<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 June 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 No X
--- ---
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 August 6, 1999.
<PAGE>
BGF INDUSTRIES, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 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 June 30, 1999
and December 31, 1998........................................ 2
Consolidated Condensed Statements of Operations.............. 3
For the three months ended June 30, 1999 and 1998....... 3
For the six months ended June 30, 1999 and 1998......... 3
Consolidated Condensed Statements of Cash Flows for the
six months ended June 30, 1999 and 1998...................... 4
Notes to the Consolidated Condensed Financial Statements..... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
Overview................................................ 10
Results of Operations................................... 11
Liquidity and Capital Resources......................... 14
Impact of New Accounting Pronouncements................. 16
Year 2000............................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 17
PART II. OTHER INFORMATION............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
<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 and 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. 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>
June 30, December 31,
1999 1998
--------------- ---------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents....................... $ 19 $ 18
Trade accounts receivable, net.................. 20,754 20,808
Inventories..................................... 39,709 42,532
Other current assets............................ 4,499 5,260
--------- ---------
Total current assets......................... 64,981 68,618
Net property, plant and equipment................. 58,190 58,103
Other noncurrent assets........................... 11,259 10,045
--------- ---------
Total assets................................. $ 134,430 $ 136,766
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Book overdraft.................................. $ 4,276 $ 657
Accounts payable................................ 8,502 6,794
Accrued liabilities............................. 10,012 6,743
Current portion of long-term debt............... 2,520 1,000
--------- ---------
Total current liabilities.................... 25,310 15,194
Long-term debt, net of discount of $1,917 and $0,
respectively................................... 137,563 150,000
Deferred income taxes............................. 8,354 8,354
Postretirement benefit obligation................. 1,480 1,394
--------- ---------
Total liabilities............................ 172,707 174,942
--------- ---------
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............................... 63,513 63,614
Loan to parent.................................. (136,790) (136,790)
--------- ---------
Total stockholder's equity (deficit)......... (38,277) (38,176)
--------- ---------
Total liabilities and stockholder's
equity (deficit).......................... $ 134,430 $ 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 Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
1999 1998 1999 1998
------------- ---------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales........................... $44,209 $45,711 $89,329 $103,854
Cost of goods sold.................. 37,231 37,839 76,063 83,160
------- ------- ------- --------
Gross profit...................... 6,978 7,872 13,266 20,694
Selling, general and administrative
expenses........................... 1,577 2,647 3,508 5,488
Restructuring Charge................ 769 - 769 -
------- ------- ------- --------
Operating income.................. 4,632 5,255 8,989 15,206
------- ------- ------- --------
Other (income) expenses:
Interest expense.................. 3,939 205 7,829 601
Other income...................... (245) (24) (353) (79)
------- ------- ------- --------
3,694 181 7,476 522
------- ------- ------- --------
Income before taxes and
extraordinary loss.............. 938 5,044 1,513 14,684
Income tax expense.................. 365 1,942 585 5,653
------- ------- ------- --------
Income before extraordinary
loss............................ 573 3,102 928 9,031
------- ------- ------- --------
Extraordinary loss on write-off of
debt issuance costs, net of income
taxes of $639...................... -- -- (1,029) --
------- ------- ------- --------
Net income (loss)................. $ 573 $ 3,102 $ (101) $ 9,031
======= ======= ======= ========
</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 Six Months
Ended June 30,
---------------------
1999 1998
-------- -------
(unaudited)
<S> <C> <C>
Net cash provided by operating activities.......................... $ 14,877 $12,703
-------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment....................... (4,138) (6,654)
-------- -------
Net cash used in investing activities.......................... (4,138) (6,654)
-------- -------
Cash flows from financing activities:
Book overdraft................................................... 3,619 (808)
Principal payments of long-term debt............................. - (6,050)
Proceeds from borrowing of revolving credit...................... 5,000 -
Payments on borrowing of revolving credit........................ (41,000) -
Payments on borrowings of term loans............................. (8,000) -
Proceeds from senior subordinated debt........................... (65,000) -
Proceeds from borrowing of notes................................. 98,000 -
Net borrowings on working capital line of credit................. - 809
Debt issuance costs.............................................. (3,357) -
-------- -------
Net cash used in financing activities............................ (10,738) (6,049)
-------- -------
Net increase in cash and cash equivalents........................ 1 -
Cash and cash equivalents at beginning of period................. 18 -
-------- -------
Cash and cash equivalent at end of period........................ $ 19 $ -
======== =======
</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 six months ended
June 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:
June 30, December 31,
1999 1998
------------ -------------
(unaudited)
Supplies........................ $ 1,539 $ 1,571
Raw materials................... 2,967 4,283
Stock-in-process................ 5,974 8,029
Finished goods.................. 29,229 28,649
------- -------
$39,709 $42,532
======= =======
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:
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
Excess of acquisition cost over
assigned value of net assets acquired... $ 5,809 $ 5,809
Debt issuance costs....................... 6,229 4,598
------- -------
12,038 10,407
Accumulated amortization.................. (1,113) (696)
------- -------
10,925 9,711
Other..................................... 334 334
------- -------
$11,259 $10,045
======= =======
4. Accrued liabilities:
Accrued liabilities consist of the following:
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
Income Taxes.............................. $ - $ 855
Payroll................................... 842 117
Pension and 401(k)........................ 2,618 4,439
Interest.................................. 4,586 553
Restructuring Reserve..................... 563 --
Other..................................... 1,403 779
------- ------
$10,012 $6,743
======= ======
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:
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
Senior Credit Facility
Amortizing Term Loan....................... $ 42,000 $ 50,000
Revolving Credit Facility.................. -- 36,000
Senior Subordinated Credit Facility.......... -- 65,000
Exchange notes, net of amortized discount.... 98,083 --
-------- --------
140,083 151,000
Less current portion......................... 2,520 1,000
-------- --------
$137,563 $150,000
======== ========
On May 28, 1999, the Company paid off $8,000 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.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
(unaudited) (unaudited)
1999 1998 1999 1998
---------- --------- --------- -----------
United States..... $42,089 $40,925 $84,709 $ 89,748
Foreign........... 2,120 4,786 4,620 14,106
------- ------- ------- --------
$44,209 $45,711 $89,329 $103,854
======= ======= ======= ========
7
<PAGE>
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
(dollars in thousands)
The following table summarizes net sales for each market BGF serves:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
1999 1998 1999 1998
---------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Electronics:
Lightweight fabrics............. $14,964 $12,881 $30,376 $ 30,042
Heavyweight fabrics............. 5,754 9,630 11,252 22,788
Composites........................ 10,359 12,875 22,178 27,742
Filtration........................ 6,049 4,640 11,962 9,075
Commercial........................ 2,946 2,491 5,343 5,259
Insulation........................ 2,203 1,945 4,095 4,042
Construction...................... 1,934 1,249 4,123 4,906
------- ------- ------- --------
$44,209 $45,711 $89,329 $103,854
======= ======= ======= ========
</TABLE>
8
<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, Inc., 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 second quarter ended June 30,
1999 due to a restructuring plan announced on May 3, 1999 that resulted in the
elimination of 67 employees across the company. The charges incurred are costs
for employee severence. As of June 30, 1999, all these employees have been
terminated and $206 of the restructuring costs have been paid out, leaving a
remaining reserve of $563 for severence payments scheduled through January,
2001. At June 30, 1999, the reserve is included in accrued liabilities in the
accompanying 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 for 10 1/4 % senior subordinated notes due
2009 that were privately issued on January 21, 1999.
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.
9
<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. In both 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.
-10-
<PAGE>
The following table summarizes approximate net sales for each of the
markets we serve, as classified by us, for the three and six months ended
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
(dollars in millions)
Electronics:
Lightweight fabrics......................................... $15.1 $12.9 $30.4 $ 30.0
Heavyweight fabrics......................................... $ 5.7 $ 9.6 $11.2 $ 22.9
Composites.................................................... $10.4 $12.9 $22.2 $ 27.6
Filtration.................................................... $ 6.0 $ 4.6 $12.0 $ 9.0
Commercial.................................................... $ 2.9 $ 2.5 $ 5.3 $ 5.3
Insulation.................................................... $ 2.2 $ 1.9 $ 4.1 $ 4.0
Construction.................................................. $ 1.9 $ 1.3 $ 4.1 $ 5.0
----- ----- ----- ------
Total net sales............................................. $44.2 $45.7 $89.3 $103.8
===== ===== ===== ======
</TABLE>
Results of Operations
The following table summarizes our historical results of operations as a
percentage of net sales for the three and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales..................................................... 100.0 % 100.0% 100.0 % 100.0 %
Cost of goods sold............................................ 84.2 % 82.8% 85.1 % 80.1 %
----- ----- ----- -----
Gross profit................................................ 15.8 % 17.2% 14.9 % 19.9 %
Selling, general and administrative expenses.................. 3.6 % 5.8% 3.9 % 5.3 %
----- ----- ----- -----
Restructuring charges 1.7 % 0.0% 0.9 % 0.0 %
----- ----- ----- -----
Operating income............................................ 10.5 % 11.4% 10.1 % 14.6 %
Other (income) expenses:
Interest expense............................................ 8.9 % 0.4% 8.8 % 0.6 %
Other expenses, net......................................... (.5)% 0.0% (0.4)% (0.1)%
----- ----- ----- -----
Income before taxes and extraordinary loss.............. 2.1 % 11.0% 1.7 % 14.1 %
----- ----- ----- -----
Income tax expense............................................ 0.8 % 4.2% 0.7 % 5.4 %
----- ----- ----- -----
Income before extraordinary loss........................ 1.3 % 6.8% 1.0 % 8.7 %
Extraordinary loss on write-off of debt issuance costs,
net of income taxes of $639................................ 0.0 % 0.0% (1.1)% 0.0 %
----- ----- ----- -----
Net income.............................................. 1.3 % 6.8% (0.1)% 8.7 %
===== ===== ===== =====
</TABLE>
-11-
<PAGE>
We have changed our definition of EBITDA to be more closely aligned with
the indebtedness covenants contained in our indenture. EBITDA, as presented
below, is now defined as net income before interest expense, income taxes,
depreciation, amortization expense, and non-recurring non-cash charges.
EBITDA is now calculated as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended Three Months Ended
December 31, June 30, June 30,
-------------------------------------------------- -------------------- ------------------
1994 1995 1996 1997 1998 1999 1998 1999 1998
--------- --------- -------- -------- -------- --------- --------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (loss)................ $ 6,787 $12,584 $24,030 $21,730 $15,317 $ (101) $ 9,031 $ 573 $3,102
Depreciation and amortization.... 7,801 8,223 6,085 6,759 7,399 4,091 3,802 2,023 1,901
Interest......................... 4,311 2,979 1,993 2,355 4,517 7,829 601 3,939 205
Taxes............................ 4,478 7,093 15,996 13,652 9,854 585 5,653 365 1,942
Extraordinary Loss, i.e.,
amortization................. -- -- -- -- -- 1,029 -- -- --
------- ------- ------ ------ ------ ------- ------- ------ ------
EBITDA........................... $23,377 $30,879 $48,104 $44,496 $37,087 $13,433 $19,087 $6,900 $7,150
======= ======= ======= ======= ======= ======= ======= ====== ======
</TABLE>
Reported EBITDA for the quarter ended June 30, 1999 decreased $0.3 million,
or 3.5%, to $6.9 million from $7.2 million for the quarter ended June 30, 1998
and for the six months ended June 30, 1999 decreased by $5.7 million, or 29.6%,
to $13.4 million from $19.1 million for the six months ended June 30, 1998. For
the twelve month period ended June 30, 1999, net sales and EBITDA were $187.2
million and $31.8 million, respectively. EBITDA for reporting purposes includes
the reduction of income of $769,000 for restructuring charges in the three
months ended June 30, 1999. If the restructuring charges were to be added back,
EBITDA would have been $7.7 million for the three months ended June 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 June 30, 1999 Compared to Three Months Ended June 30, 1998
Net Sales. Net sales decreased $ 1.5 million, or 3.3%, to $44.2 million in the
three months ended June 30, 1999, from $45.7 million in the three months ended
June 30, 1998, primarily due to a decrease of $3.9 million, or 40.6%, in the
sales of heavyweight fabrics used in rigid printed circuit boards and a decrease
of $2.5 million, or 19.4%, in the sales in the composites market due to a slow
demand for carbon and Kevlar products. These decreases were partially offset by
an increase of $2.2 million, or 17.1%, in sales in the lightweight fabric
markets and an increase of $1.4 million, or 30.4%, in the sales of filtration
fabrics.
Gross Profit Margins. Gross profit margins decreased from 17.2 % in the three
months ended June 30, 1998 to 15.8% in the three months ended June 30, 1999, due
primarily to lower volumes resulting in less absorption of fixed costs as well
as price pressures in the electronics segments.
-12-
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 3.6% from 5.8% of net sales in the three
months ended June 30, 1999 and 1998, respectively. 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. Expenses for profit sharing and
executive bonuses were $387,000 for the three months ended June 30, 1999 and
$1,357,000 for the three months ended June 30, 1998. Export sales commissions
were $21,000 for the three months ended June 30, 1999 and $88,000 for the three
months ended June 30, 1998.
BGF incurred charges of $769,000 in the second quarter ended June 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 $0.6 million to $4.6 million, or 10.5% of net sales, in the three
months ended June 30, 1999, from $5.3 million, or 11.4% of net sales, in the
three months ended June 30, 1998.
Interest Expense. Interest expense increased $3.7 million to $3.9 million in
the three months ended June 30, 1999 from $0.2 million in the three months ended
June 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 June 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 incomes taxes.
Net Income. As a result of the aforementioned factors, net income decreased
$2.5 million to $0.6 million in the three months ended June 30, 1999, from $3.1
million in the three months ended June 30, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Sales. Net sales decreased $14.5 million, or 14.0 %, to $89.3 million in
the six months ended June 30, 1999, from $103.8 million in the six months ended
June 30, 1998, primarily due to a decrease of $11.7 million, or 51.1%, in the
sales of heavyweight fabrics used in rigid printed circuit boards and a decrease
of $5.4 million, or 19.6%, in the sales in the composites market due to a slow
demand for carbon and Kevlar products. These decreases were partially offset by
a $3.0 million, or 33.3%, 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 19.9% in the six
months ended June 30, 1998 to 14.9% in the six months ended June 30, 1999, due
primarily to lower capacity utilization and price pressures in heavyweight
fabrics used in rigid printed circuit boards.
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<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 3.9% from 5.3% of net sales in the six
months ended June 30, 1999 and 1998, respectively. 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. Expenses for profit sharing and
executive bonuses were $864,000 for the six months ended June 30, 1999 and
$2,954,000 for the six months ended June 30, 1998. Export sales commissions
were $78,000 for the six months ended June 30, 1999 and $281,000 for the six
months ended June 30, 1998.
BGF incurred charges of $769,000 in the second quarter ended June 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 $6.2 million to $9.0 million, or 10.1% of net sales, in the six months
ended June 30, 1999, from $15.2 million, or 14.6 % of net sales, in the six
months ended June 30, 1998.
Interest Expense. Interest expense increased $7.2 million to $7.8 million in
the six months ended June 30, 1999, from $0.6 million in the six months ended
June 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 six months ended June 30,
1999 and 1998 of 38.7% 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 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 $9.1 million to a loss of $0.1 million in the six
months ended June 30, 1999, from $9.0 million in the six months ended June 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.
On January 21, 1999, we privately issued 10 1/4% Senior Subordinated Notes
due 2009. Our net proceeds from the sale of these old notes were approximately
$94.9 million, after deducting the initial purchaser's discount and expenses of
the offering of the old notes. We used the net proceeds from the offering to
repay all $65.0 million of indebtedness under the term loan
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<PAGE>
under a senior subordinated credit facility and $29.9 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 $14.9 million for the six months ended June 30, 1999 and was
primarily the result of non-cash adjustments, to net income for depreciation of
$4.0 million and amortization of $2.2 million, a decrease in inventory of $2.8
million and an increase in accounts payable and accrued expenses of $4.9
million.
Net Cash Used in Investing Activities. Net cash used in investing activities
was $4.1 million for the six months ended June 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
$10.7 million for the six months ended June 30, 1999 and was primarily the
result of payments on the senior subordinated debt of $65.0 million and net
payments on the revolving credit facility of $41.0 million and an $8.0 million
payment on the term loan, offset by proceeds from the notes of $98.0 million.
Indebtedness and Other Matters. At June 30, 1999, we had outstanding $140.1
million of long-term debt, consisting of $42.0 million under the term loan of
our senior credit facility and $98.1 million under our notes (net of discount of
$1.9 million).
Capital Expenditures. We have historically financed our capital expenditures
through cash flow from operations and borrowings under our credit facilities.
Capital expenditures were $1.8 million for the three months ended June 30, 1999
and $4.1 million for the six months ended June 30, 1999. The principal capital
expenditures during these periods included $1.8 million of a $4.0 million new
non-woven line for insulation applications. The project is targeted for
completion in 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 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
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<PAGE>
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
The following is a summary update of our Year 2000 efforts. For a full
discussion of the risks presented by Year 2000 issues, a description of the
phases of our Year 2000 efforts, our business systems and our embedded
technology, and an historical account of our progress through the phases of our
Year 2000 efforts, please read the following together with the "Year 2000"
discussion included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Registration Statement.
As of the end of July 1999, we had completed the necessary upgrade to one
of the databases in our financial package that had been identified for an
upgrade by its manufacturer. The financial package is part of our business
systems.
The following table shows our progress as of July 28, 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/Estimated 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 Loom monitoring
Implementation................ 100% 7/31/1999 98% systems: 9/30/1999
Other: 4/30/1999
</TABLE>
Costs. Expenses incurred through July 28, 1999 for our Year 2000 efforts
were approximately $380,000. We continue to estimate that our total overall
costs related to our Year 2000 efforts will be $400,000. 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
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<PAGE>
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.
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 compliant on schedule, that Year 2000 related
costs will not become material or that our contingency plans, when finalized,
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.
The 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 compliant.
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 June 30, 1999, we had an
interest rate swap agreement effective through September 30, 2004 on a notional
amount of $42.0 million. Under this agreement, we have secured a fixed LIBOR
rate of interest of 5.04% on the notional amount which 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 $42.0 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 June 30,
1999, we would have received approximately $1.2 million to terminate the
agreement. A 1% decrease in LIBOR would decrease the amount received by
approximately $0.06 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: August 6, 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> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 19 0
<SECURITIES> 0 0
<RECEIVABLES> 21,427 0
<ALLOWANCES> (673) 0
<INVENTORY> 39,709 0
<CURRENT-ASSETS> 4,499 0
<PP&E> 132,519 0
<DEPRECIATION> (74,329) 0
<TOTAL-ASSETS> 134,430 0
<CURRENT-LIABILITIES> 25,310 0
<BONDS> 0 0
0 0
0 0
<COMMON> 1 0
<OTHER-SE> (38,278) 0
<TOTAL-LIABILITY-AND-EQUITY> 134,430 0
<SALES> 89,329 103,854
<TOTAL-REVENUES> 89,329 103,854
<CGS> 76,063 83,160
<TOTAL-COSTS> 76,063 83,160
<OTHER-EXPENSES> 4,277 5,488
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,829 601
<INCOME-PRETAX> 1,513 14,684
<INCOME-TAX> 585 5,653
<INCOME-CONTINUING> 928 9,031
<DISCONTINUED> 0 0
<EXTRAORDINARY> (1,029) 0
<CHANGES> 0 0
<NET-INCOME> (101) 9,031
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
