<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number: 333-72321
BGF Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-1600845
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3802 Robert Porcher Way, Greensboro, North Carolina
(Address of registrant's principal executive office)
27410
(Zip Code)
Registrant's telephone number, including area code:
(336) 545-0011
---------------------------
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date: 1,000 shares of common stock, $1.00 par value, as of November 12, 1999.
<PAGE>
BGF INDUSTRIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION.......................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS................ 1
Item 1. Consolidated Condensed Financial Statements (unaudited)........ 2
Consolidated Condensed Balance Sheets as of September 30, 1999
and December 31, 1998 (unaudited).............................. 2
Consolidated Condensed Statements of Operations (unaudited).... 3
For the three months ended September 30, 1999 and 1998.... 3
For the nine months ended September 30, 1999 and 1998..... 3
Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 (unaudited)........... 4
Notes to the Consolidated Condensed Financial Statements....... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
Overview.................................................. 9
Results of Operations..................................... 10
Liquidity and Capital Resources........................... 13
Impact of New Accounting Pronouncements................... 15
Year 2000................................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
PART II. OTHER INFORMATION.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
<PAGE>
PART I - FINANCIAL INFORMATION
CAUTIONARY STATEMENT REGARDING
FORWARD LOOKING STATEMENTS
Some of the information in this Report may contain forward looking
statements. Such statements include, in particular, statements about our plans,
strategies and prospects (rather than historical facts) within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify forward looking statements by our use of
forward looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
plans, intentions and expectations reflected in or suggested by these forward
looking statements are reasonable, we cannot assure you that our plans,
intentions or expectations will be achieved. Such statements are based on our
current plans and expectations and are subject to risks and uncertainties that
exist in the operations of the Company and its business environment that could
render actual outcomes and results materially different from those predicted.
In the preparation of this Report, where such forward looking statements appear,
we have sought to accompany those statements with meaningful cautionary
statements identifying important factors that could cause our actual results to
differ materially from the forward looking statements we make in this Report.
Such factors include: our significant level of indebtedness; the highly
competitive nature of our markets; our concentrated customer base; limitations
on our ability to incur additional debt; our lack of long-term customer and
vendor contracts; our ability to complete the implementation of our Year 2000
efforts on a timely basis and the ability of our suppliers, vendors and
customers and other third parties on whom we rely to be Year 2000 ready; our
ability to address technological advances in the markets we serve; and changes
in economic conditions generally. This list of risks and uncertainties,
however, is not intended to be exhaustive. You should also review the other
cautionary statements we make in this Report, in our Registration Statement on
Form S-4 (SEC File No. 333-72321) with respect to our 10 1/4% Series B Senior
Subordinated Notes due 2009, especially the "Risk Factors" section of the
Registration Statement, and in our other SEC filings. All forward looking
statements attributable to us or persons acting for us are expressly qualified
in their entirety by our cautionary statements.
We do not have, and expressly disclaim, any obligation to release
publicly any updates or changes in our expectations or any changes in events,
conditions or circumstances on which any forward looking statement is based.
-1-
<PAGE>
Item 1. Consolidated Condensed Financial Statements
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ -------------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................ $ 142 $ 18
Trade accounts receivable, net....................................... 21,675 20,808
Inventories.......................................................... 38,281 42,532
Other current assets................................................. 4,423 5,260
--------- ---------
Total current assets.............................................. 64,521 68,618
Net property, plant and equipment...................................... 57,494 58,103
Other noncurrent assets................................................ 11,131 10,045
--------- ---------
Total assets...................................................... $ 133,146 $ 136,766
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Book overdraft....................................................... $ 3,455 $ 657
Accounts payable..................................................... 9,064 6,794
Accrued liabilities.................................................. 8,734 6,743
Current portion of long-term debt.................................... 3,200 1,000
--------- ---------
Total current liabilities......................................... 24,453 15,194
Long-term debt, net of discount of $1,867 and $0, respectively......... 135,933 150,000
Deferred income taxes.................................................. 8,354 8,354
Postretirement benefit obligation...................................... 1,522 1,394
--------- ---------
Total liabilities................................................. 170,262 174,942
--------- ---------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, $1.00 par value. Authorized 3,000 shares; issued
and outstanding 1,000 shares....................................... 1 1
Capital in excess of par value....................................... 34,999 34,999
Retained earnings.................................................... 64,674 63,614
Loan to parent....................................................... (136,790) (136,790)
--------- ---------
Total stockholder's equity (deficit).............................. (37,116) (38,176)
--------- ---------
Total liabilities and stockholder's equity (deficit).............. $ 133,146 $ 136,766
========= =========
</TABLE>
The accompanying condensed notes are an integral part of the consolidated
financial statements.
-2-
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
------------- ---------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales........................... $43,959 $46,857 $133,288 $150,711
Cost of goods sold.................. 36,621 38,842 112,684 122,002
------- ------- -------- --------
Gross profit...................... 7,338 8,015 20,604 28,709
Selling, general and administrative
expenses........................... 1,959 1,914 5,467 7,402
Restructuring Charge................ - - 769 -
------- ------- -------- --------
Operating income.................. 5,379 6,101 14,368 21,307
------- ------- -------- --------
Other (income) expenses:
Interest expense.................. 3,614 1,150 11,443 1,751
Other income,net.................. (141) (63) (494) (142)
------- ------- -------- --------
3,473 1,087 10,949 1,609
------- ------- -------- --------
Income before taxes and
extraordinary loss.............. 1,906 5,014 3,419 19,698
Income tax expense.................. 745 1,931 1,330 7,584
------- ------- -------- --------
Income before extraordinary
loss............................ 1,161 3,083 2,089 12,114
------- ------- -------- --------
Extraordinary loss on write-off of
debt issuance costs, net of income
taxes of $639...................... - - 1,029 -
------- ------- -------- --------
Net income........................ $ 1,161 $ 3,083 $ 1,060 $ 12,114
======= ======= ======== ========
</TABLE>
The accompanying condensed notes are an integral part of the consolidated
financial statements.
-3-
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
--------------------------
1999 1998
------------- -----------
<S> <C> <C>
(unaudited)
Net cash provided by operating activities........................... $ 18,200 $ 22,322
-------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment......................... (5,396) (9,016)
-------- ---------
Net cash used in investing activities............................. (5,396) (9,016)
-------- ---------
Cash flows from financing activities:
Book overdraft..................................................... 2,798 (526)
Principal payments of long-term debt............................... (66,000) (20,000)
Proceeds from borrowing of long-term debt.......................... - 152,000
Proceeds from borrowing of revolving credit........................ 9,000 -
Payments on borrowing of revolving credit.......................... (45,000) -
Payments on borrowings of term loans............................... (8,000) -
Proceeds from borrowing on notes................................... 98,000 -
Net repayments on working capital line of credit................... - (5,000)
Loan to parent..................................................... - (135,302)
Debt issuance costs................................................ (3,478) (4,491)
-------- ---------
Net cash used in financing activities.............................. (12,680) (13,319)
-------- ---------
Net increase (decrease) in cash and cash equivalents................ 124 (13)
Cash and cash equivalents at beginning of period.................... 18 29
-------- ---------
Cash and cash equivalent at end of period........................... $ 142 $ 16
======== =========
</TABLE>
The accompanying condensed notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying unaudited interim consolidated condensed financial
statements of BGF Industries, Inc. ("BGF" or the "Company") have been prepared
by the Company in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X, and accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of items of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year. The Company believes that the disclosures are adequate to
make the information presented not misleading.
These financial statements should be read in conjunction with the audited
consolidated financial statements of BGF Industries, Inc. as of and for the year
ended December 31,1998 on file with the Securities and Exchange Commission in
the Company's Registration Statement on Form S-4 (SEC File No. 333 - 72321),
(the "Registration Statement") declared effective on June 18, 1999.
2. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
(unaudited)
Supplies.................................................... $ 1,614 $ 1,571
Raw materials............................................... 3,133 4,283
Stock-in-process............................................ 6,097 8,029
Finished goods.............................................. 27,437 28,649
------- -------
$38,281 $42,532
======= =======
</TABLE>
-5-
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
3. Other Noncurrent Assets:
Other noncurrent assets consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- -------------
<S> <C> <C>
(unaudited)
Excess of acquisition cost over assigned value of net assets acquired... $ 5,809 $ 5,809
Debt issuance costs..................................................... 6,349 4,598
------- -------
12,158 10,407
Accumulated amortization................................................ (1,361) (696)
------- -------
10,797 9,711
Other................................................................... 334 334
------- -------
$11,131 $10,045
======= =======
</TABLE>
4. Accrued liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ------------
<S> <C> <C>
(unaudited)
Income Taxes............................................................ $ 279 $ 855
Payroll................................................................. 729 117
Pension and 401(k)...................................................... 3,154 4,439
Interest................................................................ 2,262 553
Restructuring Reserve................................................... 298 -
Other................................................................... 2,012 779
------ ------
$8,734 $6,743
====== ======
</TABLE>
-6-
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
5. Debt:
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ------------
<S> <C> <C>
(unaudited)
Senior Credit Facility
Amortizing Term Loan.................................................... $ 40,000 $ 50,000
Revolving Credit Facility............................................... 1,000 36,000
Senior Subordinated Credit Facility....................................... - 65,000
Exchange notes, net of unamortized discount............................... 98,133 -
-------- --------
139,133 151,000
Less current portion...................................................... 3,200 1,000
-------- --------
$135,933 $150,000
======== ========
</TABLE>
As of September 30, 1999, the Company paid off $10,000 of the principal
amount of the term loan prior to its scheduled payment. In addition, the
Company terminated the portion of the interest rate swap agreement related
to this principal pay down. The impact of these transactions was not material
to the Company's financial statements.
6. Segment Information:
BGF operates in one business segment that manufactures specialty woven and
non-woven fabrics for use in a variety of industrial and commercial
applications. BGF's principal market is the United States. Information by
geographic area is presented below, with sales based on the location of the
customer. BGF does not have any long-lived assets outside the United States.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
(unaudited) (unaudited)
1999 1998 1999 1998
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
United States................... $41,564 $44,577 $126,273 $135,219
Foreign......................... 2,395 2,280 7,015 15,492
------- ------- -------- --------
$43,959 $46,857 $133,288 $150,711
======= ======= ======== ========
</TABLE>
-7-
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands)
7. Commitments and Contingencies:
In 1997, BGF cosigned a debt facility with Glass Holdings guaranteeing the
payment and performance of the obligations of Belmont of America, an affiliate
of BGF. The obligation guaranteed by BGF under the debt facility is a $5,000
tax-free variable rate demand note for Belmont of America. On June 30, 1999,
Belmont of America paid off the $5,000 tax-free variable rate demand note,
relieving BGF of its guarantee.
8. Other Transactions:
BGF incurred charges of $769, included as a component of operating income in
the accompanying financial statements, in the nine month period ended September
30, 1999 due to a restructuring plan announced on May 3, 1999 that resulted in
the elimination of 67 hourly and salary employees across the company. The
charges incurred are costs for salaried employee severence. As of September 30,
1999, all these employees have been terminated and $471 of the restructuring
costs have been paid out, leaving a remaining reserve of $298 for severence
payments scheduled through January, 2001. At September 30, 1999, the reserve is
included in accrued liabilities in the accompanying financial statements.
On January 21, 1999, BGF issued $100 million of senior subordinated notes
($98 million net of discount) due 2009. Net proceeds of approximately $95.3
million were used to repay outstanding indebtedness of $65.0 million under the
senior subordinated credit facility, interest of $0.5 million under the senior
subordinated credit facility, and $29.8 million under the revolver. Interest is
payable semiannually beginning in July 1999. In addition, debt issuance costs of
$1.7 million ($1.0 million net of tax) associated with the termination of the
senior subordinated credit facility were written off in the first quarter of
1999 and recorded as an extraordinary charge in the financial statements.
On June 18, 1999 the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-4 relating to its offering of
$100,000 of 10 1/4% series B senior subordinated notes due 2009. The notes
issued in the offering were exchanged on July 23, 1999 for 10 1/4% senior
subordinated notes due 2009 that were privately issued on January 21, 1999.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Report contains certain forward-looking statements with respect to
our operations, industry, financial condition and liquidity. These statements
reflect our assessment of a number of risks and uncertainties. Our actual
results could differ materially from the results anticipated in these forward
looking statements as a result of certain factors set forth in this Report. An
additional statement made pursuant to the Private Securities Litigation Reform
Act of 1995 and summarizing certain of the principal risks and uncertainties
inherent in our business is included in Part I of this Report under the caption
"Cautionary Statement Regarding Forward Looking Statements." You are encouraged
to read this statement carefully.
You should read the following discussion and analysis in conjunction with
the accompanying consolidated condensed financial statements and related notes
of BGF Industries, Inc. and our wholly owned subsidiary, and with our audited
consolidated financial statements as of the year ended December 31, 1998 set
forth in our Registration Statement.
Overview
Our business focuses on the production of value-added specialty woven and
non-woven fabrics made from glass, carbon and aramid yarns. Both in revenue and
market share, we believe we are the second largest manufacturer of glass fiber
fabrics and a leading producer of other high performance fabrics in North
America. Our fabrics are a critical component in the production of a variety of
electronic, filtration, composite, insulation, construction and commercial
products. Our glass fiber fabrics are used by our customers in printed circuit
boards, which are integral to virtually all advanced electronic products,
including computers and cellular telephones. Our fabrics are also used by our
customers to strengthen, insulate and enhance the dimensional stability of
hundreds of products that they make for their own customers in various markets,
including aerospace, transportation, construction, power generation and oil
refining.
-9-
<PAGE>
Results of Operations
The following table summarizes our historical results of operations as a
percentage of net sales for the three and nine months ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................ 83.3% 82.9% 84.5% 81.0%
----- ----- ----- -----
Gross profit................................................ 16.7% 17.1% 15.5% 19.0%
Selling, general and administrative expenses.................. 4.5% 4.1% 4.1% 4.9%
----- ----- ----- -----
Restructuring charges......................................... 0.0% 0.0% 0.6% 0.0%
----- ----- ----- -----
Operating income............................................ 12.2% 13.0% 10.8% 14.1%
Other (income) expenses:......................................
Interest expense............................................ 8.2% 2.4% 8.6% 1.2%
Other income, net........................................... (0.3)% (0.1)% (0.4)% (0.1)%
----- ----- ----- -----
Income before taxes and extraordinary loss.............. 4.3% 10.7% 2.6% 13.0%
----- ----- ----- -----
Income tax expense............................................ 1.7% 4.1% 1.0% 5.0%
----- ----- ----- -----
Income before extraordinary loss........................ 2.6% 6.6% 1.6% 8.0%
Extraordinary loss on write-off of debt issuance costs, 0.0% 0.0% 0.8% 0.0%
net of income taxes of $639................................ ----- ----- ----- -----
Net income.............................................. 2.6% 6.6% 0.8% 8.0%
===== ===== ===== =====
</TABLE>
-10-
<PAGE>
EBITDA, as presented below, is defined as net income before interest expense,
income taxes, depreciation, amortization expense, and non-recurring non-cash
charges.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September, September,
------------------------------------------------
1999 1998 1999 1998
------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net Income .............................................. $ 1,060 $12,114 $1,161 $3,083
Depreciation and amortization............................ 6,140 5,688 2,048 1,886
Interest................................................. 11,443 1,751 3,615 1,150
Taxes.................................................... 1,330 7,584 745 1,931
Extraordinary Loss ...................................... 1,029 - - -
------------ ------- ------ ------
EBITDA................................................... $21,002 $27,137 $7,569 $8,050
============ ======= ====== ======
</TABLE>
Reported EBITDA for the quarter ended September 30, 1999 decreased $0.5 million,
or 6.2%, to $7.6 million from $8.1 million for the quarter ended September 30,
1998 and for the nine months ended September 30, 1999 decreased by $6.1 million,
or 22.6%, to $21.0 million from $27.1 million for the nine months ended
September 30, 1998. For the twelve-month period ended September 30, 1999, net
sales and EBITDA were $184.3 million and $31.0 million, respectively. EBITDA for
reporting purposes includes the reduction of income of $769,000 for
restructuring charges in the twelve months and nine months ended September 30,
1999. If the restructuring charges were to be added back, EBITDA would be $31.8
million for the twelve months ended and $21.8 million for the nine months ended
September 30, 1999.
We believe that EBITDA is a widely accepted financial indicator of a company's
ability to service and/or incur indebtedness. EBITDA does not represent and
should not be considered as an alternative to net income or cash flow from
operations as determined by generally accepted accounting principles, and EBITDA
does not necessarily indicate whether cash flow will be sufficient for cash
requirements. Not every company calculates EBITDA in exactly the same fashion.
As a result, EBITDA as presented above may not necessarily be comparable to
similarly titled measures of other companies.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net Sales. Net sales decreased $2.9 million, or 6.2%, to $44.0 million in the
three months ended September 30, 1999, from $46.9 million in the three months
ended September 30, 1998, primarily due to a decrease of $3.7 million, or
38.2%, in the sales of heavyweight fabrics used in rigid printed circuit boards
and a decrease of $2.1 million, or 17.2%, in the sales in the composites market
due to a slow demand for aerospace products. These decreases were partially
offset by an increase of $0.4 million, or 2.7%, in sales in the lightweight
fabric markets and an increase of $2.7 million, or 67.6%, in the sales of
filtration fabrics.
-11-
<PAGE>
Gross Profit Margins. Gross profit margins decreased from 17.1% in the three
months ended September 30, 1998 to 16.7% in the three months ended September 30,
1999, due primarily to lower volumes resulting in less absorption of fixed costs
as well as price pressures in the electronics segments.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 4.5% of the net sales in the three months
ended September 30, 1999 from 4.1% of net sales in the three months ended
September 30, 1998. This was mainly due to lower sales dollars for the period
combined with decreases in profit sharing and executive bonuses as well as
export sales commissions.
Operating Income. As a result of the aforementioned factors, operating income
decreased $0.7 million to $5.4 million, or 12.2% of net sales, in the
three months ended September 30, 1999, from $6.1 million, or 13.0% of net sales,
in the three months ended September 30, 1998.
Interest Expense. Interest expense increased $2.5 million to $3.6 million in
the three months ended September 30, 1999 from $1.1 million in the three months
ended September 30, 1998, due to the increase in debt, which was incurred on
September 30, 1998, in order to loan our parent company, Glass Holdings, funds
to enable AGY Holdings, a wholly owned subsidiary of Glass Holdings, to purchase
a 51% ownership interest in Advanced Glassfiber Yarns.
Income Tax Expense. The effective tax rate in the three months ended September
30, 1999 and 1998 of 39.1% and 38.5% respectively was higher than the federal
statutory rate of 35.0% primarily due to state incomes taxes.
Net Income. As a result of the aforementioned factors, net income decreased
$1.9 million to $1.2 million in the three months ended September 30, 1999, from
$3.1 million in the three months ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to Nine months Ended September 30,
1998
Net Sales. Net sales decreased $17.4 million, or 11.6%, to $133.3 million in
the nine months ended September 30, 1999, from $150.7 million in the nine months
ended September 30, 1998, primarily due to a decrease of $15.3 million, or
46.9%, in the sales of heavyweight fabrics used in rigid printed circuit boards
and a decrease of $7.5 million, or 18.9%, in the sales in the composites market
due to a slow demand for aerospace products. These decreases were partially
offset by a $5.5 million, or 42.0%, increase in the sales of filtration fabrics
due to an increased demand in this market in 1999.
Gross Profit Margins. Gross profit margins decreased from 19.0% in the nine
months ended September 30, 1998 to 15.5% in the nine months ended September 30,
1999, due primarily to lower volumes resulting in less absorption of fixed costs
as well as price pressures in the electronics segment.
-12-
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 4.1% of net sales in the nine months ended
September 30, 1999 from 4.9% of net sales in the nine months ended September 30,
1998. This was primarily due to significantly lower expenses for profit sharing
and executive bonuses to take into account the current profitability of BGF as
well as lower sales commissions to agents because of lower export sales.
Restructuring Charges. BGF incurred charges of $769,000 in the nine months
ended September 30,1999 due to a restructuring plan announced on May 3, 1999
that resulted in the elimination of 67 jobs (20 salaried and 47 wage) across the
company.
Operating Income. As a result of the aforementioned factors, operating income
decreased $6.9 million to $14.4 million, or 10.8% of net sales, in the nine
months ended September 30, 1999, from $21.3 million, or 14.1% of net sales, in
the nine months ended September 30, 1998.
Interest Expense. Interest expense increased $9.6 million to $11.4 million in
the nine months ended September 30, 1999, from $1.8 million in the nine months
ended September 30, 1998, due to the increase in debt, which was incurred on
September 30, 1998, in order to loan our parent company, Glass Holdings, funds
to enable AGY Holdings, a wholly owned subsidiary of Glass Holdings, to purchase
a 51% ownership interest in Advanced Glassfiber Yarns.
Income Tax Expense. The effective tax rate in the nine months ended September
30, 1999 and 1998 of 38.9% and 38.5% respectively was higher than the federal
statutory rate of 35.0% primarily due to state income taxes.
Net Income. As a result of the aforementioned factors, and the write-off of
debt issuance costs of $1.0 million after tax associated with the repayment of
outstanding indebtedness in connection with the issuance of senior subordinated
notes, net income decreased $11.0 million to $1.1 million in the nine months
ended September 30, 1999, from $12.1 million in the nine months ended September
30, 1998.
Liquidity and Capital Resources
Historically, our primary sources of liquidity have been cash flow from
operations and borrowings under our credit facilities. Our future need for
liquidity will arise primarily from interest payable on our 10 1/4% Series B
Senior Subordinated Notes due 2009 and our senior credit facility, principal
payments on the senior credit facility beginning in December 1999 and the
funding of our capital expenditures and working capital requirements. We have
no mandatory payments of principal on our notes scheduled prior to their
maturity.
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<PAGE>
On January 21, 1999, we privately issued $100 million ($98 million net of
discount) 10 1/4% Senior Subordinated Notes due 2009. Our net proceeds of
approximately $95.3 million were used to repay all $65.0 million of indebtedness
under the term loan under a senior subordinated credit facility, interest of
$0.5 million under the senior subordinated credit facility and $29.8 million of
indebtedness under the revolver under our senior credit facility, which was
incurred on September 30, 1998 to fund the purchase by AGY Holdings of a 51%
ownership interest in Advanced Glassfiber. On July 23, 1999, we exchanged the
old notes for substantially identical new Series B notes that have been
registered under the Securities Act.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities was $18.2 million for the nine months ended September 30, 1999 and
was primarily the result of non-cash adjustments to net income for depreciation
of $6.0 million and amortization of $2.5 million, a decrease in inventory of
$4.3 million and an increase in accounts payable and accrued expenses of $4.3
million.
Net Cash Used in Investing Activities. Net cash used in investing activities
was $5.4 million for the nine months ended September 30, 1999 and was the result
of purchases of property, plant and equipment.
Net Cash Used in Financing Activities. Net cash used in financing activities was
$12.7 million for the nine months ended September 30, 1999 and was primarily the
result of payments on the senior subordinated debt of $66.0 million and net
payments on the revolving credit facility of $45.0 million and an $8.0 million
payment on the term loan, offset by proceeds from the notes of $98.0 million and
proceeds from borrowing of revolving credit of $9.0 million.
Indebtedness and Other Matters. At September 30, 1999, we had outstanding
$139.1 million of long-term debt, consisting of $40.0 million under the term
loan of our senior credit facility and $98.1 million under our notes (net of
discount of $1.9 million). In addition, we had outstanding $1.0 million on the
revolving credit facility.
Capital Expenditures. We have historically financed our capital expenditures
through cash flow from operations and borrowings under our credit facilities.
Capital expenditures were $1.3 million for the three months ended September 30,
1999 and $5.4 million for the nine months ended September 30, 1999. The
principal capital expenditures during these periods included $2.1 million of a
$4.0 million new non-woven line for insulation applications. The project is
targeted for completion in the last quarter of 1999.
We are anticipating total capital expenditures in 1999 to be approximately
$7.0 million.
Our ability to make scheduled payments of principal or to pay the interest or
liquidated damages, if any, on, or to refinance our indebtedness, including the
notes, or to fund planned capital expenditures will depend on our future
performance. Our future performance, to some extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. Based upon the current level of our operations, we
believe that cash flow from operations and available cash, together with
availability under the senior
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<PAGE>
credit facility, will be adequate to meet our future liquidity needs for at
least the next two years. However, we cannot assure you that we will generate
sufficient cash flow from operations or that future borrowings will be available
under our senior credit facility in an amount sufficient to enable us to service
our indebtedness, including the notes, or to fund our other liquidity needs. In
addition, we may need to refinance all or a portion of the principal of the
notes on or prior to maturity. We cannot assure you that we will be able to
effect any refinancing on commercially reasonable terms or at all.
Impact of New Accounting Pronouncements
On June 8, 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Deferral of the Effective Date of FAS 133", which changes the effective date of
FAS 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. We anticipate that, due to our
limited use of derivative instruments, the adoption of SFAS 133 will not have a
significant effect on our results of operations or financial position.
Year 2000
Many computer programs use only two digits to identify a year in a date field
within the program (e.g., "98" or "02") often meaning that the program will fail
to distinguish dates in the "2000s" from dates in the "1900s." If not
corrected, computer applications making calculations and comparisons in
different centuries may cause inaccurate results, or fail by or at the Year
2000.
Risks Presented. These Year 2000 issues are of particular importance to us.
We recognized that many of the systems and equipment we use to conduct and
manage our business were at risk for Year 2000 compliance. If these risks are
not assessed and remediated, our ability to continue normal business operations
could be substantially impaired, including our ability to manufacture our
products. We also recognized that Year 2000 related issues could adversely
affect the operations and financial performance of our material suppliers and
customers. Any of these issues, if not addressed properly, could have a
material adverse effect on our business, financial condition and results of
operations.
Business Systems. We operate two mission-critical business systems to run our
business. We purchased the primary of these two systems in 1990, modified the
system to conform it to our business needs and then installed it in stages
between 1990 and 1993. This system is necessary for us to successfully process
orders, manufacture products, ship products, bill customers and collect data for
both internal and external reporting requirements. Our other mission-critical
business system is a financial package which we purchased and installed recently
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<PAGE>
in January 1999. This system is used for general accounting purposes. We have
developed an interface between these two systems, so that relevant data can be
transported from one to the other. Our business systems also include other
third-party software that has been installed on approximately 250 personal
computers located throughout our various facilities. Our employees using such
software have also at times modified various modules of such software to improve
business functions. We do not consider these modified applications as mission-
critical, however.
Embedded Technology. We employ a large amount of manufacturing equipment, as
well as systems which operate business functions such as e-mail, telephones and
security. As mentioned above, we also utilize approximately 250 personal
computers in our business. These systems, pieces of equipment and computer
hardware could contain embedded technology that is not Year 2000 compliant.
Our Year 2000 Efforts. Since 1997, we have been working to achieve Year 2000
readiness. Our Year 2000 efforts have been focused on mission-critical issues
and are being directed by our Information Systems Department, with frequent
interaction with our senior management. The Information Systems Department is
responsible for:
(1) identifying systems and applications that may be affected by Year 2000
issues;
(2) evaluating and/or developing alternatives for affected systems, including
modifying, replacing or discontinuing the systems; and
(3) converting, testing and implementing affected systems to ensure that the
systems and their applications are Year 2000 compliant.
We refer to these phases as (1) The Identification Phase; (2) The
Evaluation Phase; and (3) The Conversion, Testing and Implementation Phase.
Our Information Systems Department is also responsible for evaluating the
Year 2000 readiness of our primary vendors and customers. It is also
responsible for developing contingency plans in the event we or our primary
vendors or customers are not Year 2000 ready on a timely basis.
Specifics of Phases.
. Business Systems.
Identification Phase. With regard to our business systems, in 1997,
we purchased specialty software to run against the "library" of
approximately 1,200 programs that make up our business systems. This
specialized software is designed to identify programs that contain fields
that could be date-oriented and thus susceptible to Year 2000 issues.
Approximately 50% of our 1,200 programs were identified as containing date-
oriented fields. We completed this work in March 1998.
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<PAGE>
Evaluation Phase. The Evaluation Phase then consisted of our
individually reviewing the date fields of each of the identified programs
to determine whether that program would need to be modified, replaced or
discontinued. We prioritized our review of the programs by difficulty
level, reviewing the more complex of the programs first. As a result of
these evaluations, we determined that we would need to address
approximately 80-90% of the programs identified as containing date fields.
Our scheduled work in this phase was complete as of June 1998. However, we
were later informed by the manufacturer of our financial package that two
of the databases in this package would need to be upgraded due to Year 2000
issues. The necessary upgrades to these databases were completed as of the
end of October 1999.
Conversion, Implementation and Testing Phase. We completed the
remediations necessary to programs relating to our PC-based software in
March 1999 and the remediations necessary to our other business systems,
other than our financial package, in April 1999. We completed the
necessary upgrades to two of the databases in our financial package by the
end of October 1999. We are currently not aware of any other necessary
modifications. As we modify programs, we put them back into operation and
test them. Based on our evaluation efforts, we have not been required to
replace or discontinue any of our business systems.
. Embedded Technology.
Identification Phase. Beginning in early 1998, we developed a list of
specific manufacturing equipment and computer hardware that might contain
technology susceptible to Year 2000 issues. We developed this list through
communications among our various plant managers, machinery operators, MIS
personnel and other of our personnel, as well as discussions with the
various manufacturers of our equipment and hardware. After the list was
compiled, we created an internal database outlining the specifics on the
equipment and hardware and assigned responsibility for evaluating and
performing the necessary remedial efforts for each one. This phase was
completed in November 1998.
Evaluation Phase. We consistently updated our database of equipment
and hardware as our Evaluation Phase progressed. We have evaluated all of
the items identified as potentially having Year 2000 related issues.
Typically, our evaluation involved seeking representatives from the
manufacturer that their equipment or hardware is Year 2000 compliant and/or
manually running Year 2000 regression tests ourselves against the
equipment/hardware. We completed this phase in April 1999.
Conversion, Testing and Implementation Phase. As a result of our
evaluation efforts, we determined that the computers/equipment used to
monitor some of our looms at one of our manufacturing facilities would need
to be upgraded. The manufacturer of this hardware was originally scheduled
to perform and complete this upgrade in September 1999, but has rescheduled
the upgrade to be completed no later than November 15, 1999. We are
already operating the same, upgraded, loom monitoring equipment at another
of our manufacturing facilities. The upgraded equipment passed
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<PAGE>
our Year 2000 tests. Other than this loom monitoring system, we replaced
the telephony system for our corporate offices in April 1999. We did not
identify any other necessary material modifications or replacements
pertaining to embedded technology. Otherwise, we have made some immaterial
modifications to equipment and purchased some hardware to upgrade some of
our older PCs because of Year 2000 issues. As each of these projects have
been completed, we have put the specific equipment back into operation and
run tests for Year 2000 compliance. We will complete this phase by November
15, 1999 when the loom monitoring system is scheduled to be upgraded.
State of Readiness. The following table shows our progress as of
November 9, 1999 through each phase of our Year 2000 efforts for our
business systems and PC-based software, as well as for embedded technology:
<TABLE>
<CAPTION>
Business Systems Embedded Technology
------------------------------------------ ---------------------------------------------
Actual Actual/Estimated
Phase % Complete Completion Date % Complete Completion Date
- ---------------------------- ------------------- --------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Identification.............. 100% 3/31/1998 100% 11/30/1998
Evaluation.................. 100% 6/30/1998 100% 4/30/1999
Conversion, Testing and
Implementation ............ 100% 10/31/1999 99% Loom monitoring
systems: 11/15/1999
Other: 4/30/1999
</TABLE>
Third Parties. Aside from the manufacturers of the personal computers and
manufacturing equipment we use to run our business, the third parties which we
rely on most heavily are our suppliers of raw materials, energy and services, as
well as our customers. We purchase our resources from several vendors and sell
our products to a number of customers for a wide variety of applications.
However, if a significant number of these vendors or customers fail to be Year
2000 ready, it could prevent or substantially impair our ability to transact
business with them as usual. We would then need to find alternative supplies of
these resources or customers for our products. If we could not find or were
delayed in finding, alternatives, it could have a material adverse effect on our
business, results of operations and financial condition.
In addition to our suppliers of equipment, which we discussed above, we
have also identified our key vendors of raw materials, energy and services. We
have contacted each of these suppliers regarding their plans for dealing with
Year 2000 issues and have received responses from approximately 95% of them.
Also, beginning in the first quarter of 1999, we began to survey our major
customers as to their preparations for the Year 2000 and any anticipated changes
in their purchases from us related to this issue. Of the responses we have
received to date, we have not identified any material issues regarding the Year
2000 readiness of our major vendors and customers. However, we cannot assure
you that our vendors and customers will be Year 2000 ready. If any of our
material vendors or customers fail to be Year 2000 ready, it could have an
adverse material effect on our business and results of operations.
Costs. We are currently using mainly internal resources to address our
Year 2000 issues. We estimate that we have and will continue to use the
equivalent of 2 full time members of our
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<PAGE>
Information Systems Department to implement our Year 2000 efforts. Also, in
October 1998, we retained a programmer on a temporary basis to assist us on Year
2000 modifications. We retained this programmer through mid-April 1999. Costs
associated with our Year 2000 efforts are being expenses as incurred through our
normal budget with no additional funding allocated to the Information Systems
Department. We continue to estimate that our total overall costs related to our
Year 2000 efforts will be approximately $400,000. Expenses incurred through
November 9, 1999 were approximately $385,000. We cannot assure you, however,
that as we progress through the final phases of our Year 2000 efforts, that we
will not identify further issues that could cause our costs to become material.
A material increase in our Year 2000 costs could have a material adverse effect
on our financial condition and results of operations.
Worst Case Scenario and Contingency Plans. If our systems and equipment,
or our material vendors and customers, are not Year 2000 ready on a timely
basis, it could have a material adverse effect on our business, financial
condition and results of operations. Excluding the potential impact of the Year
2000 issues of material third parties, which we are unable to control, a
reasonable worst case scenario for our company would be if our identification
and evaluation efforts had not adequately detected material Year 2000 issues and
a material number of our mission-critical systems and equipment were rendered
inoperable.
In order to be ready for such a scenario, we have developed a contingency
plan. Our contingency plan consists of manual work-arounds in the event of
business system failures with respect to our core business functions needed to
take orders, manufacture our products, ship to and bill our customers. We plan
to ensure that our staff is up-to-date on these manual procedures that already
back-up our systems, some of which have previously been ISO certified. Despite
these efforts, because of the uncertain nature of the Year 2000, as well as the
potential impact of third party Year 2000 issues, we cannot assure you that our
contingency plans will be adequate.
As we discuss above, currently, we are not aware of any Year 2000 issues
that would materially affect our business or financial condition. However, we
cannot assure you that our systems will be Year 2000 complaint on schedule, that
Year 2000 related costs will not become material or that our contingency plans
will be adequate. Furthermore, we are currently unable to anticipate the
magnitude of the effect on us of the failure of any of our material vendors and
customers to be Year 2000 ready. If any such risks, either with respect to our
systems or our vendors or customers, materialize, they could have a material
adverse effect on our business, financial condition and results of operations.
This disclosures contained herein concerning Year 2000 are designated as
"Year 2000 Readiness Disclosures" and are made pursuant to the Year 2000
Information and Readiness Disclosure Act. Compliance with the Act, however,
does not preclude any claims that may arise under the federal securities laws.
The estimates and conclusions related to our Year 2000 efforts contain forward
looking statements and are based on our management's best estimates of future
events. Risks to achieving Year 2000 compliance include the availability of
resources, our ability to discover and correct potential Year 2000 sensitive
problems which could have a serious impact on specific systems, equipment or
facilities, and the ability of our material vendors and customers to make their
systems Year 2000 complaint.
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<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our senior credit facility is subject to market risks, including interest
rate risk. Our financial instruments are not currently subject to foreign
currency risk or commodity price risk. We have no financial instruments held for
trading or speculative purposes.
We are exposed to market risk related to changes in interest rates on
borrowings under our senior credit facility. The senior credit facility bears
interest based on LIBOR.
We entered into an interest rate swap agreement to manage our exposure to
interest rate changes under the senior credit facility. The swap involves the
exchange of fixed and variable interest rate payments based on a contractual
principal amount and time period. Payments or receipts on the agreement are
recorded as adjustments to interest expense. At September 30, 1999, we had an
interest rate swap agreement effective through September 30, 2004 on a notional
amount of $40.0 million. Under this agreement, we have secured a fixed LIBOR
rate of interest of 5.04% on the notional amount that is reduced in a manner
consistent with the amortization of the principal on our term loan. This swap
effectively changes our payment of interest on $40.0 million of variable rate
debt for the contract period.
The fair value of the interest rate swap agreement represents the estimated
receipts or payments that would be made to terminate the agreement. At September
30, 1999, we would have received approximately $1.4 million to terminate the
agreement. A 1% decrease in LIBOR would decrease the amount received by
approximately $0.6 million. The fair value is based on dealer quotes,
considering current interest rates.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
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<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.
BGF Industries, Inc.
/s/ Philippe R. Dorier
--------------------------------------------
Philippe R. Dorier
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 12, 1999
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule (filed electronically)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 142 0
<SECURITIES> 0 0
<RECEIVABLES> 22,220 0
<ALLOWANCES> (545) 0
<INVENTORY> 38,281 0
<CURRENT-ASSETS> 64,521 0
<PP&E> 133,824 0
<DEPRECIATION> (76,330) 0
<TOTAL-ASSETS> 133,146 0
<CURRENT-LIABILITIES> 24,453 0
<BONDS> 0 0
0 0
0 0
<COMMON> 1 0
<OTHER-SE> (37,117) 0
<TOTAL-LIABILITY-AND-EQUITY> 133,146 0
<SALES> 133,288 150,711
<TOTAL-REVENUES> 133,288 150,711
<CGS> 112,684 122,002
<TOTAL-COSTS> 112,684 122,002
<OTHER-EXPENSES> 6,236 7,402
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,443 1,751
<INCOME-PRETAX> 3,419 19,698
<INCOME-TAX> 1,330 7,584
<INCOME-CONTINUING> 2,089 12,114
<DISCONTINUED> 0 0
<EXTRAORDINARY> (1,029) 0
<CHANGES> 0 0
<NET-INCOME> 1,060 12,114
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
