SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended December 31, 1997
Commission File Number:
UNIFRAX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
34-1535916
(I.R.S.Employer Identification No.)
2351 Whirlpool Street, Niagara Falls, NY
14305-2413
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including
area code: (716) 278-3800
-------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION
12(g) OF THE ACT:
10.5% Senior Notes Due 2003
SECURITIES REGISTERED PURSUANT TO SECTION
12(b) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ X ]
---
Documents Incorporated By Reference: None.
<PAGE>
PART I
ITEM 1. BUSINESS
Unifrax Corporation ("Unifrax" or "Company") manufactures heat
resistant ceramic fiber products for automotive, commercial, and industrial
customers primarily throughout North America. Manufacturing facilities are
located in Western New York and Indiana. Unifrax and its predecessor, the North
American Fibers Division of The Carborundum Company was an indirect wholly-owned
subsidiary of The British Petroleum Company p.l.c. ("BP"). On October 30, 1996,
the Company completed a comprehensive recapitalization (the "Recapitalization").
Pursuant to the Recapitalization, Unifrax redeemed 80% of its common stock held
by BP in exchange for a written promise to pay an aggregate of $120 million of
cash (the "Interim Obligation") and a note payable in the amount of $7 million.
Concurrent with the Recapitalization, Kirtland Capital Partners II L.P. and its
affiliates ("Kirtland") established two wholly-owned subsidiaries, Unifrax
Investment Corp. ("Investment") and Unifrax Holding Co. ("Holding"). In this
regard, Investment issued $100 million of senior, unsecured indebtedness and
Holding purchased 90% of the remaining stock of Unifrax that was owned by BP.
Subsequent to the transactions described above, Investment was merged with the
Company. The proceeds of the $100 million senior, unsecured indebtedness and
borrowings of $25 million were used to repay the Interim Obligation. As a result
of the Recapitalization, Holding and BP own 90% and 10%, respectively, of the
Company.
The Company transacted sales of certain products through indirect
wholly-owned subsidiaries of BP in Europe (XPE Vertriebs GmbH) and South America
(NAF Brasil Ltda.). Prior to the Recapitalization, BP contributed these related
sales corporations to Unifrax.
Prior to February 29, 1996, 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 Unifrax were sold to Societe Europeenne des
Produits Refractaires and various other units of Compagnie de Saint Gobain
(SEPR). Concurrent with the Saint-Gobain Sale, Carborundum was re-named Unifrax.
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. Increasingly, the Company has applied its
expertise to rapidly-growing, high value-added niche markets. These niche
markets, which include automotive, power generation, and fire protection now
account for the majority of the Company's net sales.
MARKETS
As a result of a covenant not to compete entered into with SEPR
(reference is made to the information under the heading "Relationship With
SEPR-Covenant Not to Compete" provided under Item 13 of this Form 10-K, which is
hereby incorporated herein by reference), the Company is prohibited from
manufacturing, selling or distributing any ceramic fiber products outside the
North American market until March 1, 2001 except XPE(TM) which the Company will
sell worldwide and certain products for which SEPR will act as distributor.
Furnace-Related Markets. Ceramic fiber for furnace-related
applications is generally sold to the metal production, petrochemical, and
ceramic and glass industries.
Automotive Market. Three product types account for substantially all of
the fiber consumed by the automotive industry: paper, XPE(TM) gasket material,
and insulation heat shields.
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.
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.
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.
The Company's operations in Tonawanda, New York, in early 1997 became
certified under the International Quality Standard, ISO 9000, and the rigorous
U.S. automotive standard, QS 9000.
In late 1997 the Company successfully brought into service its expanded
furnacing capability at its New Carlisle, Indiana, facility. At a cost of over
$14 million, this project was undertaken as a strategic move to meet the
anticipated growing demand for ceramic fiber products.
RAW MATERIALS
Although the Company purchases some of its raw materials from sole
suppliers, substitute materials are available from other suppliers on similar
terms. Supplier changes would require some level of product and process
qualification, but there are no technical barriers identified. The exception is
vermiculite, a mineral which is an important raw material in the manufacture of
XPE(TM) which is used in automotive catalytic converter gaskets. The Company
currently purchases the majority of its requirements of vermiculite from one
supplier in China and the balance 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 continue to
rely on the Chinese source.
RESEARCH AND DEVELOPMENT
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.
The Company has maintained a strong financial commitment to its
research and development program. Research and development expense constituted
approximately 2.5% and 3.1% of net sales during the years 1996 and 1997,
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, quality assurance and price.
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, 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.
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.
PRODUCT AND HEALTH SAFETY ISSUES
Manufacturers of man-made vitreous fibers ("MMVF") such as fiberglass,
mineral wool and ceramic fiber have investigated the potential for adverse
health effects associated with the inhalation of airborne fiber. Independent
animal studies have indicated that ceramic fiber inhaled by test animals, in
large quantities during the course of their lifetimes, can cause fibrosis, lung
cancer and mesothelioma, a malignant tumor of the lining of the lungs and chest
cavity. Company and industry-sponsored studies of workers with occupational
exposure to airborne ceramic fiber, however, to date have found no clinically
significant relationship between ceramic fiber exposure and respiratory disease
in humans.
The Company has established organization and management systems for the
purpose of ensuring that health and safety matters are properly identified,
evaluated and addressed throughout the Company's operations. 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") provides advice to the
Company regarding proper handling practices for ceramic fiber and other related
product management issues.
The Company developed and implemented a comprehensive Product
Stewardship Program ("PSP") as one of its management systems. A key element of
the PSP is research focused on identifying and evaluating the potential health
effects associated with the inhalation of respirable fibers. These studies have
taken two forms: human studies, known as epidemiological investigations, and
toxicological research, which is generally conducted with test animals. Many of
these research activities have been conducted with the participation of other
members of the ceramic fiber industry.
The Company's PSP 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.
In the absence of a specific U.S. government standard regulating
ceramic fiber exposure, several years ago the industry adopted a recommended
exposure guideline ("REG") of one fiber per cubic centimeter of air. 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.
During 1997 several participants in the industry, including the Company,
voluntarily reduced the REG from one fiber per cubic centimeter to one-half
fiber per cubic centimeter based on prudence and not significant risk.
Over time, health research data have been used by various organizations
to classify certain man-made fibers. For example, classification terms, such as
"possible" (International Agency for Research on Cancer, "IARC"), "probable"
(EPA and Health Canada, "HC"), "reasonably anticipated" (National Toxicology
Program, "NTP"), and "suspected" (proposed by the American Conference of
Governmental Industrial Hygienists, "ACGIH") reflect the view of each
organization as to the potential carcinogenicity of ceramic fiber and/or other
MMVFs. Each of these classifications reflect concern for human health and
uncertainty regarding the potential for airborne ceramic fiber to affect
occupational health adversely. These classification determinations have not been
followed by exposure standards in the U.S., although the ACGIH recently proposed
exposure standards for public comment.
Some regulators in other countries have adopted a variety of regulatory
thresholds. Member States of the European Union voted in November 1997 to
classify ceramic fiber as "Category 2: Substances which should be regarded as if
they are carcinogenic to man" on the basis of animal studies, although
refractory ceramic fiber exposure has not been associated with any respiratory
disease in humans. If the U.S. were to adopt 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.
ENVIRONMENTAL REGULATION
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 persons. 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. Reference is
made to the information included in Note 15 to the consolidated financial
statements included in this Form 10-K, and to information appearing under the
headings "Health and Safety Indemnity" and "Environmental Indemnity" provided
under Item 13 of this Form 10-K, which are hereby incorporated herein by
reference.
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.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 400 persons
on a full-time basis, Approximately 60 employees at the Company's Tonawanda
plant are members of the Oil, Chemical and Atomic Workers union.
ITEM 2. PROPERTIES
The flagship of the Company's operations is located in New Carlisle,
Indiana. This facility is believed to be the largest ceramic fiber manufacturing
plant in the world, producing blown and spun forms of bulk fiber and blankets.
The 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.
Approximate
Plant Site Square Feet Status Use
- ---------- ----------- ------ ---
New Carlisle, IN 230,000 Owned Bulk ceramic fiber, blankets,
modules, boards
Tonawanda, NY 144,000 Leased Papers, felts, boards, XPE(TM),
porosity-controlled paper
Amherst, NY 42,000 Leased Woven and spun textiles
Sanborn, NY 10,000 Leased Fibermax(R)high temperature fiber
Niagara Falls, NY 33,000 Owned Headquarters, research laboratory
ITEM 3. LEGAL PROCEEDINGS
Reference is made to the information included in Note 15 to the
consolidated financial statements of the Company included under Item 8 in this
Form 10-K, which is hereby incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's stock is not traded on public markets.
ITEM 6. SELECTED FINANCIAL DATA
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Company's consolidated financial statements and related notes in Item 8
of this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Net sales $67,692 $76,246 $84,064 $91,631 $87,111
Income before interest, taxes
and cumulative effect of
change in accounting
principle 13,539 17,708 21,448 22,429 20,039
Interest expense 0 0 0 2,246 12,537
Provision for income taxes 5,611 7,256 8,743 8,543 1,937
------- ------- ------- ------- ------
Income before cumulative
effect of change in
accounting principle 7,928 10,452 12,705 11,640 5,565
Cumulative effect of change
in accounting principle (2,658)(a) -- -- -- --
------- ------- ------- ------- -------
Net income $ 5,270 $10,452 $12,705 $11,640 $ 5,565
======= ======= ======= ======= =======
OTHER DATA:
EBITDA(b) $17,510 $21,928 $25,749 $26,520 $25,362
Depreciation and amortization 3,971 4,220 4,301 4,091 5,323
Cash Flows From Operating
Activities 10,172 11,324 18,925 18,631 13,987
Cash Flows From Investing
Activities (2,950) (2,578) (3,593) (8,579) (9,276)
Cash Flows From Financing
Activities (7,134) (8,743) (15,393) (9,191) (5,250)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
BALANCE SHEET DATA (AT PERIOD
END):
<S> <C> <C> <C> <C> <C>
Working capital $13,583 $16,688 $14,763 $14,022 $12,921
Long Term Debt 0 0 0 127,750 122,500
Total assets 55,105 56,897 54,239 93,391 90,462
Total liabilities 18,634 18,943 18,815 147,455 136,641
Parent company
investment(c) 36,471 37,954 35,424 -- --
Stockholders' Deficit(c) -- -- -- (54,064) (46,179)
</TABLE>
(a) Represents the cumulative effect of a change in accounting principle made
in 1993 related to the accounting for postretirement benefits other than
pensions.
(b) "EBITDA" means earnings from operations before interest expense, taxes,
depreciation, amortization, and cumulative effect of change in accounting
principle. EBITDA is included because management believes that it is an
indicator used by investors to gauge a company's ability to service its
interest and principal obligations. EBITDA should not be considered in
isolation from, as a substitute for, or as being more meaningful than net
income, cash flows from operating, investing and financing activities or
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles and should not be construed as an
indication of the Company's operating performance or as a measure of
liquidity. EBITDA, as presented herein, may be calculated differently by
other companies and, as such, EBITDA amounts presented herein may not be
comparable to other similarly titled measures of other companies.
(c) Prior to consummation of the Recapitalization, the Company was accounted
for as a division of Carborundum rather than as a subsidiary, and 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 was eliminated and replaced by
stockholders' deficit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included in this Management Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this document
that do not relate to present or historical conditions are "forward looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, as amended, and of Section 21F of the Securities Exchange Act of 1934,
as amended. Additional oral or written statements may be made by the Company
from time to time, and such statements may be included in documents filed with
the Securities and Exchange Commission. Such forward looking statements involve
risks and uncertainties which could cause results or outcomes to differ
materially from those expressed in such forward looking statements. Among the
important factors on which such statements are based are assumptions concerning
the continuing strength of the ceramic fiber market on which the Company is
substantially dependent, changing prices for ceramic fiber products, acceptance
of new products, the status of health and safety issues affecting the ceramic
fiber industry in general and the Company in particular, the Company's
continuing ability to operate under the restrictions imposed by the substantial
indebtedness which it is subject to, the risks associated with international
operations, the impact of environmental regulations on the Company's operations
and property and related governmental regulations, and the continuing
availability of certain raw materials, including vermiculite which is purchased
from a source in China.
GENERAL
The following section should be read in conjunction with the other
information set forth in this document, including the financial statements and
the notes thereto.
RESULTS OF OPERATIONS
Year Ended December 31,
1995 1996 1997
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 48.3 50.9 50.7
----- ----- -----
Gross profit 51.7 49.1 49.3
Selling and distribution 13.8 14.1 14.9
Administration 7.4 7.8 8.3
Allocated corporate charges 3.2 0.4 -
Research & development 2.9 2.5 3.1
----- ----- -----
Operating income 24.4 24.4 23.0
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net sales decreased $4.5 million or 4.9% from $91.6 million in 1996 to
$87.1 million in 1997. Strong demand for bulk fibers to the automotive, metals,
and specialties sectors and growth in specialty products for fire protection
were offset by lower sales in some traditional blanket applications and in
porosity-controlled products. Sales of porosity controlled products were
affected by the controversy during 1997 regarding airbag safety, which resulted
in announcements of design changes. Also, to reduce end-user cost, the Company
changed the product form being sold to certain customers.
Gross profit declined by $2.0 million, or 4.5%, from $45.0 million in 1996
to $43.0 million in 1997. Gross profit as a percentage of net sales increased
slightly from 49.1% in 1996 to 49.3% in 1997. The decline in gross profit was
due to the lower sales volume and downward pressure on prices in the automotive
market and on some of the larger projects in traditional markets.
Selling and distribution expenses increased by $0.1 million or 1.0%, from
$12.9 million in 1996 to $13.0 million in 1997 as a result of inflation, offset
partially by the effects of the lower sales volume. Selling and distribution
expense as a percentage of net sales increased from 14.1% in 1996 to 14.9% in
1997.
Administration expenses and allocated corporate charges decreased by $0.3
million or 3.6% from $7.5 million in 1996 to $7.2 million in 1997, due to the
elimination of the allocated corporate charges. 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, or providing the
services internally. The arm's length purchases of services are included under
"Administration." Administration expenses as a percentage of net sales were 8.2%
in 1996 and 8.3% in 1997.
Research and development expenses increased by $0.4 million or 18.6% from
$2.3 million in 1996 to $2.7 million in 1997. The higher expense was due to a
planned increase in testing and development expenditures for automotive
products, and for the development of new fibers. Research and development
expenses as a percentage of net sales were 2.5% in 1996 and 3.1% in 1997.
Operating income decreased by $2.3 million, or 10.4%, from $22.3 million in
1996 to $20.0 million in 1997. Operating income as a percentage of net sales
decreased from 24.4% in 1996 to 23.0% in 1997, as a result of the factors
previously indicated.
Interest expense increased by $10.3 million, or 458.2%, from $2.2 million
in 1996 to $12.5 million in 1997 as a result of borrowings in connection with
the Recapitalization, which occurred in October 1996. Interest expense as a
percentage of net sales increased from 2.5% in 1996 to 14.4% in 1997.
Provision for income taxes decreased $6.6 million, or 77.6%, from $8.5
million in 1996 to $1.9 million in 1997. The effective income tax rate decreased
from 42.3% in 1996 to 25.8% in 1997, due to the recognition of $1.0 million of
deferred tax assets resulting from the Recapitalization which were previously
unrecognized.
Net income decreased by $6.0 million, or 51.7%, from $11.6 million in 1996
to $5.6 million in 1997, as a result of factors previously indicated. Net income
as a percentage of net sales decreased from 12.7% in 1996 to 6.4% in 1997, as a
result of the factors discussed above.
EBITDA decreased by $1.1 million, or 4.4%, from $26.5 million in 1996 to
$25.4 million in 1997. The decrease in EBITDA is attributable to the factors
affecting operating income which were discussed above, offset partially by an
increase in depreciation and amortization from $4.1 million in 1996 to $5.3
million in 1997, resulting from the capacity expansion in New Carlisle and a
full year of amortization of deferred financing costs associated with the
Recapitalization. EBITDA as a percent of net sales increased from 28.9% in 1996
to 29.1% in 1997.
Capital Expenditures increased $1.1 million, or 14.0%, from $8.3 million in
1996 to $9.4 million in 1997, due to the timing of investment in capacity
expansion in New Carlisle. Capital expenditures included projects to replace
worn equipment, to improve efficiency, and to add capacity. Working capital
decreased from $14.0 million in 1996 to $12.9 million in 1997. Lower receivables
and inventories were offset by the effect of lower payables, lower accrued
expenses, and the conversion of the advance from affiliates to preferred stock.
Cash flows from operating activities decreased $4.6 million, or 24.9%, from
$18.6 million in 1996 to $14.0 million in 1997 as a consequence of the lower net
income discussed above. Cash outflows from investing activities increased $0.7
million from $8.6 million in 1996 to $9.3 million in 1997 due to increased
capital expenditures. Cash outflows from financing activities decreased $3.9
million from $9.2 million in 1996 to $5.3 million in 1997 as there was no repeat
during 1997 of the outflows associated with the Recapitalization.
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales increased $7.5 million, or 8.9% from $84.1 million in 1995 to $91.6
million in 1996. This increase was principally due to continued strong demand
for bulk and blanket products in the furnace-related market, for
automotive-related products, and for other niche market applications. The
increase was partially offset by lower sales of porosity-controlled products due
to program design and shipment timing.
Gross profit increased $1.6 million, or 3.6%, from $43.4 million in
1995 to $45.0 million in 1996. This increase was the result of higher sales
volume. Gross profit margin decreased from 51.7% in 1995 to 49.1% in 1996. This
decline was due to outside purchases and resales of ceramic fiber resulting from
capacity constraints at the Company's New Carlisle, Indiana facility and to
one-time expenses associated with the facility expansion project.
Selling and distribution expenses increased $1.3 million, or 11.2%,
from $11.6 million in 1995 to $12.9 million in 1996. This increase resulted
primarily from the addition of sales and distribution operations in Europe and
Brazil following the Saint-Gobain Sale and higher sales volume. Selling and
distribution expenses as a percentage of net sales increased slightly from 13.8%
in 1995 to 14.1% in 1996.
Administration expenses increased $0.9 million, or 15.2%, from $6.2
million in 1995 to $7.1 million in 1996. This increase resulted primarily from
the addition of 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 7.4% in 1995 to 7.8% in 1996.
Allocated corporate charges decreased $2.3 million, or 87%, from $2.7
million in 1995 to $0.4 million in 1996. Allocated corporate charges for 1995
were recognized for the entire year. 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 Saint-Gobain. The arm's length purchases of services are included under
"Administration."
Research and development expenses decreased $0.1 million, or 5.9%, from
$2.4 million in 1995 to $2.3 million in 1996. This decrease was primarily due to
the timing of new product testing.
Operating income increased $1.8 million, or 8.8%, from $20.5 million in
1995 to $22.3 million in 1996. Operating income as a percentage of net sales
remained relatively flat at about 24.4% from 1995 to 1996.
Net income decreased $1.1 million, or 8.4%, from $12.7 million in 1995
to $11.6 million in 1996 primarily as a result of interest charges on the debt
associated with the Recapitalization. Net income as a percentage of net sales
decreased from 15.1% in 1995 to 12.7% in 1996 as a result of the factors
discussed above.
EBITDA increased $0.8 million, or 3.0%, from $25.7 million in 1995 to
$26.5 million in 1996. The improvement in EBITDA is attributable to the factors
discussed above, despite a slight decrease in depreciation and amortization of
$0.2 million, or 4.9%, from $4.3 million in 1995 to $4.1 million in 1996. On a
percentage of net sales basis, EBITDA decreased from 30.6% in 1995 to 28.9% in
1996.
Capital expenditures in 1996 were $8.3 million and included projects to
improve efficiency, as well as add capacity in New Carlisle, Indiana. Working
capital, excluding cash, deferred taxes, and interest declined from $12.3
million in 1995 to $9.9 million in 1996 due to lower receivables from the
Carborundum overseas units and higher trade payables and accruals in 1996.
Cash flows from operating activities decreased slightly from $ 18.9 million in
1995 to $18.6 million in 1996. Cash outflows from investing activities increased
$5.0 million from $3.6 million in 1995 to $8.6 million in 1996 due to the higher
capital expenditures associated with the plant expansion in New Carlisle,
Indiana. Cash outflows from financing decreased $6.2 million from $15.4 million
in 1995 to $9.2 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
In conjunction with the Recapitalization and sale to Unifrax Holding,
the Company entered into a Credit Agreement pursuant to which the Company has
available to it a $25.0 million term loan and a $20.0 million revolving credit
facility. The revolving credit facility is available for working capital and
other corporate purposes. Loans under the Credit Agreement bear interest at a
rate based upon LIBOR or the lender's prime rate plus a negotiated margin. In
addition, the Company issued to BP Exploration (Alaska), Inc. a subordinated
$7.0 million note bearing interest at prime, with principal repayment due
October, 1999. The Company also incurred $100 million of long term indebtedness
in the form of an indenture for senior notes at 10.5% per annum as part of the
Recapitalization and sale. Both the indenture and the Credit Agreement 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. At December 31, 1997, the Company was in
compliance with all Credit Agreement and Indenture covenants.
As a result of a post closing working capital adjustment between BP and
Holding, BP paid Holding $2.50 million in December 1996. Holding subsequently
advanced the Company $2.25 million, which the Company then used to further
reduce its then outstanding $25.0 million term loan. In September 1997 the
advance from Holding was converted to 6% cumulative preferred stock.
During 1997 the Company made voluntary prepayments of principal
totalling $7.7 million on its Term Loan thereby reducing the balance outstanding
from $20.75 million at December 31, 1996 to $13.0 million at December 31, 1997.
As a result of these actions, the Company will have no mandatory third party
principal payments due in 1998. As of December 31, 1997 the Company borrowed
$2.5 million against its $20.0 million revolving credit facility.
Management believes that cash flows from operations and the available
credit facility will be sufficient to fund operating and capital expenditure
needs for 1998.
Prior to the Recapitalization, the results of operations of the
Company's U.S. subsidiaries were included in the consolidated U.S. corporate
income tax return of BPA. The Company's provision for income taxes was computed
as if the Company filed its annual tax returns on a separate company basis. The
current portion of the income tax provision was satisfied by the Company through
a charge or credit to parent company investment.
As of October 30, 1996, the Company entered into a tax sharing
agreement with Holding. The results of its operations are now included in the
consolidated U. S. corporate income tax return of Holding. The Company's
provision for income taxes is computed as if the Company filed its annual tax
returns on a separate Company basis. The current portion of the income tax
provision will be satisfied by a payment to or from Holding.
The Unifrax Corporation Recapitalization Agreement provided for an
election to have the Recapitalization treated as an asset purchase for income
tax purposes, with a resulting increase in the tax basis of assets. The
historical cost basis of assets and liabilities was retained for financial
reporting purposes. As a result, the Company recognized a deferred tax asset of
approximately $31,266,000 (net of a valuation allowance of approximately
$15,000,000). The valuation allowance was established based upon management's
current estimate of the realization of the deferred tax asset. Also, as a result
of the Recapitalization, the Company is eligible to receive a refundable state
investment tax credit of approximately $625,000.
At December 31, 1997, the Company had Federal and state net operating loss
carryforwards totaling approximately $10,900,000 which will be available to
offset future taxable income. These net operating loss carryforwards expire in
2011 through 2012.
LEGAL PROCEEDINGS
Reference is made to the information included in Note 15 to the consolidated
financial statements of the Company included under Item 8 in this Form 10-K,
which is hereby incorporated herein by reference.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time- sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $250,000, which includes $100,000 for
the purchase of new software or equipment that will be capitalized and $150,000
that will be expensed as incurred. To date, the Company has incurred and
expensed approximately $75,000, primarily for assessment of the Year 2000 issue
and the development of a modification plan.
The project is estimated to be completed not later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company has not been able to identify any probable indirect material adverse
impact on its operations or financial condition likely to result from the
effects of Year 2000 problems on its vendors, customers, agents or other third
parties, but its ability to assess such effects is extremely limited and the
failure of third parties to appropriately address Year 2000 problems could have
material adverse effects on the company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page in
Form 10K
Report of Independent Auditors......................................... 13
Consolidated Balance Sheets as of December 31, 1996 and 1997........... 14
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997.................................. 15
Consolidated Statements of Parent Company Investment and Stockholders'
Deficit for the years ended December 31, 1995, 1996, and 1997..... 16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.................................. 17
Notes to Consolidated Financial Statements ............................ 18
<PAGE>
Report of Independent Auditors
Board of Directors
Unifrax Corporation
We have audited the accompanying consolidated balance sheets of Unifrax
Corporation as of December 31, 1996 and 1997, and the related consolidated
statements of income, parent company investment and stockholders' deficit and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial position of Unifrax
Corporation at December 31, 1996 and 1997 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, 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
February 27, 1998
<PAGE>
Unifrax Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1997
---- ----
(In Thousands)
ASSETS
Current assets:
<S> <C> <C>
Cash $ 898 $ 359
Accounts receivable, trade, less allowances of $1,202
and $1,254, respectively 13,231 12,095
Accounts receivable, other 625 625
Inventories 10,091 7,885
Deferred income taxes 5,395 2,320
Prepaid expenses and other current assets 294 411
-------- --------
Total current assets 30,534 23,695
Property, plant and equipment, net 33,939 37,516
Deferred income taxes 23,576 24,849
Organization costs, net of accumulated amortization
of $129 and $891, respectively 4,792 4,030
Other assets 550 372
-------- --------
$ 93,391 $ 90,462
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities:
Accounts payable $ 5,831 $ 3,206
Accrued expenses 8,431 7,568
Amounts due affiliates 2,250 -
--------- --------
Total current liabilities 16,512 10,774
Long term debt 120,750 115,500
Note payable--affiliate 7,000 7,000
Accrued postretirement benefit cost 2,957 3,209
Other long-term obligations 236 158
-------- --------
Total liabilities 147,455 136,641
STOCKHOLDERS' DEFICIT
Common stock--$.01 par value; shares authorized--40,000 - December 31, 1997
(50,000-December 31, 1996), shares
issued and outstanding--20,000 - -
Redeemable convertible cumulative preferred stock--voting;
$.01 par value; shares authorized--10,000, shares issued
and outstanding--1666.67 - December 31, 1997
(none - December 31, 1996) - -
Additional paid-in capital 40,020 42,520
Accumulated deficit (93,971) (88,406)
Cumulative translation adjustment (113) (293)
-------- --------
(54,064) (46,179)
-------- --------
$ 93,391 $ 90,462
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Unifrax Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
---- ---- ----
NET SALES
<S> <C> <C> <C>
Outside $ 79,986 $ 90,954 $ 87,111
Affiliates 4,078 677 -
-------- -------- --------
84,064 91,631 87,111
OPERATING EXPENSES
Cost of goods sold 40,630 46,635 44,154
Selling and distribution 11,579 12,881 13,007
Administration 6,189 7,135 7,223
Allocated corporate charges 2,700 356 -
Research and development 2,450 2,305 2,734
-------- -------- -------
63,548 69,312 67,118
-------- -------- -------
Operating income 20,516 22,319 19,993
Interest expense - (2,246) (12,537)
Royalty income, net of related expenses 953 435 350
Other expense (21) (325) (304)
-------- -------- --------
932 (2,136) (12,491)
-------- -------- --------
Income before income taxes 21,448 20,183 7,502
Provision for income taxes 8,743 8,543 1,937
-------- -------- -------
NET INCOME $ 12,705 $ 11,640 $ 5,565
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Unifrax Corporation
Consolidated Statements of Parent Company Investment and Stockholders' Deficit
(In Thousands)
<TABLE>
<CAPTION>
Additional Cumulative Total Parent
Paid-In Accumulated Translation Stockholders' Company
Capital Deficit Adjustment Deficit Investment
-------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ - $ - $ - $ - $37,954
Net income - - - -
12,705
Net change in parent company advances - - - - (15,235)
-------- -------- ------- -------- --------
Balance at December 31, 1995 - - - - 35,424
Net income for the period January 1,
1996 to October 30, 1996 - - - - 11,006
Net change in parent company advances - - - - (6,038)
Recapitalization--Note 1 40,020 (94,605) (51) (54,636) (40,392)
Net income for the period October 31,
1996 to December 31, 1996 - 634 - 634 -
Foreign currency translation adjustment - - (62) (62) -
-------- -------- ------ -------- ------
Balance at December 31, 1996 40,020 (93,971) (113) (54,064) -
Net Income - 5,565 - 5,565 -
Issuance of Preferred Stock 2,500 - - 2,500 -
Foreign currency translation adjustment - - (180) (180) -
-------- -------- ------- -------- ------
BALANCE AT DECEMBER 31, 1997 $ 42,520 $(88,406) $ (293) $(46,179) $ -
======== ======== ======= ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Unifrax Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
---- ---- ----
(In Thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 12,705 $ 11,640 $ 5,565
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,301 4,091 5,323
Provision for deferred income taxes 28 214 1,802
Provision for pension expense 149 52 -
Loss on sales of property, plant
and equipment 88 251 20
Changes in operating assets and liabilities:
Accounts receivable 1,402 1,042 1,136
Inventories 119 (2,390) 2,206
Prepaid expenses and other current assets (29) (113) (117)
Accounts payable and accrued expenses 54 3,447 (1,942)
Accrued postretirement benefit cost 108 311 252
Other long term liabilities - 86 (78)
Other - - (180)
-------- -------- --------
Cash provided by operating activities 18,925 18,631 13,987
INVESTING ACTIVITIES
Capital expenditures (3,404) (8,267) (9,421)
Deferred software and other costs (294) (175) -
Proceeds from sales of property, plant and
equipment 105 90 145
Other investing activities - (227) -
-------- -------- --------
Cash used in investing activities (3,593) (8,579) (9,276)
FINANCING ACTIVITIES
Cash transfers to parent company, net (15,393) (7,272) -
Borrowings under revolving loan - - 19,350
Repayments of revolving loan - - (16,850)
Long term borrowings - 125,000 -
Repayments of long-term borrowings - (4,250) (7,750)
Increase in amounts due affiliates - 2,250 -
Recapitalization payment - (120,000) -
Organization costs - (4,919) -
-------- --------- --------
Cash used in financing activities (15,393) (9,191) (5,250)
-------- --------- --------
Net (decrease) increase in cash (61) 861 (539)
Cash--beginning of year 98 37 898
-------- --------- --------
CASH--END OF YEAR $ 37 $ 898 $ 359
======== ========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Unifrax Corporation
Notes to Consolidated Financial Statements
December 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Unifrax Corporation ("Unifrax" or "Company") manufactures heat resistant ceramic
fiber products for automotive, commercial, and industrial customers primarily
throughout North America. Manufacturing facilities are located in Western New
York and Indiana. Unifrax and its predecessor, the North American Fibers
Division of The Carborundum Company ("Carborundum") was an indirect wholly-owned
subsidiary of The British Petroleum Company p.l.c. ("BP").
On October 30, 1996, the Company completed a comprehensive recapitalization (the
"Recapitalization"). Pursuant to the Recapitalization, Unifrax redeemed 80% of
its common stock held by BP in exchange for a written promise to pay an
aggregate of $120 million of cash (the "Interim Obligation") and a note payable
in the amount of $7 million. Concurrent with the Recapitalization, Kirtland
Capital Partners II L.P. ("Kirtland") established two wholly-owned subsidiaries,
Unifrax Investment Corp. ("Investment") and Unifrax Holding Co. ("Holding"). In
this regard, Investment issued $100 million of senior, unsecured indebtedness
and Holding purchased 90% of the remaining stock of Unifrax that was owned by
BP. Subsequent to the transactions described above, Investment was merged with
the Company. The proceeds of the $100 million senior, unsecured indebtedness and
borrowings of $25 million under Unifrax's Loan and Security Agreement (see Note
6) were used to repay the Interim Obligation and to pay certain transaction
costs and fees. As a result of the Recapitalization, Holding and BP own 90% and
10%, respectively, of the Company.
The accompanying consolidated financial statements present the historical
operations of Unifrax and its predecessor.
Pursuant to the Recapitalization, BP America Inc. ("BPA") a subsidiary of BP,
agreed to indemnify the Company, subject to certain limitations, against 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 prior to the consummation of the Recapitalization, and
against certain environmental liabilities arising prior to consummation of the
Recapitalization.
The Company transacted sales of certain products through indirect wholly-owned
subsidiaries of BP in Europe (XPE Vertriebs GmbH) and South America (NAF Brasil
Ltda.). Prior to the Recapitalization, BP contributed these related sales
corporations to Unifrax. The results of XPE Vertriebs GmbH and NAF Brasil Ltda.
are included in the consolidated financial statements of Unifrax at historical
cost.
Unifrax had certain shared assets and incurred certain common costs which
related to both Unifrax and other Carborundum operations. The Company has made
certain allocations of assets, liabilities and expenses in the accompanying
consolidated financial statements. The Company believes that the basis of such
allocations is reasonable, however, the amounts could differ from amounts that
would be determined if the Company had operated on a stand-alone basis during
the periods presented.
Certain amounts for 1995 and 1996 have been reclassified to conform to the 1997
presentation.
2. SAINT-GOBAIN SALE
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 Unifrax, and its related domestic and foreign
affiliates (collectively the "Group"). In May 1995, BP entered into an agreement
under the terms of which it agreed to sell principally all continuing businesses
of the Group including the non-North American Fibers businesses of Carborundum,
but excluding Unifrax, to Societe Europeenne des Produits Refractaires and
various other affiliates of Compagnie de Saint-Gobain ("SEPR"). On February 29,
1996, BP completed the sale of principally all continuing businesses of
Carborundum, but excluding Unifrax.
During the year ended December 31, 1995 and the two month period ended February
29, 1996, the Company's sales to businesses included as part of this sale
amounted to $4,078,000 and $677,000, respectively.
In connection with this sale, BP and SEPR entered into various agreements
regarding the ongoing relationship between the Unifrax and SEPR subsequent to
the closing of the transaction. These agreements, which expire March 1, 2001,
with certain exceptions, prohibit the Company from competing with SEPR outside
of North America. In addition, SEPR will perform certain die cutting operations
for the Company, and the Company must provide SEPR with certain specified
technical services and product information for which, in certain circumstances,
the Company will receive a royalty.
3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions, balances and
profits are eliminated upon consolidation.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment to the customer. Sales to
affiliates generally reflect prices offered to the Company's highest volume
distributors. Provisions are recorded for probable future returns and
uncollectible accounts as revenue is recognized.
ACCOUNTS RECEIVABLE
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.
INVENTORIES
Inventories are stated at the lower of cost or market. 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 45 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.
IMPAIRMENT OF LONG LIVED ASSETS
The Company reviews asset carrying amounts whenever events or circumstances
indicate that such carrying amounts may not be recoverable. When considered
impaired, the carrying amount of the asset is reduced, by a charge to income, to
its current fair value.
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.
INCOME TAXES
Prior to the Recapitalization (see Note 1), the results of operations of the
Company's U.S. subsidiaries were included in the consolidated U.S. corporate
income tax return of BPA. The Company's provision for income taxes was computed
as if the Company filed its annual tax returns on a separate company basis. The
current portion of the income tax provision was satisfied by the Company through
a charge or credit to parent company investment.
As of October 30, 1996, the Company entered into a tax sharing agreement with
Holding. The results of its operations are currently included in the
consolidated U.S. corporate income tax return of Holding. The Company's
provision for income taxes is computed as if the Company filed its annual tax
returns on a separate company basis. The current portion of the income tax
provision will be satisfied by a payment to or from Holding.
Income taxes are accounted for under the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
the 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
The Company performs ongoing employee health studies and conducts tests as part
of new product research and development. The cost of ceramic fiber health
studies are expensed as incurred. Amounts charged to operations during the years
ended December 31, 1995, 1996 and 1997 relating to the cost of these health
studies amounted to $1,329,000, $1,559,000 and $1,253,000, respectively, and are
included in administration expense in the accompanying statements of income.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for stock options granted under its stock-based
compensation plan in accordance with the intrinsic value based method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), as allowed under
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS 123"). Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market value of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
4. INVENTORIES
Major classes of inventories are as follows:
December 31
1996 1997
---- ----
(In Thousands)
Raw material and supplies $ 1,722 $ 1,598
In-process 1,758 1,551
Finished product 6,041 4,410
------- -------
9,521 7,559
Adjustment to LIFO cost 570 326
------- -------
$10,091 $ 7,885
======= =======
The cost of inventories determined on the LIFO method exceeds the current cost
of inventories principally as a result of reduced manufacturing costs.
Certain of the Company's products contain vermiculite, which is a naturally
occurring mineral. The Company purchases a majority of its vermiculite
requirements from a source in China and the balance from a source in the United
States. As a result of the superior performance qualities of the Chinese
vermiculite, the Company believes that it will be reliant upon the Chinese
source during at least 1998 and 1999.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31
1996 1997
---- ----
(In Thousands)
Land and land improvements $1,532 $1,974
Buildings 14,547 18,589
Machinery, equipment, furniture and fixtures 38,809 48,909
Construction in progress 9,225 1,435
-------- --------
64,113 70,907
Less accumulated depreciation (30,174) (33,391)
-------- -------
$ 33,939 $ 37,516
======== ========
For the years ended December 31, 1995, 1996 and 1997, depreciation expense
amounted to $4,008,000, $3,910,000 and $4,383,000, respectively.
6. LONG TERM DEBT AND NOTE PAYABLE -- AFFILIATE
Long term debt consists of the following:
December 31
1996 1997
(In Thousands)
10 1/2% Senior Notes due 2003 $ 100,000 $ 100,000
Loan and Security Agreement
Term loan 20,750 13,000
Revolving loan - 2,500
--------- -----
LONG TERM DEBT $ 120,750 $115,500
========= =======
The Company's Loan and Security Agreement dated as of October 30, 1996
("Security Agreement") enables the Company to borrow up to $45,000,000 as
follows: a term loan of $25,000,000 (reduced by repayments subsequent to October
30, 1996) and revolving loans plus letter of credit obligations not to exceed
$20,000,000. Interest rates on the revolving loan and term loan range from LIBOR
plus 1.25% to LIBOR plus 2.0%, as defined. A fee of .25% is charged on the
average daily amount by which the revolving credit amount available exceeds the
outstanding principal balance of revolving loans plus the letter of credit
obligations. As of December 31, 1997, the Company had a letter of credit in
effect of $624,000 as required by the State of New York for Worker's
Compensation. The weighted
average interest rate on the obligations outstanding at December 31, 1997 was
7.68% (7.53% at December 31, 1996). All outstanding amounts under the Security
Agreement mature October 2001.
The Security Agreement contains various restrictive covenants which include, but
are not limited to, a minimum net worth requirement, a minimum fixed charge
coverage ratio, a minimum interest coverage ratio, and restrictions on capital
expenditures, distributions, and incurring debt, as defined. Borrowings under
the Security Agreement are secured by assets of the Company including, but not
limited to, accounts receivable, inventory, equipment and fixtures.
The note payable--affiliate accrues interest, payable annually, at the prime
lending rate (8.50% at December 31, 1997; 8.25% at December 31, 1996). This
obligation matures in October, 1999.
Maturities of long-term debt and note payable--affiliate are $0 in 1998,
$10,750,000 in 1999, $9,000,000 in 2000, $2,750,000 in 2001, and $0 in 2002.
Interest payments made in 1996 and 1997 amounted to $106,000 and $12,417,000,
respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 and 1997, the carrying amount and the fair value of the
Company's financial instruments were as follows. Bracketed amounts in the
carrying amount column represent liabilities for potential cash outflows.
Bracketed amounts in the fair value column represent estimated cash outflows
required to currently settle the financial instrument at current market rates.
<TABLE>
<CAPTION>
December 31
1996 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- ------- -----
(In Thousands)
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 898 $ 898 $ 359 $ 359
Liabilities:
Long-term debt (including
current maturities) (127,750) (130,250) (122,500) (127,500)
</TABLE>
The following methods and assumptions were used by the Company in estimating the
fair values of financial instruments. The carrying amount reported in the
balance sheet for cash and cash equivalents approximates fair value. The fair
value of the Company's senior notes were estimated using quoted prices. The fair
value of variable rate loans approximate carrying amounts.
8. RELATED PARTY TRANSACTIONS
Prior to the Saint-Gobain Sale (see Note 2), certain support services, such as
information systems, credit and collections, payroll, corporate communications
and health, safety, and environmental quality were provided to all domestic
Unifrax businesses on a centralized basis by Carborundum. Costs for these
services were allocated based on usage. The Company was charged for such
services in the amount of $1,191,000 and $168,000 for the year ended December
31, 1995 and the two month period ended February 29, 1996, 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 by Carborundum, either based on the level of service provided or
based on the overall cost structure of Unifrax. Amounts allocated to the Company
amounted to $2,700,000 and $356,000
for the year ended December 31, 1995 and the two month period ended February 29,
1996, respectively.
In the opinion of management, charges and allocations were 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. Management estimates the cost for these services on a
stand-alone basis would have been approximately $1,700,000 for the year ended
December 31, 1995.
As a result of the sale of principally all continuing businesses of Carborundum
except for the Company (see Notes 1 and 2), and the elimination of Carborundum
corporate activities, the Company entered into a service continuation agreement
with SEPR. Under the terms of the agreement, SEPR provided certain
administrative services, substantially similar to those services previously
provided by Carborundum centrally, and charged the Company a service fee, which
approximated the charges previously received for similar services, for the
period March 1, 1996 to October 30, 1996.
Prior to the Recapitalization (see Note 1), the Company's property, product and
certain other loss exposures were insured through insurance premiums paid to
indirect wholly-owned insurance subsidiaries of BP. In addition, the Company was
self-insured for all workers' compensation loss exposures. Insurance premiums
charged to operations for these various insurance categories during the year
ended December 31, 1995 and the period from January 1, 1996 to October 30, 1996
amounted to $117,000 and $211,000, respectively. Management estimates the cost
for these insurance categories on a stand-alone basis would have been
approximately $800,000 per annum for the years ended December 31, 1995 and 1996.
The Company historically performed research and development activities for all
Carborundum ceramic fiber businesses and performed certain research and
development services for a joint venture affiliated with Carborundum. The
Company granted licenses to the ceramic fiber businesses located outside of
North America and to the joint venture to use the technology developed and
charged a royalty based upon the level of sales of products manufactured at such
businesses. The amounts charged to these businesses totaled $884,000 and
$148,000 for the year ended December 31, 1995 and the two month period ended
February 29, 1996, respectively, and is included in royalty income, net of
related expenses, in the accompanying statements of income. As discussed in Note
2, the Company, 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 Company will receive a royalty.
The Company periodically entered into product purchase transactions with certain
BP affiliates. Purchases from such entities during the years ended December 31,
1995 and 1996 totaled $1,073,000 and $331,000, respectively.
During 1996, the Company paid Kirtland a financing fee of $500,000 as
compensation for its services as financial advisor. In addition, Kirtland and
the Company entered into an Advisory Services Agreement pursuant to which
Kirtland will provide management consulting and financial advisory services to
the Company for an annual fee initially in the amount of $300,000. The Company
paid $50,000 in 1996 and $300,000 in 1997 to Kirtland in connection with the
Advisory Services Agreement.
As a consequence of the Recapitalization, Holding advanced the Company
$2,250,000 in December, 1996. During 1997 this advance was converted to 1,500
shares of 6% cumulative preferred stock. To preserve its 10% ownership in the
Company, BP subsequently exchanged interest owed to it on the Note
payable-affiliate for 166.67 shares of 6% cumulative preferred stock.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
1996 1997
---- ----
(In Thousands)
Accrued compensation and employee benefits $ 2,437 $ 2,963
Ceramic fiber product stewardship and monitoring 1,098 618
Interest 2,127 2,028
Other 2,769 1,959
------ ------
$8,431 $ 7,568
====== =======
10. RETIREMENT PLANS
Prior to the Recapitalization (see Note 1), the Company participated in defined
benefit retirement plans sponsored by BPA. These defined benefit retirement
plans were 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 were made to the defined benefit plans which at least equaled the
amounts required by law. Contribution amounts were determined by independent
actuaries using an actuarial cost method that had an objective of providing an
adequate fund to meet pension obligations as they matured. 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 expense allocated to the
Company approximated $149,000 and $52,000 in 1995 and 1996, respectively.
Amounts allocated were principally determined based on payroll.
Pursuant to the Recapitalization, for the salary related plan, BPA agreed to
vest the affected employees in their accrued benefits under such plan as of the
date of the Recapitalization ("Closing Date"). The Company, post the
Recapitalization, does not sponsor a defined benefit retirement plan for
salaried employees.
As required by the Recapitalization Agreement, during 1997, the Company
established a qualified defined benefit pension plan (the "Mirror Plan")
covering its hourly union employees previously covered by the BPA flat dollar
plan. The accrued benefit liabilities and related assets pertaining to active
employees under the flat dollar plan, effective as of the Closing Date, were
transferred to the Mirror Plan and its related trust during the first quarter of
1998. The net periodic pension expense for this plan for the year ended December
31, 1997 included the following (in thousands).
Service cost -- benefits earned during the period $ 43
Interest cost on projected benefit obligation 48
Actual return on plan assets (49)
Net amortization and deferral 14
----
NET PERIODIC PENSION COST $ 56
====
The following table sets forth the Mirror Plan's funded status at December 31,
1997 (in thousands):
Actuarial present value of accumulated benefit obligation,
including vested benefit obligation of $658 $ 773
=====
Projected benefit obligation $ 773
Plan assets at fair value 753
-----
Projected benefit obligation in excess of plan assets (20)
Unrecognized net gain (43)
-----
ACCRUED PENSION COST $ (63)
=====
The projected benefit obligation is based on a weighted-average assumed discount
rate of 7% and a weighted-average expected long-term rate of return on plan
assets used to determine the expected return on plan assets in net periodic
pension cost of 8%. Unrecognized gains and losses are amortized on a
straight-line basis over a period approximating the average remaining service
period for active participants.
Also during 1997 the Company established a qualified defined contribution,
money-purchase pension plan for its salaried employees. Under the money-purchase
plan, the Company contributes an amount equal to 2.5% of an employee's
applicable annual compensation to investment accounts as directed by the
employee. The annual expense for the money purchase plan in 1997 was $422,000.
The Company also sponsors a defined contribution 401(k) plan which is available
to substantially all non-union employees of the Company. Company contributions,
representing a 50% matching of employee contributions up to a maximum of 6% of
the employee's base pay, amounted to $313,000, $314,000 and and $428,000 during
the years ended December 31, 1995, 1996 and 1997, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits for retired
employees who meet eligibility requirements. Prior to the Recapitalization this
was done through BPA. Those benefits are currently provided through insured
arrangements. The Company's policy is to fund postretirement benefits as
insurance premiums or claims become due. Amounts allocated to the Company by BPA
for 1995 and the ten month period ended October 30, 1996 were principally
determined based on employer information.
The following table summarizes the components of net periodic postretirement
benefit expense allocated to the Company by BPA for 1995 and the ten months
ended October 30, 1996 and the amount charged to expense for the two month
period ended December 31, 1996, and the year ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31
1995 1996 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost--benefits earned $ 70 $115 214
Interest costs 265 247 134
Amortization of unrecognized net gain - - (84)
---- ---- ----
NET PERIODIC POSTRETIREMENT BENEFIT EXPENSE $335 $362 $264
==== ==== ====
</TABLE>
The following table presents the status of the unfunded postretirement benefit
obligation and the amounts recognized in the Company's balance sheets:
December 31
1996 1997
---- ----
(In Thousands)
Accumulated postretirement benefit obligation:
Retirees $ - $ 24
Employees fully eligible 1,035 662
Other active employees 1,151 1,582
------ ------
2,186 2,268
Unrecognized net gain 771 941
------ ------
ACCRUED POSTRETIREMENT BENEFIT COST $2,957 $3,209
====== ======
Pursuant to the Recapitalization, BPA retained responsibility for all
postretirement medical and/or life insurance coverage for retirees or other
employees terminated prior to the Closing Date and for any employee who receives
benefits under other plans as defined in the Agreement.
The accumulated postretirement benefit obligation is based on a weighted-average
assumed discount rate of 7.0% at December 31, 1997 and 1996 and a projected long
term compensation growth rate of 4.0% at December 31, 1997 and 1996. The assumed
annual rate of future increase in per capita cost of health care benefits
(health care cost trend rate) for 1997 and beyond is 6.0% for all beneficiaries.
A one percentage point increase in the assumed
health care cost trend rate would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by approximately $42,000 and increase
the annual aggregate service and interest cost by approximately $8,000.
Unrecognized gains and losses are amortized on a straight-line basis over a
period approximating the average remaining service period for active
participants.
12. INCOME TAXES
The provision for income taxes consists of the following:
Year Ended December 31
1995 1996 1997
---- ---- ----
(In Thousands)
Current:
Federal $6,900 $6,671 $ 100
State 1,815 1,658 35
------ ------ ------
8,715 8,329 135
Deferred 28 214 1,802
------ ------ ------
$8,743 $8,543 $1,937
====== ====== ======
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
1995 1996 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Income before income taxes at 35% for 1995 and
1996; 34% for 1997 $7,507 $7,064 $2,551
Permanent income tax disallowances 51 274 66
State taxes, net of federal benefit 1,185 1,078 291
Reduction of valuation allowance - - (1,000)
Other - 127 29
------ ------ -----
$8,743 $8,543 $1,937
====== ====== ======
</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, 1996 and 1997, the
major components of deferred tax assets and liabilities were as follows:
December 31
1996 1997
(In Thousands)
Deferred tax liabilities
Deferred charges $ (172) $ (109)
Deferred tax assets
Tax goodwill and other intangible assets 30,321 28,344
Property, plant and equipment 7,867 4,635
Net operating loss carryforward 1,837 3,850
Accrued liabilities 1,273 1,835
Accrued postretirement benefit cost 1,183 1,284
Inventory 718 475
Other 444 355
-------- -------
Gross deferred tax assets 43,643 40,778
Valuation allowance 14,500 13,500
------- -------
Net deferred tax assets 29,143 27,278
------- -------
NET DEFERRED TAX ASSET $28,971 $27,169
======= =======
The Recapitalization agreement provided for an election to have the
Recapitalization (see Note 1) treated as an asset purchase for income tax
purposes, with a resulting increase in the tax basis of assets. The historical
cost basis of assets and liabilities was
retained for financial reporting purposes. As a result, the Company recognized a
deferred tax asset of approximately $31,266,000 (net of a valuation allowance of
approximately $15,000,000). Also, as a result of the Recapitalization, the
Company is eligible to receive a refundable state investment tax credit of
approximately $625,000.
The amounts for December 31, 1996 above have been revised from those previously
reported, based upon the final determination of the basis of assets and
liabilities for income tax purposes. The amounts previously reported were based
upon preliminary estimates. The subsequent revision had no impact on the
reported net deferred tax assets.
At December 31, 1997, the Company has Federal and state net operating loss
carryforwards totaling approximately $10,900,000 which will be available to
offset future taxable income. These net operating loss carryforwards expire in
2011 through 2012. The Company paid $125,000 for income taxes during the year
ended December 31, 1997. During the fourth quarter of 1997, the Company
recognized a benefit of $1,000,000 for deferred tax assets previously
unrecognized.
13. STOCK OPTIONS
Effective October 30, 1996 the Company established the Unifrax Corporation 1996
Stock Option Plan to make awards of stock options to officers and key employees
for up to 1,505 shares of common stock. In 1996, 1,075 options were granted and
were outstanding at December 31, 1996 and 1997. The options were granted at a
price of $1,500 per share and vest in equal amounts over a four year period from
the grant date. The options expire ten years after grant.
The Company has elected to account for its employee stock options in accordance
with APB 25 and related interpretations, as permitted by SFAS 123. As a result,
no compensation expense for employee stock options has been recognized in the
financial statements. Companies electing to account for employee stock options
in accordance with APB 25 must make pro forma disclosures of net income as if
the fair value based method of accounting in SFAS 123 had been applied, if the
difference between the two methods of accounting is material. The fair value of
each option on the date of grant was $453.45, which was estimated at the date of
grant using the following weighted-average assumptions: risk free interest rate
of 6%, dividend yield of 0%, and a weighted-average expected life of the option
of 6 years. If the fair value based method accounting provision of SFAS 123 had
been adopted, net income would have been $11,628,000 and $5,492,000 for the
years ended December 31, 1996 and 1997, respectively. The effects of applying
SFAS 123 for providing pro forma disclosures are not likely to be representative
of the effects on reported net income for future years.
14. LEASE COMMITMENTS AND RENTALS
The Company rents three manufacturing facilities and certain equipment under
various operating leases. The lease agreement for one of the facilities expires
2003 and contains options which allow the Company 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 a second facility expires 2004 and contains options which allow
the Company 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, 1995, 1996 and 1997 amounted to
$1,429,000, $1,479,000 and $1,580,000, respectively.
Future minimum lease payments under all non-cancelable operating leases having a
remaining term in excess of one year as of December 31, 1997 are as follows (in
thousands):
1998 $ 846
1999 783
2000 774
2001 774
2002 774
Thereafter 479
------
$4,430
15. CONTINGENCIES
CERAMIC FIBERS
Regulatory agencies and others, including the Company, are currently conducting
scientific research to determine the potential health impact resulting from the
inhalation of airborne ceramic fibers. To date, the results of this research
have been inconclusive as to whether or not ceramic fiber exposure presents an
unreasonable risk to humans.
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 indemnities is presently not determinable.
Pursuant to the Unifrax Corporation Recapitalization Agreement
("Recapitalization Agreement"), BP America Inc. and certain of its affiliates
(collectively "BPA"), has agreed to indemnify the Company against liabilities
for personal injury and wrongful death attributable to exposure prior to the
Closing to refractory ceramic fibers manufactured by the Company. BPA has agreed
to indemnify the Company 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, BPA has agreed to indemnify the
Company against 80% of all losses, until the total loss which the Company incurs
reaches $3.0 million, after which time BPA has agreed to indemnify the Company
against 100% of such losses. BPA has agreed to indemnify the Company 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 BPA and the Company, pro rata, based on the
length of exposure or pursuant to arbitration if initiated by the Company.
The Company cannot avail itself of this indemnity for losses attributable to the
Company's failure to maintain a Product Stewardship Program consistent with the
program maintained by the Company prior to Closing, as modified in a
commercially reasonable manner in accordance with changing regulatory,
scientific and technical factors. BP shall not indemnify the Company with
respect to any liabilities for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product Stewardship Program
consistent with that maintained by the Company prior to the Closing.
Unifrax intends 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 the terms of the Recapitalization Agreement, BPA 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 existing as of the Closing Date.
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.
Prior to divestment, the Company owned a site in Sanborn, NY, at which extensive
remediation activity is currently being undertaken. The site was used by a
number of former Carborundum operations other than the Company. Testing has
indicated that certain contamination is present in the soil. Neither past nor
current operations of the Company are believed to have contributed to, or to be
contributing to, the existence of the contamination. BPA has assumed
responsibility for implementing remedial activities specified by the State of
New York which required removal of the contamination, chiefly by means of soil
vapor extraction. Under the terms of an agreement, BPA has taken title to and
assumed liability for the remediation of this property as of October 30, 1996.
Unifrax leases a portion of the present manufacturing facilities on this site.
LEGAL PROCEEDINGS
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, including product liability claims.
From time to time the Company has been named as a defendant in lawsuits
involving alleged injury suffered from exposure to ceramic fiber. The Company
believes that it is not presently a party to any litigation the outcome of which
would have a material adverse effect on its financial condition or results of
operations. Pursuant to the Recapitalization Agreement, BPA agreed to indemnify
the Company, subject to certain limitations, against all currently known
lawsuits and certain future lawsuits alleging exposure to ceramic fiber
(reference is made to the information appearing under the heading "Relationship
with BP and its Subsidiaries" in Item 13 of the report on Form 10-K for the
Unifrax Corporation for the year 1997 which is hereby incorporated herein by
reference).
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.
16. MAJOR CUSTOMER
The Company 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
1996 or 1997.
17. STOCKHOLDERS' EQUITY
Effective April 21, 1997, the shareholders of Unifrax Corporation authorized an
amendment to the Certificate of Incorporation of Unifrax Corporation to reduce
the number of authorized common shares from 50,000 shares to 40,000 shares and
to authorize 10,000 shares of cumulative preferred stock with a 6% annual
dividend.
Effective September 30, 1997, Unifrax Corporation issued and sold 1,500 shares
of 6% cumulative preferred stock of the Company to Unifrax Holding Co. in
satisfaction of an advance of $2.25 million made by Unifrax Holding Co. to the
Company on December 20, 1996. The advance was then canceled effective September
30, 1997. The preferred stock thereby acquired by Unifrax Holding Co. is
cumulative with an annual dividend of 6% with dividend payments subject to
various covenants in the Company's loan agreements.
Unifrax Corporation also issued and sold BP Exploration (Alaska) Inc. 166.67
shares of 6% cumulative preferred stock at $1,500 per share, as satisfaction in
part for interest owed through October 30, 1997, on the Note Payable--affiliate.
The preferred stock is redeemable, in full, at the option of the Company, at
$1,500 per share, which equals the stated value of the preferred stock. The
preferred stock is convertible, at the option of the stockholder, into an equal
number of shares of common stock. The number of shares into which the preferred
stock is convertible is subject to
adjustment for subsequent stock dividends payable on the common stock, stock
splits or reverse stock splits, and other modifications to the common stock.
Dividends in arrears totaled $36,250 at December 31, 1997.
18. EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
adoption in 1998 will have no impact on the Company's net income or
stockholders' equity. Statement No. 130 requires the cumulative translation
adjustment, which is currently reported in stockholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive income.
If the Company adopted Statement No. 130 for the year ended December 31, 1997,
the total of other comprehensive income items, and comprehensive income would
have been $(293,000) and $5,385,000, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which is
effective for fiscal years beginning after December 15, 1997. The Company does
not expect that Statement No. 131 will have any material effect on its financial
statements.
<PAGE>
Schedule II
Valuation and Qualifying Accounts
Unifrax Corporation
(Dollars In Thousands)
<TABLE>
<CAPTION>
Balance
at Charged to Balance at
Beginning Charged to Other End of
of Period Expense Accounts Deductions Period
YEAR ENDED DECEMBER 31, 1997 Deducted from asset accounts:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 799 $ 3 $ - $ 8(a) $ 794
Allowance for return 403 877 - 820(b) 460
------ ------ --- --- ------
TOTAL $1,202 $ 880 $ - $ 828 $1,254
====== ===== === ====== ======
YEAR ENDED DECEMBER 31, 1996 Deducted from asset accounts:
Allowance for doubtful accounts $ 638 $ 164 $ - $ 3(a) $ 799
Allowance for returns 281 1,162 - 1,040(b) 403
------ ------ --- ------ ------
$ 919 $1,326 $ - $1,043 $1,202
====== ====== === ====== ======
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
------ ------ --- ------ ------
TOTAL $1,337 $ 969 $ - $1,387 $ 919
====== ====== === ====== ======
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
(b) Returns from customers during the year.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
Name Age Position
William P. Kelly 48 Director, President and Chief Executive Officer
Mark D. Roos 42 Vice President and Chief Financial Officer
Paul J. Viola 42 Vice President, Sales and Marketing
Kevin J. O'Gorman 47 Vice President, Operations
Paul M. Boymel 45 Vice President, Technology
Joseph J. Kuchera 40 Vice President, Human Resources
John E. Pilecki 45 Vice President, Engineering and Purchasing
James E. Cason 43 Vice President, Risk Management
Raymond A. Lancaster 52 Director
William D. Manning, Jr. 63 Director
John G. Nestor 53 Chairman of the Board
John F. Turben 62 Director
Edmund S. Wright 55 Director
Mr. Kelly has been President and Chief Executive Officer of the Company
since February 1996. 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 February 1996, 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
February 1996. He joined Carborundum in 1978 and served in several positions,
including General Manager, Sales and Marketing for Carborundum's worldwide
ceramic fiber business from 1993 to 1995 and Manager of the Automotive Products
Group of Carborundum's Structural Ceramics Division from 1991 to 1993.
Mr. O'Gorman has been Vice President, Operations of the Company since
February 1996. 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 February 1996 and Manager of Technology since 1989. He joined Carborundum
in 1981.
Mr. Kuchera has been Vice President, Human Resources of the Company since
February 1996 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 February 1996. He joined Carborundum in 1976 and has served in
various engineering and manufacturing positions, including Engineering Manager
since 1990 and worldwide engineering and purchasing manager since 1993.
Mr. Cason has been Vice President, Risk Management, of the Company since
1997, and Director of Health, Safety, and Environment, since 1996. He joined
Carborundum in 1993 as Director of Health, Safety, and Environmental Quality.
Mr. Lancaster has been a Managing Partner of Kirtland since 1995. He is a
Director of Fairmount Mineral, Ltd., Management Reports, Inc., PVC Container
Corp., R Tape Corp., Shore Bridge Corp., and STERIS Corp.
Mr. Manning is currently self-employed as a management consultant. From
1987 to 1994, he was Senior Vice President of The Lubrizol Corporation and
President of Lubrizol Petroleum Chemicals Co. Mr. Manning is a director of
Robbins and Myers, Inc., Fletcher Paper Company and Park Avenue Marble Co.
Mr. Nestor has been with Kirtland since 1986 and has been a Managing
Partner of Kirtland since 1995. He is Chairman of TruSeal Technologies, Inc.,
and a Director of Fairmount Minerals Ltd. and R Tape Corp.
Mr. Turben has been with Kirtland since 1977 and has been a Managing
Partner of Kirtland since 1995. He is Chairman of The Hickory Group, PVC
Container Corp. and Harrington & Richardson 1871, Inc., Chairman of the
Executive Committee of Fairmount Minerals Ltd., and a Director of NACCO
Industries and TruSeal Technologies, 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 and Glasstech, Inc.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
All non-Executive Directors receive an annual retainer of $10,000 which
is paid in approximately quarterly installments.
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 for 1995, 1996 and 1997 (the "named executive officers").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Securities
Name and Underlying
Principal Position Salary Bonus(a) Options
- ------------------ ------ -------- ------------
W.Kelly 1997 211,268 -0- N/A
President and 1996 168,090 $53,000 376.25
Chief Executive Officer 1995 155,514 53,000 N/A
K.O'Gorman 1997 128,538 -0- N/A
Vice President, 1996 120,649 30,641 161.25
Operations 1995 115,689 30,641 N/A
P. Viola 1997 121,248 -0- N/A
Vice President, 1996 111,655 28,490 161.25
Sales and Marketing 1995 106,632 28,490 N/A
J. Cason 1997 128,430 -0- N/A
Vice President 1996 124,836 27,000 53.75
Risk Management 1995 121,200 20,000 N/A
M. Roos 1997 112,650 -0- N/A
Vice President 1996 106,306 22,000 107.50
Chief Financial Officer 1995 101,760 22,000 N/A
(a) Does not include one-time, nonrecurring cash bonuses paid by BP to
certain officers in 1996 relating to the Saint-Gobain and the Unifrax
sales.
STOCK OPTION GRANTS, EXERCISES AND YEAR-END VALUES
The following tables set forth information regarding grants of Unifrax
Corporation stock options to the named executive officers. The stock options
which were granted in 1996 relate to shares of common stock of Unifrax
Corporation. No options were granted in 1997 and no options were exercised
during 1996 or 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Number of Securities Underlying Value of Unexercised In-The-
Unexercised Options at FY-End Money Options at FY-End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------------- ----------------------------
W. Kelly 94.00/282.25 -0-
K. O'Gorman 40.25/121.00 -0-
P. Viola 40.25/121.00 -0-
M. Roos 26.75/80.75 -0-
J. Cason 13.25/40.50 -0-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Of the 20,000 shares of common stock of Unifrax Corporation
outstanding, Unifrax Holding Co. owns 18,000 shares or 90% and BP Exploration
(Alaska) Inc., a subsidiary of BP, owns 2,000 shares or 10%. Of the 1666.67
shares of cumulative preferred stock outstanding, Unifrax Holding Co. owns 1500
shares or 90% and BP Exploration (Alaska) Inc., owns 166.67 shares or 10%. The
following own shares of Unifrax Holding Co. and, consequently, have a beneficial
interest in Unifrax Corporation.
<TABLE>
<CAPTION>
Number of
Shares of Beneficial
Unifrax Holding Co. Percent of Ownership of
Beneficial Owner Common Stock Unifrax Holding Co. Unifrax Corp.
- ---------------- ------------------- ------------------- -------------
<S> <C> <C> <C>
Kirtland 2550 SOM Center Road
Suite 105
Willoughby Hills, Ohio 44094(a) 247,000 91.7% 82.5%
William P. Kelly 5,000 1.9% 1.7%
Mark D. Roos 1,000 * *
Paul J. Viola 1,350 * *
Kevin J. O'Gorman 1,500 * *
James E. Cason 1,000 * *
All directors and executive
officers of Unifrax Corporation
as a group(b) 14,350 5.3% 4.8%
</TABLE>
(a) "Kirtland" includes Kirtland Capital Partners II L.P. and its
affiliates. Kirtland Capital Corporation is the general partner of
Kirtland and exercises voting control and investment discretion with
respect to Kirtland's investment in Unifrax. John F. Turben, John G.
Nestor and Raymond A. Lancaster are the directors of Kirtland Capital
Corporation.
(b) Excludes shares held by Kirtland of which Messrs. Turben, Nestor and
Lancaster may be deemed to be beneficial owners as a result of their
control of Kirtland. Messrs. Turben, Nestor and Lancaster disclaim any
such beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information in paragraphs 1-3 of Item 1 and Note
15 of the financial statements contained in Item 8, which are hereby
incorporated herein by reference.
RELATIONSHIP WITH BP AND ITS SUBSIDIARIES
Stockholders Agreement. On October 30, 1996, Unifrax Holding Co. and BP
Exploration (Alaska), Inc. ("BPX") entered into an agreement relating to their
respective ownership of stock of the Company (the "Stockholders Agreement").
This agreement (i) in certain circumstances grants BPX preemptive rights and
rights of first refusal with respect to issuances and sales, respectively, of
stock of the Company; (ii) grants BP piggyback registration rights with respect
to equity securities of the Company; (iii) restricts in certain circumstances
the ability of the Company to enter into certain dilutive or non-arm's-length
transactions; and (iv) grants BP the right to participate in certain
circumstances in sales by Unifrax Holding of Holding's common stock of the
Company.
Recapitalization Agreement. Pursuant to the Unifrax Corporation Recapitalization
Agreement ("Recapitalization Agreement"), B. P. America, Inc. ("BPA") has agreed
to indemnify the Company as set forth below.
General Indemnity. The Recapitalization Agreement provides that, subject to
certain limitations, BPA and certain of its affiliates 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 former Carborundum business not part of the Company or its
foreign subsidiaries, and the Sanborn, New York, real estate transferred from
the Company to a BP subsidiary prior to Closing. BPA 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,
BPA 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. BPA 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, BPA 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 BPA has agreed to
indemnify the Company and Holding against 100% of such losses. BPA 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 BPA
and the Company, pro rata, based on the length of exposure or pursuant to
arbitration if initiated by the Company.
The Company cannot avail itself of this indemnity for losses attributable
to the Company's failure to maintain a Product Stewardship Program consistent
with the program maintained by the Company prior to Closing, as modified in a
commercially reasonable manner in accordance with changing regulatory,
scientific and technical factors. BPA shall not indemnify the Company with
respect to any liabilities for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product Stewardship Program
consistent with that maintained by the Company prior to the Closing.
Environmental Indemnity. Pursuant to the Recapitalization Agreement, and
subject to certain limitations, BPA has agreed to indemnify the Company and
Holding against environmental liabilities arising from pre-closing conditions.
The Recapitalization Agreement also provides that BPA 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 entered 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 paid BP $10 million for the
Non-compete Agreement.
Sanborn Lease. Prior to the Closing, the Company transferred the real
property located in Sanborn, New York (the "Sanborn Property") to a subsidiary
of BPA. BPA leased the real property comprising the Sanborn Property currently
used by the Company in its operations to the Company in accordance with the
terms and conditions of a 20 year lease (the "Lease"). The Lease provides that
the Company will be responsible for taxes, utilities and insurance. The Company
has an option to purchase the property for $1.00 at any time during the 20-year
lease term. The Company will utilize this facility pursuant to a lease, rather
than fee ownership, in order to preserve maximum flexibility for possible
consolidation of operations in the future.
RELATIONSHIP WITH SEPR
As part of the Saint-Gobain Sale, the Company entered into a series of
agreements with Compagnie de Saint Gobain ("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 ceramic fiber products
(with the exception of XPE(TM) for automotive gaskets) 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. SEPR
is prohibited from manufacturing, selling and distributing products in North
America which are manufactured using technology licensed by the Company to SEPR.
Product Distribution Agreement. Pursuant to the Product Distribution
Agreement, SEPR has been appointed as the Company's exclusive distributor
outside the North American market, for a five-year term, for the Company's
product lines which are not covered by the License, except for XPE(TM). These
include (i) products manufactured only in the North American market and sold
outside the North American market prior to the
Saint-Gobain Sale ("Group I Products"); and (ii) if SEPR is unable, with its
equivalent products, to fulfill a request from a customer outside of the North
American market, (y) products manufactured only in the North American market and
not sold outside the North American market prior to the Saint-Gobain Sale or (z)
products developed by the Company after the Saint-Gobain Sale ("Group II
Products").
For Group I Products, minimum purchase quantities and distributor discounts
are to be agreed upon annually on a product-by-product basis by the Company and
SEPR. Failure to agree on sales quantities or discounts or failure by SEPR to
purchase the minimum quantities may lead to termination of the Product
Distribution Agreement on a product-by-product basis twelve months thereafter.
For Group II Products, SEPR receives a fixed discount from the prevailing North
American market price.
Distribution Product License Agreement. Pursuant to the Distribution
Product License Agreement, SEPR must distribute such products on the Company's
behalf. SEPR is not entitled to a license to manufacture any of the Group II
Products. SEPR will be granted a royalty-bearing manufacturing license on any
Group I Products which are terminated from the Product Distribution Agreement.
SEPR also has the right to cancel the Product Distribution Agreement upon 12
months' notice on a product-by-product basis for Group I Products by taking out
a license. Any license of Group I Products will grant rights to the then-current
patents and technology but will not include any rights to license improvements
developed by the Company after the product has been terminated from the Product
Distribution Agreement. Any license for Group I Products will require SEPR to
pay a royalty on a declining scale until March 1, 2006, after which the license
becomes royalty-free. The Company is obligated to supply technical services, to
be charged at a per diem rate, until February 28, 2002.
Conversion Agreement. Pursuant to the Conversion Agreement, SEPR has an
obligation to die-cut rolls of XPE(TM) for the Company in connection with the
Company's sales to customers within Europe and South America and has been
granted a right of first refusal to provide this service to the company in other
countries outside the North American market. These rights and obligations will
continue until the earlier of a cancellation of this arrangement by SEPR or the
expiration of certain patents covering XPE(TM).
XPE(TM) License Agreement. Pursuant to the XPE(TM) License Agreement, SEPR
may cancel the Conversion Agreement upon six months' notice and take up to a
20-year royalty-free license to manufacture XPE(TM). The Company may continue to
sell XPE(TM) outside of the North American market during the term of such
license. In such event, the Company will be precluded from granting any further
license of this technology outside of the North American market for 20 years
except to an affiliate. The Company is obligated to supply, at a per diem rate,
technical services for a period of three years from the date of grant of the
license. The technology to be transferred will be that current at the date of
grant of the license but with no rights to improvements thereafter.
Trademark License and Consent Agreement. Under the terms of the
Saint-Gobain Sale, the name "Carborundum" and the Carborundum logo became the
property of SEPR, with the Company having the right to continue to use the name
and logo until March 1, 1997 while exhausting the existing inventory of
literature and packaging material. The ownership of product trademarks such as
Fiberfrax(R)ceramic fiber, remains with the Company. Until March 1, 2001, SEPR
has the right to use the Company's product trademarks royalty-free outside of
the North American market for products manufactured under the License Agreement.
After March 1, 2001, SEPR will have no further right in such product trademarks
and sole use thereof will revert to the Company.
RELATIONSHIP WITH KIRTLAND AND UNIFRAX HOLDING CO.
Kirtland Advisory Services Agreement. As part of the Recapitalization, the
Company paid Kirtland a financing fee of $500,000 and reimbursed Kirtland for
its out-of-pocket expenses as compensation for its services as financial
advisor. Also at the Closing, Kirtland and the Company entered into an Advisory
Services Agreement pursuant to which Kirtland will provide management consulting
and financial advisory services to the Company for an annual fee initially in
the amount of $300,000, which amount may be
increased up to $500,000 with the approval of the members of the Board of
Directors of the Company who do not have a direct financial interest in any
person receiving payments under the Advisory Services Agreement. In addition, if
the Company completes an acquisition, Kirtland will be entitled to receive a fee
in an amount which will approximate 1% of the gross purchase price of the
acquisition (including assumed debt). The Advisory Services Agreement included
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 has entered
into a tax sharing agreement with the Company (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides that in any year in which the Company is included
in any consolidated tax return of Holding and has taxable income, the Company
will pay to Holding (except with respect to tax benefits resulting from the
Non-compete Agreement between BP and Holding) the amount of the tax liability
that the Company would have had on such date if it had been filing a separate
return. Conversely, if the Company generates losses or credits which actually
reduce the consolidated tax liability of Holding and its other subsidiaries, if
any, Holding will credit to the Company the amount of such reduction in the
consolidated tax liability. In the event any state and local income taxes are
determinable on a combined or consolidated basis, the Tax Sharing Agreement
provides for a similar allocation between Holding and the Company of such state
and local taxes.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
Page in
Form 10-K
(1) FINANCIAL STATEMENTS
Audited consolidated financial statements of the Company
as of December 31, 1996 and 1997, and for the three years
in the period ended December 31, 1997. 13
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and Qualifying Accounts 31
All other schedules have been omitted as the required information is not
applicable or the information is presented in the financial statements or
the notes thereto.
(3) EXHIBITS
2.1* Unifrax Corporation Recapitalization Agreement
3.1* Certificate of Incorporation of the Registrant
3.2 Consent of Stockholders for Amendment of Certificate of
Incorporation
3.3 Certificate of Amendment to Certificate of Incorporation
3.4* By-laws of the Registrant
4.1* Form of Indenture (including form of Note)
10.1* Form of Loan and Security Agreement among Unifrax Corporation,
Bank of America Illinois and the lenders party thereto (Credit
Agreement)
10.2 First Amendment to Loan and Security Agreement
10.3* 1996 Stock Option Plan
10.4** Unifrax Corporation Noncompetition Agreement
10.5* Lease relating to Tonawanda plant
10.6* Lease relating to Amherst plant
10.7* Sanborn Lease
10.8* Covenant Not to Compete between The British Petroleum Company
p.l.c., its affiliates, and the Unifrax Corporation and
Societe Europeenne des Produits Refractaires, and its
affiliates (portions of this Exhibit have been omitted and
will be filed separately with the Commission pursuant to a
request for confidential treatment)
10.9* Product Distribution Agreement between the Unifrax Corporation
and Societe Europeenne des Produits Refractaires (portions of
this Exhibit have been omitted and will be filed separately
with the Commission pursuant to a request for confidential
treatment)
10.10* Distributed Product License Agreement between the Unifrax
Corporation and Societe Europeenne des Produits Refractaires
(portions of this Exhibit have been omitted and will be filed
separately with the Commission pursuant to a request for
confidential treatment)
10.11* License Agreement between the Unifrax Corporation and Societe
Europeenne des Produits Refractaires (portions of this Exhibit
have been omitted and will be filed separately with the
Commission pursuant to a request for confidential treatment)
10.12* Trademark License and Consent Agreement between the Unifrax
Corporation and Societe Europeenne des Produits Refractaires
10.13* Conversion Agreement between the Unifrax Corporation and
Societe Europeenne des Produits Refractaires (portions of this
Exhibit have been omitted and will be filed separately with
the Commission pursuant to a request for confidential
treatment)
10.14* XPE(TM) License Agreement between the Unifrax Corporation and
Societe Europeenne des Produits Refractaires
10.15* Form of Covenant Not to Compete between Holding and BP
10.16* Form of Stockholders Agreement among the Company, BPX and
Holding
10.17 Amendment to Stockholders Agreement dated September 30, 1997,
among the Company, BP Exploration (Alaska), Inc. and Holding
10.18 Stock Purchase Agreement dated September 30, 1997, between the
Company and Holding
10.19 Stock Purchase Agreement dated September 30, 1997, between the
Company and BP Exploration (Alaska), Inc.
10.20* Tax Sharing Agreement between the Company and Holding
10.21* Advisory Services Agreement between the Company and Kirtland
Capital Corporation
10.22* Form of BP Note
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
* Incorporated by reference to the exhibits filed with the Registration
Statement on Form S-1 of Unifrax Investment Corp (Registration No.
333-10611).
** Incorporated by reference to the exhibits filed with Form 10-K for the
fiscal year ended December 31, 1996 for Unifrax Corporation.
(b) No reports on Form 8-K have been filed during the period covered by this
report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March _____, 1998.
UNIFRAX CORPORATION.
By:
William P. Kelly, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/William P. Kelly
William P. Kelly Director, President and Chief March ____, 1998
Executive Officer (Principle
Executive Officer)
/s/Mark D. Roos
Mark D. Roos Vice President & Chief March ____, 1998
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/John G. Nestor
John G. Nestor Chairman of the Board March ____, 1998
/s/Raymond A. Lancaster
Raymond A. Lancaster Director March ____, 1998
William D. Manning, Jr. Director March ____, 1998
/s/John F. Turben
John F. Turben Director March ____, 1998
/s/Edmund S. Wright
Edmund S. Wright Director March ____, 1998
EXHIBIT 12.1 UNIFRAX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
Year Ended Year Ended
December 31, 1996 December 31, 1997
(in thousands) (in thousands)
Earnings from continuing operations before
income taxes $20,183 $ 7,502
Fixed charges
Interest 2,246 12,537
Imputed interest on operating lease
obligations 286 403
------- -------
2,532 12,940
Adjusted earnings available for payment of
fixed charges $22,715 $20,442
------- -------
Ratio of earnings to fixed charges 9.0 1.6
======= =======
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRATION
XPE Vertriebs GmbH
Benrodestrasse, 132
40597 Dusseldorf
GERMANY
NAF Brasil Ltda.
Rua Benedito Ribeiro Panzeti Martins, 678-Jardim.Alice
13.330-000 - Indaiatuba - Sao Paulo - Brazil
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNIFRAX
CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
AND THEIR CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 359
<SECURITIES> 0
<RECEIVABLES> 13,349
<ALLOWANCES> 1,254
<INVENTORY> 7,885
<CURRENT-ASSETS> 23,695
<PP&E> 70,907
<DEPRECIATION> 33,391
<TOTAL-ASSETS> 90,462
<CURRENT-LIABILITIES> 12,683
<BONDS> 120,000
<COMMON> 0
0
0
<OTHER-SE> (46,179)
<TOTAL-LIABILITY-AND-EQUITY> 90,462
<SALES> 87,111
<TOTAL-REVENUES> 87,111
<CGS> 44,154
<TOTAL-COSTS> 44,154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 880
<INTEREST-EXPENSE> 12,537
<INCOME-PRETAX> 7,502
<INCOME-TAX> 1,937
<INCOME-CONTINUING> 5,565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,565
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
