<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-10611
PROSPECTUS
$100,000,000
[ UNIFRAX LOGO ]
UNIFRAX INVESTMENT CORP.
10 1/2% SENIOR NOTES DUE 2003
Unifrax Investment Corp. ("Investment Corp.") is offering (the "Offering")
$100,000,000 aggregate principal amount of its 10 1/2% Senior Notes due 2003
(the "Notes"). The Offering is part of the financing that will be used to
consummate the recapitalization of Unifrax Corporation (the "Recapitalization")
which will result in Unifrax Holding Co. ("Holding") owning 90% of the common
stock of Unifrax Corporation, an indirect wholly-owned subsidiary of The British
Petroleum Company plc ("BP"). An affiliate of BP will retain the remaining 10%
of the common stock of Unifrax Corporation. The Recapitalization will be
effected pursuant to the Recapitalization Agreement (as defined). Under the
terms of the Recapitalization Agreement, Investment Corp. will merge into
Unifrax Corporation upon completion of the Offering, with Unifrax Corporation
becoming the surviving corporation (the "Company") and becoming liable for the
Notes. The consummation of the Offering and the consummation of the
Recapitalization and the transactions contemplated thereby will be concurrent,
and each is conditioned upon the other. Prior to the merger, Investment Corp.
will be the issuer and will be obligated under the Notes, and Unifrax
Corporation will have no liability either under the Notes or in connection with
the Offering. Upon consummation of the merger of Investment Corp. and Unifrax
Corporation, Unifrax Corporation, as the surviving corporation, will be liable
under the Notes and in connection with the Offering to the same extent that
Investment Corp. was so liable prior to such merger. See "The Recapitalization."
Interest on the Notes will be payable semi-annually on each May 1 and
November 1, commencing May 1, 1997, at the rate of 10 1/2% per annum. The Notes
will be redeemable, in whole or in part, at the option of the Company on or
after November 1, 2000, at the redemption prices set forth herein plus accrued
interest to the date of redemption. In addition, on or prior to November 1,
1999, the Company may, at its option, redeem up to $30.0 million in aggregate
principal amount with the net cash proceeds of one or more Public Equity
Offerings (as defined), at the redemption price set forth herein plus accrued
interest to the date of redemption; provided, however, that after any such
redemption the aggregate principal amount of the Notes outstanding must equal at
least $70.0 million.
The Notes will be senior unsecured obligations of the Company, will rank
senior to all subordinated indebtedness of the Company and will rank pari passu
in right of payment with all other senior indebtedness of the Company, including
the indebtedness under the Credit Agreement (as defined). As of October 9, 1996,
after giving pro forma effect to the Recapitalization, the Company would have
had approximately $132.0 million of total indebtedness and $25.0 million of
secured indebtedness outstanding under the Credit Agreement (in each case
excluding unused commitments of $20.0 million under the Credit Agreement).
Upon a Change of Control (as defined), each holder will have the right to
require the Company to repurchase such holder's Notes at a price equal to 101%
of their principal amount plus accrued interest to the date of repurchase. There
can be no assurance that the Company will have the financial ability or will be
permitted by the Credit Agreement to repurchase the Notes. See "Risk
Factors--Potential Inability to Make a Required Change of Control Offer." In
addition, the Company will be obligated to offer to repurchase Notes at 100% of
their principal amount plus accrued interest to the date of repurchase in the
event of certain asset sales.
There is no existing market for the Notes, and there can be no assurance as
to the liquidity of any markets that may develop for the Notes, the ability of
the holders of the Notes to sell their Notes or the price at which such holders
would be able to sell their Notes. The Company does not intend to apply for
listing of the Notes on any securities exchange. See "Risk Factors--Absence of
Prior Market for Notes; Determination of Offering Price; Market Risk."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
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 ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
=====================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING INVESTMENT
PUBLIC(1) DISCOUNT(2) CORP.(3)
- -----------------------------------------------------------------------------------------------------
Per Note.......................................... 100% 2.75% 97.25%
- -----------------------------------------------------------------------------------------------------
Total............................................. $100,000,000 $2,750,000 $97,250,000
=====================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from October 30, 1996.
(2) Investment Corp. has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by Investment Corp., estimated at
$600,000.
------------------------
The Notes are offered, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters, and subject to various other conditions
including the Underwriters' right to reject orders in whole or in part. It is
expected that delivery of the Notes will be made on or about October 30, 1996.
BT SECURITIES CORPORATION NATIONSBANC CAPITAL MARKETS, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 25, 1996.
<PAGE> 2
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. Prior to February 29, 1996,
Unifrax Corporation ("Unifrax") was known as The Carborundum Company
("Carborundum") and included a number of divisions and subsidiaries engaged in
various manufacturing businesses. On February 29, 1996, all of the Carborundum
businesses except for the North American ceramic fibers division (the
"Division") were sold in the Saint-Gobain Sale (as defined). Concurrent with the
Saint-Gobain Sale, Carborundum was re-named Unifrax, and subsequent to the
Saint-Gobain Sale, Unifrax has consisted solely of the Division. As used herein,
unless the context otherwise requires, the "Company," prior to February 29,
1996, refers to the Division and, subsequently, refers to Unifrax and the
related sales corporations in Europe (XPE Vertriebs GmbH) and South America (NAF
Brasil Ltda.).
THE COMPANY
The Company 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. Developed by the Company in 1942,
ceramic fiber is a white, glassy material belonging to a class of materials
known as man-made vitreous fibers (a class which also includes fiberglass and
mineral wool). Ceramic fiber possesses several commercially attractive
performance properties including stability at very high temperatures, extremely
low heat transmission and retention, light weight compared to other
heat-resistant materials, chemical stability and corrosion resistance. These
properties make ceramic fiber a superior insulating material in high temperature
applications.
Ceramic fiber's most common application has been to line industrial
furnaces, where high temperatures demand its heat-resistant characteristics.
Historically, the industrial furnace-related market has represented the largest
percentage of the Company's sales. While maintaining its strong position in this
traditional market, the Company's strategy has been to apply its expertise to
rapidly-growing, high value-added niche markets. These niche markets, which
include automotive (products such as airbag inflation filters and catalytic
converter gaskets), power generation (products such as steam boiler insulation,
duct wrap and stack linings), and fire protection (products such as commercial
kitchen exhaust duct wrap and cable trays), now account for the majority of the
Company's net sales. For the year ended December 31, 1995, approximately 44% of
the Company's net sales were derived from furnace-related markets, 31% from
automotive-related markets, and 25% from other markets. During each of the four
years ended December 31, 1995, sales of new products and applications (those
commercialized within the previous five years) represented over 20% of the
Company's net sales.
During the four-year period ended December 31, 1995, the Company's net
sales and EBITDA increased at compound annual growth rates of 12% and 28%,
respectively. During this period, the growth in EBITDA exceeded the growth in
sales due to a shift in the sales mix to higher margin products, improvements in
manufacturing efficiency, increased capacity utilization rates, and continued
control of marketing and administrative costs.
COMPETITIVE STRENGTHS
The Company has the following strengths which provide competitive
advantages in the North American ceramic fiber market.
Broad Product Line. The Company manufactures one of the broadest lines of
ceramic fiber products sold in the North American market. 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 high value-added
products. These products are used in thermal management applications where heat
resistance, light weight and low heat transmission and retention are required.
3
<PAGE> 3
Product Innovation. The Company has demonstrated the ability to introduce
successful, high value-added products and applications for both traditional and
niche markets. The Company's product leadership can be attributed to its close
relationship with its customers and its extensive research and development
efforts. These new products have been sold in the furnace-related markets as
well as in high-growth niche markets for both existing and new applications.
Examples of successful new product introductions include porosity-controlled
paper used as a filter in automotive airbag inflators, expandable paper (known
as XPE(TM)) used as a gasket in catalytic converters, easy-to-install Anchor-Loc
2(R) furnace modules and Insulfrax(R) furnace blanket which uses a new fiber
chemistry.
Strong Customer Relationships. Long-term customer relationships with
distributors as well as end-use customers have been an important factor in the
Company's success. Of the Company's top 10 distributors in 1995, the majority
have represented the Company for over 10 years and a substantial number have
been distributors for the Company for more than 20 years. A significant number
of end-use customers have also been purchasing products from the Company for
extended periods of time. For example, in the furnace-related market, most of
the Company's current customers have been purchasing products for at least 5
years, many for over 10 years and several for over 20 years. In many situations,
especially in the case of the automotive market, customers recognize that they
must depend on a particular supplier for an extended period and consequently
exercise considerable care in the supplier selection process. The Company's
products are currently specified in numerous automotive applications, such as
airbag inflators, which require "zero defect" components. By successfully
meeting such stringent requirements, the Company is recognized as a reliable
supplier, and has developed solid relationships with its customers.
Recognized Quality. The Company's products have received repeated
recognition for high quality and excellent capability, including eight
consecutive Chrysler Pentastars, an award which Chrysler bestows on only the top
2% of its suppliers. The Company also expects its Tonawanda facility to receive
certification under QS-9000, the quality standard for GM, Ford and Chrysler
suppliers, early in 1997, although there can be no assurance that it will do so.
Low Cost Manufacturing. The Company's manufacturing strategy has
consistently emphasized investment in capital equipment and process engineering
improvements designed to increase efficiency and lower manufacturing costs. The
Company believes it has the industry's most advanced fiber manufacturing
technology and has obtained the scale of operations necessary to protect its
position as a low cost manufacturer in the North American market.
BUSINESS STRATEGY
The Company's business objective is to increase earnings by expanding its
leadership position in niche markets while maintaining its market position in
furnace-related markets. To meet this objective, the Company will continue to
focus research and development efforts on the creation of new niche products and
applications, and will add needed capacity at its New Carlisle, Indiana facility
to maintain its position as a low cost producer of bulk fiber and blanket. In
addition, the Company has developed the industry model for product stewardship,
and will continue to lead the industry's effort on such programs.
New Products and Markets. By combining its market knowledge and strong
customer relationships with its technical expertise, the Company has
successfully introduced a wide variety of new products. During each of the past
four years, new products and applications (those commercialized within the
previous five years) have accounted for over 20% of the Company's net sales.
These new products have been sold for use in existing and new applications to
both the furnace-related and high-growth niche markets, and many are designed
and qualified to meet specialized customer requirements. The Company's
cumulative research and development expenses were $9.4 million for the four
fiscal years ended December 31, 1995 and the Company expects such expenses to be
$2.5 million in 1996. The Company plans to continue to dedicate substantial
resources to its new product development programs and expects new products to
continue to drive the Company's long-term growth.
4
<PAGE> 4
Continued Cost Reduction and Productivity Enhancements. The Company's
current management team has a successful track record of achieving cost
reductions and will continue these efforts. By concentrating its furnacing
operations primarily at one location, the Company believes that it has developed
the industry's most advanced fiber manufacturing technology and has obtained the
scale of operations necessary to protect its position as a low cost manufacturer
in the North American market. The Company spent $12.8 million in total capital
expenditures for the four fiscal years ended December 31, 1995. The Company
anticipates spending $9.7 million in 1996, including construction in progress
under a $13.7 million furnace expansion program to be completed in 1997. This
furnace expansion is designed to provide needed capacity and flexibility and to
further reduce manufacturing costs.
Leadership in Product Health and Safety. 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. The Company has been the
industry's leader with respect to management of potential health and product
safety issues associated with ceramic fiber. Specifically, the Company has
established systems to identify and reduce potential adverse health effects, if
any, associated with its products. The Company works actively with its employees
and customers to reduce workplace exposure through improved product handling
procedures. In addition, the Company has been active in developing new types of
industrial fibers with physical and chemical properties that may help to reduce
the potential risks associated with ceramic fiber. See "Business -- Product and
Health Safety Issues."
RISK FACTORS
An investment in the Notes involves certain risks associated with the
Company's business and the industry in which it competes, including (i) the
Company's dependence on ceramic fiber and the health and safety issues related
thereto, (ii) the Company's substantial leverage, (iii) restrictions imposed by
the terms of the Company's indebtedness, (iv) the Company's potential inability
to make a Change of Control Offer as required by the Notes, (v) the impact of
environmental regulations on the company's operations and property and
governmental regulations relating thereto, (vi) the control of the Company by a
majority stockholder, (vii) the dependence by the Company on certain key
executives, (viii) the Company's sensitivity to general economic conditions and
the highly competitive nature of the ceramic fiber industry, (ix) the Company's
dependence on a certain product line and on a raw material supplier, and (x)
restrictions on the Company's ability to expand internationally due to a
covenant not to compete. For a more detailed discussion of these and certain
other risks, see "Risk Factors."
SAINT-GOBAIN SALE
On February 29, 1996, BP completed the sale of substantially all of the
assets of Carborundum, other than the Division, 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"), the Company entered into a series of
agreements with SEPR which govern their market and business relationships.
These agreements affect how the Company conducts business and currently
restrict the Company's ability to expand its sales outside of the North
American market for a period of 5 years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Relationships and Related Transactions -- Relationship with SEPR."
THE INVESTORS
Holding was formed in June 1996 by Kirtland Capital Partners II L.P.
(solely or together with its predecessors and affiliates "Kirtland") to effect
the Recapitalization. Kirtland is a private investment firm based in Cleveland,
Ohio, which has been buying and building manufacturing and distribution
businesses since 1978. Kirtland has made investments in middle market businesses
that manufacture and distribute wire and wire harnesses, PVC pipe and plumbing
products and decorative laminates. In addition, Kirtland previously made a
related industry investment in North American Refractories Co., a leading
manufacturer and
5
<PAGE> 5
distributor of refractory products. See "Certain Relationships and Related
Transactions -- Relationship with Kirtland and Holding."
THE RECAPITALIZATION
The Offering is part of the Recapitalization which is being effected
pursuant to the Recapitalization Agreement dated as of June 9, 1996 (the
"Recapitalization Agreement"), among Unifrax, Holding, Investment Corp. and BP
and certain of its subsidiaries, including BP America, Inc. ("BP America").
Certain subsidiaries of BP own all of the outstanding stock of Unifrax. The
principal components of the Recapitalization, which will be consummated
concurrently with the Offering (the "Closing"), include the following:
- Kirtland and management of the Company will invest $27.0 million in
Holding (the "Equity Investment"). Holding owns all of the outstanding
capital stock of Investment Corp., the registrant, which was organized to
effect the Recapitalization.
- Investment Corp. will merge into Unifrax with Unifrax becoming the
surviving corporation and becoming liable for the Notes.
- The proceeds of the Offering, together with estimated initial borrowings
by the Company of $25.0 million under the Credit Agreement, $7.0 million
under the subordinated promissory note to be issued by the Company to a
subsidiary of BP (the "BP Note") and the proceeds of the Equity
Investment, will be used to: (i) pay affiliates of BP $144.0 million in
connection with the redemption of certain stock of Unifrax held by
affiliates of BP; (ii) pay affiliates of BP $10.0 million as
consideration for the Non-compete Agreement (the "Non-compete Agreement")
between BP and Holding; and (iii) pay an estimated $5.0 million of fees
and expenses relating to the Recapitalization, the Offering, the Credit
Agreement and the Equity Investment. See "The Recapitalization."
Upon completion of the Recapitalization, Holding will own 90% of the common
stock of the Company and an affiliate of BP will own 10% of the common stock of
the Company. See "Risk Factors -- Controlling Stockholder," "Principal
Stockholders" and "Certain Relationships and Related Transactions."
Pursuant to the Recapitalization Agreement, BP America will indemnify
Holding and the Company, subject to certain limitations, against liabilities
arising from operations of the Company which were discontinued prior to the
Closing, liabilities for wrongful death or personal injury allegedly caused by
exposure, prior to the Closing, to refractory ceramic fiber products
manufactured by the Company, and certain environmental matters. See "Certain
Relationships and Related Transactions -- Relationship with BP and its
Subsidiaries -- Recapitalization Agreement."
LOCATION OF EXECUTIVE OFFICES
The Company's executive offices are located at 2351 Whirlpool Street,
Niagara Falls, New York 14305. The Company's telephone number is (716) 278-3800.
6
<PAGE> 6
THE OFFERING
Issuer..................... Investment Corp. will issue the Notes and will
merge into Unifrax Corporation in connection with
the Recapitalization. After the merger, Unifrax
Corporation will be the surviving corporation and
will be liable for the Notes.
Securities Offered......... $100,000,000 aggregate principal amount of 10 1/2%
Senior Notes due 2003.
Maturity Date.............. November 1, 2003.
Payment Dates.............. Interest on the Notes will accrue from the date of
issuance and will be payable semiannually on each
May 1 and November 1, commencing May 1, 1997.
Ranking.................... The Notes will be senior unsecured obligations of
the Company (as defined), will rank senior to all
subordinated indebtedness of the Company and will
rank pari passu in right of payment with all other
senior indebtedness of the Company, including the
indebtedness under the Credit Agreement (as
defined). Since the indebtedness under the Credit
Agreement is secured by the assets of the company,
there can be no assurance that the Notes will be
paid in full. See "Description of Notes."
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of the Company on or after November
1, 2000, at the redemption prices set forth herein
plus accrued interest to the date of redemption. In
addition, on or prior to November 1, 1999, the
Company may, at its option, redeem up to $30.0
million in aggregate principal amount with the net
cash proceeds of one or more Public Equity
Offerings, at the redemption price set forth herein
plus accrued interest to the date of redemption;
provided, however, that after any such redemption
the aggregate principal amount of the Notes
outstanding must equal at least $70.0 million. See
"Description of Notes -- Redemption -- Optional
Redemption."
Change of Control.......... If a Change of Control occurs, the Company will be
required to offer to repurchase all outstanding
Notes at a price equal to 101% of their principal
amount plus accrued interest to the date of
repurchase. The Credit Agreement will restrict the
repurchase by the Company of Notes in these and
other circumstances. If the Company fails to
repurchase the Notes when so obligated, that
failure will constitute a default under the
Indenture (as defined). The occurrence of a default
under the Indenture will also cause a default under
the Credit Agreement. See "Description of
Notes -- Change of Control."
Offers to Purchase......... In the event of certain asset sales, the Company
will be required to offer to repurchase the Notes
at a price equal to 100% of their principal amount
plus accrued interest to the date of repurchase.
See "Description of Notes -- Certain
Covenants -- Limitation on Asset Sales."
Certain Covenants.......... The Indenture governing the Notes (the "Indenture")
will impose certain limitations on the ability of
the Company and its subsidiaries to, among other
things, incur additional indebtedness, incur liens,
pay dividends or make certain other restricted
payments, consummate certain asset sales, enter
into certain transactions with affiliates, engage
in certain lines of business, merge or consolidate
with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or
substantially all of the assets of the Company,
impose restrictions on the ability of a subsidiary
to pay certain dividends or make certain payments
to the Company and sell or issue preferred stock of
subsidiaries to third parties. See "Description of
Notes -- Certain Covenants."
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<PAGE> 7
USE OF PROCEEDS
Aggregate consideration for the Recapitalization, the Non-compete Agreement
and related fees and expenses will be funded with (i) a $25.0 million term loan
under the Credit Agreement, (ii) the $100.0 million proceeds of the Offering,
(iii) the $7.0 million BP Note, and (iv) the $27.0 million Equity Investment.
The sources and uses of funds to consummate the Recapitalization and
related transactions are set forth in the following table:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Credit Agreement(a)................................................. $ 25.0
The Notes........................................................... 100.0
The BP Note......................................................... 7.0
Equity Investment................................................... 27.0
------
Total Sources............................................. $ 159.0
======
USES OF FUNDS:
Payments to existing stockholder(b)................................. $ 144.0
Non-compete Agreement(c)............................................ 10.0
Fees and expenses................................................... 5.0
------
Total Uses................................................ $ 159.0
======
</TABLE>
- ---------------
(a) The Credit Agreement will consist of a $25.0 million term loan and a
revolving credit facility of $20.0 million. The Company anticipates that no
amounts will be borrowed under the revolving credit facility to consummate
the Recapitalization. See "Description of Credit Agreement and Other
Indebtedness."
(b) The payments to existing stockholder are made in consideration of the
redemption of shares of Unifrax and the sale of shares of Unifrax, and the
amount of the payments is subject to decrease based on changes in the net
working capital of the Company at the Closing. See "The Recapitalization."
(c) See "Certain Relationships and Related Transactions -- Relationship with BP
and its Subsidiaries -- Non-compete Agreement" for a description of the
Non-compete Agreement to be provided by BP to Holding.
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<PAGE> 8
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary financial data of the Company for
the five years ended December 31, 1995 and for the six-month periods ended as of
June 30, 1995 and June 30, 1996, and certain pro forma data for the year ended
December 31, 1995 and the six-month period ended June 30, 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 six-month
periods ended June 30, 1995 and June 30, 1996, have been derived from, and
should be read in conjunction with, the unaudited financial statements and the
notes thereto 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 six-month period ended June
30, 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 six-month
period ended June 30, 1996, assume that the Recapitalization and the
Saint-Gobain Sale occurred on January 1, 1995. The pro forma balance sheet data
as of June 30, 1996, gives effect to the Recapitalization as if it had occurred
on June 30, 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 Recapitalization 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.
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<PAGE> 9
The following table should be read in conjunction with "Selected Historical
Financial Data," "Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, --------------------------------------
------------------------------------------------------------- PRO FORMA
PRO FORMA COMBINED(A) CONSOLIDATED
1991 1992 1993 1994 1995 1995 1995 1996 1996
------- ------- ------- ------- ------- --------- --------- ----------- ------------
(DOLLARS IN THOUSANDS)
<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 $83,638 $ 43,036 $45,192 $ 45,121
Cost of goods sold.... 27,620 33,099 34,153 37,590 40,630 40,594 20,803 22,579 22,573
------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit.......... 25,920 31,466 33,539 38,656 43,434 43,044 22,233 22,613 22,548
Selling and
distribution......... 9,462 10,370 9,932 10,688 11,579 12,066 6,064 6,418 6,499
Administration........ 5,701 5,212 5,415 6,279 6,189 8,869 3,218 3,429 4,431
Allocated corporate
charges (b).......... 2,900 2,600 2,800 2,300 2,700 -- 1,350 356 --
Research and
development.......... 2,106 2,455 2,247 2,272 2,450 2,450 1,372 1,121 1,121
Restructuring
charges.............. -- 480 155 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- --------
Operating income...... 5,751 10,349 12,990 17,117 20,516 19,659 10,229 11,289 10,497
Interest expense...... -- -- -- -- -- (13,003) -- -- (6,455)
Other income
(expense)............ 541 555 549 591 932 542 392 43 (46)
------- ------- ------- ------- ------- ------- ------- ------- --------
Income before income
taxes and accounting
change............... 6,292 10,904 13,539 17,708 21,448 7,198 10,621 11,332 3,996
Provision for income
taxes................ 2,511 4,356 5,611 7,256 8,743 2,900 4,316 4,697 1,688
------- ------- ------- ------- ------- ------- ------- ------- --------
Income before
accounting change.... 3,781 6,548 7,928 10,452 12,705 4,298 6,305 6,635 2,308
Effect of accounting
change............... -- -- (2,658)(c) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- --------
Net Income............ $ 3,781 $ 6,548 $ 5,270 $10,452 $12,705 $ 4,298 $ 6,305 $ 6,635 $ 2,308
======= ======= ======= ======= ======= ======= ======= ======= ========
OTHER DATA:
EBITDA (d)............ $ 9,515 $14,501 $17,510 $21,928 $25,749 $25,282 $ 12,715 $13,287 $ 12,796
Depreciation and
amortization......... 3,223 3,597 3,971 4,220 4,301 5,081 2,094 1,955 2,345
Cash flows from
operating
activities(g)........ NA 9,347 10,172 11,324 18,925 8,040 8,141
Cash flows from
investing
activities(g)........ NA (3,571) (2,950) (2,578) (3,593) (1,169) (3,049)
Cash flows from
financing
activities(g)........ NA (6,049) (7,134) (8,743) (15,393) (6,858) (5,129)
Capital
expenditures......... 2,751 3,669 3,032 2,670 3,404 3,404 1,193 2,795 2,795
Ratio of EBITDA to
interest expense
(d).................. 1.94x 1.98x
Ratio of earnings to
fixed charges (e).... 75.90x 113.41x 124.08x 166.50x 165.98x 1.52x 169.59x 172.70x 1.58x
BALANCE SHEET DATA
(AT PERIOD END):
Working capital....... $11,103 $11,597 $13,583 $16,688 $14,763 $ 17,151 $15,362 $ 16,169
Total assets.......... 53,453 54,327 55,105 56,897 54,239 56,668 57,903 83,048
Long-term debt........ -- -- -- -- -- -- -- 132,000
Total liabilities..... 15,414 15,888 18,634 18,943 18,815 19,136 20,788 146,591
Parent company
investment/
Stockholders' equity
(deficit)(f)......... 38,039 38,439 36,471 37,954 35,424 37,532 37,115 (63,543)
</TABLE>
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(a) Represents the combined data of Unifrax and the affiliated overseas sales
corporations created following the Saint-Gobain Sale.
(b) Certain administrative services and research and development activities were
provided to all businesses of Carborundum including the Division 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 Carborundum. 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 Division been operating as a stand-alone
entity.
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<PAGE> 10
(c) Represents the cumulative effect of a change in accounting principle made in
1993 related to the accounting for post-retirement benefits other than
pensions.
(d) "EBITDA" means earnings from operations before interest expense, taxes,
depreciation, amortization, and cumulative effect of change in accounting
principle. EBITDA is included because management believes that it is an
indicator used by investors to gauge a company's ability to service its
interest and principal 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, investing and financing activities, or
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles and should not be construed as an
indication of the Company's operating performance or as a measure of
liquidity. EBITDA, as presented herein, may be calculated differently by
other companies and, as such, EBITDA amounts presented herein may not be
comparable to other similarly titled measures of other companies.
(e) Earnings used in computing the ratio of earnings to fixed charges consist of
income from continuing operations before income taxes and cumulative effect
of a change in accounting principle plus fixed charges. Fixed charges
consist of interest expense, amortization of financing costs and imputed
interest on lease obligations.
(f) The Division (prior to the Closing) had no separately identifiable equity
other than an amount equal to its net assets captioned as "parent company
investment." In connection with the Recapitalization, this investment will
be eliminated and replaced by stockholders' equity comprised of the
Company's issued common stock at par value and a residual amount of
additional paid-in capital.
(g) Information for 1991 is not available.
11
<PAGE> 11
RISK FACTORS
Prospective purchasers of the Notes 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
Possible Health Concerns Related to Ceramic Fibers. 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 (the "EPA"), have categorized ceramic fiber as
"probably carcinogenic in humans." To date, studies of workers with occupational
exposure to airborne ceramic fiber have found no clinically significant
relationship between prior or current exposure to ceramic fiber and disease in
humans; however, 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
substantial 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.
Ceramic Fibers Litigation. 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 the lawsuits brought against it have been
without merit and the litigation currently pending, or to its knowledge
threatened, will not have a material adverse effect on the financial condition
or results of operations of the Company. The Company's belief is based on the
fact that, although animal studies have indicated that ceramic fiber inhaled by
test animals can cause disease, there have been no human diseases proven to be
caused by exposure to refractory ceramic fiber. The Company's belief is also
based on the indemnification agreements with BP, as set forth below. As part of
the Recapitalization, BP has agreed to indemnify the Company and Holding against
certain liabilities for wrongful death or personal injury arising from exposure
to ceramic fiber prior to the Recapitalization. The Company is aware of no third
party evaluations of the Company's liability for ceramic fiber litigation.
Additional litigation and administrative proceedings could be brought against
the Company and its distributors and customers, and the Company could be exposed
to significant defense costs as well as potential adverse judgments with respect
to exposure claims for periods after the Recapitalization. However, BP's
indemnity will not extend to any liabilities for wrongful death or personal
injury caused by exposures which occur after the Recapitalization. If claims
arise from exposure in part before and in part after the Recapitalization, then
BP's indemnity will only apply to the portion of the injury arising from the
exposure prior to the Recapitalization. BP shall not indemnify the Company with
respect to any liabilities for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product Stewardship Program
consistent with that maintained by the Company prior to the Recapitalization, as
modified in a commercially reasonable manner in accordance with changing
regulatory, scientific and technical factors. In addition, there can be no
assurance that the Company will be able to obtain adequate product liability
insurance coverage for any future exposures which are not covered by BP's
indemnity. BP's failure to indemnify the Company, or the imposition of claims
against the Company which are not covered by BP's indemnity, could have a
material adverse effect on the Company. See "Certain Relationships and Related
Transactions -- Relationship with BP and Its Subsidiaries."
Cost of Compliance with Future Government Regulations. To date, studies of
occupational exposure have found no clinically significant relationship between
prior or current exposure to ceramic fiber and disease in humans; however, there
can be no assurance that a link will not be found in the future. The costs which
may be 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. The EPA has proposed to make
refractory ceramic fibers subject to a "Significant New Use Rule" ("SNUR"); a
final rule has never been promulgated, but the
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<PAGE> 12
May 13, 1996 Regulatory Agenda predicts that U.S. EPA will take final action on
the proposed rule in December of 1996. This date for final action has been
postponed from year to year for several years. Under a SNUR, a manufacturer must
notify the EPA if it plans a significant new use of one of its chemicals or
compounds, and the EPA may require testing to ensure that the proposed new use
is safe. Since the Company relies heavily on the development of new uses for
ceramic fibers and the introduction of new products for its sales growth, this
increased governmental regulation could materially impact operations of the
Company.
Although no specific U.S. government regulations currently exist for the
allowable concentrations of ceramic fiber in breathable air, the U.S.
Occupational Safety and Health Administration ("OSHA"), the National Institute
of Occupational Safety and Health ("NIOSH"), and Health Canada ("HC") have been
reviewing the potential health implications of ceramic fiber exposure for
several years. Currently, the Company voluntarily complies with an industry
recommended exposure guideline of 1.0 fiber per cubic centimeter of air as
determined by the Refractory Ceramic Fiber Coalition ("RCFC"). The American
Conference of Governmental Industrial Hygienists ("ACGIH"), an independent
association of prominent scientists, is currently considering a recommended
exposure guideline for ceramic fibers between 0.1 and 0.5 fibers per cubic
centimeter of air. Such ACGIH recommendations may be adopted by government
regulators. Although none are presently foreseen domestically, if the U.S.
adopts legislative or regulatory standards severely restricting the use of
ceramic fiber or severely limiting fiber exposure, such regulations could have a
material adverse effect on the Company. There is no guarantee that the Company
or its customers could economically reduce exposure levels. The higher costs
associated with meeting such standards could make the Company's products less
competitive than alternative products. See "The Recapitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business -- Product and Health Safety Issues."
SUBSTANTIAL LEVERAGE
After consummation of the Recapitalization, the Company will have
significant indebtedness. At June 30, 1996, on a pro forma basis after giving
effect to the Recapitalization and the financing thereof, the Company would have
had total indebtedness of approximately $132.0 million, and a stockholders'
deficit of $63.5 million. In addition, the Company expects to borrow additional
amounts under the Credit Agreement or otherwise for working capital and other
corporate purposes. Under the Credit Agreement, the Company will have a $20
million revolving credit facility, which will be undrawn at the Closing. There
are no currently existing arrangements to borrow additional funds beyond the
funds available under the Credit Agreement. See "The Recapitalization,"
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Description of Credit Agreement and Other
Indebtedness" and the Financial Statements and notes thereto included elsewhere
in this Prospectus.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes including, but not limited to, the
following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate or other purposes may be limited, (ii) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of the
principal of, and interest on, its indebtedness, (iii) the agreements governing
the Company's long-term indebtedness will contain certain restrictive financial
and operating covenants that could limit the Company's ability to compete and
expand, and (iv) the Company's vulnerability to economic downturns may be
increased, and its ability to withstand competitive pressures or respond to
changing business and economic conditions may be reduced. The ability of the
Company to pay interest and principal on the Notes to satisfy its other debt
obligations and to make planned expenditures will be dependent on the future
operating performance of the Company, which could be affected by changes in
economic conditions and other factors, including factors beyond the control of
the Company. A failure to comply with the covenants and other provisions of its
debt instruments could result in events of default under such instruments, which
could permit acceleration of the debt under such instruments and in some cases
acceleration of debt under other instruments that contain cross-default or
cross-acceleration provisions. The Company believes that cash flow from
operations will be sufficient to cover its debt service requirements and other
requirements. However, if the Company is at any time unable to generate
sufficient cash flow from operations to service its indebtedness,
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<PAGE> 13
it may be required to seek to renegotiate the terms of the instruments relating
to that indebtedness or seek to refinance all or a portion of that indebtedness
or to obtain additional financing. There can be no assurance that the Company
will be able to successfully renegotiate such terms or that any such refinancing
would be possible or that any additional financing could be obtained, or
obtained on terms that are favorable or acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Credit Agreement and Other Indebtedness."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture will restrict, among other things, the Company's ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. The Indenture will also impose
restrictions on the ability of subsidiaries to pay dividends or make certain
payments to the Company. The Credit Agreement will contain other restrictive
covenants, including financial covenants relating to the net worth, capital
expenditures and interest coverage and debt coverage ratios of the Company, and
covenants relating to employee benefits, environmental laws, certain contracts
for the purchase of materials or services, and the amendment of certain
documents (including the Indenture and the Notes) that are not contained in the
Indenture. In addition, certain covenants that are contained in both the
Indenture and the Credit Agreement, including limitations on indebtedness,
liens, mergers and consolidations, the purchase and sale of assets, the payment
of dividends and other payments in respect to stock, are more restrictive in the
Credit Agreement. A breach of any of these covenants could result in a default
under the Credit Agreement and/or the Indenture. Upon the occurrence of an event
of default under the Credit Agreement, the lenders thereunder could elect to
declare all amounts outstanding under the Credit Agreement, together with
accrued interest, to be immediately due and payable. If the Company were unable
to repay those amounts, such lenders could proceed against the collateral
granted to them to secure that indebtedness. If the lenders under the Credit
Agreement accelerate the payment of such indebtedness, there can be no assurance
that the assets of the Company would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the Notes.
Substantially all of the Company's assets will be pledged as security for
indebtedness incurred under the Credit Agreement. See "Description of
Notes -- Certain Covenants" and "Description of Credit Agreement and Other
Indebtedness."
POTENTIAL INABILITY TO MAKE A REQUIRED CHANGE OF CONTROL OFFER
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all of the Notes that might be delivered by Holders seeking
to accept the Change of Control offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third-party financing to the extent that it does not
have available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing. In addition,
the Credit Agreement will restrict the repurchase of Notes by the Company in
connection with a Change of Control Offer and restricts the ability of the
Company to incur indebtedness from third parties, which restriction may only be
waived at the discretion of the lenders under the Credit Agreement.
If the Company fails to repurchase the Notes when so obligated, that
failure will constitute a default under the Indenture. The occurrence of a
default under the Indenture will also cause a default under the Credit
Agreement, and since the indebtedness under the Credit Agreement will be secured
by the assets of the Company, there can be no assurance that the Notes will be
paid in full.
PROTECTION LIMITS OF THE INDENTURE
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant requiring the Company to make a Change of Control Offer. The
restrictions in the Indenture may make it more difficult or discourage a
takeover of the Company, whether or not the management of the Company is in
favor or opposed. Consequently, consummation of any such transaction in certain
circumstances may require the
14
<PAGE> 14
repurchase of the Notes, and there can be no assurance that the Company or the
acquiring party will have sufficient financial resources to effect such
repurchase or whether the Company will be permitted to do so by the lenders
under the Credit Agreement. See "-- Potential Inability to Make a Required
Change of Control Offer." Although these restrictions cover arrangements that
have traditionally been used to effect highly leveraged transactions, the
Indenture may not afford the Holders of Notes protection in all circumstances
from the adverse aspects of a highly leveraged transaction, reorganization,
restructuring, or similar transaction including risk of nonpayment of principal
and interest.
Furthermore, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain limited purposes. See "Description
of Notes -- Modification of the Indenture."
IMPACT OF ENVIRONMENTAL REGULATION; GOVERNMENTAL REGULATION
Like similar companies, the Company's operations and properties are subject
to a wide variety of foreign, federal, state and local laws and regulations,
including those governing the use, storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials, substances and
wastes, the remediation of contamination in the environment, and the health and
safety of employees and other individuals. As such, the nature of the Company's
operations exposes it to the risk of claims with respect to environmental
protection and health and safety matters, and there can be no assurance that
material costs or liabilities will not be incurred in connection with such
claims. The Company may incur liability as a potentially responsible party
("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA" or "Superfund"), or comparable state
law in connection with off-site disposal activities at three sites. Carborundum
has entered into a Consent Decree with the New York State Department of
Environmental Conservation to remediate contamination at the Company's facility
located in Sanborn, New York. However, pursuant to the Recapitalization
Agreement, BP has agreed to indemnify the Company as to these and other
environmental matters. See "Certain Relationships and Related Transactions --
Relationship with BP and Its Subsidiaries -- Recapitalization Agreement --
Environmental Indemnity." Based upon its experience to date, the Company
believes that the future cost of compliance with existing environmental
protection and health and safety laws and regulations, and liability for known
claims of this type, will not have a material adverse effect on the Company's
business or financial position. However, future events, such as changes in
existing laws and regulations or their interpretation, and more rigorous
enforcement policies of regulatory agencies, may give rise to additional
expenditures or liabilities that could be material to the Company's business or
financial position. See "Business -- Environmental Matters."
CONTROLLING STOCKHOLDER
Upon consummation of the Recapitalization, Holding will own 90% of the
outstanding common stock of the Company. Kirtland owns a majority of the
outstanding common stock of Holding. By virtue of such stock ownership, Kirtland
will have the power to control all matters submitted to stockholders of the
Company and to elect all directors of the Company and its subsidiaries. The
interests of Kirtland as equity holder may differ from the interests of holders
of the Notes. See "Principal Stockholders" and "Certain Relationships and
Related Transactions."
DEPENDENCE ON KEY EXECUTIVES
The Company's performance to date has depended largely on William P. Kelly,
the Company's President and Chief Executive Officer, and certain other executive
officers of the Company. The loss of the services of Mr. Kelly or such other
persons could have a material adverse effect on the business and operations of
the Company and there can be no assurance that the Company would be able to find
replacements with equivalent skills. The Company has no written employment
agreement with, or "key man" life insurance on, its executive officers. See
"Management."
15
<PAGE> 15
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.
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 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 "Certain Relationships and Related Transactions --
Relationship with SEPR" and "Business -- Competition."
DEPENDENCE ON PRODUCT LINE
The adoption of automotive airbags in the U.S. over the past five years has
resulted in rapid growth in the Company's sales of porosity-controlled paper,
which is used in airbag inflators. Today most airbag inflation systems depend on
sodium azide technology. The Company believes that sodium azide technology may
be gradually displaced in new car designs by one or more alternative
technologies which may or may not use the Company's porosity-controlled paper.
As new car models are designed, alternative technologies existing or being
developed may replace the Company's ceramic based fiber paper, leaving the
Company with a smaller potential market for its products. During each of the two
years ended December 31, 1994 and December 31, 1995, the Company's sales of
porosity-controlled paper represented between 10% and 15% of the Company's total
net sales. A substantial decrease in sales of porosity-controlled paper, if it
were to occur, could have a material adverse effect on the Company's financial
condition and results of operations. See "Business -- Markets."
DEPENDENCE ON RAW MATERIAL SUPPLIER
Vermiculite is a mineral which is an important raw material in the
manufacture of the XPE(TM) product line used in automotive catalytic converters.
The Company currently purchases approximately one-half of its requirements of
vermiculite from one supplier in China and the other half from a U.S. supplier.
Because vermiculite from the Chinese source has superior performance qualities,
the Company believes that over the next two to three years, both it and its
competitors will become increasingly reliant on the Chinese source. Although the
Company is attempting to identify additional sources, at the present time, no
additional source of vermiculite with comparable performance qualities has been
located, and if such a source is located in the future, there can be no
assurance that supplies can be obtained from such source on the same terms and
conditions as are obtained from the current supplier. During the year ended
December 31, 1995, the Company's sales of XPE(TM) represented approximately 10%
of the Company's net sales. Any significant interruption in the supply of
vermiculite for an extended period of time could have a material adverse effect
on the financial condition and results of operations of the Company. See
"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 affect how the Company
conducts business outside the North American 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
(other than XPE(TM) sales) outside the North American market. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Relationships and Related Transactions -- Relationship with SEPR."
16
<PAGE> 16
ABSENCE OF PRIOR MARKET FOR NOTES; DETERMINATION OF OFFERING PRICE; MARKET RISK
The Company does not intend to apply for a listing of the Notes on a
securities exchange. There is currently no established market for the Notes and
there can be no assurance as to the liquidity of markets that may develop for
the Notes. If such markets were to exist, the Notes could trade at prices that
may be lower than the initial market values thereof, depending on many factors,
including prevailing interest rates, the markets for similar securities, the
financial performance of the Company and other factors.
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading market independent of
the financial performance of, and prospects for, the Company.
FRAUDULENT CONVEYANCE
The incurrence by the Company of indebtedness such as the Notes may be
subject to review under relevant state and federal fraudulent conveyance laws if
a bankruptcy case or lawsuit is commenced by or on behalf of unpaid creditors of
the Company. Under these laws, if a court were to find that, after giving effect
to the sale of the Notes and the application of the net proceeds therefrom,
either (a) the Company incurred such indebtedness with the intent of hindering,
delaying or defrauding creditors or (b) the Company received less than
reasonably equivalent value or consideration for incurring such indebtedness and
(i) was insolvent or were rendered insolvent by reason of such transactions,
(ii) was engaged in a business or transaction for which the assets remaining
with the Company constituted reasonably small capital or (iii) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court may subordinate such indebtedness to presently
existing and future indebtedness of the Company, avoid the issuance of such
indebtedness and direct the repayment of any amounts paid thereunder to the
Company's creditors, or take other action detrimental to the holders of such
indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and matured.
There can be no assurance as to what standard a court would apply in order
to determine solvency. To the extent that proceeds from the sale of the Notes
were used to finance the Recapitalization, a court may find that the Company did
not receive fair consideration or reasonably equivalent value for the incurrence
of the indebtedness represented thereby. In addition, if a court were to find
that any of the components of the Recapitalization constituted a fraudulent
transfer, to the extent that proceeds from the sale of the Notes were used to
finance the Recapitalization, a court may find that the Company did not receive
fair consideration or reasonably equivalent value for the incurrence of the
indebtedness represented by the Notes.
The Company believes that it received equivalent value at the time the
indebtedness under the Notes was incurred. In addition, the Company does not
believe that, after giving effect to the Recapitalization, it (i) was or will be
insolvent or rendered insolvent, (ii) was or will be engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, nor did any of such entities intend to incur, or believe that they will
or would incur, debts beyond its ability to pay such debts as they mature. These
beliefs are based on the Company's operating history, analysis of internal cash
flow projections and estimated values of assets and liabilities of the Company
at the time of the Offering and after giving pro forma effect to the
Recapitalization. There can be no assurance, however, that a court passing on
these issues would make the same determination.
LACK OF INDEPENDENT OPERATING HISTORY
Holding, which was formed in June 1996 to effect the Recapitalization, has
no operating history. The Company has conducted business as a division of BP and
has no independent operating history. The Company
17
<PAGE> 17
has been dependent upon BP for certain financial and administrative support.
Following consummation of the Recapitalization, the company will be responsible
for administering its own treasury, cash management, accounting, legal, risk
management, tax, environmental, insurance, human resources and other services.
BENEFITS TO INSIDERS
Kirtland is the majority shareholder of Holding which, upon completion of
the Recapitalization, will own 90% of the Common Stock of the Company. At the
Closing, the Company will pay Kirtland a financing fee, and will reimburse
Kirtland for its out of pocket expenses as compensation for its services as
financial advisor. Also at the Closing, Kirtland will enter into an advisory
services agreement with the Company pursuant to which Kirtland will provide
management consulting and financial advisory services to the Company. See
"Certain Relationships and Related Transactions -- Relationship with Kirtland
and Holding."
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<PAGE> 18
THE RECAPITALIZATION
The Offering is part of the Recapitalization which is being effected
pursuant to the Recapitalization Agreement. Currently, all of the outstanding
stock of Unifrax is owned by BP Exploration (Alaska) Inc. ("BPX") and The
Standard Oil Company ("Standard"). BPX and Standard are subsidiaries of BP. At
the Closing, the following steps shall occur in the order set forth below:
1. BP shall contribute to Unifrax XPE Vertriebs GmbH and NAF Brasil Ltda.
2. Unifrax shall redeem, and BPX and Standard shall sell to Unifrax, the
one share of Unifrax held by Standard and 79 shares of the 99 shares of
Unifrax held by BPX (the "Redeemed Shares") in exchange for a written
promise from Unifrax to pay an aggregate of $120.0 million (the
"Redemption Cash") and delivery of the BP Note.
3. Holding will purchase from BPX 18 shares of Unifrax, leaving BPX two
shares of Unifrax. Holding shall pay BPX $17.0 million in cash for the
18 shares of Unifrax (the "Initial Payment"). The Initial Payment is
subject to a decrease based on changes in the net working capital of the
Company. Additionally, Holding will pay BP $10.0 million in
consideration for the Non-compete Agreement.
4. Investment Corp. shall complete the Offering.
5. Investment Corp. and Unifrax shall be merged, with Unifrax the surviving
corporation. Pursuant to the merger: (i) all outstanding shares of
Unifrax held by BPX shall be converted into 2,000 shares of common stock
of Unifrax; (ii) all of the outstanding shares of Unifrax held by
Holding shall be converted into 18,000 shares of common stock of
Unifrax; and (iii) all outstanding shares of Investment Corp. shall be
cancelled. The consummation of the Offering and the consummation of the
Recapitalization and the transactions contemplated thereby will be
concurrent, and each is conditioned upon the other. Accordingly, prior
to the merger, Investment Corp. will be the issuer and will be obligated
under the Notes, and Unifrax will have no liability either under the
Notes or in connection with the Offering. Upon consummation of the
merger, Unifrax, as the surviving corporation, will be liable under the
Notes and in connection with the Offering to the same extent that
Investment Corp. was so liable prior to such merger.
6. Unifrax shall borrow $25.0 million under the Credit Agreement.
7. Unifrax shall pay Standard and BPX the Redemption Cash and shall pay the
fees and expenses of the transaction, estimated at $5.0 million.
Upon completion of the Recapitalization, Holding will own 90% of the common
stock of Unifrax and BPX will own 10% of the common stock of Unifrax. See "Risk
Factors -- Controlling Stockholder," "Principal Stockholders" and "Certain
Relationships and Related Transactions."
Pursuant to the Recapitalization Agreement, BP America will indemnify
Holding and the Company, subject to certain limitations, against liabilities
arising from operations of the Company which were discontinued prior to the
Closing, liabilities for wrongful death or personal injury allegedly caused by
exposure, prior to the Closing, to refractory ceramic fiber products
manufactured by the Company, and certain environmental matters. See "Certain
Relationships and Related Transactions -- Relationship with BP and its
Subsidiaries -- Recapitalization Agreement."
Consummation of the Offering is conditioned upon the closing of the
Recapitalization. Closing of the Recapitalization is conditioned upon events set
forth in the Recapitalization Agreement, including Investment Corp.'s ability to
obtain financing.
19
<PAGE> 19
USE OF PROCEEDS
Aggregate consideration for the Recapitalization, the Non-compete Agreement
and related fees and expenses, of approximately $159 million (subject to a
decrease for changes in the net working capital of the Company) will be funded
with (i) a $25.0 million term loan under the Credit Agreement, (ii) the $100.0
million proceeds of the Offering, (iii) the $7.0 million BP Note, and (iv) the
$27.0 million Equity Investment.
The sources and uses of funds to consummate the Recapitalization and
related transactions are set forth in the following table:
<TABLE>
<CAPTION>
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Credit Agreement(a)......................................... $ 25.0
The Notes................................................... 100.0
The BP Note................................................. 7.0
Equity Investment........................................... 27.0
-------
Total Sources.......................................... $ 159.0
==============
USES OF FUNDS:
Payments to existing stockholder(b)......................... $ 144.0
Non-compete Agreement(c).................................... 10.0
Fees and expenses........................................... 5.0
-------
Total Uses............................................. $ 159.0
==============
</TABLE>
- ---------------
(a) The Credit Agreement will consist of a $25.0 million term loan and a
revolving credit facility of $20.0 million. The Company anticipates that no
amounts will be borrowed under the revolving credit facility to consummate
the Recapitalization. See "Description of Credit Agreement and Other
Indebtedness."
(b) The payments to the existing stockholder are made in consideration of the
redemption of shares of Unifrax and the sale of shares of Unifrax, and the
amount of the payments is subject to decrease based on changes in the net
working capital of the Company at the Closing. See "The Recapitalization."
(c) See "Certain Relationships and Related Transactions -- Relationship with BP
and its Subsidiaries -- Non-compete Agreement" for a description of the
Non-compete Agreement to be provided by BP to Holding.
20
<PAGE> 20
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996 and as adjusted to reflect the Recapitalization. The
information given below is unaudited and 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>
JUNE 30, 1996
ACTUAL PRO FORMA
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Credit Agreement(a)........................................ $ -- $ 25,000
Notes...................................................... -- 100,000
The BP Note................................................ -- 7,000
-------- ---------
Total long-term debt......................................... -- 132,000
Parent company investment/Stockholders' equity (deficit)(b):
Common Stock............................................... -- --
Parent company investment/additional paid-in capital....... 37,115 31,493
Accumulated deficit........................................ -- (95,036)
-------- ---------
Total parent company investment/stockholders' equity
(deficit).................................................. 37,115 (63,543)
-------- ---------
Total capitalization......................................... $ 37,115 $ 68,457
======== =========
- ---------------
<FN>
(a) The Credit Agreement will consist of a $25.0 million term loan and a
revolving credit facility of $20.0 million. The Company anticipates that no
amounts will be borrowed under the revolving credit facility to consummate
the Recapitalization. See "Description of Credit Agreement and Other
Indebtedness."
(b) The Company was historically accounted for as a division, with no separately
reported equity other than an amount equal to its net assets captioned as
"parent company investment," which included transactions of an intercompany
nature. In connection with the Recapitalization, (i) the amount of the
parent company investment, adjusted for the assets and liabilities to be
transferred to BP, will be reclassified as common stock, at par value, and
additional paid-in capital; (ii) 80 shares of stock out of 100 shares
outstanding, will be redeemed, which will result in an 80% elimination of
the amounts recorded as common stock and additional paid-in capital; (iii)
the amount of the redemption price in excess of the adjustment to common
stock and additional paid-in capital will be recorded as an accumulated
deficit; and (iv) the Company will recognize a deferred tax asset as a
result of the Recapitalization which will be recorded as additional paid-in
capital.
</TABLE>
21
<PAGE> 21
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data gives effect to the
Saint-Gobain Sale and the Recapitalization. See Notes 2, 7, and 17 to the
audited financial statements included herein.
The unaudited pro forma consolidated balance sheet of the Company as of
June 30, 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 consolidated
balance sheet had occurred on June 30, 1996.
The unaudited pro forma consolidated statements of income of the Company
for the year ended December 31, 1995 and the six months ended June 30, 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 consolidated 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.
22
<PAGE> 22
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ -- $ -- $ --
Accounts receivable, net.............................. 15,235 -- 15,235
Inventories........................................... 8,840 -- 8,840
Deferred income taxes................................. 2,769 307(a) 3,076
Prepaid expenses and other current assets............. 433 -- 433
-------- --------- ---------
Total current assets....................................... 27,277 307 27,584
Property, plant and equipment, net......................... 30,082 -- 30,082
Deferred income taxes...................................... -- 19,838(a) 19,838
Other assets............................................... 544 5,000(b) 5,544
-------- --------- ---------
$ 57,903 $ 25,145 $ 83,048
======== ========= =========
LIABILITIES, PARENT COMPANY INVESTMENT/STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 3,805 $ -- $ 3,805
Accrued expenses......................................... 8,110 (500)(c) 7,610
-------- --------- ---------
Total current liabilities.................................. 11,915 (500) 11,415
Long-term debt............................................. -- 125,000(d) 125,000
Note payable -- shareholder................................ -- 7,000(e) 7,000
Accrued postretirement benefit cost........................ 5,116 (2,340)(c) 2,776
Deferred income taxes...................................... 3,357 (3,357)(a) --
Other long-term obligations................................ 400 -- 400
-------- --------- ---------
Total liabilities.......................................... 20,788 125,803 146,591
Parent company investment/Stockholders' equity (deficit):
Common stock; $0.01 par value, 50,000 shares
authorized, 20,000 issued and outstanding pro
forma............................................... -- --(f) --
Parent company investment/Additional paid-in
capital............................................. 37,115 (5,622)(f) 31,493
Accumulated deficit................................... -- (95,036)(f) (95,036)
-------- --------- ---------
37,115 (100,658) (63,543)
-------- --------- ---------
$ 57,903 $ 25,145 $ 83,048
======== ========= =========
</TABLE>
See accompanying notes.
23
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(a) Reflects the net deferred income tax effects of the Recapitalization. The
Recapitalization Agreement provides that an election will be made to have the
Recapitalization treated as an asset purchase for income tax purposes, with a
corresponding increase in the tax basis of assets. For financial reporting purposes, the
Company will retain its historical cost basis. The Company will recognize a related
deferred tax asset (net of a valuation allowance of $20,145) because, based upon the
Company's past history of profitability, management considers realization of this asset
to be more likely than not.
(b) Represents the financing fees associated with the Credit Agreement and the Notes.
(c) Reflects the assumption of certain obligations of the Company by BP America.
(d) Reflects borrowings by the Company as follows:
Credit Agreement.................................................. $ 25,000
Notes............................................................. 100,000
--------
125,000
Less current portion.............................................. --
--------
$125,000
========
(e) Reflects the issuance of the BP Note.
(f) The Company was historically accounted for as a division, with no separately reported
equity other than an amount equal to its net assets captioned as "parent company
investment" which included transactions of an intercompany nature. In connection with
the Recapitalization, (i) the amount of the parent company investment, adjusted for the
assets and liabilities to be transferred to BP, will be reclassified as common stock, at
par value, and additional paid-in capital; (ii) 80 shares of stock out of 100 shares
outstanding, will be redeemed, which will result in an 80% elimination of the amounts
recorded as common stock and additional paid-in capital; (iii) the amount of the
redemption price in excess of the adjustment to common stock and additional paid-in
capital will be recorded as an accumulated deficit; and (iv) the Company will recognize
a deferred tax asset as a result of the Recapitalization which will be recorded as
additional paid-in capital.
</TABLE>
24
<PAGE> 24
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales......................................................... $ 84,064 $ (426)(a) $ 83,638
Operating expenses:
Cost of goods sold.............................................. 40,630 (36)(a) 40,594
Selling and distribution........................................ 11,579 487(a) 12,066
Administration.................................................. 6,189 2,680(b) 8,869
Allocated corporate charges..................................... 2,700 (2,700)(c) --
Research and development........................................ 2,450 -- 2,450
-------- --------- --------
63,548 431 63,979
Operating income.................................................. 20,516 (857) 19,659
Interest expense.................................................. -- (13,003)(d) (13,003)
Other income, net................................................. 932 (390)(a) 542
-------- --------- --------
Income before income taxes........................................ 21,448 (14,250) 7,198
Provision for income taxes........................................ 8,743 (5,843)(e) 2,900
-------- --------- --------
Net income........................................................ $ 12,705 $ (8,407) $ 4,298
======== ========= ========
<FN>
(a) Reflects the impact of the Saint-Gobain Sale (see "Certain Relationships and Related
Transactions -- Relationship with SEPR") as follows:
i) elimination of sales to previously affiliated foreign ceramic fiber businesses
acquired by SEPR,
net of continuing sales as defined in the SEPR agreements............................ $ (426)
ii) cost of goods sold effect of (i) above............................................... (36)
iii) additional selling and distribution costs associated with the newly organized foreign
XPE(TM) sales affiliates in Germany and Brazil....................................... 487
iv) reduction in royalty payments received as a result of the Saint-Gobain Sale.......... (390)
(b) Reflects the following:
i) additional administration costs associated with the newly organized foreign XPE(TM)
sales affiliates in Germany and Brazil............................................... $ 250
ii) increased charges for insurance as a stand-alone company............................. 800
iii) increased pension expense............................................................ 351
iv) increased administration expenses to operate as a stand-alone company................ 500
v) advisory fee to Kirtland............................................................. 300
vi) amortization of deferred financing costs............................................. 780
vii) elimination of divestment related expenses........................................... (137)
viii) adjustment to interest costs for the postretirement benefit obligations retained by
BP................................................................................... (164)
-------
Total................................................................................ $ 2,680
=======
(c) As a stand-alone company, the Company will no longer be charged an allocation of the costs
of the discontinued Carborundum worldwide group headquarters, including an allocation of
overhead charges from BP. Incremental costs of operating as a stand-alone entity are
reflected in (b)ii), (b)iv) and (b)v) above.
(d) Reflects the interest expense on the pro forma debt instruments as follows:
i) Credit Agreement(*).................................................................. $ 1,925
ii) Notes at an assumed interest rate of 10.50% per annum................................ 10,500
iii) BP Note at Prime (assuming Prime equals 8.25%)....................................... 578
-------
Total................................................................................ $13,003
=======
* Reflects the term notes of $25,000 at an interest rate of 2.00% over LIBOR (assuming
LIBOR equals 5.50%) and a commitment fee of 0.25% on the unused portion of the
$20,000 available revolving credit facility, all of which is assumed to be unused.
Increasing LIBOR and Prime each by 1/8% per annum would increase pro forma interest expense
by $40.
(e) Income taxes, which include federal and state income taxes, have been calculated at an
effective income tax rate of 41%.
</TABLE>
25
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales......................................................... $ 45,192 $ (71)(a) $ 45,121
Operating expenses:
Cost of goods sold.............................................. 22,579 (6)(a) 22,573
Selling and distribution........................................ 6,418 81(a) 6,499
Administration.................................................. 3,429 1,002(b) 4,431
Allocated corporate charges..................................... 356 (356)(c) --
Research and development........................................ 1,121 -- 1,121
-------- --------- --------
33,903 721 34,624
-------- --------- --------
Operating income.................................................. 11,289 (792) 10,497
Interest expense.................................................. -- (6,455)(d) (6,455)
Other income (expense), net....................................... 43 (89)(a) (46)
-------- --------- --------
Income before income taxes........................................ 11,332 (7,336) 3,996
Provision for income taxes........................................ 4,697 (3,009)(c) 1,688
-------- --------- --------
Net income........................................................ $ 6,635 $ (4,327) $ 2,308
======== ========= ========
<FN>
(a) Reflects the impact of the Saint-Gobain Sale (see "Certain Relationships and Related
Transactions -- Relationship with SEPR") as follows:
i) elimination of sales to previously affiliated foreign ceramic fiber businesses
acquired by SEPR, net of continuing sales as defined in the SEPR
agreement............................................................................. $ (71)
ii) cost of goods sold effect of (i) above................................................ (6)
iii) additional selling and distribution costs associated with the newly organized foreign
XPE(TM) sale affiliates in Germany and Brazil......................................... 81
iv) reduction in royalty payments received as a result of the Saint-Gobain Sale........... (89)
The pro forma adjustments for the six-month period ended June 30, 1996 reflect the
impact of the Saint-Gobain Sale through February 29, 1996. Subsequent to February 29,
1996, the historical results include the impact of the Saint-Gobain Sale.
(b) Reflects the following:
i) additional administration costs associated with the newly organized foreign XPE(TM)
sales affiliates in Germany and Brazil................................................ $ 42
ii) increased charges for insurance as a stand-alone company.............................. 400
iii) increased pension expense............................................................. 172
iv) increased administration expenses to operate as a stand-alone company................. 200
v) advisory fee to Kirtland.............................................................. 150
vi) amortization of deferred financing costs.............................................. 390
vi) elimination of divestment related expenses............................................ (270)
vii) adjustment to interest costs for the postretirement benefit obligations retained by
BP.................................................................................... (82)
------
Total................................................................................. $1,002
======
(c) As a stand-alone company, 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 from BP. Incremental costs of operating as a stand-alone entity are
reflected in (b)ii), (b)iv) and (b)v) above.
(d) Reflects the interest expense on the pro forma debt instruments as follows:
i) Credit Agreement(*)................................................................... $ 916
ii) Notes at an assumed interest rate of 10.50% per annum................................. 5,250
iii) BP Note at Prime (assuming Prime equals 8.25%)........................................ 289
------
Total................................................................................. $6,455
======
* Reflects the term notes of $25,000 (less scheduled repayments of $2,500 during the
period) at an interest rate of 2.00% over LIBOR (assuming LIBOR equals 5.50%) and a
commitment fee of 0.25% on the unused portion of the $20,000 available revolving
credit facility, all of which is assumed to be unused.
Increasing LIBOR and Prime each by 1/8% per annum would increase pro forma interest expense
by $19.
(e) Income taxes, which include federal and state income taxes, have been calculated at an
effective income tax rate of 41%.
</TABLE>
26
<PAGE> 26
SELECTED HISTORICAL 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 six-month periods
ended June 30, 1995 and June 30, 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 six-month
periods ended June 30, 1995, and June 30, 1996, have been derived from, and
should be read in conjunction with, the unaudited financial statements and the
notes 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 six-month period ended June
30, 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, COMBINED(A)
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................................ $53,540 $64,565 $67,692 $76,246 $84,064 $43,036 $45,192
Cost of goods sold....................... 27,620 33,099 34,153 37,590 40,630 20,803 22,579
------- ------- ------- ------- ------- ------- -------
Gross profit............................. 25,920 31,466 33,539 38,656 43,434 22,233 22,613
Selling and distribution................. 9,462 10,370 9,932 10,688 11,579 6,064 6,418
Administration........................... 5,701 5,212 5,415 6,279 6,189 3,218 3,429
Allocated corporate charges(b)........... 2,900 2,600 2,800 2,300 2,700 1,350 356
Research and development................. 2,106 2,455 2,247 2,272 2,450 1,372 1,121
Restructuring charges.................... -- 480 155 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Operating income......................... 5,751 10,349 12,990 17,117 20,516 10,229 11,289
Other income............................. 541 555 549 591 932 392 43
------- ------- ------- ------- ------- ------- -------
Income before taxes and cumulative
effect of change in accounting
principle............................ 6,292 10,904 13,539 17,708 21,448 10,621 11,332
Provision for income taxes............... 2,511 4,356 5,611 7,256 8,743 4,316 4,697
------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of change
in accounting principle................ 3,781 6,548 7,928 10,452 12,705 6,305 6,635
Cumulative effect of change in accounting
principle.............................. -- -- (2,658)(c) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................... $ 3,781 $ 6,548 $ 5,270 $10,452 $12,705 $ 6,305 $ 6,635
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(d)................................ $ 9,515 $14,501 $17,510 $21,928 $25,749 $12,715 $13,287
Depreciation and amortization............ 3,223 3,597 3,971 4,220 4,301 2,094 1,955
Cash flows from operating
activities(g).......................... NA 9,347 10,172 11,324 18,925 8,040 8,141
Cash flows from investing
activities(g).......................... NA (3,571) (2,950) (2,578) (3,593) (1,169) (3,049)
Cash flows from financing
activities(g).......................... NA (6,049) (7,134) (8,743) (15,393) (6,858) (5,129)
Capital expenditures..................... 2,751 3,669 3,032 2,670 3,404 1,193 2,795
Ratio of earnings to fixed charges(e).... 75.90x 113.41x 124.08x 166.50x 165.98x 169.59x 172.70x
BALANCE SHEET DATA (AT PERIOD END):
Working capital.......................... $11,103 $11,597 $13,583 $16,688 $14,763 $17,151 $15,362
Total assets............................. 53,453 54,327 55,105 56,897 54,239 56,668 57,903
Total liabilities........................ 15,414 15,888 18,634 18,943 18,815 19,136 20,788
Parent company investment(f)............. 38,039 38,439 36,471 37,954 35,424 37,532 37,115
- ---------------
<FN>
(a) Represents the combined data of Unifrax and the affiliated overseas sales
corporations created following the Saint-Gobain Sale.
</TABLE>
27
<PAGE> 27
(b) Certain administrative services and research and development activities were
provided to all businesses of Carborundum, including the Division, 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.
(c) Represents the cumulative effect of a change in accounting principle made in
1993 related to the accounting for postretirement benefits other than
pensions.
(d) "EBITDA" means earnings from operations before interest expense, taxes,
depreciation, amortization, and cumulative effect of change in accounting
principle. EBITDA is included because management believes that it is an
indicator used by investors to gauge a company's ability to service its
interest and principal 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, investing and financing activities or
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles and should not be construed as an
indication of the Company's operating performance or as a measure of
liquidity. EBITDA, as presented herein, may be calculated differently by
other companies and, as such, EBITDA amounts presented herein may not be
comparable to other similarly titled measures of other companies.
(e) Earnings used in computing the ratio of earnings to fixed charges consist of
income from continuing operations before income taxes and cumulative effect
of a change in accounting principle plus fixed charges. Fixed charges
consist of interest expense, amortization of financing costs and imputed
interest on lease obligations.
(f) The Division was accounted for as a division of Carborundum rather than as a
subsidiary. The Division (prior to consummation of the Recapitalization) had
no separately identifiable equity other than an amount equal to its net
assets captioned as "parent company investment." In connection with the
Recapitalization, this investment will be eliminated and replaced by
stockholders' equity comprised of the Company's issued common stock at par
value and a residual amount of additional paid-in capital.
(g) Information is not available for 1991.
28
<PAGE> 28
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 Recapitalization, these results may not be comparable to future operating
results. See the notes to the audited financial statements included herein.
GENERAL
The Company 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. Developed by the Company in 1942,
ceramic fiber is a white, glassy material belonging to a class of materials
known as man-made vitreous fibers. Ceramic fiber is sold to the furnace-related
market, the automotive market and several other niche markets. The Company's
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 products and
applications and the general economic expansion of ceramic fiber markets. During
the four-year period ended December 31, 1995, the Company's net sales and EBITDA
increased at compound annual rates of approximately 12% and 28%, respectively.
During the three-year period ended December 31, 1995, the Company's cash
provided by operations, cash used in investing and cash used in financing
increased at compound annual growth rates of 27%, 0% and 37%, respectively. The
growth rate in EBITDA and cash provided by operations has exceeded the growth
rate in net sales during this period due to high profit margins resulting from
several factors, including a sales mix shift to higher value-added products,
improved manufacturing efficiency, higher capacity utilization and continued
control of marketing and administration costs. During each of the four years
ended December 31, 1995, the sales of products 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 operated autonomously; however, 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 administration 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 (including the Company) 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. In the future, the Company believes it will be able to obtain such
administrative services at comparable rates.
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 overseas production capacity to fulfill North American demand.
The Recapitalization will be treated as an asset purchase for income tax
purposes, with a corresponding increase in the tax basis of assets. 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 future profitability and the extended
period over which the timing differences will reverse.
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<PAGE> 29
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 50.5 49.3 48.3 48.3 50.0
----- ----- ----- ----- -----
Gross profit............................... 49.5 50.7 51.7 51.7 50.0
Selling and distribution................... 14.7 14.0 13.8 14.1 14.2
Administration............................. 8.0 8.2 7.4 7.5 7.6
Allocated corporate charges................ 4.1 3.0 3.2 3.1 0.8
Research & development..................... 3.3 3.0 2.9 3.2 2.4
Restructuring charges...................... 0.2 -- -- -- --
----- ----- ----- ----- -----
Operating income........................... 19.2 22.5 24.4 23.8 25.0
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996, COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
Net sales increased $2.2 million, or 5.0% from $43.0 million in 1995 to
$45.2 million in 1996. This increase was principally due to continued strong
demand for bulk, blanket, and module products in the furnace-related market, for
XPE(TM) in the automotive market, and for other niche market applications. The
increase was partially offset by lower sales of porosity-controlled paper. Lower
porosity-controlled paper sales resulted from one customer's decision to
purchase roll goods rather than finished product and another customer's
transition to a new driver-side airbag design which uses less ceramic fiber
paper.
Gross profit increased $0.4 million, or 1.7%, from $22.2 million in 1995 to
$22.6 million in 1996. This increase was the result of higher sales volume.
Gross profit margin decreased from 51.7% in 1995 to 50.0% in 1996. This decline
was due to outside purchases and resales of ceramic fiber blanket resulting from
capacity constraints at the Company's New Carlisle, Indiana facility.
Selling and distribution expenses increased $0.3 million, or 5.8%, from
$6.1 million in 1995 to $6.4 million in 1996. This increase resulted primarily
from the addition of XPE(TM) sales and distribution operations in Europe and
Brazil following the Saint-Gobain Sale, and the payment of sales incentives
earned by the sales force for record volumes. Selling and distribution expenses
as a percentage of net sales increased slightly from 14.1% in 1995 to 14.2% in
1996.
Administration expenses increased $0.2 million, or 6.6%, from $3.2 million
in 1995 to $3.4 million in 1996. This increase resulted primarily from the
addition of XPE(TM) selling and distribution operations in Europe and Brazil
following the Saint-Gobain Sale, and from various expenses associated with BP's
divestment of the Company. Administration expenses as a percentage of net sales
increased slightly from 7.5% in 1995 to 7.6% in 1996.
Allocated corporate charges decreased $1.0 million, or 74%, from $1.4
million in 1995 to $0.4 million in 1996. Allocated corporate charges for the
first half of 1995 were recognized for all six months of the period. Allocated
corporate charges were recognized for only two months of 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 arm's length
services purchased by the Company in March through June 1996 from SEPR totaled
$348 thousand and were at similar rates to those paid by the Company for
comparable services in January and February. 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.
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<PAGE> 30
Research and development expenses decreased $0.3 million, or 18%, from $1.4
million in 1995 to $1.1 million in 1996. This decrease was primarily due to the
timing of new product testing.
Operating income increased $1.1 million, or 10.4%, from $10.2 million in
1995 to $11.3 million in 1996. Operating income as a percentage of net sales
increased from 23.8% in 1995 to 25.0% in 1996 as a result of the factors
discussed above.
Net income increased $0.3 million, or 5.2%, from $6.3 million in 1995 to
$6.6 million in 1996. Net income as a percentage of net sales remained flat at
14.7% in 1995 and 1996. The slight increase in net income is due to the factors
discussed above.
EBITDA increased $0.6 million, or 4.5%, from $12.7 million in 1995 to $13.3
million in 1996. On a percentage of net sales basis, EBITDA decreased from 29.5%
in 1995 to 29.4% in 1996. The improvement in EBITDA is attributable to the
factors discussed above, despite a slight decrease in depreciation and
amortization of $0.1 million, or 6.6%, from $2.1 million in 1995 to $2.0 million
in 1996.
Capital expenditures in 1996 were $2.8 million and included projects to
improve efficiency, as well as add capacity in New Carlisle, Indiana. Working
capital, excluding cash and deferred taxes, declined from $14.4 million in 1995
to $12.6 million in 1996 due to lower receivables from the Carborundum overseas
units and higher trade payables and accruals in 1996.
Cash flows from operating activities increased $0.1 million, or 1.3%, from
$8.0 million in 1995 to $8.1 million in 1996 due to the higher net income and
lower working capital. Cash outflows from investing activities increased $1.8
million, or 160.8%, from $1.2 million in 1995 to $3.0 million in 1996 due to the
higher capital expenditures associated with the plant expansion in New Carlisle,
Indiana. Cash outflows from financing decreased $1.7 million, or 25.2%, from
$6.8 million in 1995 to $5.1 million in 1996, as the net cash flows were
transferred to the parent.
YEAR ENDED DECEMBER 31, 1995, COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales increased $7.9 million, or 10.3%, 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 products in the furnace-related market and
significant demand for porosity-controlled paper and XPE(TM) in the automotive
market. The Company achieved record sales in 1995, despite its discontinuation
of a resale product purchased from a former BP-owned business unit which
accounted for $4.2 million of the Company's net sales in 1994.
Gross profit increased $4.7 million, or 12.4% from $38.7 million in 1994 to
$43.4 million in 1995. This increase was the result of higher sales of
value-added products. Specifically, gross profit margin increased from 50.7% in
1994 to 51.7% in 1995 due to increased sales of high margin products and ongoing
cost reductions, despite price increases in raw materials. The Company's
manufacturing cost reduction programs largely offset increases in purchased
materials and labor costs.
Selling and distribution expenses increased $0.9 million, or 8.3%, from
$10.7 million in 1994 to $11.6 million in 1995. This increase resulted primarily
from higher warehousing and freight expenses associated with the Company's
increased sales. Selling and distribution expenses as a percentage of net sales
decreased from 14.0% in 1994 to 13.8% in 1995.
Administration expenses decreased $0.1 million, or 1.4%, from $6.3 million
in 1994 to $6.2 million in 1995. In addition, administration expenses as a
percentage of net sales decreased from 8.2% in 1994 to 7.4% in 1995.
Allocated corporate charges increased $0.4 million, or 17.4%, from $2.3
million in 1994 to $2.7 million in 1995. This increase resulted primarily from
higher costs recorded by Carborundum for a BP stock appreciation rights program.
Research and development expenses increased $0.2 million, or 7.8%, from
$2.3 million in 1994 to $2.5 million in 1995. This increase was due to new
product development projects, including a new fiber
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<PAGE> 31
development project and the transfer of two Carborundum research and development
projects to the Company.
Operating income increased $3.4 million, or 19.9%, from $17.1 million in
1994 to $20.5 million in 1995. Operating income as a percentage of net sales
increased from 22.5% in 1994 to 24.4% in 1995 as a result of the factors
discussed above.
Net income increased $2.3 million, or 21.6%, from $10.4 million in 1994 to
$12.7 million in 1995. Net income as a percentage of net sales increased from
13.7% in 1994 to 15.1% in 1995, due to the factors discussed above.
EBITDA increased $3.8 million, or 17.4%, from $21.9 million in 1994 to
$25.7 million in 1995. As a percentage of net sales, EBITDA increased from 28.8%
in 1994 to 30.6% in 1995. The improvement in EBITDA is attributable to the
factors discussed above, in addition to an increase in depreciation and
amortization of $0.1 million, or 1.9% from $4.2 million in 1994 to $4.3 million
in 1995.
Capital expenditures in 1995 were $3.4 million and were principally
designed to eliminate manufacturing bottlenecks and to improve efficiency.
Year-end working capital, excluding cash and deferred taxes, declined from $13.8
million in 1994 to $12.3 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.
Cash flows from operating activities increased $7.6 million, or 67.1%, from
$11.3 million in 1994 to $18.9 million in 1995 due to the higher net income and
lower working capital. Cash outflows from investing activities increased $1.0
million, or 39.4%, from $2.6 million in 1994 to $3.6 million in 1995 due to the
higher capital expenditures discussed above. Cash outflows from financing
activities increased $6.7 million, or 76.1%, from $8.7 million in 1994 to $15.4
million in 1995, as the net cash flows were transferred to the parent.
YEAR ENDED DECEMBER 31, 1994, COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Net sales increased $8.5 million, or 12.6%, 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 paper and XPE(TM) from the automotive markets.
Gross profit increased $5.2 million, or 15.3%, 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% in 1993 to 50.7% in 1994. This increase was primarily
the result of a sales mix shift to high value-added products, manufacturing cost
reduction programs and improved manufacturing efficiencies due to increased
volume. Raw materials prices remained relatively flat in 1994.
Selling and distribution expenses increased $0.8 million, or 7.6%, from
$9.9 million in 1993 to $10.7 million in 1994. This increase was due to higher
warehousing and freight costs, a larger advertising campaign and the addition of
employees to support new product opportunities associated with the increase in
net sales. However, selling and distribution expenses as a percentage of net
sales decreased from 14.7% in 1993 to 14.0% in 1994.
Administration expenses increased $0.9 million, or 16.0%, 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% in 1993 to 8.2% in 1994. This increase was
primarily the result of higher spending on consultants.
Allocated corporate charges decreased $0.5 million, or 17.9%, from $2.8
million in 1993 to $2.3 million in 1994. This decrease was largely attributable
to restructuring within Carborundum in 1993.
Research and development expenses increased $0.1 million, or 1.1%, from
$2.2 million in 1993 to $2.3 million in 1994 as inflationary cost increases were
offset by lower spending in a variety of areas.
Operating income increased $4.1 million, or 31.8%, from $13.0 million in
1993 to $17.1 million in 1994. Operating income as a percent of net sales
increased from 19.2% in 1993 to 22.5% in 1994 as a result of the factors
discussed above.
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<PAGE> 32
Net Income increased $5.2 million, or 98.3%, from $5.3 million in 1993 to
$10.5 million in 1994. Net income as a percentage of net sales increased from
7.8% in 1993 to 13.7% in 1994, due to the factors discussed above.
EBITDA increased $4.4 million, or 25.2%, from $17.5 million in 1993 to
$21.9 million in 1994. As a percentage of net sales basis, EBITDA increased from
25.9% in 1993 to 28.8% in 1994. The improvement in EBITDA is attributable to the
factors discussed above, in addition to an increase in depreciation and
amortization of $0.2 million, or 6.3% from $4.0 million in 1993 to $4.2 million
in 1994.
Capital expenditures of $2.7 million in 1994 were primarily for
maintenance, process cost reduction and efficiency projects.
Cash flows from operating activities increased $1.1 million, or 11.3%, from
$10.2 million in 1993 to $11.3 million in 1994 due to the higher net income
offset in part by higher working capital as a result of the sales increase. Cash
outflows from investing activities decreased $0.4 million, or 12.6%, from $3.0
million in 1993 to $2.6 million in 1994 due to the lower capital expenditures.
Cash outflows from financing activities increased $1.6 million, or 22.6%, from
$7.1 million in 1993 to $8.7 million in 1994, as the net cash flows were
transferred to the parent.
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 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.
Historically, the Company 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 costs and to eliminate production bottlenecks.
BP historically performed all treasury functions on behalf of the Company.
As a result, the Company relied on BP for short-term financing. Over the past
three years, the Company generated cumulative cash transfers to BP of $31.3
million, of which $15.4 million was attributable to 1995. The Company has
established its own cash management system to meet its daily cash management
needs and will maintain independent banking relationships.
Concurrent with the Offering, the Company expects to enter into a Credit
Agreement pursuant to which the Company will have available to it a $25.0
million term loan and a $20.0 million revolving credit facility. The revolving
credit facility will be undrawn at the Closing. The revolving credit facility
will be available for working capital and other corporate purposes. Loans under
the Credit Agreement will bear interest at a rate based upon LIBOR or the
lender's prime rate plus a negotiated margin. Both the Indenture and the Credit
Agreement will contain certain restrictive covenants including requirements that
the Company meet certain financial ratio tests and limitations on the ability of
the Company to incur additional indebtedness. The proceeds of the Offering will
be used by the Company to redeem 80% of the stock of the Company from BP.
Following consummation of the Recapitalization, the Company will have a
significant increase in debt service requirements over historical levels due to
its borrowings under the Credit Agreement and the Notes. Management believes
that cash flow from operations, together with available borrowings under the
revolving credit facility, will be sufficient to carry on its business for the
foreseeable future and to meet its debt service, capital expenditures and other
liquidity requirements. See "Description of Credit Agreement and Other
Indebtedness -- Credit Agreement."
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<PAGE> 33
The Company has budgeted approximately $9.7 million for capital
expenditures in 1996, including expenditures for its capacity expansion at the
New Carlisle, Indiana facility. The total cost of the capacity expansion is
estimated at $14.4 million, which consists of $13.7 million of capitalized
expenditures and $0.7 million of related period costs.
As part of its product stewardship program the Company anticipates spending
between $2.0 and 3.0 million over approximately two years for health studies to
develop new types of ceramic fibers. Spending is anticipated to commence once
new fiber development is completed and test protocols are established, projected
to occur during 1997.
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<PAGE> 34
BUSINESS
The Company 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. Developed by the Company in 1942,
ceramic fiber is a white, glassy material belonging to a class of materials
known as man-made vitreous fibers (a class which also includes fiberglass and
mineral wool). Ceramic fiber possesses several commercially attractive
performance properties including stability at very high temperatures, extremely
low heat transmission and retention, light weight compared to other
heat-resistant materials, chemical stability and corrosion resistance. These
properties make ceramic fiber a superior insulating material in high temperature
applications.
Ceramic fiber's most common application has been to line industrial
furnaces, where high temperatures demand its heat-resistant characteristics.
Historically, the industrial furnace-related market has represented the largest
percentage of the Company's sales. While maintaining its strong position in this
traditional market, the Company's strategy has been to apply its expertise to
rapidly-growing, high value-added niche markets. These niche markets, which
include automotive (products such as airbag inflation filters and catalytic
converter gaskets), power generation (products such as steam boiler insulation,
duct wrap and stack linings), and fire protection (products such as commercial
kitchen exhaust duct wrap and cable trays), now account for the majority of the
Company's net sales. For the year ended December 31, 1995, approximately 44% of
the Company's net sales were derived from furnace-related markets, 31% from
automotive-related markets, and 25% from other markets. During each of the four
years ended December 31, 1995, sales of new products and applications (those
commercialized within the previous five years) represented over 20% of the
Company's net sales.
During the four-year period ended December 31, 1995, the Company's net
sales and EBITDA increased at compound annual growth rates of 12% and 28%,
respectively. During this period, the growth in EBITDA exceeded the growth in
sales due to a shift in the sales mix to higher margin products, improvements in
manufacturing efficiency, increased capacity utilization rates, and continued
control of marketing and administrative costs.
COMPETITIVE STRENGTHS
The Company has the following strengths which provide competitive
advantages in the North American ceramic fiber market.
Broad Product Line. The Company manufactures one of the broadest lines of
ceramic fiber products sold in the North American market. 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 high value-added
products. These products are used in thermal management applications where heat
resistance, light weight and low heat transmission and retention are required.
Product Innovation. The Company has demonstrated the ability to introduce
successful, high value-added products and applications for both traditional and
niche markets.The Company's product leadership can be attributed to its close
relationship with its customers and its extensive research and development
efforts. These new products have been sold in the furnace-related markets as
well as in high-growth niche markets for both existing and new applications.
Examples of successful new product introductions include porosity-controlled
paper used as a filter in automotive airbag inflators, expandable paper (known
as XPE(TM)) used as a gasket in catalytic converters, easy-to-install Anchor-Loc
2(R) furnace modules and Insulfrax(R) furnace blanket which uses a new fiber
chemistry.
Strong Customer Relationships. Long-term customer relationships with
distributors as well as end-use customers have been an important factor in the
Company's success. Of the Company's top 10 distributors in 1995, the majority
have represented the Company for over 10 years and a substantial number have
been distributors for the Company for more than 20 years. A significant number
of end-use customers have also been purchasing products from the Company for
extended periods of time. For example, in the furnace-related market, most of
the Company's current customers have been purchasing products for at least 5
years, many for
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<PAGE> 35
over 10 years and several for over 20 years. In many situations, especially in
the case of the automotive market, customers recognize that they must depend on
a particular supplier for an extended period and consequently exercise
considerable care in the supplier selection process. The Company's products are
currently specified in numerous automotive applications, such as airbag
inflators, which require "zero defect" components. By successfully meeting such
stringent requirements, the Company is recognized as a reliable supplier, and
has developed solid relationships with its customers.
Recognized Quality. The Company's products have received repeated
recognition for high quality and excellent capability, including eight
consecutive Chrysler Pentastars, an award which Chrysler bestows on only the top
2% of its suppliers. The Company also expects its Tonawanda facility to receive
certification under QS-9000, the quality standard for GM, Ford and Chrysler
suppliers, early in 1997.
Low Cost Manufacturing. The Company's manufacturing strategy has
consistently emphasized investment in capital equipment and process engineering
improvements designed to increase efficiency and lower manufacturing costs. The
Company believes it has the industry's most advanced fiber manufacturing
technology and has obtained the scale of operations necessary to protect its
position as a low cost manufacturer in the North American market.
BUSINESS STRATEGY
The Company's business objective is to increase earnings by expanding its
leadership position in niche markets while maintaining its market position in
furnace-related markets. To meet this objective, the Company will continue to
focus research and development efforts on the creation of new niche products and
applications, and will add needed capacity at its New Carlisle, Indiana facility
to maintain its position as a low cost producer of bulk fiber and blanket. In
addition, the Company has developed the industry model for product stewardship,
and will continue to lead the industry's effort on such programs.
New Products and Markets. By combining its market knowledge and strong
customer relationships with its technical expertise, the Company has
successfully introduced a wide variety of new products. During each of the past
four years, new products and applications (those commercialized within the
previous five years) have accounted for over 20% of the Company's net sales.
These new products have been sold for use in existing and new applications to
both the furnace-related and high-growth niche markets, and many are designed
and qualified to meet specialized customer requirements. The Company's
cumulative research and development expenses were $9.4 million for the four
fiscal years ended December 31, 1995 and the Company expects such expenses to be
$2.5 million in 1996. The Company plans to continue to dedicate substantial
resources to its new product development programs and expects new products to
continue to drive the Company's long-term growth.
Continued Cost Reduction and Productivity Enhancements. The Company's
current management team has a successful track record of achieving cost
reductions and will continue these efforts. By concentrating its furnacing
operations primarily at one location, the Company believes that it has developed
the industry's most advanced fiber manufacturing technology and has obtained the
scale of operations necessary to protect its position as a low cost manufacturer
in the North American market. The Company spent $12.8 million in total capital
expenditures for the four fiscal years ended December 31, 1995. The Company
anticipates spending $9.7 million in 1996, including construction in progress
under a $13.7 million furnace expansion program to be completed in 1997. This
furnace expansion is designed to provide needed capacity and flexibility and to
further reduce manufacturing costs.
Leadership in Product Health and Safety. 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. The Company has been the
industry's leader with respect to management of potential health and product
safety issues associated with ceramic fiber. Specifically, the Company has
established systems to identify and reduce potential adverse health effects, if
any, associated with its products. The Company works actively with its employees
and customers to reduce
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<PAGE> 36
workplace exposure through improved product handling procedures. In addition,
the Company has been active in developing new types of industrial fibers with
physical and chemical properties that may help to reduce the potential risks
associated with ceramic fiber.
PRODUCTS AND APPLICATIONS
As an integrated ceramic fiber manufacturer, the Company manufactures and
markets one of the broadest lines of ceramic fiber products sold in North
America. Ceramic fiber was developed by the Company in 1942 and was identified
as a material with commercially attractive performance properties. In the 1950s,
ceramic fiber refractories (heat resistant materials) began to replace
traditional brick linings in furnace applications. Ceramic fiber is an efficient
insulator, typically reducing energy consumption by 20% to 30% compared to
substitute materials such as hard brick refractories. Fiber usage increased
slowly until the 1970s when the oil crisis created a surge in worldwide demand
for energy-saving devices and technology. Because of its insulating properties,
ceramic fiber came into wide use in a variety of energy-saving applications.
Today, it is produced in the form of bulk fiber, blankets, modules, papers,
felts, boards and textiles. New products include engineered fibers for brake
linings, duct wrap and other fire protection products, XPE(TM) for catalytic
converters and porosity-controlled paper used as a filter for automotive airbag
inflators.
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, chemical composition and fiber dimension and strength. The
Company has sophisticated process controls which are essential to meeting its
customers' precise product specifications. Bulk ceramic fiber is sold to
fabricators of a variety of heat-resistant and insulating 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 substantially all of the Company's other products. Bulk
ceramic fiber is sold under the Fiberfrax, Insulfrax, and Fibermax trade names.
Blankets and Modules. The Company's blanket products begin as bulk fiber
which, through a needling process, is woven into a strong, flexible, durable
blanket. These blankets are preferred over traditional hard brick in a variety
of high temperature applications, including kiln and furnace linings and
expansion joint seals used for fire protection in commercial construction.
Modules are folded or laminated from layers of ceramic fiber blanket which are
compressed into rectangular "blocks" which can be secured to furnace interiors
through a variety of hardware options. The Company has developed a modular
lining system under the Anchor-Loc 2 brandname that has a unique anchoring
hardware and blanket lamination technique which makes it both easy to install
and simple to maintain.
Boards. The Company's board products consist of a group of rigid,
self-supporting, light-weight and easy to cut insulating boards well-suited for
applications involving mechanical vibration and/or stress at high temperatures.
These qualities facilitate handling and installation in a variety of industrial
applications, including use as refractory linings, backup for other furnace
insulating materials, rigid gaskets and seals. Ceramic fiber boards are sold
under the Duraboard brand name.
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 forms: porosity-controlled paper and XPE(TM).
Porosity-controlled paper is an integral component of automotive airbag
inflators in which the ceramic fiber filters the hot gases released during the
inflation process. XPE(TM) is used as a gasket or seal around the core ceramic
component of catalytic converters where the catalytic reaction occurs. By
forming this seal, XPE(TM) forces exhaust gases through the catalyst, and at the
same time acts as an insulating support 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 fabricated into both rigid and flexible shapes.
Felts are used in applications such as automotive and aerospace heat shields,
appliance insulation and gaskets.
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<PAGE> 37
Textiles. The Company uses traditional textile manufacturing techniques to
produce ceramic fiber yarn (Fiberfrax(R) yarn) which is, in turn, used to make
cloth, rope, braids, wicking, tapes, and sleevings. 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 welding curtains and blankets.
Other Products. The Company also manufactures specialty products in the
form of moldables, pumpables, caulks and coating cements, fabricated products,
ultra high temperature products and engineered fibers. Specialty products are
typically injected or applied to furnace and boiler hot spots, furnace lining
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 as fire protection materials
for commercial construction including grease, HVAC, and exhaust ducts. Ultra
high temperature products are used as linings for steel reheat furnaces, forge
furnaces, and in ultra high temperature ceramic kilns. The Company also produces
engineered fibers for applications in the coatings or friction market where
fiber size, diameter, and chemistry must meet precise technical specifications.
SALES AND MARKETING
The Company uses a combination of distributors, direct sales and
multi-functional teams to reach its markets. Sales channels vary from market to
market and between regions within markets depending upon the availability of
local distributors and the particular customer's needs.
In some markets, customer purchasing decisions are based largely on price
and service. In these markets, the Company uses its high-volume capabilities to
produce the lowest cost fiber products while relying on its distributors to meet
local customer service needs. These distributors provide sales, warehousing,
engineering, and design support for the Company's products. Working with the
Company's field sales engineers and customer service personnel, the distributors
provide a cost-effective method of servicing the market for these products,
while meeting the customers' need for rapid delivery, and local service and
support.
For more highly engineered applications, customers tend to base purchasing
decisions on a supplier's technical knowledge, process capabilities, and quality
assurance systems. These customers are more concerned with product performance
characteristics, process control and quality which meet their exacting
specifications. In these situations, the Company utilizes direct selling and/or
multi-functional teams comprised of sales, technical, manufacturing, and quality
assurance professionals. Multi-functional teams provide solutions to complex
customer problems while promoting the Company's product design, process control,
and quality assurance capabilities. The use of such teams also accelerates new
product introduction by reducing the time from concept to commercialization.
Aside from managing these distribution channels, the Company's sales and
marketing organization also has responsibility for identifying new product
opportunities, maintaining effective customer service and developing and
coordinating communications and advertising in trade publications.
The Company motivates its sales and marketing organization through sales
incentive payout programs focusing on three key objectives: sales volume growth,
new product application and development, and achievement of specific,
strategically important targets.
MARKETS
In North America, the most common historical application for ceramic fiber
has been to line industrial furnaces, where high temperature processes require
ceramic fiber's heat-resistant characteristics. Over the past several decades,
ceramic fiber has replaced traditional refractory linings in many types of
furnaces 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 insulating
furnaces, heaters and kilns and for other high temperature applications. Newer
applications generally rely on
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<PAGE> 38
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 airbag inflators and duct wrap systems used as passive fire
protection in commercial construction.
While maintaining its strong position in traditional furnace-related
markets, the Company's objective is to strengthen its leadership position in
more specialized niche markets. The Company has used its strong position and
technical expertise in the furnace-related markets to expand into these high
growth niche markets. These niche markets include automotive (airbag inflation
filters and catalytic converter gaskets), power generation (steam boiler
insulation, duct wrap and stack linings), and fire protection (commercial
kitchen exhaust duct wrap and cable trays).
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
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
As a result of the covenant not to compete entered into with SEPR, the
Company is prohibited from manufacturing, selling or distributing any products
outside the North American market until March 1, 2001 except XPE(TM) which the
Company will sell worldwide and certain products for which SEPR will act as
distributor. However, Company management believes that significant opportunities
exist within North America to expand the company's sales and profits.
Furnace-Related Markets. Ceramic fiber for furnace-related applications is
generally sold to the metal production, petrochemical, and ceramic and glass
industries.
The Company believes the metal production industry is the largest consumer
of ceramic fiber. The Company sells bulk fiber, blankets, modules, and textiles
to this market where these products are used as furnace linings, molten metal
transfer trough linings, seals and gaskets, and heat and splash shields. Demand
in the metal production industry historically has been linked to general
economic conditions, the rate of new furnace capacity expansions 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 OEMs,
engineering firms, or local refractory contractors. Demand in this 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 products in furnace
linings, as backup insulation for, 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 this market historically
has been linked to general economic conditions, the rate of furnace relining or
overhaul in the ceramic and glass industries, and the response to higher energy
costs.
Automotive Market. Three product types account for substantially all of
the fiber consumed by the automotive industry: porosity-controlled paper used in
airbag inflators, XPE(TM) gasket material used in catalytic converters, and
insulation material used in engine heat shields. In 1995, approximately 11% of
the Company's
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<PAGE> 39
net sales represented direct or indirect purchases of porosity-controlled paper
by TRW Inc. No other customer of the Company accounted for more than 10% of the
Company's net sales in 1995.
The Company believes it is the leading producer of porosity-controlled
paper used in the inflator modules of automotive airbags. The Company expects
continued growth in the demand for airbags as domestic and international airbag
usage increases and as more airbags are contained in each vehicle. However, the
primary technology for airbag inflators is presently based upon the use of
sodium azide as the propellant used to inflate the airbag. The Company believes
that sodium azide technology may be gradually displaced in new car designs by
one or more alternative technologies which may or may not use the Company's
porosity-controlled paper. As new car models are designed, alternative
technologies existing or being developed may replace the Company's ceramic based
fiber paper, leaving the Company with a smaller potential market for its
products. See "Risk Factors -- Dependence on Product Line."
The Company also supplies XPE(TM) for use in automotive catalytic
converters. The Company expects continued growth in XPE(TM) sales resulting from
the ongoing regulatory initiatives to reduce emissions. Much of this growth is
expected to come from international sales as more nations require cleaner
automobile emissions. In connection with the Saint-Gobain Sale, the Company
established overseas sales and distribution channels to service the worldwide
XPE(TM) market. SEPR has the right to take up a royalty-free, non-exclusive
license to manufacture and sell XPE(TM) outside the North American market in
competition with the Company. See "Risk Factors -- Dependence on Raw Material
Supplier" and "Certain Relationships and Related Transactions -- Relationship
with SEPR."
The Company also sells a number of other products to the automotive
industry. Examples of these products include bulk ceramic fiber and felts for
use in automotive friction components, preforms for piston crown reinforcement
and heat shields, where ceramic fiber provides improved performance
characteristics.
Other Markets. Ceramic fiber is being used in several newer applications
in niche markets such as power generation, fire protection, and commercial
insulation. In these industries, products are often customized to meet special
customer needs.
The power generation industry uses a variety of ceramic fiber products in
steam turbine duct linings. Ceramic fiber is also applied in package boilers
used in schools, hospitals and other institutions. 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 aided 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 exhaust
ducts, expansion joints, penetration seals), industrial construction (cable
trays, valve covers) and manufactured products (safes, file cabinets, wood stove
flues). Demand in the fire protection market historically has been linked to
general economic conditions, the level of commercial and institutional
construction, greater safety legislation, changes in 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 bulk fiber,
blankets, modules, boards, 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.
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 fiber with different
characteristics, dimensions, and process yields. These variations translate into
a
40
<PAGE> 40
wide variety of products that rely on specific fiber characteristics to achieve
an application's performance requirements.
The Company also employs advanced manufacturing processes associated with
the "wet" manufacture of papers and felts, boards, and other products. These
processes use bulk ceramic fiber as a feedstock in combination with binders or
other liquids which are then passed over a device 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. The major exception is vermiculite, a mineral which
is an important raw material in the manufacture of XPE(TM) which is used in
automotive catalytic converters. The Company currently purchases approximately
one-half of its requirements of vermiculite from one supplier in China and the
other half from a U.S. supplier. Because vermiculite from the Chinese source has
superior performance qualities, the Company believes that over the next two to
three years, both it and its competitors will become increasingly reliant on the
Chinese source. The Chinese source is expected to become dominant because of the
vermiculite's performance. Although the Company is attempting to identify
additional sources, at the present time, no additional source of vermiculite
with comparable performance qualities has been located, and if such a source is
located in the future, there can be no assurance that supplies can be obtained
from such source on the same terms and conditions as are obtained from the
current supplier. Any significant interruption in the supply of vermiculite for
an extended period of time 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(TM) represented approximately 10%
of the Company's net sales. See "Business -- Markets," and "Business --
Manufacturing and Operations." 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.
By concentrating its furnacing operations primarily at one location, the
Company believes that it has developed the industry's most advanced fiber
manufacturing technology 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 low volume, flexible
facilities designed for rapid commercialization of new products. This
two-pronged manufacturing strategy has resulted in lower costs, greater variety,
higher product quality and consistency, and superior customization and
engineering. 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 Pentastar Award in each of the last eight years, placing it
within the top 2% of Chrysler's suppliers. The Company's operations are
currently in the process of seeking certification under the International
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 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.
TECHNOLOGY AND TECHNOLOGY SUPPORT SERVICES
The Company employs a two-pronged technology program that focuses on
process improvement and new product development. The objective of this program
is greater manufacturing efficiency and market leadership in new applications.
As a result of its technology program, the Company has consistently achieved
annual
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<PAGE> 41
productivity and quality improvements in its manufacturing processes. During
each of the four years ended December 31, 1995, the Company's sales of products
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,
operates in a 9,500 square foot laboratory, including facilities for pilot plant
development and traditional research and development activities. This group of
nineteen employees possesses a broad base of material science expertise in
ceramics, chemistry, chemical engineering, mechanical engineering and physics.
In addition, each manufacturing facility has a process engineering staff
dedicated to the design and implementation of cost savings and product
improvement projects. Process engineering efforts draw heavily upon the central
research and development group in order to resolve the customers' technical
requirements.
New product development efforts are initiated based on the feedback and
direction of field sales and marketing professionals. A multi-functional team
approach 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 to develop new fiber
types as part of the Company's Product Stewardship Program.
The Company has maintained a strong financial commitment to its research
and development program. Research and development expense constituted
approximately 3.3%, 3.0%, and 2.9% of net sales during the years 1993, 1994 and
1995, respectively.
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 new high growth 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 ceramic fiber in many
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.
When the New Carlisle expansion is completed, the Company believes that it will
have sufficient
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<PAGE> 42
capacity to meet the demand for bulk fiber and blanket products through the year
2000. 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.
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 216,000 Owned Bulk ceramic fiber, blankets, modules, boards
Tonawanda, NY 144,000 Leased Papers, felts, boards, XPE(TM),
porosity-controlled paper
Amherst, NY 42,000 Leased Woven and spun textiles
Sanborn, NY 10,000 Leased(a) Fibermax(R), high temperature fiber
Niagara Falls, NY 33,000 Owned Headquarters, research laboratory
</TABLE>
- ---------------
(a) Currently, the Company owns this property. Prior to the Closing, the Company
will transfer this property to a subsidiary of BP America which will lease
the facility to the Company pursuant to a 20 year lease. See "Certain
Relationships and Related Transactions -- Relationship with BP and its
Subsidiaries -- Sanborn Lease."
PRODUCT AND HEALTH SAFETY ISSUES
Manufacturers of man-made vitreous fibers ("MMVF") such as fiberglass,
mineral wool and ceramic fiber have investigated 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, in
large quantities during the course of their lifetimes, can cause fibrosis, lung
cancer and mesothelioma, a malignant tumor of the lining of the lungs and chest
cavity. Company and industry-sponsored studies of workers with occupational
exposure to airborne ceramic fiber, however, to date have found no clinically
significant relationship between ceramic fiber exposure and respiratory disease
in humans.
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
environmental quality ("HSE") staff of professionals is led by a senior manager
who reports to the President and Chief Executive Officer of the Company. In
addition to these internal HSE resources, the Company utilizes the knowledge,
skills and expertise of a number of external consultants, including an
independent advisory board. Comprised of an internationally recognized group of
experts in the fields of medicine, pulmonary science, veterinary pathology,
toxicology and legislative, regulatory and legal affairs, the Ceramic Fiber
Advisory Board ("CFAB") evaluates human and animal study protocols and results.
In addition, the CFAB provides advice to the Company regarding proper handling
practices for ceramic fiber and other related product management issues.
The Company developed and implemented a comprehensive Product Stewardship
Program ("PSP") as one of its management systems. A key element of the PSP is
research focused on identifying and evaluating the potential health effects
associated with the inhalation of respirable fibers. These studies have taken
two forms: human studies, known as epidemiological investigations, and
toxicological research, which is generally conducted with test animals. Many of
these research activities have been conducted with the participation of other
members of the ceramic fiber industry.
In the area of human assessment, in 1987 the company commissioned a study
of approximately 1,500 current and former industry employees. The study was
conducted by researchers from the University of Cincinnati. The study, which is
ongoing, analyzes chest x-rays, pulmonary function and medical questionnaires.
Additionally, a mortality registry and a lung tissue registry have been
maintained pursuant to the study. Results to date of this study have identified
no clinically significant incidence of respiratory disease from ceramic fiber
exposure. Another finding indicates that exposure to ceramic fiber is associated
with an increased incidence of pleural plaques. The term "pleural plaque" is
used to describe discrete areas of
43
<PAGE> 43
thickening of a pleura (or membrane), 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 a form of
disease. Other findings suggest that the combination of ceramic fiber exposure
and smoking may result in a net effect greater than the added impacts of each
individual element. Accordingly, 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 ("MTD") study found that lifetime
exposure by laboratory rodents to ceramic fiber, at approximately 200 fibers per
cubic centimeter caused lung cancer in some of the rats tested. Unlike the rat
results, a hamster MTD study found no elevated incidence of lung cancer, but
instead identified some animals with mesothelioma. Separately, a multi-dose
inhalation study identified a "no observable adverse effect level ("NOAEL") at
about 25 fibers per cubic centimeter, along with evidence suggesting a
non-linear relationship between increasing dose and biological effect.
The Company's Product Stewardship Program also includes elements designed
to identify exposed populations, monitor employee and customer exposures and
pursue exposure reductions. Initial assessments indicate that most ceramic fiber
exposure is confined to the workplace and to a limited population of about
30,000 persons. Employee and customer exposure monitoring is conducted by the
Company under a rigorous protocol, jointly adopted pursuant to a voluntary
consent agreement by the U.S. Environmental Protection Agency ("EPA") and the
Refractory Ceramic Fiber Coalition ("RCFC"), the ceramic fiber industry trade
association. 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. Three years of monitoring have resulted in the collection and analysis
of 2,710 samples. Monitoring results document a continued trend of reduced
occupational exposure which have been produced by the introduction or
improvement of engineering controls, process changes or handling practices.
In the absence of a specific U.S. government standard regulating ceramic
fiber exposure, the industry adopted a recommended exposure guideline ("REG") of
one fiber per cubic centimeter. Scientific data available to date has been
regarded as insufficient for the purpose of defining a specific exposure
threshold of acceptably low risk for humans. The industry's voluntary exposure
guideline provides a quantitative basis to measure progress in implementing PSP
objectives to seek continuous reduction in fiber exposure through initiatives
that are technically and economically feasible.
PSP objectives also govern some of the design criteria of an ongoing
product research and development program. Called the 3-D program, representing
dose, dimension and durability, the Company searches for new ways to reduce
ceramic fiber potency potential. Health concerns can be reduced by producing
fibers that do not become airborne (dose); or if they become airborne, the
fibers are too large to be inhaled (dimension); or if inhaled, the fibers break
down more rapidly in the lung (durability). The Company has been active in
developing new types of industrial fibers with physical and chemical properties
that may help to reduce the potential risk associated with ceramic fiber. The
potential risks associated with fiber exposure are believed to be driven by
three characteristics, namely dose, dimension and durability. The Company has
already developed and introduced a new fiber type, suitable for applications to
1,800()F with a significantly reduced potential for exposure risks. The
Company's new fiber development efforts focus on fibers which are dimensionally
difficult to inhale, or if inhaled have physical and chemical properties which
cause them to break down more rapidly in lung fluids.
The proactive communication of ceramic fiber test data and study findings
with employees, customers, and other interested parties 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 authorities.
In keeping with PSP's proactive communication strategy, the Company has
developed and maintained cooperative working relationships with the regulatory
community. The Company shares animal and human
44
<PAGE> 44
study data freely and voluntarily includes regulatory agencies in the
development of the protocols for new studies. EPA conducted a review in 1991 to
determine if ceramic fiber exposure posed an unreasonable risk to human health.
EPA determined that available data was not sufficient to determine whether or
not an unreasonable risk exists. The U.S. Occupational Health and Safety
Administration ("OSHA") and Health Canada ("HC") have been reviewing the
potential health implications of ceramic fiber exposure for several years. The
Company provides information to these agencies routinely and, upon request,
undertakes special studies to facilitate agency investigations. The Company also
shares data with non-regulatory agencies, such as the National Institute for
Occupational Safety and Health ("NIOSH") and the National Toxicology Program
("NTP"). The Company also provides data to private sector organizations, such as
the American Conference of Governmental Industrial Hygienists ("ACGIH") and the
scientific community to facilitate their efforts to evaluate potential
exposure-related impacts.
Over time, health research data have been used by various organizations to
classify certain man-made fibers. For example, classification terms, such as
"possible" (International Agency for Research on Cancer, "IARC"), "probable"
(EPA and HC), "reasonably anticipated" (NTP), and "suspected" (ACGIH) reflect
the view of each organization as to the potential carcinogenicity of ceramic
fiber and/or other MMVFs. Each of these classifications reflect concern for
human health and uncertainty regarding the potential for airborne ceramic fiber
to affect occupational health adversely. These classification determinations
have not been followed by exposure standards in the U.S., but some regulators in
other countries have adopted a variety of regulatory thresholds. Although none
are presently foreseen domestically, if the U.S. adopts legislative or
regulatory standards severely restricting the use of ceramic fiber or severely
limiting fiber exposure, a material adverse effect on the Company's business
could result.
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 to differentiate itself from competitors.
Some of the Company's technology and trademarks have been licensed to SEPR. See
"Certain Relationships and Related Transactions -- 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 June 30, 1996, the Company
employed approximately 404 persons on a full-time basis, most of which were
non-union except for approximately 66 employees at the Company's Tonawanda plant
who are members of the Oil, Chemical and Atomic Workers union. The Company's
agreement with the union expires in 1998. The Company believes it has a
satisfactory relationship with its employees.
LEGAL PROCEEDINGS
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, including product liability claims.
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 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."
ENVIRONMENTAL MATTERS
General. The Company is subject to a variety of foreign, federal, state
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
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<PAGE> 45
can be no assurance that regulatory changes or changes in regulatory
interpretation or enforcement will not render compliance more difficult and
costly.
Superfund Sites. The Company may be named as a potentially responsible
party ("PRP")pursuant to the Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended ("CERCLA" or "Superfund") or comparable
state law in connection with off-site disposal of hazardous substances at three
sites, and Carborundum has entered into a Consent Decree with the New York State
Department of Environmental Conservation to remediate contamination at the
Company's facility located in Sanborn, New York. 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 and generators and transporters who have
contributed hazardous substances to the site. Courts have interpreted CERCLA to
impose retroactive, strict, joint and several liability upon all persons liable
for response costs. While the Company's ultimate clean-up liability at the sites
at which the Company is a potential PRP is not presently determined, the Company
does not expect to incur any material liability with respect to any of these
sites, individually or in the aggregate, as a result of BP America's
indemnification obligations for environmental liabilities under the
Recapitalization Agreement. In addition, BP America has assumed liability for
other potential off-site clean-up obligations associated with Carborundum. See
"Certain Relationships and Related Transactions -- Relationship with BP and its
Subsidiaries -- Recapitalization Agreement -- Environmental Indemnity." The
sites at which the Company has maintained potential off-site liability and the
Company's Sanborn, New York facility are described below.
Kline Trail Site. In 1984, the Company voluntarily advised the State of
Indiana of potential unauthorized disposal of waste at an Indiana site by a
transporter. 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.
PCB Inc., 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 by the EPA, either as to the number of potential
PRPs involved at the site or total projected clean-up costs.
Shulman Site. The Company has potential liability with respect to the
Shulman site in St. Joseph County, Indiana. The site is a landfill which the
Company believes to have 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 certain response 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 installing a clay cap
over the site, the cost of which is not yet known.
Sanborn Site. The Company's Sanborn, New York site was used by a number of
former Carborundum operations, as a result of which contamination by volatile
organic compounds is present in the soil and groundwater. Neither past nor
current operations of the Company are believed to have contributed to, or to be
contributing to, the existence of this contamination. While Carborundum entered
into a Consent Decree with the State of New York under which the Company is to
conduct remedial activities at the site, BP America has assumed responsibility
for implementing the remediation, 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.
Environmental Indemnity. See "Certain Relationships and Related
Transactions -- Relationship with BP and Its Subsidiaries -- Recapitalization
Agreement -- Environmental Indemnity."
46
<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Effective as of the Closing, the directors and executive officers of the
Company are expected to be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ----------------------------------------------
<S> <C> <C>
William P. Kelly..................... 46 Director, President and Chief Executive
Officer
Mark D. Roos......................... 41 Director, 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...................... 44 Vice President, Engineering and Purchasing
Raymond A. Lancaster................. 50 Director
William D. Manning, Jr............... 62 Director
John G. Nestor....................... 51 Chairman of the Board
John F. Turben....................... 61 Director
Edmund S. Wright..................... 53 Director
</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
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, and Vice President-Europe from 1986-1989.
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 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 the Saint-Gobain Sale and Manager of Technology since 1989. He joined
Carborundum in 1981.
Mr. Kuchera has been Vice President, Human Resources of the Company since
the Saint-Gobain Sale and Manager of Human Resources 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 the Saint-Gobain Sale. He joined Carborundum in 1976 and has
served in various engineering and manufacturing positions, including as
Engineering Manager since 1990 and worldwide engineering and purchasing manager
since 1993.
47
<PAGE> 47
Mr. Lancaster has been a Managing Partner of Kirtland since 1995. From 1990
to 1995, he was a General Partner of Key Equity Partners, a unit of Keycorp.
From 1984 to 1990, he was a Managing Partner of Norstar Venture Partners, a unit
of Fleet Financial Group. Mr. Lancaster is a director of Steris Corp. and
Fairmount Minerals Ltd.
Mr. Manning is currently self-employed as a management consultant. From
1987 to 1994, he was Senior Vice President of The Lubrizol Corporation and
President of Lubrizol Petroleum Chemicals Co. Mr. Manning is a director of
Robbins and Myers, Inc., Fletcher Paper Company and Park Avenue Marble Co.
Mr. Nestor has been with Kirtland since 1986 and has been a Managing
Partner of Kirtland since 1995. He is a director of Execution Services Inc. and
Fairmount Minerals Ltd.
Mr. Turben has been with Kirtland since 1977 and has been a Managing
Partner of Kirtland since 1995. He is a director of Execution Services Inc.,
Fairmount Minerals Ltd., Austin Ventures and Harrington & Richardson 1871, Inc.
Mr. Wright has been Chairman of the Board of Directors of Dakota Catalyst
Inc. since 1995. From 1981 to 1994, he was President and Chief Executive Officer
of North American Refractories Company. Mr. Wright is a director of Fairmount
Minerals Ltd.
COMPENSATION OF DIRECTORS
The Company expects that all directors of the Company will receive an
annual retainer of $10,000.
EXECUTIVE COMPENSATION
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 SECURITIES
COMPENSATION UNDERLYING
NAME AND ------------------ OPTIONS/ ALL OTHER
PRINCIPAL POSITION SALARY BONUS SARS(A) COMPENSATION(B)
- --------------------------------------------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
W. Kelly..................................... $155,514 $53,000 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 0/0 2,563
Vice President, Engineering and Purchasing
</TABLE>
- ---------------
(a) Options relate to ordinary shares of BP and do not relate to shares of
Common Stock of the Company. SARs relate to American Depositary Receipts
("ADRs") of BP. Each ADR is equal to twelve ordinary shares of BP.
48
<PAGE> 48
(b) Represents matching contributions made on behalf of the individuals to the
BP Capital Accumulation Plan and does not include bonuses paid to Messrs.
Kelly and Roos in 1996 by BP relating to the Saint-Gobain Sale.
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 during 1995, exercise of stock
options during 1995 by, and the value of options and SARs held at the end of
1995 by, the named executive officers. The stock options granted in 1995 and
earlier relate to ordinary shares of BP. The SARs granted in 1995 and earlier
relate to ADRs of BP. Each ADR is equal to twelve ordinary shares of BP.
OPTION/SAR GRANTS IN 1995 INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE
OPTIONS/ VALUE AT
NUMBER OF SARS ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICES
UNDERLYING EMPLOYEES APPRECIATION FOR
OPTIONS/ IN EXERCISE (10 YEARS)(d)
SARS FISCAL OR BASE -------------------------------------
NAME GRANTED(a) YEAR(b) PRICE(c) EXPIRATION DATE 5% 10%
- ------------------------ ---------- ----------- -------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
W. Kelly (e)............ 37,800/0 N/A $ 6.46 February 28, 2005 $ 153,567 $ 389,173
K. O'Gorman (e)......... 19,560/0 N/A 6.46 February 28, 2005 79,465 201,381
P. Viola (e)............ 19,560/0 N/A 6.46 February 28, 2005 79,465 201,381
M. Roos (f)............. 0/1,100 N/A 76.63 February 28, 2005 53,011 134,341
J. Pilecki.............. 0/0 N/A N/A N/A N/A N/A
<FN>
- ---------------
(a) Options and SARs become exercisable three years from the date of grant,
provided that BP meets certain performance targets.
(b) 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.
(c) 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.
(d) The assumed rates of appreciation are not intended to represent either past
or future appreciation rates with respect to the ordinary shares or the ADRs
of BP. The rates are prescribed in the applicable Securities and Exchange
Commission rules for use by all companies for the purpose of this table.
(e) 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 BP ordinary shares
exercisable in United Kingdom pounds sterling. Such 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 (d) above. These options terminate upon the consummation of the
Recapitalization.
(f) This table does not include the March 6, 1996, grant of SARs to Mr. Roos in
the amount of 900 ADRs of BP. 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
</TABLE>
49
<PAGE> 49
and $144,961, respectively. See footnote (d) above. These SARs terminate
upon the consummation of the Recapitalization.
AGGREGATED OPTION/SAR EXERCISES IN 1995 AND
FISCAL YEAR END OPTION/SAR VALUES (a)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(a)
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
W. Kelly................................ 0/0 37,800/2,001 $ 0/0 $76,901/81,044
K. O'Gorman............................. 0/0 19,560/1,800 0/0 39,793/68,700
P. Viola................................ 0/0 19,560/1,701 0/0 39,793/64,790
M. Roos................................. 0/466 0/2,034 0/16,543 0/61,070
J. Pilecki.............................. 0/0 0/0 N/A N/A
<FN>
- ---------------
(a) An option or SAR is "in the money" when the fair market value of the
underlying ordinary shares or ADRs exceeds the exercise price of the option
or SAR.
</TABLE>
1996 UNIFRAX CORPORATION STOCK OPTION PLAN
The Company expects to adopt a stock option plan (the "Option Plan") prior
to the consummation of the Offering pursuant to which options relating to the
common stock of the Company may be granted to any person who at the time of the
grant, is an employee of the Company or a subsidiary of the Company. The Option
Plan will be administered by the Compensation Committee. Subject to the express
provisions of the Option Plan, the Committee will have broad discretion to make
all determinations necessary or advisable for administering the Option Plan,
including the terms and conditions upon which options may be granted or
exercised.
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
COMPENSATION ELIGIBLE
UP TO COMPENSATION
AND INCLUDING ABOVE
1/48 OF THE 1/48 OF THE
YEARS OF SERVICE SOCIAL SECURITY SOCIAL SECURITY
(AT BEGINNING OF MONTHS) 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%.
50
<PAGE> 50
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.
The Company is a participating employer in the BP America Master Hourly
Plan for Represented Employees ("Hourly Plan") with respect to its
collectively-bargained employees. The Hourly Plan currently provides an accrued
benefit to the eligible Hourly Plan participants of $23.00 per year of credit
service, which amount is scheduled to increase to $24.00 per year of credited
service for retiring and/or terminating plan participants after September 23,
1996.
After the Closing, the Company will cease to be a participating employer
under the Hourly Plan. The Company will establish a mirror plan with respect to
this benefit program, to provide a continuation of benefits to the active
collectively-bargained employees at the Closing Date. Assets related to the
accrued liabilities of these active employees shall be transferred from the
Hourly Plan trust to a trust established by the Company in relation to the
mirror plan.
SAVINGS PLAN
The Company is a participating employer in the Carborundum Capital
Accumulation Plan (the "CAP") which covers substantially all employees,
including executive officers, but excludes employees covered by the collective
bargaining agreement. The CAP 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 provisions. The Company expects to adopt a similar plan.
The Tax Deferred Savings Plan for Hourly Employees of the Carborundum
Company and related trust (401(k) Savings Plan) is applicable to 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 Savings Plan. A participant may
direct a minimum of 1% and a maximum of 16% of eligible earnings to the Savings
Plan, subject to certain limitations under the Internal Revenue Code. A
participant's
51
<PAGE> 51
contributions become distributable upon the termination of his or her employment
for any reason. The Company does not match any employee contributions. The
Company plans to continue this collectively-bargained Savings 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 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 in 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. At least a majority of the members of the Audit Committee will be
independent directors.
The Compensation Committee will be charged with 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.
52
<PAGE> 52
PRINCIPAL STOCKHOLDERS
Holding owns 100% of the issued and outstanding common stock of Investment
Corp. Upon completion of the Recapitalization, Holding will own 90% of the
issued and outstanding common stock of the Company, with the remaining 10% held
by BPX. Upon consummation of the Recapitalization, the following persons will
own the outstanding common stock of Holding as set forth below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIAL OWNER OF COMMON STOCK OF CLASS
---------------- --------------- --------
<S> <C> <C>
Kirtland................................................... 247,000 91.5%
2550 SOM Center Road
Suite 105
Willoughby Hills, Ohio 44094(a)
William P. Kelly........................................... 5,000 1.9%
Mark D. Roos............................................... 1,000 *
Paul J. Viola.............................................. 1,350 *
Kevin J. O'Gorman.......................................... 1,500 *
John E. Pilecki............................................ 1,150 *
All directors and executive officers
of the Company as a group(b)............................. 13,350 4.9%
<FN>
- ---------------
*Less than 1%
(a) Kirtland Capital Corporation is the general partner of Kirtland and
exercises voting control and investment discretion with respect to
Kirtland's investment in Unifrax. John F. Turben, John G. Nestor and Raymond
A. Lancaster are the directors of Kirtland Capital Corporation.
(b) Excludes shares held by Kirtland of which Messrs. Turben, Nestor and
Lancaster may be deemed to be beneficial owners as a result of their control
of Kirtland. Messrs. Turben, Nestor and Lancaster disclaim any such
beneficial ownership.
</TABLE>
53
<PAGE> 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH BP AND ITS SUBSIDIARIES
Stockholders Agreement. At the Closing, Holding and BPX will enter into an
agreement relating to their respective ownership of stock of the Company (the
"Stockholders Agreement"). This agreement will: (i) in certain circumstances
grant BPX preemptive rights and rights of first refusal with respect to
issuances and sales, respectively, of stock of the Company; (ii) grant BP
piggyback registration rights with respect to equity securities of the Company;
(iii) restrict in certain circumstances the ability of the Company to enter into
certain dilutive or non-arm's-length transactions; and (iv) grant BP the right
to participate in certain circumstances in sales by Holding of Holding's common
stock of the Company.
Recapitalization Agreement. Pursuant to the Recapitalization Agreement, BP
America has agreed to indemnify the Company as set forth below.
General Indemnity. The Recapitalization Agreement provides that,
subject to certain limitations, BP America and certain of its affiliates
(collectively, "Seller") shall jointly and severally indemnify the Company
and Holding against, among other things, any and all claims, damages,
losses, expenses, costs, penalties, liens, fines, assessments, obligations
or liabilities of any kind, arising from all the discontinued operations of
the Company or its subsidiaries. The discontinued operations include but
are not limited to certain previously divested businesses, any other
Carborundum business not part of the Division or its foreign subsidiaries,
and the Sanborn New York real estate being transferred from the Company to
a BP subsidiary prior to Closing. See "-- Sanborn Lease." Seller also has
agreed to indemnify the Company and Holding for any breach of a
representation or warranty set forth in the Recapitalization Agreement.
Health and Safety Indemnity. Pursuant to the Recapitalization
Agreement, Seller has agreed to indemnify the Company and Holding against
liabilities for personal injury and wrongful death attributable to exposure
prior to the Closing to refractory ceramic fibers manufactured by the
Company. Seller has agreed to indemnify the Company and Holding against all
liabilities arising from exposure claims pending at the time of the
Closing. For all other claims arising from alleged exposure occurring
solely prior to Closing, Seller has agreed to indemnify the Company and
Holding against 80% of all losses, until the total loss which the Company
incurs reaches $3.0 million, after which time Seller has agreed to
indemnify the Company and Holding against 100% of such losses. Seller has
agreed to indemnify the Company and Holding against all punitive damages
attributable to the conduct of the Company prior to Closing. Where losses
arise from alleged exposure both before and after Closing, the losses will
be allocated between Seller and the Company, pro rata, based on the length
of exposure or pursuant to arbitration if initiated by the Company.
The Company cannot avail itself of this indemnity for losses
attributable to the Company's failure to maintain a Product Stewardship
Program consistent with the program maintained by the Company prior to
Closing, as modified in a commercially reasonable manner in accordance with
changing regulatory, scientific and technical factors. BP shall not
indemnify the Company with respect to any liabilities for wrongful death or
personal injury to the extent caused by the failure of the Company to
maintain a Product Stewardship Program consistent with that maintained by
the Company prior to the Closing.
Environmental Indemnity. Pursuant to the Recapitalization Agreement,
and subject to certain limitations, Seller has agreed to indemnify the
Company and Holding against environmental liabilities arising from
pre-closing conditions. The Recapitalization Agreement also provides that
Seller shall indemnify the Company and Holding against off-site liabilities
caused by the transport, storage or disposal of hazardous substances as
well as for the remedial obligations at the Sanborn, New York site.
Non-compete Agreement. At the Closing, BP shall enter into the Non-compete
Agreement with Holding providing that for a period of five years from the
Closing, BP and its affiliates will not, anywhere in the world, own, advise,
consult, manage, operate, join, control, be associated with or participate in
the ownership, management, operation or control of any business that competes
with the Company or its subsidiaries. Holding shall pay BP $10 million for the
Non-compete Agreement.
54
<PAGE> 54
Sanborn Lease. Prior to the Closing, the Company will transfer the real
property located in Sanborn, New York (the "Sanborn Property") to a subsidiary
of BP America known as Elm Holdings, Inc. ("Elm Holdings"). Elm Holdings will
lease the real property comprising the Sanborn Property currently used by the
Company in its operations to the Company in accordance with the terms and
conditions of a 20 year lease (the "Lease"). The Lease provides that the Company
will be responsible for taxes, utilities and insurance. The Company has an
option to purchase the property for $1.00 at any time during the 20-year lease
term. The Company will utilize this facility pursuant to a lease, rather than
fee ownership, in order to preserve maximum flexibility for possible
consolidation of operations in the future.
RELATIONSHIP WITH SEPR
As part of the Saint-Gobain Sale, the Company entered into a series of
agreements with SEPR which are summarized below (collectively, the "SEPR
Agreements").
Covenant Not to Compete. Pursuant to a covenant not to compete, the
Company is prohibited from manufacturing, selling or distributing products (with
the exception of XPE(TM) for automotive catalytic converters) outside the North
American market or owning an interest in or having an involvement with any
manufacturer or distributor of ceramic fibers outside that territory until March
1, 2001. SEPR is prohibited from manufacturing, selling and distributing
products in North America which are manufactured using technology licensed by
the Company to SEPR.
License Agreement. Pursuant to a License Agreement, SEPR received from the
Company a 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 the Company 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. Until March 1, 2001, SEPR
is obligated to pay the Company an annual technical fee, and the Company must
provide specific technical services, and product improvements and replacements,
and must maintain all of its patents outside of the North American market.
Product Distribution Agreement. Pursuant to the Product Distribution
Agreement, SEPR has 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(TM). These
include (i) products manufactured only in the North American market and sold
outside the North American market prior to the Saint-Gobain Sale ("Group I
Products"); and (ii) if SEPR is unable, with its equivalent products, to fulfill
a request from a customer outside of the North American market, (y) products
manufactured only in the North American market and not sold outside the North
American market prior to the Saint-Gobain Sale or (z) products developed by the
Company after 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.
For Group II Products, SEPR receives a fixed discount from the prevailing North
American market price.
Distribution Product License Agreement. Pursuant to the Distribution
Product License Agreement, SEPR must distribute such products on the Company's
behalf. SEPR is not entitled to a 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 upon 12
months' notice on a product-by-product basis for Group I Products by taking out
a license. 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. Any license for Group I Products will require SEPR to
pay a royalty on a declining scale until March 1, 2006, after which the license
becomes royalty-free. The Company is obligated to supply technical services, to
be charged at a per diem rate, until February 29, 2002.
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Conversion Agreement. Pursuant to the Conversion Agreement, SEPR has an
obligation to die-cut rolls of XPE(TM) 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(TM).
XPE(TM) License Agreement. Pursuant to the XPE(TM) License Agreement, SEPR
may cancel the Conversion Agreement upon six months' notice and take up to a
20-year royalty-free license to manufacture XPE(TM). The Company may continue to
sell XPE(TM) outside of the North American market during the term of such
license. In such event, the Company will be precluded from granting any further
license of this technology outside of the North American market for 20 years
except to an affiliate. The Company is obligated to supply, at a per diem rate,
technical services for a period of three years from the date of grant of the
license. 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 right to continue to use the name
and logo until March 1, 1997 while exhausting the existing inventory of
literature and packaging material. The ownership of product trademarks 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 such product trademarks
and sole use thereof will revert to the Company.
RELATIONSHIP WITH KIRTLAND AND HOLDING
Kirtland Advisory Services Agreement. At the Closing, the Company will pay
Kirtland a financing fee of $500,000 and reimburse Kirtland for its
out-of-pocket expenses as compensation for its services as financial advisor.
Also at the Closing, Kirtland and the Company will enter into an Advisory
Services Agreement (the "Advisory Services Agreement") pursuant to which
Kirtland will provide management consulting and financial advisory services to
the Company for an annual fee initially in the amount of $300,000, which amount
may be increased up to $500,000 with the approval of the members of the Board of
Directors of the Company who do not have a direct financial interest in any
person receiving payments under the Advisory Services Agreement. In addition, if
the Company completes an acquisition, Kirtland will be entitled to receive a fee
in an amount which will approximate 1% of the gross purchase price of the
acquisition (including assumed debt). The Advisory Services Agreement will
include customary indemnification provisions in favor of Kirtland.
Tax Sharing Agreement. Holding will file a consolidated federal income tax
return, under which the federal income tax liability of Holding and its
subsidiaries will be determined on a consolidated basis. Holding will enter into
a tax sharing agreement with the Company (the "Tax Sharing Agreement"). The Tax
Sharing Agreement is expected to provide that in any year in which the Company
is included in any consolidated tax return of Holding and has taxable income,
the Company will pay to Holding (except with respect to tax benefits resulting
from the Non-compete Agreement between BP and Holding) the amount of the tax
liability that the Company would have had on such date if it had been filing a
separate return. Conversely, if the Company generates losses or credits which
actually reduce the consolidated tax liability of Holding and its other
subsidiaries, if any, Holding will credit to the Company the amount of such
reduction in the consolidated tax liability. In the event any state and local
income taxes are determinable on a combined or consolidated basis, the Tax
Sharing Agreement provides for a similar allocation between Holding and the
Company of such state and local taxes.
The Company believes that the terms of the agreements and transactions
described above are fair to the Company and that no more favorable terms could
be obtained from unaffiliated third parties.
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DESCRIPTION OF CREDIT AGREEMENT AND OTHER INDEBTEDNESS
CREDIT AGREEMENT
Concurrently with the consummation of the Offering, the Company will
execute and deliver a $45.0 million term loan and revolving credit agreement
(the "Credit Agreement") and borrow thereunder approximately $25.0 million. The
proceeds from the sale of the Notes and the borrowings under the Credit
Agreement will be used to fund the Recapitalization and to pay financing fees
associated with the issuance of the Notes.
The balance of available borrowings under the Credit Agreement will be
available for general corporate purposes, including working capital and other
requirements of the Company. The revolving credit loans and the term loan are
anticipated to bear interest at a rate based upon the lender's prime rate or a
LIBOR-based rate. It is expected that the Company will also pay a commitment fee
upon the closing of the Credit Agreement, and an annual fee based in part upon
the amount of the average unused commitments. It is expected that the Credit
Agreement will terminate on the fifth anniversary of the date of the
consummation of the Offering, unless terminated sooner upon an event of default
(to be defined in the Credit Agreement), and outstanding revolving credit loans
and the term loan will be payable on such date or such earlier date as may be
accelerated following the occurrence of any event of default.
The Credit Agreement contains various covenants, including financial
covenants that require the Company to maintain minimum levels of net worth,
interest coverage and debt coverage ratios and capital expenditures. The other
covenants contained in the Credit Agreement include the obligation on the part
of the Company and its subsidiaries to limit mergers, liquidations,
consolidations and the sale and purchase of property; to limit dividends and
payments in respect of capital stock and indebtedness; to limit the incurrence
of indebtedness and the granting of liens and providing guarantees and making
investments and creating subsidiaries; to limit entering into future agreements
and transactions with related parties and making amendments to certain documents
(including the Indenture and the Notes).
The Events of Default contained in the Credit Agreement include the failure
to pay amounts due thereunder and the failure to perform or observe other
covenants set forth in the Credit Agreement and Agreements relating thereto; the
failure to make payments due under other indebtedness and the occurrence of any
default thereunder (including the Notes); insolvency, bankruptcy reorganization
or other similar proceedings of the Company and any of its subsidiaries; the
occurrence or existence of certain events relating to employee benefits matters;
if any representation or warranty of the Company or any of its subsidiaries in
the Credit Agreement or any agreement relating thereto or any documents
delivered in connection therewith is untrue or misleading in any material
respect when made or deemed made; if a judgment or decree is entered against the
Company or any subsidiary thereof, subject to certain limitations; if the Credit
Agreement or any agreement relating thereto ceases to be valid or enforceable or
the obligations thereunder are terminated; if the Company or any subsidiary
thereof is enjoined or restrained from conducting all or a material part of its
business for ten (10) or more days; if payments are made under the BP Note when
the funds available to the Company are below a certain minimum level; if there
occurs a material adverse change in the Company or in the collateral securing
the indebtedness under the Credit Agreement or in the ability of the Company to
perform its obligations thereunder; or if there occurs a change of control of
the Company or Holding.
Indebtedness under the Credit Agreement will rank pari passu with the Notes
and will be secured by a lien on all of the Company's real and personal
property, accounts receivable, inventory, general intangibles, trademarks and
licenses and the proceeds thereof. The Credit Agreement will contain various
events of default customary for transactions of this type.
THE BP NOTE
At the Closing, the Company will issue to BPX the BP Note in the principal
amount of $7.0 million. The note shall bear interest at the prime rate of
interest charged by a bank to be specified at Closing. Interest on the BP Note
is due on the first, second and third anniversaries of the date of the BP Note.
The principal of the BP Note is due on the third anniversary of the BP Note. The
BP Note is subordinate to the Notes and to the indebtedness under the Credit
Agreement.
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DESCRIPTION OF NOTES
The Notes will be issued under an indenture (the "Indenture") to be dated
as of October 15, 1996 by and among the Company and PNC Bank, National
Association, as Trustee (the "Trustee"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Indenture (a
copy of which will be filed as an exhibit to the Registration Statement of which
this Prospectus is a part), including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the TIA as in
effect on the date of the Indenture. The definitions of certain capitalized
terms used in the following summary are set forth below under "-- Certain
Definitions."
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all other senior unsecured obligations of the
Company.
The Notes as issued will be in book-entry form and represented by a single
global certificate which will be deposited with, or on behalf of, The Depository
Trust Company ("DTC") and registered in the name of Cede & Co., as nominee of
DTC. A beneficial owner may request physical delivery of Notes in certificated
form.
Initially, the Trustee will act as Paying Agent and Registrar for the
Notes. The Company may change any paying agent and registrar without notice to
holders of the Notes (the "Holders"). The Company will pay, when due, principal
(and premium, if any) on the Notes at the Trustee's corporate office in New
York, New York. At the Company's option, when due, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered addresses
of the Holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100,000,000 and
will mature on November 1, 2003. Interest on the Notes will accrue at the rate
of 10 1/2% per annum and will be payable semi-annually in cash on each May 1 and
November 1, commencing on May 1, 1997, to the Persons who are registered Holders
at the close of business on the April 15 and October 15, respectively,
immediately preceding the applicable interest payment date. Interest on the
Notes will accrue from and including the most recent date to which interest has
been paid or, if no interest has been paid, from and including the date of
issuance.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after November
1, 2000, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on of the years set forth
below, plus, in each case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------- ----------
<S> <C>
2000.................................... 105.250%
2001.................................... 102.625%
2002 and thereafter..................... 100.000%
</TABLE>
Optional Redemption Upon Public Equity Offerings. At any time, or from
time to time, on or prior to November 1, 1999, the Company may, at its option,
redeem up to $30,000,000 in aggregate principal amount with the net cash
proceeds of one or more Public Equity Offerings (as defined below) to redeem the
Notes at a redemption price equal to 110.500% of the principal amount thereof
plus accrued interest to the date of redemption; provided that after giving
effect to any such redemption the aggregate principal amount of Notes
outstanding must equal at least $70,000,000. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 60 days after the consummation of any such
Public Equity Offering.
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As used in the preceding paragraph, a "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of Holding or the
Company pursuant to a registration statement filed with and declared effective
by the Commission in accordance with the Securities Act; provided that, in the
event of a Public Equity Offering by Holding, Holding contributes to the capital
of the Company the portion of the net cash proceeds of such Public Equity
Offering necessary to pay the aggregate redemption price plus accrued interest
to the redemption date of the Notes to be redeemed pursuant to the preceding
paragraph.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; and provided,
further, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis
as is practicable (subject to the procedures of the Depository Trust Company),
unless such method is otherwise prohibited. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the paying agent for the Notes funds in satisfaction of the
applicable redemption price pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest thereon to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A Change of Control Offer shall remain open for a period of 20
business days or such longer period as may be required by law. Holders electing
to have a Note purchased pursuant to a Change of Control Offer will be required
to surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the paying agent for the
Notes at the address specified in the notice prior to the close of business on
the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third-party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to the Company's obligation to make a Change of Control Offer.
Restrictions in the Indenture described herein on the ability of the Company and
its Subsidiaries to incur additional Indebtedness, to grant liens on their
property, to make Restricted Payments and to make Asset Sales may also make more
difficult or discourage a
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takeover of the Company, whether favored or opposed by the management of the
Company. Consummation of any such transaction in certain circumstances may
require repurchase of the Notes, and there can be no assurance that the Company
or the acquiring party will have sufficient financial resources to effect such
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage any
leveraged buyout of the Company by the management of the Company. While such
restrictions cover a wide variety of arrangements which have traditionally been
used to effect highly leveraged transactions, the Indenture may not afford the
Holders of Notes protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, assume, guarantee, acquire, become liable, contingently or otherwise,
with respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness (other than Permitted Indebtedness); provided,
however, that if no Default or Event of Default shall have occurred and be
continuing at the time of or as a consequence of the incurrence of any such
Indebtedness, the Company may incur Indebtedness (including, without limitation,
Acquired Indebtedness) and any Subsidiary may incur Acquired Indebtedness, in
each case, if on the date of the incurrence of such Indebtedness, after giving
effect to the incurrence thereof (including a pro forma application of the net
proceeds of such Indebtedness), the Consolidated Fixed Charge Coverage Ratio of
the Company is greater than (a) 2.00 to 1.0, if the date of such incurrence is
on or prior to November 1, 1999, or (b) 2.25 to 1.0, if the date of such
incurrence is after November 1, 1999.
Indebtedness of a Person which is secured by a Lien on an asset acquired by
the Company or a Subsidiary of the Company (whether or not such Indebtedness is
assumed by the acquiring Person) shall be deemed incurred at the time of the
Asset Acquisition.
The Company will not incur any Indebtedness which by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated in right of
payment to any other Indebtedness of the Company unless such Indebtedness is
also by its terms (or by the terms of any agreement governing such Indebtedness)
made expressly subordinate in right of payment to the Notes pursuant to
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most favorable to
the holders of any other Indebtedness of the Company.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Subsidiaries to, directly or indirectly, (a) declare
or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or Holding or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock, (c) make any principal
payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or
retire for value, prior to any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes or (d) make any
Investment (other than a Permitted Investment) (each of the foregoing actions
set forth in clauses (a), (b) (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto,
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(i) a Default or an Event of Default shall have occurred and be continuing or
(ii) the Company is not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the covenant described
under "-- Limitation on Incurrence of Additional Indebtedness" or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date (the amount expended for such
purposes, if other than in cash, being the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company earned subsequent to the Issue Date and on or prior to
the date the Restricted Payment occurs (the "Reference Date") (treating such
period as a single accounting period); plus (x) 100% of the aggregate net cash
proceeds received by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and on or prior
to the Reference Date of Qualified Capital Stock of the Company; plus (y)
without duplication of any amounts included in clause (iii)(x) above, 100% of
the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit: (1) the payment of any dividend within
60 days after the date of declaration of such dividend if the dividend would
have been permitted on the date of declaration; (2) the acquisition of any
shares of Capital Stock of the Company, either (A) solely in exchange for shares
of Qualified Capital Stock of the Company or (B) if no Default or Event of
Default shall have occurred and be continuing, through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company that is subordinate or junior in
right of payment to the Notes, either (A) solely in exchange for shares of
Qualified Capital Stock of the Company, or (B) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of (I) shares of Qualified Capital Stock of the Company or (II)
Refinancing Indebtedness; (4) the making of payments by the Company to Holding
pursuant to and in accordance with the Tax Sharing Agreement; (5) the making of
payments by the Company to Holding to pay operating expenses, not to exceed
$500,000 in any fiscal year; (6) payments by the Company to redeem or repurchase
or to enable Holding to redeem or repurchase Capital Stock of Holding or the
Company, as the case may be, or Equity Interests issued to or on behalf of
directors, officers and employees of the Company or any of its Subsidiaries
pursuant to Company policy with respect to employees of the Company or its
Subsidiaries who have died or become disabled or whose employment has been
terminated or pursuant to the terms of employment contracts, other agreements or
employee benefit plans of Holding, the Company or any of its Subsidiaries not to
exceed $300,000 in any fiscal year; provided, however, that if such amount is
not used in its entirety within such fiscal year, the unutilized amount may be
utilized solely in the next succeeding fiscal year; and (7) payments for the
redemption, repurchase or other acquisition of shares of Capital Stock of the
Company in satisfaction of indemnification or similar claims arising under any
merger, consolidation, asset purchase or investment or similar acquisition
agreement, permitted under the Indenture, pursuant to which such shares of
Capital Stock were issued. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2)(B), (6) and (7) shall be included in such calculation.
Not later than the date of making any Restricted Payment (as defined in the
first paragraph of this covenant), the Company shall deliver to the Trustee an
officers' certificate stating that such Restricted Payment complies with the
Indenture and setting forth in reasonable detail the basis upon which the
required calculations were computed, which calculations may be based upon the
Company's latest available internal quarterly financial statements.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Subsidiaries to, consummate an Asset Sale unless (a) the Company or the
applicable Subsidiary of the Company, as the case may be, receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors), (b) at least 90% of the consideration received by
the Company or the Subsidiary of the Company, as the case may
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be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is
received at the time of such disposition; and (c) upon the consummation of an
Asset Sale, the Company shall apply, or cause such Subsidiary to apply, the Net
Cash Proceeds relating to such Asset Sale within 270 days of receipt thereof
either (i) to the extent the properties or assets that were the subject to such
Asset Sale constitute collateral under the Credit Agreement, to prepay any
Indebtedness under the Credit Agreement and effect a permanent reduction in the
availability under the Credit Agreement, (ii) to make an investment in
properties or assets that replace the properties or assets that were the subject
of such Asset Sale or in properties or assets that will be used in the business
of the Company and its Subsidiaries as existing on the Issue Date or in
businesses reasonably related thereto ("Replacement Assets"), or (iii) a
combination of prepayment and investment permitted by the foregoing clauses
(c)(i) and (c)(ii). On the 271st day after an Asset Sale or such earlier date,
if any, as the Board of Directors of the Company determines not to apply the Net
Cash Proceeds relating to such Asset Sale as set forth in clauses (c)(i),
(c)(ii) and (c)(iii) of the next preceding sentence (each, a "Net Proceeds Offer
Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been
applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (c)(i), (c)(ii) and (c)(iii) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Subsidiary, as
the case may be, to make an offer to purchase (a "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 days nor more than 45
days following the applicable Net Proceeds Offer Trigger Date, from all Holders
on a pro rata basis, that principal amount of Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest, if any, thereon to the date of
purchase; provided, however,that if at any time any non-cash consideration
received by the Company or any Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise disposed
of for cash (other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5,000,000 resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5,000,000, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
Person in a transaction permitted under "-- Merger, Consolidation and Sale of
Assets," the successor corporation shall be deemed to have sold the properties
and assets of the Company and its Subsidiaries not so transferred for purposes
of this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the fair
market value of such properties and assets of the Company or its Subsidiaries
deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this
covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Subsidiaries will be permitted to consummate an Asset Sale without complying
with such paragraphs to the extent (a) at least 90% of the consideration for
such Asset Sale constitutes Replacement Assets and (b) such Asset Sale is for
fair market value; provided that any consideration not constituting Replacement
Assets received by the Company or any of its Subsidiaries in connection with any
Asset Sale permitted to be consummated under this paragraph shall constitute Net
Cash Proceeds subject to the provisions of the two immediately preceding
paragraphs.
Notice of each Net Proceeds Offer will be mailed to the record Holders as
shown on the register of Holders within 25 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes with an aggregate principal amount exceeding the Net Proceeds Offer
Amount, Notes of tendering Holders will be purchased on a pro rata basis (based
on principal amounts tendered). A Net Proceeds Offer shall remain open for a
period of 20 business days or such longer period as may be required by law.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary of the Company to (a) pay dividends or make any other distributions
on or in respect of its Capital Stock; (b) make loans or advances or to pay any
Indebtedness or other obligation owed to the Company or any other Subsidiary of
the Company; or (c) transfer any of its property or assets to the Company or any
other Subsidiary of the Company, except for such encumbrances or restrictions
existing under or by reason of: (i) applicable law; (ii) the Indenture; (iii)
the Credit Agreement; (iv) customary non-assignment provisions of any contract
or any lease governing a leasehold interest of any Subsidiary of the Company;
(v) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person or the properties or assets of the Person so
acquired; (vi) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date; (vii) Purchase Money
Indebtedness for property or assets acquired that impose restrictions only on
the property or assets so acquired; or (viii) an agreement governing Refinancing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iii), (v), (vi) or (vii)
above; provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are no less favorable
to the Holders in any material respect as determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in the applicable
agreement referred to in such clause (ii), (iii), (v), (vi) or (vii).
Limitation on Preferred Stock of Subsidiaries. The Company will not permit
any of its Subsidiaries to issue any Preferred Stock (other than to the Company
or to a Subsidiary of the Company) or permit any Person (other than the Company
or a Subsidiary of the Company) to own any Preferred Stock of any Subsidiary of
the Company.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
permit or suffer to exist any Liens of any kind against or upon any property or
assets of the Company or any of its Subsidiaries, whether owned on the Issue
Date or acquired after the Issue Date, or any proceeds therefrom, or assign or
otherwise convey any right to receive income or profits therefrom unless (a) in
the case of Liens securing Indebtedness that is expressly subordinate or junior
in right of payment to the Notes, the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Liens and (b) in
all other cases, the Notes are equally and ratably secured, except for (i) Liens
existing as of the Issue Date to the extent and in the manner such Liens are in
effect on the Issue Date; (ii) Liens securing the Notes; (iii) Liens of the
Company or a Subsidiary of the Company on assets of any Subsidiary; (iv) Liens
securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which has been incurred in accordance with the provisions of the Indenture;
provided, however, that such Liens (x) are no less favorable to the Holders and
are not more favorable to the lienholders with respect to such Liens than the
Liens in respect of the Indebtedness being Refinanced and (y) do not extend to
or cover any property or assets of the Company or any of its Subsidiaries not
securing the Indebtedness so Refinanced; and (v) Permitted Liens.
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Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and its
Subsidiaries), whether as an entirety or substantially as an entirety to any
Person unless: (a) either (i) the Company shall be the surviving or continuing
corporation or (ii) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and its Subsidiaries substantially as an
entirety (the "Surviving Entity") (x) shall be a corporation organized and
validly existing under the laws of the United States or any state thereof or the
District of Columbia and (y) shall expressly assume, by supplemental indenture
(in form and substance satisfactory to the Trustee), executed and delivered to
the Trustee, the due and punctual payment of the principal of, premium, if any,
and interest on all of the Notes and the performance of every covenant of the
Notes and the Indenture on the part of the Company to be performed or observed;
(b) immediately after giving effect to such transaction and the assumption
contemplated by clause (a)(ii)(y) above (including giving effect to any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the case
may be, (i) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction and
(ii) shall be able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the covenant described under "--
Limitation on Incurrence of Additional Indebtedness;" (c) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (a)(ii)(y) above (including, without limitation, giving
effect to any Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and (d) the Company or
the Surviving Entity, as the case may be, shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of the
Company, the Capital Stock of which constitutes all or substantially all of the
properties and assets of the Company, shall be deemed to be the transfer of all
or substantially all of the properties and assets of the Company.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Notes with the same effect as if such surviving entity had been named as
such and the Company shall be discharged from its obligations under the
Indenture and the Notes.
Limitations on Transactions With Affiliates. (a) The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
or permit to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of their respective
Affiliates (each an "Affiliate Transaction"), other than (i) Affiliate
Transactions permitted under paragraph (b) of this covenant and (ii) Affiliate
Transactions on terms that are no less favorable to the Company or the
applicable Subsidiary of the Company than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Subsidiary. All
Affiliate Transactions (and each series of related Affiliate Transactions which
are similar or part of a common plan) involving aggregate payments or other
property with a fair market value in excess of $1,000,000 shall be
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approved by the Board of Directors of the Company, such approval to be evidenced
by a Board Resolution stating that such Board of Directors has determined that
such transaction complies with the foregoing provisions. If the Company or any
Subsidiary of the Company enters into an Affiliate Transaction (or a series of
related Affiliate Transactions related to a common plan) that involves an
aggregate fair market value of more than $5,000,000, the Company shall, prior to
the consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Subsidiary of the Company, as the case may be, from a financial point of view,
from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Subsidiary
of the Company as determined in good faith by the Company's Board of Directors;
(ii) transactions exclusively between or among the Company and any of its
Subsidiaries or exclusively between or among such Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture; (iii) Restricted
Payments permitted by the Indenture; (iv) payments made pursuant to the Advisory
Services Agreement; (v) payments made pursuant to and in accordance with the BP
Note and (vi) any agreement as in effect on the Issue Date.
Conduct of Business. The Company and its Subsidiaries will not engage in
any businesses which are not the same, similar or related to the businesses in
which the Company and its Subsidiaries are engaged on the Issue Date.
Future Subsidiary Guarantors. The Indenture will provide that the Company
shall cause each Subsidiary of the Company which, after the date of the
Indenture, becomes a guarantor under the Credit Agreement to execute and deliver
an indenture supplemental to the Indenture and thereby become a Guarantor which
shall be bound by the Guarantee of the Notes in the form set forth in the
Indenture (without such Guarantor being required to execute and deliver a
Guarantee endorsed on the Notes).
Reports to Holders. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of Section 314(a) of
the TIA.
EVENTS OF DEFAULT
The following events will be defined in the Indenture as "Events of
Default":
(a) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(b) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer);
(c) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to the covenant
described under "-- Certain Covenants -- Merger, Consolidation and Sale of
Assets," which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
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(d) a default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Subsidiary of the Company (or the
payment of which is guaranteed by the Company or any Subsidiary of the
Company), whether such Indebtedness now exists or is created after the
Issue Date, which default (i) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness after any applicable
grace period provided in such Indebtedness on the date of such default (a
"payment default") or (ii) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of
any such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity
of which has been so accelerated, aggregates at least $5,000,000;
(e) one or more judgments in an aggregate amount in excess of
$3,000,000 (which are not covered by (i) insurance as to which the insurer
has not disclaimed coverage or (ii) indemnification under the
Recapitalization Agreement as to which BP has not disputed entitlement)
shall have been rendered against the Company or any of its Subsidiaries and
such judgments remain undischarged, unpaid or unstayed for a period of 60
days after such judgment or judgments become final and non-appealable;
(f) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(f) above) shall occur and be continuing, the Trustee or the Holders of at least
25% in principal amount of outstanding Notes may declare the principal of,
premium, if any, and accrued and unpaid interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration," and the
same shall become immediately due and payable. If an Event of Default specified
in clause (f) above occurs and is continuing, then all unpaid principal of, and
premium, if any, and accrued and unpaid interest on all of the outstanding Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (a) if the rescission would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of the acceleration, (c) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (d) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f) of the description of
Events of Default above, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers
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shall provide such certification at least annually whether or not they know of
any Default or Event of Default) that has occurred and, if applicable, describe
such Default or Event of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, and satisfied all of its obligations with respect to the Notes, except
for (a) the rights of Holders to receive payments in respect of the principal
of, premium, if any, and interest on the Notes when such payments are due, (b)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (c) the rights, powers, trust,
duties and immunities of the Trustee and the Company's obligations in connection
therewith and (d) the Legal Defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "-- Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (a)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in United States dollars, non-callable United States
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (b) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (c) in the case of Covenant Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (d) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (e) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other agreement
or instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (f) the Company shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Company with the intent of preferring the Holders over any
other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; (g) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, reasonably satisfactory to the Trustee, each stating that
all conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance, as the case may be, have been complied with; (h) the
Company shall have delivered to the Trustee an opinion of counsel, reasonably
satisfactory to the Trustee, to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; and (i) certain other customary conditions precedent are
satisfied.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Company has paid all other sums payable under the Indenture by the Company;
and (c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may: (a) reduce the amount of Notes whose Holders must consent to an
amendment; (b) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes; (c)
reduce the principal of or change or have the effect of changing the fixed
maturity of any Notes, or change the date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor;
(d) make any Notes payable in money other than that stated in the Notes; (e)
make any change in provisions of the Indenture protecting the right of each
Holder to receive payment of principal of and interest on such Note on or after
the due date thereof or to bring suit to enforce such payment, or permitting
Holders of a majority in principal amount of Notes to waive Defaults or Events
of Default; (f) amend, change or modify in any material respect the obligation
of the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate a Net Proceeds Offer with respect to
any Asset Sale that has been consummated or modify any of the provisions or
definitions with respect thereto; or (g) modify or change any provision of the
Indenture or the related definitions affecting ranking of the Notes in a manner
which adversely affects the Holders.
GOVERNING LAW
The Indenture will provide that the Indenture and the Notes will be
governed by and construed in accordance with the laws of the State of New York,
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
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The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or a
Guarantor, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms to be used in
the Indenture. Reference is made to the form of Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person merges or consolidates with the
Company or any of its Subsidiaries or assumed by the Company or a Subsidiary of
the Company in connection with the acquisition of assets from such Person and in
each case not incurred in connection with, or in anticipation or contemplation
of, such acquisition, merger or consolidation.
"Advisory Services Agreement" means the advisory services agreement by and
between the Company and Kirtland Capital Corporation, as such agreement may be
amended.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Certain
Covenants -- Limitations on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Subsidiary of the Company in any other Person pursuant to which such Person
shall be merged with or into the Company or any Subsidiary of the Company, or
(b) the acquisition by the Company or any Subsidiary of the Company of the
assets of any Person (other than a Subsidiary of the Company) which constitute
all or substantially all of the assets of such Person or comprises any division
or line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Subsidiaries (including any Sale and Leaseback Transaction) to any Person
other than the Company or a Subsidiary of the Company of (a) any Capital Stock
of any Subsidiary of the Company; or (b) any other property or assets of the
Company or any Subsidiary of the Company other than in the ordinary course of
business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Subsidiaries receive aggregate consideration of less than $500,000 and (ii) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of the Company as permitted under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets."
"Board of Directors" means, as to any Person, the board of directors or
other equivalent governing body of such Person or any duly authorized committee
thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"BP" means The British Petroleum Company plc and any of its Subsidiaries.
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"BP Note" means the promissory note of the Company to be dated as of the
Issue Date in favor of BP Exploration (Alaska) Inc., a Delaware corporation, in
the original principal amount of $7,000,000.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP, and the amount of such obligations at
any date shall be the capitalized amount of such obligations at such date,
determined in accordance with GAAP.
"Capital Stock" means (a) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (b) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (c) commercial paper maturing no more than
one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (d)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank (including the Trustee)
organized under the laws of the United States of America or any state thereof or
the District of Columbia or any United States branch of a foreign bank having at
the date of acquisition thereof combined capital and surplus of not less than
$250,000,000; (e) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clause (a) above entered
into with any bank meeting the qualifications specified in clause (d) above; and
(f) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (a) through (e) of this
definition including funds managed and advised by the Trustee or an affiliate of
the Trustee and for which the Trustee or an affiliate of the Trustee receives
payment.
"Change of Control" means the occurrence of one or more of the following
events: (a) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company or Holdings to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Indenture) other than Permitted Holder(s);
(b) the approval by the holders of Capital Stock of the Company of any plan or
proposal for the liquidation or dissolution of the Company (whether or not
otherwise in compliance with the provisions of the Indenture); (c) any Person or
Group (other than the Permitted Holders(s)) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company or Holdings; or (d) the replacement of a majority
of the Board of Directors of the Company or Holdings over a two-year period from
the directors who constituted the Board of Directors of the Company or Holdings,
as the case may be, at the beginning of such period, and such replacement shall
not have been approved by a vote of at least a majority of the Board of
Directors of the Company or Holdings, as the case may be, then still in office
who either were members of such Board of Directors at the beginning of such
period or whose election as a member of such Board of Directors was previously
so approved.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "-- Change
of Control."
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
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"Commission" means the Securities and Exchange Commission.
"Company" means the Unifrax Investment Corp., a Delaware corporation.
"Consolidated EBITDA" means, for any period, the sum (without duplication)
of (a) Consolidated Net Income and (b) to the extent Consolidated Net Income has
been reduced thereby, (i) all income taxes of the Company and its Subsidiaries
paid or accrued in accordance with GAAP for such period (other than income taxes
attributable to extraordinary, unusual or nonrecurring gains or losses or taxes
attributable to sales or dispositions outside the ordinary course of business),
(ii) Consolidated Interest Expense, (iii) Consolidated Non-cash Charges, and
(iv) expenses associated with voluntary health studies undertaken by the Company
to develop new types of industrial fibers with physical and chemical properties
to help reduce the potential risks associated with ceramic fiber not to exceed
$1,250,000 in any consecutive 12-month period, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for the Company and its Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
the Company for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis, in accordance with Article 11 of Regulation S-X under the
Securities Act of 1933, as amended, for the period of such calculation to (a)
the incurrence or repayment of any Indebtedness of the Company or any of its
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (b) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of its Subsidiaries incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If the
Company or any of its Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or such Subsidiary,
as the case may be, had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (i) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (ii) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (iii) notwithstanding clause (i) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Company and its Subsidiaries prior to the stated maturity
thereof
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pursuant to the agreements governing such Indebtedness), plus (b) the product of
(i) the amount of all dividend payments on any series of Preferred Stock of the
Company (other than dividends paid in Qualified Capital Stock) paid, accrued or
scheduled to be paid or accrued during such period times (ii) a fraction, the
numerator of which is one and the denominator of which is one minus the
then-current effective consolidated federal, state and local income tax rate of
the Company, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Company and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without limitation, (i)
any amortization of original issue discount, (ii) the net costs under Interest
Swap Obligations, (iii) all capitalized interest and (iv) the interest portion
of any deferred payment obligation; and (b) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and its Subsidiaries during such period as determined on
a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any
period, the aggregate net income (or loss) of the Company and its Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (a) after-tax gains from Asset
Sales or abandonments or reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains, (c) the net income of any
Person acquired in a "pooling of interests" transaction accrued prior to the
date it is merged or consolidated with the Company or any Subsidiary of the
Company, (d) the net income (but not loss) of any Subsidiary of the Company to
the extent that the declaration of dividends or similar distributions by such
Subsidiary of that income is restricted by a contract, operation of law or
otherwise, (e) the net income of any Person, other than a Subsidiary of the
Company, except to the extent of cash dividends or distributions paid to the
Company or to a Subsidiary of the Company by such Person, (f) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued), and (g) in the case of a successor to the Company
by consolidation or merger or as a transferee of the Company's assets, any net
income (or loss) of the successor corporation prior to such consolidation,
merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-Cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and its Subsidiaries reducing Consolidated Net Income of the Company
for such period, determined on a consolidated basis in accordance with GAAP
(excluding any such charges constituting an extraordinary item or loss or any
such charge which requires an accrual of or a reserve for cash charges for any
future period).
"Covenant Defeasance" has the meaning set forth under "-- Legal Defeasance
and Covenant Defeasance."
"Credit Agreement" means the Loan and Security Agreement to be dated as of
the Issue Date among the Company, Bank of America Illinois, as agent, and the
lenders party thereto, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder (provided that such increase in borrowings is permitted by the
covenant described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness") or adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness under
such agreement or any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or similar agreement or arrangement designed to protect the Company or
any Subsidiary of the Company against fluctuations in currency values.
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"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Equity Interests" means warrants, options or other stock purchase rights
to acquire the Capital Stock of the Company or Holding, as the case may be (but
excluding any debt security which is convertible into or exchangeable for,
Common Stock of the Company or Holding, as the case may be).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair market value shall be
determined by the Board of Directors of the Company acting reasonably and in
good faith and shall be evidenced by a Board Resolution of the Company delivered
to the Trustee.
"Foreign Subsidiaries" means XPE Vertriebs GmbH, a German corporation and
NAF Brasil Ltda., a Brazilian corporation.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantee" means a guarantee, direct or indirect, in any manner, of all or
any part of any Indebtedness.
"Guarantor" means any Subsidiary of the Company that guarantees the
Company's obligations under the Indenture and the Notes after the Issue Date.
"Holding" means Unifrax Holding Co., a Delaware corporation.
"Incur" has the meaning set forth under "-- Certain Covenants -- Limitation
on Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication, (a)
all Obligations of such Person for borrowed money, (b) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (c)
all Capitalized Lease Obligations of such Person, (d) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business), (e) all Obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (f) Guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (a) through (e) above and clause
(h) below, (g) all Obligations of any other Person of the type referred to in
clauses (a) through (f) above which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (h) all Obligations under currency agreements and
interest swap agreements of such Person and (i) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented by such
Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the
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fair market value of such Disqualified Capital Stock, such fair market value
shall be determined reasonably and in good faith by the Board of Directors of
the Company.
"Independent Financial Advisor" means a firm (a) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect material financial interest in the Company and (b) which, in the
judgment of the Board of Directors of the Company, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Subsidiaries on commercially reasonable terms in accordance with
normal trade practices of the Company or such Subsidiary, as the case may be, or
of the industry. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Capital Stock of any Subsidiary of the Company such
that, after giving effect to any such sale or disposition, it ceases to be a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Capital Stock of such Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under "-- Legal Defeasance and
Covenant Defeasance."
"Lien" means with respect to any property or assets of any person, any
lien, mortgage or deed of trust, pledge, hypothecation, assignment, security
interest, lien, charge, easement, encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
on or with respect to such property or assets (including, without limitation,
any conditional sale or other title retention agreement, any lease in the nature
thereof (but excluding operating leases as defined by GAAP) and any agreement
having substantially the same economic effect as any of the foregoing).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Subsidiaries from such Asset Sale net of (a)
reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale, (d) appropriate
amounts to be provided by the Company or any Subsidiary of the Company, as the
case may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary of
the Company, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale and (e) with respect to any proceeds
received by any Subsidiary of the Company, any dividend or distribution payable
to holders of minority interests in such Subsidiary from the proceeds of such
Asset Sale.
"Net Proceeds Offer" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
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"Net proceeds Offer Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under
"-- Certain Covenants -- Limitation on Asset Sales."
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holders" means Kirtland Capital Partners II, L.P. and Kirtland
Capital Corporation, an Ohio corporation and their Affiliates and any
shareholder or partner thereof.
"Permitted Indebtedness" means, without duplication, each of the following:
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed (A)
$25,000,000 with respect to the Indebtedness under the term loan facility
as reduced by the aggregate principal amount permanently repaid with the
proceeds of Asset Sales and (B) the greater of $20,000,000 or the amount
available for borrowings with respect to Indebtedness under the revolving
credit facility pursuant to the borrowing base of the Credit Agreement as
reduced by the aggregate principal amount permanently repaid with the
proceeds of Asset Sales less the amount of Indebtedness then outstanding
pursuant to clause (o) hereof;
(c) Indebtedness outstanding on the Issue Date;
(d) Interest Swap Obligations of the Company or a Guarantor covering
Indebtedness of the Company or any of its Subsidiaries and Interest Swap
Obligations of any Subsidiary of the Company covering Indebtedness of such
Subsidiary; provided, however, that such Interest Swap Obligations are
entered into to protect the Company and its Subsidiaries from fluctuations
in interest rates on Indebtedness permitted under the Indenture to the
extent the notional principal amount of such Interest Swap Obligation does
not exceed the principal amount of the Indebtedness to which such Interest
Swap Obligation relates;
(e) Indebtedness of a Subsidiary of the Company to the Company or to
another Subsidiary of the Company for so long as such Indebtedness is held
by the Company or such Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Subsidiary of the Company; provided
that if as of any date any Person other than the Company or such Subsidiary
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness under this clause (e) by the issuer of
such Indebtedness;
(f) Indebtedness of the Company to a Subsidiary of the Company for so
long as such Indebtedness is held by such Subsidiary, in each case subject
to no Lien; provided that (i) any Indebtedness of the Company to any
Subsidiary of the Company is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
Notes and (ii) if as of any date any Person other than a Subsidiary of the
Company owns or holds any such Indebtedness or holds a Lien in respect of
such Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness under this clause (f) by the
Company;
(g) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
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(h) Indebtedness of the Company or any of its Subsidiaries represented
by letters of credit for the account of the Company or such Subsidiary, as
the case may be, in order to provide security for workers' compensation
claims, payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business;
(i) Refinancing Indebtedness;
(j) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(k) Capitalized Lease Obligations and Purchase Money Indebtedness of
the Company or any of its Subsidiaries in an aggregate principal amount not
to exceed $2,000,000 at any one time outstanding;
(l) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $5,000,000 at any one time outstanding;
(m) Indebtedness arising from guarantees of loans and advances by
third parties to employees and officers of the Company or its Subsidiaries
in the ordinary course of business for bona fide business purposes,
provided that the aggregate amount of such guarantees when added to the
amount then outstanding pursuant to clause (d) of the definition of
"Permitted Investments" does not exceed $250,000;
(n) Indebtedness arising from the repurchase of Common Stock or Equity
Interests if otherwise permitted under the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments" above;
(o) Indebtedness incurred by a Foreign Subsidiary in the ordinary
course of business in the aggregate not to exceed $5,000,000 at any one
time outstanding; and
(p) Guarantees incurred pursuant to the Credit Agreement or clause (o)
above.
"Permitted Investments" means (a) Investments by the Company or any
Subsidiary of the Company in any Person that is or will be immediately after
such Investment a Wholly Owned Subsidiary of the Company or that will merge or
consolidate into the Company or a Wholly Owned Subsidiary of the Company, (b)
Investments in the Company by any Subsidiary of the Company; provided that any
Indebtedness evidencing any such Investment held by a Subsidiary of the Company
is unsecured and subordinated, pursuant to a written agreement, to the Company's
obligations under the Notes and the Indenture; (c) investments in cash and Cash
Equivalents; (d) loans and advances to employees and officers of the Company or
any of the Subsidiaries of the Company in the ordinary course of business for
bona fide business purposes provided that the aggregate amount of such loans and
advances when added to the amount outstanding pursuant to clause (l) of the
definition of "Permitted Indebtedness" does exceed $250,000 at any one time
outstanding; (e) Interest Swap Obligations and Currency Agreements entered into
in the ordinary course of the Company's or its Subsidiaries' businesses and
otherwise in compliance with the Indenture; (f) Investments in securities of
trade creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (g) Investments made by the Company or its Subsidiaries as a result
of consideration received in connection with an Asset Sale made in compliance
with the covenant described under "-- Certain Covenants -- Limitation on Asset
Sales" covenant and (h) Investments by the Company or any Subsidiary of the
Company in Persons other than Wholly Owned Subsidiaries not to exceed $2,000,000
at any one time outstanding.
"Permitted Liens" means the following types of Liens:
(a) Liens for taxes, assessments or governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or a Subsidiary of the Company, as
the case may be, shall have set aside on its books such reserves as may be
required pursuant to GAAP;
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(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(c) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(d) judgment Liens not giving rise to an Event of Default;
(e) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Subsidiaries;
(f) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(g) Liens securing Purchase Money Indebtedness of the Company or any
Subsidiary of the Company; provided, however, that (i) the Purchase Money
Indebtedness shall not be secured by any property or assets of the Company
or any Subsidiary of the Company other than the property and assets so
acquired and (ii) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition;
(h) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(i) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Subsidiaries, including rights of offset and set-off;
(j) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(k) Liens securing Indebtedness incurred under the Credit Agreement or
pursuant to clause (l) or (o) of the definition of Permitted Indebtedness;
and
(l) Liens securing Acquired Indebtedness incurred in accordance with
the covenant described under "-- Certain Covenants -- Limitation on
Incurrence of Additional Indebtedness;" provided that (i) such Liens
secured such Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a Subsidiary of
the Company and were not granted in connection with, or in anticipation of,
the incurrence of such Acquired Indebtedness by the Company or a Subsidiary
of the Company and (ii) such Liens do not extend to or cover any property
or assets of the Company or of any of its Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the time
such Indebtedness became Acquired Indebtedness of the Company or a
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Subsidiary of the Company.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
77
<PAGE> 77
"Public Equity Offering" has the meaning set forth under
"-- Redemption -- Optional Redemption upon Public Equity Offerings."
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Subsidiaries incurred in connection with the purchase of property or assets for
the business of the Company and its Subsidiaries and any Refinancing thereof.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Recapitalization Agreement" means the recapitalization agreement effective
as of June 9, 1996 among Unifrax, Holding, Investment Corp. and BP.
"Reference Date" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Subsidiary of the Company of Indebtedness incurred in accordance with the
covenant described under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness" covenant (other than pursuant to clause (b), (d), (e),
(f), (g), (h), (j), (k), (l) or (o) of the definition of Permitted
Indebtedness), in each case that does not (i) result in an increase in the
aggregate principal amount of Indebtedness of the Company as of the date of such
proposed Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company and its Subsidiaries in connection
with such Refinancing) or (ii) create Indebtedness with (x) a Weighted Average
Life to Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (y) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided that (1) if such
Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (2) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"Replacement Assets" has the meaning set forth under "-- Certain
Covenants -- Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Subsidiary of the Company of any property, whether
owned by the Company or any Subsidiary of the Company at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or such
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(v)
of Regulation S-X under the Securities Act.
"Subsidiary," with respect to any Person, means (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (b) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "-- Certain
Covenants -- Merger, Consolidation and Sale of Assets."
78
<PAGE> 78
"Tax Sharing Agreement" means the agreement between the Company and Holding
as such Tax Sharing Agreement is in effect on the Issue Date and as the same may
be amended pursuant to any amendment, alteration, modification or waiver thereto
that is not materially adverse to the interests of the Company or the Holders.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than in the case of a
foreign subsidiary, directors' qualifying shares or immaterial amounts of shares
required to be owned by other Persons pursuant to applicable law) are owned by
such Person or any Wholly Owned Subsidiary of such Person.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among Investment Corp. and BT Securities Corporation
and NationsBanc Capital Markets, Inc. (together, the "Underwriters"), the
Underwriters have severally agreed to purchase from Investment Corp., and
Investment Corp. has agreed to sell to the Underwriters severally, the entire
principal amount of the Notes offered hereby.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions. The nature of
each Underwriter's obligation is such that each is committed to purchase the
aggregate principal amount of Notes set forth opposite its name if any Notes are
purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- --------------------------------------------------------------------------- ----------------
<S> <C>
BT Securities Corporation.................................................. $ 75,000,000
NationsBanc Capital Markets, Inc........................................... 25,000,000
----------------
Total.................................................................... $100,000,000
===============
</TABLE>
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain dealers
at such price less a concession not in excess of 0.250% of the principal amount
of the Notes offered hereby. After the public offering of the Notes offered
hereby, the public offering price and other selling terms may be changed.
Investment Corp. does not intend to apply for listing of the Notes on a
national securities exchange. Investment Corp. has been advised by the
Underwriters that they presently intend to make a market in the Notes, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in the Notes, and any such market making
may be discontinued at any time at the sole discretion of the Underwriters.
There can be no assurance that an active public market for the Notes will
develop.
Investment Corp. has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Act, or to contribute to payments
that the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the Notes being offered hereby will be passed upon for
Investment Corp. by Baker & Hostetler, Cleveland, Ohio. Certain legal matters
will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York. From time
to time, Baker & Hostetler represents The British Petroleum Company plc and
certain of its affiliates in certain matters.
79
<PAGE> 79
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 Investment
Corp. as of August 20, 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 six-month periods ended June 30, 1995 and 1996 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 Notes 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 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 Notes, 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. (The Commission maintains
a site on the World Wide Web containing reports, proxy materials, information
statements and other items. The address is http://www.sec.gov). 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.
80
<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNIFRAX INVESTMENT CORP.:
Report of Independent Auditors........................................................ F-2
Balance Sheet as of August 20, 1996................................................... F-3
Note to Balance Sheet................................................................. F-4
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION:
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
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH AND NAF BRASIL LDTA.:
Independent Accountants' Review Report................................................ F-21
Combined Balance Sheets as of June 30, 1995 and 1996 (unaudited)...................... F-22
Combined Statements of Income for the six months ended June 30, 1995 and 1996
(unaudited)......................................................................... F-23
Combined Statement of Changes in Parent Company Investment for the six months ended
June 30, 1995 and 1996 (unaudited).................................................. F-24
Combined Statements of Cash Flows for the six months ended June 30, 1995 and 1996
(unaudited)......................................................................... F-25
Notes to Interim Combined Financial Statements (unaudited)............................ F-26
</TABLE>
F-1
<PAGE> 81
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
Unifrax Investment Corp.
We have audited the accompanying balance sheet of Unifrax Investment Corp. at
August 20, 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 Investment Corp. at August
20, 1996 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Buffalo, New York
August 20, 1996
F-2
<PAGE> 82
UNIFRAX INVESTMENT CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 20,
1996
----------
<S> <C>
Cash.............................................................................. $1,000
======
SHAREHOLDER'S EQUITY
Common stock, no par value; 1,000 shares authorized; 1,000 shares issued and
outstanding..................................................................... $ 10
Additional paid-in capital........................................................ 990
------
$1,000
======
</TABLE>
See accompanying note.
F-3
<PAGE> 83
UNIFRAX INVESTMENT CORP.
NOTE TO BALANCE SHEET
1. ORGANIZATION
Unifrax Investment Corp. was organized for the purpose of obtaining funds
through a public offering of debt securities to be used to partially finance a
stock redemption by Unifrax Corporation, an indirect wholly-owned subsidiary of
BP America Inc. and ultimately of The British Petroleum Company plc ("BP"), in
connection with a recapitalization and acquisition of Unifrax Corporation and
two related sales corporations located in Germany and Brazil, which are owned by
BP International Limited, a wholly-owned subsidiary of BP, by Unifrax Holding
Co.
Unifrax Investment Corp. was incorporated in Delaware on August 20, 1996.
F-4
<PAGE> 84
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.
/s/ ERNST & YOUNG LLP
Buffalo, New York
April 19, 1996
Except for Notes 1 and 14, as to which the date is
June 9, 1996
F-5
<PAGE> 85
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1995
------- -------
<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................................................... 2,783 2,465
Prepaid expenses and other current assets............................... 152 181
------- -------
Total current assets...................................................... 26,528 24,657
Property, plant and equipment, net........................................ 30,076 29,288
Other assets.............................................................. 293 294
------- -------
$56,897 $54,239
======= =======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable........................................................ $ 2,354 $ 3,081
Accrued expenses........................................................ 7,486 6,813
------- -------
Total current liabilities................................................. 9,840 9,894
Accrued postretirement benefit cost....................................... 4,878 4,986
Deferred income taxes..................................................... 3,825 3,535
Other long-term obligations............................................... 400 400
------- -------
Total liabilities......................................................... 18,943 18,815
Parent company investment -- excess of assets over liabilities............ 37,954 35,424
------- -------
$56,897 $54,239
======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 86
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
<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...................................... 2,247 2,272 2,450
Restructuring charges......................................... 155 -- --
------- ------- -------
54,702 59,129 63,548
------- ------- -------
Operating income................................................ 12,990 17,117 20,516
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.......................................... 13,539 17,708 21,448
Provision for income taxes...................................... 5,611 7,256 8,743
------- ------- -------
Income before cumulative effect of change in accounting
principle..................................................... 7,928 10,452 12,705
Cumulative effect of change in accounting principle............. (2,658) -- --
------- ------- -------
Net income...................................................... $ 5,270 $10,452 $12,705
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 87
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
STATEMENT OF CHANGES IN PARENT COMPANY INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1993......................................................... $38,439
Net income......................................................................... 5,270
Net change in parent company advances.............................................. (7,238)
-------
Balance at December 31, 1993....................................................... 36,471
Net income......................................................................... 10,452
Net change in parent company advances.............................................. (8,969)
-------
Balance at December 31, 1994....................................................... 37,954
Net income......................................................................... 12,705
Net change in parent company advances.............................................. (15,235)
-------
Balance at December 31, 1995....................................................... $35,424
=======
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 88
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 5,270 $10,452 $12,705
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........................... (233) (591) 28
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...................... 97 350 54
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> 89
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 p1c ("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, and its related domestic and
foreign affiliates (collectively the "Group"). In May 1995, BP entered into an
agreement under the terms of which it agreed to sell principally all continuing
businesses of the Group including the non-North American Fibers businesses of
Carborundum, but 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.
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 14). 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.
On June 9, 1996, BP entered into an agreement whereby BP agreed, subject to
future financing, to complete a recapitalization of Unifrax, which will result
in Unifrax Holding Co., an entity controlled by Kirtland Capital Partners, and
BP owning 90% and 10%, respectively, of the common stock of Unifrax. The
agreement contains, among other things, an indemnification by BP, 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 cost sharing provisions. The closing
of the transaction is expected to occur in October 1996.
F-10
<PAGE> 90
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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).
2. SAINT-GOBAIN SALE
On February 29, 1996, BP completed the sale of principally all continuing
businesses of the Group, including Carborundum, but excluding the Division.
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 time of shipment to the customer.
Sales to affiliates generally reflect prices offered to the Division's highest
volume distributors. The Division provides for probable 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
F-11
<PAGE> 91
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
improvements that extend the useful life of an asset are capitalized.
Expenditures for routine repairs and maintenance are generally charged to
operations when incurred.
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.
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
F-12
<PAGE> 92
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
as part of new product research and development. The cost of ceramic fiber
health studies are expensed as incurred. Amounts charged to operations during
the years ended December 31, 1993, 1994 and 1995 relating to the cost of these
health studies amounted to $1,115 thousand, $1,819 thousand and $1,329 thousand,
respectively, and are included in administration 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
------- -------
<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> 93
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
------- -------
<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
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'
F-14
<PAGE> 94
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $1,000 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
------ ------
<S> <C> <C>
Employee benefit accruals......................................... $1,957 $2,083
Ceramic fiber product stewardship and monitoring.................. 1,192 1,168
Other............................................................. 4,337 3,562
------ ------
$7,486 $6,813
====== ======
</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 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.
F-15
<PAGE> 95
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
---- ---- ----
<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
------ ------
<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 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.
F-16
<PAGE> 96
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ------ ------
<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 (233) (591) 28
------ ------ ------
$5,611 $7,256 $8,743
====== ====== ======
</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
------ ------ ------
<S> <C> <C> <C>
Income before income taxes at 35%......................... $4,739 $6,198 $7,507
Permanent income tax disallowances........................ 24 57 51
Impact of federal rate change on deferred taxes........... 80 -- --
State taxes, net of federal benefit....................... 768 1,001 1,185
------ ------ ------
$5,611 $7,256 $8,743
====== ====== ======
</TABLE>
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
------- -------
<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........................................... 1,948 1,624
Accrued postretirement benefit cost........................... 1,989 2,033
Inventory..................................................... 728 712
Other......................................................... 270 292
------- -------
Total deferred tax assets....................................... 4,935 4,661
------- -------
Net deferred tax liability...................................... $(1,042) $(1,070)
======= =======
</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
F-17
<PAGE> 97
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
(DOLLARS IN
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.
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.
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 had 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). This indemnity was
superseded by the Recapitalization Agreement (see Note 1), which provides that
BP or one of its subsidiaries will indemnify Unifrax for such losses, if any,
subject to certain cost sharing provisions. Unifrax, including the Division, and
BP America intend to defend ceramic fiber claims vigorously.
F-18
<PAGE> 98
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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.
The Division owns a site in Sanborn, NY, at which extensive remediation
activity is currently being undertaken. The site has been used by a number of
former Carborundum operations other than the Division, as a result of which,
certain contamination is present in the soil. Neither past nor current
operations of the Division are believed to have contributed to, or to be
contributing to, the existence of the contamination. BP America has 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. Because BP
America has assumed liability for the remediation and has, to date, conducted
the remediation activities without involvement from the Division, the
probability that the Division would be required to make material expenditures
related to the site cleanup is considered remote. In connection with the June 9,
1996 agreement between BP America and Unifrax Holding, BP America will take
title to, and assume all liabilities with respect to, this property upon
completion of the Recapitalization and Unifrax will lease a portion of the
present manufacturing facilities on site. Accordingly, no reserves have been
established in the Division's balance sheet with respect to this property.
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.
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.
F-19
<PAGE> 99
NORTH AMERICAN FIBERS DIVISION OF UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
The following pro forma financial information assumes the agreements with
SEPR were in effect at January 1, 1995, and 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.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net Sales............................................. $ 84,064 $ (426) $83,638
Operating income...................................... 20,516 (1,127) 19,389
Income before income taxes............................ 21,448 (1,517) 19,931
Net income............................................ 12,705 (895) 11,810
</TABLE>
F-20
<PAGE> 100
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors
Unifrax Corporation
We have reviewed the accompanying interim combined balanced sheets of
Unifrax Corporation, XPE Vertriebs GmbH and NAF Brasil Ltda. (the "Company") as
of June 30, 1995 and 1996 and the related interim combined statements of income,
changes in parent company investment and cash flows for the six-month periods
then ended. These financial statements are the responsibility of the Company'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 interim combined financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Buffalo, New York
July 10, 1996
F-21
<PAGE> 101
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH
AND NAF BRASIL LTDA.
COMBINED BALANCE SHEETS
JUNE 30, 1995 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 111 $ --
Accounts receivable, trade, less allowances of $1,338
and $1,147, respectively...................................... 13,875 15,235
Accounts receivable, affiliates................................. 2,158 --
Inventories..................................................... 8,297 8,840
Deferred income taxes........................................... 2,626 2,769
Prepaid expenses and other current assets....................... 196 433
------- -------
Total current assets............................................ 27,263 27,277
Property, plant and equipment, net.............................. 29,156 30,082
Other assets.................................................... 249 544
------- -------
$56,668 $57,903
======= =======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable.............................................. $ 2,181 $ 3,805
Accrued expenses.............................................. 7,931 8,110
------- -------
Total current liabilities....................................... 10,112 11,915
Accrued postretirement benefit cost............................. 4,945 5,116
Deferred income taxes........................................... 3,679 3,357
Other long-term obligations..................................... 400 400
------- -------
Total liabilities............................................... 19,136 20,788
Parent company investment -- excess of assets over
liabilities................................................... 37,532 37,115
------- -------
$56,668 $57,903
======= =======
</TABLE>
See independent accountants' review report and accompanying notes.
F-22
<PAGE> 102
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH
AND NAF BRASIL LTDA.
COMBINED STATEMENTS OF INCOME
JUNE 30, 1995 AND 1996
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net sales....................................................... $43,036 $45,192
Operating expenses:
Cost of goods sold............................................ 20,803 22,579
Selling and distribution...................................... 6,064 6,418
Administration................................................ 3,218 3,429
Allocated corporate charges................................... 1,350 356
Research and development...................................... 1,372 1,121
------- -------
32,807 33,903
------- -------
Operating income................................................ 10,229 11,289
Other income (expense):
Royalty income, net of related expenses.................... 423 264
Miscellaneous.............................................. (31) (221)
------- -------
392 43
------- -------
Income before income taxes...................................... 10,621 11,332
Provision for income taxes...................................... 4,316 4,697
------- -------
Net income...................................................... $ 6,305 $ 6,635
======= =======
</TABLE>
See independent accountants' review report and accompanying notes.
F-23
<PAGE> 103
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH
AND NAF BRASIL LTDA.
COMBINED STATEMENT OF CHANGES IN PARENT COMPANY INVESTMENT
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Balance -- beginning of period.................................. $37,954 $35,424
Net income...................................................... 6,305 6,635
Net change in parent company advances........................... (6,727) (4,944)
------- -------
Balance -- end of period........................................ $37,532 $37,115
======= =======
</TABLE>
See independent accountants' review report and accompanying notes.
F-24
<PAGE> 104
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH
AND NAF BRASIL LTDA.
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 6,305 $ 6,635
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization................................. 2,094 1,955
Provision for deferred income taxes........................... 11 (482)
Provision for pension expense................................. 120 78
Loss on sales of property, plant and equipment................ 50 157
Changes in operating assets and liabilities:
Accounts receivable........................................... (358) (962)
Inventories................................................... (477) (1,139)
Prepaid expenses and other current assets..................... (44) (252)
Accounts payable and accrued expenses......................... 272 2,021
Accrued postretirement benefit cost........................... 67 130
------- -------
Cash provided by operating activities........................... 8,040 8,141
INVESTING ACTIVITIES
Capital expenditures............................................ (1,193) (2,795)
Deferred software and other costs............................... -- (254)
Proceeds from sales of property, plant and equipment............ 24 --
------- -------
Cash used in investing activities............................... (1,169) (3,049)
FINANCING ACTIVITIES
Cash transfers to parent company, net........................... (6,858) (5,129)
Cash used in financing activities............................... (6,858) (5,129)
------- -------
Net increase (decrease) in cash................................. 13 (37)
Cash -- beginning of period..................................... 98 37
------- -------
Cash -- end of period........................................... $ 111 $ --
======= =======
</TABLE>
See independent accountants' review report and accompanying notes.
F-25
<PAGE> 105
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
JUNE 30, 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 plc
("BP"). The unaudited financial information furnished herein reflects the
combined financial position and combined results of operations 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 "Company"), and reflects all
adjustments, which in the opinion of management are of a normal recurring
nature, necessary to fairly state the Company's financial position and results
of operations for the periods presented. This information should be read in
conjunction with the audited financial statements of the North American Fibers
Division of Unifrax Corporation for the year ended December 31, 1995.
Prior to February 29, 1996, Unifrax Corporation was known as The Carborundum
Company ("Carborundum") and included a number of divisions and subsidiaries
engaged in various manufacturing businesses. On February 29, 1996, all of the
businesses except for the North American Ceramic Fibers Division (the
"Division") were sold in the Saint-Gobain Sale (see Note 6). Concurrent with the
sale, Carborundum was renamed Unifrax Corporation, and subsequent to the sale,
Unifrax consisted solely of the Division. The financial statements of Unifrax
Corporation (included in the combined financial statements of the Company)
represent only the financial position, results of operations, changes in parent
company investment, and cash flows of the Division as of and for the six month
periods ending June 30, 1995 and 1996.
Subsequent to the Saint-Gobain Sale (see Note 6), the Company began making sales
of certain products through related sales corporations in Europe (XPE Vertriebs
GmbH) and South America (NAF Brasil Ltda.) 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.
On June 9, 1996, BP entered into an agreement whereby BP agreed, subject to
future financing, to complete a recapitalization of the Company, which will
result in Unifrax Holding Co., a wholly-owned subsidiary of Kirtland Capital
Partners, and BP owning 90% and 10%, respectively, of the common stock of the
Company. As part of the recapitalization, BP will contribute their ownership in
XPE Vertriebs GmbH and NAF Brasil Ltda. to Unifrax (to be accounted for at
historical basis), and these companies will become subsidiaries of Unifrax. The
Company expects to close the transaction in October 1996. The effects of any
divestiture of the Company are not reflected in the accompanying financial
statements.
Unifrax has 3,000 authorized shares of $1 par value common stock, of which 100
shares are currently issued and outstanding. XPE Vertriebs GmbH has an
authorized quota of 600,000 deutsche marks, which is fully subscribed, and NAF
Brasil Ltda. has an authorized quota of 500,000 Real, of which 499,999 is
subscribed. Unifrax has historically been accounted for as a division, with no
separately reported equity other than an amount equal to its net assets
captioned as "parent company investment."
The results of operations for the six months ended June 30, 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 Company in the
future or what the financial position, results of operations or
See independent accountants' review report.
F-26
<PAGE> 106
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
cash flows of the Company would have been if it were a separate, stand alone
entity during the periods presented.
2. INVENTORIES
Major classes of inventories are as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Raw material and supplies...................................... $ 1,382 $ 1,445
In-process..................................................... 1,600 1,142
Finished product............................................... 4,650 5,700
7,632 8,287
Adjustment to LIFO cost........................................ 665 553
------- -------
$ 8,297 $ 8,840
======= =======
</TABLE>
At June 30, 1996, the Company had open purchase commitments for a raw material
used in the manufacturing process totaling approximately $700 thousand.
3. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land and land improvements..................................... $ 1,387 $ 1,709
Buildings...................................................... 15,339 15,574
Machinery, equipment, furniture and fixtures................... 36,973 38,421
Construction in progress....................................... 2,141 4,482
------- -------
55,840 60,186
Less accumulated depreciation and amortization................. 26,684 30,104
------- -------
$29,156 $30,082
======= =======
</TABLE>
For the six month periods ended June 30, 1995 and 1996, depreciation expense
amounted to $2,050 thousand and $1,951 thousand, respectively.
4. 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 not required to do so, management of the
Company 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.
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.
See independent accountants' review report.
F-27
<PAGE> 107
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Consistent with customary practice among manufacturers of ceramic fiber
products, the Company has entered into agreements with distributors of its
product whereby the Company 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 claims is presently not determinable.
Under an agreement with Unifrax, BP America had agreed to indemnify the Company
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. This indemnity was superseded by the Recapitalization
Agreement (see Note 1), which provides that BP, or one of its subsidiaries, will
indemnify the Company for such losses, if any, subject to certain cost sharing
provisions. 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 chemical or petroleum substances by the Company
or by other parties.
Under agreements with Unifrax, BP America assumed liability, and the rights to
recovery from third parties, for environmental remediation and other similar
required actions with respect to certain environmental obligations of the
Company.
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 position.
The Division owns a site in Sanborn, NY, at which extensive remediation
activity is currently being undertaken. The site has been used by a number of
former Carborundum operations other than the Division, as a result of which,
certain contamination is present in the soil. Neither past nor current
operations of the Division are believed to have contributed to, or to be
contributing to, the existence of the contamination. BP America has 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. Because BP
America has assumed liability for the remediation and has, to date, conducted
the remediation activities without involvement from the Division, the
probability that the Division would be required to make material expenditures
related to the site cleanup is considered remote. In connection with the June 9,
1996 agreement between BP America and Unifrax Holding, BP America will take
title to, and assume all liabilities with respect to, this property upon
completion of the Recapitalization and Unifrax will lease a portion of the
present manufacturing facilities on site. Accordingly, no reserves have been
established in the Division's balance sheet with respect to this property.
OTHER
Various other legal proceedings and claims have been made against the Company 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 Company, the ultimate liability, if any, resulting from such matters will
not have a material adverse effect on the Company's financial position.
See independent accountants' review report.
F-28
<PAGE> 108
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH AND NAF BRASIL LTDA.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. CAPITAL EXPANSION PROJECT
In November 1995, the Company announced that an estimated $14 million
manufacturing facility expansion will be undertaken at the Company's New
Carlisle, Indiana facility. Construction began in the second quarter of 1996 and
the new facility is expected to be fully operational in late 1997.
6. SAINT-GOBAIN SALE
On February 29, 1996, BP completed the sale of principally all continuing
businesses of Unifrax, excluding the Company, to Societe Europeenne des Produits
Refractaires and various other affiliates of Compagnie de Saint- Gobain ("SEPR")
(the "Saint-Gobain Sale"). In connection with this sale, BP and SEPR entered
into various agreements regarding the ongoing relationship between the Company
and SEPR subsequent to the closing of the sale. The following pro forma
financial information assumes the agreements with SEPR were in effect January 1,
1996 and is based on available data and upon certain assumptions that management
of the Company believes are reasonable under the circumstances. The 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.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales..................................... $ 45,192 $ (71) $45,121
Operating income.............................. 11,289 (188) 11,101
Income before income taxes.................... 11,332 (277) 11,055
Net income.................................... 6,635 (163) 6,472
</TABLE>
See independent accountants' review report.
F-29
<PAGE> 109
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT 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................................ 12
The Recapitalization........................ 19
Use of Proceeds............................. 20
Capitalization.............................. 21
Pro Forma Financial Data.................... 22
Selected Historical Financial Data.......... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 29
Business.................................... 35
Management.................................. 47
Principal Stockholders...................... 53
Certain Relationships and Related
Transactions.............................. 54
Description of Credit Agreement and Other
Indebtedness.............................. 57
Description of Notes........................ 58
Underwriting................................ 79
Legal Matters............................... 79
Experts..................................... 80
Additional Information...................... 80
Index to Financial Statements............... F-1
</TABLE>
---------------
UNTIL JANUARY 23, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
---------------------------
PROSPECTUS
---------------------------
UNIFRAX
UNIFRAX INVESTMENT CORP.
$100,000,000
10 1/2% SENIOR NOTES DUE 2003
BT SECURITIES CORPORATION
NATIONSBANC CAPITAL MARKETS, INC.
OCTOBER 25, 1996
- ------------------------------------------------------
- ------------------------------------------------------
