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, 1998
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.
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. In
connection with this sale, The British Petroleum Company p.l.c. ("BP") and SEPR
entered into various agreements regarding the ongoing relationship between
Unifrax and SEPR subsequent to the closing of the transaction. These agreements
expire March 1, 2001, with certain exceptions. The Company must provide SEPR
with certain specified technical services and product information for which, in
certain circumstances, the Company will receive a royalty.
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, including
automotive, power generation, and fire protection.
MARKETS
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. During 1998, the Company's operations in New
Carlisle, Indiana and in Amherst, New York also became certified under ISO 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 an
overseas source and the balance from a U.S. supplier. Because vermiculite from
the overseas 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 overseas 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 3.1% and 3.2% of net sales during the years 1997 and 1998,
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 has been 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 were taken for a period of five years concluding 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, under DG
XI, 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 14 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, 1998, the Company employed approximately 406 persons
on a full-time basis, Approximately 66 employees at the Company's Tonawanda
plant are members of the Oil, Chemical and Atomic Workers union.
<PAGE>
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.
<TABLE>
<CAPTION>
Approximate
Plant Site Square Feet Status Use
- ---------- ----------- ------ ----
<S> <C> <C> <C>
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
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Reference is made to the information included in Note 14 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
There is no established public trading market for the Company's stock.
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,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $76,246 $84,064 $91,631 $87,111 $85,499
Income before interest and income taxes 17,708 21,448 22,429 20,039 18,338
Interest expense - - 2,246 12,537 11,988
Provision for income taxes 7,256 8,743 8,543 1,937 2,305
------- ------- ------- ------- -------
Net income $10,452 $12,705 $11,640 $ 5,565 $ 4,045
======= ======= ======= ======= =======
OTHER DATA:
EBITDA(a) $21,928 $25,749 $26,520 $25,362 $23,987
Depreciation and amortization 4,220 4,301 4,091 5,323 5,649
Cash Flows From Operating Activities 11,324 18,925 18,631 13,987 9,243
Cash Flows From Investing Activities (2,578) (3,593) (8,579) (9,276) (3,759)
Cash Flows From Financing Activities (8,743) (15,393) (9,191) (5,250) (5,800)
BALANCE SHEET DATA (AT PERIOD
END):
Working capital $ 16,688 $ 14,763 $ 14,022 $ 12,921 $ 4,858
Long Term Debt -- -- 127,750 122,500 105,950
Total assets 56,897 54,239 93,391 90,462 88,654
Total liabilities 18,943 18,815 147,455 136,641 130,778
Parent company investment(b) 37,954 35,424 -- -- --
Stockholders' Deficit(b) -- -- (54,064) (46,179) (42,124)
</TABLE>
(a) "EBITDA" means earnings from operations before interest expense,
taxes, depreciation, and amortization. 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.
(b) 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.
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. Additional oral or written forward looking 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 an overseas source.
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.
<PAGE>
RESULTS OF OPERATIONS
Year Ended December 31,
1996 1997 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 50.9 50.7 51.2
----- ----- -----
Gross profit 49.1 49.3 48.8
Selling, general and administrative 21.9 23.2 24.1
Allocated corporate charges 0.4 - -
Research & development 2.5 3.1 3.2
----- ----- -----
Operating income 24.3% 23.0% 21.5%
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net sales decreased $1.6 million or 1.9% from $87.1 million in 1997 to
$85.5 million in 1998. Several Unifrax markets for ceramic fiber, including
petrochemicals, steel and power generation, weakened during 1998 as a
consequence of global economic pressures and uncertainty. Also,
porosity-controlled products continued to be affected by automotive industry
airbag design changes toward systems using less filtration.
Gross profit declined by $1.3 million, or 2.8%, from $43.0 million in 1997
to $41.7 million in 1998. Gross profit as a percentage of net sales decreased
slightly from 49.3% in 1997 to 48.8% in 1998. The decline in gross profit was
due to the lower sales volume and downward pressure on prices in the automotive
market and in some traditional markets.
Selling, general and administrative expenses increased by $0.4 million or
1.9%, from $20.2 million in 1997 to $20.6 million in 1998 as a result of
inflation, offset partially by the effects of the lower sales volume. Selling,
general and administrative expenses as a percentage of net sales increased from
23.2% in 1997 to 24.1% in 1998.
Research and development expenses increased by $0.1 million or 1.3% from
$2.7 million in 1997 to $2.8 million in 1998. The higher expense was due to
additional testing and development expenditures for new products. Research and
development expenses as a percentage of net sales were 3.1% in 1997 and 3.2% in
1998.
Operating income decreased by $1.6 million, or 8.2%, from $20.0 million in
1997 to $18.4 million in 1998. Operating income as a percentage of net sales
decreased from 23.0% in 1997 to 21.5% in 1998, as a result of the factors
previously indicated.
Interest expense decreased by $0.6 million, or 5.1%, from $12.5 million in
1997 to $11.9 million in 1998 as a result of the repurchase of $2.0 million of
10.5% Senior Notes, voluntary prepayment of principal on the term loan, lower
interest rates on borrowings, and conversion of the amount due affiliates into
preferred stock of the Company. Interest expense as a percentage of net sales
decreased from 14.4% in 1997 to 13.9% in 1998.
Provision for income taxes increased $0.4 million, or 20.7%, from $1.9
million in 1997 to $2.3 million in 1998. The effective income tax rate increased
from 25.8% in 1997 to 36.3% in 1998. The effective income tax rate for 1997 was
less than that which would be expected due to the recognition of $1.0 million of
deferred tax assets resulting from the Recapitalization which were, prior to
1997, unrecognized.
Net income decreased by $1.6 million, or 27.3%, from $5.6 million in 1997
to $4.0 million in 1998, as a result of factors previously indicated. Net
income as a percentage of net sales decreased from 6.4% in 1997 to 4.7% in 1998,
as a result of the factors discussed above.
EBITDA decreased by $1.4 million, or 5.4%, from $25.4 million in 1997 to
$24.0 million in 1998. 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 $5.3 million in 1997 to $5.7
million in 1998, resulting from the capacity expansion in New Carlisle. EBITDA
as a percent of net sales decreased from 29.1% in 1997 to 28.1% in 1998.
Capital Expenditures decreased $5.6 million, or 59.4%, from $9.4 million in
1997 to $3.8 million in 1998, due primarily to the completion of the investment
in capacity expansion in New Carlisle. Capital expenditures in 1998 included
projects to replace worn equipment, to reduce costs and to increase capacity in
certain processes. Working capital decreased from $12.9 million in 1997 to $4.9
million in 1998. Increased levels of raw materials and in-process inventories
were offset by the reclassification of the note payable--affiliate from long
term to current liabilities, and also the current portion of long term debt to
current liabilities.
Cash flows from operating activities decreased $4.8 million, or 33.9%, from
$14.0 million in 1997 to $9.2 million in 1998 as a consequence of the lower net
income and inventory change discussed above. Cash outflows from investing
activities decreased $5.5 million from $9.3 million in 1997 to $3.8 million in
1998 due to decreased capital expenditures. Cash outflows from financing
activities increased $0.5 million from $5.3 million in 1997 to $5.8 million in
1998.
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, general and administrative expenses increased by $0.2 million or
1.1%, from $20.0 million in 1996 to $20.2 million in 1997 as a result of
inflation, offset partially by the effects of the lower sales volume. Selling,
general and administrative expenses as a percentage of net sales increased from
21.8% in 1996 to 23.2% in 1997.
Allocated corporate charges decreased by $0.3 million or 100% from $0.3
million in 1996 to $0 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 in selling, general and administrative
expenses.
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.
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, 1998, the Company was in
compliance with all Credit Agreement and Indenture covenants.
During 1998 the Company made voluntary prepayments of principal
totaling $3.0 million on its Term Loan thereby reducing the balance outstanding
from $13.0 million at December 31, 1997 to $10.0 million at December 31, 1998.
As of December 31, 1998 the Company borrowed $1.7 million against its $20.0
million revolving credit facility.
On August 25, 1998, the Company repurchased $2 million face value of
Senior Notes.
Management believes that cash flows from operations and the available
credit facility will be sufficient to fund operating and capital expenditure
needs for 1999.
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 BP America, Inc. ("BP America"). 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.
At December 31, 1998, the Company had Federal and state net operating
loss carryforwards totaling approximately $17.4 million which will be available
to offset future taxable income. These net operating loss carryforwards expire
in 2011 through 2013.
LEGAL PROCEEDINGS
Reference is made to the information included in Note 14 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 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, the Company has completed and put into production corrections
or upgrades to all but one identified system as of December 31, 1998. 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. Conversion to a Year 2000
compliant version is scheduled for the second quarter of 1999. The Company is
working with the payroll vendors to assure that this timetable is met.
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 or 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 guarantee 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.
The only Year 2000 problem that the Company has identified and
considers reasonably likely of occurrence that might materially adversely affect
the Company's results of operations or financial condition would be if the
Company's payroll vendor were unable to deliver a Year 2000 compliant upgrade on
the promised schedule. The vendor has indicated to the Company that they have a
Year 2000 compliant version of their software running in production with several
other customers. The Company is working with them and monitoring the project
closely to assure timely completion of the effort. Should the payroll vendor not
be able to deliver a Year 2000 compliant version of their software by December
31, 1999, the Company could be required to calculate its payroll information on
a manual basis until an alternative payroll service provider can be identified
and qualified.
<PAGE>
ITEM 7A. MARKET RISK DISCLOSURES
The Company is exposed to certain market risks, principally changes in
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
The Company has various long-term indebtedness outstanding at December
31, 1998. The interest impact of an increase in interest rates of 100 basis
points (1%) would be as follows:
Instrument Interest Rate Impact on Earnings
- --------- ------------- (in thousands)
------------
Loan and Security Agreement LIBOR plus 100 - 175 points $ (117)
Senior Notes Fixed -
Note payable - affiliate Prime (70)
-------
(187)
Less tax benefit 65
Net income reduction $ (122)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page in
Form 10K
--------
Report of Independent Auditors 15
Consolidated Balance Sheets as of December 31, 1997 and 1998 16
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998 17
Consolidated Statements of Parent Company Investment and Stockholders'
Deficit for the years ended December 31, 1996, 1997, and 1998 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 19
Notes to Consolidated Financial Statements 20
<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, 1997 and 1998, 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, 1998.
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, 1997 and 1998 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, 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 19, 1999
<PAGE>
<TABLE>
<CAPTION>
Unifrax Corporation
Consolidated Balance Sheets
December 31
1997 1998
---- ----
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash $ 359 $ 43
Accounts receivable, trade, less allowances of $1,254
and $708, respectively 12,095 12,328
Accounts receivable, other 625 625
Inventories 7,885 10,343
Deferred income taxes 2,320 2,494
Prepaid expenses and other current assets 411 220
---------- ----------
Total current assets 23,695 26,053
Property, plant and equipment, net 37,516 36,707
Deferred income taxes 24,849 22,402
Organization costs, net of accumulated amortization
of $891 and $1,642, respectively 4,030 3,279
Other assets 372 213
---------- ----------
$ 90,462 $ 88,654
========== ==========
Liabilities and stockholders' deficit Current liabilities:
Note payable--affiliate $ - $ 7,000
Current portion of long term debt - 3,750
Accounts payable 3,206 3,306
Accrued expenses 7,568 7,139
---------- ----------
Total current liabilities 10,774 21,195
Long term debt 115,500 105,950
Note payable--affiliate 7,000 -
Accrued postretirement benefit cost 3,209 3,472
Other long-term obligations 158 161
---------- ----------
Total liabilities 136,641 130,778
Stockholders' deficit
Common stock--$.01 par value; 40,000 shares authorized; 20,000 shares
issued and outstanding - -
Redeemable convertible cumulative preferred stock--voting; $.01 par
value; 10,000 shares authorized; 1,666.67 shares issued and outstanding - -
Additional paid-in capital 42,520 42,520
Accumulated deficit (88,406) (84,361)
Accumulated other comprehensive income (293) (283)
---------- ----------
(46,179) (42,124)
---------- ----------
$ 90,462 $ 88,654
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Unifrax Corporation
Consolidated Statements of Income
Year Ended December 31
1996 1997 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net sales
Outside $ 90,954 $ 87,111 $ 85,499
Affiliates 677 - -
---------- ---------- ----------
91,631 87,111 85,499
Cost of goods sold 46,635 44,154 43,760
---------- ---------- ----------
Gross profit 44,996 42,957 41,739
Selling, general and administrative expenses 20,016 20,230 20,618
Research and development 2,305 2,734 2,770
Allocated corporate charges 356 - -
---------- ---------- ----------
Operating income 22,319 19,993 18,351
Royalty income, net of related expenses 435 350 104
Other expense (325) (304) (117)
---------- ---------- ----------
Income before interest and income taxes 22,429 20,039 18,338
Interest expense (2,246) (12,537) (11,988)
---------- ---------- ----------
Income before income taxes 20,183 7,502 6,350
Provision for income taxes 8,543 1,937 2,305
---------- ---------- ----------
Net income $ 11,640 $ 5,565 $ 4,045
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Unifrax Corporation
Consolidated Statements of Parent Company Investment and Stockholders' Deficit
(In Thousands)
Accumulated
Additional Other Total Parent
Paid-In Accumulated Comprehensive Stockholders' Company Comprehensive
Capital Deficit Income Deficit Investment Income
------- ------- ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ - $ - $ - $ - $ 35,424
Net income for the period January
1, 1996 to October 30, 1996 - - - - 11,006 $ 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 - 634
Foreign currency translation
adjustment - - (62) (62) - (62)
------ ------ ---- ---- ------ ------
Comprehensive income 11,578
Balance at December 31, 1996 40,020 (93,971) (113) (54,064) -
Net Income - 5,565 - 5,565 - 5,565
Foreign currency translation
adjustment - - (180) (180) - (180)
-----
Comprehensive income 5,385
Issuance of Preferred Stock 2,500 - - 2,500 -
-------- --------- --------- ------- ------
Balance at December 31, 1997 42,520 (88,406) (293) (46,179) -
Net Income - 4,045 - 4,045 - 4,045
Foreign currency translation
adjustment - - 10 10 - 10
-------- --------- -------- ------- ------ ------
Comprehensive income
Balance at December 31, 1998 $ 42,520 $ (84,361) $ (283) $ (42,124) $ -
========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Unifrax Corporation
Consolidated Statements of Cash Flows
Year Ended December 31
1996 1997 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 11,640 $ 5,565 $ 4,045
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 4,091 5,323 5,649
Provision for deferred income taxes 214 1,802 2,273
Loss (gain) on sales of property, plant
and equipment 251 20 (7)
Changes in operating assets and liabilities:
Accounts receivable 1,042 1,136 (233)
Inventories (2,390) 2,206 (2,458)
Prepaid expenses and other current assets (113) (117) 191
Accounts payable and accrued expenses 3,447 (1,942) (493)
Accrued postretirement benefit cost 311 252 263
Other long term liabilities 86 (78) 3
Other 52 (180) 10
----------- ----------- -----------
Cash provided by operating activities 18,631 13,987 9,243
Investing activities
Capital expenditures (8,267) (9,421) (3,821)
Deferred software and other costs (175) - -
Proceeds from sales of property, plant and equipment 90 145 62
Other investing activities (227) - -
----------- ----------- -----------
Cash used in investing activities (8,579) (9,276) (3,759)
Financing activities
Cash transfers to parent company, net (7,272) - -
Borrowings under revolving loan - 19,350 21,600
Repayments of revolving loan - (16,850) (22,400)
Long term borrowings 125,000 - -
Repayments of long-term borrowings (4,250) (7,750) (5,000)
Increase in amounts due affiliates 2,250 - -
Recapitalization payment (120,000) - -
Organization costs (4,919) - -
----------- ----------- -----------
Cash used in financing activities (9,191) (5,250) (5,800)
----------- ----------- -----------
Net increase (decrease) in cash 861 (539) (316)
Cash--beginning of year 37 898 359
----------- ----------- -----------
Cash--end of year $ 898 $ 359 $ 43
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Unifrax Corporation
Notes to Consolidated Financial Statements
December 31, 1998
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 the Company'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. ("BP America") 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 incurred certain common costs which related to both Unifrax and other
Carborundum operations. The Company has made certain allocations of 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.
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 two month period ended February 29, 1996, the Company's sales to
businesses included as part of this sale amounted to $677,000.
In connection with this sale, BP and SEPR entered into various agreements
regarding the ongoing relationship between Unifrax and SEPR subsequent to the
closing of the transaction. These agreements expire March 1, 2001, with certain
exceptions. 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 BP America. 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.
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.
Advertising Costs
Advertising costs, which consist principally of advertisements in trade
journals, brochures, and attendance at trade shows, are expensed as incurred.
Advertising costs totaled $828,000, $792,000 and $810,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Health, Safety and Environmental Quality Programs
Costs associated with the Company's Health, Safety and Environmental Quality
("HSEQ") programs, which include the Company's Product Stewardship Program, the
Ceramic Fibers Advisory Board, ongoing employee health studies and workplace
exposure monitoring studies, are expensed as incurred. Amounts charged to
operations during the years ended December 31, 1996, 1997 and 1998 relating to
HSEQ and testing in connection with research and development totaled $1,559,000,
$1,253,000 and $1,738,000, respectively, and are included in selling, general
and administrative expenses, and research and development in the accompanying
statements of income.
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.
Effects of New Accounting Pronouncements
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or stockholders' deficit.
Statement 130 requires the Company's foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' deficit, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform with the requirements of Statement 130.
4. Inventories
Major classes of inventories are as follows:
December 31
1997 1998
---- ----
Raw material and supplies $ 1,598 $ 3,459
In-process 1,551 2,008
Finished product 4,410 4,341
--------- ---------
7,559 9,808
Adjustment to LIFO cost 326 535
--------- ---------
$ 7,885 $ 10,343
========= =========
The cost of inventories determined on the LIFO method exceeds the current cost
of inventories principally as a result of reduced manufacturing costs.
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31
1997 1998
---- ----
(In Thousands)
Land and land improvements $ 1,974 $ 1,982
Buildings 18,589 18,793
Machinery, equipment, furniture and fixtures 48,909 50,759
Construction in progress 1,435 2,829
------------- -------------
70,907 74,363
Less accumulated depreciation (33,391) (37,656)
------------- -------------
$ 37,516 $ 36,707
============= =============
For the years ended December 31, 1996, 1997 and 1998, depreciation expense
amounted to $3,910,000, $4,383,000 and $4,739,000, respectively.
6. Long Term Debt and Note Payable -- Affiliate
Long term debt consists of the following:
December 31
1997 1998
---- ----
(In Thousands)
10 1/2% Senior Notes due 2003 $ 100,000 $ 98,000
Loan and Security Agreement:
Term loan 13,000 10,000
Revolving loan 2,500 1,700
---------- ----------
115,500 109,700
Less current portion - 3,750
---------- ----------
Long term debt $ 115,500 $ 105,950
========== ==========
The Company's Loan and Security Agreement dated as of October 30, 1996 ("Loan
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 1.00%
to LIBOR plus 1.75%, 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, 1998, 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, 1998 was
7.04% (7.68% at December 31, 1997). All outstanding amounts under the Loan
Agreement mature October 2001.
The Loan 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 Loan Agreement are secured by assets of the Company including, but not
limited to, accounts receivable, inventory, equipment and fixtures.
On August 25, 1998, the Company repurchased $2 million face value of Senior
Notes.
The note payable--affiliate accrues interest, payable annually, at the prime
lending rate (7.75% at December 31, 1998; 8.50% at December 31, 1997). This
obligation matures in October, 1999.
Maturities of long-term debt and note payable--affiliate are as follows (in
thousands):
1999 $ 10,750
2000 6,250
2001 1,700
2002 -
2003 98,000
Interest payments made in 1997 and 1998 amounted to $12,417,000 and $12,031,000,
respectively.
7. Fair Value of Financial Instruments
At December 31, 1997 and 1998, 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.
December 31
1997 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Assets:
Cash and cash equivalents $ 359 $ 359 $ 43 $ 43
Liabilities:
Long-term debt (including
current maturities) (122,500) (127,500) (116,700) (120,620)
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 $168,000 for the two month period ended February 29,
1996.
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 $356,000 for the two month period ended February 29, 1996.
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.
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 period
from January 1, 1996 to October 30, 1996 amounted to $211,000. Management
estimates the cost for these insurance categories on a stand-alone basis would
have been approximately $800,000 per annum for the year ended December 31, 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 $148,000 for the two
month period ended February 29, 1996, 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 two month period ended
February 29, 1996 totaled $331,000.
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, $300,000 in 1997, and $300,000 in 1998 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:
December 31
1997 1998
---- ----
(In Thousands)
Accrued compensation and employee benefits $ 2,963 $ 2,726
Ceramic fiber product stewardship and monitoring 618 742
Interest 2,028 1,989
Other 1,959 1,682
-------- --------
$ 7,568 $ 7,139
======== ========
10. Pension and Other Retirement Benefits
Prior to the Recapitalization (see Note 1), the Company participated in defined
benefit retirement plans sponsored by BP America. 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 $52,000 in 1996. Amounts allocated were
principally determined based on payroll.
Pursuant to the Recapitalization, for the salary related plan, BP America 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 BP America 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.
<PAGE>
The following tables summarize certain information with respect to the Mirror
Plan:
December 31
1997 1998
--- ----
(In Thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 682 $ 785
Service cost 55 43
Interest cost 48 54
Actuarial loss - 33
Amendment - 108
-------- --------
Benefit obligation at end of year 785 1,023
Change in Plan Assets
Fair value of plan assets at beginning of year $ 699 $ 753
Actual return on plan assets 54 86
-------- --------
Fair value of plan assets at end of year 753 839
-------- --------
Funded status (32) (184)
Unrecognized prior service cost - 108
Unrecognized actuarial gains (31) (24)
Additional minimum liability - (84)
-------- --------
Accrued pension obligation $ (63) $ (184)
======== ========
Year Ended December 31
1997 1998
---- ----
(In Thousands)
Components of Net Periodic Pension Cost
Service cost $ 55 $ 43
Interest cost 48 54
Expected return on plan assets (49) (60)
-------- --------
Net periodic pension cost $ 54 $ 37
======== ========
Weighted Average Assumptions as of December 31
Discount rate 7.0% 6.5%
Expected return on plan assets 7.0% 8.0%
Unrecognized gains and losses are amortized on a straight-line basis over a
period approximating the average remaining service period for active
participants.
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 was $422,000 and
$426,000 for the years ended December 31, 1997 and 1998, respectively.
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 $314,000, $428,000 and $427,000 during the
years ended December 31, 1996, 1997 and 1998, respectively.
In addition to pension benefits, the Company also provides certain health care
and life insurance benefits for retired employees who meet eligibility
requirements. Prior to the Recapitalization this was done through BP America.
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 BP America for 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 BP America for the ten months ended
October 30, 1996 and the amount charged to expense for the two month period
ended December 31, 1996, and the years ended December 31, 1997 and 1998.
Year Ended December 31
1996 1997 1998
---- ---- ----
(In Thousands)
Service cost--benefits earned $ 115 $ 214 $ 214
Interest costs 247 134 159
Amortization of unrecognized net gain - (84) (72)
------- ------- -------
Net periodic postretirement benefit expense $ 362 $ 264 $ 301
======= ======= =======
The following table presents the status of the unfunded postretirement benefit
obligation and the amounts recognized in the Company's balance sheets:
December 31
1997 1998
---- ----
(In Thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 1,920 $ 2,268
Service cost 214 214
Interest cost 134 159
Actuarial loss - 182
Benefits paid - (3)
--------- ---------
Benefit obligation at end of year 2,268 2,820
Unrecognized actuarial gains 941 687
--------- ---------
Accrued postretirement benefit cost $ 3,209 $ 3,507
========= =========
Weighted Average Assumptions as of December 31
Discount rate 7.0% 6.5%
Rate of compensation increase 4.0% 4.0%
Pursuant to the Recapitalization, BP America 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.
<PAGE>
The assumed annual rate of future increase in per capita cost of health care
benefits (health care cost trend rate) for 1999 and beyond is 6% for all
beneficiaries. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effect:
One Percentage One Percentage
Point Increase Point Decrease
(In Thousands)
Effect on total of service and
interest cost components $ 8 $ 8
Effect on postretirement
benefit obligation 54 (53)
Unrecognized gains and losses are amortized on a straight-line basis over a
period approximating the average remaining service period for active
participants.
11. Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31
1996 1997 1998
---- ---- ----
(In Thousands)
Current:
Federal $ 6,671 $ 100 $ -
State 1,658 35 32
----------- ----------- -----------
8,329 135 32
Deferred 214 1,802 2,273
----------- ----------- -----------
$ 8,543 $ 1,937 $ 2,305
=========== =========== ===========
The provision for income taxes differs from the amount computed by applying the
statutory income tax rate as follows:
Year Ended December 31
1996 1997 1998
---- ---- ----
(In Thousands)
Income before income taxes at 35% for
1996; 34% for 1997 and 1998 $ 7,064 $ 2,551 $ 2,159
Permanent income tax disallowances 274 66 62
State taxes, net of federal benefit 1,078 291 21
Reduction of valuation allowance - (1,000) -
Other 127 29 63
--------- --------- ----------
$ 8,543 $ 1,937 $ 2,305
========= ========= ==========
<PAGE>
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, 1997 and 1998, the
major components of deferred tax assets and liabilities were as follows:
December 31
1997 1998
---- ----
(In Thousands)
Deferred tax liabilities
Deferred charges $ (109) $ (47)
Deferred tax assets
Tax goodwill and other intangible assets 28,344 26,296
Property, plant and equipment 4,635 1,559
Net operating loss carryforward 3,850 6,631
Accrued liabilities 1,835 1,252
Accrued postretirement benefit cost 1,284 1,389
Inventory 475 1,156
Other 355 160
---------- ----------
Gross deferred tax assets 40,778 38,443
Valuation allowance 13,500 13,500
---------- ----------
Net deferred tax assets 27,278 24,943
---------- ----------
Net deferred tax asset $ 27,169 $ 24,896
========== ==========
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. 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, 1998, the Company has Federal and state net operating loss
carryforwards totaling approximately $17,395,000 which will be available to
offset future taxable income. These net operating loss carryforwards expire in
2011 through 2013. The Company paid $125,000 and $11,000 for income taxes during
the years ended December 31, 1997 and 1998, respectively. During the fourth
quarter of 1997, the Company recognized a benefit of $1,000,000 for deferred tax
assets previously unrecognized.
<PAGE>
12. 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. The options are granted at the
approximate fair value of the underlying shares at the date of grant and
generally vest in equal amounts over a four year period from the grant date. The
options expire ten years after grant. A summary of stock option activity and
exercise prices is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-----------------------------------------------------------------------------------
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 - $ - 1,075 $ 1,500 1,075 $ 1,500
Granted 1,075 1,500 - - 161 1,500
-----------------------------------------------------------------------------------
Outstanding, December 31 1,075 $ 1,500 1,075 $ 1,500 1,236 $ 1,500
===================================================================================
Exercisable, end of year - $ 1,500 268 $ 1,500 577 $ 1,500
===================================================================================
</TABLE>
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, $5,492,000, and $3,965,000
for the years ended December 31, 1996, 1997, and 1998, 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.
13. 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 was $1,479,000, $1,580,000 and $1,788,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Future minimum lease payments under all non-cancelable operating leases having a
remaining term in excess of one year as of December 31, 1998 are as follows (in
thousands):
1999 $ 842
2000 853
2001 847
2002 774
2003 384
Thereafter 95
----------
$ 3,795
==========
14. 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.
Superfund Sites. The Company may be named as a potentially responsible party
("PRP") pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended ("CERCLA" or "Superfund") or comparable state
law in connection with off-site disposal of hazardous substances at three sites,
and 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 site, chiefly by means of soil vapor extraction,
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.
<PAGE>
15. Stockholders' Equity
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 $186,250 at December 31, 1998 ($36,250 at December
31, 1997).
<PAGE>
<TABLE>
<CAPTION>
Schedule II
Valuation and Qualifying Accounts
Unifrax Corporation
(Dollars In Thousands)
Balance
at Charged to Balance at
Beginning Charged to Other End of
of Period Expense Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 794 $ (404) $ - $ 8(a) $ 382
Allowance for return 460 935 - 1,069(b) 326
-------- ------- ------ ------- --------
TOTAL $ 1,254 $ 531 $ - $ 1,077 $ 708
======== ======= ====== ========= ========
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
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
-------- ------- ------ ------- --------
TOTAL $ 919 $ 1,326 $ - $ 1,043 $ 1,202
======== ======= ====== ========= ========
</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 49 Director, President and Chief Executive Officer
Mark D. Roos 43 Vice President and Chief Financial Officer
David E. Brooks 49 Vice President, Sales and Marketing
Kevin J. O'Gorman 48 Vice President, Operations
Paul J. Viola 43 Vice President, Acquisitions and Strategic
Development
Paul M. Boymel 46 Vice President, Technology
Joseph J. Kuchera 41 Vice President, Human Resources
John E. Pilecki 46 Vice President, Engineering and Purchasing
James E. Cason 44 Vice President, Risk Management
Raymond A. Lancaster 53 Director
William D. Manning, Jr. 64 Director
John G. Nestor 54 Chairman of the Board
John F. Turben 63 Director
Edmund S. Wright 56 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, Vice President of Carborundum's domestic
ceramic fiber business from 1989 to 1993, and Vice President of Carborundum's
European operations 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. Brooks has been Vice President, Sales and Marketing of the Company
since May 1998. Previously he was President of Monofrax, Inc., a unit of Cookson
Group/Vesuvius Refractories, since January 1997. Mr. Brooks originally joined
Carborundum in 1980 and served in several positions, including Marketing Manager
of Carborundum's domestic ceramic fiber business from 1988 to 1993 and General
Manager of the Monofrax Refractories Division from 1993 to 1996.
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 fiber business from 1993
to 1995 and Manager, Manufacturing for its domestic ceramic fiber business from
1990 to 1993.
Mr. Viola has been Vice President, Acquisitions and Strategic
Development of the Company since May 1998. Previously he had been Vice
President, Sales and Marketing of the Company since February 1996. Mr. Viola
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.
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 was Manager of Human Resources for Carborundum's
domestic ceramic fiber business from 1988 to 1996. 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's ceramic fiber business in
1976 and has served in various engineering and manufacturing positions,
including domestic 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 Minerals, 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.
<PAGE>
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 1996, 1997 and 1998 (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Securities
Name and Underlying
Principal Position Salary Bonus(a) Options
- ------------------ ------ ------- -------
<S> <C> <C> <C> <C>
W. Kelly 1998 224,363 88,715 N/A
President and 1997 211,268 -0- N/A
Chief Executive Officer 1996 168,090 $53,000 376.25
K. O'Gorman 1998 144,034 21,851 N/A
Vice President, 1997 128,538 -0- N/A
Operations 1996 120,649 30,641 161.25
J. Cason 1998 132,252 20,522 N/A
Vice President 1997 128,430 -0- N/A
Risk Management 1996 124,836 27,000 53.75
P. Viola 1998 124,640 19,169 N/A
Vice President, 1997 121,248 -0- N/A
Acquisitions and 1996 111,655 28,490 161.25
Strategic Development
M. Roos 1998 117,768 18,193 N/A
Vice President 1997 112,650 -0- N/A
Chief Financial Officer 1996 106,306 22,000 107.50
</TABLE>
(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.
<PAGE>
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 or 1998 and no options were
exercised during 1996, 1997 or 1998.
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 188.00 / 188.25 -0-
K. O'Gorman 80.50 / 80.75 -0-
P. Viola 80.50 / 80.75 -0-
M. Roos 53.50 / 54.00 -0-
J. Cason 26.75 / 27.00 -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 90.5% 81.5%
William P. Kelly 5,000 1.8% 1.6%
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) 18,050 6.6% 6.6%
</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 advisory board members 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 included in paragraph 2 of Item 1 and
Notes 1 and 14 of the financial statements contained in Item 8, which is 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"), BP America, Inc. ("BP
America") has agreed to indemnify the Company as set forth below.
General Indemnity. The Recapitalization Agreement provides that, subject to
certain limitations, BP America and certain of its affiliates 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. BP America 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, BP
America 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. BP America 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, BP America 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 BP America
has agreed to indemnify the Company and Holding against 100% of such losses. BP
America 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 BP America 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 America 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, BP America has agreed to indemnify the Company
and Holding against environmental liabilities arising from pre-closing
conditions. The Recapitalization Agreement also provides that BP America 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 BP America. BP America 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 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, 1997 and 1998, and for the three years
in the period ended December 31, 1998. 15
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and Qualifying Accounts 37
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(i) Unifrax Corporation Recapitalization Agreement
3.1(i) Certificate of Incorporation of the Registrant
3.2(iii) Consent of Stockholders for Amendment of Certificate of
Incorporation
3.3(iii) Certificate of Amendment to Certificate of Incorporation
3.4(i) By-laws of the Registrant
4.1(i) Form of Indenture (including form of Note)
10.1(i) Form of Loan and Security Agreement among Unifrax
Corporation, Bank of America Illinois and the lenders
party thereto (Credit Agreement)
10.2(ii) First Amendment to Loan and Security Agreement
10.3(iv) Second Amendment to Loan and Security Agreement
10.4(i) 1996 Stock Option Plan
10.5(ii) Unifrax Corporation Noncompetition Agreement
10.6(i) Lease relating to Tonawanda plant
10.7(i) Lease relating to Amherst plant
10.8(i) Sanborn Lease
10.9(i) 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)
10.10(i) 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)
10.11(i) 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)
10.12(i) 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)
10.13(i) Trademark License and Consent Agreement between the Unifrax
Corporation and Societe Europeenne des Produits Refractaires
10.14(i) 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)
10.15(i) XPE(TM) License Agreement between the Unifrax Corporation
and Societe Europeenne des Produits Refractaires
10.16(i) Form of Covenant Not to Compete between Holding and BP
10.17(i) Form of Stockholders Agreement among the Company, BPX and Holding
10.18(iii)Amendment to Stockholders Agreement dated September 30, 1997,
among the Company, BP Exploration (Alaska), Inc. and Holding
10.19(iii)Stock Purchase Agreement dated September 30, 1997, between the
Company and Holding
10.20(iii)Stock Purchase Agreement dated September 30,
1997, between the Company and BP Exploration (Alaska), Inc.
10.21(i) Tax Sharing Agreement between the Company and Holding
10.22(i) Advisory Services Agreement between the Company and Kirtland
Capital Corporation
10.23(i) Form of BP Note
10.24 Termination Agreement dated December 4, 1998 relative
to the Conversion Agreement and the purchase of certain
assets from SEPR
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
(i) Incorporated by reference to the exhibits filed with the
Registration Statement on Form S-1 of Unifrax
Investment Corp (Registration No. 333-10611).
(ii) Incorporated by reference to the exhibits filed with Form
10-K for the fiscal year ended December 31, 1996 for Unifrax
Corporation.
(iii) Incorporated by reference to the exhibits filed with Form
10-K for the fiscal year ended December 31, 1997 for Unifrax
Corporation.
(iv) Incorporated by reference to the exhibits filed with Form
10-Q for the fiscal quarter ended June 30, 1998 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 29, 1999.
UNIFRAX CORPORATION.
By: /s/William P. Kelly
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 March 29, 1999
-------------------
William P. Kelly Director, President and Chief
Executive Officer (Principle
Executive Officer)
/s/Mark D. Roos March 19, 1999
---------------
Mark D. Roos Vice President & Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/John G. Nestor March 29, 1999
-----------------
John G. Nestor Chairman of the Board
/s/Raymond A. Lancaster
----------------------- March 29, 1999
Raymond A. Lancaster Director
/s/William D. Manning, Jr. March 29, 1999
--------------------------
William D. Manning, Jr. Director
/s/John F. Turben March 29, 1999
-----------------
John F. Turben Director
/s/Edmund S. Wright March 29, 1999
-------------------
Edmund S. Wright Director
<PAGE>
EXHIBIT 12.1 UNIFRAX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED
CHARGES
Year Ended December 31
1996 1997 1998
---- ---- ----
(In Thousands)
Earnings from continuing operations before
income taxes $ 20,183 $ 7,502 $ 6,350
Fixed charges
Interest 2,246 12,537 11,988
Imputed interest on operating lease
obligations 286 403 381
--------- --------- ---------
2,532 12,940 12,369
Adjusted earnings available for payment of
fixed charges $ 22,715 $ 20,442 $ 18,719
========= ========= =========
Ratio of earnings to fixed charges 9.0 1.6 1.5
========= ========= =========
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
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, 1998
AND THEIR CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 13,036
<ALLOWANCES> 708
<INVENTORY> 10,343
<CURRENT-ASSETS> 26,053
<PP&E> 74,363
<DEPRECIATION> 37,656
<TOTAL-ASSETS> 88,654
<CURRENT-LIABILITIES> 21,195
<BONDS> 105,950
<COMMON> 0
0
0
<OTHER-SE> (42,124)
<TOTAL-LIABILITY-AND-EQUITY> 88,654
<SALES> 85,499
<TOTAL-REVENUES> 85,499
<CGS> 43,760
<TOTAL-COSTS> 43,760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 531
<INTEREST-EXPENSE> 11,988
<INCOME-PRETAX> 6,350
<INCOME-TAX> 2,305
<INCOME-CONTINUING> 4,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,045
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
