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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File No. 333-72305
Advanced Glassfiber Yarns LLC
(Exact name of registrant as specified in its charter)
Delaware 3229 58-2407014
(State of formation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
Commission File No. 333-72305-01
AGY Capital Corp.
(Exact name of registrant as specified in its charter)
Delaware 3229 57-1072917
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
2558 Wagener Road, Aiken, South Carolina 29801
(Address of registrants' principal executive office) (Zip Code)
(803) 643-1501
(Registrants' telephone number, including area code)
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Securities registered pursuant to Sections 12(b) or 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports) and (2) have 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 the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. Yes [X] No [_]
There is no established trading market for the membership interests of Advanced
Glassfiber Yarns LLC. As of April 2, 2001, Porcher Industries, S.A. owned a
51.0% membership interest and Owens Corning owned a 49.0% membership interest.
All 1,000 shares of common stock of AGY Capital Corp. are owned by Advanced
Glassfiber Yarns LLC. Accordingly, AGY Capital Corp. meets the conditions set
forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore
filing this form with the abbreviated narrative disclosure format.
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ADVANCED GLASSFIBER YARNS LLC
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page No.
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PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market For Registrants' Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrants 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27
SIGNATURES 29
1
PART I
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Annual Report may contain forward-looking
statements. These statements include, in particular, statements about our plans,
strategies and prospects within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify
forward-looking statements by our use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Although we believe that our plans, intentions and expectations reflected
in or suggested by such forward-looking statements are reasonable, we cannot
assure you that our plans, intentions or expectations will be achieved. Such
statements are based on our current plans and expectations and are subject to
risks and uncertainties that exist in our operations and our business
environment that could render actual outcomes and results materially different
from those predicted. When considering such forward-looking statements, you
should keep in mind the following important factors that could cause our actual
results to differ materially from those contained in any forward-looking
statements:
. our significant level of indebtedness and limitations on our
ability to incur additional debt;
. the impact of Owens Corning's unpredictable bankruptcy proceeding
on our financial condition and ongoing operations;
. the risk that obtaining raw materials and capital equipment
services from sources other than Owens Corning would be more costly
or require us to change substantively our manufacturing processes;
. the risk of conflicts of interest with our equity holders;
. a downturn in the electronics industry and the movement of
electronics industry production outside of North America;
. our concentrated customer base and the nature of our markets;
. a disruption of production at one of our facilities;
. foreign currency fluctuations;
. an easing of import restrictions and duties with respect to glass
fabrics;
. labor strikes or stoppages;
. our ability to comply with environmental and safety and health laws and
requirements; and
. changes in economic conditions generally.
This list of risks and uncertainties, however, is not intended to be exhaustive.
You should also review the other cautionary statements we make in this Annual
Report and in our Registration Statement on Form S-4 (SEC File No. 333-72305)
with respect to our 9 7/8% Senior Subordinated Notes due 2009, especially the
"Risk Factors" section of the Registration Statement. All forward-looking
statements attributable to us or persons acting for us are expressly qualified
in their entirety by our cautionary statements.
We do not have, and expressly disclaim, any obligation to release publicly any
updates or changes in our expectations or any changes in events, conditions or
circumstances on which any forward looking statement is based.
Item 1. Business
General
Advanced Glassfiber Yarns LLC is a Delaware limited liability company initially
formed by Owens Corning to own and operate Owens Corning's Glass Yarns and
Specialty Materials Business. On July 1, 1998, Owens Corning contributed
substantially all of the assets and liabilities of its Glass Yarns and Specialty
Materials Business to us. Thereafter, on September 30, 1998, Owens Corning sold
a 51.0% interest in us to a wholly owned subsidiary of Porcher Industries. Owens
Corning retained the remaining 49.0% interest. AGY Capital Corp. is a wholly
owned subsidiary of Advanced Glassfiber Yarns LLC, formed solely to facilitate
our offering of 9 7/8% Senior Subordinated Notes due 2009.
2
Advanced Glassfiber Yarns LLC headquarters are located at 2558 Wagener Road,
Aiken South Carolina 29801. Our telephone number is (803) 643-1501.
We are one of the largest global suppliers of glass yarns. We are one of only
three major glass yarns producers with manufacturing facilities in North America
and one of only five major glass yarns producers that supply glass yarns
globally. Our glass yarns are produced by converting molten glass into thin
glass filaments which are then twisted into yarn.
Glass yarns, because of their unique physical properties, are a critical
material used in a variety of electronic, industrial, construction and specialty
applications. Heavy yarns are used in a wide range of applications, such as
printed circuit boards, roofing materials, filtration equipment, building
reinforcements, window screening, aerospace materials and reinforced tapes. Fine
yarns are used primarily to construct laminates for multi-layer printed circuit
boards, which are integral to virtually all advanced electronic products,
including computers, telecommunications equipment, television equipment,
automotive equipment and home appliances. We also produce a subcategory of heavy
yarns known as specialty materials, such as S-2 Glass(R), a proprietary high-
strength glass yarn. Specialty materials, which accounted for 11% of our 2000
net sales, are used for aircraft laminates, oxygen tanks, sporting goods and
vehicle armor. Fine yarns and specialty materials generally command higher
prices and profit margins than non-specialty heavy yarns, primarily due to their
value-added characteristics.
Attractive Industry Fundamentals. The glass yarns industry has historically been
characterized by a limited number of suppliers, high barriers to entry, a
limited number of cost-effective substitutes and high capacity utilization.
Historically, new entry into the market has been limited due to high barriers of
entry, which include technological know-how and significant capital expenditure
requirements. In addition, we believe that the industry's capacity utilization
generally has been high, which has allowed manufacturers to more efficiently
operate their facilities. Our capacity utilization, as measured by use of
installed bushings, averaged approximately 88% between 1997 and 2000.
Stable Customer Base. We sell our products to over 200 customers worldwide,
including every major North American and European weaver and a diverse group of
other domestic and international commercial and industrial users of yarns. We
maintain long-standing relationships with our major customers by collaborating
with them to meet their specific manufacturing requirements and by providing
high quality products and strong customer service. In addition, our customer
relationships generally are stable due to the limited number of global suppliers
of glass yarns and the costs to customers associated with "qualifying" new
suppliers. In order to qualify a new supplier, a customer may need to modify its
own loom set-ups and fabric specifications and also qualify the new glass yarn
supplier with downstream manufacturers and weavers. Furthermore, although glass
yarns generally represent a small fraction of an end product's overall
manufacturing cost, product defects can be costly for customers. Consequently,
customers demand high-quality, reliable yarns from their suppliers and we have
established a reputation with our customers for meeting these demands. As a
result of these factors, we have maintained strong relationships with each of
our top five customers for over 25 years.
Unique Properties of Glass Yarns. The characteristics of glass yarns include:
. high strength-to-weight ratio;
. dimensional stability;
. heat resistance;
. moisture resistance;
. chemical resistance;
. electrical resistance; and
. thermal insulation.
Although carbon and aramid fibers are stronger than glass yarns, they are
significantly more expensive. Other materials, such as steel and wood, are less
expensive but lack the physical characteristics of glass yarns. Given the
3
unique combination of physical attributes and relative low cost of glass yarns,
we believe few cost-effective substitute products exist.
Diversified End-Use Markets. The characteristics of glass yarn make it the
material of choice for a variety of products manufactured in the electronics,
industrial, construction and specialty markets. Furthermore, within each of
these markets, our products have a variety of applications, including: printed
circuit boards, transformers, switch-gear, filtration bags, heat shields,
welding curtains, filament tape, insect screening, optical fiber cable, aircraft
laminates, wire coatings, gaskets, ignition cables, reinforced concrete, roofing
materials, wallcoverings, filtration equipment, sporting goods and armor. We
believe that this diversity in end-use applications reduces volatility in
overall demand for our products.
Superior Production Technology and Product Innovation. We believe that we are
the technological leader in the production of glass yarns due to our strong
process engineering and product development capabilities. We pioneered the glass
yarns industry with the introduction of "glass cotton" in the 1930s and the
introduction of fine yarns in the 1940s, and have continued our innovation with
the development of S-2 Glass(R) and Zentron(R). We employ 44 technical
professionals dedicated to the development of new products, process improvements
and product innovations.
Business Strategy
Our business strategy includes the following key elements:
Emphasize Fine Yarns and Specialty Materials. We will continue our focus on
increasing the proportion of our net sales attributable to fine yarns and
specialty materials. Sales of fine yarns and specialty materials increased as a
proportion of net sales from 33% in 1997 to 39% in 2000. We believe our global
leadership in producing fine yarns and specialty materials is a competitive
advantage when targeting manufacturers of sophisticated electronics and
specialty composites.
Develop New Products and Product Innovations. To maintain our technological
leadership position in the glass yarns industry, we conduct an active internal
research and development program aimed at developing new and improved products.
In addition, we have formed several joint product development programs with our
customers such as BGF Industries, a wholly-owned subsidiary of Porcher
Industries, and downstream manufacturers. We also have a continuing relationship
with Owens Corning pursuant to which we and Owens Corning conduct joint
development programs and share in Owens Corning's technology and research and
development. We will continue our focus on research and development and our
commitment to collaborate with our customers to improve and develop products.
Focus on Operating Efficiency. We continually seek to improve the quality of our
production facilities and our operating systems by utilizing modern production
technology. These new technologies have enabled us to increase through-put,
product quality and operational flexibility.
Selective Geographic Expansion. We believe that we have opportunities to expand
our business outside of North America. Approximately 29% of our 2000 net sales
were outside of North America, with approximately 22% in Europe, 6% in Asia and
less than 1% in other regions. We believe that Asia represents an attractive
long-term opportunity for sales of our fine yarns. Some of our customers are
expanding their production capabilities in Asia to meet the region's demand for
glass fabrics used to manufacture electronic laminates. We anticipate that glass
yarns needed for such increased production will be sourced locally. Our strategy
is to continue to expand outside North America by establishing in-region
manufacturing capability.
Products and Markets
Our products are produced based on weight and strength specifications developed
in close cooperation with customers. Our products fall into two categories
based on filament diameter:
4
. heavy yarns, with a filament diameter between 7 and 14 microns, and
. fine yarns, with a filament diameter generally up to 7 microns.
The following table sets forth the percentage of net sales attributable to our
two major product categories from 1998 to 2000:
Year Ended December 31,
----------------------
1998 1999 2000
---- ---- ----
Heavy yarns 74.0% 73.0% 71.9%
Fine yarns 26.0% 27.0% 28.1%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Heavy Yarns. Heavy yarns are used for a wide range of applications, such as
printed circuit boards, roofing materials, filtration equipment, building
reinforcements, window screening, aerospace materials and reinforced tapes.
Currently, prices for heavy yarns, excluding specialty materials, generally
range from approximately $2.00 to $5.00 per kilogram. We also produce a
subcategory of heavy yarns known as specialty materials, such as S-2 Glass(R), a
proprietary high strength glass yarn. Specialty materials, which accounted for
11% of our 2000 sales, are used for aircraft laminates, oxygen tanks, sporting
goods and vehicle armor. Currently, prices for specialty materials range from
approximately $12.00 to $31.00 per kilogram.
Fine Yarns. Fine yarns, which require a significant level of technical
engineering expertise, generally command higher prices than non-specialty heavy
yarns, and are primarily used to construct laminates in multi-layer printed
circuit boards. Printed circuit board customers require a material that yields a
highly uniform, flat surface. We believe that we are the world's largest
producer of fine yarns and that our technological leadership differentiates us
from our competitors. Currently, prices for fine yarns range from approximately
$4.00 to $19.00 per kilogram.
We primarily sell to glass yarn weavers who weave glass yarn into fabric
ultimately used in a wide variety of end-use applications. Our customers
include, among others, every major glass weaver in North America and Europe. We
have a customer base of over 200 customers. Our top five and top ten customers
accounted for 55% and 66% of our 1999 sales, respectively, and 57% and 70% of
our 2000 sales, respectively. Our top five customers in 2000 were Porcher
Industries (including its affiliates such as BGF Industries), Hexcel-Schwebel,
Inc., JPS Glass Inc., Bay Mills and CS Interglas. Among the different markets in
the glass yarns industry, the electronic market is characterized by a few major
customers, each with a strong relationship with us but that generally qualify
more than one supplier. The industrial and construction markets are
characterized by many customers that generally qualify only one supplier. The
specialty market is characterized by customers that require highly specialized
yarns produced in a cooperative effort with the supplier and, consequently,
generally qualify only one supplier.
We market our products primarily through a direct sales force with offices
located in the United States, Europe and Asia. Our North American customers are
serviced by five sales personnel and one sales manager, European customers are
serviced by three sales personnel and one sales manager and Asian customers are
serviced by one sales manager. The marketing and business planning organization
consists of four individuals who have product line management, pricing, market
analysis, competitive intelligence, and market development responsibility for
North and South America, Europe and Asia.
The following table sets forth the percentage of our net sales by geographic
region from 1998 to 2000:
5
Year Ended December 31,
-----------------------
1998 1999 2000
---- ---- ----
North America 74.8% 70.5% 70.8%
Europe 21.2% 25.2% 22.1%
Asia 3.8% 3.8% 6.3%
Latin America 0.2% 0.5% 0.8%
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Research and Development
To maintain our leadership position in the glass yarns industry, we conduct an
active research and development program aimed at improving our manufacturing
processes and developing new and improved products. Our Science and Technology
Group manages the research and development program. We spent $5.9 million, $7.5
million and $6.8 million to fund the Science and Technology Group in 1998, 1999
and 2000, respectively. A portion of the Science and Technology Group dedicates
their efforts to the Technical Services Organization ("TSO"). The Aiken and
Huntingdon facilities each have a TSO that is organized into technical teams
around each major customer category. We also have TSO resources located at the
South Hill facility and in Europe. The TSO carries out ongoing process and
product improvements, troubleshooting of manufacturing problems, and transfer of
newly developed processes and products to manufacturing. The Science and
Technology Group also has a project engineering group which is responsible for
capital projects. The remaining persons in our Science and Technology group are
focused on research and development and are experts in chemistry, product
development, process technology, and customer applications. The research and
development work is conducted at our Aiken Central Technology Laboratory in
Aiken.
We have numerous United States patents, patent applications and trademarks.
While we consider our patents to be valuable assets, we do not believe that our
competitive position is dependent on patent protection or that our operations
are dependent on any individual patent or group of related patents. However, in
some instances, patents and patent protection may deter entry by new competitors
with respect to some of our product lines. Our policy is to obtain patents on
our new products and enforce our patent rights. In connection with the formation
transactions, Owens Corning assigned and licensed to us patents, know-how,
trademarks and business information relating to or used in our business. In
addition, we entered into a support services agreement with Owens Corning
pursuant to which they will cooperate with respect to research and development.
See "Certain Relationships and Related Transactions."
Manufacturing Process
Glass yarns are manufactured by mixing naturally occuring materials melting at
high temperatures to create molten glass that flows through a bushing to create
continuous glass strands. These strands are spooled and then twisted to create
glass fiber yarns. We employ two types of manufacturing processes for glass
yarns, "direct melt" and "indirect melt."
The "direct melt" glass fiber manufacturing process, which is employed at the
Aiken facility, begins when finely ground raw materials, including sand,
limestone, clay, borates and specialty chemicals, are blended together in a bulk
quantity called the "batch." The batch is then fed into a furnace where it is
melted. The molten glass flows to numerous, heat-resistant alloy trays called
bushings. These bushings have thousands of small, precisely drilled tubular
openings through which glass flows and becomes filaments. The hair-like
filaments are coated with an aqueous chemical mixture called "sizing," which
protects the filaments during processing and handling, including weaving or
braiding, and ensures good adhesion of the glass fiber to the resin when
manufacturing polymer reinforcements.
After sizing is applied, filaments are gathered together into strands that go
through further processing steps
6
depending on the market into which the fiber will be sold. The filaments are
wound onto intermediate packages by high speed winders. In most cases, the
strands are unwound from the intermediate packages and are twisted together to
form glass fiber yarns that are rewound onto bobbins for sale to customers.
The Huntingdon facility and the South Hill facility employ a melt process, known
as "indirect melt," to manufacture fine glass fiber yarns using glass marbles as
the principal raw material. The glass marbles are melted in individual furnaces
and pulled through bushings to form filaments. The filaments are sized, wound
onto intermediate packages, and twisted in the same manner as in the direct melt
process. The advantage of the indirect method is that each bushing has its own
melting device. This process, which we pioneered, allows us to add incremental
production capacity with more reasonable capital expense and construction time
and results in a more consistent product.
Raw Materials and Other Supplies and Sources
The major raw materials used by us in the production of glass yarns are glass
marbles at the Huntingdon and South Hill facilities, and silica and borates at
the Aiken facility. We purchase glass marbles from Owens Corning pursuant to an
exclusive supply agreement. Silica is readily available and is currently
provided to us by a number of local suppliers. We primarily use borates in our
production processes at our Aiken facility, which are sourced from a supplier in
Turkey that is owned by the Turkish government. Our supply of borates from
Turkey is sourced through Owens Corning under a supply agreement which provides
that, if there is a limited or reduced supply of borates, Owens Corning will
allocate a portion of such supply to us.
In addition to the raw materials involved in the production of glass yarns, we
use specialized capital equipment, such as bushings. Bushings are heat-resistant
alloy trays through which molten glass is filtered to produce glass filaments.
Our bushings are currently manufactured and periodically reconditioned by Owens
Corning. As a part of the formation transactions, Owens Corning agreed to
continue providing bushings to us and reconditioning service for the bushings.
See "Certain Relationships and Related Transactions."
Competition
We believe that the principal competitive factors affecting the glass yarns
industry include the quality, performance, product pricing and consistency of
products, response to customer requirements and stability of business
relationships with customers.
We are one of only five major producers of glass yarns that supply their
products globally. The other global suppliers are PPG, Vetrotex, Nittobo and
N.E.G. In addition to the five global suppliers of glass yarns, there are two
significant regional manufacturers, Taiwan Glass, a limited licensee of our
technology, and Nan Ya Plastics Corp., a licensee of PPG's technology, each of
which operates and has significant sales in Asia. Currently, we and PPG are the
only major producers of glass yarns with production facilities in North America.
However, Vetrotex has recently built a plant for the production of glass yarns,
primarily for the heavy electronics market, in Mexico. We believe that this
plant became operational in mid-2000.
Employees
As of December 31, 2000, we had approximately 1,643 full-time employees. As of
that date, approximately 1,556 of the employees were engaged in manufacturing
and related services. Production, maintenance, warehouse and shipping employees
at our Aiken facility are represented by Teamsters Local Union Number 86, an
affiliate of the International Brotherhood of Teamsters. The collective
bargaining agreement with this union covering our employees at Aiken expires on
May 3, 2002. The Union of Needletrades, Industrial and Textile Employees and its
local 1034T represent our production, maintenance, warehouse and shipping
employees at our Huntingdon facility. The collective bargaining agreement with
this union covering our employees at Huntingdon expires on October 31, 2002.
Management considers our labor relations to be generally good and anticipates no
interruption in operations due to labor-related matters.
Environmental and Health Matters
7
Our past and present operations, including our ownership and operation of real
properties, are subject to extensive and changing federal, state, local and
foreign environmental laws and requirements, that include, among others, those
governing discharges to air and water, the handling and disposal of soils and
hazardous substances and wastes, and the remediation of contamination associated
with releases of hazardous substances at our facilities and off-site disposal
locations. Our operations are also governed by laws and requirements relating to
workplace safety and health. Management believes that we are generally in
material compliance with these laws and requirements.
We, like all manufacturers of glass yarns, are subject, in various
jurisdictions, to laws and regulations designed to reduce solid wastes by
requiring, among other things, use of materials producing waste to be degradable
in landfills, minimum levels of recycled content, various recycling
requirements, disposal fees and limits on the use of harmful products. In
addition, various consumer and special interest groups have lobbied from time to
time for the implementation of additional environmental protection measures. We
do not believe that either the legislation promulgated to date or currently
pending initiatives will have a material adverse effect on our business. There
can be no assurance that any future legislation or regulatory efforts will not
have a material adverse effect on our business, financial condition or results
of operations.
In connection with the formation transactions, Owens Corning retained all
liabilities resulting from the presence of hazardous substances at or migrating
from the sites contributed by Owens Corning to us, as well as all liabilities
resulting from the transportation or arrangements made by Owens Corning for the
treatment, storage or disposal of hazardous substances to any off-site location
prior to September 30, 1998. We have not assumed any of these liabilities. In
addition, Owens Corning has agreed to indemnify us against any losses and
damages arising out of the environmental liabilities retained by Owens Corning.
However, with respect to environmental remedial action, Owens Corning's
indemnification obligations are limited to compliance with the standards set
under applicable environmental laws and these obligations will be satisfied upon
and to the extent of final approval of the remedial action by the governing
environmental authority.
Item 2. Properties
We operate three manufacturing facilities in the United States. The following
table sets forth a description of our manufacturing facilities:
2000 Owned
Approximate Production or
Facility Products Square Feet (in metric tons) Leased
--------- -------- ----------- -------------- ------
Aiken, South Carolina Heavy, Fine, and Specialty 1,540,000 52,614 Owned
Huntingdon, Pennsylvania Fine and Specialty 405,000 7,587 Owned
South Hill, Virginia (1) Fine 27,200 470 Leased
- ---------
(1) The South Hill facility is a co-location facility shared with BGF
Industries, at which we and BGF Industries work together closely to coordinate
the production of glass yarns for use solely by BGF Industries' operations at
that facility. We opened the facility in June 1998 and it became fully
operational in 1999. See "Certain Relationships and Related Transactions." We
own all of the equipment located in the South Hill facility, but lease the
building from BGF Industries.
In addition to the facilities that we own or lease, subsidiaries of Owens
Corning with facilities in Battice, Belgium,
8
Rio Claro, Brazil, L'Ardoise, France and Guelph, Ontario have historically
provided us with specific products, primarily heavy yarns, to serve segments of
the European and North American markets. Although these facilities have been
retained by Owens Corning, we entered into contracts to purchase specific glass
yarns manufactured at these facilities. See "Certain Relationships and Related
Transactions."
We believe our facilities and equipment are suitable and adequate for our
business as presently conducted. Substantially all of our properties and assets
and the properties and assets of our respective domestic subsidiaries serve as
security for our senior credit facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
Item 3. Legal Proceedings
We have not been involved in any significant litigation or proceedings. From
time to time, we may become involved in litigation or proceedings in the
ordinary course of our business. We believe that such ordinary course of
business matters will not have a material adverse effect on our financial
condition, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the membership interest of Advanced
Glassfiber Yarns LLC or the common stock of AGY Capital Corp. Porcher
Industries, S.A. owned a 51.0% membership interest and Owens Corning owned a
49.0% membership interest. All 1,000 shares of common stock of AGY Capital Corp.
are owned by Advanced Glassfiber Yarns LLC.
Item 6. Selected Financial Data
We present below our selected historical financial information. Selected
historical financial information related to Owens Corning's Glass Yarns and
Specialty Materials Business is presented for each of the years ended December
31, 1996 and 1997 and the nine months ended September 30, 1998. Selected
historical financial information subsequent to consummation of the formation
transactions on September 30, 1998 is presented for the three months ended
December 31, 1998 and the years ended December 31, 1999 and 2000.
We derived the historical information for the three months ended December 31,
1998, and the years ended December 31, 1999 and 2000 from our audited financial
statements which appear elsewhere in this report. We derived the historical
information for the years ended December 31, 1997 and 1996 and the nine months
ended September 30, 1998 from the Predecesor Business audited financial
statements that are not included in this report.
The historical financial statements of the predecessor business were derived
from the historical financial statements of Owens Corning. We have not adjusted
our historical statements of operations to reflect the effect of supply
agreements that we entered into with Owens Corning in connection with the
formation transactions.
We have presented adjusted EBITDA in our selected financial data because it is a
widely accepted financial indicator of a company's ability to service
indebtedness. You should not consider adjusted EBITDA as an alternative to net
income or loss, as a measure of operating results, or to cash flows as a measure
of liquidity in accordance with generally accepted accounting principles.
Adjusted EBITDA presented below may not necessarily be comparable to similarly
titled measures reported by other companies as they are not calculated
identically by all companies. We define adjusted EBITDA as income or loss before
income taxes and extraordinary item, interest expense, depreciation and
amortization expense, non-recurring charges of $2.3 million for the three months
ended December 31, 1998 and $3.0 million in 1999, and restructuring charges of
$2.0 million for the nine months ended September 30, 1998 and $0.3 million in
1999.
We have also presented the ratio of earnings to fixed charges. In calculating
the ratio of earnings to fixed charges, earnings consist of income or loss
before income taxes plus fixed charges. Fixed charges consist of interest
expense, whether expensed or capitalized, and the portion of rental expense
estimated to be attributable to interest.
You should read the historical data set forth below in conjunction with our
consolidated financial statements together with the notes thereto, included
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
10
Consolidated Company The Predecessor Business
----------------------------------------- ---------------------------------------
Year Three Months Nine Months Year
Ended Ended Ended Ended
December 31, December 31, September 30, December 31,
------------------------ ----------------------
2000 1999 1998 1998 1997 1996
---- ---- ---- ---- ---- ----
(dollars in thousands)
Statement of Operations
Data:
Net sales $ 278,288 $ 252,236 $ 63,403 $ 274,979 $ 277,357 $ 205,248
203,726 183,138 43,494 180,343 182,366 134,820
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 74,562 69,098 19,909 94,636 94,991 70,428
Selling, general and
administrative expenses 16,407 16,812 4,123 14,345 14,813 11,487
Amortization 11,420 11,611 2,848 - - -
Restructuring cost (1) - 290 - - - 2,034
---------- ---------- ---------- ---------- ---------- ----------
Operating income 46,735 40,385 12,938 80,291 80,178 56,907
Interest expense 35,449 36,824 9,113 - - -
Other income, net (900) (2,235) (450) (3,003) (2,688) (2,328)
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes 12,186 5,796 4,275 83,294 82,866 59,235
Income taxes expense 93 190 - 33,051 32,540 16,226
---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary loss 12,093 5,606 4,275 50,243 50,326 43,009
Extraordinary item, loss
on early extinguishment
of debt (3) - (3,616) - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 12,093 $ 1,990 $ 4,275 $ 50,243 $ 50,326 $ 43,009
========== ========== ========== ========== ========== ==========
Other Data:
Depreciation and
amortization $ 27,944 $ 25,963 $ 5,975 $ 6,394 $ 8,305 $ 8,233
Capital expenditures 12,716 18,368 6,943 13,509 8,324 15,314
Adjusted EBITDA 73,628 69,889 21,334 67,663 91,171 91,527
Cash flow from operating
activities 48,243 59,187 18,819 28,438 65,274 62,113
Cash flow from investing
activities (15,928) (15,603) (3,327) (13,509) (8,324) (15,314)
Cash flow from financing
activities (34,450) (50,155) (2,712) (14,940) (56,922) (46,783)
Ratio of earnings to
fixed charges 1.3x 1.2x 1.5x 67.0x 78.0x 136.0x
Balance Sheet Data (2)
(at period end):
Working capital (deficit) $ (2,721) $ (1,964) $ 32,061 $ N/A $ (11,872) $ (4,944)
Total assets 436,009 454,416 465,469 N/A 153,961 163,839
Total debt 329,586 359,855 402,198 N/A - -
Net assets/Members' interest 23,751 20,231 21,285 N/A 30,940 36,850
(1) During the first quarter of 1998, we recorded a $2.0 million restructuring
charge related to personnel reductions at the Aiken and Huntington
facilities. We recorded a $0.3 million restructuring charge in 1999.
(2) The historical balance sheet data for the periods 1996 through December 31,
1997 have not been adjusted to reflect the fact that Owens Corning did not
contribute deferred tax assets to Advanced Glassfiber Yarns and that Owens
Corning retained the following liabilities: income taxes payable, trade
accounts payable and certain post-retirement health care benefits for those
of our employees that were previously employees of Owens Corning. The
December 31, 1998 balance sheet data reflects the following: the
elimination of assets not contributed by Owens Corning and liabilities not
assumed by Advanced Glassfiber Yarns, the accounting for the purchase by
Porcher Industries of the 51.0% interest in Advanced Glassfiber Yarns and
the various financing transactions related to our formation on September
30, 1998.
(3) During the first quarter of 1999, we recorded a $3.6 million charge related
to the write-off of debt issuance costs.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion together with our consolidated
financial statements and related notes contained in this Annual Report.
Overview
Advanced Glassfiber Yarns is a Delaware limited liability company initially
formed by Owens Corning to own and operate its Glass Yarns and Specialty
Materials Business. On July 1, 1998, Owens Corning contributed substantially all
of the assets and liabilities of this business to Advanced Glassfiber Yarns. On
September 30, 1998, Owens Corning sold a 51.0% interest in Advanced Glassfiber
Yarns to a wholly owned subsidiary of Porcher Industries. Owens Corning retained
the remaining 49.0% interest. Since, at all times up to September 30, 1998 we
were either a division of Owens Corning or a wholly owned subsidiary of Owens
Corning, our financial information for all periods prior to October 1, 1998 has
been derived from the financial statement of Owens Corning.
Since at all times up to September 30, 1998 we were either a division of Owens
Corning or a wholly owned subsidiary of Owens Corning, our financial information
for all periods prior to October 1, 1998 has been derived from the financial
statements of Owens Corning. Accordingly, our historical financial information
for the year ended December 31, 1998 is based upon the historical financial
information of the business as it was operated by Owens Corning from January 1,
1998 through September 30, 1998 and the historical financial information of
Advanced Glassfiber Yarns from October 1, 1998 through December 31, 1998. The
historical financial statements contained in this report for all periods ending
on or before September 30, 1998 have not been adjusted to reflect that Owens
Corning did not contribute all of the assets and liabilities of the business to
us. In addition, these historical financial statements have not been adjusted to
reflect the effect of the supply agreements entered into with Owens Corning in
connection with the formation transactions. See "Certain Relationships and
Related Transactions." The supply agreements generally require Owens Corning to
provide raw materials, capital equipment and services to us at Owens Corning's
cost plus pre-determined margins.
Net Sales. Effective December 31, 2000, the Company adopted the Securities and
Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition, as amended, in 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue, including specifying basic
criteria which must be met before revenue can be recognized. The impact of
adopting SAB No. 101 was immaterial. Net sales consist of sales to customers,
including discounts and negotiated rebates. Prices for our products depend upon
the terms of our customer agreements and the category of product being sold.
Gross Profit. Cost of sales consists of raw materials, energy, labor and
manufacturing overhead. These components of cost of sales as a percentage of
total cost of sales averaged 37% for raw materials including resale goods, 8%
for energy, 41% for labor and 14% for other costs, from 1998 to 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of the cost of our employees, including research
and development and engineering personnel, and prior to 2000 the estimated costs
of corporate services provided by Owens Corning.
Other Income, net. Other income consists of royalties and technical service fees
earned from a non-exclusive limited license granted by us to Taiwan Glass
Industrial Corporation. The historical financial statements only include the
portion of the royalties and fees attributable to the manufacture and sale of
glass yarn products by Taiwan Glass. Other income also includes interest income
and foreign currency gains and losses, as well as alloy lease income or
expenses.
Adjusted EBITDA. Adjusted EBITDA is defined as net income or loss before income
taxes and extraordinary item,
12
interest expense, depreciation and amortization expense, non-recurring charges
of $2.3 million for the three months ended December 31, 1998 and $3.0 million
for 1999 and restructuring charges of $2.0 million for the nine months ended
September 30, 1998 and 0.3 million in 1999. Adjusted EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to service
indebtedness; however, adjusted EBITDA should not be considered as an
alternative to net income or loss, as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted accounting
principles. Adjusted EBITDA as presented in this Annual Report may not be
comparable to similarly titled measures reported by other companies as they are
not calculated identically by all companies.
Results of Operations
The following table summarizes our historical results of operations and
historical results of operations as a percentage of net sales.
Consolidated Company The Predecessor
--------------------------------------- Business
Year Ended ------------------------
December 31, Three Months Nine Months
----------- Ended Ended
2000 1999 December 31, 1998 September 30, 1998
---- ---- ----------------- ------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.2 72.6 68.6 65.7
----- ----- ----- -----
Gross profit 26.8 27.4 31.4 34.3
Selling, general and administrative
expenses 5.9 6.7 6.5 5.6
Amortization 4.1 4.6 4.4 --
Restructuring cost -- 0.1 -- 1.0
----- ----- ----- -----
Operating income 16.8 16.0 20.5 27.7
Interest expense 12.7 14.6 14.4 --
Other income, net (0.3) (0.9) (0.7) (1.1)
----- ----- ----- -----
Income before taxes and extraordinary item 4.4 2.3 6.8 28.8
Income tax expense -- 0.1 -- 7.9
----- ----- ----- -----
Income before extraordinary item 4.4 2.2 6.8 20.9
Extraordinary item, loss on early
extinguishment of debt -- 1.4 -- --
----- ----- ----- -----
Net income 4.4% 0.8% 6.8% 20.9%
===== ===== ===== =====
Fiscal Year 2000 Compared to Fiscal Year 1999
Net Sales. Net sales increased $26.1 million, or 10.3%, to $278.3 million as
compared to $252.2 million in the year ended December 31, 1999. This increase
was primarily due to higher demand in all markets, except in industrial
products. The largest increases were in the electrical and the construction
markets, with 22.8% and 14.5%, respectively. This was partially offset by the
impact of a 13.0% decline in the exchange rate of the European currency versus
the U.S. dollar in 2000 as compared to 1999. Price increases implemented in the
last two quarters of 2000 continue to move towards the historical pricing level
of late 1998 and early 1999.
Gross Profit. Gross profit increased by $5.5 million, or 8.0%, from $69.1
million for 1999 to $74.6 million for 2000. As a percentage of net sales, gross
profit decreased to 26.8% as compared to 27.4% for the year ended December 31,
1999. The positive impact of higher volumes sold was partially offset by the
residual effect of the 1999 selling price reductions, additional startup
manufacturing costs related to increases in
13
capacity in early 2000, as well as increases in energy costs since the second
quarter of 2000. Excluding the impact of a weakening European currency, gross
profit in the year 2000 would have been 27.7%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 5.9% of net sales for the year ended
December 31, 2000 as compared to 6.7% of net sales for the year ended December
31, 1999. This decrease, which was primarily attributable to an increase in
sales, without a corresponding increase in cost during the year of 2000, as well
as 1999 non-recurring costs related to the establishment of independent
operational, management and information system controls, was partially offset by
an increase in depreciation of the aforesaid systems established in 1999.
Operating Income. Operating income increased $6.3 million to $46.7 million, or
16.8% of net sales, for the year ended December 31, 2000 from $40.4 million, or
16.0% of net sales, for the year ended December 31, 1999. This increase was
primarily related to the factors discussed above.
Interest Expense. Interest expense decreased $1.4 million to $35.4 million, or
12.7% of net sales, for the year ended December 31, 2000 from $36.8 million, or
14.6% of net sales, for the year ended December 31, 1999.
Other Income, net. Other income/expense, net decreased $1.3 million to $0.9
million, or 0.3% of net sales, for the year ended December 31, 2000 from $2.2
million, or 0.9% of net sales, for the year ended December 31, 1999. This
increase was primarily due to the increase in alloy lease cost.
Net Income. Also as a result of the aforementioned factors and the $3.6 million
loss on early extinguishment of debt, which occurred in 1999, net income
increased $10.1 million to $12.1 million in the year ended December 31, 2000,
from $2.0 million in the year ended December 31, 1999.
Fiscal Year 1999 Compared to Fiscal Year 1998
Net Sales. Net sales decreased $16.4 million, or 6.1%, to $252.2 million in 1999
from $268.6 million in 1998. This decrease was due primarily to selling price
reductions, a lower demand for heavy yarns used in rigid printed circuit boards
as well as reduced sales to the construction industry. The decrease was
partially offset by increased industrial and specialty application sales, which
improved by 11% and 7%, respectively, compared to 1998.
Gross Profit. Gross profit margins decreased by $21.2 million, or 23.5%, from
$90.3 million for 1998 to $69.1 million for 1999. As a percentage of net sales,
gross profit decreased to 27.4% as compared to 33.6% for the year ended December
31, 1998. This decrease is attributable to selling price reductions mainly in
the electronic segment and to the weakening of European currencies against the
U.S. dollar. Also, higher depreciation costs resulted from the allocation of the
purchase price following the acquisition of 51.0% of our shares by Porcher
Industries, SA on September 30, 1998. In addition, the terms of the Owens
Corning supply agreements resulted in an increase in the manufacturing costs.
This was partially offset by a more favorable product mix as well as an increase
in the selling price of fine yarns effective in the third quarter of 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 6.7% from 5.8% of net sales for 1999 and
1998, respectively. This was primarily due to the establishment of independent
operational, management and information system controls in connection with the
formation transactions and a decrease in sales. Non-recurring costs associated
with our separation from Owens Corning and establishment of such independent
systems represented 1.2% of net sales for 1999.
Operating Income. Income from operations decreased by $29.5 million, or 42.2%,
from $69.9 million for 1998 to $40.4 million for 1999. Excluding the impact of
the restructuring costs, non-recurring charges described above and amortization
of intangibles, income from operations decreased by $21.7 million or 28.2% from
$77.0 million for 1998 to $55.3 million for 1999. This decrease was primarily
related to the factors discussed above.
Interest Expense. Interest expense increased $27.7 million to $36.8 million, or
14.6% of net sales, for the year ended December 31, 1999 from $9.1 million, or
3.4% of net sales, for the year ended December 31, 1998.
Other Income, net. Other income/expense, net decreased $0.6 million to $2.2
million, or 0.9% of net sales, for the
14
year ended December 31, 1999 from $2.8 million, or 1.0% of net sales, for the
year ended December 31, 1998.
Net Income. Also as a result of the aforementioned factors and the $3.6 million
loss on early extinguishment of debt, which occurred in 1999, net income
decreased $45.3 million to $2.0 million in the year ended December 31, 1999,
from $47.3 million in the year ended December 31, 1998.
Liquidity and Capital Resources
Historically, our primary sources of liquidity prior to the formation
transaction were cash flows from operations. Since the consummation of the
formation transactions, our primary sources of liquidity have been cash flows
from operations, borrowings under the senior credit facility and the issuance of
our 9 7/8% senior subordinated notes due 2009. Our principal uses of liquidity
are to fund operations, principal payments on the senior credit facility, and
interest payments and to finance our planned capital expenditures. We have no
mandatory payment of principal on our subordinated notes prior to their
maturity.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities decreased $11.0 million from $59.2 million for 1999 to $48.2 million
for 2000. The decrease was primarily attributable to a decrease in accounts
payable and accrued liabilities of $18.3 million, a $5.5 million increase in
other assets, a $2.6 million decrease in pension and post-retirement, and a
decrease in alloy depletion of $1.1 million, offset by a decrease in income
before depreciation, amortization and extraordinary item of $8.4 million, a $4.2
million decrease in accounts receivable related to a change in payment terms of
a significant customer and improved collections and a $3.9 million decrease in
inventory as a result of strong customer demand.
Net Cash Used in Investing Activities. Net cash used in investing activities
increased $.3 million from $15.6 million for 1999 to $15.9 million for 2000. A
significant portion of these capital expenditures in 2000 was for rebuilds of
glass melting furnaces and other equipment upgrades used in our operations.
Capital Expenditures. We have historically financed our capital expenditures
through cash flow from operations and borrowings under our senior credit
facility. For the year ended December 31, 2000, capital expenditures were $19.8
million, excluding assets associated with a sale and leaseback transaction
during the second quarter of 2000 pursuant to which we sold manufacturing
equipment for net proceeds of approximately $3.9 million.
Net Cash Used in Financing Activities. Net cash used in financing activities was
$34.5 million for 2000 and primarily consists of a $4.0 million tax distribution
to one of our members and net payment on term loans of $30.2 million.
Sources of Liquidity. In connection with the formation transactions, we entered
into a senior credit facility, which provided for:
. a six-year revolver in an aggregate principal amount of up to $75.0
million, which includes a $10.0 million swing line sub-facility and a
$30.0 million letter of credit sub-facility;
. a seven-year term loan in an aggregate principal amount of $125.0
million; and
. a six-year term loan in an aggregate principal amount of $115.0
million.
On December 16, 1999, we and our lenders amended our senior credit facility to:
(1) reduce the overall borrowing commitment under the six-year revolver from
$75.0 million to $65.0 million; (2) re-amortize the remaining principal balance
due under our seven-year term loan as a result of our repayment of $15.0 million
of principal amounts due under such loan; and (3) ease the restrictions imposed
by certain financial covenants.
First Union National Bank serves as agent under the senior credit facility. The
senior credit facility is collateralized by a first priority lien on
substantially all of our properties and assets and by a pledge of Porcher
Industries' interest in Advanced Glassfiber Yarns. As of December 31, 2000,
$182.0 million was outstanding under the senior credit facility and we had
borrowing availability thereunder equal to approximately $53.3 million.
15
Our amended senior credit facility requires us to comply with financial ratios.
If we breach any of the covenants in the senior credit facility, or we are
unable to comply with the required financial ratios, we may be in default under
the senior credit facility and the indenture governing our 9 7/8% Senior
Subordinated Notes due 2009. If we default under the senior credit facility, the
lenders can declare all borrowings outstanding, including accrued interest and
other fees, due and payable. If we use all of our available cash to repay
borrowings under the senior credit facility, we may not be able to make payments
on our notes. While we currently comply with these financial ratios, and believe
that we will continue to do so, we cannot assure you that our business will
generate sufficient cash flows from operations to enable us to continue to
comply with such ratios in the future.
On January 21, 1999, we privately issued $150.0 million of 9 7/8% Senior
Subordinated Notes due 2009. Our net proceeds from the sale of these notes were
approximately $142.9 million, after deducting the initial purchasers' discount.
We used the net proceeds from the offering, together with additional borrowings
under our senior credit facility, to repay all debt outstanding under a $150.0
million senior subordinated credit facility, which was incurred on September 30,
1998 in connection with the formation transactions. On July 23, 1999, we
exchanged the notes for substantially identical new notes that have been
registered under the Securities Act of 1933. We generally fund the interest
payments on the notes with operating cash flows.
Our ability to make scheduled payments of principal of, or to pay the interest
or liquidated damages, if any, on, or to refinance, our indebtedness, or to fund
planned capital expenditures will depend on our future performance, which is
generally subject to economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Based upon the current level of
operations, we believe that cash flows from operations and available cash,
together with availability under the senior credit facility, will be adequate to
meet our future liquidity needs for at least the next two years. However, we
cannot assure you that our business will generate sufficient cash flows from
operations or that future borrowings will be available under the senior credit
facility in an amount sufficient to enable us to service our indebtedness, or to
fund our other liquidity needs, including the possible construction of a new
melter at our Aiken facility and the payment of tax distributions.
Impact of Owens Corning's Bankruptcy. On October 5, 2000, Owens Corning, which
owns a 49.0% economic interest in Advanced Glassfiber Yarns, and certain of
Owens Corning's United States subsidiaries (collectively, the "Debtors") filed
voluntary petitions with the United States Bankruptcy Court for the District of
Delaware seeking relief under Chapter 11 of the United States Bankruptcy Code.
According to filings made by Owens Corning with the SEC, the Debtors will
continue to manage their properties and operate their businesses as "debtors-in-
possession" in accordance with the applicable provisions of the United States
Bankruptcy Code. To date, we have not experienced interruptions in operations or
supply of material. Although no assurances can be provided, we do not believe
that Owens Corning's bankruptcy will have a material adverse effect on our
business, financial condition or results of operations. However, this forward-
looking statement is subject to risks and uncertainties that exist in our
operations and our business environment. See "Cautionary Statement Regarding
Forward-Looking Statements."
Proposed Transaction between Our Two Members. We previously reported that
Porcher Industries Group and Owens Corning executed a memorandum of
understanding setting forth the general parameters pursuant to which Porcher
Industries Group intended to purchase Owens Corning's 49.0% economic interest in
Advanced Glassfiber Yarns. Due to Owens Corning's recent bankruptcy filing, we
cannot assure you that this transaction will ever be consummated or that it will
be consummated on the terms previously disclosed. In addition, consummation of
such a transaction would be subject to factors outside our control, including,
among other things, the execution of definitive agreements, our ability to
obtain any required lender consents and other approvals, and Porcher Industries
Group's ability to obtain satisfactory financing. If Porcher Industries Group
acquires Owens Corning's 49.0% economic interest, we may be required to step up
the value of certain assets from Owens Corning's historical book value to fair
market value as of the date of the transaction. This could result in the
recording of additional depreciation and amortization expense and the payment of
additional property taxes, which would reduce our future net income.
Introduction of the Single European Currency
On January 1, 1999, eleven member states of the European Union-Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal
and Spain introduced the Euro as a common legal currency
16
among those states for "paperless" transactions, pending the substitution of
Euro banknotes and coins for the national currencies of the participating member
states. As of that date, fixed exchange rates were introduced. It is anticipated
that by July 1, 2002, the Euro will be the official legal tender for the
participating member states and that the national currencies of those member
states will be withdrawn from circulation.
The introduction of the Euro has necessitated only minor changes in our
information technology and other systems in order to accommodate the use of the
Euro in corporate transactions and in financial reporting. Costs incurred in
connection with the conversion have been immaterial.
We expect that the final introduction of the Euro will result in greater market
efficiency and will foster a more competitive economic environment within and
among the participating member states. This is largely a function of the fact
that the pricing of products and services will be more transparent through the
use of a single common currency within the participating member states. While we
do not believe the Euro conversion will materially affect our operations,
particularly with respect to our sales in the participating member states, there
can be no assurance whether and to what extent the introduction of the Euro will
affect our business, financial condition and results of operations, or whether
we will be able to realize any strategic or operational benefits from the
introduction of the Euro.
We intend to continue exploring various strategic and operational measures with
respect to the introduction of the Euro with a view to enhancing our overall
financial position, operating results and market position. These strategic and
operational options will be shaped to some extent by both European and national
rules and regulations regarding the particular measures required to complete the
transition to the Euro as the legal currency of the participating member states.
Impact of Inflation
We generally attempt to pass cost increases on to our customers. Costs are
affected by, among other things, inflation, and we may experience the effects of
inflation in future periods. We believe, however, that inflation has not had a
material impact on us during the past 3 years.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS 133
requires us to record all derivatives on the balance sheet at fair value.
Changes in derivative fair values will either be recognized in earnings as
offsets to the changes in fair value of related hedged assets, liabilities and
firm commitments or, for forecasted transactions, deferred and recorded as a
component of other accumulated comprehensive income until the hedged
transactions occur and are recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value will be immediately recognized in
earnings.
We will adopt SFAS 133 effective January 1, 2001 and will initially record a
$4.2 million unrealized gain in Other Comprehensive Income as the cumulative
effect of this change in accounting for our interest rate swaps. For our foreign
currency derivatives, the adoption of SFAS 133 will not have a material impact
on our financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below. Our
market risk discussion includes "forward- looking statements" and represents an
estimate of possible changes in fair value that would occur assuming
hypothetical future movements in interest rates. These disclosures are not
precise indicators of expected future losses, but only indicators of reasonably
possible losses. As a result, actual future results may differ materially from
those presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Cautionary Statement Regarding Forward-
Looking Statements."
Our senior credit facility is subject to market risks, including interest rate
risk. Our financial instruments are not currently subject to commodity price
risk. We do not enter into derivatives for trading or speculative purposes.
17
We are exposed to market risk related to changes in interest rates on borrowings
under our senior credit facility. The senior credit facility bears interest
based on LIBOR. Our interest rate risk management objective is to limit the
impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, from time to time we enter
into interest rate swap agreements in order to mitigate our interest rate risk
with respect to indebtedness outstanding under the senior credit facility.
We entered into interest rate swap agreements to manage our exposure to interest
rate changes under the senior credit facility. The swaps involve the exchange of
fixed and variable interest rate payments based on a contractual principal
amount and time period. Payments or receipts on the agreement are recorded as
adjustments to interest expense. Under this agreement, we have secured a fixed
LIBOR rate of interest of 4.92% on Term Loan A and 5.04% on the Term Loan B with
an aggregate on the notional amount which is reduced in a manner consistent with
the amortization of the principal on our term loans. As of December 31, 2000, we
had two interest rate swap agreements effective through September 30, 2004 and
2005 on a notional amount of $172.5 million, equal to the borrowings outstanding
under Term Loans A and B under our senior credit facility. During 2000 and 1999,
AGY terminated portions of the interest rate swaps related to the early payment
of Terms Loan A and B. As the result of this partial unwind of swap agreements,
AGY recognized a gain in other income of $0.2 million and $1.5 million for the
years ended December 31, 2000 and 1999, respectively. The fair value of the
interest rate swap agreements, representing the estimated amounts that we would
receive to terminate the agreements, was approximately $4.2 million and $12.9
million respectively as of December 31, 2000 and as of December 31, 1999. A 100
basis point decrease in LIBOR would result in our having to pay $0.5 million to
terminate the agreements. The fair value is based on dealer quotes, considering
current interest rates.
We are exposed to foreign currency exchange rate risk mainly as a result of our
export sales denominated in the Euro. Our risk management strategy is to use
derivative financial instruments, including forwards, swaps, collars and
purchased options, to hedge some portion or all of these exposures, in
accordance with our financial risk management policy. Our objective is to limit
the impact of foreign currency changes on earnings and cash flows.
As of December 31, 2000, the notional value of our foreign currency hedging
instruments was $11.8 million, and the approximate fair value was $-0-. The
potential loss in fair value of such financial instruments from a hypothetical
10% decrease in the underlying exchange rates relative to the U.S. dollar would
be approximately $0.8 million as of December 31, 2000. The potential gain in the
fair value of such financial instruments from a hypothetical 10% increase in the
underlying exchange rates relative to the U.S. dollar would be approximately
$0.8 million as of December 31, 2000. The fair value is based on dealer quotes,
considering current exchange rates.
In addition, we are exposed to losses in the event of nonperformance by the
counterparties under the derivative agreements. We expect the counterparties,
which are major financial institutions, to perform fully under these contracts.
However, if the counterparts were to default on their obligations under the
interest rate swap agreements, we could be required to pay the full rate on our
senior credit facility, even if the rate was in excess of the rates in the
interest rate swap agreements.
Item 8. Financial Statements and Supplementary Data
See page F-1 of the financial reports included herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
18
PART III
Item 10. Directors and Executive Officers of the Registrants
The following table sets forth information with respect to our directors,
executive officers and other key employees:
Name Age Position
- ---- --- --------
Robert Porcher 72 Chief Executive Officer and Chairman of the
Board of Directors
Robert Pistole 63 President
Catherine Cuisson 35 Vice President and Chief Financial Officer
Heinz J. Otto 51 Director
Serge Piolat 50 Director
Philippe Porcher 47 Director
Michael H. Thaman 37 Director
Robert Porcher is our Chief Executive Officer, Chairman of the Board and a
Director. Mr. Robert Porcher has been Chairman of the Board of Directors and
Chief Executive Officer of Porcher Industries from 1952 to 1998. Porcher
Industries owns 51.0% of Advanced Glassfiber Yarns. Mr. Robert Porcher
beneficially owns 54% of the outstanding capital stock of Porcher Industries.
Since December 9, 1998, Mr. Porcher has served as the Chairman of the
Supervisory Board of Porcher Industries.
Robert Pistole has been our President since the departure of Robert Fisher in
January 2000. Prior to joining us, Mr. Pistole was a retiree from Owens Corning
where he held a number of different positions since 1963. These positions
included Vice President of Operations for Composites from 1994 to 1997, Vice
President of Operations for the Industrial Material Group from 1989 to 1994 and
Vice President of Engineering from 1986 to 1989.
Catherine Cuisson is our Vice President and Chief Financial Officer. Prior to
the formation transactions, Ms. Cuisson served as Controller of Porcher
Industries since November, 1994. Prior to joining Porcher Industries, Ms.
Cuisson had served as a financial auditor with Coopers & Lybrand L.L.P. since
1987. Ms. Cuisson obtained the equivalent of a certified public accountancy
degree upon graduating from the Institut Commercial de Nancy in Nancy, France.
Heinz J. Otto is a Director. Mr. Otto has been President of Owens Corning's
Composites Division since 1996. Mr. Otto previously managed the European
operations of Landis & Gyr Corp., a Swiss corporation, and served on its
Executive Board since 1992. Prior to joining Landis & Gyr, Mr. Otto held various
management positions with General Electric Company.
Serge Piolat is a Director. Since December 9, 1998, Mr. Piolat has served as
Vice Chairman of the Executive Board and Chief Operating Officer of Porcher
Industries. Mr Piolat previously managed different divisions of the Porcher
Group since 1989.
Philipe Porcher is a Director. Since December 9, 1998, Mr. Philipe Porcher has
been the Chairman of the Executive Board and Chief Executive Officer of Porcher
Industries. Previously, Mr. Philipe Porcher had been the Vice-Chairman of
Porcher Industries since March 1993 and also served as the Manager of the
technical textile division of the Porcher Group. Mr. Philipe Porcher is the son
of Mr. Robert Porcher, our Chairman of the Board and a Director.
Michael H. Thaman is a Director. Mr. Thaman has been Senior Vice President and
Chief Financial Officer of Owens Corning since April 2000. Mr. Thaman had
previously served in various
19
other management positions with Owens Corning since 1992. Prior to joining Owens
Corning, Mr. Thaman spent six years as a strategy consultant at Mercer
Management Consulting, where he was a vice president in their New York office.
Item 11. Executive Compensation
The following table sets forth information concerning the compensation of our
Chief Executive Officer and our two other most highly compensated executives
during 2000:
Other
Name and Principal Position Salary (1) Bonus Compensation
--------------------------- ---------- ----- ------------
Robert Porcher
Chief Executive Officer
2000 - - -
1999 - - -
Robert Pistole (2)
President
2000 $ 200,000 $ 100,000 $ 17,500
1999 - - -
Catherine Cuisson
Vice President and
Chief Financial Officer
2000 $ 115,000 $ 33,250 -
1999 $ 111,250 $ 13,750 -
- --------------------------------------------------------------------------------
_____________________
(1) Includes amounts earned in the indicated period that were paid in the
following period.
(2) Amount shown in the table consist of compensation earned by Mr. Pistole from
May 2000, the date on which Mr. Pistole became our full-time President, until
December 31, 2000. From January 10, 2000 until May 2000 we paid Mr. Pistole
$161,449 in consulting fees to perform the role of interim President.
Mr. Pistole entered into an employment contract with us in May 2000, pursuant to
which Mr. Pistole agreed to serve as our President until at least December 31,
2002. This contract provides for a minimum annual base salary at the rate of
$300,000 for Mr. Pistole. The minimum annual base salary may be increased by the
Board of Directors. Mr Pistole's employment contract includes provisions
restricting him from competing with us during employment and, except in certain
circumstances, for a limited period of time after termination of employment. In
addition, Mr. Pistole's employment contract provides for severance payments in
the event of termination by us without cause equal to the officer's base salary
at the rate then in effect for one year from the date of termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding each person or entity that
beneficially owns more than a 5% ownership interest in Advanced Glassfiber
Yarns. Each indicated entity has sole voting and investment power with respect
to its respective ownership interest.
Name of Beneficial Owner Ownership Interest
------------------------ ------------------
AGY Holdings, Inc. (1) 51.0%
Jefferson Holdings, Inc. (2) 49.0%
____________
(1) Address is c/o BGF Industries, Inc., 3802 Robert Porcher Way, Greensboro,
North Carolina 27510. Porcher Industries owns 100% of the outstanding
capital stock of Glass Holdings Corp., which owns 100% of the outstanding
capital stock of AGY Holdings, Inc., which is the record holder of a 51.0%
ownership interest in Advanced Glassfiber Yarns. Mr. Robert Porcher owns
54.0% of the outstanding capital stock of Porcher Industries.
(2) Address is One Owens Corning Parkway, Toledo, Ohio 43659-0001. Owens
Corning owns 100% of the outstanding capital stock of Jefferson Holdings,
Inc., which is the record holder of a 49.0% ownership interest
20
in Advanced Glassfiber Yarns.
Item 13. Certain Relationships and Related Transactions
Prior to the formation of Advanced Glassfiber Yarns, many of the components of
the Glass Yarns and Specialty Materials Business were owned, leased or otherwise
controlled by Owens Corning. These components include, among others,
manufacturing facilities and equipment, employees trained in the use and repair
of the equipment, access to raw materials, intellectual property rights and
know-how and agreements with sales representatives worldwide.
In connection with the formation transactions, we entered into agreements with
Owens Corning and Porcher Industries and their respective affiliates to
facilitate our continuing operation. These agreements are intended to benefit us
and the other parties. However, they may result in conflicts of interest between
us and these related parties. The following are summaries of these agreements
and, as such, are qualified in their entirety by reference to the full text of
the related agreements. Unless otherwise indicated, all agreements referred to
in this section were dated September 30, 1998.
On October 5, 2000, Owens Corning and certain of its United States subsidiaries
(collectively, the "Debtors") filed voluntary petitions with the United States
Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of
the United States Bankruptcy Code. According to filings made by Owens Corning
with the SEC, the Debtors will continue to manage their properties and operate
their businesses as "debtors-in-possession" in accordance with the applicable
provisions of the United States Bankruptcy Code. To date, we have not
experienced interruptions in operations or supply of material. Although no
assurances can be provided, we do not believe that Owens Corning's bankruptcy
will have a material adverse effect on our business, financial condition or
results of operations. However, this forward-looking statement is subject to
risks and uncertainties that exist in our operations and our business
environment. See "--Cautionary Statement Regarding Forward-Looking Statements."
LLC Purchase Agreement
Pursuant to an LLC purchase agreement, Porcher Industries purchased a 51.0%
interest in Advanced Glassfiber Yarns. The LLC purchase agreement required us to
enter into the supply agreements described below relating to the conduct of our
business with Owens Corning, Porcher Industries and their respective affiliates.
The LLC purchase agreement also requires each of Owens Corning and Porcher
Industries to indemnify the other from any and all losses which arise out of the
breach by the other party of any of its representations and warranties or any of
its covenants contained in the LLC purchase agreement.
Non-Competition
Pursuant to a non-compete agreement, Owens Corning and Porcher Industries and
their respective affiliates agreed not to compete with us in the manufacture and
sale of particular glass yarns and specialty materials that we currently
produce. Owens Corning and Porcher Industries and their respective affiliates
generally may not manufacture or sell, among other things, such business
products, for the later of a five-year period beginning on September 30, 1998 or
any date on which either Owens Corning or Porcher Industries owns less than a 5%
ownership interest in us. Owens Corning and its affiliates have retained the
right to manufacture limited types of glass yarns.
Employee Benefits
During 1999, Owens Corning permitted our employees, including our employees who
were employed by Owens Corning before September 30, 1998 ("transferred
employees"), to become or remain as participants in, be covered by, or accrue
benefits under certain Owens Corning employee benefit plans. We reimbursed Owens
Corning specified amounts or, in some instances, Owens Corning's costs for this
coverage. These arrangements with Owens Corning terminated as of December 31,
1999. We also became a participating employer in the two Owens Corning 401(k)
Plans. We did not sponsor our own defined benefit pension plan in 1999. However,
we paid Owens Corning specified amounts per employee who accrued benefits under
the Owens Corning Merged Retirement Plan (the "OC Plan"). We also agreed to pay
amounts associated with early retirement benefits under the OC Plan.
Specifically, transferred employees who, as of September 30, 1998, did not
qualify for the early retirement benefit under the OC Plan would continue to
receive credit toward eligibility for the early retirement benefit for service
with us. If a
21
transferred employee remained employed by us until he qualifies for early
retirement, the OC Plan treated the transferred employee as having elected early
retirement upon retirement from us. We are obligated to pay Owens Corning the
difference between the lump sum benefit payable to the transferred employee as
an early retiree and the lump sum benefit payable to the transferred employee as
a deferred vested benefit on the date of retirement from us under the applicable
provisions of the OC Plan. These liabilities were estimated to be $5.1 million
on the date of the formation transactions.
We established our own 401(k) Plan effective January 1, 2000 covering all
eligible employees. There is a defined contribution retirement account within
this plan, which includes self-directed investments into various investment
vehicles. Effective January 1, 2000, we adopted health care and life insurance
benefit plans for certain retired employees and their dependents. The terms of
this plan are substantially the same as the Owens Corning Plan.
In connection with the formation transactions, we assumed, and currently remain
responsible for, the liabilities for post-retirement medical and life insurance
benefits with respect to transferred employees. These liabilities were estimated
to be $12.0 million on the date of the formation transactions.
Facilities Arrangements at Aiken
Prior to the formation transactions, Owens Corning's glass yarn and glass mat
factories, located in adjacent plants in Aiken, South Carolina, shared a number
of facilities and services. As part of the formation transactions, Owens Corning
transferred to us its glass yarn plant in Aiken, while retaining ownership of
the glass mat plant. In order to preserve the efficiencies and cost savings
created by the sharing arrangements in existence before the formation
transactions, we and Owens Corning have entered into the agreements described
below.
Aiken Sewer Agreement. We entered into a sanitary sewer agreement pursuant to
which we permit Owens Corning to use our sanitary system in Aiken for sanitary
wastewater discharges in exchange for the payment by Owens Corning of 50% of the
actual costs of maintaining our sanitary system. The sanitary sewer agreement
will terminate after a period of ten years, unless extended or otherwise
terminated as set forth therein.
Aiken Wastewater Treatment Agreement. We entered into a wastewater treatment
agreement pursuant to which we treat at our wastewater treatment facility in
Aiken aqueous industrial and laboratory waste discharged by Owens Corning. In
exchange for such services, Owens Corning pays an allocated portion of our
actual costs of operating the wastewater treatment facility. The wastewater
treatment agreement will terminate after a period of ten years, unless extended
or otherwise terminated as set forth therein.
Aiken Stormwater Agreements. We entered into various stormwater agreements
pursuant to which:
. we permit Owens Corning to discharge stormwater into our two stormwater
ponds; and
. Owens Corning permits us to discharge stormwater into Owens Corning's
landfill sedimentation basin in Aiken.
Each party is individually responsible for any sampling and for complying with
their respective stormwater permits. The stormwater agreements will terminate
after a period of ten years, unless extended or otherwise terminated as set
forth therein.
Aiken Landfill Agreement. We entered into a landfill agreement pursuant to which
Owens Corning permits us to use Owens Corning's landfill in Aiken for the
disposal of waste in exchange for an allocated portion of the actual costs of
operating the landfill. The landfill agreement is effective for the operating
life of the landfill, unless earlier terminated as set forth therein.
Facilities Arrangements at Huntingdon
Huntingdon Lease. Owens Corning leases from us approximately 89,818 square feet
of our facility in Huntingdon, Pennsylvania for use as a glass mat manufacturing
and distribution facility. The lease will expire on September 30, 2003, unless
extended or terminated as provided in the lease agreement. Owens Corning pays a
nominal fixed fee for the term of the lease plus its allocated share of all
building operating expenses, as calculated in the lease
22
agreement.
Huntingdon Air Modeling Agreement. Prior to the formation transactions, Owens
Corning treated its glass yarn and glass mat manufacturing operations in
Huntingdon as a single facility for environmental compliance purposes. As part
of the formation transactions, Owens Corning transferred to us the entire
facility in Huntingdon, a portion of which it leases back from us. In order to
maintain continuity in complying with air emission modeling requirements under
applicable environmental laws, we entered into an air modeling agreement
pursuant to which the parties will treat their respective facilities in
Huntingdon, including the portion leased to Owens Corning, as a single facility
for modeling current and/or projected air emissions. Although we have agreed to
share the costs of the modeling, each party remains solely responsible for its
own environmental liabilities, if any. The air modeling agreement will terminate
after a period of five years, unless extended or otherwise terminated as set
forth therein.
Subleases Relating to Equipment at Aiken and Huntingdon
Prior to the formation transactions, Owens Corning leased equipment used in the
manufacturing of glass yarns at its Aiken and Huntingdon facilities. Owens
Corning agreed to sublease this equipment to us on substantially the same
economic terms as provided to Owens Corning in the original leases.
At our Aiken facility, we sublease from Owens Corning, pursuant to Owens
Corning's master leases, some manufacturing equipment owned by Carly 1995
Leasing Trust and a vacuum treatment oven owned by Pitney Bowes Credit
Corporation. We sublease other manufacturing equipment from Owens Corning at its
Aiken and Huntingdon facilities pursuant to Owens Corning's master lease with
John Hancock Mutual Life Insurance Company. Specific terms of these subleases
are described below. If any of the master leases are terminated, all of our
rights under the related subleases will also terminate.
Our sublease with Owens Corning relating to the Carly lease was due to expire on
December 28, 2000. The sublease generally provides that we may purchase the
equipment at the termination of the sublease. The purchase of this equipment and
the resolution of the accrued lease payments is pending approval of the court
overseeing the Owens Corning bankruptcy proceeding. We paid Owens Corning
$325,000 pursuant to this sublease during 2000. We have accrued an additional
expense of $106,000.
The initial term of our sublease with Owens Corning relating to the Pitney
Bowes/John Hancock lease ends on March 31, 2001, but may be extended for up to
two additional years unless Owens Corning exercises its right to terminate the
sublease. The sublease generally provides that we may purchase the vacuum
treatment oven at the termination of the sublease. In 2000, we paid Owens
Corning $1,325,000 and accrued an additional expense of $442,000 pursuant to
this sublease.
Services Agreements
We have entered into several agreements pursuant to which Owens Corning performs
services for us that are important to the success of our operations. Some of
these services agreements continued for a short time until we hired and trained
our own personnel, while others are intended to continue for a longer duration.
These service agreements, which are described more fully below, provide for the
fabrication and repair of equipment, engineering and technical services, sales
agency agreements in Europe and administrative and information systems services.
In addition to the services provided by Owens Corning, we perform manufacturing
and distribution services for Owens Corning at the Huntingdon facility, where
Owens Corning continues to have operations.
Alloy Services Agreement. We entered into an alloy services agreement pursuant
to which Owens Corning provides, at prices to be determined annually, services
relating to the alloying, fabrication and repair of bushings, thermocouples and
glass melter parts constructed from metal alloys. We have generally agreed to
use Owens Corning exclusively for these services. Owens Corning has also agreed
to manage our inventory of industrial precious metals and metal alloys and to
lease to us metal alloys for use in bushings, thermocouples and glass melter
parts at prices determined according to the formula set forth in the alloy
services agreement. This agreement will terminate on December 31, 2005, unless
extended or otherwise terminated. We paid Owens Corning $4.0 million for the
refurbishing of bushings during 2000.
23
Support Services Agreement. We entered into a support services agreement
pursuant to which Owens Corning provides engineering, design and technical
services to us at previously agreed upon prices for a five-year period. The
support services agreement will be automatically extended each year for an
additional one-year term until terminated.
Transitional Services Agreement. We entered into a transitional services
agreement pursuant to which Owens Corning provides corporate, administrative and
information systems services to us at mutually agreed upon prices. The provision
of payroll and selected administration functions expired on December 31, 2000.
The provision of all other services provided for in the transitional services
agreement expired on December 31, 1999 or earlier.
Manufacturing Services Agreement. We entered into a manufacturing services
agreement pursuant to which we provide manufacturing services to Owens Corning
to support their glass mat manufacturing and distribution business in
Huntingdon. Owens Corning pays a monthly fee for our provision of manufacturing,
management and ancillary services and pays additional fees in exchange for our
provision of other services that may be requested by Owens Corning. The
manufacturing services agreement will expire whenever Owens Corning or any of
its affiliates no longer owns a 49.0% ownership interest in us, unless earlier
terminated.
Supply Agreements
Prior to the formation transactions, Owens Corning obtained raw materials from
its affiliates or through third party suppliers. We have entered into supply
agreements, more fully described below, which provide us with access to the
necessary raw materials through Owens Corning's affiliated and non-affiliated
suppliers. In addition, pursuant to the agreements described below, we purchased
assets of the glass yarns business of several of Owens Corning's non-U.S.
affiliates. We also agreed to sell byproducts of one of its manufacturing
processes to Owens Corning.
Byproducts Supply Agreement. We entered into a supply agreement pursuant to
which Owens Corning will purchase the first 10 million pounds of byproducts of
our manufacturing processes called dry chopped yarn and slit hanks, also known
as "sliver," that we produce each year. Each year, Owens Corning will pay a
fixed price per pound for the first 10 million pounds of byproducts and a higher
fixed price for any additional amounts shipped by us. We are under no obligation
to manufacture any specified quantity of the byproducts to supply to Owens
Corning. The byproducts supply agreement will expire on December 31, 2003, after
which it may be renewed for additional five-year terms, unless canceled by
either party.
Borates Supply Agreement. Prior to the formation transactions, Owens Corning
entered into an agreement with Etibank, a supplier of borates in Turkey that is
owned by the Turkish government, pursuant to which Etibank mines, processes,
sells and delivers borates to Owens Corning for use in manufacturing glass
yarns. We entered into a borates supply agreement pursuant to which we purchase
borates from Owens Corning at a price equal to Owens Corning's cost to purchase,
transport and process borates plus a $150,000 annual administrative charge. The
borates supply agreement will terminate on December 31, 2005, after which it
will automatically renew for a period equal to any renewal period in Owens
Corning's supply agreement with Etibank, unless canceled by either party upon 90
days' advance notice.
OC Belgium Agreements. We and N.V. Owens Corning S.A., a wholly owned subsidiary
of Owens Corning ("OC Belgium"), entered into a supply agreement in 1998
pursuant to which we purchase at previously determined prices fiberglass yarns
to be manufactured by OC Belgium at its facility in Battice, Belgium. We also
have the option to acquire the Battice plant's fiberglass yarns manufacturing
equipment upon the termination of the agreement or at the time Owens Corning no
longer uses this equipment to produce fiberglass yarns. The supply agreement
with OC Belgium will terminate on December 31, 2003, after which it may be
renewed for additional one-year terms, unless canceled by either party. In
addition, we have an exclusive right to terminate this agreement effective
December 31, 2001 upon one year's prior notice.
We and OC Belgium also entered into a purchase agreement in 1998 pursuant to
which we purchased OC Belgium's list of customers that purchase heavy glass
yarns from OC Belgium, transferable contracts between OC Belgium and its
customers, the finished products inventory of heavy glass yarns owned by OC
Belgium that were located in its public warehouse in Antwerp, Belgium, and all
of OC Belgium's accounts receivable arising exclusively out of the sale of heavy
glass yarns by OC Belgium.
24
OC Canada Agreements. Our Canadian subsidiary and Owens-Corning Canada, Inc., a
wholly owned subsidiary of Owens Corning ("OC Canada"), entered into a supply
agreement pursuant to which we purchase at previously determined prices minimum
and maximum quantities of fiberglass yarns to be manufactured by OC Canada at
its facility in Guelph, Canada. This agreement was terminated by mutual
agreement in 1999.
Our Canadian subsidiary and OC Canada also entered into a purchase agreement in
1998 pursuant to which we purchased OC Canada's list of customers which purchase
heavy glass yarns from OC Canada, transferable contracts between OC Canada and
its customers, and all of OC Canada's accounts receivable arising exclusively
out of the sale of heavy glass yarns by OC Canada.
OC Japan Agreement. We and Owens Corning (Japan) Ltd., a wholly owned subsidiary
of Owens Corning ("OC Japan"), entered into a purchase agreement in 1998
pursuant to which we purchased OC Japan's list of customers which purchase glass
yarns from OC Japan, various transferable contracts between OC Japan, its
customers, all of OC Japan's accounts receivable arising exclusively out of the
sale of glass yarns by OC Japan, and the finished products inventory of glass
yarns owned by OC Japan that were located in its warehouses in Tokyo and Osaka,
Japan. This agreement expired on December 31, 1999 and was not renewed.
Low Tex Type 30 Agreement. We and Owens Corning entered into a supply agreement
on May 17, 2000 pursuant to which we will purchase for distribution of Type 30
fiberglass roving products having a bare glass linear density of 200 to 480
grams per 1000 meters. These rovings are to be manufactured by OC Brazil at its
plant in Rio Claro, Brazil and by OC France at its plant in L'Ardoise, France.
Glass Marbles Supply Agreement. We entered into a glass marbles supply agreement
pursuant to which we purchase exclusively from Owens Corning at mutually
determined prices all of our requirements for glass marbles for use in our glass
yarns business. Owens Corning has agreed not to supply glass marbles to any
third party for use in the manufacturing of glass yarns. We have the option to
acquire Owens Corning's glass marbles manufacturing equipment upon the
termination of the agreement or at the time Owens Corning no longer uses this
equipment to produce glass marbles. The glass marbles supply agreement will
expire on December 31, 2005, after which it may be renewed for additional
five-year terms by either party, unless terminated by us upon two years' prior
notice. We purchased $5.2 million of glass marbles during 2000 from Owens
Corning.
Co-location Arrangement with BGF Industries in South Hill, Virginia
Prior to the formation transactions, Owens Corning entered into a co-location
arrangement with BGF Industries in South Hill, Virginia. As a result of the
formation transactions, we have succeeded to Owens Corning's rights and
obligations under the co-location arrangement. As part of the arrangement, we
lease approximately 27,200 square feet of segregated space within BGF
Industries' recently built multi-layer plant for the purpose of manufacturing
fiberglass yarn for sale to BGF Industries pursuant to a 10-year renewable
supply contract. We paid BGF Industries approximately $0.7 million pursuant to
this co-location arrangement during 2000. Also as part of the co-location
arrangement, we lease from BGF Industries manpower at an hourly job rate per
employee and BGF Industries provides technical, quality control and improvement
and other non-managerial services at previously determined rates. The employee
leasing and services contracts end upon the termination of either the premises
lease or the supply contract. The parties also have agreed to confidentiality
and disclosure obligations in connection with the co-location arrangement.
25
Intellectual Property
In connection with the formation transactions, Owens-Corning Fiberglas
Technology, Inc., a wholly owned subsidiary of Owens Corning, assigned to us
patents, know-how, trademarks and business information, relating to or used in
our business. Owens Corning has also licensed to us additional intellectual
property assets and rights, mainly patents and know-how, pursuant to a patent
and know-how license agreement and related agreements (collectively, the "Master
License"). The Master License grants to us a worldwide, paid-up and royalty-free
license to make, have made, use, sell, import and offer to sell glass fiber
yarns and specialty products. The license is exclusive for the duration of the
non-compete agreement between Owens Corning and us with respect to various
products and non-exclusive with respect to others, and we have limited
sublicensing rights. The patent license included in the Master License is for
the life of the patent, while the know-how license is perpetual. The patent and
know-how licenses are terminable only upon the occurrence of specified events.
The Master License also includes a grant-back license pursuant to which Owens
Corning may manufacture, import and sell a very limited class of yarn products
under our patents and know how. This grant-back license does not include those
products which Owens Corning is prohibited from selling for the duration of the
non-compete agreement. The Master License further provides that Owens Corning
has agreed to render to us, upon request and on terms to be agreed upon, a very
limited class of services relating to our manufacture of glass yarn products.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Incorporated by Reference or Filed with this Report:
1. FINANCIAL STATEMENTS
See Index on page F-1.
2. FINANCIAL STATEMENT SCHEDULES
See Index on page F-1.
3. EXHIBITS
Ex. Description
--- -----------
2.1(1) Amended and Restated Asset Contribution Agreement dated as of
July 31, 1998 between Owens Corning and Lincoln Yarns LLC
2.2(1) LLC Interest Sale and Purchase Agreement dated as of July 31,
1998 among Owens Corning, Lincoln Yarns LLC and Glass Holdings
Corp.
2.3(1) Amendment No. 1 to LLC Interest Sale and Purchase Agreement
dated as of September 30, 1998 among Owens Corning, Advanced
Glassfiber Yarns LLC and AGY Holdings, Inc.
3.1(1) Certificate of Formation of Advanced Glassfiber Yarns LLC
3.2(1) Advanced Glassfiber Yarns LLC Amended and Restated Limited
Liability Company Operating Agreement between Jefferson
Holdings, Inc. and AGY Holdings, Inc. dated as of September 30,
1998
3.3(1) Certificate of Incorporation of AGY Capital Corp.
3.4(1) Bylaws of AGY Capital Corp.
4.1(1) Indenture, dated as of January 21, 1999, among Advanced
Glassfiber Yarns LLC, AGY Capital Corp., the Guarantors and
Bank of New York, as trustee, relating to $150 million
principal amount of 9 7/8% Senior Subordinated Notes due 2009.
4.2(1) Form of 9 7/8% Series A and Series B Senior Subordinated Notes
due 2009 (included in Exhibit 4.1)
4.3(1) Registration Rights Agreement dated as of January 21, 1999
among Advanced Glassfiber Yarns LLC, AGY Capital Corp. and the
Initial Purchasers
10.1(1) Patent and Know How License Agreement dated as of September 30,
1998 among Owens Corning Fiberglas Technology, Inc., Owens
Corning and Advanced Glassfiber Yarns LLC
10.2(1) Glass Marbles Supply Agreement dated as of September 30, 1998
between Owens Corning and Advanced Glassfiber Yarns LLC
10.3(1) Alloy Services Agreement dated as of September 30, 1998 between
Advanced Glassfiber Yarns LLC and Owens Corning
10.4(1) Non-Compete Agreement dated as of September 30, 1998 among
Owens Corning, AGY Holdings Corp., Porcher Industries, S.A. and
Advanced Glassfiber Yarns LLC
10.5(1) Manufacturing Services Agreement dated as of September 30, 1998
between Owens Corning and Advanced Glassfiber Yarns LLC
10.6(1) Trademark Assignment Agreement dated as of September 30, 1998
by Owens Corning Fiberglas Technology, Inc. and Owens Corning
in favor of Advanced Glassfiber Yarns LLC
10.7(1) Master Patent and Know How Assignment Agreement dated as of
September 30, 1998 by Owens Corning Fiberglas Technology, Inc.,
Owens Corning and Advanced Glassfiber Yarns LLC
10.8(1) Borates Supply Agreement dated as of September 30, 1998 between
Owens Corning and Advanced Glassfiber Yarns LLC
10.9(1) Transitional Services Agreement dated as of September 30, 1998
by and among Owens Corning and Advanced Glassfiber Yarns LLC
10.10(1) Support Services Agreement dated as of September 30, 1998
between Advanced Glassfiber Yarns LLC and Owens Corning
10.11(1) Software License Agreement dated as of September 30, 1998
between Owens Corning and Advanced Glassfiber Yarns LLC
27
10.12(1) Keep-Well Agreement dated as of September 30, 1998 between Owens
Corning and Advanced Glassfiber Yarns LLC
10.13(1) Senior Credit Agreement dated as of September 30, 1998 among
Advanced Glassfiber Yarns LLC,
the Guarantors, First Union National Bank, as agent and lender, and
certain other lenders
10.14(1) Senior Subordinated Credit Agreement dated as of September 30, 1998
among Advanced Glassfiber Yarns LLC, the Guarantors, First Union
Investors, Inc., as co-agent and lender, and Warburg Dillon Read
LLC, as co-agent and lender
10.15(1) Note Purchase Agreement dated January 21, 1999 among Advanced
Glassfiber Yarns LLC, AGY Capital Corp. and the Initial Purchasers
10.16(2) Syndication Amendment and Assignment dated as of November 30, 1998
among Advanced Glassfiber Yarns LLC, the Guarantors, First Union
National Bank, as agent and lender, and certain other lenders.
10.17(2) Second Amendment to Credit Agreement dated as of December 16, 1999
among Advanced Glassfiber Yarns LLC, the Guarantors, First Union
National Bank, as agent and lender, and certain other lenders.
10.18 Employment Agreement dated as of June 12, 2000 between Advanced
Glassfiber Yarns LLC and Robert G. Pistole.
12 Statement of Computation of Ratios
21(1) Subsidiaries of the Registrant
99 Reconciliation of Net Income to EBITDA
___________
(1) Filed as part of our Registration Statement (333-72305) filed with the SEC
and incorporated herein by reference.
(2) Filed as part of our Annual Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the fourth quarter of
the fiscal year ending December 31, 2000.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Aiken, State of South Carolina, on April 2, 2001.
ADVANCED GLASSFIBER YARNS LLC
By /S/ CATHERINE CUISSON
---------------------
Catherine Cuisson
Chief Financial Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this annual report on Form 10-K has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Robert Porcher Chief Executive Officer and April 2, 2001
- --------------------- Chairman of the Board
Robert Porcher of Directors
/s/ Heinz J. Otto Director April 2, 2001
- ---------------------
Heinz J. Otto
/s/ Serge Piolat Director April 2, 2001
- ---------------------
Serge Piolat
/s/ Philippe Porcher Director April 2, 2001
- ---------------------
Philippe Porcher
/s/ Michael H. Thaman Director April 2, 2001
- ---------------------
Michael H. Thaman
/s/ Robert G. Pistole President April 2, 2001
- ---------------------
Robert G. Pistole
/s/ Catherine Cuisson Vice President and April 2, 2001
- --------------------- Chief Financial Officer
Catherine Cuisson (Principal Financial and
Accounting Officer)
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Aiken, State of South Carolina, on April 2, 2001.
AGY CAPITAL CORP.
By /s/ Catherine Cuisson
---------------------------
Catherine Cuisson
Chief Financial Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this annual report on Form 10-K has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Robert Porcher Chief Executive Officer and April 2, 2001
- ------------------------- Chairman of the Board
Robert Porcher of Directors
/s/ Heinz J. Otto Director April 2, 2001
- -------------------------
Heinz J. Otto
/s/ Serge Piolat Director April 2, 2001
- -------------------------
Serge Piolat
/s/ Philippe Porcher Director April 2, 2001
- -------------------------
Philippe Porcher
/s/ Michael H. Thaman Director April 2, 2001
- -------------------------
Michael H. Thaman
/s/ Robert G. Pistole President April 2, 2001
- -------------------------
Robert G. Pistole
/s/ Catherine Cuisson Vice President and April 2, 2001
- ------------------------- Chief Financial Officer
Catherine Cuisson (Principal Financial and
Accounting Officer)
30
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Material Business)
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended December 31, 2000 and 1999, and the periods October 1,
1998 to December 31, 1998 and January 1, 1998 to September 30, 1998 F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2000 and 1999, and the periods
October 1, 1998 to December 31, 1998 and January 1, 1998 to September 30, 1998 F-5
Consolidated Statements of Cash Flows for years ended December 31, 2000 and 1999 and the periods, October 1,
1998 to December 31, 1998 and January 1, 1998 to September 30, 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Advanced Glassfiber Yarns LLC:
We have audited the accompanying consolidated balance sheets of Advanced
Glassfiber Yarns LLC and subsidiaries ("AGY" or "the Consolidated Company") as
of December 31, 2000 and December 31, 1999 and the related statements of
operations, of comprehensive income and of cash flows for the years ending
December 31, 2000 and 1999 and for the period from October 1, 1998 to December
31, 1998. We have also audited the statements of operations, of comprehensive
income and of cash flows of the Predecessor Business (as described in Note 1)
for the period from January 1, 1998 to September 30, 1998. These financial
statements are the responsibility of the Company's and the Predecessor Business'
management, respectively. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
The financial statements for the periods ended prior to October 1, 1998 do not
reflect the new basis of accounting established by the acquisition of the 51.0%
interest in the Predecessor Business as described in Note 1, and are presented
on the historical cost basis existing prior to the acquisition period.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AGY as of December 31, 2000 and
1999 and the results of their operations and of their cash flows for the years
ended December 31, 2000 and 1999, and for the period from October 1, 1998 to
December 31, 1998 and the results of operations and cash flows of the
Predecessor Business for the period from January 1, 1998 to September 30, 1998,
in conformity with accounting principles generally accepted in the United States
of America.
PRICEWATERHOUSECOOPERS LLP
February 16, 2001
F-2
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31, December 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,054 $ 6,223
Trade accounts receivable less allowance of $1,770 and $3,200 respectively 29,981 33,460
Inventories (Note 3) 25,011 26,813
Other current assets 5,947 645
---------- ---------
Total current assets 64,993 67,141
---------- ---------
Net property, plant and equipment (Note 4) 148,438 151,605
Intangible assets, net (Note 5) 222,578 235,670
---------- ---------
Total assets $ 436,009 $ 454,416
========== =========
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable $ 29,181 $ 26,412
Accrued liabilities (Note 6) 23,863 24,303
Current portion of long-term debt (Note 7) 14,670 18,390
---------- ---------
Total current liabilities 67,714 69,105
---------- ---------
Long-term debt, net of discount of $2,616 and $2,819, respectively (Note 7) 314,916 341,465
Deferred distribution (Note 17) 6,681 1,819
Pension and other employee benefit plans (Note 10) 22,947 21,796
---------- ---------
Total liabilities 412,258 434,185
---------- ---------
Commitments and contingencies (Note 19) - -
Members' interest (Note 8 and 17) 23,751 20,231
---------- ---------
Total liabilities and members' interest $ 436,009 $ 454,416
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Consolidated Company Predecessor Business
--------------------------------------- ----------------------
For the Year Three Months Nine Months
Ended December 31, Ended Ended
2000 1999 December 31, 1998 September 30, 1998
---- ---- ----------------- ------------------
Net sales (Note 15) $ 278,288 $ 252,236 $ 63,403 $ 205,248
Cost of goods sold 203,726 183,138 43,494 134,820
--------- --------- --------- ---------
Gross profit 74,562 69,098 19,909 70,428
Selling, general and administrative
expenses 16,407 16,812 4,123 11,487
Amortization 11,420 11,611 2,848 -
Restructuring cost - 290 - 2,034
--------- --------- --------- ---------
Operating income 46,735 40,385 12,938 56,907
Interest expense (Note 13) 35,449 36,824 9,113 -
Other income (900) (2,235) (450) (2,328)
--------- --------- --------- ---------
Income before provision for income
taxes and extraordinary item 12,186 5,796 4,275 59,235
Income tax expense (Note 14) 93 190 - 16,226
--------- --------- --------- ---------
Income before extraordinary item 12,093 5,606 4,275 43,009
Extraordinary item, loss on early
extinguishment of debt (Note 7) - 3,616 - -
--------- --------- --------- ---------
Net income $ 12,093 $ 1,990 $ 4,275 $ 43,009
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Consolidated Company Predecessor Business
---------------------------------------- -------------------------
For the Year Three Months Nine Months
Ended December 31, Ended Ended
2000 1999 December 31, 1998 September 30, 1998
---- ---- ----------------- ------------------
Net income $ 12,093 $ 1,990 $ 4,275 $ 43,009
Other comprehensive income (loss):
Foreign currency translation (31) 199 (1) 539
--------- -------- -------- ---------
Comprehensive income $ 12,062 $ 2,189 $ 4,274 $ 43,548
========= ======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Consolidated Company Predecessor Business
--------------------------------------- --------------------
For the Year Three Months Nine Months
Ended December 31, Ended Ended
------------------ December 31 September 30,*
2000 1999 1998 1998
---- ---- ---- ----
Cash flows from operating activities:
Net income $ 12,093 $ 1,990 $ 4,275 $ 43,009
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 14,573 12,376 2,753 6,394
Amortization of debt issuance costs 1,747 1,795 374 -
Amortization of goodwill and other intangibles 11,420 11,611 2,848 -
Amortization of discount on notes 204 181 - -
Inventory noncash change - - 1,321 -
Deferred income tax credit - - - (841)
Extraordinary loss - 3,616 - -
Alloy depletion 1,224 2,254 613 2,499
Changes in assets and liabilities: -
Trade accounts receivable, net 3,450 (739) (478) (13,788)
Inventories 1,802 (2,108) (2,489) (3,591)
Other assets (5,306) 186 (34) (278)
Accounts payable 5,385 17,679 6,486 (468)
Accrued liabilities 500 6,550 2,250 702
Pension and post-retirement 1,151 3,796 900 1,912
Income taxes payable - - - (7,112)
---------- ----------- ----------- -----------
Net cash provided by operating activities 48,243 59,187 18,819 28,438
---------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (19,760) (15,277) (3,327) (13,509)
Proceeds from sale of fixed assets 3,915 - - -
Other (83) (326) - -
---------- ----------- ----------- -----------
Net cash used in investing activities (15,928) (15,603) (3,327) (13,509)
---------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from (payments on) revolving credit facility, net (200) (5,300) 1,000 14,000
Proceeds from (payments on) bridge facility - (150,000) - 150,000
Payments on capital lease (92) (100) - -
Proceeds from senior subordinated notes - 147,000 - -
Repayment to members - - (525) -
Proceeds from (payments on) term loans (30,179) (34,125) (3,187) 240,000
Distribution to Porcher Industries - - - (203,624)
Distribution to Owens Corning (3,979) (1,587) - (195,638)
Contribution from Owens Corning - - - 2,250
Net transfers to Owens Corning - - - (14,940)
Debt issuance costs - (6,043) - (6,988)
---------- ----------- ----------- -----------
Net cash used in financing activities (34,450) (50,155) (2,712) (14,940)
---------- ----------- ----------- -----------
Effect of exchange rate on cash (34) 15 (1) 11
---------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (2,169) (6,556) 12,779 -
---------- ----------- ----------- -----------
Cash and cash equivalents, beginning of period 6,223 12,779 - -
---------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 4,054 $ 6,223 $ 12,779 $ -
========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 32,982 $ 27,697 $ 8,929 $ -
========== =========== =========== ===========
Supplemental disclosure of non-cash financing/investing activities:
Capital lease $ - $ - $ 386 $ -
========== =========== =========== ===========
Non-cash contribution to capital $ - $ - $ - $ 87,134
========== =========== =========== ===========
Non-cash disposal of fixed assets $ 630 $ - $ - $ -
========== =========== =========== ===========
Final fixed assets appraisal reclassification $ - $ 4,171 $ - $ -
========== =========== =========== ===========
Step-up of assets from sale of 51% interest $ - $ - $ - $ 267,341
========== =========== =========== ===========
Property and equipment financed in accrueds increase (decrease) $ (2,582) $ 2,765 $ 3,230 $ -
========== =========== =========== ===========
Deferred distribution to Porcher $ 4,357 $ 1,656 $ - $ -
========== =========== =========== ===========
*Includes the financing and distribution transactions described in Note 1.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Advanced Glassfiber Yarns LLC ("AGY" or the "Company") was formed by Owens
Corning to own and operate Owens Corning's Glass Yarns and Specialty Materials
Business (the "Predecessor Business" or the "Company"), which was contributed to
AGY, then a wholly-owned subsidiary of Owens Corning, on July 1, 1998 (the
"Contribution"). On September 30, 1998, Owens Corning sold a 51.0% interest in
AGY to a wholly owned subsidiary of Porcher Industries, S.A. ("Porcher
Industries") for aggregate consideration of $338.9 million (the "Majority
Purchase"). In addition, Porcher Industries paid fees and expenses of
approximately $3.2 million in connection with the Majority Purchase. Therefore,
the total aggregate consideration paid by Porcher Industries for its 51.0%
interest in AGY was $342.1 million. Owens Corning retained a 49.0% interest in
AGY.
Prior to October 1, 1998, the Predecessor Business was managed as an operating
unit of the Composites Systems Business of Owens Corning which provided certain
administrative and operational support. The accompanying financial statements
prior to the Majority Purchase include the cost of the Predecessor Business'
employees and allocations of certain corporate services provided by Owens
Corning. Management, using its experience with the Predecessor Business and its
judgment, allocated approximately $6.2 million of such corporate services and
other support to the Predecessor Business for the nine months ended September
30, 1998. The allocations were made primarily by estimating the proportional
historical cost of various corporate departments and other functions providing
services to the Predecessor Business. The proportions were based primarily upon
estimates of the number of full time equivalent employees rendering service to
the Predecessor Business. Management believes that its methodology is reasonable
and that the costs of the operational and administrative support included in the
accompanying financial statements prior to the Majority Purchase are comparable
to those that the Predecessor Business would have incurred had it operated as a
separate entity.
Concurrently with the Majority Purchase, AGY was recapitalized. AGY borrowed an
aggregate of $404.0 million through a combination of $254.0 million under a
Senior Credit Facility (as defined herein) and $150.0 million under a Senior
Subordinated Credit Facility (the "Subordinated Facility"). AGY used the
proceeds from the initial borrowing under the Senior Credit Facility and
Subordinated Facility plus a $2.2 million contribution from Owens Corning to pay
(i) an aggregate cash distribution of $399.2 million (the "Distribution") to
Owens Corning and Porcher Industries in the amounts of $195.6 million and $203.6
million, respectively, and (ii) approximately $7.0 million in fees and expenses.
The initial borrowings under the Senior Credit Facility and the Subordinated
Facility, and the application of the net proceeds therefrom are collectively
referred to as the "Financings". The Financings, together with the Majority
Purchase, are collectively referred to as the "formation transactions".
In connection with the formation transactions, the net cash outlay by Porcher
Industries was $138.5 million, represented by the $338.9 million paid for the
Majority Purchase plus fees and expenses of $3.2 million less the $203.6 million
cash distribution Porcher Industries received from AGY. The total cash
consideration received by Owens Corning was $532.3 million, comprised of the
$338.9 million paid by Porcher Industries and the $195.6 million cash
distribution received from AGY less a $2.2 million contribution.
The acquisition of the 51.0% interest in AGY by a wholly owned subsidiary of
Porcher Industries was accounted for as a partial purchase business combination
in accordance with the provisions of APB No. 16 "Business Combinations" and EITF
Issue No. 88-16, "Basis in Leveraged Buyout Transactions."
F-7
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Basis of Presentation -- (Continued)
The allocation of the purchase price, as adjusted in 1999 based on final
appraisals, was as follows (in thousands):
Accounts receivable $ 16,411
Inventories 12,645
Property, plant and equipment 88,212
Other assets 407
Identifiable intangibles 22,000
Goodwill 216,611
Accrued liabilities (14,137)
--------
$ 342,149
========
In 1999, the Company received final appraisals on the assets acquired and as a
result a reclassification of $4.2 million was made between property, plant and
equipment and goodwill.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The business is conducted through the Company and
three wholly-owned subsidiaries, AGY Yarns Canada, AGY Capital Corp. and AGY
Europe SARL. Significant intercompany accounts and transactions have been
eliminated. Separate financial statements or condensed consolidating financial
data of the wholly-owned subsidiaries are not presented as management has
determined that they would not be material to the holders of the Company's
Senior Subordinated Notes.
Cash and Cash Equivalents. The Company considers cash on hand, cash deposited in
financial institutions and money market accounts with maturities of less than
ninety days at date of purchase to be cash equivalents. These are stated at cost
which approximates market value.
Inventories. Inventories are stated at the lower of cost or market value and
include material, labor and manufacturing overhead. Cost is determined using the
first-in, first-out (FIFO) method.
Rebuild of Glass Melting Furnaces. Glass melting furnaces periodically require
substantial rebuilding. The time period between rebuilds varies depending upon
the utilization of the furnace. The Company applies the capital method of
accounting for the cost to rebuild glass melting furnaces. Under this method,
costs are capitalized when incurred and depreciated over the estimated useful
lives of the rebuilt furnaces, which is approximately 14 years.
Property, Plant and Equipment. Property, plant and equipment are stated at cost,
less accumulated depreciation. Depreciation of property, plant and equipment is
calculated principally on the straight-line method over the estimated useful
lives of the assets. Repairs and maintenance costs are expensed as incurred;
major replacements and improvements are capitalized. When assets are retired or
sold, the cost and related accumulated depreciation are removed from the
accounts with any resulting gain or loss reflected in operations.
The estimated useful lives of the assets are as follows:
Buildings and leasehold improvements 15-40 Years
Machinery and equipment 5-25 Years
Alloy metals are the primary component of the heat resistant glass forming
bushings in the Company's glass melting furnaces. Molten glass is passed through
the bushings to form glass filaments. During the manufacturing process a small
portion of the alloy metals is physically consumed. The portion of the alloy
metal physically consumed is measured at the time a bushing is reconditioned and
is charged to income. The amount of metal loss and the service
F-8
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies -- (Continued)
life of the bushings are dependent upon a number of factors including the type
of furnace and the product being produced. Based upon historical metal loss, the
Company's alloy metals have a useful life of up to 29 years.
Alloy metals are an integral part of the Company's installed glass melting
furnaces and therefore are classified as property, plant and equipment in the
accompanying financial statements.
Revenue Recognition and Concentration of Credit Risk. Revenues are recognized
when both risk of loss and title to products passes to the customer, which is
typically at shipment. Effective December 31, 2000, the Company adopted the
Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition, as amended, in 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue, including specifying basic
criteria which must be met before revenue can be recognized. The impact of
adopting SAB No. 101 was immaterial.
Two customers accounted for 46% and 47% of the Company's gross accounts
receivable at December 31, 2000 and 1999, respectively. The following table
represents a summary of sales to significant customers as a percentage of the
Company's net sales:
Consolidated Company Predecessor Business
--------------------------------- --------------------
Three Months Nine Months
Ended December 31, Ended Ended
------------------ December 31, September 30,
2000 1999 1998 1998
---- ---- ---- ----
Customer A 25.0% 25.0% 22.0% 19.0%
Customer B 17.0% 16.0% 16.0% 17.0%
---- ---- ---- ----
42.0% 41.0% 38.0% 36.0%
==== ==== ==== ====
Foreign Currency Translation. The assets and liabilities of the Company's
Canadian operations are translated from its functional currency to U.S. dollars
at the year-end exchange rates and income and expenses are translated at the
average exchange rates prevailing during the period.
As of the date of the formation transactions, the European operations of AGY
consisted principally of a distributorship. As of the date of the formation
transactions, the European operations became a direct and integral component of
the U.S. operations and are not a distinct and separate operation.
On June 8, 1999, the Company formed AGY Europe, SARL, a wholly owned subsidiary
located in Lyon, France. This subsidiary provides administrative and managerial
support for the Company's European operations. The assets and liabilities of the
Company's AGY Europe, SARL operations are translated from its functional
currency to U.S. dollars at the year-end exchange rates and income and expenses
are translated at the average exchange rates prevailing during the period.
Prior to the formation transactions, the functional currency of Owens Corning's
European operations was the local currency. Accordingly, assets and liabilities
of the European group were translated at the year-end exchange rates and income
and expenses were translated at the average exchange rates prevailing during the
period.
Adjustments resulting from the translations were recorded as a separate
component of Net Assets/Members' Interest.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial
F-9
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies -- (Continued)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Intangible Assets. Included in intangible assets are goodwill, patents and
trademarks, debt issuance costs and covenant not to compete. Goodwill represents
the excess of cost over the fair value of tangible and intangible assets
acquired. Debt issuance costs are being amortized over the terms of the
respective debt agreements using the interest method (See Note 5).
The Company's policy is to evaluate goodwill and other intangible assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. This evaluation is
based on undiscounted operating cashflows that will result from the use of such
assets. When projected future cashflows on an undiscounted basis are less than
the carrying value of the assets, the impaired assets are written down to net
realizable value. The Company believes there is no impairment at December 31,
2000.
Other Income. Other income includes royalty and interest income, technical
service fees, foreign currency gains and losses, as well as alloy lease income
and expense.
Research and Development. The Company expenses research and development costs as
incurred. These costs were approximately $6.8 million, $7.5 million, $1.7
million and $ 4.2 million for the years ended December 31, 2000 and 1999, and
the periods ended December 31, 1998, and September 30, 1998, respectively.
Impairment of Long-Lived Assets. The Company assesses whether its long lived
assets are impaired as required by SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," based on an
evaluation of undiscounted projected cash flows through the remaining
amortization period. If an impairment exists, the amount of such impairment is
calculated based on the estimated fair value of the asset. The Company believes
there is no impairment at December 31, 2000.
Fair Value of Financial Instruments. The fair value of financial instruments in
the accompanying financial statements approximates the carrying value, unless
otherwise disclosed.
Recently Issued Accounting Standards. In June 1998, the Financial Accounting
Standards Board (the FASB) issued Statement No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), subsequently amended by SFAS No.
137 and SFAS No. 138. SFAS 133 requires the Company to record all derivatives on
the balance sheet at fair value. Changes in derivative fair values will either
be recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a component of other accumulated comprehensive income
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedging derivative's change in fair value will be
immediately recognized in earnings.
The Company will adopt SFAS 133 effective January 1, 2001 and will initially
record a $4.2 million unrealized gain in Other Comprehensive Income as the
cumulative effect of this change in accounting for our interest rate swaps.
For our foreign currency derivatives, the adoption of SFAS 133 will not have a
material impact on the Company's financial position or results of operations.
Reclassification. Certain previously reported amounts have been reclassified to
conform with the current presentation.
F-10
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Inventories
Inventories consist of the following (in thousands):
December 31, December 31,
2000 1999
------------ ------------
Finished goods $ 20,051 $ 21,022
Materials and supplies 4,960 5,791
--------- ---------
Total Inventories $ 25,011 $ 26,813
========= =========
4. Net Property, Plant and Equipment
Net property, plant and equipment consist of the following (in thousands):
December 31, December 31,
2000 1999
------------ ------------
Land $ 827 $ 827
Building and leasehold improvements 26,659 24,840
Machinery and equipment 111,852 95,846
Construction in progress 7,383 12,578
--------- ---------
Gross property, plant and equipment 146,721 134,091
--------- ---------
Less: accumulated depreciation (29,677) (15,104)
Alloy metals 31,394 32,618
--------- ---------
Total Net property, plant and equipment $ 148,438 $ 151,605
========= =========
The Company leases computer equipment under a capital lease agreement. The
carrying value of equipment under capital leases was approximately $193,000 and
$289,000 at December 31, 2000, and 1999, respectively.
5. Intangible Assets
Goodwill and all other intangible assets are amortized on the straight-line
method over the estimated useful lives of the assets, which are as follows (in
thousands):
December 31, December 31, Amortization
2000 1999 Period
------------ ------------ ------------
Goodwill $ 216,611 $ 216,611 25 Years
Patents and trademarks 20,205 20,140 8 Years
Debt issuance costs 13,224 13,224 6 - 10 Years
Covenant not to compete 2,000 2,000 5 Years
----------- -----------
252,040 251,975
Accumulated Amortization (29,462) (16,305)
----------- -----------
Total Intangible assets $ 222,578 $ 235,670
=========== ===========
F-11
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31, December 31,
2000 1999
------------ ------------
Vacation $ 3,003 $ 3,061
Interest 7,001 6,989
Real and personal property taxes 2,531 1,487
Incentive compensation and profit sharing 2,555 717
Benefits 2,622 60
Due to Owens Corning 1,804 7,644
Other 4,347 4,345
----------- -----------
Total Accrued liabilites $ 23,863 $ 24,303
=========== ===========
Under the transitional services agreement with Owens Corning (Note 9), the
administration of the Company's health benefit plan was performed by Owens
Corning through December 31, 1999. As such, the accrued costs associated with
these benefits are included in the due to Owens Corning as of December 31, 1999.
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31, December 31,
2000 1999
------------ ------------
Senior Credit Facility:
Revolving Credit Facility $ 9,500 $ 9,700
Term Loan A 76,840 99,188
Term Loan B 95,669 103,501
9 7/8% Senior Subordinated Notes, net
of amortized discount 147,384 147,181
Capital lease obligation 193 285
----------- -----------
329,586 359,855
Less current portion (14,670) (18,390)
----------- -----------
Total Long-term debt $ 314,916 $ 341,465
=========== ===========
F-12
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Long Term Debt - (Continued)
The following is a schedule of future maturities of term debt, including minimum
lease payments (in thousands):
Twelve Month Ended
December 31,
------------------
2001 $ 14,670
2002 23,630
2003 23,502
2004 51,419
2005 67,833
2006 and thereafter 148,532
Senior Credit Facility. In connection with the formation transactions, AGY
entered into a senior secured credit agreement, pursuant to which the lenders
committed to lend to AGY up to $315.0 million (the "Senior Credit Facility"),
including: (i) a six-year revolving credit facility in an aggregate principal
amount of up to $75.0 million (the "Revolver") which includes a $30.0 million
letter of credit subfacility; (ii) a six-year term loan in an aggregate
principal amount of $115.0 million ("Term Loan A"); (iii) a seven-year term loan
in an aggregate principal amount of $125.0 million ("Term Loan B" and together
with Term Loan A, the "Term Loans"). On December 16, 1999, the Company and its
lenders amended the Senior Credit Facility, reducing the available amount of the
Revolver from $75.0 million to $65.0 million. The available balance under the
Revolver was $53.3 million and $53.9 million at December 31, 2000 and 1999,
respectively.
The amendment to the Senior Credit Facility also modified certain financial
covenants, including the interest coverage ratio and the leverage ratio. The
changes to the Senior Credit Facility as outlined in the amendment are reflected
in the financial statements and in the corresponding notes as of December 31,
2000.
The Senior Credit Facility is collateralized by a first priority lien on
substantially all of the properties and assets of AGY and its respective
domestic subsidiaries, now owned or acquired thereafter and a pledge of Porcher
Industries' membership interest in AGY. The Senior Credit Facility will be
guaranteed by all of AGY's future domestic subsidiaries.
At AGY's option, the interest rates per annum applicable to the Revolver and the
Term Loan A are fluctuating rates of interest measured by reference either to:
(i) LIBOR plus a borrowing margin or (ii) the bank's base rate, which is the
greater of the published prime rate or the overnight federal funds rate plus
0.5% (the "ABR") plus a borrowing margin. The applicable borrowing margin for
the Revolver and Term Loan A ranges from 1.75% to 3.0% for LIBOR based
borrowings and .5% to 1.75% for ABR based borrowings. The applicable borrowing
margin for the Term Loan B ranges from 3.50% to 3.75% for LIBOR based borrowings
and 2.25% to 2.5% for ABR based borrowings. In October 1998, the Company entered
into interest rate swap agreements which convert the LIBOR rates of interest on
Term Loan A and Term Loan B to 4.92% and 5.04% per annum, respectively, plus the
applicable borrowing margin, in order to limit its exposure to interest rate
fluctuations under the Term Loan portion of the Senior Credit Facility. These
swap agreements remain in effect through the six-year and seven-year terms of
Term Loan A and Term Loan B, respectively. The notional amount of these swaps
was approximately $76.8 million and $95.7 million for Term Loan A and Term Loan
B, respectively, at December 31, 2000. The fair value of the interest rate swap
agreements, representing the estimated amount that the Company would receive to
terminate the swap agreements, was approximately $ 1,306,000 and $ 2,896,000,
respectively, at December 31, 2000. The Company is exposed to losses, in the
event of nonperformance by the counterparties under the interest rate swap
agreements. As of December 31, 2000, the Company expects the counterparties to
fully perform under these contracts.
During 2000 and 1999, AGY terminated portions of the interest rate swaps related
to the early payment of Term Loans A and B. As the result of this partial unwind
of swap agreements, AGY recognized a gain in other income of $0.2 million and
$1.5 million for the years ended December 31, 2000 and 1999, respectively.
F-13
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Long Term Debt - (Continued)
The interest rate on borrowings outstanding under the Revolver, Term Loan A and
Term Loan B as of December 31, 2000 was 9.39%, 7.67% and 8.54%, respectively.
The Senior Credit Facility contains covenants restricting AGY and its
subsidiaries with respect to the incurrence of debt (including guarantees); the
creation of liens; substantially changing the nature of AGY's or its
subsidiaries' businesses; the consummation of certain transactions such as
dispositions of substantial assets, mergers, acquisitions, reorganizations and
recapitalizations; the making of certain investments and loans, non-ordinary
course asset sales and capital expenditures; the making of dividends and other
distributions; transactions with affiliates (outside of trade sales and
purchases) and AGY's ability to prepay certain debt. AGY also is required to
comply with certain financial tests and maintain certain financial ratios as
defined in the Senior Credit Facility. Certain of these financial tests and
ratios include: (i) maintaining a maximum Leverage Ratio; (ii) maintaining a
minimum Consolidated Net Worth; (iii) maintaining a minimum Interest Coverage
Ratio; and (iv) maintaining a minimum Fixed Charge Coverage Ratio. At December
31, 2000 and 1999, the Company was in compliance with the aforementioned
covenants.
The Senior Credit Facility also contains customary Events of Default. An Event
of Default under the Senior Credit Facility will allow the lenders thereunder to
accelerate or, in certain cases, will automatically cause the acceleration of
the maturity of the debt under the Senior Credit Facility. Further, in the event
of default, the interest rate would be increased.
Senior Subordinated Notes. On January 21, 1999, the Company issued $150 million
of 9 7/8% Senior Subordinated Notes ($147 million net of discount) due 2009.
Interest is payable semiannually beginning in July, 1999. Net proceeds of
approximately $142.9 million plus additional borrowings under the revolving
credit facility were used to repay outstanding indebtedness of $150.0 million
under the Senior Subordinated Credit Facility. In addition, debt issuance costs
of $3.6 million associated with the termination of the Senior Subordinated
Credit Facility were written off in the first quarter of 1999.
Other. The Company has outstanding standby letters of credit at December 31,
2000 and 1999 of approximately $2,226,000 and $1,392,000, respectively, to
secure workers compensation obligations. Such letters of credit expire in
September 2001 but are automatically renewable for one year if not terminated
before expiration.
Keepwell Agreement. In connection with the formation transactions, Owens Corning
entered into a Keepwell Agreement to support the liquidity of AGY. In the event
that AGY does not have the liquidity to pay the interest on the Senior Credit
Facility when due, Owens Corning will loan AGY an amount equal to the aggregate
deficiency. Owens Corning's obligations to make such loans is limited to a
maximum aggregate amount of $65.0 million, and a maximum annual amount of $20.0
million. The Owens Corning maximum aggregate obligation is reduced by $10.0
million semi-annually beginning in 1999. This Agreement terminates in January
2002.
F-14
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Membership Interest
The following table sets forth the statement of changes in members' interest
(net assets prior to the majority purchase) in AGY (in thousands):
Accumulated Membership Interest
Other -----------------------------------
Net Comprehensive Owens
Assets Income Corning Porcher Total
--------- ---------- ------------ --------- -----------
Balance at December 31, 1997 $ 32,508 $ (1,568) $ - $ - $ 30,940
Net income from January 1, 1998 to
June 30, 1998 24,698 - - - 24,698
Translation gain - 539 - - 539
--------- ---------- ------------ --------- -----------
Balance at June 30, 1998 57,206 (1,029) - - 56,177
Change from Business Unit to LLP (57,206) 1,029 56,177 - -
Deferred tax adjustment due to
change from Business Unit to LLP - - (10,513) - (10,513)
Net income from July 1, 1998 to
September 30, 1998 - - 18,311 - 18,311
Net transfers to Owens Corning - - (14,940) - (14,940)
Net liabilities assumed by Owens
Corning and treated as capital
contribution - - 97,647 - 97,647
Contribution from Owens Corning - - 2,250 - 2,250
Sale of 51% interest to Porcher - - (74,808) 342,149 267,341
Distributions - - (195,638) (203,624) (399,262)
--------- ---------- ------------ --------- -----------
Balance at September 30, 1998 - - (121,514) 138,525 17,011
Net income from October 1, 1998 to
December 31, 1998 - - 2,095 2,180 4,275
Foreign currency translation
adjustment - (1) - - (1)
--------- ---------- ------------ --------- -----------
Balance at December 31, 1998 - (1) (119,419) 140,705 21,285
Net income 975 1,015 1,990
Foreign currency translation
adjustment - 199 - - 199
Distribution to members - - (1,587) (1,656) (3,243)
--------- ---------- ------------ --------- -----------
Balance at December 31, 1999 - 198 (120,031) 140,064 20,231
Net income 5,926 6,167 12,093
Foreign currency translation
adjustment - (31) (31)
Distribution to members - - (4,185) (4,357) (8,542)
--------- ---------- ------------ --------- -----------
Balance at December 31, 2000 $ - $ 167 $ (118,290) $ 141,874 $ 23,751
========= ========== ============ ========= ===========
Put Right. Commencing September 30, 2003, each of the members have the right to
sell not less than all their ownership interest in AGY (a "Put Right") in the
event certain conditions described below are satisfied. If either of the members
exercises its Put Right, the value of the ownership interest will be determined
by a third party according to the procedures set forth in the operating
agreement. AGY's obligation to purchase a member's ownership interest is
conditioned upon AGY financing the purchase with a third party lender while
maintaining or obtaining not less than a B rating on its then outstanding
unsecured debt after giving effect to the purchase. In addition, AGY's ability
to fund the Put Right will be conditioned upon maintaining compliance with the
covenants under the Senior Credit Facility.
F-15
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Membership Interest -- (Continued)
As of December 31, 2000, AGY could not finance the purchase of all or any
portion of either member's ownership interest and maintain a credit rating of at
least B on its existing unsecured debt. If AGY meets this requirement in the
future, the Company will commence accretion to this estimated redemption value
of each member's ownership interest. Such accreted redemption amount will be
presented outside of the members' interest section of the balance sheet after
total liabilities. Management's estimate of the aggregate value of the members'
ownership interest using the measurement procedures specified in the Operating
Agreement is approximately $250 million.
9. Transactions with Related Parties
The Company engages in several transactions with related parties. The following
is a description of these transactions.
Sales. Porcher Industries and affiliates represented approximately $69,000,000,
$63,000,000, $14,000,000 and $39,000,000 of AGY's net sales for the years ended
December 31, 2000 and 1999 and the periods ended December 31, 1998, and
September 30, 1998, respectively. Trade receivables from Porcher and affiliates
were approximately $5,543,000 and $6,900,000 at December 31, 2000 and 1999,
respectively.
Purchases of Materials. The Company purchases glass marbles, which are used as
an input material to the production of certain glass yarns, from Owens Corning.
Glass marble purchases were $5,210,000, $ 4,988,000, $1,667,000 and $2,157,000
for the years ended December 31, 2000 and 1999, and the periods ended December
31, 1998, and September 30, 1998, respectively.
Glass Forming Bushing Fabrication Services and Alloy Metal Loss. The glass
forming bushings used in the Company's glass melting furnaces require periodic
refurbishing. Refurbishing and fabrication services are provided to the Company
by Owens Corning's central alloy operations. Such services and alloy metals
physically consumed in the manufacturing process are charged to the Company and
were $4,010,000, $3,885,000, $721,000 and $2,499,000 for the years ended
December 31, 2000 and 1999, and the periods ended December 31, 1998, and
September 30, 1998, respectively.
Borates Supply Agreement. The Company purchases borates, which are used as an
input material to the production of certain glass yarns from Owens Corning.
Borates purchases were $3,205,000, $3,280,000, $879,000 and $2,550,000 for the
years ended December 31, 2000 and 1999, the periods ended December 31, 1998, and
September 30, 1998, respectively. Additionally, Owens Corning began charging the
Company an administrative fee for these services beginning October 1, 1998. Such
administrative charges were $150,000, $150,000 and $25,000 for the years ended
December 31, 2000 and 1999 and the three month period ended December 31, 1998,
respectively.
Battice Supply Agreement. The Company purchases certain glass yarn products from
Owens Corning's Battice manufacturing facility for resale. Such purchases were
$19,024,000, $18,830,000 and $5,017,000 for the years ended December 31, 2000
and 1999 and the three month period ended December 31, 1998. Prior to the
Majority Purchase, Owens Corning's Battice manufacturing facility sold such
products directly to the customer.
Byproducts Supply Agreement. Owens Corning purchases byproducts of the Company's
manufacturing processes called dry chopped yarn and slit hanks from the Company.
The Company's sales of these byproducts to Owens Corning were $1,198,000,
$2,902,000, $244,000 and $818,000 for the years ended December 31, 2000 and
1999, and the periods ended December 31, 1998 and September 30, 1998,
respectively, and are included in net sales.
Owens Corning produces Low Tex Type 30 for the Company's customers. Beginning
October 1, 1998 the Company receives a fee from Owen Corning equal to 10% of
sales of those products to the Company's customers. Effective July 1, 2000, AGY
began purchasing this product from OC at fixed prices. Total purchases of Low
Tex Type 30
F-16
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Transactions with Related Parties--(Continued)
were $6,390,000 for the year ended December 31, 2000.
Transitional Services. The Company entered into a transitional services
agreement with Owens Corning at the time of the Majority Purchase for processing
the Company's payroll, health care and benefit costs, accounts payable and for
providing certain accounting and information services. The transition of these
functions to AGY was completed in 2000. Charges for such services were $458,000,
$3,910,000 and $1,681,000, and are included in the selling, general, and
administrative expenses for the years ended December 31, 2000 and 1999 and the
three month period ended December 31, 1998, respectively. In addition, the
Company reimbursed Owens Corning for paying certain health care costs. Such
health care charges were $7,683,000 and $2,097,000, and were included in
selling, general and administrative expenses for the year ended December 31,
1999 and the three month period ended December 31, 1998.
Lease Transactions. The Company has entered into operating sub-lease agreements
with Owens Corning for certain manufacturing equipment. The rental expense
included in the Company's statements of operations associated with these leases
was $2,199,000, $2,243,000, $557,000, and $1,677,000 for the years ended
December 31, 2000 and 1999, and the periods ended December 31, 1998 and
September 30, 1998, respectively.
The future minimum rental commitments associated with these leases are as
follows (in thousands):
2001 $ 1,776
2002 522
2003 26
The Company leases a manufacturing facility from a wholly-owned subsidiary of
Porcher Industries. Rental expenses associated with this facility was
approximately $655,000, $655,000, $165,000, and $110,000 for the years ended
December 31, 2000, and 1999, and the periods ended December 31, 1998, and
September 30, 1998, respectively.
Amounts due to related parties as of December 31, 2000 and 1999 under these
various arrangements totaled $5.6 million and $9.1 million, respectively, and
are included in both accounts payable and accrued liabilities.
On October 5, 2000, Owens Corning and certain of its United States subsidiaries
(collectively, the "Debtors") filed voluntary petitions with the United States
Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of
the United States Bankruptcy Code. According to filings made by Owens Corning
with the SEC, the Debtors will continue to manage their properties and operate
their businesses as "debtors-in-possession" in accordance with the applicable
provisions of the United States Bankruptcy Code. To date, the Company has not
experienced an interruption in operations or supply of material. The Company
does not believe that Owens Corning's bankruptcy will have a material adverse
effect on its business, financial condition or results of operations.
10. Employee Benefits
Pension Plan. Prior to the Majority Purchase, the hourly and salaried employees
of the Predecessor Business participated in Company wide defined benefit plans
maintained by Owens Corning. Under the plans, pension benefits were generally
based on an employee's pay and number of years of service. Contributions to
these pension plans were based on the calculations of independent actuaries
using the projected unit credit method. Plan assets consisted primarily of
equity securities with the balance in fixed income investments. The unrecognized
cost of retroactive amendments and actuarial gains and losses were amortized
over the average future service period of plan participants expected to receive
benefits.
F-17
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Employee Benefits --(Continued)
Pension expense attributed to the Predecessor Business defined benefit pension
plans includes the following (in thousands):
Nine Months Ended
September 30, 1998
------------------
Service cost $ 1,673
Interest cost on projected benefit obligation 5,892
Actual return on plan assets (6,746)
Amortization of transition amount (420)
Amortization of actuarial loss 1,260
Amortization of prior service cost (765)
-----
Net pension expense $ 894
=====
Assumptions used:
Discount rates 6.50%
Return on asset 9.00%
Rate of compensation increase 5.50%
Under the Majority Purchase, Owens Corning continued to remain responsible for
pension benefits earned through September 30, 1998. However, AGY agreed to pay
for subsidized benefits offered under the plan to participants who retire before
normal retirement age. This subsidized benefit is the result of the plan paying
early retirement benefits which are actuarially larger than benefits provided at
normal retirement age. For those participants under age 55 on September 30,
1998, the subsidy on the entire retirement benefit (including the portion of the
benefit earned while the participant was an employee of the Predecessor
Business) has been borne by AGY. This liability to AGY at September 30, 1998 was
actuarially calculated to be $5.1 million.
Additionally, AGY has agreed to be responsible for the service costs under the
plan through December 31, 1999. The amount reimbursable to Owens Corning
attributed to AGY's unfunded contracted responsibility under this agreement was
$8,485,000 and $7,799,000 as of December 31, 2000 and 1999, respectively. At
December 31, 2000, the current portion of this liability of $858,000 has been
included in accounts payable.
Defined Contribution Plan. Effective January 1, 2000, AGY adopted a defined
contribution 401(k) plan which allows qualifying employees to contribute up to
15% of their pre-tax compensation on an annual basis. Accordingly, AGY employees
no longer participate in the Owens Corning pension plan. The Company matches 35%
of each employee's contribution up to a certain percentage. For the year ended
December 31, 2000, AGY contributed $926,000 under this plan.
Postretirement. The employees of the Predecessor Business participated in health
care and life insurance benefit plans for certain retired employees and their
dependents. The heath care plans in the U.S. were unfunded and pay either: 1)
stated percentages of covered medically necessary expenses, after subtracting
payments by Medicare or other providers and after stated deductibles have been
met, or, 2) fixed amounts of medical expense retirement.
Employees became eligible to participate in the health care plans upon
retirement under the Predecessor Business' pension plans if they had accumulated
10 years of service after age 45. Some of the plans were contributory, with some
retiree contributions adjusted annually. The Predecessor Business reserved the
right to change or eliminate these benefit plans subject to the terms of
collective bargaining agreements. Under the Majority Purchase, AGY assumed the
liability for these health care and life insurance benefits for active employees
on September 30, 1998.
F-18
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Employee Benefits -- (Continued)
The amount of net postretirement benefits cost attributed to AGY and the
Predecessor Business included the following components (in thousands):
Consolidated Company Predecessor Business
-------------------------------------------- --------------------
For the Year Three Months Nine Months
Ended December 31, Ended Ended
------------------ December 31, September 30,
2000 1999 1998 1998
---- ---- ----------------- ------------------
Service cost $ 910 $ 900 $ 225 $ 753
Interest cost on projected benefit
obligation 1,199 700 175 2,864
Amortization of prior services
cost (143) - - (2,599)
Amortization of unrecognized loss 69 - - -
-------- ------- ---------- -----------
Net pension expense $ 2,035 $ 1,600 $ 400 $ 1,018
======== ======= ========== ===========
Assumptions used:
Discount rates 8.00% 8.00% 6.50%
Initial health care cost trend rate 15.00% 10.00% 4-9.5%
Ultimate health care cost trend rate 5.00% 4.00% 4-7%
The change in benefit obligation and the funded status of the postretirement
benefit plans at December 31, is summarized below (in thousands):
For the Year
Ended December 31,
----------------------
2000 1999
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period $ 14,000 $ 12,400
Service cost 910 900
Interest cost 1,199 700
Actuarial loss 2,151 1,217
Amortization of prior service costs (143) -
Amortization of unrecognized losses 69 -
Expected benefit payments - -
Adjustment for majority purchase - -
---------- ---------
Benefit obligation at end of period $ 18,186 $ 15,217
========== =========
FUNDED STATUS
Funded status at end of period $ (18,186) $ (15,217)
Unrecognized net actuarial loss 2,151 1,217
---------- ---------
Net amount recognized $ (16,035) $ (14,000)
========== =========
At December 31, 2000, the current portion of this liability of $715,000 has been
included in accounts payable.
F-19
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Employee Benefits--(Continued)
Assumed health care trend rates have significant effect on the amounts reported
for the health care plans. A one- percentage point change in assumed health care
cost trend rates would have the following effects (in thousands):
1-Percentage Point
----------------------
Increase Decrease
---------- ----------
Effect on total of service and interest cost components for 2000 $ 214 $ (214)
Effect on postretirement benefit obligation at December 31, 2000 $ 1,400 $ (1,400)
Effective January 1, 2000, AGY adopted a health care and life insurance benefit
plan for certain retired employees and their dependents. The terms of this plan
are substantially the same as the terms of the Owens Corning plan.
11. Concentrations
The Company is self-insured for certain elements of their employee benefits,
including workers compensation, but limits its liability through stop-loss
insurance and annual plan maximum insurance limits. Self-insurance liabilities
are based on claims filed and estimates of claims incurred but not reported.
12. Restructuring and Nonrecurring Charges
During the first quarter of 1998, the Predecessor Business recorded a $2 million
restructuring charge relating to personnel reductions at the Aiken and
Huntingdon plant locations. The charge represents severance costs associated
with the elimination of approximately 100 positions.
During the period October 1, 1998 to December 31, 1998, the Company incurred
nonrecurring charges of $ 626,000 related to labor agreement settlements
included in the cost of sales and $268,000 related to relocation costs included
in selling, general and administration expense. An additional $130,000 of costs
associated with software training was incurred and is included in selling,
general and administrative expenses. The operating profit for the period October
1, 1998 to December 31, 1998 was adversely impacted by $1.3 million attributable
to charges resulting from the purchase accounting adjustment to reflect the fair
value of the inventory as of the date of the Majority Purchase.
During the year ended December 31, 1999, the Company incurred nonrecurring
charges of $262,000 related to labor agreement settlements included in the cost
of sales, $1,182,000 related to relocation costs included in selling, general
and administrative expenses and $252,000 related to professional fees included
in selling, general and administrative expenses. An additional $1,584,000 of
consulting costs associated with software training and system implementation was
incurred and is included in selling, general and administrative expenses. In
addition, during the fourth quarter of 1999, severance costs of $290,000 were
accrued and are included as restructuring charges.
13. Interest Expense
Interest expense includes the following for the years ended December 31, 2000
and 1999 and the three month period ended December 31, 1998 (in thousands):
F-20
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Interest Expense--(Continued)
Three Months
Year Ended December 31, Ended
------------------------- December 31,
2000 1999 1998
-------- ------------ ------------
Interest expense on long-term debt $ 33,080 $ 34,848 $ 8,739
Amortization of debt issuance cost 2,369 1,976 374
--------- ------------ ------------
Total interest expense $ 35,449 $ 36,824 $ 9,113
========= ============ ============
There was no interest expense for the nine months ended September 30, 1998.
14. Income Taxes
The income tax expense, income taxes payable and deferred income taxes included
in the accompanying financial statements have been calculated as if the
Predecessor Business, prior to July 1, 1998 operated as a stand alone entity.
Effective July 1, 1998, the Company was established as a limited liability
company, and is not subject to income tax; therefore, the statement of
operations included herein does not reflect income tax expense for any period
subsequent to July 1, 1998. Income tax expense reflected in the statement of
operations for the nine months ended September 30, 1998 represents the estimated
income tax expense attributable to the results of operations of the Predecessor
Business through June 30, 1998. Income tax for the periods subsequent to the
Contributions is the responsibility of the members based on their respective
interest in AGY.
Income before income tax expense (in thousands):
Nine Month Ended
September 30, 1998
------------------
U.S. $ 57,139
Foreign 2,096
------------
Total $ 59,235
============
The income tax expense consists of the following (in thousands):
Nine Months Ended
September 30, 1998
------------------
Currently payable:
U.S. state and federal $ 16,229
Foreign 838
Deferred:
U.S. state and federal (841)
-----------
Total income tax expense $ 16,226
===========
F-21
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Income Taxes -- (Continued)
The reconciliation between U.S. federal statutory rate and the effective income
tax rate is:
Nine Months Ended
September 30, 1998
------------------
U.S. Federal statutory rate 35%
State and local income taxes 4%
Foreign tax rates greater than U. S. Federal statutory rate
LLC income not subject to tax (12%)
-----
27%
=====
Deferred income taxes were determined based on the estimated future tax effects
of temporary differences between the financial reporting and tax bases of assets
and liabilities, given the provisions of the enacted tax laws. As a result of
the conversion to a limited liability company, the deferred tax asset at July 1,
1998 of $10.5 million was treated as a deemed distribution and reflected as a
reduction of net assets.
Income tax expense of $93,000 and $190,000 was recorded in 2000 and 1999,
respectively related to foreign taxes on AGY Yarns Canada and AGY Europe SARL.
Deferred taxes were immaterial as of and for the years ended December 31, 2000
and 1999.
15. Segment Information
The Company operates in one business segment that manufactures glass fiber yarns
and specialty materials that are used in a variety of industrial and commercial
applications. The following geographic information represents the Company's net
sales based on product shipment location and total assets based on physical
locations for the region and period indicated (in thousands):
Consolidated Company Predecessor Business
---------------------------------------------------- --------------------
Year Year Three Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
---- ---- ---- ----
Net Sales
North America $ 197,133 $ 177,776 $ 51,164 $ 149,686
Europe 61,525 63,500 10,861 46,276
Asia 17,522 9,690 1,244 8,929
Latin America 2,108 1,270 134 357
------------ ------------- ---------- ------------
Total $ 278,288 $ 252,236 $ 63,403 $ 205,248
============ ============= ========== ============
Assets by region (in thousands):
December 31, December 31,
2000 1999
------------ ------------
North America $ 394,604 $ 417,024
Europe 37,027 33,558
Asia 4,378 3,834
------------ ----------
Total Assets $ 436,009 $ 454,416
============ ==========
F-22
ADVANCED GLASSFIBER YARNS LLC
(formerly Glass Yarns and Specialty Materials Business)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Pro Forma Supplementary Data
The following pro forma supplementary data for the period from January 1, 1998
to September 30, 1998 gives effect to the formation transactions as if they had
occurred on January 1, 1998. The pro forma supplementary data is provided for
informational purposes only and should not be construed to be indicative of the
Company's results of operations had the transactions been consummated on the
date assumed and does not project the Company's results of operations for any
future date (See Notes 1 and 2).
Nine Months Ended
September 30, 1998
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Net sales $ 205,248
Gross profit 63,281
Operating profit 41,216
Net income 14,718
17. Distributions
Pursuant to the terms of the Operating Agreement, the Company makes an annual
distribution (the "Tax Distribution") from its net cash flows and permitted
borrowings under the Senior Credit Facility to each of Owens Corning and Porcher
Industries in order to fund the taxes payable by each owner on their
proportionate share of the Company's net ordinary income and net capital gain.
In connection with the Majority Purchase, the Company has made a partnership
election to step up the basis of certain of the Company's tangible and
intangible assets. The resulting increase in depreciation and amortization
expense is allocated wholly to Porcher Industries. As a result, the Tax
Distributions are not made on a pro rata basis and Porcher Industries has an
unrecovered distribution amount (the "Deferred Distribution").
The Tax Distribution was $3.2 million based on the three months ended December
31, 1998, of which $1.6 million was paid to Owens Corning and $1.6 million was
treated as a Deferred Distribution to Porcher Industries. The Tax Distribution
was $8.5 million based on the year ended December 31, 1999 of which $4.2 million
was paid to Owens Corning and $4.4 million was treated as a Deferred
Distribution to Porcher Industries. The Deferred Distribution earns interest at
the highest rate of interest on the Senior Credit Facility. Earned interest on
the distribution was $508,000 and $163,000, for the years ended December 31,
2000 and 1999, respectively. The Deferred Distribution to Porcher Industries
totalled $6,681,000 and $1,819,000 at December 31, 2000 and 1999, respectively.
Based on the members' estimated taxable income for the year ended December 31,
2000, the Tax Distribution will approximate $7.8 million of which $3.8 million
will be paid in cash to Owens Corning and $4.0 million will be treated as a
Deferred Distribution payable to Porcher Industries. These distributions will be
recorded in the first quarter of 2001.
18. Quarterly Financial Information (Unaudited)
The following table sets forth summary quarterly financial information for the
years ended December 31, 2000 and 1999 (in thousands):
2000 by Quarter First Second Third Fourth
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Net sales $70,477 $68,704 $68,834 $70,273
Gross profit 17,982 19,295 18,030 19,255
Operating income 11,157 12,054 11,220 12,304
Income before extraordinary item 2,309 3,539 1,953 4,292
Net income 2,309 3,539 1,953 4,292
1999 by Quarter First Second Third Fourth
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Net sales $61,970 $61,617 $63,620 $65,029
Gross profit 19,434 16,599 16,600 16,465
Operating income 12,108 9,618 9,831 8,828
Income before extraordinary item 2,838 1,240 1,304 224
Net income (778) 1,240 1,304 224
19. Commitments and Contingencies
The Company is not a party to any significant litigation or claims, other than
routine matters incidental to the operation of the Company. The Company does not
expect that the outcome of any pending claims will have a material adverse
effect on the Company's results of operations or financial position.
The Company is self-insured for certain elements of their employee benefits,
including workers compensation but limits its liability through stop-loss
insurance and annual plan maximum insurance limits. Self-insurance liabilities
are based on claims filed and estimates of claims incurred but not reported.
F-23