-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dc4oyCsMAZ/+NCSvdCzXM/IdwC9DF07wCeVGUme1oFJHd5jjHbPKWlLYUu9l7XNl 7mmvPxojmCEH8kgo+TcrhA== 0001021408-01-002013.txt : 20010409 0001021408-01-002013.hdr.sgml : 20010409 ACCESSION NUMBER: 0001021408-01-002013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED GLASSFIBER YARNS LLC CENTRAL INDEX KEY: 0001078420 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 582407014 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72305 FILM NUMBER: 1591614 BUSINESS ADDRESS: STREET 1: 2556 WAGENER ROAD CITY: AIKEN STATE: SC ZIP: 29801 BUSINESS PHONE: 8036488351 MAIL ADDRESS: STREET 1: 2556 WAGENER ROAD CITY: AIKEN STATE: SC ZIP: 29801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGY CAPITAL CORP CENTRAL INDEX KEY: 0001078392 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72305-01 FILM NUMBER: 1591615 BUSINESS ADDRESS: STREET 1: 2556 WAGENER ROAD CITY: AIKEN STATE: SC ZIP: 29801 BUSINESS PHONE: 8036488351 10-K405 1 0001.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission File No. 333-72305 Advanced Glassfiber Yarns LLC (Exact name of registrant as specified in its charter) Delaware 3229 58-2407014 (State of formation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.) Commission File No. 333-72305-01 AGY Capital Corp. (Exact name of registrant as specified in its charter) Delaware 3229 57-1072917 (State of incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.) 2558 Wagener Road, Aiken, South Carolina 29801 (Address of registrants' principal executive office) (Zip Code) (803) 643-1501 (Registrants' telephone number, including area code) ---------------- Securities registered pursuant to Sections 12(b) or 12(g) of the Act: None Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. Yes [X] No [_] There is no established trading market for the membership interests of Advanced Glassfiber Yarns LLC. As of April 2, 2001, Porcher Industries, S.A. owned a 51.0% membership interest and Owens Corning owned a 49.0% membership interest. All 1,000 shares of common stock of AGY Capital Corp. are owned by Advanced Glassfiber Yarns LLC. Accordingly, AGY Capital Corp. meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the abbreviated narrative disclosure format. ================================================================================ ADVANCED GLASSFIBER YARNS LLC ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS
Page No. -------- PART I CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Item 1. Business 2 Item 2. Properties 8 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market For Registrants' Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17 Item 8. Financial Statements and Supplementary Data 18 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 18 PART III Item 10. Directors and Executive Officers of the Registrants 19 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 20 Item 13. Certain Relationships and Related Transactions 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27 SIGNATURES 29
1 PART I CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this Annual Report may contain forward-looking statements. These statements include, in particular, statements about our plans, strategies and prospects within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. Such statements are based on our current plans and expectations and are subject to risks and uncertainties that exist in our operations and our business environment that could render actual outcomes and results materially different from those predicted. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statements: . our significant level of indebtedness and limitations on our ability to incur additional debt; . the impact of Owens Corning's unpredictable bankruptcy proceeding on our financial condition and ongoing operations; . the risk that obtaining raw materials and capital equipment services from sources other than Owens Corning would be more costly or require us to change substantively our manufacturing processes; . the risk of conflicts of interest with our equity holders; . a downturn in the electronics industry and the movement of electronics industry production outside of North America; . our concentrated customer base and the nature of our markets; . a disruption of production at one of our facilities; . foreign currency fluctuations; . an easing of import restrictions and duties with respect to glass fabrics; . labor strikes or stoppages; . our ability to comply with environmental and safety and health laws and requirements; and . changes in economic conditions generally. This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in this Annual Report and in our Registration Statement on Form S-4 (SEC File No. 333-72305) with respect to our 9 7/8% Senior Subordinated Notes due 2009, especially the "Risk Factors" section of the Registration Statement. All forward-looking statements attributable to us or persons acting for us are expressly qualified in their entirety by our cautionary statements. We do not have, and expressly disclaim, any obligation to release publicly any updates or changes in our expectations or any changes in events, conditions or circumstances on which any forward looking statement is based. Item 1. Business General Advanced Glassfiber Yarns LLC is a Delaware limited liability company initially formed by Owens Corning to own and operate Owens Corning's Glass Yarns and Specialty Materials Business. On July 1, 1998, Owens Corning contributed substantially all of the assets and liabilities of its Glass Yarns and Specialty Materials Business to us. Thereafter, on September 30, 1998, Owens Corning sold a 51.0% interest in us to a wholly owned subsidiary of Porcher Industries. Owens Corning retained the remaining 49.0% interest. AGY Capital Corp. is a wholly owned subsidiary of Advanced Glassfiber Yarns LLC, formed solely to facilitate our offering of 9 7/8% Senior Subordinated Notes due 2009. 2 Advanced Glassfiber Yarns LLC headquarters are located at 2558 Wagener Road, Aiken South Carolina 29801. Our telephone number is (803) 643-1501. We are one of the largest global suppliers of glass yarns. We are one of only three major glass yarns producers with manufacturing facilities in North America and one of only five major glass yarns producers that supply glass yarns globally. Our glass yarns are produced by converting molten glass into thin glass filaments which are then twisted into yarn. Glass yarns, because of their unique physical properties, are a critical material used in a variety of electronic, industrial, construction and specialty applications. Heavy yarns are used in a wide range of applications, such as printed circuit boards, roofing materials, filtration equipment, building reinforcements, window screening, aerospace materials and reinforced tapes. Fine yarns are used primarily to construct laminates for multi-layer printed circuit boards, which are integral to virtually all advanced electronic products, including computers, telecommunications equipment, television equipment, automotive equipment and home appliances. We also produce a subcategory of heavy yarns known as specialty materials, such as S-2 Glass(R), a proprietary high- strength glass yarn. Specialty materials, which accounted for 11% of our 2000 net sales, are used for aircraft laminates, oxygen tanks, sporting goods and vehicle armor. Fine yarns and specialty materials generally command higher prices and profit margins than non-specialty heavy yarns, primarily due to their value-added characteristics. Attractive Industry Fundamentals. The glass yarns industry has historically been characterized by a limited number of suppliers, high barriers to entry, a limited number of cost-effective substitutes and high capacity utilization. Historically, new entry into the market has been limited due to high barriers of entry, which include technological know-how and significant capital expenditure requirements. In addition, we believe that the industry's capacity utilization generally has been high, which has allowed manufacturers to more efficiently operate their facilities. Our capacity utilization, as measured by use of installed bushings, averaged approximately 88% between 1997 and 2000. Stable Customer Base. We sell our products to over 200 customers worldwide, including every major North American and European weaver and a diverse group of other domestic and international commercial and industrial users of yarns. We maintain long-standing relationships with our major customers by collaborating with them to meet their specific manufacturing requirements and by providing high quality products and strong customer service. In addition, our customer relationships generally are stable due to the limited number of global suppliers of glass yarns and the costs to customers associated with "qualifying" new suppliers. In order to qualify a new supplier, a customer may need to modify its own loom set-ups and fabric specifications and also qualify the new glass yarn supplier with downstream manufacturers and weavers. Furthermore, although glass yarns generally represent a small fraction of an end product's overall manufacturing cost, product defects can be costly for customers. Consequently, customers demand high-quality, reliable yarns from their suppliers and we have established a reputation with our customers for meeting these demands. As a result of these factors, we have maintained strong relationships with each of our top five customers for over 25 years. Unique Properties of Glass Yarns. The characteristics of glass yarns include: . high strength-to-weight ratio; . dimensional stability; . heat resistance; . moisture resistance; . chemical resistance; . electrical resistance; and . thermal insulation. Although carbon and aramid fibers are stronger than glass yarns, they are significantly more expensive. Other materials, such as steel and wood, are less expensive but lack the physical characteristics of glass yarns. Given the 3 unique combination of physical attributes and relative low cost of glass yarns, we believe few cost-effective substitute products exist. Diversified End-Use Markets. The characteristics of glass yarn make it the material of choice for a variety of products manufactured in the electronics, industrial, construction and specialty markets. Furthermore, within each of these markets, our products have a variety of applications, including: printed circuit boards, transformers, switch-gear, filtration bags, heat shields, welding curtains, filament tape, insect screening, optical fiber cable, aircraft laminates, wire coatings, gaskets, ignition cables, reinforced concrete, roofing materials, wallcoverings, filtration equipment, sporting goods and armor. We believe that this diversity in end-use applications reduces volatility in overall demand for our products. Superior Production Technology and Product Innovation. We believe that we are the technological leader in the production of glass yarns due to our strong process engineering and product development capabilities. We pioneered the glass yarns industry with the introduction of "glass cotton" in the 1930s and the introduction of fine yarns in the 1940s, and have continued our innovation with the development of S-2 Glass(R) and Zentron(R). We employ 44 technical professionals dedicated to the development of new products, process improvements and product innovations. Business Strategy Our business strategy includes the following key elements: Emphasize Fine Yarns and Specialty Materials. We will continue our focus on increasing the proportion of our net sales attributable to fine yarns and specialty materials. Sales of fine yarns and specialty materials increased as a proportion of net sales from 33% in 1997 to 39% in 2000. We believe our global leadership in producing fine yarns and specialty materials is a competitive advantage when targeting manufacturers of sophisticated electronics and specialty composites. Develop New Products and Product Innovations. To maintain our technological leadership position in the glass yarns industry, we conduct an active internal research and development program aimed at developing new and improved products. In addition, we have formed several joint product development programs with our customers such as BGF Industries, a wholly-owned subsidiary of Porcher Industries, and downstream manufacturers. We also have a continuing relationship with Owens Corning pursuant to which we and Owens Corning conduct joint development programs and share in Owens Corning's technology and research and development. We will continue our focus on research and development and our commitment to collaborate with our customers to improve and develop products. Focus on Operating Efficiency. We continually seek to improve the quality of our production facilities and our operating systems by utilizing modern production technology. These new technologies have enabled us to increase through-put, product quality and operational flexibility. Selective Geographic Expansion. We believe that we have opportunities to expand our business outside of North America. Approximately 29% of our 2000 net sales were outside of North America, with approximately 22% in Europe, 6% in Asia and less than 1% in other regions. We believe that Asia represents an attractive long-term opportunity for sales of our fine yarns. Some of our customers are expanding their production capabilities in Asia to meet the region's demand for glass fabrics used to manufacture electronic laminates. We anticipate that glass yarns needed for such increased production will be sourced locally. Our strategy is to continue to expand outside North America by establishing in-region manufacturing capability. Products and Markets Our products are produced based on weight and strength specifications developed in close cooperation with customers. Our products fall into two categories based on filament diameter: 4 . heavy yarns, with a filament diameter between 7 and 14 microns, and . fine yarns, with a filament diameter generally up to 7 microns. The following table sets forth the percentage of net sales attributable to our two major product categories from 1998 to 2000: Year Ended December 31, ---------------------- 1998 1999 2000 ---- ---- ---- Heavy yarns 74.0% 73.0% 71.9% Fine yarns 26.0% 27.0% 28.1% ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Heavy Yarns. Heavy yarns are used for a wide range of applications, such as printed circuit boards, roofing materials, filtration equipment, building reinforcements, window screening, aerospace materials and reinforced tapes. Currently, prices for heavy yarns, excluding specialty materials, generally range from approximately $2.00 to $5.00 per kilogram. We also produce a subcategory of heavy yarns known as specialty materials, such as S-2 Glass(R), a proprietary high strength glass yarn. Specialty materials, which accounted for 11% of our 2000 sales, are used for aircraft laminates, oxygen tanks, sporting goods and vehicle armor. Currently, prices for specialty materials range from approximately $12.00 to $31.00 per kilogram. Fine Yarns. Fine yarns, which require a significant level of technical engineering expertise, generally command higher prices than non-specialty heavy yarns, and are primarily used to construct laminates in multi-layer printed circuit boards. Printed circuit board customers require a material that yields a highly uniform, flat surface. We believe that we are the world's largest producer of fine yarns and that our technological leadership differentiates us from our competitors. Currently, prices for fine yarns range from approximately $4.00 to $19.00 per kilogram. We primarily sell to glass yarn weavers who weave glass yarn into fabric ultimately used in a wide variety of end-use applications. Our customers include, among others, every major glass weaver in North America and Europe. We have a customer base of over 200 customers. Our top five and top ten customers accounted for 55% and 66% of our 1999 sales, respectively, and 57% and 70% of our 2000 sales, respectively. Our top five customers in 2000 were Porcher Industries (including its affiliates such as BGF Industries), Hexcel-Schwebel, Inc., JPS Glass Inc., Bay Mills and CS Interglas. Among the different markets in the glass yarns industry, the electronic market is characterized by a few major customers, each with a strong relationship with us but that generally qualify more than one supplier. The industrial and construction markets are characterized by many customers that generally qualify only one supplier. The specialty market is characterized by customers that require highly specialized yarns produced in a cooperative effort with the supplier and, consequently, generally qualify only one supplier. We market our products primarily through a direct sales force with offices located in the United States, Europe and Asia. Our North American customers are serviced by five sales personnel and one sales manager, European customers are serviced by three sales personnel and one sales manager and Asian customers are serviced by one sales manager. The marketing and business planning organization consists of four individuals who have product line management, pricing, market analysis, competitive intelligence, and market development responsibility for North and South America, Europe and Asia. The following table sets forth the percentage of our net sales by geographic region from 1998 to 2000: 5 Year Ended December 31, ----------------------- 1998 1999 2000 ---- ---- ---- North America 74.8% 70.5% 70.8% Europe 21.2% 25.2% 22.1% Asia 3.8% 3.8% 6.3% Latin America 0.2% 0.5% 0.8% ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Research and Development To maintain our leadership position in the glass yarns industry, we conduct an active research and development program aimed at improving our manufacturing processes and developing new and improved products. Our Science and Technology Group manages the research and development program. We spent $5.9 million, $7.5 million and $6.8 million to fund the Science and Technology Group in 1998, 1999 and 2000, respectively. A portion of the Science and Technology Group dedicates their efforts to the Technical Services Organization ("TSO"). The Aiken and Huntingdon facilities each have a TSO that is organized into technical teams around each major customer category. We also have TSO resources located at the South Hill facility and in Europe. The TSO carries out ongoing process and product improvements, troubleshooting of manufacturing problems, and transfer of newly developed processes and products to manufacturing. The Science and Technology Group also has a project engineering group which is responsible for capital projects. The remaining persons in our Science and Technology group are focused on research and development and are experts in chemistry, product development, process technology, and customer applications. The research and development work is conducted at our Aiken Central Technology Laboratory in Aiken. We have numerous United States patents, patent applications and trademarks. While we consider our patents to be valuable assets, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent or group of related patents. However, in some instances, patents and patent protection may deter entry by new competitors with respect to some of our product lines. Our policy is to obtain patents on our new products and enforce our patent rights. In connection with the formation transactions, Owens Corning assigned and licensed to us patents, know-how, trademarks and business information relating to or used in our business. In addition, we entered into a support services agreement with Owens Corning pursuant to which they will cooperate with respect to research and development. See "Certain Relationships and Related Transactions." Manufacturing Process Glass yarns are manufactured by mixing naturally occuring materials melting at high temperatures to create molten glass that flows through a bushing to create continuous glass strands. These strands are spooled and then twisted to create glass fiber yarns. We employ two types of manufacturing processes for glass yarns, "direct melt" and "indirect melt." The "direct melt" glass fiber manufacturing process, which is employed at the Aiken facility, begins when finely ground raw materials, including sand, limestone, clay, borates and specialty chemicals, are blended together in a bulk quantity called the "batch." The batch is then fed into a furnace where it is melted. The molten glass flows to numerous, heat-resistant alloy trays called bushings. These bushings have thousands of small, precisely drilled tubular openings through which glass flows and becomes filaments. The hair-like filaments are coated with an aqueous chemical mixture called "sizing," which protects the filaments during processing and handling, including weaving or braiding, and ensures good adhesion of the glass fiber to the resin when manufacturing polymer reinforcements. After sizing is applied, filaments are gathered together into strands that go through further processing steps 6 depending on the market into which the fiber will be sold. The filaments are wound onto intermediate packages by high speed winders. In most cases, the strands are unwound from the intermediate packages and are twisted together to form glass fiber yarns that are rewound onto bobbins for sale to customers. The Huntingdon facility and the South Hill facility employ a melt process, known as "indirect melt," to manufacture fine glass fiber yarns using glass marbles as the principal raw material. The glass marbles are melted in individual furnaces and pulled through bushings to form filaments. The filaments are sized, wound onto intermediate packages, and twisted in the same manner as in the direct melt process. The advantage of the indirect method is that each bushing has its own melting device. This process, which we pioneered, allows us to add incremental production capacity with more reasonable capital expense and construction time and results in a more consistent product. Raw Materials and Other Supplies and Sources The major raw materials used by us in the production of glass yarns are glass marbles at the Huntingdon and South Hill facilities, and silica and borates at the Aiken facility. We purchase glass marbles from Owens Corning pursuant to an exclusive supply agreement. Silica is readily available and is currently provided to us by a number of local suppliers. We primarily use borates in our production processes at our Aiken facility, which are sourced from a supplier in Turkey that is owned by the Turkish government. Our supply of borates from Turkey is sourced through Owens Corning under a supply agreement which provides that, if there is a limited or reduced supply of borates, Owens Corning will allocate a portion of such supply to us. In addition to the raw materials involved in the production of glass yarns, we use specialized capital equipment, such as bushings. Bushings are heat-resistant alloy trays through which molten glass is filtered to produce glass filaments. Our bushings are currently manufactured and periodically reconditioned by Owens Corning. As a part of the formation transactions, Owens Corning agreed to continue providing bushings to us and reconditioning service for the bushings. See "Certain Relationships and Related Transactions." Competition We believe that the principal competitive factors affecting the glass yarns industry include the quality, performance, product pricing and consistency of products, response to customer requirements and stability of business relationships with customers. We are one of only five major producers of glass yarns that supply their products globally. The other global suppliers are PPG, Vetrotex, Nittobo and N.E.G. In addition to the five global suppliers of glass yarns, there are two significant regional manufacturers, Taiwan Glass, a limited licensee of our technology, and Nan Ya Plastics Corp., a licensee of PPG's technology, each of which operates and has significant sales in Asia. Currently, we and PPG are the only major producers of glass yarns with production facilities in North America. However, Vetrotex has recently built a plant for the production of glass yarns, primarily for the heavy electronics market, in Mexico. We believe that this plant became operational in mid-2000. Employees As of December 31, 2000, we had approximately 1,643 full-time employees. As of that date, approximately 1,556 of the employees were engaged in manufacturing and related services. Production, maintenance, warehouse and shipping employees at our Aiken facility are represented by Teamsters Local Union Number 86, an affiliate of the International Brotherhood of Teamsters. The collective bargaining agreement with this union covering our employees at Aiken expires on May 3, 2002. The Union of Needletrades, Industrial and Textile Employees and its local 1034T represent our production, maintenance, warehouse and shipping employees at our Huntingdon facility. The collective bargaining agreement with this union covering our employees at Huntingdon expires on October 31, 2002. Management considers our labor relations to be generally good and anticipates no interruption in operations due to labor-related matters. Environmental and Health Matters 7 Our past and present operations, including our ownership and operation of real properties, are subject to extensive and changing federal, state, local and foreign environmental laws and requirements, that include, among others, those governing discharges to air and water, the handling and disposal of soils and hazardous substances and wastes, and the remediation of contamination associated with releases of hazardous substances at our facilities and off-site disposal locations. Our operations are also governed by laws and requirements relating to workplace safety and health. Management believes that we are generally in material compliance with these laws and requirements. We, like all manufacturers of glass yarns, are subject, in various jurisdictions, to laws and regulations designed to reduce solid wastes by requiring, among other things, use of materials producing waste to be degradable in landfills, minimum levels of recycled content, various recycling requirements, disposal fees and limits on the use of harmful products. In addition, various consumer and special interest groups have lobbied from time to time for the implementation of additional environmental protection measures. We do not believe that either the legislation promulgated to date or currently pending initiatives will have a material adverse effect on our business. There can be no assurance that any future legislation or regulatory efforts will not have a material adverse effect on our business, financial condition or results of operations. In connection with the formation transactions, Owens Corning retained all liabilities resulting from the presence of hazardous substances at or migrating from the sites contributed by Owens Corning to us, as well as all liabilities resulting from the transportation or arrangements made by Owens Corning for the treatment, storage or disposal of hazardous substances to any off-site location prior to September 30, 1998. We have not assumed any of these liabilities. In addition, Owens Corning has agreed to indemnify us against any losses and damages arising out of the environmental liabilities retained by Owens Corning. However, with respect to environmental remedial action, Owens Corning's indemnification obligations are limited to compliance with the standards set under applicable environmental laws and these obligations will be satisfied upon and to the extent of final approval of the remedial action by the governing environmental authority. Item 2. Properties We operate three manufacturing facilities in the United States. The following table sets forth a description of our manufacturing facilities:
2000 Owned Approximate Production or Facility Products Square Feet (in metric tons) Leased --------- -------- ----------- -------------- ------ Aiken, South Carolina Heavy, Fine, and Specialty 1,540,000 52,614 Owned Huntingdon, Pennsylvania Fine and Specialty 405,000 7,587 Owned South Hill, Virginia (1) Fine 27,200 470 Leased
- --------- (1) The South Hill facility is a co-location facility shared with BGF Industries, at which we and BGF Industries work together closely to coordinate the production of glass yarns for use solely by BGF Industries' operations at that facility. We opened the facility in June 1998 and it became fully operational in 1999. See "Certain Relationships and Related Transactions." We own all of the equipment located in the South Hill facility, but lease the building from BGF Industries. In addition to the facilities that we own or lease, subsidiaries of Owens Corning with facilities in Battice, Belgium, 8 Rio Claro, Brazil, L'Ardoise, France and Guelph, Ontario have historically provided us with specific products, primarily heavy yarns, to serve segments of the European and North American markets. Although these facilities have been retained by Owens Corning, we entered into contracts to purchase specific glass yarns manufactured at these facilities. See "Certain Relationships and Related Transactions." We believe our facilities and equipment are suitable and adequate for our business as presently conducted. Substantially all of our properties and assets and the properties and assets of our respective domestic subsidiaries serve as security for our senior credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources." Item 3. Legal Proceedings We have not been involved in any significant litigation or proceedings. From time to time, we may become involved in litigation or proceedings in the ordinary course of our business. We believe that such ordinary course of business matters will not have a material adverse effect on our financial condition, liquidity or results of operations. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters There is no established trading market for the membership interest of Advanced Glassfiber Yarns LLC or the common stock of AGY Capital Corp. Porcher Industries, S.A. owned a 51.0% membership interest and Owens Corning owned a 49.0% membership interest. All 1,000 shares of common stock of AGY Capital Corp. are owned by Advanced Glassfiber Yarns LLC. Item 6. Selected Financial Data We present below our selected historical financial information. Selected historical financial information related to Owens Corning's Glass Yarns and Specialty Materials Business is presented for each of the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1998. Selected historical financial information subsequent to consummation of the formation transactions on September 30, 1998 is presented for the three months ended December 31, 1998 and the years ended December 31, 1999 and 2000. We derived the historical information for the three months ended December 31, 1998, and the years ended December 31, 1999 and 2000 from our audited financial statements which appear elsewhere in this report. We derived the historical information for the years ended December 31, 1997 and 1996 and the nine months ended September 30, 1998 from the Predecesor Business audited financial statements that are not included in this report. The historical financial statements of the predecessor business were derived from the historical financial statements of Owens Corning. We have not adjusted our historical statements of operations to reflect the effect of supply agreements that we entered into with Owens Corning in connection with the formation transactions. We have presented adjusted EBITDA in our selected financial data because it is a widely accepted financial indicator of a company's ability to service indebtedness. You should not consider adjusted EBITDA as an alternative to net income or loss, as a measure of operating results, or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. Adjusted EBITDA presented below may not necessarily be comparable to similarly titled measures reported by other companies as they are not calculated identically by all companies. We define adjusted EBITDA as income or loss before income taxes and extraordinary item, interest expense, depreciation and amortization expense, non-recurring charges of $2.3 million for the three months ended December 31, 1998 and $3.0 million in 1999, and restructuring charges of $2.0 million for the nine months ended September 30, 1998 and $0.3 million in 1999. We have also presented the ratio of earnings to fixed charges. In calculating the ratio of earnings to fixed charges, earnings consist of income or loss before income taxes plus fixed charges. Fixed charges consist of interest expense, whether expensed or capitalized, and the portion of rental expense estimated to be attributable to interest. You should read the historical data set forth below in conjunction with our consolidated financial statements together with the notes thereto, included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 10
Consolidated Company The Predecessor Business ----------------------------------------- --------------------------------------- Year Three Months Nine Months Year Ended Ended Ended Ended December 31, December 31, September 30, December 31, ------------------------ ---------------------- 2000 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- ---- (dollars in thousands) Statement of Operations Data: Net sales $ 278,288 $ 252,236 $ 63,403 $ 274,979 $ 277,357 $ 205,248 203,726 183,138 43,494 180,343 182,366 134,820 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 74,562 69,098 19,909 94,636 94,991 70,428 Selling, general and administrative expenses 16,407 16,812 4,123 14,345 14,813 11,487 Amortization 11,420 11,611 2,848 - - - Restructuring cost (1) - 290 - - - 2,034 ---------- ---------- ---------- ---------- ---------- ---------- Operating income 46,735 40,385 12,938 80,291 80,178 56,907 Interest expense 35,449 36,824 9,113 - - - Other income, net (900) (2,235) (450) (3,003) (2,688) (2,328) ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes 12,186 5,796 4,275 83,294 82,866 59,235 Income taxes expense 93 190 - 33,051 32,540 16,226 ---------- ---------- ---------- ---------- ---------- ---------- Income before extraordinary loss 12,093 5,606 4,275 50,243 50,326 43,009 Extraordinary item, loss on early extinguishment of debt (3) - (3,616) - - - - ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 12,093 $ 1,990 $ 4,275 $ 50,243 $ 50,326 $ 43,009 ========== ========== ========== ========== ========== ========== Other Data: Depreciation and amortization $ 27,944 $ 25,963 $ 5,975 $ 6,394 $ 8,305 $ 8,233 Capital expenditures 12,716 18,368 6,943 13,509 8,324 15,314 Adjusted EBITDA 73,628 69,889 21,334 67,663 91,171 91,527 Cash flow from operating activities 48,243 59,187 18,819 28,438 65,274 62,113 Cash flow from investing activities (15,928) (15,603) (3,327) (13,509) (8,324) (15,314) Cash flow from financing activities (34,450) (50,155) (2,712) (14,940) (56,922) (46,783) Ratio of earnings to fixed charges 1.3x 1.2x 1.5x 67.0x 78.0x 136.0x Balance Sheet Data (2) (at period end): Working capital (deficit) $ (2,721) $ (1,964) $ 32,061 $ N/A $ (11,872) $ (4,944) Total assets 436,009 454,416 465,469 N/A 153,961 163,839 Total debt 329,586 359,855 402,198 N/A - - Net assets/Members' interest 23,751 20,231 21,285 N/A 30,940 36,850
(1) During the first quarter of 1998, we recorded a $2.0 million restructuring charge related to personnel reductions at the Aiken and Huntington facilities. We recorded a $0.3 million restructuring charge in 1999. (2) The historical balance sheet data for the periods 1996 through December 31, 1997 have not been adjusted to reflect the fact that Owens Corning did not contribute deferred tax assets to Advanced Glassfiber Yarns and that Owens Corning retained the following liabilities: income taxes payable, trade accounts payable and certain post-retirement health care benefits for those of our employees that were previously employees of Owens Corning. The December 31, 1998 balance sheet data reflects the following: the elimination of assets not contributed by Owens Corning and liabilities not assumed by Advanced Glassfiber Yarns, the accounting for the purchase by Porcher Industries of the 51.0% interest in Advanced Glassfiber Yarns and the various financing transactions related to our formation on September 30, 1998. (3) During the first quarter of 1999, we recorded a $3.6 million charge related to the write-off of debt issuance costs. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our consolidated financial statements and related notes contained in this Annual Report. Overview Advanced Glassfiber Yarns is a Delaware limited liability company initially formed by Owens Corning to own and operate its Glass Yarns and Specialty Materials Business. On July 1, 1998, Owens Corning contributed substantially all of the assets and liabilities of this business to Advanced Glassfiber Yarns. On September 30, 1998, Owens Corning sold a 51.0% interest in Advanced Glassfiber Yarns to a wholly owned subsidiary of Porcher Industries. Owens Corning retained the remaining 49.0% interest. Since, at all times up to September 30, 1998 we were either a division of Owens Corning or a wholly owned subsidiary of Owens Corning, our financial information for all periods prior to October 1, 1998 has been derived from the financial statement of Owens Corning. Since at all times up to September 30, 1998 we were either a division of Owens Corning or a wholly owned subsidiary of Owens Corning, our financial information for all periods prior to October 1, 1998 has been derived from the financial statements of Owens Corning. Accordingly, our historical financial information for the year ended December 31, 1998 is based upon the historical financial information of the business as it was operated by Owens Corning from January 1, 1998 through September 30, 1998 and the historical financial information of Advanced Glassfiber Yarns from October 1, 1998 through December 31, 1998. The historical financial statements contained in this report for all periods ending on or before September 30, 1998 have not been adjusted to reflect that Owens Corning did not contribute all of the assets and liabilities of the business to us. In addition, these historical financial statements have not been adjusted to reflect the effect of the supply agreements entered into with Owens Corning in connection with the formation transactions. See "Certain Relationships and Related Transactions." The supply agreements generally require Owens Corning to provide raw materials, capital equipment and services to us at Owens Corning's cost plus pre-determined margins. Net Sales. Effective December 31, 2000, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, as amended, in 2000. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue, including specifying basic criteria which must be met before revenue can be recognized. The impact of adopting SAB No. 101 was immaterial. Net sales consist of sales to customers, including discounts and negotiated rebates. Prices for our products depend upon the terms of our customer agreements and the category of product being sold. Gross Profit. Cost of sales consists of raw materials, energy, labor and manufacturing overhead. These components of cost of sales as a percentage of total cost of sales averaged 37% for raw materials including resale goods, 8% for energy, 41% for labor and 14% for other costs, from 1998 to 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist of the cost of our employees, including research and development and engineering personnel, and prior to 2000 the estimated costs of corporate services provided by Owens Corning. Other Income, net. Other income consists of royalties and technical service fees earned from a non-exclusive limited license granted by us to Taiwan Glass Industrial Corporation. The historical financial statements only include the portion of the royalties and fees attributable to the manufacture and sale of glass yarn products by Taiwan Glass. Other income also includes interest income and foreign currency gains and losses, as well as alloy lease income or expenses. Adjusted EBITDA. Adjusted EBITDA is defined as net income or loss before income taxes and extraordinary item, 12 interest expense, depreciation and amortization expense, non-recurring charges of $2.3 million for the three months ended December 31, 1998 and $3.0 million for 1999 and restructuring charges of $2.0 million for the nine months ended September 30, 1998 and 0.3 million in 1999. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness; however, adjusted EBITDA should not be considered as an alternative to net income or loss, as a measure of operating results or to cash flows as a measure of liquidity in accordance with generally accepted accounting principles. Adjusted EBITDA as presented in this Annual Report may not be comparable to similarly titled measures reported by other companies as they are not calculated identically by all companies. Results of Operations The following table summarizes our historical results of operations and historical results of operations as a percentage of net sales.
Consolidated Company The Predecessor --------------------------------------- Business Year Ended ------------------------ December 31, Three Months Nine Months ----------- Ended Ended 2000 1999 December 31, 1998 September 30, 1998 ---- ---- ----------------- ------------------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 73.2 72.6 68.6 65.7 ----- ----- ----- ----- Gross profit 26.8 27.4 31.4 34.3 Selling, general and administrative expenses 5.9 6.7 6.5 5.6 Amortization 4.1 4.6 4.4 -- Restructuring cost -- 0.1 -- 1.0 ----- ----- ----- ----- Operating income 16.8 16.0 20.5 27.7 Interest expense 12.7 14.6 14.4 -- Other income, net (0.3) (0.9) (0.7) (1.1) ----- ----- ----- ----- Income before taxes and extraordinary item 4.4 2.3 6.8 28.8 Income tax expense -- 0.1 -- 7.9 ----- ----- ----- ----- Income before extraordinary item 4.4 2.2 6.8 20.9 Extraordinary item, loss on early extinguishment of debt -- 1.4 -- -- ----- ----- ----- ----- Net income 4.4% 0.8% 6.8% 20.9% ===== ===== ===== =====
Fiscal Year 2000 Compared to Fiscal Year 1999 Net Sales. Net sales increased $26.1 million, or 10.3%, to $278.3 million as compared to $252.2 million in the year ended December 31, 1999. This increase was primarily due to higher demand in all markets, except in industrial products. The largest increases were in the electrical and the construction markets, with 22.8% and 14.5%, respectively. This was partially offset by the impact of a 13.0% decline in the exchange rate of the European currency versus the U.S. dollar in 2000 as compared to 1999. Price increases implemented in the last two quarters of 2000 continue to move towards the historical pricing level of late 1998 and early 1999. Gross Profit. Gross profit increased by $5.5 million, or 8.0%, from $69.1 million for 1999 to $74.6 million for 2000. As a percentage of net sales, gross profit decreased to 26.8% as compared to 27.4% for the year ended December 31, 1999. The positive impact of higher volumes sold was partially offset by the residual effect of the 1999 selling price reductions, additional startup manufacturing costs related to increases in 13 capacity in early 2000, as well as increases in energy costs since the second quarter of 2000. Excluding the impact of a weakening European currency, gross profit in the year 2000 would have been 27.7%. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to 5.9% of net sales for the year ended December 31, 2000 as compared to 6.7% of net sales for the year ended December 31, 1999. This decrease, which was primarily attributable to an increase in sales, without a corresponding increase in cost during the year of 2000, as well as 1999 non-recurring costs related to the establishment of independent operational, management and information system controls, was partially offset by an increase in depreciation of the aforesaid systems established in 1999. Operating Income. Operating income increased $6.3 million to $46.7 million, or 16.8% of net sales, for the year ended December 31, 2000 from $40.4 million, or 16.0% of net sales, for the year ended December 31, 1999. This increase was primarily related to the factors discussed above. Interest Expense. Interest expense decreased $1.4 million to $35.4 million, or 12.7% of net sales, for the year ended December 31, 2000 from $36.8 million, or 14.6% of net sales, for the year ended December 31, 1999. Other Income, net. Other income/expense, net decreased $1.3 million to $0.9 million, or 0.3% of net sales, for the year ended December 31, 2000 from $2.2 million, or 0.9% of net sales, for the year ended December 31, 1999. This increase was primarily due to the increase in alloy lease cost. Net Income. Also as a result of the aforementioned factors and the $3.6 million loss on early extinguishment of debt, which occurred in 1999, net income increased $10.1 million to $12.1 million in the year ended December 31, 2000, from $2.0 million in the year ended December 31, 1999. Fiscal Year 1999 Compared to Fiscal Year 1998 Net Sales. Net sales decreased $16.4 million, or 6.1%, to $252.2 million in 1999 from $268.6 million in 1998. This decrease was due primarily to selling price reductions, a lower demand for heavy yarns used in rigid printed circuit boards as well as reduced sales to the construction industry. The decrease was partially offset by increased industrial and specialty application sales, which improved by 11% and 7%, respectively, compared to 1998. Gross Profit. Gross profit margins decreased by $21.2 million, or 23.5%, from $90.3 million for 1998 to $69.1 million for 1999. As a percentage of net sales, gross profit decreased to 27.4% as compared to 33.6% for the year ended December 31, 1998. This decrease is attributable to selling price reductions mainly in the electronic segment and to the weakening of European currencies against the U.S. dollar. Also, higher depreciation costs resulted from the allocation of the purchase price following the acquisition of 51.0% of our shares by Porcher Industries, SA on September 30, 1998. In addition, the terms of the Owens Corning supply agreements resulted in an increase in the manufacturing costs. This was partially offset by a more favorable product mix as well as an increase in the selling price of fine yarns effective in the third quarter of 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to 6.7% from 5.8% of net sales for 1999 and 1998, respectively. This was primarily due to the establishment of independent operational, management and information system controls in connection with the formation transactions and a decrease in sales. Non-recurring costs associated with our separation from Owens Corning and establishment of such independent systems represented 1.2% of net sales for 1999. Operating Income. Income from operations decreased by $29.5 million, or 42.2%, from $69.9 million for 1998 to $40.4 million for 1999. Excluding the impact of the restructuring costs, non-recurring charges described above and amortization of intangibles, income from operations decreased by $21.7 million or 28.2% from $77.0 million for 1998 to $55.3 million for 1999. This decrease was primarily related to the factors discussed above. Interest Expense. Interest expense increased $27.7 million to $36.8 million, or 14.6% of net sales, for the year ended December 31, 1999 from $9.1 million, or 3.4% of net sales, for the year ended December 31, 1998. Other Income, net. Other income/expense, net decreased $0.6 million to $2.2 million, or 0.9% of net sales, for the 14 year ended December 31, 1999 from $2.8 million, or 1.0% of net sales, for the year ended December 31, 1998. Net Income. Also as a result of the aforementioned factors and the $3.6 million loss on early extinguishment of debt, which occurred in 1999, net income decreased $45.3 million to $2.0 million in the year ended December 31, 1999, from $47.3 million in the year ended December 31, 1998. Liquidity and Capital Resources Historically, our primary sources of liquidity prior to the formation transaction were cash flows from operations. Since the consummation of the formation transactions, our primary sources of liquidity have been cash flows from operations, borrowings under the senior credit facility and the issuance of our 9 7/8% senior subordinated notes due 2009. Our principal uses of liquidity are to fund operations, principal payments on the senior credit facility, and interest payments and to finance our planned capital expenditures. We have no mandatory payment of principal on our subordinated notes prior to their maturity. Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased $11.0 million from $59.2 million for 1999 to $48.2 million for 2000. The decrease was primarily attributable to a decrease in accounts payable and accrued liabilities of $18.3 million, a $5.5 million increase in other assets, a $2.6 million decrease in pension and post-retirement, and a decrease in alloy depletion of $1.1 million, offset by a decrease in income before depreciation, amortization and extraordinary item of $8.4 million, a $4.2 million decrease in accounts receivable related to a change in payment terms of a significant customer and improved collections and a $3.9 million decrease in inventory as a result of strong customer demand. Net Cash Used in Investing Activities. Net cash used in investing activities increased $.3 million from $15.6 million for 1999 to $15.9 million for 2000. A significant portion of these capital expenditures in 2000 was for rebuilds of glass melting furnaces and other equipment upgrades used in our operations. Capital Expenditures. We have historically financed our capital expenditures through cash flow from operations and borrowings under our senior credit facility. For the year ended December 31, 2000, capital expenditures were $19.8 million, excluding assets associated with a sale and leaseback transaction during the second quarter of 2000 pursuant to which we sold manufacturing equipment for net proceeds of approximately $3.9 million. Net Cash Used in Financing Activities. Net cash used in financing activities was $34.5 million for 2000 and primarily consists of a $4.0 million tax distribution to one of our members and net payment on term loans of $30.2 million. Sources of Liquidity. In connection with the formation transactions, we entered into a senior credit facility, which provided for: . a six-year revolver in an aggregate principal amount of up to $75.0 million, which includes a $10.0 million swing line sub-facility and a $30.0 million letter of credit sub-facility; . a seven-year term loan in an aggregate principal amount of $125.0 million; and . a six-year term loan in an aggregate principal amount of $115.0 million. On December 16, 1999, we and our lenders amended our senior credit facility to: (1) reduce the overall borrowing commitment under the six-year revolver from $75.0 million to $65.0 million; (2) re-amortize the remaining principal balance due under our seven-year term loan as a result of our repayment of $15.0 million of principal amounts due under such loan; and (3) ease the restrictions imposed by certain financial covenants. First Union National Bank serves as agent under the senior credit facility. The senior credit facility is collateralized by a first priority lien on substantially all of our properties and assets and by a pledge of Porcher Industries' interest in Advanced Glassfiber Yarns. As of December 31, 2000, $182.0 million was outstanding under the senior credit facility and we had borrowing availability thereunder equal to approximately $53.3 million. 15 Our amended senior credit facility requires us to comply with financial ratios. If we breach any of the covenants in the senior credit facility, or we are unable to comply with the required financial ratios, we may be in default under the senior credit facility and the indenture governing our 9 7/8% Senior Subordinated Notes due 2009. If we default under the senior credit facility, the lenders can declare all borrowings outstanding, including accrued interest and other fees, due and payable. If we use all of our available cash to repay borrowings under the senior credit facility, we may not be able to make payments on our notes. While we currently comply with these financial ratios, and believe that we will continue to do so, we cannot assure you that our business will generate sufficient cash flows from operations to enable us to continue to comply with such ratios in the future. On January 21, 1999, we privately issued $150.0 million of 9 7/8% Senior Subordinated Notes due 2009. Our net proceeds from the sale of these notes were approximately $142.9 million, after deducting the initial purchasers' discount. We used the net proceeds from the offering, together with additional borrowings under our senior credit facility, to repay all debt outstanding under a $150.0 million senior subordinated credit facility, which was incurred on September 30, 1998 in connection with the formation transactions. On July 23, 1999, we exchanged the notes for substantially identical new notes that have been registered under the Securities Act of 1933. We generally fund the interest payments on the notes with operating cash flows. Our ability to make scheduled payments of principal of, or to pay the interest or liquidated damages, if any, on, or to refinance, our indebtedness, or to fund planned capital expenditures will depend on our future performance, which is generally subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based upon the current level of operations, we believe that cash flows from operations and available cash, together with availability under the senior credit facility, will be adequate to meet our future liquidity needs for at least the next two years. However, we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available under the senior credit facility in an amount sufficient to enable us to service our indebtedness, or to fund our other liquidity needs, including the possible construction of a new melter at our Aiken facility and the payment of tax distributions. Impact of Owens Corning's Bankruptcy. On October 5, 2000, Owens Corning, which owns a 49.0% economic interest in Advanced Glassfiber Yarns, and certain of Owens Corning's United States subsidiaries (collectively, the "Debtors") filed voluntary petitions with the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the United States Bankruptcy Code. According to filings made by Owens Corning with the SEC, the Debtors will continue to manage their properties and operate their businesses as "debtors-in- possession" in accordance with the applicable provisions of the United States Bankruptcy Code. To date, we have not experienced interruptions in operations or supply of material. Although no assurances can be provided, we do not believe that Owens Corning's bankruptcy will have a material adverse effect on our business, financial condition or results of operations. However, this forward- looking statement is subject to risks and uncertainties that exist in our operations and our business environment. See "Cautionary Statement Regarding Forward-Looking Statements." Proposed Transaction between Our Two Members. We previously reported that Porcher Industries Group and Owens Corning executed a memorandum of understanding setting forth the general parameters pursuant to which Porcher Industries Group intended to purchase Owens Corning's 49.0% economic interest in Advanced Glassfiber Yarns. Due to Owens Corning's recent bankruptcy filing, we cannot assure you that this transaction will ever be consummated or that it will be consummated on the terms previously disclosed. In addition, consummation of such a transaction would be subject to factors outside our control, including, among other things, the execution of definitive agreements, our ability to obtain any required lender consents and other approvals, and Porcher Industries Group's ability to obtain satisfactory financing. If Porcher Industries Group acquires Owens Corning's 49.0% economic interest, we may be required to step up the value of certain assets from Owens Corning's historical book value to fair market value as of the date of the transaction. This could result in the recording of additional depreciation and amortization expense and the payment of additional property taxes, which would reduce our future net income. Introduction of the Single European Currency On January 1, 1999, eleven member states of the European Union-Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain introduced the Euro as a common legal currency 16 among those states for "paperless" transactions, pending the substitution of Euro banknotes and coins for the national currencies of the participating member states. As of that date, fixed exchange rates were introduced. It is anticipated that by July 1, 2002, the Euro will be the official legal tender for the participating member states and that the national currencies of those member states will be withdrawn from circulation. The introduction of the Euro has necessitated only minor changes in our information technology and other systems in order to accommodate the use of the Euro in corporate transactions and in financial reporting. Costs incurred in connection with the conversion have been immaterial. We expect that the final introduction of the Euro will result in greater market efficiency and will foster a more competitive economic environment within and among the participating member states. This is largely a function of the fact that the pricing of products and services will be more transparent through the use of a single common currency within the participating member states. While we do not believe the Euro conversion will materially affect our operations, particularly with respect to our sales in the participating member states, there can be no assurance whether and to what extent the introduction of the Euro will affect our business, financial condition and results of operations, or whether we will be able to realize any strategic or operational benefits from the introduction of the Euro. We intend to continue exploring various strategic and operational measures with respect to the introduction of the Euro with a view to enhancing our overall financial position, operating results and market position. These strategic and operational options will be shaped to some extent by both European and national rules and regulations regarding the particular measures required to complete the transition to the Euro as the legal currency of the participating member states. Impact of Inflation We generally attempt to pass cost increases on to our customers. Costs are affected by, among other things, inflation, and we may experience the effects of inflation in future periods. We believe, however, that inflation has not had a material impact on us during the past 3 years. Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133), subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS 133 requires us to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other accumulated comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. We will adopt SFAS 133 effective January 1, 2001 and will initially record a $4.2 million unrealized gain in Other Comprehensive Income as the cumulative effect of this change in accounting for our interest rate swaps. For our foreign currency derivatives, the adoption of SFAS 133 will not have a material impact on our financial position or results of operations. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The effects of potential changes in interest rates are discussed below. Our market risk discussion includes "forward- looking statements" and represents an estimate of possible changes in fair value that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Statement Regarding Forward- Looking Statements." Our senior credit facility is subject to market risks, including interest rate risk. Our financial instruments are not currently subject to commodity price risk. We do not enter into derivatives for trading or speculative purposes. 17 We are exposed to market risk related to changes in interest rates on borrowings under our senior credit facility. The senior credit facility bears interest based on LIBOR. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time we enter into interest rate swap agreements in order to mitigate our interest rate risk with respect to indebtedness outstanding under the senior credit facility. We entered into interest rate swap agreements to manage our exposure to interest rate changes under the senior credit facility. The swaps involve the exchange of fixed and variable interest rate payments based on a contractual principal amount and time period. Payments or receipts on the agreement are recorded as adjustments to interest expense. Under this agreement, we have secured a fixed LIBOR rate of interest of 4.92% on Term Loan A and 5.04% on the Term Loan B with an aggregate on the notional amount which is reduced in a manner consistent with the amortization of the principal on our term loans. As of December 31, 2000, we had two interest rate swap agreements effective through September 30, 2004 and 2005 on a notional amount of $172.5 million, equal to the borrowings outstanding under Term Loans A and B under our senior credit facility. During 2000 and 1999, AGY terminated portions of the interest rate swaps related to the early payment of Terms Loan A and B. As the result of this partial unwind of swap agreements, AGY recognized a gain in other income of $0.2 million and $1.5 million for the years ended December 31, 2000 and 1999, respectively. The fair value of the interest rate swap agreements, representing the estimated amounts that we would receive to terminate the agreements, was approximately $4.2 million and $12.9 million respectively as of December 31, 2000 and as of December 31, 1999. A 100 basis point decrease in LIBOR would result in our having to pay $0.5 million to terminate the agreements. The fair value is based on dealer quotes, considering current interest rates. We are exposed to foreign currency exchange rate risk mainly as a result of our export sales denominated in the Euro. Our risk management strategy is to use derivative financial instruments, including forwards, swaps, collars and purchased options, to hedge some portion or all of these exposures, in accordance with our financial risk management policy. Our objective is to limit the impact of foreign currency changes on earnings and cash flows. As of December 31, 2000, the notional value of our foreign currency hedging instruments was $11.8 million, and the approximate fair value was $-0-. The potential loss in fair value of such financial instruments from a hypothetical 10% decrease in the underlying exchange rates relative to the U.S. dollar would be approximately $0.8 million as of December 31, 2000. The potential gain in the fair value of such financial instruments from a hypothetical 10% increase in the underlying exchange rates relative to the U.S. dollar would be approximately $0.8 million as of December 31, 2000. The fair value is based on dealer quotes, considering current exchange rates. In addition, we are exposed to losses in the event of nonperformance by the counterparties under the derivative agreements. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparts were to default on their obligations under the interest rate swap agreements, we could be required to pay the full rate on our senior credit facility, even if the rate was in excess of the rates in the interest rate swap agreements. Item 8. Financial Statements and Supplementary Data See page F-1 of the financial reports included herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 18 PART III Item 10. Directors and Executive Officers of the Registrants The following table sets forth information with respect to our directors, executive officers and other key employees: Name Age Position - ---- --- -------- Robert Porcher 72 Chief Executive Officer and Chairman of the Board of Directors Robert Pistole 63 President Catherine Cuisson 35 Vice President and Chief Financial Officer Heinz J. Otto 51 Director Serge Piolat 50 Director Philippe Porcher 47 Director Michael H. Thaman 37 Director Robert Porcher is our Chief Executive Officer, Chairman of the Board and a Director. Mr. Robert Porcher has been Chairman of the Board of Directors and Chief Executive Officer of Porcher Industries from 1952 to 1998. Porcher Industries owns 51.0% of Advanced Glassfiber Yarns. Mr. Robert Porcher beneficially owns 54% of the outstanding capital stock of Porcher Industries. Since December 9, 1998, Mr. Porcher has served as the Chairman of the Supervisory Board of Porcher Industries. Robert Pistole has been our President since the departure of Robert Fisher in January 2000. Prior to joining us, Mr. Pistole was a retiree from Owens Corning where he held a number of different positions since 1963. These positions included Vice President of Operations for Composites from 1994 to 1997, Vice President of Operations for the Industrial Material Group from 1989 to 1994 and Vice President of Engineering from 1986 to 1989. Catherine Cuisson is our Vice President and Chief Financial Officer. Prior to the formation transactions, Ms. Cuisson served as Controller of Porcher Industries since November, 1994. Prior to joining Porcher Industries, Ms. Cuisson had served as a financial auditor with Coopers & Lybrand L.L.P. since 1987. Ms. Cuisson obtained the equivalent of a certified public accountancy degree upon graduating from the Institut Commercial de Nancy in Nancy, France. Heinz J. Otto is a Director. Mr. Otto has been President of Owens Corning's Composites Division since 1996. Mr. Otto previously managed the European operations of Landis & Gyr Corp., a Swiss corporation, and served on its Executive Board since 1992. Prior to joining Landis & Gyr, Mr. Otto held various management positions with General Electric Company. Serge Piolat is a Director. Since December 9, 1998, Mr. Piolat has served as Vice Chairman of the Executive Board and Chief Operating Officer of Porcher Industries. Mr Piolat previously managed different divisions of the Porcher Group since 1989. Philipe Porcher is a Director. Since December 9, 1998, Mr. Philipe Porcher has been the Chairman of the Executive Board and Chief Executive Officer of Porcher Industries. Previously, Mr. Philipe Porcher had been the Vice-Chairman of Porcher Industries since March 1993 and also served as the Manager of the technical textile division of the Porcher Group. Mr. Philipe Porcher is the son of Mr. Robert Porcher, our Chairman of the Board and a Director. Michael H. Thaman is a Director. Mr. Thaman has been Senior Vice President and Chief Financial Officer of Owens Corning since April 2000. Mr. Thaman had previously served in various 19 other management positions with Owens Corning since 1992. Prior to joining Owens Corning, Mr. Thaman spent six years as a strategy consultant at Mercer Management Consulting, where he was a vice president in their New York office. Item 11. Executive Compensation The following table sets forth information concerning the compensation of our Chief Executive Officer and our two other most highly compensated executives during 2000: Other Name and Principal Position Salary (1) Bonus Compensation --------------------------- ---------- ----- ------------ Robert Porcher Chief Executive Officer 2000 - - - 1999 - - - Robert Pistole (2) President 2000 $ 200,000 $ 100,000 $ 17,500 1999 - - - Catherine Cuisson Vice President and Chief Financial Officer 2000 $ 115,000 $ 33,250 - 1999 $ 111,250 $ 13,750 - - -------------------------------------------------------------------------------- _____________________ (1) Includes amounts earned in the indicated period that were paid in the following period. (2) Amount shown in the table consist of compensation earned by Mr. Pistole from May 2000, the date on which Mr. Pistole became our full-time President, until December 31, 2000. From January 10, 2000 until May 2000 we paid Mr. Pistole $161,449 in consulting fees to perform the role of interim President. Mr. Pistole entered into an employment contract with us in May 2000, pursuant to which Mr. Pistole agreed to serve as our President until at least December 31, 2002. This contract provides for a minimum annual base salary at the rate of $300,000 for Mr. Pistole. The minimum annual base salary may be increased by the Board of Directors. Mr Pistole's employment contract includes provisions restricting him from competing with us during employment and, except in certain circumstances, for a limited period of time after termination of employment. In addition, Mr. Pistole's employment contract provides for severance payments in the event of termination by us without cause equal to the officer's base salary at the rate then in effect for one year from the date of termination. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth information regarding each person or entity that beneficially owns more than a 5% ownership interest in Advanced Glassfiber Yarns. Each indicated entity has sole voting and investment power with respect to its respective ownership interest. Name of Beneficial Owner Ownership Interest ------------------------ ------------------ AGY Holdings, Inc. (1) 51.0% Jefferson Holdings, Inc. (2) 49.0% ____________ (1) Address is c/o BGF Industries, Inc., 3802 Robert Porcher Way, Greensboro, North Carolina 27510. Porcher Industries owns 100% of the outstanding capital stock of Glass Holdings Corp., which owns 100% of the outstanding capital stock of AGY Holdings, Inc., which is the record holder of a 51.0% ownership interest in Advanced Glassfiber Yarns. Mr. Robert Porcher owns 54.0% of the outstanding capital stock of Porcher Industries. (2) Address is One Owens Corning Parkway, Toledo, Ohio 43659-0001. Owens Corning owns 100% of the outstanding capital stock of Jefferson Holdings, Inc., which is the record holder of a 49.0% ownership interest 20 in Advanced Glassfiber Yarns. Item 13. Certain Relationships and Related Transactions Prior to the formation of Advanced Glassfiber Yarns, many of the components of the Glass Yarns and Specialty Materials Business were owned, leased or otherwise controlled by Owens Corning. These components include, among others, manufacturing facilities and equipment, employees trained in the use and repair of the equipment, access to raw materials, intellectual property rights and know-how and agreements with sales representatives worldwide. In connection with the formation transactions, we entered into agreements with Owens Corning and Porcher Industries and their respective affiliates to facilitate our continuing operation. These agreements are intended to benefit us and the other parties. However, they may result in conflicts of interest between us and these related parties. The following are summaries of these agreements and, as such, are qualified in their entirety by reference to the full text of the related agreements. Unless otherwise indicated, all agreements referred to in this section were dated September 30, 1998. On October 5, 2000, Owens Corning and certain of its United States subsidiaries (collectively, the "Debtors") filed voluntary petitions with the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the United States Bankruptcy Code. According to filings made by Owens Corning with the SEC, the Debtors will continue to manage their properties and operate their businesses as "debtors-in-possession" in accordance with the applicable provisions of the United States Bankruptcy Code. To date, we have not experienced interruptions in operations or supply of material. Although no assurances can be provided, we do not believe that Owens Corning's bankruptcy will have a material adverse effect on our business, financial condition or results of operations. However, this forward-looking statement is subject to risks and uncertainties that exist in our operations and our business environment. See "--Cautionary Statement Regarding Forward-Looking Statements." LLC Purchase Agreement Pursuant to an LLC purchase agreement, Porcher Industries purchased a 51.0% interest in Advanced Glassfiber Yarns. The LLC purchase agreement required us to enter into the supply agreements described below relating to the conduct of our business with Owens Corning, Porcher Industries and their respective affiliates. The LLC purchase agreement also requires each of Owens Corning and Porcher Industries to indemnify the other from any and all losses which arise out of the breach by the other party of any of its representations and warranties or any of its covenants contained in the LLC purchase agreement. Non-Competition Pursuant to a non-compete agreement, Owens Corning and Porcher Industries and their respective affiliates agreed not to compete with us in the manufacture and sale of particular glass yarns and specialty materials that we currently produce. Owens Corning and Porcher Industries and their respective affiliates generally may not manufacture or sell, among other things, such business products, for the later of a five-year period beginning on September 30, 1998 or any date on which either Owens Corning or Porcher Industries owns less than a 5% ownership interest in us. Owens Corning and its affiliates have retained the right to manufacture limited types of glass yarns. Employee Benefits During 1999, Owens Corning permitted our employees, including our employees who were employed by Owens Corning before September 30, 1998 ("transferred employees"), to become or remain as participants in, be covered by, or accrue benefits under certain Owens Corning employee benefit plans. We reimbursed Owens Corning specified amounts or, in some instances, Owens Corning's costs for this coverage. These arrangements with Owens Corning terminated as of December 31, 1999. We also became a participating employer in the two Owens Corning 401(k) Plans. We did not sponsor our own defined benefit pension plan in 1999. However, we paid Owens Corning specified amounts per employee who accrued benefits under the Owens Corning Merged Retirement Plan (the "OC Plan"). We also agreed to pay amounts associated with early retirement benefits under the OC Plan. Specifically, transferred employees who, as of September 30, 1998, did not qualify for the early retirement benefit under the OC Plan would continue to receive credit toward eligibility for the early retirement benefit for service with us. If a 21 transferred employee remained employed by us until he qualifies for early retirement, the OC Plan treated the transferred employee as having elected early retirement upon retirement from us. We are obligated to pay Owens Corning the difference between the lump sum benefit payable to the transferred employee as an early retiree and the lump sum benefit payable to the transferred employee as a deferred vested benefit on the date of retirement from us under the applicable provisions of the OC Plan. These liabilities were estimated to be $5.1 million on the date of the formation transactions. We established our own 401(k) Plan effective January 1, 2000 covering all eligible employees. There is a defined contribution retirement account within this plan, which includes self-directed investments into various investment vehicles. Effective January 1, 2000, we adopted health care and life insurance benefit plans for certain retired employees and their dependents. The terms of this plan are substantially the same as the Owens Corning Plan. In connection with the formation transactions, we assumed, and currently remain responsible for, the liabilities for post-retirement medical and life insurance benefits with respect to transferred employees. These liabilities were estimated to be $12.0 million on the date of the formation transactions. Facilities Arrangements at Aiken Prior to the formation transactions, Owens Corning's glass yarn and glass mat factories, located in adjacent plants in Aiken, South Carolina, shared a number of facilities and services. As part of the formation transactions, Owens Corning transferred to us its glass yarn plant in Aiken, while retaining ownership of the glass mat plant. In order to preserve the efficiencies and cost savings created by the sharing arrangements in existence before the formation transactions, we and Owens Corning have entered into the agreements described below. Aiken Sewer Agreement. We entered into a sanitary sewer agreement pursuant to which we permit Owens Corning to use our sanitary system in Aiken for sanitary wastewater discharges in exchange for the payment by Owens Corning of 50% of the actual costs of maintaining our sanitary system. The sanitary sewer agreement will terminate after a period of ten years, unless extended or otherwise terminated as set forth therein. Aiken Wastewater Treatment Agreement. We entered into a wastewater treatment agreement pursuant to which we treat at our wastewater treatment facility in Aiken aqueous industrial and laboratory waste discharged by Owens Corning. In exchange for such services, Owens Corning pays an allocated portion of our actual costs of operating the wastewater treatment facility. The wastewater treatment agreement will terminate after a period of ten years, unless extended or otherwise terminated as set forth therein. Aiken Stormwater Agreements. We entered into various stormwater agreements pursuant to which: . we permit Owens Corning to discharge stormwater into our two stormwater ponds; and . Owens Corning permits us to discharge stormwater into Owens Corning's landfill sedimentation basin in Aiken. Each party is individually responsible for any sampling and for complying with their respective stormwater permits. The stormwater agreements will terminate after a period of ten years, unless extended or otherwise terminated as set forth therein. Aiken Landfill Agreement. We entered into a landfill agreement pursuant to which Owens Corning permits us to use Owens Corning's landfill in Aiken for the disposal of waste in exchange for an allocated portion of the actual costs of operating the landfill. The landfill agreement is effective for the operating life of the landfill, unless earlier terminated as set forth therein. Facilities Arrangements at Huntingdon Huntingdon Lease. Owens Corning leases from us approximately 89,818 square feet of our facility in Huntingdon, Pennsylvania for use as a glass mat manufacturing and distribution facility. The lease will expire on September 30, 2003, unless extended or terminated as provided in the lease agreement. Owens Corning pays a nominal fixed fee for the term of the lease plus its allocated share of all building operating expenses, as calculated in the lease 22 agreement. Huntingdon Air Modeling Agreement. Prior to the formation transactions, Owens Corning treated its glass yarn and glass mat manufacturing operations in Huntingdon as a single facility for environmental compliance purposes. As part of the formation transactions, Owens Corning transferred to us the entire facility in Huntingdon, a portion of which it leases back from us. In order to maintain continuity in complying with air emission modeling requirements under applicable environmental laws, we entered into an air modeling agreement pursuant to which the parties will treat their respective facilities in Huntingdon, including the portion leased to Owens Corning, as a single facility for modeling current and/or projected air emissions. Although we have agreed to share the costs of the modeling, each party remains solely responsible for its own environmental liabilities, if any. The air modeling agreement will terminate after a period of five years, unless extended or otherwise terminated as set forth therein. Subleases Relating to Equipment at Aiken and Huntingdon Prior to the formation transactions, Owens Corning leased equipment used in the manufacturing of glass yarns at its Aiken and Huntingdon facilities. Owens Corning agreed to sublease this equipment to us on substantially the same economic terms as provided to Owens Corning in the original leases. At our Aiken facility, we sublease from Owens Corning, pursuant to Owens Corning's master leases, some manufacturing equipment owned by Carly 1995 Leasing Trust and a vacuum treatment oven owned by Pitney Bowes Credit Corporation. We sublease other manufacturing equipment from Owens Corning at its Aiken and Huntingdon facilities pursuant to Owens Corning's master lease with John Hancock Mutual Life Insurance Company. Specific terms of these subleases are described below. If any of the master leases are terminated, all of our rights under the related subleases will also terminate. Our sublease with Owens Corning relating to the Carly lease was due to expire on December 28, 2000. The sublease generally provides that we may purchase the equipment at the termination of the sublease. The purchase of this equipment and the resolution of the accrued lease payments is pending approval of the court overseeing the Owens Corning bankruptcy proceeding. We paid Owens Corning $325,000 pursuant to this sublease during 2000. We have accrued an additional expense of $106,000. The initial term of our sublease with Owens Corning relating to the Pitney Bowes/John Hancock lease ends on March 31, 2001, but may be extended for up to two additional years unless Owens Corning exercises its right to terminate the sublease. The sublease generally provides that we may purchase the vacuum treatment oven at the termination of the sublease. In 2000, we paid Owens Corning $1,325,000 and accrued an additional expense of $442,000 pursuant to this sublease. Services Agreements We have entered into several agreements pursuant to which Owens Corning performs services for us that are important to the success of our operations. Some of these services agreements continued for a short time until we hired and trained our own personnel, while others are intended to continue for a longer duration. These service agreements, which are described more fully below, provide for the fabrication and repair of equipment, engineering and technical services, sales agency agreements in Europe and administrative and information systems services. In addition to the services provided by Owens Corning, we perform manufacturing and distribution services for Owens Corning at the Huntingdon facility, where Owens Corning continues to have operations. Alloy Services Agreement. We entered into an alloy services agreement pursuant to which Owens Corning provides, at prices to be determined annually, services relating to the alloying, fabrication and repair of bushings, thermocouples and glass melter parts constructed from metal alloys. We have generally agreed to use Owens Corning exclusively for these services. Owens Corning has also agreed to manage our inventory of industrial precious metals and metal alloys and to lease to us metal alloys for use in bushings, thermocouples and glass melter parts at prices determined according to the formula set forth in the alloy services agreement. This agreement will terminate on December 31, 2005, unless extended or otherwise terminated. We paid Owens Corning $4.0 million for the refurbishing of bushings during 2000. 23 Support Services Agreement. We entered into a support services agreement pursuant to which Owens Corning provides engineering, design and technical services to us at previously agreed upon prices for a five-year period. The support services agreement will be automatically extended each year for an additional one-year term until terminated. Transitional Services Agreement. We entered into a transitional services agreement pursuant to which Owens Corning provides corporate, administrative and information systems services to us at mutually agreed upon prices. The provision of payroll and selected administration functions expired on December 31, 2000. The provision of all other services provided for in the transitional services agreement expired on December 31, 1999 or earlier. Manufacturing Services Agreement. We entered into a manufacturing services agreement pursuant to which we provide manufacturing services to Owens Corning to support their glass mat manufacturing and distribution business in Huntingdon. Owens Corning pays a monthly fee for our provision of manufacturing, management and ancillary services and pays additional fees in exchange for our provision of other services that may be requested by Owens Corning. The manufacturing services agreement will expire whenever Owens Corning or any of its affiliates no longer owns a 49.0% ownership interest in us, unless earlier terminated. Supply Agreements Prior to the formation transactions, Owens Corning obtained raw materials from its affiliates or through third party suppliers. We have entered into supply agreements, more fully described below, which provide us with access to the necessary raw materials through Owens Corning's affiliated and non-affiliated suppliers. In addition, pursuant to the agreements described below, we purchased assets of the glass yarns business of several of Owens Corning's non-U.S. affiliates. We also agreed to sell byproducts of one of its manufacturing processes to Owens Corning. Byproducts Supply Agreement. We entered into a supply agreement pursuant to which Owens Corning will purchase the first 10 million pounds of byproducts of our manufacturing processes called dry chopped yarn and slit hanks, also known as "sliver," that we produce each year. Each year, Owens Corning will pay a fixed price per pound for the first 10 million pounds of byproducts and a higher fixed price for any additional amounts shipped by us. We are under no obligation to manufacture any specified quantity of the byproducts to supply to Owens Corning. The byproducts supply agreement will expire on December 31, 2003, after which it may be renewed for additional five-year terms, unless canceled by either party. Borates Supply Agreement. Prior to the formation transactions, Owens Corning entered into an agreement with Etibank, a supplier of borates in Turkey that is owned by the Turkish government, pursuant to which Etibank mines, processes, sells and delivers borates to Owens Corning for use in manufacturing glass yarns. We entered into a borates supply agreement pursuant to which we purchase borates from Owens Corning at a price equal to Owens Corning's cost to purchase, transport and process borates plus a $150,000 annual administrative charge. The borates supply agreement will terminate on December 31, 2005, after which it will automatically renew for a period equal to any renewal period in Owens Corning's supply agreement with Etibank, unless canceled by either party upon 90 days' advance notice. OC Belgium Agreements. We and N.V. Owens Corning S.A., a wholly owned subsidiary of Owens Corning ("OC Belgium"), entered into a supply agreement in 1998 pursuant to which we purchase at previously determined prices fiberglass yarns to be manufactured by OC Belgium at its facility in Battice, Belgium. We also have the option to acquire the Battice plant's fiberglass yarns manufacturing equipment upon the termination of the agreement or at the time Owens Corning no longer uses this equipment to produce fiberglass yarns. The supply agreement with OC Belgium will terminate on December 31, 2003, after which it may be renewed for additional one-year terms, unless canceled by either party. In addition, we have an exclusive right to terminate this agreement effective December 31, 2001 upon one year's prior notice. We and OC Belgium also entered into a purchase agreement in 1998 pursuant to which we purchased OC Belgium's list of customers that purchase heavy glass yarns from OC Belgium, transferable contracts between OC Belgium and its customers, the finished products inventory of heavy glass yarns owned by OC Belgium that were located in its public warehouse in Antwerp, Belgium, and all of OC Belgium's accounts receivable arising exclusively out of the sale of heavy glass yarns by OC Belgium. 24 OC Canada Agreements. Our Canadian subsidiary and Owens-Corning Canada, Inc., a wholly owned subsidiary of Owens Corning ("OC Canada"), entered into a supply agreement pursuant to which we purchase at previously determined prices minimum and maximum quantities of fiberglass yarns to be manufactured by OC Canada at its facility in Guelph, Canada. This agreement was terminated by mutual agreement in 1999. Our Canadian subsidiary and OC Canada also entered into a purchase agreement in 1998 pursuant to which we purchased OC Canada's list of customers which purchase heavy glass yarns from OC Canada, transferable contracts between OC Canada and its customers, and all of OC Canada's accounts receivable arising exclusively out of the sale of heavy glass yarns by OC Canada. OC Japan Agreement. We and Owens Corning (Japan) Ltd., a wholly owned subsidiary of Owens Corning ("OC Japan"), entered into a purchase agreement in 1998 pursuant to which we purchased OC Japan's list of customers which purchase glass yarns from OC Japan, various transferable contracts between OC Japan, its customers, all of OC Japan's accounts receivable arising exclusively out of the sale of glass yarns by OC Japan, and the finished products inventory of glass yarns owned by OC Japan that were located in its warehouses in Tokyo and Osaka, Japan. This agreement expired on December 31, 1999 and was not renewed. Low Tex Type 30 Agreement. We and Owens Corning entered into a supply agreement on May 17, 2000 pursuant to which we will purchase for distribution of Type 30 fiberglass roving products having a bare glass linear density of 200 to 480 grams per 1000 meters. These rovings are to be manufactured by OC Brazil at its plant in Rio Claro, Brazil and by OC France at its plant in L'Ardoise, France. Glass Marbles Supply Agreement. We entered into a glass marbles supply agreement pursuant to which we purchase exclusively from Owens Corning at mutually determined prices all of our requirements for glass marbles for use in our glass yarns business. Owens Corning has agreed not to supply glass marbles to any third party for use in the manufacturing of glass yarns. We have the option to acquire Owens Corning's glass marbles manufacturing equipment upon the termination of the agreement or at the time Owens Corning no longer uses this equipment to produce glass marbles. The glass marbles supply agreement will expire on December 31, 2005, after which it may be renewed for additional five-year terms by either party, unless terminated by us upon two years' prior notice. We purchased $5.2 million of glass marbles during 2000 from Owens Corning. Co-location Arrangement with BGF Industries in South Hill, Virginia Prior to the formation transactions, Owens Corning entered into a co-location arrangement with BGF Industries in South Hill, Virginia. As a result of the formation transactions, we have succeeded to Owens Corning's rights and obligations under the co-location arrangement. As part of the arrangement, we lease approximately 27,200 square feet of segregated space within BGF Industries' recently built multi-layer plant for the purpose of manufacturing fiberglass yarn for sale to BGF Industries pursuant to a 10-year renewable supply contract. We paid BGF Industries approximately $0.7 million pursuant to this co-location arrangement during 2000. Also as part of the co-location arrangement, we lease from BGF Industries manpower at an hourly job rate per employee and BGF Industries provides technical, quality control and improvement and other non-managerial services at previously determined rates. The employee leasing and services contracts end upon the termination of either the premises lease or the supply contract. The parties also have agreed to confidentiality and disclosure obligations in connection with the co-location arrangement. 25 Intellectual Property In connection with the formation transactions, Owens-Corning Fiberglas Technology, Inc., a wholly owned subsidiary of Owens Corning, assigned to us patents, know-how, trademarks and business information, relating to or used in our business. Owens Corning has also licensed to us additional intellectual property assets and rights, mainly patents and know-how, pursuant to a patent and know-how license agreement and related agreements (collectively, the "Master License"). The Master License grants to us a worldwide, paid-up and royalty-free license to make, have made, use, sell, import and offer to sell glass fiber yarns and specialty products. The license is exclusive for the duration of the non-compete agreement between Owens Corning and us with respect to various products and non-exclusive with respect to others, and we have limited sublicensing rights. The patent license included in the Master License is for the life of the patent, while the know-how license is perpetual. The patent and know-how licenses are terminable only upon the occurrence of specified events. The Master License also includes a grant-back license pursuant to which Owens Corning may manufacture, import and sell a very limited class of yarn products under our patents and know how. This grant-back license does not include those products which Owens Corning is prohibited from selling for the duration of the non-compete agreement. The Master License further provides that Owens Corning has agreed to render to us, upon request and on terms to be agreed upon, a very limited class of services relating to our manufacture of glass yarn products. 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents Incorporated by Reference or Filed with this Report: 1. FINANCIAL STATEMENTS See Index on page F-1. 2. FINANCIAL STATEMENT SCHEDULES See Index on page F-1. 3. EXHIBITS Ex. Description --- ----------- 2.1(1) Amended and Restated Asset Contribution Agreement dated as of July 31, 1998 between Owens Corning and Lincoln Yarns LLC 2.2(1) LLC Interest Sale and Purchase Agreement dated as of July 31, 1998 among Owens Corning, Lincoln Yarns LLC and Glass Holdings Corp. 2.3(1) Amendment No. 1 to LLC Interest Sale and Purchase Agreement dated as of September 30, 1998 among Owens Corning, Advanced Glassfiber Yarns LLC and AGY Holdings, Inc. 3.1(1) Certificate of Formation of Advanced Glassfiber Yarns LLC 3.2(1) Advanced Glassfiber Yarns LLC Amended and Restated Limited Liability Company Operating Agreement between Jefferson Holdings, Inc. and AGY Holdings, Inc. dated as of September 30, 1998 3.3(1) Certificate of Incorporation of AGY Capital Corp. 3.4(1) Bylaws of AGY Capital Corp. 4.1(1) Indenture, dated as of January 21, 1999, among Advanced Glassfiber Yarns LLC, AGY Capital Corp., the Guarantors and Bank of New York, as trustee, relating to $150 million principal amount of 9 7/8% Senior Subordinated Notes due 2009. 4.2(1) Form of 9 7/8% Series A and Series B Senior Subordinated Notes due 2009 (included in Exhibit 4.1) 4.3(1) Registration Rights Agreement dated as of January 21, 1999 among Advanced Glassfiber Yarns LLC, AGY Capital Corp. and the Initial Purchasers 10.1(1) Patent and Know How License Agreement dated as of September 30, 1998 among Owens Corning Fiberglas Technology, Inc., Owens Corning and Advanced Glassfiber Yarns LLC 10.2(1) Glass Marbles Supply Agreement dated as of September 30, 1998 between Owens Corning and Advanced Glassfiber Yarns LLC 10.3(1) Alloy Services Agreement dated as of September 30, 1998 between Advanced Glassfiber Yarns LLC and Owens Corning 10.4(1) Non-Compete Agreement dated as of September 30, 1998 among Owens Corning, AGY Holdings Corp., Porcher Industries, S.A. and Advanced Glassfiber Yarns LLC 10.5(1) Manufacturing Services Agreement dated as of September 30, 1998 between Owens Corning and Advanced Glassfiber Yarns LLC 10.6(1) Trademark Assignment Agreement dated as of September 30, 1998 by Owens Corning Fiberglas Technology, Inc. and Owens Corning in favor of Advanced Glassfiber Yarns LLC 10.7(1) Master Patent and Know How Assignment Agreement dated as of September 30, 1998 by Owens Corning Fiberglas Technology, Inc., Owens Corning and Advanced Glassfiber Yarns LLC 10.8(1) Borates Supply Agreement dated as of September 30, 1998 between Owens Corning and Advanced Glassfiber Yarns LLC 10.9(1) Transitional Services Agreement dated as of September 30, 1998 by and among Owens Corning and Advanced Glassfiber Yarns LLC 10.10(1) Support Services Agreement dated as of September 30, 1998 between Advanced Glassfiber Yarns LLC and Owens Corning 10.11(1) Software License Agreement dated as of September 30, 1998 between Owens Corning and Advanced Glassfiber Yarns LLC 27 10.12(1) Keep-Well Agreement dated as of September 30, 1998 between Owens Corning and Advanced Glassfiber Yarns LLC 10.13(1) Senior Credit Agreement dated as of September 30, 1998 among Advanced Glassfiber Yarns LLC, the Guarantors, First Union National Bank, as agent and lender, and certain other lenders 10.14(1) Senior Subordinated Credit Agreement dated as of September 30, 1998 among Advanced Glassfiber Yarns LLC, the Guarantors, First Union Investors, Inc., as co-agent and lender, and Warburg Dillon Read LLC, as co-agent and lender 10.15(1) Note Purchase Agreement dated January 21, 1999 among Advanced Glassfiber Yarns LLC, AGY Capital Corp. and the Initial Purchasers 10.16(2) Syndication Amendment and Assignment dated as of November 30, 1998 among Advanced Glassfiber Yarns LLC, the Guarantors, First Union National Bank, as agent and lender, and certain other lenders. 10.17(2) Second Amendment to Credit Agreement dated as of December 16, 1999 among Advanced Glassfiber Yarns LLC, the Guarantors, First Union National Bank, as agent and lender, and certain other lenders. 10.18 Employment Agreement dated as of June 12, 2000 between Advanced Glassfiber Yarns LLC and Robert G. Pistole. 12 Statement of Computation of Ratios 21(1) Subsidiaries of the Registrant 99 Reconciliation of Net Income to EBITDA ___________ (1) Filed as part of our Registration Statement (333-72305) filed with the SEC and incorporated herein by reference. (2) Filed as part of our Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the fourth quarter of the fiscal year ending December 31, 2000. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aiken, State of South Carolina, on April 2, 2001. ADVANCED GLASSFIBER YARNS LLC By /S/ CATHERINE CUISSON --------------------- Catherine Cuisson Chief Financial Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ Robert Porcher Chief Executive Officer and April 2, 2001 - --------------------- Chairman of the Board Robert Porcher of Directors /s/ Heinz J. Otto Director April 2, 2001 - --------------------- Heinz J. Otto /s/ Serge Piolat Director April 2, 2001 - --------------------- Serge Piolat /s/ Philippe Porcher Director April 2, 2001 - --------------------- Philippe Porcher /s/ Michael H. Thaman Director April 2, 2001 - --------------------- Michael H. Thaman /s/ Robert G. Pistole President April 2, 2001 - --------------------- Robert G. Pistole /s/ Catherine Cuisson Vice President and April 2, 2001 - --------------------- Chief Financial Officer Catherine Cuisson (Principal Financial and Accounting Officer) 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aiken, State of South Carolina, on April 2, 2001. AGY CAPITAL CORP. By /s/ Catherine Cuisson --------------------------- Catherine Cuisson Chief Financial Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ Robert Porcher Chief Executive Officer and April 2, 2001 - ------------------------- Chairman of the Board Robert Porcher of Directors /s/ Heinz J. Otto Director April 2, 2001 - ------------------------- Heinz J. Otto /s/ Serge Piolat Director April 2, 2001 - ------------------------- Serge Piolat /s/ Philippe Porcher Director April 2, 2001 - ------------------------- Philippe Porcher /s/ Michael H. Thaman Director April 2, 2001 - ------------------------- Michael H. Thaman /s/ Robert G. Pistole President April 2, 2001 - ------------------------- Robert G. Pistole /s/ Catherine Cuisson Vice President and April 2, 2001 - ------------------------- Chief Financial Officer Catherine Cuisson (Principal Financial and Accounting Officer) 30 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Material Business) INDEX TO FINANCIAL STATEMENTS
Page No. -------- Report of Independent Accountants F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3 Consolidated Statements of Operations for the years ended December 31, 2000 and 1999, and the periods October 1, 1998 to December 31, 1998 and January 1, 1998 to September 30, 1998 F-4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000 and 1999, and the periods October 1, 1998 to December 31, 1998 and January 1, 1998 to September 30, 1998 F-5 Consolidated Statements of Cash Flows for years ended December 31, 2000 and 1999 and the periods, October 1, 1998 to December 31, 1998 and January 1, 1998 to September 30, 1998 F-6 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Advanced Glassfiber Yarns LLC: We have audited the accompanying consolidated balance sheets of Advanced Glassfiber Yarns LLC and subsidiaries ("AGY" or "the Consolidated Company") as of December 31, 2000 and December 31, 1999 and the related statements of operations, of comprehensive income and of cash flows for the years ending December 31, 2000 and 1999 and for the period from October 1, 1998 to December 31, 1998. We have also audited the statements of operations, of comprehensive income and of cash flows of the Predecessor Business (as described in Note 1) for the period from January 1, 1998 to September 30, 1998. These financial statements are the responsibility of the Company's and the Predecessor Business' management, respectively. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements for the periods ended prior to October 1, 1998 do not reflect the new basis of accounting established by the acquisition of the 51.0% interest in the Predecessor Business as described in Note 1, and are presented on the historical cost basis existing prior to the acquisition period. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AGY as of December 31, 2000 and 1999 and the results of their operations and of their cash flows for the years ended December 31, 2000 and 1999, and for the period from October 1, 1998 to December 31, 1998 and the results of operations and cash flows of the Predecessor Business for the period from January 1, 1998 to September 30, 1998, in conformity with accounting principles generally accepted in the United States of America. PRICEWATERHOUSECOOPERS LLP February 16, 2001 F-2 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, December 31, 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 4,054 $ 6,223 Trade accounts receivable less allowance of $1,770 and $3,200 respectively 29,981 33,460 Inventories (Note 3) 25,011 26,813 Other current assets 5,947 645 ---------- --------- Total current assets 64,993 67,141 ---------- --------- Net property, plant and equipment (Note 4) 148,438 151,605 Intangible assets, net (Note 5) 222,578 235,670 ---------- --------- Total assets $ 436,009 $ 454,416 ========== ========= LIABILITIES AND MEMBERS' INTEREST Current liabilities: Accounts payable $ 29,181 $ 26,412 Accrued liabilities (Note 6) 23,863 24,303 Current portion of long-term debt (Note 7) 14,670 18,390 ---------- --------- Total current liabilities 67,714 69,105 ---------- --------- Long-term debt, net of discount of $2,616 and $2,819, respectively (Note 7) 314,916 341,465 Deferred distribution (Note 17) 6,681 1,819 Pension and other employee benefit plans (Note 10) 22,947 21,796 ---------- --------- Total liabilities 412,258 434,185 ---------- --------- Commitments and contingencies (Note 19) - - Members' interest (Note 8 and 17) 23,751 20,231 ---------- --------- Total liabilities and members' interest $ 436,009 $ 454,416 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. F-3 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands)
Consolidated Company Predecessor Business --------------------------------------- ---------------------- For the Year Three Months Nine Months Ended December 31, Ended Ended 2000 1999 December 31, 1998 September 30, 1998 ---- ---- ----------------- ------------------ Net sales (Note 15) $ 278,288 $ 252,236 $ 63,403 $ 205,248 Cost of goods sold 203,726 183,138 43,494 134,820 --------- --------- --------- --------- Gross profit 74,562 69,098 19,909 70,428 Selling, general and administrative expenses 16,407 16,812 4,123 11,487 Amortization 11,420 11,611 2,848 - Restructuring cost - 290 - 2,034 --------- --------- --------- --------- Operating income 46,735 40,385 12,938 56,907 Interest expense (Note 13) 35,449 36,824 9,113 - Other income (900) (2,235) (450) (2,328) --------- --------- --------- --------- Income before provision for income taxes and extraordinary item 12,186 5,796 4,275 59,235 Income tax expense (Note 14) 93 190 - 16,226 --------- --------- --------- --------- Income before extraordinary item 12,093 5,606 4,275 43,009 Extraordinary item, loss on early extinguishment of debt (Note 7) - 3,616 - - --------- --------- --------- --------- Net income $ 12,093 $ 1,990 $ 4,275 $ 43,009 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-4 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands)
Consolidated Company Predecessor Business ---------------------------------------- ------------------------- For the Year Three Months Nine Months Ended December 31, Ended Ended 2000 1999 December 31, 1998 September 30, 1998 ---- ---- ----------------- ------------------ Net income $ 12,093 $ 1,990 $ 4,275 $ 43,009 Other comprehensive income (loss): Foreign currency translation (31) 199 (1) 539 --------- -------- -------- --------- Comprehensive income $ 12,062 $ 2,189 $ 4,274 $ 43,548 ========= ======== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. F-5 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Consolidated Company Predecessor Business --------------------------------------- -------------------- For the Year Three Months Nine Months Ended December 31, Ended Ended ------------------ December 31 September 30,* 2000 1999 1998 1998 ---- ---- ---- ---- Cash flows from operating activities: Net income $ 12,093 $ 1,990 $ 4,275 $ 43,009 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 14,573 12,376 2,753 6,394 Amortization of debt issuance costs 1,747 1,795 374 - Amortization of goodwill and other intangibles 11,420 11,611 2,848 - Amortization of discount on notes 204 181 - - Inventory noncash change - - 1,321 - Deferred income tax credit - - - (841) Extraordinary loss - 3,616 - - Alloy depletion 1,224 2,254 613 2,499 Changes in assets and liabilities: - Trade accounts receivable, net 3,450 (739) (478) (13,788) Inventories 1,802 (2,108) (2,489) (3,591) Other assets (5,306) 186 (34) (278) Accounts payable 5,385 17,679 6,486 (468) Accrued liabilities 500 6,550 2,250 702 Pension and post-retirement 1,151 3,796 900 1,912 Income taxes payable - - - (7,112) ---------- ----------- ----------- ----------- Net cash provided by operating activities 48,243 59,187 18,819 28,438 ---------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment (19,760) (15,277) (3,327) (13,509) Proceeds from sale of fixed assets 3,915 - - - Other (83) (326) - - ---------- ----------- ----------- ----------- Net cash used in investing activities (15,928) (15,603) (3,327) (13,509) ---------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from (payments on) revolving credit facility, net (200) (5,300) 1,000 14,000 Proceeds from (payments on) bridge facility - (150,000) - 150,000 Payments on capital lease (92) (100) - - Proceeds from senior subordinated notes - 147,000 - - Repayment to members - - (525) - Proceeds from (payments on) term loans (30,179) (34,125) (3,187) 240,000 Distribution to Porcher Industries - - - (203,624) Distribution to Owens Corning (3,979) (1,587) - (195,638) Contribution from Owens Corning - - - 2,250 Net transfers to Owens Corning - - - (14,940) Debt issuance costs - (6,043) - (6,988) ---------- ----------- ----------- ----------- Net cash used in financing activities (34,450) (50,155) (2,712) (14,940) ---------- ----------- ----------- ----------- Effect of exchange rate on cash (34) 15 (1) 11 ---------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (2,169) (6,556) 12,779 - ---------- ----------- ----------- ----------- Cash and cash equivalents, beginning of period 6,223 12,779 - - ---------- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 4,054 $ 6,223 $ 12,779 $ - ========== =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ 32,982 $ 27,697 $ 8,929 $ - ========== =========== =========== =========== Supplemental disclosure of non-cash financing/investing activities: Capital lease $ - $ - $ 386 $ - ========== =========== =========== =========== Non-cash contribution to capital $ - $ - $ - $ 87,134 ========== =========== =========== =========== Non-cash disposal of fixed assets $ 630 $ - $ - $ - ========== =========== =========== =========== Final fixed assets appraisal reclassification $ - $ 4,171 $ - $ - ========== =========== =========== =========== Step-up of assets from sale of 51% interest $ - $ - $ - $ 267,341 ========== =========== =========== =========== Property and equipment financed in accrueds increase (decrease) $ (2,582) $ 2,765 $ 3,230 $ - ========== =========== =========== =========== Deferred distribution to Porcher $ 4,357 $ 1,656 $ - $ - ========== =========== =========== ===========
*Includes the financing and distribution transactions described in Note 1. The accompanying notes are an integral part of the consolidated financial statements. F-6 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Advanced Glassfiber Yarns LLC ("AGY" or the "Company") was formed by Owens Corning to own and operate Owens Corning's Glass Yarns and Specialty Materials Business (the "Predecessor Business" or the "Company"), which was contributed to AGY, then a wholly-owned subsidiary of Owens Corning, on July 1, 1998 (the "Contribution"). On September 30, 1998, Owens Corning sold a 51.0% interest in AGY to a wholly owned subsidiary of Porcher Industries, S.A. ("Porcher Industries") for aggregate consideration of $338.9 million (the "Majority Purchase"). In addition, Porcher Industries paid fees and expenses of approximately $3.2 million in connection with the Majority Purchase. Therefore, the total aggregate consideration paid by Porcher Industries for its 51.0% interest in AGY was $342.1 million. Owens Corning retained a 49.0% interest in AGY. Prior to October 1, 1998, the Predecessor Business was managed as an operating unit of the Composites Systems Business of Owens Corning which provided certain administrative and operational support. The accompanying financial statements prior to the Majority Purchase include the cost of the Predecessor Business' employees and allocations of certain corporate services provided by Owens Corning. Management, using its experience with the Predecessor Business and its judgment, allocated approximately $6.2 million of such corporate services and other support to the Predecessor Business for the nine months ended September 30, 1998. The allocations were made primarily by estimating the proportional historical cost of various corporate departments and other functions providing services to the Predecessor Business. The proportions were based primarily upon estimates of the number of full time equivalent employees rendering service to the Predecessor Business. Management believes that its methodology is reasonable and that the costs of the operational and administrative support included in the accompanying financial statements prior to the Majority Purchase are comparable to those that the Predecessor Business would have incurred had it operated as a separate entity. Concurrently with the Majority Purchase, AGY was recapitalized. AGY borrowed an aggregate of $404.0 million through a combination of $254.0 million under a Senior Credit Facility (as defined herein) and $150.0 million under a Senior Subordinated Credit Facility (the "Subordinated Facility"). AGY used the proceeds from the initial borrowing under the Senior Credit Facility and Subordinated Facility plus a $2.2 million contribution from Owens Corning to pay (i) an aggregate cash distribution of $399.2 million (the "Distribution") to Owens Corning and Porcher Industries in the amounts of $195.6 million and $203.6 million, respectively, and (ii) approximately $7.0 million in fees and expenses. The initial borrowings under the Senior Credit Facility and the Subordinated Facility, and the application of the net proceeds therefrom are collectively referred to as the "Financings". The Financings, together with the Majority Purchase, are collectively referred to as the "formation transactions". In connection with the formation transactions, the net cash outlay by Porcher Industries was $138.5 million, represented by the $338.9 million paid for the Majority Purchase plus fees and expenses of $3.2 million less the $203.6 million cash distribution Porcher Industries received from AGY. The total cash consideration received by Owens Corning was $532.3 million, comprised of the $338.9 million paid by Porcher Industries and the $195.6 million cash distribution received from AGY less a $2.2 million contribution. The acquisition of the 51.0% interest in AGY by a wholly owned subsidiary of Porcher Industries was accounted for as a partial purchase business combination in accordance with the provisions of APB No. 16 "Business Combinations" and EITF Issue No. 88-16, "Basis in Leveraged Buyout Transactions." F-7 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Basis of Presentation -- (Continued) The allocation of the purchase price, as adjusted in 1999 based on final appraisals, was as follows (in thousands): Accounts receivable $ 16,411 Inventories 12,645 Property, plant and equipment 88,212 Other assets 407 Identifiable intangibles 22,000 Goodwill 216,611 Accrued liabilities (14,137) -------- $ 342,149 ======== In 1999, the Company received final appraisals on the assets acquired and as a result a reclassification of $4.2 million was made between property, plant and equipment and goodwill. 2. Summary of Significant Accounting Policies Principles of Consolidation. The business is conducted through the Company and three wholly-owned subsidiaries, AGY Yarns Canada, AGY Capital Corp. and AGY Europe SARL. Significant intercompany accounts and transactions have been eliminated. Separate financial statements or condensed consolidating financial data of the wholly-owned subsidiaries are not presented as management has determined that they would not be material to the holders of the Company's Senior Subordinated Notes. Cash and Cash Equivalents. The Company considers cash on hand, cash deposited in financial institutions and money market accounts with maturities of less than ninety days at date of purchase to be cash equivalents. These are stated at cost which approximates market value. Inventories. Inventories are stated at the lower of cost or market value and include material, labor and manufacturing overhead. Cost is determined using the first-in, first-out (FIFO) method. Rebuild of Glass Melting Furnaces. Glass melting furnaces periodically require substantial rebuilding. The time period between rebuilds varies depending upon the utilization of the furnace. The Company applies the capital method of accounting for the cost to rebuild glass melting furnaces. Under this method, costs are capitalized when incurred and depreciated over the estimated useful lives of the rebuilt furnaces, which is approximately 14 years. Property, Plant and Equipment. Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation of property, plant and equipment is calculated principally on the straight-line method over the estimated useful lives of the assets. Repairs and maintenance costs are expensed as incurred; major replacements and improvements are capitalized. When assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts with any resulting gain or loss reflected in operations. The estimated useful lives of the assets are as follows: Buildings and leasehold improvements 15-40 Years Machinery and equipment 5-25 Years Alloy metals are the primary component of the heat resistant glass forming bushings in the Company's glass melting furnaces. Molten glass is passed through the bushings to form glass filaments. During the manufacturing process a small portion of the alloy metals is physically consumed. The portion of the alloy metal physically consumed is measured at the time a bushing is reconditioned and is charged to income. The amount of metal loss and the service F-8 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Summary of Significant Accounting Policies -- (Continued) life of the bushings are dependent upon a number of factors including the type of furnace and the product being produced. Based upon historical metal loss, the Company's alloy metals have a useful life of up to 29 years. Alloy metals are an integral part of the Company's installed glass melting furnaces and therefore are classified as property, plant and equipment in the accompanying financial statements. Revenue Recognition and Concentration of Credit Risk. Revenues are recognized when both risk of loss and title to products passes to the customer, which is typically at shipment. Effective December 31, 2000, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, as amended, in 2000. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue, including specifying basic criteria which must be met before revenue can be recognized. The impact of adopting SAB No. 101 was immaterial. Two customers accounted for 46% and 47% of the Company's gross accounts receivable at December 31, 2000 and 1999, respectively. The following table represents a summary of sales to significant customers as a percentage of the Company's net sales: Consolidated Company Predecessor Business --------------------------------- -------------------- Three Months Nine Months Ended December 31, Ended Ended ------------------ December 31, September 30, 2000 1999 1998 1998 ---- ---- ---- ---- Customer A 25.0% 25.0% 22.0% 19.0% Customer B 17.0% 16.0% 16.0% 17.0% ---- ---- ---- ---- 42.0% 41.0% 38.0% 36.0% ==== ==== ==== ==== Foreign Currency Translation. The assets and liabilities of the Company's Canadian operations are translated from its functional currency to U.S. dollars at the year-end exchange rates and income and expenses are translated at the average exchange rates prevailing during the period. As of the date of the formation transactions, the European operations of AGY consisted principally of a distributorship. As of the date of the formation transactions, the European operations became a direct and integral component of the U.S. operations and are not a distinct and separate operation. On June 8, 1999, the Company formed AGY Europe, SARL, a wholly owned subsidiary located in Lyon, France. This subsidiary provides administrative and managerial support for the Company's European operations. The assets and liabilities of the Company's AGY Europe, SARL operations are translated from its functional currency to U.S. dollars at the year-end exchange rates and income and expenses are translated at the average exchange rates prevailing during the period. Prior to the formation transactions, the functional currency of Owens Corning's European operations was the local currency. Accordingly, assets and liabilities of the European group were translated at the year-end exchange rates and income and expenses were translated at the average exchange rates prevailing during the period. Adjustments resulting from the translations were recorded as a separate component of Net Assets/Members' Interest. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial F-9 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Summary of Significant Accounting Policies -- (Continued) statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intangible Assets. Included in intangible assets are goodwill, patents and trademarks, debt issuance costs and covenant not to compete. Goodwill represents the excess of cost over the fair value of tangible and intangible assets acquired. Debt issuance costs are being amortized over the terms of the respective debt agreements using the interest method (See Note 5). The Company's policy is to evaluate goodwill and other intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This evaluation is based on undiscounted operating cashflows that will result from the use of such assets. When projected future cashflows on an undiscounted basis are less than the carrying value of the assets, the impaired assets are written down to net realizable value. The Company believes there is no impairment at December 31, 2000. Other Income. Other income includes royalty and interest income, technical service fees, foreign currency gains and losses, as well as alloy lease income and expense. Research and Development. The Company expenses research and development costs as incurred. These costs were approximately $6.8 million, $7.5 million, $1.7 million and $ 4.2 million for the years ended December 31, 2000 and 1999, and the periods ended December 31, 1998, and September 30, 1998, respectively. Impairment of Long-Lived Assets. The Company assesses whether its long lived assets are impaired as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," based on an evaluation of undiscounted projected cash flows through the remaining amortization period. If an impairment exists, the amount of such impairment is calculated based on the estimated fair value of the asset. The Company believes there is no impairment at December 31, 2000. Fair Value of Financial Instruments. The fair value of financial instruments in the accompanying financial statements approximates the carrying value, unless otherwise disclosed. Recently Issued Accounting Standards. In June 1998, the Financial Accounting Standards Board (the FASB) issued Statement No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133), subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS 133 requires the Company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other accumulated comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The Company will adopt SFAS 133 effective January 1, 2001 and will initially record a $4.2 million unrealized gain in Other Comprehensive Income as the cumulative effect of this change in accounting for our interest rate swaps. For our foreign currency derivatives, the adoption of SFAS 133 will not have a material impact on the Company's financial position or results of operations. Reclassification. Certain previously reported amounts have been reclassified to conform with the current presentation. F-10 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Inventories Inventories consist of the following (in thousands): December 31, December 31, 2000 1999 ------------ ------------ Finished goods $ 20,051 $ 21,022 Materials and supplies 4,960 5,791 --------- --------- Total Inventories $ 25,011 $ 26,813 ========= ========= 4. Net Property, Plant and Equipment Net property, plant and equipment consist of the following (in thousands): December 31, December 31, 2000 1999 ------------ ------------ Land $ 827 $ 827 Building and leasehold improvements 26,659 24,840 Machinery and equipment 111,852 95,846 Construction in progress 7,383 12,578 --------- --------- Gross property, plant and equipment 146,721 134,091 --------- --------- Less: accumulated depreciation (29,677) (15,104) Alloy metals 31,394 32,618 --------- --------- Total Net property, plant and equipment $ 148,438 $ 151,605 ========= ========= The Company leases computer equipment under a capital lease agreement. The carrying value of equipment under capital leases was approximately $193,000 and $289,000 at December 31, 2000, and 1999, respectively. 5. Intangible Assets Goodwill and all other intangible assets are amortized on the straight-line method over the estimated useful lives of the assets, which are as follows (in thousands): December 31, December 31, Amortization 2000 1999 Period ------------ ------------ ------------ Goodwill $ 216,611 $ 216,611 25 Years Patents and trademarks 20,205 20,140 8 Years Debt issuance costs 13,224 13,224 6 - 10 Years Covenant not to compete 2,000 2,000 5 Years ----------- ----------- 252,040 251,975 Accumulated Amortization (29,462) (16,305) ----------- ----------- Total Intangible assets $ 222,578 $ 235,670 =========== =========== F-11 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, December 31, 2000 1999 ------------ ------------ Vacation $ 3,003 $ 3,061 Interest 7,001 6,989 Real and personal property taxes 2,531 1,487 Incentive compensation and profit sharing 2,555 717 Benefits 2,622 60 Due to Owens Corning 1,804 7,644 Other 4,347 4,345 ----------- ----------- Total Accrued liabilites $ 23,863 $ 24,303 =========== =========== Under the transitional services agreement with Owens Corning (Note 9), the administration of the Company's health benefit plan was performed by Owens Corning through December 31, 1999. As such, the accrued costs associated with these benefits are included in the due to Owens Corning as of December 31, 1999. 7. Long-Term Debt Long-term debt consists of the following (in thousands): December 31, December 31, 2000 1999 ------------ ------------ Senior Credit Facility: Revolving Credit Facility $ 9,500 $ 9,700 Term Loan A 76,840 99,188 Term Loan B 95,669 103,501 9 7/8% Senior Subordinated Notes, net of amortized discount 147,384 147,181 Capital lease obligation 193 285 ----------- ----------- 329,586 359,855 Less current portion (14,670) (18,390) ----------- ----------- Total Long-term debt $ 314,916 $ 341,465 =========== =========== F-12 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Long Term Debt - (Continued) The following is a schedule of future maturities of term debt, including minimum lease payments (in thousands): Twelve Month Ended December 31, ------------------ 2001 $ 14,670 2002 23,630 2003 23,502 2004 51,419 2005 67,833 2006 and thereafter 148,532 Senior Credit Facility. In connection with the formation transactions, AGY entered into a senior secured credit agreement, pursuant to which the lenders committed to lend to AGY up to $315.0 million (the "Senior Credit Facility"), including: (i) a six-year revolving credit facility in an aggregate principal amount of up to $75.0 million (the "Revolver") which includes a $30.0 million letter of credit subfacility; (ii) a six-year term loan in an aggregate principal amount of $115.0 million ("Term Loan A"); (iii) a seven-year term loan in an aggregate principal amount of $125.0 million ("Term Loan B" and together with Term Loan A, the "Term Loans"). On December 16, 1999, the Company and its lenders amended the Senior Credit Facility, reducing the available amount of the Revolver from $75.0 million to $65.0 million. The available balance under the Revolver was $53.3 million and $53.9 million at December 31, 2000 and 1999, respectively. The amendment to the Senior Credit Facility also modified certain financial covenants, including the interest coverage ratio and the leverage ratio. The changes to the Senior Credit Facility as outlined in the amendment are reflected in the financial statements and in the corresponding notes as of December 31, 2000. The Senior Credit Facility is collateralized by a first priority lien on substantially all of the properties and assets of AGY and its respective domestic subsidiaries, now owned or acquired thereafter and a pledge of Porcher Industries' membership interest in AGY. The Senior Credit Facility will be guaranteed by all of AGY's future domestic subsidiaries. At AGY's option, the interest rates per annum applicable to the Revolver and the Term Loan A are fluctuating rates of interest measured by reference either to: (i) LIBOR plus a borrowing margin or (ii) the bank's base rate, which is the greater of the published prime rate or the overnight federal funds rate plus 0.5% (the "ABR") plus a borrowing margin. The applicable borrowing margin for the Revolver and Term Loan A ranges from 1.75% to 3.0% for LIBOR based borrowings and .5% to 1.75% for ABR based borrowings. The applicable borrowing margin for the Term Loan B ranges from 3.50% to 3.75% for LIBOR based borrowings and 2.25% to 2.5% for ABR based borrowings. In October 1998, the Company entered into interest rate swap agreements which convert the LIBOR rates of interest on Term Loan A and Term Loan B to 4.92% and 5.04% per annum, respectively, plus the applicable borrowing margin, in order to limit its exposure to interest rate fluctuations under the Term Loan portion of the Senior Credit Facility. These swap agreements remain in effect through the six-year and seven-year terms of Term Loan A and Term Loan B, respectively. The notional amount of these swaps was approximately $76.8 million and $95.7 million for Term Loan A and Term Loan B, respectively, at December 31, 2000. The fair value of the interest rate swap agreements, representing the estimated amount that the Company would receive to terminate the swap agreements, was approximately $ 1,306,000 and $ 2,896,000, respectively, at December 31, 2000. The Company is exposed to losses, in the event of nonperformance by the counterparties under the interest rate swap agreements. As of December 31, 2000, the Company expects the counterparties to fully perform under these contracts. During 2000 and 1999, AGY terminated portions of the interest rate swaps related to the early payment of Term Loans A and B. As the result of this partial unwind of swap agreements, AGY recognized a gain in other income of $0.2 million and $1.5 million for the years ended December 31, 2000 and 1999, respectively. F-13 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Long Term Debt - (Continued) The interest rate on borrowings outstanding under the Revolver, Term Loan A and Term Loan B as of December 31, 2000 was 9.39%, 7.67% and 8.54%, respectively. The Senior Credit Facility contains covenants restricting AGY and its subsidiaries with respect to the incurrence of debt (including guarantees); the creation of liens; substantially changing the nature of AGY's or its subsidiaries' businesses; the consummation of certain transactions such as dispositions of substantial assets, mergers, acquisitions, reorganizations and recapitalizations; the making of certain investments and loans, non-ordinary course asset sales and capital expenditures; the making of dividends and other distributions; transactions with affiliates (outside of trade sales and purchases) and AGY's ability to prepay certain debt. AGY also is required to comply with certain financial tests and maintain certain financial ratios as defined in the Senior Credit Facility. Certain of these financial tests and ratios include: (i) maintaining a maximum Leverage Ratio; (ii) maintaining a minimum Consolidated Net Worth; (iii) maintaining a minimum Interest Coverage Ratio; and (iv) maintaining a minimum Fixed Charge Coverage Ratio. At December 31, 2000 and 1999, the Company was in compliance with the aforementioned covenants. The Senior Credit Facility also contains customary Events of Default. An Event of Default under the Senior Credit Facility will allow the lenders thereunder to accelerate or, in certain cases, will automatically cause the acceleration of the maturity of the debt under the Senior Credit Facility. Further, in the event of default, the interest rate would be increased. Senior Subordinated Notes. On January 21, 1999, the Company issued $150 million of 9 7/8% Senior Subordinated Notes ($147 million net of discount) due 2009. Interest is payable semiannually beginning in July, 1999. Net proceeds of approximately $142.9 million plus additional borrowings under the revolving credit facility were used to repay outstanding indebtedness of $150.0 million under the Senior Subordinated Credit Facility. In addition, debt issuance costs of $3.6 million associated with the termination of the Senior Subordinated Credit Facility were written off in the first quarter of 1999. Other. The Company has outstanding standby letters of credit at December 31, 2000 and 1999 of approximately $2,226,000 and $1,392,000, respectively, to secure workers compensation obligations. Such letters of credit expire in September 2001 but are automatically renewable for one year if not terminated before expiration. Keepwell Agreement. In connection with the formation transactions, Owens Corning entered into a Keepwell Agreement to support the liquidity of AGY. In the event that AGY does not have the liquidity to pay the interest on the Senior Credit Facility when due, Owens Corning will loan AGY an amount equal to the aggregate deficiency. Owens Corning's obligations to make such loans is limited to a maximum aggregate amount of $65.0 million, and a maximum annual amount of $20.0 million. The Owens Corning maximum aggregate obligation is reduced by $10.0 million semi-annually beginning in 1999. This Agreement terminates in January 2002. F-14 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Membership Interest The following table sets forth the statement of changes in members' interest (net assets prior to the majority purchase) in AGY (in thousands):
Accumulated Membership Interest Other ----------------------------------- Net Comprehensive Owens Assets Income Corning Porcher Total --------- ---------- ------------ --------- ----------- Balance at December 31, 1997 $ 32,508 $ (1,568) $ - $ - $ 30,940 Net income from January 1, 1998 to June 30, 1998 24,698 - - - 24,698 Translation gain - 539 - - 539 --------- ---------- ------------ --------- ----------- Balance at June 30, 1998 57,206 (1,029) - - 56,177 Change from Business Unit to LLP (57,206) 1,029 56,177 - - Deferred tax adjustment due to change from Business Unit to LLP - - (10,513) - (10,513) Net income from July 1, 1998 to September 30, 1998 - - 18,311 - 18,311 Net transfers to Owens Corning - - (14,940) - (14,940) Net liabilities assumed by Owens Corning and treated as capital contribution - - 97,647 - 97,647 Contribution from Owens Corning - - 2,250 - 2,250 Sale of 51% interest to Porcher - - (74,808) 342,149 267,341 Distributions - - (195,638) (203,624) (399,262) --------- ---------- ------------ --------- ----------- Balance at September 30, 1998 - - (121,514) 138,525 17,011 Net income from October 1, 1998 to December 31, 1998 - - 2,095 2,180 4,275 Foreign currency translation adjustment - (1) - - (1) --------- ---------- ------------ --------- ----------- Balance at December 31, 1998 - (1) (119,419) 140,705 21,285 Net income 975 1,015 1,990 Foreign currency translation adjustment - 199 - - 199 Distribution to members - - (1,587) (1,656) (3,243) --------- ---------- ------------ --------- ----------- Balance at December 31, 1999 - 198 (120,031) 140,064 20,231 Net income 5,926 6,167 12,093 Foreign currency translation adjustment - (31) (31) Distribution to members - - (4,185) (4,357) (8,542) --------- ---------- ------------ --------- ----------- Balance at December 31, 2000 $ - $ 167 $ (118,290) $ 141,874 $ 23,751 ========= ========== ============ ========= ===========
Put Right. Commencing September 30, 2003, each of the members have the right to sell not less than all their ownership interest in AGY (a "Put Right") in the event certain conditions described below are satisfied. If either of the members exercises its Put Right, the value of the ownership interest will be determined by a third party according to the procedures set forth in the operating agreement. AGY's obligation to purchase a member's ownership interest is conditioned upon AGY financing the purchase with a third party lender while maintaining or obtaining not less than a B rating on its then outstanding unsecured debt after giving effect to the purchase. In addition, AGY's ability to fund the Put Right will be conditioned upon maintaining compliance with the covenants under the Senior Credit Facility. F-15 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Membership Interest -- (Continued) As of December 31, 2000, AGY could not finance the purchase of all or any portion of either member's ownership interest and maintain a credit rating of at least B on its existing unsecured debt. If AGY meets this requirement in the future, the Company will commence accretion to this estimated redemption value of each member's ownership interest. Such accreted redemption amount will be presented outside of the members' interest section of the balance sheet after total liabilities. Management's estimate of the aggregate value of the members' ownership interest using the measurement procedures specified in the Operating Agreement is approximately $250 million. 9. Transactions with Related Parties The Company engages in several transactions with related parties. The following is a description of these transactions. Sales. Porcher Industries and affiliates represented approximately $69,000,000, $63,000,000, $14,000,000 and $39,000,000 of AGY's net sales for the years ended December 31, 2000 and 1999 and the periods ended December 31, 1998, and September 30, 1998, respectively. Trade receivables from Porcher and affiliates were approximately $5,543,000 and $6,900,000 at December 31, 2000 and 1999, respectively. Purchases of Materials. The Company purchases glass marbles, which are used as an input material to the production of certain glass yarns, from Owens Corning. Glass marble purchases were $5,210,000, $ 4,988,000, $1,667,000 and $2,157,000 for the years ended December 31, 2000 and 1999, and the periods ended December 31, 1998, and September 30, 1998, respectively. Glass Forming Bushing Fabrication Services and Alloy Metal Loss. The glass forming bushings used in the Company's glass melting furnaces require periodic refurbishing. Refurbishing and fabrication services are provided to the Company by Owens Corning's central alloy operations. Such services and alloy metals physically consumed in the manufacturing process are charged to the Company and were $4,010,000, $3,885,000, $721,000 and $2,499,000 for the years ended December 31, 2000 and 1999, and the periods ended December 31, 1998, and September 30, 1998, respectively. Borates Supply Agreement. The Company purchases borates, which are used as an input material to the production of certain glass yarns from Owens Corning. Borates purchases were $3,205,000, $3,280,000, $879,000 and $2,550,000 for the years ended December 31, 2000 and 1999, the periods ended December 31, 1998, and September 30, 1998, respectively. Additionally, Owens Corning began charging the Company an administrative fee for these services beginning October 1, 1998. Such administrative charges were $150,000, $150,000 and $25,000 for the years ended December 31, 2000 and 1999 and the three month period ended December 31, 1998, respectively. Battice Supply Agreement. The Company purchases certain glass yarn products from Owens Corning's Battice manufacturing facility for resale. Such purchases were $19,024,000, $18,830,000 and $5,017,000 for the years ended December 31, 2000 and 1999 and the three month period ended December 31, 1998. Prior to the Majority Purchase, Owens Corning's Battice manufacturing facility sold such products directly to the customer. Byproducts Supply Agreement. Owens Corning purchases byproducts of the Company's manufacturing processes called dry chopped yarn and slit hanks from the Company. The Company's sales of these byproducts to Owens Corning were $1,198,000, $2,902,000, $244,000 and $818,000 for the years ended December 31, 2000 and 1999, and the periods ended December 31, 1998 and September 30, 1998, respectively, and are included in net sales. Owens Corning produces Low Tex Type 30 for the Company's customers. Beginning October 1, 1998 the Company receives a fee from Owen Corning equal to 10% of sales of those products to the Company's customers. Effective July 1, 2000, AGY began purchasing this product from OC at fixed prices. Total purchases of Low Tex Type 30 F-16 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Transactions with Related Parties--(Continued) were $6,390,000 for the year ended December 31, 2000. Transitional Services. The Company entered into a transitional services agreement with Owens Corning at the time of the Majority Purchase for processing the Company's payroll, health care and benefit costs, accounts payable and for providing certain accounting and information services. The transition of these functions to AGY was completed in 2000. Charges for such services were $458,000, $3,910,000 and $1,681,000, and are included in the selling, general, and administrative expenses for the years ended December 31, 2000 and 1999 and the three month period ended December 31, 1998, respectively. In addition, the Company reimbursed Owens Corning for paying certain health care costs. Such health care charges were $7,683,000 and $2,097,000, and were included in selling, general and administrative expenses for the year ended December 31, 1999 and the three month period ended December 31, 1998. Lease Transactions. The Company has entered into operating sub-lease agreements with Owens Corning for certain manufacturing equipment. The rental expense included in the Company's statements of operations associated with these leases was $2,199,000, $2,243,000, $557,000, and $1,677,000 for the years ended December 31, 2000 and 1999, and the periods ended December 31, 1998 and September 30, 1998, respectively. The future minimum rental commitments associated with these leases are as follows (in thousands): 2001 $ 1,776 2002 522 2003 26 The Company leases a manufacturing facility from a wholly-owned subsidiary of Porcher Industries. Rental expenses associated with this facility was approximately $655,000, $655,000, $165,000, and $110,000 for the years ended December 31, 2000, and 1999, and the periods ended December 31, 1998, and September 30, 1998, respectively. Amounts due to related parties as of December 31, 2000 and 1999 under these various arrangements totaled $5.6 million and $9.1 million, respectively, and are included in both accounts payable and accrued liabilities. On October 5, 2000, Owens Corning and certain of its United States subsidiaries (collectively, the "Debtors") filed voluntary petitions with the United States Bankruptcy Court for the District of Delaware seeking relief under Chapter 11 of the United States Bankruptcy Code. According to filings made by Owens Corning with the SEC, the Debtors will continue to manage their properties and operate their businesses as "debtors-in-possession" in accordance with the applicable provisions of the United States Bankruptcy Code. To date, the Company has not experienced an interruption in operations or supply of material. The Company does not believe that Owens Corning's bankruptcy will have a material adverse effect on its business, financial condition or results of operations. 10. Employee Benefits Pension Plan. Prior to the Majority Purchase, the hourly and salaried employees of the Predecessor Business participated in Company wide defined benefit plans maintained by Owens Corning. Under the plans, pension benefits were generally based on an employee's pay and number of years of service. Contributions to these pension plans were based on the calculations of independent actuaries using the projected unit credit method. Plan assets consisted primarily of equity securities with the balance in fixed income investments. The unrecognized cost of retroactive amendments and actuarial gains and losses were amortized over the average future service period of plan participants expected to receive benefits. F-17 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Employee Benefits --(Continued) Pension expense attributed to the Predecessor Business defined benefit pension plans includes the following (in thousands): Nine Months Ended September 30, 1998 ------------------ Service cost $ 1,673 Interest cost on projected benefit obligation 5,892 Actual return on plan assets (6,746) Amortization of transition amount (420) Amortization of actuarial loss 1,260 Amortization of prior service cost (765) ----- Net pension expense $ 894 ===== Assumptions used: Discount rates 6.50% Return on asset 9.00% Rate of compensation increase 5.50% Under the Majority Purchase, Owens Corning continued to remain responsible for pension benefits earned through September 30, 1998. However, AGY agreed to pay for subsidized benefits offered under the plan to participants who retire before normal retirement age. This subsidized benefit is the result of the plan paying early retirement benefits which are actuarially larger than benefits provided at normal retirement age. For those participants under age 55 on September 30, 1998, the subsidy on the entire retirement benefit (including the portion of the benefit earned while the participant was an employee of the Predecessor Business) has been borne by AGY. This liability to AGY at September 30, 1998 was actuarially calculated to be $5.1 million. Additionally, AGY has agreed to be responsible for the service costs under the plan through December 31, 1999. The amount reimbursable to Owens Corning attributed to AGY's unfunded contracted responsibility under this agreement was $8,485,000 and $7,799,000 as of December 31, 2000 and 1999, respectively. At December 31, 2000, the current portion of this liability of $858,000 has been included in accounts payable. Defined Contribution Plan. Effective January 1, 2000, AGY adopted a defined contribution 401(k) plan which allows qualifying employees to contribute up to 15% of their pre-tax compensation on an annual basis. Accordingly, AGY employees no longer participate in the Owens Corning pension plan. The Company matches 35% of each employee's contribution up to a certain percentage. For the year ended December 31, 2000, AGY contributed $926,000 under this plan. Postretirement. The employees of the Predecessor Business participated in health care and life insurance benefit plans for certain retired employees and their dependents. The heath care plans in the U.S. were unfunded and pay either: 1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or, 2) fixed amounts of medical expense retirement. Employees became eligible to participate in the health care plans upon retirement under the Predecessor Business' pension plans if they had accumulated 10 years of service after age 45. Some of the plans were contributory, with some retiree contributions adjusted annually. The Predecessor Business reserved the right to change or eliminate these benefit plans subject to the terms of collective bargaining agreements. Under the Majority Purchase, AGY assumed the liability for these health care and life insurance benefits for active employees on September 30, 1998. F-18 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Employee Benefits -- (Continued) The amount of net postretirement benefits cost attributed to AGY and the Predecessor Business included the following components (in thousands):
Consolidated Company Predecessor Business -------------------------------------------- -------------------- For the Year Three Months Nine Months Ended December 31, Ended Ended ------------------ December 31, September 30, 2000 1999 1998 1998 ---- ---- ----------------- ------------------ Service cost $ 910 $ 900 $ 225 $ 753 Interest cost on projected benefit obligation 1,199 700 175 2,864 Amortization of prior services cost (143) - - (2,599) Amortization of unrecognized loss 69 - - - -------- ------- ---------- ----------- Net pension expense $ 2,035 $ 1,600 $ 400 $ 1,018 ======== ======= ========== =========== Assumptions used: Discount rates 8.00% 8.00% 6.50% Initial health care cost trend rate 15.00% 10.00% 4-9.5% Ultimate health care cost trend rate 5.00% 4.00% 4-7%
The change in benefit obligation and the funded status of the postretirement benefit plans at December 31, is summarized below (in thousands): For the Year Ended December 31, ---------------------- 2000 1999 ---- ---- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of period $ 14,000 $ 12,400 Service cost 910 900 Interest cost 1,199 700 Actuarial loss 2,151 1,217 Amortization of prior service costs (143) - Amortization of unrecognized losses 69 - Expected benefit payments - - Adjustment for majority purchase - - ---------- --------- Benefit obligation at end of period $ 18,186 $ 15,217 ========== ========= FUNDED STATUS Funded status at end of period $ (18,186) $ (15,217) Unrecognized net actuarial loss 2,151 1,217 ---------- --------- Net amount recognized $ (16,035) $ (14,000) ========== ========= At December 31, 2000, the current portion of this liability of $715,000 has been included in accounts payable. F-19 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Employee Benefits--(Continued) Assumed health care trend rates have significant effect on the amounts reported for the health care plans. A one- percentage point change in assumed health care cost trend rates would have the following effects (in thousands):
1-Percentage Point ---------------------- Increase Decrease ---------- ---------- Effect on total of service and interest cost components for 2000 $ 214 $ (214) Effect on postretirement benefit obligation at December 31, 2000 $ 1,400 $ (1,400)
Effective January 1, 2000, AGY adopted a health care and life insurance benefit plan for certain retired employees and their dependents. The terms of this plan are substantially the same as the terms of the Owens Corning plan. 11. Concentrations The Company is self-insured for certain elements of their employee benefits, including workers compensation, but limits its liability through stop-loss insurance and annual plan maximum insurance limits. Self-insurance liabilities are based on claims filed and estimates of claims incurred but not reported. 12. Restructuring and Nonrecurring Charges During the first quarter of 1998, the Predecessor Business recorded a $2 million restructuring charge relating to personnel reductions at the Aiken and Huntingdon plant locations. The charge represents severance costs associated with the elimination of approximately 100 positions. During the period October 1, 1998 to December 31, 1998, the Company incurred nonrecurring charges of $ 626,000 related to labor agreement settlements included in the cost of sales and $268,000 related to relocation costs included in selling, general and administration expense. An additional $130,000 of costs associated with software training was incurred and is included in selling, general and administrative expenses. The operating profit for the period October 1, 1998 to December 31, 1998 was adversely impacted by $1.3 million attributable to charges resulting from the purchase accounting adjustment to reflect the fair value of the inventory as of the date of the Majority Purchase. During the year ended December 31, 1999, the Company incurred nonrecurring charges of $262,000 related to labor agreement settlements included in the cost of sales, $1,182,000 related to relocation costs included in selling, general and administrative expenses and $252,000 related to professional fees included in selling, general and administrative expenses. An additional $1,584,000 of consulting costs associated with software training and system implementation was incurred and is included in selling, general and administrative expenses. In addition, during the fourth quarter of 1999, severance costs of $290,000 were accrued and are included as restructuring charges. 13. Interest Expense Interest expense includes the following for the years ended December 31, 2000 and 1999 and the three month period ended December 31, 1998 (in thousands): F-20 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Interest Expense--(Continued)
Three Months Year Ended December 31, Ended ------------------------- December 31, 2000 1999 1998 -------- ------------ ------------ Interest expense on long-term debt $ 33,080 $ 34,848 $ 8,739 Amortization of debt issuance cost 2,369 1,976 374 --------- ------------ ------------ Total interest expense $ 35,449 $ 36,824 $ 9,113 ========= ============ ============
There was no interest expense for the nine months ended September 30, 1998. 14. Income Taxes The income tax expense, income taxes payable and deferred income taxes included in the accompanying financial statements have been calculated as if the Predecessor Business, prior to July 1, 1998 operated as a stand alone entity. Effective July 1, 1998, the Company was established as a limited liability company, and is not subject to income tax; therefore, the statement of operations included herein does not reflect income tax expense for any period subsequent to July 1, 1998. Income tax expense reflected in the statement of operations for the nine months ended September 30, 1998 represents the estimated income tax expense attributable to the results of operations of the Predecessor Business through June 30, 1998. Income tax for the periods subsequent to the Contributions is the responsibility of the members based on their respective interest in AGY. Income before income tax expense (in thousands):
Nine Month Ended September 30, 1998 ------------------ U.S. $ 57,139 Foreign 2,096 ------------ Total $ 59,235 ============
The income tax expense consists of the following (in thousands):
Nine Months Ended September 30, 1998 ------------------ Currently payable: U.S. state and federal $ 16,229 Foreign 838 Deferred: U.S. state and federal (841) ----------- Total income tax expense $ 16,226 ===========
F-21 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Income Taxes -- (Continued) The reconciliation between U.S. federal statutory rate and the effective income tax rate is: Nine Months Ended September 30, 1998 ------------------ U.S. Federal statutory rate 35% State and local income taxes 4% Foreign tax rates greater than U. S. Federal statutory rate LLC income not subject to tax (12%) ----- 27% ===== Deferred income taxes were determined based on the estimated future tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities, given the provisions of the enacted tax laws. As a result of the conversion to a limited liability company, the deferred tax asset at July 1, 1998 of $10.5 million was treated as a deemed distribution and reflected as a reduction of net assets. Income tax expense of $93,000 and $190,000 was recorded in 2000 and 1999, respectively related to foreign taxes on AGY Yarns Canada and AGY Europe SARL. Deferred taxes were immaterial as of and for the years ended December 31, 2000 and 1999. 15. Segment Information The Company operates in one business segment that manufactures glass fiber yarns and specialty materials that are used in a variety of industrial and commercial applications. The following geographic information represents the Company's net sales based on product shipment location and total assets based on physical locations for the region and period indicated (in thousands):
Consolidated Company Predecessor Business ---------------------------------------------------- -------------------- Year Year Three Months Nine Months Ended Ended Ended Ended December 31, December 31, December 31, September 30, 2000 1999 1998 1998 ---- ---- ---- ---- Net Sales North America $ 197,133 $ 177,776 $ 51,164 $ 149,686 Europe 61,525 63,500 10,861 46,276 Asia 17,522 9,690 1,244 8,929 Latin America 2,108 1,270 134 357 ------------ ------------- ---------- ------------ Total $ 278,288 $ 252,236 $ 63,403 $ 205,248 ============ ============= ========== ============ Assets by region (in thousands): December 31, December 31, 2000 1999 ------------ ------------ North America $ 394,604 $ 417,024 Europe 37,027 33,558 Asia 4,378 3,834 ------------ ---------- Total Assets $ 436,009 $ 454,416 ============ ==========
F-22 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Pro Forma Supplementary Data The following pro forma supplementary data for the period from January 1, 1998 to September 30, 1998 gives effect to the formation transactions as if they had occurred on January 1, 1998. The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company's results of operations had the transactions been consummated on the date assumed and does not project the Company's results of operations for any future date (See Notes 1 and 2). Nine Months Ended September 30, 1998 ------------------ Net sales $ 205,248 Gross profit 63,281 Operating profit 41,216 Net income 14,718 17. Distributions Pursuant to the terms of the Operating Agreement, the Company makes an annual distribution (the "Tax Distribution") from its net cash flows and permitted borrowings under the Senior Credit Facility to each of Owens Corning and Porcher Industries in order to fund the taxes payable by each owner on their proportionate share of the Company's net ordinary income and net capital gain. In connection with the Majority Purchase, the Company has made a partnership election to step up the basis of certain of the Company's tangible and intangible assets. The resulting increase in depreciation and amortization expense is allocated wholly to Porcher Industries. As a result, the Tax Distributions are not made on a pro rata basis and Porcher Industries has an unrecovered distribution amount (the "Deferred Distribution"). The Tax Distribution was $3.2 million based on the three months ended December 31, 1998, of which $1.6 million was paid to Owens Corning and $1.6 million was treated as a Deferred Distribution to Porcher Industries. The Tax Distribution was $8.5 million based on the year ended December 31, 1999 of which $4.2 million was paid to Owens Corning and $4.4 million was treated as a Deferred Distribution to Porcher Industries. The Deferred Distribution earns interest at the highest rate of interest on the Senior Credit Facility. Earned interest on the distribution was $508,000 and $163,000, for the years ended December 31, 2000 and 1999, respectively. The Deferred Distribution to Porcher Industries totalled $6,681,000 and $1,819,000 at December 31, 2000 and 1999, respectively. Based on the members' estimated taxable income for the year ended December 31, 2000, the Tax Distribution will approximate $7.8 million of which $3.8 million will be paid in cash to Owens Corning and $4.0 million will be treated as a Deferred Distribution payable to Porcher Industries. These distributions will be recorded in the first quarter of 2001. 18. Quarterly Financial Information (Unaudited) The following table sets forth summary quarterly financial information for the years ended December 31, 2000 and 1999 (in thousands):
2000 by Quarter First Second Third Fourth -------------- ----- ------ ------ ------ Net sales $70,477 $68,704 $68,834 $70,273 Gross profit 17,982 19,295 18,030 19,255 Operating income 11,157 12,054 11,220 12,304 Income before extraordinary item 2,309 3,539 1,953 4,292 Net income 2,309 3,539 1,953 4,292 1999 by Quarter First Second Third Fourth -------------- ----- ------ ----- ------ Net sales $61,970 $61,617 $63,620 $65,029 Gross profit 19,434 16,599 16,600 16,465 Operating income 12,108 9,618 9,831 8,828 Income before extraordinary item 2,838 1,240 1,304 224 Net income (778) 1,240 1,304 224
19. Commitments and Contingencies The Company is not a party to any significant litigation or claims, other than routine matters incidental to the operation of the Company. The Company does not expect that the outcome of any pending claims will have a material adverse effect on the Company's results of operations or financial position. The Company is self-insured for certain elements of their employee benefits, including workers compensation but limits its liability through stop-loss insurance and annual plan maximum insurance limits. Self-insurance liabilities are based on claims filed and estimates of claims incurred but not reported. F-23 EX-12.1 2 0002.txt COMPUTATION OF RATIO OF EARNINGS Exhibit 12 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) Computation of Ratio of Earnings to Fixed Charges (dollars in thousands)
Consolidated Company The Predecessor Business ---------------------------------------------- ------------------------------------------- Year Three Months Nine Months Year Year Ended Ended Ended Ended Ended December 31, December 31, December 31, December 31, December 31, ------------------------- ------------- ------------ ------------ ------------ 2000 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- ---- Earnings: Pretax income (a) $ 12,186 $ 5,796 $ 4,275 $ 59,235 $ 82,866 $ 83,294 Add: Fixed charges 36,400 37,790 9,354 898 1,076 618 Capitalized interest --------- ----------- --------- ---------- ---------- ---------- $ 48,586 $ 43,586 $ 13,629 $ 60,133 $ 83,942 $ 83,912 ========= =========== ========= ========== ========== ========== Fixed Charges: Interest expense (b) $ 35,449 $ 36,824 $ 9,113 $ - $ - $ - Capitalized interest - - - - - - Portion of rents representative of interest factor 951 966 241 898 1,076 618 --------- ----------- --------- ---------- ---------- ---------- $ 36,400 $ 37,790 $ 9,354 $ 898 $ 1,076 $ 618 ========= =========== ========= ========== ========== ========== Ratio of earnings to fixed charges 1.3x 1.2x 1.5x 67x 78x 136x
(a) Income before taxes, and extraordinary loss. (b) Includes amortization of debt issuance costs and original issue discount and excluded capitalized interest. EX-10.18 3 0003.txt EMPLOYMENT AGREEMENT EXHIBIT 10.18 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is dated and entered into this 12 day of June, 2000, by and among Advanced Glassfiber Yarns LLC, a Delaware corporation, ("COMPANY") and Robert Pistole, an individual residing in Aiken, South Carolina ("EMPLOYEE"). In consideration of the promises, covenants and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, EMPLOYEE and COMPANY agree as follows: 1. Employment. ---------- COMPANY hereby employs EMPLOYEE and EMPLOYEE hereby accepts employment in the position of President of COMPANY (the "Position"), effective May 1, 2000, upon the terms and conditions hereinafter set forth. 2. Services. -------- During the term of employment hereunder, EMPLOYEE shall devote substantially all of his professional time and energy to the performance of his duties in the Position and shall use his best efforts in the performance of the same. COMPANY and EMPLOYEE agree that EMPLOYEE's duties in Position shall be determined by COMPANY as they may be altered at the discretion of the Board of Directors of COMPANY ("Board"), the Chairman of the Board, or the Chief Operating Officer of the majority owner of COMPANY. EMPLOYEE shall serve as a member of the Supervisory Board of Porcher Groupe. EMPLOYEE's office shall be located at the COMPANY's headquarters in Aiken, South Carolina. EMPLOYEE will not be required to relocate outside of the Aiken, South Carolina, area without his consent. After obtaining written approval from the Board, EMPLOYEE is authorized to serve on the board of directors of other organizations as long as such service and the activities of such boards are not inconsistent with the business objectives of the COMPANY. 3. Compensation. ------------ For and in consideration of the promises and covenants made herein and the services to be provided hereunder, COMPANY agrees to compensate EMPLOYEE as follows: (a) Salary. COMPANY shall pay to EMPLOYEE an annual salary in the amount ------ of Three Hundred Thousand and No/l00 Dollars ($300,000), less taxes and other normal withholdings. Said salary shall be paid to EMPLOYEE in accordance with COMPANY's regular payroll procedures. EMPLOYEE's annual salary shall be subject to consideration for increase on each anniversary of the date of the execution of this Agreement at the discretion of the Chairman Board of the COMPANY, taking into account EMPLOYEE's performance of his duties during the preceding year and other relevant factors. Any increase in the annual salary of EMPLOYEE is subject to the approval of the Board. (b) Benefits. EMPLOYEE shall be entitled to receive or participate in all -------- employment benefits or benefit plans generally made available by COMPANY to its employees, if any, to the same extent and under the same conditions as other covered employees. In addition to the benefits so described, EMPLOYEE shall be eligible for six weeks of paid vacation (exclusive of holidays and personal days made available to COMPANY employees in the ordinary course of business), eligible to participate in the Retiree Medical Plan as designated by the COMPANY, and be eligible for an automobile allowance of $700 per month. For purposes of participation in the COMPANY Retirement Plan only, EMPLOYEE's employment shall be considered to have commenced on January 1, 2000. (c) Incentive Compensation. The EMPLOYEE shall participate in the ---------------------- Incentive Compensation plan ("IC") at the participation level of 70% of the initial annual base salary reflected herein. The participation level of EMPLOYEE will also be subject to consideration for increase at the discretion of the Chairman of the Board at any time during the term of this Agreement and shall be subject to approval by the Board. COMPANY reserves the right to alter or amend the IC plan at its discretion, provided that the IC plan shall not be modified in a manner which adversely affects EMPLOYEE unless such modifications apply generally to other senior managers of COMPANY participating in the IC plan at the time. (d) Signing Bonus. EMPLOYEE shall receiving a signing bonus of $50,000, ------------- less taxes and other normal withholdings, to be paid to EMPLOYEE in two equal installments payable on September 1, 2000, and December 31, 2000. The amount of the signing bonus reflected herein shall be deducted from the IC payment for the first year of employment to the extent IC payment may be due for said year. (e) Relocation. The COMPANY shall pay for the move and relocation of ---------- EMPLOYEE and his family in accordance with the COMPANY's transferring homeowner's policy. COMPANY agrees that EMPLOYEE's boat will be prepared and moved in accordance with EMPLOYEE's wishes. COMPANY also agrees that, until such time as construction of EMPLOYEE's house is completed, the COMPANY will pay the temporary living expenses of EMPLOYEE which are estimated to be $1100 per month for rental property and other expenses. EMPLOYEE agrees to make reasonable efforts to ensure that the total cost of his relocation shall not exceed $100,000. COMPANY will assume responsibility for payment of reasonable expenses incurred in good faith over $100,000 but will review such amounts for reasonableness. (f) Expenses. During the term of EMPLOYEE's employment hereunder, EMPLOYEE -------- shall be entitled to receive prompt reimbursement for all reasonable and customary expenses incurred by him in performing services hereunder including all expense of travel and living expenses while away from home on -2- business or at the request of and in service of the COMPANY; provided that such expenses are incurred and accounted for in accordance with the policy and procedures established by the COMPANY as approved by the Board. (g) Indemnification. COMPANY shall indemnify and provide reasonable --------------- advances for expenses to EMPLOYEE to the fullest extent provided by its bylaws as interpreted under the law of the State of Delaware. In addition, if EMPLOYEE is made a party or threatened to be made a party to any potential, pending or completed action, suit or other legal proceeding, whether civil, criminal administrative or investigative, by reason of the fact that EMPLOYEE is or was an officer, director, or employee of COMPANY or any subsidiary or affiliate thereof in which capacity EMPLOYEE is or was serving at the COMPANY's request, EMPLOYEE shall be indemnified against expenses (including reasonable attorney's fees and costs), judgments, fines, and amounts paid and incurred by him in connection with such action, suit, or proceeding. Notwithstanding any of the foregoing, EMPLOYEE shall not be entitled to any indemnification if he committed fraud or similar misconduct in relation to the underlying matter or allegations giving rise to EMPLOYEE's claimed right of indemnification. 4. Term and Termination. -------------------- EMPLOYEE's employment with COMPANY began on May 1, 2000, and shall continue through December 31, 2002, unless terminated earlier as provided in this Agreement. The parties hereto acknowledge and agree that this Agreement shall be terminated upon the occurrence of any of the following events: (a) EMPLOYEE's death, in which event EMPLOYEE shall be entitled to no further salary, incentive pay, or other compensation or benefits except as may be provided by applicable benefit plans. (b) EMPLOYEE becoming or remaining Disabled for substantially continuous period of three (3) months. For purposes of subparagraphs (b) and (c), the term "Disabled" shall mean EMPLOYEE's inability to perform the essential functions of his position with or without reasonable accommodation. In the event of termination under this subparagraph (b), medical and other benefits shall continue to the extent provided by the applicable plan(s). Except as so stated, in the event EMPLOYEE's employment is terminated under this subparagraph (b), EMPLOYEE shall be entitled to no further salary, incentive payment, or other compensation or benefits. (c) Mutual written agreement between COMPANY and EMPLOYEE to terminate. (d) Immediately upon written notice of termination from COMPANY "for cause." For purposes of this Agreement, a termination shall be considered to be "for cause" if it results from: (i) any act of fraud, misappropriation, dishonesty, -3- embezzlement, or similar misconduct by EMPLOYEE against the interest of COMPANY; (ii) EMPLOYEE's conviction of a felony or any crime involving moral turpitude; or (iii) gross negligence or neglect by EMPLOYEE in the performance of his duties (other than any such failure resulting from EMPLOYEE being Disabled or EMPLOYEE's death). In the event of termination "for cause," EMPLOYEE's compensation and other benefits set forth in this Agreement (other than benefits which have accrued but not been paid) shall terminate. (e) Upon written notice from the COMPANY for any reason other than as set forth in subparagraphs 4(a), (b), (c) or (d) of this Agreement. Termination under this provision shall be referred to as "without cause." If terminated under this subparagraph (e), EMPLOYEE shall be paid within thirty (30) days of the date of termination an amount equal to 100% of EMPLOYEE's base salary at the time of termination plus an amount equal to 70% of the maximum amount of IC plan pay which EMPLOYEE was eligible to receive in relation to the year in which the termination occurs. (f) EMPLOYEE may terminate his employment with COMPANY by providing notice in writing to the Chairman of the Board no less than ninety (90) days prior to the effective date of such termination. If notice is provided as called for herein, COMPANY shall pay to EMPLOYEE the remainder of his signing bonus, if any, when due as set forth in paragraph 3(d) hereof, as well as any expenses which may remain owing in accordance with paragraph 3(f) hereof. Except as set forth in this subparagraph (f) and any applicable benefit plan, EMPLOYEE shall be due no further salary, incentive payment or other compensation or benefit in the event EMPLOYEE terminates his employment with COMPANY. Nothing in this subparagraph (f) shall, however, alter or prejudice any rights EMPLOYEE may have under subparagraph (g) hereof in the event EMPLOYEE terminates his employment under the provisions of and in accordance with subparagraph (g) hereof. (g) EMPLOYEE may resign his employment with "Good Reason" if he resigns within ninety (90) days immediately following the occurrence of the Good Reason provided, however, that EMPLOYEE must give written notice to the Chairman of the Board of the COMPANY of the existence of Good Reason and the opportunity to cure at least thirty (30) days prior to resignation. In the event of EMPLOYEE's resignation for Good Reason within ninety (90) days immediately following the occurrence of a Good Reason, EMPLOYEE shall be entitled to severance pay of a lump sum equal to twelve (12) months of base salary at his then-current rate plus the maximum incentive bonus otherwise due for the current year. For purposes of this Agreement, "Good Reason" shall arise if, after a Change of Control, as defined below, COMPANY assigns to EMPLOYEE, without the consent of EMPLOYEE, duties materially inconsistent with EMPLOYEE's position in COMPANY, removes EMPLOYEE from executive job status, reduces EMPLOYEE's base salary, or reduces EMPLOYEE's benefits in a material manner. Notwithstanding anything else set forth in this -4- subparagraph (g), however, any payment due EMPLOYEE under this subparagraph (g) shall be reduced by any amounts paid or accrued for the benefit of EMPLOYEE during his first twelve (12) months of employment, either directly or indirectly, with any entity obtaining control as the result of a Change in Control as defined below. As used herein, "Change in Control" means and includes the occurrence of any one of the following events: (1) individuals who, as of the date of this Agreement, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided that any person becoming a director after the date of this Agreement and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the COMPANY in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; (2) any person becomes a "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the COMPANY representing more than 50% of the combined voting power of the COMPANY's then outstanding securities eligible to vote for the election of the Board (the "COMPANY Voting Securities"); provided, however, that the event described in this paragraph (2) shall not be deemed to be a Change in Control of the COMPANY by virtue of any of the following acquisitions: (A) any acquisition by a person who is on the date of this Agreement the beneficial owner of more than 50% of the outstanding COMPANY Voting Securities, (B) an acquisition by the COMPANY which reduces the number of COMPANY Voting Securities outstanding and thereby results in any person acquiring beneficial ownership of more than 50% of the outstanding COMPANY Voting Securities; provided, that if after such acquisition by the COMPANY such person becomes the beneficial owner of additional COMPANY Voting Securities that increases the percentage of outstanding COMPANY Voting Securities beneficially owned by such person, a Change in Control of the COMPANY shall then occur, (C) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the COMPANY or any parent or subsidiary, (D) an acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities, (E) an acquisition pursuant to a Non-Qualifying Transaction (as defined in paragraph (3) below), or (F) a transaction (other than the one described in paragraph (3) below) -5- in which COMPANY Voting Securities are acquired from the COMPANY, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (F) does not constitute a Change in Control of the COMPANY under this paragraph (2); or (3) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the COMPANY that requires the approval of the COMPANY's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or the sale or other disposition of all or substantially all of the COMPANY's assets to an entity that is not an affiliate of the COMPANY (a "Sale"), unless immediately following such Reorganization or Sale: (A) more than 50% of the total voting power of (x) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the COMPANY (in either case, the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the COMPANY Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Corporation Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such COMPANY Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (B) no person (other than (x) the Corporation, (y) any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation, or (z) a person who immediately prior to the Reorganization or Sale was the beneficial owner of more than 50% of the outstanding COMPANY Voting Securities) is the beneficial owner, directly or indirectly, of more than 50% of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a "Non-Qualifying Transaction"); or (4) approval by the stockholders of the COMPANY of a complete liquidation or dissolution. -6- 5. Non-disclosure of Confidential Information. ------------------------------------------ (a) Definitions. ----------- The following definitions shall apply to this Agreement: . "Trade Secrets" means all secret, proprietary or confidential information regarding COMPANY or its business, including any and all information not generally known to, or ascertainable by, persons not employed by COMPANY, the disclosure or knowledge of which would permit those persons to derive actual or potential economic value therefrom or to cause economic or financial harm to COMPANY. Such information shall include, but not be limited to, financial information, strategic plans and forecasts, marketing plans and forecasts, customer lists, mailing lists, computer software (including without limitation, source code, object code and manuals), customer billing or order information, technical information regarding COMPANY's products or services, prices offered to or paid by customers, purchase and supply information, current and future development and expansion or contraction plans of COMPANY, sales and marketing plans and techniques, information concerning personnel assignments and operations of COMPANY and matters concerning the financial affairs, future plans and management of COMPANY. "Trade Secrets" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating a legal right of COMPANY. . "Confidential Information" means information, other than Trade Secrets, which relates to COMPANY, COMPANY's activities, COMPANY's business or COMPANY's suppliers or customers that is not generally known by persons not employed by COMPANY and which is or has been disclosed to EMPLOYEE or of which EMPLOYEE became aware as a consequence of or through his relationship to COMPANY. "Confidential Information" shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any legal right of COMPANY. . "Documents" means originals or copies of handbooks, manuals, files, memoranda, correspondence, notes, photographs, slides, overheads, audio or visual tapes, cassettes, or disks, and records maintained on computer or other electronic media. (b) Covenant Regarding Non-disclosure of Trade Secrets or Confidential ------------------------------------------------------------------ Information. ----------- EMPLOYEE covenants and agrees that: (i) during his employment with COMPANY he will not use or disclose any Trade Secrets or Confidential Information of COMPANY other than as necessary in connection with the performance of his duties as an employee of COMPANY; and (ii) for a period of two (2) years immediately following the termination of his employment with COMPANY, EMPLOYEE shall not, directly or -7- indirectly, transmit or disclose any Trade Secret or Confidential Information of COMPANY to any person and shall not make use of any such Trade Secret or Confidential Information, directly or indirectly, for himself or others, without the prior written consent of COMPANY, except for a disclosure that is required by any law or order, in which case EMPLOYEE shall provide COMPANY prior written notice of such requirement and an opportunity to contest such disclosure. However, to the extent that such information is a "trade secret" as that term is defined under a state or federal law, this subparagraph is not intended to, and does not, limit COMPANY's rights or remedies thereunder and the time period for prohibition on disclosure or use of such information is until such information becomes generally known to the public through the act of one who has the right to disclose such information without violating a legal right of COMPANY. (c) Return of Information. --------------------- EMPLOYEE agrees that he shall return all Trade Secrets, Confidential Information or other property of COMPANY immediately upon the termination of his employment with COMPANY, including all handbooks, training materials, reports, policy statements, programs, customer lists, mailing lists and other documents provided by COMPANY or acquired by EMPLOYEE as a result of his employment with COMPANY, and all copies thereof. 6. Inventions and Other Developments. --------------------------------- All inventions, formulas, techniques, processes, concepts, systems and programs, mailing lists and customer lists and compilations, whether or not patented or patentable, made or conceived, individually or in conjunction with others, by EMPLOYEE during the term of his employment with COMPANY that relate to activities or proposed activities of COMPANY or that result from work performed by EMPLOYEE for COMPANY are the sole and exclusive property of COMPANY. EMPLOYEE further agrees that, upon request by COMPANY, he will assign title to any such inventions, formulas, techniques, processes, concepts, systems and programs, and lists and compilations to COMPANY and will sign any and all documents necessary to effect such assignment. 7. Non-solicitation of Customers Covenant. -------------------------------------- To protect the Trade Secrets, Confidential Information and goodwill of COMPANY, EMPLOYEE agrees that, during his employment and for a period of two (2) years immediately following the termination of his employment with COMPANY, that he will not, without the prior written permission of COMPANY, directly or indirectly, for himself or on behalf of any other person, partnership, firm or corporation, solicit, divert away, attempt to solicit or divert away any Customer, or Potential Customer, of COMPANY for purposes of providing or selling products or services that are similar to or competitive with those provided by COMPANY, if COMPANY is then still engaged in the provision or sale of that type of good or service. For purposes of this covenant, "Customer" means any individual or entity to whom COMPANY has provided goods or -8- services and with whom EMPLOYEE had, alone or in conjunction with others, Material Contact during the twelve (12) months prior to the termination of EMPLOYEE's employment, and "Potential Customer" means any individual or entity to whom COMPANY has actively sought to sell products or services within the twelve (12) months immediately prior to the termination of EMPLOYEE's employment and with whom EMPLOYEE had Material Contact on COMPANY's behalf during that same time period. For purposes of this covenant, EMPLOYEE had "Material Contact" with a customer if (i) EMPLOYEE had business dealings with the customer on COMPANY's behalf; (ii) EMPLOYEE was responsible for supervising or coordinating the dealings between the customer and COMPANY; or (iii) EMPLOYEE obtained trade secrets or confidential information (such terms having the same meanings as defined in Paragraph 5, but in each case relating to the Customer or Potential Customer) about the customer as a result of EMPLOYEE's association with COMPANY. 8. Non-recruitment of Employees Covenant. ------------------------------------- EMPLOYEE agrees that he will not, for so long as he is employed by COMPANY and for a period of two (2) years immediately following the termination of his employment, solicit or induce, or attempt to solicit or induce, any employee of the COMPANY to terminate his or her relationship with COMPANY or to enter into an employment or agency relationship with EMPLOYEE or with any other person or entity other than COMPANY. 9. Relief. ------ EMPLOYEE acknowledges that the covenants and promises contained in this Agreement are reasonable and necessary means of protecting and preserving COMPANY's goodwill and its interest in the confidentiality and proprietary value of its Trade Secrets and Confidential Information. EMPLOYEE further acknowledges that the same are reasonable and necessary means of protecting itself from unfair competition by EMPLOYEE. EMPLOYEE agrees that any breach of these covenants or promises will leave COMPANY with no adequate remedy at law and will cause COMPANY to suffer irreparable damage and injury. EMPLOYEE further agrees that any breach of these covenants or promises will entitle COMPANY to injunctive relief in aid of arbitration in any court of competent jurisdiction without the necessity of posting any bond. EMPLOYEE also agrees that any such injunctive relief shall be in addition to any damages that may be recoverable in arbitration by COMPANY as a result of such breach. EMPLOYEE agrees that he will be liable to COMPANY for all reasonable attorneys' fees and expenses which may be incurred by COMPANY in enforcing its rights under this paragraph 9. -9- EMPLOYEE further agrees that no failure or delay by COMPANY in exercising, enforcing or asserting any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise of any such right, power or privilege. 10. Severability. ------------ The covenants and other provisions set forth in paragraphs 5 through 8 of this Agreement shall be considered and construed as separate and independent covenants and provisions. Should any such covenant or provision, or any part thereof, be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or unenforceability shall not render invalid, void or unenforceable any other such covenant or provision of this Agreement. If any portion of such covenants or provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, territory, definition of activities or definition of information covered is invalid or unreasonable in scope, the invalid or unreasonable term shall be eliminated, redefined, or replaced with a new enforceable term such that the intent of COMPANY and EMPLOYEE in agreeing to the covenants and provisions of this Agreement will not be impaired and the covenant or provision in question shall be enforceable to the fullest extent of the applicable laws. 11. Disputes and Governing Law. -------------------------- (a) COMPANY and EMPLOYEE agree that any dispute arising in connection with, or relating to, this Agreement or the termination of this Agreement, to the maximum extent allowable by applicable law, shall be subject to resolution through informal methods and, failing such efforts, through arbitration. Either party may notify the other party of the existence of a dispute by written notice. The parties shall thereafter attempt in good faith to resolve their differences within the thirty (30) days after the receipt of such notice. If the dispute cannot be resolved within the thirty (30) day period, either party may file a written demand for arbitration with the other party. The arbitration shall proceed in accordance with the terms of the Federal Arbitration Act and the rules and procedures of the American Arbitration Association. Three arbitrators shall be appointed through the American Arbitration Association's procedures to resolve the dispute. The award of the arbitrator shall be binding and conclusive upon the parties. Either party shall have the right to have the award made the judgment of a court of competent jurisdiction in the state of South Carolina or any other court having jurisdiction. (b) COMPANY and EMPLOYEE agree that, except as otherwise stated expressly herein, this agreement shall be interpreted under the laws of the state of South Carolina. 12. Assignment. ---------- This Agreement may not be assigned by EMPLOYEE to any other person or entity but may be assigned by COMPANY at its discretion. -10- 13. Titles. ------ The titles, headings and captions used in this Agreement are for convenience of reference only and shall in no way limit, define, expand, or otherwise affect the meaning or construction of any provision of this Agreement. 14. Entire Agreement. ---------------- This Agreement is intended by the Parties hereto to be the final expression of their agreement with respect to the subject matter hereof and represents the complete and exclusive statement of the terms of their agreement. There have been no offers or inducements regarding the making of this Agreement except as set forth below. Except as expressly noted herein, this Agreement supersedes any former agreements between the parties governing the same subject matter. This Agreement may be modified only by a written instrument signed by each of the parties hereto. IN WITNESS WHEREOF, the undersigned set their hands and seals this 12th day of June, 2000. Advanced Glassfiber Yarns LLC Robert G. Pistole By: /s/ Robert Porcher /s/ Robert G. Pistole --------------------------- ------------------------- NAME: Robert Porcher Robert G. Pistole TITLE: Chairman of the Board -11- EX-99.1 4 0004.txt RECONCILIATION OF NET INCOME Exhibit 99 ADVANCED GLASSFIBER YARNS LLC (formerly Glass Yarns and Specialty Materials Business) Reconciliation of Net Income to EBITDA (dollars in thousands)
The Predecessor Business Consolidated Company -------------------------------------- -------------------------------------------- Year Nine Months Three Months Year Year Ended Ended Ended Ended Ended December 31, September 30, December 31, December 31, December 31, --------------------- ------------ ------------- ------------ ----------- 1996 1997 1998 1998 1999 2000 ---- ---- ---- ---- ---- ---- Net income $ 50,243 $ 50,326 $ 43,009 $ 4,275 $ 1,990 $ 12,093 Depreciation and amortization(1) 8,233 8,305 6,394 5,601 23,987 25,993 Non-recurring, start-up cost - - 2,034 2,345 3,282 - Interest - - - 9,113 36,824 35,449 Taxes 33,051 32,540 16,226 - 190 93 Extraordinary loss - - - - 3,616 - -------- ---------- ------------ ------------ ----------- ---------- Adjusted EBITDA $ 91,527 $ 91,171 $ 67,663 $ 21,334 $ 69,889 $ 73,628 ======== ========== ============ ============ =========== ==========
(1) Excluding depreciation and amortization recorded in interest expense. -----END PRIVACY-ENHANCED MESSAGE-----