SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 333-72305
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 August 20, 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 JUNE 30, 2002
TABLE OF CONTENTS
This Form 10-Q/A (Amendment No. 1) is being filed to incorporate certain edits
and modifications that were inadvertently omitted from the submission yesterday,
August 19, 2002.
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited) 1
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001 1
Consolidated Statements of Operations 2
For the three months ended June 30, 2002 and 2001 (unaudited) 2
For the six months ended June 30, 2002 and 2001 (unaudited) 2
Consolidated Statements of Comprehensive Income 3
For the three months ended June 30, 2002 and 2001 (unaudited) 3
For the six months ended June 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows 4
For the six months ended June 30, 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 14
Overview 14
Results of Operations 15
Liquidity and Capital Resources 19
Disclosure Regarding Forward-Looking Statements 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,189 $ 100
Trade accounts receivable less allowance of $1,538 and $1,102 respectively 14,292 13,392
Inventories 29,741 43,847
Other current assets 3,477 3,188
----------- ------------
Total current assets 49,699 60,527
----------- ------------
Net property, plant and equipment 137,698 142,191
Intangible assets, net (Note 5) 18,855 209,622
Other non-current assets - 145
----------- ------------
Total assets $ 206,252 $ 412,485
=========== ============
LIABILITIES AND MEMBERS' INTEREST (DEFICIT)
Current liabilities:
Accounts payable $ 11,863 $ 16,205
Accrued liabilities 24,858 24,201
Current portion of long-term debt, net of discount of $2,278 and $2,392, respectively 328,213 330,441
----------- ------------
Total current liabilities 364,934 370,847
----------- ------------
Deferred distribution 12,765 11,435
Pension and other employee benefit plans 27,243 25,753
Other non-current liabilities - 413
----------- ------------
Total liabilities 404,942 408,448
----------- ------------
Commitments and contingencies - -
Members' interest (deficit) (198,690) 4,037
----------- ------------
Total liabilities and members' interest (deficit) $ 206,252 $ 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 For the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2002 2001 2002 2001
------------------------- -------------------------
(unaudited) (unaudited)
Net sales $ 47,908 $ 55,118 $ 92,629 $ 123,965
Cost of goods sold 42,314 40,026 79,877 87,293
--------- --------- --------- ---------
Gross profit 5,594 15,092 12,752 36,672
Selling, general and administrative expenses 3,777 3,278 6,820 7,913
Restructuring 223 - 223 -
Amortization 733 2,900 1,465 5,960
--------- --------- --------- ---------
Operating income 861 8,914 4,244 22,799
Interest expense 8,601 8,356 17,239 16,602
Other income, net (186) (193) (360) (586)
--------- --------- --------- ---------
Income (loss) before income taxes and adoption of an
accounting principle (7,554) 751 (12,635) 6,783
Income tax expense 20 80 22 92
--------- --------- --------- ---------
Income (loss) before adoption of an accounting principle (7,574) 671 (12,657) 6,691
Cumulative effect of adoption of an accounting
principle (Note 5) - - (188,418) -
--------- --------- --------- ---------
Net income (loss) $ (7,574) $ 671 $(201,075) $ 6,691
========= ========= ========= =========
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 For the Six Months
Ended June 30, Ended June 30,
----------------------------- -------------------------------
2002 2001 2002 2001
----------------------------- -------------------------------
(unaudited) (unaudited)
Net income (loss) $ (7,574) $ 671 $ (201,075) $ 6,691
Other comprehensive income (loss):
Currency hedges-options (14) 27 8 195
Currency hedges-forwards (320) (71) (300) 36
Commodity swaps 61 (468) 384 (468)
Interest rate swaps (1,364) (36) (35) 425
Foreign currency translation 92 72 79 (51)
----------- ---------- -------------- -----------
Comprehensive income (loss) $ (9,119) $ 195 $ (200,939) $ 6,828
=========== ========== ============== ===========
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 Six Months
Ended June 30,
-------------------------------------
2002 2001
-------------------------------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (201,075) $ 6,691
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of adoption of an accounting principle 188,418 -
Depreciation 8,388 7,167
Amortization of debt issuance costs 941 874
Amortization of goodwill and other intangibles 1,465 5,960
Amortization of discount on notes 115 109
Alloy usage 370 894
Changes in assets and liabilities:
Trade accounts receivable, net (801) 8,405
Inventories 14,106 (13,899)
Other assets (140) 4,195
Accounts payable (3,823) (9,550)
Accrued liabilities (187) (1,835)
Pension and post-retirement 1,490 1,363
-------------- --------------
Net cash provided by operating activities 9,267 10,374
-------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,800) (10,067)
Other (21) (43)
-------------- --------------
Net cash used in investing activities (4,821) (10,110)
-------------- --------------
Cash flows from financing activities:
Proceeds from revolving credit facility 21,800 47,200
Payments on revolving credit facility (12,200) (36,200)
Payments on capital lease (54) (50)
Payments on term loans (11,888) (8,786)
Proceeds from interest rate swap - 1,118
Distribution to Owens Corning - (4,033)
Deferred financing costs (27) -
-------------- --------------
Net cash used in financing activities (2,369) (751)
-------------- --------------
Effect of exchange rate on cash 12 (48)
-------------- --------------
Net decrease in cash and cash equivalents 2,089 (535)
-------------- --------------
Cash and cash equivalents, beginning of period 100 4,054
-------------- --------------
Cash and cash equivalents, end of period $ 2,189 $ 3,519
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 15,608 $ 15,290
============== ==============
Supplemental disclosure of non-cash financing/investing activities:
Decrease in property and equipment financed in accrueds $ (538) $ (3,027)
============== ==============
Increase/(decrease) in fair value of interest rate swaps and derivatives $ 56 $ (931)
============== ==============
Deferred distribution - Porcher $ 911 $ 3,979
============== ==============
Current distribution - Owens Corning $ 876 $ -
============== ==============
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 (the "Company") have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and
accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of items of a normal
recurring nature) considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended June 30,
2002 are not necessarily indicative of the results to be expected for the full
year. 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 in our 2001 Annual Report on Form 10-K.
The preparation of the consolidated 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 liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
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.
As discussed in Note 5, amortization expense was understated by $0.7 million
during the first quarter of 2002. As such, the first quarter 2002 results have
been restated to reflect the correction of this error.
Also as discussed in Note 5, the Company adopted the provisions of SFAS 142
during 2002.
2. Liquidity and Financial Condition
The Company has experienced declines in sales to the electronics industry
(a significant market segment of the Company's business) since the economic
downturn that began during the second quarter 2001. As a result, during the
second half of 2001, the Company significantly lowered production levels and
implemented workforce reductions and other cost saving initiatives. During the
first three months of 2002, the Company believed that the economic recovery in
the electronics industry had begun, based on the fact that sales to the
electronics industry increased by 102.2% in the first
5
quarter of 2002 compared to the last quarter of 2001. However, sales in the
electronics industry in the second quarter of 2002 remain unchanged as compared
to the first quarter of 2002, further indicating that there is still no evidence
of a substantial recovery in this industry. The Company continues to have little
visibility as to when and to what extent demand may recover. The Company has
continued to operate at reduced production schedules in order to decrease
inventory levels, increase cash flows and maintain its other cost saving
initiatives. The Company's plan is to continue these efforts until such time as
sales levels increase.
As discussed in Note 7, the Company has entered into a Forbearance Agreement
with its Senior Lenders and is in default under the Indenture governing its
9 7/8% Senior Subordinate Notes due 2009. These conditions, together with the
Company's net loss in fiscal 2001 and the first half of fiscal 2002 and its
deficit in members' interest, raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or liabilities
that may result from the outcome of this uncertainty.
Although some of our customers have suffered from the recent economic downturn,
we have not experienced a negative impact on collections. One of our major
customers and affiliate BGF Industries, recently announced it entered into a
forbearance agreement until March 31, 2003, with its senior lenders with respect
to breaches of certain financial covenants under BGF's senior credit facility.
This agreement rescinded BGF's lenders' payment blockage notice prohibiting BGF
from making the required interest payments on its subordinated notes. BGF's
current financial position could result in additional credit risk to the Company
as well as reduced sales levels to BGF.
3. Inventories
Inventories consist of the following:
June 30, December 31,
2002 2001
---------------- -----------------
(unaudited)
Finished goods $ 24,988 $ 37,973
Materials and supplies 4,753 5,874
---------------- -----------------
Total Inventories $ 29,741 $ 43,847
================ =================
4. Net Property, Plant and Equipment
Net property, plant and equipment consist of the following:
June 30, December 31,
2002 2001
------------ --------------
(unaudited)
Land $ 827 $ 827
Building and leasehold improvements 27,746 27,028
Machinery and equipment 130,162 123,375
Construction in progress 2,488 5,725
------------ --------------
Gross property, plant and equipment 161,223 156,955
------------ --------------
Less: accumulated depreciation (52,818) (44,430)
Alloy metals 29,293 29,666
------------ --------------
Total net property, plant and equipment $ 137,698 $ 142,191
============ ==============
6
During the second quarter of 2002, the Company revised its estimates of the
depreciable lives on certain fixed assets. This resulted in additional
depreciation expense of $1.3 million, which is included in cost of goods sold
and a credit of $0.2 million, which is included in selling, general and
administrative expenses.
5. Intangible Assets, net and Restatement
As of June 30, 2002 and December 31, 2001, the Company's intangible assets
and related accumulated amortization consisted of the following:
June 30, 2002 December 31, 2001
--------------------------------------- ----------------------------------------
Useful
Life Accumlated Accumlated
(Years) Gross Amortization Net Gross Amortization Net
------------ ---------- ------------- ----------- ----------- ------------- -----------
Intangible assets
subject to amortization:
Customer list 25 Years $ 241 $ 39 $ 202 $ 230 $ 37 $ 193
Patents and trademarks 8 Years 20,247 9,443 10,804 20,227 8,178 12,049
Debt issuance costs 6-10 Years 13,623 6,274 7,349 13,596 5,334 8,262
Covenant not to compete 5 Years 2,000 1,500 500 2,000 1,300 700
Total intangible assets
---------- ------------- ----------- ----------- ------------- -----------
subject to amortization $ 36,111 $ 17,256 $ 18,855 $ 36,053 $ 14,849 $ 21,204
========== ============= =========== =========== ============= ===========
Intangible assets not
subject to amortization:
Goodwill - - - $ 216,392 $ 27,974 $ 188,418
The Company adopted the provisions of SFAS No. 142 effective January 1, 2002. In
accordance with SFAS No. 142, the Company ceased amortizing goodwill on that
date. SFAS No. 142 requires that an intangible asset that is acquired should be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but should be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to carrying amount. The Company
completed its transitional goodwill impairment test in the second quarter of
2002. In performing this test, the Company estimated the fair value of its
intangible assets, considering market valuations and the recent adverse changes
in business conditions. Based on this
7
analysis, the Company determined that recorded goodwill exceeded its implied
fair value. Accordingly, the Company recorded a non-cash impairment charge of
$188.4 million, which is recognized as the cumulative effect of a change in
accounting principle in the Consolidated Statement of Operations in 2002. Net
income for the three and six months ended June 30, 2001, exclusive of
amortization of goodwill, was $2.9 million and $11.2 million, respectively.
The provisions of SFAS 142 allowed the Company to finalize its transitional
impairment testing during 2002 subsequent to the date of adoption of SFAS 142.
As a result of the impairment charge recognized under the transitional
impairment test, the Company has restated its first quarter results to reflect
the charge as of January 1, 2002, the date of adoption of SFAS 142.
Additionally, the first quarter 2002 results have been restated to reflect the
correction of an error that understated amortization expense by approximately
$0.7 million. The first quarter 2002 results are as follows:
Restated As previously reported
Three Months Three Months
Ended March 31, Ended March 31,
2002 2002
------------ ------------
(unaudited) (unaudited)
Net sales $ 44,721 $ 44,721
Cost of goods sold 37,563 37,563
--------- ---------
Gross profit 7,158 7,158
Selling, general and administrative expenses 3,041 3,041
Amortization 732 7
--------- ---------
Operating income 3,385 4,110
Interest expense 8,638 8,638
Other income, net (174) (174)
--------- ---------
Loss before income taxes and adoption of an
accounting principle (5,079) (4,354)
Income tax expense 2 2
--------- ---------
Loss before adoption of an accounting principle (5,081) (4,356)
Cumulative effect of adoption of an accounting
principle (188,418) -
--------- ---------
Net loss $(193,499) $ (4,356)
========= =========
The Company recorded amortization expense on the above intangibles of $1.2
million and $1.2 million during the first and second quarters of 2002,
respectively, compared to $1.2 million and $1.2 million on a pro forma basis
during the first and second quarters of 2001. Based on the current amount of
intangible assets subject to amortization, the estimated amortization expense
for each of the succeeding 5 years are as follows: 2002: $4.8 million; 2003:
$4.7 million; 2004: $4.4 million; 2005: $4.0 million; and 2006: $2.6 million.
8
6. Accrued Liabilities
Accrued liabilities consist of the following:
June 30, December 31,
2002 2001
---------------- -----------------
(unaudited)
Vacation $ 2,779 $ 2,743
Interest 7,009 6,923
Real and personal property taxes 2,179 1,501
Incentive compensation and profit sharing 170 194
Payroll and benefits 2,321 2,528
Due to Owens Corning and other related parties 2,419 518
Deferred hedging 4,746 4,509
Restructuring 390 1,160
Other 2,845 4,125
------- -------
Total accrued liabilities $24,858 $24,201
======= =======
The second quarter reduction in the restructuring liability was for the
salary and benefits of employees terminated in the fourth quarter of 2001. The
restructuring reserve was increased in the second quarter of 2002 to recognize
the liability associated with the elimination of certain salary positions.
Activity in the restructuring liability consists of the following:
December 31, 2001 balance $ 1,160
Payments (722)
Accruals -
-------
March 31, 2002 balance 438
-------
Payments (271)
Accruals 223
-------
June 30, 2002 balance $ 390
=======
9
7. Long-term Debt
Debt consists of the following:
June 30, December 31,
2002 2001
---------------- ----------------
(unaudited)
Senior Credit Facility
Revolving credit facility $ 34,400 $ 24,800
Term loan A 51,162 62,531
Term loan B 94,891 95,410
9 7/8% Senior Subordinated Notes, net
of discount 147,722 147,608
Capital lease obligation 38 92
--------- ---------
328,213 330,441
Less current portion (328,213) (330,441)
--------- ---------
Long-term debt $ - $ -
========= =========
On December 14, 2001, the Company's senior lenders waived the requirement
in the Company's Senior Credit Facility to maintain and meet the Fixed Charge
Coverage Ratio and modified the Leverage Ratio and Interest Coverage Ratio to be
less restrictive for the quarters ending December 31, 2001 and March 31, 2002
("Third Amendment"). Absent the Third Amendment, the Company would have been in
violation of certain covenants of the Senior Credit Facility as of December 31,
2001 and March 31, 2002. The amendment also provided 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 prohibition of any cash distribution by the Company to the Company's
Members until the Company is in compliance with the original covenants of the
Senior Credit Facility.
The Company defaulted on certain financial covenants under the Senior Credit
Facility as of June 30, 2002. Therefore and prior to being in default, the
Company entered into Fourth and Fifth Amendments to the Senior Credit Facility
and Forbearance Agreements, under which senior lenders have agreed to forbear
exercising acceleration rights and remedies under such credit facility until
September 27, 2002 while the parties continue restructuring discussions. Certain
provisions of the Fifth Amendment include (A) a reduction in the Company's
revolving commitment from $65.0 to $57.0 million; (B) a $45.0 million borrowing
cap on the revolving facility; and (C) an additional 100 basis point increase in
the interest spread payable over LIBOR for advances under the Senior Credit
Facility. Additionally, the Fourth and Fifth Amendments and Forbearance
Agreements require the Company to refrain from making the $7.4 million interest
payment on its 9 7/8% Senior Subordinated Notes due 2009 (the "Notes") that was
due upon the expiration of a 30-day grace period on August 14, 2002 under the
indenture governing the Notes. As of August 14, 2002, the Company is in default
under the terms of the indenture governing the Notes, and the holders have the
right to accelerate the entire $150.0 million indebtedness of the Notes. The
Company has initiated negotiations with a steering committee of the
10
holders of the Notes and intends to continue its efforts to achieve a consensual
restructuring of such indebtedness. However, there can be no assurance that the
terms of the Notes will be amended or restructured or that the holders of the
Notes will not accelerate amounts due under the Indenture. As a result of these
uncertainties, amounts due under the Senior Credit Facility and Notes have been
reflected as current liabilities in the consolidated balance sheet, which
results in a significant working capital deficit.
The Company has retained Credit Suisse First Boston as its financial advisor to
explore strategic alternatives, including, but not limited to, restructuring its
debt and negotiating amendments to the Senior Credit Facility with the Company's
lenders and negotiating with the Steering Committee of the holders of our Notes.
Even though discussions are ongoing, there can be no assurance that the Company
will obtain any necessary amendments or waivers or that the Company will
otherwise be able to refinance its debt on favorable terms, or at all. If
restructuring discussions are unsuccessful, all alternatives, including a
judicial reorganization, must be considered.
8. 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. Our 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 For the Six Months
Ended June 30, Ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
-------------------------- -------------------------
(unaudited) (unaudited)
Net Sales
North America $ 32.7 $ 37.4 $ 64.1 $ 83.3
Europe 12.5 14.0 24.1 32.0
Asia 1.9 3.0 2.8 7.4
Latin America 0.8 0.7 1.6 1.3
--------- -------- --------- ---------
Total $ 47.9 $ 55.1 $ 92.6 $ 124.0
========= ======== ========= =========
Sales by product category are as follows (in millions):
11
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
-------------------------- -------------------------
(unaudited) (unaudited)
Net Sales
Heavy Yarns $ 39.8 $ 43.9 $ 76.1 $ 90.6
Fine Yarns 8.1 11.2 16.5 33.4
--------- --------- --------- ---------
Total $ 47.9 $ 55.1 $ 92.6 $ 124.0
========= ========= ========= =========
9. Accounting for Derivatives
Gains and losses on derivatives qualifying as cash flow hedges are
recorded in Other Comprehensive Income (OCI) to the extent that the hedges are
effective or until the underlying transactions are recognized in earnings. As of
June 30, 2002, the net derivative loss in OCI was $4.0 million. During the
second quarter of 2002, $1.3 million of accumulated losses were reclassified
from OCI to earnings, of which a $1.1 million loss was recorded in interest
expense, a $0.1 million loss was recorded in cost of sales and a $0.1 million
loss was recorded in other income. The ineffective portion of changes in fair
values of hedge positions reported in second quarter 2002 earnings was
immaterial. As of June 30, 2002, the Company expects to reclassify $4.6 million
of net losses on derivative instruments during the next twelve months from OCI
to earnings due to payments on its interest rate swaps, actual export sales, and
purchases of natural gas.
A summary of the amounts included in the accumulated other comprehensive
income is shown below (unaudited):
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 (102) (2) 468 3,036 3,400
Reclassification to earnings (93) (170) - 739 476
---------- ----------- --------- ------------- ------------
Balance at June 30, 2001 $ (195) $ (36) $ 468 $ (425) $ (188)
---------- ----------- --------- ------------- ------------
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
---------- ----------- --------- ------------- ------------
Current period changes in value 64 464 11 2,440 2,979
Reclassification to earnings (50) (144) (72) (1,076) (1,342)
---------- ----------- --------- ------------- ------------
Balance at June 30, 2002 $ (8) $ 300 $ 134 $ 3,541 $ 3,967
========== =========== ========= ============= ============
12
10. Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145. This Statement modifies
or amends several other authoritative pronouncements, including those covering
gains and losses from extinguishment of debt. Management is currently evaluating
the effects of this statement on the Company.
On June 28, 2002, the FASB issued Statement No. 146, Accounting for Exit and
Disposal Activities, which is required to be adopted for disposal activities
initiated after December 31, 2002. Management is currently evaluating the
effects of this statement on the Company.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
This Quarterly Report contains certain forward-looking statements with
respect to our operations, industry, financial condition and liquidity. These
statements reflect the Company's assessment of a number of risks and
uncertainties. The Company's 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 the
Company's audited consolidated financial statements as of the year ended
December 31, 2001 and related notes 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 82.2% of our net sales during the
six months ended June 30, 2002 and 73.1% of our net sales during the
six months ended June 30, 2001; and
. fine yarns, which accounted for 17.8% of our net sales during the
six months ended June 30, 2002 and 26.9% of our net sales during the
six months ended June 30, 2001.
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.
Our business continued to experience a significant sales decline in the second
quarter of 2002 due to the ongoing impact of a severe downturn in the global
electronics industry that began during the second quarter of 2001. As a result,
we have defaulted on covenants under our Senior Credit Facility and Senior
Subordinated Notes. We are operating under a Forbearance Agreement with our
Senior Lenders and have initiated negotiations with certain holders of the Notes
in an effort to achieve a consensual restructuring of such indebtedness.
Additionally, effective in the first quarter of 2002, the Company adopted the
provisions of SFAS 142 and recorded a non-cash impairment charge on goodwill
totaling $188.4 million.
14
Results of Operations
The following table summarizes our historical results of operations as
a percentage of net sales:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
------------------------------ ----------------------------
(unaudited) (unaudited)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 88.3 % 72.6 % 86.3 % 70.4 %
------------ ----------- ---------- ----------
Gross profit 11.7 % 27.4 % 13.7 % 29.6 %
Selling, general and
administrative expenses 7.9 % 6.0 % 7.3 % 6.4 %
Restructing 0.4 % - % 0.2 % - %
Amortization 1.5 % 5.2 % 1.7 % 4.8 %
------------ ----------- ---------- ----------
Operating income 1.9 % 16.2 % 4.5 % 18.4 %
Interest expense 18.0 % 15.1 % 18.6 % 13.4 %
Other income, net (0.2)% (0.4)% (0.4)% (0.5)%
------------ ----------- ---------- ----------
Income (loss) before taxes (15.9)% 1.5 % (13.7)% 5.5 %
Income tax expense 0.0 % 0.2 % - % 0.1 %
------------ ----------- ---------- ----------
Income (loss) before adoption of an accounting principle (15.9)% 1.3 % (13.7)% 5.4 %
Cumulative effect of adoption of an accounting principle - % - % (203.5)% - %
------------ ----------- ---------- ----------
Net income (loss) (15.9)% 1.3 % (217.2)% 5.4 %
============ =========== ========== ==========
Adjusted EBITDA, as presented below, is defined as net income before
interest expense, income taxes, depreciation, amortization, restructuring
expense and non-recurring, non-cash charges. Adjusted EBITDA is calculated as
follows (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- -------------------------------
2002 2001 2002 2001
---------------------------- -------------------------------
(unaudited) (unaudited)
Net income (loss) $ (7,574) $ 671 $ (201,075) $ 6,691
Depreciation and amortization 5,524 6,578 9,852 13,127
Cumulative effect of adoption of an accounting principle - - 188,418 -
Interest 8,601 8,356 17,239 16,602
Refinancing cost 726 - 811 -
Taxes 20 80 22 92
------------- ------------ --------------- ------------
Adjusted EBITDA $ 7,297 $ 15,685 $ 15,267 $ 36,512
============= ============ =============== ============
15
Adjusted EBITDA for the quarter ended June 30, 2002 decreased $8.4 million, or
53.5%, to $7.3 million from $15.7 million for the quarter ended June 30, 2001
and for the six months ended June 30, 2002 decreased $21.2 million, or 58.2%, to
$15.3 million from $36.5 million for the same period in 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.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Sales. Net sales decreased $7.2 million, or 13.1%, to $47.9 million
in the three months ended June 30, 2002 from $55.1 million in the three months
ended June 30, 2001. This decline reflects primarily the ongoing impact of a
severe downturn in the global electronics industry that began during the second
quarter of 2001. Our sales to the electronics market declined by 33.0% in the
three months ended June 30, 2002 compared to the three months ended June 30,
2001. The slight recovery in volumes compared to the first quarter of 2002 was
offset by additional price erosion and an adverse change in the mix of the
products sold to the electronics market. Given the length and complexity of the
supply chain in the electronics industry, we have little visibility as to when
and to what extent demand may recover. However, sales to the non- electronics
markets continued to trend upwards slightly as compared to the first quarter of
this year.
Gross Profit. Gross profit decreased $9.5 million to $5.6 million, or
11.7% of net sales, for the three months ended June 30, 2002 versus $15.1
million, or 27.4% of net sales, for the three months ended June 30, 2001. This
decline primarily reflects a sharp reduction in revenues, resulting in part from
price erosions that occurred during the first quarter of 2002, and a lower
capacity utilization, offset, in part, by the favorable impact of continued
manufacturing improvements associated with operating cost reduction programs
implemented as a response to the adverse market conditions during the previous
twelve month period. Since December 31, 2001 we made significant efforts to
deplete inventory and improve our cash position. Reduced production schedules
resulted in an $8.8 million decrease in inventory this quarter, 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 $3.8 million for the three months ended June 30,
2002 as compared to $3.3 million for the three months ended June 30, 2001. If we
had not incurred a charge of $0.7 million associated with the financial
restructuring of the Company during the current three month period and excluding
the impact of the reversal of the accruals for profit sharing and bonuses of
$0.5 million for the period ended June 30, 2001, selling, general and
administrative expenses
16
would have been $0.7 million lower than last year, reflecting the reduction in
workforce and other cost savings initiatives implemented since June 30, 2001.
Restructuring. A restructuring charge of $0.2 million was incurred in
the three months ended June 30, 2002 associated with the elimination of certain
salaried positions during that period.
Amortization. As mentioned previously, we adopted SFAS No. 142
effective January 1, 2002 and amortization of goodwill ceased on the effective
date. As a result, amortization expense decreased $2.2 million to $0.7 million
in the three months ended June 30, 2002, from $2.9 million for the same period
ended June 30, 2001.
Operating Income. As a result of the aforementioned factors, operating
income decreased $8.0 million to $0.9 million, or 1.9% of net sales, for the
three months ended June 30, 2002 from $8.9 million, or 16.2% of net sales, for
the three months ended June 30, 2001.
Interest Expense. Interest expense increased $0.2 million to $8.6
million in the three months ended June 30, 2002 from $8.4 million in the three
months ended June 30, 2001. The increase was a result of 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
June 30, 2002, consistent with the quarter ended June 30, 2001.
Net Income (Loss). As a result of the aforementioned factors, net
income decreased $8.2 million to a loss of $7.6 million in the three months
ended June 30, 2002, from $0.6 million in income for the three months ended June
30, 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Sales. Net sales decreased $31.4 million, or 25.3%, to $92.6
million in the six months ended June 30, 2002 from $124.0 million in the six
months ended June 30, 2001. This decline reflects primarily the ongoing impact
of a severe downturn in the global electronics industry that began during the
second quarter of 2001. Our sales to the electronics market declined by 55.4% in
the six months ended June 30, 2002 compared to the same period last year. As the
results of the second quarter of 2002 indicate, there is still no evidence of a
recovery in this industry. Given the length and complexity of the supply chain
in this industry, we have little visibility as to when and to what extent demand
may recover.
Gross Profit. Gross profit decreased from 29.6% of net sales for the
six months ended June 30, 2001 to 13.7% of net sales for the six months ended
June 30, 2002. This decline reflects
17
primarily the sharp reduction in revenue and a lower capacity utilization,
offset, in part, by the favorable impact of continued improved manufacturing
performances associated with the operating costs reduction programs implemented
during the last twelve months in response to the adverse market conditions.
Since December 31, 2001 we have made significant efforts to deplete inventory
and improve our cash position. Reduced production schedules resulted in a $14.1
million decrease in inventory, but negatively impacted gross profit as a result
of the under-absorption of fixed costs. The decrease is also attributable to
price erosion that occurred during the first quarter of 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $6.8 million for the six months ended June 30, 2002
as compared to $7.9 million for the three months ended June 30, 2001. If we had
not incurred a charge of $0.8 million in 2002 associated with the financial
restructuring of the Company, such expenses would have been $1.9 million lower
than last year, reflecting the reduction in workforce and other cost savings
initiatives implemented since June 30, 2001.
Restructuring. A restructuring charge of $0.2 million was incurred in
the six months ended June 30, 2002 associated with the elimination of certain
salaried positions during the same period.
Amortization. As mentioned previously, we adopted SFAS No. 142
effective January 1, 2002 and amortization of goodwill ceased on the effective
date. As a result, amortization expense decreased $4.5 million to $1.5 million
in the six months ended June 30, 2002, from $6.0 million for the same period
ended June 30, 2001.
Operating Income. As a result of the aforementioned factors, operating
income decreased $18.6 million to $4.2 million, or 4.5% of net sales, for the
six months ended June 30, 2002 from $22.8 million, or 18.4% of net sales, for
the six months ended June 30, 2001.
Interest Expense. Interest expense increased $0.6 million to $17.2
million in the six months ended June 30, 2002 from $16.6 million in the six
months ended June 30, 2001. The increase was a result of slightly higher average
outstanding borrowings and 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
prevailing interest rates.
Other Income, net. Other Income was $0.4 million for the six months
ended June 30, 2002, as compared to $0.6 million for the six months ended June
30, 2001. The decrease reflects a $0.6 million decrease in royalty income
related to the termination of a licensing arrangement in the first quarter of
2002, partially offset by increases in foreign currency gains related to the
strengthening of the euro versus the US dollar in the first half of 2002.
Cumulative Effect of Adoption of an Accounting Principle. As previously
discussed, we adopted SFAS No. 142 effective January 1, 2002 and completed our
transitional goodwill
18
impairment test in the second quarter of 2002. We determined that recorded
goodwill exceeded its implied fair value. Accordingly, we restated our first
quarter results to reflect a non-cash impairment charge of $188.4 million, which
is recognized as the cumulative effect of an adoption of accounting principle as
of January 1, 2002.
Net Income (Loss). As a result of the aforementioned factors, net
income decreased $207.8 million to a loss of $201.1 million in the six months
ended June 30, 2002, from income of $6.7 million in the six months ended June
30, 2001.
Liquidity and Capital Resources
On December 14, 2001, our senior lenders waived the requirement in our
Senior Credit Facility 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 ("Third
Amendment"). Absent the Third Amendment, we would have been in violation of
certain covenants of our Senior Credit Facility as of December 31, 2001 and
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 prohibition of
any cash distributions by the Company to our Members until we are in compliance
with the original covenants under the Senior Credit Facility.
We did not comply with certain financial covenants under the Senior Credit
Facility for the quarter ended June 30, 2002. Therefore and prior to being in
default, on June 28, 2002, we and our senior lenders entered into a Fourth
Amendment to Credit Agreement and Forbearance Agreement (the "Fourth
Amendment"), under which our senior lenders have agreed not to exercise
acceleration remedies available to them during the term of the agreement, which
expired August 13, 2002. The Fourth Amendment requires, among other things: (a)
that the Company refrain from paying its July 15, 2002, interest payment on its
9 7/8% Senior Subordinated Notes (the "Notes") or any other payment on the
Notes; (b) that the borrowing cap on the revolving credit facility be reduced to
$45.0 million from its previous cap of $50.0 million; (c) that the Company
deliver certain periodic financial reports to its senior lenders and their
financial advisors; (d) a limitation on capital spending during the term of the
Forbearance Agreement; and (e) monthly interest payments on all senior loans. In
addition, the Fourth Amendment required that the Company agree to restrictive
covenants with respect to cash balances, investments, and incurrence of
additional indebtedness. The Fourth Amendment also required the Company to pay
the Senior Lenders forbearance fees of approximately $250,000 and to continue
the 100 basis point increase in applicable margin that became effective with the
Third Amendment.
On August 13, 2002, we and our senior lenders entered into a Fifth Amendment to
Credit Agreement and Forbearance Agreement (the "Fifth Amendment"), under which
our senior lenders have agreed not to exercise acceleration remedies available
to them during the term of the agreement, which expires September 27, 2002. The
Fifth Amendment continues the provisions of the Fourth Amendment and further
requires: (a) a reduction in the Revolving
19
Commitment from $65.0 million to $57.0 million; (b) an additional 100 basis
point increase in the interest spread payable over LIBOR for advances under the
facility; and (c) an additional fee of approximately $250,000. Although we and
our Senior Lenders continue restructuring discussions, an outstanding event of
default under the Fifth Amendment would permit the Senior Lenders to declare all
amounts outstanding there under to be immediately due and payable, together with
accrued and unpaid interest.
Because of the Fourth Amendment and Fifth Amendment, the Company did not pay its
$7.4 million interest payment due on the Notes upon the expiration of a 30-day
grace period on August 14, 2002. We are now in default under the indenture
governing the Notes and the holders have the right to accelerate the $150.0
million principal amount of the Notes. We have initiated negotiations with a
steering committee of the holders of the Notes and intend to continue our
efforts to achieve a consensual restructuring of such indebtedness. However,
there can be no assurance that the terms of the Notes will be amended or
restructured or that the holders of the Notes will not accelerate the total
amounts due under the Indenture.
If the Senior Lenders were to accelerate maturity of amounts due under the
Senior Credit Facility, or if the holders of the Notes were to accelerate the
amounts due under the Indenture, the Company would not have sufficient funds to
repay its outstanding debt, and it is unlikely that the Company could obtain
sufficient alternative financing. As a result of these uncertainties, amounts
due under the Senior Credit Facility and Notes have been reflected as current
liabilities as of June 30, 2002, which results in a significant working capital
deficit as of June 30, 2002. These conditions, together with the Company's net
loss in fiscal 2001 and the first half of fiscal 2002 and its deficit in members
interest, raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or liabilities that may result from
the outcome of this uncertainty.
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 amendments to the Senior Credit Facility with our lenders and
negotiating with the Steering Committee of the holders of our Notes. 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, or at all. If restructuring discussions are
unsuccessful, all alternatives, including a judicial reorganization, must be
considered.
Based upon current and anticipated levels of operations, assuming no payment of
interest on the Notes and provided that there is no intervening acceleration of
our indebtedness either under the Indenture or the Senior Credit Facility, we
believe we have sufficient liquidity from our cash flow 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 extend, restructure or refinance our indebtedness will be subject to
future economic conditions and to financial, business and other factors beyond
our control.
As of June 30, 2002, we had cash and cash equivalents of $2.2 million and
available undrawn commitments under our Senior Credit Facility of $8.4 million,
after giving effect to the
20
$45.0 million revolver borrowing cap under the terms of the Amended Senior
Credit Facility. As of June 30, 2002, our net debt was $326.0 million, a
decrease of $8.7 million from March 31, 2002. The decrease was primarily the
result of an $8.8 million reduction in inventory and reflects our focus on
working capital management and cost control.
At June 30, 2002, we had $328.2 million of debt outstanding at a weighted
average interest rate of 9.2%, consisting of $180.5 million under our Senior
Credit Facility and $147.7 million under our Notes (net of discount of $2.3
million). The amounts outstanding under our Senior Credit Facility included
$34.4 million outstanding under the revolver.
Net Cash Provided by Operating Activities. Net cash provided by operating
activities was $9.3 million for the six months ended June 30, 2002, and was
primarily the result of net loss of $201.1 million, which includes a cumulative
effect of adopting a new accounting principle, a $0.8 million increase in
accounts receivable and a $4.0 million decrease in accounts payable and accrued
liabilities, offset by non-cash adjustments of $199.7 million, $14.1 million
decrease in inventory and a $1.5 million increase in pension and post
retirement. The decline in accounts payable and a decrease in inventory resulted
from an initiative to reduce inventory. We expect operating cash flows to
improve for the remainder of 2002 as a result of working capital management,
particularly through inventory reduction.
Although some of our customers have suffered from the recent economic downturn,
we have not experienced a negative impact on collections. One of our major
customers and affiliates, BGF Industries, recently announced it entered into a
forbearance agreement until March 31, 2003, with its senior lenders with respect
to breaches of certain financial covenants under BGF's senior credit facility.
This agreement rescinded BGF's lenders payment blockage notice prohibiting BGF
from making the required interest payments on its subordinated notes. BGF's
current financial position could result in additional credit risk to the Company
as well as reduced sales levels to BGF.
Net Cash Used in Investing Activities. Net cash used in investing activities was
$4.8 million for the six months ended June 30, 2002 and was the result of the
payment for capital expenditures incurred during the three months ended June 30,
2002. A significant portion of the capital expenditures was for the buyout of
critical manufacturing equipment previously financed under an operating lease.
We anticipate capital expenditures to be $2.0 million for the second half of
2002.
Net Cash Provided by Financing Activities. Net cash used by financing activities
was $2.4 million for the six months ended June 30, 2002 and was primarily the
result of net borrowings under our revolving credit facility of $9.6 million
offset by payments on term loans of $11.9 million.
We derived 22.3% of our net sales in the second quarter of 2002 from products
sold in currencies other than the US dollar. The US 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."
21
However, we cannot assure you that any such hedging activities will be
sufficient to eliminate risks relating to currency fluctuations.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report may contain
forward-looking statements. These statements include, in particular, statements
about our plans, strategies and prospects within the meaning of Section 27A of
the Securities 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;
. our ability to restructure our debt or to obtain additional
favorable amendments and waivers to our Senior Credit Facility or
that we will otherwise be able to refinance our debt on favorable
terms or at all;
. we are in default under the terms of the indenture governing our
Notes and the holders currently have the right to accelerate the
principal amount of the Notes;
. if we are unable to restructure our indebtedness, it is unlikely
that we will be able to obtain sufficient alternative funding from
other sources, with the result that we will be required to consider
judicial reorganization of the Company;
. the current financial position of BGF Industries, one of our major
customers and affiliates, could result in additional credit risk and
lower sales to BGF Industries;
. 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;
. downturns 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 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.
22
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 certifications under
the Sarbanes-Oxley Act.
Certification Under the Sarbanes - Oxley Act
The certification by the Company's chief executive officer and chief
financial officer of this report on Form 10-Q, as required by Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), accompanies this report to
the Securities and Exchange Commission as additional correspondence.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The effects of potential changes in currency exchange rates, commodity
prices 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 rates, commodity prices and currency exchange rates. These disclosures
are not precise indicators of expected future losses, but only indicators of
reasonably possible losses. As a result, actual future results may differ
materially from those presented. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Disclosure Regarding
Forward-Looking Statements."
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 these agreements, 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 June 30, 2002, we had two interest rate swap
agreements effective through September 30, 2003 on a notional amount of $146.1
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 June 30, 2002, we would have paid approximately $4.3 million
to terminate the agreements. A 100 basis point increase in LIBOR would decrease
the amount paid by approximately $1.5 million. In contrast, a 100 basis point
decrease in LIBOR would increase the amount paid by approximately $1.6 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 June 30, 2002, the fair value
of the Company's Senior Subordinated Notes was $52.5 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 in the second quarter of 2001 and was particularly severe in the
electronics 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.
24
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 June
30, 2002, the notional value of our foreign currency hedging instruments was
$8.3 million, and the fair value of these instruments was negative $0.4 million.
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 $0.4 million as of June 30, 2002. 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 $0.5 million as of June 30, 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 184,000 MMBtu's.
As of June 30, 2002, the total notional value of the remaining commodity hedging
instrument was $0.8 million, and the approximate fair value was negative $0.1
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 June 30, 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 June 30,
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.
25
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: August 20, 2002
26
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: August 20, 2002
27