SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1999
Commission File Number: 333-10611
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
-------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _____
<PAGE>
UNIFRAX CORPORATION
FORM 10-Q
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998.......................1
Condensed Consolidated Statements of Income for the
Three-month and nine-month periods ended
September 30, 1999 and 1998....................................2
Condensed Consolidated Statements of Cash Flow for the
Nine-months ended September 30, 1999 and 1998..................3
Notes to Condensed Consolidated Financial Statements..................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................14
Item 2. Changes in Securities..............................................14
Item 3. Defaults on Senior Securities......................................14
Item 4. Submission of Matters to a Vote of Security Holders ...............14
Item 5. Other Information..................................................14
Item 6. Exhibits and Report on Form 8-K....................................14
Signatures....................................................................15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIFRAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1998 1999
---- ---
<S> <C> <C>
ASSETS
Current assets:
Cash $ 43 $ 2,965
Accounts receivable, less allowances of $708
and $829, respectively 12,953 14,247
Inventories 10,343 8,972
Deferred income taxes 2,494 2,494
PREPAID EXPENSES AND OTHER CURRENT ASSETS 220 237
-------- --------
Total current assets 26,053 28,915
Property, plant and equipment, at cost 74,363 75,199
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (37,656) (40,164)
-------- --------
36,707 35,035
Deferred income taxes 22,402 20,567
Organization costs, net of accumulated amortization
of $1,642 and $2,204, respectively 3,279 2,717
OTHER ASSETS 213 165
$ 88,654 $ 87,399
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable -- affiliate $ 7,000 $ 7,000
Current portion of long term debt 3,750 8,500
Accounts payable 3,306 1,660
ACCRUED EXPENSES 7,139 10,246
------- --------
Total current liabilities 21,195 27,406
Long term debt 105,950 96,000
Accrued postretirement benefit cost 3,472 3,344
OTHER LONG-TERM OBLIGATIONS 161 161
-------- --------
Total liabilities 130,778 126,911
STOCKHOLDERS' DEFICIT
Common stock--$.01 par value; shares authorized--40,000;
shares issued and outstanding--20,000 -- --
Redeemable convertible cumulative preferred stock--voting $.01 par value;
shares authorized--10,000, shares issued and outstanding--1,666.67
(aggregate liquidation preference of $2,686 and $2,799, respectively,
including dividends in arrears) -- --
Additional paid-in capital 42,520 42,520
Accumulated deficit (84,361) (81,507)
Accumulated other comprehensive loss--cumulative foreign currency
<PAGE>
TRANSLATION ADJUSTMENTS (283) (525)
------- ---------
TOTAL STOCKHOLDERS' DEFICIT (42,124) (39,512)
$ 88,654 $ 87,399
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIFRAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 20,767 $ 20,588 $ 64,524 $ 62,281
COST OF GOODS SOLD 10,396 10,252 32,375 32,230
------ ------ ------ ------
Gross margin 10,371 10,336 32,149 30,051
Selling, general and
ADMINISTRATION EXPENSES 6,110 5,643 17,958 16,719
------ ------ ------ ------
Operating income 4,261 4,693 14,191 13,332
OTHER INCOME (EXPENSE), NET 123 25 226 (110)
------ ------- ------ ------
Income before interest and income taxes 4,384 4,718 14,417 13,222
INTEREST EXPENSE (3,066) (2,809) (9,108) (8,598)
------ ------- ------- ------
Income before income taxes 1,318 1,909 5,309 4,624
PROVISION FOR INCOME TAXES 389 713 1,509 1,770
------ ------- ------- ------
NET INCOME $ 929 $ 1,196 $ 3,800 $ 2,854
====== ======= ======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIFRAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,800 $ 2,854
Depreciation and amortization 4,248 4,099
Other adjustments and changes in operating assets and liabilities 1,201 3,573
------- -------
Cash provided by operating activities 9,249 10,526
INVESTING ACTIVITIES
Capital expenditures (1,772) (2,434)
Proceeds from sales of property, plant and equipment 45 30
------- -------
Cash used in investing activities (1,727) (2,404)
FINANCING ACTIVITIES
Repurchase of Senior Notes (2,000) (2,000)
Borrowings under revolving loan 17,450 19,050
Repayments of revolving loan (19,550) (20,750)
REPAYMENT OF TERM LOAN (3,000) (1,500)
------- -------
Cash used in financing activities (7,100) (5,200)
Net increase/decrease in cash 422 2,922
CASH--BEGINNING OF PERIOD 359 43
------- -------
CASH--END OF PERIOD $ 781 $ 2,965
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Unifrax Corporation (the "Company" or "Unifrax") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Results for the period ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and the notes thereto for the year ended December 31, 1998, included
in the Company's annual report on Form 10-K filed with the Securities and
Exchange Commission. All capitalized terms used in these notes to condensed
consolidated financial statements that are not defined herein have the meanings
given to them in such consolidated financial statements and notes to
consolidated financial statements.
NOTE B - INVENTORIES
The components of inventory consist of the following (in thousands):
December 31 September 30
1998 1999
---- ----
Raw materials and supplies $3,459 $3,264
Work in process 2,008 1,511
FINISHED PRODUCTS 4,341 3,753
------- -------
9,808 8,528
ADJUSTMENT TO LIFO COST 535 444
------ ------
$10,343 $8,972
====== =====
<PAGE>
NOTE C - CONTINGENCIES
CERAMIC FIBERS
Regulatory agencies and others, including the Company, are currently conducting
scientific research to determine the potential health impact resulting from the
inhalation of airborne ceramic fibers. To date, studies of workers with
occupational exposure to airborne ceramic fiber have found no clinically
significant relationship between prior or current exposure to ceramic fiber and
disease in humans; however, independent animal studies have indicated that
ceramic fiber inhaled by test animals at elevated doses can produce respiratory
disease, including cancer. The results of this research have been inconclusive
as to whether or not ceramic fiber exposure presents an unreasonable risk to
humans.
From time to time Carborundum, as predecessor to Unifrax, and other
manufacturers of ceramic fibers have been named as defendants in lawsuits
alleging death or personal injury as a result of exposure in the manufacture and
handling of ceramic fiber and other products. The amount of any liability that
might ultimately exist with respect to these claims or any other unasserted
claims is presently not determinable. The Company believes the lawsuits brought
against The Carborundum Company have been without merit and the litigation
currently pending, or to its knowledge threatened, will not have a material
adverse effect on the financial condition or results of operations of the
Company. The Company's belief is based on the fact that, although animal studies
have indicated that ceramic fiber inhaled by test animals at elevated doses can
cause disease, there is no evidence that exposure to refractory ceramic fiber
has resulted in disease in humans.
Consistent with customary practice among manufacturers of ceramic fiber
products, Carborundum entered into agreements with distributors of its product
whereby Carborundum agreed to indemnify the distributors against losses
resulting from ceramic fiber claims and the costs to defend against such claims.
To the best of the Company's knowledge, there have been no historical, nor are
there any current, ceramic fiber exposure claims made against these
indemnification agreements. Consequently, the amount of any liability that might
ultimately exist with respect to these indemnities is presently not
determinable.
Pursuant to the Recapitalization Agreement, BP America Inc. and certain of its
affiliates (collectively "BP America"), has agreed to indemnify the Company
against liabilities for personal injury and wrongful death attributable to
exposure which occurred prior to the Closing to refractory ceramic fibers
manufactured by the Company. BP America has agreed to indemnify the Company
against all liabilities arising from exposure claims pending at the time of the
Closing. For all other claims arising from alleged exposure occurring solely
prior to Closing, BP America has agreed to indemnify the Company against 80% of
all losses, until the total loss which the Company incurs reaches $3.0 million,
after which time BP America has agreed to indemnify the Company against 100% of
such losses. BP America has agreed to indemnify the Company against all punitive
damages attributable to the conduct of the Company prior to Closing. Where
losses arise from alleged exposure both before and after Closing, the losses
will be allocated between BP America and the Company, pro rata, based on the
length of exposure or pursuant to arbitration if initiated by the Company. To
date the Company has incurred no claims losses applicable to the $3.0 million
total mentioned above.
The Company cannot avail itself of this indemnity for losses attributable to the
Company's failure to maintain a Product Stewardship Program consistent with the
program maintained by the Company prior to Closing, as modified in a
commercially reasonable manner in accordance with changing regulatory,
scientific and technical factors. BP shall not indemnify the Company with
respect to any liabilities for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product Stewardship Program
consistent with that maintained by the Company prior to the Closing. In the
Company's opinion, the Product Stewardship Program has been maintained in a
manner consistent with these requirements. Unifrax intends to defend ceramic
fiber claims vigorously.
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to loss contingencies pursuant to various federal, state
and local environmental laws and regulations. These include possible obligations
to remove or mitigate the effects on the environment of the placement, storage,
disposal or release of certain chemical or petroleum substances by the Company
or by other parties.
The Company may be named as a potentially responsible party ("PRP") pursuant to
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended ("CERCLA" or "Superfund") or comparable state law in connection with
off-site disposal of hazardous substances at three sites, and The Carborundum
Company has entered into a Consent Decree with the New York State Department of
Environmental Conservation to remediate contamination at the facility located in
Sanborn, New York. While the Company's ultimate clean-up liability at the sites
at which the Company is a potential PRP is not presently determinable, the
Company does not expect to incur any material liability with respect to any of
these sites, individually or in the aggregate, as a result of its activities at
these sites. Furthermore, BP America has agreed to indemnify the Company for
certain environmental liabilities, which might ultimately exist, under the
Recapitalization Agreement. In addition, BP America has assumed liability for
other potential off-site clean-up obligations associated with Carborundum. The
locations 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. In 1999,
BP America made a de minimus payment which substantially settled its
environmental obligations for this site. 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 include $1.7 million for installation of a water line. The Company's share
of that cost is less than $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.
<PAGE>
SANBORN SITE. Under the terms of an agreement with BP America, Unifrax leases a
portion of the present manufacturing facilities on this site. The Carborundum
Company's Sanborn, New York, site was used by a number of former Carborundum
operations. Testing in the area has found that contamination by volatile organic
compounds is present in the soil and groundwater. Neither past nor current
operations of Unifrax are believed to have contributed to, or to be contributing
to, the existence of this contamination. While The Carborundum Company entered
into a Consent Decree with the State of New York under which it was to conduct
remedial activities at the site, BP America has taken title to and assumed
liability for the remediation of this property as of October 30, 1996. Efforts
to remediate the groundwater at this site are expected to continue for some
time.
Under the terms of the Recapitalization Agreement, BP America assumed liability,
and the rights to recovery from third parties, for environmental remediation and
other similar required actions with respect to certain environmental obligations
of Unifrax, including the above, which existed as of the Closing Date.
The Company may, in the future, be involved in further environmental assessments
or clean-ups. While the ultimate requirement for any such remediation, and its
cost, is presently not known, and while the amount of any future costs could be
material to the results of operations in the period in which they are
recognized, the Company does not expect these costs, based upon currently known
information and existing requirements, to have a material adverse effect on its
financial position.
LEGAL PROCEEDINGS
In addition to the ceramic fiber and environmental matters discussed above,
BP/Carborundum and Unifrax are involved in litigation relating to various claims
arising out of their operations in the normal course of business, including
product liability claims. While the outcomes of this litigation could be
material to the results of operations in the period recognized, based on the
current claims asserted the management of the Company believes that the ultimate
liability, if any, resulting from such matters will not have a material adverse
effect on the Company's financial position.
The Carborundum Company has been named in numerous legal claims alleging
pre-Closing asbestos exposure. None of the current or past products of Unifrax
are asbestos-containing materials, as defined by OSHA (29CFR1900.1001(b)). For
these claims related to pre-Closing Carborundum Company matters, BP America has
responsibility under the Recapitalization Agreement and is managing the claims
directly.
NOTE D - COMPREHENSIVE INCOME
Comprehensive income for the three-month and nine-month periods ended September
30, 1998 and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 929 $ 1,196 $ 3,800 $ 2,854
Change in foreign currency
translation adjustment 39 (19) 5 (242)
--- ----- ----- -----
Comprehensive income $ 968 $ 1,177 $ 3,805 $ 2,612
=== ===== ===== =====
</TABLE>
<PAGE>
NOTE E - INTEREST RATE SWAP AGREEMENT
Effective October 1, 1999, the company entered into interest rate swap
agreements to effectively convert fixed-rate debt with a notional principal
amount of $25,000,000 to variable-rate debt. Under the agreements the Company
receives from, or pays to, the banks an amount computed as the difference
between interest based upon a fixed rate of 6.2% per annum, and interest based
upon the established LIBOR rate, which at September 30, 1999 was 5.4%.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
Statements included in this Management Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this
document that do not relate to present or historical conditions are
"forward looking statements" within the meaning of that term in
Section 27A of the Securities Act of 1933, as amended, and of Section
21F of the Securities Exchange Act of 1934, as amended. Additional
oral or written statements may be made by the Company from time to
time, and such statements may be included in documents filed with the
Securities and Exchange Commission. Such forward looking statements
involve risks and uncertainties which could cause results or outcomes
to differ materially from those expressed in such forward looking
statements. Forward looking statements include, without limitation,
any statement that may predict, forecast, indicate or imply future
results, performance or achievements, and may contain the words
"believe", "anticipate", "expect", "estimate", "project", "will
continue", "will result", or words or phrases of similar meaning.
Among the important factors on which such statements are based are
assumptions concerning the continuing strength of the ceramic fiber
market on which the Company is substantially dependent, changing
prices for ceramic fiber products, acceptance of new products, the
status of health and safety issues affecting the ceramic fiber
industry in general and the Company in particular, the Company's
continuing ability to operate under the restrictions imposed by the
substantial indebtedness which it is subject to, the risks associated
with international operations, the impact of environmental regulations
on the Company's operations and property and related governmental
regulations, and the continuing availability of certain raw materials,
including vermiculite which is purchased from an overseas source.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the third quarter of 1999 decreased by $0.2 million or
0.9% from $20.8 million in 1998 to $20.6 million in 1999, due to lower
sales in some traditional markets including petrochemical and steel,
and in porosity controlled products resulting from changes in
automotive industry airbag system designs.
Gross profit remained unchanged at $10.3 million in both 1998 and
1999. Gross profit as a percentage of net sales increased from 49.9%
in 1998 to 50.2% in 1999, primarily as a result of improved
manufacturing efficiencies.
Selling, general and administrative expenses decreased by $0.5
million, or 7.6% from $6.1 million in 1998 to $5.6 million in 1999,
primarily as a result of lower spending in sales and marketing as a
consequence of lower sales volume, and lower administrative costs.
Selling, general and administrative expenses as a percentage of net
sales decreased from 29.4% in 1998 to 27.4% in 1999.
Operating income increased by $0.4 million, or 10.1%, from $4.3
million in 1998 to $4.7 million in 1999. Operating income as a
percentage of net sales increased from 20.5% in 1998 to 22.8% in 1999,
as a result of the factors previously indicated.
<PAGE>
Interest expense decreased by $0.3 million, or 8.4% from $3.1 million
in 1998 to $2.8 million in 1999 due primarily to the lower level of
debt in 1999. Interest expense decreased as a percentage of net sales
from 14.8% in 1998 to 13.6% in 1999.
Provision for income taxes increased by $0.3 million, or 83.3% from
$0.4 million in 1998 to $0.7 million in 1999. The effective income tax
rate increased from 29.5% in 1998 to 37.3% in 1999, primarily as a
result of recognizing, during 1998, certain deferred tax benefits
resulting from the Recapitalization and due to losses in overseas
subsidiaries for which no income tax benefit has been recognized.
Net income increased by $0.3 million or 28.7% from $0.9 million in
1998 to $1.2 million in 1999, as a result of the factors previously
indicated. Net income as a percentage of net sales increased from 4.5%
in 1998 to 5.8% in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS
ENDED SEPTEMBER 30, 1998
Net sales for the first nine months of 1999 decreased by $2.2 million
or 3.5% from $64.5 million in 1998 to $62.3 million in 1999 due to
lower sales in some traditional markets, including petrochemical and
steel, and in porosity controlled products due to changes in
automotive industry airbag system designs.
Gross profit decreased by $2.1 million or 6.5% from $32.1 million in
1998 to $30.0 million in 1999. Gross profit as a percentage of net
sales decreased from 49.8% in 1998 to 48.3% in 1999. The decrease was
due to the lower sales volume and downward price pressure in the
automotive market, and in some traditional markets.
Selling, general and administrative expenses decreased by $1.3 million
or 6.9% from $18.0 million in 1998 to $16.7 million in 1999, primarily
as a result of lower spending in sales and administration and
non-recurring reductions of liabilities associated with the product
stewardship program and retiree medical and insurance programs.
Selling, general and administrative expenses as a percentage of net
sales decreased from 27.8% in 1998 to 26.8% in 1999.
Operating income decreased by $0.9 million, or 6.1% from $14.2 million
in 1998 to $13.3 million in 1999. Operating income as a percentage of
net sales decreased from 22.0% in 1998 to 21.4% in 1999, as a result
of the factors previously indicated.
Interest expense decreased by $0.5 million or 5.6% from $9.1 million
in 1998 to $8.6 million in 1999 primarily due to the lower level of
debt in 1999. Interest expense as a percentage of net sales decreased
from 14.1% in 1998 to 13.8% in 1999.
Provision for income taxes increased $0.3 million, or 17.3%, from $1.5
million in 1998 to $1.8 million in 1999. The effective income tax rate
increased from 28.4% in 1998 to 38.3% in 1999, primarily as a result
of recognizing during 1998, certain deferred tax benefits resulting
from the Recapitalization and due to losses in overseas subsidiaries
for which no income tax benefit has been recognized.
Net income decreased by $0.9 million, or 24.9% from $3.8 million in
1998 to $2.9 million in 1999, as a result of factors previously
indicated. Net income as a percentage of net sales decreased from 5.9%
in 1998 to 4.6% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 1999, the Company's
cash provided by operating activities increased by $1.3 million or
13.8%, from $9.2 million in 1998 to $10.5 million in 1999. The higher
operating cash flow was primarily the result of a reduction in the
level of inventories.
<PAGE>
Cash used for investing activities increased $0.7 million or 39.2%
from $1.7 million in 1998 to $2.4 million in 1999. This increase was
due to higher capital spending.
Cash used for financing activities decreased by $1.9 million from $7.1
million in 1998 to $5.2 million in 1999. During 1999 the Company made
repayments of $1.5 million on its Term Loan, repurchased $2 million of
Senior Notes and repaid $1.7 million, net, of its $20 million
revolving credit facility.
The Company expects that cash on hand, cash flow from operations and
borrowings under the available credit facility will be adequate to
meet its anticipated operating requirements and planned capital
expenditures over the next 12 months. See Item 2, "Forward Looking
Statements".
LEGAL PROCEEDINGS
Reference is made to the information included in Note C to the
consolidated financial statements of the Company included under Item 1
in this Form 10-Q, which is hereby incorporated herein by reference.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result,
those computer programs would recognize a date using "00" as the year
1900 rather than the year 2000. This could have caused a system
failure or miscalculation resulting in disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities.
The Company has completed an assessment of its Year 2000 readiness and
believes it has identified all significant areas with potential
date-related problems. The Company has determined which of those
identified areas are critical to the normal operation of the business.
As of September 30, 1999, the Company believes it has completed and
put into production corrections or upgrades to all critical systems
thereby making them ready for the date change to the year 2000.
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, date rollback 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.
<PAGE>
The total Year 2000 project cost is estimated at approximately
$250,000 which includes $125,000 for the purchase of new software and
equipment that will be capitalized, and $125,000 that will be expensed
as incurred. To date the Company has incurred and expensed
approximately $100,000. All funds used for Year 2000 remediation have
been treated as a part of normal operating expenses and on-going
capital budgeting.
The costs of the project and the completion date of the remaining
items are based on management's best estimates which were derived
using numerous assumptions of future events, including the continued
availability of certain resources and other factors. However there can
be no assurance that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific
factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes
and similar uncertainties. The Company's review of the status of key
supplier's Year 2000 readiness leads management to expect that there
will be no material adverse impact in key suppliers' ability to
provide the Company with the products and services needed for the
orderly conduct of business in the year 2000 and beyond. In addition,
the Company has not been able to identify any probable indirect
material adverse impact on its operations or financial condition
likely to result from the effects of the Year 2000 problems on its
vendors, customers, agents, or other third parties, but the ability to
assess such effects is extremely limited and the failure of third
parties to appropriately address Year 2000 problems could have
material adverse effects on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1999, the Company has approximately $16 million of
variable rate long-term debt. In addition, effective October 1, 1999,
the Company entered into interest rate swap agreements to effectively
convert fixed-rate debt with a notional principal amount of $25
million to variable-rate debt. Under these agreements, the Company
makes or receives payments equal to the difference between fixed and
variable interest rate payments on the notional amount. A 1%
fluctuation in interest rates would change future annual interest
expense by approximately $405,000.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the information included in Note C to the
consolidated financial statements of the Company and included in this
Form 10-Q, which is hereby incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the period covered
by this report.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UNIFRAX CORPORATION
DATE: November 12, 1999 BY: /S/ WILLIAM P. KELLY
------------------ -------------------------------
William P. Kelly, President and
Chief Executive Officer
DATE: November 12, 1999 BY: /S/ MARK D. ROOS
----------------- -------------------------------
Mark D. Roos, Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNIFRAX
CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1999, AND THEIR CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE
PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,965
<SECURITIES> 0
<RECEIVABLES> 15,076
<ALLOWANCES> 829
<INVENTORY> 8,972
<CURRENT-ASSETS> 28,915
<PP&E> 75,199
<DEPRECIATION> (40,164)
<TOTAL-ASSETS> 87,399
<CURRENT-LIABILITIES> 27,406
<BONDS> 96,000
<COMMON> 0
0
0
<OTHER-SE> (39,512)
<TOTAL-LIABILITY-AND-EQUITY> 87,399
<SALES> 62,281
<TOTAL-REVENUES> 62,281
<CGS> 32,230
<TOTAL-COSTS> 32,230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 737
<INTEREST-EXPENSE> 8,598
<INCOME-PRETAX> 4,624
<INCOME-TAX> 1,770
<INCOME-CONTINUING> 2,854
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,854
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
