Item 1. Business
General
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. In the course of our normal operations, we are engaged in various related party transactions. See Item 13 for further discussion.
BGF is a Delaware corporation. Our headquarters are located at 3802 Robert Porcher Way, Greensboro, North Carolina 27410, and our telephone number is (336) 545-0011.
Limited Number of Domestic Producers. We are one of a limited number of major domestic manufacturers of glass fiber fabrics. Our major competitors in the global glass fabric weaving industry are Hexcel/Clark-Schwebel, Nitto Boseki (Japan), Nan Ya Plastics (Taiwan) and Taiwan Glass (Taiwan). We and Hexcel/Clark-Schwebel are the primary manufacturers based in the United States. Although direct imports of glass fiber fabrics into the U.S. have been limited, increasing imports of laminates and rigid printed circuit boards from Asia have been impacting demand for domestically produced heavyweight glass fiber fabrics used in rigid printed circuit boards.
Barriers to Entry. There are a limited number of major global suppliers of glass and carbon yarns to fabric producers such as BGF, and we have experienced supply shortages from time to time. Accordingly, we believe that it would be difficult for new competitors to ensure a constant and adequate supply of glass and carbon yarns. Additionally, the process of producing high quality glass fiber and other high performance fabrics requires extensive technological expertise and research and development capability, both of which require substantial know-how and capital compared to many less complex businesses.
Diversified Markets and Uses. The unique characteristics of our fabrics make them critical components in a variety of products manufactured for sale in the electronics, composites, filtration, commercial, insulation and construction markets. Within each of these markets, our fabrics have a variety of applications, including:
. Printed circuit boards . Helicopter blades . Telecommunications equipment . Reinforced concrete . Filtration bags . Roofing materials . Heat shields . Wall coverings . Welding curtains . Filtration equipment . Aircraft laminates . Sporting goods
Lack of Product Substitutes. For many applications of our products, there are a limited number of economical product substitutes, if any. For example, substantially all printed circuit boards for high-end electronics applications use glass fiber fabrics. The unique properties of glass fiber also make it a critical component in high temperature filtration and insulation products. In many composite products, only glass, carbon and aramid fibers can meet the requisite strength-to-weight ratios.
Glass fiber fabrics offer an excellent combination of properties, from high strength to fire resistance. Wide ranges of yarn sizes and weave patterns provide broad design potential, enabling customers to choose the best combination of material performance, economics and product flexibility. Carbon fiber fabrics possess many of the same characteristics of glass fiber fabrics and provide higher strength and lighter weight in the products in which they are incorporated. Aramid fiber fabrics also share many of the same characteristics as glass fiber fabrics and are lighter in weight and provide greater impact resistance in the products in which they are incorporated.
Business Strategy
Our goal is to be the preferred supplier to markets that require a technically complex application of fabrics made of glass, carbon and aramid yarns. To achieve this goal, we intend to pursue the following long-term strategies:
Continue to Focus on Lightweight Fabrics for the Multi-Layer Printed Circuit Board Market. We seek to continue to expand our sales of lightweight glass fiber fabrics to meet the growing demand for multi-layer printed circuit boards. Our investment in the South Hill, Virginia, lightweight fabrics facility is an important part of this strategy. In addition, we have leased a portion of this facility to Advanced Glassfiber Yarns to manufacture glass yarns exclusively for our production of lightweight glass fiber fabrics. We believe that this arrangement strengthens the compatibility between our weaving process and the glass yarns we use in our weaving process, thereby enabling us to produce the highest quality lightweight glass fiber fabrics. We also believe that the quality of the products we manufacture at the South Hill facility will enable us to enhance and expand our relationships with customers in the multi-layer printed circuit board market.
Capitalize on the Growth in the Filtration and Composites Markets. We believe substantial opportunities exist to increase our sales and market share in both the filtration and composites markets. We intend to leverage our already strong position in the high temperature filtration market by developing new woven and non-woven high performance fabrics for environmental applications in power generation, steel mills and other industries that are subject to strict environmental regulations. In addition, we believe that there may be increased opportunities internationally in this market as lesser developed countries adopt stricter environmental regulations.
We also believe that we have substantial opportunities to increase our sales in the composites market for applications in the transportation industry. In the composites market, we are pursuing strategic relationships with key suppliers to the aerospace and automobile industries for the design and manufacture of new products.
Develop New Applications for Fabrics. We plan to continue to leverage the technical expertise and experience of our research and development and sales and marketing staff to develop new applications for existing fabrics and to develop new fabrics that meet customer requirements for strength, weight, fire resistance and durability. We believe that many opportunities exist to continue to develop both woven and non-woven fabrics to replace traditional materials in markets which have historically not utilized the fabrics we produce. For example, we have begun selling fabrics for use in the reinforcement of metal automobile body parts.
Products and Markets
We sell our products primarily in the United States and focus on the following markets:
Electronics. We produce glass fiber fabrics for multi-layer and rigid printed circuit boards for use in the electronics industry. The demand for multi-layer printed circuit boards, which primarily use lightweight glass fiber fabrics, decreased from 2000 to 2001 primarily as a result of significant inventory adjustments in the electronics industry that began during the first quarter of 2001. In addition, the decrease in capital spending in the information technology and telecommunications industry led fabricators of printed circuit boards to reduce production which negatively impacted our sales to these customers. Furthermore, the demand for our heavyweight fabrics has decreased due to competitive pressures from Asian laminate producers. Sales of glass fabrics to the electronics industry were $52.8 million in 2001 and $100.4 million in 2000. These sales represented 35.9% and 49.8% of our net sales in 2001 and 2000, respectively.
Composites. Our glass, carbon and aramid fiber fabrics are used in various composite materials, which are used in various applications, including structural aircraft parts and interiors, helicopter rotor blades, tooling, brake linings and ducting. Net sales of fabrics for composites were $50.2 million in 2001, representing 34.2% of our net sales. Our sales in this market held up well prior to September 11, 2001. During the last quarter of 2001, we experienced a decline in orders from customers in the aerospace industry due to uncertainly over airline traffic recovery. At this point, the decrease has not been fully offset by the market for refurbishing existing aircraft or increased purchases by the military.
Filtration. We produce fabrics for high temperature dust filtration used by industrial customers to control emissions into the environment. Our filtration bags are sold to utilities, producers of asphalt and carbon black, cement plants and steel mills. Sales of our filtration fabrics were $19.6 million in 2001 and $29.0 million in 2000. These sales represented 13.3% and 14.4% of our net sales in 2001 and 2000, respectively. The decrease in sales of filtration fabrics is due to fewer large utility projects that have replaced filter bags, as well as a downturn in the steel and foundry industries.
Commercial. Our glass fiber fabrics are used in commercial applications where fire resistance and dimensional stability are critical. Applications for these products include ceiling tile and acoustical facing fabrics, window coverings and movie screens. Sales in this segment in 2001 were comparable to 2000.
Insulation. We produce materials for high-temperature, fire-resistant insulation. Applications for these products include insulation for joints, pipes, valves, transportation exhaust systems, heat shields and home appliances. Sales in this segment in 2001 were comparable to 2000.
Construction. The fire resistant qualities of glass fiber fabrics make them a critical component of products used in the construction industry. Applications for these products include smoke and fire barrier curtains, drywall bonding tape, rubber mat backing and fabric structures, such as commercial tents and roofs. Sales in 2001 were down compared to 2000 due to the overall slow down in the U.S. economy.
Sales and Marketing
We sell our products through an experienced direct sales force of six sales representatives, four market managers and two telemarketing representatives. Our sales representatives have specific customer groups, while the market managers are responsible for specific product lines. The sales representatives are compensated on a salary and commission basis and the market managers are compensated on a salary and bonus basis. Each sales representative has a technical orientation and the necessary expertise to sell our full line of products. We maintain an internet web site, located at www.bgf.com, which contains extensive product information.
We sell our products to over 400 customers, including many leading companies in their respective industry segments, including Cytec Engineered Materials, Polyclad Laminates, Isola USA, BHA, and Saint Gobain. We continually seek to strengthen and expand our relationships with our customers. Due to the stringent quality, delivery and performance standards demanded by many of our customers and the ultimate users of our products in various markets, our customers are increasingly moving toward collaborative agreements among both fabric producers, such as BGF, and their own customers. We believe that we are well positioned to benefit from this trend because of our strong competitive position within the industry, our investment in technical and manufacturing expertise and our long-term relationships with customers and suppliers. Our markets remain competitive, however, and this competitiveness is exemplified by continual and rapid technological change. To effectively compete, we must process and utilize effectively extensive technological and manufacturing capabilities. We could
face even further competition if cost effective alternatives to glass, carbon or aramid fiber fabrics are developed.
Two of our customers, Cytec Engineered Materials and Polyclad Laminates, each accounted for more than 10% of our net sales and together accounted for 25.0% and 23.1% of our net sales, respectively, in 2001 and in 2000. Our top ten customers in 2001 and in 2000 accounted for 45.5% and 51.9% of our net sales, respectively. Our customers are not contractually required to purchase any of our products and may terminate their relationship with us at any time.
Industry Segments
We operate in one business segment that manufactures specialty woven and nonwoven fabrics for use in a variety of industrial and commercial applications. Information related thereto can be found in footnote 11 of the consolidated financial statements under Item 8 of this Report.
Research and Development
We maintain a modern, well-equipped research and development facility, located at our headquarters in Greensboro, North Carolina, that divides its efforts among developing new products and improving current products. The research and development facility is divided into seven state-of-the-art laboratories focusing on the following strategic areas of product development:
. Applications and development; . Pilot processing; . Physical testing; . Composites development; . Microscopy; . Analytical testing; and . Filtration technology
We have several United States patents, patent applications and trademarks. While we consider our patents to be valuable assets, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent or group of related patents. However, in some instances, patents and patent protection may serve as a barrier to entry in some of our product lines, such as commercial and insulation. Our policy is to obtain patents on our new products and enforce our patent rights.
Raw Materials
The principal materials we use to manufacture our products are glass, aramid and carbon yarns. We purchase glass yarns from Advanced Glassfiber Yarns, PPG Industries, Dupont Company and Cytec Engineered Materials. Beginning in September 1998, Advanced Glassfiber Yarns began to supply us with glass yarns produced at the South Hill, Virginia lightweight fiber fabrics facility. The supply agreement expires on December 31, 2008, unless extended by Advanced Glassfiber Yarns. Glass Holdings, our parent corporation, through a wholly owned subsidiary,
purchased a 51% interest in Advanced Glassfiber Yarns from Owens Corning on September 30, 1998. Our main suppliers of carbon yarns are Amoco, Toho and Cytec Engineered Materials and our main supplier of aramid yarns is DuPont.
Employees
As of December 31, 2001, we employed approximately 954 full time and part time employees, 764 of which are hourly employees and 190 of which are paid on a salary basis. All of our employees are located in the United States. None of our employees is represented by a labor union. In response to the downturn in market conditions experienced beginning the second quarter of 2001, we furloughed production employees as well as eliminated several salaried positions thereby reducing our equivalent number of employees by approximately 25%. This workforce reduction occurred during the third and fourth quarters of 2001. We incurred a pre-tax restructuring charge of $502,000 in October 2001 as a result of the elimination of salaried positions.
Environmental and Health Matters
Our past and present operations, including our ownership and operation of real properties, are subject to extensive and changing federal, state, local and foreign environmental laws and requirements including those governing discharges to air and water, the handling and disposal of soils and hazardous substances and wastes, and the remediation of contamination associated with releases of hazardous substances at our facilities and off-site disposal locations. Our operations are also governed by laws and requirements relating to workplace safety and health. We believe that we are generally in material compliance with currently applicable environmental laws and requirements.
In the course of a September 1998 environmental site assessment, we 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. We immediately reported the contamination to the United States Environmental Protection Agency ("USEPA") Region 3 and the Virginia Department of Environmental Quality ("VDEQ").
The agencies have required additional sampling and site characterization, which is ongoing. With USEPA and VEDQ oversight, we have assessed the site to determine the extent of the contamination. In the spring of 2001, we submitted to USEPA a Site Assessment Report, which documents the full extent of the progressive assessment activities and currently is under agency review. Based upon the results of the site assessment, we are developing a cleanup plan, which we will begin to implement upon receiving USEPA's approval of the site assessment. All assessment and cleanup activities have been and will be conducted in compliance with applicable state and federal regulatory requirements. Cleanup costs remain uncertain, as we have not received any estimates of ultimate costs. We may incur costs or liabilities relating to this and other environmental or safety and health matters in the future, including those relating to compliance with laws and requirements, remediation of contamination or claims by third parties.
Like all weavers of glass, carbon and aramid fibers, we are subject to laws and regulations designed to reduce solid wastes by requiring, among other things, regulated wastes to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of our products. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of additional environmental protection measures. We do not believe that the legislation promulgated to date and currently pending initiatives will have a material adverse effect on our business, financial condition and results of operations. We cannot assure you, however, that any future legislation or regulatory efforts will not have a material adverse effect on our business, financial condition and results of operations.
Item 2.
Item 2. Properties
We own and operate four manufacturing facilities and a research and development facility, together occupying over 786,000 square feet. We believe that these facilities are suitable for manufacturing the products we offer and have capacities appropriate to meet existing production requirements. The following table sets forth a description of our facilities.
Item 3.
Item 3. Legal Proceedings
From time to time, we may become involved in various legal proceedings arising in the ordinary course of business. We believe that such ordinary course of business matters will not have a material adverse effect on our business, financial condition, liquidity or results of operations. See also "Item 1. Business - Environmental and Safety and Health Matters."
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for BGF's common stock. All shares of BGF's issued and outstanding common stock are held by Glass Holdings.
We did not declare any dividends or make any distributions on our common stock in 2001. Further, we have no commitment or current plans to make dividends or other distributions in 2002 and our senior credit facility restricts our ability to pay dividends on other distributions.
Item 6.
Item 6. Selected Financial Data
The following table sets forth certain selected financial information derived from our audited consolidated financial statements for the five-year period ended December 31, 2001. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and related notes and other financial information included elsewhere in this Report.
/(1)/ In order to conform with recent technical literature from the Emerging Issues Task Force, shipping and handling costs are now included in cost of goods sold and not presented as a part of net sales. The prior period financial statements have been reclassified to conform to the current presentation.
/(2)/ During 1999, the Company terminated salaried employees in connection with a restructuring plan. In 2001, the Company terminated additional salaried employees in addition to reducing the production workforce by approximately 25%. As a result of the restructuring plan, BGF incurred charges for salaried employee severance.
/(3)/ 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. Debt issuance costs of $0.3 million associated with the amendment dated December 16, 1999 were written off in the fourth quarter of 1999 and recorded as an additional amortization charge in the financial statements. Debt issuance costs of $0.6 million associated with the amendment dated September 28, 2001, were written off in the third quarter of 2001 and recorded as an additional amortization charge in the financial statements.
/(4)/ Amounts do not include amortization of debt issuance costs and original issue discount, which is included in interest expense.
/(5)/ EBITDA is defined as net income before interest expense, income taxes, depreciation, amortization expense and non-recurring, non-cash charges. 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 may not necessarily be comparable to similarly titled measures of other companies. See also Exhibit 99.1 to this Report for a reconciliation of net income to EBITDA.
/(6)/ The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. Earnings consist of income before taxes and changes in accounting principles and fixed charges, excluding capitalized interest. Fixed charges consists of interest expense, capitalized interest, amortization of debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor).
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read together with our consolidated financial statements and related notes contained in this Report. The forward-looking statements under this section are subject to risks and uncertainties that exist in our operations and business environment. See Item 1, "Disclosure Regarding Forward-Looking Statements".
Overview
Over the last 10 years, the demand for multi-layer printed circuit boards, which primarily use lightweight glass fiber fabrics, has generally been increasing. In contrast, over the last 3 years, the demand for our heavyweight fabrics has generally been decreasing due to competitive pressures from Asian laminate producers. As a result, we have shifted our electronics glass fiber fabrics manufacturing capacity mix in recent years from heavyweight fabrics, which are typically used in rigid printed circuit boards, toward more technologically advanced and higher-margin lightweight fabrics. Since the fourth quarter of 1997, we have experienced downward pricing
pressures on our heavyweight glass fiber fabrics due to foreign exchange fluctuations between the dollar and various Asian currencies and over-capacity in Asian heavyweight fabrics manufacturing, which has led to increased imports of laminates and printed circuit boards into the U.S. from Asia. However, our sales of the higher-margin, lightweight glass fiber fabrics used in multi-layer printed circuit boards have continued to increase except during the calendar year 2001 as a result of a significant inventory adjustment at the OEM level combined with a drop in information technology expenditures by businesses as explained above. We are unable to determine if further declines in this business will continue.
Critical Accounting Policies
The SEC recently issued two releases, FR 60 and 61, relating to critical accounting policies and financial statement disclosure.
We have selected accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner. The significant accounting policies are summarized in Note 1 to the consolidated financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants, engineers, lawyers and actuaries to assist in our evaluation. We believe the following accounting policies are the most critical because they involve the most significant judgments and estimates used in preparation of our consolidated financial statements:
. Allowance for doubtful accounts - We maintain an allowance for doubtful receivables for estimated losses resulting from the inability of our trade customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide a general allowance for other accounts based on historical collection and write-off experience. Judgment is critical because some customers are currently operating in bankruptcy or have experienced financial difficulties. If the financial condition of any of our customers worsens, additional allowances may be required.
. Inventories - Our inventories are valued at the lower of cost or market value. We evaluate all of our inventory styles to determine obsolete or slow-moving items. Finished goods are written down based on quality and age. Second quality goods are also written down from their original value. Our methodology recognizes projected inventory losses at the time such losses are anticipated rather than at the time goods are actually sold. The adequacy of this estimate is dependent on a number of future factors, including, but not limited to, the state of the economy and the level of customer demand. These factors could cause our inventory reserve to change by a material amount in the near term.
. Long-lived assets - We periodically review our property and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable and calculate this impairment based on estimated future undiscounted cash flows. Assumptions and estimates used in evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.
. Valuation allowances for deferred income tax assets - We have recorded deferred income tax assets related to the realization of intercompany interest income and the reversal of certain reserves, and have determined that a valuation allowance is not necessary. An adjustment to income tax expense would be required in a future period if we determined that the amount of deferred tax assets to be realized differs from the net recorded amounts.
Results of Operations
The following table summarizes our historical results of operations as a percentage of net sales for the years ended December 31, 2001, 2000 and 1999:
Fiscal Year 2001 Compared to Fiscal Year 2000
Net sales. Net sales decreased $54.6 million, or 27.1%, to $146.8 million in 2001 from $201.4 million in 2000. Sales of glass, carbon and aramid fibers used in various composite materials increased $4.0 million during 2001 as compared to 2000. However, for the same period, our sales of electronics fabrics used in multi-layer and rigid printed circuit boards decreased $47.6
million, or 47.5%, and sales of fabrics used in filtration products decreased $9.4 million, or 32.5%. The decrease in sales of electronics fabrics was primarily a result of significant inventory adjustments in the electronics industry that began during the first quarter of 2001. In addition, the decrease in capital spending in the information technology and telecommunications industry has led fabricators of printed circuit boards to reduce production, thus negatively impacting our sales to these customers. We do not expect sales to the electronics market to increase significantly during the first quarter of 2002.
The decrease in sales of filtration fabrics was due to fewer large utility projects that have replaced filter bags as well as a downturn in the steel and foundry industries. Our second largest market, fabrics used in composite materials, held up well prior to September 11, 2001. We now expect to confront a decline in orders from customers in the aerospace industry due to uncertainty over airline traffic recovery. It is unknown if this decrease will be fully or partially offset by the market for refurbishing existing aircraft or increased purchases by the military.
In response to these market conditions, we have reduced production schedules and focused on operating cost reductions and working capital management. In the third and fourth quarters of 2001, we furloughed additional production employees thereby reducing our production workforce by approximately 25% since January 2001. In addition, to the furlough of production employees, we reduced a number of salaried positions in order to cut costs in future periods. The reduction of production schedules resulted in a $8.1 million decrease in inventories during the fourth quarter. We have also amended our senior credit facility as more fully described under "Liquidity and Capital Resources."
Gross profit. Gross profit margins decreased to 10.4% in 2001 from 17.7% in 2000, due primarily to the shifts in product mix, discussed above as well as lower sales and production volumes resulting in less absorption of fixed costs.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to 4.8% of net sales in 2001 from 4.6% of net sales in 2000. This was primarily due to lower sales volumes for 2001, offset by decreased accruals for profit sharing, management fees and bonuses.
Operating income. As a result of the aforementioned factors and charges of $502,000 incurred in 2001 due to the restructuring charge associated with the salaried workforce reduction, operating income decreased $18.7 million to $7.6 million, or 5.3% of net sales, in 2001 from $26.3 million, or 13.1% of net sales, in 2000.
Interest expense. Interest expense decreased $0.2 million to $14.0 million, or 9.5% of net sales, in 2001 from $14.2 million, or 7.0% of net sales, in 2000, due to lower interest rates offset by a write-off of $0.6 million of deferred financing fees relating to our senior credit facility.
Other income, net. Other income decreased $0.4 million to $1.4 million, or 1.0% of net sales, in 2001 from $1.8 million, or 0.9% of net sales, in 2000. During 2001 and 2000, we received payments from Glass Holdings totaling $11.0 million and $11.7 million, respectively, on the loan held by us. We 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, we reflected $1.1 million and $1.3 million as interest income recorded in other income on the consolidated statement of operations in 2001 and 2000, respectively.
Income tax expense (benefit). The effective tax rate in 2001 and 2000 of 37.8% and 40.2%, respectively, was higher than the federal statutory rate of 35.0% primarily due to the effect of state income taxes.
Net income (loss). As a result of the aforementioned factors, net income decreased $11.5 million to a loss of $(3.1) million in 2001 from $8.4 million in 2000.
Fiscal Year 2000 Compared to Fiscal Year 1999
Net sales. Net sales increased $19.7 million, or 10.8% to $201.4 million in 2000, from $181.7 million in 1999, primarily due to an increase of $8.9 million or 14.2%, in the sales of lightweight fabrics used in multilayer printed circuit boards, and an increase of $5.7 million, or 24.7%, in the sales of heavyweight fabrics used in rigid printed circuit boards.
Sales of our products in the composites market increased $4.1 million, or 9.7% from $42.1 million in 1999 to $46.2 million in 2000 due to an increase in demand for aerospace products.
Sales of our filtration products increased by $2.4 million, or 9.0%, from $26.6 million in 1999 to $29.0 million in 2000, due to incentive programs and large replacement orders.
Gross profit. Gross profit margins increased from 16.6% in 1999 to 17.7% in 2000 due primarily to shifts in product mix and higher volumes resulting in more absorption of fixed costs, as well as price increases in the specialty markets and some electronics accounts in August of 2000.
Selling, general and administrative expenses. Selling, general and administrative expenses increased to 4.6% of net sales in 2000 from 4.1% of net sales in 1999. This was primarily due to an increase in sales commissions and employee profit sharing awards.
Operating income. As a result of the aforementioned factors and charges of $769,000 incurred in 1999 due to a restructuring plan that eliminated several salary positions across the company, operating income increased $4.4 million, to $26.3 million, or 13.1% of net sales in 2000 from $21.9 million, or 12.1% of net sales, in 1999.
Interest expense. Interest expense decreased $1.6 million or 10.1%, to $14.2 million in 2000, from $15.8 million in 1999, due to payments on the senior credit facility.
Income tax expense. The effective tax rate in 2000 and 1999 of 40.2% and 37.9% respectively, was higher than the federal statutory rate of 35.0% primarily due to state income tax.
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 in 1999, net income increased $4.5 million to $8.3 million in 2000, from $3.7 million in 1999.
Balance Sheets
Accounts receivable. Accounts receivable declined $16.0 million, or 55.7%, from December 31, 2000 to 2001. This decline was a result of lower sales in 2001 than in 2000.
Inventory. Inventory increased $2.3 million, or 6.2%, from December 31, 2000 to 2001. This is mainly due to lower sales of fabrics for electronic products. However, during the second half of 2001, we focused on working capital management and reduced our inventory from a high of $50.0 million at the end of July 2001 to $39.0 million at the end of December 2001. We intend to continue to decrease inventories throughout the first half of 2002.
Net property, plant and equipment. Net property, plant and equipment increased $7.7 million, or 14.1%, from December 31, 2000 to 2001. The net increase is the result of purchases of capital assets, offset by disposals and depreciation.
The principal capital expenditures during 2001 and 2000 included:
(1) $5.9 million and $1.0 million in 2001 and 2000, respectively, converting old looms at our heavyweight fabrics facility in South Hill, Virginia, in order to run lightweight fabrics;
(2) $5.3 million and $1.4 million in 2001 and 2000, respectively, for the beginning of the second phase of our lightweight fabrics facility in South Hill, Virginia; and
(3) $1.5 million and $0.9 million in 2001 and 2000, respectively, for new looms and finishing unit upgrades at our facility in Altavista, Virginia.
Accounts payable and accrued liabilities. Accounts payable and accrued liabilities declined $13.3 million, or 53.0%, from December 31, 2000 to 2001. This decline was primarily the result of reduced inventory purchases near the end of 2001 and a decrease in income taxes payable. In addition, the profit sharing accrual was reduced $2.5 million as a result of the decrease in our profitability.
Deferred compensation arrangements. As disclosed in the consolidated financial statements and related notes herein, we restated our December 31, 2000 balance sheet to reflect liabilities associated with deferred compensation arrangements. These liabilities were recorded in postretirement benefit and pension obligations and totalled approximately $1.2 million and $1.1 million at December 31, 2001 and December 31, 2000, respectively.
During the fourth quarter of 2000, we approved the expansion of our lightweight fabrics facility in South Hill, Virginia, as well as the purchase of new looms to be installed in our heavyweight production facility in South Hill, Virginia. The new looms were installed in order to change part of the fabric production at that facility from heavyweight fabrics to lightweight fabrics. These
capital projects were approved to meet the forecasted growth that was projected in 2000 for 2001 and thereafter. Given the current environment in the electronics industry, in the third quarter of 2001, we stopped all capital expenditure projects that could be suspended and completed only those open projects that were in a state of completion that made them impossible to suspend. At this point, we cannot provide any assurances as to when we will complete the remainder of the South Hill expansion, if at all. We will evaluate the completion of this project as market conditions warrant.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our 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 ($100.0 million outstanding at December 31, 2001 net of unamortized discount of $1.4 million), principal and interest payments on the senior credit facility, and the funding of capital expenditures and working capital requirements. There are no mandatory payments of principal on the senior subordinated notes scheduled prior to their maturity.
Net cash provided by operating activities. Net cash provided by operating activities was $1.1 million for 2001, compared with $6.9 million in 2000 and was primarily the result of a net loss of $(3.0) million, adjusted for non-cash charges/(credits) to net income for depreciation of $8.6 million, amortization of $1.7 million, deferred income taxes of $(5.7) million, an increase in inventory of $(2.3) million, a decrease in accounts payable and accrued expenses of $(15.1) million and a decrease in trade accounts receivable of $16.0 million. These operating results were driven by reduced customer demand, especially in the electronics and filtration product industries where sales declined over 47% and 32%, respectively, as described above, from 2000 to 2001. This reduced demand caused unfavorable absorption resulting from reduced production schedules in the fourth quarter of 2001 and also caused a reduction in accounts receivable and accounts payable. We expect operating cash flows to improve throughout fiscal 2002 as a result of working capital management and an increase in sales.
Net cash used in investing activities. Net cash used in investing activities was $15.7 million and $6.7 million in 2001 and 2000, respectively, and was the result primarily of purchases of property, plant and equipment. Capital expenditures in 2001 were related to a large expansion project at the South Hill facility. This project was suspended in late 2001, as discussed above. We have historically financed our capital expenditures through cash flow from operations and borrowings under our credit facilities. We expect our capital spending during 2002 to be limited primarily to maintenance purposes, which will result in lower capital expenditures compared to 2001.
Net cash provided by financing activities. Net cash provided by financing activities was $14.6 million for 2001, compared with net cash used of $0.1 million for 2000, and consisted primarily of net payments on the term loan of $19.2 million, net proceeds on the revolver of $27.0 million, payments received on a loan to Glass Holdings of $9.9 million, and a decrease in the book overdraft of $3.1 million. During 2002, as a result of forecasted positive cash flows from the business, we expect the outstanding balance on the revolver to be reduced. In addition, as a
result of a recently signed Job Creation and Worker Assistance Act of 2002, which allows us to carry back our 2001 consolidated tax loss for five years, we expect to receive approximately $6.0 million in federal tax refunds during 2002 through an intercompany loan payment from Glass Holdings, our parent and tax filer.
At December 31, 2001, we had outstanding debt of $27.0 million under our senior credit facility, with additional available borrowings of up to $6.0 million. Based upon current and anticipated levels of operations, we believe that our cash flows from operations, combined with short term availability under the senior credit facility, will be adequate to meet short term liquidity needs with respect to existing obligations and operations. We are continuing our efforts to reduce inventory levels and improve working capital, while implementing additional cost-saving initiatives. Overall, BGF's business plan anticipates continued improvements in our operations that will improve liquidity and provide a return to profitability. However, our future performance is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. See "Cautionary Statements Regarding Forward-Looking Statements."
On September 28, 2001, we amended our senior credit facility. As a result of the amendment, we wrote off $573,000 of deferred financing fees relating to the original borrowings in 1998 under the senior credit facility which was charged to interest expense. Under the terms of the amendment, we paid off the existing term loan of $15.6 million, reduced the availability under the revolver from $60 million to $50 million, and locked in the interest rate to 2.75 points over LIBOR (1.87% at December 31, 2001) through 2002 at which time the rate will revert back to the initial rate under the senior credit facility. The availability under the revolver is subject to a borrowing base calculation, which is based on specified percentages of eligible accounts receivable and inventories.
The senior credit facility, as amended, requires us to satisfy various covenants such as a certain maximum senior leverage ratio, minimum consolidated net worth, interest coverage ratio, and maximum capital expenditure levels. The amendment has significantly eased the financial covenants through the end of 2002. Based on our current operating performance we believe that BGF will be able to achieve the amended financial covenant levels through December 2002, although no assurances can be provided. If we are able to continue to satisfy such covenants under our senior credit facility, we believe that we will operate with sufficient liquidity throughout the current downturn in the lightweight electronics and filtration industries.
The senior credit facility contains a cross-default provision related to the indebtedness of an affiliate. In the event that this affiliate does not remain in compliance with its covenants throughout 2002, we have received a waiver under our senior credit facility from our lenders through April 1, 2003 of any such cross default.
We are currently negotiating a new longer term financing arrangement with another lender and expect it to be finalized in April 2002. However, there can be no assurance that such a refinancing will be consummated.
On January 21, 1999, BGF issued $100.0 million of 10 1/4% Senior Subordinated Notes ($98 million net of discount) due 2009. The net proceeds to us from the sale of these notes were approximately $94.9 million, after deducting the initial purchaser's discount and expenses. We used the net proceeds from the offering to repay all $65.0 million of indebtedness under the 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% interest in Advanced Glassfiber. Upon the repayment of the $65.0 million of indebtedness under the senior subordinated credit facility, the facility was terminated. On July 23, 1999, we exchanged the old notes for substantially identical new notes that have been registered under the Securities Act. There are no cross-default provisions for these senior subordinated notes in conjunction with the covenants discussed above for the senior credit facility.
On September 30, 1998, AGY Holdings, an affiliate of BGF, purchased a 51% ownership interest in Advanced Glassfiber Yarns LLC ("Advanced Glassfiber") for aggregate consideration of $338.9 million, including post-closing adjustments. In connection with the acquisition, BGF loaned Glass Holdings approximately $138.6 million to provide Glass Holdings a portion of the capital necessary to fund the acquisition. The balance is payable on October 31, 2008 or such later date as may be agreed to by us and Glass Holdings. We have not accrued interest income earned under the terms of the loan agreement due to the fact that full repayment of the loan and related interest by Glass Holdings is contingent upon Glass Holdings' receipt of dividends and other distributions from its two subsidiaries, we and Advanced Glassfiber, which are currently restricted from paying dividends and other distributions under their debt agreements. Interest in arrears as of December 31, 2001 and 2000 totaled $38.1 million, and $27.4 million, respectively. See also "Item 13. Certain Relationships and Related Transactions." During 2001 and 2000, we received payments from Glass Holdings totaling $11.0 million and $11.7 million, respectively. While there are interest amounts in arrears, we 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, we reflected $9.9 million and $10.5 million of the cash payment received as a reduction of principal and $1.1 million and $1.2 million was recognized as interest income (recorded in other income on the consolidated statement of operations) in 2001 and 2000, respectively.
Following is a summary of our fixed obligations at the end of 2001 and will require the use of funds:
Payments due by year In thousands 2002 2003 2004 2005 Thereafter - ------------------------------------------------------------------------- Long-term debt/(1)/ $ -- $27.0 $ -- $ -- $100.0 Operating leases 0.8 0.7 0.6 0.5 0.4 ---- ----- ---- ---- ------ $0.8 $27.7 $0.6 $0.5 $100.4
/(1)/ 10 1/4% Senior Subordinated Notes, due 2009 of $100.0 million and revolver balance of $27.0 million due 2003.
Restructuring Charge
In 2001, management approved a restructuring plan which resulted in the reduction of our salaried and wage workforce by approximately 25%. As a result of the restructuring, we incurred charges of $0.5 million. The charges incurred were costs for salaried employee severance and are expected to be paid out during 2002.
Outlook for 2002
The following section contains forward-looking statements about our plans, strategies and prospects during 2002. 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, you should keep in mind the important factors that could cause our actual results to differ materially from those contained in any forward-looking statements set forth under Part I, "Cautionary Statement Regarding Forward-Looking Statements."
Looking ahead to 2002:
. Sales trends during January and February 2002 increased slightly from the average monthly sales for the last quarter of 2001. These improvements over the fourth quarter of 2001 are expected to continue through 2002, contingent upon the recovery of the electronics market. As a result of this expected increase in customer demand, utilization of manufacturing facilities would increase resulting in improved gross margins relative to the fourth quarter of 2001. Our second largest market, fabrics used in composite materials, held up well prior to September 11, 2001. However, we now expect to confront a decline in orders from customers in the aerospace industry due to uncertainty over airline traffic recovery.
. We plan to continue to reduce inventory levels during 2002 as we did during the second half of 2001. This reduction would improve our cash flows from operations.
. As a result of headcount reductions and other cost saving initiatives implemented in the fourth quarter of 2001, we expect to reduce selling, general, and administrative costs.
. Raw material pricing in the first quarter of 2002 is expected to decline from the fourth quarter of 2001. The resulting benefit to cost of goods sold is expected to begin in the second quarter of 2002.
. Due to the recently signed Job Creation and Worker Assistance Act of 2002, which allows us to carry back our 2001 consolidated tax loss for five years, we expect to receive approximately $6.0 million in federal tax refunds during 2002.
. We anticipate finalizing an asset based financing arrangement in the second quarter of 2002, which will increase the flexibility of our borrowing options.
Related Party Transactions
See Item 13, "Certain Relationships and Related Transactions" for a discussion of related party transactions.
Impact of Inflation
We generally attempt to pass cost increases on to our customers. Costs are affected by, among other things, inflation, and we may experience the effects of inflation in future periods. We believe, however, that inflation has not had a material impact on us during the past three years.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement applies to all business combinations initiated after June 30, 2001.
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. Existing goodwill will continue to be amortized through the remainder of 2001 at which time amortization will cease and the Company will perform a transitional goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the year ended December 31, 2001 was $181,000. The amount of unamortized goodwill as of December 31, 2001 is approximately $4.7 million.
In order to conform with recent technical literature from the Emerging Issues Task Force, shipping and handling costs are now included in cost of goods sold and not presented as a reduction of net sales. The fiscal 1999 financial information presented in this section has been reclassified to conform to the current presentation. In addition, the fiscal 1999 financial statements as presented in "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" have been reclassified to conform to the current presentation.
Prior to the reclassification, revenues and cost of goods sold for fiscal 1999 were $178.5 million and $148.3 million, respectively. As a result of the reclassification, revenues and cost of goods sold for fiscal 1999 are (in thousands) $181.7 million and $151.5 million, respectively. See footnote 1 of the consolidated financial statements.
Item 7a.
Item 7a. 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. On September 28, 2001 we amended our senior credit facility. Under the terms of the amendment, we paid off the existing term loan of $15.6 million and reduced the availability under the revolver from $60.0 million to $50.0 million. Simultaneously, we also amended our interest rate swap term from March 31, 2004 to September 30, 2003 and redesignated the swap to cover only the revolver portion of our senior credit facility. At December 31, 2001, the notional amount of the interest rate swap agreement was $19.2 million. Under this agreement, we have secured a fixed rate of interest of 5.04% on the notional amount. This swap effectively changes our payment of interest on $19.2 million of variable rate debt to a fixed rate 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 December 31, 2001, we would have paid approximately $527,000 to terminate the agreement. A 100 basis point decrease in LIBOR would increase the amount paid by approximately $179,000. The fair value, as determined by the counterparty, is based on dealer quotes, considering current interest rates. The unrealized loss on this derivative instrument is a component of other comprehensive income (loss).
The fair value of the senior subordinated notes as of March 27, 2002 and December 31, 2001 was approximately $77.5 million and $64.0 million, respectively.
Actual gains and losses in the future may differ materially from the above analysis, however, based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and our actual exposures and hedges.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Page of the financial reports included herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The names, ages and positions of our directors and executive officers as of March 26, 2002 are set forth below. Each of our directors is also a director of Glass Holdings. All directors are elected annually and hold office until their successors are elected and qualified or until their earlier removal or resignation.
Name Age Positions with BGF - ---- --- ------------------ Robert Porcher 73 Chairman of the Board, Chief Executive Officer and Director Philippe Porcher 48 Vice Chairman Richard L. Cromer 58 President Philippe R. Dorier 45 Senior Vice President, Chief Financial Officer, Secretary and Treasurer James R. Henderson 64 Executive Vice President Sales and Merchandising
Robert Porcher has been our Chairman of the Board and Chief Executive Officer and one of our directors since 1988. Mr. Porcher has maintained various positions with Porcher Industries, including Chairman of the Board of Directors and Chief Executive Officer of Porcher Industries, since 1952. Since December 9, 1998, Mr. Porcher has served as Chairman of the Supervisory Board of Porcher Industries. Mr. Porcher beneficially owns a controlling interest in Porcher Industries, which owns 100% of the outstanding capital stock of our parent, Glass Holdings. See "Item 12. Security Ownership of Certain Beneficial Owners and Management."
Philippe Porcher has been our Vice Chairman since April 1998. He has also served as Vice President of Porcher Industries since March 1993. Before becoming Vice President of Porcher Industries, Mr. Philippe Porcher served as Director of Porcher Industries' industrial division. Mr. Philippe Porcher is the son of Robert Porcher, who is our Chairman of the Board and Chief Executive Officer and one of our directors. Since December 9, 1998, Mr. Philippe Porcher has served as President of the Executive Board of Porcher Industries.
Richard L. Cromer was named President of BGF in April 1998. Prior to joining BGF, Mr. Cromer was employed by Owens Corning for 31 years in various capacities, including as Director of Operations Strategy from 1997 to 1998, General Manager-Textiles from 1994 to 1997 and Director of Operations Support from 1989 to 1994. Since December 9, 1998, Mr. Cromer has served as a member of the Executive Board of Porcher Industries.
Philippe R. Dorier has been our Senior Vice President, Chief Financial Officer, Secretary and Treasurer since 1993. From 1988 to 1993, he served as our Vice President International Audit. From 1984 until 1988, Mr. Dorier served as the Vice President of Finance of Babolat VS, S.A., and from 1980 until 1983, as the Administration and Finance Manager of Syva-Biomerieux S.A. Since December 9, 1998, Mr. Dorier has served as a member of the Executive Board of Porcher Industries.
James R. Henderson has been Executive Vice President Sales and Merchandising since joining BGF in 1989. Prior to joining BGF, Mr. Henderson was employed for 31 years with United Merchants and Manufacturers, Inc., a company engaged in the textile business. Mr. Henderson served as the Senior Vice President of United Merchants and Manufacturers, President of their Uniglass Division, and as Chairman of the Board of United's Marglass subsidiary in England.
Item 11.
Item 11. Executive Compensation
The following table shows, for the fiscal years ended December 31, 2001, 2000, and 1999, the compensation paid to or earned by our Chief Executive Officer and our four other most highly compensated executive officers who were serving at the end of 2001.
/(1)/ Includes the following amounts deferred at the election of the following executive officers pursuant to BGF's 401(k) plan in 2001, 2000 and 1999, respectively: Mr. Dorier--$10,500, $9,790, and $9,983; and Mr. Henderson--$10,481, $7,075, and $10,000; and Mr. Cromer--$6,800, $3,158, and $0.
/(2)/ Represents a management fee paid by BGF Services, Inc., an affiliate of BGF, to Messrs. Robert and Philippe Porcher and reimbursed by BGF to cover services provided by Messrs. Robert and Philippe Porcher to BGF. See "Item 13. Certain Relationships and Related Party Transactions".
/(3)/ Paid for by BGF Services and reimbursed by BGF to BGF Services in the form of management fees to cover services rendered to BGF. See "Item 13. Relationships and Related Party Transactions."
/(4)/ In 2001, includes $6,483 for club membership fees; $1,382 for maintenance of automobiles; $25,841 depreciation associated with cost of residence; and $37,703 associated with maintenance of residence. In 2000, includes $5,596 for club membership fees; $478 for maintenance of automobile; $25,841 depreciation associated with cost of residence; and $67,078 associated with maintenance of residence in 2000. In 1999, includes $3,640 for club membership fees; $1,447 for maintenance of automobile; $25,840 depreciation associated with cost of residence; and $21,143 associated with maintenance of residence in 1999.
/(5)/ Represents $10,878, $9,484, and $8,622, in 2001, 2000, and 1999, respectively, of personal use of company car, gross annual profit sharing distributions of $6,800 and $3,158 in 2001 and 2000, respectively, and $16,781 in relocation fees in 2000.
/(6)/ Represents gross annual profit sharing distributions of $6,427, $3,120, and $6,382 in 2001, 2000, and 1999, respectively, and $7,048, $5,980, and $6,834 in 2001, 2000, and 1999, respectively, of personal use of a company car.
/(7)/ Represents gross annual profit sharing distributions of $6,336, $3,066, and $6,572 in 2001, 2000, and 1999, respectively, and $5,956, $5,778, and $5,841, in 2001, 2000, and 1999, respectively, for personal use of a company car.
Retirement Plans
Retirement System. The Retirement System of BGF Industries, Inc. covers substantially all employees of BGF after they have completed one year of service. Employees with five or more years of service are entitled to benefits beginning at normal retirement age. This plan also provides reduced benefits to participants electing to retire early, beginning at age 55. Participants are required to contribute three percent of covered compensation per year and interest is credited on employee contributions. In general, the normal retirement benefit is payable as an annuity. Participants may also elect a lump-sum distribution of their accrued benefit.
Normal retirement benefits are determined by reference to an employee's "accumulated contributions." Accumulated contributions are the sum of all required employee contributions
plus interest credited on the contributions, compounded annually at the rate of 120% of the federal mid-term rate in effect under section 1274 of the Internal Revenue Code for the first month of the plan year. In general, the annual normal retirement benefit is equal to 50% of the accumulated employee contributions, plus 3/4% of employee plan compensation up to $6,600 for the plan year 1989.
The estimated annual benefits payable upon retirement at normal retirement age for the executive officers listed in the "Executive Compensation" table above is as follows: Mr. Cromer--$23,619; Mr. Dorier--$63,357; Mr. Henderson--$24,182. These calculations are based on 2001 compensation, assume benefits are payable as a straight-life annuity, and assume that each individual will work until age 65. Mr. Robert Porcher and Mr. Philippe Porcher do not participate in the Retirement System.
401(k) Plan. The Employees' Profit Sharing and Tax Savings Plan of BGF Industries, Inc. covers most employees of BGF. After completing one hour of service, employees may defer up to 15% of their plan compensation each year, subject to Internal Revenue Code limitations. We may, in our discretion, match employees' elective deferrals up to a specified limitation each year and may make a discretionary employer contribution for employees that have completed one year of service. All contributions are 100% vested and nonforfeitable at all times. Benefits are payable after separation from service in a lump sum in cash.
Compensation of Directors
Our directors did not receive separate compensation for their services as directors in 2000.
Compensation Committee Interlocks and Insider Participation
Mr. Robert Porcher, who serves as both an executive officer and as a member of the board of directors of BGF, serves as the Chairman of the Supervisory Board of Porcher Industries, which is the equivalent of a board of directors. Mr. Robert Porcher also serves as an executive officer of Glass Holdings, AGY Holdings, BGF Services, Inc., BGF Overseas, Inc., Advanced Glassfiber Yarns, LLC and AGY Capital Corp., all of which are affiliates of BGF. He is a member of the board of directors for Glass Holdings, AGY Holdings, BGF Services, BGF Overseas, Advanced Glassfiber Yarns and AGY Capital Corp. Messrs. Cromer and Dorier also serve as members of the Executive Board of Porcher Industries, whose members are equivalent to executive officers. Mr. Dorier also serves as an executive officer of Glass Holdings, AGY Holdings, BGF Services, BGF Overseas and as a director of Glass Holdings, AGY Holdings and BGF Services. Mr. Philippe Porcher serves as Chairman of the Executive Board of Porcher Industries. He also serves as a director of Advanced Glassfiber Yarns and AGY Capital Corp. These positions effectively create interlocks between BGF and Glass Holdings, AGY Holdings, BGF Services, BGF Overseas, Advanced Glassfiber Yarns and AGY Capital Corp. See also "Item 13. Certain Relationships and Related Party Transactions."
Deferred Compensation Agreements
We have entered into Deferred Compensation Agreements with our executives and we are the guarantor of Mr. Dorier's Deferred Compensation Agreement with BGF Services. The agreements provide for both pre-retirement survivor benefits, as well as post-retirement benefits to the executive. The agreements also contain a non-competition provision. Generally, under each of the agreements, if the executive dies before the age of 65, his beneficiary or, if none, his estate will receive monthly payments for a 10-year period of an amount equal to 50% of the greater of:
(1) the executive's monthly base salary in effect on the January 1 prior to his death; or
(2) the executive's average monthly base salary on January 1 of the five years prior to his death.
This amount is decreased progressively if the executive dies after the age of 60 but before 65. The agreements also provide for post-retirement benefits in the form of:
(1) monthly payments over 10 years, the sum of which is equal to the "applicable percentage" multiplied by the greater of (a) the executive's annual base salary on January 1 immediately preceding or concurrent with his retirement or (b) the average of the executive's annual base salary on January 1 of the five years prior to his retirement. The "applicable percentage" is one and one-half. If the executive dies prior to receiving all of the monthly payments, the payments are made to his designated beneficiary or, if none, his estate. Reduced benefits are paid if the executive retires prior to age 65; and
(2) a payment on death equal to three-quarters of his annual base salary on the January 1 immediately preceding or concurrent with his retirement.
In 1998, we entered into an agreement with Mr. Pope with regard to his executive life insurance policies. In accordance with this agreement, we transferred ownership of the life insurance to Mr. Pope in March 2001. The cash surrender value of these policies was $155,788 at that time.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of BGF's outstanding common stock as of December 31, 2001 for each person or group known to our management to be holding more than 5% of the common stock and for each director and executive officer named in the "Executive Compensation" table and all of our directors and executive officers as a group.
An asterisk in the percent of class column indicates beneficial ownership of less than 1% of the outstanding common stock.
As noted in the table, Porcher Industries indirectly owns 100% of the outstanding common stock of BGF. The address of Porcher Industries is Porcher Industries S.A., Badinieres, 38300 Bourgoin-Jallieu, France.
As reflected in the graphic below the table, Mr. Robert Porcher may be deemed to beneficially own 56.05% of the outstanding capital stock of Porcher Industries, and thus Glass Holdings and BGF, through (1) his 7.22% direct ownership interest in Porcher Industries and (2) his ownership interest in Societe Civile des Terres Froides. Mr. Robert Porcher's address is c/o Porcher Industries S.A., Badinieres, 38300 Bourgoin-Jallieu, France.
Mr. Robert Porcher's 56.05% interest includes a 0.7% interest of his son, Philippe Porcher, an executive officer of BGF, in Societe Civile des Terres Froides. Mr. Robert Porcher controls the voting and investment of these shares. The asterisk aside the name of Philippe Porcher represents this interest.
Name of Beneficial Owner Percent of Class - ------------------------ ---------------- Porcher Industries 100.00% Robert T. Porcher 56.05% Philippe Porcher * Richard L. Cromer -- Philippe R. Dorier -- James R. Henderson -- All directors and executive officers as a group 56.05% (5 persons)
Item 13.
Item 13. Certain Relationships and Related Transactions
We are wholly owned by Porcher Industries through its U.S. holding company, Glass Holdings. We have on going financial, managerial and commercial agreements and arrangements with Porcher Industries, Glass Holdings and other wholly-owned subsidiaries of Glass Holdings, as well as other affiliates of Porcher Industries. Mr. Robert Porcher, our Chairman of the Board and Chief Executive Officer, beneficially owns a controlling interest in Porcher Industries. See "Item 12. Security Ownership of Certain Beneficial Owners and Management."
We pay management fees to BGF Services, Inc., a wholly owned subsidiary of Glass Holdings, that cover the periodic management services of Robert Porcher and his son Philippe Porcher, the Vice President of Porcher Industries, and the full time services of Philippe Dorier, our Chief Financial Officer. We also reimburse BGF Services for the costs associated with automobiles provided to Messrs. Robert Porcher and Dorier and maintenance and upkeep of Robert Porcher's Greensboro, North Carolina residence, which is owned by BGF Services and has a net book value of approximately $1.0 million. In connection with these arrangements, we incurred expenses of $641,000 in 2001. BGF Services does not derive a profit from this arrangement and therefore these terms cannot be considered comparable to those that would be provided to third parties.
Porcher Industries and its French parent company provide general management and strategic planning advice to us in exchange for management fees that reimburse these companies for a portion of the compensation of Robert Porcher, Philippe Porcher and other employees who allocate their time among us and other Porcher Industries affiliates. In 2001, we were not billed by the parent company for management expenses. We were billed $47,000 for reimbursement of travel and administrative expenses. These terms cannot be considered comparable to those that would be provided to a third party.
We purchase carbon fibers and finished products from Porcher Industries. We purchased $4.7 million in 2001 for these products. We sell finished goods and occasionally unfinished goods directly to Porcher and its affiliates. In 2001, we billed Porcher Industries and its affiliates $240,000 for these goods. Porcher Industries billed us for commissions for sales of its products in Asia, Europe, and Australia of $204,000 in 2001. We believe that prices and commissions paid or received by us for these transactions are comparable to those paid to third parties.
We collect and deposit customer payments on behalf of two wholly owned subsidiaries of Porcher Industries in exchange for fees equal to 2% of amounts collected. We billed $33,000 in fees for these services incurred in 2001. We believe that these fees are comparable to those that would be paid to third parties.
Graham A. Pope, a former director of BGF, performed certain consulting services for BGF regarding Shanghai Porcher. We paid Mr. Pope $10,000 in consulting fees in 2001.
On September 30, 1998, AGY Holdings purchased its 51% ownership interest in Advanced Glassfiber for aggregate consideration of approximately $338.9 million, including post-closing adjustments. We loaned Glass Holdings approximately $138.6 million to provide it with a
portion of the capital necessary to fund the acquisition. Additionally, BGF had a non-interest bearing loan payable to Glass Holdings from prior years of $1.8 million resulting in a net loan amount to Glass Holdings of $136.8 million. Our loan to Glass Holdings is evidenced in part by promissory notes. In 2001, Glass Holdings paid down $9.9 million in principal and $1.1 million interest. We believe that these transactions were on terms no more favorable than if Glass Holdings had borrowed the funds directly from a third party.
Currently, Advanced Glassfiber leases approximately 27,200 square feet of segregated space at our South Hill, Virginia lightweight fiber fabric facility for the purpose of manufacturing glass yarns for exclusive supply to us under a supply contract, extendible at the option of Advanced Glassfiber, that expires on December 31, 2008. We also provide Advanced Glassfiber with leased employees and administrative and technical support services. We billed Advanced Glassfiber approximately $0.9 million pursuant to this agreement in 2001. We also purchased approximately $25.9 million of raw materials from Advanced Glassfiber in the twelve months ended December 31, 2001. We believe that each of these arrangements are on terms no more favorable than those that would be provided to third parties. While Advanced Glassfiber is currently experiencing financial difficulties, we do not expect our operations to be significantly impacted.
See also note 13 to the consolidated financial statements filed as part of this Annual Report in Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. FINANCIAL STATEMENTS See Index on page.
2. FINANCIAL STATEMENT SCHEDULE See Index on page.
(a) Documents Incorporated by Reference or Filed with this Report:
EXHIBITS
Exhibit No. Description of Exhibit ---------- ----------------------
3.1(1) Certificate of Incorporation of BGF Industries, Inc., as amended
3.2(1) Bylaws of BGF Industries, Inc., as amended
4.1(1) Indenture, dated as of January 21, 1999, among BGF Industries, Inc. and The Bank of New York, as trustee, relating to $100 million principal amount of 10 1/4% Senior Subordinated Notes Due 2009
4.2(1) Form of 10 1/4% Series A and Series B Senior Subordinated Notes due 2009 (included in Exhibit 4.1)
10.1(1) Deferred Compensation Agreement, dated November 13, 1995, by and between BGF Industries, Inc. and Graham A. Pope /(2)/
10.2(1) Deferred Compensation Agreement, dated April 1, 1998, by and between BGF Industries, Inc. and Richard L. Cromer /(2)/
10.3(1) Deferred Compensation Agreement, dated April 16, 1990, by and between BGF, Industries, Inc. and James R. Henderson /(2)/
10.4(1) Deferred Compensation Agreement, dated January 28, 1993, by and between BGF Services, Inc. and Philippe Dorier /(2)/
10.5(1) Lease, dated March 20, 1996, between E.R. English, Sr., as lessor, and BGF Industries, Inc., as lessee
10.6(1) Purchase Order (Lease), dated November 26, 1996, between K&C Brokerage, as lessor, and BGF Industries, Inc., as lessee
10.7(1) Lease, dated November 1, 1991, by and between H.V. Johns, Jr., as lessor, and BGF Industries, Inc. as lessee
10.8(1) Agreement between Contractor and Owner (Warehouse Lease), dated February 1, 1998, between Boyd Warehouse/Emmett Williams, as lessor, and BGF Industries, as lessee
10.9(1) Note Purchase Agreement dated January 15, 1999 between BFG Industries, Inc., Inc. and the Initial Purchaser
10.10(1) Senior Credit Agreement dated September 30, 1999 among BGF Industries, Inc., as Borrower, its Domestic Subsidiaries from time to time party thereto, as Guarantors, the Lenders Parties thereto and First Union National Bank, as Agent
10.11(1) Senior Subordinated Credit Agreement dated as of September 30, 1998 among BGF Industries, Inc., as Borrower, certain subsidiaries from time to time party thereto, as Guarantors, and First Union Investors, Inc., as Agent
10.12(1) Promissory Note, dated September 30, 1998, from Glass Holdings Corp. to BGF Industries, Inc. for the original principal amount of $135,043,844.62
10.13(1) Promissory Note, dated December 23, 1998, from Glass Holdings Corp. to BGF Industries, Inc. for the original principal amount of $2,681,000
10.14(3) Second Amendment to Credit Agreement, dated December 16, 1999, by and among BGF Industries, Inc. (the "Borrower"), certain Domestic Subsidiaries of the Borrower party thereto (collectively the "Guarantors"), several banks and other financial institutions party thereto (the "Lenders") and First Union National Bank (the "Agent").
10.15(3) Syndication Amendment and Assignment, dated November 30, 1998, by and among BGF Industries, Inc. (the "Borrower"), certain Domestic Subsidiaries of the Borrower party thereto (collectively the "Guarantors"), the Existing Lender (as defined therein), the New Lenders (as defined therein), and First Union National Bank (the "Agent").
10.16(4) Lease Agreement, dated December 1, 1999 by and between Lawson Family LLC and BGF Industries, Inc.
10.17(5) Lease Agreement, dated October 1, 2000 by and between Edgar J.T. Perrow and BGF Industries, Inc.
10.18(6) Third Amendment to Credit Agreement, dated September 28, 2001, by and among BGF Industries, Inc. (the "Borrower"), certain Domestic Subsidiaries of the Borrower party thereto (collectively the "Guarantors"), several banks and other financial institutions party thereto (the "Lenders") and First Union National Bank (the "Agent").
12 Statement of Computation of Ratios
21 Subsidiaries of BGF
24 Powers of Attorney (included on signature page)
99.1 Reconciliation of net income to EBITDA
- ----------
(1) Filed as part of the Company's Registration Statement (333-72321) and incorporated herein by reference. /(2)/Management contract or compensatory plan or arrangement. (3) Filed as part of the Company's Form 8-K, dated December 16, 1999 and incorporated herein by reference.
(4) Filed as part of the Company's Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference. (5) Filed as part of the Company's Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference. (6) Filed as part of the Company's Form 10-Q for the fiscal quarter ended September 30, 2001 and incorporated herein by reference.
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K during the quarter ended December 31, 2001.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of BGF Industries, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) on page 33 present fairly, in all material respects, the financial position of BGF Industries, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 33 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above.
As discussed in Note 7 to the consolidated financial statements, the Company may not be able to comply with its loan covenants under its existing credit agreement in April 2003 as it relates to a cross-default provision of an affiliate's indebtedness.
As discussed in Note 17, the Company's consolidated financial statements have been restated to reflect deferred compensation liabilities.
/S/ PRICEWATERHOUSECOOPERS LLP - ------------------------------ Greensboro, North Carolina March 15, 2002
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
The accompanying notes are an integral part of the consolidated financial statements.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (dollars in thousands)
For the Year Ended December 31, ------------------------------- 2001 2000 1999 ------------------------------- Net sales $146,842 $201,419 $181,681 Cost of goods sold 131,639 165,830 151,491 -------- -------- -------- Gross profit 15,203 35,589 30,190 Selling, general and administrative expenses 7,071 9,333 7,492 Restructuring charge (Note 15) 502 -- 769 -------- -------- -------- Operating income 7,630 26,256 21,929 Interest expense 13,972 14,168 15,817 Other income, net (1,396) (1,844) (1,485) -------- -------- -------- Income (loss) before income taxes and extraordinary loss (4,946) 13,932 7,597 Income tax expense (benefit) (1,868) 5,602 2,880 -------- -------- -------- Income (loss) before extraordinary loss (3,078) 8,330 4,717 Extraordinary loss on write-off of debt issuance costs, net of income taxes of $639 -- -- 1,029 -------- -------- -------- Net income (loss) $ (3,078) $ 8,330 $ 3,688 -------- -------- -------- Other comprehensive income (loss) net of tax: Cumulative effect of change in accounting principle 183 -- -- Change in fair value of cash flow hedge (525) -- -- -------- -------- -------- Total comprehensive income (loss) $ (3,420) $ 8,330 $ 3,688 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
1. Summary of Significant Accounting Policies
Principles of Consolidation. BGF Industries, Inc. is a wholly owned subsidiary of Glass Holdings Corp. ("Glass Holdings"), which is a wholly owned subsidiary of Porcher Industries, S.A. These consolidated financial statements include the accounts of BGF Industries, Inc. and its wholly owned subsidiary, BGF Overseas, Inc. (collectively "BGF "). All intercompany transactions and balances are eliminated in consolidation. BGF manufactures high-quality glass, aramid and carbon fiber fabrics for use in a variety of electronic, composite, insulation, construction, filtration, and commercial applications. The principal market is the United States.
Cash and Cash Equivalents. For purposes of the statements of cash flows, BGF considers cash on hand, cash deposited in financial institutions and money market accounts with maturities of less than ninety days at date of purchase to be cash equivalents. These are stated at cost which approximates market value. The book overdrafts in bank accounts consist of outstanding checks which have not been presented to a bank for payment.
Inventories. Inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment. Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation of property, plant and equipment is calculated principally on the straight-line method over the estimated useful lives of the assets. Repairs and maintenance costs are expensed as incurred; major replacements and improvements are capitalized. When assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts with any resulting gain or loss reflected in operations.
The estimated useful lives of the assets are as follows:
Buildings............................................ 15-50 years Machinery and equipment.............................. 3-10 years
In the event that facts and circumstances indicate that the cost of long-lived assets may not be recoverable, the estimated future undiscounted cash flows is compared to the asset's carrying value and if less, an impairment loss is recognized in an amount by which the carrying value exceeds its fair value.
Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases based on enacted tax laws and statutory rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the legislation is enacted. A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Intangible Assets. The excess of acquisition cost over assigned value of net assets acquired is amortized over 40 years, using the straight-line method. Debt issuance costs are amortized over the terms of the respective debt agreements using the interest method. BGF assesses the recoverability of long-lived assets, including goodwill, by determining whether the carrying value of the asset balances over their remaining lives can be recovered through undiscounted future operating cash flows.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
1. Summary of Significant Accounting Policies -- (Continued)
Revenue Recognition. Revenue from product sales and the related cost of goods sold are recognized at the time both risk of loss and legal title transfer to the customer, which is typically at shipment.
Financial Instruments. BGF selectively enters into interest rate protection agreements to mitigate changes in interest rates on its variable rate borrowings. None of these agreements are used for speculative or trading purposes. The fair value of BGF's interest rate swap agreement is the estimated amount BGF would have to pay or receive to terminate the swap agreement as of the reporting date, taking into account current interest rates, and is disclosed in Note 7. The interest rate swaps are accounted for as hedges on the basis that such derivatives reduce the risk of changes in interest rates on BGF's variable rate debt. The interest differentials from these swaps are recorded in interest expense.
BGF enters into foreign currency exchange contracts to manage exposures related to specific foreign currency transactions or anticipated cash flows.
Rates currently available to BGF for debt with similar terms and remaining maturities are used to estimate fair value of the revolver. The carrying amount of BGF's revolver approximates fair value. Current bond prices used to estimate the fair value of BGF's senior subordinated notes. The fair value of the senior subordinated notes as of December 31, 2001 and 2000 was approximately $64,000 and $87,500, respectively.
Pension Plans and Other Postretirement Benefits. BGF has a contributory defined benefit pension plan covering most employees. Pension expense for the plan is determined using the projected unit credit method. BGF also provides certain retirement health care benefits, the estimated cost for which is accrued within the employees' active service lives. BGF's customary funding policy of these plans is to contribute amounts permitted by the Internal Revenue Code and in conformance with ERISA guidelines.
Research and Development. BGF expenses research and development costs as incurred. These costs were approximately $854, $1,172, and $1,425 for the years ended December 31, 2001, 2000, and 1999, respectively.
Advertising and Promotion. BGF expenses advertising and promotion costs as incurred and these costs are included as selling, general and administrative expenses. Such amounts were not material for 2001, 2000, and 1999.
Foreign Currency Transactions. Gains (losses) resulting from foreign currency transactions are included in other income or other expenses, and amounted to $65, $65, and $177, in 2001, 2000, and 1999, respectively.
Use of Estimates. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States 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.
At December 31, 2001, the Company has recorded provisions for slow-moving and obsolete inventories and for lower of cost or market issues associated with its inventories. The adequacy of this estimate is dependent on a number of future factors, including but not limited to the state of the economy and the level of customer demand. These factors could cause the inventory reserve to change by a material amount in the near term.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
1. Summary of Significant Accounting Policies -- (Continued)
Reclassifications. Certain amounts from the prior consolidated financial statements have been reclassified to conform to the current presentation. In order to conform with recent literature from the Emerging Issues Task Force, net sales and cost of goods sold have been adjusted to reflect the inclusion of shipping and handling costs as a component of cost of goods sold instead of a reduction of net sales.
2. Inventories
Inventories consist of the following:
December 31, December 31, 2001 2000 ------------ ------------ Supplies $ 2,001 $ 1,606 Raw materials 2,591 4,897 Stock-in-process 5,507 6,536 Finished goods 28,938 23,706 ------- ------- Total inventories $39,037 $36,745 ======= =======
3. Other Current Assets
Other current assets consist of the following:
December 31, December 31, 2001 2000 ------------ ------------ Deferred income taxes $3,476 $2,443 Prepaid expenses and other 1,217 627 ------ ------ Total other current assets $4,693 $3,070 ====== ======
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
4. Net Property Plant and Equipment
Net property, plant and equipment consist of the following:
December 31, December 31, 2001 2000 ------------ ------------ Land $ 3,155 $ 3,155 Buildings 42,195 36,322 Machinery and equipment 104,090 98,964 -------- -------- Gross property, plant and equipment 149,440 138,441 Less: accumulated depreciation (87,285) (83,953) -------- -------- Net property, plant and equipment $ 62,155 $ 54,488 ======== ========
5. Other Noncurrent Assets
Other noncurrent assets consist of the following:
Amortization of deferred financing charges of $1,348, $788, and $792 for the years ended December 31, 2001, 2000, and 1999, respectively, has been included in interest expense. During January 1999, the Company wrote off net debt issuance costs of $1,668 related to the termination of the senior subordinated credit facility. These costs have been classified as an extraordinary item in the accompanying financial statements. In December 1999, BGF wrote off $268 of net debt issuance costs related to the revolving credit facility due to an amendment dated December 16, 1999. In 2001, BGF wrote off $573 of net debt issuance costs related to the senior credit facility due to an amendment dated September 28, 2001. These costs have been classified as interest expense in the accompanying financial statements.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
6. Accrued Liabilities
Accrued liabilities consist of the following:
December 31, December 31, 2001 2000 ------------ ------------ Income taxes $ -- $ 4,883 Payroll 163 173 Profit sharing and other benefits 154 2,664 Interest 4,836 4,817 Restructuring 467 -- Medical benefits 921 1,084 Other 1,101 285 ------ ------- Total accrued liabilities $7,642 $13,906 ====== =======
7. Long-term Debt
Long-term debt consists of the following:
Senior credit facility. BGF has a senior credit facility with a syndicate of lenders and First Union National Bank, as agent. The senior credit facility, as amended on September 28, 2001, provides BGF with a revolving credit facility with total credit of up to $50.0 million, including amounts outstanding on two subfacilities. These two subfacilities are represented by a $5.0 million swingline facility, used for working capital requirements and typically repaid within a short time frame, and a $20.0 million letter of credit facility. All borrowing under the senior credit facility is limited to a calculated borrowing base, such that the total of all amounts outstanding cannot exceed the borrowing base, which is based on specified percentages of eligible accounts receivable and inventories. Under the terms of the amendment entered into on September 28, 2001, BGF paid off the existing term loan of $15.6 million, reduced the availability under the revolver from $60 million to $50 million, and locked in the interest rate to 2.75 points over LIBOR (1.87% at December 31, 2001) through 2002 at which time the rate will revert back to the initial rate under the senior credit facility. The senior credit facility matures in September 2003. As part of the amendment to the senior credit facility on September 28, 2001, the lenders waived BGF's requirement to maintain and meet its leverage and fixed charge coverage ratios until the quarter ended March 31, 2003. In addition, the consolidated net worth, interest coverage, and senior leverage ratios were modified to be less restrictive. Also, the revised covenants placed a limitation on maximum capital expenditure levels and limit BGF's use of proceeds upon the occurrence of certain transactions.
7. Long-term Debt -- (Continued)
The senior credit facility is collateralized by a first priority lien on substantially all of BGF's real and personal property. The lien also covers (1) 100% of the capital stock of each direct or indirect domestic subsidiary of BGF, (2) 65% of the capital stock of each first tier foreign subsidiary of BGF and (3) certain promissory notes issued by affiliates of BGF. The senior credit facility is also collateralized by a non-recourse pledge by Glass Holdings, the parent of BGF, of capital stock of certain affiliates of BGF.
The senior credit facility provides for an annual administrative fee to be paid to the agent, an unused commitment fee payable to the lenders and certain other fees payable in connection with letters of credit issued under the revolver.
Liquidity. Management believes that BGF will be able to satisfy the amended financial covenant levels under the senior credit facility through 2002, although there can be no assurance that these covenants will be met. The possibility exists that certain financial covenants will not be met if business conditions render actual outcomes and results materially different from those predicted. Failure to comply with such covenants would constitute a default under the senior credit facility, and the lender would be entitled to accelerate the maturity of the indebtedness outstanding thereunder.
BGF incurred a net loss of $3.0 million in 2001 and operating cash flows declined from $6.8 million in 2000 to $1.1 million in 2001. These operating results were driven by reduced customer demand, especially in the electronics and filtration product industries, and unfavorable absorption resulting from significantly reduced production schedules in the fourth quarter of 2001. BGF's primary sources of liquidity are cash flows from operations and borrowings under its credit facilities. BGF's future need for liquidity will arise primarily from interest payments on its 10 1/4% Series B Senior Subordinated Notes due 2009, principal and interest payments on the senior credit facility, and the funding of capital expenditures and working capital requirements. There are no mandatory payments of principal on the senior subordinated notes scheduled prior to their maturity.
At December 31, 2001, BGF had outstanding debt of $27.0 million under the Senior Credit Facility, with additional available borrowings of $6.0 million. BGF is continuing its efforts to reduce inventory levels and improve working capital, while implementing additional cost-saving initiatives. Based upon current and anticipated levels of operations, BGF believes that its cash flows from operations, combined with short-term availability under the senior credit facility, will be adequate to meet liquidity needs with respect to existing obligations and operations for fiscal 2002. However, BGF's future performance is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.
The senior credit facility contains a cross-default provision related to the indebtedness of an affiliate. In the event this affiliate does not remain in compliance with its covenants throughout 2002, BGF has received an anticipatory waiver through April 1, 2003 of any such cross-default from its lenders.
BGF is currently negotiating a new longer term financing arrangement with another lender and expects it to be finalized in April 2002. However, there can be no assurance that such a refinancing will be consummated.
Interest rate swap. During 1998, BGF entered into an interest rate swap transaction which originally expired on September 30, 2004, on an initial notional amount on $50,000 in order to limit its exposure to interest rate fluctuations under the term loan portion of the senior credit facility. Under the swap agreement, BGF had secured a fixed rate of interest of 5.04% on the notional amount, which was correlated in a manner consistent with the amortization of the term loan principal. During 1999 and 2000, BGF terminated portions of the interest rate swap relating to early payments of $25,800 and $5,000, respectively, on the term loan. BGF recognized gains of $890 and $94, respectively, related to the terminations in 1999 and 2000, which have been included as other income in the accompanying financial statements. The amount of the term loan covered by this swap was $19,200 as of December 31, 2000.
In connection with BGF's amendment to the senior credit facility on September 28, 2001, BGF also amended its interest rate swap to change the maturity date from March 31, 2004 to September 30, 2003 and redesignated the instrument to cover only the revolver portion of its senior credit facility, which also expires on September 30, 2003. At December 31, 2001, the notional amount of the interest rate swap agreement was $19.2 million. This swap
7. Long-term Debt - (Continued)
effectively changes BGF's payment of interest on $19.2 million of variable rate debt to a fixed rate of 5.04% for the contract period. The fair value of the interest rate swap agreement, representing the estimated amount that BGF would pay to terminate the swap agreement, was approximately $527 at December 31, 2001 and has been recorded as a liability; however, BGF has no intention of terminating the swap agreement.
Senior subordinated notes. BGF also has outstanding $100,000 of 10 1/4% series B senior subordinated notes due 2009. Interest on the 10 1/4% series B senior subordinated notes is payable semi-annually in January and July. There is no cross-default provision for this debt in conjunction with the covenants discussed above for the senior credit facility.
The aggregate maturities of long-term debt at December 31, 2001 are as follows:
2002 -- 2003 $ 27,000 2004 -- 2005 -- 2006 -- Thereafter $100,000
8. Income Taxes
Income tax expense (benefit) consists of the following:
---------------------------- Current Deferred Total ------- -------- ------- Federal $3,335 $(4,807) $(1,472) State 380 (776) (396) ------ ------- ------- $3,715 $(5,583) $(1,868) ====== ======= =======
---------------------------- Current Deferred Total ------- -------- ------- Federal $ 9,265 $(4,370) $4,895 State 1,413 (706) 707 ------- ------- ------ $10,678 $(5,076) $5,602 ======= ======= ======
---------------------------- Current Deferred Total ------- -------- ------- Federal $8,333 $(5,601) $2,732 State 1,054 (906) 148 ------ ------- ------ $9,387 $(6,507) $2,880 ====== ======= ======
A reconciliation of the difference between the federal statutory rate and the effective income tax rate as a percentage of income before taxes is as follows:
2001 2000 1999 ---- ---- ---- Federal statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 5.1% 5.0% 1.7% Other (3.6)% 0.2% 1.2% ---- ---- ---- 36.5% 40.2% 37.9% ==== ==== ====
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
8. Income Taxes -- (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, ----------------- 2001 2000 ----------------- Deferred tax assets: Loan to parent $14,635 $10,516 Inventories 1,020 759 Accrued liabilities 1,643 900 Accounts receivable 154 126 Tax credits 630 630 Retirement 1,003 1,048 ------- ------- Total gross deferred tax assets 19,085 13,979 ------- ------- Deferred tax liabilities: Depreciation (5,925) (6,586) Other (1,150) (1,150) ------- ------- Total gross deferred tax liabilities (7,075) (7,736) ------- ------- Net deferred tax asset $12,010 $ 6,243 ======= =======
BGF is included in the consolidated federal tax return of Glass Holdings. Pursuant to a tax sharing agreement, BGF is required to make tax sharing payments to Glass Holdings with respect to BGF's pro rata share of consolidated federal income tax liabilities which does not differ significantly from that which would be determined on a stand alone basis.
9. Employee Benefits
Defined Contribution Plan. BGF has a 401(k) savings plan for all employees. Company contributions, if any, are made at the discretion of BGF's Board of Directors. BGF allows participants an election of receiving their profit sharing, when applicable, in cash or as an employer contribution to the 401(k) plan. Plan expense amounted to $0, $2,500 and $778 in 2001, 2000 and 1999, respectively.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
9. Employee Benefits -- (Continued)
Defined Benefit Pension Plan. BGF has a defined benefit pension plan covering substantially all of its employees. Participating employees are required to contribute to the pension plan. BGF made no contributions to the pension plan for 2001, 2000, and 1999.
A summary of the components of the defined benefit pension plans' net periodic pension cost is as follows:
2001 2000 1999 ------- ------- ------- Service cost-benefits earned during the period $ 841 $ 677 $ 996 Interest cost on projected benefit obligation 1,228 1,038 1,040 Expected return on plan assets (1,226) (1,212) (1,214) Recognized net actuarial gain -- (135) -- Net amortization and deferral 7 7 7 ------- ------- ------- Net periodic pension expense 850 375 829 Settlement gain -- -- (539) ------- ------- ------- Total pension expense $ 850 $ 375 $ 290 ======= ======= =======
Assumptions used: Weighted-average discount rates 7.25% 7.50% 8.00% Rate of increase in compensation levels 4.00% 4.00% 4.00% Expected long-term rate of return on assets 8.00% 8.00% 8.00%
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
9. Employee Benefits -- (Continued)
The change in projected benefit obligation, the change in fair value of plan assets and the funded status of BGF's pension plan at December 31 is summarized below: 2001 2000 ------- ------- Change in projected benefits obligations: Projected benefit obligation at beginning of year $16,388 $13,977 Service cost 841 677 Interest cost 1,228 1,038 Actuarial (gain)/loss 1,000 704 Benefits paid (1,555) (848) Plan participants' contributions 761 840 Settlement -- -- ------- ------- Projected benefit obligation at end of year $18,663 $16,388 ======= =======
Change in fair value of plan assets: Fair value of plan assets at beginning of year $15,377 $15,572 Actual return on plan assets (1,068) (187) Employee contributions 761 840 Benefits paid (1,555) (848) Settlement -- -- ------- ------- Fair value of plan assets at end of year $13,515 $15,377 ======= =======
Funded status $(5,148) $(1,011) Unrecognized prior service cost 41 48 Unrecognized gain 2,311 (1,001) ------- ------- Net amount recognized in liabilities $(2,796) $(1,964) ======= =======
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
9. Employee Benefits -- (Continued)
Postretirement Benefits. In addition to providing pension benefits, BGF provides certain retirement health care benefits to eligible employees. Employees become eligible for these benefits by attaining specified age and service requirements.
A summary of the components of the other postretirement benefit plan's net periodic cost is as follows:
The change in projected benefit obligation, the change in fair value of plan assets and the funded status of BGF's postretirement benefit plan at December 31 is summarized below:
2001 2000 ------- ------- Change in projected benefit obligations: Projected benefit obligation at beginning of year $ 1,910 $ 1,612 Service cost 91 78 Interest cost 135 138 Plan participant contributions 110 98 Actuarial loss 167 157 Benefits paid (487) (173) ------- ------- Projected benefit obligation at end of year $ 1,926 $ 1,910 ======= =======
Change in fair value of plan assets: Fair value of plan assets at beginning of year $ -- $ -- Actual return on plan assets -- -- Employer contributions 377 75 Employee contributions 110 98 Benefits paid (487) (173) ------- ------- Fair value of plan assets at end of year $ 0 $ 0 ======= =======
Funded status $(1,926) $(1,910) Unrecognized loss 483 320 ------- ------- Net amount recognized in liabilities $(1,443) $(1,590) ======= =======
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
9. Employee Benefits -- (Continued)
Assumed health care trend rates have a significant effect on the amounts reported for the postretirement benefit obligation. A one-percentage point change in assumed health care cost trend rates would have the following effects:
2001 2000 ----- ----- 1% increase: Effect on total of service and interest cost components $ 32 $ 30 Effect on postretirement benefit obligation $ 209 $ 199
1% decrease: Effect on total of service and interest cost components $ (27) $ (25) Effect on postretirement benefit obligation $(181) $(172)
Deferred Compensation Benefits. BGF has deferred compensation arrangements for certain key executives which generally provide for payments upon retirement or death. The amounts accrued under this arrangement were $1,176 and $1,087 as of December 31, 2001 and December 31, 2000, respectively, and are reflected in postretirement benefit and pension obligations. The Company funds a portion of these obligations through life insurance contracts on behalf of the executives participating in these arrangements. Net cash surrender value included in other noncurrent assets was $481 and $581 at December 31, 2001, and December 31, 2000, respectively. Expenses related to these arrangements, including premiums and changes in cash surrender value, were $174, $165, and $156 for fiscal 2001, 2000, and 1999, respectively, and are recorded in selling, general, and administrative expenses.
10. Concentrations
BGF's cash and cash equivalents are placed in major domestic and international banks. Deposits in such banks may exceed federally insured limits.
Substantially all of BGF's raw materials are purchased from two suppliers. In the event suppliers are unable or unwilling to deliver glass, aramid or carbon yarns, the business, financial condition and results of operations could be materially adversely affected.
Substantially all of BGF's trade accounts receivable are due from companies in the electronics, composites, insulation, filtration, construction and commercial industries. Management periodically performs credit evaluations of its customers and generally does not require collateral. Credit losses have historically been within management's expectations.
The following table presents a summary of sales of significant customers as a percentage of BGF's net sales:
2001 2000 1999 ---- ---- ---- Customer A 19.0% 12.3% 13.7% ==== ==== ==== Customer B 6.0% 10.8% 13.7% ==== ==== ====
11. 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. Net sales 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.
2001 2000 1999 -------- -------- -------- United States $140,866 $186,050 $170,831 Foreign 5,976 15,369 10,850 -------- -------- -------- $146,842 $201,419 $181,681 ======== ======== ========
12. Commitments and Contingencies
Leases. BGF leases facilities and equipment. Generally, these leases contain renewal options under cancelable and noncancelable operating leases. Rent expense amounted to $1,083, $711, and $662 for the years ended December 31, 2001, 2000, and 1999, respectively. Under the terms of noncancelable operating leases, BGF is committed to the following future minimum lease payments at December 31, 2001:
Fiscal Year - ----------- 2002............................................. $792 2003............................................. 671 2004............................................. 556 2005............................................. 452 2006............................................. 425
Legal and Environmental Matters. From time to time BGF is involved in various legal proceedings arising in the ordinary course of business. Management believes that the ultimate resolution of these legal matters will not have a material adverse impact on BGF's financial position or results of operations.
In the course of a September 1998 environmental site assessment, BGF discovered reportable quantities of polychlorinated biphenyls ("PCBs") in the soil at a plant site 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. BGF has reported the contamination to the United States Environmental Protection Agency ("USEPA") Region 3 and the Virginia Department of Environmental Quality ("VDEQ").
The USEPA and VDEQ have required additional sampling and site characterization, which is ongoing. BGF is currently developing a cleanup plan in conjunction with USEPA and VEDQ oversight. BGF will begin to implement this plan upon receiving approval from USEPA. Accordingly, actual cleanup costs remain uncertain. BGF may incur costs or liabilities relating to this and other environmental or safety and health matters in the future, including those relating to compliance with laws and requirements, remediation of contamination or claims by third parties.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
13. Related Party Transactions
Related party balances at December 31, 2001, 2000, and 1999 and transactions for the years ended December 31 were as follows:
In 1998, BGF loaned an officer $365. The loan was non-interest bearing and was payable upon the sale of the officer's former residence. The loan was paid in full in 2000.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
13. Related Party Transactions -- (Continued)
On September 30, 1998, AGY Holdings, an affiliate of BGF, purchased a 51% ownership interest in Advanced Glassfiber Yarns LLC for aggregate consideration of $338,900, including post-closing adjustments. In connection with the acquisition, BGF loaned Glass Holdings approximately $138,590 to provide Glass Holdings a portion of the capital necessary to fund the acquisition. BGF raised the proceeds for this loan by borrowing (1) $88,400 under the senior credit facility, and (2) $65,000 under the senior subordinated credit facility which was refinanced in 1999 with senior subordinated notes (Note 7). The loan from BGF to Glass Holdings is evidenced by promissory notes that bear interest at the Cost of Funds Rate for BGF for the calendar year immediately preceding the date on which any interest is due. With respect to any period of determination, the Cost of Funds Rate means a rate per annum equal to the blended interest rate, as reasonably calculated by BGF, applicable to borrowings of BGF during such period in respect of indebtedness incurred by BGF, to fund the loan to Glass Holdings. Accrued interest is due and payable on the first business day of February of each year commencing on February 1, 1999 and on any date on which any principal is due. The promissory notes are payable on October 31, 2008 or such later date as may be agreed to by BGF and Glass Holdings. BGF has not recorded interest income earned under the terms of the loan agreement due to the fact that 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, BGF and Advanced Glassfiber, which are currently restricted from paying dividends and other distributions under their debt agreements. Interest in arrears as of December 31, 2001 and 2000 totaled $38,098 and $27,400, respectively. BGF received payments from Glass Holdings totaling $11,034 and $11,680 in 2001 and 2000, respectively. While there are interest amounts in arrears, 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 $9,931 and $10,480 of the cash payment received as a reduction of principal and $1,103 and $1,200 was recognized as interest income (recorded in other income on the consolidated statement of operations in 2001 and 2000, respectively). At December 31, 2001 and 2000, the loan to Glass Holdings has been included as a contra equity account in the financial statements.
On October 5, 2000, Owens Corning, which owns a 49% economic interest in Advanced Glassfiber Yarns LLC (a major supplier of glass yarns to BGF), and certain of Owens Corning's United States subsidiaries (collectively, the "Debtors") filed voluntary petitions with the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the United States Bankruptcy Code. According to filings made by Owens Corning with the SEC, the Debtors will continue to manage their properties and operate their businesses as "debtors-in-possession" in accordance with the applicable provisions of the United States Bankruptcy Code. To date, Advanced Glassfiber, and consequently BGF, has not experienced interruptions in operations or supply of material. Although no assurances can be provided, the Company does not believe that Owens Corning's bankruptcy will have a material adverse effect on BGF's business, financial condition or results of operations.
BGF INDUSTRIES, INC. (a wholly owned subsidiary of Glass Holdings Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (dollars in thousands)
14. Quarterly Financial Information (Unaudited)
The following table sets forth summary quarterly financial information for the years ended December 31, 2001 and 2000:
2001 By Quarter First Second Third Fourth --------------- ------- ------- ------- ------- Net sales $46,558 $34,426 $35,178 $30,680 Gross profit 8,257 4,020 2,522 404 Operating income 5,557 2,153 1,626 (1,706) Net income (loss) 1,466 19 (1,275) (3,288)
2001 By Quarter First Second Third Fourth --------------- ------- ------- ------- ------- Net sales $46,736 $48,280 $51,410 $54,993 Gross profit 7,890 7,921 9,452 10,326 Operating income 5,745 5,757 7,425 7,329 Net income 1,362 1,551 2,401 3,016
15. Restructuring Charge
In 2001, management approved a restructuring plan which resulted in the reduction of BGF's salary and wage workforce by approximately 25%. As a result of the restructuring, BGF incurred charges of $502, included as a component of operating income in the accompanying 2001 financial statements. The charges incurred were costs for salaried employee severance.
In 1999, management approved a restructuring plan which resulted in the reduction of BGF's salary workforce. As a result of the restructuring, BGF incurred charges of $769, included as a component of operating income.
16. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all business combinations be accounted for under the purchase method. The statement applies to all business combinations initiated after June 30, 2001.
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. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the year ended December 31, 2001 was $181, and net goodwill as of December 31, 2001 was $4,724.
17. Restatement of Consolidated Financial Statements
In 2001, the Company determined that its prior years' consolidated financial statements should be restated to properly reflect deferred compensation liabilities. The effect of the restatement was to record deferred compensation liabilities of $1,087 and $1,007 at December 31, 2000 and 1999, respectively and additional deferred income tax assets of $413 and $383, respectively. Selling, general and administrative expenses for 2000 and 1999 were increased by $80 and $82, respectively, while net income was reduced by $50 and $51, respectively. Retained earnings at December 31, 1998 were reduced by $573, which is net of tax.
Schedule II - Valuation and Qualifying Accounts
(In thousands)
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 2002.
BGF INDUSTRIES, INC.
By: /s/ Richard L. Cromer ----------------------------- Richard L. Cromer President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities indicated on March 27, 2002.
Signature Title - --------- -----
/s/ Robert Porcher Chairman of the Board of Directors, - ----------------------------- Chief Executive Officer and Robert Porcher Director (Principal Executive Officer)
/s/ Richard L. Cromer - ----------------------------- Richard L. Cromer President
/s/ Philippe R. Dorier Chief Financial Officer (Principal - ----------------------------- Financial and Accounting Officer) Philippe R. Dorier