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 September 30, 1999
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.)
2556 WAGENER ROAD, AIKEN, SOUTH CAROLINA
(Address of registrants' principal executive office)
29801
(Zip Code)
Registrants' telephone number, including area code:
(803) 643-1377
---------------------------
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 November 15, 1999, 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. FINANCIAL INFORMATION (unaudited)............................................................... 3
Item 1. Condensed Consolidated Financial Statements..................................................... 3
Condensed Consolidated Balance Sheets........................................................... 3
Condensed Consolidated Statements of Operations................................................. 4
Condensed Consolidated Statements of Comprehensive Income....................................... 5
Condensed Consolidated Statements of Cash Flows................................................. 6
Notes to Condensed Consolidated Financial Statements............................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................................... 11
Overview........................................................................................ 11
Results of Operations........................................................................... 12
Liquidity and Capital Resources................................................................. 13
Year 2000....................................................................................... 15
Introduction of the Single European Currency.................................................... 18
Recently Issued Accounting Standard............................................................. 19
Disclosure Regarding Forward-Looking Statements................................................. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 20
Part II. OTHER INFORMATION............................................................................... 22
Item 6. Exhibits and Reports on Form 8-K................................................................ 22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED GLASSFIBER YARNS LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
COMPANY COMPANY
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................... $ 12,779 $ 12,385
Trade receivables, net................................................. 32,657 39,283
Inventories............................................................ 24,691 29,053
Other current assets................................................... 217 757
------------- --------------
Total current assets................................................. 70,344 81,478
Property, plant and equipment, net........................................ 152,364 153,819
Intangible assets......................................................... 242,148 234,909
Other assets.............................................................. 613 383
------------- --------------
Total assets......................................................... $ 465,469 $ 470,589
============= ==============
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Current portion of long-term debt...................................... $ 14,297 $ 18,539
Accounts payable....................................................... 9,716 23,863
Accrued liabilities.................................................... 11,783 12,945
Due to Owens Corning................................................... 2,487 21,643
------------- --------------
Total current liabilities............................................ 38,283 76,990
------------- --------------
Pension and other current employee benefit plans.......................... 18,000 20,847
Long-term debt, less current portion...................................... 387,901 351,172
Deferred distribution..................................................... -- 1,611
------------- --------------
Total liabilities.................................................... 444,184 450,620
Members' interest......................................................... 21,285 19,969
------------- --------------
Total liabilities and members' interest.............................. $ 465,469 $ 470,589
============= ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
ADVANCED GLASSFIBER YARNS LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE PREDECESSOR CONSOLIDATED THE PREDECESSOR CONSOLIDATED
BUSINESS COMPANY BUSINESS COMPANY
------------- ------------- ------------- -------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................ $ 64,612 $ 63,620 $205,248 $187,207
Cost of sales............................ 43,394 46,478 134,820 132,948
------------- ------------- ------------- -------------
Gross margin........................... 21,218 17,142 70,428 54,259
Selling, general and administrative
expenses............................... 3,829 4,453 11,487 14,155
Amortization............................. ---- 2,858 --- 8,548
Restructuring costs...................... ---- ---- 2,034 ----
------------- ------------- ------------- -------------
Income from operations 17,389 9,831 56,907 31,556
Interest expense......................... ---- 9,155 ---- 27,303
Other income............................. (922) (628) (2,328) (1,128)
------------- ------------- ------------- -------------
Income before provision for income
taxes and extraordinary item........ 18,311 1,304 59,235 5,381
Provision for income taxes............... ---- ---- 16,226 ----
------------- ------------- ------------- -------------
Income before extraordinary item......... 18,311 1,304 43,009 5,381
Extraordinary item, loss on early
extinguishment of debt................. ---- ---- ---- 3,616
------------- ------------- ------------- -------------
Net income............................... $ 18,311 $ 1,304 $ 43,009 $ 1,765
============= ============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
ADVANCED GLASSFIBER YARNS LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE PREDECESSOR CONSOLIDATED THE PREDECESSOR CONSOLIDATED
BUSINESS COMPANY BUSINESS COMPANY
------------- ------------- ------------- -------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income............................... $ 18,311 $ 1,304 $ 43,009 $ 1,765
Other comprehensive income:
Foreign currency translation........... 373 (4) 539 117
------------- ------------- ------------- -------------
Comprehensive income..................... $ 18,684 $ 1,300 $ 43,548 $ 1,882
============= ============= ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
ADVANCED GLASSFIBER YARNS LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE PREDECESSOR CONSOLIDATED
BUSINESS COMPANY
------------- -------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 43,009 $ 1,765
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation......................................................... 6,394 9,279
Amortization of debt issuance costs.................................. ---- 1,262
Amortization of goodwill and other intangibles....................... ---- 8,548
Amortization of bond discount........................................ ---- 134
Deferred income tax credit........................................... (841) ----
Loss on early extinguishment of debt................................. ---- 3,616
Alloy usage.......................................................... 2,499 1,707
Changes in assets and liabilities:
Trade receivables, net............................................. (13,788) (6,577)
Inventories........................................................ (3,591) (4,353)
Other assets....................................................... (278) (318)
Trade accounts payable............................................. (468) 10,884
Accrued liabilities................................................ 702 1,160
Pension and post-retirement........................................ 1,912 2,847
Income taxes payable............................................... (7,112) ----
------------- -------------
Net cash provided by operating activities................................. 28,438 29,954
------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment............................. (13,509) (9,436)
------------- -------------
Net cash used in investing activities................................ (13,509) (9,436)
------------- -------------
Cash flows from financing activities:
Proceeds from (payments on) revolving loan............................. 14,000 (15,000)
Proceeds from (payments on) bridge facility............................ 150,000 (150,000)
Payments on capital lease.............................................. ---- (72)
Proceeds from senior notes............................................. ---- 147,000
Proceeds from (payments on) term loans................................. 240,000 (14,550)
Distribution to Porcher Industries..................................... (203,624) ----
Distribution to Owens Corning.......................................... (195,638) (1,587)
Contribution from Owens Corning 2,250 ----
Net transfers to Owens Corning......................................... (14,940) ----
Due to Owens Corning................................................... ---- 19,137
Payment of financing costs............................................. (6,988) (5,937)
------------- -------------
Net cash used in financing activities................................ (14,940) (21,009)
------------- -------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Effect of exchange rate on cash........................................ 11 97
------------- -------------
Net decrease in cash................................................... -- (394)
Cash, beginning of period.............................................. -- 12,779
------------- -------------
Cash, end of period.................................................... ---- $ 12,385
============= =============
Interest paid............................................................. ---- $ 22,797
============= =============
Non-cash financing/investing activities:
Non-cash contributions to capital $87,134 ----
============= =============
Step-up of assets from sale of 51% interest $67,341 ----
============= =============
Additions to property, plant and equipment included in accounts
payable.............................................................. ---- $ 3,244
============= =============
Accrual of deferred distribution..................................... ---- $ 1,611
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
7
<PAGE>
ADVANCED GLASSFIBER YARNS LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
Advanced Glassfiber Yarns LLC (the "Consolidated Company") is a
Delaware limited liability company initially formed by Owens Corning to own and
operate Owens Corning's glass yarns and specialty materials business (the
"Predecessor Business"). On July 1, 1998, Owens Corning contributed
substantially all of the assets and liabilities of the Predecessor Business to
the Consolidated Company. On September 30, 1998, Owens Corning sold a 51%
interest in Advanced Glassfiber Yarns to a wholly owned subsidiary of Porcher
Industries. Owens Corning retained the remaining 49% interest. Accordingly, the
historical financial information for the three and nine months ended September
30, 1998 is based upon the historical financial information of the business as
it was operated by Owens Corning.
AGY Capital Corp. is a wholly owned subsidiary of Advanced Glassfiber
Yarns, formed solely to facilitate our offering of 9 7/8% Senior Sub-
ordinated Notes due 2009. Separate financial statements or condensed
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.
We have prepared the accompanying unaudited interim consolidated
condensed financial statements 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
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year. We believe that the disclosures are
adequate to make the information presented not misleading. The historical
financial statements of the Predecessor Business were derived from the
historical financial statements of Owens Corning.
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, 1998 on file with the SEC in our
Registration Statement on Form S-4 (SEC File No. 333-72305) that was declared
effective on June 21, 1999.
8
<PAGE>
2. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1998 1999
---- ----
(UNAUDITED)
Finished goods $ 19,491 $ 22,737
Materials and supplies 5,200 6,316
------------ -------------
$ 24,691 $ 29,053
============ =============
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
Vacation $ 3,180 $ 3,728
Accrued interest ---- 3,359
Real and personal property taxes 3,030 2,798
Incentive compensation and profit
sharing 2,535 1,055
Other 3,038 2,005
------------ -------------
$ 11,783 $ 12,945
============ =============
4. DEBT
Debt consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
Revolving credit facility $ 15,000 $ ----
Term Loan A 112,125 103,500
Term Loan B 124,688 118,763
Senior subordinated credit facility 150,000 ----
Capital lease obligation 385 314
Exchange notes, net of amortized
discount --- 147,134
------------ -------------
402,198 369,711
Less current portion 14,297 18,539
------------ -------------
$ 387,901 $351,172
============ =============
On June 30, 1999, we paid off $5.0 million of the principal amount of
one of the term loans prior to its scheduled payment. In addition, we terminated
the portion of the interest rate swap agreement related to this principal
repayment and recorded a gain of $0.3 million in the second quarter of 1999.
Such gain was netted against interest expense in the accompanying financial
statements.
9
<PAGE>
5. OTHER TRANSACTIONS
On January 21, 1999, we issued $150.0 million of 9 7/8% Senior
Subordinated Notes due 2009 ($147.0 million net of discount). Interest is
payable semiannually beginning in July 1999. Net proceeds of approximately
$141.9 million plus additional borrowings under our revolving credit facility
were used to repay $150.0 million outstanding under our senior subordinated
credit facility. In addition, debt issuance costs of $3.6 million associated
with the termination of our senior subordinated credit facility were written off
in the first quarter of 1999, and are classified as extraordinary charges.
On June 21, 1999, the SEC declared effective our Registration Statement
on Form S-4 relating to our offering of $150.0 million of 9 7/8% Series B Senior
Subordinated Notes due 2009. These notes were issued on July 23, 1999 in
exchange for our 9 7/8% Senior Subordinated Notes due 2009 that were privately
issued on January 21, 1999. These new notes are substantially identical to the
old notes that we issued on January 21, 1999, except for the elimination of
transfer restrictions, registration rights and liquidated damages provisions
relating to the old notes.
During the nine months ended September 30, 1999, selling, general and
administrative expenses and relocation costs included approximately $2.1 million
in nonrecurring consulting expenses and relocation costs. During this same
period, we recorded a distribution to our members of $3.2 million. As a result,
at September 30, 1999, the balance sheet reflects a deferred distribution of
$1.6 million to Porcher Industries.
On June 8, 1999, we formed AGY Europe, SARL, a wholly owned subsidiary
located in Lyon, France. This subsidiary provides administrative and managerial
support for our European operations.
6. SEGMENT INFORMATION
We operate in one business segment that manufactures glass fiber yarns
and specialty yarns that are used in a variety of industrial and commercial
applications. The following geographic information represents our net sales
based on product shipment location (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
THE PREDECESSOR CONSOLIDATED THE PREDECESSOR CONSOLIDATED
BUSINESS COMPANY BUSINESS COMPANY
1998 1999 1998 1999
<S> <C> <C> <C> <C>
---- ---- ---- ----
Net sales:
North America................ $ 47.6 $ 44.2 $ 149.4 $ 133.4
Europe....................... 13.5 15.4 46.5 45.1
Asia......................... 3.4 3.4 8.9 7.7
Latin America................ 0.1 0.6 0.4 1.0
------ ------ ------- -------
Total ....................... $ 64.6 $ 63.6 $ 205.2 $ 187.2
====== ====== ======= =======
</TABLE>
10
<PAGE>
Sales by product category are as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
THE PREDECESSOR CONSOLIDATED THE PREDECESSOR CONSOLIDATED
BUSINESS COMPANY BUSINESS COMPANY
1998 1999 1998 1999
<S> <C> <C> <C> <C>
---- ---- ---- ----
Net sales:
Heavy Yarns.................. $ 47.9 $ 46.7 $ 153.6 $ 136.5
Fine Yarns................... 16.7 16.9 51.6 50.7
------ ------ ------- -------
Total ....................... $ 64.6 $ 63.6 $ 205.2 $ 187.2
====== ====== ======= =======
</TABLE>
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 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 condensed financial statements and related
notes, and with our audited consolidated financial statements as of the year
ended December 31, 1998 set forth in our Registration Statement.
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:
o heavy yarns, which accounted for 75% our net sales during the nine months
ended September 30, 1998 and 73% of our net sales during the nine months
ended September 30, 1999; and
o fine yarns, which accounted for 25% of our net sales during the nine months
ended September 30, 1998 and 27% of our net sales during the nine months
ended September 30, 1999;
We believe that we are the world's largest producer of fine yarns, and
the world's second largest producer of heavy yarns. Glass yarns are a critical
material used in a variety of electronic, industrial, construction and specialty
applications such as printed circuit boards,
11
<PAGE>
roofing materials, filtration equipment, building reinforcement, window
screening, aerospace materials, sporting goods and vehicle armor.
RESULTS OF OPERATIONS
The following table summarizes our historical results of operations and
historical results of operations as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $64.6 100.0% $63.6 100.0% $205.2 100.0% $187.2 100.0%
Cost of sales................ 43.4 67.2 46.5 73.1 134.8 65.7 132.9 71.0
----- ----- ----- ----- ------ ----- ------ -----
Gross profit................. 21.2 32.8 17.1 26.9 70.4 34.3 54.3 29.0
Selling, general and
administrative expenses.. 3.8 5.9 4.5 7.1 11.5 5.6 14.2 7.6
Amortization................. ---- ---- 2.8 4.4 ---- ---- 8.5 4.5
Restructuring costs......... ---- ---- ---- ---- 2.0 1.0 ---- ----
----- ----- ----- ----- ------ ----- ------ -----
Income from operations....... $17.4 26.9% $ 9.8 15.4% $ 56.9 27.7% $31.6 16.9%
===== ===== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales decreased $1.0 million, or 1.5%, to $63.6 million
in the three months ended September 30, 1999 from $64.6 million in the three
months ended September 30, 1998. This decrease was due primarily to decreased
demand for heavy yarns used in rigid printed circuit boards as well as reduced
sales to the construction industry. The decrease was partially offset by
increased industrial applications sales, which increased by 27% compared to the
comparable period of 1998.
GROSS PROFIT. Gross profit margins decreased from 32.8% for the three
months ended September 30, 1998 to 26.9% for the three months ended September
30, 1999. This decrease is attributable to selling price reductions.
Additionally, the terms of the supply agreements with Owens Corning in effect
during 1999 resulted in an increase in fabrication costs. These changes have
been partially offset by a more favorable higher margin product mix as well as
an increase in the selling price of fine yarns effective in the third quarter of
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to 7.1% from 5.6% of net sales for the three
months ended September 30,
12
<PAGE>
1999 and 1998, respectively. This was primarily due to the establishment of
independent operational, management and information system controls in
connection with the formation transactions and a decrease in sales.
Non-recurring costs associated with our separation from Owens Corning
represented 0.7% of net sales for the three months ended September 30, 1999.
INCOME FROM OPERATIONS. As a result of the aforementioned factors and
amortization of goodwill and other intangibles of $2.8 million, income from
operations decreased $7.6 million to $9.8 million, or 15.4% of net sales, for
the three months ended September 30, 1999, from $17.4 million, or 26.9% of net
sales, for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES. Net sales decreased $18.0 million, or 8.8% to $187.2 million
in the nine months ended September 30, 1999 from $205.2 million in the nine
months ended September 30, 1998. This decrease was due primarily to decreased
demand for heavy yarns used in rigid printed circuit boards as well as reduced
sales to the construction industry. The decrease was partially offset by
increased industrial and specialty applications sales, which increased by 12%
and 6%, respectively, in the first nine months of 1999 compared to the
comparable period in 1998.
GROSS PROFIT. Gross profit margins decreased from 34.3% for the nine
months ended September 30, 1998 to 29.0% for the nine months ended September 30,
1999. This decrease is attributable to selling price reductions in the
electrical market and to the weakening of European currencies. Additionally, the
terms of the supply agreements with Owens Corning in effect during 1999 resulted
in an increase in fabrication costs. On a pro forma basis, reflecting the
aforementioned supply agreements, gross profit margins decreased from 31.7% for
the nine months ended September 30, 1998 to 29.0% for the nine months ended
September 30, 1999. These changes have been partially offset by a more favorable
higher margin product mix as well as an increase in the selling price of fine
yarns effective in the third quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to 7.6% from 5.6% of net sales for the nine
months ended September 30, 1999 and 1998, respectively. This was primarily due
to the establishment of independent operational, management and information
system controls in connection with the formation transactions and a decrease in
sales. Non-recurring costs associated with our separation from Owens Corning
represented 1.1% of net sales for the nine months ended September 30, 1999.
INCOME FROM OPERATIONS. As a result of the aforementioned factors and
amortization of goodwill and other intangibles of $8.5 million, income from
operations decreased $25.3 million to $31.6 million, or 16.9% of net sales, for
the nine months ended September 30, 1999, from $56.9 million, or 27.7% of net
sales, for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary sources of liquidity were cash flows from
operations. Since the consummation of the formation transactions, our primary
sources of liquidity have been cash flows from operations and borrowings under
the senior credit facility. Our principal uses of
13
<PAGE>
liquidity are to fund operations, service debt, including interest payments,
and finance our planned capital expenditures, including the purchase of new
management information systems for our headquarters at the Aiken facility.
Net cash provided by operating activities increased $1.6 million from
$28.4 million for the nine months ended September 30, 1998 to $30.0 million for
the nine months ended September 30, 1999. The increase was primarily
attributable to a decrease in accounts receivable of $7.2 million, an increase
in accounts payable and accrued liabilities of $11.9 million, and a decrease in
income taxes payable of $7.1 million offset by a reduction of net income, before
extraordinary item and depreciation and amortization of $24.8 million.
In connection with the formation transactions, we entered into a senior
credit facility, which provides for:
o a six-year revolver in an aggregate principal amount of up to
$75.0 million, which includes a $10.0 million swing line sub-
facility and a $30.0 million letter of credit sub-facility;
o a seven-year term loan in an aggregate principal amount of $125.0
million; and
o a six-year term loan in an aggregate principal amount of $115.0 million.
First Union National Bank serves as agent under the senior credit facility. The
senior credit facility is collateralized by a first priority lien on
substantially all of our properties and assets and by a pledge of Porcher
Industries' interest in Advanced Glassfiber Yarns. As of September 30, 1999,
$222.3 million was outstanding under the senior credit facility and we had
availability thereunder equal to approximately $74.5 million.
Our senior credit facility requires us to comply with financial ratios.
If we breach any of the covenants in the senior credit facility, or we are
unable to comply with the required financial ratios, we may be in default under
the senior credit facility and the indenture governing our 9 7/8% Senior
Subordinated Notes due 2009. If we default under the senior credit facility, the
lenders can declare all borrowings outstanding, including accrued interest and
other fees, due and payable. If we use all of our available cash to repay
borrowings under the senior credit facility, we may not be able to make payments
on our notes. While we currently comply with these financial ratios, and believe
that we will continue to do so, we cannot assure you that our business will
generate sufficient cash flows from operations to enable us to continue to
comply with such ratios in the future.
On January 21, 1999, we privately issued $150.0 million of 9 7/8%
Senior Subordinated Notes due 2009. Our net proceeds from the sale of these
notes were approximately $141.9 million, after deducting the initial purchasers'
discount and expenses of the offering. We used the net proceeds from the
offering, together with additional borrowings under our senior credit facility,
to repay all debt outstanding under a $150.0 million senior subordinated credit
facility, which was incurred on September 30, 1998 in connection with the
formation transactions. On July 23, 1999, we exchanged the notes for
substantially identical new notes that have been registered under the Securities
Act of 1933. We expect to fund the interest payments on the
notes with operating cash flows.
We have historically financed our capital expenditures through cash
flow from operations. Capital expenditures, including capital leases, were $12.6
million for the nine months ended September 30, 1999. We expect to make annual
capital expenditures aggregating approximately $17.0 million in 1999. We
anticipate that capital expenditures incurred in 1999 will be made for routine
maintenance and rebuilds of glass melting furnaces and other equipment
14
<PAGE>
upgrades used in our operations. We also intend to spend approximately $3.3
million for our new year 2000 compliant management information systems in 1999.
In addition, we are currently exploring the feasibility of constructing a new
melter at our Aiken facility.
Our ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, our indebtedness,
or to fund planned capital expenditures will depend on our future performance,
which is generally subject to economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Based upon the current
level of operations, we believe that cash flows from operations and available
cash, together with availability under the senior credit facility, will be
adequate to meet our future liquidity needs for at least the next two years.
However, we cannot assure you that our business will generate sufficient cash
flows from operations or that future borrowings will be available under the
senior credit facility in an amount sufficient to enable us to service our
indebtedness, or to fund our other liquidity needs, including the possible
construction of a new melter at our Aiken facility and the payment of tax
distributions.
YEAR 2000
STATE OF READINESS. At the beginning of 1998, the management of our
information systems and research and development groups began to assess the year
2000 issue. These persons have developed and implemented a comprehensive year
2000 compliance program to make our IT and non-IT assets year 2000 compliant.
Our IT assets are primarily used in the delivery of our products and services,
and are also used in our internal operations, such as billing and accounting.
Our non-IT assets are primarily micro-processor based process control systems
used in the manufacture of our products.
Our year 2000 compliance program consists of the following phases:
o Phase One-Assessment
--------------------
Establish year 2000 program team. Identify core business areas,
processes and systems and determine their ability to operate properly
when post-1999 dates are introduced.
o Phase Two-Develop Remediation Plan
----------------------------------
Identify appropriate remedial action or system replacement for each
identified system that is not year 2000 compliant.
o Phase Three-Develop Implementation Plans and Contingency Plans; Testing
-----------------------------------------------------------------------
Develop implementation plans for remedial actions or systems
replacements and develop contingency plans to handle data exchange and
bad data. Identify and secure necessary resources. Test and verify
upgraded, converted or replacement systems.
15
<PAGE>
o Phase Four-Implementation
-------------------------
Perform remedial actions and systems replacements.
The following table summarizes our progress to date under our year 2000
compliance program:
<TABLE>
<CAPTION>
IT NON-IT
-------------------------------------------- ---------------------------------------------
<S> <C> <C>
Phase One Completed November 30, 1998. Completed November 30, 1998.
Phase Two Completed November 30, 1998. Identified Completed November 30, 1998. Identified 2
systems to be replaced: financial and order of 17 process control systems to be replaced
entry/planning systems. We also need to with the rest to be upgraded.
replace some of these systems to complete
our separation from Owens Corning's
computer systems.
Phase Three Completed September 30, 1999. Completed October 31, 1999.
Phase Four Completed September 30, 1999. Completed October 31, 1999.
Financial system replacement was completed Replacement of our two process control
March 1, 1999. systems was completed October 31, 1999.
Order entry/planning systems was completed
September 1,1999.
</TABLE>
During the second phase of the year 2000 compliance program, we
identified several key IT and non-IT systems that needed to be replaced in order
to become year 2000 compliant. The IT systems to be replaced included all
financial and order entry/planning systems and the non-IT systems to be replaced
included various process control systems. Replacement of our financial and order
entry/planning systems was also necessary to complete the separation from Owens
Corning's computer systems. Of the 17 process control systems that were
evaluated, two were identified as having compliance issues sufficient to warrant
total system replacement. Implementation and internal testing of these
replacement systems were completed October 31, 1999. The systems that will not
be replaced were upgraded to become year 2000 compliant on the same schedule as
the system replacements. Upgrading these systems generally required less
resources than total system replacement. As replacement of some of our systems
was contemplated with our separation from Owens Corning, we have deferred no
material IT projects due to our year 2000 efforts.
In addition to internal systems, we are dependent on external
suppliers, including Owens Corning, for the delivery of raw materials, energy
and supplies. We have contacted approximately 200 of our top external suppliers,
who represent approximately 90% of our total purchases, to evaluate their year
2000 compliance plans and state of readiness and determine whether a year
2000-related event will impede the ability of our suppliers to continue to
provide
16
<PAGE>
us goods and services. Approximately 87% of these suppliers have responded that
they are or expect to be year 2000 compliant. Although we have not received
responses from 13% of our suppliers, we believe that even if non-responsive
suppliers experience business disruption due to year 2000 it will not have a
material effect on our business operations. We believe that our key suppliers
are sufficiently aware of year 2000 issues and are taking actions to remediate
any problems. However, we cannot assure you that our key suppliers will not
suffer a year 2000 business disruption and we have used no independent
verification or validation process to evaluate such risks. We could suffer
business disruptions and loss of revenue if our material suppliers fail to
supply goods and services necessary for our operations.
Of our top ten customers, who represent approximately 67% of our sales
as of September 30, 1999, our two largest customers and two others have inquired
of our year 2000 state of readiness and we have responded to these inquiries.
Other than in connection with our relationship with Owens Corning, we have taken
no steps to determine the year 2000 readiness status of our customers. If a
sufficient number of our material customers were unable to receive or take
delivery of our products due to year 2000 problems, we would suffer business
disruptions and loss of revenue.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. As of September 30, 1999, we had
spent approximately $2.9 million in software and external consulting costs to
address the year 2000 issue. We estimate that our year 2000 compliance program,
including the cost of new hardware and software for new systems, will cost
approximately $3.3 million, including the cost to establish and test the
independent replacement computer systems discussed above, excluding the cost of
internal personnel. We expect to spend approximately $0.4 million in the fourth
quarter of 1999. Approximately 10% of the total projected costs are projected to
be spent on systems repair and modification and 90% on the referenced system
replacements. We expect to capitalize approximately $1.7 million of these costs
and we intend to fund these costs from cash flow from operations.
RISKS PRESENTED BY THE YEAR 2000 ISSUE. We believe that we have
identified all material year 2000 issues and implemented a plan to address these
issues prior to any impact on business operations. However, failure to complete
remediation and replacement programs as scheduled could impact our ability to
properly manufacture goods and conduct normal business operations, which may
result in potential liability for failure to deliver product or other harm. If
this were to occur, we could experience a material adverse impact on our
financial condition and results of operations. Likewise, failure of key
suppliers or customers to achieve compliance could adversely impact our ability
to manufacture, distribute and sell products.
CONTINGENCY PLANS. In the event that all of our systems are not made
compliant prior to the need to handle year 2000 dates, we have considered
alternatives to continue normal business operations. We anticipate that process
control systems that do not handle year 2000 dates properly can continue to
operate with some limitation in functions. These systems will be tested to
demonstrate this capability. With regard to information technology systems that
are critical to business operations, we believe that our remediation and
replacement program will sufficiently address year 2000 issues. However, we will
continue to evaluate our progress and create additional contingency plans as
necessary.
17
<PAGE>
The estimates and conclusions related to our year 2000 compliance
program contain forward-looking statements and are based on management's best
estimates of future events. Risks to completing the year 2000 compliance program
include the availability of resources, our ability to discover and correct the
potential year 2000 specific problems that could have a serious impact on
specific systems, equipment or facilities and the ability of suppliers and
vendors and other third parties to make their systems year 2000 compliant.
Various of our disclosures and announcements concerning year 2000 programs are
intended to constitute "Year 2000 Readiness Disclosures" as defined in the
recently enacted Year 2000 Information and Readiness Disclosure Act.
INTRODUCTION OF THE SINGLE EUROPEAN CURRENCY
On January 1, 1999, eleven member states of the European Union-Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands,
Portugal and Spain-introduced the Euro as a common legal currency among those
states for "paperless" transactions, pending the substitution of Euro banknotes
and coins for the national currencies of the participating member states. As of
that date, fixed exchange rates were introduced. It is anticipated that by July
1, 2002, the Euro will be the official legal tender for the participating member
states and that the national currencies of those member states will be withdrawn
from circulation.
The introduction of the Euro has necessitated only minor changes in our
information technology and other systems in order to accommodate the use of the
Euro in corporate transactions and in financial reporting. Costs incurred in
connection with the conversion have been immaterial.
Our management is informally reviewing the various ways in which the
introduction of the Euro will affect our business and competitive position. We
expect that the introduction of the Euro will result in greater market
efficiency and will foster a more competitive economic environment within and
among the participating member states. This is largely a function of the fact
that the pricing of products and services will be more transparent through the
use of a single common currency within the participating member states. While we
do not believe the Euro conversion will materially affect our operations,
particularly with respect to our sales in the participating member states, there
can be no assurance whether and to what extent the introduction of the Euro will
affect our business, financial condition and results of operations, or whether
we will be able to realize any strategic or operational benefits from the
introduction of the Euro.
We intend to continue exploring various strategic and operational
measures with respect to the introduction of the Euro with a view to enhancing
our overall financial position, operating results and market position. These
strategic and operational options will be shaped to some extent by both European
and national rules and regulations regarding the particular measures required to
complete the transition to the Euro as the legal currency of the participating
member states.
18
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARD
On June 9, 1999, the Financial Accounting Standards Board issued SFAS
No. 137, "Deferral of the Effective Date of FAS 133," which changes the
effective date of FAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. We anticipate that,
due to our limited use of derivative instruments, the adoption of SFAS 133 will
not have a significant effect on our results of operations or financial
position.
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:
o our significant level of indebtedness and limitations on our ability
to incur additional debt;
o our dependence upon Owens Corning to provide us with many materials
and services;
o our ability to establish effective and cost-efficient independent
operational management and information systems controls as a result
of our separation from Owens Corning;
o the risk of conflicts of interest with our equity holders;
o a downturn in the electronics industry and the movement of
electronics industry production outside of North America;
o our concentrated customer base and the nature of our markets;
o a disruption of production at one of our facilities;
o foreign currency fluctuations;
o an easing of import restrictions and duties with respect to glass
fabrics;
o a failure by us or our suppliers or customers to address success-
fully year 2000 issues;
o labor strikes or stoppages;
19
<PAGE>
o our ability to comply with environmental and safety and health laws
and requirements; and
o 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 Registration Statement on Form S-4 (SEC File
No. 333-72305) with respect to our 9 7/8 % Senior Subordinated Notes due 2009,
especially the "Risk Factors" section of the Registration Statement. All
forward-looking statements attributable to us or persons acting for us are
expressly qualified in their entirety by our cautionary statements.
We do not have, and expressly disclaim, any obligation to release
publicly any updates or changes in our expectations or any changes in events,
conditions or circumstances on which any forward looking statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The effects of potential changes in interest rates are discussed below.
Our market risk discussion includes "forward-looking statements" and represents
an estimate of possible changes in fair value that would occur assuming
hypothetical future movements in interest rates. These disclosures are not
precise indicators of expected future losses, but only indicators of reasonably
possible losses. As a result, actual future results may differ materially from
those presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Disclosure Regarding Forward-Looking
Statements."
Our senior credit facility is subject to market risks, including
interest rate risk. Our financial instruments are not currently subject to
commodity price risk. We hold no financial instruments for trading or
speculative purposes.
We are exposed to market risk related to changes in interest rates on
borrowings under our senior credit facility. The senior credit facility bears
interest based on LIBOR. Our interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower our
overall borrowing costs. To achieve these objectives, from time to time we enter
into interest rate swap agreements in order to mitigate our interest rate risk
with respect to indebtedness outstanding under the senior credit facility.
We entered into an interest rate swap agreement to manage our exposure
to interest rate changes under the senior credit facility. The swap involves the
exchange of fixed and variable interest rate payments based on a contractual
principal amount and time period. Payments or receipts on the agreement are
recorded as adjustments to interest expense. At September 30, 1999, we had two
interest rate swap agreements effective through September 30, 2003 and 2005 on
an initial notional amount of $240 million, equal to the original borrowings
under Term Loans A and B under our senior credit facility. Under this agreement,
we have secured a fixed LIBOR rate of interest of 4.92% on the Term Loan A and
5.04% on the Term Loan B with an aggregate on the notional amount which is
reduced in a manner consistent with the amortization of the
20
<PAGE>
principal on our term loans.
The fair value of the interest rate swap agreement represents the
estimated receipts or payments that would be made to terminate the agreement. At
September 30, 1999, we would have received approximately $11.1 million to
terminate the agreements. A 1% decrease in LIBOR would decrease the amount
received by approximately $7.3 million. The fair value is based on dealer
quotes, considering current interest rates.
In addition, we are exposed to losses in the event of nonperformance by
the counterparties under the interest rate swap agreements. We expect the
counterparties, which are major financial institutions, to perform fully under
these contracts. However, if the counterparts were to default on their
obligations under the interest rate swap agreements, we could be required to pay
the full rate on our senior credit facility, even if the rate was in excess of
the rates in the interest rate swap agreements.
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K - None
22
<PAGE>
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
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 15, 1999
23
<PAGE>
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
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 15, 1999
24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001078420
<NAME> ADVANCED GLASSFIBER YARNS LLC
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> AUG-01-1998 AUG-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 0 12,385
<SECURITIES> 0 0
<RECEIVABLES> 33,393 41,904
<ALLOWANCES> 0 (2,621)
<INVENTORY> 24,378 29,053
<CURRENT-ASSETS> 59,228 81,478
<PP&E> 149,458 165,754
<DEPRECIATION> 0 (11,935)
<TOTAL-ASSETS> 445,476 470,589
<CURRENT-LIABILITIES> 23,494 76,990
<BONDS> 391,250 351,172
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,932 19,969
<TOTAL-LIABILITY-AND-EQUITY> 445,476 470,589
<SALES> 64,612 63,620
<TOTAL-REVENUES> 64,612 63,620
<CGS> 43,394 46,478
<TOTAL-COSTS> 43,394 46,478
<OTHER-EXPENSES> 2,907 6,683
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 9,155
<INCOME-PRETAX> 18,311 1,304
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 18,311 1,304
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 18,311 1,304
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001078420
<NAME> ADVANCED GLASSFIBER YARNS LLC
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> SEP-30-1998 SEP-30-1999
<CASH> 0 12,385
<SECURITIES> 0 0
<RECEIVABLES> 33,393 41,904
<ALLOWANCES> 0 (2,621)
<INVENTORY> 24,378 29,053
<CURRENT-ASSETS> 59,228 81,478
<PP&E> 149,458 165,754
<DEPRECIATION> 0 (11,935)
<TOTAL-ASSETS> 445,476 470,589
<CURRENT-LIABILITIES> 23,494 76,990
<BONDS> 391,250 351,172
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,932 19,969
<TOTAL-LIABILITY-AND-EQUITY> 445,476 470,589
<SALES> 205,248 187,207
<TOTAL-REVENUES> 205,248 187,207
<CGS> 134,820 132,948
<TOTAL-COSTS> 134,820 132,948
<OTHER-EXPENSES> 11,193 21,575
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 27,303
<INCOME-PRETAX> 59,235 5,381
<INCOME-TAX> 16,226 0
<INCOME-CONTINUING> 43,009 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 3,616
<CHANGES> 0 0
<NET-INCOME> 43,009 1,765
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
