheets of the Railroad at September 30, 1967 and 1968, and of Prodco at September 30, 1968 follow:

Bangor and Aroostook Railroad Company and Subsidiaries
Condensed Consolidated Balance Sheets

Assets

  1968 1967
Current assets:    
Cash $ 1,864,993 $ 1,979,000
Marketable securities 107,635 51,052
Receivables 1,370,979 1,514,953
Materials and supplies, at cost 922,867 976,460
Other current assets 87,300 60,529
Total current assets 4,353,774 4,581,994
Special funds 81,311 118,112
Advances to parent company 301,132 301,132
Properties, at cost less accumulated depreciation of $25,222,755 in 1968 63,392,266 61,713,226
Other assets and deferred charges 890,536 896,899
  $69,019,019 $67,611,363


Liabilities

Current liabilities:    
Bank loan $ 61,190 $ 92,349
Current portion of long-term debt 2,350,916 2,180,346
Accounts payable and accrued expenses 2,770,580 2,628,638
Total current liabilities 5,182,686 4,901,333
Long-term debt (exclusive of current portion) 26,463,871 25,369,667
Deferred Federal income taxes 6,555,810 6,555,810
Other liabilities and deferred credits 121,792 113,119
Shareholders' equity:    
Common stock-179,810 shares outstanding 179,810 179,810
Capital surplus 9,265,540 9,265,540
Retained income (restricted under loan agreements) 21,249,510 21,226,084
  $69,019,019 $67,611,363

Prodco Finance Co.—Condensed Balance Sheet

    1968
Assets
Cash   $ 25,000
Notes and accounts receivable   8,444,786
Loans and advances to growers   26,232,655
Crop loans to parent company owned ranches   1,684,859
Deferred charges   2,312
    $36,389,612
Liabilities and Capital
Loans payable to banks   $30,538,357
Accounts payable and accrued expenses   886,501
Parent company investment:    
Subordinated loans $4,000,000  
Short-term advances 923,795  
Capital stock, 25,000 shares—$1 par value 25,000  
Retained earnings 15,959  
    4,964,754
    $36,389,612

Note: Producers Cotton Oil Company (a subsidiary of Bangor Punta Corporation) is obligated to loan Prodco Finance Co. up to $4,000,000 subordinated to the bank loans, and has also guaranteed 10% of the maximum amount advanced by certain banks to Prodco during the year, and with respect to the principal bank has guaranteed the 10% or $2,000,000 whichever is greater.

Since the inception of Prodco, gross revenues aggregated $1,711,346, expenses totaled $1,695,387, resulting in a net income of $15,959.

(2) Acquisitions During Current Year:
All acquisitions during the current year have been accounted for as purchases and the statement of consolidated income includes the earnings of such companies from the respective dates of acquisition. Pursuant to a tender offer, 98% of the capital stock of Producers Cotton Oil Company was acquired in December 1967. Additional common stock of Starcraft Corporation was acquired in March 1968, increasing Bangor Punta's ownership interest to 96%, and on September 30, 1968 Starcraft was merged into a wholly-owned subsidiary. On July 30, 1968, Waukesha Motor Company was acquired and merged. In connection with the purchase of Metcalf Sc Eddy, Inc. in October 1967, up to 40,000 additional shares of common stock are to be delivered depending on the earnings of the acquired business over the next six years. With respect to another acquisition, cash payments are required based on pre-tax earnings, as defined, over the next five years.

(3) Properties and Depreciation:

Properties and related accumulated depreciation at September 30, 1968 consist of:

 

  Properties, at Cost Annual Rates of Depreciation Accumulated Depredation
Land $ 2,930,888 $ -
Farm lands 12,095,790    
Buildings and site improvements 24,979,325 2.5 to 10% 8,178,505
Machinery and equipment 68,584,315 5 1/2 to 33 1/4% 37,888,828
Leaseholds 2,046,085 Term of Lease 834,962
  $110,636,403   $46,902,295


Farm lands and other properties of Producers Cotton Oil Company, a consolidated subsidiary, are substantially pledged under deeds of trust and mortgages to secure certain insurance company loans and bank loans.

The aggregate amount of depreciation charged for the years ended September 30, 1967 and 1968 was $1,962,577 and $4,057,529, respectively.

The "excess of cost over net assets of companies acquired" is considered to have a continuing value over an indefinite period and therefore is not being amortized.

(4) Long-term Debt:
Long-term debt at September 30, 1968 is summarized as follows:

  Current Amount Noncurrent Amount
Insurance company loans:    
6% joint and several promissory notes due March 1, 1983 $600,000 $25,200,000
6% joint and several convertible notes due March 1, 1983   4,200,000
7 1/4% joint and several notes due March 1, 1983   20,000,000
5.78% note payable in annual instalments of $468,000 with the final instalment of $805,500 payable in 1980 468,000 5,953,500
51/2% and 53/4% notes payable in annual instalments of $220,000 with the final instalment of $1,320,000 payable in 1983 220,000 4,180,000
6% note payable in semiannual instalments of $50,000 with the final instalment of $504,236 payable in 1974 100,000 954,236
Bank loans:    
Term notes, interest 1% over prime rate, due in quarterly instalments of $400,000 each with balance due on September 30, 1972 1,600,000 6,400,000
Revolving loan, prime interest rate, revolving credit extended to June 15, 1970—maximum available, $30,000,000   30,000,000
Other bank loans, 4% to 6 3/4% 291,012 1,649,326
5 1/4% guaranteed convertible debentures due 1988   15,000,000
61/2%,ntotes payable in ten annual instalments beginning May 1, 1969 (secured
by pledge of marketable securities)
144,840 1,303,560
Other debt 431,013 823,578
  $3,854,865 $115,664,200

Annual instalments on the 6% promissory notes due March 1, 1983 are payable in the amount of $600,000 from 1969 to 1973 and $1,800,000 from 1974 to 1982. The 6% convertible notes held by the insurance company are convertible into Bangor Punta common stock at the conversion price of $33.17, subject to anti-dilution adjustments.

Pursuant to a Note and Warranty Agreement dated July 31, 1968, the 714% joint and several notes due March 1, 1983 were issued together with 55,000 Series A warrants and 60,000 Series B warrants to purchase 115,000 shares of Bangor Punta common stock at $55 a share, subject to adjustment. Any portion of the loan not used for "approved acquisitions", as defined, by November 1, 1970, must, at the option of the holders of such notes and by notice given to Bangor Punta prior to May 1, 1971 be repaid. In the event of repayment, the lender must surrender the proportionate number of 60,000 Series B warrants originally received. Annual instalments on the notes are due in amounts equal to 2% of the aggregate principal amount from 1973 to 1977 and 6% from 1978 to 1982.

The insurance company and bank loan agreements, as amended, provide, among other things, for the maintenance of minimum working capital and restrict the amounts which may be paid as dividends on and redemptions of any class of stock after September 30, 1965, except dividends payable solely in shares of stock of the Company. At September 30, 1968 working capital exceeded the minimum requirement. The consolidated retained earnings available for dividends at September 30, 1968 was $3,900,000. In addition, 50% of consolidated net income (as defined) in subsequent years will be available for cash dividends.

The 5 1/4% guaranteed convertible debentures due July I, 1988 are unsecured direct obligations of Bangor Punta International Capital Company (International Capital), are guaranteed jointly and severally by Bangor Punta Corporation and Bangor Punta Operations, Inc. (a wholly-owned subsidiary) and are convertible from January 15, 1969 into Bangor Punta Corporation common stock at $55 a share. The debentures will be subject to redemption through a sinking fund on each July 1 from 1979 to 1987 in principal amounts equal to 10% of the aggregate principal amount of debentures outstanding on April 30, 1979. At the option of International Capital, subject to certain restrictions, the debentures may be redeemed in principal amounts of not less than $1,000,000 beginning July 1, 1971. In the event that interest paid to the debenture holders becomes subject to United States taxation, the debentures outstanding may be called for redemption.

(5) Subordinated Debt:
The 53/4% subordinated bonds are due November 15, 1992 and are secured by the pledge of all shares of common stock of Producers Cotton Oil Company owned by the Company. A mortgage of certain real estate interests owned by a subsidiary of Producers, subject to existing liens, may be substituted for the pledged shares. Deficiencies after realization on the pledged security are subordinated to all exist-ing and future senior indebtedness, as defined. The bonds are entitled to an annual purchase fund from 1968 through 1977 and to an annual sinking fund commencing in 1978 and are, subject to certain restrictions, redeemable at the option of the Company. At September 30, 1968, $244,000 principal amount of bonds were held in treasury.

The 51/2% convertible subordinated debentures due April 15, 1987 were called for redemption on September 18, 1968. All outstanding debentures were converted into common stock except for $23,900 principal amount.

(6) Federal Taxes on Income:
Punta Alegre Sugar Corporation and its domestic subsidiaries filed a consolidated income tax return for the year ended September 30, 1960, claiming losses reflecting the seizure of their Cuban assets which the corporation has elected to carry forward as a "foreign expropriation loss". With the approval of its tax counsel, Dewey, Ballantine, Bushby, Palmer & Wood, the corporation has claimed deductions based on a net operating loss carryover from 1960 in amounts sufficient to offset all consolidated taxable income for the six years ended September 30, 1966. The corporation has provided for Federal income tax requirements in its financial statements on the assumption that no carryover was available after 1966. The Internal Revenue Service is currently examining the corporation's tax returns for the years 1964 through 1966.

The tax provision for 1968 is net of investment credits of $470,000 (as compared with $1,300,000 in 1967) and includes provision for deferred taxes of $1,500,000.

(7) Incentive Stock Options:

Incentive stock options have been granted to officers and employees at various times since 1960 at prices of 95% or 100% of market value at date of grant. A summary of the transactions in those options during the year ended September 30, 1968 follows:

  $2.00 Convertible Preference Stock (shs.) $1.25 Convertible Preference Stock (shs.) Common Stock (shs.)
Outstanding at September 30, 1967   11,575 82,122
Granted     2,750
Substituted (Waukesha) 360   75
  360 11,575 84,947
Deduct:      
Exercised 360 1,367 10,410
       

 

Cancelled 400
360 1,367 10,810
Outstanding at 10,208 74,137
September 30, 1968

The aggregate option price of the 360 shares of $2.00 convertible preference stock, 1,367 shares of $1.25 convertible preference stock and 10,410 shares of common stock exercised during the year ended September 30, 1968 amounted to $188,423 and the fair value of the shares at the exercise dates was $565,547. At September 30, 1968, 1,630 shares of common stock were available for future grants under a "Qualified Stock Option" plan.

During 1968, options were granted to various officers and employees to purchase 6,600 shares (net of cancellations) of common treasury stock at $20 per share. All the options have been exercised on deferred payment terms with $128,000 outstanding at September 30, 1968. The fair value of the shares at the exercise dates amounted to $248,869. In the event that any such officer or employee terminates his employment prior to the dates specified in the individual option agreements, all or part of his shares may be required to be redelivered to the Company at which time the corresponding indebtedness will be cancelled.

(8) Preference Stock:

The $1.25 convertible preference stock, $1 par value, is entitled to cumulative dividends at the annual rate of $1.25, is entitled to $25 per share plus accrued dividends upon involuntary liquidation, and is convertible at the rate of one share of common stock for each share of preference stock. The Board of Directors has resolved that no action be taken to cause the formal redemption of all or part of this issue prior to September 15, 1971. The redemption price after that date will be $25.25 per share.

The $1.25 convertible preference stock—Series B, $1 par value, is entitled to cumulative dividends at the annual rate of $1.25, is entitled to $43.75 per share plus accrued dividends upon involuntary liquidation, is convertible at the rare of one share of common stock for each share of such preference stock, and may be redeemed on or after February 1, 1971, at $43.75 per share. The holders of such stock may cause the Company to purchase all of such shares for $3,500,000 between December 31, 1968 and February 1, 1971, and in addition, the Company may, at its option, purchase all of the shares for $3,500,000 at any time before January 1, 1971.

The $2.00 convertible preference stock—Series C, $1 par value, is entitled to cumulative dividends at the annual rate of $2.00, is entitled to $50.00 per share plus accrued dividends upon involuntary liquidation and is convertible at the rate of 1.1 share of common stock for each share of such preference stock, subject to adjustment. The stock may be redeemed by the Company at prices ranging from $54.00 a share during the twelve month period beginning July 30, 1973 to $51.00 a share during the twelve-month period beginning July 30, 1976 and at $50.00 a share thereafter plus accrued dividends.

The aggregate preference on involuntary liquidation exceeds the par value of the issued $1.25 convertible preference stock, the $1.25 convertible preference stock—Series B and the $2.00 convertible preference stock—Series C by $43,774,622 at September 30, 1968. In the opinion of counsel, there are no restrictions upon surplus by reason of such differences.

(9) Pension and Profit Sharing Plans:

The parent and one subsidiary have pension plans under which insurance policies are purchased for qualifying employees. The cost of these plans for 1968 amounted to $26,459. The parent and certain subsidiaries and divisions have deferred profit sharing and union retirement plans to which they make contributions. The contributions under these various plans aggregated $1,899,917 for the year ended September 30, 1968.

(10) Commitments and Contingent Liabilities:

In the opinion of General Counsel, legal proceedings pending are not expected to have any material adverse effect on the Corporation's financial position as such actions are substantially without merit or are covered by product liability insurance.

Aggregate annual rentals under leases expiring more than three years from September 30, 1968 amounted to approximately $1,283,000, plus, in certain cases, real estate taxes and other expenses.

On August 23, 1968, Bangor Punta agreed to acquire Crosman Arms Company, Inc. (Crosman), a privately owned manufacturer of pellet guns used for target shooting. The consideration is to be 190,000 shares of a new $3.00 convertible preference stock—Series D which will be convertible into common stock. The acquisition is subject to the receipt of a favorable tax ruling and to the vote of the shareholders of Crosman.

A subsidiary has been engaged by two companies to assist them in acquisitions. Bangor Punta Operations, Inc. has agreed to guarantee bank loans up to a maximum amount of $2,000,000 obtained by such companies to finance acquisitions and has also guaranteed performance under contingent payment arrangements with the seller of an acquired business.

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