SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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
(Address of registrants' principal executive office)
29801
(Zip Code)
Registrants' telephone number, including area code:
(803) 643-1501
---------------------------
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
---- -----
As of May 15, 2002, all 1,000 shares of common stock of AGY Capital
Corp. were owned by Advanced Glassfiber Yarns LLC. Accordingly, AGY Capital
Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of
Form 10-Q and is therefore filing this form with the reduced disclosure format.
ADVANCED GLASSFIBER YARNS LLC
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2002
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 1
Consolidated Statements of Operations
For the three months ended March 31, 2002 and 2001 (unaudited) 2
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended March 31, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows
For the three months ended March 31, 2002 and 2001 (unaudited) 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Overview 12
Results of Operations 13
Liquidity and Capital Resources 15
Cautionary Statement Regarding Forward-Looking Statements 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
2002 2001
------------ ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,075 $ 100
Trade accounts receivable less allowance of $1,783 and $1,102 respectively 13,913 13,392
Inventories (Note 2) 38,579 43,847
Other current assets 3,155 3,188
------------ -------------
Total current assets 56,722 60,527
------------ -------------
Net property, plant and equipment (Note 3) 138,902 142,191
Intangible assets, net (Note 4 and Note 9) 209,154 209,622
Other non-current assets - 145
------------ -------------
Total assets $ 404,778 $ 412,485
============ =============
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable $ 11,226 $ 16,205
Accrued liabilities (Note 5) 18,178 24,201
Current portion of long-term debt, net of discount of $2,334 and $2,392 (Note 6) 335,836 330,441
------------ ---------------
Total current liabilities 365,240 370,847
------------ ---------------
Deferred distribution 11,639 11,435
Pension and other employee benefit plans 26,537 25,753
Other non-current liabilities - 413
------------ ---------------
Total liabilities 403,416 408,448
------------ ---------------
Commitments and contingencies - -
Members' interest 1,362 4,037
------------ ---------------
Total liabilities and members' interest $ 404,778 $ 412,485
============ ===============
The accompanying notes are an integral part of the consolidated financial
statements.
1
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the Three
Months
Ended March 31,
------------------------------
2002 2001
------------------------------
(unaudited)
Net sales $ 44,721 $ 68,846
Cost of goods sold 37,563 47,268
----------- -----------
Gross profit 7,158 21,578
Selling, general and administrative expenses 3,041 4,636
Amortization 7 3,059
----------- -----------
Operating income 4,110 13,883
Interest expense 8,638 8,247
Other income, net (174) (395)
----------- -----------
Income (loss) before taxes (4,354) 6,031
Income tax expense 2 12
----------- -----------
Net income (loss) $ (4,356) $ 6,019
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
For the Three Months
Ended March 31,
--------------------------
2002 2001
--------------------------
(unaudited)
Net income (loss) $ (4,356) $ 6,019
Other comprehensive income (loss):
Currency hedges-options 22 168
Currency hedges-forwards 20 107
Commodity swap 323
Interest rate swaps 1,329 461
Foreign currency translation (13) (123)
---------- ---------
Comprehensive income (loss) $ (2,675) $ 6,632
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Three Months
Ended March 31,
-------------------------------------
2002 2001
-------------------------------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (4,356) $ 6,019
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 3,595 3,490
Amortization of debt issuance costs 467 437
Amortization of goodwill and other intangibles 7 3,059
Amortization of discount on notes 58 55
Recognition of gain on interest rate swaps (60) (70)
Alloy usage 175 577
Changes in assets and liabilities:
Trade accounts receivable, net (524) 2,665
Inventories 5,269 (5,643)
Other assets 174 3,994
Accounts payable (4,540) (7,810)
Accrued liabilities (4,475) (5,365)
Pension and post-retirement 784 695
--------------- ---------------
Net cash provided by (used in) operating activities (3,426) 2,103
--------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (927) (4,895)
Other (7) -
--------------- ---------------
Net cash used in investing activities (934) (4,895)
--------------- ---------------
Cash flows from financing activities:
Borrowings from revolving credit facility 15,900 14,500
Payments on revolving credit facility (4,600) (2,700)
Payments on capital lease (18) (25)
Payments on term loans (5,944) (4,523)
Proceeds from interest rate swap - 1,118
Distribution to Owens Corning - (4,033)
--------------- ---------------
Net cash provided by financing activities 5,338 4,337
--------------- ---------------
Effect of exchange rate on cash (3) (71)
--------------- ---------------
Net increase in cash and cash equivalents 975 1,474
--------------- ---------------
Cash and cash equivalents, beginning of period 100 4,054
--------------- ---------------
Cash and cash equivalents, end of period $ 1,075 $ 5,528
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,472 $ 11,324
=============== ===============
Supplemental disclosure of non-cash financing/investing activities:
Decrease in property and equipment financed in accrueds $ (445) $ (1,196)
=============== ===============
Increase (Decrease) in fair value of interest rate swaps and derivatives $ 1,694 $ (588)
=============== ===============
Deferred distribution $ - $ 3,979
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
4
ADVANCED GLASSFIBER YARNS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except as otherwise indicated)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Advanced Glassfiber Yarns LLC have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the full year. The Company believes
that the disclosures are adequate to make the information presented not
misleading.
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. Separate financial statements or consolidating
financial data of AGY Capital Corp. are not presented because management has
determined that they are not material. AGY Capital Corp. has no assets or
operations.
These financial statements should be read in conjunction with the
audited consolidated financial statements of Advanced Glassfiber Yarns LLC as of
and for the year ended December 31, 2001 on file with the Securities and
Exchange Commission in the 2001 Annual Report on Form 10-K.
Certain amounts from the prior consolidated financial statements have
been reclassified to conform to the current presentation.
2. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2002 2001
---------------- -----------------
(unaudited)
Finished goods $ 33,485 $ 37,973
Materials and supplies 5,094 5,874
---------------- -----------------
$ 38,579 $ 43,847
================ =================
5
3. NET PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment consist of the following:
March 31, December 31,
2002 2001
------------ --------------
(unaudited)
Land $ 827 $ 827
Building and leasehold improvements 27,275 27,028
Machinery and equipment 123,166 123,375
Construction in progress 6,171 5,725
------------ --------------
Gross property, plant and equipment 157,439 156,955
------------ --------------
Less: accumulated depreciation (48,025) (44,430)
Alloy metals 29,488 29,666
------------ --------------
Total Net property, plant and equipment $ 138,902 $ 142,191
============ ==============
4. INTANGIBLE ASSETS, NET
Goodwill and all other intangible assets consist of the following:
March 31, December 31,
2002 2001
------------ ------------
(unaudited)
Goodwill $ 216,611 $ 216,611
Patents and trademarks 20,244 20,238
Debt issuance costs 13,596 13,596
Covenant not to compete 2,000 2,000
------------ ------------
252,451 252,445
Less: accumulated amortization (43,297) (42,823)
------------ ------------
Total Intangible assets, net $ 209,154 $ 209,622
============ ============
See Note 9 for discussion of the Company's adoption of SFAS 142.
6
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
March 31, December 31,
2002 2001
---------------- ----------------
(unaudited)
Vacation $ 2,798 $ 2,743
Interest 3,327 6,923
Real and personal property taxes 1,785 1,501
Incentive compensation and profit sharing 146 194
Payroll and benefits 2,371 2,528
Due to OC and other related parties 1,239 518
Current portion of interest swap and natural gas commodity swap 3,168 4,509
Restructuring 438 1,160
Other 2,906 4,125
---------------- ----------------
$ 18,178 $ 24,201
================ ================
6. CURRENT PORTION OF LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2002 2001
---------------- ----------------
(unaudited)
Senior Credit Facility
Revolving Credit Facility $ 36,100 $ 24,800
Term Loan A 56,846 62,531
Term Loan B 95,150 95,410
9 7/8% Senior Subordinated Notes, net
of amortized discount 147,666 147,608
Capital lease obligation 74 92
---------------- ----------------
335,836 330,441
Less current portion (335,836) (330,441)
---------------- ----------------
Long-term debt $ - $ -
================ ================
On December 14, 2001, the Company's senior lenders waived its
requirement to maintain and meet the Company's Fixed Charge Coverage Ratio and
modified the Company's Leverage Ratio and Interest Coverage Ratio to be less
restrictive for the quarters ending December 31, 2001 and March 31, 2002. Absent
the covenant modification dated December 14, 2001, the Company would have been
in violation of certain covenants of its Senior Credit Facility as of March 31,
2002. Based on the Company's current level of performance, the Company does not
expect to comply with certain financial covenants under the Senior Credit
Facility for the quarter ended June 30, 2002. Additionally, if the Company
defaults under its Senior Credit Facility, the Company's senior lenders may be
able to prohibit the Company from making the interest payments of approximately
$7.4 million due under the Senior Subordinated Notes on July 15,
7
2002, which would result in default under its indenture. If the Company defaults
under its senior credit facility or its indenture, the lenders or note holders
may immediately accelerate repayment of all amounts outstanding under the
respective agreements. As a result of these uncertainties, amounts due under
the Senior Credit Facility and Senior Subordinated Notes have been reflected as
current liabilities in accordance with Generally Accepted Accounting
Principles, which results in a significant working capital deficit. The Company
have retained Credit Suisse First Boston as its financial advisor to explore
strategic alternatives, including, but not limited to, restructuring its debt
and negotiating with the Company's lenders favorable amendments to the Senior
Credit Facility. Even though discussions are ongoing, there can be no assurance
that the Company will obtain any necessary amendments and waivers or that the
Company will otherwise be able to refinance its debt on favorable terms, if at
all.
7. SEGMENT INFORMATION
The Company operates in one business segment that manufactures glass
fiber yarns and specialty yarns that are used in a variety of industrial and
commercial applications. The Company's principal market is the United States.
The Company does not have any significant long-lived assets outside of the
United States. Information by geographic area is presented below, with net sales
based on product shipment location (in millions):
For the Three Months
Ended March 31,
-------------------------
2002 2001
-------------------------
(unaudited)
Net Sales
North America $ 31.4 $ 45.9
Europe 11.6 18.0
Asia 0.9 4.3
Latin America 0.8 0.6
--------- ---------
Total $ 44.7 $ 68.8
========= =========
Sales by product category are as follows (in millions):
For the Three Months
Ended March 31,
-------------------------
2002 2001
-------------------------
(unaudited)
Net Sales
Heavy yarns $ 36.2 $ 46.6
Fine yarns 8.5 22.2
--------- ---------
Total $ 44.7 $ 68.8
========= =========
8
8. ACCOUNTING FOR DERIVATIVES
Gains and losses on derivatives qualifying as cash flow hedges are
recorded in OCI to the extent that the hedges are effective until the underlying
transactions are recognized in earnings. As of March 31, 2002, the net
derivative loss in OCI was $2.3 million. During the first quarter of 2002, $1.3
million of accumulated losses were reclassified from OCI to earnings, of which a
$1.2 million loss was recorded in interest expense, a $0.2 million loss was
recorded in cost of sales and a $0.1 million gain was recorded in other income.
The ineffective portion of changes in fair values of hedge positions reported in
first quarter 2002 earnings was immaterial. As of March 31, 2002, the Company
expects to reclassify $3.0 million during the next twelve months from OCI to
earnings.
A summary of the amounts included in the accumulated other
comprehensive income is shown below:
Currency Currency
Hedge Hedge Commodity Interest Rate Accumulated
Options Forwards Swaps Swaps OCI
----------- ------------ ------------ ------------ ------------
Balance at December 31, 2000 $ - $ - $ - $ - $ -
January 1, 2001, transition adjustment $ - 136 - (4,200) (4,064)
Current period changes in value (168) (125) - 3,036 2,743
Reclassification to earnings - (118) - 703 585
----------- ------------ ------------ ------------ ------------
Balance at March 31, 2001 $ (168) $ (107) $ - $ (461) $ (736)
=========== ============ ============ ============ ============
Balance at December 31, 2001 $ - $ - $ 518 $ 3,506 $ 4,024
Current period changes in value (14) (41) (158) (198) (411)
Reclassification to earnings (8) 21 (165) (1,131) (1,283)
----------- ------------ ------------ ------------ ------------
Balance at March 31, 2002 $ (22) $ (20) $ 195 $ 2,177 $ 2,330
=========== ============ ============ ============ ============
9. RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS 142 effective January 1,
2002. In accordance with this adoption, the Company ceased amortizing goodwill
effective on the same date. The Company is also currently evaluating the useful
lives assigned to its intangible assets. SFAS 142 requires that goodwill be
tested annually for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step must be measured
as of the beginning of the fiscal year. However, a company has six months from
the date of adoption to complete the first step. The Company expects to complete
the first step of the goodwill impairment test by the end of June 2002. The
second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of its fiscal year. Intangible assets deemed to
have an indefinite life will be tested for impairment using a one-step process
which compares the fair value to the carrying amount of the asset as of the
beginning of the fiscal year. Any impairment loss resulting from the
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principle. In light of the changes in market
9
conditions and the unprecedented downturn in the electronics market, the Company
believes that an impairment of goodwill under SFAS 142 exists as of January 1,
2002 and it expects that approximately $75 million to $150 million of its
goodwill will likely be impaired. As the enterprise value of the Company is
still being evaluated, the Company has not determined the amount of the
impairment loss but expects to complete the measurement during the second
quarter 2002 using discounted cash flow models, market valuations and third
party appraisals.
Amortized intangible assets consists of the following:
March 31, 2002 December 31, 2001
------------------------------------------------------------------------------------
(unaudited)
Useful Gross Gross
Life Carrying Accumulated Carrying Accumulated
(Years) Amount Amortization Amount Amortization
---------- ------------------ ---------------- ------------------ ----------------
Amortized intangible assets:
Debt issuance costs 6 - 10 $ 13,596 $ 5,860 $ 13,596 $ 5,386
Patent additions 8 233 59 227 52
------------------ ---------------- ------------------ ----------------
Total Amortized intangible assets $ 13,829 $ 5,919 $ 13,823 $ 5,438
================== ================ ================== ================
Unamortized intangible assets consist of the following:
March 31, 2002
(unaudited)
---------------------
Unamortized intangible assets:
Goodwill, net $ 201,244
=====================
Aggregate amortization expense is as follows:
Aggregate amortization expense (unaudited):
For the quarter ended March 31, 2002 $ 474
Estimated aggregate amortization expense
For the year ended December 31, 2002 $ 1,895
For the year ended December 31, 2003 $ 1,895
For the year ended December 31, 2004 $ 1,705
For the year ended December 31, 2005 $ 1,133
For the year ended December 31, 2006 $ 1,133
10
The following presents net income (loss) exclusive of amortization of goodwill:
For the Three Months
Ended March 31,
------------------------------
2002 2001
------------------------------
(unaudited)
Net income (loss) $ (4,356) $ 6,019
Goodwill amortization - 3,049
------------ ------------
Net income (loss) excluding amortization of
goodwill $ (4,356) 9,068
============ ============
The Company adopted SFAS 133 on January 1, 2001 and initially recorded a $4.1
million unrealized gain in Other Comprehensive Income as the cumulative effect
of this change in accounting related to interest rate swaps. For foreign
currency derivatives, the adoption of SFAS 133 did not have a material impact on
its financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements with respect
to our operations, industry, financial condition and liquidity. These statements
reflect our assessment of a number of risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors set forth in this
Quarterly Report. An additional statement made pursuant to the Private
Securities Litigation Reform Act of 1995 and summarizing certain of the
principal risks and uncertainties inherent in our business is included herein
under the caption "Cautionary Statement Regarding Forward-Looking Statements."
You are encouraged to read this section carefully.
You should read the following discussion and analysis in conjunction
with the accompanying consolidated financial statements and related notes, and
with our audited consolidated financial statements and related notes as of and
for the year ended December 31, 2001 set forth in our 2001 Annual Report on Form
10-K.
OVERVIEW
Our business focuses on the production of glass yarn by converting
molten glass into thin filaments, which are then twisted into yarn. Our products
fall into two categories based on filament diameter:
. heavy yarns, which accounted for 67.7% of our net sales
during the three months ended March 31, 2001 and 81.0% of our net
sales during the three months ended March 31, 2002; and
. fine yarns, which accounted for 32.3% of our net sales during
the three months ended March 30, 2001 and 19.0% of our net
sales during the three months ended March 31, 2002.
Glass yarns are a critical material used in a variety of electronic,
industrial, construction and specialty applications such as printed circuit
boards, roofing materials, filtration equipment, building reinforcement, window
screening, aerospace materials, sporting goods and vehicle armor.
12
RESULTS OF OPERATIONS
The following table summarizes our historical results of operations as
a percentage of net sales:
For the Three Months
Ended March 31,
-----------------------------
2002 2001
-----------------------------
(unaudited)
Net sales 100.0 % 100.0 %
Cost of goods sold 83.9 % 68.6 %
------------ ----------
Gross profit 16.1 % 31.4 %
Selling, general and
administrative expenses 6.9 % 6.7 %
Amortization - % 4.5 %
------------ ----------
Operating income 9.2 % 20.2 %
Interest expense 19.2 % 11.9 %
Other income, net (0.2) % (0.4) %
------------ ----------
Net income (loss) (9.8) % 8.7 %
============ ==========
Adjusted EBITDA, as presented below, is defined as net income before
interest expense, income taxes, depreciation, amortization expense and
non-recurring non-cash charges. Adjusted EBITDA is calculated as follows (in
thousands):
For the Three Months
Ended March 31,
----------------------------
2002 2001
----------------------------
(unaudited)
Net income (loss) $ (4,356) $ 6,019
Depreciation and amortization 3,603 6,549
Interest 8,638 8,247
Taxes 2 12
---------- ----------
Adjusted EBITDA $ 7,887 $ 20,827
========== ==========
Adjusted EBITDA for the quarter ended March 31, 2002 decreased $12.9 million, or
62.0%, to $7.9 million from $20.8 million for the quarter ended March 31, 2001.
We believe that adjusted EBITDA is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. Adjusted
EBITDA does not represent and should not be considered as an alternative to net
income or cash flow from operations as determined by generally accepted
accounting principles, and adjusted EBITDA does not necessarily indicate whether
cash flow will be sufficient for cash requirements. Not every company calculates
adjusted EBITDA in exactly the same fashion. As a result, adjusted EBITDA as
presented above may not necessarily be comparable to similarly titled measures
of other companies.
13
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net Sales. Net sales decreased $24.1 million, or 35.0%, to $44.7
million in the three months ended March 31, 2002 from $68.8 million in the three
months ended March 31, 2001. Our sales of product into the electronics market
declined by 66.0% in the three months ended March 31, 2002 compared to the three
months ended March 31, 2001. This decrease is primarily the result of a general
economic downturn, which began during the second quarter of 2001 and average
price erosions of 3.5% since the beginning of 2002. However, as compared to the
three months ended December 31, 2001, our volumes recovered by 32.0% in the
three months ended March 31, 2002, with electrical sales increasing by 102.2%.
As a result, we believe that economic conditions are improving and that demand
for our products is beginning to increase. Further, we expect sales of product
in the electronics market to improve in the second half of 2002 as the
industry's inventory continues to diminish.
Gross Profit. Gross profit decreased to 16.1% of net sales for the
three months ended March 31, 2002 compared to 31.4% for the same period in 2001.
Excluding the impact of changes in the exchange rate of European currencies,
gross profit in the first quarter of 2002 would have been 16.7%. This decrease
was primarily attributable to lower absorption of fixed costs combined with the
previously mentioned price decreases. Since December 31, 2001 we made a
significant effort to deplete inventory and improve our cash position. Reduced
production schedules resulted in a $5.3 million decrease in inventory, but
negatively impacted gross profit as a result of the under-absorption of fixed
costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $3.1 million for the three months ended March 31,
2002 as compared to $4.6 million for the same period of 2001. This was primarily
the result of a reduction in workforce, elimination of incentive compensation
and profit sharing and other cost savings initiatives implemented during the
last half of 2001. Such expenses as a percentage of net sales remained
relatively flat in the three months ended March 31, 2002 compared to the three
months ended March 31, 2001.
Operating Income. As a result of the aforementioned factors, operating
income decreased $9.8 million to $4.1 million, or 9.2% of net sales, for the
three months ended March 31, 2002 from $13.9 million, or 20.2% of net sales, for
the three months ended March 31, 2001. Effective January 1, 2002, the
amortization of goodwill was suspended in accordance with the adoption of SFAS
142. Operating income would have decreased $2.9 million to $1.2 million or 2.7%
of net sales had goodwill been amortized for the three months ended March 31,
2002. By June of 2002, we will complete our review of the fair value of goodwill
using discounted cash flow models, market valuations and third party appraisals.
Any impairment loss resulting from the transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principle and will
be recognized at that time.
Interest Expense. Interest expense increased $0.4 million to $8.6
million in the three months ended March 31, 2002 from $8.2 million in the three
months ended March 31, 2001. The increase was a result of higher average debt
outstanding and an increase in our weighted average
14
interest rate. The increase in our weighted average interest rate is due to a
100 basis point increase in interest rates on our amended senior credit facility
that was effective in December 2001, partially offset by lower interest rates on
our revolving credit facility as a result of market conditions.
Other Income, net. Other Income was $0.2 million for the quarter ended
March 31, 2002, as compared to $0.4 for the quarter ended March 31, 2001. The
decrease is mainly the result of lower royalty income because the associated
technology licensing arrangement terminated February 27, 2002.
Net Income (Loss). As a result of the aforementioned factors, net
income decreased $10.4 million to a loss of $4.4 million in the three months
ended March 31, 2002, from income of $6.0 million in the three months ended
March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
On December 14, 2001, our senior lenders waived our requirement to
maintain and meet our Fixed Charge Coverage Ratio and modified our Leverage
Ratio and Interest Coverage Ratio to be less restrictive for the quarters ending
December 31, 2001 and March 31, 2002. Absent the covenant modification dated
December 14, 2001, we would have been in violation of certain covenants of our
Senior Credit Facility as of March 31, 2002. The amendment also provides for 1)
a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; 2) a cap of $50.0 million for amounts borrowed
under the revolving credit facility; 3) a $1.75 million and $1.5 million limit
on capital spending for the quarters ending December 31, 2001, and March 31,
2002, respectively; and 4) the terms prohibit us from making any cash
distributions to our Members until we are in compliance with the original
covenants under the credit agreement.
Based on our current level of performance, we do not expect to comply
with certain financial covenants under the Senior Credit Facility for the
quarter ended June 30, 2002. Additionally, if we default under our Senior Credit
Facility, our senior lenders may be able to prohibit us from making the interest
payments of approximately $7.4 million due under the Senior Subordinated Notes
on July 15, 2002, which would result in default under our indenture. If we
default under our senior credit facility or our indenture, the lenders or note
holders may immediately accelerate repayment of all amounts outstanding under
the respective agreements. As a result of these uncertainties, amounts due under
the Senior Credit Facility and Senior Subordinated Notes have been reflected as
current liabilities as of March 31, 2002 in accordance with Generally Accepted
Accounting Principles, which results in a significant working capital deficit as
of March 31, 2002. We have retained Credit Suisse First Boston as our financial
advisor to explore strategic alternatives, including, but not limited to,
restructuring our debt and negotiating with our lenders favorable amendments to
the Senior Credit Facility. Even though discussions are ongoing, there can be no
assurance that we will obtain any necessary amendments and waivers or that we
will otherwise be able to refinance our debt on favorable terms, if at all.
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Based upon current and anticipated levels of operations and provided
that there is no intervening acceleration of our indebtedness or a blockage of
the $7.4 million interest payment due July 15, 2002, under the Senior
Subordinated Notes, we believe we have sufficient liquidity from our cashflow
from operations, combined with our availability under the senior credit
facility, to meet our projected cash needs through December 2002. Our future
operating performance and ability to service or refinance the Notes and to
extend or refinance our other indebtedness will be subject to future economic
conditions and to financial, business and other factors beyond our control.
As of March 31, 2002, we had cash and cash equivalents of $1.1 million
and available undrawn commitments under our Senior Credit Facility of $11.7
million, after giving effect to the $50.0 million revolver borrowing cap under
the terms of the December 14, 2001 amendment. As of March 31, 2002, our net debt
was $334.7 million, an increase of $4.4 million from December 31, 2001. The
increase was primarily the result of the semiannual $7.4 million interest
payment on our subordinated debt during the quarter and a reduction in accounts
payable related to the timing of certain expenditures including real property
taxes, offset by a $5.3 million reduction in inventory. Historically, our net
debt has increased in the first quarter of each year. The $4.4 million increase
in our debt from December 31, 2001, to March 31, 2002, was less than anticipated
and reflects our focus on working capital management and cost control.
At March 31, 2002, we had $335.6 million of debt outstanding at a
weighted average interest rate of 9.2%, consisting of $188.1 million under our
senior credit facility, $147.7 million under our 9 7/8% senior subordinated
notes (net of discount of $2.3 million) and $0.1 million of capital leases. The
amounts outstanding under our senior credit facility included $36.1 million
outstanding under the revolver. As of March 31, 2002, we had approximately $11.7
million of availability under the revolver after giving effect to the $50.0
million cap under the terms of the December 14, 2001 amendment.
Net Cash Used in Operating Activities. Net cash used in operating
activities was $3.4 million for the three months ended March 31, 2002, and was
primarily the result of net loss of $4.4 million, non-cash adjustments of $4.3
million, and a $4.5 million decrease in accounts payable and a $4.5 million
decrease in accrued liabilities, partially offset by a $5.3 million decrease in
inventory. A decline in accounts payable and a decrease in inventory resulted
from an initiative to reduce inventory. We expect operating cash flows to
improve throughout fiscal 2002 as a result of working capital management,
particularly through inventory reduction.
Net Cash Used in Investing Activities. Net cash used in investing
activities was $0.9 million for the three months ended March 31, 2002 and was
the result of the payment for capital expenditures incurred during the three
months ended March 31, 2002 and the three months ended December 31, 2001. A
significant portion of the capital expenditures in the three months ended March
31, 2002 was for process automation.
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Capital Expenditures. We have historically financed our capital
expenditures through cash flow from operations and borrowings under our senior
credit facility. In an effort to preserve cash outflows, capital expenditures
were limited to $0.5 million for the three months ended March 31, 2002. We will
continue to monitor and will adjust our capital expenditures spending level, if
warranted by market developments or our operating performance.
Net Cash Provided by Financing Activities. Net cash provided by
financing activities was $5.3 million for the three months ended March 31, 2002
and was primarily the result of net borrowings under our revolving credit
facility of $11.3 million offset by payments on term loans of $5.9 million.
We derived 22.9% of our net sales in the first quarter of 2002 from
products sold in currencies other than the U. S. dollar. The U. S. dollar
value of our export sales sometimes varies with currency exchange rate
fluctuations. We may therefore be exposed to exchange losses as a result of
such fluctuations that could reduce our net income. We have adopted a risk
management strategy to use derivative financial instruments including forwards
and options to hedge foreign currency exposures. See "Quantitative and
Qualitative Disclosures About Market Risk." However, we cannot assure you that
any such hedging activities will be sufficient to eliminate risks relating to
currency fluctuations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Quarterly Report may contain
forward-looking statements. These statements include, in particular, statements
about our plans, strategies and prospects within the meaning of Section 27A of
the Securities 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 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;
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. 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;
. whether or not we are able to comply with environmental and safety and
health laws and requirements
. whether or not we are able to satisfy the covenants and other
provisions under our various financial instruments; 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 Quarterly Report and in our 2001 Annual Report on Form 10-K. 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in currency exchange rates and
interest rates are discussed below. Our market risk discussion includes
"forward-looking statements" and represents an estimate of possible changes in
fair value that would occur assuming hypothetical future movements in interest
and currency exchange rates. These disclosures are not precise indicators of
expected future losses, but only indicators of reasonably possible losses. As a
result, actual future results may differ materially from those presented. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statement Regarding Forward-Looking Statements."
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, 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 notional
amount which is reduced in a manner consistent with the amortization of the
principal on our term loans. As of March 31, 2002, we had two interest rate swap
agreements effective through September 30, 2003 on a notional amount of $152.0
million, equal to the borrowings outstanding under Term Loans A and B under our
Senior Credit Facility. During the quarter ended March 31, 2001, we shortened
the duration of our interest rate swaps to September 2003. As a result of this
transaction, we received proceeds of $1.1 million, which will be reclassified
from accumulated other comprehensive income to earnings over the remaining life
of the related debt. The fair value of the interest rate swap agreements
represents the estimated receipts or payments that would be made to terminate
the agreements. At March 31, 2002, we would have paid approximately $3.0 million
to terminate the agreements. A 100 basis point increase in LIBOR would decrease
the amount paid by approximately $1.6 million. In contrast, a 100 basis point
decrease in LIBOR would increase the amount paid by approximately $1.8 million.
The fair value is based on dealer quotes, considering current interest rates.
Estimated fair value of notes payable. The Senior Credit Facility is a
variable-rate debt obligation. Accordingly, the estimated fair value of this
debt obligation approximates its book value. As of March 31, 2002, the fair
value of the Company's Senior Subordinated Notes was $53.0 million versus a
recorded book value of $147.7 million. The fair value of the Notes is estimated
on the basis of quoted market prices; however, trading in these securities is
limited and may not reflect fair value. The fair value is subject to
fluctuations based on the Company's performance, its credit rating, and changes
in interest rates for debt securities with similar terms. As previously
discussed, the Company's financial performance has deteriorated due to the
global economic downturn that began late in the first quarter of 2001 and was
particularly severe in the electronics and industrial market. As a result, the
credit ratings on the Company's debt were downgraded in 2001 and 2002 and may be
subject to further downgrade.
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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 March
31, 2002, the notional value of our foreign currency hedging instruments was
$2.6 million, and the fair value of these instruments was immaterial. The
potential loss in fair value of such financial instruments from a hypothetical
10% increase in the underlying exchange rate relative to the US dollar would be
approximately $0.1 million as of December 31, 2001. The potential gain in the
fair value of such financial instruments from a hypothetical 10% decrease in the
underlying exchange rate relative to the US dollar would be approximately $0.1
million as of March 31, 2002. The fair value is based on dealer quotes,
considering current exchange rates.
During the quarter ended June 30, 2001, we entered into two natural gas
commodity swaps whereby we agreed to pay a fixed price to hedge 579,000 MMBtu's
of the commodity. We entered into these swaps to reduce the variability of the
cash flows associated with our forecasted purchases of natural gas. One of these
contracts matured in December 2001. The remaining contract terminates in
December 2002 and provide for a fixed price of $4.14/MMBtu on 275,000 MMBtu's.
As of March 31, 2002, the total notional value of the remaining commodity
hedging instrument was $1.1 million, and the approximate fair value was negative
$0.2 million. The potential loss in fair value of such financial instruments
from a hypothetical 10% increase in the underlying commodity price would be
approximately $0.1 million as of March 31, 2002. The potential gain in the fair
value of such financial instruments from a hypothetical 10% decrease in the
underlying commodity price would be approximately $0.1 million as of March 31,
2002. The fair value is based on dealer quotes, considering current commodity
prices
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 counterparties 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED GLASSFIBER YARNS LLC
/s/ Catherine Cuisson
------------------------------------------
Catherine Cuisson
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: May 15, 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGY CAPITAL CORP.
/s/ Catherine Cuisson
------------------------------------------
Catherine Cuisson
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: May 15, 2002
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