SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number: 333-10611
UNIFRAX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 34-1535916
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
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
-------------------------------------------
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 _____
<PAGE>
Unifrax Corporation
Form 10-Q
Index
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998.............................1
Condensed Consolidated Statements of Income for the
Three-month and six-month periods ended June 30, 1999 and 1998..2
Condensed Consolidated Statements of Cash Flows for the
Six-months ended June 30, 1999 and 1998.........................3
Notes to Condensed Consolidated Financial Statements..............4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ ....9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................14
Item 2. Changes in Securities and Use of Proceeds........................14
Item 3. Defaults on Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders..............14
Item 5. Other Information................................................14
Item 6. Exhibits and Report on Form 8-K..................................14
Signatures................................................................15
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unifrax Corporation
Condensed Consolidated Balance Sheets
(Unaudited - In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31 June 30
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $ 43 $ 463
Accounts receivable, less allowances of $708
and $725, respectively 12,953 13,177
Inventories 10,343 9,377
Deferred income taxes 2,494 2,494
Prepaid expenses and other current assets 220 331
-------------- -------------
Total current assets 26,053 25,842
Property, plant and equipment, at cost 74,363 75,257
Less accumulated depreciation and amortization (37,656) (39,709)
-------------- -------------
36,707 35,548
Deferred income taxes 22,402 21,280
Organization costs, net of accumulated amortization
of $1,642 and $2,017, respectively 3,279 2,904
Other assets 213 206
-------------- -------------
$ 88,654 $ 85,780
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable -- affiliate $ 7,000 $ 7,000
Current portion of long term debt 3,750 7,250
Accounts payable 3,306 1,767
Accrued expenses 7,139 7,240
-------------- -------------
Total current liabilities 21,195 23,257
Long term debt 105,950 99,750
Accrued postretirement benefit cost 3,472 3,301
Other long-term obligations 161 161
-------------- --------------
Total liabilities 130,778 126,469
STOCKHOLDERS' DEFICIT
Common stock--$.01 par value; shares authorized--40,000;
shares issued and outstanding--20,000 -- --
Redeemable convertible cumulative preferred stock--voting $.01 par value;
shares authorized--10,000, shares issued and outstanding--1,666.67
(aggregate liquidation preference of $2,686 and $2,724, respectively,
including dividends in arrears) -- --
Additional paid-in capital 42,520 42,520
Accumulated deficit (84,361) (82,703)
Accumulated other comprehensive loss (283) (506)
--------------- ---------------
Total stockholders' deficit (42,124) (40,689)
--------------- ---------------
$ 88,654 $ 85,780
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Unifrax Corporation
Condensed Consolidated Statements of Income
(Unaudited - In Thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 22,023 $ 20,520 $ 43,757 $ 41,693
Cost of goods sold 11,067 10,755 21,979 21,978
------------ ----------- ------------ ----------
Gross margin 10,956 9,765 21,778 19,715
Selling, general and
Administration expenses 5,982 5,299 11,848 11,076
------------ ----------- ------------ ----------
Operating income 4,974 4,466 9,930 8,639
Other income (expense), net 24 (53) 103 (135)
------------ ----------- ----------- -----------
Income before interest and income taxes 4,998 4,413 10,033 8,504
Interest expense (3,011) (2,858) (6,042) (5,789)
------------ ----------- ------------ -----------
Income before income taxes 1,987 1,555 3,991 2,715
Provision for income taxes 609 558 1,120 1,057
----------- ------------ ----------- ----------
Net Income $ 1,378 $ 997 $ 2,871 $ 1,658
=========== ============ =========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Unifrax Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
Six Months Ended June 30
1998 1999
---- ----
OPERATING ACTIVITIES
Net income $ 2,871 $ 1,658
Depreciation and amortization 2,841 2,762
Other adjustments and changes in operating
assets and liabilities (1,911) 578
----------- ----------
Cash provided by operating activities 3,801 4,998
INVESTING ACTIVITIES
Capital expenditures (976) (1,899)
Proceeds from sales of property, plant
and equipment 28 21
----------- -----------
Cash used in investing activities (948) (1,878)
FINANCING ACTIVITIES
Repurchase of Senior Notes -- (2,000)
Borrowings under revolving loan 16,150 18,850
Repayments of revolving loan (18,050) (18,550)
Repayments of term loan (1,000) (1,000)
------------ ------------
Cash used in financing activities (2,900) (2,700)
Net increase(decrease) in cash (47) 420
Cash--beginning of period 359 43
------------ ------------
Cash--end of period $ 312 $ 463
============ ============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Unifrax Corporation
Notes to Condensed Consolidated Financial Statements
June 30 , 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Unifrax Corporation ("The Company" or "Unifrax") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Results for the period ended June 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and the notes thereto for the year ended December 31, 1998, included in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. All capitalized terms used in these notes to condensed consolidated
financial statements that are not defined herein have the meanings given to them
in such consolidated financial statements and notes to consolidated financial
statements.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
December 31 June 30
1998 1999
----------- --------
Raw materials and supplies $ 3,459 $ 4,049
Work in process 2,008 1,495
Finished products 4,341 3,389
----------- -----------
9,808 8,933
Adjustment to LIFO Cost 535 444
----------- -----------
$ 10,343 $ 9,377
=========== ===========
<PAGE>
NOTE C - 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, studies of workers with
occupational exposure to airborne ceramic fiber have found no clinically
significant relationship between prior or current exposure to ceramic fiber and
disease in humans; however, independent animal studies have indicated that
ceramic fiber inhaled by test animals at elevated doses can produce respiratory
disease, including cancer. The results of this research have been inconclusive
as to whether or not ceramic fiber exposure presents an unreasonable risk to
humans.
From time to time Carborundum, as predecessor to Unifrax, and other
manufacturers of ceramic fibers have been named as defendants in lawsuits
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 or any other unasserted
claims is presently not determinable. The Company believes the lawsuits brought
against The Carborundum Company have been without merit and the litigation
currently pending, or to its knowledge threatened, will not have a material
adverse effect on the financial condition or results of operations of the
Company. The Company's belief is based on the fact that, although animal studies
have indicated that ceramic fiber inhaled by test animals at elevated doses can
cause disease, there is no evidence that exposure to refractory ceramic fiber
has resulted in disease in humans.
Consistent with customary practice among manufacturers of ceramic fiber
products, Carborundum entered into agreements with distributors of its product
whereby Carborundum agreed to indemnify the distributors against losses
resulting from ceramic fiber claims and the costs to defend against such claims.
To the best of the Company's knowledge, there have been no historical, nor are
there any current, ceramic fiber exposure claims made against these
indemnification agreements. Consequently, the amount of any liability that might
ultimately exist with respect to these indemnities is presently not
determinable.
Pursuant to the Recapitalization Agreement, BP America Inc. and certain of its
affiliates (collectively "BP America"), has agreed to indemnify the Company
against liabilities for personal injury and wrongful death attributable to
exposure which occurred prior to the Closing to refractory ceramic fibers
manufactured by the Company. BP America 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, BP America 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 BP America has agreed to indemnify the Company against 100% of
such losses. BP America 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 BP America and the Company, pro rata, based on the
length of exposure or pursuant to arbitration if initiated by the Company. To
date the Company has incurred no claims losses applicable to the $3.0 million
total mentioned above.
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. In the
Company's opinion, the Product Stewardship Program has been maintained in a
manner consistent with these requirements. 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.
The Company may be named as a potentially responsible party ("PRP") pursuant to
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended ("CERCLA" or "Superfund") or comparable state law in connection with
off-site disposal of hazardous substances at three sites, and The Carborundum
Company has entered into a Consent Decree with the New York State Department of
Environmental Conservation to remediate contamination at the facility located in
Sanborn, New York. While the Company's ultimate clean-up liability at the sites
at which the Company is a potential PRP is not presently determinable, the
Company does not expect to incur any material liability with respect to any of
these sites, individually or in the aggregate, as a result of its activities at
these sites. Furthermore, BP America has agreed to indemnify the Company for
certain environmental liabilities, which might ultimately exist, under the
Recapitalization Agreement. In addition, BP America has assumed liability for
other potential off-site clean-up obligations associated with Carborundum. The
sites at which the Company has maintained potential off-site liability and the
Carborundum Sanborn, New York facility are described below.
Kline Trail Site. In 1984, the Company voluntarily advised the State of Indiana
of potential unauthorized disposal of waste at an Indiana site by a transporter.
No response from the state has been received, and no further information about
the potential for remediation costs at the site has been received by the
Company. It is expected that little or no liability will be associated with this
site.
PCB Inc., Site. The New Carlisle, Indiana facility received a request for
information from the EPA in 1994 concerning potential responsibility for cleanup
of the PCB Treatment site located in Kansas City, Kansas and Kansas City,
Missouri. Records indicate that a number of capacitors from the New Carlisle
facility of The Carborundum Company, now Unifrax Corporation, were sent to the
PCB Treatment site. A response documenting the timely destruction of those
materials was submitted to the EPA. In September 1997 the EPA contacted BP
America via letter to verify that a total of 10,900 pounds of capacitors and
transformers had been sent to the site by BP America/Carborundum. No additional
information on cleanup timing or cost has since been received. Based on the
total pounds delivered by all parties to the site, the liability, if any,
ultimately attributable to BP America or Carborundum is not expected to have a
material adverse effect on the Company's financial position.
Osage Metals Site. Osage Metals Co., Inc. was a scrap metal business in Kansas
City, Kansas, that reclaimed metals from various sources, including metal from
used transformers and capacitors. Osage purchased transformer and capacitor
scrap metal from PCB Treatment Co., Inc. ("PCB Inc." above) and others. An EPA
sampling of soil at the Osage site indicated the presence of PCB and lead
contamination. In early 1998 BP America was notified by the EPA that it was
potentially liable under CERCLA for response costs at the Osage site. Through
April 1997 the EPA had incurred $1.2 million of the estimated $1.8 million in
cleanup costs related to the Osage site and was seeking recovery of the costs
from potentially responsible parties. Based on documents BP America received
from the EPA showing volumetric rankings, BP America/Carborundum accounted for
approximately one tenth of one percent of the total weight of capacitors sent to
PCB Treatment, Inc. Consequently, the liability, if any, ultimately attributable
to BP America or Carborundum is not expected to have a material adverse effect
on the Company's financial position.
Shulman Site. The Company has potential liability with respect to the Shulman
Site in St. Joseph County, Indiana. The site is a landfill which the Company
believes to have been contaminated by chemicals migrating from an adjacent
facility. Plant trash from the New Carlisle facility was hauled to the site. An
agreement has been reached pursuant to which the Company, as part of a response
group, agreed to assume approximately 5% of certain response costs, which to
date includes $1.7 million for installation of a water line. The Company's share
of that cost is under $100,000. The owner of the adjacent facility has assumed
the bulk of site remediation costs to date. It is anticipated that site
remediation will ultimately involve installing a clay cap over the site, the
cost of which is not yet known.
Sanborn Site. Under the terms of an agreement with BP America, Unifrax leases a
portion of the present manufacturing facilities on this site. The Carborundum
Company's Sanborn, New York site was used by a number of former Carborundum
operations. Testing in the area has found that contamination by volatile organic
compounds is present in the soil and groundwater. Neither past nor current
operations of Unifrax are believed to have contributed to, or to be contributing
to, the existence of this contamination. While The Carborundum Company entered
into a Consent Decree with the State of New York under which it was to conduct
remedial activities at the site, BP America has taken title to and assumed
liability for the remediation of this property as of October 30, 1996. Efforts
to remediate the groundwater at this site are expected to continue for some
time.
Under the terms of the Recapitalization Agreement, BP America assumed liability,
and the rights to recovery from third parties, for environmental remediation and
other similar required actions with respect to certain environmental obligations
of Unifrax, including the above, which existed 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.
Legal Proceedings
In addition to the ceramic fiber and environmental matters discussed above,
BP/Carborundum and Unifrax are involved in litigation relating to various claims
arising out of their operations in the normal course of business, including
product liability claims. While the outcomes of this litigation could be
material to the results of operations in the period recognized, based on the
current claims asserted the management of the Company believes that the ultimate
liability, if any, resulting from such matters will not have a material adverse
effect on the Company's financial position.
The Carborundum Company has been named in numerous legal claims alleging
pre-Closing asbestos exposure. None of the current or past products of Unifrax
are asbestos-containing materials, as defined by OSHA. For these claims related
to pre-Closing Carborundum Company matters, BP America has responsibility under
the Recapitalization Agreement and is managing the claims directly.
NOTE D - COMPREHENSIVE INCOME
Comprehensive income for the three-month and six-month periods ended June 30,
1998 and 1999 consisted of the following (in thousands):
Three months ended June 30 Six months ended June 30
1998 1999 1998 1999
---- ---- ---- ----
Net income $ 1,378 $ 997 $ 2,871 $ 1,658
Change in foreign currency
translation adjustment 2 (34) (33) (223)
------- ------- -------- ---------
Comprehensive income $ 1,380 $ 963 $ 2,838 $ 1,435
======= ======= ======== =========
Accumulated other comprehensive loss is comprised of the foreign currency
translation adjustments.
8
<PAGE>
Item 2. 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. Forward looking statements
include, without limitation, any statement that may predict, forecast, indicate
or imply future results, performance or achievements, and may contain the words
"believe", "anticipate", "expect", "estimate", "project", "will continue", "will
result", or words or phrases of similar meaning. 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 an overseas source.
Three Months Ended June 30, 1999 Compared With Three Months Ended June 30, 1998
Net sales for the second quarter of 1999 decreased by $1.5 million or 6.8% from
$22.0 million in 1998 to $20.5 million in 1999, due to lower sales in some
traditional market applications, including petrochemicals and steel and in
porosity-controlled products due to changes in automotive industry airbag system
designs.
Gross profit decreased by $1.2 million, or 10.9%, from $11.0 million in 1998 to
$9.8 million in 1999. Gross profit as a percentage of net sales decreased from
49.7% in 1998 to 47.6% in 1999. The gross profit decrease was primarily due to
the lower sales and lower selling prices as a result of competition in
automotive products, and in some traditional markets.
Selling, general and administration expenses decreased by $0.7 million, or
11.4%, from $6.0 million in 1998 to $5.3 million in 1999, primarily as a result
of nonrecurring reductions of liabilities associated with the product
stewardship programs and retiree medical and insurance programs. Selling,
general and administration expense as a percentage of net sales decreased from
27.2% in 1998 to 25.8% in 1999.
Operating income decreased by $0.5 million, or 10.2%, from $5.0 million in 1998
to $4.5 million in 1999. Operating income as a percentage of net sales decreased
from 22.6% in 1998 to 21.8% in 1999, as a result of the factors previously
indicated.
Interest expense decreased by $0.1 million, or 5.1% from $3.0 million in 1998 to
$2.9 million in 1999 due to the lower level of long term debt. Interest expense
increased as a percentage of net sales from 13.7% in 1998 to 13.9% in 1999.
Provision for income taxes remained at $0.6 million for the three months ended
June 30, 1998 and 1999. The effective income tax rate increased from 30.6% in
1998 to 35.9% in 1999, primarily as a result of recognizing, during 1998,
certain deferred tax benefits resulting from the Recapitalization and due to
losses in overseas subsidiaries for which no income tax benefit has been
recognized.
Net income decreased by $0.4 million or 27.6% from $1.4 million in 1998 to $1.0
million in 1999, as a result of the factors previously indicated. Net income as
a percentage of net sales decreased from 6.3% in 1998 to 4.9% in 1999.
Six Months Ended June 30, 1999 Compared With Six Months Ended June 30, 1998
Net sales for the first six months of 1999 decreased by $2.1 million or 4.7%
from $43.8 million in 1998 to $41.7 million in 1999 due to lower sales in some
traditional markets, including petrochemical and steel, and in
porosity-controlled products due to changes in automotive industry airbag system
designs.
Gross profit decreased by $2.1 million, or 9.5% from $21.8 million in 1998 to
$19.7 million in 1999. Gross profit as a percentage of net sales decreased from
49.8% in 1998 to 47.3% in 1999. The gross profit decrease was due to the lower
sales volume and downward price pressure in the automotive market, and in some
traditional markets.
Selling, general and administration expenses decreased by $0.8 million or 6.5%
from $11.9 million in 1998 to $11.1 million in 1999, decreasing as a percentage
of net sales from 27.1% in 1998 to 26.6% in 1999, primarily as a result of
nonrecurring reductions of liabilities associated with the product stewardship
programs and retiree medical and insurance programs.
Operating income decreased by $1.3 million, or 13.0% from $9.9 million in 1998
to $8.6 million in 1999. Operating income as a percentage of net sales decreased
from 22.7% in 1998 to 20.7% in 1998, as a result of the factors previously
indicated.
Interest expense decreased by $0.2 million or 4.2% from $6.0 million in 1998 to
$5.8 million in 1999 due to the lower level of long term debt. Interest expense
as a percentage of net sales increased from 13.8% in 1998 to 13.9% in 1999.
Provision for income taxes remained at $1.1 million for the six months ended
June 30, 1998 and 1999. The effective income tax rate increased from 28.1% in
1998 to 38.9% in 1999, primarily as a result of recognizing during 1998, certain
deferred tax benefits resulting from the Recapitalization and due to losses in
overseas subsidiaries for which no income tax benefit has been recognized.
Net income decreased by $1.2 million, or 42.2% from $2.9 million in 1998 to $1.7
million in 1999, as a result of factors previously indicated. Net income as a
percentage of net sales decreased from 6.6% in 1998 to 4.0% in 1999.
Liquidity and Capital Resources
During the six-month period ended June 30, 1999, the Company's cash provided by
operating activities increased by $1.2 million or 31.5%, from $3.8 million in
1998 to $5.0 million in 1999. This increase was principally the result of a
reduction in the level of inventories, offset in part by lower net income,
depreciation and amortization.
Cash used in investing activities increased $0.9 million or 98.1% from $1.0
million in 1998 to $1.9 million in 1999. This increase was due to higher capital
spending.
Cash used in financing activities decreased by $0.2 million or 6.9% from $2.9
million in 1998 to $2.7 million in 1999. During 1999 the Company made a
prepayment of $1.0 million on its Term Loan and purchased $2.0 million of its
Senior Notes.
Management believes that cash flows from operations and the available credit
facility will be sufficient to fund operating and capital expenditure needs over
the next 12 months.
Legal Proceedings
Reference is made to the information included in Note C to the consolidated
financial statements of the Company included under Item 1 in this Form 10-Q,
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 would recognize a date using "00" as the year 1900 rather than the year
2000. This could have caused a system failure or miscalculation resulting in
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 of its Year 2000 readiness and believes
it has identified all significant areas with potential date-related problems.
The Company has determined which of those identified areas are critical to the
normal operation of the business, and has developed a remediation plan for
non-compliant, critical areas. Of those non-compliant, critical systems, as of
June 30, 1999, the Company had completed and put into production corrections or
upgrades to all but one identified system. The completed systems include all
line of business software, support software and networks, with the exception of
payroll. Payroll is the final critical system, and is being addressed by the
outsourcing vendor. Subsequent to June 30, 1999, the vendor completed testing,
and the payroll system, to the best of the Company's knowledge and belief, is
now fully compliant.
In addition to the critical systems identified, there are other systems or
pieces of equipment which assist in the day to day operation of the Company, but
are not vital to business operations. An action plan is in place to provide for
the Year 2000 readiness of these other items either through upgrade, repair or
replacement. This is a continuous process which is underway now, and will be
continuing through 1999. Although the Company expects that these other items
will be Year 2000 compliant by late 1999, the Company does not believe these
other items will seriously disrupt the orderly conduct of its business even if
not corrected or replaced within the time frame.
It is the Company's current policy to keep much of its operational software,
both critical and noncritical on maintenance contracts which provide the most
current versions of the software as a part of the contracts. Most vendors have
supplied Year 2000 compliant software as a part of their normal product
enhancement and evolution, and these upgrades have been or are being applied to
achieve Year 2000 readiness. The Company understands from these software vendors
that they have performed substantial product quality assurance testing of their
products prior to general release, contributing to their assurance of their
products' Year 2000 readiness. In addition, the Company, as part of its
implementation process, performed additional testing and verification of
substantially all software, including software not under maintenance contracts.
Although the software has been tested to the best of the supplier's and the
Company's ability, there is no absolute assurance that these various software
systems are indeed Year 2000 compliant.
The total Year 2000 project cost is estimated at approximately $250,000 which
includes $100,000 for the purchase of new software and equipment that will be
capitalized, and $150,000 that will be expensed as incurred. To date the Company
has incurred and expensed approximately $125,000 primarily for the assessment
effort and remediation of the line of business software. All funds used for Year
2000 remediation have been treated as a part of normal operating expenses and
on-going capital budgeting.
The costs of the project and the completion date of the remaining items are
based on management's best estimates which were derived using numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However there can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause 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's review of the status of key supplier's Year 2000 readiness leads
management to expect that there will be no material adverse impact in key
suppliers' ability to provide the Company with the products and services needed
for the orderly conduct of business in the year 2000 and beyond. In addition,
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 the Year 2000 problems on its vendors, customers, agents, or other
third parties, but the 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 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the information included in Note C to the
consolidated financial statements of the Company and included in
this Form 10-Q, which is hereby incorporated herein by reference.
Item 2. Changes in Securities
None.
Item 3. Defaults on Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the period
covered by this report.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UNIFRAX CORPORATION
Date: August 12, 1999 By: /s/ William P. Kelly
--------------- -----------------------
William P. Kelly, President
and Chief Executive Officer
Date: August 12, 1999 By: /s/ Mark D. Roos
--------------- -----------------------
Mark D. Roos, Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNIFRAX
CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30,
1999, AND THEIR CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD ENDED
JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 463
<SECURITIES> 0
<RECEIVABLES> 13,902
<ALLOWANCES> 725
<INVENTORY> 9,377
<CURRENT-ASSETS> 25,842
<PP&E> 75,257
<DEPRECIATION> 39,709
<TOTAL-ASSETS> 85,780
<CURRENT-LIABILITIES> 23,257
<BONDS> 99,750
<COMMON> 0
0
0
<OTHER-SE> (40,689)
<TOTAL-LIABILITY-AND-EQUITY> 85,780
<SALES> 41,693
<TOTAL-REVENUES> 41,693
<CGS> 21,978
<TOTAL-COSTS> 21,978
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 573
<INTEREST-EXPENSE> 5,789
<INCOME-PRETAX> 2,715
<INCOME-TAX> 1,057
<INCOME-CONTINUING> 1,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,658
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
