-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PeodIEgXhlyBcgC6nMhl6CyaBTQku/SIEwpFjzadgP5bZhhFaftUjTRLYaoX4wUL vSX+Zvh91LDErnOQ88nodA== 0000950135-98-002223.txt : 19980406 0000950135-98-002223.hdr.sgml : 19980406 ACCESSION NUMBER: 0000950135-98-002223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980403 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRUNSWICK TECHNOLOGIES INC CENTRAL INDEX KEY: 0000826075 STANDARD INDUSTRIAL CLASSIFICATION: BROADWOVEN FABRIC MILS, MAN MADE FIBER & SILK [2221] IRS NUMBER: 010402052 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-10721 FILM NUMBER: 98587643 BUSINESS ADDRESS: STREET 1: 43 BIBBER PKWY CITY: BRUNSWICK STATE: ME ZIP: 04011 BUSINESS PHONE: 2077297792 MAIL ADDRESS: STREET 1: 43 BIBBER PARKWAY CITY: BRUNSWICK STATE: ME ZIP: 04011 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the year ended December 31, 1997. [ ] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period to . Commission File Number 0-22089 BRUNSWICK TECHNOLOGIES, INC. (Exact Name of Registrant As Specified In Its Charter) MAINE 01-0405052 (State or other jurisdiction of Incorporation (I.R.S. Employer Identification No.) or organization) 43 BIBBER PARKWAY, BRUNSWICK, MAINE 04011 (Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (207) 729-7792 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.0001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporation by reference in Part III of this Form 10-K or any amendment to this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock held by non-affiliates as of March 26, 1998 was approximately $70,978,200 based on the closing price as reported on such date on the Nasdaq National Market. Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of March 26, 1998: 5,162,054 shares of Common Stock, $0.0001 par value. The registrant's definitive proxy statement for its Annual Meeting of Stockholders, to be held on May 13, 1998, which will be filed with the Commission on or before April 30, 1998, is incorporated by reference in response to Part III, Items 10, 11, 12 and 13; and certain exhibits to the registrant's Form S-1 Registration Statement (File No. 333-10721) and Form 8-K dated March 2, 1998, are incorporated by reference in response to Part IV, Item 14. ================================================================================ 2 BRUNSWICK TECHNOLOGIES, INC. TABLE OF CONTENTS
SECURITIES AND EXCHANGE COMMISSION ITEM NUMBERS AND DESCRIPTION PAGE ---------------------------------- ---- PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 9 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 16 Item 8. Financial Statements and Supplementary Data................. 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 32 PART III Item 10. Directors and Executive Officers of the Registrant.......... 32 Item 11. Executive Compensation...................................... 32 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 32 Item 13. Certain Relationships and Related Transactions.............. 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 33
1 3 Information contained in this report with respect to expected financial results and future events and trends is forward-looking based on Management's estimates and assumptions and is subject to risks and uncertainties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Statement Concerning Forward-Looking Statements." ITEM 1: BUSINESS GENERAL Brunswick Technologies, Inc. (the "Company") is a technologically advanced, leading developer and producer of engineered reinforcement fabrics used in the fabrication of composite materials. The Company's technologically advanced stitchbonding equipment and processes prepare glass, carbon and other fibers for combination with resin to produce laminates used in the construction of such diverse items as boats, skis, diving boards, protective helmets and ballistic armor applications, car and truck parts, and industrial tanks and pipes. Since the invention of composite reinforcement fabrics in the early 1940's, these materials have developed broad applicability as substitutes for wood, steel and concrete. Composite products offer substantial benefits over conventional materials, including: a higher strength-to-weight ratio, greater design flexibility while maintaining structural integrity, chemically inert properties and lower maintenance requirements. As a result of their superior features, composite reinforcement fabrics are increasingly demanded by a growing number of industries and applications, including transportation, infrastructure, recreation, petro-chemical and construction. Management believes the use of engineered composite reinforcement fabrics will continue to grow as the market is made more aware of the positive features of such materials and as the cost of more advanced composite fibers such as carbon continues to decline. The Company's principal strength lies in its innovative quadraxial single-step stitchbonding fabrication process. Through use of its proprietary production equipment, the Company can quickly and cost effectively produce engineered composite reinforcement fabrics in sizes and shapes not otherwise generally available. Fabrics created from the Company's proprietary manufacturing process offer characteristics integral to the production of composite materials in infrastructure, industrial and large scale commercial applications. The Company has introduced a number of manufacturing processes that not only more efficiently create composite reinforcement fabrics, but also optimize the performance characteristics of such fabrics. In a proprietary single-step production process, the Company is able to stitchbond fibers in different directions without diminishing the composite fibers' inherent properties, thus dramatically improving the structural strength of the reinforcement fabric. This compares favorably, firstly, with traditional composite fabrics which are woven, and therefore require the use of more resin to achieve the same degree of structural integrity, and secondly, with the more costly multi-step processes of other weft-insertion or stitchbonding manufacturing technologies. In addition, the Company's proprietary, high through-put manufacturing processes have the ability to produce heavyweight quadraxial fabrics over 100 inches wide in a single-step, which allows for cost-effective fabrication of composite parts of up to 10 inches thick. The combination of these features produces fabrics which enable composite fabricators to manufacture end-products at competitive costs while maintaining the maximum structural integrity of these products. The Company's strategy is to increase revenues and net income by increasing its domestic and international market share in the composite reinforcement fabric industry as well as making additional strategic acquisitions for product and market presence. Key elements of this strategy include: (i) increasing market share for Company's products; (ii) continuing to build the customer and project base for White Steel(R) (see "Joint Projects"); (iii) aggressively moving further into the carbon fiber fabric market; and (iv) expanding further into the European market. In a move to accelerate the implementation of its strategic business plan and expand its product line, the Company acquired Advanced Textiles, Inc. ("ATI"), a subsidiary of Burlington Industries, Inc. ("Burlington") on October 30, 1996. During 1997, ATI was fully integrated into the operations of the Company, including sales, distribution and manufacturing. In order to accelerate the Company's penetration of the European market, the Company acquired the business and assets of Tech Textiles International Ltd. ("TTI"), located in Andover, UK on March 2, 1998. The acquisition will serve as a platform for the transfer of the Company's proprietary process technology and production of White Steel(R) while providing access to European suppliers and other sales distribution channels. 2 4 INDUSTRY BACKGROUND Since the invention of composite reinforcement fabrics made from fiberglass in the early 1940's, various attempts have been made to commercialize the potential of these fabrics as replacements for wood, steel and concrete. These diverse pioneering projects include the 1953 Corvette and Wonder Bread delivery trays from the early 1950's. While these efforts were remarkable for their day, the potential of these materials did not start to be realized until the mid-1960's when the recreational boat industry converted from wood to composite reinforcement fabrics. This development spurred the expansion of the composite fiber industry from occasional to broad usage in a wide variety of consumer products such as skis, diving boards and protective helmets, and industrial applications, including cars, trucks, ballistic armor applications and industrial tanks & pipes. Over this period the processes used to create fabrics composed of composite fibers have dramatically evolved. Traditionally, reinforcement fibers were woven together to create a composite reinforcement fabric. The weaving process aligns these fibers along the zero-to-ninety degree axis, inserting them over and under each other to create the weave, resulting in the bending of such fibers, or crimping. While woven fabrics are highly suitable for certain applications such as ballistic protection, the crimping which occurs in the weaving process reduces each individual fiber's strength and reinforcement properties. As the mechanical properties of the composite reinforcement fabric is the key parameter for the design of the underlying product or application, the integrity of the fibers performance defines the amount of such fibers needed to achieve specific performance specifications. In contrast to weaving, weft insertion or stitchbonding a composite fabric allows the manufacturer to optimize the fibers mechanical properties, thus reducing the volume of fibers required as compared to the weaving process. The weft insertion process, while optimizing the fibers mechanical properties, is typically a multi-step, relatively slow process used for select niche markets. In 1990, the Company introduced a revolutionary new product line, BiTex(TM), the first generation of price-competitive, heavy-weight stitchbonded reinforcement fabrics. For the first time, weft-inserted or stitchbonded composite reinforcement fabrics, whose market potential was previously limited by their high cost, became competitive in numerous composite applications, from automobile bumpers and one-piece molded commercial aircraft structures to high-strength consumer products such as boat hulls and skis. The Company's innovative stitchbonding production processes align the composite reinforcement fibers in a variety of axes. All of this takes place in a single production step with high production throughputs, all without crimping the fiber and thereby avoiding degradation of the fibers strength. While the Company does offer some weft inserted multi-step products, these are generally offered in traditional lightweight markets. Certain of the Company's competitors also can offer weft-inserted or stitchbonded reinforcement fabrics, though they generally manufacture their products in multi-step processes. The competitors' manufacturing processes are more costly due to the greater number of steps in the process and the lower throughput rate as compared to the Company's proprietary, high throughput, one-step process. COMPANY STRATEGY The Company's strategy to continue its current growth includes the following elements: - Continue to build market share in existing markets by: (i) accelerating the pace of marine conversions through the development of new fabrics and production techniques; (ii) aligning itself with high volume end users by expanding the Company's knowledge of their production needs and end market requirements; and (iii) realigning North American distribution to optimize market impact; - Grow White Steel(R) business by: (i) seeking out and developing high volume applications for White Steel(R) as a replacement for wood, steel and concrete; (ii) developing partnerships to accelerate the conversion of traditional materials to composites; and (iii) investing in the Company's core manufacturing process technology to drive the cost competitiveness of White Steel(R); - Develop European market presence by: (i) using the 1998 acquisition of TTI as a base to introduce the Company technology to the European marketplace; (ii) increasing penetration of White Steel(R) into key markets and projects; and (iii) expanding TTI's base growth rate by increasing product offerings; - Increase market presence in the developing carbon fiber market by: (i) developing carbon fiber based processing techniques and reinforcement fabrics to highlight carbon fibers inherent advantages; and (ii) fostering joint development teams to increase the market for carbon reinforcing fabrics; 3 5 - Continued expansion of its leadership position in the composite reinforcement fabrics industry through the development of new products and processes to answer the needs of a wide range of industries including the continuing integration of fabric design elements with the specific needs of composite fabricators and capitalization of the Company's position as the only supplier of composite reinforcement fabrics to develop and manufacture its own production equipment; and - Pursuit of additional acquisitions to further broaden the Company's product line as well as manufacturing capacity, product market coverage, and distribution channels. ACQUISITION OF ADVANCED TEXTILES, INC. AND TECH TEXTILES INTERNATIONAL LTD. On October 30, 1996, the Company acquired all of the outstanding capital stock of ATI pursuant to a Stock purchase Agreement dated as of October 22, 1996 among the Company, Burlington and Peter L. DeWalt, the President (and partial owner) of ATI. In consideration for the capital stock of ATI, the Company (i) agreed to pay to Burlington the sum of $600,000 in cash (discounted to $513,000 using an interest rate of 8.25%) over a two to six year period and issued to Burlington a convertible subordinated promissory note in the aggregate principal amount of $7,296,500 (the "Convertible Note"), and (ii) issued to Mr. DeWalt 5,350 shares of Common Stock. The acquisition was the result of extensive negotiations between the Company and Burlington. The Company elected to pursue this acquisition because it believes that by offering a product line which satisfies a broader range of composite reinforcement fabric requirements, it is better positioned to be the principal provider of these fabrics to its expanded customer base. The Company believes it is capturing additional market share by cross-marketing its existing products to ATI's customers and vice versa. The Company is applying its specialized know-how and technical skills to ATI's manufacturing capabilities and achieving cost-savings through economies of scale. Additionally, the acquisition offers integrated distribution channels and higher manufacturing efficiencies at ATI's production facility. On March 2, 1998 the Company acquired the business and assets of TTI based in Andover, UK from T&N plc for approximately $5.9 million in cash. The acquisition was made through a wholly owned subsidiary in the UK, Brunswick Technologies Europe Ltd. The acquired business will be the Company's base of operations for the Company's continued expansion into Europe. TTI, is a composite reinforcement materials company which manufactures glass, carbon and other high modulus reinforcements, many of which are used in high margin applications in aerospace, automotive and wind generation. TTI is based in a 25,000 square foot manufacturing facility which currently employs 24 people with annual sales exceeding $6 million. Management expects this acquisition to make a positive contribution to the company's consolidated revenues and earnings in 1998. The Company expects the acquisition will strengthen its leading market share position in the reinforcement market and help advance its key growth strategy to serve a worldwide market in the composite industry. Management believes that the acquisition is a platform for the transfer of the Company's proprietary process technology and production of White Steel(R) and provides access to European suppliers and other sales distribution channels. The Company also anticipates greater opportunities with current industry partnerships, many of which are European-based and are subject to Common Market product origin requirements. Other financial and competitive advantages include significant savings on duty, shipping costs and material delivery time. TTI's current management team will continue to manage the day to day operations. PRODUCTS The Company currently manufactures composite reinforcement fabrics, also referred to as stitchbonded or weft inserted non-crimped fabrics, primarily from glass, carbon and aramid fibers, and is distributing them under the BiTex, Cofil(TM) and White Steel(R) Trade names. The Company is continuously researching new methods of producing other types of composite fabrics and the use of new fibers to create them. The Company's introduction of its proprietary stitchbonding production processes in 1990 enabled composite reinforcement fabrics to compete more successfully with conventional materials by reducing such fabric's manufacturing costs, which previously had been prohibitively high. ATI, which the Company purchased in 1996, was a pioneer in the industry's transition to non-crimped reinforcement fabrics, although it still produces some woven fabrics for specific applications, such as ballistic armor applications. The ATI operation, which was integrated into the Company during 1997, offers a product range that focuses on high-margin, high-quality, specialty products required by a wide range of end users. In 4 6 general, the weft-inserted light-weight and super-light-weight fabrics produced are not sold as commodities. TTI, located in Andover, UK and acquired in March, 1998, manufactures products similar to those manufactured by ATI using weft insertion stitchbonding technology. The Company's composite reinforcement fabrics permit a reduction in the quantity of fibers used and the consequential reduction in the quantity of resin required, leading to significant reductions in cost for equivalent mechanical performance. The Company believes that it is currently the only supplier of composite reinforcement fabrics which develops and manufactures its own production equipment. The Company's proprietary stitchbonding production processes allow it to offer composite reinforcement fabrics of varying weights, widths and fiber orientations, and to produce fabric at unrivaled efficiencies. Furthermore, these fabrics can be engineered to respond to a customer's specific requirements. The Company's experience indicates that these proprietary processes can be successfully applied to other base materials, allowing for production of reinforcement fabrics from various carbon, aramid and other fibers. The Company's current output is presently used by end-product manufacturers to build a wide range of products, including boats, diving boards, snowboards, swimming pools, truck bodies, ballistic protection products and corrosion sensitive vessels. Engineered composite reinforcement fabrics offer significant advantages over other currently used materials: - Strength-to-Weight Ratio. Composite products possess a strength-to-weight ratio much higher than that of steel, wood or concrete. Composite reinforcement fabrics are uncommonly strong for their weight and density. Use of these materials in transportation industries provides for substantial fuel savings and greater payload capacity. The marine market is the most mature of the industries currently using composite reinforcement fabrics. Truck and railcar manufacturers are developing bodies made out of these materials. Certain light-weight woven fabrics offer high energy-absorption characteristics and, therefore, are ideal for ballistic shielding applications. Furthermore, due to their inherent strength-to- weight ratio, construction materials can be built from reinforcement fabrics in both load and no-load designs and in shapes too complex to be built from much heavier metals. The Company is working in a joint development project to develop products for infrastructure applications such as bridges and reinforced column wrapping for earthquake protection. - Longer Life-Cycle. Products produced from composite reinforcement fabrics do not rust or rot, are chemically inert, non-conductive and generally maintenance free, making their life-cycles significantly longer than those of steel, concrete or wood. These features allow use of composite reinforcement fabrics in environmentally corrosive situations, such as salt water immersion or highway construction. Accordingly, these products are increasingly used in finished products such as marine pilings, telephone poles, one-piece septic tanks, guardrails, building columns, bridge columns, and bridges. - Greater Safety. Products produced with composite reinforcement fabrics do not suffer from the disintegration failures suffered by steel and concrete. Moreover, composite materials offer significantly greater high-energy impact absorption, and their one-piece fabrication means that no weak seams need to be introduced into the part. The Company is working with its customers to develop products made from composite reinforcement fabrics which will offer non-varying mechanical strength and stiffness through the entire life-cycle of the product, and to lower the risk of continuous deterioration and degradation of strength, which can be caused by metal fatigue in steel or environmental erosion in concrete. These tougher products are being developed for use in automotive and highway safety applications, bullet-resistant applications, structural support, and as components of deep-sea oil drilling platforms. - Design and Process Freedom and Efficiency. Composite reinforcement fabrics can be molded in tremendously flexible ways, allowing the creation of complex parts. Manufacturers assembling final products using these materials are able to use one part, formed in a complex shape, instead of having to use two or more simpler parts formed from metals. This obviously results in significant cost savings, in both material and labor costs. Architecturally, designers can create shapes that would not otherwise be buildable from conventional construction materials. - Environmental Benefits. Use of the Company's stitchbonded products reduces the amount of resin required to manufacture the end-product resulting in the decreased release of volatile organic compounds by end-product fabricators. The use of composite reinforcement fabrics in products which substitute for wood, steel or concrete can also diminish the amount of chemicals released in the environment. For example, marine pilings and telephone poles constructed of composite materials would 5 7 not be treated with arsenic or other toxic substances presently required to provide adequate product cycle life to wood products. Due to their high strength-to-weight ratios, composite reinforcement fabrics offer the transportation industry substantial fuel savings and permit the transport of greater payloads due to increased truck capacity. The construction industry is starting to use these fabrics as a shield from noise, heat, weather, and electro-magnetic interference. These products can be highly insulating, in addition to their chemically non-reactive nature, making them ideal for use as pipes, tanks and ducting, especially in corrosive situations. The paper and petrochemical industries are starting to use these types of products in hostile environments. PRODUCT ENGINEERING, MANUFACTURING AND DEVELOPMENT The Company believes that its strongest competitive advantage is its technical and developmental know-how. The principal reasons for its progress in technical development thus far are the quality of its product design and its engineering and manufacturing capabilities. These capabilities enable the Company to design and engineer products that meet or exceed end-product manufacturers performance and reliability specifications. The Company believes that it has created and will continue to create know-how and technology to manufacture products at lower costs than its competitors by pursuing its engineering and manufacturing development in-house. The quality of the technology and know-how of a business or product line is an important factor in the Company's evaluation of potential acquisition candidates. The Company's operations utilize current-generation computer systems for product design and documentation as well as for performance testing. A key to the Company's ability to reduce manufacturing cost has been the reduction of direct labor through the introduction of its proprietary single-step, automated or semi-automated manufacturing processes. The Company believes that its ability to produce fabric in a single step at 20 feet per minute is the fastest in the composite reinforcement fabrics industry. It also believes that it has the unique capacity to produce quadraxial reinforcements over 100 inches wide in a single step. The Company's proprietary capabilities allow composite reinforcement fabrics to be produced by continuously placing reinforcement fibers in layers at different angular orientations and concurrently stitching them together to achieve certain desired properties, depending upon the application, such as greater carrying capability and corresponding strength. The Company's machines are capable of producing reinforcements in five different directions/orientations and planes or any combination thereof. The Company has continued to build on the success of its BiTex(TM) and White Steel(R) product lines, and has introduced the following product and process innovations: - First commercial binderless mat production process introduced in 1990; - First single-step quadraxial products introduced in 1992; - First 100+inch-wide single-step fabrics commercialized in 1993; - First capability to produce, in a single-step, 150 inch 0-90 degree binderless mat product, and commercialization of same in 1994; and - Introduction of a second generation White Steel(R) machine capable of producing fabrics in excess of 100 oz. per square yard in 1997. The Company invests in product development to meet and anticipate customer requirements. The Company also undertakes end-product manufacturer-sponsored or joint sponsored product development contracts. Accordingly, the Company's development activities are generally product or program specific. The Company spent $408,247, $498,038 and $677,192 on both Company-sponsored and customer-sponsored research and development in the fiscal years ended December 31, 1995 1996 and 1997, respectively. A certain amount of the Company's R&D activities are dedicated to the building of new production equipment. MARKETING AND SALES The Company's competitive position in the marketplace is dependent upon its continuing ability to design innovative processes to generate products for specific composite fabricator applications. The Company's marketing philosophy is to have a team of employees work directly with prospective and active composite fabricators. The Company markets its products primarily through its own marketing and sales force directly to composite fabricators either individually or at trade shows. 6 8 Although 78% and 76% of the Company's gross sales were made through four distributors in 1995 and 1996, respectively and 68% through five distributors in 1997 (FRP Supply, GLS Corporation, M.A. Hanna Resin Distribution, Plastic Sales, Inc. and RP Associates) each distributor is comprised of a subset of multiple regional distributors. In 1995, 1996 and 1997 the Company made 9.8%, 12.0%, and 23%, respectively, of its sales directly to composite fabricators. Management believes that the key to the Company's sales and marketing strategy is the development of long-term relationships with end-product manufacturers through its team approach of combining product development and sales. The Company's production and sales managers work with sales staff in all markets to develop products for particular end-product manufacturers. The Company's competitive position in the European market has been greatly enhanced through the March, 1998, acquisition of TTI in Andover, UK. TTI's sales managers have been utilizing a similar team approach to that of the Company's and now have a broader product line with which to compete in the market. Management believes that further expansion of the use of heavy and super-heavy weight fabrics throughout the composite industry will uniquely benefit sales of the Company's White Steel(R) product line. SUPPLY There are three significant suppliers of E-Glass raw material utilized by the Company. Vetrotex CertainTeed Corp ("Vetrotex"), a shareholder of the Company, is the primary supplier which supplies approximately 55% of the requirements. PPG Industries is the second largest supplier accounting for approximately 30% of the supply. Owens Corning accounts for about 7% of the requirements. Additional suppliers include GAF and Jushi Fiberglass of China. The Company's ability to grow is dependent upon its ability to obtain an adequate supply of fiberglass at a competitive cost. The Company had a supply agreement with Vetrotex to supply 90% of its requirement which expired in August 1996. Since then the Company has developed stronger relationships with the other suppliers to insure adequate supply and cost effective pricing to support the anticipated growth in the years ahead. The acquisition of ATI increased the demand significantly and also improved the Company's position to negotiate with the vendors for more favorable terms. BACKLOG The Company's backlog as of December 31, 1997 was approximately $3,079,000, or approximately 4.9 weeks of sales. Backlog as of December 31, 1996 was approximately $957,200, or approximately 2.6 weeks of sales. The increased backlog is due, in part, to the somewhat higher mix of sales directly to end users who place extended purchase orders with the company. In addition, the Company has worked hard to ensure its distributors place repetitive orders in a timely fashion. JOINT PROJECTS In February 1995, the Company entered into a Collaborative Agreement with E.I. du Pont de Nemours and Company, Inc. ("DuPont"), Hardcore Composites Ltd. ("Hardcore"), The Dow Chemical Company and Hopkins University under the Federal Advanced Technology Program to develop agile heavyweight composites for large civil bridge infrastructure applications. For its part in the cooperative project, the Company was awarded up to $750,000 in matching funds over three years as part of a $13.5 million grant from the U.S. Department of Commerce and the National Institute of Standards and Technology. The project began in May of 1996 and runs through May of 1999 and is directed toward the study of the manufacturing competency of composites produced with Seeman Composite Resin Infusion Molding Process (SCRIMP) technology (a process of layering dry fabric and drawing resin through the layered fabric with the use of vacuum pressure) and their ability to increase the life of large structures such as bridges, while reducing such structures cost and weight. The project has enabled the Company to independently develop its newest White Steel(R) machine which had its first trials in early 1997. This development is considered enabling technology which has enhanced the speed, quality and cost-effectiveness of composite reinforcement production. The entire budget of the program contemplated by the Collaborative Agreement is approximately $1,547,000, which is to be spent over three years. Reimbursement of expenses related to expenditures on new technologies from a grant from the National Institute of Standards and Technology ("NIST") in the amount of $143,274 was included as a benefit to the 1997 statement of income. Cost of goods sold was credited for $24,166 of this amount while $119,108 credited to other income. The Company is responsible for adherence to applicable federal laws and regulations covering both federal funds, including allowability of costs. The Company expects to spend approximately $100,000 to complete the last year of the project with one half of that amount coming from a NIST grant in 1998. 7 9 The parties to the Collaborative Agreement have a mutually agreed to protect each other's proprietary information for a period of five years. Any technology jointly developed in the performance of the Collaborative Agreement ("Program Technology") is to be owned jointly by the project participants, with the right to use the same on an unrestricted basis. The Program Technology may also be subject to a non-exclusive, non-transferable paid-up license to the United States government which may not publicly disclose any proprietary information relative to the Program Technology. The Company is also involved in a collaboration with Hardcore DuPont Composites LLC ("Hardcore DuPont"), a joint venture between Hardcore and DuPont, wherein the Company provided the engineered composite fabric for the manufacture of two railroad cars using the SCRIMP process. The successful prototypes have permitted a consortium comprised of Hardcore DuPont, Burlington Northern and Trinity Industries to initiate a project for the industrial manufacture of railroad cars using the Company's fabric. The project is currently producing a rail car body every 3.5 working days. The Department of Defense has awarded funding through the 1995 Defense Experimental Program to Stimulate Competitive Research (DEPSCoR) to the University of Maine (Orono) relative to a study of the dynamics of thick composite structures. The Company has agreed to provide the project with industrial composite expertise, laminate engineering, reinforcement materials, composite fabrication through subcontracts, and participation through analytical reviews and program management reviews. The Company will also provide up to $45,000 of in-kind support to University of Maine for this project. While the Company does not expect to generate material profits from this project, it will provide the Company with valuable experience and modeling techniques for the use of the Company's heavyweight fabrics in the Naval, off-shore oil, sub-marine and waterfront infrastructure materials markets. Additionally, the Company has agreed to partially fund a University of Maine graduate student through to his doctoral dissertation concerning wood composite highbred materials for use in civil infrastructure. A significant by product of this agreement has been the development of a composite laminate design program owned by the company for use in assisting customers in optimizing their laminates. The cost of this sponsorship is approximately $12,500 per year through 1999. The Company has recently agreed with ABB Offshore Technology, a division of ASEA Brown Boveri S.A., to contribute up to $5,000 of in kind services in a joint effort to design and develop new applications for offshore oil exploration and production. This agreement is an outgrowth of other co-operative projects concerned with the development of a full range of composite well head covers and pipe protection structures for the offshore oil and gas industry constructed from advanced engineered composite reinforcement fabrics. These lightweight structures range in size up to 90 feet by 90 feet by 90 feet and would replace corrosion-prone heavy steel structures. Funding for each of these projects is part of the Company's regular, on-going research and development expense. Except for Hardcore DuPont, a participant in the NIST project, and North End Composites, a subcontractor in the DEPSCoR project, the Company does not have any supply arrangements with the entities involved in these projects. COMPETITION The Company's principal competitors are producers of woven reinforcement fabrics and other producers of stitched or weft-inserted reinforcement products. Competition is based on price, product performance and customer support. The Company's continued success will depend in part on its ability to continue to develop and introduce cost competitive quality products that meet or exceed end-product manufacturer requirements. There is no competitor that manufactures products that are substantially similar to or competitive with all of the Company's products. However, there are competitors for each of the Company's products and the Company believes that there are only two companies remaining after its acquisition of ATI that have significant shares of the North American market. These are Johnston Composite Industries, a subsidiary of Johnston Industries Inc., and Knytex, a division of Owens Corning. The Company believes that it has one of the largest shares of the North American market for weft-inserted or stitchbonded (non-crimped) composite reinforcement fabrics. The Company also competes in the European market, which is highly fragmented with up to 17 small competitors addressing many niche markets. The Company has established itself as a significant competitor in this market with its 1998 acquisition of Tech Textiles International Ltd. and its growing White Steel(R) business in northern Europe. 8 10 EMPLOYEES As of December 31, 1997, the Company had 125 full time employees, of whom 98 were employed in engineering and manufacturing, 12 in sales and marketing and 15 in administrative and management functions. No employees are represented by unions. The Company believes its relations with employees are good. INTELLECTUAL PROPERTY Although the Company has three registered trademarks and owns two patents relating to its product, the Company relies almost entirely upon unpatented technology in its production processes. The Company relies in part upon state and federal trade secrets and unfair competition laws to protect its intellectual property. Management's philosophy is to patent only those processes as to which the process may be determined when analyzing the product produced. There can be no assurances that the Company can adequately protect its rights in such unpatented proprietary technology or that others will not independently develop substantially equivalent or better proprietary information or techniques, or otherwise gain access to the Company's proprietary technology or disclose such technology. The Company will seek additional protection for newly developed intellectual property as deemed appropriate. One patent, which expires in September 2011, relates to a bound structurally reinforced thermoplastic multi-layer composite fabric which is moldable. No product relating to this patent has yet been commercialized. Although the other patent, which expires in December 2009, relates to a manufacturing process commercialized by the Company, management believes that it would be very difficult to assess whether a competitive product was produced by a process which infringes the process covered by such patent. YEAR 2000 The Company is in the process of installing a new management information system which will integrate the Sales, Manufacturing, and Financial areas of the Company. The Company has hired an outside consulting firm to assist in the implementation and the primary software being used is manufactured by a third party vendor, Symix Corporation. The software is Year 2000 compliant and is expected to be fully implemented throughout the Company no later than June 1999. Total cost is estimated to be up to $500,000, most of which will be capitalized and amortized over a 5-year period. The Company is in the process of reviewing non-financial and non-production related systems to assess the potential impact of Year 2000 selected issues. The review is expected to be completed by December 31, 1998 and any remediation completed by June 1999. The Company is also in the process of reviewing Year 2000 compliance issues with its major vendors and customers. The review is expected to be completed by December 31, 1998 and the Company plans to work proactively with its vendors and customers to minimize any potential disruption caused by the Year 2000 issue. ITEM 2: PROPERTIES The Company's executive offices and major manufacturing/warehouse facility is located in a facility in Brunswick, Maine, of approximately 52,400 square feet which was substantially completed in March 1996. The Company leases the property from 2 Brunswick Development Corporation ("BDC"), a Maine corporation wholly owned by the town of Brunswick. The Company's lease is for a term of 10 years and commenced on January 1, 1996, with an option to extend the term for one additional five-year period. The Company also has an option to purchase the facility at any time between the conclusion of the fifth year of the current lease and the end of the lease, at an option price equal to the greater of fair market value of the facility or the residual debt payable to BDC on the bonds issued to finance the construction of the facility. The Company may, however, consider the purchase of the property prior to the option date, which purchase would require the consent of the bond holders. The rent for the facility is $190,212 annually through the year 2000; the lease provides for periodic scheduled rent increases, with a final annual rent of $216,412 for the last year (2005) of the current lease. The Maine operation currently leases an additional 10,000 square feet at $43,200 per year for storage of finished goods to maximize the effectiveness of material movements and traffic operations. With the acquisition of ATI, the Company acquired approximately 42,000 square feet of manufacturing, office and warehouse space in Seguin, Texas, including underlying real estate. In 1997, an additional 10,000 square feet was constructed bringing the total to approximately 52,000 square feet. The Seguin 9 11 operation also rents approximately 6,000 square feet at $6,900 per year for storage of spare machine parts and miscellaneous equipment. The Company, through its recently formed subsidiary Brunswick Technologies Europe, Ltd., leases a total of approximately 25,000 square feet of modern manufacturing, offices and warehouse space in Andover, UK. Annual rent of L71,000 is paid in quarterly installments. The two triple-net leases run through June, 2005, with the rental payments subject to adjustment in July, 2000. ITEM 3: LEGAL PROCEEDINGS The Company is involved from time to time in litigation incidental to its business. The Company is not party to any material pending legal proceedings. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS The Company's shares of Common Stock (trading symbol: BTIC) have been quoted and traded on the Nasdaq National Market tier of the Nasdaq Stock Market since February 5, 1997. The initial public offering price for the Common Stock was $9.50 per share. The following table sets forth the high and low sale prices as reported by Nasdaq for the fiscal period indicated:
1997 HIGH LOW ---- ----- ----- First Quarter(1).................................. $10 7/8 $9 1/2 Second Quarter.................................... $9 3/8 $8 5/8 Third Quarter..................................... $19 1/2 $9 1/8 Fourth Quarter.................................... $20 3/16 $14
- --------------- (1) For the period from February 5 (initial public trading day) through March 31, 1997. The approximate number of stockholders of record of the Company's Common Stock as of March 24, 1998 is 250. To date, the Company has not paid any dividends on its Common Stock. The Company currently intends to retain future earnings to finance the growth and development of the Company's business and does not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements, financial condition and other relevant factors. Item 701 Disclosure: Pursuant to outstanding common stock purchase warrants, the Company sold shares of its common stock to the parties listed below at $1.51 per share in the amounts and on the dates indicated. The sales were made pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act") in private transactions.
NUMBER OF SHARES PURCHASER DATE OF PURCHASE ---------------- --------- ---------------- 6,898................ Daniel A. Zilkha June 24, 1997 164,051.............. North Atlantic Venture Fund July 15, 1997 7,139................ Dodge D. Morgan August 11, 1997
On November 7, 1997 the Company called for prepayment of the $3,648,250, 9.5% convertible promissory noted held by Burlington Industries, Inc. The note was issued in partial payment of the October 30, 1996 purchase of Advanced Textiles, Inc. Also on November 7, 1997, Burlington Industries, under the terms of the note, elected to convert into common stock $1,500,000 of the note at an exercise price of $9.50 per share which is the equivalent of 157,894 common shares. The remaining $2,148,250 was converted on November 17, 1997 into an additional 226,131 shares of Common Stock at the same exercise price of $9.50 per share. The sale pursuant to such conversion was made pursuant to Rule 506 of Regulation D under the Act. The sale involved one accredited investor and did not involve general solicitation or advertising. 10 12 On February 10, 1997, the Company completed its initial public offering of common stock. The sale to the public totaled 2,675,000 shares, with 1,700,000 new shares being sold by the Company and 975,000 shares being sold from the holdings of an existing shareholder. The offering price was $9.50 per share with proceeds to the Company, after offering expenses, of approximately $13.7 million. From the proceeds, the Company was obligated to pay $3,648,250 of the convertible subordinated note held by Burlington Industries, plus accrued interest thereon of $94,954. From the proceeds, the Company also paid off the balance of its bank debt, approximately $2,892,960 million. Deferred charges of $512,679 at December 31, 1996, and other transactional expenses (together aggregating approximately $1.3 million) were offset against stockholders equity upon completion of the offering. For the year ended December 31, 1997, the Company expended $855,900 of the proceeds in purchases of property, plant and equipment and $4,394,000 of the proceeds for working capital. The balance of the proceeds of the initial public offering that had not been expended as of December 31, 1997 was invested in high-grade governmental and corporate obligations. ITEM 6: SELECTED FINANCIAL DATA The selected financial data set forth below for the Company's fiscal year ended December 31, 1994 and at December 31, 1994 are derived from the financial statements of the Company audited by KPMG Peat Marwick LLP, independent public accountants. The selected financial data set forth below for the Company's fiscal years ended December 31, 1995, 1996, and 1997 and at December 31, 1995, 1996 and 1997 are derived from the financial statements of the Company audited by Coopers & Lybrand L.L.P., independent accountants, which are included elsewhere in this Report. The selected financial data set forth below should be read in conjunction with the Financial Statements and Notes thereto and with MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS appearing elsewhere in this Report. BRUNSWICK TECHNOLOGIES, INC.
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996(1) 1997 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................... $ 6,376 $ 9,596 $15,476 $19,816 $30,510 Cost of goods sold.......................... 4,996 7,382 11,979 15,318 22,807 ------- ------- ------- ------- ------- Gross profit................................ 1,380 2,214 3,497 4,498 7,702 Other operating expenses.................... 1,258 1,874 2,492 3,521 5,921 Moving costs................................ -- -- 9 248 -- Facility repair costs....................... -- -- 150 (148) -- ------- ------- ------- ------- ------- Operating income............................ 122 340 846 877 1,781 Other income, net........................... (11) (26) (61) 51 202 ------- ------- ------- ------- ------- Income before income taxes.................. 111 314 785 928 1,983 Income tax (benefit) expense................ -- -- (122) 335 707 ------- ------- ------- ------- ------- Net income.................................. 111 314 907 593 1,275 ------- ------- ------- ------- ------- Preferred stock dividend.................... (332) (450) (450) (450) (51) Accretion of preferred stock Redemption value..................................... (71) (76) (82) (69) (5) ------- ------- ------- ------- ------- Net income (loss) attributable to Common stock..................................... $ (292) $ (212) $ 375 $ 74 $ 1,219 ------- ------- ------- ------- ------- Basic earnings per share.................... $ 1.33 $ 0.25 $ 0.29 ------- ------- ------- Diluted earnings per share.................. $ 0.26 $ 0.17 $ 0.26 ------- ------- -------
11 13
AT DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................. $ 548 $ 631 $ 905 $ 1,412 $12,414 Total assets................................ 4,338 5,665 7,867 18,634 25,216 Long-term liabilities....................... 337 1,177 1,069 8,975 623 Total liabilities........................... 1,873 2,886 4,168 14,289 1,989 Preferred stock............................. 5,012 5,538 6,070 6,589 -- Stockholder's equity (deficit).............. $(2,547) $(2,759) $(2,371) $(2,244) $23,227 ------- ------- ------- ------- -------
- --------------- (1) Reflects the consolidation of the operations and financial condition of ATI with those of the Company for the last two months of 1996. (2) Calculation is shown in Note 1 of Notes to Consolidated Financial Statements of the Company. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading developer and producer of engineered reinforcement fabrics used in the fabrication of composite materials. Since the invention of composite reinforcement fabrics in the early 1940's, these materials have developed broad applicability as substitutes for wood, steel, and concrete. The Company's principal strength lies in its innovative quadraxial single-step stitchbonding fabrication process. ACQUISITION OF ADVANCED TEXTILES, INC. On October 30, 1996, the Company acquired Advanced Textiles, Inc. ("ATI"), a subsidiary of Burlington Industries, Inc. ("Burlington") for a total acquisition cost of $8,539,000, payable through the issuance of a note ($7,296,500) convertible into the Company's common stock, $0.0001 par value (the "Common Stock") at the initial public offering ("IPO") price of $9.50 per share; deferred cash payments discounted to $513,000; the issuance of Common Stock valued at $53,500 to a minority shareholder in ATI; cash payments of $351,000; and acquisition costs of $325,000. The acquisition was accounted for under the purchase method of accounting. The fair market value of the assets acquired is estimated at $3,178,000, resulting in goodwill of $5,361,000 which amount is being amortized over 20 years. The operations of ATI for November and December 1996 are included in the 1996 consolidated statements of income and cash flow while ATI's net assets are included in the December 31, 1996 consolidated balance sheet and statement of stockholder's deficit. All intercompany transactions have been eliminated in the consolidated financial statements. Except where noted, the discussion below is directed at 1996 operations so consolidated. ATI contributed $1,723,573, $380,162, $105,527, and ($9,890) of net revenue, gross margin, operating income and net (loss) respectively to the 1996 consolidated statement of income. The ATI operations for the two months (November and December of 1996) resulted in a net loss due to the amortization of goodwill ($51,137) and the interest expense on the debt to Burlington ($122,582). On February 10, 1997, upon the closing of the Company's IPO, one half of the convertible subordinated note to Burlington ($3,648,250) was paid, which reduced interest expense by $28,882 a month. On November 7, 1997 the Company called the remaining $3,648,250 outstanding under the convertible subordinated note and Burlington chose to convert the note into Common Stock in a two stage conversion: $1,500,000 was converted on November 7, 1997 into 157,894 shares of Common Stock at the exercise price of $9.50 per share. The remaining $2,148,250 was converted on November 17, 1997 into an additional 226,131 Common Shares at the same exercise price of $9.50 per share. This completed the financing of the ATI acquisition and eliminated the remaining monthly interest expense of $28,882. 12 14 The following table sets forth certain financial data as a percentage of net sales:
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ Net Sales................................................. 100.0% 100.0% 100.0% Cost of goods sold........................................ 77.4 77.3 74.8 ----- ----- ----- Gross Profit.............................................. 22.6 22.7 25.2 Selling, general and administrative expenses.............. 13.5 15.2 17.2% Research and development expenses......................... 2.6 2.5 2.2 Moving costs.............................................. 0.0 1.3 -- Facility repair cost...................................... 1.0 (0.7) -- ----- ----- ----- Operating income.......................................... 5.5 4.4 5.8 Other income (expense): Interest expense........................................ (0.8) (1.3) (1.1) Miscellaneous, net...................................... 0.4 1.6 1.7 ----- ----- ----- (0.4) (0.3) 0.7 ----- ----- ----- Income before income tax.................................. 5.1 4.7 6.5 Income tax (benefit) expense.............................. (0.8) 1.7 2.3 ----- ----- ----- Net income................................................ 5.9% 3.0% 4.2% ===== ===== =====
1997 Compared to 1996 Net sales, cost of goods sold and gross profit. The percentage increases and per pound values in the net sales, cost of goods sold and gross profit accounts between 1995 and 1996 are shown below both exclusive and inclusive of ATI's results. The percentage increases for 1997 when compared to 1996, also shown below include ATI.
EXCLUSIVE OF ATI INCLUSIVE OF ATI ---------------------- ---------------------- % % 1995-1996 1995 INCREASE 1996 INCREASE 1996 --------- ----------- -------- ----------- -------- ----------- Pounds sold.............................. 11,892,012 9.0% 12,962,646 16.8% 13,893,086 Net Sales................................ $15,476,424 16.9% $18,092,138 28.1% $19,815,711 Average price per pound.................. $ 1.301 7.2% $ 1.369 9.6% $ 1.426 Cost of goods sold....................... $11,978,978 16.7% $13,974,208 28.9% $15,317,619 Average cost per pound................... $ 1.007 7.0% $ 1.078 9.5% $ 1.103 Gross profit............................. $ 3,497,446 17.7% $ 4,117,930 28.6% $ 4,498,092 Gross profit per pound................... $ 0.294 8.0% $ 0.318 10.2% $ 0.324
INCLUSIVE OF ATI -------------------------------------- % 1996-1997 1996 INCREASE 1997 --------- ----------- -------- ----------- Pounds sold........................................... 13,893,086 49.1% 20,721,483 Net Sales............................................. $19,815,711 54.0% $30,509,675 Average price per pound............................... $ 1.426 3.2% $ 1.472 Cost of goods sold.................................... $15,317,619 48.9% $22,807,179 Average cost per pound................................ $ 1.103 -0.2% $ 1.101 Gross profit.......................................... $ 4,498,092 71.2% $ 7,702,496 Gross profit per pound................................ $ 0.324 14.8% $ 0.372
NET SALES. Net sales increases reflect the positive impact of a full 12 months of ATI's activity as well as the successful cross-selling of the integrated product lines during the year. Revenues have also increased during the periods presented due to continued increases in the number of end uses of the Company's products as well as increases in market share for existing end use applications. Sales increases have been experienced in all of the major industry sectors using the Company's products: Marine, transportation, infrastructure, oil and gas, recreational and industrial. Most notably, sales of the Company's White Steel(R) product line increased over 45% to over $1.0 million in gross sales. Sales within periods have historically been affected by fluctuations in the general availability of the raw material of fiberglass strands used by the Company in its manufacturing process. With ample supply of 13 15 fiberglass (which occurred in 1996), the Company's customers tend to reduce their inventories on the basis that supplies are readily available. This resulted in Company sales for 1996 being adversely effected as customer inventories were reduced to two to three weeks of use compared to significantly higher customer inventory levels in 1995. Supplies within the industry remained readily available throughout 1997. GROSS PROFIT MARGIN. Gross profit margin continued to improve in 1997 as the Company was able to enjoy a $.046 per pound increase in the average selling price while pushing cost of goods sold down .2% to $1.101 per pound. These numbers reflect the positive impact of ATI's higher margin business as well as favorable special pricing on raw stock that the Company was able to achieve in the first half of the year. Pricing of raw stock returned to more normal levels in the second half of the year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for 1997 were impacted by the inclusion of a full 12 months of ATI's activities plus increased administrative costs associated with being a publicly traded company. Selling, general and administrative expenses for 1997 increased 74%, or $2,221,776. Within that category, selling expense increased by 89.7%, or $977,481 and as a percentage of net sales, selling expense rose from 5.5% to 6.8%, due primarily to increases in salaries associated with the acquisition of ATI. General and administrative expenses (G&A) increased $695,337, or 67.3%. As a percentage of net sales, G&A expenses increased from 5.2% in 1996 to 5.7% in 1997 with the increase caused by an increase in salaries and bonuses associated primarily with the acquisitions of ATI plus the higher legal, accounting and insurance fees associated with the Company's Common Stock being traded in the public markets. Directors and Officers insurance (D&O) increased from $10,000 annually to $75,895 annually as a result of the Company's IPO in February, 1997, while outside legal and accounting expenses (net of those directly supporting the IPO) increased by approximately $58,000 in 1997. Also in G&A, goodwill amortization increased by $224,361 resulting from a full 12 months amortization associated with the ATI acquisition in 1997 versus only two months in 1996. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by $179,154, or 36% in 1997. Most of the increase is due to costs associated with the start-up of the Company's new White Steel(R) production machine, which was brought on line during the later part of the third quarter. MOVING COSTS. Moving costs in 1996 reflect the cost of moving to the new, Brunswick, Maine facility which move was completed in the first half of 1996. In connection with the move to the new facility, the Company recorded in 1995 an expense of $150,000 to cover the expenses estimated to be incurred for the restoration of the facilities being vacated. The repairs thought to be required when the expense was recorded did not materialize and therefore the unexpended amount of $147,545 as recognized as an addition to operating income in June 1996 which offset, to some extent, other increases in operating expenses. INTEREST INCOME. Interest income of $319,071 was earned in 1997 and resulted from the investment of some of the net proceeds from the Company's IPO. INTEREST EXPENSE. Interest expense increased as a result of the debt due to Burlington, which was incurred in November 1996 and partially retired in February 1997, in conjunction with the IPO. The remaining balance was converted into Common Stock in November 1997. Also, the Company had capitalized interest associated with the construction phase of new machines totaling $72,084 in 1997, up from only $14,022 in 1996. MISCELLANEOUS INCOME. Miscellaneous income includes some of the impact of reimbursement of expenses related to expenditures on new technologies from a grant from the NIST in 1997 when the amount of $143,274 was included as a benefit to the 1997 statement of income. Cost of goods sold was credited for $24,166 of this amount while $119,108 was credited to other income. The reimbursement of certain expenditures from this grant resulted in a credit of $93,638 and $34,266 to cost of goods sold and recognition of $332,432 and $66,742 as other income in the 1996 and 1995 periods, respectively. Cash discounts, which are also included in miscellaneous income, earned through the early payment of trade debt, totaled $131,469 in 1997 and was achieved by utilization of some of the net proceeds of the Company's IPO. INCOME TAXES. In 1997, the Company recorded income tax expense of $707,400, for an effective rate of 35.7%. In 1996, the Company recorded income tax expense at an effective rate of 36.1%. 1996 compared to 1995 Refer to the table in the section above comparing 1997 to 1996 for a summary of the changes in the net revenue and cost of goods sold accounts for 1996 compared to 1995. 14 16 NET SALES. The increase in net sales was attributable to increases in market share and existing end use applications as well as the acquisition of ATI in 1996. The increases in cost of goods sold and gross profit for 1996 were in line with the increases in net sales for the year. OPERATING EXPENSES. Operating expenses for 1996 were affected by the inclusion of two months of ATI's operations. Selling, general and administrative expenses for 1996 increased by $937,528, or 45%. Within this category, selling expense increased $216,404, or 34.9%. Salaries and travel accounted for $62,230 and $80,045 of the selling expense increase respectively. Marketing expense increased $43,594, or 58.3% primarily as a result of special marketing programs. General and administrative expense (G&A) increased $385,054, or 55.8%. Within G&A, salaries increased by $106,843, or 39.4% due to increased number of employees as well as wage rate increases. Also in G&A, property taxes increased by $32,370 due to the relocation to the new building in Brunswick and the addition of a new machine; bad debt expense increased by $18,320; and $51,137 in goodwill amortization resulted from the purchase of ATI. MOVING COSTS. Moving costs in 1996 reflect the cost of moving to the new Brunswick facility which move was completed in the first half of 1996. In connection with the move to the new facility, the Company recorded in 1995 an expense of $150,000 to cover the expenses estimated to be incurred for the restoration of the facilities being vacated. The repairs thought to be required when the expense was recorded did not materialize and therefore the unexpended amount of $147,545 was recognized as an addition to operating income in June 1996 which offset, to some extent, other increases in operating expenses. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased by $89,791, or 22.0%. A large increase in this expense grouping was a $16,844 increase in outside professional fees. OTHER INCOME. The increase in the interest expenses is due to the interest on the debt to Burlington for November and December 1996 in the amount of $122,582. Reimbursement of expenses related to expenditures on new technologies from a grant from the National Institute of Standards and Technology ("NIST") in the amount of $426,070 was included as a benefit to the 1996 Statement of Income. Cost of goods sold was credited for $93,638 of this amount while $332,432 was credited to other income. The reimbursement of certain expenditures from this grant resulted in a credit of $34,266 to cost of goods sold and recognition of $66,742 as other income in the 1995 period. INCOME TAXES. In 1995, an income tax benefit of $121,900 was recorded due to the elimination of a valuation allowance which had been established because of uncertainties that existed with respect to the realization of income tax benefits. Liquidity And Capital Resources INITIAL PUBLIC OFFERING. On February 10, 1997, the Company issued and sold 1,700,000 new shares of its Common Stock in its IPO. As part of the IPO, a stockholder which owned a large percentage of the Company sold 800,000 of its shares to the public so that the total sale to the public was 2,500,000 shares. The price to the public was $9.50 per share. After selling commissions of 7%, the Company realized proceeds of $8.835 per share or $15,019,500. Expenses associated with the offering were approximately $1 million so that net proceeds were about $14 million. In accordance with the terms of the note to Burlington, upon the closing of the IPO, 50% of the note was redeemed in the amount of $3,648,250 plus accrued interest of $94,954. Bank debt totaling $2,693,960 was also paid with the IPO proceeds. In connection with the IPO, the Company was recapitalized as follows: all shares of Common Stock were split on a 33 for 1 basis; all shares of the Company's preferred stock, converted into shares of Common Stock on a 33 for 1 basis; the holders of preferred stock were issued in the aggregate an additional 211,088 shares of Common Stock in payment of $2,005,342 in accrued cash dividends pursuant to the terms of the preferred stock; and the Company's no par value Common Stock was converted into Common Stock with a par value of $0.0001 per share. On October 30, 1997, (one year from the date of the acquisition of ATI), the outstanding balance of the convertible note to Burlington became convertible into Common Stock at a rate of $9.50 per share. On October 30, the Company called the remaining $3,648,250 outstanding under the convertible subordinated note and Burlington chose to convert the note into Common Stock in a two stage conversion: $1,500,000 was converted on November 7, 1997 into 157,894 shares of Common Stock at the exercise price of $9.50 per share. The remaining $2,148,250 was converted on November 17, 1997 into an additional 226,131 shares of Common Stock at the same exercise price of $9.50 per share. This completed the financing of the ATI acquisition and eliminated the remaining monthly interest expense of $28,882. 15 17 The Company used approximately $2.2 million of the net proceeds from the IPO to accelerate the payment of trade debt in order to take advantage of early payment discount incentives being offered by major suppliers. OTHER CONSIDERATIONS. The TTI acquisition substantially reduced the liquidity of the Company. The Company continues to have an unused $2,500,000 revolving credit facility with its bank. The bank has committed to an increase in the credit facility of $1,500,000 to $4,000,000. Details of the arrangement are given in Note 4 of Notes to the Consolidated Financial Statements of the Company. Acquisition of Tech Textiles International Ltd. On March 2, 1998 the Company acquired the business and assets of Tech Textiles International Ltd. (TTI) based in Andover, UK from T&N plc for approximately $5.9 million in cash. The acquisition was made through The Company's recently formed wholly owned subsidiary in the UK, Brunswick Technologies Europe Ltd. The acquired business will be the Company's base of operations for the Company's continued expansion into Europe. TTI, is a composite reinforcement materials manufacturer of proprietary glass, carbon and other high modulus reinforcements which are used in applications in aerospace, automotive and wind generation. Located in a 25,000 square foot manufacturing facility, TTI employs 24 people with annual sales exceeding $6 million. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Information contained in this report with respect to expected financial results and future events and trends is forward-looking, based on Management's estimates and assumptions and is subject to risks and uncertainties. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation reform Act of 1995. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors and risks. The Company's future operating results are dependent on its ability to achieve increased sales and to control expenses. Factors such as lower that expected inflation, product cost fluctuations, changes in product mix, continued or increased competitive pressures from existing competitors and new entrants, including price cutting strategies, and deterioration in general for regional economic conditions are all factors which could adversely affect sales projections. Additionally, the Company's operating results may be negatively affected by (i) difficulties in and unanticipated expenses of assimilating the operations of BTI Europe, including difficulties in cross-marketing products, (ii) fluctuations in valuation of the pound Sterling versus other European currencies and (iii) the failure to obtain necessary capital for the expansion of facilities and acquisitions. Other components of operating results could be adversely affected by state or federal legislation or regulation that increases costs, increases in labor rates due to low unemployment or other factors, or the inability to control various expense categories. ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following described consolidated financial statements of the Company are included in response to this item: Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1996 and 1997. Consolidated Statements of Income for the years ended December 31, 1995, 1996, and 1997. Consolidated Statements of Stockholder's Deficit for the years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Cash Flow for the years ended December 31, 1995, 1996 and 1997. Notes to Consolidated Financial Statements
16 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of BRUNSWICK TECHNOLOGIES, INC.: We have audited the accompanying consolidated balance sheets of Brunswick Technologies, Inc., and subsidiary as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders equity (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1997 and 1996 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Brunswick Technologies, Inc., and subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. --------------------------------------------- Coopers & Lybrand L.L.P. Portland, Maine February 20, 1998, except for Note 14, as to which the date is March 2, 1998 17 19 BRUNSWICK TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Net Sales......................................... $15,476,424 $19,815,711 $30,509,675 Cost of goods sold (raw material purchased from a stockholder amounted to $7,809,567 in 1995, $8,548,754 in 1996, and $8,933,450 in 1997...... 11,978,978 15,317,619 22,807,179 ----------- ----------- ----------- Gross Profit............................ 3,497,446 4,498,092 7,702,496 Selling, general and administrative expenses...... 2,084,712 3,022,240 5,244,016 Research and development expenses................. 408,247 498,038 677,192 Moving costs...................................... 8,560 248,314 -- Facility repair costs............................. 150,000 (147,545) -- ----------- ----------- ----------- Operating income........................ 845,927 877,045 1,781,288 ----------- ----------- ----------- Other Income (expense): Interest income................................. 4,732 4,102 319,071 Interest expense................................ (128,854) (255,931) (328,415) Miscellaneous, net.............................. 62,800 303,181 210,845 ----------- ----------- ----------- (61,322) 51,352 201,501 ----------- ----------- ----------- Income before income tax................ 784,605 928,397 1,982,789 ----------- ----------- ----------- Income tax (benefit) expense...................... (121,900) 335,000 707,400 ----------- ----------- ----------- Net income.............................. 906,505 593,397 1,275,389 ----------- ----------- ----------- Preferred stock dividend.......................... (450,120) (450,120) (50,561) Accretion of preferred stock redemption value..... (81,693) (69,559) (5,439) ----------- ----------- ----------- Net income attributable to common stock........... $ 374,692 $ 73,718 $ 1,219,389 =========== =========== =========== Basic: Earnings per share.............................. $ 1.33 $ 0.25 $ 0.29 Weighted average common shares outstanding...... 280,830 297,140 4,215,827 Diluted Earnings per share.............................. $ 0.26 $ 0.17 $ 0.26 Weighted average common shares outstanding...... 3,460,445 3,498,302 4,936,033
The accompanying notes are an integral part of the financial statements 18 20 BRUNSWICK TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1996 1997 ----------- ----------- ASSETS Current Assets: Cash...................................................... $ 355,106 $ 352,839 Marketable securities available for sale.................. -- 6,607,344 Accounts receivable, net of allowance for doubtful accounts of $38,603 in 1996 and $46,087 in 1997........ 2,619,399 2,978,229 Inventories............................................... 3,262,850 3,308,031 Refundable income taxes................................... 21,061 -- Deferred income taxes..................................... 167,000 179,600 Other current assets...................................... 300,190 353,704 ----------- ----------- Total current assets................................... 6,725,606 13,779,747 Property, plant & equipment Land and building......................................... 800,000 937,317 Furniture and fixtures.................................... 355,963 458,043 Leasehold Improvements.................................... 73,952 80,731 Machinery and equipment................................... 5,114,646 6,477,110 Vehicles.................................................. 68,039 92,318 Machine under construction................................ 1,040,922 231,354 ----------- ----------- 7,453,522 8,276,873 Less accumulated depreciation and amortization............ (1,453,090) (2,003,050) ----------- ----------- Net property, plant and equipment...................... 6,000,432 6,273,823 ----------- ----------- Deferred charges............................................ 512,679 -- Due from shareholder........................................ -- 69,581 Other assets (net of accumulated amortization for patents of $799 and $1,185 in 1996 and 1997, respectively)........... 85,783 54,097 Goodwill (net of accumulated amortization of $51,327 and $321,898 in 1996 and 1997, respectively).................. 5,309,673 5,039,102 ----------- ----------- Total assets......................................... $18,634,173 $25,216,350 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Bank overdraft............................................ $ 300,809 $ -- Note payable to bank...................................... 1,179,968 -- Current installments of long-term debt.................... 297,758 100,000 Due to stockholder........................................ 1,044,559 83,854 Accounts payable-trade.................................... 1,785,384 538,601 Accrued expenses.......................................... 705,223 513,744 Income taxes payable...................................... -- 130,000 ----------- ----------- Total current liabilities.............................. 5,313,701 1,366,199 Long-term debt, excluding current installments.............. 8,853,304 253,244 Deferred income taxes....................................... 121,900 370,000 Commitments Convertible preferred stock (liquidation preference of $6,641,317 in 1996)......................... 6,589,209 -- Shareholders' equity (deficit): Preferred stock $10 par value; 1,000,000 shares authorized, none outstanding........................... -- -- Common stock, $0.0001 par value; 20,000,000 shares authorized, 301,624 outstanding in 1996 and 5,146,606 outstanding in 1997.................................... 30 515 Additional paid in capital................................ 463,989 24,714,963 Treasury stock at cost: 3,300 shares in 1996 and 1997..... (5,000) (5,000) Accumulated deficit....................................... (2,702,960) (1,483,571) ----------- ----------- Total shareholders' equity (deficit)................... (2,243,941) 23,226,907 ----------- ----------- Total liabilities and shareholders' equity (deficit)........................................... $18,634,173 $25,216,350 =========== ===========
The accompanying notes are an integral part of the financial statements 19 21 BRUNSWICK TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL ------------------ PAID-IN ---------------- ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY (DEFICIT) --------- ------ ----------- ------ ------- ----------- ---------------- BALANCE AT DECEMBER 31, 1994.... 271,986 $ 27 $ 392,617 -- $ -- $(3,151,370) $(2,758,726) Exercise of common stock options....................... 13,035 2 3,573 -- -- -- 3,575 Exercise of warrants to purchase common stock.................. 4,653 -- 14,100 -- -- -- 14,100 Repurchase of common stock...... -- -- -- (3,300) (5,000) -- (5,000) Accrual of preferred stock dividend...................... -- -- -- -- -- (450,120) (450,120) Accretion of preferred stock redemption value.............. -- -- -- -- -- (81,693) (81,693) Net income...................... -- -- -- -- -- 906,505 906,505 --------- ---- ----------- ------ ------- ----------- ----------- BALANCE AT DECEMBER 31, 1995.... 289,674 29 410,290 (3,300) (5,000) (2,776,678) (2,371,359) Exercise of common stock options....................... 6,600 -- 200 -- -- -- 200 Issue of stock in acquisition of Advanced Textiles, Inc........ 5,350 1 53,499 -- -- -- 53,500 Accrual of preferred stock dividend...................... -- -- -- -- -- (450,120) (450,120) Accretion of preferred stock redemption value.............. -- -- -- -- -- (69,559) (69,559) Net income...................... -- -- -- -- -- 593,397 593,397 --------- ---- ----------- ------ ------- ----------- ----------- BALANCE AT DECEMBER 31, 1996.... 301,624 30 463,989 (3,300) (5,000) (2,702,960) (2,243,941) Accrual of preferred stock dividend...................... -- -- -- -- -- (50,561) (50,561) Accretion of preferred stock redemption value.............. -- -- -- -- -- (5,439) (5,439) Conversion of preferred shares to common stock............... 2,548,280 255 6,644,954 -- -- -- 6,645,209 Issuance of common stock to public........................ 1,700,000 170 13,741,499 -- -- -- 13,741,669 Exercise of warrants to purchase common stock.................. 178,089 18 (18) -- -- -- -- Issuance of stock upon conversion of debt............ 384,026 38 3,648,212 -- -- -- 3,648,250 Exercise of common stock options under employee compensation plans including tax benefit of $215,000...................... 34,587 4 216,327 -- -- -- 216,331 Net income...................... -- -- -- -- 1,275,389 1,275,389 --------- ---- ----------- ------ ------- ----------- ----------- BALANCE AT DECEMBER 31, 1997.... 5,146,606 $515 $24,714,963 (3,300) $(5,000) $(1,483,571) $23,226,907 ========= ==== =========== ====== ======= =========== ===========
The accompanying notes are an integral part of the financial statements 20 22 BRUNSWICK TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1996 1997 ----------- ----------- ------------ Cash Flows from operating activities: Net income................................................ $ 906,505 $ 593,397 $ 1,275,389 Adjustments to reconcile net income to net provided by (used in) operating activities: Depreciation and amortization........................... 396,595 479,669 846,974 Deferred taxes.......................................... (274,100) 229,000 235,500 Loss (gain) on sale of property, plant and equipment.... (4,164) -- 4,500 Changes in assets and liabilities: (Increase) decrease in accounts receivable............ (1,071,253) 172,493 (358,830) (Increase) in inventories............................. (104,060) (725,564) (45,181) (Increase) decrease in refundable income taxes........ (16,000) (5,061) 21,061 (Increase) in other current assets.................... (51,684) (176,721) (53,514) (Increase) in due from stockholder.................... -- -- (69,581) Increase (decrease) in due to stockholder............. 622,888 (587,619) (960,705) Increase (decrease) in accounts payable and accrued expenses............................................ 597,585 721,129 (1,438,262) Increase (decrease) in income taxes payable........... 32,000 (32,000) 344,942 ----------- ----------- ------------ Net cash provided by (used in) operating activities........................................ 1,034,312 668,723 (197,707) ----------- ----------- ------------ Cash flows from investing activities: Acquisition of Advanced Textiles, Inc., net of cash required................................................ -- (294,512) -- Loss on sales of marketable securities.................... -- -- 6,948 Purchases of marketable securities........................ (96,947,023) Sale of marketable securities............................. 90,332,731 Purchases of property, plant and equipment................ (899,271) (1,132,236) (855,908) Proceeds from sale of property, plant and equipment....... 12,126 -- 2,000 (Increase) decrease in other assets....................... (36,140) 17,687 31,300 ----------- ----------- ------------ Net cash used in investing activities............... (923,285) (1,409,061) (7,429,952) ----------- ----------- ------------ Cash flows from financing activities: Increase (decrease) in bank overdraft..................... 97,406 84,187 (300,809) Net proceeds (repayments) under line of credit............ (80,000) 1,179,968 (1,179,968) Proceeds from long-term debt borrowings................... -- 321,375 -- Repayment of long-term debt............................... (20,662) (92,946) (5,149,568) Net principal repayments under capital lease obligations............................................. (5,293) (2,620) -- Net proceeds received from issuance of common stock to public.................................................. -- -- 14,682,689 Proceeds from exercise of common stock options and warrants................................................ 17,675 200 1,389 Transactional expenses associated with issuance of stock................................................... -- (512,679) (428,341) Repurchase of common stock................................ (5,000) -- ----------- ----------- ------------ Net cash provided by financing activities........... 4,126 977,485 7,625,392 ----------- ----------- ------------ Net increase (decrease) in cash..................... 115,153 237,147 (2,267) Cash at beginning of period................................. 2,806 117,959 355,106 ----------- ----------- ------------ Cash at end of period....................................... $ 117,959 $ 355,106 $ 352,839 =========== =========== ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (including interest capitalized of $14,022 in 1996 and $72,064 in 1997)............................. $ 128,276 $ 141,886 $ 528,889 Income taxes............................................ $ 136,200 $ 168,626 $ 100,300 Acquisition of Advanced Textiles, Inc. net of cash acquired: Working capital, other than cash........................ $ 1,259,027 Property, land and equipment............................ 1,537,675 Goodwill................................................ 5,360,810 Convertible note due to seller.......................... (7,296,500) Other amount due to seller.............................. (513,000) Issuance of common stock................................ (53,500) ----------- Net cash used to acquire Advanced Textiles, Inc......... $ 294,512 =========== Noncash financing activities: Conversion of preferred stock into common stock in February 1997......................................... $ 6,645,209 Conversion of debt into common stock in November 1997... $ 3,648,250
The accompanying notes are an integral part of the financial statements 21 23 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Brunswick Technologies, Inc. is a developer and manufacturer of stitchbonded engineered composite reinforcement fabrics made from glass, carbon and other fibers. Its products are used worldwide in a diverse range of products, including those used in the marine, automotive, oil & gas, construction, and transportation industries. Principles of Consolidation The Consolidated Financial Statements include the accounts of Brunswick Technologies, Inc. and Advanced Textiles, Inc. (ATI), its wholly-owned subsidiary. The accounts of ATI are included from October 30, 1996, the date of acquisition. All significant intercompany balances and transactions have been eliminated in the Consolidated Financial Statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of standard cost, which approximates the first-in, first-out method, or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line method over estimated useful lives as follows:
YEARS ----- Buildings................................................... 30 Furniture and fixtures...................................... 2-7 Machinery and equipment..................................... 4-15 Vehicles.................................................... 5
Amortization of capitalized leased assets and leasehold improvements is provided on the straight-line method over the shorter of the lease term or the useful life. Interest expense incurred on borrowings used to finance the construction of production machinery is capitalized and included in the cost basis of the asset. Expenditures for maintenance, repairs and minor replacements are charged to operations while expenditures for major replacements and betterments are added to the property, plant and equipment accounts. When fixed assets are retired or otherwise disposed of, the asset cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in income. Research and Development Expenditures for research and development are charged to operations as incurred. Patents Costs associated with securing patents for the Company's products are capitalized and amortized over the shorter period of 17 years, or the estimated useful life. 22 24 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Grants Revenues from government agencies research grants are recognized when reimbursable expenses are incurred. Revenue Recognition Revenues are recognized when finished goods are shipped to customers or services rendered, with appropriate provision for uncollectible accounts. Stock Split and Authorized Shares On January 6, 1997, the Board of Directors approved a 33 to 1 stock split of the Company's common stock to be effective immediately prior to the effective date of the registration statement for the Company's initial public offering on February 10, 1997 (see Note 12). All share and per share amounts have been retroactively restated to reflect this stock split. In addition, on August 14, 1996 the Board and the shareholders approved an increase in the authorized shares of common stock to 20,000,000 shares, to be effective immediately prior to the effective date of the registration statement. The Board and the shareholders also authorized the creation of a new undesignated class of preferred stock consisting of 1,000,000 shares, $10 par value. Computation of Earnings per Share Statement of Financial Accounting Standard no. 128, "Earnings Per Share" provides reporting standards for basic and diluted earnings per share and is effective for financial statement periods ending after December 15, 1997. Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period, which during 1995, 1996 and 1997 were 280,830, 297,140 and 4,215,827 respectively. Diluted earnings per share is computed using income available to common shareholders and weighted average common shares outstanding during the period after considering the potential dilutive effect of common stock equivalents based on the treasury stock method. The diluted weighted average number of common shares outstanding for 1995, 1996 and 1997 were 3,460,445, 3,498,302 and 4,936,033, respectively. All prior period earnings per share data has been restated to conform to the provisions of this statement. Marketable Securities Marketable securities classified as available for sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders equity. Marketable securities held to maturity are stated at cost adjusted for amortization of bond premiums and accretion of bond discounts. At December 31, 1997 the cost of marketable securities approximated fair value. Contractual maturities for debt securities classified as available for sale were between one and six months, except for one security which matures in 2015. Fair Value of Financial Instruments At December 31, 1997, the carrying amounts of the Company's financial instruments included in current assets and current liabilities approximate fair value because of the short maturity of those instruments. The carrying amounts of the Company's long-term debt also approximates their fair value as of December 31, 1997, based upon the borrowing rates currently available to the Company for loans with similar terms and maturities. Foreign Exchange Forward foreign exchange contracts are used to hedge committed foreign currency sales. Realized and unrealized gains and losses on these contracts are recorded in net income in the same period in which the hedged transactions affect earnings. The Company had $326,000 of forward foreign currency exchange contracts outstanding at December 31, 1997. The unrealized gain on the open contracts at December 31, 1997 was approximately $13,000. 23 25 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Goodwill Goodwill, which represents the excess of the cost of the ATI acquisition over the fair value of ATI's net assets at the date of the acquisition, is being amortized over 20 years. Impairment Accounting The Company adopted Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," (SFAS No. 121) in 1996. The Company reviews the recoverability of its long-lived assets, including goodwill and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The measurement of possible impairment is based on the Company's ability to recover the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. The measurement of impairment requires management to make estimates of expected future cash flows related to long-lived assets. It is at least reasonably possible that future events or circumstances could cause these estimates to change. The Company's policy on impairment prior to the adoption of SFAS No. 121 was not materially different. New Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 will require that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The requirements of the pronouncement are effective for the Company's fiscal year beginning after December 15, 1997 and are not expected to have a material effect on the Company's financial statements. In June 1997, FASB issued SFAS No. 131 Financial Reporting for Segments of a Business Enterprise. SFAS No. 131 will require that a public business enterprise report financial and descriptive information about its reportable operating segments. The requirements of this pronouncement are effective for financial statements for the periods beginning after December 15, 1997. The Company has not determined what, if any, effect this will have on its financial statements. Reclassifications Certain prior year amounts have been reclassified to conform with the presentation used in the 1997 financial statements. 1. ACQUISITION OF ADVANCED TEXTILES, INC. On October 30, 1996, the Company acquired ATI, a subsidiary of Burlington Industries, Inc. for a total acquisition cost of $8,359,000, payable through the issuance of a note for $7,296,500 convertible into the Company's common stock at $9.50 per share; deferred cash payments discounted to $513,000; the issuance of common stock valued at $53,500 to a minority shareholder in ATI; cash payments of $351,000; and acquisition costs of $325,000. The acquisition was accounted for under the purchase method of accounting. The fair market value of the assets acquired is estimated at $3,178,000, resulting in goodwill of $5,361,000 which amount is being amortized over 20 years. 24 26 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro forma unaudited results of operations of the Company, assuming the acquisition had occurred on January 1, 1995 are as follows:
YEARS ENDED DECEMBER 31, --------------------- 1996 1995 ------- ------- Net sales................................................. $26,444 $28,475 ======= ======= Net income................................................ $ 2.804 $ 686 ======= ======= Diluted earnings per share................................ $ 0.81 $ 0.20 ======= =======
2. INVENTORIES Inventories consist of the following components:
DECEMBER 31, ------------------------ 1996 1997 ---------- ---------- Raw materials............................................. $ 576,275 $ 752,428 Work in progress.......................................... 653,026 706,353 Finished goods............................................ 2,033,549 1,849,250 ---------- ---------- $3,262,850 $3,308,031 ========== ==========
3. DEBT Long term debt consists of the following:
DECEMBER 31, ------------------------ 1996 1997 ---------- --------- 5.75% note payable to a financial institution, paid in full in January 1997.................................... $ 9,095 $ -- Equipment term loan payable to a bank, paid in full in February 1997........................................... 1,425,414 -- 9.50% convertible subordinated note incurred in the purchase of ATI......................................... 7,296,500 -- Non-interest bearing obligation incurred in the purchase of ATI, discounted at 8.25%............................. 420,053 353,244 ---------- --------- 9,151,062 353,244 Less current installments................................. (297,758) (100,000) ---------- --------- Long term debt, excluding current installments............ $8,853,304 $ 253,244 ========== =========
The schedule of maturities of long-term debt at December 31, 1997, are as follows: 1998.................................................... $100,000 1999.................................................... 100,000 2000.................................................... 100,000 2001.................................................... 53,244 Thereafter.............................................. 0 -------- $353,244 ========
In June 1997, the Company renegotiated its existing debt facility with a bank. The new agreements allows unsecured borrowings up to $2.5 million. At the Company's option, interest is charged at either the bank's prime rate or the London Interbank Borrowing Rate (LIBOR), plus 1.75%. There is an unused line fee of 1/8 of 1% of the unused portion and there were no borrowings outstanding at December 31, 1997. The line of credit expires on June 1, 1998. At December 31, 1996, $1,179,968 was outstanding under its debt facility at a weighted average rate of 8.25%. 25 27 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the equipment term loan at the Company's option, interest is charged at either the bank's prime rate or LIBOR, plus 2.25%. At December 31, 1996, the Company had elected a nine month LIBOR rate to be effective through March 1, 1997 and which equaled 8% including the 2.25% mark up. This loan was paid in full on February 10, 1997. The terms of the convertible subordinated note required payment of $3,648,250 of principal within seven months after the completion of the Company's initial public offering; this amount was paid in February 1997 (see Note 12). The remaining principal amount of the convertible note was converted into 384,027 shares of common stock in November 1997. The non-interest bearing obligation is payable in annual installments of $100,000 on December 15 of each year until the entire obligation is paid. In addition, the annual payment may be increased by an amount up to $100,000 based on certain income tax effects experienced by the holder of the note. The obligation has been discounted at 8.25% and no increase in the annual payment had been required through December 31, 1997. 4. LEASES Commencing January 1, 1996, the Company began leasing a newly constructed manufacturing facility. The lease term is for ten years with an option to renew for an additional five years. The Company has the option to purchase the facility at fair market value at any time between the end of the fifth year of the lease and the end of lease. In July 1997 the Company agreed to an increase in the lease in exchange for the fit-out of additional space. In connection with the vacating of its former facility in December 1995, the Company recorded $150,000 as its estimated cost to make repairs to the premises as specified in its lease agreement. However, this estimate was not realized and $147,545 was reversed in June 1996. In connection with the relocation to its new facility, the Company recorded a separate operating expense for the cost of the move, which included the rental expense for the old facility for the six months through June 30, 1996. The Company also has operating leases for equipment and a vehicle. Total rental expense under all operating leases was $176,558, $288,454 and $346,400 for the years ended December 31, 1995, 1996 and 1997 respectively. At December 31, 1997, future minimum lease payments under all non-cancelable leases are as follows:
OPERATING LEASES ---------------- 1998................................................ $ 221,799 1999................................................ 218,430 2000................................................ 207,196 2001................................................ 198,062 2002................................................ 201,188 Thereafter.......................................... 633,516 ---------- $1,680,191 ==========
26 28 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. CONVERTIBLE PREFERRED STOCK The Company's convertible preferred stock, no par value consists of four series whose activity is shown in the following table:
SERIES AA SERIES BB SERIES C SERIES D ------------------ --------------------- --------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ --------- ------- ----------- ------- ----------- ------- ----------- BALANCE AT DECEMBER 31, 1994... 3,657 $ 316,920 33,167 $ 2,111,196 18,000 $ 1,153,063 16,000 $ 1,956,538 Accrual of preferred stock dividend...................... -- 18,285 -- 165,835 -- 90,000 -- 176,000 Accretion of preferred stock redemption value.............. -- 39,818 -- 18,650 -- 7,089 -- 16,136 ------ --------- ------- ----------- ------- ----------- ------- ----------- BALANCE AT DECEMBER 31, 1995... 3,657 375,023 33,167 2,295,681 18,000 1,250,152 16,000 2,148,674 Accrual of preferred stock dividend...................... -- 18,285 -- 165,835 -- 90,000 -- 176,000 Accretion of preferred stock redemption value.............. -- 35,869 -- 15,080 -- 5,715 -- 12,895 ------ --------- ------- ----------- ------- ----------- ------- ----------- BALANCE AT DECEMBER 31, 1996... 3,657 429,177 33,167 2,476,596 18,000 1,345,867 16,000 2,337,569 Accrual of preferred stock dividend...................... -- 2,054 -- 18,828 -- 10,110 -- 19,770 Accretion of preferred stock redemption value.............. -- 2,805 -- 1,179 -- 447 -- 1,008 Conversion of preferred stock......................... (3,657) (434,036) (33,167) (2,496,403) (18,000) (1,356,423) (16,000) (2,358,347) ------ --------- ------- ----------- ------- ----------- ------- ----------- BALANCE AT DECEMBER 31, 1997... 0 $ 0 0 $ 0 0 $ 0 0 $ 0 ====== ========= ======= =========== ======= =========== ======= =========== TOTAL CONVERTIBLE PREFERRED SHARES --------------------- SHARES AMOUNT ------- ----------- BALANCE AT DECEMBER 31, 1994... 70,824 $ 5,537,717 Accrual of preferred stock dividend...................... -- 450,120 Accretion of preferred stock redemption value.............. -- 81,693 ------- ----------- BALANCE AT DECEMBER 31, 1995... 70,824 6,069,530 Accrual of preferred stock dividend...................... -- 450,120 Accretion of preferred stock redemption value.............. -- 69,559 ------- ----------- BALANCE AT DECEMBER 31, 1996... 70,824 6,589,209 Accrual of preferred stock dividend...................... -- 50,561 Accretion of preferred stock redemption value.............. -- 5,439 Conversion of preferred stock......................... (70,824) (6,645,209) ------- ----------- BALANCE AT DECEMBER 31, 1997... 0 $ 0 ======= ===========
Shares of all series of preferred stock are entitled to cumulative dividends at the rate of 10% per annum of the original price. In addition, shares of preferred stock have a liquidation preference. On February 10, 1997, the date of the closing of the Company's initial public offering, all of the Company's four series of outstanding preferred stock were converted to 2,337,192 shares of common stock. In addition, holders of shares of preferred stock received 211,088 shares of common stock in payment of accrued dividends of $2,005,342 as of the date of conversion. 6. CAPITAL STOCK The Company has three employee stock option plans, one each established in 1991, 1994 and 1997. The plans reserve for issuance a total of 990,000 common shares. Options granted prior to June 29, 1995 vest at a rate of 20% per year beginning on the date of the grant. Options granted on June 29, 1995 and after vest at 20% per year beginning one year after the date of grant. All the shares available in the 1991 and 1994 plans have been granted. The Company's 1997 Equity Incentive Plan was adopted by the Board of Directors on January 22, 1997 and approved by the shareholders at a meeting held on January 23, 1997. A total of 421,740 shares of Common Stock have been reserved for awards under the 1997 Plan. Pursuant to the 1997 Plan, a committee of the Board of Directors is authorized to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock or similar securities defined thereunder, all in its discretion, to key individuals, consultants and directors of the Company or one of its affiliates. At December 31, 1997, 374,240 shares remained available to be granted. 27 29 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of changes in common stock options during 1995, 1996, and 1997 is:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- ---------------- Outstanding grants at December 31, 1994..................... 451,539 $0.58 Granted................................................... 83,325 $1.52 Exercised................................................. (13,035) $0.27 Canceled.................................................. (4,290) $1.10 ------- ----- Outstanding grants at December 31, 1995..................... 517,539 $0.74 Granted................................................... 9,900 $9.50 Exercised................................................. (6,600) $0.03 Canceled.................................................. -- -- ------- ----- Outstanding grants at December 31, 1996..................... 520,839 $0.91 Granted................................................... 48,000 $9.50 Exercised................................................. (34,587) $0.15 Canceled.................................................. (1,500) $9.50 ------- ----- Outstanding grants at December 31, 1997..................... 532,752 $1.66 ======= ===== Options exercisable at December 31, 1995.................... 363,429 $0.36 ======= ===== Options exercisable at December 31, 1996.................... 408,969 $0.47 ======= ===== Options exercisable at December 31, 1997.................... 374,217 $0.59
The weighted average grant date fair values of options granted during 1995, 1996 and 1997 were $0.42, $2.64 and $4.85, respectively. OPTIONS OUTSTANDING AT DECEMBER 31, 1997
WEIGHTED AVERAGE ---------------------- REMAINING WEIGHTED NUMBER EXERCISE CONTRACTUAL NUMBER AVERAGE RANGE OF EXERCISE PRICE OUTSTANDING PRICE LIFE EXERCISABLE EXERCISE PRICE ----------------------- ----------- -------- ----------- ----------- -------------- $0.03-0.16................................ 232,977 $0.04 3.5 years.. 232,977 $0.04 $1.50-1.60................................ 241,725 $1.52 6.5 years.. 141.240 $1.52 $9.50..................................... 58,050 $9.50 9.1 years.. -- --
In 1995, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standard (SFAS) No. 123 Accounting for Stock-Based Compensation." This statement requires a fair value based method of accounting for employee stock options and would result in expense recognition for the Company's employee stock plans. It also permits a company to continue to measure compensation expense for such plans using the intrinsic value based method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company has elected to follow APB 25 in accounting for its employee stock plans, and accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock plans been determined based on the fair value requirements of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 -------- -------- -------- Net income: As reported.............................. $906,505 $593,397 $1,275,389 ======== ======== ======== Pro Forma................................ $904,962 $585,920 $1,237,985 ======== ======== ======== Diluted earnings per share: As reported.............................. $ 0.26 $ 0.17 $ 0.26 ======== ======== ======== Pro Forma............................. $ 0.26 $ 0.17 $ 0.25 ======== ======== ========
28 30 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of stock options in the pro forma accounts for fiscal 1995, 1996 and 1997 is not necessarily indicative of the future effects on net income and earnings per share. The fair value of each stock option grant has been estimated on the date of grant at its minimum value using the following weighted average assumptions for 1995, 1996 and 1997: risk-free interest rates of 6.2 -- 6.5%, expected life of five years and no dividend yield and 50% volatility in 1997 only. In conjunction with the issuance of the preferred stock, the Company issued warrants for the purchase of its common stock. Each warrant was exercisable for one share of common stock. In 1995, warrants were exercised to purchase 4,653 common shares at $3.03 per share. In 1997, 211,200 warrants were exercised on a "cashless" basis by non-employee shareholders which resulted in 178,089 shares of common stock being issued. Also in conjunction with the IPO, the Company granted the Underwriter Warrants to purchase 125,000 shares of common stock at a price 20% higher than the initial offering price of $9.50. The warrants became exercisable 1 year following the IPO. 8. CONCENTRATION OF CREDIT RISK The Company utilizes a national distribution system that sells to approximately 600-700 end users. Four individual distributors accounted for approximately 78% and 76% of the Company's 1995 and 1996 revenues, respectively. In 1997, five individual distributors accounted for approximately 68% of the Company's revenues in 1997. The same distributors represented 38% of the Company's account receivable balances at December 31, 1997. 9. INCOME TAXES Income tax (benefit) expense consists of the following:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 --------- -------- -------- Current: Federal................................. $ 120,200 $103,000 $441,400 State................................... 32,000 3,000 30,500 --------- -------- -------- 152,200 106,000 471,900 --------- -------- -------- Deferred Federal................................. (214,600) 36,000 242,500 State................................... (59,500) 193,000 (7,000) --------- -------- -------- (274,100) 229,000 235,500 --------- -------- -------- Total tax (benefit) expense............... $(121,900) $335,000 $707,400 ========= ======== ========
The actual income tax (benefit) expense differs from the expected tax computed by applying the U.S. federal corporate tax rate of 34% to income before income tax as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1996 1997 ---------- --------- --------- Computed expected income tax........... $ 267,000 $ 315,000 $ 674,000 State income taxes..................... 47,000 54,000 78,500 Change in valuation allowance.......... (439,100) -- -- Other.................................. 3,200 (34,000) (45,100) ---------- --------- --------- Total tax (benefit) expense............ $ (121,900) $ 335,000 $ 707,400 ========== ========= =========
29 31 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities consist of the following at:
DECEMBER 31, ------------------------ 1996 1997 ---------- ---------- Deferred Tax assets (liabilities): Reserve.......................................... $ 23,000 $ 65,800 Net operating loss carryforward.................. 264,000 186,500 Alternative minimum tax credit carryforward...... 283,000 238,000 Compensation..................................... 29,000 39,000 Other............................................ 4,100 78,300 Depreciation and amortization.................... (558,000) (798,000) ---------- ---------- Net deferred tax assets.................. $ 45,100 $ (190,400) ========== ========== Current deferred tax assets...................... $ 167,000 $ 179,600 ========== ========== Non-current deferred tax liabilities............. $ (121,900) $ (370,000) ========== ==========
As of December 31, 1997, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $504,000, which expire at various dates through 2006. Under Internal Revenue Code Section 382, utilization of net operating loss carryforwards may be limited in the event of changes in the ownership structure of the Company. Such a change occurred in 1990, and the net operating loss carryforwards are limited for utilization at approximately $95,000 per year. In addition, the Company has alternative minimum tax credit carryforwards of approximately $238,000 which have no expiration date. The company has not established a valuation allowance against the deferred tax assets at December 31, 1996 and 1997. 10. RELATED PARTY The Company purchases a significant portion of its raw materials inventory from a stockholder. For the years ended December 31, 1995, 1996 and 1997, purchases of raw materials were $7,809,567, $8,548,754 and $8,933,450 respectively. At December 31, 1996, and 1997, the Company had due this stockholder, $1,044,559 and $83,854, respectively, for purchases of raw materials. In addition, the Company was obligated under a non-interest bearing note payable to the stockholder, payable in quarterly installments of $17,500 through April 1997. Amounts due under this note at December 31, 1996 were $32,500 The note was paid off in April 1997. 11. NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY (NIST) GRANT The Company is a participant in a consortium to develop a manufacturing competency to replace wood, steel, and concrete with high performance composites. The project has been awarded a grant by NIST whereby 50% of the project's costs will be reimbursed. In 1995, the Company incurred project eligible costs of $201,936 and applied for reimbursement of $100,968, for which the Company has recorded miscellaneous income of $66,742 and reduced cost of goods sold by $34,226. In 1996 the Company incurred project eligible costs of, and applied for reimbursement for, $426,070, for which the Company has recorded miscellaneous income $332,432 and reduced cost of goods sold by $93,638. In 1997, the Company incurred eligible costs and applied for reimbursement for $143,274 for which the Company has recorded miscellaneous income of $119,108 and reduced cost of goods sold by $24,166. 12. INITIAL PUBLIC OFFERING On February 10, 1997, the Company completed its initial public offering of common stock. The sale to the public totaled 2,500,000 shares, with 1,700,000 new shares being sold by the Company and 800,000 shares being sold from the holdings of an existing shareholder. The offering price was $9.50 per share with proceeds to the Company, after all offering expenses, of approximately $13.7 million. From the proceeds, the Company was obligated to pay $3,648,250 of the convertible subordinated note plus accrued interest thereon (see 30 32 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Note 3). With the remaining proceeds, the Company also paid off the balance of its bank debt, approximately $2.6 million. Deferred charges of $512,679 at December 31, 1996, and other transactional expenses (together aggregating approximately $1 million) were offset against stockholders equity upon completion of the offering. Pursuant to the terms of the preferred stock agreements, the outstanding shares of preferred stock were automatically converted to common stock, on the consummation of the Company's initial public offering. As a result, 70,824 shares of preferred stock were converted to 2,337,192 shares of common stock. In addition, on August 14, 1996, the Board of Directors approved the issuance of common stock in lieu of cash payment of the cumulative preferred dividend. This resulted in an additional 211,088 shares of common stock being issued to holders of preferred stock as of the closing of the offering. In addition, the Board approved the grant of stock to Directors totaling 1,000 shares (subsequently increased to 2,000 shares), to be issued at the closing of the offering. 13. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations:
1995 1996 1997 ---------------------------- ----------------------------- ------------------------------- NET PER NET PER NET PER INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE -------- -------- ------ -------- --------- ------ ---------- --------- ------ Basic EPS............... $374,692 280,830 $1.33 $ 73,718 297,140 $0.25 $1,219,389 4,215,827 $0.29 Effect of dilutive securities: Conversion of Preferred............. 531,813 2,548,280 519,679 2,548,280 56,000 283,142 Conversion of Stock Options............... 631,335 652,882 437,064 -------- -------- -------- --------- ---------- --------- Diluted EPS............. $906,505 3,460,445 $0.26 $593,397 3,498,302 $0.17 $1,275,389 4,936,033 $.026 ======== ======== ======== ========= ========== =========
The conversion of the Company's convertible subordinated note was anti-dilutive and has been excluded from Diluted EPS in 1995, 1996 and 1997. The note was converted in November 1997. 14. SUBSEQUENT EVENT Acquisition of Tech Textiles International LTD. On March 2, 1998 the Company acquired the business and assets of Tech Textiles International Ltd. (TTI) based in Andover, UK from T&N plc for approximately $5.9 million in cash. The acquisition was made by the Company and through the Company's recently formed wholly owned subsidiary in the UK, Brunswick Technologies Europe Ltd. and will be accounted for using the purchase method of accounting. TTI, is a composite reinforcement materials manufacturer of proprietary glass, carbon and other high modulus reinforcements which are used in applications such as aerospace, automotive and wind generation. Located in a 25,000 square foot manufacturing facility, TTI currently employs 24 people with annual sales exceeding $6,000,000. 31 33 BRUNSWICK TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. UNAUDITED QUARTERLY FINANCIAL INFORMATION Unaudited financial results by quarter for the fiscal year ended December 31, 1997 and 1996 are summarized below and should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition.
MARCH JUNE SEPTEMBER DECEMBER ------- ------- ---------- --------- (IN THOUSANDS EXCEPT PER SHARE INFORMATION) 1997 Net sales............................................ $7,332 $8,073 $7,603 $7,502 Cost of sales........................................ 5,448 5,872 5,682 5,805 Net income........................................... 287 446 446 97 Income applicable to common shares................... 231 446 446 97 Diluted EPS.......................................... $ 0.07 $ 0.09 $ 0.09 $ 0.02 1996 Net sales............................................ $4,744 $4,433 $4,246 $6,392 Cost of sales........................................ 3,631 3,353 3,381 4,953 Net income........................................... 135 192 66 200 Income applicable to common shares................... 5 62 (74) 81 Proforma Diluted EPS................................. $ 0.04 $ 0.06 $ 0.02 $ 0.06
16. 401K PLAN The Company sponsors a 401K retirement savings plan. Under the plan, the Company will make matching contributions of at least 25% of a participant's contribution up to 6% of the participant 's eligible compensation, subject to limitations required by governmental laws or regulations. No contributions were made to the plan in 1995 or 1996. Company contributions to the plan in 1997 were $6,906. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12 AND 13. Information required by Part III (Items 10 through 13) is incorporated by reference to the Company's definitive proxy statement, for its annual meeting of stockholders to be held on May 13, 1998, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, on or before April 30, 1998. If for any reason such a statement is not filed within such a period, this Report will be appropriately amended. 32 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K (a) Financial Statements The following described consolidated financial statements of the Company are included in this report: Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1996 and 1997. Consolidated Statements of Income for the years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Stockholder's Deficit for the years ended December 31, 1995, 1996 and 1997. Consolidated Statements of Cash Flow for the years ended December 31, 1995, 1996 and 1997. Notes to Consolidated Financial Statements Financial Statement Schedules: Schedules are omitted because not applicable or the information is included elsewhere herein. (b) Reports on Form 8-K None. (c) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 2 Agreement by and among the Registrant, Brunswick Technologies Europe Limited, T&N PLC and Tech Textiles International Limited, dated as of March 2, 1998. Incorporated by reference to Exhibit 2 to the Registrant's Report on Form 8-K dated March 2, 1998. *3.1 Amended and Restated Articles of Incorporation of the Registrant. *3.2 Third Restated Bylaws of the Registrant. *4.1 Amended and Restated Registration Rights Agreement dated August 25, 1993. *4.2 Amendment No. 1 to the Registration Rights Agreement dated October 30, 1996. *4.3 Amendment No. 2 to the Registration Rights Agreement dated October 30, 1996. *4.4 Form of Josephthal Warrant. *4.5 Specimen Stock certificate for shares of Common Stock. *4.6 Amendment No. 3 to Registration Rights Agreement dated February 3, 1997. *10.1 Loan Agreement between the Registrant and Fleet Bank of Maine dated May 30, 1996. *10.2 Security Agreement between the Registrant and Fleet Bank of Maine dated May 30, 1996. *10.3 Demand Note in favor of Fleet Bank of Maine dated May 30, 1996. *10.4 Supply Agreement between the Registrant and Vetrotex CertainTeed Corp. dated August 25, 1993 (confidential portion of which have been omitted and filed separately with the Commission under a request for confidential treatment pursuant to Rule 406 under the Securities Act). *10.5 Private Activity Bond Requirements Certificate of Brunswick Technologies, Inc. dated December 1, 1995. *10.6 Lease Agreement between the Registrant and Brunswick Development Corporation dated August 1, 1995. *10.7 Collaborative Agreement between the Registrant and E.I. du Pont de Nemours and Company, Inc., et al. *10.8 Financial Advisory Agreement and Indemnification Agreement between the Registrant and Josephthal Lyon & Ross Incorporated. *10.9 Installment Promissory Note between the Registrant and Vetrotex CertainTeed Corp. dated March 31, 1992.
33 35
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- *10.10 Security Agreement between the Registrant and Vetrotex CertainTeed Corp. dated March 31, 1992. *10.11 Stock Purchase Agreement among the Registrant, Burlington Industries, Inc. and Peter L. DeWalt dated October 22, 1996 and First Amendment to Stock Purchase Agreement dated October 29, 1996. *10.12 Registration Rights Agreement among the Registrant, Burlington Industries, Inc., and Peter L. DeWalt, dated October 30, 1996. *10.13 Employment Agreement between Advanced Textiles, Inc., a subsidiary of the Registrant, and Peter L. DeWalt, dated October 30, 1996. *10.14 Convertible Subordinated Promissory Note made by the Registrant in favor of Burlington Industries, Inc. dated October 30, 1996. *10.15 Recapitalization Agreement among the Registrant and the holders of its common stock. *10.16 Term Note in favor of Fleet Bank of Maine dated May 30, 1996. *10.17 First Amendment to Term Note dated December, 1996. *10.18 First Amendment to Loan Agreement dated December, 1996. *10.19 First Amendment to Demand Note dated December, 1996. *10.20 First Amendment to Security Agreement dated December, 1996. *10.21 1991 Stock Option Plan. *10.22 Amendment No. 1 to 1991 Stock Option Plan. *10.23 1994 Employee Stock Option Plan. *10.24 Amendment No. 1 to 1994 Employee Stock Option Plan. *10.25 1997 Equity Incentive Plan. *10.26 Form of Common Stock Purchase Warrant. *10.27 Form of Amendment No. 1 to Common Stock Purchase Warrant. 10.28 Agreement regarding lending arrangements dated June 6, 1997. 21 Registrant's subsidiaries. 23 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule (Restated). 27.3 Financial Data Schedule (Restated).
- --------------- * Previously filed and incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-10721). 34 36 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 the 2nd day of April, 1998. BRUNSWICK TECHNOLOGIES, INC. /s/ MARTIN S. GRIMNES By: -------------------------------------- Martin S. Grimnes Principal Executive Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARTIN S. GRIMNES Principal Executive Officer and Director April 2, 1998 - --------------------------------------------- Martin S. Grimnes /s/ DAVID M. COIT Director April 2, 1998 - --------------------------------------------- David M. Coit /s/ WILLIAM M. DUBAY President, Principal Operating Officer April 2, 1998 - --------------------------------------------- and Director William M. Dubay /s/ DONALD R. HUGHES Director April 2, 1998 - --------------------------------------------- Donald R. Hughes /s/ MAX G. PITCHER Director April 2, 1998 - --------------------------------------------- Max G. Pitcher /s/ DAVID E. SHARPE Director April 2, 1998 - --------------------------------------------- David E. Sharpe /s/ PETER N. WALMSLEY Director April 2, 1998 - --------------------------------------------- Peter N. Walmsley /s/ ALAN CHESNEY Treasurer and Principal Financial and April 2, 1998 - --------------------------------------------- Accounting Officer Alan Chesney
35 37 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 2 Agreement by and among the Registrant, Brunswick Technologies Europe Limited, T&N PLC and Tech Textiles International Limited, dated as of March 2, 1998. Incorporated by reference to Exhibit 2 to the Registrant's Report on Form 8-K dated March 2, 1998. 10.28 Agreement regarding lending arrangements dated June 6, 1997. 21 Registrant's subsidiaries. 23 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule (Restated). 27.3 Financial Data Schedule (Restated).
36 EX-10.28 2 RENEWED LINE OF CREDIT 1 EXHIBIT 10.28 June 6, 1997 Mr. William M. Dubay President & Chief Operating Officer Brunswick Technologies, Inc. P.O. Box 516 Brunswick, ME 04011 Dear Bill: Fleet Bank of Maine is pleased to renew a $2,500,000 working capital line of credit to Brunswick Technologies, Inc. with Advanced Textiles, Inc. as Guarantor. This letter, when properly signed and accepted, will constitute an agreement between Fleet Bank of Maine of Portland, Maine (hereinafter referred to as "Bank"), which agrees to lend, and Brunswick Technologies, Inc. of Brunswick Maine and Advanced Textiles, Inc. of Seguin, Texas, (hereinafter referred to as "Co-Borrowers") which agree to borrow, in accordance with the following terms and conditions, in addition to those as outlined in the loan documents: BORROWER: Brunswick Technologies, Inc. GUARANTOR: Advanced Textiles, Inc. PURPOSE: Short term working capital MAXIMUM AMOUNT: $2,500,000 INTEREST RATE: At the Borrower's option, either Fleet Bank of Maine's Prime Lending Rate (presently 8.50%) or the London Interbank Offered Rate plus 1.75% for amounts of $100,000 or more for periods of 30 to 360 days, payable monthly and based on actual days outstanding over a 360 day year. FEES: 1/8 of 1% on the unused portion, charged quarterly in arrears. TERM: On demand, with interest payable monthly. Subject to your continued favorable financial condition (in the sole judgment of the Bank) this line of credit is available for your use through May 31, 1998 and is subject to review prior to renewal. Payments not made within 10 days of the due date will be assessed a late fee equal to 5% of the payment amount. PREPAYMENTS/YIELD MAINTENANCE FEE ASSESSMENT: At any time that (i) the interest rate on the loan is a fixed rate and (ii) the Bank in its sole discretion should 2 determine that current market conditions can accommodate a prepayment request, the Borrower shall have the right at any time and from time to time to prepay the loan in whole (but not in part), and the Borrower shall pay to the Bank a yield maintenance fee in an amount computed as follows. The current rate for United States Treasury securities (Bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the maturity date of the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made shall be subtracted from the "Cost of Funds" component of the fixed rate in effect at the time of prepayment. If the result is zero or a negative number, there shall be no yield maintenance fee. If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid. The resulting amount shall be divided by 360 and multiplied by the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made. Said amount shall be reduced to present value calculated by using the number of days remaining in the designated term and using the above referenced United States Treasury security rate and the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made. The resulting amount shall be the yield maintenance fee due to the Bank upon prepayment of the fixed rate loan. Each reference in the paragraph to "Fixed Rate Election" shall mean the election by the Borrower pursuant to the paragraph labeled "Interest Rate" in this Agreement. MINIMUM ADVANCES: Advances under the Line will be subject to a minimum advance of $5,000 per request. REPORTING: The Borrower shall submit to the Bank the following reports and such other as the Bank may request without limitation: (a) Borrower's quarterly 10Q reports submitted within 45 days of the end of each quarter. (b) Borrower's annual audited and consolidated financial statement (with consolidating schedules) to include its 10K report within 120 days of year-end prepared by a certified public accountant acceptable to the Bank. (c) Quarterly covenant compliance certificates, within 45 days of quarter-end. FINANCIAL DISCLOSURE: Bank shall be satisfied that the financial information previously delivered to it fairly presents the business and financial condition of the Borrower and Guarantor and the results of operations for the periods covered by such information, and that there have been no material adverse change in the business, assets or financial condition of the Borrower and Guarantor since the date of the most recent financial information delivered to us. DEPOSITORY RELATIONSHIP: The rate and terms of this credit facility are in express reliance on Brunswick Technologies maintaining its deposit and commercial banking 3 relationships with the Bank. The Bank shall have the right to charge any of the borrower's accounts for any amounts due in connection with the credit facility. NON-ASSIGNABILITY OF COMMITMENT: This commitment is expressly offered only to the Co-borrowers and only for the purposes described herein. This commitment may not be assigned without the written permission of Fleet Bank of Maine. FINANCIAL AND BUSINESS COVENANTS: - Borrower and Guarantor shall maintain a combined maximum leverage ratio of 1.0:1 (tested quarterly). For covenant purposes the leverage ratio will be equal to total senior liabilities divided by the Company's tangible net worth plus subordinated debt. - Borrower and Guarantor shall maintain a combined cash flow coverage ratio of 1.2:1 (i.e., net income plus depreciation expense plus interest expense / current maturities of long term debt plus interest expense.) Terms are as defined by GAAP. (tested annually) - Martin Grimnes and William Dubay shall remain actively involved with the operation of Borrower. MISCELLANEOUS REQUIREMENT AND CONDITION: - All debt currently subordinated to the Bank will continue to be subordinated including the notes due to Burlington Industries by Brunswick Technologies. - Execution and delivery of loan documentation, opinions and other documentation in form and substance satisfactory to Bank. WRITTEN MODIFICATIONS: The Co-borrowers may not maintain any action against the Bank on any agreement to lend money, extend credit, forbear from collection of a debt or make any other accommodation for repayment of a debt for more than $250,000 unless the promise, contract or agreement is in writing and signed by a duly authorized representative of Bank. EXPENSES: All reasonable out-of-pocket expenses, including without limitation, attorney's fees, searches, filing fees and appraisal costs, will be paid by the Borrower regardless of whether or not a financing package in concluded. The Bank reserves the right to participate out any portion of the Line. Accordingly, you grant the Bank the right to provide prospective participants with any information relative to the Line, including but not limited, to any information supplied to the Bank by you. The parities hereto agree that this commitment shall survive the loan closing and that each of the obligations and undertakings of the Borrower and Guarantor hereunder shall be 4 continuing and shall not cease until the entire loan, together with interest and fees, is paid in full. If the foregoing terms are acceptable to you, please sign and return a copy of this letter to me indicating your acceptance thereof. The commitment set forth herein will expire without further action if I have not received your written acceptance of this letter on or before June 15, 1997. The Bank reserves the right to terminate this commitment at any time upon the occurrence of any adverse change in the Borrower's or Guarantor's financial condition or business as determined by the Bank in its sole discretion or the occurrence of any event of default under the existing loan arrangements dated May 30, 1996 by and between Brunswick Technologies and the Bank. By signing below the undersigned also agrees and acknowledges that any dispute arising out of or relating to this commitment letter or any actual or alleged modification thereof, or any alleged breach thereof, shall be settled by arbitration in Portland, Maine in accordance with the rules of the American Arbitration Association governing commercial arbitration. Sincerely, \s\ Claude R. Carbonneau Claude R. Carbonneau Vice President ACCEPTED AND ACKNOWLEDGED: Brunswick Technologies, Inc. Date: June 6, 1997 By: /s/ William M. Dubay -------------------- William M. Dubay Its President Enclosure Advanced Textiles, Inc. By: -------------------- Its EX-21 3 REGISTRANT'S SUBSIDIARIES 1 EX-21 SUBSIDIARIES OF BRUNSWICK TECHNOLOGIES, INC. Advanced Textiles, Inc. ("ATI"). ATI is a wholly-owned subsidiary of the Registrant, and is incorporated in the State of Texas. Brunswick Technologies Europe Limited ("BTE") BTE is a wholly-owned subsidiary of the Registrant and is incorporated under the laws of the United Kingdom. EX-23 4 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Brunswick Technologies, Inc. on Forms S-8 (File Nos. 333-36921 and 333-47915) of our report dated February 20, 1998, except for Note 14 as to which the date is March 2, 1998, on our audits of the consolidated financial statements of Brunswick Technologies, Inc. as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. ---------------------------- Portland, Maine March 30, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE DATED 12/31/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BRUNSWICK TECHNOLOGIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE ROUNDED TO THOUSANDS (EXCEPT FOR PER SHARE AMOUNTS). 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 352 6,607 3,024 46 3,308 13,780 8,277 2,003 25,216 1,366 0 0 0 24,715 (5) 25,216 30,510 30,510 22,807 5,901 (530) 0 328 1,983 707 1,275 0 0 0 1,275 0.29 0.26
EX-27.2 6 RESTATED 1997 QUATERLY FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BRUNSWICK TECHNOLOGIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE, SIX AND NINE MONTHS ENDING MARCH 31, 1997, JUNE 30, 1997, AND SEPTEMBER 30, 1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE ROUNDED TO THOUSANDS (EXCEPT FOR PER SHARE AMOUNTS). 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 APR-01-1997 JUL-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 6,581 6,456 7,364 0 506 0 3,087 2,264 2,913 42 48 46 3,479 3,581 3,258 13,470 13,342 14,178 7,567 7,755 8,078 1,590 1,726 1,868 24,955 24,698 25,607 2,443 1,782 1,868 0 0 0 0 0 0 0 0 0 20,900 20,850 20,850 (5) (5) (5) 24,955 24,698 25,607 7,332 15,405 23,008 7,332 15,405 23,008 5,448 11,320 17,002 1,339 2,866 4,237 (87) (214) (405) 0 0 0 162 260 325 470 1,173 1,849 183 441 670 287 732 1,179 0 0 0 0 0 0 0 0 0 287 732 1,179 0.09 0.10 0.10 0.07 0.09 0.09
EX-27.3 7 RESTATED FINANCIAL DATA SCHEDULE DATED 12/31/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BRUNSWICK TECHNOLOGIES, INC.'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE ROUNDED TO THOUSANDS (EXCEPT FOR PER SHARE AMOUNTS). 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 355 0 2,658 39 3,263 6,726 7,454 1,453 18,634 5,314 0 0 6,589 464 (5) 18,634 19,816 19,816 15,318 3,621 (303) 0 252 928 335 593 0 0 0 593 0.29 0.26
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