<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1996.
REGISTRATION NO. 333-3892
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNIFRAX ACQUISITION INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3299 16-1499385
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
UNIFRAX ACQUISITION INC.
2351 Whirlpool Street
Niagara Falls, New York 14302
(716) 278-3800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
William P. Kelly
Unifrax Acquisition Inc.
2351 Whirlpool Street
Niagara Falls, New York 14302
(716) 278-3800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
Alan N. Waxman
Squire, Sanders & Dempsey
520 Madison Avenue
New York, New York 10022
Gary T. Johnson
Jones, Day, Reavis & Pogue
77 West Wacker
Chicago, Illinois 60601
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
UNIFRAX ACQUISITION INC.
Cross-Reference Sheet between items of Form S-1 and the prospectus pursuant
to Item 501(b) of Regulation S-K.
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
------------------------------------------------- ------------------------------------
<S> <C> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus........... Cover Page of Registration
Statement; Cross Reference Sheet;
Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back Cover
Pages; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................................. Prospectus Summary; Use of Proceeds;
The Transaction; Business
5. Determination of Offering Price.................. Front Cover Page; Prospectus
Summary; Risk Factors
6. Dilution......................................... Not Applicable
7. Selling Security Holders......................... Cover Page; Prospectus Summary; The
Transaction; Ownership of Common
Stock
8. Plan of Distribution............................. Front Cover Page; Underwriting
9. Description of Securities to be Registered....... Description of Capital Stock
10. Interests of Named Experts and Counsel........... Not Applicable
11. Information With Respect to the Registrant:...... Front Cover Page; Risk Factors;
Dividend Policy; Selected Financial
Data; Pro Forma Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Business; Management;
Ownership of Common Stock; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 3, 1996
8,000,000 Shares
Unifrax Acquisition Inc.
To be Renamed
Unifrax Corporation
Common Stock
($.01 par value)
------------------
All of the 8,000,000 shares of common stock (the "Common Stock") of the Company
are being offered and sold by certain indirect wholly owned subsidiaries of
The British Petroleum Company p.l.c. , including Unifrax Corporation
("Unifrax") (collectively, the "Selling Stockholders"). The Company will
not receive any proceeds from the sale of the shares of Common Stock
offered hereby (the "Offering") unless the over-allotment option is
exercised. Upon completion of the Offering, neither The British
Petroleum Company p.l.c. nor any of its subsidiaries will own any
shares of Common Stock. The Offering is conditioned upon the
closing of the Assets Transfer Agreement and the closing of the
offering of the Senior Notes and the New Credit Facility
described herein. See "The Transaction" and "Financing
Plan".
Prior to the Offering, there has been no public market for the Common Stock. It
is anticipated that the initial public offering price will be between $12
and $14 per share. For information relating to the factors to be
considered in determining the initial offering price to the
public, see "Underwriting". The Common Stock has been
approved for listing on the Nasdaq Stock Market's
National Market System under the symbol
"FRAX", subject to notice of issuance.
------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE SHARES OF COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDERS(1)(2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(2)..................................... $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Selling Stockholders estimated
at $ .
(2) The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase a maximum of 1,200,000
additional shares of Common Stock to cover over-allotments of shares. If the
option is exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ , Proceeds to
Selling Stockholders will be $ , and Proceeds to the Company will
be $ . Upon consummation of the Offering, the Company will receive
only the net proceeds, if any, from any exercise of the over-allotment
option. See "Use of Proceeds" and "Underwriting".
------------------
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1996.
CS First Boston Schroder Wertheim & Co.
The date of this Prospectus is , 1996.
<PAGE> 4
[GROUP PHOTOGRAPH OF COMPANY PRODUCTS WITH CAPTION "MANUFACTURER OF A BROAD
RANGE OF CERAMIC FIBER PRODUCT FORMS USED TO PROVIDE HEAT MANAGEMENT SOLUTIONS
FOR HIGH TEMPERATURE INSULATION AND OTHER ENGINEERED APPLICATIONS" AND "UNIFRAX"
LOGO]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Company intends to furnish to its stockholders annual reports
containing consolidated financial statements audited by independent auditors and
quarterly reports containing unaudited consolidated financial data for the first
three quarters of each fiscal year following the end of each such quarter.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and financial
statements included elsewhere in this Prospectus. Unless otherwise indicated,
all information in the Prospectus assumes that the over-allotment option is not
exercised. As used herein, unless the context otherwise requires, the term
"Company" refers to Unifrax Acquisition Inc. and its subsidiaries, and its
predecessor, the unincorporated North American ceramic fiber division of Unifrax
(formerly known as The Carborundum Company) and its overseas sales affiliates
(collectively, the "North American Fibers Business"), and the term "BP" refers
either to The British Petroleum Company p.1.c. or one of its subsidiaries (other
than Unifrax or either of its overseas sales affiliates).
THE COMPANY
The Company believes that it is the leading North American manufacturer of
ceramic fiber with a market share in excess of 40% of the ceramic fiber sold in
the North American market as measured by volume.
Historically, the Company's sales growth has been driven by several
factors, including the use of ceramic fiber as a lower cost or higher
performance substitute for traditional hard brick refractories and other
insulating materials, the introduction of new ceramic fiber product
applications, and the general economic expansion of primary ceramic fiber
markets. During the four-year period ended December 31, 1995, the Company's net
sales and income before income taxes have increased at a compound annual rate of
approximately 12% and 35%, respectively. The growth rate in income before income
taxes has exceeded the growth rate in net sales during this period due to higher
profit margins resulting from several factors, including a sales mix shift to
higher value-added product forms and applications, improved manufacturing
efficiency, higher capacity utilization, and marketing and administrative cost
control. During each of the four years ended December 31, 1995, the Company's
sales of product forms and applications which were commercialized within the
previous five years comprised over 20% of the Company's net sales.
The Company believes that it has the following product, manufacturing, and
marketing strengths which provide competitive advantages in the North American
ceramic fiber market.
- The Company manufactures one of the broadest lines of ceramic fiber
products sold in North America.
- The Company's product forms are recognized by customers for their high
quality, technical sophistication, and consistency.
- The Company has demonstrated the ability to introduce successfully new,
higher value-added product forms and applications for both traditional
and niche markets.
- The Company maintains both higher volume facilities for the low cost
production of bulk, blanket, and paper product forms and lower volume,
highly flexible facilities for the production of higher value-added
product forms.
- The Company has developed one of the industry's most advanced technology
bases in furnacing, fiberizing, and process control and has obtained the
scale of operations necessary to protect its position as a low cost
manufacturer in the North American market.
- The Company is able to serve a broad range of markets through a
combination of direct and distributor sales.
The Company's growth strategy is to maintain its strong position in the
furnace-related markets while building on its leadership position in higher
growth niche markets through the development of new, higher value-added product
forms and applications. The largest percentage of the Company's sales
historically has been to furnace-related markets for use in furnace and kiln
linings. However, sales to niche markets have experienced more rapid growth than
sales to the Company's furnace-related markets in recent years and now account
for the majority of the Company's sales. Such markets for the Company's products
include the automotive (safety airbag inflation filters, catalytic converter
supports), power generation (duct and stack
3
<PAGE> 6
linings, pumpable joint-filling material), and fire protection (commercial
kitchen exhaust duct and cable coverings, hazardous material containers)
industries. The Company continues to devote significant resources to developing
new product forms and applications in order to support growth.
Ceramic fiber is a white glassy fibrous material belonging to a class of
materials called man-made vitreous fibers. Ceramic fiber was developed by the
Company in 1942 and was identified quickly as a material with commercially
attractive performance properties. These properties include stability at very
high temperatures (generally up to 2,300(++)F, but up to 3,000(++)F in certain
product forms), exceptionally light weight compared to other heat-resistant
materials, and extremely low heat transmission, making it a superior insulating
material at very high temperatures. In addition, ceramic fiber exhibits high
levels of chemical stability and resistance to attack from most corrosive
materials. Man-made fibers such as ceramic fiber, fiberglass, and mineral wool
have been categorized as "possibly carcinogenic in humans" and "probably
carcinogenic in humans" by various government agencies and health organizations.
Substantially all of the Company's products contain ceramic fiber, and the
Company's dependence on ceramic fiber represents a substantial contingent
liability of the Company. See "Risk Factors -- Dependence on Ceramic Fiber;
Health and Safety Issue", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and "Business -- Health and Product Safety
Issues".
The Company manufactures and markets one of the broadest lines of ceramic
fiber products sold in North America. The Company's ceramic fiber is produced in
numerous forms, including bulk fiber, blankets and modules, boards, papers and
felts, textiles, and a variety of other higher value-added product forms. These
product forms are used in thermal management applications where heat resistance,
light weight, and low heat storage are required. Many of the Company's product
applications were created as a result of working closely with customers in a
number of industries to fulfill specialized requirements. As a result, the
Company's product line has evolved into products with capabilities tied closely
to, and qualified for, specific customer applications.
The Company's ceramic fiber is sold to a number of industries and is used
in many different applications. The metals production, petrochemical, ceramic
and glass, automotive, power generation, fire protection, and commercial
insulation industries are the major consumers of ceramic fiber. The most common
application in North America for ceramic fiber has traditionally been to line
industrial furnaces, where high temperature processes require ceramic fiber's
heat-resistant characteristics. Significant newer product applications have also
developed in the automotive and fire protection industries. These newer
applications generally rely on ceramic fiber's heat-resistant characteristics
combined with other compositional and dimensional qualities to satisfy more
highly engineered requirements. Examples of these newer applications include
porosity-controlled paper for use in automotive safety airbag inflation systems
and duct wrap systems used in commercial insulation. For the year ended December
31, 1995, approximately 44% of the Company's sales were derived from
furnace-related markets, 31% from automotive-related markets, and 25% from other
markets.
THE TRANSACTION
Unifrax Acquisition Inc. is a newly organized Delaware corporation which
was formed to acquire substantially all of the assets and liabilities of the
North American Fibers Business from Unifrax and other indirect wholly owned
subsidiaries of The British Petroleum Company p.1.c. BP's decision to sell the
North American Fibers Business is part of its stated intention to concentrate
its resources on the development of its core integrated hydrocarbon and
chemicals businesses.
The Company has operated as a business division within a larger entity
since inception. Prior to February 29, 1996, Unifrax, then known as The
Carborundum Company ("Carborundum"), owned and
operated a number of high performance ceramic product businesses. On February
29, 1996, BP completed the sale of substantially all of Carborundum's businesses
other than the North American Fibers Business to Societe Europeenne des Produits
Refractaires ("SEPR") and various other affiliates of Compagnie de Saint-Gobain,
a multinational French manufacturing company. In connection with that sale (the
"Saint-Gobain Sale"), Carborundum changed its name to Unifrax Corporation, and
the Company entered into a series of agreements which govern market and business
relationships between the Company and SEPR. These
4
<PAGE> 7
agreements with SEPR affect how the Company conducts business outside of the
United States, Canada, and Mexico (the "North American Market") and will
restrict the Company's ability to expand its sales outside of the North American
Market. As used herein, SEPR refers either to SEPR or one of its affiliates,
unless the context otherwise requires. See "Relationship with SEPR" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Immediately prior to the consummation of the Offering, the Company will
acquire the North American Fibers Business and obtain a five-year covenant not
to compete from BP (the "Covenant Not To Compete") in exchange for notes in the
aggregate principal amount of $55 million (collectively, the "Selling
Stockholder Note"), and 8,000,000 shares of Common Stock of the Company (or 100%
of the issued and outstanding shares of the Common Stock), all of which shares
are being sold in the Offering. Consummation of the Offering is conditioned upon
the Company's acquisition of the North American Fibers Business. Unifrax
Acquisition Inc. will change its name to Unifrax Corporation either shortly
before or shortly after the consummation of the Offering.
In addition, the Company will borrow approximately $10.5 million under the
New Credit Facility and $45 million through the issuance of the Senior Notes
(each as defined in "Financing Plan"). Of the proceeds from these borrowings,
$55 million, along with any other required funds of the Company, will be paid to
BP as repayment of the Selling Stockholder Note. The consummation of the
Offering is conditioned upon the closing of the offering of the Senior Notes and
the New Credit Facility. As used herein, the term "Transaction" refers to the
acquisition of the North American Fibers Business by the Company, the Offering,
and the related financings described herein under "Financing Plan". After giving
effect to the Transaction, the Company's long-term debt as of March 31, 1996,
would have been approximately $55.5 million (approximately 63% of total
capitalization). See "Capitalization", "The Transaction", "Financing Plan", and
"Pro Forma Financial Data".
5
<PAGE> 8
THE OFFERING
COMMON STOCK OFFERED BY THE SELLING
STOCKHOLDERS.................................... 8,000,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THE
OFFERING(1)..................................... 8,000,000 shares
USE OF PROCEEDS................................. The Company will not receive
any proceeds from the
Offering other than the
proceeds, if any, from any
exercise of the
over-allotment option. If the
over-allotment option is
exercised, the net proceeds
from the sale of such option
shares will be used by the
Company for general corporate
purposes. See "Use of
Proceeds".
DIVIDEND POLICY................................. The Company currently expects
to pay regular quarterly cash
dividends of $.13 per share
on its Common Stock,
commencing in the fourth
quarter of 1996, subject to
declaration by the Company's
Board of Directors (a
majority of which will not be
appointed until after the
consummation of the Offering)
and compliance with
provisions contained in the
Company's New Credit Facility
and Senior Notes. See
"Dividend Policy" and
"Financing Plan".
PROPOSED NASDAQ SYMBOL.......................... FRAX
- ---------------
(1) Excludes 1,000,000 shares of Common Stock which will be reserved for
issuance under a stock option plan to be adopted prior to the Offering,
including approximately 375,000 shares of Common Stock subject to options
expected to be granted to employees of the Company prior to consummation of
the Offering. See "Management -- Stock Option and SAR Grants, Exercises and
Year-End Values".
6
<PAGE> 9
SUMMARY FINANCIAL AND OTHER DATA
The following table sets forth summary financial data of the Company for
the five years ended December 31, 1995 and for the three-month periods ended
March 31, 1995 and March 31, 1996, and certain pro forma data for the year ended
December 31, 1995 and the three-month period ended March 31, 1996. The
historical data set forth below for 1993, 1994, and 1995 have been derived from,
and should be read in conjunction with, the Company's audited financial
statements and the notes thereto appearing elsewhere in this Prospectus. The
historical financial data set forth below for 1992 have been derived from
audited financial statements which are not included herein. The historical
financial data set forth below for 1991 have been derived from unaudited
financial statements of the Company which, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such data. The historical financial data for the
three-month periods ended March 31, 1995, and March 31, 1996, have been derived
from, and should be read in conjunction with, the unaudited financial statements
of the Company for such periods which are also included herein. Such financial
statements reflect, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of such
data. Operating results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year ended December
31, 1996.
The pro forma statement of income data for 1995 and for the three-month
period ended March 31, 1996, assume that the Transaction and the Saint-Gobain
Sale occurred on January 1, 1995. The pro forma balance sheet data as of March
31, 1996, give effect to the Transaction as if it had occurred on March 31,
1996. The pro forma financial data do not purport to represent what the
Company's financial condition or results of operations would actually have been
had the Transaction and the Saint-Gobain Sale in fact occurred on the assumed
date, or to project the Company's financial condition or results of operations
for any future period or date.
The following table should be read in conjunction with "Selected Financial
Data", "Pro Forma Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, -------------------------------
-------------------------------------------------------------- PRO FORMA
PRO FORMA COMBINED COMBINED
1991 1992 1993 1994 1995 1995 1995 1996 1996
------- ------- ------- ------- ------- ---------- ------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales...................... $53,540 $64,565 $67,692 $76,246 $84,064 $ 83,588 $21,384 $21,581 $ 21,502
Cost of goods sold............. 27,620 33,099 34,153 37,590 40,630 40,377 10,551 10,642 10,600
------- ------- ------- ------- ------- ---------- ------- -------- ----------
Gross profit................... 25,920 31,466 33,539 38,656 43,434 43,211 10,833 10,939 10,902
Selling and distribution....... 9,462 10,370 9,932 10,688 11,579 12,186 3,028 3,134 3,181
Administration................. 5,701 5,212 5,415 6,279 6,189 8,206 1,811 1,737 2,214
Allocated corporate charges
(a).......................... 2,900 2,600 2,800 2,300 2,700 -- 675 356 --
Research and development....... 2,106 2,955 2,747 2,772 2,950 2,950 854 699 699
Restructuring charges.......... -- 480 155 -- -- -- -- -- --
------- ------- ------- ------- ------- ---------- ------- -------- ----------
Operating income............... 5,751 9,849 12,490 16,617 20,016 19,869 4,465 5,013 4,808
Interest expense............... -- -- -- -- -- (4,276) -- -- (984)
Other income................... 541 555 549 591 932 519 196 87 19
------- ------- ------- ------- ------- ---------- ------- -------- ----------
Income before income taxes and
accounting change............ 6,292 10,404 13,039 17,208 20,948 16,112 4,661 5,100 3,843
Provision for income taxes..... 2,511 4,152 5,407 7,052 8,539 6,567 1,894 2,100 1,587
------- ------- ------- ------- ------- ---------- ------- -------- ----------
Income before accounting
change....................... 3,781 6,252 7,632 10,156 12,409 9,545 2,767 3,000 2,256
Accounting change.............. -- -- (2,658)(e) -- -- -- -- -- --
------- ------- ------- ------- ------- ---------- ------- -------- ----------
Net income..................... $ 3,781 $ 6,252 $ 4,974 $10,156 $12,409 $ 9,545 $ 2,767 $ 3,000 $ 2,256
======= ======= ======= ======= ======= ========== ======= ========= ==========
Net income per common
share(b)..................... $ 1.19 $ 0.28
========== ==========
Weighted average shares
outstanding(b)............... 8,000 8,000
OTHER DATA:
EBITDA (c)..................... $ 9,515 $14,001 $17,010 $21,428 $25,249 $ 24,689 $ 5,714 $ 6,076 $ 5,803
Depreciation and
amortization................. 3,223 3,597 3,971 4,220 4,301 4,301 1,053 976 976
Capital expenditures........... 2,751 3,669 3,032 2,670 3,404 3,404 572 1,160 1,160
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................ $11,103 $11,301 $12,991 $15,800 $13,579 $17,811 $17,163 $ 17,469
Total assets................... 53,453 54,531 55,513 57,509 55,055 58,769 59,507 105,795
Long-term debt................. -- -- -- -- -- -- -- 55,500
Total liabilities.............. 15,414 16,388 19,634 20,443 20,815 20,173 21,298 73,343
Parent company investment
(d).......................... 38,039 38,143 35,879 37,066 34,240 38,596 38,209 --
Stockholders' equity........... -- -- -- -- -- -- -- 32,452
</TABLE>
7
<PAGE> 10
- ---------------
(a) Certain administrative services and research and development activities were
provided to all businesses of Unifrax, including the Company, on a
centralized basis. Indirect administrative expenses were allocated to the
businesses either based on the level of service provided or based on the
overall cost structure of Unifrax. In the opinion of management of the
Company, charges and allocations have been determined on a reasonable basis;
however, they are not necessarily indicative of the level of expenses which
might have been incurred had the Company been operating as a stand-alone
entity.
(b) Historical earnings per share are not presented, as the historical capital
structure of the Company prior to the Transaction is not comparable with the
capital structure that will exist subsequent to the Transaction. Pro forma
earnings per share are based on the assumption that 8,000,000 shares of
Common Stock were outstanding for each period, which represents the total
number of shares that will be outstanding following consummation of the
Transaction.
(c) "EBITDA" means earnings from operations before interest expense, taxes,
depreciation, amortization, and cumulative effect of change in accounting
principle. EBITDA is included because it is commonly used by certain
investors and analysts as one measure of an issuer's ability to fund
operations and meet its financial obligations. EBITDA should not be
considered in isolation from, as a substitute for or as being more
meaningful than net income, cash flows from operating activities or other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles as a measure of the Company's profitability
or liquidity.
(d) The North American Fibers Business was accounted for as a division of
Unifrax rather than as a subsidiary. The North American Fibers Business
(prior to consummation of the Transaction) had no separately identifiable
equity other than an amount equal to its net assets captioned as "parent
company investment." In connection with the Transaction, this investment
will be eliminated and replaced by stockholders' equity comprised of the
Company's newly issued common stock at par value and a residual amount of
additional paid-in capital.
(e) Represents the cumulative effect of a change in accounting principle made in
1993 related to the accounting for postretirement benefits other than
pensions.
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<PAGE> 11
RISK FACTORS
Prospective purchasers of the shares of Common Stock offered hereby should
consider carefully the following risk factors, as well as the other information
set forth in this Prospectus.
DEPENDENCE ON CERAMIC FIBER; HEALTH AND SAFETY ISSUE
Substantially all of the Company's products contain ceramic fiber, a
man-made vitreous fiber which, along with similar fibers such as fiberglass and
mineral wool, has been categorized as "possibly carcinogenic in humans" by the
International Agency for Research on Cancer, an agency within the World Health
Organization of the United Nations. Other government agencies and health
organizations, including the U.S. Environmental Protection Agency, have
categorized ceramic fiber as "probably carcinogenic in humans". Although studies
to date of workers with occupational exposure to airborne ceramic fiber have
found no link between prior or current exposure to ceramic fiber and disease in
humans, independent animal studies have indicated that ceramic fiber inhaled by
test animals can cause cancer. Whether or not ceramic fiber is ever demonstrated
to cause disease in humans, the Company could be required to spend substantially
greater amounts of money in connection with the monitoring, study, and
resolution of this health and safety issue, including efforts to develop a
product or process that would meet any government-imposed regulation.
Furthermore, the Company's efforts to develop a product or process that would
satisfy any regulatory initiative may not be successful.
From time to time, the Company has been named as a defendant in lawsuits
involving alleged injury suffered from exposure to ceramic fiber. The Company
believes that the lawsuits brought against it have been without merit and has
obtained an agreement of indemnity from BP America Inc. ("BP America"), an
indirect wholly owned subsidiary of The British Petroleum Company p.1.c.,
relating to certain liabilities for wrongful death or personal injury arising
from exposure to ceramic fiber prior to the consummation of the Offering.
Additional litigation and administrative proceedings could be brought against
the Company and its distributors and customers, and the Company could be exposed
to significantly higher defense costs as well as potential adverse judgments
with respect to exposure claims for periods after the Offering. BP America will
indemnify the Company for claims and expenses (including reasonable attorneys'
fees) for wrongful death or personal injury over and above (x) $100,000 per
occurrence and (y) $2.5 million in the aggregate caused by exposure to ceramic
fiber products manufactured by Unifrax. However, BP America's indemnity for any
such wrongful death or personal injury will not extend to any exposures which
occur after consummation of the Offering. If claims arise from exposure in part
before and in part after the consummation of the Offering, then BP America's
indemnity will only apply to the portion of the injury arising from the exposure
prior to the consummation of the Offering. Furthermore, BP America will not
indemnify the Company for third party injury if the Company's failure to
implement the existing Product Stewardship Program or any necessary better
program with respect to ceramic fiber products caused such injury. In addition,
there can be no assurance that the Company will be able to obtain adequate
product liability coverage for any past or future exposures which are not
covered by the agreement of indemnity from BP America.
Although studies to date of occupational exposure have found no link
between prior or current exposure to ceramic fiber and disease in humans, there
can be no assurance that a link will not be found in the future. The costs
incurred by the Company in dealing with the ceramic fiber health issue and the
imposition of government regulation cannot be reasonably estimated at this time
but could have a material adverse effect on the financial condition and results
of operations of the Company. See "The Transaction", "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and
"Business -- Health and Product Safety Issues".
GENERAL ECONOMIC CONDITIONS; COMPETITION
The Company's business is sensitive to downturns in the general economy
because a substantial portion of its products are used in cyclical industries.
In particular, the Company sells a significant amount of its products for
applications in the automotive industry. Furthermore, the Company recently began
a $14.4 million expansion project at its facility in New Carlisle, Indiana. This
expansion will increase the Company's fixed
9
<PAGE> 12
costs and may increase its sensitivity to general economic conditions. See
"Business -- Cyclicality and Seasonality".
The ceramic fiber industry is highly competitive, and some of the Company's
competitors are larger and have greater resources than the Company. This
competition could adversely affect the Company's financial condition and results
of operations. See "Relationship with SEPR" and "Business -- Competition".
DEPENDENCE ON PRODUCT LINE
The Company's porosity-controlled paper is used in automotive safety airbag
inflation systems which incorporate sodium azide technology. The Company
believes that this sodium azide technology may be displaced in four to five
years by other technology that may not use the Company's ceramic fiber-based
paper. Although the replacement technology has not been fully developed and is
presently more expensive than the sodium azide technology, there can be no
assurance that the sodium azide technology will not be displaced earlier. During
the five years ended December 31, 1995, the Company's sales of
porosity-controlled paper for this application represented approximately 2.1%,
2.9%, 7.2%, 11.3% and 13.8%, respectively, of the Company's net sales and a
higher percentage of the Company's operating income. A substantial decrease in
sales of porosity-controlled paper could have a material adverse effect on the
Company's financial condition and results of operations. See
"Business -- Markets".
LEVERAGE
The degree to which the Company is leveraged and the terms of the Company's
indebtedness could have important consequences to holders of the Common Stock
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
and other general corporate purposes may be adversely affected, (ii) a
significant portion of the Company's cash flow from operations will be dedicated
to the payment of the principal of and interest on its indebtedness, and (iii)
the New Credit Facility and Senior Notes will contain certain covenants which
restrict the Company's ability to pay dividends. Although the Company believes
that it will have the resources to service all of its obligations for the next
several years as they become due, there can be no assurance that it will be able
to do so.
After giving effect to the Transaction, the Company's long-term debt as of
March 31, 1996, would have been approximately $55.5 million (approximately 63%
of total capitalization). See "Capitalization", "The Transaction", "Financing
Plan", and "Pro Forma Financial Data".
DEPENDENCE ON RAW MATERIAL SUPPLIER
Most of the Company's raw materials are available from various companies.
To date, the Company generally has experienced no difficulty in obtaining raw
materials as needed, and it generally believes it can obtain raw materials of
the same quality and at comparable prices as other manufacturers. However, the
Company purchases substantially all of its requirements of vermiculite from one
supplier in China. Vermiculite is a light weight, highly water-absorbent mineral
and an important raw material in the manufacture of the Company's successful
expanding mat ("XPE") product line used in automotive catalytic converters.
Although the Company has identified potential alternative sources of supply of
vermiculite and is attempting to identify additional alternative sources, there
can be no assurance that supplies can be obtained on the same terms and
conditions, including quality requirements, from alternative suppliers. Any
significant interruption in the supply of vermiculite could have a material
adverse effect on the financial condition and results of operations of the
Company. During the year ended December 31, 1995, the Company's sales of XPE
represented approximately 10% of the Company's net sales. See "Relationship with
SEPR", "Business -- Markets", and "Business -- Manufacturing and Operations".
RESTRICTIONS ON INTERNATIONAL EXPANSION
As part of the arrangements related to the Saint-Gobain Sale, the Company
entered into a series of agreements with SEPR which will affect how the Company
conducts business outside the North American
10
<PAGE> 13
Market. These agreements include the Company's covenant not to compete with SEPR
outside the North American Market until March 1, 2001, and other restrictions on
the Company's ability to distribute its products and license its technology
outside the North American Market. These arrangements restrict the Company's
ability to expand its sales outside the North American Market. See "Relationship
with SEPR" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal and local governmental
regulations related to the use, storage, discharge, and disposal of toxic,
volatile, or otherwise hazardous chemicals used in its manufacturing processes.
Although the Company believes its activities conform to presently applicable
environmental regulations, failure to comply with present and future regulations
could result in fines being imposed on the Company, suspension of production, or
a cessation of operations. There can be no assurance that regulatory changes or
changes in regulatory interpretation or enforcement will not render compliance
more difficult and costly. Any failure of the Company to control the use of, or
restrict the discharge of, hazardous substances or comply with environmental
regulations could subject it to significant future liabilities. In addition,
although the Company believes that its past operations conform with all
applicable environmental laws and regulations, there can be no assurance that
the Company has not in the past violated applicable laws or regulations, which
violations could result in remediation or other liabilities, or that the past
use or disposal of environmentally sensitive materials in conformity with then
existing environmental laws and regulations will not result in remediation or
other liabilities under current or future environmental laws or regulations. See
"The Transaction", "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Contingencies" and "Business -- Environmental
Matters".
ABSENCE OF PRIOR MARKET FOR SHARES; DETERMINATION OF OFFERING PRICE; MARKET RISK
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market for the Common
Stock will develop or, if developed, will be sustained. The initial public
offering price of the Common Stock will be determined by negotiations between BP
and the Representatives of the Underwriters and may not be indicative of the
market price after the Offering. See "Underwriting".
The stock market has from time to time experienced extreme price and volume
fluctuations which have been unrelated to the operating performance of
particular companies. The market price for the shares of Common Stock may be
highly volatile depending on various factors, including general economic,
political and stock market conditions, industry reports, actions by government
agencies, announcements by the Company or its competitors, and fluctuations in
the Company's operating results. These and other factors may adversely affect
the market price of the Common Stock.
DISTRIBUTION OF PROCEEDS FROM OFFERING AND RELATED TRANSACTIONS
The Company will not receive any proceeds from the Offering other than the
proceeds, if any, from any exercise of the over-allotment option. In addition to
the net proceeds from the Offering, BP will also receive from the Company,
concurrently with the consummation of the Offering or shortly thereafter, $55
million in repayment of the Selling Stockholder Note (plus accrued interest
thereon, if any). With the exception of the determination of the initial public
offering price for the Common Stock, none of the terms related to the
acquisition of the North American Fibers Business by the Company resulted from
arm's length negotiations and the Company does not believe such terms are as
favorable as terms which might have been obtained in arm's length negotiations.
See "Use of Proceeds", "The Transaction", "Financing Plan", and "Underwriting".
PROVISIONS LIMITING CHANGES IN CONTROL
The Company's charter and by-laws contain provisions that might diminish
the likelihood that a potential acquiror would make an offer for the Common
Stock, impede a transaction favorable to the interests of the stockholders, or
increase the difficulty of removing the incumbent Board of Directors and
management. These
11
<PAGE> 14
provisions include a staggered board, the inability to remove a director without
cause, special procedures for director nominations by stockholders, and the
authorization of unissued Common Stock. See "Description of Capital
Stock -- Certain Anti-Takeover Provisions Affecting Stockholders".
The Company's charter also authorizes the Board of Directors to provide for
the issuance of preferred stock in one or more series and to fix the terms of
the preferred stock. Such preferred stock could have voting, liquidation, and
dividend rights which would be superior to the voting, liquidation, and dividend
rights of the Common Stock. The terms of preferred stock approved by the Board
of Directors of the Company could also have the effect of limiting changes in
control of the Company. See "Description of Capital Stock -- Preferred Stock".
12
<PAGE> 15
USE OF PROCEEDS
The Company will not receive any proceeds from the Offering other than the
proceeds, if any, from any exercise of the over-allotment option. All net
proceeds of the Offering, estimated to be approximately $ million (assuming
the Price to Public is $ per share (the mid-point of the estimated price
range identified on the cover page of this Prospectus)), will be received by the
Selling Stockholders. If the over-allotment option is exercised in full, the net
proceeds of approximately $ million from the sale of such option shares will
be used by the Company for general corporate purposes, which may include
repayment of outstanding indebtedness and acquisitions of complementary
businesses. No acquisitions are presently pending or are under discussion. The
indebtedness under the New Credit Facility and the Senior Notes will have been
incurred in connection with the Transaction and are expected to bear interest at
the respective rates of interest described under "Financing Plan", and would
have otherwise been due and payable in 2001 and 2006, respectively.
In addition to the net proceeds from the Offering, BP will also receive $55
million (plus accrued interest thereon, if any) in repayment of the Selling
Stockholder Note. These payments will be financed from proceeds of the Senior
Notes and the New Credit Facility. Payments of interest, if any, will be
financed with cash on hand or additional borrowings under the New Credit
Facility. See "The Transaction" and "Financing Plan".
DIVIDEND POLICY
The Company intends to pay quarterly cash dividends on the Common Stock,
beginning with the fourth quarter of 1996. The initial annual dividend rate is
expected to be $.13 per share. The payment of dividends will be at the sole
discretion of the Company's Board of Directors, a majority of which will not be
appointed until after the consummation of the Offering, and will depend upon the
Company's profitability, financial condition, cash requirements, future
prospects, and other factors deemed relevant by the Board of Directors. Upon
completion of the Offering, the payment of dividends will be restricted by
covenants in the Company's New Credit Facility and Senior Notes which limit the
payment of dividends or the making of other distributions to stockholders. See
"Financing Plan" and "Pro Forma Financial Data".
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the actual capitalization of the North
American Fibers Business as of March 31, 1996 and as adjusted to reflect the
Transaction. This table should be read in conjunction with the financial
statements and the information under "Pro Forma Financial Data", including in
each case the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------
AS
ACTUAL ADJUSTED
------- -------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt, including current maturities of long-term debt........ $ -- $ --
======= =======
Long-term debt:
New Credit Facility.................................................. $ -- $10,500(1)
Senior Notes......................................................... -- 45,000(1)
------- -------
Total long-term debt................................................... -- 55,500
Parent company investment/Stockholders' equity(2)(3):
Parent company investment............................................ 38,209 --
Preferred stock, $.01 par value, 1,000,000 shares authorized, no
shares issued or outstanding, as adjusted......................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 8,000,000
shares issued and outstanding, as adjusted........................ -- 80
Additional paid-in capital........................................... -- 32,372
------- -------
Total parent company investment/stockholders' equity(2)(3)............. 38,209 32,452
------- -------
Total capitalization................................................... $38,209 $87,952
======= =======
</TABLE>
- ---------------
(1) In connection with the Transaction, the Company will enter into the New
Credit Facility and will issue the Senior Notes. The $55.0 million Selling
Stockholder Note issued by the Company as part of the consideration for the
North American Fibers Business transferred by BP to the Company in the
Transaction will be retired with borrowings under the New Credit Facility
and proceeds from the sale of the Senior Notes. The borrowings under the New
Credit Facility also reflect the estimated financing expenses incurred in
connection with entering into the New Credit Facility and issuing the Senior
Notes. The New Credit Facility will also provide for additional borrowings
up to $9.5 million which may be used for general corporate purposes,
including working capital and other capital requirements. See "Financing
Plan".
(2) The North American Fibers Business was accounted for as a division of
Unifrax rather than as a subsidiary. The North American Fibers Business
(prior to the consummation of the Transaction) had no separately
identifiable equity other than an amount equal to its net assets captioned
as "parent company investment." In connection with the Transaction, this
investment will be eliminated and replaced by a stockholders' equity account
comprised of the Company's newly issued Common Stock at par value and a
residual amount of additional paid-in capital.
(3) Subsequent to March 31, 1996, but prior to the Transaction, the Company
issued 1,000 shares of Common Stock which will be repurchased (at their cost
of $1.00 per share) with available cash.
14
<PAGE> 17
THE TRANSACTION
Unifrax Acquisition Inc. was incorporated in Delaware on April 19, 1996. As
of the date of this Prospectus, the Company's 1,000 outstanding shares of Common
Stock are owned by William P. Kelly, the President and Chief Executive Officer
of the Company. Immediately prior to the consummation of the Offering and
pursuant to an Assets Transfer Agreement to be entered into among Unifrax, BP
America and the Company (the "Assets Transfer Agreement"), (i) Unifrax and the
stockholders of its overseas sales affiliates will transfer the North American
Fibers Business to the Company, and the Company will obtain the Covenant Not To
Compete, in exchange for the Selling Stockholder Note in the principal amount of
$55 million and 8,000,000 shares of Common Stock and (ii) the 1,000 shares of
Common Stock currently outstanding and owned by Mr. Kelly will be repurchased at
cost ($1,000). As a result of the Assets Transfer Agreement, the Selling
Stockholders will own 100% of the issued and outstanding shares of the Company's
Common Stock. Concurrent with the consummation of the Offering, the Company
intends to enter into the New Credit Facility and issue the Senior Notes. The
proceeds of the Senior Notes and the New Credit Facility will be used to repay
the principal amount of the Selling Stockholder Note. Accrued interest, if any,
on the Selling Stockholder Note at the rate of % per annum will be paid
from cash on hand or additional borrowings under the New Credit Facility. In the
Offering, BP is selling 100% of its ownership interest in the Company. Unifrax
Acquisition Inc. will change its name to Unifrax Corporation either shortly
before or shortly after the consummation of the Offering.
Pursuant to the Assets Transfer Agreement, except as described below, the
Company will assume all of the obligations and liabilities arising out of or
relating to the North American Fibers Business or the transferred assets, as if
the Company had operated the business from its commencement and the business had
never been owned by Unifrax or its affiliates.
The Assets Transfer Agreement contains certain covenants regarding the
operations of the Company prior to the closing of the assets transfer (the
"Closing") and, until the Closing, requires BP America to continue to provide
the Company with working capital and services in accordance with past custom and
practice.
Pursuant to the Assets Transfer Agreement, BP America will indemnify the
Company from liability for certain matters, including (i) any United States
federal, state, or local income or franchise taxes for any period up to and
including the consummation of the Offering, including those attributable to any
affiliated or combined group of which Unifrax or either of its overseas sales
affiliates was a member at any time prior to the Closing, (ii) claims relating
to assets and liabilities of Unifrax which are not being transferred to Unifrax
Acquisition Inc., (iii) claims in connection with the stock purchase agreement
entered into by Unifrax relating to the Saint-Gobain Sale (other than claims
arising from any breach by the Company, on or after the Closing, of the
agreements entered into with SEPR in connection with the Saint-Gobain Sale),
(iv) all claims relating to the certain specific, known environmental matters
identified under "Business -- Environmental Matters", and (v) claims and
expenses (including reasonable attorneys' fees) for wrongful death or personal
injury over and above (x) $100,000 per occurrence and (y) $2.5 million in the
aggregate caused by exposure to ceramic fiber products manufactured by Unifrax;
provided, however, that BP America's indemnity for any such wrongful death or
personal injury will not extend to any exposures which occur after consummation
of the Offering. If claims arise from exposure in part before and in part after
the consummation of the Offering, then BP America's indemnity will only apply to
the portion of the injury arising from exposure prior to the consummation of the
Offering. Notwithstanding the foregoing, BP America will not indemnify the
Company for third party injury if the Company's failure to implement the
existing Product Stewardship Program or any necessary better program with
respect to ceramic fiber products caused such injury. For purposes of this
indemnity, the Product Stewardship Program or necessary better program shall
consist of at least the following elements: maintenance of handling procedures;
research, as reasonably appropriate, into health effects and safe handling;
continuing research, as reasonably appropriate, into alternative products;
informing customers and others who may come into contact with ceramic fiber
products about safe handling; and effective steps, as reasonably appropriate, to
ensure that the program is implemented throughout the distribution chain of the
products. See "Risk Factors--Dependence on Ceramic Fiber; Health and Safety
Issue" and "Business -- Health and Product Safety Issues".
15
<PAGE> 18
The Company is not entitled to any other indemnity from BP. Pursuant to the
Assets Transfer Agreement, the Company will indemnify BP from liability for
certain matters, including (i) any taxes described in clause (i) of the
preceding paragraph attributable to the operation of the Company following the
Closing, (ii) the assets and liabilities transferred to the Company, and (iii)
all liabilities attributable to the operation of the Company or its overseas
sales affiliates arising after the Closing, including any liabilities arising
from any breach of the agreement entered into with SEPR in connection with the
Saint-Gobain Sale. See "Relationship with SEPR".
FINANCING PLAN
Concurrently with the consummation of the Offering, the Company will (i)
execute and deliver a revolving credit agreement and borrow thereunder
approximately $10.5 million against the $20 million, five-year revolving credit
facility (the "New Credit Facility") and (ii) issue $45 million in aggregate
principal amount of senior notes (the "Senior Notes") in a private placement.
The proceeds from the sale of the Senior Notes and the borrowings under the New
Credit Facility will be used to repay the $55 million Selling Stockholder Note
upon consummation of the Offering and to pay financing fees associated with the
Senior Notes. Accrued interest, if any, at the rate of % per annum on the
Selling Stockholder Note will be paid from cash on hand or additional borrowings
under the New Credit Facility. Unifrax has entered into a commitment letter with
Key Bank to provide the New Credit Facility.
The balance of available borrowings under the New Credit Facility will be
available for general corporate purposes, including working capital and other
capital requirements of the Company. At the option of the Company, borrowings
under the New Credit Facility will bear interest based on a lending bank's prime
lending rate or the U.S. dollar London Interbank Offered Rate (LIBOR), plus
0.75%.
The Company presently expects the Senior Notes to bear interest at a rate
of % per annum. The Senior Notes will have a final maturity of ten years
with an average life of seven years. The Senior Notes will require equal annual
principal payments, commencing at the end of the fourth year after issuance.
The respective agreements governing the New Credit Facility and the Senior
Notes will contain various covenants, including restrictive covenants which
require the Company to maintain minimum levels for various ratios, including an
interest coverage ratio and a debt coverage ratio. The agreements will also
contain customary covenants imposing certain restrictions on mergers and
consolidations, sales of assets, incurrences of liens, sale and leaseback
transactions, subsidiary indebtedness, and certain other payments (including
dividends).
The respective agreements governing the New Credit Facility and the Senior
Notes will also contain customary events of default, including defaults relating
to failure to pay interest or principal, material breaches of representations
and warranties, breaches of covenants, cross-defaults to certain other
indebtedness for money borrowed, and events of bankruptcy, insolvency, and
reorganization. The occurrence of an event of default would allow the
indebtedness to be accelerated, in the case of the New Credit Facility at its
principal amount plus accrued interest, and in the case of the Senior Notes at a
price equal to the redemption price stated therein.
RELATIONSHIP WITH SEPR
As part of the Saint-Gobain Sale, Unifrax entered into a series of
agreements with SEPR which affects how the Company conducts business outside of
the North American Market. Until March 1, 2001, the Company and any entity which
controls, is controlled by or is under common control with the Company are
precluded from competing with SEPR in the ceramic fiber business outside of the
North American Market with the exception of XPE for automotive catalytic
converters. The Company also entered into certain licensing agreements with SEPR
involving the Company's patents, know-how, and trademarks outside the North
American Market as described below. SEPR was not granted any rights to use any
of the Company's patents, know-how, or trademarks in the North American Market.
The Company's two newly organized
16
<PAGE> 19
overseas sales affiliates were formed for the purpose of effecting the Company's
sale of XPE outside of the North American Market.
Covenant Not To Compete. The SEPR covenant not to compete prohibits the
Company from producing, selling or distributing products (with the exception of
XPE for automotive catalytic converters) outside the North American Market or
taking an interest in or having an involvement with any producer or distributor
of ceramic fibers outside that territory until March 1, 2001.
License Agreement. SEPR received from the Company a nonexclusive,
royalty-free license (the "License") to manufacture and sell outside the North
American Market the ceramic fiber products, and their improvements and
replacements, which were manufactured by Carborundum in Australia, Brazil,
Germany, and the United Kingdom prior to the Saint-Gobain Sale. The Company is
precluded from granting any further license of this technology outside the North
American Market for 20 years except to an affiliate. SEPR is obligated to pay
the Company an annual technical fee, and the Company must provide specific
technical services, product improvements, and product replacements and must
maintain all of its patents until March 1, 2001.
Product Distribution Agreement. Pursuant to the Product Distribution
Agreement, SEPR has also been appointed as the Company's exclusive distributor
outside the North American Market, for a five-year term, for the Company's
product lines which are not covered by the License, except for XPE. These
include (I) products only manufactured in the North American Market and sold
outside the North American Market prior to the Saint-Gobain Sale ("Group I
Products"); and (II) products only manufactured in the North American Market and
not sold outside the North American Market prior to the Saint-Gobain Sale
("Group II Products").
For Group I Products, minimum purchase quantities and distributor discounts
are to be agreed upon annually on a product-by-product basis by the Company and
SEPR. Failure to agree on sales quantities or discounts or failure by SEPR to
purchase the minimum quantities may lead to termination of the Product
Distribution Agreement on a product-by-product basis twelve months thereafter.
Distributed Product License Agreement. If customers demand Group II
Products outside the North American Market, SEPR is obliged to distribute such
products on the Company's behalf. SEPR is not entitled to take up any license to
manufacture any of the Group II Products. SEPR will be granted a royalty-bearing
manufacturing license on any Group I Products which are terminated from the
Product Distribution Agreement. SEPR also has the right to cancel the Product
Distribution Agreement on a product-by-product basis for Group I Products by
taking out a license to manufacture and paying the license royalty. Any license
of Group I Products will grant rights to the then-current patents and technology
but will not include any rights to license improvements developed by the Company
after the product has been terminated from the Product Distribution Agreement.
The license for Group I Products requires SEPR to pay a royalty on a declining
scale until March 1, 2006, after which the license becomes royalty-free.
Conversion Agreement. Under the Conversion Agreement, SEPR has an
obligation to die-cut rolls of XPE for the Company in connection with the
Company's sales to customers within Europe and South America and has been
granted a right of first refusal to provide this service to the Company in other
countries outside the North American Market. These rights and obligations will
continue until the earlier of a cancellation of this arrangement by SEPR or the
expiration of certain patents covering XPE.
XPE License Agreement. SEPR has a right to cancel the Conversion Agreement
upon six months' notice and to take up a royalty-free, non-exclusive license for
20 years to manufacture XPE. The Company may continue to sell XPE outside of the
North American Market during the life of any license SEPR may take up for XPE
but may not license any other third party other than an affiliate. The Company
is obliged to supply technical services for a period of three years from the
date of grant of the license, to be charged at a per diem rate. The technology
to be transferred will be that current at the date of grant of the license but
with no rights to improvements thereafter.
Trademark License and Consent Agreement. Under the terms of the
Saint-Gobain Sale the name "Carborundum" and the Carborundum logo became the
property of SEPR, with the Company having the
17
<PAGE> 20
right to continue to use them while exhausting existing inventory of literature
and packaging material until March 1, 1997. The ownership of the product
trademarks of the Company, such as Fiberfrax(R) ceramic fiber, remains with the
Company. Until March 1, 2001, SEPR has the right to use the Company's product
trademarks royalty-free outside of the North American Market for products
manufactured under the License Agreement. After March 1, 2001, SEPR will have no
further right in the product trademarks and sole use will revert to the Company.
18
<PAGE> 21
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company for the five years ended December 31, 1995 and for the three-month
periods ended March 31, 1995 and March 31, 1996. The historical data set forth
below for the years 1993, 1994, and 1995 have been derived from, and should be
read in conjunction with, the Company's audited financial statements and the
notes thereto appearing elsewhere in this Prospectus. The financial statements
for the years 1993, 1994, and 1995 have been audited by Ernst & Young LLP,
independent auditors, whose report thereon also appears elsewhere herein. The
historical financial data set forth below for 1992 have been derived from
audited financial statements which are not included herein. The historical
financial data set forth below for 1991 have been derived from unaudited
financial statements of the Company which, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such data. The historical financial data for the
three-month periods ended March 31, 1995, and March 31, 1996, have been derived
from, and should be read in conjunction with, the unaudited financial statements
of the Company for such periods which are also included herein. Such financial
statements reflect, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of such
data. Operating results for the three-month period ended March 31, 1996 are not
necessarily indicative of the results to be expected for the year ended December
31, 1996.
The following table should be read in conjunction with "Pro Forma Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, -------------------
--------------------------------------------------- COMBINED
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Net sales.......................... $53,540 $64,565 $67,692 $76,246 $84,064 $21,384 $21,581
Cost of goods sold................. 27,620 33,099 34,153 37,590 40,630 10,551 10,642
------- ------- ------- ------- ------- ------- --------
Gross profit....................... 25,920 31,466 33,539 38,656 43,434 10,833 10,939
Selling and distribution........... 9,462 10,370 9,932 10,688 11,579 3,028 3,134
Administration..................... 5,701 5,212 5,415 6,279 6,189 1,811 1,737
Allocated corporate charges(a)..... 2,900 2,600 2,800 2,300 2,700 675 356
Research and development........... 2,106 2,955 2,747 2,772 2,950 854 699
Restructuring charges.............. -- 480 155 -- -- -- --
------- ------- ------- ------- ------- ------- --------
Operating income................... 5,751 9,849 12,490 16,617 20,016 4,465 5,013
Other income....................... 541 555 549 591 932 196 87
------- ------- ------- ------- ------- ------- --------
Income before income taxes
and accounting change............ 6,292 10,404 13,039 17,208 20,948 4,661 5,100
Provision for income taxes......... 2,511 4,152 5,407 7,052 8,539 1,894 2,100
------- ------- ------- ------- ------- ------- --------
Income before accounting
change........................... 3,781 6,252 7,632 10,156 12,409 2,767 3,000
Accounting change.................. -- -- (2,658)(d) -- -- -- --
------- ------- ------- ------- ------- ------- --------
Net income......................... $ 3,781 $ 6,252 $ 4,974 $10,156 $12,409 $ 2,767 $ 3,000
======== ======== ======== ======== ======== ======== ==========
OTHER DATA:
EBITDA(b).......................... $ 9,515 $14,001 $17,010 $21,428 $25,249 $ 5,714 $ 6,076
Depreciation and amortization...... 3,223 3,597 3,971 4,220 4,301 1,053 976
Capital expenditures............... 2,751 3,669 3,032 2,670 3,404 572 1,160
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................... $11,103 $11,301 $12,991 $15,800 $13,579 $17,811 $17,163
Total assets....................... 53,453 54,531 55,513 57,509 55,055 58,769 59,507
Total liabilities.................. 15,414 16,388 19,634 20,443 20,815 20,173 21,298
Parent company investments(c)...... 38,039 38,143 35,879 37,066 34,240 38,596 38,209
</TABLE>
19
<PAGE> 22
- ---------------
(a) Certain administrative services and research and development activities were
provided to all businesses of Unifrax, including the Company, on a
centralized basis. Indirect administrative expenses were allocated to the
businesses either based on the level of service provided or based on the
overall cost structure of Unifrax. In the opinion of management of the
Company, charges and allocations have been determined on a reasonable basis;
however, they are not necessarily indicative of the level of expenses which
might have been incurred had the Company been operating as a stand-alone
entity.
(b) "EBITDA" means earnings from operations before interest expense, taxes,
depreciation, amortization, and cumulative effect of change in accounting
principle. EBITDA is included because it is commonly used by certain
investors and analysts as one measure of an issuer's ability to fund
operations and meet its financial obligations. EBITDA should not be
considered in isolation from, as a substitute for, or as being more
meaningful than net income, cash flows from operating activities or other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles as a measure of the Company's profitability
or liquidity.
(c) The North American Fibers Business was accounted for as a division of
Unifrax rather than as a subsidiary. The North American Fibers Business
(prior to consummation of the Transaction) had no separately identifiable
equity other than an amount equal to its net assets captioned as "parent
company investment." In connection with the Transaction, this investment
will be eliminated and replaced by stockholders' equity comprised of the
Company's newly issued common stock at par value and a residual amount of
additional paid-in capital.
(d) Represents the cumulative effect of a change in accounting principle made in
1993 related to the accounting for postretirement benefits other than
pensions.
20
<PAGE> 23
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data gives effect to the
Saint-Gobain Sale and the Transaction and the application of the net proceeds
thereof. See Notes 2, 7, and 17 to the audited financial statements included
herein.
The unaudited pro forma combined balance sheet of the Company as of March
31, 1996 has been prepared after giving effect to the pro forma adjustments
described in the notes to the pro forma financial data. These adjustments have
been made assuming the transactions reflected in the pro forma combined balance
sheet had occurred on March 31, 1996.
The unaudited pro forma combined statements of income of the Company for
the year ended December 31, 1995 and the three months ended March 31, 1996 have
been prepared after giving effect to the pro forma adjustments described in the
notes to the pro forma financial data. These adjustments have been made assuming
the transactions reflected in the pro forma combined statements of income had
occurred on January 1, 1995.
The unaudited pro forma financial data set forth below is for informational
purposes only and may not necessarily be indicative of the financial position
and results of operations of the Company as they may be in the future or what
the financial position or results of operations of the Company would have been
had the transactions described above occurred on the dates indicated. The pro
forma adjustments are based upon available information and upon certain
assumptions that management of the Company believes are reasonable under the
circumstances.
21
<PAGE> 24
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash.............................................. $ 555 $ -- $ 555
Accounts receivable, net.......................... 16,040 -- 16,040
Inventories....................................... 9,128 -- 9,128
Deferred income taxes............................. 3,386 306(a) 3,692
Prepaid expenses and other current assets......... 472 -- 472
---------- ----------- ---------
Total current assets................................ 29,581 306 29,887
Property, plant and equipment, net.................. 29,442 -- 29,442
Deferred income taxes............................... -- 45,482(a) 45,482
Other assets........................................ 484 500(b) 984
---------- ----------- ---------
$ 59,507 $ 46,288 $105,795
========= =========== =========
LIABILITIES, PARENT COMPANY
INVESTMENT AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 3,164 $ -- $ 3,164
Accrued expenses.................................. 9,254 -- 9,254
Selling Stockholder Note.......................... -- 55,000(c) --
(55,000)(d)
---------- ----------- ---------
Total current liabilities........................... 12,418 -- 12,418
New Credit Facility................................. -- 10,000(d) 10,500
500(b)
Senior Notes........................................ -- 45,000(d) 45,000
Accrued postretirement benefit cost................. 5,025 -- 5,025
Deferred income taxes............................... 3,455 (3,455)(a) --
Other long-term obligations......................... 400 -- 400
---------- ----------- ---------
Total liabilities................................... 21,298 52,045 73,343
Parent company investment/Stockholders' equity:
Parent company investment......................... 38,209 (38,209)(e) --
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding.... -- -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 8,000,000 issued and
outstanding pro forma.......................... -- 80(e) 80
Additional paid-in capital........................ -- 49,243(a) 32,372
(55,000)(c)
38,129(e)
---------- ----------- ---------
$ 59,507 $ 46,288 $105,795
========= =========== =========
</TABLE>
See accompanying notes.
22
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(a) Reflects the deferred income tax effects of the Transaction. The Transaction
will be treated as an asset purchase for income tax purposes, with a
corresponding increase in the basis of assets for income tax purposes. For
financial reporting purposes, the Company will retain its historical cost
basis. The Company will recognize a related deferred tax asset because
management considers realization of this asset to be more likely than not
based upon the Company's past history of profitability, expected
profitability in the future, and the extended period over which the timing
differences will reverse.
(b) Represents the financing fees associated with the Senior Notes.
(c) Reflects the Selling Stockholder Note. See "The Transaction" and "Financing
Plan".
(d) Reflects borrowings by the Company of $55 million under the New Credit
Facility and the Senior Notes. The borrowings will be used to retire the
Selling Stockholder Note. See "Financing Plan".
(e) The North American Fibers Business was accounted for as a division of
Unifrax rather than as a subsidiary. The North American Fibers Business
(prior to consummation of the Transaction) had no separately identifiable
equity other than an amount equal to its net assets captioned as "parent
company investment". In connection with the Transaction, this investment
will be eliminated and replaced by stockholders' equity comprised of the
Company's newly issued common stock at par value and a residual amount of
additional paid-in capital.
23
<PAGE> 26
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales........................................ $ 84,064 $ (476)(i) $83,588
Operating expenses:
Cost of goods sold............................. 40,630 (253)(i) 40,377
Selling and distribution....................... 11,579 607(i) 12,186
Administration................................. 6,189 2,017(ii) 8,206
Allocated corporate charges.................... 2,700 (2,700)(iii) --
Research and development....................... 2,950 -- 2,950
---------- ----------- ---------
64,048 (329) 63,719
---------- ----------- ---------
Operating income................................. 20,016 (147) 19,869
Interest expense................................. -- (4,276)(iv) (4,276)
Other income, net................................ 932 (413)(i) 519
---------- ----------- ---------
Income before income taxes....................... 20,948 (4,836) 16,112
Provision for income taxes....................... 8,539 (1,972)(v) 6,567
---------- ----------- ---------
Net income....................................... $ 12,409 $(2,864) $ 9,545
========= =========== =========
Net income per common share...................... $ 1.19(vi)
=========
Weighted average shares outstanding.............. 8,000(vi)
</TABLE>
- ---------------
<TABLE>
<C> <S> <C> <C>
(i) Reflects the impact of the Saint-Gobain Sale (See "Relationship with SEPR") as
follows:
a) elimination of sales to previously affiliated foreign ceramic fiber
business acquired by SEPR, net of continuing sales as defined in the
SEPR agreements........................................................ $ (476)
b) cost of goods sold effect of a) above.................................. (253)
c) additional selling and distribution costs associated with the newly
organized foreign XPE sales affiliates in Germany and Brazil........... 607
d) reduction in royalty payments received as a result of the Saint-Gobain
Sale................................................................... (413)
(ii) Reflects the following:
a) Additional administration costs associated with the newly organized
foreign XPE sales affiliates in Germany and Brazil..................... $ 366
b) Increased charges for insurance as a stand-alone company............... 800
c) Increased pension expense.............................................. 351
d) Increased administration expenses to operate as a stand-alone
company................................................................ 500
------
$2,017
======
(iii) As a stand-alone entity, the Company will no longer be charged an allocation for the
costs of the discontinued Carborundum worldwide group headquarters, including an
allocation of overhead charges by BP. Incremental costs of operating as a stand-alone
entity are reflected in (ii)b) and (ii)d) above.
</TABLE>
24
<PAGE> 27
<TABLE>
<C> <S> <C> <C>
(iv) Reflects the following:
a) New Credit Facility (less repayments of $10,500 during the period) at
an interest rate of 0.75% over LIBOR (assuming LIBOR equals 5.88% per
annum). Following the Transaction, all available cash flow will be
available to repay debt. Historical cash flows from operating
activities in excess of cash used for investing activities ($15,332),
after giving effect to the pro forma effect of the Transaction and the
Saint-Gobain Sale, was assumed to be used to repay anticipated
borrowings under the New Credit Facility ($10,500)..................... $ 348
b) Senior Notes of $45,000 at a fixed interest rate to be established upon
execution and delivery of a note purchase agreement based upon 1.85%
over the 7-year Treasury Note rate (assuming the 7-year Treasury Note
rate equals 6.70% per annum)........................................... 3,848
c) Commitment fee of 0.20% per annum on the unused portion of the $20,000
New Credit Facility.................................................... 30
d) Amortization of deferred financing costs over the 10-year life of the
Senior Notes........................................................... 50
------
$4,276
======
Increasing LIBOR and the 7-year Treasury Note rates each by 1/8% per annum would
increase pro forma interest expense by $63.
(v) Income taxes, which include federal and state income taxes, have been calculated at
the income tax rates in effect during the period.
(vi) Historical earnings per share are not presented, as the historical capital structure
of the Company prior to the Transaction is not comparable with the capital structure
that will exist subsequent to the Transaction. Pro forma earnings per share are based
on the assumption that 8,000,000 shares of Common Stock were outstanding during the
period, which represents the total number of shares that will be outstanding
following consummation of the Transaction.
</TABLE>
25
<PAGE> 28
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales........................................... $ 21,581 $ (79)(i) $21,502
Operating expenses:
Cost of goods sold................................ 10,642 (42)(i) 10,600
Selling and distribution.......................... 3,134 47(i) 3,181
Administration.................................... 1,737 477(ii) 2,214
Allocated corporate charges....................... 356 (356)(iii) --
Research and development.......................... 699 -- 699
---------- ----------- ---------
16,568 126 16,694
---------- ----------- ---------
Operating income.................................... 5,013 (205) 4,808
Interest expense.................................... -- (984)(iv) (984)
Other income, net................................... 87 (68)(i) 19
---------- ----------- ---------
Income before income taxes.......................... 5,100 (1,257) (3,843)
Provision for income taxes.......................... 2,100 (513)(v) 1,587
---------- ----------- ---------
Net income.......................................... $ 3,000 $ (744) $ 2,256
========= =========== =========
Net income per common share......................... $ 0.28(vi)
=========
Weighted average shares outstanding................. 8,000(vi)
</TABLE>
- ---------------
<TABLE>
<C> <S> <C> <C>
(i) Reflects the impact of the Saint-Gobain Sale (see "Relationship with SEPR") as
follows:
a) elimination of sales to previously affiliated foreign ceramic fiber
business acquired by SEPR, net of continuing sales as defined in the
SEPR agreements........................................................ $ (79)
b) cost of goods sold effect of a) above.................................. (42)
c) additional selling and distribution costs associated with the newly
organized foreign XPE sales affiliates in Germany and Brazil........... 47
d) reduction in royalty payments received as a result of the Saint-Gobain
Sale................................................................... (68)
The pro forma adjustments for the three-month period ended March 31, 1996,
reflect the impact of the Saint-Gobain Sale through February 29, 1996. For
the month of March 1996, the historical results include the impact of the
Saint-Gobain Sale.
(ii) Reflects the following:
a) Additional administration costs associated with the newly organized
foreign XPE sales affiliates in Germany and Brazil..................... $ 68
b) Increased charges for insurance as a stand-alone company............... 200
c) Increased pension expense.............................................. 84
d) Increased administration expenses to operate as a stand-alone
company................................................................ 125
------
$ 477
======
(iii) As a stand-alone entity, the Company will no longer be charged an allocation for the
costs of the discontinued Carborundum worldwide group headquarters, including an
allocation of overhead charges by BP. Incremental costs of operating as a stand-alone
entity are reflected in (ii)b) and (ii)d) above.
</TABLE>
26
<PAGE> 29
<TABLE>
<C> <S> <C> <C>
(iv) Reflects the following:
a) Senior Notes of $45,000 at a fixed interest rate to be established upon
execution and delivery of a note purchase agreement based upon 1.85%
over the 7-year Treasury Note rate (assuming the 7-year Treasury Note
rate equals 6.70% per annum)........................................... $ 962
b) Commitment fee of 0.20% per annum on the unused portion of the $20,000
New Credit Facility.................................................... 10
c) Amortization of deferred financing costs over the 10-year life of the
Senior Notes........................................................... 12
------
$ 984
======
Increasing the 7-year Treasury Note rate by 1/8% per annum would increase pro forma
interest expense by $14.
(v) Income taxes, which include federal and state income taxes, have been calculated at
the income tax rates in effect during the period.
(vi) Historical earnings per share are not presented, as the historical capital structure
of the Company prior to the Transaction is not comparable with the capital structure
that will exist subsequent to the Transaction. Pro forma earnings per share are based
on the assumption that 8,000,000 shares of Common Stock were outstanding during the
period, which represents the total number of shares that will be outstanding
following consummation of the Transaction.
</TABLE>
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the other
information set forth in this Prospectus, including the financial statements and
the notes thereto. The discussion herein refers to the actual historical
financial results of the Company. As a consequence of the Saint-Gobain Sale and
the Transaction, these results may not be comparable to future operating
results. See Notes 2, 7, and 17 to the audited financial statements included
herein.
RESULTS OF OPERATIONS
Overview
Ceramic fiber is sold to the furnace-related market, the automotive market,
and other niche markets. Sales and earnings from year-to-year reflect the
relative strengths of these markets as well as the product mix sold within any
particular market.
Historically, the Company's sales growth has been driven by several
factors, including the use of ceramic fiber as a lower cost or higher
performance substitute for traditional hard brick refractories and other
insulating materials, the introduction of new ceramic fiber product
applications, and the general economic expansion of primary ceramic fiber
markets. During the four-year period ended December 31, 1995, the Company's net
sales and income before income taxes have increased at a compound annual rate of
approximately 12% and 35%, respectively. The growth rate in income before income
taxes has exceeded the growth rate in net sales during this period due to higher
profit margins resulting from several factors, including a sales mix shift to
higher value-added product forms and applications, improved manufacturing
efficiency, higher capacity utilization, and marketing and administrative cost
control. During each of the four years ended December 31, 1995, the Company's
sales of product forms and applications which were commercialized within the
previous five years comprised over 20% of the Company's net sales.
Prior to the Saint-Gobain Sale, the Company operated as a major division of
Carborundum. The Company provided many business services such as engineering,
sales and marketing, accounting, manufacturing, ceramic fiber research and
development, and general administration. For efficiency, Carborundum provided
some support services, such as information systems, credit and collections,
payroll, corporate communications, and health, safety, and environmental quality
on a centralized basis. The Company was charged for these services based on
usage.
In addition, certain other indirect administrative expenses of Carborundum,
such as legal, treasury, and executive office, as well as certain research and
development activities directed more broadly at ceramic materials, were
allocated to the businesses either based on the level of service provided or
based on the overall cost structure of Carborundum. Amounts allocated to the
Company for such expenses are shown as "allocated corporate charges" in the
Company's statements of income. In the opinion of management, charges and
allocations to the Company have been determined on a reasonable basis; however,
they are not necessarily indicative of the level of expenses which might have
been incurred had the Company been operating as a stand-alone entity.
As a major business unit of Carborundum, the Company was closely tied to
Carborundum's other ceramic fiber operations in the United Kingdom, Germany,
Australia, and Brazil. These non-North American units were generally dependent
on the Company for new product and process technology. Occasionally, the Company
relied upon this larger production capacity to fulfill North American demand. As
a consequence of increasing demand for its products, the Company has been
required to pursue alternative sourcing strategies for certain product forms
until the completion of the capacity expansion currently underway in New
Carlisle, Indiana. These alternative sources include competitors and the
overseas operations acquired by SEPR in the Saint-Gobain Sale. Purchases from
these alternative sources have been, and are anticipated to continue to be, at
market prices. Consequently, the Company has earned, and anticipates earning, no
profit on the final sale of these purchases and, as a result, gross profit as a
percentage of sales has been, and will continue to be, adversely affected by
these sales. In addition, the Company entered into a series of agreements with
SEPR in
28
<PAGE> 31
connection with the Saint-Gobain Sale which restricts the Company's ability to
expand its sales outside the North American Market. See "Risk
Factors -- Restrictions on International Expansion" and "Relationship with
SEPR".
The Transaction will be treated as an asset purchase for income tax
purposes, with a corresponding increase in the basis of assets for income tax
purposes. For financial reporting purposes, the Company will retain its
historical cost basis. The Company will recognize a related deferred tax asset
as management considers realization of this asset to be more likely than not
based upon the Company's past history of profitability, expected profitability
in the future and the extended period over which the timing differences will
reverse.
Three months ended March 31, 1996, compared with three months ended March 31,
1995
Net sales increased 0.9 percent from $21.4 million in the first quarter
1995 to $21.6 million in the first quarter 1996. This increase was due to higher
shipments of ceramic fiber blanket to the furnace-related market and XPE to the
automotive market, which was offset partially by lower sales of
porosity-controlled paper. The increase in XPE was largely the result of the
growth in export sales. The decrease in sales of porosity-controlled paper was
primarily due to one customer's decision to purchase roll goods from the Company
instead of finished product, and another customer's transition to a new
driver-side airbag design which uses less ceramic fiber paper.
Gross profit increased 1.0 percent from $10.8 million in the first quarter
1995 to $10.9 million in the first quarter 1996. Gross profit as a percentage of
net sales remained constant at 49.3 percent.
Selling and distribution expenses increased 3.5 percent from $3.0 million
in the first quarter 1995 to $3.1 million in the first quarter 1996. This
increase was primarily the result of sales incentives earned by the sales force
for record volumes. Payment of the performance incentives also increased selling
and distribution expenses as a percentage of net sales from 14.2 percent in the
first quarter 1995 to 14.5 percent in the first quarter 1996.
Administration expenses decreased 4.1 percent from $1.8 million in the
first quarter 1995 to $1.7 million in the first quarter 1996. This decrease was
primarily due to a non-recurring expense in the first quarter of 1995 of $0.3
million. The effect was also to reduce administration expenses as a percentage
of sales from 8.5 percent in the first quarter 1995 to 8.0 percent in the first
quarter 1996.
Allocated corporate charges for the first quarter 1995 were recognized for
all three months of the quarter. Allocated corporate charges were recognized for
only two months of first quarter 1996, as the Saint-Gobain Sale was completed on
February 29, 1996. Subsequent to the sale, the Company began purchasing services
on an arm's-length basis from unrelated third parties, including temporary
purchases from SEPR. The arm's-length purchases of services are included under
"administration". The arms' length services purchased by the Company in March
1996 from SEPR totalled $71,000 and were at the same rates which Carborundum
charged the Company for comparable services in January and February 1996. Some
previously-allocated corporate charges were replaced with other third party
services, at rates generally equal to or less than the allocations. Certain
other allocated corporate charges were not replaced and the corresponding
services were provided by existing employees within the Company.
Research and development expenses decreased 18.1 percent from $0.9 million
in the first quarter 1995 to $0.7 million in the first quarter 1996. The
decrease was primarily due to a lower level of expense for trials for the airbag
product line and other new products.
Royalty income, net of related expenses, was $0.2 million in the first
quarter 1995 compared to $0.1 million in the first quarter 1996.
Income before income taxes increased 9.4 percent from $4.7 million (21.8
percent of net sales) in the first quarter 1995 to $5.1 million (23.6 percent of
net sales) in the first quarter 1996 as a result of the factors discussed above.
29
<PAGE> 32
In November 1995, the Company announced a $14.4 million capital expansion
project at its New Carlisle, Indiana manufacturing facility. A total of $0.6
million was spent on this project during first quarter 1996. Working capital
(excluding cash and deferred taxes) decreased from $14.4 million (16.8 percent
of net sales on an annualized basis) in the first quarter 1995 to $13.2 million
(15.3 percent of net sales on an annualized basis) in the first quarter 1996,
due primarily to lower receivables from former Carborundum affiliates.
Year ended December 31, 1995, compared with year ended December 31, 1994
Net sales increased 10.3 percent from $76.2 million in 1994 to a record
$84.1 million in 1995. This increase was principally due to strong demand for
bulk, blanket and module product forms from the furnace-related market,
significant demand for porosity-controlled paper from the automotive market, and
higher demand for XPE from the automotive market. Unifrax achieved record sales
in 1995, despite its discontinuation of sales of a resale product purchased from
a former BP-owned business unit which accounted for $4.2 million of the
Company's sales in 1994.
Gross profit increased 12.4 percent from $38.7 million in 1994 to $43.4
million in 1995. This increase was the result of new product sales in generally
higher value-added products. Specifically, gross profit as a percentage of net
sales increased from 50.7 percent in 1994 to 51.7 percent in 1995 due to
increased sales of higher margin products and ongoing cost reduction, despite
price increases in raw materials costs. Strengthening markets for key raw
materials pushed alumina prices up 10.6 percent, zircon prices up 46.0 percent,
and sand prices up 3.1 percent over 1994 levels. The Company's manufacturing
cost reduction programs largely offset increases in purchased materials and
labor costs.
Selling and distribution expenses increased 8.3 percent from $10.7 million
in 1994 to $11.6 million in 1995. This increase primarily resulted from higher
warehousing and freight expenses, inflation, and other items. Selling and
distribution expenses as a percentage of net sales decreased from 14.0 percent
in 1994 to 13.8 percent in 1995 due to the relatively smaller increase in costs
compared to the larger increase in sales.
Administration expenses decreased 1.4 percent from $6.3 million in 1994 to
$6.2 million in 1995. This decrease was primarily due to a reduction in expenses
related to health-related consultants and studies. In addition, administration
expenses as a percentage of net sales decreased from 8.2 percent in 1994 to 7.4
percent in 1995.
Allocated corporate charges increased 17.4 percent from $2.3 million in
1994 to $2.7 million in 1995. This increase primarily resulted from higher costs
recorded by Carborundum for a BP stock appreciation rights program.
Research and development expenses increased 6.4 percent from $2.8 million
in 1994 to $3.0 million in 1995. This increase was due to new product
development projects, a new fiber development project, and the transfer of two
Carborundum research and development projects to the Company. Research and
development in both 1995 and 1994 included a $0.5 million provision for animal
tests expected to occur in a subsequent year. Because these tests are an
important component of the product development program, expenses are accrued
each year even though actual tests do not occur annually.
Royalty income increased 53.2 percent from $0.6 million in 1994 to $1.0
million in 1995. The increase in royalty income was due to stronger ceramic
fiber sales by the overseas Carborundum businesses sold by BP to SEPR and a
correspondingly higher royalty owed to the Company as a result of those sales.
Income before income taxes increased 21.7 percent from $17.2 million (22.6
percent of net sales) in 1994 to $20.9 million (24.9 percent of net sales) in
1995 as a result of the factors discussed above.
Capital expenditures in 1995 were $3.4 million and were principally
designed to relieve manufacturing bottlenecks and to improve efficiency.
Year-end working capital excluding cash and deferred taxes declined from $12.3
million in 1994 to $10.3 million in 1995 due primarily to lower receivables from
the Carborundum overseas units and higher year-end trade payables. Terms of
collection with the other Carborundum affiliates were shortened at year-end 1995
in anticipation of the Saint-Gobain Sale.
30
<PAGE> 33
Year ended December 31, 1994, compared with year ended December 31, 1993
Net sales increased 12.6 percent from $67.7 million in 1993 to $76.2
million in 1994. This increase was principally due to strong demand for bulk
fiber and blanket, from the furnace-related markets and for porosity-controlled
airbag paper and XPE from the automotive markets.
Gross profit increased 15.3 percent from $33.5 million in 1993 to $38.7
million in 1994. At the same time, gross profit as a percentage of net sales
increased from 49.5 percent in 1993 to 50.7 percent in 1994. This increase was
primarily the result of a sales mix shift to higher value-added products, the
favorable effect of higher volume on manufacturing efficiencies, and
manufacturing cost reduction programs. Prices of key raw materials including
alumina, sand, and zircon remained relatively flat in 1994.
Selling and distribution expenses increased 7.6 percent from $9.9 million
in 1993 to $10.7 million in 1994. This increase was the result of higher
warehousing and freight costs associated with the increase in sales, a larger
advertising campaign, and the addition of employees to support new product
opportunities. Selling and distribution expenses as a percentage of net sales
decreased from 14.7 percent in 1993 to 14.0 percent in 1994.
Administration expenses increased 16.0 percent from $5.4 million in 1993 to
$6.3 million in 1994, while administration expenses as a percentage of net sales
increased from 8.0 percent in 1993 to 8.2 percent in 1994. This increase was
primarily the result of higher spending on health consultants and health-related
studies.
Allocated corporate charges decreased 17.9 percent from $2.8 million in
1993 to $2.3 million in 1994. This decrease in allocated corporate charges was a
result of a restructuring within Carborundum between 1992 and 1993.
Research and development expenses increased 0.9 percent from $2.7 million
in 1993 to $2.8 million in 1994 as inflationary cost increases were offset by
lower spending in a variety of areas. Research and development expenses in both
1994 and 1993 included a provision of $0.5 million for animal tests expected to
occur in a subsequent year. Because these tests are an important component of
the product development program, expenses are accrued each year even though
actual tests do not occur annually.
Income before income taxes increased 32.0 percent from $13.0 million (19.3
percent of net sales) in 1993 to $17.2 million (22.6 percent of net sales) in
1994 as a result of the factors discussed above.
Capital expenditures of $2.7 million in 1994 were primarily for
replacements and process cost reduction, and efficiency projects. Year-end
working capital, excluding cash and deferred taxes, increased from $10.1 million
in 1993 to $12.3 million in 1994 primarily as a result of higher year-end trade
receivables associated with strong fourth quarter sales and higher in-process
and finished goods inventories to support the increasing sales volume.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $10.2 million, $11.3 million,
and $18.9 million for years 1993, 1994, and 1995, respectively. Cash flows in
1993 and 1994 were affected by increases in year-end accounts receivable
associated with stronger fourth quarter sales. Accounts receivable at year-end
1995 were $1.4 million lower than at year-end 1994 due primarily to lower
receivables from the Carborundum overseas units. Terms of collection with the
other Carborundum affiliates were shortened at year-end 1995 in anticipation of
the closure of the agreement between BP and SEPR for the purchase of
Carborundum. Inventories increased in 1994 to support the increasing sales
volume.
Year-end working capital, excluding cash and deferred taxes, in the last
three years has averaged between 12 percent and 16 percent of net sales, rising
somewhat seasonally at the end of the year. Within a particular calendar year,
the difference between the highest and lowest level of working capital has
generally been between $1.0 and $1.5 million.
Historically, the Company has used cash from operating activities to fund
its capital expenditure needs. Capital expenditures were $3.0 million, $2.7
million, and $3.4 million for years 1993, 1994, and 1995, respectively. Capital
expenditures included projects to replace worn equipment, to reduce
manufacturing
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<PAGE> 34
costs, and to eliminate production bottlenecks. Capital expenditures also
included spending to meet environmental compliance requirements.
BP has historically performed all treasury functions on behalf of the
Company. As a result, the Company has relied on BP for short-term financing.
Under the BP cash management system, excess cash balances are swept daily into a
BP concentration account. BP also automatically funds any negative cash balances
at the end of each day. Over the past three years, the Company has generated
cumulative cash transfers to BP of $31.3 million, of which $15.4 million was
attributable to 1995. The Company is currently establishing its own cash
management system in conjunction with a bank to meet its daily cash management
needs following divestiture from BP.
Prior to consummation of the Offering, the Company expects to enter into a
$45 million Senior Note agreement and also to obtain the $20 million New Credit
Facility. The fixed interest rate on the Senior Notes will be based on
seven-year maturity U.S. Treasuries plus a negotiated margin. The variable rate
on the New Credit Facility will be based on LIBOR or the lender's prime rate
plus a negotiated margin. Both the Senior Notes agreement and the New Credit
Facility agreement will contain certain restrictive covenants including
requirements that the Company meet certain financial ratio tests. All of the
proceeds from the sale of the Senior Notes will be used to repay a portion of
the Selling Stockholder Note. Approximately $10 million of borrowings under the
New Credit Facility will be used to repay a portion of the Selling Stockholder
Note, and $.5 million will be used to pay financing fees associated with the
Senior Notes.
Following consummation of the Transaction, the Company will maintain
independent banking relationships and short-term credit sources as needed. See
"Financing Plan". The Company anticipates that its aggregate cash flow over the
next several years will be sufficient to fund its operations and planned capital
expenditures after the Offering without significant, if any, bank or other
financing other than that provided under the New Credit Facility and the Senior
Notes. The remaining $9.5 million of the New Credit Facility will be available
to the Company for general corporate purposes, including working capital and
other capital requirements.
The Company has budgeted approximately $10.2 million for capital
expenditures in 1996, including $7.2 million for its capacity expansion at the
New Carlisle, Indiana facility. The total cost of the capacity expansion is
estimated at $14.4 million, with the second half of the expenditures planned for
1997.
SEASONALITY
The Company's results of operations are generally not seasonal, although
some increase in sales sometimes occurs in the second and fourth quarters as
certain industries in the Company's furnace-related markets prepare for planned
shutdowns and furnace repairs.
INFLATION
Price increases, although announced each year, have been low and are often
difficult to sustain due to the variety of markets and customers to which the
Company sells. The Company's costs are affected by commodity price changes and
general inflation in operating costs. The Company has generally been successful
in holding increases in its manufacturing costs below the rate of inflation
through productivity improvements. However, general inflation affects selling,
administrative, and similar costs for the Company and its competitors.
CONTINGENCIES
Ceramic Fibers. Regulatory agencies and others, including the Company, are
currently conducting scientific research to determine the potential health
impact resulting from the inhalation of airborne ceramic fibers. To date, the
results of this research have been inconclusive as to whether or not ceramic
fiber exposure presents an unreasonable risk to humans, although various
agencies and others have categorized ceramic fiber as "possibly carcinogenic to
humans" and "probably carcinogenic to humans".
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<PAGE> 35
Various legal proceedings and claims have been made against manufacturers
of ceramic fibers, including the Company, alleging death or personal injury as a
result of exposure in the manufacture and handling of ceramic fiber and other
products. The amount of any liability that might ultimately exist with respect
to these claims is presently not determinable.
Under an agreement with Unifrax, BP America has agreed to indemnify
Unifrax, including the Company, for liabilities, if any, that might result from
an unfavorable outcome of ceramic fiber claims in excess of $100,000 per
occurrence and $2.5 million in the aggregate, subject to certain conditions.
Unifrax, including the Company, and BP America intend to defend ceramic fiber
claims vigorously.
Environmental Matters. The Company is subject to loss contingencies
pursuant to various federal, state, and local environmental laws and
regulations. These include possible obligations to remove or mitigate the
effects on the environment of the placement, storage, disposal, or release of
certain substances by the Company or by other parties.
Under agreements with Unifrax, BP America assumed all liability, and the
rights to recovery from third parties, for environmental remediation and other
similar required actions with respect to certain environmental obligations of
Unifrax, including certain obligations associated with the North American Fibers
Business.
The estimated cost of known environmental obligations, except for those
obligations assumed by BP America, has been provided for in accordance with the
Company's accounting policies. In addition, the Company may, in the future, be
involved in further environmental assessments or clean-ups. While the ultimate
requirement for any such remediation, and its cost, is presently not known, and
while the amount of any future costs could be material to the results of
operations in the period in which they are recognized, the Company does not
expect these costs, based upon currently known information and existing
requirements, to have a material adverse effect on its financial condition.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
Under the provisions of this accounting standard, asset carrying amounts are
required to be reviewed whenever events or circumstances indicate that such
carrying amounts may not be recoverable. When considered impaired, the
accounting standard requires that the carrying amount of the asset be reduced,
by a charge to income, to its current fair value. The Company adopted SFAS 121
effective January 1, 1996. The adoption of the accounting standard had no impact
on the Company's results of operations or financial condition.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123, which must be adopted by the Company in
1996, encourages a fair value-based method of accounting for employee stock
options or similar equity instruments, but allows continued use of the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies
electing to continue to use APB 25 must make pro forma disclosures of net income
and earnings per share as if the fair value-based method had been applied. The
Company has not yet determined whether it will account for stock based
compensation under the provision of APB 25 or SFAS 123.
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<PAGE> 36
BUSINESS
GENERAL
Ceramic fiber was developed by the Company in 1942 and was identified
quickly as a material with commercially attractive performance properties. These
properties include stability at very high temperatures (generally up to
2,300(++)F, but up to 3,000(++)F in certain product forms), exceptionally light
weight compared to other heat-resistant materials, and extremely low heat
transmission, making it a superior insulating material at very high
temperatures. In addition, ceramic fiber exhibits high levels of chemical
stability and resistance to attack from most corrosive materials.
In the 1950s, ceramic fiber began to replace the more traditional hard
brick refractories. During the 1970s, demand for ceramic fiber increased in both
domestic and export markets, stimulated by higher energy costs and greater
government regulatory requirements relating to environmental concerns. Since the
1970s, new product applications as well as production process control advances
have led to lower product costs, increased sales, higher production rates, and
product quality improvements. New product applications developed during the
1990s include engineered fibers for brake linings, metal matrix composites, a
variety of new product applications for fire protection, new forms of XPE for
catalytic converters, and a new product application for automotive safety airbag
inflation systems.
The Company's principal executive offices are located at 2351 Whirlpool
Street, Niagara Falls, New York 14305, and its telephone number is (716)
278-3800.
BUSINESS STRATEGY
The Company's strong market positions and financial success are a result of
the effective implementation of a consistent business strategy. The Company's
business strategy is based upon its product technology and new product
development, its advanced and low-cost manufacturing capability, its strong
position in the furnace-related markets, its focus on growth and leadership in
niche markets, its emphasis on ongoing profitability improvement, and its
industry leadership in product health and safety. The Company believes this
business strategy will allow it to maintain its market leadership positions and
will continue to drive the Company's growth.
Product Technology/New Product Development. The Company manufactures and
markets one of the broadest lines of ceramic fiber products sold in North
America, which consists of bulk fiber, blankets and modules, boards, papers and
felts, textiles, and a variety of other higher value-added product forms. The
Company's product forms are recognized by customers for their high quality,
technical sophistication, and consistency. The Company has designed and
qualified many of its product forms to meet specialized customer requirements.
The Company's product leadership is the result of many factors, including its
focus on new product development and commercialization. During each of the four
years ended December 31, 1995, new products have accounted for over 20% of the
Company's sales. These new product forms have been sold for both existing and
new applications in the furnace-related markets and in higher growth niche
markets. Examples of successful new product application introductions during the
last five years include porosity-controlled paper for use in automotive safety
airbag inflation systems, new forms of XPE for use in automotive catalytic
converters, and Anchor-Loc-2(R) modules for use in industrial furnace and heater
linings. The Company has dedicated substantial resources to its new product
development programs, which are expected to continue to be important
contributors to the Company's long-term growth.
Advanced/Low-Cost Manufacturing Capability. The Company has a
manufacturing strategy which emphasizes both higher volume facilities for the
low cost production of bulk, blanket, and paper product forms and lower volume,
highly flexible facilities for the production of higher value-added product
forms. By concentrating its furnacing operations primarily at one location, the
Company believes that it has developed one of the industry's most advanced
technology bases in furnacing, fiberizing, and process control and has obtained
the scale of operations necessary to protect its position as a low cost
manufacturer in the North American Market. In the balance of its operations, the
Company has created separate, smaller, and
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<PAGE> 37
expandable operations which provide the manufacturing flexibility necessary to
increase production of its higher value-added product forms rapidly and to
introduce new product applications quickly. The Company is committed to
continuous quality and process improvement. The Company has won the Chrysler
Gold Pentastar Award in each of the last eight years. The Company's
manufacturing strategy has enabled it to achieve higher product quality and
consistency, to produce a broad range of product forms for multiple
applications, to produce highly customized and engineered products designed for
specific customer and application demands, and to achieve a competitive, low
cost market position.
Strong Position in Furnace-Related Markets. The largest percentage of the
Company's sales has historically been for furnace-related applications such as
industrial furnace and kiln linings in the metals production, petrochemical, and
ceramic and glass industries. The Company is a leading North American
manufacturer and marketer of ceramic fiber product forms for these
furnace-related markets. The Company's strong market position is a result of
several factors including its product line breadth, technology, quality, and
consistency; emphasis on the development and introduction of new, higher
value-added product forms; advanced process technology; low cost, highly
flexible manufacturing capabilities; and the expansion and optimization of the
Company's distributor and direct sales operations. The Company is focused on
combining these product, manufacturing, and marketing strengths to maintain and
enhance its position in the furnace-related markets.
Growth/Leadership in Niche Markets. The Company has used its overall
expertise derived from its furnace-related markets to expand into higher growth
niche markets for ceramic fiber. In recent years, these niche markets have
experienced more rapid growth than the Company's furnace-related markets and now
account for the majority of its sales. Such growth markets for the Company's
products include the automotive (safety airbag inflation filters, catalytic
converter supports), power generation (duct and stack linings, pumpable
joint-filling material), and fire protection (commercial kitchen exhaust duct
and cable coverings, hazardous material containers) industries. The Company
intends to increase its sales to these and other new markets by focusing on
product introductions and on new market and product application development
efforts.
Ongoing Profitability Improvement. The Company is focused on improving
profitability in order to further drive earnings growth. During the four-year
period ended December 31, 1995, the Company's net sales increased at a compound
annual rate of approximately 12%. During the same period, the Company's income
before income taxes increased at the higher compound annual rate of
approximately 35% due to the Company's ability to bring its ratio of income
before income taxes to net sales from approximately 16% in 1992 to approximately
25% in 1995. This margin increase was driven by several factors, including a
sales mix shift to higher value-added product forms and applications, improved
manufacturing efficiency, higher capacity utilization, and marketing and
administrative cost control. The Company has implemented several manufacturing,
marketing, and administrative initiatives designed to support continued
profitability improvement.
Leadership in Product Health and Safety. The Company has taken an active
approach to the management of potential health and product safety issues
associated with ceramic fiber. Specifically, the Company has established
senior-level organization and management systems to identify and reduce
potential adverse health effects, if any, associated with its ceramic fiber
products. The Company is also conducting research relating to the development of
ceramic fiber types which are less durable if inhaled and fibers that are larger
in dimension, thereby reducing the likelihood of inhalation during manufacture
or installation.
PRODUCT FORMS AND APPLICATIONS
The Company manufactures and markets one of the broadest lines of ceramic
fiber products sold in North America. As an integrated ceramic fiber
manufacturer, the Company uses advanced process control technology to produce
high quality ceramic fiber. The Company's ceramic fiber is produced in numerous
forms, including bulk fiber, blankets and modules, papers and felts, boards,
textiles, and a variety of other higher value-added product forms. Many of the
Company's product applications were developed as a result of working closely
with customers in a number of industries to fulfill specialized requirements. As
a result, the
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<PAGE> 38
Company's product line has evolved into products with capabilities tied closely
to, and qualified for, specific customer applications.
BULK CERAMIC FIBER. The Company manufactures and sells several types of
ceramic fiber in bulk form in order to meet a wide range of requirements for
heat resistance, fiber dimension, and chemical composition. The Company has
sophisticated process controls which are essential to meeting its customers'
precise product specifications. Ceramic fiber is sold in bulk to fabricators of
a variety of heat-resistant and insulation products such as vacuum-cast shapes
and is also sold for use in a number of packing, reinforcement, filtration, and
filler applications. Bulk ceramic fiber is also the base material for most of
the Company's other product forms. The Company often customizes its bulk ceramic
fiber to specific customer applications, thereby achieving sole source supplier
status. Bulk ceramic fiber is sold under the Fiberfrax(R), Insulfrax(R), and
Fibermax(R) trade names.
BLANKETS AND MODULES. The Company's blanket and module product forms
consist of a group of lightweight, high strength, insulating blankets and
modules that combine the advantages of low heat storage and heat resistance.
Blankets are made from bulk fiber that has undergone a needling process to
create products with superior handling strength for applications where
flexibility and durability during installation are required. Blankets provide
proven and effective solutions in a variety of high temperature applications,
including kiln and furnace linings, fire protection, and expansion joint seals
used in commercial construction. Blankets are also fabricated into modules for
lining furnaces and other types of heat processing equipment. Modules are folded
or sectioned pieces of ceramic fiber blanket which are compressed into
rectangular shapes which can be secured to furnace interiors through a variety
of hardware options. Modular lining systems provide ease of installation and
simplified maintenance after installation. Blankets are sold under trade names
such as Durablanket(R) and Fibermat(R). A wide variety of module designs are
produced under the Anchor-Loc(R) brand name.
BOARDS. Rigidity, durability, and high refractory capabilities make
Duraboard(R) brand ceramic fiber boards well suited for applications involving
mechanical vibration or stress at high temperatures. The rigidity of the boards
makes them strong and self-supporting, yet relatively lightweight and easy to
cut or shape. This facilitates handling and installation in a variety of
industrial applications, including use as refractory linings, backup for other
furnace insulating materials, rigid gaskets, and seals.
PAPERS AND FELTS. The Company offers the broadest line of ceramic fiber
papers and felts available in the industry. The automotive industry is the
Company's largest market for ceramic fiber papers and has purchased these
products primarily in two product forms: porosity-controlled paper and XPE.
Porosity-controlled paper is an integral component of automotive safety airbag
inflation systems. In this application, ceramic fiber serves to filter gases
released during the inflation process and insulates the airbag inflation system.
XPE provides an effective "expanding" seal around the core ceramic component of
catalytic converters where the catalytic reaction actually occurs. By forming
this seal, XPE forces exhaust gases through the catalyst, and at the same time
provides an insulating barrier between the core and the metal housing. Both of
these automotive applications are highly engineered to meet stringent
manufacturer specifications. The Company's ceramic fiber-based papers are also
used in a variety of high temperature applications in the aerospace, appliance,
ceramic and glass, petrochemical, and steel industries. The Company also
manufactures felts that can be formed to retain a shape while offering all of
the advantages of ceramic fiber, including high temperature stability, light
weight, and superior insulating performance. Felts are used in a number of
applications, including heat shields in automotive, aerospace and appliance
insulation and as gaskets.
TEXTILES. The Company makes ceramic fiber products that are formed using
traditional textile manufacturing techniques. These textile product forms
include clothes, ropes, braids, wicking, tapes, and sleevings. Fiberfrax(R)
yarn, the material from which textiles are woven, is also available in bulk
form. Textiles provide superior insulation and possess excellent resistance to
heat, corrosion, and breakdown due to mechanical vibration and stress. Textiles
are used as gaskets, wrapping materials, and insulation, and are also
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<PAGE> 39
used in personal protection equipment applications. Typical applications include
uses as welding curtains and blankets, furnace curtains, furnace door gaskets,
fuel line insulation, and wire insulation.
OTHER PRODUCT FORMS. Other product forms include specialty products,
fabricated products, extreme high temperature-resistant products, and engineered
fibers. Specialty product forms include moldables, pumpables, caulks, and
coating cements which combine ceramic fiber with an inorganic binder to provide
strength at elevated temperatures. Specialty products are typically injected or
applied to furnace and boiler hot spots, refractory-lined furnace cracks,
furnace door jambs, areas around pipe and cable penetration points, and other
hard-to-insulate areas. Fabricated products are typically composite systems
which consist of a ceramic fiber core material encapsulated in foil, textile, or
other high temperature material by quilting, laminating, or other bonding
techniques. Fabricated products are used in fire stop materials for commercial
construction, furnace door seals, and grease, HVAC, and chemical exhaust ducts.
Extreme high temperature-resistant products include Fibermax(R) mat and modules
that are used as linings for incinerators, synthesizers for crude oil
production, and in special high temperature ceramic kilns. The Company also
produces ceramic fiber for applications where fiber size, diameter, and
chemistry must meet technical engineering requirements. These engineered fibers
are currently used as a friction material for brake linings and diesel piston
preforms.
MARKETS
The Company's ceramic fiber is sold to a number of industries and is used
in many different applications. The metals production, petrochemical, ceramic
and glass, automotive, power generation, fire protection, and commercial
insulation industries are the major consumers of ceramic fibers. The most common
application in North America for ceramic fiber has traditionally been to line
industrial furnaces, where high temperature processes require ceramic fiber's
heat-resistant characteristics. Newer applications generally rely on ceramic
fiber's heat-resistant characteristics combined with other compositional and
dimensional qualities to satisfy more highly engineered requirements. Examples
of these newer applications include porosity-controlled paper for automotive
safety airbag inflation systems and duct wrap systems used in commercial
insulation.
Ceramic fiber has replaced traditional refractory linings in many types of
furnaces and kilns, providing longer lasting and higher performance insulating
capability for applications in the petrochemical, metals production, and ceramic
and glass industries. In these markets, ceramic fiber is principally used for
insulation, reinforcement, and fire protection for furnaces, heaters, kiln
linings, and other high temperature applications. Ceramic fiber is an efficient
insulator, typically reducing energy consumption by 20 to 30% compared to
substitute materials such as hard brick refractories.
It is the Company's objective to be a market leader in more specialized
niche applications, which has historically resulted in a significant percentage
of new product applications. The Company has used its strong position and
technical expertise derived from the furnace-related markets to expand into
these higher growth niche markets. In recent years, these niche applications
have experienced more rapid growth than the Company's furnace-related markets.
Some of the more recent applications include automotive uses such as catalytic
converter supports, safety airbag inflation filters, aluminum piston crown
reinforcements, heat shields, and friction material for brake linings. Other
newer applications include insulation in fire protection systems for aerospace
and commercial buildings, in commercial appliances and hazardous waste
containers, and in power generation.
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The following table sets forth a breakdown of the Company's net sales
between the furnace-related, automotive and other markets for the five years
ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Market
Furnace-related $30.3 57 % $35.8 55 % $33.9 50 % $35.8 47 % $36.9 44 %
Automotive 9.6 18 12.9 20 16.9 25 21.9 29 26.4 31
Other 13.6 25 15.9 25 16.9 25 18.5 24 20.8 25
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $53.5 100 % $64.6 100 % $67.7 100 % $76.2 100 % $84.1 100 %
</TABLE>
FURNACE-RELATED MARKETS. Ceramic fiber for furnace-related applications is
generally sold to the metals production, petrochemical, and ceramic and glass
industries.
The Company believes that the metals production industry is the largest
consumer of ceramic fiber. The Company sells blankets, modules, and textiles to
this market where they are used as furnace linings, molten metal transfer trough
linings, seals and gaskets, and heat and splash shields. Demand in the metals
production industry historically has been linked to general economic conditions,
the rate of new furnace capacity expansions in metals production industries, and
the response to higher energy costs.
The petrochemical industry uses ceramic fiber blankets and modules in
furnace, flue and stack linings, and as removable pads and covers in oil
refining, chemical production, and steam generation. The Company typically sells
pursuant to significant project-sized orders, which are placed by furnace
original equipment manufacturers, engineering firms, or local refractory
contractors. Demand in the petrochemical industry historically has been linked
to energy costs, general economic conditions, and the rate of new capacity
expansion in the petrochemical industry.
The ceramic and glass industry uses ceramic fiber product forms in furnace
linings, as backup insulation, and as separators in the production of brick,
structural clay, whiteware, technical ceramics, hard refractories, and glass.
The Company generally sells blankets and modules, textiles, and papers and felts
into this market. The ceramic and glass industry is highly fragmented with many
small to moderate-sized customers. Demand in the ceramic and glass market
historically has been linked to general economic conditions, the rate of new
furnace capacity expansion in the ceramic and glass industries, and the response
to higher energy costs.
AUTOMOTIVE MARKET. The Company's product forms are used in a variety of
applications in the automotive market. Demand from the automotive market
historically has been linked to general economic growth, the specific economic
conditions facing the automotive industry, the increased usage of driver-side
and passenger-side automotive safety airbags in response to more stringent
safety legislation and consumer preference, and the increased usage of
automotive catalytic converters in response to additional legislation relating
to emissions. In 1995, approximately 11% of the Company's net sales represented
direct or indirect purchases by TRW Inc. No other customer of the Company
accounted for more than 10% of the Company's net sales in 1995. TRW's purchases
consist of porosity-controlled paper.
The Company believes that it is the leading producer of porosity-controlled
paper used in the inflator modules of automotive safety airbag inflation
systems. The Company expects continued growth in the demand for airbags as
domestic and international airbag usage increases as more airbags are contained
in each vehicle. However, the primary technology for airbag inflation systems is
presently based upon the use of sodium azide as an explosive material in the
inflation process. The Company believes that the use of sodium azide-based
technology in airbag inflation systems, which requires the use of ceramic
fiber-based paper, may be displaced in four to five years by other technology
which may not require the same material. See "Risk Factors -- Dependence on
Product Line".
The Company also supplies XPE for use as a ceramic substrate support in
automotive catalytic converters. The Company expects continued growth in XPE
sales resulting from continued regulatory initiatives to reduce emissions which
in turn increase demand for catalytic converters. Much of this growth is
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<PAGE> 41
expected to come from international sales as both developing and developed
nations require cleaner automobile emissions. In connection with the
Saint-Gobain Sale, the Company recently established overseas sales and
distribution channels to service worldwide XPE applications. SEPR has the right
to take up a royalty-free, non-exclusive license to manufacture and sell XPE
outside the North American Market upon 6 months' notice. See "Risk
Factors -- Dependence on Raw Material Supplier" and "Relationship with SEPR".
The Company also sells a number of other product forms to the automotive
industry. Examples of these products include bulk ceramic fiber for use in
automotive friction components and heat shields, where ceramic fiber brings
improved application performance characteristics.
OTHER MARKETS. Ceramic fiber is being used in several newer applications
in niche markets such as the power generation, fire protection, and commercial
insulation industries. In these industries, product forms are often customized
to meet special customer needs.
The power generation industry uses a variety of ceramic fiber product forms
in steam boilers used by public utilities and package boilers used by schools,
hospitals, and other institutions. Ceramic fiber is also used in duct and stack
linings. Demand in the power generation market historically has been linked to
general economic conditions and the rate of power consumption, but in recent
years has been driven by legislation and deregulation supporting the growth of
independent power producers.
The fire protection industry includes transportation (railroad tank cars,
aerospace, hazardous materials), commercial construction (venting and heating
ducts, expansion joints, penetration seals), industrial construction (cable
trays, valve covers), and manufactured products (safes, file cabinets, wood
stove flues). The Company sells blankets, boards, and fabricated systems to this
market. Demand in the fire protection market historically has been linked to
general economic conditions, the level of commercial and institutional
construction, greater safety legislation, building codes, enforcement levels for
stationary applications, more stringent regulations for mobile applications, and
the level of bulk transportation vehicle production.
The commercial insulation market includes sales to manufacturers of
domestic furnace combustion chambers, commercial ovens, laboratory hot plates,
furnaces, and small firing kilns. The Company typically sells blankets and
modules, boards, and papers and felts to this market. Demand in the commercial
insulation market historically has been linked to the response to higher energy
costs and to more stringent appliance design requirements.
TECHNOLOGY AND TECHNOLOGY SUPPORT SERVICES
The Company believes it is the low cost producer of bulk, blanket, and
paper ceramic fiber product forms in North America. The Company employs a
two-pronged technology program that focuses on process improvement and new
product development. The objective of this program is to continue to be the low
cost manufacturer of bulk, blanket, and paper ceramic fiber product forms and to
be a market leader in new ceramic fiber applications. As a result of its
technology program, the Company has consistently achieved annual productivity
and quality improvements in its manufacturing processes. During each of the four
years ended December 31, 1995, the Company's sales of product forms and
applications which were commercialized within the previous five years comprised
over 20% of the Company's net sales.
The research and development group, located at the Company's headquarters,
uses a 15,000 square foot laboratory, including facilities for pilot plant
development and traditional research and development activities. The diversity
of the research and development staff's skills provides a talent pool from a
wide range of disciplines. The research and development staff possesses a broad
base of material science expertise in ceramics, chemistry, chemical engineering,
mechanical engineering, paper science, and physics. The research and development
staff is a valuable resource which enables the Company to produce high quality
products that consistently meet customer requirements and to bring new product
applications to the market quickly and effectively.
39
<PAGE> 42
New product application development efforts are initiated based upon the
feedback and direction of field sales and marketing professionals. A
multifunctional team approach, where team participants are linked by computer,
is used in most development projects. Currently, development teams are focused
on automotive products, fabricated products, and new products for the Company's
furnace-related business, as well as a program relating to the development of
new fiber types as part of the Company's Product Stewardship Program. Under this
program, the Company is researching the possibility of developing fiber types
which are less durable if inhaled and fibers that are larger in dimension,
thereby reducing the likelihood of inhalation during manufacture or
installation. See "Risk Factors -- Dependence on Ceramic Fiber; Health and
Safety Issue" and "Business -- Health and Product Safety Issues".
In addition, each manufacturing facility has a process engineering staff
dedicated to the design and implementation of cost savings and product
improvement-oriented projects. Process engineering efforts draw heavily upon the
central research and development group in order to resolve the customers'
technical requirements.
The Company has maintained a strong commitment to its research and
development program. Spending for research and development constituted
approximately 3.2%, 2.9%, and 2.9% of net sales during the years 1993, 1994 and
1995, respectively.
SALES AND MARKETING
The Company's sales and marketing organization has several key functions:
sales, product development and support, customer and marketing services,
communication, and advertising. The Company uses a combination of direct sales
staff, distributors, and multifunctional teams to market its products. The
Company's sales channel varies from region to region depending upon the
availability and capability of local distributors and the characteristics of the
product mix sold in each region. The Company has sales incentive programs in
place focusing on three key objectives: sales volume growth, new product
application and market development, and achievement of specific, strategically
important targets.
The Company's sales and marketing organization has responsibility for
direct selling, managing distributor relationships, and maintaining an effective
customer service function through the use of field sales engineers who work with
distributors and customers to provide application engineering support for the
Company's products. The customer service function is responsible for order
processing, coordinating shipment schedules, assisting in product line
selections, obtaining credit approval, and a variety of other tasks necessary to
support the sales process. The Company's sales and marketing organization also
provides sales support through marketing communications and advertising in trade
publications to promote the Company's product lines and its professional image.
Although customer purchasing criteria vary from product line to product
line, two prevalent purchasing philosophies exist. The furnace-related markets
tend to purchase ceramic fiber products on the basis of price and service. In
these markets, the Company uses its large furnace, high volume production
capabilities to reduce manufacturing costs and relies on its distributors to
meet the customers' service requirements. These distributors provide sales,
warehousing, engineering, and design support for the Company's products. Working
with the Company's customer service personnel, the distributors provide a
cost-effective method of servicing the market for these products. The Company
believes that its strategy of using its distributors to support the
furnace-related markets provides the Company with the advantage of lower
expenses for sales and marketing and provides customers with local service and
support. In addition, this approach gives the Company the opportunity to focus
more of its market development resources on commercializing new product forms
and applications and on capitalizing on niche market opportunities.
The other purchasing philosophy exists in the market for more highly
engineered, technical applications such as in the automotive and aerospace
markets. Purchasing decisions here are driven by a supplier's technical
knowledge, process capabilities, and quality assurance systems. These customers
are concerned with understanding product performance, process control and
variability, and quality assurance systems used to prevent the shipment of
nonconforming products. The Company often competes in these markets by using a
multifunctional team approach that involves sales, technical, manufacturing,
research and development, and
40
<PAGE> 43
quality assurance professionals. These multifunctional teams provide solutions
for customers and promote the Company's manufacturing and process control
capabilities and quality assurance systems. This approach also minimizes the
time needed to move new product application concepts from the development phase
to manufacturing to full commercialization.
MANUFACTURING AND OPERATIONS
Ceramic fiber is produced by melting a combination of alumina, silica, and
other additives in either a submerged electrode furnace (SEF) or in an electric
arc furnace. The molten mixture is made into fiber either by blowing an air
stream on the molten material flowing from the furnace (blowing process) or by
directing the molten material onto a series of spinning wheels (spinning
process). The blowing and spinning processes produce different fiber
characteristics, dimensions, and process yields. These variations translate into
a wide variety of product forms that rely on specific fiber characteristics to
achieve an application's performance requirements. Once blown or spun into a
fibrous shape, bulk fiber can be converted into blanket form by a needling
process.
The Company also employs advanced manufacturing processes associated with
the "wet" manufacture of papers and felts, boards, and other product forms. This
process uses bulk ceramic fiber as a feedstock in combination with binders or
other liquids which are then passed over a device which is similar in function
to those used in the paper industry. The Company's use of specialized process
control technology and computer-aided production allow it to meet precise
tolerances and demanding customer requirements.
Although the Company purchases some of its raw materials from sole
suppliers, almost all of these materials are readily available from other
suppliers on similar terms, with the exception of the Company's purchase of
vermiculite, a light weight, highly water-absorbent mineral which is an
important raw material in the manufacture of XPE used in automotive catalytic
converters. The Company currently purchases substantially all of its
requirements of vermiculite from one supplier in China, and although the Company
has identified potential alternative sources of supply and is attempting to
identify additional alternative sources, any significant interruption in the
supply of this material could have a material adverse effect on the financial
condition and results of operations of the Company. See "Risk
Factors -- Dependence on Raw Material Supplier" and "Relationship with SEPR".
The Company also benefits from a long-term purchase contract with the Power
Authority of the State of New York which permits the Company to purchase
electricity for its Western New York plants at favorable rates until 2006.
In pursuit of the Company's strategic objective of being the low cost
producer of bulk, blanket, and paper ceramic fiber product forms while
maintaining a steady flow of new product forms and applications, the Company
maintains higher volume facilities for the low cost production of bulk, blanket,
and paper ceramic fiber product forms and also maintains a flexible
manufacturing approach for higher value-added products. By concentrating its
furnacing operations primarily at one location, the Company believes that it has
developed one of the industry's most advanced technology bases in furnacing,
fiberizing, and process control for the manufacture of ceramic fiber and has
obtained the scale of operations necessary to protect its position as a low cost
manufacturer in the North American market. In the balance of its operations, the
Company has created separate, smaller, and expandable operations in Western New
York which provide the Company with the manufacturing flexibility necessary to
increase production of its higher value-added product forms rapidly and to
introduce new product applications quickly. As a result, this manufacturing
strategy has yielded the advantages of lower product cost, a greater variety of
product applications, a higher quality and more consistent product, and superior
customization and engineering of product forms to meet specific customer and
application demands. Continual productivity improvement is a cornerstone of the
Company's manufacturing strategy.
The Company monitors its processes and products to ensure that its
customer's quality requirements are met. This ongoing commitment to quality is
evident in the detailed data collection and documentation capabilities used by
the Company. As a result of its quality assurance orientation, the Company has
won the Chrysler Gold Pentastar Award in each of the last eight years, placing
it within the top 2 percent of Chrysler's suppliers. The Company's operations
are currently in the process of seeking certification under the Interna-
41
<PAGE> 44
tional Quality Standard, ISO 9000, and the rigorous U.S. automotive standard, QS
9000. Although the Company believes it will obtain these certifications, there
can be no assurance that it will do so.
Due to continued growth in demand for ceramic fiber products, the North
American-based ceramic fiber industry is approaching full capacity in the
production of bulk fiber and blankets. In the fall of 1995, the Company began a
$14.4 million furnace expansion and conversion project at its New Carlisle,
Indiana, facility. This expansion project is being undertaken as a strategic
move to meet the anticipated growing demand for ceramic fiber products and to
maintain the Company's leading North American market position by continuing to
exploit its cost and technology advantages in the high volume manufacture of
these products. This expansion involves the addition of a new furnacing line and
other improvements to the facility.
COMPETITION
The ceramic fiber industry is highly competitive, and some of the Company's
competitors are larger and have greater resources than the Company. In the
furnace-related markets, competition is based primarily on product quality,
price, and service. In the newer niche markets, competition is based primarily
on product technology, technical specifications, manufacturing process
capabilities, and quality assurance.
The Company believes that it is the leading North American manufacturer of
ceramic fiber as measured by volume. The Company has significant competitors in
its markets, some of which manufacture ceramic fiber while others purchase
ceramic fiber and then reprocess it into products which compete with the
Company's products. In the furnace-related markets, the Company's competitors
are Morgan Crucible's Thermal Ceramics business unit (which is believed by the
Company to be the market leader worldwide), American Premier Refractories and
Chemicals, and A.P. Green. In the automotive market, the Company's significant
competitors include Thermal Ceramics, Minnesota Mining & Manufacturing Company
("3M") and Lydall. Both Lydall and 3M are reprocessors of ceramic fiber. The
Company's significant competitors in its other markets include Lydall and
Thermal Ceramics. In some instances, ceramic fiber competes with a limited
number of non-ceramic fiber products such as hard brick refractories and mineral
wool. However, there are no practical substitutes for many ceramic fiber
applications.
CYCLICALITY AND SEASONALITY
The Company's products are generally used in industries subject to supply
and demand cycles which reflect general economic activity. In addition, certain
markets historically have been slightly seasonal, with higher sales in the
second and fourth quarters and lower sales in the first and third quarters.
BACKLOG
The Company does not consider its backlog significant because it fills most
of its orders within one month and substantially all of its orders within three
months.
PROPERTIES
The flagship of the Company's operations is located in New Carlisle,
Indiana. This facility is believed to be the largest ceramic fiber manufacturing
plant in the world, producing blown and spun forms of bulk fiber and blankets.
The site also provides other value-adding production operations. The Company
also operates three manufacturing plants in Niagara and Erie Counties in Western
New York.
The Company's headquarters is located in Niagara Falls, New York. This site
houses salaried and hourly support and management staff as well as application
engineers and other professionals dedicated to research and development of new
products and applications for ceramic fiber.
42
<PAGE> 45
The following table provides a description of the Company's principal
facilities.
<TABLE>
<CAPTION>
APPROXIMATE
PLANT SITE SQUARE FEET STATUS USE
- ----------------- ----------- ------ ----------------------------------------
<S> <C> <C> <C>
New Carlisle, IN 200,000 Owned Bulk ceramic fiber, blankets, modules,
boards, and select vacuum-cast product
forms
Tonawanda, NY 150,000 Leased Papers, felts, boards, XPE,
porosity-controlled paper, and other
product forms
Amherst, NY 42,000 Leased Woven and spun textiles
Sanborn, NY 10,000 Owned Fibermax(R) high temperature fiber
Niagara Falls, NY 33,000 Owned Headquarters, research laboratory
</TABLE>
When the expansion project at its New Carlisle facility is completed, the
Company believes that its capacity will be sufficient to meet the demand for
bulk fiber and blanket products through the year 2000.
HEALTH AND PRODUCT SAFETY ISSUES
Since the early 1980s, manufacturers of man-made fibers such as fiberglass,
mineral wool, and ceramic fiber have been aware of the potential for adverse
health effects associated with the inhalation of airborne fiber. Independent
animal studies have indicated that ceramic fiber inhaled by test animals can
cause cancer. Studies to date of workers with occupational exposure to airborne
ceramic fiber, however, have found no link between ceramic fiber and disease in
humans. Over time, the evolving data have been used to make classification
decisions by government agencies and health organizations such as the
International Agency for Research on Cancer ("IARC"), U.S. Environmental
Protection Agency ("EPA"), U.S. National Toxicology Program ("NTP"), and Health
Canada ("HC"). These classifications reflect concern for human health and
uncertainty regarding the potential for airborne ceramic fiber to affect
occupational health adversely. Classification terms, such as "possible" (IARC),
"probable" (EPA and HC) and "reasonably anticipated" (NTP) reflect the view of
each agency as to the potential carcinogenicity of ceramic and/or other man-made
fiber.
For example, the EPA conducted an accelerated review of ceramic fiber in
1991 to determine if it posed an unreasonable risk to human health. At the
completion of this review, the EPA determined that there was not sufficient data
available to conclude whether or not exposure to ceramic fiber presented an
unreasonable risk to humans. In order to gather more data on exposure to ceramic
fiber, the Company, along with other members of the ceramic fiber industry,
through their trade organization, the Refractory Ceramic Fiber Coalition
("RCFC"), entered into a consent agreement with the EPA to collect further data.
Under the terms of this agreement, industry and customer workplace monitoring
samples will be taken for a period of five years to conclude in mid-1998.
Between June 1993 and December 1995, across all categories of manufacturing and
installation activities monitored by RCFC members, 90 percent of workplace
samples fell below the industry's recommended exposure guideline of one fiber
per cubic centimeter.
In addition to the EPA, the U.S. Occupational Safety and Health
Administration ("OSHA") and HC have been reviewing the potential health
implications of ceramic fiber exposure for several years. The Company provides
information to each agency routinely and, upon request, undertakes special
studies to facilitate agency investigations. In addition to its cooperation with
the EPA as noted above, the Company also participates in an "Issue Table"
evaluation with HC and periodic status update briefings with OSHA. The Company
also shares data with non-regulatory agencies such as the National Institute for
Occupational Safety and Health and the NTP. The Company also provides data to
private sector organizations such as the American Conference of Governmental
Industrial Hygienists and the scientific community to facilitate their efforts
to evaluate potential exposure-related impacts.
In the area of human assessment, the ceramic fiber industry is conducting
an ongoing study of approximately 1,000 former and present industry employees.
Conducted by researchers from the University of Cincinnati, these investigations
have identified no clinically significant incidence of disease from ceramic
fiber
43
<PAGE> 46
exposure. Other findings have indicated that the exposure to ceramic fiber is
associated with an increase in pleural plaques and increased respiratory
symptoms. The term "pleural plaque" is used to describe discrete areas of
thickening, usually along the inside of the chest wall and the outside of the
lungs. The formation of pleural plaques is not completely understood, but is
believed to be related to an inflammatory response caused by inhaled fibers.
Pleural plaques, which have previously been associated with exposure to
asbestos, are considered to be markers of exposure, not disease. Studies have
also shown that a combination of ceramic fiber exposure and smoking may have a
greater effect than the exposure to ceramic fiber alone. As a result, the
Company has implemented a no-smoking program at each of its facilities.
In studies on test animals over the last four decades, mixed results have
been observed. A "maximum tolerated dose" study found that lifetime exposure to
ceramic fiber, at approximately 200 fibers per cubic centimeter (which is 200 to
1,000 times greater than routine occupational exposure), caused cancer in some
of the rats tested. Separately, a multi-dose inhalation study identified a "no
observable adverse effect level" at 25 fibers per cubic centimeter, with
evidence suggesting a non-linear relationship between increasing dose and
biological impact.
The Company has established organization and management systems to ensure
that health and safety matters are properly identified, evaluated, and addressed
throughout the Company's operations. The Company's health, safety, and
environment quality staff of professionals is led by a senior manager who
reports to the President and Chief Executive Officer of the Company. This team
provides support for the operating facilities as well as customer assistance.
The Company takes a proactive approach to lowering airborne exposures
encountered with ceramic fiber. It also leads an effort to mobilize the rest of
the ceramic fiber industry to address these same issues. The Company has
remained a prominent player in the development and financial support of human
observation and animal testing programs to assess potential ceramic fiber health
effects. In a parallel effort, the Company has actively addressed worker
exposure through the implementation of engineered solutions and other actions
which have dramatically reduced employee and customer exposure to airborne
ceramic fiber. Significant initiatives include the installation of advanced air
filtration systems, production modifications to reduce the incidence of airborne
fiber, and the development and implementation of a Product Stewardship Program.
In addition, the Company has developed and maintained cooperative working
relationships with the regulatory community and bases this cooperation on its
practice of full disclosure of all animal test and human study observation
results. The Company has voluntarily included regulatory agencies in the
development of the protocols for new studies and disclosed all new data from
studies at interim and final stages. Also, the Company maintains a Ceramic Fiber
Advisory Board comprised of internationally recognized experts in the fields of
pulmonary science, toxicology, and legal, regulatory and environmental affairs
to evaluate human and animal study protocols and results in addition to
providing advice to the Company on the safe handling of ceramic fiber and
related product management issues.
One of the primary elements of the Company's Product Stewardship Program is
research focused on determining the potential health effects of respirable
fibers. These studies have taken two forms: human studies, known as
epidemiological investigations, and toxicological research, which is generally
conducted on test animals. Many of these research activities have been conducted
with the participation of other members of the ceramic fiber industry.
Another significant objective of the Product Stewardship Program is to
reduce the exposure of employees and customers to airborne ceramic fiber in the
absence of complete knowledge of the effects of various levels of exposure. In
addition, waste reduction, pollution control, and efficient waste disposal
methods are promoted. Although no U.S. government regulations exist for ceramic
fiber, a voluntary exposure guideline of one fiber per cubic centimeter
recommended by the industry is used by the Company. Various regulations exist
outside of the United States. This exposure guideline is not based on any
scientific evidence that demonstrates that higher levels of exposure are unsafe
or that lower levels of exposure are safe.
Routine workplace monitoring programs are conducted by Company personnel at
both Company and customer sites following a rigorous quality assurance plan and
a consent agreement which the major producers in the ceramic fiber industry
signed with the EPA. These programs are designed to measure and track airborne
44
<PAGE> 47
concentrations of ceramic fiber in the workplace. If the industry's voluntary
exposure guidelines are exceeded at the Company's facilities, the Company
deploys workplace controls or takes other actions to reduce exposures to within
industry guideline levels. The Company also works with customers to provide
engineering and other support to further lower exposures.
The Company also incorporates specific design objectives into its ongoing
research and development program in order to lower potential exposure to
airborne ceramic fiber. Called the 3-D program, standing for dose, durability,
and dimension, the Company searches for ways to reduce airborne fiber in the
manufacturing process (dose), make ceramic fiber products that breakdown more
rapidly if inhaled (durability), and produce fiber products that are larger in
size and reduce the likelihood of inhalation (dimension).
The proactive communication of ceramic fiber test data and study findings
with employees, customers, and government regulatory agencies is a routine
practice at the Company and also is an important part of the Product Stewardship
Program. Communication occurs in many forms, including warning labels, material
safety data sheets (MSDSs), special-purpose information packages, safe-handling
videotapes, presentations to professional societies and trade groups, customer
seminars and workshops, employee communication forums, health communication
kits, and reports to regulatory agencies.
PATENTS AND TRADEMARKS
Although the Company obtains patent protection for certain product
innovations, the Company believes that its success depends more heavily on the
technical expertise and innovative abilities of its personnel than on its patent
protection. The Company believes its trademarks are important in order to
develop and support brand image and distinction from competitive products. Some
of the Company's technology and trademarks have been licensed to SEPR. See
"Relationship with SEPR".
EMPLOYEES
The Company's human resource strategy is to recruit, retain and develop an
employee team that is flexible, focused on customer service and capable of
achieving the Company's business objectives. As of March 31, 1996, the Company
employed approximately 390 persons on a full-time basis. Approximately 60 of
these employees at the Company's Tonawanda plant are members of the Oil,
Chemical and Atomic Workers union, and none of the Company's other employees are
members of a union. The Company believes it maintains good relationships with
its employees and the union.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of its business, including
product liability claims. The Company believes that it is not presently a party
to any litigation the outcome of which would have a material adverse effect on
its financial condition or results of operations. See "Risk
Factors -- Dependence on Ceramic Fiber; Health and Safety Issue" and "The
Transaction".
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal and local governmental
regulations related to the use, storage, discharge, and disposal of toxic,
volatile, or otherwise hazardous chemicals used in its manufacturing processes.
Although the Company believes its activities conform to presently applicable
environmental regulations, failure to comply with present and future regulations
could result in fines being imposed on the Company, suspension of production, or
a cessation of operations. There can be no assurance that regulatory changes or
changes in regulatory interpretation or enforcement will not render compliance
more difficult and costly. Any failure of the Company to control the use of, or
restrict the discharge of, hazardous substances or comply with environmental
regulations could subject it to significant future liabilities. In addition,
although the Company believes that its past operations conform with all
applicable environmental laws and regulations, there can be no assurance that
the Company has not in the past violated applicable laws or regulations, which
violations could result in remediation or other liabilities, or that the past
use or disposal of environmentally
45
<PAGE> 48
sensitive materials in conformity with then existing environmental laws and
regulations will not result in remediation or other liabilities under current or
future environmental laws or regulations. The Company does not believe that it
will incur any material capital expenditures for environmental control
facilities during the remainder of 1996 or 1997 other than the expenditures for
such facilities in its expansion project at its New Carlisle plant.
Currently, the Company is a potentially responsible party ("PRP") at three
"Superfund" sites pursuant to the Comprehensive Environmental Compensation and
Liability Act of 1980 ("CERCLA"). CERCLA requires clean-up of sites from which
there has been a release or threatened release of hazardous substances and
authorizes the EPA to take any necessary response actions at Superfund sites,
including ordering PRPs liable for the release to take or pay for such actions.
PRPs are broadly defined under CERCLA and include past and present owners and
operators of a site. Courts have interpreted CERCLA to impose strict joint and
several liability upon all persons liable for response costs. No ruling has been
made on any of these sites to date, but the Company does not expect to incur any
material liability with respect to any of these sites or in connection with a
New York Department of Environmental Conservation remediation order affecting
its Sanborn site, individually or in the aggregate, as a result of BP America's
indemnification obligations under the Assets Transfer Agreement. See "The
Transaction".
The following provides additional information regarding those sites where
BP America has agreed to indemnify the Company for any liability with respect to
environmental remediation or other similar required actions.
In 1984, the Company voluntarily advised the State of Indiana of potential
unauthorized disposal of waste at an Indiana site by a transporter, without the
prior knowledge or consent of the Company. No response from the state has been
received, and no further information about the potential for remediation costs
at the site has been received by the Company. It is expected that little or no
liability will be associated with this site.
The New Carlisle facility received a request for information from the EPA
in 1994 concerning potential responsibility for cleanup of the PCB Treatment
site, located in Kansas City, Kansas and Kansas City, Missouri. Records indicate
that a number of capacitors from the New Carlisle facility were sent to the PCB
Treatment site. A response documenting the timely destruction of those materials
was submitted to the EPA, but no further information has been provided, either
as to the number of participants or total costs.
The Company is a PRP with respect to the Shulman site in St. Joseph County,
Indiana. The site is a landfill, which has also been contaminated by chemicals
migrating from an adjacent facility. Plant trash from the New Carlisle facility
was hauled to the site. An agreement has been reached pursuant to which the
Company, as part of a response group, agreed to assume approximately 5% of the
site cleanup costs, which to date includes $1.7 million for installation of a
water line. The Company's share of that cost is under $100,000. The owner of the
adjacent facility has assumed the bulk of site remediation costs to date. It is
anticipated that site remediation will ultimately involve a cap, the cost of
which is not yet known.
The Company owns a site in Sanborn, New York, at which extensive
remediation activity is underway. The site has been used by a number of former
Carborundum operations, as a result of which contamination by chlorinated
hydrocarbons is present in the soil. Neither past nor current operations of the
Company are believed to have contributed to, or to be contributing to, the
existence of this contamination. BP America assumed responsibility for
implementing remedial activities specified by the State of New York which
required removal of the contamination, chiefly by means of soil vapor
extraction. Efforts to remediate the site are expected to continue for some
time, at a cost to BP America of approximately $12.5 million.
46
<PAGE> 49
MANAGEMENT
PRESENT DIRECTOR
William P. Kelly, President and Chief Executive Officer of the Company, is
the sole director of Unifrax Acquisition Inc.
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information concerning the persons
who will serve as the directors and executive officers of the Company
immediately after the consummation of the Offering. The Company presently
anticipates that at least three independent directors will join the Board of
Directors of the Company soon after the consummation of the Offering. These
persons have not yet been identified.
DIRECTORS
<TABLE>
<CAPTION>
NAME AGE TERM EXPIRES
- ------------------ --- -------------------------------------------
<S> <C> <C>
William P. Kelly 46 1999
Mark D. Roos 41 1998
</TABLE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------ --- -------------------------------------------
<S> <C> <C>
William P. Kelly 46 President and Chief Executive Officer
Mark D. Roos 41 Vice President and Chief Financial Officer
Paul J. Viola 40 Vice President, Sales and Marketing
Kevin J. O'Gorman 45 Vice President, Operations
Paul M. Boymel 43 Vice President, Research and Development
Joseph J. Kuchera 38 Vice President, Human Resources
John E. Pilecki 43 Vice President, Engineering and Purchasing
</TABLE>
Mr. Kelly has been President and Chief Executive Officer of the Company
since the Saint-Gobain Sale. He joined Carborundum in 1972 as an engineer, and
has served in several positions, including Vice President of Carborundum's
worldwide ceramic fiber business from 1993 to 1996 and Vice President of the
Company from 1989 to 1993.
Mr. Roos has been Vice President and Chief Financial Officer of the Company
since the Saint-Gobain Sale, and has been chief financial officer of the Company
since 1995. He joined Carborundum in 1985 and served in several financial
planning, control and business strategy positions until he left in 1991 to
become Vice President, Finance and Administration, of The Airolite Company, a
metal products manufacturer. He rejoined Carborundum in 1993 as Director of
Finance, Planning and Control.
Mr. Viola has been Vice President, Sales and Marketing of the Company since
the Saint-Gobain Sale. He joined Carborundum in 1978 and has served in several
positions, including General Manager, Sales and Marketing for Carborundum's
worldwide ceramic fiber business from 1993 to 1995 and Manager of the Automotive
Products Group of Carborundum's Structural Ceramics Division from 1991 to 1993.
Mr. O'Gorman has been Vice President, Operations of the Company since the
Saint-Gobain Sale. He joined Carborundum in 1990 and served as General Manager,
Manufacturing and Engineering of its worldwide ceramic fibers business from 1993
to 1995 and Manager, Manufacturing for the Company from 1990 to 1993.
Dr. Boymel has been Vice President, Research and Development of the Company
since 1989. He joined Carborundum in 1981.
47
<PAGE> 50
Mr. Kuchera has been Vice President, Human Resources of the Company since
1988. He joined Carborundum in 1981 and served in several human resource
positions in connection with a number of different Carborundum business units.
Mr. Pilecki has been Vice President, Engineering and Purchasing of the
Company since 1996. He joined Carborundum in 1976 and has served in various
engineering and manufacturing positions, including as Engineering Manager since
1990 and purchasing manager since 1993.
COMPENSATION OF DIRECTORS
The Company expects that Directors who are not employees of the Company
will receive an annual retainer of $15,000, plus $1,000 for each meeting of the
Board and $1,000 for each Board committee meeting attended, Directors who are
also employees of the Company or any affiliate thereof will not receive any
compensation for Company Board or Board committee service. The nonemployee
directors are also expected to be eligible to receive grants of stock options
and stock appreciation rights on the Common Stock.
EXECUTIVE COMPENSATION
INTRODUCTION
The following table sets forth the respective amounts of compensation of
the Chief Executive Officer and the next four highest-paid executive officers of
the Company (determined by reference to 1995) (the "named executive officers")
for 1995.
1995 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
NAME AND -------------------- OPTIONS/ ALL OTHER
PRINCIPAL POSITION SALARY BONUS SARS(1) COMPENSATION(2)
- --------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
W. Kelly $155,514 $53,550 37,800/ $ 4,631
President and 0
Chief Executive Officer
K. O'Gorman 115,689 30,641 19,560/ 3,441
Vice President, 0
Operations
P. Viola 106,632 28,490 19,560/ 3,171
Vice President, 0
Sales and Marketing
M. Roos 101,760 22,000 0/ 3,027
Vice President and 1,100
Chief Financial Officer
J. Pilecki 86,072 13,337 0 2,563
Vice President,
Engineering and
Purchasing
</TABLE>
- ---------------
(1) Options relate to ordinary shares of The British Petroleum Company p.1.c.
and do not relate to shares of Common Stock. The SARs relate to American
Depositary Receipts of The British Petroleum Company p.1.c. Each American
Depositary Receipt is equal to twelve ordinary shares of The British
Petroleum Company p.1.c.
(2) Represents matching contributions made on behalf of the individuals to the
Capital Accumulation Plan and does not include bonuses paid to Messrs. Kelly
and Roos in 1996 by BP relating to the Saint-Gobain Sale.
48
<PAGE> 51
STOCK OPTION AND SAR GRANTS, EXERCISES AND YEAR-END VALUES
The following tables set forth information regarding grants of stock
options and SARs to the named executive officers, exercise of stock options by
the named executive officers during 1995, and stock options expected to be
granted. The stock options granted in 1995 and earlier relate to ordinary shares
of The British Petroleum Company p.1.c. and do not relate to shares of Common
Stock. The SARs granted in 1995 and earlier relate to American Depositary
Receipts of The British Petroleum Company p.1.c. Each American Depositary
Receipt is equal to twelve ordinary shares of The British Petroleum Company
p.1.c.
OPTION/SAR GRANTS IN 1995
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR
% OF TOTAL OPTION TERM
OPTIONS/SARS EXERCISE OR (10 YEARS)(4)
OPTIONS/SARS GRANTED TO EMPLOYEES BASE ---------------------
NAME GRANTED(1) IN FISCAL YEAR(2) PRICE(3) EXPIRATION DATE 5% 10%
- ----------------- ------------- --------------------- ----------- ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
W. Kelly (5) 37,800/ N/A $ 6.46 February 28, 2005 $153,567 $389,173
0
K. O'Gorman (5) 19,560/ N/A 6.46 February 28, 2005 79,465 201,381
0
P. Viola (5) 19,560/ N/A 6.46 February 28, 2005 79,465 201,381
0
M. Roos 0/ N/A 76.63 February 28, 2005 53,011 134,341
1,100
J. Pilecki 0 N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Options and SARs become exercisable three years from the date of grant,
provided that The British Petroleum Company p.1.c. meets certain performance
targets.
(2) The number of options and SARs granted to each of the named executive
officers represents less than 1% of the total options and SARs granted to BP
employees in 1995.
(3) Represents the closing price on the business day immediately preceding the
date of grant. Options are exercisable in United Kingdom pounds sterling.
The options were granted at an exercise price of 4.08 pounds sterling. The
estimated exercise price in U.S. dollars was determined by using the
exchange rate on grant date of 1.5838 U.S. dollars to one United Kingdom
pound sterling. The actual exercise price in U.S. dollars may be different
depending on the exchange rate at the time of exercise.
(4) The assumed rates of appreciation are not intended to represent either past
or future appreciation rates with respect to the ordinary shares or the
American Depositary Receipts of The British Petroleum Company p.1.c. The
rates are prescribed in the applicable Securities and Exchange Commission
rules for use by all companies for the purpose of this table.
(5) This table does not include the March 6, 1996, grant of options to Messrs.
Kelly, O'Gorman and Viola each in the amount of 16,000 ordinary shares of
The British Petroleum Company p.1.c. The options are exercisable in United
Kingdom pounds sterling. The options were granted at an exercise price of
5.41 pounds sterling. The estimated exercise price in U.S. dollars, $8.28,
was determined by using the exchange rate on grant date of 1.5305 U.S.
dollars to one United Kingdom pound sterling. The actual exercise price in
U.S. dollars may be different depending on the exchange rate at the time of
exercise. The potential realizable value of these options at assumed annual
rates of stock price appreciation of 5% and 10% for the ten-year option term
are $83,315 and $211,139, respectively. See footnote 4 to this table.
(6) This table does not include the March 6, 1996, grant of SARs to Mr. Roos in
the amount of 900 American Depositary Receipts of The British Petroleum
Company p.l.c. The SARs were granted at an exercise price of $101.06. The
potential realizable value of these SARs at assumed annual rates of stock
price appreciation of 5% and 10% for the ten-year SAR term are $57,202 and
$144,961, respectively. See footnote 4 to this table.
49
<PAGE> 52
AGGREGATED OPTION/SAR EXERCISES IN 1995 AND
DECEMBER 31, 1995 OPTION/SAR VALUES (1)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1995 DECEMBER 31, 1995
----------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE(2)
- -------------------------------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
W. Kelly.............................. 0/ 37,800/ 0/ $ 76,901/
0 2,001 0 81,044
K. O'Gorman........................... 0/ 19,560/ 0/ 39,793/
0 1,800 0 68,700
P. Viola.............................. 0/ 19,560/ 0/ 39,793/
0 1,701 0 64,790
M. Roos............................... 0/ 0/ 0/ 0/
466 2,034 $ 16,543 61,070
J. Pilecki............................ 0/ 0/ N/A N/A
0 0
</TABLE>
- ---------------
(1) This table does not include exercises during 1995 by Messrs. Kelly, O'Gorman
and Viola.
(2) An option or SAR is "in the money" when the fair market value of the
underlying ordinary shares or American Depositary Receipts exceeds the
exercise price of the option or SAR.
The Company expects to adopt a stock option plan prior to the consummation
of the Offering pursuant to which grants of stock options relating to the Common
Stock may be made to the named executive officers and other employees of the
Company. The following table sets forth information regarding the currently
anticipated grants of stock options to the named executive officers during 1996.
ANTICIPATED OPTION/SAR GRANTS IN 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
% OF TOTAL OPTION TERM
OPTIONS/SARS EXERCISE OR (10 YEARS)(4)
OPTIONS/SARS GRANTED TO EMPLOYEES BASE EXPIRATION -----------------------
NAME GRANTED(1) IN FISCAL YEAR PRICE(2) DATE(3) 5% 10%
- ----------------- ------------ --------------------- ----------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. Kelly 72,836/ 21.1% 2006 $595,480 $1,509,064
0
K. O'Gorman 54,786/ 15.9% 2006 447,910 1,135,092
0
P. Viola 50,494/ 14.6% 2006 412,820 1,046,167
0
M. Roos 47,775/ 13.8% 2006 390,590 989,833
0
J. Pilecki 41,721/ 12.1% 2006 341,095 864,403
0
</TABLE>
- ---------------
(1) Options become exercisable according to the following schedule: 25% of the
grant immediately upon the date of the grant and an additional 25% of the
grant on the following three anniversaries of the date of the grant. It is
anticipated that the number of options granted will decrease if the exercise
price is higher than the price assumed for purposes of this table and will
increase if the exercise price is lower than that
50
<PAGE> 53
assumed price; in each case, the dollar value of the Company's Common Stock
subject to these options at the time of grant will remain constant. See
footnote 2 to this table.
(2) The exercise price is equal to the "Price to Public" set forth on the cover
page of this Prospectus (assumed to be the mid-point of the estimated price
range identified on the cover page of this Prospectus).
(3) The options will expire on the tenth anniversary of the date of grant.
(4) The assumed rates of appreciation are not intended to represent either past
or future appreciation rates with respect to the Common Stock. The rates are
prescribed in the applicable Securities and Exchange Commission rules for
use by all companies for the purpose of this table.
RETIREMENT BENEFITS
The Company is a participating employer in the BP America Retirement
Accumulation Plan (the "Plan") for salaried employees which was amended as of
January 1, 1989, to provide monthly benefit credits based upon years of service
as follows:
<TABLE>
<CAPTION>
PERCENT OF ELIGIBLE PERCENT OF ELIGIBLE
COMPENSATION UP TO COMPENSATION
AND INCLUDING 1/48 ABOVE 1/48 OF THE
YEARS OF SERVICE OF THE SOCIAL SECURITY SOCIAL SECURITY
(AT BEGINNING OF MONTH) WAGE BASE WAGE BASE
----------------------------------------- ---------------------- -------------------
<S> <C> <C> <C>
Tier I: less than 10 3% 6%
Tier II: 10, less than 20, or attainment of age 40 4% 7%
Tier
III: 20, less than 35, or attainment of age 50 5% 9%
Tier IV: 35 or more, regardless of age 6% 6%
</TABLE>
Eligible compensation includes base salary but does not include annual
incentive awards paid currently or long-term incentive awards. Benefits for
service through December 31, 1988, were based on the Plan formula then in
effect, and were converted to opening balances under the Plan. Both opening
balances and benefit credits receive regular interest credits at one-year
Treasury Bill rates plus 1% (with a minimum of 5%) until the participant
commences receiving benefit payments. In addition, the opening balance receives
supplemental interest credits at one-half of the regular interest credit rate
until the participant separates from service. For the year 1995, the regular
interest rate was 6.25% and the supplemental interest rate was 3.125%.
The Plan contains transitional provisions for employees who were at least
age 50 at January 1, 1989. The transitional minimum benefit is a final average
pay benefit for all service, specifically 1.6% of final average pay (based on
final three years) times years of service up to 35 less 50% of the primary
social security benefit reduced proportionately for years of service less than
35. Benefits vest after completion of five years of service.
The Company is a participating employer in the BP America supplemental
plans which will provide those benefits which are otherwise produced by
application of the Plan formula, but which, under Section 415 or Section
401(a)(17) of the Internal Revenue Code, are not permitted to be paid through a
qualified plan and its related trust. Such arrangements are specifically
provided for under the law. The Company also has a supplemental plan which uses
the Plan formula applied to annual incentive awards.
The total projected annual benefits payable under the formula of the Plan
at age 65, without regard to the Section 415 or 401(a)(17) limit and recognizing
supplemental pensions as described above, are as follows for the named executive
officers of the Company: Mr. Kelly $126,545, Mr. O'Gorman $43,787, Mr. Viola
$91,800, Mr. Roos $59,638, and Mr. Pilecki $21,195. These projected benefits are
based on an annuity conversion rate of 6.5%, future regular interest credits of
5.0%, and a 0.0% salary scale.
Upon consummation of the Offering, the Company will cease to be a
participating employer under the plans described above and employees will be
treated as terminated participants in accordance with applicable plan
provisions. The Company expects that its Board of Directors will consider the
adoption of one or more retirement plans following the consummation of the
Offering.
51
<PAGE> 54
SAVINGS PLAN
The Capital Accumulation Plan (the "CAP") covers substantially all
employees, including executive officers but excluding the employees covered by
the collective bargaining agreement, and is designed to qualify under Section
401(a) of the Internal Revenue Code. Each participant has the option to defer
taxation of a portion of his or her earnings by directing the Company to
contribute a percentage of such earnings to the CAP. A participant may direct a
minimum of 1% and a maximum of 16% of eligible earnings to the CAP, subject to
certain limitations set forth in the Code. Under certain circumstances, the
Internal Revenue Code will impose limits on the amount of earnings of a "highly
compensated" participant (as defined in Section 414(q) of the Code). A
participant's contributions become distributable upon the termination of his or
her employment for any reason. The Company matches 50% of each dollar, up to 6%
of base pay, of employee contributions to the CAP. Upon consummation of the
Offering, the Company will cease to be a participating employer under the CAP
and employees will be treated as terminated participants in accordance with
applicable plan pensions. The Company expects to adopt a similar plan.
THE BOARD AND CERTAIN BOARD COMMITTEES
The Company's Board will supervise the management of the Company as
provided by Delaware law.
Shortly after the consummation of the Offering, the Company's Board is
expected to establish the following committees.
The Executive Committee will possess all the powers and authority of the
Company's Board and the management and direction of the business and affairs of
the Company, except as limited by law.
The Audit Committee will recommend to the Board the Company's independent
auditors, review the annual audit reports of the Company, and review audit and
any non-audit fees paid to the Company's independent auditors. The Audit
Committee will report its findings and recommendations to the Board for
ratification. It is anticipated that Ernst & Young LLP will be appointed to
examine the financial statements of the Company in 1996. At least a majority of
the members of the Audit Committee will be independent directors.
The Compensation Committee will be charged with the responsibility for
supervising the Company's executive compensation policies, administering the
employee incentive plans, reviewing officers' salaries, approving significant
changes in executive employee benefits, and recommending to the Board such other
forms of remuneration as it deems appropriate. The Compensation Committee will
be comprised entirely of independent directors.
The Company's Board may establish a finance committee to supervise the
financial affairs of the Company and such committee may redelegate to certain
officers the authority to approve financing transactions within specified dollar
limitations. The Company's Board may also establish other committees.
OWNERSHIP OF COMMON STOCK
The Company has 1,000 shares of Common Stock, par value $.01 per share,
outstanding, all of which shares are owned by Mr. William P. Kelly.
Simultaneously with the transfer of the North American Fibers Business to the
Company, Mr. Kelly's shares of Common Stock will be repurchased by the Company
at their initial purchase price ($1,000) and retired. In the Offering, the
Selling Stockholders are selling 100% of their ownership interest in the
Company. The mailing address for Unifrax is c/o BP America Inc., 200 Public
Square, Cleveland, Ohio 44114, and for the other Selling Stockholder (BP
International Limited) is Britannic House, 1 Finsbury Circus, London EC2M 7BA
England.
The Company expects to grant options to purchase Common Stock to certain
executive officers of the Company. The following table sets forth certain
information with respect to the beneficial ownership of the Company's Common
Stock, adjusted to reflect (i) the repurchase of the 1,000 shares of Common
Stock owned beneficially and of record by Mr. Kelly, (ii) the sale of the Common
Stock being offered hereby
52
<PAGE> 55
(assuming the Price to Public is the mid-point of the estimated price range
identified on the cover page of this Prospectus) and (iii) the expected grant of
options exercisable within 60 days from the date of this Prospectus. See
"Management -- Stock Option and SAR Grants, Exercises and Year-End Values".
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) OF CLASS(3)
------------------------------------------------------ ----------------------- -----------
<S> <C> <C>
W. Kelly.............................................. 18,209 *
K. O'Gorman........................................... 13,697 *
P. Viola.............................................. 12,624 *
M. Roos............................................... 11,944 *
J. Pilecki............................................ 10,430 *
All directors and current executive officers as a
group
(7 persons)......................................... 86,328 1.1%
</TABLE>
- ---------------
*Less than one percent.
(1) The mailing address for each of the persons named in the above table is c/o
Unifrax Corporation, 2351 Whirlpool Street, Niagara Falls, New York 14302.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting and
investment power with respect to securities. The persons named in the above
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them. All shares shown in the
above chart will be beneficially owned pursuant to options granted under the
Company's 1996 Stock Option Plan.
(3) Shares of Common Stock subject to options currently exercisable within 60
days of the consummation of the Offering are deemed outstanding for
computing the percentage of the person holding such securities but are not
outstanding for computing the percentage of any other person or entity.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Pursuant to the Company's Certificate of Incorporation (the "Charter"), the
Company is authorized to issue 30,000,000 shares of Common Stock, par value $.01
per share, of which 1,000 shares are issued and outstanding. The Common Stock
offered hereby, when issued and sold as contemplated by this Prospectus, will be
validly issued, fully paid, and nonassessable. Upon consummation of the
Offering, there will be 8,000,000 shares of Common Stock outstanding.
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and, except as described
below, a majority vote is required for all actions to be taken by stockholders.
In the event of a liquidation, dissolution, or winding-up of the Company, the
holders of Common Stock are entitled to share equally and ratably in the assets
of the Company, if any, remaining after the payment of all debts and liabilities
of the Company and the liquidation preference of any outstanding preferred
stock. The Common Stock has no preemptive rights and no redemption, sinking
fund, or conversion privileges.
The Company's by-laws also provide for a classified Board of Directors
consisting of three classes as nearly equal in size as practicable. Each class
holds office until the third annual meeting for election of directors following
the election of such class, except that the initial terms of the three classes
expire in 1997, 1998, and 1999, respectively. No director may be removed by
holders of Common Stock except for cause, and the provisions of the Charter
relating to the classified Board may be amended only upon the vote of the
holders of at least 80% of the outstanding shares of Common Stock.
The Company's Board will have the responsibility for considering
nominations for prospective Board members. The Board will consider nominees
recommended by other directors, stockholders, and management provided that
nominations by stockholders are made in accordance with the Company's by-laws.
See "Description of Capital Stock -- Certain Anti-Takeover Provisions Affecting
Stockholders".
53
<PAGE> 56
The Charter provides that except under certain circumstances, directors of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duties as a director. The by-laws
of the Company provide for indemnification of the officers and directors to the
full extent permitted by applicable law.
Application is being made for listing the Common Stock on the NASDAQ Stock
Market National Market under the symbol "FRAX". The transfer agent and registrar
for the Common Stock is .
PREFERRED STOCK
The authorized capital stock of the Company includes 1,000,000 shares of
preferred stock, par value $.01 per share, none of which are currently issued or
outstanding. The Board of Directors is authorized to provide for the issuance of
such preferred stock in one or more series and to fix the dividend rate,
conversion rights, voting rights, rights and terms of redemption, redemption
price or prices, liquidation preferences and qualifications, limitations, and
restrictions thereof with respect to each series. The Company currently has no
plans to issue any shares of preferred stock.
CERTAIN ANTI-TAKEOVER PROVISIONS AFFECTING STOCKHOLDERS
The by-laws also contain several other provisions which may have the effect
of limiting changes in control of the Company. These provisions include: (i) the
classification of the Board of Directors into three classes with directors of
each class serving for successive three-year terms, (ii) the elimination of the
right of stockholders to act without a meeting by written consent, and (iii) a
provision that permits the removal of members of the Company's Board of
Directors only for cause (unless otherwise provided for in connection with the
rights of holders of preferred stock), and these provisions may not be amended
or repealed in any respect unless that action is approved by the affirmative
vote of the holders of not less than 80% of all of the outstanding shares of
capital stock of the Company entitled to vote. These provisions, together with
provisions of the Company's by-laws, would make the removal of incumbent
directors more difficult and time-consuming and may have the effect of
discouraging a tender offer or other takeover attempt not previously approved by
the Board of Directors. In addition, the Company's by-laws require nominations
for prospective directors by the stockholders to be submitted not less than 50
days prior to the annual meeting or special meeting called for that purpose (or
not later than the close of business on the 10th day following the date on which
notice was provided in the event that less than 50 days' notice is provided) and
to comply with the provisions of the by-laws.
DIVIDENDS
Holders of Common Stock are entitled to such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any preferred stock
that may be issued, and subject to the restrictions on the Company's ability to
pay dividends under the New Credit Facility and the Senior Notes. See "Dividend
Policy".
54
<PAGE> 57
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1996 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation and Schroder Wertheim & Co. Incorporated are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Selling Stockholders the following respective numbers of
shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------------------------------------------------------------------- ---------
<S> <C>
CS First Boston Corporation............................................
Schroder Wertheim & Co. Incorporated...................................
---------
Total........................................................ 8,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the overallotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 1,200,000 additional shares of Common Stock from the Company at the
initial public offering price less the underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. Such option may be
exercised only to cover over-allotments in the sale of the shares of Common
Stock. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as it was obligated to
purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus and, through the Representatives, to certain dealers at such price
less a concession of $ per share, and the Underwriters and such dealers
may allow a discount of $ per share on sales to certain other dealers.
After the initial public offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.
The Representatives have informed the Company and the Selling Stockholders
that they do not expect discretionary sales by the Underwriters to exceed 5% of
the shares being offered hereby.
The Company has agreed not to offer, sell, contract to sell, announce its
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act of 1933 (the "Securities Act") relating to, any shares of the
Company's Common Stock or securities convertible into or exchangeable or
exercisable for any shares of its Common
55
<PAGE> 58
Stock without the written consent of CS First Boston Corporation for a period of
180 days after the date of this Prospectus.
Prior to the Offering, the offering price per share of Common Stock will be
determined in negotiations between BP and the Representatives of the
Underwriters. In determining that price, consideration will be given to various
factors, including the market valuation of comparable companies, market
conditions for initial public offerings, the history of and prospects for the
Company's business, the Company's past and present operations, its past and
present earnings and current financial position, an assessment of the Company's
management, the general condition of the securities markets and other relevant
factors.
The Company and BP America have agreed to indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or contribute to payments which the Underwriters may be required to make in
respect thereof.
The Common Stock has been approved for trading on the Nasdaq Stock Market's
National Market System, subject to notice of issuance.
CS First Boston Corporation and its affiliates, and affiliates of Schroder
Wertheim & Co. Incorporated, have from time to time provided services to The
British Petroleum Company p.1.c. and its subsidiaries for which they received
customary compensation, including CS First Boston Corporation's services as
placement agent for the Senior Notes. From January 1, 1995 through the date of
this Prospectus, CS First Boston Corporation will have received approximately
$ from BP and its affiliates, and CS First Boston Corporation and its
affiliates expect to receive approximately $ in fees as placement agent
for the Senior Notes, and affiliates of Schroder Wertheim & Co. Incorporated
will have received approximately $ from BP and its affiliates.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the shares of Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that the Company
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of shares of Common Stock are effected. Accordingly, any
resale of the shares of Common Stock in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the shares of Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of shares of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders, and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such shares of Common Stock without the benefit of a prospectus
qualified under such securities laws, (ii) where required by law, that such
purchaser is purchasing as principal and not as agent, and (iii) such purchaser
has reviewed the text above under "Resale Restrictions".
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
56
<PAGE> 59
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any shares of Common Stock acquired by such purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from the
Company. Only one such report must be filed in respect of shares of Common Stock
acquired on the same date and under the same prospectus exemption.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Squire, Sanders & Dempsey. Certain legal matters
will be passed upon for the Underwriters by Jones, Day, Reavis & Pogue. From
time to time, Jones, Day, Reavis & Pogue represents The British Petroleum
Company p.1.c. and certain of its affiliates in certain matters.
EXPERTS
The financial statements of the North American Fibers Division of Unifrax
Corporation at December 31, 1995 and 1994, and for each of the three years in
the period ended December 31, 1995, and the balance sheet of Unifrax Acquisition
Inc. at April 19, 1996 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
With respect to the unaudited combined interim financial information for
the three-month periods ended March 31, 1995 and 1996 for the North American
Fibers Division of Unifrax Corporation, XPE Vertriebs GmbH and NAF Brasil Ltda.,
appearing elsewhere herein and in the Registration Statement, Ernst & Young LLP
have reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
report, included elsewhere herein, states that they did not audit and they do
not express an opinion on that interim financial information. Accordingly, the
degree of reliance on such information should be restricted in light of the
limited nature of the review procedures applied. The independent auditors are
not subject to the liability provisions of Section 11 of the Securities Act of
1933 (the "Act") for their report on the unaudited interim financial information
because that report is not a "report" or a "part" of the Registration Statement
prepared or certified by the auditors within the meaning of Sections 7 and 11 of
the Act.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, with respect to the shares of
Common Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain items of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to the exhibit for a more
57
<PAGE> 60
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement and such exhibits and schedules filed as a part thereof,
which may be inspected, without charge, at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and at Northwest Atrium
Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of
all or any portion of the Registration Statement may be obtained from the Public
Reference Section of the Commission, upon payment of prescribed fees.
58
<PAGE> 61
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNIFRAX ACQUISITION INC.:
Report of Independent Auditors....................................................... F-2
Balance Sheet as of April 19, 1996................................................... F-3
Note to Balance Sheet................................................................ F-4
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION:
FINANCIAL STATEMENTS:
Report of Independent Auditors....................................................... F-5
Balance Sheets as of December 31, 1994 and 1995...................................... F-6
Statements of Income for the years ended December 31, 1993, 1994 and 1995............ F-7
Statement of Changes in Parent Company Investment for the years ended December 31,
1993, 1994 and 1995................................................................ F-8
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995........ F-9
Notes to Financial Statements........................................................ F-10
INTERIM COMBINED FINANCIAL STATEMENTS (UNAUDITED):
Independent Accountants' Review Report............................................... F-21
Combined Balance Sheets as of March 31, 1995 and 1996 (unaudited).................... F-22
Combined Statements of Income for the three months ended March 31, 1995 and 1996
(unaudited)........................................................................ F-23
Combined Statement of Changes in Parent Company Investment for the three months ended
March 31, 1995 and 1996 (unaudited)................................................ F-24
Combined Statements of Cash Flows for the three months ended March 31, 1995 and 1996
(unaudited)........................................................................ F-25
Notes to Interim Combined Financial Statements (unaudited)........................... F-26
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Unifrax Acquisition Inc.
We have audited the accompanying balance sheet of Unifrax Acquisition Inc.
at April 19, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Unifrax Acquisition Inc. at April
19, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Buffalo, New York
April 19, 1996
F-2
<PAGE> 63
UNIFRAX ACQUISITION INC.
BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 19
1996
---------
<S> <C>
ASSETS
Cash.............................................................................. $ 1,000
========
SHAREHOLDER'S EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding................................................. $ --
Common stock, $.01 par value; 30,000,000 shares authorized;
1,000 shares issued and outstanding............................................. 10
Additional paid-in capital...................................................... 990
---------
$ 1,000
========
</TABLE>
See accompanying note.
F-3
<PAGE> 64
UNIFRAX ACQUISITION INC.
NOTE TO BALANCE SHEET
1. ORGANIZATION
Unifrax Acquisition Inc. was organized for the purpose of acquiring the
North American ceramic fiber business of Unifrax Corporation, an indirect
wholly-owned subsidiary of BP America Inc. and ultimately of The British
Petroleum Company p.1.c. ("BP"), and two related sales corporations, located in
Germany and Brazil, owned by BP International Limited, a wholly-owned subsidiary
of BP.
Unifrax Acquisition Inc. was incorporated in Delaware on April 19, 1996.
F-4
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
Board of Directors
BP America Inc.
We have audited the accompanying balance sheets of the North American
Fibers Division of Unifrax Corporation (the "Division") at December 31, 1994 and
1995 and the related statements of income, changes in parent company investment
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Division at December 31,
1994 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the financial statements, in 1993 the Division
changed its method of accounting for postretirement benefits other than
pensions.
ERNST & YOUNG LLP
Buffalo, New York
April 19, 1996
F-5
<PAGE> 66
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1995
------- -------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 98 $ 37
Accounts receivable, trade, less allowances of $1,337
and $919, respectively................................................ 13,380 13,675
Accounts receivable, affiliates.......................................... 2,295 598
Inventories.............................................................. 7,820 7,701
Deferred income taxes.................................................... 3,395 3,281
Prepaid expenses and other current assets................................ 152 181
------- -------
Total current assets....................................................... 27,140 25,473
Property, plant and equipment, net......................................... 30,076 29,288
Other assets............................................................... 293 294
------- -------
$57,509 $55,055
======= =======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable......................................................... $ 2,354 $ 3,081
Accrued expenses......................................................... 8,986 8,813
------- -------
Total current liabilities.................................................. 11,340 11,894
Accrued postretirement benefit cost........................................ 4,878 4,986
Deferred income taxes...................................................... 3,825 3,535
Other long-term obligations................................................ 400 400
------- -------
Total liabilities.......................................................... 20,443 20,815
Parent company investment -- excess of assets over liabilities............. 37,066 34,240
------- -------
$57,509 $55,055
======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 67
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1993 1994 1995
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Net sales:
Outside..................................................... $63,864 $71,890 $79,515
Affiliate................................................... 3,828 4,356 4,549
------- ------- -------
67,692 76,246 84,064
Operating expenses:
Cost of goods sold.......................................... 34,153 37,590 40,630
Selling and distribution.................................... 9,932 10,688 11,579
Administration.............................................. 5,415 6,279 6,189
Allocated corporate charges................................. 2,800 2,300 2,700
Research and development.................................... 2,747 2,772 2,950
Restructuring charges....................................... 155 -- --
------- ------- -------
55,202 59,629 64,048
------- ------- -------
Operating income.............................................. 12,490 16,617 20,016
Other income (expense):
Royalty income, net of related expenses..................... 630 622 953
Miscellaneous............................................... (81) (31) (21)
------- ------- -------
549 591 932
------- ------- -------
Income before income taxes and cumulative effect of change in
accounting principle........................................ 13,039 17,208 20,948
Provision for income taxes.................................... 5,407 7,052 8,539
------- ------- -------
Income before cumulative effect of change in accounting
principle................................................... 7,632 10,156 12,409
Cumulative effect of change in accounting principle........... (2,658) -- --
------- ------- -------
Net income.................................................... $ 4,974 $10,156 $12,409
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 68
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
STATEMENT OF CHANGES IN PARENT COMPANY INVESTMENT
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
Balance at January 1, 1993....................................................... $ 38,143
Net income....................................................................... 4,974
Net change in parent company advances............................................ (7,238)
-----------
Balance at December 31, 1993..................................................... 35,879
Net income....................................................................... 10,156
Net change in parent company advances............................................ (8,969)
-----------
Balance at December 31, 1994..................................................... 37,066
Net income....................................................................... 12,409
Net change in parent company advances............................................ (15,235)
-----------
Balance at December 31, 1995..................................................... $ 34,240
===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 69
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1993 1994 1995
------- ------- --------
(THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 4,974 $10,156 $ 12,409
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization.................................. 3,971 4,220 4,301
Provision for deferred income taxes............................ (437) (795) (176)
Provision for pension (income) expense......................... (90) (223) 149
Loss (gain) on sales of property, plant and equipment.......... 69 (6) 88
Foreign exchange loss (gain)................................... 21 43 (20)
Cumulative effect of change in accounting principle............ 2,658 -- --
Changes in operating assets and liabilities:
Accounts receivable......................................... (2,737) (1,475) 1,422
Inventories................................................. 849 (1,542) 119
Prepaid expenses and other current assets................... 66 (62) (29)
Accounts payable and accrued expenses....................... 597 850 554
Accrued postretirement benefit cost......................... 231 158 108
------- ------- --------
Cash provided by operating activities............................ 10,172 11,324 18,925
INVESTING ACTIVITIES
Capital expenditures............................................. (3,032) (2,670) (3,404)
Deferred software and other costs................................ -- -- (294)
Proceeds from sales of property, plant and equipment............. 82 92 105
------- ------- --------
Cash used in investing activities................................ (2,950) (2,578) (3,593)
FINANCING ACTIVITIES
Cash transfers to parent company, net............................ (7,134) (8,743) (15,393)
------- ------- --------
Cash used in financing activities................................ (7,134) (8,743) (15,393)
------- ------- --------
Net increase (decrease) in cash.................................. 88 3 (61)
Cash -- beginning of year........................................ 7 95 98
------- ------- --------
Cash -- end of year.............................................. $ 95 $ 98 $ 37
======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 70
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Unifrax Corporation ("Unifrax"), previously known as The Carborundum
Company ("Carborundum"), is an indirect wholly-owned subsidiary of BP America
Inc. ("BP America") and ultimately of The British Petroleum Company p.1.c.
("BP"). Prior to the sale referred to below, the continuing operations of
Unifrax and related affiliates principally comprised high performance ceramic
product businesses with manufacturing facilities located in the United States,
Puerto Rico, Brazil, Germany, Australia, and the United Kingdom. The North
American Fibers Division of Unifrax (the "Division"), included herein,
manufactures heat resistant ceramic fiber products for automotive, commercial,
and industrial customers primarily throughout North America. Manufacturing
facilities are located in Western New York (Tonawanda, Sanborn, and Amherst) and
New Carlisle, Indiana.
As part of a program to review holdings not related to its core hydrocarbon
and chemicals businesses, in 1994 BP announced its intent to seek potential
buyers for Carborundum, including the Division. In May 1995, BP entered into an
agreement under the terms of which it agreed to sell principally all continuing
businesses of Carborundum, excluding the Division, to Societe Europeenne des
Produits Refractaires and various other affiliates of Compagnie de Saint-Gobain
("SEPR"). This sale was completed on February 29, 1996. In connection with the
sale, Carborundum changed its name to Unifrax Corporation.
The effects of any divestiture of the Division are not reflected in the
accompanying special-purpose financial statements, which are intended to reflect
the specific assets and liabilities of the operations being sold on a historical
cost basis. The accompanying financial statements include the assets,
liabilities and related operations of the Division expected to be included as
part of any divestiture and exclude the assets, liabilities and related
operations of other Carborundum divisions, including Carborundum's ceramic fiber
operations located outside of North America.
Prior to the sale referred to above, the Division had certain shared assets
and incurred certain common costs which related to both the Division and other
Unifrax operations. As such, for purposes of preparing these special-purpose
financial statements, management of Unifrax made certain allocations of assets,
liabilities and expenses to the Division. Management of the Division believes
that the basis of such allocations is reasonable; however, the amounts could
differ from amounts that would be determined if the Division were operated on a
stand-alone basis (see Note 7).
Under the terms of agreements dated October 14, 1994 and April 19, 1996, BP
America assumed, through an indirect wholly-owned subsidiary, certain assets and
liabilities of Unifrax. Further, under the terms of these agreements, BP
America, among other things, agreed to indemnify Unifrax, including the
Division, for all liabilities, if any, that might result from any claims for
wrongful death or personal injury caused by exposure to refractory ceramic fiber
products manufactured by Unifrax, subject to certain loss retention levels (see
Note 13). This indemnity, upon the execution of an agreement providing for the
sale of Unifrax, or the Division, to an entity not affiliated with BP America,
will be superseded by the sale agreement, which will contain, among other
things, additional provisions necessary to administer the agreement. Assets and
liabilities assumed, or indemnified, by BP America under the terms of these
agreements are not included in the accompanying special-purpose financial
statements.
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Division in the
future or what the financial position, results of operations or cash flows of
the Division would have been if it were a separate, stand-alone entity during
the periods presented (see Note 7).
F-10
<PAGE> 71
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SAINT-GOBAIN SALE
On February 29, 1996, BP completed the sale of principally all continuing
businesses of Carborundum, excluding the Division, but including ceramic fiber
businesses located outside of North America.
During the years ended December 31 1993, 1994 and 1995, the Division's
sales to businesses included as part of this sale amounted to $3,828 thousand,
$4,356 thousand and $4,549 thousand, respectively.
In connection with this sale, BP and SEPR entered into various agreements
regarding the ongoing relationship between the Division and SEPR subsequent to
the closing of the transaction. Under the terms of certain of these agreements,
among other things, for a period of five years ending on March 1, 2001:
(i) the Division is precluded from selling, outside of the United States,
Canada and Mexico, products licensed to SEPR;
(ii) for products manufactured by the Division that are not covered by the
license agreement, except for expanding paper products, the world-wide
marketing rights of which are retained by the Division, SEPR is the
exclusive distributor of such products outside of the United States,
Canada and Mexico; for certain of these products, SEPR can elect, on a
product by product basis, to manufacture the product and pay a royalty to
the Division;
(iii) die cutting operations associated with expanding paper products in Brazil
and Germany will be performed by SEPR; in lieu of performing the die
cutting, SEPR can elect to obtain a royalty free license to manufacture
expanding paper products outside of the United States, Canada, and Mexico;
and
(iv) the Division is required to provide certain specified technical services
and product information for which, in certain situations, the Division
will receive a royalty.
Note 17 to the financial statements ("Pro Forma Impact of Saint-Gobain
Sale") includes a summary of the pro forma impact of the Saint-Gobain Sale on
the operations of the Division for the year ended December 31, 1995.
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Division recognizes revenue at the point of passage of title, which is
generally at the time of shipment to the customer. Sales to affiliates generally
reflect prices offered to the Division's highest volume distributors. The
Division provides for possible future returns and uncollectible accounts as
revenue is recognized.
INVENTORIES
Inventories are stated at cost, but not in excess of net realizable value.
The cost of substantially all inventories is determined by the last-in,
first-out method (LIFO).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets which range from 3 years to 20 years for machinery and equipment, and
20 years to 40 years for land improvements and buildings. Expenditures for
renewals and improvements that extend the useful life of an asset are
capitalized. Expenditures for routine repairs and maintenance are generally
charged to operations when incurred.
F-11
<PAGE> 72
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
Under the provisions of this accounting standard, asset carrying amounts are
required to be reviewed whenever events or circumstances indicate that such
carrying amounts may not be recoverable. When considered impaired, the
accounting standard requires that the carrying amount of the asset be reduced,
by a charge to income, to its current fair value. With regards to assets to be
disposed of, the accounting standard requires such assets to be reported at the
lower of carrying amount or fair value less cost to sell. Unifrax, and the
Division, adopted SFAS 121 effective January 1, 1996. The adoption of the
accounting standard had no impact on the Division's results of operations or
financial position.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and that are not allocable to current or
future earnings are expensed. Liabilities for environmental costs are recognized
when environmental assessments or clean-ups are probable and the associated
costs can be reasonably estimated. Generally, the timing of these provisions
coincides with the commitment to a formal plan of action or, if earlier, on
divestment or on closure of inactive sites.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, Unifrax adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"). This accounting standard requires companies
to accrue the actuarially determined costs of postretirement benefits other than
pensions during the years that the employee renders the necessary service. Under
Unifrax's previous policy, the annual expense of health care and life insurance
benefits provided to certain retired employees was determined based on the
amount of actual claims incurred and on premiums paid. As a result of Unifrax
electing to immediately recognize the cumulative effect of adopting SFAS 106 as
of January 1, 1993, an after-tax charge of $2,658 thousand ($4,489 thousand
before tax) is included in the Division's 1993 operations.
INCOME TAXES
The results of operations of Unifrax's U.S. subsidiaries, including the
operations of the Division, are included in the consolidated U.S. corporate
income tax return of BP America. The Division's provision for income taxes is
computed as if the Division filed its annual tax returns on a separate company
basis. The current portion of the income tax provision is satisfied by the
Division through a charge or credit to parent company investment.
Income taxes are accounted for under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rate and laws that apply in the periods in which
the deferred tax asset or liability is expected to be realized or settled.
Investment tax credits are accounted for using the flow-through method.
F-12
<PAGE> 73
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERAMIC FIBER HEALTH STUDIES
Ceramic fiber health studies (see Note 14), which management of the
Division considers to be an integral part of the business, are generally
undertaken by the Division and other producers of ceramic fiber once every three
to five years. The Division also performs ongoing employee health studies and
conducts tests as part of new product research and development. The cost of
ceramic fiber health studies are accrued annually based on the estimated cost
and scope of the studies and the Division's estimated cost sharing percentage.
Amounts charged to operations during the years ended December 31, 1993, 1994 and
1995 relating to the cost of these health studies amounted to $1,615 thousand,
$2,319 thousand and $1,829 thousand, respectively, and are included in
administration and research and development expense in the accompanying
statements of income.
ACCOUNTING FOR STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123, which must be adopted by the Division in
1996, encourages a fair value-based method of accounting for employee stock
options or similar equity instruments, but allows continued use of the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Companies
electing to continue to use APB 25 must make pro forma disclosures of net income
and earnings per share as if the fair value-based method had been applied. The
Division has not yet determined whether it will account for stock based
compensation under the provisions of APB 25 or SFAS 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4. INVENTORIES
Major classes of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
(THOUSANDS)
<S> <C> <C>
Raw material and supplies.......................................... $1,497 $1,309
In-process......................................................... 1,601 1,066
Finished product................................................... 4,057 4,564
------ ------
7,155 6,939
Adjustment to LIFO cost............................................ 665 762
------ ------
$7,820 $7,701
====== ======
</TABLE>
The cost of inventories determined on the LIFO method exceeds the current
cost of inventories principally as a result of reduced manufacturing costs.
F-13
<PAGE> 74
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Land and land improvements............................................. $ 1,377 $ 1,712
Buildings.............................................................. 15,196 15,555
Machinery, equipment, furniture and fixtures........................... 36,674 37,878
Construction in progress............................................... 1,792 2,472
-------- --------
55,039 57,617
Less accumulated depreciation and amortization......................... (24,963) (28,329)
-------- --------
$ 30,076 $ 29,288
======== ========
</TABLE>
For the years ended December 31, 1993, 1994 and 1995, depreciation expense
amounted to $3,911 thousand, $4,132 thousand and $4,008 thousand, respectively.
6. FINANCING ACTIVITIES
The Division is part of a centralized cash management system whereby all
cash disbursements of the Division are funded by, and all cash receipts are
transferred to, BP America.
7. RELATED PARTY TRANSACTIONS
Certain support services, such as information systems, credit and
collections, payroll, corporate communications and health, safety, and
environmental quality have been provided to all domestic Unifrax businesses on a
centralized basis. Costs for these services were allocated to the businesses
based on usage. The Division was charged for such services in the amount of
$1,245 thousand, $1,295 thousand and $1,191 thousand for the years ended
December 31, 1993, 1994 and 1995, respectively.
In addition, certain other indirect administrative expenses of Unifrax, as
well as research and development activities, except those research and
development activities relating specifically to ceramic fiber businesses, were
allocated to the businesses either based on the level of service provided or
based on the overall cost structure of Unifrax. Amounts allocated to the
Division amounted to $2,800 thousand, $2,300 thousand and $2,700 thousand for
the years ended December 31, 1993, 1994 and 1995, respectively.
In the opinion of management, charges and allocations have been determined
on a reasonable basis; however, they are not necessarily indicative of the level
of expenses which might have been incurred had the Division been operating as a
stand-alone entity. Management estimates the cost for these services on a stand-
alone basis would have been approximately $1,700 thousand per annum for the
years ended December 31, 1993, 1994 and 1995.
As a result of the sale of principally all continuing businesses of Unifrax
except for the Division (see Notes 1 and 2), and the elimination of Unifrax
corporate activities, the Division has a service continuation agreement with
SEPR. Under the terms of the agreement, SEPR will provide certain administrative
services, substantially similar to those services previously provided by Unifrax
centrally, and will charge the Division a service fee, which will approximate
the charges previously received for similar services, for a period of up to six
F-14
<PAGE> 75
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
months. Upon the expiration of this agreement, the Division expects that the
applicable administrative services will be provided internally, or purchased
from other third-party providers.
The Division's property, product and certain other loss exposures are
insured through insurance premiums paid to indirect wholly-owned insurance
subsidiaries of BP. Also, except for the State of New York, for which the
Division was self-insured, the Division, through December 31, 1993, insured its
workers' compensation obligations through insurance premiums paid to one of the
subsidiaries. On January 1, 1994, the Division became self-insured for all
workers' compensation loss exposures. Insurance premiums charged to operations
for these various insurance categories during the years ended December 31, 1993,
1994 and 1995 amounted to $279 thousand, $243 thousand and $117 thousand,
respectively. Management estimates the cost for these insurance categories on a
stand-alone basis would have been approximately $900 thousand per annum for the
years ended December 31, 1993, 1994 and 1995.
The Division historically performed research and development activities for
all Unifrax ceramic fiber businesses and performed certain research and
development services for a joint venture affiliated with Unifrax. The Division
granted licenses to the ceramic fiber businesses located outside of North
America and to the joint venture to use the technology developed and charged a
royalty based upon the level of sales of products manufactured at such
businesses. The amounts charged to these businesses totaled $687 thousand, $709
thousand and $884 thousand for the years ended December 31, 1993, 1994 and 1995,
respectively, and is included in royalty income, net of related expenses, in the
accompanying statements of income. As discussed in Note 2, the Division, for a
period of five years ending on March 1, 2001, will continue to provide ceramic
fiber businesses located outside of North America with specified technical
services and product information for which, in certain situations, the Division
will receive a royalty (see Note 17).
The Division periodically enters into product purchase transactions with
certain BP affiliates and other Unifrax businesses. Purchases from such entities
during the years ended December 31, 1993, 1994 and 1995 totaled $3,095 thousand,
$3,285 thousand and $1,073 thousand, respectively.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1995
------ ------
(THOUSANDS)
<S> <C> <C>
Employee benefit accruals.................................................. $1,957 $2,083
Ceramic fiber health studies............................................... 1,500 2,000
Other ceramic fiber product stewardship and monitoring..................... 1,192 1,168
Other...................................................................... 4,337 3,562
------ ------
$8,986 $8,813
====== ======
</TABLE>
9. RETIREMENT PLANS
The Division participates in defined benefit retirement plans sponsored by
BP America. The defined benefit retirement plans are of two general
types -- flat dollar plans and salary related plans. Flat dollar plans, which
are negotiated with unions, pay benefits based on length of service. Salary
related plans, pertaining to all non-hourly employees, pay benefits based on
length of service and level of compensation. Annual contributions are made to
the defined benefit plans which at least equal the amounts required by law.
Contribution amounts are determined by independent actuaries using an actuarial
cost method that has an objective of providing an
F-15
<PAGE> 76
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RETIREMENT PLANS (CONTINUED)
adequate fund to meet pension obligations as they mature. The assets of these
plans are held in U.S. and foreign equity securities, fixed income securities,
interest bearing cash and real estate. Net pension income (expense) allocated to
the Division approximated $90 thousand, $223 thousand and $(149) thousand in
1993, 1994 and 1995, respectively. Amounts allocated are principally determined
based on payroll.
The Division, through BP America, participates in a defined contribution
401(k) plan which is available to substantially all non-union employees of the
Division. Division contributions, representing a 50% matching of employee
contributions up to a maximum of 6% of the employee's base pay, amounted to $281
thousand, $299 thousand and $313 thousand during the years ended December 31,
1993, 1994 and 1995, respectively.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Division, through BP America, provides certain health care and life
insurance benefits for retired employees who meet eligibility requirements.
Those benefits are provided through insured and self-insured arrangements. As
discussed in Note 3, Unifrax adopted SFAS 106 effective January 1, 1993. Prior
to 1993, the annual expense of providing benefits to retirees was based on the
amount of actual claims incurred and on premiums paid.
The Division's policy is to fund postretirement benefits as insurance
premiums or claims become due. Amounts allocated to the Division are principally
determined based on employer information.
The following table summarizes the components of net periodic
postretirement benefit expense allocated to the Division for 1993, 1994 and
1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1993 1994 1995
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned....................................... $ 55 $ 89 $ 70
Interest costs........................................................ 380 304 265
---- ---- ----
Net periodic postretirement benefit expense........................... $435 $393 $335
==== ==== ====
</TABLE>
The following table presents the status of the unfunded postretirement
benefit obligation allocated to the Division and the amounts recognized in the
Division's balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1994 1995
------ ------
(THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $2,136 $2,340
Employees fully eligible................................................. 720 839
Other active employees................................................... 1,035 1,605
------ ------
3,891 4,784
Unrecognized net gain...................................................... 987 202
------ ------
Accrued postretirement benefit cost........................................ $4,878 $4,986
====== ======
</TABLE>
The accumulated postretirement benefit obligation is based on a
weighted-average assumed discount rate of 7.0% at December 31, 1995 (8.5% at
December 31, 1994). The assumed rates of future increases in per capita cost of
health care benefits (health care cost trend rate) for 1996 are 10.4% for those
beneficiaries under
F-16
<PAGE> 77
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
age 65 and 8.1% for those beneficiaries age 65 and over, each declining
gradually to 5% for both age groups by the year 2003 and in subsequent years.
Decreasing the discount rate to 7.0% in 1995 increased the accumulated
postretirement benefit obligation by approximately $900 thousand.
The effect of a one percentage point increase in the assumed health care
cost trend rate would increase the accumulated postretirement benefit obligation
as of December 31, 1995 by approximately $500 thousand and increase the annual
aggregate service and interest cost by approximately $60 thousand.
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1993 1994 1995
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................................ $4,594 $6,179 $6,900
State.......................................................... 1,250 1,668 1,815
------ ------ ------
5,844 7,847 8,715
Deferred......................................................... (437) (795) (176)
------ ------ ------
$5,407 $7,052 $8,539
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1993 1994 1995
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Income before income taxes at 35%................................ $4,564 $6,023 $7,332
Permanent income tax disallowances............................... 24 57 51
Impact of federal rate change on deferred taxes.................. 80 -- --
State taxes, net of federal benefit.............................. 739 972 1,156
------ ------ ------
$5,407 $7,052 $8,539
====== ====== ======
</TABLE>
F-17
<PAGE> 78
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1994 and
1995, the major components of deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
(THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment................................ $(5,809) $(5,624)
Other........................................................ (168) (107)
------- -------
Total deferred tax liabilities................................. (5,977) (5,731)
Deferred tax assets:
Accrued liabilities.......................................... 2,560 2,440
Accrued postretirement benefit cost.......................... 1,989 2,033
Inventory.................................................... 728 712
Other........................................................ 270 292
------- -------
Total deferred tax assets...................................... 5,547 5,477
------- -------
Net deferred tax liability..................................... $ (430) $ (254)
======= =======
</TABLE>
12. LEASE COMMITMENTS AND RENTALS
The Division rents two manufacturing facilities and certain equipment under
various operating leases. The lease agreement for one of the facilities expires
2002 and contains options which allow the Division to extend the lease term for
up to three additional five year periods, or to purchase the facility for a
purchase price determined in accordance with the lease agreement. The lease
agreement for the second facility expires 2004 and contains options which allow
the Division to extend the lease term for up to two additional five year
periods, or to purchase the facility for a purchase price equal to fair value.
Total rental expense for the years ended December 31, 1993, 1994 and 1995
amounted to $1,206 thousand, $1,176 thousand and $1,429 thousand, respectively.
Future minimum lease payments under all non-cancelable operating leases
having a remaining term in excess of one year as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
1996...................................... $ 858
1997...................................... 838
1998...................................... 825
1999...................................... 765
2000...................................... 774
Thereafter................................ 1,979
</TABLE>
13. SEVERANCE
During 1993, the Division implemented a work force reduction program with
respect to salaried employees. Included in the 1993 operating results is a
charge of $155 thousand relating to the cost of this program. Total employee
separations under the program were 9.
F-18
<PAGE> 79
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. CONTINGENCIES
CERAMIC FIBERS
Regulatory agencies and others, including the Division, are currently
conducting scientific research to determine the potential health impact
resulting from the inhalation of airborne ceramic fibers. To date, the results
of this research have been inconclusive as to whether or not ceramic fiber
exposure presents an unreasonable risk to humans. Although not required to do
so, management of the Division intends to undertake a study in 1997, either
separately or in conjunction with other producers of ceramic fibers, to
evaluate, among other things, the physical properties of ceramic fibers having a
redesigned chemistry. At December 31, 1994 and 1995, accrued expenses includes
$1,500 thousand and $2,000 thousand, respectively, relating to the estimated
cost of ceramic fiber health studies.
Various legal proceedings and claims have been made against manufacturers
of ceramic fibers, including Unifrax and the Division, alleging death or
personal injury as a result of exposure in the manufacture and handling of
ceramic fiber and other products. The amount of any liability that might
ultimately exist with respect to these claims is presently not determinable.
Consistent with customary practice among manufacturers of ceramic fiber
products, the Division has entered into agreements with distributors of its
product whereby the Division has agreed to indemnify the distributors against
losses resulting from ceramic fiber claims and the costs to defend against such
claims. The amount of any liability that might ultimately exist with respect to
these indemnities is presently not determinable.
Under an agreement with Unifrax, BP America has agreed to indemnify
Unifrax, including the Division, for liabilities, if any, that might result from
an unfavorable outcome of ceramic fiber claims in excess of $100 thousand per
occurrence and $2,500 thousand in the aggregate (see Note 1). Unifrax, including
the Division, and BP America intend to defend ceramic fiber claims vigorously.
ENVIRONMENTAL MATTERS
The Division is subject to loss contingencies pursuant to various federal,
state and local environmental laws and regulations. These include possible
obligations to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain chemical or petroleum
substances by the Division or by other parties.
Under agreements with Unifrax, BP America assumed all liability, and the
rights to recovery from third parties, for environmental remediation and other
similar required actions with respect to certain environmental obligations of
Unifrax, including certain obligations associated with the North American
ceramic fiber business (see Note 1).
The estimated cost of known environmental obligations, except for those
obligations assumed by BP America, has been provided for in accordance with the
Division's accounting policies. In addition, the Division may, in the future, be
involved in further environmental assessments or clean-ups. While the ultimate
requirement for any such remediation, and its cost, is presently not known, and
while the amount of any future costs could be material to the results of
operations in the period in which they are recognized, the Division does not
expect these costs, based upon currently known information and existing
requirements, to have a material adverse effect on its financial position.
OTHER
Various other legal proceedings and claims have been made against the
Division in the ordinary course of business. While the amounts could be material
to the results of operations in the period recognized, in the
F-19
<PAGE> 80
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. CONTINGENCIES (CONTINUED)
opinion of management of the Division, the ultimate liability, if any, resulting
from such matters will not have a material adverse effect on the Division's
financial position.
15. CAPITAL EXPANSION PROJECT
In November 1995, the Division announced that an estimated $14 million
manufacturing facility expansion will be undertaken at the Division's New
Carlisle, Indiana facility. Construction is scheduled to begin in the second
quarter of 1996 and the new facility is expected to be fully operational in late
1997.
16. MAJOR CUSTOMER
The Division had sales to one customer which accounted for approximately
11% of net sales for 1995. No one customer accounted for 10% or more of net
sales in 1993 or 1994.
17. PRO FORMA IMPACT OF SAINT-GOBAIN SALE (UNAUDITED)
As described in Note 2, in connection with the sale of principally all
continuing businesses of Unifrax, excluding the Division, BP and SEPR entered
into various agreements regarding the ongoing relationship between the Division
and SEPR subsequent to the closing of the sale.
Assuming the agreements with SEPR were in effect at January 1, 1995, net
sales, operating income, income before income taxes and net income for the year
ended December 31, 1995, on a pro forma basis, would have been $83,588 thousand,
$18,820 thousand, $19,339 thousand and $11,410 thousand, respectively. This pro
forma financial information is based on available data and upon certain
assumptions that management of the Division believes are reasonable under the
circumstances. Pro forma adjustments principally comprise the elimination of
certain affiliate sales and royalties and the inclusion of estimated direct
customer and distributor sales under the agreements with SEPR, as adjusted for
the estimated impacts on costs and expenses.
F-20
<PAGE> 81
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors
BP America Inc.
We have reviewed the accompanying combined balance sheets of the North
American Fibers Division of Unifrax Corporation, XPE Vertriebs GmbH and NAF
Brasil Ltda. (the "Division") as of March 31, 1995 and 1996 and the related
combined statements of income, changes in parent company investment and cash
flows for the three month periods then ended. These financial statements are the
responsibility of the Division's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying combined financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Buffalo, New York
April 19, 1996
F-21
<PAGE> 82
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
COMBINED BALANCE SHEETS
MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................... $ 63 $ 555
Accounts receivable, trade, less allowances of $1,298
and $1,014, respectively............................................ 13,572 16,040
Accounts receivable, affiliates........................................ 3,367 --
Inventories............................................................ 8,257 9,128
Deferred income taxes.................................................. 3,368 3,386
Prepaid expenses and other current assets.............................. 262 472
------- -------
Total current assets..................................................... 28,889 29,581
Property, plant and equipment, net....................................... 29,609 29,442
Other assets............................................................. 271 484
------- -------
$58,769 $59,507
======= =======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable....................................................... $ 2,076 $ 3,164
Accrued expenses....................................................... 9,002 9,254
------- -------
Total current liabilities................................................ 11,078 12,418
Accrued postretirement benefit cost...................................... 4,943 5,025
Deferred income taxes.................................................... 3,752 3,455
Other long-term obligations.............................................. 400 400
------- -------
Total liabilities........................................................ 20,173 21,298
Parent company investment -- excess of assets over liabilities........... 38,596 38,209
------- -------
$58,769 $59,507
======= =======
</TABLE>
See accountants' review report and accompanying notes.
F-22
<PAGE> 83
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Net sales................................................................ $21,384 $21,581
Operating expenses:
Cost of goods sold..................................................... 10,551 10,642
Selling and distribution............................................... 3,028 3,134
Administration......................................................... 1,811 1,737
Allocated corporate charges............................................ 675 356
Research and development............................................... 854 699
------- -------
16,919 16,568
------- -------
Operating income......................................................... 4,465 5,013
Other income (expense):
Royalty income, net of related expenses................................ 211 149
Miscellaneous.......................................................... (15) (62)
------- -------
196 87
------- -------
Income before income taxes............................................... 4,661 5,100
Provision for income taxes............................................... 1,894 2,100
------- -------
Net income............................................................... $ 2,767 $ 3,000
======= =======
</TABLE>
See accountants' review report and accompanying notes.
F-23
<PAGE> 84
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
COMBINED STATEMENT OF CHANGES IN PARENT COMPANY INVESTMENT
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Balance -- beginning of period........................................... $37,066 $34,240
Net income............................................................... 2,767 3,000
Net change in parent company advances.................................... (1,237) 969
------- -------
Balance -- end of period................................................. $38,596 $38,209
======= =======
</TABLE>
See accountants' review report and accompanying notes.
F-24
<PAGE> 85
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
(THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................. $ 2,767 $ 3,000
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............................................ 1,053 976
Provision for deferred income taxes...................................... (46) (185)
Provision for pension expense............................................ 37 37
Loss on sales of property, plant and equipment........................... 14 52
Foreign exchange loss.................................................... 3 3
Changes in operating assets and liabilities:
Accounts receivable................................................... (1,267) (1,770)
Inventories........................................................... (437) (1,427)
Prepaid expenses and other current assets............................. (110) (291)
Accounts payable and accrued expenses................................. (262) 524
Accrued postretirement benefit cost................................... 65 39
------- -------
Cash provided by operating activities...................................... 1,817 958
INVESTING ACTIVITIES
Capital expenditures....................................................... (572) (1,160)
Deferred software and other costs.......................................... -- (194)
Proceeds from sales of property, plant and equipment....................... 12 --
------- -------
Cash used in investing activities.......................................... (560) (1,354)
FINANCING ACTIVITIES
Cash transfers (to) from parent company, net............................... (1,292) 914
------- -------
Cash (used in) provided by financing activities............................ (1,292) 914
------- -------
Net (decrease) increase in cash............................................ (35) 518
Cash -- beginning of period................................................ 98 37
------- -------
Cash -- end of period...................................................... $ 63 $ 555
======= =======
</TABLE>
See accountants' review report and accompanying notes.
F-25
<PAGE> 86
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Unifrax Corporation ("Unifrax"), is an indirect wholly-owned subsidiary of
BP America Inc. ("BP America") and ultimately of The British Petroleum Company
p.1.c. ("BP"). The unaudited financial information furnished herein reflects the
combined financial position and combined results of operations of the North
American Fibers Division of Unifrax and related sales corporations in Europe
(XPE Vertriebs GmbH) and South America (NAF Brasil Ltda.), which are
wholly-owned by BP International Limited, a wholly-owned subsidiary of BP
(collectively, the "Division"), and reflects all adjustments, which in the
opinion of management are of a normal recurring nature, necessary to fairly
state the Division's financial position and results of operations for the
periods presented. This information should be read in conjunction with the
Division's audited financial statements for the year ended December 31, 1995.
On February 29, 1996, BP completed the sale of principally all continuing
businesses of Unifrax, excluding the Division, to Societe Europeenne des
Produits Refractaires and various other affiliates of Compagnie de Saint-Gobain
("SEPR"). Subsequent to this sale, the Division began making sales of certain
products through related sales corporations in Europe and South America which
were established for that sole purpose. The unaudited combined financial
statements included herein include the results of these sales corporations.
Prior to February 29, 1996, sales of these products were made to other foreign
affiliates of Unifrax, who, in turn, sold to the final customer. Such sales are
included in net sales in the accompanying unaudited combined statements of
income.
In connection with the sale, BP and SEPR entered into various agreements
regarding the ongoing relationship between the Division and SEPR subsequent to
the closing of the sale. Assuming the agreements with SEPR were in effect at
January 1, 1996, net sales, operating income, income before income taxes and net
income for the three months ended March 31, 1996, on a pro forma basis, would
have been $21,502 thousand, $4,861 thousand, $4,880 thousand and $1,963
thousand, respectively. This pro forma financial information is based on
available data and upon certain assumptions that management of the Division
believes are reasonable under the circumstances. Pro forma adjustments
principally comprise the elimination of certain affiliate sales and royalties
and the inclusion of estimated direct customer and distributor sales under the
agreements with SEPR, as adjusted for the estimated impacts on costs and
expenses.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1996.
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Division in the
future or what the financial position, results of operations or cash flows of
the Division would have been if it were a separate, stand-alone entity during
the periods presented.
See accountants' review report.
F-26
<PAGE> 87
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. INVENTORIES
Major classes of inventories are as follows:
<TABLE>
<CAPTION>
MARCH 31
-----------------
1995 1996
------ ------
(THOUSANDS)
<S> <C> <C>
Raw material and supplies.................................................. $1,404 $1,336
In-process................................................................. 1,890 1,192
Finished product........................................................... 4,298 6,047
------ ------
7,592 8,575
Adjustment to LIFO cost.................................................... 665 553
------ ------
$8,257 $9,128
====== ======
</TABLE>
At March 31, 1996, the Division has open purchase commitments for a raw
material used in the manufacturing process totalling approximately $769
thousand.
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
MARCH 31
-------------------
1995 1996
-------- --------
(THOUSANDS)
<S> <C> <C>
Land and land improvements............................................... $ 1,387 $ 1,709
Buildings................................................................ 15,352 15,541
Machinery, equipment, furniture and fixtures............................. 37,002 38,069
Construction in progress................................................. 1,792 3,311
-------- --------
55,533 58,630
Less accumulated depreciation and amortization........................... (25,924) (29,188)
-------- --------
$ 29,609 $ 29,442
======== ========
</TABLE>
For the three month periods ended March 31, 1995 and 1996, depreciation
expense amounted to $1,031 thousand and $972 thousand, respectively.
4. CONTINGENCIES
CERAMIC FIBERS
Regulatory agencies and others, including the Division, are currently
conducting scientific research to determine the potential health impact
resulting from the inhalation of airborne ceramic fibers. To date, the results
of this research have been inconclusive as to whether or not ceramic fiber
exposure presents an unreasonable risk to humans. Although not required to do
so, management of the Division intends to undertake a study in 1997, either
separately or in conjunction with other producers of ceramic fibers, to
evaluate, among other things, the physical properties of ceramic fibers having a
redesigned chemistry. At March 31, 1995 and 1996, accrued expenses includes
$1,625 thousand and $2,125 thousand, respectively, relating to the estimated
cost of ceramic fiber health studies.
See accountants' review report.
F-27
<PAGE> 88
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. CONTINGENCIES (CONTINUED)
CERAMIC FIBERS (CONTINUED)
Various legal proceedings and claims have been made against manufacturers
of ceramic fibers, including Unifrax and the Division, alleging death or
personal injury as a result of exposure in the manufacture and handling of
ceramic fiber and other products. The amount of any liability that might
ultimately exist with respect to these claims is presently not determinable.
Consistent with customary practice among manufacturers of ceramic fiber
products, the Division has entered into agreements with distributors of its
product whereby the Division has agreed to indemnify the distributors against
losses resulting from ceramic fiber claims and the costs to defend against such
claims. The amount of any liability that might ultimately exist with respect to
these indemnities is presently not determinable.
Under an agreement with Unifrax, BP America has agreed to indemnify
Unifrax, including the Division, for liabilities, if any, that might result from
an unfavorable outcome of ceramic fiber claims in excess of $100 thousand per
occurrence and $2,500 thousand in the aggregate. Unifrax, including the
Division, and BP America intend to defend ceramic fiber claims vigorously.
ENVIRONMENTAL MATTERS
The Division is subject to loss contingencies pursuant to various federal,
state and local environmental laws and regulations. These include possible
obligations to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain chemical or petroleum
substances by the Division or by other parties.
Under agreements with Unifrax, BP America assumed all liability, and the
rights to recovery from third parties, for environmental remediation and other
similar required actions with respect to certain environmental obligations of
Unifrax, including certain obligations associated with the North American
ceramic fiber business.
The estimated cost of known environmental obligations, except for those
obligations assumed by BP America, has been provided for in accordance with the
Division's accounting policies. In addition, the Division may, in the future, be
involved in further environmental assessments or clean-ups. While the ultimate
requirement for any such remediation, and its cost, is presently not known, and
while the amount of any future costs could be material to the results of
operations in the period in which they are recognized, the Division does not
expect these costs, based upon currently known information and existing
requirements, to have a material adverse effect on its financial position.
OTHER
Various other legal proceedings and claims have been made against the
Division in the ordinary course of business. While the amounts could be material
to the results of operations in the period recognized, in the opinion of
management of the Division, the ultimate liability, if any, resulting from such
matters will not have a material adverse effect on the Division's financial
position.
See accountants' review report.
F-28
<PAGE> 89
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION,
XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. CAPITAL EXPANSION PROJECT
In November 1995, the Division announced that an estimated $14 million
manufacturing facility expansion will be undertaken at the Division's New
Carlisle, Indiana facility. Construction is scheduled to begin in the second
quarter of 1996 and the new facility is expected to be fully operational in late
1997.
See accountants' review report.
F-29
<PAGE> 90
Photographs of various Company products, together with products
manufactured by other companies using Company products as component parts.
<PAGE> 91
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 9
Use of Proceeds........................ 13
Dividend Policy........................ 13
Capitalization......................... 14
The Transaction........................ 15
Financing Plan......................... 16
Relationship with SEPR................. 16
Selected Financial Data................ 19
Pro Forma Financial Data............... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 28
Business............................... 34
Management............................. 47
Ownership of Common Stock.............. 52
Description of Capital Stock........... 53
Underwriting........................... 55
Notice to Canadian Residents........... 56
Legal Matters.......................... 57
Experts................................ 57
Additional Information................. 57
Index to Financial Statements.......... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Unifrax Acquisition Inc.
To be Renamed
Unifrax Corporation
8,000,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CS First Boston
Schroder Wertheim & Co.
- --------------------------------------------------------------------------------
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Selling Stockholders in
connection with the sale of Common Stock being registered. All amounts are
estimates except the Securities and Exchange Commission ("SEC"), NASD
registration, and the Nasdaq National Market fees.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee......................................... $44,414**
NASD registration fee........................................ 30,500
Nasdaq National Market fee................................... 36,500
Printing costs............................................... *
Legal fees and expenses of the Registrant.................... *
Accounting fees and expenses................................. *
Blue sky fees and expenses................................... *
Transfer agent fees.......................................... *
Miscellaneous................................................ *
---------
TOTAL.............................................. $
==========
</TABLE>
The Registrant is not responsible for any of the costs or expenses of the
Offering.
- ---------------
* To be filed by amendment.
** Previously paid.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Registrant's By-laws incorporate substantially the provisions of the
General Corporation Law of the State of Delaware providing for indemnification
of directors and officers of the Registrant against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact that such person is or was an
officer or director of the Registrant or is or was serving at the request of the
Registrant as a director, officer, employee, agent or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
As permitted by Section 102 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation contains provisions eliminating a
director's personal liability for monetary damages to the Registrant and its
stockholders arising from a breach of a director's fiduciary duty except for
liability (a) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c) under Section
174 of the Delaware General Corporation Law, or (d) for any transaction from
which the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law provides generally that
a person sued as a director, officer, employee or agent of a corporation may be
indemnified by the corporation for reasonable expenses, including attorney's
fees, if in the case of other than derivative suits he has acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that his conduct was unlawful). In the case of a
derivative suit, an officer, employee or agent of the corporation who is not
protected by the Certificate of Incorporation may be indemnified by the
corporation for reasonable expenses, including attorney's fees, if he has acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification shall be
made in the case of a derivative suit in respect of any claim as to which an
officer, employee or agent has been adjudged to be liable to the corporation
unless that
II-1
<PAGE> 93
person is fairly and reasonably entitled to indemnity for proper expenses.
Indemnification is mandatory in the case of a director, officer, employee, or
agent who is successful on the merits in defense of a suit against him.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant issued and sold on April 19, 1996, 1,000 shares of Common
Stock at $1.00 per share to William P. Kelly. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended
("Securities Act").
Immediately prior to consummation of the Offering, the Registrant will
issue 8,000,000 shares of Common Stock to the Selling Stockholders and a note in
the principal amount of $55 million in exchange for the North American Fibers
Business and the Covenant Not To Compete in a private placement. This
transaction will be exempt from registration under Section 4(2) of the
Securities Act.
In connection with the Transaction, the Registrant will issue $45 million
in principal amount of Senior Notes at par in a private placement. This
transaction will be exempt from registration under Section 4(2) of the
Securities Act.
Prior to the consummation of the Offering, the Registrant will grant
options to certain executive officers in a private placement. This transaction
will be exempt from registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<S> <C> <C>
1.1* Form of Underwriting Agreement
2.1* Form of Assets Transfer Agreement between Unifrax Corporation and the
Registrant
3.1** Certificate of Incorporation of the Registrant
3.2** Amended and Restated By-laws of the Registrant (to become effective upon
consummation of the Offering)
4.1* Form of Certificate for the Common Stock
5.1* Opinion of Squire, Sanders & Dempsey as to the legality of the securities
being registered
10.1* Form of Bank Credit Agreement between the Registrant and the Lenders to be
named therein
10.2* Form of Senior Note Agreement between the Registrant and several purchasers
to be named therein
10.3** 1996 Stock Option Plan (to become effective prior to consummation of the
Offering)
10.4** Lease relating to Tonawanda plant
10.5** Lease relating to Amherst plant
10.6** Covenant Not to Compete between The British Petroleum Company p.l.c., its
affiliates, and the Registrant and Societe Europeenne des Produits
Refractaires, and its affiliates (portions of this Exhibit have been
omitted and filed separately with the Commission pursuant to a request for
confidential treatment)
10.7** Product Distribution Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this Exhibit have been
omitted and filed separately with the Commission pursuant to a request for
confidential treatment)
10.8** Distributed Product License Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this Exhibit have been
omitted and filed separately with the Commission pursuant to a request for
confidential treatment)
10.9** License Agreement between the Registrant and Societe Europeenne des
Produits Refractaires (portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential
treatment)
10.10** Trademark License and Consent Agreement between the Registrant and Societe
Europeenne des Produits Refractaires
</TABLE>
II-2
<PAGE> 94
<TABLE>
<S> <C> <C>
10.11** Conversion Agreement between the Registrant and Societe Europeenne des
Produits Refractaires (portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for confidential
treatment)
10.12** XPE License Agreement between the Registrant and Societe Europeenne des
Produits Refractaires
21.1** Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Acknowledgment of Ernst & Young LLP
23.3** Consent of Mark D. Roos
23.4* Consent of Squire, Sanders & Dempsey (included in their opinion filed as
Exhibit 5.1 hereto)
24.1** Power of attorney
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included herein:
Schedule II Valuation and qualifying accounts for the years ended
December 31, 1993, 1994 and 1995
All other schedules for which provision is made in the applicable
accounting regulation of the SEC are not required under the related
instructions, are inapplicable, or the information is included in the financial
statements, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Niagara Falls, State of New York, on June 3, 1996.
UNIFRAX ACQUISITION INC.
By: /s/ WILLIAM P. KELLY
------------------------------
William P. Kelly
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1993, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------------- -------------
<S> <C> <C>
/s/ WILLIAM P. KELLY Director, President and Chief Executive June 3, 1996
- ------------------------------ Officer (Principal Executive Officer)
William P. Kelly
/s/ MARK D. ROOS Treasurer (Principal Financial Officer June 3, 1996
- ------------------------------ and Principal Accounting Officer)
Mark D. Roos
</TABLE>
II-4
<PAGE> 96
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BP America Inc.
We have audited the balance sheets of the North American Fibers Division of
Unifrax Corporation (the "Division") as of December 31, 1993, 1994 and 1995, and
the related statements of income, changes in parent company investment and cash
flows for the years then ended, and have issued our report thereon dated April
19, 1996 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Division's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Buffalo, New York
April 19, 1996
S-1
<PAGE> 97
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts..................... $ 490 $ 149 $ $ 1(a) $ 638
Allowance for returns........... 847 820 1,386(b) 281
Allowance for obsolescence...... 200 270 270(c) 200
----------- ----------- ----------- ----------- -----------
Total........................ $ 1,537 $ 1,239 $ 0 $ 1,657 $ 1,119
=========== =========== =========== =========== ===========
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful
accounts..................... $ 506 $ 145 $ 161(a) $ 490
Allowance for returns........... 665 2,036 1,854(b) 847
Allowance for obsolescence...... 268 107 175(c) 200
----------- ----------- ----------- ----------- -----------
Total........................ $ 1,439 $ 2,288 $ 0 $ 2,190 $ 1,537
=========== =========== =========== =========== ===========
Year ended December 31, 1993:
Deducted from asset accounts:
Allowance for doubtful
accounts..................... $ 371 $ 144 $ $ 9(a) $ 506
Allowance for returns........... 495 1,150 980(b) 665
Allowance for obsolescence...... 268 146 146(c) 268
----------- ----------- ----------- ----------- -----------
Total........................ $ 1,134 $ 1,440 $ 0 $ 1,135 $ 1,439
=========== =========== =========== =========== ===========
<FN>
- ---------------
(a) Uncollectable accounts written off, net of recoveries.
(b) Returns from customers during the year.
(c) Obsolete inventory disposals.
</TABLE>
S-2
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C> <C>
1.1* Form of Underwriting Agreement
2.1* Form of Assets Transfer Agreement between Unifrax Corporation and the
Registrant
3.1** Certificate of Incorporation of the Registrant
3.2** Amended and Restated By-laws of the Registrant (to become effective upon
consummation of the Offering)
4.1* Form of Certificate for the Common Stock
5.1* Opinion of Squire, Sanders & Dempsey as to the legality of the
securities being registered
10.1* Form of Bank Credit Agreement between the Registrant and the Lenders to
be named therein
10.2* Form of Senior Note Agreement between the Registrant and several
purchasers to be named therein
10.3** 1996 Stock Option Plan (to become effective prior to consummation of the
Offering)
10.4** Lease relating to Tonawanda plant
10.5** Lease relating to Amherst plant
10.6** Covenant Not to Compete between The British Petroleum Company p.l.c.,
its affiliates, and the Registrant and Societe Europeenne des Produits
Refractaires, and its affiliates (portions of this Exhibit have been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment)
10.7** Product Distribution Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this Exhibit have been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment)
10.8** Distributed Product License Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this Exhibit have been
omitted and filed separately with the Commission pursuant to a request
for confidential treatment)
10.9** License Agreement between the Registrant and Societe Europeenne des
Produits Refractaires (portions of this Exhibit have been omitted and
filed separately with the Commission pursuant to a request for
confidential treatment)
10.10** Trademark License and Consent Agreement between the Registrant and
Societe Europeenne des Produits Refractaires
10.11** Conversion Agreement between the Registrant and Societe Europeenne des
Produits Refractaires (portions of this Exhibit have been omitted and
filed separately with the Commission pursuant to a request for
confidential treatment)
10.12** XPE License Agreement between the Registrant and Societe Europeenne des
Produits Refractaires
21.1** Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Acknowledgment of Ernst & Young LLP
23.3** Consent of Mark D. Roos
23.4* Consent of Squire, Sanders & Dempsey (included in their opinion filed as
Exhibit 5.1 hereto)
24.1** Power of attorney
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data", and to the use of our reports dated April 19, 1996
with respect to the financial statements and schedule of the North American
Fibers Division of Unifrax Corporation and the balance sheet of Unifrax
Acquisition Inc., in Amendment No. 2 to the Registration Statement (Form S-1
No. 333-3892) and related Prospectus of Unifrax Acquisition Inc. dated June 3,
1996.
/s/ Ernst & Young LLP
Buffalo, New York
June 3, 1996
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
BP America Inc.
We are aware of the inclusion in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-3892) and related Prospectus of Unifrax Acquisition Inc.
dated June 3, 1996 of our report dated April 19, 1996 related to the unaudited
interim combined financial statements of The North American Fibers Division of
Unifrax Corporation, XPE Vertriebs GmbH and NAF Brasil Ltda. as of March 31,
1995 and 1996 and for the three-month periods then ended.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young LLP
Buffalo, New York
June 3, 1996
