FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1999 Commission File Number 2-36877
IREX CORPORATION
Pennsylvania 23-1712949
120 North Lime Street, Lancaster 17603
Registrant's Telephone Number, Including Area Code, (717) 397-3633
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
Common Shares Outstanding (Single Class) 432,202
IREX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements.
The condensed financial statements included herein have been prepared
by Irex Corporation (the Company), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
The financial information presented herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results
for the interim periods presented. Certain prior period amounts have
been reclassified to conform with the current presentation. The
results for interim periods are not necessarily indicative of the
results to be expected for the full year.
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31
1999 1998
(In Thousands Except Per Common Share Amounts)
Contracting Revenues $ 29,061 $ 30,433
Distribution and Other Revenues 80 40,858
Total Revenues 29,141 71,291
Cost of Revenues 23,274 56,110
Gross Profit 5,867 15,181
Selling, General and
Administrative Expenses 5,741 14,007
Operating Income 126 1,174
Interest (Income) Expense, Net (224) 490
Income Before Income Taxes 350 684
Income Tax Provision 101 270
Net Income $ 249 $ 414
Dividend Requirements
for Preferred Stock (245) (245)
NET INCOME APPLICABLE
TO COMMON STOCK $ 4 $ 169
Average Common Shares Outstanding
- Basic 432,002 396,326
Stock Options Issued to Employees
and Directors - 4,724
Average Common Shares Outstanding
- Diluted 432,002 401,050
Income Per Common Share - Basic $ 0.01 $ 0.43
Income Per Common Share - Diluted $ 0.01 $ 0.42
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
ASSETS (In Thousands)
Cash and Cash Equivalents $ 11,075 $ 10,485
Receivables, Net 26,190 29,719
Inventories 541 512
Actual Costs and Estimated Earnings
on Contracts in Process in
Excess of Billings 4,022 3,750
Prepaid Income Taxes 2,414 2,398
Other Prepaid Expenses 358 194
Deferred Income Taxes 2,543 2,543
Total Current Assets 47,143 49,601
Property and Equipment, Net 944 999
Note Receivable 3,500 3,500
Non-Current Deferred Income Taxes 3,147 3,147
Other Assets 624 624
TOTAL ASSETS $ 55,358 $ 57,871
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes Payable to Banks $ - $ 629
Accounts Payable 5,432 6,649
Billings in Excess of Actual Costs
and Estimated Earnings on Contracts
in Process 3,365 2,647
Accrued Workers' Compensation Insurance 2,334 2,342
Accrued Liabilities 8,937 10,340
Total Current Liabilities 20,068 22,607
Non-Current Liabilities 9,247 9,246
Redeemable Preferred Stock 10,490 10,490
Capital Stock 1,028 1,028
Paid-in Surplus 537 537
Retained Earnings 31,946 31,942
Cumulative Translation Adjustments (271) (292)
Notes Receivable (372) (372)
Treasury Stock at Cost (17,315) (17,315)
Total Shareholders' Investment 15,553 15,528
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $ 55,358 $ 57,871
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended March 31
1999 1998
(In Thousands)
Cash Flows from Operating Activities
Net income $ 249 $ 414
Reconciliation of net income to net
cash provided by operating activities
Depreciation and amortization 93 302
Provision for losses on accounts receivable 70 233
Decrease (increase) in current assets
Receivables 3,459 (798)
Inventories (29) 289
Prepaid income taxes and
other prepaid expenses (180) (28)
Actual costs and estimated earnings
on contracts in process in excess
of billings, net 446 (548)
(Decrease) increase in current liabilities
Accounts payable (1,080) 4,715
Accrued income taxes - (601)
Accrued liabilities and other liabilities (1,547) (1,128)
Net cash provided by
operating activities 1,481 2,850
Cash Flows from Investing Activities
Net additions to property and equipment (38) (188)
Acquisition of a certain business
Assets - (4,908)
Intangibles - (650)
Decrease in other assets 21 11
Net cash used for investing activities (17) (5,735)
Cash Flows from Financing Activities
Net (repayments on) borrowings from
revolving lines of credit (629) 2,326
Payments on long-term debt - (16)
Dividends paid (245) (245)
Exercise of stock options - 767
Net cash (used for) provided by
financing activities (874) 2,832
Net increase (decrease) in Cash
and Cash Equivalents 590 (53)
Cash and Cash Equivalents at
Beginning of Period 10,485 374
Cash and Cash Equivalents at
End of Period $11,075 $ 321
IREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements include the accounts of Irex
Corporation (the Company) and its subsidiaries, all of which are wholly
owned. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Prior to 1999, the Company consisted of two business units. The
distribution unit, which the Company spun off on December 31, 1998 (see
Note 5 for further discussion), was primarily a distributor and
fabricator of mechanical insulation, architectural/acoustical products
and specialty products. Subsequent to the spin-off, the Company
continues to operate only within the specialty contracting industry.
The subsidiaries in the specialty contracting unit primarily engage in
mechanical insulation, abatement, fire protection and interior finish
contracting.
(2) The Company has authorization for 2,000,000 shares of its common
stock with a par value of $1.00 per share. At March 31, 1999 1,028,633
shares were issued, 432,202 shares were outstanding and 596,431 shares
were held, at cost, in Treasury stock.
(3) All highly liquid investments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.
The Company's income tax and interest payments for the first three
months of 1999 and 1998 were:
1999 1998
Income Taxes: $ 117,000 $ 871,000
Interest: $ 72,000 $ 298,000
(4) On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. Comprehensive income, as
defined by SFAS No. 130, is the total of net income and all other
non-owner changes in equity. Total comprehensive income for the three
months ended March 31, 1999 and 1998 was $270,000 and $425,000,
respectively. The difference between net income and comprehensive
income for the above periods is due to cumulative translation
adjustments.
(5) On January 19, 1998, the Company announced its intention to spin
off one of its subsidiaries, Specialty Products & Insulation Co. (SPI).
The Company's Board of Directors (the Board), at its February 26, 1998
meeting, approved in principle the proposed transaction in which
shareholders of Irex common stock would receive a dividend of SPI
common stock through a pro rata distribution of 100% of SPI's capital
stock (the Distribution). On December 16, 1998, the Board granted
final approval of the spin-off to the Irex shareholders of all the
common stock of SPI (the Spin-off).
The Spin-off was effected on December 31, 1998 (the Closing Date)
through the Distribution to the Company shareholders of record at the
close of business on December 28, 1998. SPI distributed these shares
on the basis of one share of SPI Stock for every fifty Irex shares
held. SPI did not issue certificates for fractional shares in the
distribution. Instead, it canceled such shares and issued cash in lieu
of fractional shares at a rate of $2,698.09 per SPI share. No
consideration was paid by the Irex shareholders for shares of SPI
Stock.
The Company received an opinion of counsel to the effect that the
Distribution is not taxable to Irex and its shareholders for federal
income tax purposes. However, cash paid in lieu of fractional shares
of SPI Stock is taxable to the shareholders.
Immediately prior to the Spin-off, SPI declared a dividend of
$10.5 million, which was paid to the Company as the sole shareholder of
SPI. The dividend was paid by means of $7.0 million in cash and $3.5
million of junior subordinated notes of SPI. The pay-in-kind notes
bear interest at 10.5% and mature April 1, 2003. At the Closing Date,
immediately prior to the Distribution, total assets of SPI were $66.3
million and total liabilities were $64.6 million. The net investment
of the Company in SPI was $1.7 million at the Closing Date, immediately
prior to the Distribution. Additionally, SPI repaid intercompany debt
in the amount of $34.3 million immediately after the Spin-off.
On the Closing Date, immediately following the Distribution,
Evercore Capital Partners L.P., Evercore Capital Partners (NQ) L.P. and
Evercore Capital Offshore Partners L.P. (collectively, Evercore),
invested approximately $15.4 million in SPI in exchange for 7,113
shares of newly-issued SPI Common Stock at the purchase price of
$2,158.46 per share. In addition, certain officers of SPI acquired 109
shares of newly-issued Common Stock. As a result of the Distribution
and subsequent new investment, approximately 55% of SPI's Common Stock
is owned by Irex shareholders and by SPI's management, and
approximately 45% is owned by Evercore.
As a result of the Spin-off, SPI is now a separate company,
primarily concentrating on specialty product distribution/fabrication
in the construction industry. The Company and its wholly owned
subsidiaries will continue to operate within the specialty contracting
industry.
The following pro forma unaudited condensed consolidated statement
of income for the three months ended March 31, 1998 gives effect to the
Spin-off of SPI, and is presented as if the Spin-off had occurred as of
January 1, 1997.
The "Pro Forma" amounts represent the pro forma results of
operations of the Company after giving effect to the dividend received
from SPI and SPI's repayment of intercompany debt immediately after the
Spin-off and the elimination of operating results attributable to SPI
for the period presented. The pro forma unaudited condensed
consolidated statement of income may not be indicative of the results
that would have been obtained had the Spin-off actually occurred on the
date assumed nor is it necessarily indicative of the future
consolidated results of operations.
The Company's consolidated statement of income and consolidated
statement of cash flows for the three months ended March 31, 1999 do
not include SPI's operating results. In addition, the Company's
consolidated balance sheets at March 31, 1999 and December 31, 1998,
respectively, do not include the balance sheet of SPI.
IREX CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Unaudited
Pro Forma Unaudited
Historical Adjustments Pro Forma
(In Thousands Except Share and Per Share Amounts)
Revenues $ 71,291 $ (40,727) (a) $ 30,564
Cost of Revenues 56,110 (31,367) (a) 24,743
Gross Profit 15,181 (9,360) 5,821
Selling, General, and
Administrative Expenses 14,007 (7,722) (b) 6,285
Operating Income (Loss) 1,174 (1,638) (464)
Interest Expense, Net 490 (490) (c) -
Income (Loss) Before
Income Taxes 684 (1,148) (464)
Income Tax Provision (Benefit) 270 (471) (201)
Net Income (Loss) $ 414 $ (677) $ (263)
Dividend Requirements for
Preferred Stock (245) - (245)
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 169 $ (677) $ (508)
Average Common Shares
Outstanding - Basic 396,326 396,326
Effect of Stock Options Issued
to Employees and Directors 4,724 4,724
Average Common Shares
Outstanding - Diluted 401,050 401,050
Income (Loss) Per
Common Share - Basic $ 0.43 $ (1.28)
Income Per
Common Share - Diluted $ 0.42 $ (1.28)
(a) This adjustment includes only SPI's activity with respect to
third parties because intercompany sales and costs were eliminated
in the Company's consolidated statement of income. SPI's net
sales to affiliates were approximately $1.9 million for the three
months ended March 31, 1998.
(b) This adjustment includes the elimination of the costs,
approximating $206,000 for the three months ended March 31, 1998,
associated with Irex corporate personnel who became employees of SPI
during March and April of 1998. The amount also reflects fee income
from the computer services agreement under which SPI will pay a fee,
approximating $610,000 on an annualized basis, to continue utilizing
Irex's computer hardware, software and systems personnel for a period
of three years. SPI has the option to terminate the computer services
agreement after 18 months by notifying Irex six months prior to the
date of termination.
(c) This adjustment reflects the repayment of the Company's long-term
debt and paydown of its borrowings under short-term credit
facilities with funds received from SPI immediately after
the Spin-off.
(6) The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", during the fourth quarter of 1998.
SFAS No. 131 establishes standards for public companies to report
certain information about operating segments in annual financial
statements and also requires that selected information about operating
segments be included in interim financial reports to shareholders. It
also establishes standards for related disclosures about products and
services, including the geographic areas in which business is
conducted.
Operating segments are defined as components of an enterprise
about which discrete financial information is available, and whose
operating results are regularly evaluated by the chief operating
decision maker (or group that functions in such capacity) in assessing
performance and deciding how to allocate resources. The Company's
chief operating decision-making group is the Management Council which,
prior to the spin off of its distribution subsidiary, consisted of the
Company's president (Chief Executive Officer), two senior vice
presidents (General Counsel/Secretary and Finance/Administration) and
the presidents of each of the Company's operating subsidiaries.
Prior to the spin-off of SPI, the Company consisted of two
distinct strategic business units: a specialty contracting group and a
distribution/fabrication group. Subsequent to the December 31, 1998
spin-off, the Company's only business unit is the specialty contracting
group.
The Company's reportable operating segments for the three months
ended March 31, 1998 include Distribution, Contracting and Other. The
Distribution segment consists of SPI, which is primarily a distributor
and fabricator of mechanical insulation, architectural/acoustical
products and specialty products. The Contracting segment includes
wholly owned subsidiaries, which primarily engage in mechanical
insulation, abatement, fire protection and interior finish contracting.
The Other segment consists of the parent company which provides various
administrative and management services to the Distribution and
Contracting segments and a Delaware investment company. As a result of
the spin-off of the distribution unit on December 31, 1998, the Company
no longer has reportable segments.
The accounting policies of the operating segments are consistent
with those described in the summary of significant accounting policies
except that the separate financial results for the operating segments
have been prepared using a management approach, which is consistent
with the basis and manner in which management internally allocates
costs associated with the Company's central administration and support.
Central administrative costs are allocated for the purpose of assisting
in making internal operating decisions. The Company evaluates
performance based on net income of the operating segments and generally
accounts for intersegment sales as if the sales were made to third
parties at current market prices.
(in thousands) Distr. Contract. Other Elimin. Total
Three Months Ended
March 31, 1998
Net revenues from
external customers $ 40,727 $ 30,564 $ - $ - $ 71,291
Intersegment net
revenues 1,942 - - (1,942) -
Total net revenues $ 42,669 $ 30,564 $ - $(1,942) $ 71,291
Depreciation and
amortization 182 76 44 - 302
Interest and
dividend income 17 - 504 (504)(a) 17
Interest expense 532 205 274 (504)(a) 507
Income tax expense
(benefit) 313 (217) 174 - 270
Net income (loss) 406 (328) 336 - 414
Segment assets 53,742 48,473 24,022 (30,790)(b) 95,447
Capital expenditures 130 51 7 - 188
(a) The Distribution and Contracting segments, in addition to the
parent company, have indebtedness with Irex Financial Corporation
(IFC) in the form of long-term unsecured notes. SPI's note was
repaid December 31, 1998 as a condition of the spin-off discussed
earlier. The parent company also provides a borrowing facility for
the Distribution and Contracting segments, which receive credit for
cash deposited or charges for working capital needed. Based upon
activity within the intercompany account, the Distribution and
Contracting segments are charged interest expense.
(b) The elimination of segment assets consists primarily of
intercompany receivables.
(7) During 1992 the Company offered to exchange one share of $2.80
Cumulative Preferred Stock with a par value of $1 per share (Preferred
Stock) for each share of the Company's outstanding common stock up to a
maximum of 350,000 common shares (the Offer). A total of 349,864
common shares were exchanged on December 22, 1992 in accordance with
the Offer.
The Company's Board, at its April 29, 1999 meeting, authorized a
call of up to 160,256 shares of Preferred Stock at a call price of
$31.20 per share, plus accrued but unpaid dividends on such stock
through June 30, 1999.
All shares of Preferred Stock held of record as of May 14, 1999
will be subject to the call, except that the Company will not have the
right to redeem shares of Preferred Stock which have been continuously
and beneficially owned by the holder since the issuance of the
Preferred Stock in connection with the Offer, if such holder elects to
prohibit the redemption.
Any shares purchased by the Company pursuant to this call will
count against the Company's obligation to repurchase 1/15th of the
outstanding shares of Preferred Stock each year upon the request of
preferred shareholders. The price for future calls for redemption
declines to $30.90 on February 1, 2000 and by $0.30 each February 1
thereafter until it reaches $30.00 on February 1, 2003.
(8) Shareholders approved, via proxy vote at the Company's April 29,
1999 Annual Meeting, a Board resolution for a new Non-Qualified Stock
Option Plan for Outside Directors (the New Plan).
The New Plan provides for the grant of 2,500 options for each
non-employee director and 3,750 options for the Chairman of the Board on
January 1, 1999. The options carry an exercise price of $35.96, the
Company's book value as of that date. Options vest over a five-year
period on January 1 of each year from January 1, 1999 to January 1,
2004 in 500 share increments providing the Director is a director as of
that date; or they vest in total in the event of a major corporate
transaction. New non-employee directors or a new chairman of the board
would receive options for the balance of the five-year program
consistent with their position and offset by a reduction in their
predecessors' vested shares. These later options would be granted at
no less than the original strike price (i.e. $35.96) or such higher
strike price as may be determined by the Board.
IREX CORPORATION AND SUBSIDIARIES
March 31, 1999 and 1998
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations
As a result of the spin-off of Specialty Products & Insulation Co.
(SPI) on December 31, 1998 (see Note 5 accompanying the consolidated
financial statements), the Company's consolidated operating results for
the three months ended March 31, 1999 do not include SPI; however,
SPI's operating results are included in the consolidated statement of
income for the three months ended March 31, 1998. The following
discussion compares the Company's performance in the quarter ended
March 31, 1999 with the pro forma results of operations for the quarter
ended March 31, 1998 as presented in Note 5. The pro forma amounts
represent the Company's results of operations after giving effect to
the dividend received from SPI and SPI's repayment of intercompany debt
immediately after the spin-off and the elimination of operating results
attributable to SPI for the three months ended March 31, 1998.
Subsequent to the spin-off, the Company and its subsidiaries continue
to operate within the specialty contracting industry.
The Company achieved operating income of $126,000 in the first
quarter of 1999, an increase of almost $600,000 from the $464,000 loss
in last year's first quarter. First quarter results are typically the
Company's weakest due to seasonally lower revenue from slowed
construction activity.
Net income applicable to common shareholders, after the dividend
requirement for preferred stock, was $4,000, or $0.01 per share, in
1999 as compared to a net loss of $(508,000), or $(1.28) per common
share, in 1998. The significant improvement is mostly attributable to
a decrease in selling, general and administrative expenses as discussed
below.
Revenues
Total revenues decreased 4.7% to $29,141,000 in 1999 from
$30,564,000 in 1998. Weaker revenues from the Company's western
operations, which includes Canada operations, were partially offset by
stronger performance in the northeast operations. The changes, both
positive and negative, generally reflect conditions in localized
markets within each region. In markets where a significant backlog of
work does not exist, a lack of contracts available to bid and
competitive pricing where bid opportunities do exist, may lead to
fluctuations in revenue performance.
Gross Profit
Gross profit of $5,867,000 earned in 1999 increased only $46,000
from the $5,821,000 achieved in 1998. The gross profit margin,
however, increased significantly to 20.1% in 1999 as compared to 19.0%
last year. Approximately two-thirds of the increase is attributable to
a reduction in the cost of revenues due to favorable workers'
compensation/insurance claims experience. The Company remains focused
on and committed to incremental improvement in its safety performance.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) decreased to
19.7% of total revenues in 1999 from 20.6% in 1998. In terms of
absolute dollars, SG&A decreased 8.7% to $5,741,000 in the first
quarter of 1999 from $6,285,000 in last year's first three months. The
decrease is primarily a result of reduced personnel costs attributable
to the management and administrative support functions performed by the
corporate home office. The Company strives to maintain an overhead
structure that is flexible enough to meet the challenge of fluctuating
conditions in localized markets; the outcome is an ability to offer
competitively-priced services while remaining responsive to customer
needs.
Financial Condition and Liquidity
The Company's consolidated balance sheets at March 31, 1999 and
December 31, 1998 do not include the balance sheet of SPI. At March
31, 1999, the Company has working capital of $27.1 million and
shareholders' investment (excluding preferred stock) of $15.6 million.
Working capital at December 31, 1998 was $27.0 million and
shareholders' investment was $15.5 million. The decrease in both
accounts receivable and accounts payable from the amounts reported at
December 31, 1998 is primarily attributable to seasonally lower
revenues in the first quarter of 1999 ($29.1 million) as compared to
the fourth quarter of 1998 ($33.3 million for the contracting
operations).
The Company has no outstanding debt at March 31, 1999 as compared
to $0.6 million at December 31, 1998. The Company was required to
repay long-term debt as a result of the spin-off of SPI. The Company
used proceeds from SPI's repayment of intercompany debt to pay down
borrowings under short-term credit facilities. After the Company
repaid all debt, the remaining cash proceeds were placed in highly
liquid investments with maturities at three months or less. As a
result, the Company's consolidated income statement reflects interest
income totaling $224,000 for the quarter ended March 31, 1999.
At March 31, 1999 and December 31, 1998, the Company had unsecured
credit facilities with several banks totaling $22.5 million. There was
availability under these unsecured credit facilities for additional
borrowings of $14.6 million and $14.0 million at March 31, 1999 and
December 31, 1998, respectively. The Company expects that funds from
operations and available lines of credit will continue to provide
sufficient liquidity to meet its working capital requirements.
The Company's consolidated statements of cash flows do not include
SPI's activity for the three months ended March 31, 1999; however,
SPI's activity is included in the cash flows reported for the three
months ended March 31, 1998. Excluding SPI's operations for the three
months ended March 31, 1998, approximately $2.3 million net cash was
used for operating activities. Net cash used in the acquisition of
certain businesses is entirely attributable to SPI for the three months
ended March 31, 1998. Finally, excluding the need for funding SPI's
distribution business, net cash provided by financing activities was
approximately $2.4 million for the three months ended March 31, 1998.
Year 2000 Issue
The Company's ability to conduct its day-to-day operations is
dependent in part on an integrated software program and data-based
system (collectively, the System). The System serves as a critical
tool in carrying out functions in several key areas of the business,
including contract management, sales, financial reporting and personnel
administration.
The Company has assessed the System with respect to the Year 2000
(Y2K) issue. The Company believes that all of the relevant System
applications are Y2K compliant following the installation of an upgrade
to the System software in November 1998. On July 17, 1998, the Company
began an outsourcing arrangement under which it contracted to lease
AS400 and related data communications services from an off-site
provider. Thus, the Company is now operating on mainframe hardware
which has been certified as fully Y2K compliant by the off-site
provider.
Additional Y2K work is now concentrated on testing older PCS and
making inquiries to determine the extent of imbedded chip issues in
equipment and property that is leased by the Company. The Company has
completed its efforts with respect to embedded chip issues in property
that it owns. Less than $50,000 has been spent to date by the Company
on Y2K compliance. The Company projects that additional Y2K compliance
costs will not exceed $75,000. These costs will be expensed when
incurred and will be funded through the Company's operations.
The Company's most likely worst case scenario for Y2K is
widespread failure of external systems on which the Company relies,
such as telephone and heat. Such failures could materially lower the
volume of the Company's revenues until these failures are corrected.
The Company has sent questionnaires to major suppliers requesting
information on their Y2K compliance. Responses received to date
indicate no interruption of service based on slightly more than half of
the questionnaires having been returned as of this writing. Customers
have not yet been surveyed concerning Y2K readiness. The Company
believes that any Y2K problems encountered with suppliers and customers
can be resolved through substitution of vendors, or through reliance on
manual systems.
(a) Quantitative and Qualitative Disclosures Regarding Market Risk
The Company is subject to market risk associated with changes
in interest rates. The Company has not entered into any derivative
financial instruments to manage the above risks and the Company has not
entered into any market risk sensitive instruments for trading
purposes. The Company's debt consists of working capital lines of
credit, with various banks, having interest rates that float based on
market rates. Therefore, the outstanding balances recorded on the
balance sheet at December 31, 1998 approximate fair value. These lines
of credit are renegotiated annually.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's ACandS, Inc. subsidiary is one of a number of
defendants in pending lawsuits filed by approximately 125,000
individual claimants seeking damages for injuries allegedly caused by
exposure to asbestos fibers in insulation products used at one time by
ACandS in its business. ACandS has defenses to these actions,
including defenses based on the fact it is primarily a contracting
company in the business of installing products manufactured by others.
During the first quarter of 1999, ACandS was served with cases
involving 10,734 individual plaintiffs. In 1998, ACandS was served
with cases involving 33,154 individual plaintiffs. There were 31,489
new plaintiffs in 1997, 37,777 new plaintiffs in 1996; 44,904 new
plaintiffs in 1995, and 18,122 new plaintiffs in 1994. The filing of
multiple asbestos-related bodily injury claims against ACandS began in
approximately 1978/1979, but new filings in any single year did not
exceed 16,000 until 1993.
The bulk of the litigation against ACandS is centered in a
relatively small number of jurisdictions. In 1998, over 60 percent of
new claims filed against ACandS came from Ohio, Texas and Mississippi.
Over 80 percent were filed in these three states together with New
York, Maryland and West Virginia. These jurisdictions have
consistently produced heavy filings in recent years. It would appear
that court rules and rulings favorable to claimants in these states
encourage the filing of asbestos-related lawsuits.
The great majority of the filings are apparently the result of
screenings and other mass solicitation efforts. The lawsuits which
result from such efforts are often filed with little investigation as
to whether the claimants had any causative exposure to asbestos-containing
products associated with any particular defendant. As the scope of the
screening programs has increased, the degree of illness of the claimants
seems to have diminished.
Since the beginning of 1981, approximately 181,000 individual
claims against ACandS have been settled, dismissed or otherwise
resolved. ACandS's average cost for resolving those claims has been
low. Over half of the claims were closed without any liability payment
by ACandS. In recent years, however, the courts in many states have
given priority to the resolution of more serious cases, such as claims
by individuals diagnosed with mesothelioma, a cancer of the lining of
the lung. This has resulted in some large settlements of individual
claims in states such as New York and Maryland. In addition, the
litigation risk in jurisdictions which are difficult for defendants had
lead ACandS to block settle large numbers of claims in Texas, West
Virginia and other states.
Asbestos-related bodily injury cases filed against ACandS in
federal court have been transferred since July, 1991 to the United
States District Court for the Eastern District of Pennsylvania for
coordinated or consolidated pretrial handling. Efforts toward a
national solution of the asbestos litigation problem have been
undertaken in this multidistrict proceeding, but none has been
successful. ACandS is not aware of any serious current effort toward a
national solution.
The defense of the cases pending against ACandS is now being
handled by the Travelers Property Casualty Corp. with the participation
of other insurers that wrote coverage for ACandS. Virtually all of
ACandS's liability and defense costs for these cases are being paid by
ACandS's insurance carriers.
ACandS through final settlement agreements has secured the
commitment of a substantial amount of the considerable insurance
coverage it has for asbestos-related bodily injury claims. ACandS
believes it will secure additional coverage, if needed, from those
insurers which have not to date settled with ACandS. Two insurers
which wrote significant applicable coverage for ACandS have encountered
financial difficulties in recent years, in part because of asbestos and
environmental liabilities, but ACandS does not believe these
difficulties will affect the adequacy of the coverage available to it.
It has been more than 25 years since ACandS adopted the policy
that it would not resell, use or install asbestos-containing insulation
products. Given the length of time since this policy was established,
the increased numbers of new claims in the last several years, together
with the recent high cost of settling certain individual claims in some
jurisdictions, are troubling developments. In addition, the complexity
of the asbestos-related disease litigation makes prediction difficult.
Nevertheless, ACandS continues to effectively defend asbestos-related
bodily injury cases, and anticipates that its average disposition costs
will remain low. Management, therefore, believes that ACandS's
insurance coverage is adequate to ensure that these actions will not
have a material adverse effect on the long-term business or financial
position of the Company.
ACandS is one of a number of defendants in three actions by the
owners of buildings to recover costs associated with the replacement or
treatment of installed asbestos-containing products, one of which is an
alleged class action. One hundred three such cases against ACandS have
been dismissed and 17 have been settled. No new building-related cases
have been served on ACandS since 1994. ACandS believes that its
exposure in the three remaining cases is limited.
Insurance for the asbestos in building cases is being provided by
Travelers Property Casualty Corp. Although that part of the coverage
for these cases obtained from policies written by Aetna Casualty and
Surety Co. (now part of Travelers) has been provided under a
reservation of rights as to the availability and amount of its
coverage, necessary insurance payments have been and continue to be
made. Based on the rulings to date of courts which have considered the
availability of insurance coverage for asbestos in building claims,
ACandS does not anticipate significant problems concerning insurance
for settled or pending claims. Accordingly, ACandS believes that the
asbestos in building claims will not have a material adverse effect on
the long-term business or financial condition of the Company.
From time to time, the Company and its subsidiaries are also
parties as both plaintiff and defendant to various claims and
litigation arising in the normal course of business, including claims
concerning work performed under various contracts. In the opinion of
management, claims and litigation resulting in the normal course of
business, will not materially affect the Company's long-term business,
financial position or results of operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IREX CORPORATION
Date: May 14, 1999 /s/B. C. Werner
B. C. Werner
Controller
Duly Authorized Signer
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