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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, 2002
Commission File No. 333-72321
BGF Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 2221 56-1600845
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
3802 Robert Porcher Way, Greensboro, North Carolina 27410
(Address of registrant's principal executive office) (Zip Code)
(336) 545-0011
(Registrant's telephone number, including area code)
________________
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 August 19, 2002.
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BGF INDUSTRIES, INC.
QUARTERLY REPORT FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page No.
-------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001 1
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the three months and six months ended June 30, 2002 and 2001
(unaudited) 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited) 3
Notes to the Consolidated Financial Statements 4 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview 14
Environmental Issues 16
Results of Operations 17
Liquidity and Capital Resources 21
Disclosure Regarding Forward Looking Statements 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Current assets:
Cash $ 901 $ 22
Trade accounts receivable, net 15,408 12,710
Inventories 31,017 39,037
Income tax refundable 2,962 841
Deferred income taxes 4,705 3,476
Other current assets 1,585 376
----------- ------------
Total current assets 56,578 56,462
Property, plant and equipment, net 51,581 62,155
Deferred income taxes - 8,534
Intangible assets, net 2,866 7,967
Other noncurrent assets, net 244 481
----------- ------------
Total assets $ 111,269 $ 135,599
=========== ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Book overdraft $ - $ 2,528
Current portion of long term debt, net of discount of $1,317 128,683 -
Accounts payable 5,907 4,171
Accrued liabilities 10,047 7,642
----------- ------------
Total current liabilities 144,637 14,341
Long-term debt, net of discount of $1,417 - 125,583
Deferred income taxes 4,705 -
Post-retirement and pension benefit obligations 6,144 5,415
----------- ------------
Total liabilities 155,486 145,339
----------- ------------
Commitments and contingencies
Stockholder's 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 37,398 71,981
Accumulated other comprehensive loss (236) (342)
Loan to parent (116,379) (116,379)
----------- ------------
Total stockholder's deficit (44,217) (9,740)
----------- ------------
Total liabilities and stockholder's deficit $ 111,269 $ 135,599
=========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
1
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30
--------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------
(unaudited) (unaudited)
Net sales $ 34,519 $ 34,426 $ 70,862 $ 80,984
Cost of goods sold 36,682 30,406 72,504 68,707
---------- ---------- ---------- ----------
Gross profit (loss) (2,163) 4,020 (1,642) 12,277
Selling, general and administrative expenses 5,136 1,867 6,479 4,567
Asset impairment charges 5,816 - 5,816 -
---------- ---------- ---------- ----------
Operating income (loss) (13,115) 2,153 (13,937) 7,710
Interest expense 3,307 3,112 6,640 6,408
Other (income) loss, net (6) (990) (6) (1,111)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (16,416) 31 (20,571) 2,413
Income tax expense 10,902 12 9,286 928
---------- ---------- ---------- ----------
Net income (loss) before cumulative
effect of change in accounting principle (27,318) 19 (29,857) 1,485
Cumulative effect of change in accounting
principle - - (4,726) -
---------- ---------- ---------- ----------
Net income (loss) (27,318) 19 (34,583) 1,485
Other comprehensive income (loss) net of
tax:
Cumulative effect of change in
accounting principle - - - 183
Change in fair value of cash flow hedge 19 (13) 106 (248)
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ (27,299) $ 6 $ (34,477) $ 1,420
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
2
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Six Months
Ended June 30,
--------------------------------
2002 2001
--------------------------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (34,583) $ 1,485
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 4,503 4,147
Cumulative effect of change in accounting principle 4,726 -
Asset impairment charges 5,816 -
Amortization of intangible assets 375 484
Amortization of discount on notes 100 100
Deferred income taxes 12,010 (2,436)
Post-retirement and pension benefit obligations 729 490
Loss on disposal of equipment 1 178
Change in assets and liabilities:
Trade accounts receivable, net (2,698) 11,216
Inventories 8,020 (12,757)
Current income tax refundable (2,121) -
Other current assets (659) (2,876)
Other assets 237 111
Accounts payable 2,820 (4,698)
Accrued liabilities 2,511 (4,473)
----------- ----------
Net cash provided by (used in) operating activities 1,787 (9,029)
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,417) (7,944)
Proceeds from sale of equipment 37 64
----------- ----------
Net cash used in investing activities (1,380) (7,880)
----------- ----------
Cash flows from financing activities:
Book overdraft (2,528) 1,815
Proceeds from revolver 38,700 33,000
Payments on revolver (35,700) (23,000)
Payment on term loan - (3,596)
Payment received on loan to parent - 8,698
----------- ----------
Net cash provided by financing activities 472 16,917
----------- ----------
Net increase in cash 879 8
Cash at beginning of period 22 8
----------- ----------
Cash at end of period $ 901 $ 16
=========== ==========
Supplemental disclosure of non-cash investing activities:
Property and equipment financed in accounts payable $ 333 $ 2,131
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,078 $ 6,122
=========== ==========
Cash paid (received) during the period for income taxes $ (546) $ 448
=========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
3
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of BGF
Industries, Inc. ("the Company") have been prepared 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 three and six months ended June 30, 2002 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, 2001 on file with the Securities and Exchange Commission in
the 2001 Annual Report on Form 10-K.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. Liquidity and Financial Condition
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
contemplate the Company's continued existence as a going concern. The Company
experienced a rapid deterioration of its liquidity and financial condition
during the three months ended June 30, 2002 as a result of worsening industry
and economic conditions that had an adverse effect on its ability to generate
revenue and sufficient liquidity to fund its operations. The Company incurred a
net loss of approximately $27.3 million for the three months ended June 30, 2002
and has an $88.1 million working capital deficiency and a $44.2 million
stockholder's deficit as of June 30, 2002.
As discussed in Note 8, the Company violated certain of its financial and
other covenants under its Senior Credit Facility for the quarter ended June 30,
2002 and was prohibited by its senior lenders under the terms of the Senior
Credit Facility from making a required interest payment that was due to the
holders of the Company's senior subordinated notes on July 15, 2002.
On August 13, 2002, the Company and its senior lenders executed a
forbearance agreement with respect to breaches of these financial covenants. As
a result, the senior lenders have rescinded their payment blockage notice
prohibiting the Company from making the required interest payment on its senior
subordinated notes due 2009 on July 15, 2002. Accordingly, on August 14, 2002,
the Company made the interest payment on the notes that was previously required
on July 15, 2002.
4
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company's continued existence is dependent upon several factors
including its ability to generate sufficient operating cash flow, restructure
its operations, secure additional and/or replacement financing to meet its
working capital needs and comply with the provisions of its Senior Secured
Credit Facility forbearance agreement such that the senior lenders will not
demand immediate repayment of its outstanding debt under the Senior Credit
Facility. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The economic downturn that began during 2001 caused most companies in the
electronics industry (a significant market segment of the Company's business) to
re-evaluate their expectations with respect to how they believed they would
perform through 2002. The Company did not immediately experience the effects of
changing conditions in the economy or the electronics industry and believed that
the downturn in the electronics industry (based on historically high levels of
demand) was likely to be temporary. Accordingly, the Company maintained its
normal levels of production through mid 2001 based on its belief that the
economy would recover, demand would increase and that it would be largely
unaffected by a decline in the electronics industry. The Company's expectations
with respect to these conditions initially appeared to be correct as its sales
increased by $5.6 million to $36.3 million for the three months ended March 31,
2002 as compared to $30.7 million for the three months ended December 31, 2001.
However, additional sales increases forecasted by the Company for the three
months ended June 30, 2002 did not materialize and as a result increased
production levels were not warranted. The Company's sales decreased by $1.8
million to $34.5 million for the three months ended June 30, 2002 as compared to
the three months ended March 31, 2002, which placed additional constraints on
its liquidity and capital resources.
The Company is continuing to operate its business based on its belief
that current economic conditions and the decline in the electronics industry,
which had an adverse effect on its operations, are temporary. Accordingly, the
Company has taken steps to restructure its operations aimed at strengthening the
business including, but not limited to, (i) maintaining an aggressive cost
cutting program, (ii) announcing the closure of its South Hill heavyweight
fabrics facility and consolidating such operations into its newly constructed
South Hill multilayer facility to reduce excess capacity and (iii) engaging the
crisis management consulting firm of Realization Services, Inc. to assist in
formulating and implementing a plan to restructure its operations and explore
other strategic alternatives including a possible capital restructuring.
As discussed further in Note 12, an affiliate of the Company, Advanced
Glassfiber Yarns LLC ("AGY"), is also a major supplier and is experiencing
financial difficulties which could result in the risk that obtaining raw
materials from sources other than AGY would be more costly and could be
disruptive to the Company's business.
5
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
There can be no assurance that the Company will be successful in its
efforts to restructure its operations or that a restructuring of its operations
will actually improve its operating results. There also can be no assurance that
the Company will obtain any satisfactory terms, if at all, on the financing it
needs to sustain its business operations or that it will be able to comply with
the terms of its forbearance agreement with the senior lenders that will avoid
an acceleration of debt outstanding under the Senior Credit Facility.
3. Inventories
Inventories consist of the following:
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
Supplies $ 1,694 $ 2,001
Raw materials 2,007 2,591
Stock-in-process 5,273 5,507
Finished goods 22,043 28,938
--------- ---------
$ 31,017 $ 39,037
========= =========
In accordance with its policy of stating its inventories at the lower
of cost or market, the Company undertook an extensive re-evaluation of its
inventory valuation estimates in response to current market conditions that
caused the Company to have a build-up of excess and obsolete inventory as of
June 30, 2002. Accordingly, the Company increased its inventory reserve in the
second quarter of 2002 by approximately $4.5 million, which is included in cost
of goods sold on the accompanying consolidated statement of operations.
4. Income Taxes and Deferred Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
June 30, December 31,
2002 2001
---- ----
(unaudited)
Deferred tax assets:
Interest on loan to parent $15,757 $14,635
Inventories 2,474 1,020
Accrued liabilities 1,389 1,643
Accounts receivable 188 154
Tax credits 630 630
Accrued retirement benefits 1,738 1,003
Other 186 -
--------- -------
22,362 19,085
Valuation allowance (17,081) -
--------- -------
5,281 19,085
--------- -------
6
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Deferred tax liabilities:
Depreciation (4,131) (5,925)
Other (1,150) (1,150)
------- --------
(5,281) (7,075)
------- --------
Net deferred tax asset $ - $ 12,010
======= ========
Prior to the second quarter 2002, the Company recorded interest income
earned under the terms of the loan agreement with Glass Holdings for tax
purposes. The Company did not record this income for financial reporting
purposes which results in a deferred tax asset. Full repayment of the loan and
related interest by Glass Holdings is contingent on Glass Holdings' receipt of
dividends and other distributions from its two subsidiaries, the Company and AGY
Holdings, which are currently restricted from paying dividends and other
distributions under their various debt instruments. During the second quarter
2002, due to the poor operating performance and related liquidity constraints of
the Company and AGY Holdings, the Company recorded a full valuation allowance
against this and other deferred tax assets of approximately $17.1 million as it
is more likely than not that their benefits will not be realized in the future.
A reconciliation of the difference between income taxes computed by
applying the federal statutory rate and income tax expense in the consolidated
statement of operations and comprehensive income (loss) for the six months ended
June 30, 2002 is as follows:
Tax (benefit) at federal statutory rate $(7,200)
State income taxes (benefit), net of (662)
federal benefit
Valuation allowance 17,081
Other 67
-------
$ 9,286
=======
5. Property, Plant and Equipment, Net
Net property, plant and equipment consists of the following:
June 30, December 31,
2002 2001
---- ----
(unaudited)
Land $ 3,155 $ 3,155
Buildings 42,215 42,195
Machinery and equipment 81,367 104,090
--------- --------
Gross property, plant and equipment 126,737 149,440
Less: accumulated depreciation (74,606) (87,285)
--------- --------
52,131 62,155
Less: assets held for sale included in other current assets (550) -
--------- --------
Net property, plant and equipment $ 51,581 $ 62,155
========= ========
7
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company's loss condition in the second quarter of 2002 required it
to perform an analysis of long-lived assets to determine whether or not an
impairment had occurred, which would require accounting recognition in
accordance with generally accepted accounting principles. Accordingly, the
Company undertook an analysis of its long-lived assets that it uses in its
manufacturing operations at each of its plants and compared the net book value
of those assets to the estimated undiscounted future cash flows associated with
each of the applicable asset groups. As a result, the Company determined that an
impairment of machinery and equipment used in its South Hill heavyweight fabrics
manufacturing facility had occurred and recorded a $4.7 million write-down to
reduce the carrying value of machinery and equipment to its estimated fair value
based on prices for similar assets. This charge is recorded in asset impairment
charges on the accompanying consolidated statement of operations. On August 1,
2002, the Company announced its decision to temporarily close this facility for
at least six months. Any decision to reopen this facility will depend on market
conditions in 2003.
During the second quarter of 2002, the Company committed to sell
certain manufacturing equipment to an affiliate. The Company has recorded a $1.0
million write-down to reduce the carrying value of these assets to their fair
value of $0.5 million as determined by a third party appraisal and has recorded
the assets in other current assets. The sale was finalized in August 2002. The
charge of $1.0 million associated with this write-down is included in asset
impairment charges in the accompanying consolidated statement of operations. The
$1.0 million charge associated with the sale of this equipment is based upon the
difference between the net book value of the equipment of $1.5 million and the
selling price of $0.5 million.
6. Intangible Assets, net
Intangible assets consist of the following:
June 30, December 31,
2002 2001
---------- ------------
(unaudited)
Amortized intangible assets:
Debt issuance costs $ 5,073 $ 5,073
Accumulated amortization (2,207) (1,832)
---------- ----------
2,866 3,241
---------- ----------
Unamortized intangible assets:
Goodwill, net - 4,726
---------- ----------
Total intangible assets $ 2,866 $ 7,967
========== ==========
The debt issuance costs are being amortized over the terms of the
respective debt instruments, ranging from 6 to 10 years.
The Company had unamortized intangible assets as of December 31, 2001
with a gross carrying amount of $5,809 less accumulated amortization of $1,083.
Such intangible assets related to goodwill which originated with the acquisition
of the Company by the Porcher Group in 1988.
8
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 142 effective January 1, 2002. In accordance with SFAS No.
142, the Company ceased amortizing goodwill on the same date. SFAS No. 142
requires that an intangible asset that is acquired shall be initially recognized
and measured based on its fair value. The statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. The Company completed its transitional
goodwill impairment test in the second quarter of 2002. In performing this test,
the Company estimated the fair value of its business on a discounted cash flow
basis. Based on this analysis, the Company determined that recorded goodwill
exceeded its implied fair value and an impairment charge was recorded.
Accordingly, the Company recorded a noncash charge of $4.7 million, which is
recognized as the cumulative effect of a change in accounting principle in the
Consolidated Statement of Operations in 2002. There was no income tax benefit
recognized for this charge. Net income for the three and six months ended June
30, 2001, exclusive of amortization of goodwill, was $0.1 million and $1.6
million, respectively.
The provisions of SFAS 142 allowed the Company to finalize its
transitional impairment testing during 2002 subsequent to the date of adoption
of SFAS 142. As a result of the impairment charge recognized under the
transitional impairment test, the Company has restated its first quarter results
to reflect the charge as of January 1, 2002, the date of adoption of SFAS 142.
The first quarter 2002 results as restated and as previously reported are as
follows:
As As Previously
Restated Reported
Net sales $ 36,343 $ 36,343
Cost of goods sold 35,822 35,822
--------- --------
Gross profit 521 521
Selling, general and administrative expenses 1,343 1,343
--------- --------
Operating loss (822) (822)
Interest expense 3,333 3,333
Loss before income taxes (4,155) (4,155)
Income tax benefit 1,616 1,616
--------- --------
Loss before cumulative effect of change in accounting policy (2,539) (2,539)
Cumulative effect of change in accounting policy (4,726) -
--------- --------
Net loss $ (7,265) $ (2,539)
========= ========
9
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
7. Accrued Liabilities
Accrued liabilities consist of the following:
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
Payroll $ 282 $ 163
Environmental 2,786 434
Interest 4,922 4,836
Restructuring 209 467
Medical benefits 921 921
Other 927 821
---------- --------
$ 10,047 $ 7,642
========== ========
Restructuring. In 2001, the Company approved a restructuring plan which
resulted in the reduction of the Company's salary and wage workforce by
approximately 25%. As a result of the restructuring, the Company incurred
charges during the third quarter of 2001 of $0.5 million. The charges incurred
were costs for salaried employee severance. Such payments are being made through
the end of 2002.
Environmental. A September 1998 environmental site assessment
discovered reportable quantities of polychlorinated biphenyls ("PCBS") in soil
at the Altavista plant in and around the former site of a heat transfer oil tank
that the previous owner of the facility had removed in 1986, before BGF's 1988
acquisition. The Company immediately reported the contamination to United States
Environmental Protection Agency EPA and the Virginia Department of Environmental
Quality ("VDEQ").
The Company worked with the EPA and VDEQ to establish a sampling
protocol. The assessment revealed that the plant was contaminated with PCBs
inside in several rooms, outside in the soil, on the roof, in the sanitary and
storm sewers, and in the creeks to which the storm sewers drain. The Company has
also been informed that PCBs may have migrated their way into the city's water
treatment plant. A Site Characterization report was submitted to the EPA in
April 2001. The EPA responded to that report in May 2002 with a request for
additional assessment. The Company responded to the EPA's request in late June
2002 and proposed actions consistent with EPA's request. In light of these
recent developments, the Company has recorded an additional reserve of $2.0
million, which reflects the estimated remediation costs for the Altavista plant
as obtained from an environmental specialist. However, such remediation costs
are subject to approval of a remediation plan by the EPA which has not been
obtained at this time. The Company also has contamination issues at its Cheraw
facility. The estimated loss due to this contamination is $0.4 million, which is
also reflected in the reserve.
10
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company believes that these reserves may need to be increased, but
the Company is unable to derive a more reliable estimate at this time as actual
costs remain uncertain. The Company does not anticipate significant cash
outflows associated with this liability in the next twelve months as the
remediation plan has not been submitted to and approved by the EPA, however,
there can be no assurance that the Company will not be required to respond to
its environmental issues on a more immediate basis and that such response, if
require, will not result in significant cash outlays.
8. Debt
Debt consists of the following:
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
Senior Credit Facility:
Revolving Credit Facility $ 30,000 $ 27,000
Senior Subordinated Notes, net of unamortized discount 98,683 98,583
--------- ---------
$ 128,683 $ 125,583
========= =========
As of June 30, 2002, the Company was in violation of certain financial
and other covenants under the Senior Credit Facility. On July 10, 2002, the
Company received a default notice from its senior lenders as a result of its
failure to comply with certain covenants as required by the debt agreement.
Further, as permitted under the terms of the Senior Credit Facility, the lenders
issued a payment blockage notice prohibiting the Company from making a required
interest payment on its Senior Subordinated Notes on July 15, 2002.
On August 13, 2002, the Company and its senior lenders executed a
forbearance agreement with respect to breaches of these financial covenants. As
a result, the senior lenders have rescinded their payment blockage notice
prohibiting the Company from making the required interest payment on its senior
subordinated notes due 2009 on July 15, 2002. Accordingly, on August 14, 2002,
the Company made the interest payment on the notes that was previously required
on July 15, 2002, which was within the thirty-day period provided for in the
indenture covering the Senior Subordinated Notes.
The forbearance agreement expires on March 31, 2003. This agreement and
amendment to the Senior Credit Facility provides for the following: (1) does not
require a certain interest coverage ratio until the quarter ended March 31,
2003, (2) a lower required level of consolidated net worth beginning with the
quarter ended September 30, 2002, (3) available funding of up to approximately
$24.0 million, in total, under the revolver, term loan, swingline, and letter of
credit portions of the facility, (4) a requirement to reduce the aggregate level
of outstanding commitments by $1.5 million per month beginning August 31, 2002
and $2.0 million per month thereafter and (5) borrowing rates based on leverage
ratio.
As a result of the covenant violations under the Senior Credit Facility
as of June 30, 2002 and the anticipated covenant violations subsequent to the
expiration of the forbearance agreement term, the Senior Credit Facility has
been classified as a current liability in the accompanying balance sheet. The
Senior Subordinated Notes have also been classified as a current liability due
to the fact that they are subordinate to the Senior Credit Facility.
11
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company anticipates pursuing replacement financing prior to the
expiration of the forbearance agreement. The Company is implementing an asset
utilization plan focused on inventory reduction and the sale and leaseback of
certain assets that should result in sizable reductions of the outstanding
balance under the Senior Credit Facility. Such a reduction should allow for a
refinancing under an asset based lending structure before the end of the
forbearance period. However, there can be no assurance that the Company will
find the financing it needs to sustain the business operations or that it will
be able to comply with the terms of its forbearance agreement with the lenders
that will avoid an acceleration of debt outstanding under the Senior Credit
Facility.
The fair value of the Senior Subordinated Notes as of August 16, 2002
and June 30, 2002 was approximately $64.0 million and $76.5 million,
respectively.
During the second quarter of 2002, the Company incurred charges of $0.5
million associated with the pursuit of an asset based lending arrangement that
was not consummated.
In addition, during the second quarter of 2002, the Company paid $0.4
million to terminate its interest rate swap agreement. The amount remaining in
other comprehensive income (loss) will be recognized in earnings over the
remaining life of the underlying debt.
9. Segment Information
The Company operates in one business segment that manufactures
specialty woven and non-woven fabrics for use in a variety of industrial and
commercial applications. The Company's principal market is the United States.
Net sales information by geographic area is presented below, with sales based on
the location of the customer. The Company does not have any long-lived assets
outside the United States.
For the Three Months Ended For the Six Months Ended
June 30 June 30
----------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------
(unaudited)
United States $32,683 $33,032 $67,600 $ 76,942
Foreign 1,836 1,394 3,262 4,042
------- ------- ------- --------
$34,519 $34,426 $70,862 $ 80,984
======= ======= ======= ========
10. Commitments and Contingencies
As discussed in Note 7, the Company has environmental exposures
associated with two of its manufacturing facilities.
From time to time, the Company is involved in various other legal
proceedings and environmental matters arising in the ordinary course of
business. Management believes, however, that the ultimate resolution of such
matters will not have a material adverse impact of the Company's financial
position or results of operations.
12
BGF INDUSTRIES, INC.
(a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
11. Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145. This Statement
modifies or amends several other authoritative pronouncements, including those
covering gains and losses from extinguishment of debt. Management is currently
evaluating the effects of this Statement.
On June 28, 2002, the Financial Accounting Standards Board ("FASB")
FASB issued Statement No. 146, Accounting for Exit and Disposal Activities,
which is required to be adopted for disposal activities initiated after December
31, 2002. Management is currently evaluating the effects of this Statement.
12. Related Party Transactions
An affiliate of the Company, AGY, is also a major supplier. AGY is
experiencing financial difficulties and has defaulted on both its senior credit
facility and senior subordinated notes and is currently operating under a
forbearance agreement with its senior lender. AGY is in negotiations with its
senior lenders to restructure its debt and negotiating favorable amendments to
its senior credit facility. However, there can be no assurance that AGY will
obtain necessary amendments or will otherwise be able to refinance its debt on
favorable terms, if at all. This situation could potentially have a negative
short-term affect on the Company's raw materials supply.
During the second quarter 2002, the Company's parent, Glass Holdings,
received a $6.9 million income tax refund related to the filing of the 2001
consolidated return. On August 13, 2002, this amount was remitted to the
Company, which reduced the loan receivable from Glass Holdings.
On August 13, 2002, the Company received $5.0 million from Glass
Holdings under a loan agreement whereby the loan matures on or before June 30,
2003. Interest on the loan is at 3.25% and is payable quarterly in arrears
beginning December 2002 or may be added to the principal amount of the loan.
13. Subsequent Events
As previously discussed in Note 6, on August 1, 2002, the Company
announced the closure of one of its facilities in South Hill, Virginia and plans
to consolidate such operations into its newly constructed multilayer facility to
reduce excess capacity. The plant will be closed effective October 1, 2002.
Estimated restructuring charges, primarily associated with employee severance,
of $0.3 million were recorded at the time of the announcement.
As discussed in Note 8, the Company entered into a forbearance
agreement with its senior lenders on August 13, 2002.
On August 1, 2002, the Company finalized the sale of equipment to an
affiliate, as discussed in Note 6.
See Note 12 for additional subsequent events involving related parties.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report contains 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 Quarterly
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 herein under the caption
"Disclosure 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 financial statements and related notes, and
with our audited consolidated financial statements and related notes as of and
for the year ended December 31, 2001 set forth in our 2001 Annual Report on Form
10-K.
Overview
Our business focuses on the production of value-added specialty woven
and non-woven fabrics made from glass, carbon and aramid yarns. 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.
The economic downturn that began during 2001 caused most companies in
the electronics industry (a significant market segment of our business) to
re-evaluate their expectations with respect to how they believed they would
perform through 2002. We did not immediately experience the effects of changing
conditions in the economy or the electronics industry and believed that the
downturn in the electronics industry (based on historically high levels of
demand) was likely to be temporary. Accordingly, we proceeded to maintain our
normal levels of production through mid 2001 based on our belief that the
economy would recover, demand would increase and that we would be largely
unaffected by a decline in the electronics industry. Our expectations with
respect to these conditions initially appeared to be correct as our sales
increased by $5.6 million to $36.3 million for the three months ended March 31,
2002 as compared to $30.7 million for the three months ended December 31, 2001.
However, additional sales increases forecasted for the three months ended June
30, 2002 did not materialize. Sales decreased by $1.8 million to $34.5 million
for the three months ended June 30, 2002 as compared to the three months ended
March 31, 2002, which placed additional constraints on our liquidity and capital
resources.
On July 10, 2002, we received notice from Wachovia Bank National
Association, as agent for the lenders under the credit agreement dated September
30, 1998 (the "Senior Credit Facility") that, as a result of our failure to
maintain the minimum interest coverage and senior leverage ratios required under
the credit agreement, we were in default of the Senior Credit Facility. Further,
as permitted under the terms of the Senior Credit Facility, the lenders issued a
14
payment blockage notice prohibiting us from making a required interest payment
on our 10 1/4% Series B Senior Subordinated Notes due 2009 (the "Senior
Subordinated Notes") on July 15, 2002. As a result, we were restricted from
making the required interest payment to the holders of the Senior Subordinated
Notes.
On August 13, 2002, we and our senior lenders executed a forbearance
agreement with respect to breaches of these financial covenants and,
accordingly, on August 14, 2002, we made the interest payment on the Senior
Subordinated Notes that was previously required on July 15, 2002. See "Liquidity
and Capital Resources" for more information.
In addition, see "Environmental Issues" for further discussion of
exposures at our Altavista plant.
We are continuing to operate the business based on our belief that
current economic conditions and the decline in the electronics industry, which
had an adverse affect on our operations, is temporary. Accordingly, we have
taken certain steps to restructure our operations aimed at strengthening the
business including, but not limited to, (i) maintaining an aggressive cost
cutting program, (ii) announcing the closure of our South Hill heavy weight
fabrics facility and plans to consolidate such operations into our newly
constructed South Hill multilayer facility to reduce excess capacity and (iii)
engaging the crisis management consulting firm of Realization Services, Inc. to
assist in formulating and implementing a plan to restructure operations and
explore other strategic alternatives including a possible capital restructuring.
The plan is essentially focused on maximizing the asset utilization, reducing
inventory levels and costs, and the sale/leaseback of certain real property.
There can be no assurance that we will be successful in our efforts to
restructure our operations or that a restructuring of our operations will
actually improve our operating results. There also can be no assurance that we
will obtain on satisfactory terms, if at all, the financing we need to sustain
the business operations or that we will be able to comply with the term of the
forbearance agreement with the senior lenders that will avoid an acceleration of
debt outstanding under our Senior Credit Facility. These matters raise
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Significant charges recorded in the second quarter of 2002 include:
Inventory Write Downs. In accordance with our policy of stating inventories at
the lower of cost or market, we undertook an extensive re-evaluation of our
inventory valuation estimates in response to current market conditions that
caused us to have a build-up of excess and obsolete inventory as of June 30,
2002. It is our belief that the inventory was materially adversely affected by a
decline in market conditions in the second quarter of 2002 that was inconsistent
with our previous expectations and resulted in an accumulation of excess,
obsolete and slow-moving inventory. Accordingly, we increased our inventory
reserve in the second quarter of 2002 by approximately $4.5 million. The effects
of the write-down are included in cost of goods sold on the accompanying
consolidated statement of operations.
Asset Impairment. Our loss condition in the second quarter of 2002 required us
to perform an analysis of long-lived assets to determine whether or not an
impairment had occurred which would require accounting recognition in accordance
with generally accepted accounting principles. Accordingly, we undertook an
analysis of our long-lived assets that we use in our manufacturing operations at
each of our plants and compared the net book value of those assets to the
estimated undiscounted future cash flows associated with each of the applicable
asset groups. As a result, we determined that an impairment of machinery and
equipment used in our South
15
Hill heavyweight fabrics facility had occurred and recorded a $4.7 million
write-down to reduce the carrying value of machinery and equipment to its
estimated fair value.
During the second quarter of 2002, we committed to sell certain
manufacturing equipment from the South Hill heavyweight fabrics facility to an
affiliate. We have written down these assets to their fair value of $0.5 million
as determined by a third party appraisal and have recorded the assets in other
current assets. The sale was finalized in August 2002. The charge of $1.0
million associated with this write-down is included in asset impairment charges
in the consolidated statement of operations. The $1.0 million charge associated
with the sale of this equipment is based upon the difference between the net
book value of the equipment of $1.5 million and the selling price of $0.5
million.
Goodwill Valuation. We adopted the provisions of SFAS No. 142 effective January
1, 2002. In accordance with SFAS No. 142, we ceased amortizing goodwill on the
same date. SFAS No. 142 requires that an intangible asset that is acquired shall
be initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. We
completed our transitional goodwill impairment test in the second quarter of
2002. In performing this test, we estimated the fair value of our business on a
discounted cash flow basis. Based on this analysis, we determined that recorded
goodwill exceeded its implied fair value and an impairment charge was recorded.
Accordingly, we recorded a noncash charge of $4.7 million, which is recognized
as the cumulative effect of a change in accounting principle in the consolidated
statement of operations in 2002. There was no income tax benefit recognized for
this charge.
Deferred Tax Asset Valuation. Prior to the second quarter 2002, we recorded
interest income earned under the terms of the loan agreement with Glass Holdings
for tax purposes. We have not recorded this income for financial reporting
purposes, which resulted in a deferred tax asset. Full repayment of the loan and
related interest by Glass Holdings is contingent on Glass Holdings receipt of
dividends and other distributions from its two subsidiaries, the Company and AGY
Holdings, which are currently restricted from paying dividends and other
distributions under their various debt instruments. During the second quarter
2002, due to our poor operating performance and related liquidity constraints,
as well as the liquidity constraints of AGY Holdings, we recorded a full
valuation allowance against this and other deferred tax assets of approximately
$17.1 million.
Environmental Issues
In the course of a September 1998 environmental site assessment, we
discovered reportable quantities of polychlorinated biphenyls ("PCBs") in soil
at the Altavista facility in and around the former site of a heat transfer oil
tank that the previous owner of the facility had removed in 1986, before BGF's
1988 acquisition. We immediately reported the contamination to the EPA and the
Virginia Department of Environmental Quality ("VDEQ").
We worked with the EPA and VDEQ to establish a sampling protocol. The
assessment revealed that the plant was contaminated with PCBs inside in several
rooms, outside in the soil, on the roof, in the sanitary and storm sewers, and
in the creeks to which the storm sewers drain. We have also been informed that
PCBs may have migrated their way into the city's water treatment plant. A Site
Characterization report was submitted to the EPA in April 2001. The EPA
responded to that report in May 2002 with a request for additional assessment.
We responded to the EPA's request in late June 2002 and proposed actions
consistent with EPA's
16
request. In light of these recent developments, we have recorded an additional
reserve of $2.0 million, which reflects the estimated remediation costs for the
Altavista facility as obtained from an environmental specialist. However, such
remediation costs are subject to approval of a remediation plan by the EPA,
which has not been obtained at this time. We also have contamination issues at
our Cheraw facility. The estimated loss due to this contamination is $0.4
million, which is also reflected in the reserve.
We believe that these reserves may need to be increased, but we are
unable to derive a more reliable estimate at this time as actual costs remain
uncertain. We do not anticipate significant cash outflows associated with this
liability in the next twelve months as the remediation plan has not been
submitted to and approved by the EPA. However, there can be no assurance that
the Company will not be required to respond to its environmental issues on a
more immediate basis and that such response, if required, will not result in
significant cash outlays.
Results of Operations
The following table summarizes our historical results of operations as
a percentage of net sales:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
(unaudited)
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 106.3% 88.3% 102.3% 84.8%
----- ----- ----- -----
Gross profit (6.3)% 11.7% (2.3)% 15.2%
Selling, general and administrative
expenses 14.9% 5.4% 9.1% 5.7%
Asset impairment charges 16.8% - 8.2% -
----- ----- ----- -----
Operating income (loss) (38.0)% 6.3% (19.6)% 9.5%
Interest expense 9.6% 9.0% 9.4% 7.9%
Other (income), net 0.0% (2.8)% 0.0% (1.4)%
----- ----- ----- -----
Income (loss) before income taxes
and cumulative effect of change
in accounting principle (47.6)% 0.1% (29.0)% 3.0%
Income tax expense 31.6% 0.0% 13.1% 1.1%
Cumulative effect of change in
accounting principle - - (6.7)% -
----- ----- ----- -----
Net income (loss) (79.2)% 0.1% (48.8%) 1.9%
===== ===== ===== =====
17
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 (in thousands):
For the Three For the Six
Months Months
Ended June 30, Ended June 30,
------------------------------------------
2002 2001 2002 2001
------------------------------------------
(unaudited) (unaudited)
Net income (loss) $(27,318) $ 19 $(34,583) $ 1,485
Depreciation and amortization 2,231 2,080 9,229 4,237
Interest 3,307 3,112 6,640 6,408
Taxes 10,902 12 9,286 928
Non-cash, non-recurring charges 5,816 - 5,816 -
--------- ------ -------- -------
EBITDA $ (5,062) $5,223 $ (3,612) $13,058
========= ====== ======== =======
Non-cash, non-recurring charges for the three months and six months
ended June 30, 2002 represent fixed asset impairment charges.
EBITDA for the quarter ended June 30, 2002 decreased $10.3 million to
$(5.1) million from $5.2 million for the quarter ended June 30, 2001, and for
the six months ended June 30, 2002 decreased by $16.7 million to $(3.6) million
from $13.1 million for the six months ended June 30, 2001.
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, 2002 Compared to Three Months Ended June 30, 2001
Net Sales. Net sales increased $0.1 million, or 0.3%, to $34.5 million
in the three months ended June 30, 2002, from $34.4 million in the three months
ended June 30, 2001. This increase was primarily due to sales of electronics
-----------------------------
fabrics used in multi-layer and rigid printed circuit boards which increased
-----
$0.9 million, or 9.1%, sales of filtration fabrics which increased $1.0 million,
-----
or 20.4%, and sales of glass, carbon and aramid fibers used in various composite
materials which decreased $2.0 million, or 15.4%, during the second quarter of
-----
2002 as compared to the second quarter of 2001. The increase in sales of
electronics fabrics was primarily a result of diversification of customers
within the electronics market as well as product mix. The decrease in sales of
glass, carbon and aramid fibers was primarily the result of a decrease in the
aerospace markets. The increase in sales of filtration fabrics was due to an
increase in demand for replacement filtration bags.
18
Gross Profit Margins. Gross profit margins decreased to (6.3)% in the
three months ended June 30, 2002, from 11.7% in the three months ended June 30,
2001, due primarily to charges to cost of goods sold for additional inventory
reserves of $4.5 million. Additionally, we were unable to realize a benefit from
a decrease in raw material prices until late in the second quarter of 2002 due
to the slow inventory turnover we had been experiencing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.2 million, or 168%, to $5.1 million in the
three months ended June 30, 2002, from $1.9 million in the three months ended
June 30, 2001. This was primarily due to an increase of $2.0 million in the
environmental reserve for estimated remediation costs at our Altavista, Virginia
facility, an increase in legal and professional fees of $0.5 million associated
with the pursuit of an asset based lending arrangement that was not consummated,
and a charge of $0.5 million related to severance costs.
Asset Impairment Charges. As discussed previously, during the second
quarter of 2002, we recorded a $1.0 million impairment charge on the sale of
equipment to an affiliate and a $4.7 million impairment charge on machinery and
equipment at our South Hill heavyweight fabric manufacturing plant.
Operating Income. As a result of the aforementioned factors, operating
income decreased $15.3 million to $(13.1) million, or (38.0)% of net sales, in
the three months ended June 30, 2002, from $2.2 million, or 6.3% of net sales,
in the three months ended June 30, 2001.
Interest Expense. Interest expense increased $0.2 million to $3.3
million, or 9.6% of net sales, in the three months ended June 30, 2002 from $3.1
million in the three months ended June 30, 2001, due to a slight increase in
average interest rates.
Other (Income), Net. Other (income) decreased $1.0 million to income of
$6,000 in the three months ended June 30, 2002 from income of $1.0 million in
the three months ended June 30, 2001. During June 2001, BGF received payments
from Glass Holdings totaling $9.7 million on the loan held by BGF. BGF and Glass
Holdings have agreed that any payments made on the loan balance will be
allocated approximately 90% to principal and 10% to interest. Accordingly, BGF
reflected $8.7 million of the cash payment received as a reduction of principal
and $1.0 million was recognized as interest income in the second quarter of
2001. No such payments were received during the second quarter of 2002.
Income Tax Expense. The effective tax rates in the three months ended
June 30, 2002 and 2001 were 66.4% and 38.7%, respectively. The rate increase is
primarily the result of recording a valuation allowance on certain deferred tax
assets in 2002.
Net Income (Loss). As a result of the aforementioned factors, net
income (loss) decreased $(27.3) million to a net loss of $(27.3) million in the
three months ended June 30 2002, from $19,000 in the three months ended June 30,
2001.
19
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Sales. Net sales decreased $10.1 million, or 12.5%, to $70.9
million in the six months ended June 30, 2002, from $81.0 million in the six
months ended June 30, 2001. This decrease was primarily due to sales of glass,
carbon and aramid fibers used in various composite materials which decreased
$4.4 million, or 16.3%, during the six months ended June 30, 2002, as compared
to the same period in 2001 and our sales of electronics fabrics used in
multi-layer and rigid printed circuit boards which decreased $8.9 million, or
28.5% for the same period. Sales of filtration fabrics increased $1.9 million,
or 18.6% for the same period. The decrease in sales of electronics fabrics was
primarily the result of a significant downturn in the electronic industry that
began during the first quarter of 2001. In addition, the decrease in capital
spending in the information technology and telecommunications industries has led
fabricators of printed circuit boards to reduce production, thus negatively
impacting our sales to these customers. The increase in sales of filtration
fabrics was due to an increase in demand for replacement filtration bags.
Gross Profit Margins. Gross profit margins decreased to (2.3)% in the
six months ended June 30, 2002 from 15.2% in the six months ended June 30, 2001,
due primarily to charges to cost of goods sold for additional inventory reserves
of $4.5 million as well as shifts in product mix and lower sales and production
volumes resulting in less absorption of fixed costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million, or 41.3%, to $6.5 million in the
six months ended June 30, 2002 from $4.6 million in the six months ended June
30, 2001. This was primarily due an increase of $2.0 million in the
environmental reserve for estimated remediation costs at our Altavista, Virginia
facility, an increase in legal and professional fees of $0.5 million associated
with the pursuit of an asset based lending arrangement that was not consummated
and a charge of $0.5 million related to severance costs. These increases were
partially offset by decreased accruals for profit sharing, bonuses, management
fees and sales commissions.
Asset impairment charges. As discussed previously, during the six
months ended June 30, 2002, we recorded a $1.0 million impairment charge on the
sale of equipment to an affiliate and a $4.7 million impairment charge on
machinery and equipment at our South Hill heavyweight fabric manufacturing
plant.
Operating Income. As a result of the aforementioned factors, operating
income decreased $21.6 million to $(13.9) million, or (19.6)% of net sales, in
the six months ended June 30, 2002, from $7.7 million, or 9.5% of net sales, in
the six months ended June 30, 2001.
Interest Expense. Interest expense increased $0.2 to $6.6 million, or
9.4% of net sales, in the six months ended June 30, 2002, from $6.4 million in
the six months ended June 30, 2001, due to a slight increase in average interest
rates.
20
Other (Income), Net. Other (income) decreased $1.1 million to income of
$6,000 in the six months ended June 30, 2002 from income of $1.1 million in the
six months ended June 30, 2001. During June 2001, BGF received payments from
Glass Holdings totaling $9.7 million on the loan held by BGF. BGF and Glass
Holdings have agreed that any payments made on the loan balance will be
allocated approximately 90% to principal and 10% to interest. Accordingly, BGF
reflected $8.7 million of the cash payment received as a reduction of principal
and $1.0 million was recognized as interest income in the second quarter of
2001. No such payments were received during 2002.
Income Tax Expense. The effective tax rates for the six months ended
June 30, 2002 and 2001 were 45.1% and 38.5%, respectively. The rate increase is
primarily the result of recording a valuation allowance on certain deferred tax
assets in 2002.
Cumulative Effect of Change in Accounting Principle. As previously
discussed, we adopted SFAS No. 142 effective January 1, 2002 and recorded a
noncash charge of $4.7 million for impairment of goodwill.
Net Income (Loss). As a result of the aforementioned factors, net
income decreased $36.1 million to $(34.6) million in the six months ended June
30, 2002, from $1.5 million in the six months ended June 30, 2001.
Liquidity and Capital Resources
Our primary Sources of liquidity are cash flows from operations and
borrowings under our Senior Credit Facility. Our future need for liquidity will
arise primarily from interest payments on our 10 1/4% Series B Senior
Subordinated Notes due 2009, principal and interest payments on the Senior
Credit Facility, and the funding of our capital expenditures and working capital
requirements. There are no mandatory payments of principal on our notes
scheduled prior to their maturity.
As previously discussed, we experienced a rapid deterioration in
liquidity and financial condition during the three months ended June 30, 2002 as
a result of worsening industry and economic conditions that had a material
adverse affect on our ability to generate revenue and sufficient liquidity to
fund our operations. We incurred a net loss of approximately $34.6 million for
the six months ended June 30, 2002 and have an $88.1 million working capital
deficiency and a $44.2 million stockholder's deficit as of June 30, 2002.
As a result of the aforementioned factors, as of June 30, 2002, we were
in violation of certain financial covenants under the Senior Credit Facility. On
July 10, 2002 we received a default notice from our senior lenders that we were
in default of the Senior Credit Facility as a result of our failure to maintain
the minimum interest coverage and senior leverage ratios required under the
Senior Credit Facility. Further, as permitted under the terms of the Senior
Credit Facility, the lenders issued a payment blockage notice prohibiting us
from making a required interest payment on our Senior Subordinated Notes on July
15, 2002.
21
On August 13, 2002, we and our senior lenders executed a forbearance
agreement with respect to breaches of these financial covenants. As a result,
the senior lenders have rescinded their payment blockage notice that prohibited
us from making the required interest payment on our senior subordinated notes
due 2009 on July 15, 2002. Accordingly, on August 14, 2002, we made the interest
payment on the notes that was previously required on July 15, 2002, which was
within the thirty-day grace period provided for in the indenture covering the
Senior Subordinated Notes.
The forbearance agreement expires on March 31, 2003. This agreement and
amendment to the Senior Credit Facility provides for the following: (1) does not
require a certain interest coverage ratio until the quarter ended March 31,
2003, (2) a lower required level of consolidated net worth beginning with the
quarter ended September 30, 2002, (3) available funding of up to approximately
$24.0 million, in total, under the revolver, term loan, swingline, and letter of
credit portions of the facility, (4) a requirement to reduce the aggregate level
of outstanding commitments by $1.5 million per month beginning August 31, 2002
and $2.0 million per month thereafter and (5) borrowing rates based on leverage
ratio.
As a result of the covenant violations under the Senior Credit Facility
as of June 30, 2002 and due to the fact that we anticipate covenant violations
subsequent to the expiration of the forbearance agreement term, the Senior
Credit Facility has been classified as a current liability in the accompanying
balance sheet. The Senior Subordinated Notes have also been classified as a
current liability due to the fact that they are subordinate to the Senior Credit
Facility.
We anticipate pursuing replacement financing prior to the expiration of
the forbearance agreement. We are implementing an asset utilization plan focused
on inventory reduction and the sale and leaseback of certain assets that should
result in sizable reductions of the outstanding balance under the Senior Credit
Facility. Such a reduction should allow for a refinancing under an asset based
lending structure before the end of the forbearance period. However, there can
be no assurance that we will find the financing on satisfactory terms, if at
all, to sustain the business or that we will be able to comply with the terms of
our forbearance agreement with the lenders that would otherwise avoid an
acceleration of debt outstanding under the senior credit facility.
One of our affiliates, AGY, is also a major supplier. AGY is
experiencing financial difficulties which could result in the risk that
obtaining raw materials from sources other than AGY would be more costly and
could be disruptive to our business. AGY has defaulted on both its senior credit
facility and senior subordinated notes and is currently operating under a
forbearance agreement with its senior lender. AGY is in negotiations with its
senior lenders to restructure its debt and negotiating favorable amendments to
its senior credit facility. However, there can be no assurance that AGY will
obtain necessary amendments or will otherwise be able to refinance its debt on
favorable terms, if at all. This situation could potentially have a negative
short-term effect on the Company's raw material supply.
The fair value of the Senior Subordinated Notes as of August 15, 2002
and June 30, 2002 was approximately $64.0 million and $76.5 million,
respectively.
During the second quarter of 2002, we incurred charges of $0.5 million
associated with the pursuit of an asset based lending arrangement that was not
consummated.
22
In addition, during the second quarter of 2002, we paid $0.4 million to
terminate our interest rate swap agreement. The amount remaining in other
comprehensive income (loss) associated with this swap agreement will be
recognized in earnings over the remaining life of the underlying debt.
During the second quarter 2002, our parent, Glass Holdings, received a
$6.9 million income tax refund related to the filing of the 2001 consolidated
return. On August 13, 2002, this amount was remitted to us, which reduced our
loan receivable from Glass Holdings.
On August 13, 2002, we received $5.0 million from Glass Holdings under
a loan agreement whereby the loan matures on or before June 30, 2003. Interest
on the loan is at 3.25% and is payable quarterly in arrears beginning December
2002 or may be added to the principal amount of the loan.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities for the six months ended June 30, 2002 was $1.8 million,
compared with $(9.0) million in the six months ended June 30, 2001 and was
primarily the result of a net loss of $34.6 million, adjusted for non-cash
adjustments to net income for depreciation of $4.5 million, deferred income
taxes of $12.0 million, a decrease in inventory of $8.0 million, an increase in
accounts payable and accrued expenses of $5.3 million and an increase in trade
accounts receivable of $(2.7) million. These operating results were driven by an
increase in sales in the first quarter 2002 from the fourth quarter 2001 as well
as efforts to reduce inventory levels and production costs. We expect operating
cash flows to improve throughout fiscal 2002 as a result of working capital
management and an increase in sales during 2002 as compared to the trend
experienced during the last three quarters of 2001. However, there can be no
assurance that this improvement in cash flows will be acheived.
Net Cash Used in Investing Activities. Net cash used in investing
activities was $1.4 million for the six months ended June 30, 2002 and was the
result of purchases of property, plant and equipment. We currently expect our
capital expenditures during 2002 to be approximately $3.0 million.
Net Cash Provided by Financing Activities. Net cash provided by
financing activities was $0.5 million for the six months ended June 30, 2002 and
was primarily the result of a decrease in the book overdraft of $2.5 million,
proceeds on the revolver of $38.7 million, and payments on the Senior Credit
Facility of $35.7 million.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report may contain
forward-looking statements. These statements include, in particular, statements
about our plans, strategies and prospects within the meaning of Section 27A of
the Securities Exchange 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 such
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 our operations and our business environment that could render actual
outcomes and results materially different from those predicted. When considering
such forward-looking statements,
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you should keep in mind the following important factors that could cause our
actual results to differ materially from those contained in any forward-looking
statements:
. whether or not we are able to service or refinance our Senior
Credit Facility;
. whether or not our cash flows from operations are sufficient to
meet ongoing operations;
. the impact of Owens Corning's unpredictable bankruptcy proceeding
on the ongoing operations of Advanced Glassfiber Yarns, an
affiliate experiencing financial difficulties and a major
supplier, which could result in the risk that obtaining raw
materials from sources other than Advanced Glassfiber Yarns would
be more costly;
. our significant level of indebtedness and limitations on our
ability to incur additional debt;
. our dependence upon some of our suppliers to provide us with
materials and services;
. downturns in the electronics industry and the movement of
electronics industry production outside of North America;
. the effect of highly competitive markets and recent competition
from Asia for heavyweight glass fiber fabrics;
. our concentrated customer base and the competitive nature of our
markets;
. a disruption of production at one of our facilities;
. an easing of import restrictions and duties with respect to glass
fiber fabrics;
. whether or not we are able to comply with environmental and
safety and health laws and requirements;
. whether or not we are able to address technological advances in
the markets we serve;
. changes in economic conditions generally; and
. whether or not we are able to satisfy the covenants and other
provisions under our various financial instruments including the
forbearance agreement.
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 Quarterly Report and other reports and registration statements we file with
the SEC. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The effects of potential changes in currency exchange rates and
interest rates are discussed below. Our market risk discussion includes
"forward-looking statements" and represents an estimate of possible changes in
fair value that would occur assuming hypothetical future movements in interest
and currency exchange rates. These disclosures are not precise indicators of
expected future losses, but only indicators of reasonably possible losses. As a
result, actual future results may differ materially from those presented. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure Regarding Forward-Looking Statements."
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Our senior credit facility is subject to market risks, including
interest rate risk. Our financial instruments are not currently subject to
commodity price risk. 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. Our risk management strategy is to use
derivative financial instruments, such as swaps, to hedge interest rate
exposures. We do not enter into derivatives for trading or speculative purposes.
In June 2002, we terminated our interest rate swap agreement and paid
$0.4 million to the counterparty.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Forbearance Agreement
99.1 Statement of Chief Executive Officer of BGF Industries, Inc.
99.2 Statement of Chief Financial Officer of BGF Industries, Inc.
(b) Reports on Form 8-K
On May 22, 2002, BGF filed a current report on Form 8-K setting
forth as an exhibit a press release regarding the appointment of a
new president.
On July 7, 2002, BGF filed a current report on Form 8-K setting
forth as an exhibit a press release regarding the issuance of a
payment blockage notice by its Senior Lenders.
On July 29, 2002, BGF filed a current report on Form 8-K setting
forth as an exhibit a press release regarding the appointment of a
new chief executive officer.
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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)
/s/ James R. Henderson
---------------------------------------------
James R. Henderson
President
Date: August 19, 2002
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