<PAGE> 1
As filed with the Securities and Exchange Commission on August 22, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
UNIFRAX INVESTMENT CORP.
(Exact name of Registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
DELAWARE 3299 34-1839043
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
------------------------------
UNIFRAX INVESTMENT CORP.
2351 Whirlpool Street
Niagara Falls, New York 14305
(716) 278-3800
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive
offices)
------------------------------
William P. Kelly
Unifrax Investment Corp.
2351 Whirlpool Street
Niagara Falls, New York 14305
(716) 278-3800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
William Appleton William M. Hartnett
Baker & Hostetler Cahill Gordon & Reindel
3200 National City Center 80 Pine Street
Cleveland, Ohio 44114-3485 New York, New York 10005
(216) 621-0200 (212) 701-3000
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
=================================================================================================================================
Proposed Proposed
Title of each maximum maximum
class of securities Amount to be offering price aggregate Amount of
to be registered registered(1) per unit(1) offering price(1) registration fee
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<S> <C> <C> <C> <C>
___% Senior Notes due 2003 $100,000,000 100% $100,000,000 $34,483
=================================================================================================================================
<FN>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS SUBJECT TO COMPLETION, DATED ________, 1996
$100,000,000
UNIFRAX CORPORATION
(as successor by merger to Unifrax Investment Corp.)
% SENIOR NOTES DUE 2003
-----------------------
Unifrax Corporation (as defined), as successor by merger to the
registrant, Unifrax Investment Corp. ("Investment Corp."), is offering (the
"Offering") $100,000,000 aggregate principal amount of its % 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
reamaining 10% of the common stock of Unifrax Corporation. The Recapitalization
will be effected pursuant to the Recapitalization Agreement (as defined). The
consummation of the Offering is conditioned upon the concurrent consummation of
the Recapitalization and the transactions contemplated thereby. See "The
Recapitalization."
Interest on the Notes will be payable semi-annually on each and
, commencing , 1997, at the rate of % per annum. The Notes will
be redeemable, in whole or in part, at the option of the Company (as defined),
on or after , 2000, at the redemption prices set forth herein, plus
accrued interest to the date of redemption. In addition, on or prior to ,
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 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. The Notes will be
effectively subordinated in right of payment to all existing and future secured
indebtedness, including the Credit Agreement (as defined), of the Company. As of
June 30, 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 (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. 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. See "Description of Notes."
-----------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES
OFFERED HEREBY.
-----------------------
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.
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Price to Underwriting Proceeds to
Public(1) Discount (2) the Company (3)
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<S> <C> <C> <C>
Per Note..................................... 100% % %
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Total.................................... $ $ $
====================================================================================================================================
<FN>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company 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 the Company, estimated at $ .
</TABLE>
-----------------------
The Notes are offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters, and subject to approval
of certain legal matters by counsel. It is expected that delivery of the Notes
will be made on or about , 1996 at the offices of BT Securities
Corporation, One Bankers Trust Plaza, New York, New York 10006.
-----------------------
BT SECURITIES CORPORATION NATIONSBANC CAPITAL MARKETS, INC.
-----------------------
The date of this Prospectus is , 1996.
<PAGE> 3
[Group photograph of Company products with caption "Manufacturer of a broad
range of ceramic fiber product forms used to provide heat management solutions
for high temperature insulation and other engineered applications" and "Unifrax"
logo]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-2-
<PAGE> 4
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 27%,
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.
-3-
<PAGE> 5
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) 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.
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.
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<PAGE> 6
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 $11.4 million for the four
fiscal years ended December 31, 1995 and the Company expects such expenses to be
$3.0 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 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.
-5-
<PAGE> 7
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 successful related industry investment in North American
Refractories Co., a leading manufacturer and distributor of refractory
products. See "Certain Relationships and Related Transactions--Relationship
with Kirtland."
THE RECAPITALIZATION
The Offering is part of the Recapitalization which is being effected
pursuant to the Recapitalization Agreement dated as of June 9, 1996, as amended
(the "Recapitalization Agreement"), among Unifrax, Holding 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.
Upon completion of the Recapitalization, Holding will own 90% of the
common stock of the Company and an affilate 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
-6-
<PAGE> 8
products manufactured by the Company, and certain environmental matters.
See "Certain Relationships and Related Transactions--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.
-7-
<PAGE> 9
THE OFFERING
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Issuer............................................... Investment Corp. will issue the Notes and will merge into
Unifrax in connection with the Recapitalization. After the
merger, Unifrax will be the surviving corporation and will
be liable for the Notes.
Securities Offered................................... $100,000,000 aggregate principal amount of ____% Senior Notes
due 2003.
Maturity Date........................................ _________ , 2003.
Payment Dates........................................ Interest on the Notes will accrue from the date of issuance
and will be payable semiannually on each , and ,
commencing , 1997.
Ranking.............................................. The Notes will be senior obligations of the Company and will
rank senior in right of payment to all existing and future
subordinated indebtedness of the Company. The Notes will
rank PARI PASSU in right of payment with all existing and
future senior indebtedness of the Company. The Notes will be
effectively subordinated in right of payment to all existing
and future secured indebtedness (including indebtedness
under the Credit Agreement) of the Company.
Optional Redemption.................................. The Notes will be redeemable, in whole or in part, at the
option of the Company on or after , 2000, at the redemption
prices set forth herein plus accrued interest to the date of
redemption. In addition, on or prior to , 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--Optional Redemption."
</TABLE>
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<PAGE> 10
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<S> <C>
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. 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> 11
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:
Distribution to existing stockholder (b) $144.0
Non-compete Agreement(c) 10.0
Fees and expenses 5.0
------
Total Uses $159.0
======
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<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 distribution to existing stockholder is subject to decrease based
on working capital of the Company at the Closing.
(c) See "Certain Relationships and Related Transactions--Non-compete
Agreement" for a description of the Non-compete Agreement to be
provided by BP to Holding.
</TABLE>
RISK FACTORS
See "Risk Factors," which begins at page 13, for a discussion of
certain factors that should be considered in evaluating an investment in the
Notes.
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<PAGE> 12
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
and 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 and as of 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 and as of 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, give 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.
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".
-11-
<PAGE> 13
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- -------------------------------
PRO FORMA
PRO FORMA COMBINED(a) CONSOLI-
DATED
(DOLLARS IN THOUSANDS) 1991 1992 1993 1994 1995 1995 1995 1996 1996
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<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 22,129 22,123
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit 25,920 31,466 33,539 38,656 43,434 43,044 22,233 23,063 22,998
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 8,704 3,218 3,429 4,349
Allocated corporate
charges (b) 2,900 2,600 2,800 2,300 2,700 -- 1,350 356 --
Research and development 2,106 2,955 2,747 2,772 2,950 2,950 1,622 1,371 1,371
Restructuring charges -- 480 155 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income 5,751 9,849 12,490 16,617 20,016 19,324 9,979 11,489 10,779
Interest expense -- -- -- -- -- (13,816) -- -- (6,859)
Other income 541 555 549 591 932 542 392 43 (46)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes
and accounting change 6,292 10,404 13,039 17,208 20,948 6,050 10,371 11,532 3,874
Provision for income taxes 2,511 4,152 5,407 7,052 8,539 2,621 4,214 4,780 1,735
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before accounting
change 3,781 6,252 7,632 10,156 12,409 3,429 6,157 6,752 2,139
Effect of accounting change -- -- (2,658)(c) -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income $ 3,781 $ 6,252 $ 4,974 $10,156 $12,409 $ 3,429 $ 6,157 $6,752 $ 2,139
====== ====== ====== ====== ====== ====== ====== ====== =======
OTHER DATA:
EBITDA (d) $ 9,515 $14,001 $17,010 $21,428 $25,249 $ 24,782 $12,465 $13,487 $12,996
Depreciation and
amortization 3,223 3,597 3,971 4,220 4,301 4,916 2,094 1,955 2,263
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 1.79x 1.89x
Ratio of earnings to
fixed charges (e) 75.90x 108.26x 119.54x 161.82x 162.14x 1.42x 165.62x 175.73x 1.54x
BALANCE SHEET DATA
(AT PERIOD END):
Working capital $11,103 $11,301 $12,991 $15,800 $13,579 $17,406 $14,194 $ 15,001
Total assets 53,453 54,531 55,513 57,509 55,055 58,673 58,985 84,499
Long-term debt -- -- -- -- -- -- -- 132,000
Total liabilities 15,414 16,388 19,634 20,443 20,815 20,886 23,038 148,841
Parent company investment/
Stockholders' equity
(deficit)(f) 38,039 38,143 35,879 37,066 34,240 37,787 35,947 (64,342)
<FN>
(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.
(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 it is commonly used by certain
investors and analysts as one measure of an issuer's ability to fund
operations and meet its financial obligations. EBITDA should not be
considered in isolation from, as a substitute for or as being more
meaningful than net income, cash flows from operating activities or other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles as a measure of the Company's profitability
or liquidity.
(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 change in accounting principles plus fixed charges. Fixed charges
consist of interest expense which includes 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 asset 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.
</TABLE>
-12-
<PAGE> 14
RISK FACTORS
Prospective purchasers of the Notes offered hereby should consider
carefully the following risk factors, as well as the other information set forth
in this Prospectus.
DEPENDENCE ON CERAMIC FIBER; HEALTH AND SAFETY ISSUE
Substantially all of the Company's products contain ceramic fiber, a
man-made vitreous fiber which, along with similar fibers such as fiberglass and
mineral wool, has been categorized as "possibly carcinogenic in humans" by the
International Agency for Research on Cancer, an agency within the World Health
Organization of the United Nations. Other government agencies and health
organizations, including the U.S. Environmental Protection Agency (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.
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. 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.
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. See "Certain Relationships and Related Transactions-- Relationship
with BP and Its Subsidiaries."
-13-
<PAGE> 15
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
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 -- Contingencies", and "Business -- Health and 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 $64.3 million. In addition, the Company expects to borrow additional
amounts under the Credit Agreement or otherwise. 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.
-14-
<PAGE> 16
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, 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. In addition, the Credit Agreement will contain other
and more restrictive covenants. See "Description of Notes--Certain
Covenants" and "Description of Credit Agreement and Other Indebtedness." 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
-15-
<PAGE> 17
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 Credit
Agreement and Other Indebtedness."
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, 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. 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--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 equityholder may differ from the interests of holders
of the Notes. See "Principal Stockholders" and "Certain Relationships and
Related Transactions."
-16-
<PAGE> 18
occurrence of such Change of Control. See "Description of Notes--
Change of Control."
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."
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 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
-17-
<PAGE> 19
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 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 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."
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, 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. 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)
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<PAGE> 20
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.
-19-
<PAGE> 21
THE RECAPITALIZATION
The Offering is part of the Recapitalization which is being effected
pursuant to the Recapitalization Agreement. 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, include the following:
* Kirtland and management of the Company will make 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, the 7.0 million BP Note and 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 BP $10.0 million as
consideration for the Non-compete Agreement; 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.
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."
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 -- Recapitalization Agreement."
-20-
<PAGE> 22
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:
Distribution to existing stockholder(b) $144.0
Non-compete Agreement(c) 10.0
Fees and expenses 5.0
-----
Total Uses $159.0
=====
- --------------
<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 distribution to existing stockholder is subject to decrease
based on working capital of the Company at the Closing.
(c) See "Certain Relationships and Related Transactions--Non-compete
Agreement" for a description of the Non-compete Agreement to be
provided by BP to Holding.
</TABLE>
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<PAGE> 23
CAPITALIZATION
The following table sets forth the actual capitalization
of the Company as of June 30, 1996 and as adjusted to reflect the
Recapitalization. This table should be read in conjunction with the financial
statements and the information under "Pro Forma Financial Data", including in
each case the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
(DOLLARS IN THOUSANDS) ACTUAL PRO FORMA
- ---------------------- ------ ---------
<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 $ 35,947 31,628
Accumulated deficit -- (95,970)
------ -------
Total parent company investment/stockholders'
equity (deficit) 35,947 (64,342)
------ -------
Total capitalization $ 35,947 $ 67,658
====== =======
<FN>
(a) The Credit Agreement will also include the $20 million revolving
credit facility which is anticipated to be unused at the
consummation of the Recapitalization. See "Description of Credit
Agreement and Other Indebtedness--Credit Agreement."
(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) this investment, as adjusted for items to be
retained by BP, 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, and (ii) 80%
of stockholders' equity will be eliminated in connection with the
Recapitalization, with the remaining amount of the Recapitalization
being recorded as an accumulated deficit.
</TABLE>
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<PAGE> 24
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 combined 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.
-23-
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
Assets
------
<S> <C> <C> <C>
Current assets:
Cash ........................................................ $ -- $ -- $ --
Accounts receivable, net............................................. 15,235 -- 15,235
Inventories.......................................................... 9,290 -- 9,290
Deferred income taxes................................................ 3,401 307 (a) 3,708
Prepaid expenses and other current assets............................ 433 -- 433
-------- -------- ---------
Total current assets...................................................... 28,359 307 28,666
Property, plant and equipment, net........................................ 30,082 -- 30,082
Deferred income taxes..................................................... -- 20,207 (a) 20,207
Other assets ........................................................ 544 5,000 (b) 5,544
-------- -------- ---------
$ 58,985 $ 25,514 $ 84,499
======== ======== =========
Liabilities, Parent Company Investment/
---------------------------------------
Stockholders' Equity
--------------------
Current liabilities:
Accounts payable..................................................... $ 3,805 $ -- $ 3,805
Accrued expenses..................................................... 10,360 (500) (c) 9,860
-------- -------- ---------
Total current liabilities................................................. 14,165 (500) 13,665
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......................................................... 23,038 125,803 148,841
Parent company investment/Stockholders' equity (deficit):
Common stock; $0.01 par value, 3,000,000
shares authorized, 20,000 issued and
outstanding pro forma.............................................. -- -- (f) --
Parent company investment/Additional
paid-in capital.................................................... 35,947 (4,319) (f) 31,628
Accumulated deficit.................................................. -- (95,970) (f) (95,970)
-------- -------- ---------
35,947 (100,289) (64,342)
-------- -------- ---------
$ 58,985 $ 25,514 $ 84,499
======== ======== =========
</TABLE>
See accompanying notes.
-24-
<PAGE> 26
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
(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 $20,514) 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) this
investment, as adjusted for items to be retained by BP, 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, and (ii) 80% of stockholders' equity will be eliminated in
connection with the Recapitalization, with the remaining amount of the
Recapitalization being recorded as a accumulated deficit.
-25-
<PAGE> 27
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 2,515 (b) 8,704
Allocated corporate charges................ 2,700 (2,700)(c) --
Research and development................... 2,950 -- 2,950
-------- -------- --------
........................................... 64,048 266 64,314
-------- -------- --------
Operating income................................ 20,016 (692) 19,324
Interest expense................................ -- (13,816)(d) (13,816)
Other income, net............................... 932 (390)(a) 542
-------- -------- --------
Income before income taxes...................... 20,948 (14,898) 6,050
Provision for income taxes...................... 8,539 (5,918)(e) 2,621
-------- -------- --------
Net income...................................... $ 12,409 $(8,980) $ 3,429
======== ======== ========
- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(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 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 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 ............................................................... 615
vii) elimination of divestment related expenses....................................... (137)
viii) adjustment to interest costs for
the postretirement benefit obligations
retained by BP ............................................................... (164)
-------
Total ............................................................... $ 2,515
=======
(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(*).............................................................. $ 1,988
ii) Notes at an assumed interest rate of 11.25% per
annum ............................................................... 11,250
iii) BP Note at Prime (assuming
Prime equals 8.25%).............................................................. 578
-------
Total ............................................................... $13,816
=======
</TABLE>
-26-
<PAGE> 28
* Reflects the term notes of $25,000 at an interest rate of 2.00%
over LIBOR (assuming LIBOR equals 5.75%) 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%.
-27-
<PAGE> 29
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.......................................... 22,129 (6)(a) 22,123
Selling and distribution.................................... 6,418 81 (a) 6,499
Administration.............................................. 3,429 920 (b) 4,349
Allocated corporate charges................................. 356 (356)(c) --
Research and development.................................... 1,371 -- 1,371
------ ----- ------
33,703 639 34,342
------ ----- ------
Operating income................................................. 11,489 (710) 10,779
Interest expense................................................. -- (6,859)(d) (6,859)
Other income (expense), net...................................... 43 (89)(a) (46)
------ ----- ------
Income before income taxes....................................... 11,532 (7,658) 3,874
Provision for income taxes....................................... 4,780 (3,045)(c) 1,735
------ ----- ------
Net income....................................................... $ 6,752 $ (4,613) $ 2,139
====== ===== ======
</TABLE>
- ------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Reflects the impact of the Saint-Gobain Sale (see "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 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 input of the Saint-Gobain Sale.
(b) Reflects the following:
i) additional administration costs associated with the newly
organized foreign XPE 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......................................... 308
vi) elimination of divestment related expenses....................................... (270)
vii) adjustment to interest costs for the postretirement benefit
obligations retained by BP....................................................... (82)
-----
Total ............................................................... $ 920
=====
(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(*).............................................................. $ 945
ii) Notes at an assumed interest rate of 11.25% per
annum ............................................................... 5,625
iii) BP Note at Prime (assuming Prime equals 8.25%)................................... 289
-----
Total ............................................................... $ 6,859
=====
<FN>
* 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 5.75%) 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.
</TABLE>
-28-
<PAGE> 30
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%.
-29-
<PAGE> 31
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
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ --------------------
COMBINED(a)
(DOLLARS IN THOUSANDS) 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<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 22,129
------ ------ ------ ------ ------ ------ ------
Gross profit 25,920 31,466 33,539 38,656 43,434 22,233 23,063
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 2,955 2,747 2,772 2,950 1,622 1,371
Restructuring charges -- 480 155 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Operating income 5,751 9,849 12,490 16,617 20,016 9,979 11,489
Other income 541 555 549 591 932 392 43
------ ------ ------ ------ ------ ------ ------
Income before taxes and
cumulative effect of change
in accounting principle 6,292 10,404 13,039 17,208 20,948 10,371 11,532
Provision for income taxes 2,511 4,152 5,407 7,052 8,539 4,214 4,780
------ ------ ------ ------ ------ ------ ------
Income before cumulative effect
of change in accounting
principle 3,781 6,252 7,632 10,156 12,409 6,157 6,752
Cumulative effect of change
in accounting principle -- -- (2,658)(c) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income $ 3,781 $ 6,252 $ 4,974 $10,156 $12,409 $ 6,157 $ 6,752
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
EBITDA(d) $ 9,515 $14,001 $17,010 $21,428 $25,249 $12,465 $13,487
Depreciation and amortization 3,223 3,597 3,971 4,220 4,301 2,094 1,955
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 108.26x 119.54x 161.82x 162.14x 165.62x 175.73x
BALANCE SHEET DATA (AT PERIOD END):
Working capital $11,103 $11,301 $12,991 $15,800 $13,579 $17,406 $ 14,194
Total assets 53,453 54,531 55,513 57,509 55,055 58,673 58,985
Total liabilities 15,414 16,388 19,634 20,443 20,815 20,886 23,038
Parent company investment(f) 38,039 38,143 35,879 37,066 34,240 37,787 35,947
<FN>
(a) Represents the combined data of Unifrax and the affiliated overseas sales
corporations created following the Saint-Gobain Sale.
</TABLE>
-30-
<PAGE> 32
(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 it is commonly used by
certain investors and analysts as one measure of an issuer's ability to
fund operations and meet its financial obligations. EBITDA should not
be considered in isolation from, as a substitute for, or as being more
meaningful than net income, cash flows from operating activities or
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles as a measure of the Company's
profitability or liquidity.
(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 change in accounting principle plus fixed charges.
Fixed charges consist of interest expense which includes 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.
-31-
<PAGE> 33
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 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 27%, respectively.
The growth rate in EBITDA 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
-32-
<PAGE> 34
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.
-33-
<PAGE> 35
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 49.0
----- ----- ----- ----- -----
Gross profit 49.5 50.7 51.7 51.7 51.0
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 4.1 3.6 3.5 3.8 3.0
Restructuring charges 0.2 --. --. --. --.
---- ---- ---- ---- ----
Operating income 18.5 21.8 23.8 23.2 25.4
</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 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 $0.9 million, or 3.7%, from $22.2 million in
1995 to $23.1 million in 1996. This increase was the result of higher sales
volume. Gross profit margin decreased slightly from 51.7% in 1995 to 51.0% 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 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 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.
-34-
<PAGE> 36
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.
Research and development expenses decreased $0.2 million, or 15%, from
$1.6 million in 1995 to $1.4 million in 1996. This decrease was primarily due to
the timing of new product testing. Research and development in both 1995 and
1996 included a $0.3 million provision for animal tests expected to occur in a
subsequent year. Because these tests are an important component of the product
stewardship program, expenses are accrued each year even though actual tests do
not necessarily occur annually.
Operating income increased $1.5 million, or 15.1%, from $10.0 million
in 1995 to $11.5 million in 1996. Operating income as a percentage of net sales
increased from 23.2% in 1995 to 25.4% in 1996 as a result of the factors
discussed above.
EBITDA increased $1.0 million, or 8.2%, from $12.5 million in 1995 to
$13.5 million in 1996. On a percentage of net sales basis, EBITDA increased from
29.0% in 1995 to 29.8% 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 $14.0 million in 1995
to $10.8 million in 1996 due to lower receivables from the Carborundum overseas
units and higher trade payables and accruals in 1996.
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 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
-35-
<PAGE> 37
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 6.4%, from
$2.8 million in 1994 to $3.0 million in 1995. This increase was due to new
product development projects, including a new fiber development project and the
transfer of two Carborundum research and development projects to the Company.
Research and development in both 1995 and 1994 included a $0.5 million provision
for animal tests expected to occur in a subsequent year. Because these tests are
an important component of the ongoing product stewardship program, expenses are
accrued each year even though actual tests do not necessarily occur annually.
Operating income increased $3.4 million, or 20.5%, from $16.6 million
in 1994 to $20.0 million in 1995. Operating income as a percentage of net sales
increased from 21.8% in 1994 to 23.8% in 1995 as a result of the factors
discussed above.
EBITDA increased $3.8 million, or 17.8%, from $21.4 million in 1994 to
$25.2 million in 1995. As a percentage of net sales, EBITDA increased from 28.1%
in 1994 to 30.0% 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 $12.3
million in 1994 to $10.3 million in 1995 due primarily to lower receivables from
the Carborundum overseas units and higher year-end trade payables. Terms of
collection with the other Carborundum affiliates were shortened at year-end 1995
in anticipation of the Saint-Gobain Sale.
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 from the automotive markets.
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<PAGE> 38
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 0.9%, from
$2.7 million in 1993 to $2.8 million in 1994 as inflationary cost increases were
offset by lower spending in a variety of areas. Research and development
expenses in both 1994 and 1993 included a provision of $0.5 million for animal
tests expected to occur in a subsequent year. Because these tests are an
important component of the product stewardship program, expenses are accrued
each year even though actual tests do not necessarily occur annually.
Operating income increased $4.1 million, or 33.0%, from $12.5 million
in 1993 to $16.6 million in 1994. Operating income as a percent of net sales
increased from 18.5% in 1993 to 21.8% in 1994 as a result of the factors
discussed above.
EBITDA increased $4.4 million, or 26.0%, from $17.0 million in 1993 to
$21.4 million in 1994. As a percentage of net sales basis, EBITDA increased from
25.1% in 1993 to 28.1% 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. Year-end working
capital, excluding cash and deferred taxes, increased from $10.1 million in 1993
to $12.3 million in 1994. The change in working capital is primarily the result
of higher year-end trade receivables associated with strong fourth quarter sales
and higher in-process and finished goods inventories to support the increasing
sales volume.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $10.2 million, $11.3
million and $18.9 million for years 1993, 1994 and 1995,
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<PAGE> 39
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. In the last three years, year-end working capital, excluding cash
and deferred taxes, has averaged between 12.0% and 16.0% of net sales, rising
somewhat seasonally at the end of the year.
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. 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 after the
Recapitalization and to meet its debt service, capital expenditures and other
liquidity requirements. See "Description of Credit Agreement and Other
Indebtedness-- Credit Agreement."
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.
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<PAGE> 40
BUSINESS
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 (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 27%,
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
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<PAGE> 41
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) 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.
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
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<PAGE> 42
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 $11.4 million
for the four fiscal years ended December 31, 1995 and the Company expects such
expenses to be $3.0 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 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 for catalytic
converters and porosity-controlled paper used as a filter for automotive airbag
inflators.
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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(R), Insulfrax(R), and Fibermax(R)
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(R) 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(R) 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.
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 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 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.
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.
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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.
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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 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,
-----------------------
(DOLLARS IN MILLIONS) 1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<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>
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
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<PAGE> 46
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. Substantially all of the fiber consumed by the
automotive industry consists of porosity-controlled paper used in airbag
inflators and XPE gasket material used in catalytic converters and as insulation
material in interior firewalls. In 1995, approximately 11% of the Company's 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 for use in automotive catalytic
converters. The Company expects continued growth in XPE sales resulting from the
continuing 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 market. SEPR has the right to take up a royalty-free, non-exclusive license
to manufacture and sell XPE 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 and interior firewalls 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.
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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 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 product line 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
-46-
<PAGE> 48
on the Chinese source. The Chinese source will 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 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 percent 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
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<PAGE> 49
consistently achieved annual productivity and quality improvements in its
manufacturing processes. During each of the four years ended December 31, 1995,
the Company's sales of 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 4.1%, 3.6%, and 3.5% 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.
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<PAGE> 50
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 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,
porosity-controlled paper
Amherst, NY 42,000 Leased Woven and spun textiles
Sanborn, NY 10,000 Owned(a) Fibermax(R), high temperature fiber
Niagara Falls, NY 33,000 Owned Headquarters, research laboratory
- -----------------------
<FN>
(a) Prior to the Closing, the Company will transfer this property to a
subsidiary of BP America which will lease the land to the Company pursuant
to a 20 year lease. See "Certain Relationships and Related
Transactions--Sanborn Lease."
</TABLE>
PRODUCT AND HEALTH SAFETY ISSUES
Manufacturers of man-made vitreous mineral 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,
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<PAGE> 51
a malignant tumor of the lining of the lungs and chest cavity. 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. See
"The Business - Leadership in Product Health and Safety."
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, the ceramic fiber industry is
conducting an ongoing study of approximately 1,500 current and former industry
employees conducted by researchers from the University of Cincinnati. 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
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
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<PAGE> 52
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 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 ("MSDS's"), 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 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
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<PAGE> 53
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 man-made mineral 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 MMVF's. 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. 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."
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<PAGE> 54
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 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--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
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<PAGE> 55
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--Environmental Indemnity."
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<PAGE> 56
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:
Name Age Position
- -------------------------------------------------------------------------
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
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
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<PAGE> 57
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.
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 a Managing Partner of Kirtland since 1986. He
is a director of Execution Services Inc. and Fairmount Minerals Ltd.
Mr. Turben has been a Managing Partner of Kirtland since 1977. 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.
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<PAGE> 58
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.
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<PAGE> 59
1995 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Securities
Underlying
Name and Annual Compensation Options/ All Other
Principal Position Salary Bonus SARS(a) Compensation(b)
- ------------------ -------------------------- ------------------------------
<S> <C> <C> <C> <C>
W. Kelly $155,514 $53,550 37,800/ $ 4,631
President and 0
Chief Executive Officer
K. O'Gorman 115,689 30,641 19,560/ 3,441
Vice President, 0
Operations
P. Viola 106,632 28,490 19,560/ 3,171
Vice President, 0
Sales and Marketing
M. Roos 101,760 22,000 0/ 3,027
Vice President and 1,100
Chief Financial Officer
J. Pilecki 86,072 13,337 0/0 2,563
Vice President,
Engineering and
Purchasing
<FN>
(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 of BP. Each American Depositary Receipt is equal to twelve
ordinary shares of BP.
(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.
</TABLE>
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<PAGE> 60
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 American Depositary Receipts of BP. Each American Depositary Receipt
is equal to twelve ordinary shares of BP.
Option/SAR Grants in 1995
Individual Grants
<TABLE>
<CAPTION>
% of
Total Potential Realizable
Options/ Value at Assumed
Number of SARS Annual Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise For
Options/ in or (10 Years)(d)
SARS Fiscal 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
American Depositary Receipts 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.
</TABLE>
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<PAGE> 61
(f) This table does not include the March 6, 1996, grant of SARs to Mr. Roos in
the amount of 900 American Depositary Receipts 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 and $144,961, respectively. See footnote
(d) above. These SARs terminate upon the consummation of the
Recapitalization.
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<PAGE> 62
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 American Depositary Receipts 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>
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
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<PAGE> 63
formula then in effect, and were converted to opening balances under the Plan.
Both opening balances and benefit credits receive regular interest credits at
one-year Treasury Bill rates plus 1% (with a minimum of 5%) until the
participant commences receiving benefit payments. In addition, the opening
balance receives supplemental interest credits at one-half of the regular
interest credit rate until the participant separates from service. For the year
1995, the regular interest rate was 6.25% and the supplemental interest rate was
3.125%.
The Plan contains transitional provisions for employees who were at
least age 50 at January 1, 1989. The transitional minimum benefit is a final
average pay benefit for all service, specifically 1.6% of final average pay
(based on final three years) times years of service up to 35 less 50% of the
primary social security benefit reduced proportionately for years of service
less than 35. Benefits vest after completion of five years of service.
The Company is a participating employer in the BP America supplemental
plans which will provide those benefits which are otherwise produced by
application of the Plan formula, but which, under Section 415 or Section
401(a)(17) of the Internal Revenue Code, are not permitted to be paid through a
qualified plan and its related trust. Such arrangements are specifically
provided for under the law. The Company also has a supplemental plan which uses
the Plan formula applied to annual incentive awards.
The total projected annual benefits payable under the formula of the
Plan at age 65, without regard to the Section 415 or 401(a)(17) limit and
recognizing supplemental pensions as described above, are as follows for the
named executive officers of the Company: Mr. Kelly $126,545, Mr. O'Gorman
$43,787, Mr. Viola $91,800, Mr. Roos $59,638, and Mr. Pilecki $21,195. These
projected benefits are based on an annuity conversion rate of 6.5%, future
regular interest credits of 5.0%, and a 0.0% salary scale.
Upon consummation of the Offering, the Company will cease to be a
participating employer under the plans described above and employees will be
treated as terminated participants in accordance with applicable plan
provisions. The Company expects that its Board of Directors will consider the
adoption of one or more retirement plans following the consummation of the
Offering.
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.
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<PAGE> 64
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 pensions. 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 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 and the management and direction of the business and affairs
of the Company, except as limited by law.
The Audit Committee will recommend to the Board the Company's
independent auditors, review the annual audit reports of the Company, and review
audit and any non-audit fees paid to the Company's independent auditors. The
Audit Committee will report its findings and recommendations to the Board for
ratification. 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.
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<PAGE> 65
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 92,593 92.6%
2550 SOM Center Road
Suite 105
Willoughby Hills, Ohio 44094
William P. Kelly _____ ____%
Mark D. Roos _____ *
Paul J. Viola _____ *
Kevin J. O'Gorman _____ *
John E. Pilecki _____ *
All directors and executive
officers of the Company
as a group 7,407 7.4%
<FN>
* less than 5%
</TABLE>
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<PAGE> 66
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 commerically 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.
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<PAGE> 67
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.
Sanborn Lease. Prior to the Closing, the Company will transfer the real
property located at 2050 Cory Drive, Sanborn, New York 14132 (the "Sanborn
Property"), to a subsidiary of BP America known as Elm Holdings, Inc. ("Elm
Holdings"). Elm Holdings will lease the land comprising the Sanborn Property to
the Company in accordance with the terms and conditions of a 20 year lease (the
"Lease"). The building and all improvements and fixtures will be owned by the
Company . 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.
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 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.
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. These
include (i) products manufactured only
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<PAGE> 68
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.
Conversion Agreement. Pursuant to the Conversion Agreement, SEPR has an
obligation to die-cut rolls of XPE for the Company in connection with the
Company's sales to customers within Europe and South America and has been
granted a right of first refusal to provide this service to the company in other
countries outside the North American market. These rights and obligations will
continue until the earlier of a cancellation of this arrangement by SEPR or the
expiration of certain patents covering XPE.
XPE License Agreement. Pursuant to the XPE 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. The Company may continue to sell XPE
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
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<PAGE> 69
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
Kirtland Management Agreement
At the Closing, the Company will pay Kirtland a structuring fee of
$500,000 and reimburse Kirtland for out-of-pocket expenses as compensation for
its services as financial advisor. Also at the Closing, Kirtland and the
Company will enter into a management agreement (the "Management 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 Management
Agreement. In addition, if the Company completes an acquisition, Kirtland will
receive a fee in an amount which will approximate 1% of the gross purchase
price of the acquisition (including assumed debt). The Management 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 liability of Holding and has taxable income,
the Company will pay to 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.
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<PAGE> 70
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 which require the Company to maintain minimum levels for various
ratios, including an interest coverage ratio and a debt coverage ratio, and
covenants imposing restrictions on mergers and consolidations, sales of assets,
incurrences of liens, sale and leaseback transactions, subsidiary indebtedness,
and certain other payments (including dividends).
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
Credit Agreement.
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<PAGE> 71
DESCRIPTION OF NOTES
The Notes will be issued under an indenture (the "INDENTURE")
to be dated as of , 1996 by and among the Company and , 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 has been 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 obligations of the Company, ranking
PARI PASSU in right of payment with all other senior obligations of the Company.
The Notes will be issued in fully registered form only,
without coupons, in denominations of $1,000 and integral multiples thereof.
Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar, which initially will be the Trustee's corporate trust office.
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 ,
. 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 , 2003. Interest on the Notes will accrue at the
rate of __% PER ANNUM and will be payable semi-annually in cash on each __ and
__, commencing on __, 1997, to the Persons who are registered Holders at the
close of business on the __ and __, 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.
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<PAGE> 72
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 , 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 and unpaid interest, if any,
thereon to the date of redemption:
YEAR PERCENTAGE
2000........................................................... %
2001............................................................ %
2002 and thereafter............................................ 100.000%
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At
any time, or from time to time, on or prior to , 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 [ ]% of the principal amount
thereof, plus accrued interest, if any, thereon 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.
As used in the preceding paragraph, a "PUBLIC EQUITY
OFFERING" means an underwritten public offering of Qualified Capital Stock of
Holdings 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 Holdings, Holdings
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 and unpaid interest, if any, 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
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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 and unpaid interest, if any, 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
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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 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.
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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 ____, 1999, or (b)
2.25 to 1.0, if the date of such incurrence is after ____, 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 Holdings or any warrants, rights or
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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, (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 (excluding, in the case of clauses (iii)(x) and (y), any net cash proceeds
from a Public Equity Offering to the extent used to redeem the Notes).
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
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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 Holdings pursuant to and in accordance with the Tax
Sharing Agreement; (5) the making of payments by the Company to Holdings 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
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Company, as the case may 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 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).
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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.
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.
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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 (vii) 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
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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.
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
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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
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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 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 Management 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).
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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 ss.
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);
(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
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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
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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 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
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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
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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.
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.
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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.
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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.
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.
"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 -- Limitation on Transactions with
Affiliates."
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"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, an
English company, and any of its Subsidiaries.
"BP NOTE" means the promissory note of the Company
dated as of , 1996 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
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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 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.
"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
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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.
"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 and
(iii) Consolidated Non-cash Charges, 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.
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"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
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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 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
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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 Credit Agreement dated as
of , 1996, between the Company and , 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.
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"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.
"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 Holdings,
as the case may be (but excluding any debt security which is convertible into or
exchangeable for, Common Stock of the Company or Holdings, 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.
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"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 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
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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).
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"MANAGEMENT AGREEMENT" means the agreement by and
between the Company and Kirtland Capital Corporation, as such Management
Agreement may be amended.
"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."
"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
LP and Kirtland Capital Corporation, an Ohio corporation and their
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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
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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;
(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
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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.
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"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;
(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,
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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.
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"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.
"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 dated as of August , 1996 among the Company, Holding 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
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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."
"TAX SHARING AGREEMENT" means the agreement between
the Company and Holdings 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
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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 are
immaterial amount 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.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among the Company and BT Securities and NationsBanc
Capital Markets, Inc. (together, the "Underwriters"), the Underwriters have
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriters, 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.
Principal Amount
Underwriters of Notes
------------ --------
BT Securities Corporation....................... $___________
NationsBanc Capital Markets, Inc................ ____________
Total.................................... $100,000,000
============
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 _____% 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.
The Company does not intend to apply for listing of the Notes on a
national securities exchange. The Company 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.
The Company 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.
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LEGAL MATTERS
The validity of the Notes being offered hereby will be passed upon for
the Company 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 p.l.c. and certain of
its affiliates in certain matters.
EXPERTS
The financial statements of the North American Fibers Division of
Unifrax Corporation at December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, and the balance sheet of Unifrax
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
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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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<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-22
Combined Balance Sheets as of June 30, 1995 and 1996 (unaudited) F-23
Combined Statements of Income for the six months ended June 30, 1995 and 1996
(unaudited) F-24
Combined Statement of Changes in Parent Company Investment for the six months
ended June 30, 1995 and 1996 (unaudited) F-25
Combined Statements of Cash Flows for the six months ended June 30, 1995
and 1996 (unaudited) F-26
Notes to Interim Combined Financial Statements (unaudited) F-27
</TABLE>
F-1
<PAGE> 113
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> 114
UNIFRAX INVESTMENT CORP.
BALANCE SHEET
AUGUST 20,
1996
----
ASSETS
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
See accompanying note. =====
F-3
<PAGE> 115
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 p.l.c. ("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> 116
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> 117
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 3,395 3,281
Prepaid expenses and other current assets 152 181
------ ------
Total current assets 27,140 25,473
Property, plant and equipment, net 30,076 29,288
Other assets 293 294
------ ------
$57,509 $55,055
====== ======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable $ 2,354 $ 3,081
Accrued expenses 8,986 8,813
------ ------
Total current liabilities 11,340 11,894
Accrued postretirement benefit cost 4,878 4,986
Deferred income taxes 3,825 3,535
Other long-term obligations 400 400
------ ------
Total liabilities 20,443 20,815
Parent company investment -- excess of assets over liabilities 37,066 34,240
------ ------
$57,509 $55,055
====== ======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 118
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 2,747 2,772 2,950
Restructuring charges 155 -- --
------ ------ ------
55,202 59,629 64,048
------ ------ ------
Operating income 12,490 16,617 20,016
Other income (expense):
Royalty income, net of related expenses 630 622 953
Miscellaneous (81) (31) (21)
------ ------ ------
549 591 932
------ ------ ------
Income before income taxes and cumulative
effect of change in accounting principle 13,039 17,208 20,948
Provision for income taxes 5,407 7,052 8,539
------ ------ ------
Income before cumulative effect of change
in accounting principle 7,632 10,156 12,409
Cumulative effect of change in accounting
principle (2,658) -- --
------ ------ ------
Net income $ 4,974 $10,156 $12,409
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 119
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
STATEMENT OF CHANGES IN PARENT COMPANY INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1993 $ 38,143
Net income 4,974
Net change in parent company advances (7,238)
------
Balance at December 31, 1993 35,879
Net income 10,156
Net change in parent company advances (8,969)
------
Balance at December 31, 1994 37,066
Net income 12,409
Net change in parent company advances (15,235)
------
Balance at December 31, 1995 $ 34,240
======
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 120
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 $ 4,974 $ 10,156 $ 12,409
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 3,971 4,220 4,301
Provision for deferred income taxes (437) (795) (176)
Provision for pension (income) expense (90) (223) 149
Loss (gain) on sales of property, plant
and equipment 69 (6) 88
Foreign exchange loss (gain) 21 43 (20)
Cumulative effect of change in accounting
principle 2,658 -- --
Changes in operating assets and liabilities:
Accounts receivable (2,737) (1,475) 1,422
Inventories 849 (1,542) 119
Prepaid expenses and other current assets 66 (62) (29)
Accounts payable and accrued expenses 597 850 554
Accrued postretirement benefit cost 231 158 108
-------- -------- --------
Cash provided by operating activities 10,172 11,324 18,925
INVESTING ACTIVITIES
Capital expenditures (3,032) (2,670) (3,404)
Deferred software and other costs -- -- (294)
Proceeds from sales of property, plant and equipment 82 92 105
-------- -------- --------
Cash used in investing activities (2,950) (2,578) (3,593)
FINANCING ACTIVITIES
Cash transfers to parent company, net (7,134) (8,743) (15,393)
-------- -------- --------
Cash used in financing activities (7,134) (8,743) (15,393)
-------- -------- --------
Net increase (decrease) in cash 88 3 (61)
Cash -- beginning of year 7 95 98
-------- -------- --------
Cash -- end of year $ 95 $ 98 $ 37
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE> 121
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Unifrax Corporation ("Unifrax"), previously known as The Carborundum
Company ("Carborundum"), is an indirect wholly-owned subsidiary of BP America
Inc. ("BP America") and ultimately of The British Petroleum Company p.l.c.
("BP"). Prior to the sale referred to below, the continuing operations of
Unifrax and related affiliates principally comprised high performance ceramic
product businesses with manufacturing facilities located in the United States,
Puerto Rico, Brazil, Germany, Australia, and the United Kingdom. The North
American Fibers Division of Unifrax (the "Division"), included herein,
manufactures heat resistant ceramic fiber products for automotive, commercial,
and industrial customers primarily throughout North America. Manufacturing
facilities are located in Western New York (Tonawanda, Sanborn, and Amherst) and
New Carlisle, Indiana.
As part of a program to review holdings not related to its core
hydrocarbon and chemicals businesses, in 1994 BP announced its intent to seek
potential buyers for Carborundum, including the Division. In May 1995, BP
entered into an agreement under the terms of which it agreed to sell principally
all continuing businesses of Carborundum, excluding the Division, to Societe
Europeenne des Produits Refractaires and various other affiliates of Compagnie
de Saint-Gobain ("SEPR"). This sale was completed on February 29, 1996. In
connection with the sale, Carborundum changed its name to Unifrax Corporation.
The effects of any divestiture of the Division are not reflected in the
accompanying special-purpose financial statements, which are intended to reflect
the specific assets and liabilities of the operations being sold on a historical
cost basis. The accompanying financial statements include the assets,
liabilities and related operations of the Division expected to be included as
part of any divestiture and exclude the assets, liabilities and related
operations of other Carborundum divisions, including Carborundum's ceramic fiber
operations located outside of North America.
Prior to the sale referred to above, the Division had certain shared
assets and incurred certain common costs which related to both the Division and
other Unifrax operations. As such, for purposes of preparing these
special-purpose financial statements, management of Unifrax made certain
allocations of assets, liabilities and expenses to the Division. Management of
the Division believes that the basis of such allocations is reasonable; however,
the amounts could differ from amounts that would be determined if the Division
were operated on a stand-alone basis (see Note 7).
Under the terms of agreements dated October 14, 1994 and April 19,
1996, BP America assumed, through an indirect wholly-owned subsidiary, certain
assets and liabilities of Unifrax. Further, under the terms of these agreements,
BP America, among other things, agreed to indemnify Unifrax, including the
Division, for all liabilities, if any, that might result from any claims for
wrongful death or personal injury caused by exposure to refractory ceramic fiber
products manufactured by Unifrax,
F-10
<PAGE> 122
subject to certain loss retention levels (see Note 13). This indemnity, upon the
execution of an agreement providing for the sale of Unifrax, or the Division, to
an entity not affiliated with BP America, will be superseded by the sale
agreement, which will contain, among other things, additional provisions
necessary to administer the agreement. Assets and liabilities assumed, or
indemnified, by BP America under the terms of these agreements are not included
in the accompanying special-purpose financial statements.
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. 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.
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 Carborundum, excluding the Division, but including
ceramic fiber businesses located outside of North America.
During the years ended December 31 1993, 1994 and 1995, the Division's
sales to businesses included as part of this sale amounted to $3,828 thousand,
$4,356 thousand and $4,549 thousand, respectively.
In connection with this sale, BP and SEPR entered into various
agreements regarding the ongoing relationship between the Division and SEPR
subsequent to the closing of the transaction. Under the terms of certain of
these agreements, among other things, for a period of five years ending on March
1, 2001:
(i) the Division is precluded from selling, outside of the United
States, Canada and Mexico, products licensed to SEPR;
(ii) for products manufactured by the Division that are not covered by the
license agreement, except for expanding paper products, the world-wide
marketing rights of which are retained by the Division, SEPR is the
exclusive distributor of such products outside of the United States,
Canada and Mexico; for certain of these products, SEPR can elect, on a
product by product basis, to manufacture the product and pay a royalty
to the Division;
(iii) die cutting operations associated with expanding paper products in
Brazil and Germany will be performed by SEPR; in lieu of performing the
die cutting, SEPR can elect to obtain a royalty free license to
manufacture expanding paper products outside of the United States,
Canada, and Mexico; and
F-11
<PAGE> 123
(iv) the Division is required to provide certain specified technical
services and product information for which, in certain situations, the
Division will receive a royalty.
Note 17 to the financial statements ("Pro Forma Impact of Saint-Gobain
Sale") includes a summary of the pro forma impact of the Saint-Gobain Sale on
the operations of the Division for the year ended December 31, 1995.
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Division recognizes revenue at the point of passage of title, which
is generally at the time of shipment to the customer. Sales to affiliates
generally reflect prices offered to the Division's highest volume distributors.
The Division provides for 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 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.
F-12
<PAGE> 124
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 as part of new product research and development. The cost of
ceramic fiber health studies are accrued annually based on the estimated cost
and scope of the studies and the Division's estimated cost sharing percentage.
Amounts charged to operations during the years ended December 31, 1993, 1994 and
1995 relating to the cost of these health studies amounted to $1,615 thousand,
$2,319 thousand and $1,829 thousand, respectively, and are included in
administration and research and development expense in the accompanying
statements of income.
ACCOUNTING FOR STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123, which must be adopted by the Division in
1996, encourages a fair value-based method of accounting for employee stock
options or similar equity instruments, but allows continued use of the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Companies
electing to continue to
F-13
<PAGE> 125
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
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw material and supplies $1,497 $1,309
In-process 1,601 1,066
Finished product 4,057 4,564
------ ------
7,155 6,939
Adjustment to LIFO cost 665 762
------ ------
$7,820 $7,701
====== ======
</TABLE>
The cost of inventories determined on the LIFO method exceeds the
current cost of inventories principally as a result of reduced manufacturing
costs.
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1994 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and land improvements $ 1,377 $ 1,712
Buildings 15,196 15,555
Machinery, equipment,
furniture and fixtures 36,674 37,878
Construction in progress 1,792 2,472
------- -------
55,039 57,617
Less accumulated depreciation
and amortization (24,963) (28,329)
------- -------
$30,076 $29,288
======= =======
</TABLE>
For the years ended December 31, 1993, 1994 and 1995, depreciation
expense amounted to $3,911 thousand, $4,132 thousand and $4,008 thousand,
respectively.
6. FINANCING ACTIVITIES
The Division is part of a centralized cash management system whereby
all cash disbursements of the Division are funded by, and all cash receipts are
transferred to, BP America.
F-14
<PAGE> 126
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' 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
F-15
<PAGE> 127
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
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Employee benefit accruals $1,957 $2,083
Ceramic fiber health studies 1,500 2,000
Other ceramic fiber product
stewardship and monitoring 1,192 1,168
Other 4,337 3,562
------ ------
$8,986 $8,813
====== ======
</TABLE>
9. RETIREMENT PLANS
The Division participates in defined benefit retirement plans sponsored
by BP America. The defined benefit retirement plans are of two general types --
flat dollar plans and salary related plans. Flat dollar plans, which are
negotiated with unions, pay benefits based on length of service. Salary related
plans, pertaining to all non-hourly employees, pay benefits based on length of
service and level of compensation. Annual contributions are made to the defined
benefit plans which at least equal the amounts required by law. Contribution
amounts are determined by independent actuaries using an actuarial cost method
that has an objective of providing an adequate fund to meet pension obligations
as they mature. The assets of these plans are held in U.S. and foreign equity
securities, fixed income securities, interest bearing cash and real estate. Net
pension income (expense) allocated to the Division approximated $90 thousand,
$223 thousand and $(149) thousand in 1993, 1994 and 1995, respectively. Amounts
allocated are principally determined based on payroll.
The Division, through BP America, participates in a defined
contribution 401(k) plan which is available to substantially all non-union
employees of the Division. Division contributions, representing a 50% matching
of employee contributions up to a maximum of 6% of the employee's base pay,
amounted to $281 thousand, $299 thousand and $313 thousand during the years
ended December 31, 1993, 1994 and 1995, respectively.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Division, through BP America, provides certain health care and life
insurance benefits for retired employees who meet eligibility
F-16
<PAGE> 128
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
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned $ 55 $ 89 $ 70
Interest costs 380 304 265
---- ---- ----
Net periodic postretirement
benefit expense $435 $393 $335
==== ==== ====
</TABLE>
The following table presents the status of the unfunded postretirement
benefit obligation allocated to the Division and the amounts recognized in the
Division's balance sheets:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1994 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,136 $2,340
Employees fully eligible 720 839
Other active employees 1,035 1,605
------ ------
3,891 4,784
Unrecognized net gain 987 202
------ ------
Accrued postretirement benefit cost $4,878 $4,986
====== ======
</TABLE>
The accumulated postretirement benefit obligation is based on a
weighted-average assumed discount rate of 7.0% at December 31, 1995 (8.5% at
December 31, 1994). The assumed rates of future increases in per capita cost of
health care benefits (health care cost trend rate) for 1996 are 10.4% for those
beneficiaries under 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-17
<PAGE> 129
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
Deferred (437) (795) (176)
------ ------ ------
$5,407 $7,052 $8,539
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Income before income taxes at 35% $4,564 $6,023 $7,332
Permanent income tax disallowances 24 57 51
Impact of federal rate change on
deferred taxes 80 -- --
State taxes, net of federal benefit 739 972 1,156
------ ------ ------
$5,407 $7,052 $8,539
====== ====== ======
</TABLE>
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
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $(5,809) $(5,624)
Other (168) (107)
------ ------
Total deferred tax liabilities (5,977) (5,731)
Deferred tax assets:
Accrued liabilities 2,560 2,440
Accrued postretirement benefit cost 1,989 2,033
Inventory 728 712
Other 270 292
------ ------
Total deferred tax assets 5,547 5,477
------ ------
Net deferred tax liability $ (430) $ (254)
====== ======
</TABLE>
12. LEASE COMMITMENTS AND RENTALS
The Division rents two manufacturing facilities and certain equipment
under various operating leases. The lease agreement for one of the facilities
expires 2002 and contains options which allow the Division to extend the lease
term for up to three additional five year periods, or to purchase the facility
for a purchase price determined in accordance with the lease agreement. The
lease agreement for the second facility expires 2004 and contains options which
allow the Division to extend the lease term for up to two additional five year
periods, or to purchase the facility for a purchase price equal to fair value.
Total rental expense for the years ended December 31, 1993, 1994 and 1995
amounted to $1,206 thousand, $1,176 thousand and $1,429 thousand, respectively.
Future minimum lease payments under all non-cancelable operating leases
having a remaining term in excess of one year as of December 31, 1995 are as
follows:
F-18
<PAGE> 130
(DOLLARS IN THOUSANDS)
1996 $ 858
1997 838
1998 825
1999 765
2000 774
Thereafter 1,979
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. At December 31, 1994 and 1995, accrued expenses includes
$1,500 thousand and $2,000 thousand, respectively, relating to the estimated
cost of ceramic fiber health studies.
Various legal proceedings and claims have been made against
manufacturers of ceramic fibers, including Unifrax and the Division, alleging
death or personal injury as a result of exposure in the manufacture and handling
of ceramic fiber and other products. The amount of any liability that might
ultimately exist with respect to these claims is presently not determinable.
Consistent with customary practice among manufacturers of ceramic fiber
products, the Division has entered into agreements with distributors of its
product whereby the Division has agreed to indemnify the distributors against
losses resulting from ceramic fiber claims and the costs to defend against such
claims. The amount of any liability that might ultimately exist with respect to
these indemnities is presently not determinable.
Under an agreement with Unifrax, BP America 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-19
<PAGE> 131
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.
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.
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.
F-20
<PAGE> 132
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net Sales $84,064 $ (426) $83,638
Operating income 20,016 (1,127) 18,889
Income before income
taxes 20,948 (1,517) 19,431
Net income 12,409 (895) 11,514
</TABLE>
F-21
<PAGE> 133
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-22
<PAGE> 134
UNIFRAX CORPORATION, XPE VERTRIEBS GMBH
AND NAF BRASIL LTDA.
COMBINED BALANCED 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 3,449 --
Inventories 8,297 9,290
Deferred income taxes 3,340 3,401
Prepaid expenses and other current assets 196 433
------ ------
Total current assets 29,268 28,359
Property, plant and equipment, net 29,156 30,082
Other assets 249 544
------ ------
$58,673 $58,985
====== ======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable $ 2,182 $ 3,805
Accrued expenses 9,681 10,360
------ ------
Total current liabilities 11,862 14,165
Accrued postretirement benefit cost 4,945 5,116
Deferred income taxes 3,679 3,357
Other long-term obligations 400 400
------ ------
Total liabilities 20,886 23,038
Parent company investment -- excess of assets over liabilities 37,787 35,947
------ ------
$58,673 $58,985
====== ======
</TABLE>
See independent accountants' review report and accompanying notes.
F-23
<PAGE> 135
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 22,129
Selling and distribution 6,064 6,418
Administration 3,218 3,429
Allocated corporate charges 1,350 356
Research and development 1,622 1,371
------ ------
33,057 33,703
------ ------
Operating income 9,979 11,489
Other income (expense):
Royalty income, net of related expenses 423 264
Miscellaneous (31) (221)
------ ------
392 43
------ ------
Income before income taxes 10,371 11,532
Provision for income taxes 4,214 4,780
------ ------
Net income $ 6,157 $ 6,752
====== ======
</TABLE>
See independent accountants' review report and accompanying notes.
F-24
<PAGE> 136
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 $ 37,066 $ 34,240
Net income 6,157 6,752
Net change in parent company advances (5,436) (5,045)
------ ------
Balance - end of period $ 37,787 $ 35,947
====== ======
</TABLE>
See independent accountants' review report and accompanying notes.
F-25
<PAGE> 137
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 $ 6,157 $ 6,752
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,094 1,955
Provision for deferred income taxes (91) (298)
Provision for pension expense 120 78
Loss on sales of property, plant
and equipment 50 157
Changes in operating assets and liabilities:
Accounts receivable (1,649) (962)
Inventories (477) (1,589)
Prepaid expenses and other current assets (44) (252)
Accounts payable and accrued expenses 522 2,271
Accrued postretirement benefit cost 67 130
------- -------
Cash provided by operating activities 6,749 8,242
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 (5,567) (5,230)
------- -------
Cash used in financing activities (5,567) (5,230)
------- -------
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-26
<PAGE> 138
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 and South
America which were established for that sole purpose. The unaudited combined
financial statements included herein include the results of these sales
corporations. Prior to February 29, 1996, sales of these products were made to
other foreign affiliates of Unifrax, who, in turn, sold to the final customer.
Such sales are included in net sales in the accompanying unaudited combined
statements of income.
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. 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.
See independent accountants' review report.
F-27
<PAGE> 139
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 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 $ 1,523
In-process 1,600 1,205
Finished product 4,650 6,009
------- -------
7,632 8,737
Adjustment to LIFO cost 665 553
------- -------
$ 8,297 $ 9,290
======= =======
</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
See independent accountants' review report.
F-28
<PAGE> 140
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. At June 30, 1995 and 1996, accrued
expenses includes $1,750 thousand and $2,250 thousand, respectively, relating to
the estimated cost of ceramic fiber health studies.
Various legal proceedings and claims have been made against manufacturers of
ceramic fibers, including 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.
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
indemnity 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.
See independent accountants' review report.
F-29
<PAGE> 141
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
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 11,489 (188) 11,301
Income before income taxes 11,532 (277) 11,255
Net income 6,752 (163) 6,589
</TABLE>
See independent accountants' review report.
F-30
<PAGE> 142
================================================================================
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 UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY 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
Page
----
Prospectus Summary........................................ 3
Risk Factors.............................................. 13
The Recapitalization...................................... 20
Use of Proceeds........................................... 21
Capitalization............................................ 22
Pro Forma Financial Data.................................. 23
Selected Historical Financial Data........................ 30
Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 32
Business.................................................. 39
Management................................................ 55
Principal Stockholders.................................... 64
Certain Relationships and Related Transactions............ 65
Description of Credit Agreement and Other Indebtedness.... 69
Description of Notes...................................... 70
Underwriting.............................................. 108
Legal Matters............................................. 109
Experts................................................... 109
Available Information..................................... 109
Index to Financial Statements............................. F-1
Until , 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
----------------------
$100,000,000
UNIFRAX CORPORATION
(as successor by merger to Unifrax Investment Corp.)
% SENIOR NOTES
DUE
2003
BT SECURITIES CORPORATION
NATIONSBANC CAPITAL MARKETS, INC.
, 1996
================================================================================
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Notes being registered. All amounts are estimates except the
Securities and Exchange Commission ("SEC") and National Association of
Securities Dealers, Inc. ("NASD") fees.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
-------
<S> <C>
SEC registration fee $34,483
NASD filing Fee $10,500
Printing costs *
Legal fees and expenses *
Accounting fees and expenses *
Blue sky fees and expenses *
Trustee fees and expenses *
Miscellaneous *
-------
TOTAL $
=======
</TABLE>
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Registrant's By-laws incorporate substantially the provisions of
the General Corporation Law of the State of Delaware providing for
indemnification of directors and officers of the Registrant against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of the fact that such person
is or was an officer or director of the Registrant or is or was serving at the
request of the Registrant as a director, officer, employee, agent or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise.
As permitted by Section 102 of the Delaware General Corporation Law,
the Registrant's Certificate of Incorporation contains provisions eliminating a
director's personal liability for monetary damages to the Registrant and its
stockholders arising from a breach of a director's fiduciary duty except for
liability (a) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c) under Section
174 of the Delaware General Corporation Law, or (d) for any transaction from
which the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law provides generally
that a person sued as a director, officer, employee or agent of a corporation
may be indemnified by the corporation for reasonable expenses, including
attorney's fees, if in the case of other than derivative suits he has acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation (and, in the case of a criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful). In the case
of a derivative suit, an officer, employee or agent of the corporation who is
not protected by the Certificate of Incorporation may be indemnified by the
corporation for reasonable expenses, including attorney's fees, if he has acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification shall be
made in the case of a derivative suit in respect of any claim as to which an
officer, employee or agent has been adjudged to be liable to the corporation
unless that person is fairly and reasonably entitled to indemnity for proper
II-1
<PAGE> 144
expenses. Indemnification is mandatory in the case of a director, officer,
employee, or agent who is successful on the merits in defense of a suit against
him.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In August 1996, 1,000 shares of common stock of the Registrant were
sold by the Registrant to Holding for an aggregate offering price of $1,000.00
in a transaction exempt from the Securities Act pursuant to Section 4(2)
thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
1.1* Form of Underwriting Agreement
2.1* Recapitalization Agreement
3.1 Certificate of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1* Form of Indenture (including form of Note)
5.1* Opinion of Baker & Hostetler as to the legality of the securities
being registered
10.1* Form of Credit Agreement between the Registrant and the Lenders to
be named therein
10.2* 1996 Stock Option Plan (to become effective subsequent to consummation
of the Offering)
10.3* Lease relating to Tonawanda plant
10.4* Lease relating to Amherst plant
10.5* Sanborn Lease
10.6* Covenant Not to Compete between The British Petroleum Company
p.l.c., its affiliates, and the Registrant and Societe Europeenne
des Produits Refractaires, and its affiliates (portions of this
Exhibit have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment)
10.7* Product Distribution Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this Exhibit have
been omitted and filed separately with the Commission pursuant to a
request for confidential treatment)
10.8* Distributed Product License Agreement between the Registrant and
Societe Europeenne des Produits Refractaires (portions of this
Exhibit have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment)
10.9* License Agreement between the Registrant and Societe Europeenne des
Produits Refractaires (portions of this Exhibit have been omitted
and filed separately with the Commission pursuant to a request for
confidential treatment)
10.10* Trademark License and Consent Agreement between the Registrant and
Societe Europeenne des Produits Refractaires
10.11* Conversion Agreement between the Registrant and Societe Europeenne
des Produits Refractaires (portions of this Exhibit have been
II-2
<PAGE> 145
omitted and filed separately with the Commission pursuant to a
request for confidential treatment)
10.12* XPE License Agreement between the Registrant and Societe Europeenne
des Produits Refractaires
10.13* Form of Covenant Not to Compete between Holding and BP
10.14* Form of Stockholders Agreement among the Company, BPX and Holding
10.15* Tax Sharing Agreement between the Company and Holding
10.16* Management Agreement between the Company and Kirtland Capital
Corporation
10.17* Form of BP Note
12.1 Statement re: Computation of Ratios
23.1 Consent of Ernst & Young LLP
23.2 Acknowledgment of Ernst & Young LLP
23.3* Consent of Baker & Hostetler (included in their opinion filed as
Exhibit 5.1 hereto)
25.1* Statement of Eligibility and Qualification on Form T-1 of
____________, as Trustee under the Indenture
27.1* Financial Data Schedule
* To be filed by amendment
(b) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included
herein:
Schedule II Valuation and qualifying accounts for the years ended
December 31, 1993, 1994 and 1995
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under the related
instructions, are inapplicable, or the information is included in the financial
statements and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide
the Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 146
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared
effective.
(2) For the purpose of determining liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 147
EXHIBIT INDEX
Page
----
1.1* Form of Underwriting Agreement
2.1* Recapitalization Agreement
3.1 Certificate of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1* Form of Indenture (including form of Note)
5.1* Opinion of Baker & Hostetler as to the legality of the
securities being registered
10.1* Form of Credit Agreement between the Registrant and the
Lenders to be named therein
10.2* 1996 Stock Option Plan (to become effective subsequent to
consummation of the Offering)
10.3* Lease relating to Tonawanda plant
10.4* Lease relating to Amherst plant
10.5* Sanborn Lease
10.6* Covenant Not to Compete between The British Petroleum
Company p.l.c., its affiliates, and the Registrant and
Societe Europeenne des Produits Refractaires, and its
affiliates (portions of this Exhibit have been omitted
and filed separately with the Commission pursuant to a
request for confidential treatment)
10.7* Product Distribution Agreement between the Registrant
and Societe Europeenne des Produits Refractaires
(portions of this Exhibit have been omitted and filed
separately with the Commission pursuant to a request for
confidential treatment)
10.8* Distributed Product License Agreement between the
Registrant and Societe Europeenne des Produits
Refractaires (portions of this Exhibit have been omitted
and filed separately with the Commission pursuant to a
request for confidential treatment)
10.9* License Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this
Exhibit have been omitted and filed separately with the
Commission pursuant to a request for confidential
treatment)
10.10* Trademark License and Consent Agreement between the
Registrant and Societe Europeenne des Produits
Refractaires
10.11* Conversion Agreement between the Registrant and Societe
Europeenne des Produits Refractaires (portions of this
Exhibit have been omitted and filed separately with the
Commission pursuant to a request for confidential
treatment)
10.12* XPE License Agreement between the Registrant and Societe Europeenne
des Produits Refractaires
II-5
<PAGE> 148
10.13* Form of Covenant Not to Compete between Holding and BP
10.14* Form of Stockholders Agreement among the Company, BPX and Holding
10.15* Tax Sharing Agreement between the Company and Holding
10.16* Management Agreement between the Company and Kirtland Capital
Corporation
10.17* Form of BP Note
12.1 Statement re: Computation of Ratios
23.1 Consent of Ernst & Young LLP
23.2 Acknowledgment of Ernst & Young LLP
23.3* Consent of Baker & Hostetler (included in their opinion
filed as Exhibit 5.1 hereto)
25.1* Statement of Eligibility and Qualifications on Form T-1 of
____________ as Trustee under the Indenture
27.1* Financial Data Schedule
II-6
<PAGE> 149
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Niagara
Falls, State of New York, on August 21, 1996.
UNIFRAX INVESTMENT CORP.
By: /s/ William P. Kelly
-------------------------------
William P. Kelly, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------
/s/ William P. Kelly Director, President and Chief August 21, 1996
- ----------------------- Executive Officer (Principal
William P. Kelly Executive Officer)
/s/ Mark D. Roos Treasurer (Principal Financial August 21, 1996
- ----------------------- Officer and Principal Accounting
Mark D. Roos Officer)
II-7
<PAGE> 150
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BP America Inc.
We have audited the balance sheets of the North American Fibers
Division of Unifrax Corporation (the "Division") as of December 31, 1993, 1994
and 1995, and the related statements of income, changes in parent company
investment and cash flows for the years then ended, and have issued our report
thereon dated April 19, 1996 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Division's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Buffalo, New York
April 19, 1996
<PAGE> 151
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
NORTH AMERICAN FIBERS DIVISION OF
UNIFRAX CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 490 $ 149 $ $ 1(a) $ 638
Allowance for returns 847 820 1,386(b) 281
Allowance for obsolescence 200 270 270(c) 200
----- ----- ----- ----- -----
Total $1,537 $1,239 $0 $1,657 $1,119
===== ===== ===== ===== =====
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 506 $ 145 $ 161(a) $ 490
Allowance for returns 665 2,036 1,854(b) 847
Allowance for obsolescence 268 107 175(c) 200
----- ----- ----- ----- -----
Total $1,439 $2,288 $0 $2,190 $1,537
===== ===== ===== ===== =====
Year ended December 31, 1993:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 371 $ 144 $ $ 9(a) $ 506
Allowance for returns 495 1,150 980(b) 665
Allowance for obsolescence 268 146 146(c) 268
----- ----- ----- ----- -----
Total $1,134 $1,440 $0 $1,135 $1,439
===== ===== ===== ===== =====
<FN>
(a) Uncollectible accounts written off, net of recoveries.
(b) Returns from customers during the year.
(c) Obsolete inventory disposals.
</TABLE>
<PAGE> 1
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
UNIFRAX INVESTMENT CORP.
FIRST: The name of the Corporation is Unifrax Investment Corp.
SECOND: The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock that the Corporation shall
have authority to issue is One Thousand (1,000), all of which shall be Common
Stock, without par value.
FIFTH: The name and mailing address of the Incorporator of the
Corporation is
Catherine M. Kilbane
Baker & Hostetler
1900 East Ninth Street
3200 National City Center
Cleveland, Ohio 44114
SIXTH: The Board of Directors is authorized to make, alter or repeal
the Bylaws of the Corporation.
SEVENTH: Any one or more directors may be removed with or without
cause, by the vote or written consent of the holders of a majority of the
issued and outstanding shares of stock of the Corporation entitled to be voted
at an election of directors.
EIGHTH: Meetings of stockholders shall be held at such place, within
or without the State of Delaware, as may be designated by or in the manner
provided in the By-Laws, or, if not so designated, at the registered office of
the Corporation in the State of Delaware. Elections of directors need not be by
written ballot unless and to the extent that the By-Laws so provide.
NINTH: The Corporation reserves the right to amend, alter or repeal
any provision contained in this Certificate of Incorporation in the manner now
or hereafter prescribed by statute, and all rights of the stockholders herein
are subject to this reservation.
<PAGE> 2
TENTH: To the fullest extent permitted by the General Corporation Law
of the State of Delaware, as the same exists or may hereafter be amended, a
director of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make, file and record this Certificate of Incorporation,
do certify that the facts herein stated are true and, accordingly, have
hereunto set my hand this 20th day of August, 1996.
/s/ CATHERINE M. KILBANE
-------------------------------
Catherine M. Kilbane
Incorporator
-2-
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- --------------------------
PRO FORMA COMBINED PRO FORMA
1991 1992 1993 1994 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Earnings from continuing
operations before
income taxes,
cumulative effect of
change in accounting
principles and
extraordinary charges 6,292 10,404 13,039 17,208 20,948 6,050 10,371 11,532 3,874
Fixed charges 84 97 110 107 130 14,561 63 66 7,233
------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings(1) 6,376 10,501 13,149 17,315 21,078 20,611 10,434 11,598 11,107
====== ====== ====== ====== ====== ====== ====== ====== ======
Fixed charges:
Interest expense 0 0 0 0 0 13,816 0 0 6,859
Amortization of
financing cost 0 0 0 0 0 615 0 0 308
Imputed interest on
operating lease
obligations 84 97 110 107 130 130 63 66 66
------ ------ ------ ------ ------ ------ ------ ------ ------
Fixed charges(2) 84 97 110 107 130 14,561 63 66 7,233
====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of earnings to fixed
charges(~ 1)/(2) 75.90x 108.26x 119.54x 161.82x 162.14x 1.42x 165.62x 175.73x 1.54x
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the captions "Experts" and
"Selected Historical Financial Data," and to the use of our reports dated April
19, 1996 (except Notes 1 and 14, as to which the date is June 9, 1996) with
respect to the financial statements and schedule of the North American Fibers
Division of Unifrax Corporation and our report dated August 20, 1996 with
respect to the balance sheet of Unifrax Investment Corp. in the Registration
Statement (Form S-1 No. _________) and related Prospectus of Unifrax Investment
Corp. dated August 22, 1996.
/s/ ERNST & YOUNG LLP
Buffalo, New York
August 22, 1996
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
Unifrax Corporation
We are aware of the inclusion in the Registration Statement (Form S-1 No.
__________) and related Prospectus of Unifrax Investment Corp. dated August 22,
1996 of our report dated July 10, 1996 related to the unaudited interim combined
financial statements of Unifrax Corporation, XPE Vertriebs GmbH and NAF Brasil
Ltda. as of June 30, 1995 and 1996 and for the six-month periods then ended.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Buffalo, New York
August 22, 1996
