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, 1999
Commission File Number: 333-10611
UNIFRAX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 34-1535916
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2351 Whirlpool Street, Niagara Falls, NY
14305-2413
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including
area code: (716) 278-3800
-------------------------------------------
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.
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, catalytic converter 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.
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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 totaled $2,734,000,
$2,770,000, and $2,586,000, or approximately 3.1%, 3.2%, and 3.0% of net sales
during the years 1997, 1998, and 1999, 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 the Thermal Ceramics
business unit of Morgan Crucible, the Premier Refractories International
business unit of Cookson Group plc., and the A.P. Green business unit of RHI AG.
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.
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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.
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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 13 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.
EMPLOYEES
As of December 31, 1999, the Company employed approximately 386 persons on
a full-time basis, Approximately 65 employees at the Company's Tonawanda plant
are members of the Paper, Allied-Industrial, Chemical and Energy Workers
International Union (PACE Local 1-2058).
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<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 186,000 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 13 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.
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<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,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $ 84,064 $ 91,631 $ 87,111 $ 85,499 $ 85,089
Income before interest and income taxes 21,448 22,429 20,039 18,338 19,101
Interest expense -- 2,246 12,537 11,988 11,335
Provision for income taxes 8,743 8,543 1,937 2,305 2,792
--------- --------- --------- --------- ---------
Net income $ 12,705 $ 11,640 $ 5,565 $ 4,045 $ 4,974
========= ========= ========= ========= =========
OTHER DATA:
EBITDA(a) $ 25,837 $ 26,771 $ 25,382 $ 23,980 $ 24,831
Depreciation and amortization 4,301 4,091 5,323 5,649 5,420
Cash Flows From Operating Activities 18,925 18,631 13,987 9,243 12,684
Cash Flows From Investing Activities (3,593) (8,579) (9,276) (3,759) (3,177)
Cash Flows From Financing Activities (15,393) (9,191) (5,250) (5,800) (9,550)
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 14,763 $ 14,022 $ 12,921 $ 4,858 $ 9,447
Long Term Debt -- 127,750 122,500 105,950 100,900
Total assets 54,239 93,391 90,462 88,654 84,578
Total liabilities 18,815 147,455 136,641 130,778 122,009
Parent company investment(b) 35,424 -- -- -- --
Stockholders' Deficit(b) -- (54,064) (46,179) (42,124) (37,431)
</TABLE>
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<PAGE>
(a) "EBITDA" means earnings from operations before interest expense, taxes,
profits or losses on sales or disposals of fixed assets, 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 its recapitalization in 1996, 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.
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RESULTS OF OPERATIONS
Year Ended December 31,
----------------------
1997 1998 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 50.7 51.2 50.3
----- ----- -----
Gross profit 49.3 48.8 49.7
Selling, general and administrative 26.3 27.3 27.0
----- ----- -----
Operating income 23.0% 21.5% 22.7%
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Net sales decreased $0.4 million or 0.5% from $85.5 million in 1998 to
$85.1 million in 1999. Several Unifrax markets for ceramic fiber, including
petrochemicals and steel remained weak throughout most of 1999. Also, sales of
porosity-controlled products continued to decline due to automotive industry
airbag design changes toward systems using less filtration.
Gross profit increased by $0.6 million, or 1.4%, from $41.7 million in 1998
to $42.3 million in 1999. Gross profit as a percentage of net sales increased
from 48.8% in 1998 to 49.7% in 1999. The increase in gross profit was due to
improved plant operating efficiencies and lower overall production costs.
Selling, general and administrative expenses decreased by $0.4 million or
1.8%, from $23.4 million in 1998 to $23.0 million in 1999 primarily as a result
of nonrecurring reductions of liabilities associated with the product
stewardship programs and retiree medical and insurance programs, and reduced
testing and development expenditures. Selling, general and administrative
expenses as a percentage of net sales decreased slightly from 27.3% in 1998 to
27.0% in 1999.
Operating income increased by $1.0 million, or 5.5%, from $18.4 million in
1998 to $19.4 million in 1999. Operating income as a percentage of net sales
increased from 21.5% in 1998 to 22.7% in 1999, as a result of the factors
previously indicated.
Other expense increased by $0.5 million, or 413.7%, from $0.1 million in
1998 to $0.6 million in 1999 due to increased foreign currency exchange losses
relative to Europe and Brazil, and increased losses on disposals of equipment.
Interest expense decreased by $0.6 million, or 5.4%, from $11.9 million in
1998 to $11.3 million in 1999 primarily as a result of the repurchase of $2.0
million of 10.5% Senior Notes and repayment of principal on the term loan and
note payable - affiliate, offset in part by increasing interest rates on certain
variable-rate borrowings. Interest expense as a percentage of net sales
decreased from 13.9% in 1998 to 13.3% in 1999.
Provision for income taxes increased $0.5 million, or 21.1%, from $2.3
million in 1998 to $2.8 million in 1999. The effective income tax rate decreased
from 36.3% in 1998 to 36.0% in 1999.
Net income increased by $1.0 million, or 23.0%, from $4.0 million in 1998
to $5.0 million in 1999, as a result of factors previously indicated. Net income
as a percentage of net sales increased from 4.7% in 1998 to 5.8% in 1999, as a
result of the factors discussed above.
EBITDA increased by $0.8 million, or 3.5%, from $24.0 million in 1998 to
$24.8 million in 1999. The increase in EBITDA is principally attributable to the
factors affecting operating income which were discussed above. EBITDA as a
percent of net sales increased from 28.1% in 1998 to 29.2% in 1999.
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<PAGE>
Capital Expenditures decreased $0.6 million, or 16.0%, from $3.8 million in
1998 to $3.2 million in 1999, due to lower spending on plant and equipment.
Capital expenditures in 1999 included projects to increase capacity, to replace
equipment and to reduce costs.
Working capital increased from $4.9 million in 1998 to $9.4 million in
1999. Decreased levels of raw materials and in-process inventories were offset
by higher accounts receivable and a reduction in the current portion of long
term debt due to the repayment of the note payable - affiliate.
Cash flows from operating activities increased $3.5 million, or 38.0%, from
$9.2 million in 1998 to $12.7 million in 1999 as a consequence of the higher net
income and inventory change discussed above offset in part by higher accounts
receivable. Cash outflows from investing activities decreased $0.6 million from
$3.8 million in 1998 to $3.2 million in 1999 due to decreased capital
expenditures. Cash outflows from financing activities increased $3.8 million
from $5.8 million in 1998 to $9.6 million in 1999.
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
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 $23.0 million in 1997 to $23.4 million in 1998 as a result of
inflation and additional testing and development expenditures for new products,
offset partially by the effects of the lower sales volume. Selling, general and
administrative expenses as a percentage of net sales increased from 26.3% in
1997 to 27.3% 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's Credit Agreement provides for 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. The Credit Agreement and the indenture for the
Company's 10.5% Senior Notes 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,
1999, the Company was in compliance with all Credit Agreement and Indenture
covenants.
During 1999 the Company made payments of principal totaling $3.8 million on
its Term Loan thereby reducing the balance outstanding from $10.0 million at
December 31, 1998 to $6.2 million at December 31, 1999. As of December 31, 1999
the Company had borrowed $4.9 million against its $20.0 million revolving credit
facility.
On March 3, 1999, the Company repurchased $2 million face value of Senior
Notes.
Management believes that cash flows from operations and borrowings under
the available credit facility will be adequate to meet the Company's operating
requirements and planned capital expenditures over the next 12 months. See
"Forward Looking Statements."
As of October 30, 1996, the Company entered into a tax sharing agreement
with its principal stockholder, Unifrax Holding Co. ("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, 1999, the Company had Federal and state net operating loss
carryforwards totaling approximately $15.5 million which will be available to
offset future taxable income. These net operating loss carryforwards expire in
2011 through 2019.
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<PAGE>
LEGAL PROCEEDINGS
Reference is made to the information included in Note 13 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
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. During 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $75,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The intended use of the
derivative and its designation as either a fair value hedge, a cash flow hedge,
or a foreign currency hedge, will determine when the gains or losses on the
derivatives are to be reported in earnings and when they are to be reported as a
component of other comprehensive income. The new standard must be adopted for
year 2000 financial reporting. The impact of compliance with SFAS No. 133 has
not yet been determined by the Company.
SUBSEQUENT EVENTS
On February 4, 2000, the Company announced that Holding had entered into a
non-binding letter of intent to explore the purchase of Carborundum Insulation
Technology, the worldwide ceramic fibers business of Compagne de Saint-Gobain.
The proposed acquisition is subject to various conditions, including the
execution of a definitive purchase agreement and the satisfactory completion of
due diligence. It is expected that the acquisition, if consummated, will be
completed by the end of the second quarter of 2000.
12
<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,
1999, and has also 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.. 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 Variable, based on LIBOR $ (112)
Senior Notes Fixed -
Interest Rate Swap Agreement Variable (250)
----
(362)
Less tax benefit 127
---
Net income reduction $ (235)
============
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Page in
Form 10K
--------
Report of Independent Auditors 15
Consolidated Balance Sheets as of December 31, 1998 and 1999 16
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999 17
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1997, 1998 and 1999 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 19
Notes to Consolidated Financial Statements 20
14
<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, 1998 and 1999, and the related consolidated
statements of income, stockholders' deficit and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 17, 2000
15
<PAGE>
Unifrax Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1999
---- ----
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash $ 43 $ -
Accounts receivable, trade, less allowance of $708
and $821, respectively 12,328 14,697
Accounts receivable, other 625 -
Inventories 10,343 9,403
Deferred income taxes 2,494 2,705
Prepaid expenses and other current assets 220 233
---------- -----------
Total current assets 26,053 27,038
Property, plant and equipment, net 36,707 35,601
Deferred income taxes 22,402 19,334
Financing costs, net of accumulated amortization of
$1,642 and $2,392, respectively 3,279 2,529
Other assets 213 76
----------- ------------
$ 88,654 $ 84,578
=========== ============
Liabilities and stockholders' deficit
Current liabilities:
Note payable--affiliate $ 7,000 $ -
Current portion of long-term debt 3,750 6,250
Accounts payable 3,306 3,642
Accrued expenses 7,139 7,699
---------- ------------
Total current liabilities 21,195 17,591
Long-term debt 105,950 100,900
Accrued postretirement benefit cost 3,472 3,356
Other long-term obligations 161 162
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 (84,361) (79,387)
Accumulated other comprehensive income-cumulative foreign
currency translation adjustment (283) (564)
---------- ------------
(42,124) (37,431)
---------- ------------
$ 88,654 $ 84,578
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Unifrax Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
December 31
1997 1998 1999
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Net sales $ 87,111 $ 85,499 $ 85,089
Cost of goods sold 44,154 43,760 42,765
--------- -------- --------
Gross profit 42,957 41,739 42,324
Selling, general and administrative expenses 22,964 23,388 22,972
--------- -------- --------
Operating income 19,993 18,351 19,352
Royalty income, net of related expenses 350 104 350
Other expense (304) (117) (601)
--------- -------- --------
Income before interest and income taxes 20,039 18,338 19,101
Interest expense (12,537) (11,988) (11,335)
--------- -------- --------
Income before income taxes 7,502 6,350 7,766
Provision for income taxes 1,937 2,305 2,792
--------- -------- --------
Net income $ 5,565 $ 4,045 $ 4,974
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Unifrax Corporation
Consolidated Statements of Stockholders' Deficit
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Preferred Paid-In Accumulated Comprehensive Stockholders'
Stock Stock Capital Deficit Income Deficit
----- ----- ------- ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ - $ - $ 40,020 $ (93,971) $ (113) $ (54,064)
Net income - - - 5,565 - 5,565
Foreign currency translation adjustment - - - - (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
Foreign currency translation adjustment - - - - 10 10
--------
Comprehensive income 4,055
-----------------------------------------------------------------------------
Balance at December 31, 1998 - - 42,520 (84,361) (283) (42,124)
Net income - - - 4,974 - 4,974
Foreign currency translation adjustment - - - - (281) (281)
--------
Comprehensive income 4,693
-----------------------------------------------------------------------------
Balance at December 31, 1999 $ - $ - $ 42,520 $ (79,387) $ (564) $ (37,431)
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Unifrax Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
December 31
1997 1998 1999
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 5,565 $ 4,045 $ 4,974
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 5,323 5,649 5,420
Provision for deferred income taxes 1,802 2,273 2,857
Loss (gain) on sales of property, plant and equipment 20 (7) 310
Changes in operating assets and liabilities:
Accounts receivable 1,136 (233) (1,678)
Inventories 2,206 (2,458) 940
Prepaid expenses and other current assets (117) 191 (13)
Accounts payable and accrued expenses (1,942) (493) 270
Accrued postretirement benefit cost 252 263 (116)
Other long-term liabilities (78) 3 1
Other (180) 10 (281)
Cash provided by operating activities 13,987 9,243 12,684
Investing activities
Capital expenditures (9,421) (3,821) (3,211)
Proceeds from sales of property, plant and equipment 145 62 34
Cash used in investing activities (9,276) (3,759) (3,177)
Financing activities
Borrowings under revolving loan 19,350 21,600 42,000
Repayments of revolving loan (16,850) (22,400) (38,800)
Repayments of long-term borrowings (7,750) (5,000) (5,750)
Repayment of amounts due affiliates - - (7,000)
Cash used in financing activities (5,250) (5,800) (9,550)
Net decrease in cash (539) (316) (43)
Cash at beginning of year 898 359 43
Cash at end of year $ 359 $ 43 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Unifrax Corporation
Notes to Consolidated Financial Statements
December 31, 1999
1. Organization And Basis Of Presentation
Prior to October 30, 1996, the date on which Unifrax Corporation ("Unifrax" or
"Company") completed a comprehensive recapitalization (the "Recapitalization"),
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"). As a result of the
Recapitalization, Unifrax Holding Co. ("Holding") and BP own 90% and 10%,
respectively, of the Company. 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.
2. Significant Accounting Policies
Certain Risks and Uncertainties
The Company manufactures heat resistant ceramic fiber products for sale
generally to automotive, commercial, and industrial customers primarily
throughout North America. Manufacturing facilities are located in Western New
York and Indiana. The Company maintains adequate allowances for potential credit
losses, performs ongoing credit evaluations, and generally does not require
collateral.
Approximately 17% of the Company's employees are represented by a labor union
and are covered under a collective bargaining agreement which expires in 2004.
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. Provisions are
recorded for probable future returns and uncollectible accounts as revenue is
recognized.
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).
20
<PAGE>
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.
Financing Costs
Financing costs are being amortized on a straight line basis over periods
ranging from 5 to 7 years.
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
As of October 30, 1996, the Company entered into a tax sharing agreement with
Holding. The results of the Company's 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 is 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.
21
<PAGE>
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 $792,000, $810,000 and $771,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Research and Development Costs
Product research and development costs are charged to expense as incurred.
Research and development expense for the years ended December 31, 1997, 1998 and
1999 was $2,734,000, $2,770,000, and $2,586,000, 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, 1997, 1998 and 1999 relating to
HSEQ and testing in connection with research and development totaled $1,253,000,
$1,738,000 and $1,374,000, respectively, and are included in selling, general
and administrative expenses in the accompanying statements of income.
Financial Instruments
The Company has entered into interest rate swap agreements to effectively
convert a portion of fixed-rate debt into variable-rate debt. All payments and
receipts under the swap agreements are recorded as adjustments to interest
expense.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The intended use of the derivative and its
designation as either a fair value hedge, a cash flow hedge, or a foreign
currency hedge, will determine when the gains or losses on the derivatives are
to be reported in earnings and when they are to be reported as a component of
other comprehensive income. The new standard must be adopted for year 2000
financial reporting. The impact of compliance with SFAS No. 133 has not yet been
determined by the Company.
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.
22
<PAGE>
3. Inventories
Major classes of inventories are as follows:
December 31
1998 1999
---- ----
(In Thousands)
Raw material and supplies $ 3,459 $ 4,006
In-process 2,008 1,480
Finished product 4,341 3,459
-------- --------
9,808 8,945
Adjustment to LIFO cost 535 458
-------- --------
$ 10,343 $ 9,403
======== ========
The cost of inventories determined on the LIFO method exceeds the current cost
of inventories principally as a result of reduced manufacturing costs.
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31
1998 1999
---- ----
(In Thousands)
Land and land improvements $ 1,982 $ 1,929
Buildings 18,793 18,761
Machinery, equipment, furniture and fixtures 50,759 51,068
Construction in progress 2,829 4,697
-------- --------
74,363 76,455
Less accumulated depreciation (37,656) (40,854)
-------- ---------
$ 36,707 $ 35,601
For the years ended December 31, 1997, 1998 and 1999, depreciation expense
amounted to $4,383,000, $4,739,000 and $4,534,000, respectively.
5. Long Term Debt and Note Payable -- Affiliate
Long term debt consists of the following:
December 31
1998 1999
---- ----
(In Thousands)
10 1/2% Senior Notes due 2003 $ 98,000 $ 96,000
Loan and Security Agreement:
Term loan 10,000 6,250
Revolving loan 1,700 4,900
--------- ---------
109,700 107,150
Less current portion 3,750 6,250
--------- ---------
Long term debt $ 105,950 $ 100,900
========= =========
23
<PAGE>
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, 1999, the Company had a letter of credit in effect of $624,000
required by the State of New York for Worker's Compensation. The weighted
average interest rate on the obligations outstanding at December 31, 1999 was
8.00% (7.04% at December 31, 1998). 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, and on March 3, 1999, the Company repurchased an additional $2 million
face value of Senior Notes.
The note payable -- affiliate, plus accrued interest at the prime lending rate,
was repaid November 1, 1999.
Maturities of long-term debt are as follows (in thousands):
2000 $ 6,250
2001 4,900
2002 -
2003 96,000
Interest payments made in 1997, 1998 and 1999 amounted to $12,417,000,
$12,031,000 and $11,813,000, respectively.
6. Fair Value of Financial Instruments
At December 31, 1998 and 1999, 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, 1998 December 31, 1999
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Assets:
Cash and cash equivalents $ 43 $ 43 $ -- $ --
Liabilities:
Long-term debt (including
current maturities) (116,700) (120,620) (107,150) (105,350)
Interest rate swap agreement -- -- -- (173)
24
<PAGE>
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 was estimated using quoted prices. The fair
value of variable rate loans approximate carrying amounts. The fair value of
interest rate swap agreements was determined using discounted cash flows.
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 the banks an amount for interest based upon a fixed rate of 6.2%
per annum, and pays the banks an amount for interest based upon the established
LIBOR rate, which at December 31, 1999 was 6.48%. All payments and receipts
under the swap agreements are recorded as adjustments to interest expense.
7. Related Party Transactions
Kirtland Capital Partners II L.P. ("Kirtland"), the principal shareholder of
Holding, and the Company have entered into an Advisory Services Agreement
pursuant to which Kirtland provides management consulting and financial advisory
services to the Company for an annual fee initially in the amount of $300,000.
The Company paid $300,000 in each of 1997, 1998, 1999 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.
8. Accrued Expenses
Accrued expenses consist of the following:
December 31
1998 1999
---- ----
(In Thousands)
Accrued compensation and employee benefits $ 2,726 $ 3,806
Ceramic fiber product stewardship and monitoring 742 536
Interest 1,989 1,913
Other 1,682 1,444
-------- ---------
$ 7,139 $ 7,699
======== =========
25
<PAGE>
9. Pension and Other Retirement Benefits
The Company sponsors a qualified defined benefit pension plan (the "Plan")
covering its hourly union employees. Benefits under this plan are based on
length of service.
The following tables summarize certain information with respect to the Plan:
December 31
1998 1999
---- ----
(In Thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 785 $ 1,023
Service cost 43 41
Interest cost 54 66
Benefits paid - (19)
Actuarial loss 33 (149)
Amendment 108 -
Benefit obligation at end of year 1,023 962
Change in Plan Assets
Fair value of plan assets at beginning of year $ 753 $ 839
Actual return on plan assets 86 106
Benefits paid - (19)
Fair value of plan assets at end of year 839 926
Funded status (184) (36)
Unrecognized prior service cost 108 101
Unrecognized actuarial gains (24) (212)
Additional minimum liability (84) -
Accrued pension obligation $ (184) $ (147)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1998 1999
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Components of Net Periodic Pension Cost
Service cost $ 55 $ 43 $ 40
Interest cost 48 54 66
Expected return on plan assets (49) (60) (66)
Amortization of unrecognized prior service cost - - 7
Net periodic pension cost $ 54 $ 37 $ 47
Discount rate 7.0% 6.5% 7.5%
Expected return on plan assets 7.0% 8.0% 8.0%
</TABLE>
Unrecognized gains and losses are amortized on a straight-line basis over a
period approximating the average remaining service period for active
participants.
26
<PAGE>
The Company also sponsors 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, $426,000 and $435,000 for the
years ended December 31, 1997, 1998 and 1999, 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 $428,000, $427,000 and $480,000 during the
years ended December 31, 1997, 1998 and 1999, respectively.
In addition to pension benefits, the Company also provides certain health care
benefits to retired employees who meet eligibility requirements. The Company's
policy is to fund other postretirement benefits as insurance premiums or claims
become due.
The following table summarizes certain information with respect to the Company's
other postretirement benefits.
<TABLE>
<CAPTION>
Year Ended December 31
1997 1998 1999
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Components of net periodic postretirement benefit cost
Service cost--benefits earned $ 214 $ 214 $ 95
Interest costs 134 159 110
Amortization of unrecognized net gain (84) (72) (90)
Amortization of unrecognized prior service cost - - 24
Curtailment gain - - (265)
------- ------- ------
Net periodic postretirement benefit expense (income) $ 264 $ 301 $ (126)
======= ======= ======
</TABLE>
December 31
1998 1999
---- ----
(In Thousands)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 2,268 $ 2,820
Service cost 214 95
Interest cost 159 110
Plan participant's contributions - 7
Curtailment - 36
Actuarial loss (gain) 182 (1,391)
Benefits paid (3) (33)
Benefit obligation at end of year 2,820 1,644
Unrecognized prior service cost - (276)
Unrecognized actuarial gains 687 1,988
Accrued postretirement benefit cost $ 3,507 $ 3,356
Weighted Average Assumptions as of December 31
Discount rate 6.5% 7.5%
27
<PAGE>
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.
The assumed annual rate of future increase in per capita cost of health care
benefits (health care cost trend rate) for 2000 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:
<TABLE>
<CAPTION>
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
(In Thousands)
<S> <C> <C>
Effect on total of service and interest cost components $ 11 $ (9)
Effect on postretirement benefit obligation 83 (72)
</TABLE>
Unrecognized gains and losses are amortized on a straight-line basis over a
period approximating the average remaining service period for active
participants.
10. Income Taxes
The provision for income taxes consists of the following:
Year Ended December 31
1997 1998 1999
---- ---- ----
(In Thousands)
Current:
Federal $ 100 $ - $ 53
State 35 32 38
------- ------- -------
135 32 91
Deferred 1,802 2,273 2,701
------- ------- -------
$ 1,937 $ 2,305 $ 2,792
======= ======= =======
The provision for income taxes differs from the amount computed by applying the
statutory income tax rate as follows:
Year Ended December 31
1997 1998 1999
---- ---- ----
(In Thousands)
Income before income taxes at 34% $ 2,551 $ 2,159 $ 2,641
Permanent income tax disallowances 66 62 63
State taxes, net of federal benefit 291 21 24
Impact of income tax rate changes on
deferred income taxes - - 2,054
Reduction of valuation allowance (1,000) - (2,078)
Other 29 63 88
-------- ------- -------
$ 1,937 $ 2,305 $ 2,792
======== ======= =======
28
<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, 1998 and 1999, the
major components of deferred tax assets and liabilities were as follows:
December 31
1998 1999
---- ----
(In Thousands)
Deferred tax liabilities
Property, plant and equipment $ - $ (866)
Deferred charges (47) -
-------- ---------
Gross deferred tax liabilities (47) (866)
Deferred tax assets
Tax goodwill and other intangible assets 26,296 23,034
Property, plant and equipment 1,559 -
Net operating loss carryforward 6,631 7,186
Accrued liabilities 1,252 1,511
Accrued postretirement benefit cost 1,389 1,275
Inventory 1,156 1,112
Other 160 209
--------- ----------
Gross deferred tax assets 38,443 34,327
Valuation allowance 13,500 11,422
--------- ----------
Deferred tax assets, net of valuation allowance 24,943 22,905
--------- ----------
Net deferred tax asset $ 24,896 $ 22,039
========= ==========
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.
At December 31, 1999, the Company has Federal and state net operating loss
carryforwards totaling approximately $15,504,000 which will be available to
offset future taxable income. These net operating loss carryforwards expire in
2011 through 2019. The Company paid $125,000, $11,000 and $80,000 for income
taxes during the years ended December 31, 1997, 1998 and 1999, respectively.
11. 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>
1997 1998 1999
---- ---- ----
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 1,236 $ 1,500
Granted - - 161 1,500 - -
Outstanding, December 31 1,075 $ 1,500 1,236 $ 1,500 1,236 $ 1,500
Exercisable, end of year 268 $ 1,500 577 $ 1,500 886 $ 1,500
</TABLE>
The weighted-average remaining contractual life of the options at December 31,
1999 is 7.04 years.
29
<PAGE>
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. The fair
value of each option on the date of grant was $453.45, which was estimated at
the date of grant using the minimum value method and 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 $5,492,000, $3,965,000 and $4,888,000 for the years ended
December 31, 1997, 1998, and 1999, 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.
12. 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
2014 and contains options which allow the Company to extend the lease term for
up to two additional five year periods. 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
$1,580,000, $1,788,000 and $1,717,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
Future minimum lease payments under all non-cancelable operating leases having a
remaining term in excess of one year as of December 31, 1999 are as follows (in
thousands):
2000 $ 821
2001 815
2002 742
2003 742
2004 672
Thereafter 5,677
-----
$ 9,469
13. 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 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 it have been without merit and the
litigation currently pending, or to its knowledge threatened, will not have a
material adverse effect on the financial condition or results of operations of
the Company. 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.
30
<PAGE>
Consistent with customary practice among manufacturers of ceramic fiber
products, the Company has entered into agreements with distributors of its
product whereby it 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"), have agreed to indemnify the Company
against liabilities for personal injury and wrongful death attributable to
exposure which occurred prior to the Closing to refractory ceramic fibers
manufactured by the Company. BP America has agreed to indemnify the Company
against all liabilities arising from exposure claims pending at the time of the
Closing. For all other claims arising from alleged exposure occurring solely
prior to Closing, BP America has agreed to indemnify the Company against 80% of
all losses, until the total loss which the Company incurs reaches $3.0 million,
after which time BP America has agreed to indemnify the Company against 100% of
such losses. BP America has agreed to indemnify the Company against all punitive
damages attributable to the conduct of the Company prior to Closing. Where
losses arise from alleged exposure both before and after closing, the losses
will be allocated between BP America and the Company, pro rata, based on the
length of exposure or pursuant to arbitration if initiated by the Company. To
date the Company has incurred no claims losses applicable to the $3.0 million
total mentioned above.
The Company cannot avail itself of this indemnity for losses attributable to the
Company's failure to maintain a Product Stewardship Program consistent with the
program maintained by the Company prior to Closing, as modified in a
commercially reasonable manner in accordance with changing regulatory,
scientific and technical factors. BP shall not indemnify the Company with
respect to any liabilities for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product Stewardship Program
consistent with that maintained by the Company prior to the Closing. In the
Company's opinion, the Product Stewardship Program has been maintained in a
manner consistent with these requirements. Unifrax intends to defend ceramic
fiber claims vigorously.
Environmental Matters
The Company is subject to loss contingencies pursuant to various federal, state
and local environmental laws and regulations. These include possible obligations
to remove or mitigate the effects on the environment of the placement, storage,
disposal or release of certain chemical or petroleum substances by the Company
or by other parties.
The Company may be named as a potentially responsible party ("PRP") pursuant to
the Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended ("CERCLA" or "Superfund") or comparable state law in connection with
off-site disposal of hazardous substances at three sites, and The Carborundum
Company has entered into a Consent Decree with the New York State Department of
Environmental Conservation to remediate contamination at the facility located in
Sanborn, New York. While the Company's ultimate clean-up liability at the sites
at which the Company is a potential PRP is not presently determinable, the
Company does not expect to incur any material liability with respect to any of
these sites, individually or in the aggregate, as a result of its activities at
these sites. Furthermore, BP America has agreed to indemnify the Company for
certain environmental liabilities, which might ultimately exist, under the
Recapitalization Agreement. In addition, BP America has assumed liability for
other potential off-site clean-up obligations associated with Carborundum. The
locations at which the Company has maintained potential off-site liability and
the Carborundum Sanborn, New York facility are described below.
31
<PAGE>
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 Company 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 clean-up 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 the
Company 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 the Company 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.
32
<PAGE>
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.
14. 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 $336,250 at December 31, 1999 or $224 per share
($186,250 or $124 per share at December 31, 1998).
15. Subsequent Events
On February 4, 2000, the Company announced that its parent company, Unifrax
Holding Co., had entered into a non-binding letter of intent to explore the
purchase of Carborundum Insulation Technology, the worldwide ceramic fibers
business of Compagne de Saint-Gobain. The proposed acquisition is subject to
various conditions, including the execution of a definitive purchase agreement
and the satisfactory completion of due diligence. It is expected that the
acquisition, if consummated, will be completed by the end of the second quarter
of 2000.
33
<PAGE>
Schedule II
Valuation and Qualifying Accounts
Unifrax Corporation
(Dollars In Thousands)
<TABLE>
<CAPTION>
Balance
at Charged to Balance at
Beginning Charged to Other End of
of Period Expense Accounts Deductions Period
--------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 382 $ (1) $ - $ 1(a) $ 380
Allowance for return 326 938 - 823(b) 441
------- -------- ------ ------ -------
TOTAL $ 708 $ 937 $ - $ 824 $ 821
======= ======== ====== ====== =======
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
======= ======= ====== ====== ======
</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.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
William P. Kelly 50 Director, President and Chief Executive Officer
Mark D. Roos 44 Vice President and Chief Financial Officer
David E. Brooks 50 Vice President, Sales and Marketing
Kevin J. O'Gorman 49 Vice President, Operations
Paul J. Viola 44 Vice President, Acquisitions and Strategic Development
Paul M. Boymel 47 Vice President, Technology
Joseph J. Kuchera 42 Vice President, Human Resources
John E. Pilecki 47 Vice President, Engineering and Purchasing
James E. Cason 45 Vice President, Risk Management
Raymond A. Lancaster 54 Director
William D. Manning, Jr. 65 Director
John G. Nestor 55 Chairman of the Board
John F. Turben 64 Director
Edmund S. Wright 57 Director
</TABLE>
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.
35
<PAGE>
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, and is a
member of Kirtland Capital Partners Advisory Board. 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, has been a Managing Partner
of Kirtland since 1995, and is a member of Kirtland Capital Partners Advisory
Board. He is Chairman of TruSeal Technologies, Inc., and a Director of Fairmount
Minerals Ltd., R Tape Corp., and Profile Metal Forming, Inc.
Mr. Turben has been with Kirtland since 1977 and has been a Managing
Partner of Kirtland since 1995. He is Chairman of the Board of Kirtland Capital
Corp. and serves as 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, TruSeal
Technologies, Inc., Stonebridge Industries, Inc., Gries Financial Corp., and
Instron Corp.
Mr. Wright has been affiliated with Kirtland since 1985. He is past
Chairman of Dakota Catalyst Products Inc. and from 1981 to 1994 was President
and Chief Executive Officer of North American Refractories Company. Mr. Wright
is a director of Fairmount Minerals Ltd., Glasstech, Inc., STAM, Inc. and
Stonebridge Industries, Inc.
36
<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 (the "named executive officers") for 1997, 1998 and 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Securities All
Name and ------------------- Underlying Other
Principal Position Salary Bonus Options Compensation*
- ------------------ ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
W. Kelly 1999 $ 247,913 $ -0- N/A $ 13,444
President and 1998 224,363 88,715 N/A 10,034
Chief Executive Officer 1997 211,226 -0- N/A 9,556
D. Brooks 1999 165,240 6,000 N/A 9,088
Vice President 1998 96,974 -0- N/A 5,334
Sales and Marketing 1997 N/A N/A N/A N/A
K. O'Gorman 1999 149,864 -0- N/A 8,776
Vice President, 1998 144,034 21,851 N/A 7,922
Operations 1997 128,538 -0- N/A 7,390
J. Cason 1999 135,556 -0- N/A 7,986
Vice President 1998 132,252 20,522 N/A 7,274
Risk Management 1997 128,430 -0- N/A 7,471
P. Viola 1999 128,486 -0- N/A 7,571
Vice President, 1998 124,640 19,169 N/A 6,855
Acquisitions and 1997 121,248 -0- N/A 6,668
Strategic Development
</TABLE>
* All Other Compensation includes Company match on 401k savings plan and Company
contribution to defined contribution pension plan.
37
<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 and 1998 relate to shares of common stock of Unifrax
Corporation. No options were granted in 1997 or 1999 and no options were
exercised during 1997, 1998 or 1999.
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 (a)
- ---- ------------------------- -----------------------------
W. Kelly 282.00 / 94.25 -0-
D. Brooks 80.50 / 80.75 -0-
K. O'Gorman 120.75 / 40.50 -0-
P. Viola 120.75 / 40.50 -0-
J. Cason 40.25 / 13.50 -0-
(a) There are no options that are considered to be in-the-money as of December
31, 1999.
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) 245,541 90.0% 81.0%
William P. Kelly 5,000 1.8% 1.6%
David E. Brooks 3,700 1.4% 1.2%
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% 6.0%
</TABLE>
* Less than 1.0%
38
<PAGE>
(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 Notes 1 and 13 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.
("Holding") 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.
39
<PAGE>
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 October 30,
1996.
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. Kirtland and the Company have 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.
40
<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 14
Company 14 as of December 31, 1998 and 1999, and
for the three years in the period ended December 31,
1999.
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and Qualifying Accounts 34
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 Amendment to lease relating to Tonawanda plant
41
<PAGE>
10.8(i) Lease relating to Amherst plant
10.9(i) Sanborn Lease
10.10(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
were filed separately with the Commission pursuant to a
request for confidential treatment)
10.11(i) Product Distribution Agreement between the Unifrax Corporation
and Societe Europeenne des Produits Refractaires (portions of
this Exhibit have been omitted and were filed separately with
the Commission pursuant to a request for confidential
treatment)
10.12(i) Distributed Product License Agreement between the Unifrax
Corporation and Societe Europeenne des Produits Refractaires
(portions of this Exhibit have been omitted and were filed
separately with the Commission pursuant to a request for
confidential treatment)
10.13(i) License Agreement between the Unifrax Corporation and Societe
Europeenne des Produits Refractaires (portions of this Exhibit
have been omitted and were filed separately with the
Commission pursuant to a request for confidential treatment)
10.14(i) Trademark License and Consent Agreement between the Unifrax
Corporation and Societe Europeenne des Produits Refractaires
10.15(i) Conversion Agreement between the Unifrax Corporation and
Societe Europeenne des Produits Refractaires (portions of this
Exhibit have been omitted and were filed separately with the
Commission pursuant to a request for confidential treatment)
10.16(i) XPE(TM) License Agreement between the Unifrax Corporation and
Societe Europeenne des Produits Refractaires
10.17(i) Form of Covenant Not to Compete between Holding and BP
10.18(i) Form of Stockholders Agreement among the Company,
BPX and Holding
10.19(iii) Amendment to Stockholders Agreement dated September 30, 1997,
among the Company, BP Exploration (Alaska), Inc. and Holding
10.20(iii) Stock Purchase Agreement dated September 30, 1997, between the
Company and Holding
10.21(iii) Stock Purchase Agreement dated September 30, 1997, between the
Company and BP Exploration (Alaska), Inc.
10.22(i) Tax Sharing Agreement between the Company and Holding
10.23(i) Advisory Services Agreement between the Company and Kirtland
Capital Corporation
10.24(i) Form of BP Note
10.25(v) Termination Agreement dated December 4, 1998 relative to the
Conversion Agreement and the purchase of certain assets
from SEPR
42
<PAGE>
10.26* Retirement Select Basic Plan document and Trust Agreement
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.
(v) Incorporated by reference to the exhibits filed with Form 10-K for the
fiscal year ended December 31, 1998 for Unifrax Corporation.
* Indicates a management contract or compensatory plan or arrangement.
(b) No reports on Form 8-K have been filed during the period covered by this
report.
43
<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 28, 2000.
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/William P. Kelly March 21, 2000
- ----------------------
William P. Kelly Director, President and Chief
Executive Officer (Principle
Executive Officer)
/s/Mark D. Roos March 21, 2000
- --------------------------
Mark D. Roos Vice President & Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
/s/John G. Nestor March 23, 2000
- --------------------------
John G. Nestor Chairman of the Board
/s/Raymond A. Lancaster March 22, 2000
- --------------------------
Raymond A. Lancaster Director
/s/William D. Manning, Jr. March 24, 2000
- --------------------------
William D. Manning, Jr. Director
/s/John F. Turben March 27, 2000
- --------------------------
John F. Turben Director
/s/Edmund S. Wright March 24, 2000
- --------------------------
Edmund S. Wright Director
</TABLE>
44
EXHIBIT 12.1 UNIFRAX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED
CHARGES
Year Ended December 31
1997 1998 1999
---- ---- ----
(In Thousands)
Earnings from continuing operations before
income taxes $ 7,502 6,350 $ 7,766
Fixed charges
Interest 12,537 11,988 11,335
Imputed interest on operating lease
obligations 403 381 278
------- -------- --------
12,940 12,369 11,613
Adjusted earnings available for payment of
fixed charges $20,442 $ 18,719 $ 19,379
======= ========= ========
Ratio of earnings to fixed charges 1.6 1.5 1.7
======= ========= ========
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRATION
Unifrax GmbH
Hanns-Martin-Schleyer Strasse 30
47877 Willich-Munchheide
GERMANY
NAF Brasil Ltda.
Rua 2, N.18A - Distrito Industrial Nova Era
13.347-392 - Indaiatuba - Sao Paulo - BRASIL
<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, 1999
AND THEIR CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,518
<ALLOWANCES> 821
<INVENTORY> 9,403
<CURRENT-ASSETS> 27,038
<PP&E> 76,455
<DEPRECIATION> (40,854)
<TOTAL-ASSETS> 84,578
<CURRENT-LIABILITIES> 17,591
<BONDS> 96,000
<COMMON> 0
0
0
<OTHER-SE> (37,431)
<TOTAL-LIABILITY-AND-EQUITY> 84,578
<SALES> 85,089
<TOTAL-REVENUES> 85,089
<CGS> 42,765
<TOTAL-COSTS> 42,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 938
<INTEREST-EXPENSE> 11,335
<INCOME-PRETAX> 7,766
<INCOME-TAX> 2,792
<INCOME-CONTINUING> 4,974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,974
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
