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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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
OF INCORPORATION) IDENTIFICATION NO.)
2351 WHIRLPOOL STREET, NIAGARA FALLS, NY
14305-2413
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING
AREA CODE: (716) 278-3800
-------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common stock, $0.01
par value - 20,025 shares at April 15, 2003.
UNIFRAX CORPORATION
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
December 31, 2002 and March 31, 2003.......................................................1
Condensed Consolidated Statements of Income for the
Three-month periods ended March 31, 2002 and 2003..........................................2
Condensed Consolidated Statements of Cash Flows for the
Three-month periods ended March 31, 2002 and 2003..........................................3
Notes to Condensed Consolidated Financial Statements............................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................11
Item 3. Qualitative and Quantitative Disclosure About Market Risk......................................14
Item 4. Controls and Procedures........................................................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................15
Item 2. Changes in Securities and Use of Proceeds......................................................15
Item 3. Defaults on Senior Securities..................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
Item 5. Other Information..............................................................................15
Item 6. Exhibits and Reports on Form 8-K...............................................................15
Signatures..............................................................................................18
Certification...........................................................................................19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIFRAX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and per share amounts)
DECEMBER 31 MARCH 31
2002 2003
----------- ---------
ASSETS
Current assets:
Cash $ 5,962 $ 5,206
Marketable securities and investments 218 316
Accounts receivable, trade, less allowance of $1,916 and $1,611, respectively 33,089 34,399
Accounts receivable, related parties -- 90
Inventories 17,307 17,402
Deferred income taxes 1,530 1,533
Prepaid expenses and other current assets 2,153 1,806
--------- ---------
Total current assets 60,259 60,752
Property, plant and equipment at cost 127,411 129,249
Less accumulated depreciation and amortization (61,945) (64,522)
--------- ---------
65,466 64,727
Deferred income taxes 19,784 19,868
Financing costs, net of accumulated amortization of $4,683 and $4,939, respectively 856 600
Marketable securities and investments 1,876 1,984
Other assets 261 246
--------- ---------
$ 148,502 $ 148,177
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 92,679 $ 91,139
Accounts payable 11,410 9,091
Accounts payable, related parties 1,217 --
Accrued expenses 15,273 17,744
--------- ---------
Total current liabilities 120,579 117,974
Long-term debt 16,057 16,057
Accrued postretirement benefit cost 3,659 3,681
Other long-term obligations 1,623 1,797
Deferred income taxes 2,074 2,051
Minority interest 1,102 1,111
Redeemable cumulative Series A preferred stock--$0.01 par value;
non-voting; 30,000 shares authorized; 20,500 shares issued and
outstanding, at liquidation preference value 12,394 12,702
Redeemable convertible cumulative Series B preferred stock--$0.01
par value; voting; 10,000 shares authorized; 1,667 shares issued
and outstanding, at liquidation preference value 3,286 3,324
STOCKHOLDERS' DEFICIT
Common stock--$0.01 par value; 40,000 shares authorized;
20,025 shares issued and outstanding at
December 31, 2002 and March 31, 2003 respectively -- --
Additional paid-in capital 36,246 35,900
Accumulated deficit (48,402) (46,678)
Accumulated other comprehensive (loss) income (116) 258
--------- ---------
(12,272) (10,520)
--------- ---------
$ 148,502 $ 148,177
========= =========
See accompanying notes to consolidated financial statements.
1
UNIFRAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
---------------------------
2002 2003
-------- --------
Net sales $ 38,059 $ 38,838
Cost of goods sold 20,750 21,110
-------- --------
Gross profit 17,309 17,728
Selling, general and
administrative expenses 11,599 12,760
-------- --------
Operating income 5,710 4,968
Other income (expense) 63 (302)
Foreign exchange (expense) income (287) 991
-------- --------
Income before interest, income taxes
and minority interest 5,486 5,657
Interest expense (3,217) (2,995)
-------- --------
Income before income taxes and minority
interest 2,269 2,662
Provision for income taxes 711 879
-------- --------
Income before minority interest 1,558 1,783
Minority interest 61 59
-------- --------
Net Income $ 1,497 $ 1,724
======== ========
See accompanying notes to condensed consolidated financial statements.
2
UNIFRAX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
---------------------------
2002 2003
-------- --------
OPERATING ACTIVITIES
Net income $ 1,497 $ 1,724
Depreciation and amortization 2,613 2,545
Other adjustments and changes in operating assets and liabilities 675 (804)
-------- --------
Cash provided by operating activities 4,785 3,465
INVESTING ACTIVITIES
Capital expenditures (683) (713)
Proceeds from sales of marketable securities 106 93
Purchases of marketable securities (159) (293)
Other 21 (40)
-------- --------
Cash used in investing activities (715) (953)
FINANCING ACTIVITIES
Dividend paid (1,365) (1,308)
Retirement of Senior Notes (net) -- (5,552)
Borrowings under revolving loan 13,372 14,069
Repayments of revolving loan (12,167) (9,675)
Repayment of term loan (1,539) (883)
-------- --------
Cash used in financing activities (1,699) (3,349)
Net effect of exchange rate changes on cash (30) 81
-------- --------
Net change in cash 2,341 (756)
Cash--beginning of period 3,219 5,962
-------- --------
Cash--end of period $ 5,560 $ 5,206
======== ========
See accompanying notes to condensed consolidated financial statements.
3
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Unifrax Corporation ("The Company" or "Unifrax") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Results for the period ended March 31, 2003, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. For further information, refer to the consolidated financial statements
and the notes thereto for the year ended December 31, 2002, included in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. All capitalized terms used in these notes to condensed consolidated
financial statements that are not defined herein have the meanings given to them
in such consolidated financial statements and notes to consolidated financial
statements.
NOTE B - BUSINESS ACQUISITION
The Company through its UK subsidiary owns 1,328,025 shares,
amounting to 67.14% of Unifrax India Limited, (formerly Orient Cerlane Ltd), the
Company's majority-owned Indian subsidiary. In November 2002, in association
with the Indian Promotor Group, who has beneficial ownership of 25.77% of the
shares of Unifrax India Limited, Unifrax India Limited applied to the Delhi
Stock Exchange and the Stock Exchange Mumbai for delisting of Unifrax India
Limited's stock. If the delisting application is accepted, the Company is
obligated to purchase any further shares offered for sale before November 2003
by outside shareholders. No additional shares were purchased in the three months
ended March 31, 2003.
NOTE C - INVENTORIES
The components of inventory consist of the following (in thousands):
December 31 March 31
2002 2003
---------------- -----------
Raw materials and supplies $ 6,990 $ 6,674
Work in process 1,861 1,522
Finished products 7,395 8,148
----------- -----------
16,246 16,344
Adjustment to LIFO Cost 1,061 1,058
----------- -----------
$ 17,307 $ 17,402
=========== ===========
4
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE D - CONTINGENCIES
CERAMIC FIBERS
Regulatory agencies and others, including the Company, are currently
conducting scientific research and employee monitoring 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 statistically 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 or
in worker's compensation claims 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.
Consistent with customary practice among manufacturers of ceramic fiber
products, the Company has entered into agreements with distributors of its
product in the United States whereby it agreed to indemnify the U.S.
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 October 30, 1996 (the "BP 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 BP Closing. For all other claims arising from alleged
exposure occurring solely prior to the BP 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 the BP Closing. Where losses arise from alleged exposure
both before and after the BP 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
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
5
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
to maintain a Product Stewardship Program consistent with the program maintained
by the Company prior to the BP 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 BP 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.
Pursuant to a Warranty Agreement executed in conjunction with the
Acquisition, SEPR agreed to indemnify the Company, subject to certain maximums
as established in the Warranty Agreement, against losses resulting from alleged
or actual exposure to ceramic fibers which occurred prior to October 4, 2000
(the "SEPR Closing"). Where losses arise from alleged exposure both before and
after the SEPR Closing, the losses will be determined pro rata, temporis.
ENVIRONMENTAL MATTERS
The Company is subject to loss contingencies pursuant to various
federal, state and local environmental laws and regulations and is currently
involved in several actions regarding the clean-up of disposal sites alleged to
contain hazardous and/or toxic wastes generated over a number of years. 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. In addition, 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 various sites 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 in
the U.S. and the Carborundum Sanborn, New York facility are described below.
Kline Trail Site. In 1984, the Company voluntarily advised the State of
Indiana of potential unauthorized disposal of waste at an Indiana site by a
transporter. No response from the state has been received, and no further
information about the potential for remediation costs at the site has been
received by the Company. It is expected that little or no liability will be
associated with this site.
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 less than $100,000. The owner of the adjacent
facility has assumed the bulk of site remediation costs to date. It is
anticipated that site remediation will ultimately involve installing a clay cap
over the site, the cost of which is not yet known.
Sanborn Site. Under the terms of an agreement with BP America, Unifrax
leases a portion of the
6
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
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 groundwater pumping and water treatment, 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 BP Closing.
Pursuant to the Warranty Agreement executed in conjunction with the
sale of its ceramic fiber business to Unifrax, SEPR also agreed to indemnify the
Company against certain environmental liabilities related to activities
conducted at the various acquired sites prior to the SEPR Closing, subject to
certain maximums as established in the Warranty Agreement.
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, will have a material
adverse effect on its financial position.
LEGAL PROCEEDINGS
In addition to the ceramic fiber and environmental matters discussed
above, BP/Carborundum and Unifrax are involved in litigation relating to various
claims arising out of their operations in the normal course of business,
including product liability claims. In addition, the Company has recently been
named in a lawsuit alleging patent infringement. The Company is also involved in
two employment-related legal claims, the outcomes of which are currently not
expected to be material to the Company. While the outcomes of these various
litigations 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-BP Closing asbestos exposure. None of the current or past
Unifrax-related products are asbestos-containing materials, as defined by OSHA
(29CFR1900.1001(b)). For these claims related to pre-BP Closing Carborundum
Company matters, BP America has responsibility under the Recapitalization
Agreement and is managing the claims directly.
Also, SEPR has indemnified Unifrax for any future asbestos claims which
may arise related to alleged pre-SEPR Closing asbestos exposures associated with
products or sites sold by SEPR to Unifrax.
7
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE E - LONG TERM DEBT AND SELLER NOTE
Long term debt consists of the following (in thousands):
December 31 March 31
2002 2003
-------- --------
Credit Agreement:
Term loans
Brazil $ 3,673 $ 3,400
India 85 86
-------- --------
Total 3,758 3,486
Revolving loans
United States 17 15
United Kingdom 620 4,906
-------- --------
Total 637 4,921
10 1/2% Senior Notes due 2003 88,341 82,789
Subordinated promissory notes 16,000 16,000
-------- --------
Total debt 108,736 107,196
Less current portion 92,679 91,139
-------- --------
Long term debt $ 16,057 $ 16,057
======== ========
The Company's Credit Agreement matures on August 1, 2003, and its 10.5%
Senior Notes mature November 1, 2003. Also, the subordinated promissory notes
payable to SEPR mature on June 30, 2004. The Company has had discussions with
several financial institutions regarding the refinancing of all or a significant
portion of its indebtedness. Based on the preliminary discussions with these
banks and other lending institutions, management believes that all indebtedness
maturing in 2003 can be refinanced prior to its maturity date.
NOTE F - COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2002
and 2003 consisted of the following (in thousands):
2002 2003
----------- -----------
Net income $ 1,497 $ 1,724
Change in foreign currency
translation adjustment (639) 380
Unrealized gain on
marketable equity
securities (7) (6)
----------- ------------
Comprehensive income $ 851 $ 2,098
=========== ============
8
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE G - STOCK-BASED COMPENSATION
Effective October 30, 1996, the Company established the Unifrax
Corporation 1996 Stock Option Plan to make awards of options to purchase common
stock to officers and key employees. The company accounts for this plan under
the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income for the three-month periods ended March 31, 2002 and 2003, as if the
Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation
(in thousands):
2002 2003
------- -------
Net income, as reported $ 1,497 $ 1,724
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (29) (29)
------- -------
Pro forma net income $ 1,468 $ 1,695
======= =======
NOTE H - STOCKHOLDERS EQUITY
SERIES A PREFERRED STOCK
On December 17, 2002, the Company declared a dividend on its Redeemable
cumulative Series A preferred stock of $63.784 per share on 20,500 shares, for a
total of $1,307,575 which was subsequently paid on February 26, 2003.
NOTE I - EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the Financial Accounting Standards Board issued
FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to the
fair value method of accounting for stock-based employee compensation. In
addition, Statement 148 amends the disclosure provisions of Statement 123 to
require expanded disclosure in the summary of significant accounting policies
of the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. Statement 148's amendment of the disclosure
provisions of Statement 123 are effective for fiscal years ending after
December 15, 2002. The Company applied the new rules impacting interim
financial statements beginning in the first quarter of 2003.
On June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 143, Accounting for Asset Retirement Obligations. This standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset.
9
UNIFRAX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The Company applied the new rules beginning in the first
quarter of 2003. Application of the new rules did not impact the Company's
consolidated financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included in this Management Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this document
that do not relate to present or historical conditions are "forward looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, as amended, and of Section 21F of the Securities Exchange Act of 1934,
as amended. 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, including the
Company's ability to refinance its existing indebtedness, the risks associated
with international operations, foreign laws, and with transactions in foreign
currencies, risks associated with the impact of environmental regulations on the
Company's operations and property and related governmental regulations, and the
continuing availability of certain raw materials, including vermiculite which is
purchased from an overseas source.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
Net Sales in the first quarter of 2003 increased by $0.7 million or
2.0% from $38.1 million in 2002 to $38.8 million in 2003. Sales in the quarter
reflect the favorable currency impact in Europe offset in part by weaker demand
year-over-year in North America, particularly in furnace-related markets,
including primary metals, petrochemical, power, glass and ceramics.
Gross Profit increased by $0.4 million or 2.4% from $17.3 million in
2002 to $17.7 million in 2003. Gross Profit as a percentage of net sales
increased from 45.5% in 2002 to 45.6% in 2003.
Selling, general and administrative expenses increased by $1.2 million
or 10.0% from $11.6 million in 2002 to $12.8 million in 2003. SG&A expenses were
higher in 2003 compared to 2002 due principally to the currency effect of a
stronger Euro. SG&A expenses as a percentage of net sales increased from 30.5%
in 2002 to 32.9% in 2003.
Operating income decreased by $0.7 million or 13.0% from $5.7 million
in 2002 to $5.0 million in 2003, as a result of the factors previously
indicated. Operating income as a percentage of net sales decreased from 15.0% in
2002 to 12.8% in 2003.
11
The impact of foreign exchange changed by $1.3 million from expense of
$0.3 million in 2002 to income of $1.0 million in 2003 due primarily to the
strengthening of the Euro against the U.S. Dollar.
Interest expense decreased by $0.2 million or 6.9% from $3.2 million in
2002 to $3.0 million in 2003 due to lower levels of bank borrowings and lower
interest rates on certain variable rate borrowings. Interest expense decreased
as a percentage of net sales from 8.5% in 2002 to 7.7% in 2003.
Provision for income taxes increased by $0.2 million or 23.6% from $0.7
million on 2002 to $0.9 million in 2003. The effective income tax rate increased
from 31.3% in 2002 to 33.0% in 2003 primarily as a result of an increase in the
effective income tax rate of one of the Company's foreign subsidiaries.
Net income increased by $0.2 million or 15.2% from $1.5 million in 2002
to $1.7 million in 2003, as a result of the factors previously indicated. Net
income as a percentage of net sales increased from 3.9% in 2002 to 4.4% in 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended March 31, 2003, the Company's cash
flows from operating activities decreased by $1.3 million or 27.6%, from $4.8
million in 2002 to $3.5 million in 2003. This decrease was primarily the result
of an increase in working capital, offset in part by higher net income.
Cash used in investing activities was higher by $0.2 million, or 33.3%,
from $0.7 million in 2002 to $0.9 million in 2003, due principally to purchases
of marketable securities.
Cash used by financing activities increased by $1.6 million or 97.1%
from $1.7 million in 2002 to $3.3 million in 2003. During the first quarter of
2003 the Company paid a dividend of $1.3 million on its Redeemable cumulative
Series A preferred stock to Unifrax Holding Co., retired $5.6 million of its
Senior Notes, repaid $0.9 million of its term loans, and borrowed $4.4 million,
net, on its revolving loans.
The Company's Credit Agreement matures on August 1, 2003, and its 10.5%
Senior Notes mature November 1, 2003. Also, the subordinated promissory notes
payable to SEPR mature on June 30, 2004. The Company has had discussions with
several financial institutions regarding the refinancing of all or a significant
portion of its indebtedness. Based on the preliminary discussions with these
banks and other lending institutions, management believes that all indebtedness
maturing in 2003 can be refinanced prior to its maturity date. Furthermore,
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 the principal stockholder, Unifrax Holding Co. ("Holding"). The
results of the Company's operations are included in the consolidated U.S.
corporate income tax return of Holding. The Company's provision for U.S. 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, 2002, the Company had U.S. Federal and State net
operating loss carryforwards
12
totaling approximately $16 million which will be available to offset future
taxable income. These net operating loss carryforwards expire in 2012 through
2023.
LEGAL PROCEEDINGS
Reference is made to the information included in Note D to the
condensed consolidated financial statements of the Company included under Item 1
in this Form 10-Q, which is hereby incorporated herein by reference.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Reference is made to the information included in Note I to the
condensed consolidated financial statements of the Company included under Item 1
in this Form 10-Q, which is hereby incorporated herein by reference.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, principally changes in
interest rates and foreign currency exchange. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest rates
and foreign currency exchange. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes.
A portion of the Company's operations consists of manufacturing and
sales activities in foreign jurisdictions. The Company manufactures its products
in the United States, the United Kingdom, France, Germany, Brazil, Venezuela,
Australia, and India using materials purchased internationally, and sells into
those and other worldwide markets. Additionally, the Company operates a branch
sales office in Argentina. The Company and its subsidiaries invoice their
products both in local and foreign currencies. As a result, the Company's
financial results could be significantly affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets into which the Company sells its products. For example, when the U.K.
Pound Sterling strengthens relative to the Euro, the value of sales from the
U.K. which are denominated in Euros decreases when translated back to Sterling.
When the U.S. Dollar strengthens against other currencies, the price of
competitive imports into the U.S. from those other countries often decreases. To
mitigate the short-term effect of exchange rate changes on the Company's
purchases, sales and financial results in its various locations, the Company may
from time to time hedge its exposure to certain currencies by entering into
foreign exchange contracts. During 2002, and the three-month period ended March
31, 2003, the Company did not enter into any foreign exchange contracts.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date (the "Evaluation Date") within 90 days before
the filing date of this quarterly report, concluded that as of the Evaluation
Date the Corporation's disclosure controls and procedures were effective to
ensure that material information relating to the Corporation was being made
known to them by others within the Corporation in a timely manner, including
during the period when this quarterly report was being prepared.
There were no significant changes in the Corporation's internal
controls or, to the knowledge of the Corporation's Chief Executive Officer and
Chief Financial Officer, in other factors that could significantly affect the
Corporation's disclosure controls and procedures subsequent to the Evaluation
Date.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the information included in Note D to the
condensed consolidated financial statements of the Company and
included in this Form 10-Q, which is hereby incorporated herein by
reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed as a part of this report:
2.1(i) Unifrax Corporation Recapitalization Agreement
2.2(vii) Stock and Asset Purchase Agreement, dated as of
July 27, 2000, by and among the Company, SEPR and
certain other parties
2.3(vii) Amendment to the Stock and Asset Purchase Agreement,
dated as of October 4, 2000
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(vii) Certificate of Amendment No. 2 to Certificate of
Incorporation
3.5(i) By-laws of the Registrant
4.1(i) Form of Indenture (including form of Note)
15
4.2(i) Form of Stockholders Agreement among the Company,
BPX and Holding
4.3(iii) Amendment to Stockholders Agreement dated
September 30, 1997, among the Company, BP
Exploration (Alaska), Inc. and Holding
4.4(iii) Stock Purchase Agreement dated September 30, 1997,
between the Company and Holding
4.5(iii) Stock Purchase Agreement dated September 30, 1997,
between the Company and BP Exploration (Alaska), Inc.
4.6(vii) Amendment to Stockholders Agreement dated
October 4, 2000, between the Company, BP Exploration
(Alaska), Inc. and Holding
10.1(vii) Credit Agreement dated October 5, 2000 among Bank of
America, N.A., National City Bank, Multi Banco, S.A.,
Unifrax Corporation, NAF Brazil Ltda. and others
10.2(i)* 1996 Stock Option Plan
10.3(ii) Unifrax Corporation Noncompetition Agreement
10.4(i) Lease relating to Tonawanda plant
10.5(vi) Amendment to lease relating to Tonawanda plant
10.6(i) Lease relating to Amherst plant
10.7(i) Sanborn Lease
10.8(i) Covenant Not to Compete between The British
Petroleum Company p.l.c., its affiliates, and the
Unifrax Corporation and Societe Europeenne de
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)
10.9(i) Form of Covenant Not to Compete between Holding and
BP
10.10(i) Tax Sharing Agreement between the Company and
Holding
10.11(i) Advisory Services Agreement between the Company and
Kirtland Capital Corporation
10.12(vi)* Retirement Select Basic Plan document and Trust
Agreement
10.13(vii) Subordinated Promissory Note, dated as of October 4,
2000, issued by the Company in favor of SEPR in the
original principal amount of $8,000,000
10.14(vii) Subordinated Promissory Note, dated as of October 4,
2000, issued in favor of SEPR in the original
principal amount of $1,500,000
16
10.15(vii) Limited Recourse Promissory Note, dated as of October
4, 2000, issued in favor of SEPR in the original
principal amount of $20,200,000
10.16(vii) Limited Recourse Promissory Note, dated as of October
4, 2000, issued in favor of Carborundum do Brasil in
the original principal amount of $300,000
10.17(vii) Pledge Agreement, dated of as October 4, 2000, by
Holding in favor of SEPR
10.18(vii) Subordination Agreement, dated as of October 5, 2000,
by and among SEPR, the Company, Bank of America, N.A.
and the lenders named therein
10.19(vii) Subordination Agreement (Real Estate), dated as of
October 5, 2000, by and among SEPR, the Company, Bank
of America, N.A. and the lenders named therein
10.20(vii) Subordination Agreement, dated as of October 5, 2000,
by and among SEPR, the Company, Chase Manhattan Trust
Company, National Association and the noteholders
named therein.
99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(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.
(vi) Incorporated by reference to the exhibits filed with
Form 10-K for the fiscal year ended December 31, 1999
for Unifrax Corporation.
(vii) Incorporated by reference to the exhibits filed with
Form 8-K in connection with the SEPR Ceramic Fiber
Business acquisition filed October 19, 2000.
* 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.
17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
UNIFRAX CORPORATION
Date: 04/24/03 By: /s/ William P. Kelly
-------------------------- ----------------------------------------
William P. Kelly, President and
Chief Executive Officer
Date: 04/24/03 By: /s/ Mark D. Roos
-------------------------- ----------------------------------------
Mark D. Roos, Sr. Vice President
and Chief Financial Officer
18
CERTIFICATION
I, William P. Kelly, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Unifrax Corporation
for the period ended March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditor and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 04/24/03 By:/s/ William P. Kelly
----------------- --------------------------------------------
William P. Kelly
President & Chief Executive Officer
19
CERTIFICATION
I, Mark D. Roos, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Unifrax Corporation
for the period ended March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditor and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: 04/24/03 By:/s/ Mark D. Roos
--------- ----------------------------------------------------
Mark D. Roos
Sr. Vice President & Chief Financial Officer
20