-----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, P5QbXM8ZtYbzYT+vUVr2VLv35s54zoW67teTuCp3iYpiE0O6l81F/3mQjhjZnkr1 ulIiCzD2l1IO3WIVpvcGgg== 0001021408-02-007215.txt : 20020515 0001021408-02-007215.hdr.sgml : 20020515 20020515153152 ACCESSION NUMBER: 0001021408-02-007215 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-72305 FILM NUMBER: 02651783 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-72305-01 FILM NUMBER: 02651784 BUSINESS ADDRESS: STREET 1: 2556 WAGENER ROAD CITY: AIKEN STATE: SC ZIP: 29801 BUSINESS PHONE: 8036488351 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 Commission File No. 333-72305 Advanced Glassfiber Yarns LLC (Exact name of registrant as specified in its charter) Delaware 3229 58-2407014 (State of formation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.) Commission File No. 333-72305-01 AGY Capital Corp. (Exact name of registrant as specified in its charter) Delaware 3229 57-1072917 (State of incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.) 2558 Wagener Road, Aiken, South Carolina (Address of registrants' principal executive office) 29801 (Zip Code) Registrants' telephone number, including area code: (803) 643-1501 --------------------------- Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes X No ---- ----- As of May 15, 2002, all 1,000 shares of common stock of AGY Capital Corp. were owned by Advanced Glassfiber Yarns LLC. Accordingly, AGY Capital Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. ADVANCED GLASSFIBER YARNS LLC QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2002 TABLE OF CONTENTS
Page No. -------- Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 1 Consolidated Statements of Operations For the three months ended March 31, 2002 and 2001 (unaudited) 2 Consolidated Statements of Comprehensive Income (Loss) For the three months ended March 31, 2002 and 2001 (unaudited) 3 Consolidated Statements of Cash Flows For the three months ended March 31, 2002 and 2001 (unaudited) 4 Notes to the Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Overview 12 Results of Operations 13 Liquidity and Capital Resources 15 Cautionary Statement Regarding Forward-Looking Statements 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ADVANCED GLASSFIBER YARNS LLC CONSOLIDATED BALANCE SHEETS (dollars in thousands)
March 31, December 31, 2002 2001 ------------ --------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,075 $ 100 Trade accounts receivable less allowance of $1,783 and $1,102 respectively 13,913 13,392 Inventories (Note 2) 38,579 43,847 Other current assets 3,155 3,188 ------------ ------------- Total current assets 56,722 60,527 ------------ ------------- Net property, plant and equipment (Note 3) 138,902 142,191 Intangible assets, net (Note 4 and Note 9) 209,154 209,622 Other non-current assets - 145 ------------ ------------- Total assets $ 404,778 $ 412,485 ============ ============= LIABILITIES AND MEMBERS' INTEREST Current liabilities: Accounts payable $ 11,226 $ 16,205 Accrued liabilities (Note 5) 18,178 24,201 Current portion of long-term debt, net of discount of $2,334 and $2,392 (Note 6) 335,836 330,441 ------------ --------------- Total current liabilities 365,240 370,847 ------------ --------------- Deferred distribution 11,639 11,435 Pension and other employee benefit plans 26,537 25,753 Other non-current liabilities - 413 ------------ --------------- Total liabilities 403,416 408,448 ------------ --------------- Commitments and contingencies - - Members' interest 1,362 4,037 ------------ --------------- Total liabilities and members' interest $ 404,778 $ 412,485 ============ ===============
The accompanying notes are an integral part of the consolidated financial statements. 1 ADVANCED GLASSFIBER YARNS LLC CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands)
For the Three Months Ended March 31, ------------------------------ 2002 2001 ------------------------------ (unaudited) Net sales $ 44,721 $ 68,846 Cost of goods sold 37,563 47,268 ----------- ----------- Gross profit 7,158 21,578 Selling, general and administrative expenses 3,041 4,636 Amortization 7 3,059 ----------- ----------- Operating income 4,110 13,883 Interest expense 8,638 8,247 Other income, net (174) (395) ----------- ----------- Income (loss) before taxes (4,354) 6,031 Income tax expense 2 12 ----------- ----------- Net income (loss) $ (4,356) $ 6,019 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 2 ADVANCED GLASSFIBER YARNS LLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands)
For the Three Months Ended March 31, -------------------------- 2002 2001 -------------------------- (unaudited) Net income (loss) $ (4,356) $ 6,019 Other comprehensive income (loss): Currency hedges-options 22 168 Currency hedges-forwards 20 107 Commodity swap 323 Interest rate swaps 1,329 461 Foreign currency translation (13) (123) ---------- --------- Comprehensive income (loss) $ (2,675) $ 6,632 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. 3 ADVANCED GLASSFIBER YARNS LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
For the Three Months Ended March 31, ------------------------------------- 2002 2001 ------------------------------------- (unaudited) Cash flows from operating activities: Net income (loss) $ (4,356) $ 6,019 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 3,595 3,490 Amortization of debt issuance costs 467 437 Amortization of goodwill and other intangibles 7 3,059 Amortization of discount on notes 58 55 Recognition of gain on interest rate swaps (60) (70) Alloy usage 175 577 Changes in assets and liabilities: Trade accounts receivable, net (524) 2,665 Inventories 5,269 (5,643) Other assets 174 3,994 Accounts payable (4,540) (7,810) Accrued liabilities (4,475) (5,365) Pension and post-retirement 784 695 --------------- --------------- Net cash provided by (used in) operating activities (3,426) 2,103 --------------- --------------- Cash flows from investing activities: Purchase of property, plant and equipment (927) (4,895) Other (7) - --------------- --------------- Net cash used in investing activities (934) (4,895) --------------- --------------- Cash flows from financing activities: Borrowings from revolving credit facility 15,900 14,500 Payments on revolving credit facility (4,600) (2,700) Payments on capital lease (18) (25) Payments on term loans (5,944) (4,523) Proceeds from interest rate swap - 1,118 Distribution to Owens Corning - (4,033) --------------- --------------- Net cash provided by financing activities 5,338 4,337 --------------- --------------- Effect of exchange rate on cash (3) (71) --------------- --------------- Net increase in cash and cash equivalents 975 1,474 --------------- --------------- Cash and cash equivalents, beginning of period 100 4,054 --------------- --------------- Cash and cash equivalents, end of period $ 1,075 $ 5,528 =============== =============== Supplemental disclosure of cash flow information: Cash paid for interest $ 11,472 $ 11,324 =============== =============== Supplemental disclosure of non-cash financing/investing activities: Decrease in property and equipment financed in accrueds $ (445) $ (1,196) =============== =============== Increase (Decrease) in fair value of interest rate swaps and derivatives $ 1,694 $ (588) =============== =============== Deferred distribution $ - $ 3,979 =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. 4 ADVANCED GLASSFIBER YARNS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except as otherwise indicated) 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Advanced Glassfiber Yarns LLC have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading. AGY Capital Corp. is a wholly owned subsidiary of Advanced Glassfiber Yarns LLC, formed solely to facilitate our offering of 9 7/8% Senior Subordinated Notes due 2009. Separate financial statements or consolidating financial data of AGY Capital Corp. are not presented because management has determined that they are not material. AGY Capital Corp. has no assets or operations. These financial statements should be read in conjunction with the audited consolidated financial statements of Advanced Glassfiber Yarns LLC as of and for the year ended December 31, 2001 on file with the Securities and Exchange Commission in the 2001 Annual Report on Form 10-K. Certain amounts from the prior consolidated financial statements have been reclassified to conform to the current presentation. 2. INVENTORIES Inventories consist of the following: March 31, December 31, 2002 2001 ---------------- ----------------- (unaudited) Finished goods $ 33,485 $ 37,973 Materials and supplies 5,094 5,874 ---------------- ----------------- $ 38,579 $ 43,847 ================ ================= 5 3. NET PROPERTY, PLANT AND EQUIPMENT Net property, plant and equipment consist of the following:
March 31, December 31, 2002 2001 ------------ -------------- (unaudited) Land $ 827 $ 827 Building and leasehold improvements 27,275 27,028 Machinery and equipment 123,166 123,375 Construction in progress 6,171 5,725 ------------ -------------- Gross property, plant and equipment 157,439 156,955 ------------ -------------- Less: accumulated depreciation (48,025) (44,430) Alloy metals 29,488 29,666 ------------ -------------- Total Net property, plant and equipment $ 138,902 $ 142,191 ============ ==============
4. INTANGIBLE ASSETS, NET Goodwill and all other intangible assets consist of the following: March 31, December 31, 2002 2001 ------------ ------------ (unaudited) Goodwill $ 216,611 $ 216,611 Patents and trademarks 20,244 20,238 Debt issuance costs 13,596 13,596 Covenant not to compete 2,000 2,000 ------------ ------------ 252,451 252,445 Less: accumulated amortization (43,297) (42,823) ------------ ------------ Total Intangible assets, net $ 209,154 $ 209,622 ============ ============ See Note 9 for discussion of the Company's adoption of SFAS 142. 6 5. ACCRUED LIABILITIES Accrued liabilities consist of the following:
March 31, December 31, 2002 2001 ---------------- ---------------- (unaudited) Vacation $ 2,798 $ 2,743 Interest 3,327 6,923 Real and personal property taxes 1,785 1,501 Incentive compensation and profit sharing 146 194 Payroll and benefits 2,371 2,528 Due to OC and other related parties 1,239 518 Current portion of interest swap and natural gas commodity swap 3,168 4,509 Restructuring 438 1,160 Other 2,906 4,125 ---------------- ---------------- $ 18,178 $ 24,201 ================ ================
6. CURRENT PORTION OF LONG-TERM DEBT Long-term debt consists of the following:
March 31, December 31, 2002 2001 ---------------- ---------------- (unaudited) Senior Credit Facility Revolving Credit Facility $ 36,100 $ 24,800 Term Loan A 56,846 62,531 Term Loan B 95,150 95,410 9 7/8% Senior Subordinated Notes, net of amortized discount 147,666 147,608 Capital lease obligation 74 92 ---------------- ---------------- 335,836 330,441 Less current portion (335,836) (330,441) ---------------- ---------------- Long-term debt $ - $ - ================ ================
On December 14, 2001, the Company's senior lenders waived its requirement to maintain and meet the Company's Fixed Charge Coverage Ratio and modified the Company's Leverage Ratio and Interest Coverage Ratio to be less restrictive for the quarters ending December 31, 2001 and March 31, 2002. Absent the covenant modification dated December 14, 2001, the Company would have been in violation of certain covenants of its Senior Credit Facility as of March 31, 2002. Based on the Company's current level of performance, the Company does not expect to comply with certain financial covenants under the Senior Credit Facility for the quarter ended June 30, 2002. Additionally, if the Company defaults under its Senior Credit Facility, the Company's senior lenders may be able to prohibit the Company from making the interest payments of approximately $7.4 million due under the Senior Subordinated Notes on July 15, 7 2002, which would result in default under its indenture. If the Company defaults under its senior credit facility or its indenture, the lenders or note holders may immediately accelerate repayment of all amounts outstanding under the respective agreements. As a result of these uncertainties, amounts due under the Senior Credit Facility and Senior Subordinated Notes have been reflected as current liabilities in accordance with Generally Accepted Accounting Principles, which results in a significant working capital deficit. The Company have retained Credit Suisse First Boston as its financial advisor to explore strategic alternatives, including, but not limited to, restructuring its debt and negotiating with the Company's lenders favorable amendments to the Senior Credit Facility. Even though discussions are ongoing, there can be no assurance that the Company will obtain any necessary amendments and waivers or that the Company will otherwise be able to refinance its debt on favorable terms, if at all. 7. SEGMENT INFORMATION The Company operates in one business segment that manufactures glass fiber yarns and specialty yarns that are used in a variety of industrial and commercial applications. The Company's principal market is the United States. The Company does not have any significant long-lived assets outside of the United States. Information by geographic area is presented below, with net sales based on product shipment location (in millions): For the Three Months Ended March 31, ------------------------- 2002 2001 ------------------------- (unaudited) Net Sales North America $ 31.4 $ 45.9 Europe 11.6 18.0 Asia 0.9 4.3 Latin America 0.8 0.6 --------- --------- Total $ 44.7 $ 68.8 ========= ========= Sales by product category are as follows (in millions): For the Three Months Ended March 31, ------------------------- 2002 2001 ------------------------- (unaudited) Net Sales Heavy yarns $ 36.2 $ 46.6 Fine yarns 8.5 22.2 --------- --------- Total $ 44.7 $ 68.8 ========= ========= 8 8. ACCOUNTING FOR DERIVATIVES Gains and losses on derivatives qualifying as cash flow hedges are recorded in OCI to the extent that the hedges are effective until the underlying transactions are recognized in earnings. As of March 31, 2002, the net derivative loss in OCI was $2.3 million. During the first quarter of 2002, $1.3 million of accumulated losses were reclassified from OCI to earnings, of which a $1.2 million loss was recorded in interest expense, a $0.2 million loss was recorded in cost of sales and a $0.1 million gain was recorded in other income. The ineffective portion of changes in fair values of hedge positions reported in first quarter 2002 earnings was immaterial. As of March 31, 2002, the Company expects to reclassify $3.0 million during the next twelve months from OCI to earnings. A summary of the amounts included in the accumulated other comprehensive income is shown below:
Currency Currency Hedge Hedge Commodity Interest Rate Accumulated Options Forwards Swaps Swaps OCI ----------- ------------ ------------ ------------ ------------ Balance at December 31, 2000 $ - $ - $ - $ - $ - January 1, 2001, transition adjustment $ - 136 - (4,200) (4,064) Current period changes in value (168) (125) - 3,036 2,743 Reclassification to earnings - (118) - 703 585 ----------- ------------ ------------ ------------ ------------ Balance at March 31, 2001 $ (168) $ (107) $ - $ (461) $ (736) =========== ============ ============ ============ ============ Balance at December 31, 2001 $ - $ - $ 518 $ 3,506 $ 4,024 Current period changes in value (14) (41) (158) (198) (411) Reclassification to earnings (8) 21 (165) (1,131) (1,283) ----------- ------------ ------------ ------------ ------------ Balance at March 31, 2002 $ (22) $ (20) $ 195 $ 2,177 $ 2,330 =========== ============ ============ ============ ============
9. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted the provisions of SFAS 142 effective January 1, 2002. In accordance with this adoption, the Company ceased amortizing goodwill effective on the same date. The Company is also currently evaluating the useful lives assigned to its intangible assets. SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete the first step of the goodwill impairment test by the end of June 2002. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of its fiscal year. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle. In light of the changes in market 9 conditions and the unprecedented downturn in the electronics market, the Company believes that an impairment of goodwill under SFAS 142 exists as of January 1, 2002 and it expects that approximately $75 million to $150 million of its goodwill will likely be impaired. As the enterprise value of the Company is still being evaluated, the Company has not determined the amount of the impairment loss but expects to complete the measurement during the second quarter 2002 using discounted cash flow models, market valuations and third party appraisals. Amortized intangible assets consists of the following:
March 31, 2002 December 31, 2001 ------------------------------------------------------------------------------------ (unaudited) Useful Gross Gross Life Carrying Accumulated Carrying Accumulated (Years) Amount Amortization Amount Amortization ---------- ------------------ ---------------- ------------------ ---------------- Amortized intangible assets: Debt issuance costs 6 - 10 $ 13,596 $ 5,860 $ 13,596 $ 5,386 Patent additions 8 233 59 227 52 ------------------ ---------------- ------------------ ---------------- Total Amortized intangible assets $ 13,829 $ 5,919 $ 13,823 $ 5,438 ================== ================ ================== ================
Unamortized intangible assets consist of the following:
March 31, 2002 (unaudited) --------------------- Unamortized intangible assets: Goodwill, net $ 201,244 =====================
Aggregate amortization expense is as follows: Aggregate amortization expense (unaudited): For the quarter ended March 31, 2002 $ 474 Estimated aggregate amortization expense For the year ended December 31, 2002 $ 1,895 For the year ended December 31, 2003 $ 1,895 For the year ended December 31, 2004 $ 1,705 For the year ended December 31, 2005 $ 1,133 For the year ended December 31, 2006 $ 1,133 10 The following presents net income (loss) exclusive of amortization of goodwill: For the Three Months Ended March 31, ------------------------------ 2002 2001 ------------------------------ (unaudited) Net income (loss) $ (4,356) $ 6,019 Goodwill amortization - 3,049 ------------ ------------ Net income (loss) excluding amortization of goodwill $ (4,356) 9,068 ============ ============ The Company adopted SFAS 133 on January 1, 2001 and initially recorded a $4.1 million unrealized gain in Other Comprehensive Income as the cumulative effect of this change in accounting related to interest rate swaps. For foreign currency derivatives, the adoption of SFAS 133 did not have a material impact on its financial position or results of operations. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains forward-looking statements with respect to our operations, industry, financial condition and liquidity. These statements reflect our assessment of a number of risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth in this Quarterly Report. An additional statement made pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing certain of the principal risks and uncertainties inherent in our business is included herein under the caption "Cautionary Statement Regarding Forward-Looking Statements." You are encouraged to read this section carefully. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and related notes, and with our audited consolidated financial statements and related notes as of and for the year ended December 31, 2001 set forth in our 2001 Annual Report on Form 10-K. OVERVIEW Our business focuses on the production of glass yarn by converting molten glass into thin filaments, which are then twisted into yarn. Our products fall into two categories based on filament diameter: . heavy yarns, which accounted for 67.7% of our net sales during the three months ended March 31, 2001 and 81.0% of our net sales during the three months ended March 31, 2002; and . fine yarns, which accounted for 32.3% of our net sales during the three months ended March 30, 2001 and 19.0% of our net sales during the three months ended March 31, 2002. Glass yarns are a critical material used in a variety of electronic, industrial, construction and specialty applications such as printed circuit boards, roofing materials, filtration equipment, building reinforcement, window screening, aerospace materials, sporting goods and vehicle armor. 12 RESULTS OF OPERATIONS The following table summarizes our historical results of operations as a percentage of net sales: For the Three Months Ended March 31, ----------------------------- 2002 2001 ----------------------------- (unaudited) Net sales 100.0 % 100.0 % Cost of goods sold 83.9 % 68.6 % ------------ ---------- Gross profit 16.1 % 31.4 % Selling, general and administrative expenses 6.9 % 6.7 % Amortization - % 4.5 % ------------ ---------- Operating income 9.2 % 20.2 % Interest expense 19.2 % 11.9 % Other income, net (0.2) % (0.4) % ------------ ---------- Net income (loss) (9.8) % 8.7 % ============ ========== Adjusted EBITDA, as presented below, is defined as net income before interest expense, income taxes, depreciation, amortization expense and non-recurring non-cash charges. Adjusted EBITDA is calculated as follows (in thousands): For the Three Months Ended March 31, ---------------------------- 2002 2001 ---------------------------- (unaudited) Net income (loss) $ (4,356) $ 6,019 Depreciation and amortization 3,603 6,549 Interest 8,638 8,247 Taxes 2 12 ---------- ---------- Adjusted EBITDA $ 7,887 $ 20,827 ========== ========== Adjusted EBITDA for the quarter ended March 31, 2002 decreased $12.9 million, or 62.0%, to $7.9 million from $20.8 million for the quarter ended March 31, 2001. We believe that adjusted EBITDA is a widely accepted financial indicator of a company's ability to service and/or incur indebtedness. Adjusted EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles, and adjusted EBITDA does not necessarily indicate whether cash flow will be sufficient for cash requirements. Not every company calculates adjusted EBITDA in exactly the same fashion. As a result, adjusted EBITDA as presented above may not necessarily be comparable to similarly titled measures of other companies. 13 THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 Net Sales. Net sales decreased $24.1 million, or 35.0%, to $44.7 million in the three months ended March 31, 2002 from $68.8 million in the three months ended March 31, 2001. Our sales of product into the electronics market declined by 66.0% in the three months ended March 31, 2002 compared to the three months ended March 31, 2001. This decrease is primarily the result of a general economic downturn, which began during the second quarter of 2001 and average price erosions of 3.5% since the beginning of 2002. However, as compared to the three months ended December 31, 2001, our volumes recovered by 32.0% in the three months ended March 31, 2002, with electrical sales increasing by 102.2%. As a result, we believe that economic conditions are improving and that demand for our products is beginning to increase. Further, we expect sales of product in the electronics market to improve in the second half of 2002 as the industry's inventory continues to diminish. Gross Profit. Gross profit decreased to 16.1% of net sales for the three months ended March 31, 2002 compared to 31.4% for the same period in 2001. Excluding the impact of changes in the exchange rate of European currencies, gross profit in the first quarter of 2002 would have been 16.7%. This decrease was primarily attributable to lower absorption of fixed costs combined with the previously mentioned price decreases. Since December 31, 2001 we made a significant effort to deplete inventory and improve our cash position. Reduced production schedules resulted in a $5.3 million decrease in inventory, but negatively impacted gross profit as a result of the under-absorption of fixed costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $3.1 million for the three months ended March 31, 2002 as compared to $4.6 million for the same period of 2001. This was primarily the result of a reduction in workforce, elimination of incentive compensation and profit sharing and other cost savings initiatives implemented during the last half of 2001. Such expenses as a percentage of net sales remained relatively flat in the three months ended March 31, 2002 compared to the three months ended March 31, 2001. Operating Income. As a result of the aforementioned factors, operating income decreased $9.8 million to $4.1 million, or 9.2% of net sales, for the three months ended March 31, 2002 from $13.9 million, or 20.2% of net sales, for the three months ended March 31, 2001. Effective January 1, 2002, the amortization of goodwill was suspended in accordance with the adoption of SFAS 142. Operating income would have decreased $2.9 million to $1.2 million or 2.7% of net sales had goodwill been amortized for the three months ended March 31, 2002. By June of 2002, we will complete our review of the fair value of goodwill using discounted cash flow models, market valuations and third party appraisals. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle and will be recognized at that time. Interest Expense. Interest expense increased $0.4 million to $8.6 million in the three months ended March 31, 2002 from $8.2 million in the three months ended March 31, 2001. The increase was a result of higher average debt outstanding and an increase in our weighted average 14 interest rate. The increase in our weighted average interest rate is due to a 100 basis point increase in interest rates on our amended senior credit facility that was effective in December 2001, partially offset by lower interest rates on our revolving credit facility as a result of market conditions. Other Income, net. Other Income was $0.2 million for the quarter ended March 31, 2002, as compared to $0.4 for the quarter ended March 31, 2001. The decrease is mainly the result of lower royalty income because the associated technology licensing arrangement terminated February 27, 2002. Net Income (Loss). As a result of the aforementioned factors, net income decreased $10.4 million to a loss of $4.4 million in the three months ended March 31, 2002, from income of $6.0 million in the three months ended March 31, 2001. LIQUIDITY AND CAPITAL RESOURCES On December 14, 2001, our senior lenders waived our requirement to maintain and meet our Fixed Charge Coverage Ratio and modified our Leverage Ratio and Interest Coverage Ratio to be less restrictive for the quarters ending December 31, 2001 and March 31, 2002. Absent the covenant modification dated December 14, 2001, we would have been in violation of certain covenants of our Senior Credit Facility as of March 31, 2002. The amendment also provides for 1) a 100 basis point increase in the interest spread payable over LIBOR for advances under the facility; 2) a cap of $50.0 million for amounts borrowed under the revolving credit facility; 3) a $1.75 million and $1.5 million limit on capital spending for the quarters ending December 31, 2001, and March 31, 2002, respectively; and 4) the terms prohibit us from making any cash distributions to our Members until we are in compliance with the original covenants under the credit agreement. Based on our current level of performance, we do not expect to comply with certain financial covenants under the Senior Credit Facility for the quarter ended June 30, 2002. Additionally, if we default under our Senior Credit Facility, our senior lenders may be able to prohibit us from making the interest payments of approximately $7.4 million due under the Senior Subordinated Notes on July 15, 2002, which would result in default under our indenture. If we default under our senior credit facility or our indenture, the lenders or note holders may immediately accelerate repayment of all amounts outstanding under the respective agreements. As a result of these uncertainties, amounts due under the Senior Credit Facility and Senior Subordinated Notes have been reflected as current liabilities as of March 31, 2002 in accordance with Generally Accepted Accounting Principles, which results in a significant working capital deficit as of March 31, 2002. We have retained Credit Suisse First Boston as our financial advisor to explore strategic alternatives, including, but not limited to, restructuring our debt and negotiating with our lenders favorable amendments to the Senior Credit Facility. Even though discussions are ongoing, there can be no assurance that we will obtain any necessary amendments and waivers or that we will otherwise be able to refinance our debt on favorable terms, if at all. 15 Based upon current and anticipated levels of operations and provided that there is no intervening acceleration of our indebtedness or a blockage of the $7.4 million interest payment due July 15, 2002, under the Senior Subordinated Notes, we believe we have sufficient liquidity from our cashflow from operations, combined with our availability under the senior credit facility, to meet our projected cash needs through December 2002. Our future operating performance and ability to service or refinance the Notes and to extend or refinance our other indebtedness will be subject to future economic conditions and to financial, business and other factors beyond our control. As of March 31, 2002, we had cash and cash equivalents of $1.1 million and available undrawn commitments under our Senior Credit Facility of $11.7 million, after giving effect to the $50.0 million revolver borrowing cap under the terms of the December 14, 2001 amendment. As of March 31, 2002, our net debt was $334.7 million, an increase of $4.4 million from December 31, 2001. The increase was primarily the result of the semiannual $7.4 million interest payment on our subordinated debt during the quarter and a reduction in accounts payable related to the timing of certain expenditures including real property taxes, offset by a $5.3 million reduction in inventory. Historically, our net debt has increased in the first quarter of each year. The $4.4 million increase in our debt from December 31, 2001, to March 31, 2002, was less than anticipated and reflects our focus on working capital management and cost control. At March 31, 2002, we had $335.6 million of debt outstanding at a weighted average interest rate of 9.2%, consisting of $188.1 million under our senior credit facility, $147.7 million under our 9 7/8% senior subordinated notes (net of discount of $2.3 million) and $0.1 million of capital leases. The amounts outstanding under our senior credit facility included $36.1 million outstanding under the revolver. As of March 31, 2002, we had approximately $11.7 million of availability under the revolver after giving effect to the $50.0 million cap under the terms of the December 14, 2001 amendment. Net Cash Used in Operating Activities. Net cash used in operating activities was $3.4 million for the three months ended March 31, 2002, and was primarily the result of net loss of $4.4 million, non-cash adjustments of $4.3 million, and a $4.5 million decrease in accounts payable and a $4.5 million decrease in accrued liabilities, partially offset by a $5.3 million decrease in inventory. A decline in accounts payable and a decrease in inventory resulted from an initiative to reduce inventory. We expect operating cash flows to improve throughout fiscal 2002 as a result of working capital management, particularly through inventory reduction. Net Cash Used in Investing Activities. Net cash used in investing activities was $0.9 million for the three months ended March 31, 2002 and was the result of the payment for capital expenditures incurred during the three months ended March 31, 2002 and the three months ended December 31, 2001. A significant portion of the capital expenditures in the three months ended March 31, 2002 was for process automation. 16 Capital Expenditures. We have historically financed our capital expenditures through cash flow from operations and borrowings under our senior credit facility. In an effort to preserve cash outflows, capital expenditures were limited to $0.5 million for the three months ended March 31, 2002. We will continue to monitor and will adjust our capital expenditures spending level, if warranted by market developments or our operating performance. Net Cash Provided by Financing Activities. Net cash provided by financing activities was $5.3 million for the three months ended March 31, 2002 and was primarily the result of net borrowings under our revolving credit facility of $11.3 million offset by payments on term loans of $5.9 million. We derived 22.9% of our net sales in the first quarter of 2002 from products sold in currencies other than the U. S. dollar. The U. S. dollar value of our export sales sometimes varies with currency exchange rate fluctuations. We may therefore be exposed to exchange losses as a result of such fluctuations that could reduce our net income. We have adopted a risk management strategy to use derivative financial instruments including forwards and options to hedge foreign currency exposures. See "Quantitative and Qualitative Disclosures About Market Risk." However, we cannot assure you that any such hedging activities will be sufficient to eliminate risks relating to currency fluctuations. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Some of the information in this Quarterly Report may contain forward-looking statements. These statements include, in particular, statements about our plans, strategies and prospects within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions or expectations will be achieved. Such statements are based on our current plans and expectations and are subject to risks and uncertainties that exist in our operations and our business environment that could render actual outcomes and results materially different from those predicted. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statements: . our significant level of indebtedness and limitations on our ability to incur additional debt; . the risk that obtaining raw materials and capital equipment services from sources other than Owens Corning would be more costly or require us to change substantively our manufacturing processes; . the risk of conflicts of interest with our equity holders; . a downturn in the electronics industry and the movement of electronics industry production outside of North America; . our concentrated customer base and the nature of our markets; 17 . a disruption of production at one of our facilities; . foreign currency fluctuations; . an easing of import restrictions and duties with respect to glass fabrics; . labor strikes or stoppages; . whether or not we are able to comply with environmental and safety and health laws and requirements . whether or not we are able to satisfy the covenants and other provisions under our various financial instruments; and . changes in economic conditions generally. This list of risks and uncertainties, however, is not intended to be exhaustive. You should also review the other cautionary statements we make in this Quarterly Report and in our 2001 Annual Report on Form 10-K. All forward-looking statements attributable to us or persons acting for us are expressly qualified in their entirety by our cautionary statements. We do not have, and expressly disclaim, any obligation to release publicly any updates or changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The effects of potential changes in currency exchange rates and interest rates are discussed below. Our market risk discussion includes "forward-looking statements" and represents an estimate of possible changes in fair value that would occur assuming hypothetical future movements in interest and currency exchange rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement Regarding Forward-Looking Statements." We are exposed to market risk related to changes in interest rates on borrowings under our Senior Credit Facility. The Senior Credit Facility bears interest based on LIBOR. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we entered into interest rate swap agreements to manage our exposure to interest rate changes under the Senior Credit Facility. The swaps involve the exchange of fixed and variable interest rate payments based on a contractual principal amount and time period. Payments or receipts on the agreement are recorded as adjustments to interest expense. Under this agreement, we have secured a fixed LIBOR rate of interest of 4.92% on Term Loan A and 5.04% on the Term Loan B with an aggregate notional amount which is reduced in a manner consistent with the amortization of the principal on our term loans. As of March 31, 2002, we had two interest rate swap agreements effective through September 30, 2003 on a notional amount of $152.0 million, equal to the borrowings outstanding under Term Loans A and B under our Senior Credit Facility. During the quarter ended March 31, 2001, we shortened the duration of our interest rate swaps to September 2003. As a result of this transaction, we received proceeds of $1.1 million, which will be reclassified from accumulated other comprehensive income to earnings over the remaining life of the related debt. The fair value of the interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. At March 31, 2002, we would have paid approximately $3.0 million to terminate the agreements. A 100 basis point increase in LIBOR would decrease the amount paid by approximately $1.6 million. In contrast, a 100 basis point decrease in LIBOR would increase the amount paid by approximately $1.8 million. The fair value is based on dealer quotes, considering current interest rates. Estimated fair value of notes payable. The Senior Credit Facility is a variable-rate debt obligation. Accordingly, the estimated fair value of this debt obligation approximates its book value. As of March 31, 2002, the fair value of the Company's Senior Subordinated Notes was $53.0 million versus a recorded book value of $147.7 million. The fair value of the Notes is estimated on the basis of quoted market prices; however, trading in these securities is limited and may not reflect fair value. The fair value is subject to fluctuations based on the Company's performance, its credit rating, and changes in interest rates for debt securities with similar terms. As previously discussed, the Company's financial performance has deteriorated due to the global economic downturn that began late in the first quarter of 2001 and was particularly severe in the electronics and industrial market. As a result, the credit ratings on the Company's debt were downgraded in 2001 and 2002 and may be subject to further downgrade. 19 We are exposed to foreign currency exchange rate risk mainly as a result of our export sales denominated in the Euro. Our risk management strategy is to use derivative financial instruments, including forwards, swaps, collars and purchased options, to hedge some portion or all of these exposures, in accordance with our financial risk management policy. Our objective is to limit the impact of foreign currency changes on earnings and cash flows. As of March 31, 2002, the notional value of our foreign currency hedging instruments was $2.6 million, and the fair value of these instruments was immaterial. The potential loss in fair value of such financial instruments from a hypothetical 10% increase in the underlying exchange rate relative to the US dollar would be approximately $0.1 million as of December 31, 2001. The potential gain in the fair value of such financial instruments from a hypothetical 10% decrease in the underlying exchange rate relative to the US dollar would be approximately $0.1 million as of March 31, 2002. The fair value is based on dealer quotes, considering current exchange rates. During the quarter ended June 30, 2001, we entered into two natural gas commodity swaps whereby we agreed to pay a fixed price to hedge 579,000 MMBtu's of the commodity. We entered into these swaps to reduce the variability of the cash flows associated with our forecasted purchases of natural gas. One of these contracts matured in December 2001. The remaining contract terminates in December 2002 and provide for a fixed price of $4.14/MMBtu on 275,000 MMBtu's. As of March 31, 2002, the total notional value of the remaining commodity hedging instrument was $1.1 million, and the approximate fair value was negative $0.2 million. The potential loss in fair value of such financial instruments from a hypothetical 10% increase in the underlying commodity price would be approximately $0.1 million as of March 31, 2002. The potential gain in the fair value of such financial instruments from a hypothetical 10% decrease in the underlying commodity price would be approximately $0.1 million as of March 31, 2002. The fair value is based on dealer quotes, considering current commodity prices In addition, we are exposed to losses in the event of nonperformance by the counterparties under the derivative agreements. We expect the counterparties, which are major financial institutions, to perform fully under these contracts. However, if the counterparties were to default on their obligations under the interest rate swap agreements, we could be required to pay the full rate on our Senior Credit Facility, even if the rate was in excess of the rates in the interest rate swap agreements. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCED GLASSFIBER YARNS LLC /s/ Catherine Cuisson ------------------------------------------ Catherine Cuisson Vice President and Chief Financial Officer (Principal Accounting Officer) Dated: May 15, 2002 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AGY CAPITAL CORP. /s/ Catherine Cuisson ------------------------------------------ Catherine Cuisson Vice President and Chief Financial Officer (Principal Accounting Officer) Dated: May 15, 2002 22 -----END PRIVACY-ENHANCED MESSAGE-----