10-Q 1 l95316ae10vq.txt UNIFRAX CORPORATION 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission File Number: 333-10611 UNIFRAX CORPORATION (Exact name of registrant as specified in its charter)

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 --- --- UNIFRAX CORPORATION FORM 10-Q INDEX

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFRAX CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1 UNIFRAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements. 2 UNIFRAX CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements. 3 UNIFRAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 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 June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and the notes thereto for the year ended December 31, 2001, 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 - ACQUISITION OF SHARES IN SUBSIDIARY During February 2002, pursuant to a tender offering, the Company acquired an additional 25,050 shares of the Company's Indian subsidiary, Orient Cerlane Ltd ("OCL") at a cost of approximately $100,000. In April 2002, the Company acquired an additional 10,325 shares at a cost of approximately $30,000. Subsequent to this acquisition the Company owns 66.14% of OCL. NOTE C - INVENTORIES The components of inventory consist of the following (in thousands): December 31 June 30 2001 2002 ---------------- ----------- Raw materials and supplies $ 6,740 $ 6,026 Work in process 1,604 1,717 Finished products 7,128 7,476 ----------- ----------- 15,472 15,219 Adjustment to LIFO Cost 833 924 ----------- ----------- $ 16,305 $ 16,143 =========== =========== 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 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 4 UNIFRAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 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 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 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, 5 UNIFRAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 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 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. 6 UNIFRAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 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. 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-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. NOTE E - COMPREHENSIVE INCOME Comprehensive income for the three-month and six-month periods ended June 30, 2001 and 2002 consisted of the following (in thousands):

7 UNIFRAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 NOTE F - DERIVATIVE FINANCIAL INSTRUMENTS Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. In order to manage interest rate risk exposure, on January 30, 2002, the Company entered into an interest rate swap agreement with Bank of America N.A. which will mature November 1, 2003, to effectively convert fixed-rate debt with a notional principal amount of $25,000,000 to variable-rate debt. Under the terms of the agreement, Unifrax will receive 10.50% and will pay 3 month LIBOR plus 7.30%, compounded quarterly and paid semi-annually on the interest payment dates associated with the Senior Notes. The calculated variable rate at June 30, 2002 was 9.2125%. In accordance with Statement 133, the Company recognized the fair value of the interest rate swap agreement as a current asset, and increased the balance of its long term debt to fair value by the amount of $59,000, at June 30, 2002. NOTE G - EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company has applied the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the statement does not impact the net income of the Company. In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, the criteria for classifying an asset as held-for-sale are significantly changed from prior treatment. Assets which are to be disposed of are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. 8 UNIFRAX CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 The Company has applied this new rule beginning in the first quarter of 2002. The Company has determined that implementation of this new rule does not impact the financial position of the Company as of June 30, 2002. NOTE H - STOCKHOLDERS EQUITY COMMON STOCK During the second quarter of 2002, options to purchase 32 shares of the Company's Common Stock at $1,500 per share were exercised. Subsequently, approximately 7 of these shares were redeemed by the Company. This resulted in an increase of additional paid-in capital of approximately $46,000, including related income tax benefits of approximately $22,000. SERIES A PREFERRED STOCK On December 18, 2001, the Company declared a dividend on its Redeemable cumulative Series A preferred stock of $66.572 per share on 20,500 shares, for a total of $1,364,733 which was subsequently paid on January 31, 2002. Unifrax Holding Co. then used the proceeds of their dividend from Unifrax Corporation to pay the interest due to SEPR on the outstanding subordinated notes. NOTE I - LONG TERM DEBT AND SELLER NOTE Long term debt consists of the following (in thousands):

9 UNIFRAX CORPORATION 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 to which it is subject, 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 JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001 Net Sales in the second quarter of 2002 decreased by $2.3 million or 5.4% from $42.4 million in 2001 to $40.1 million in 2002. Sales in the quarter reflect the weaker demand year-over-year in certain markets within North America and Europe, particularly in furnace-related markets, including primary metals, petrochemical, power, glass and ceramics, offset somewhat by higher sales of Automotive Catalytic Converter Mat. Gross Profit decreased by $0.9 million or 4.4% from $20.1 million in 2001 to $19.2 million in 2002. Gross Profit as a percentage of net sales increased from 47.4% in 2001 to 47.9% in 2002. The decrease in gross profit was due to the lower sales volume. The increased overall gross profit percentage of net sales reflects the effect of the improvement in margins and lower manufacturing costs in North and South America. Selling, general and administrative expenses decreased by $0.2 million or 1.6% from $12.1 million in 2001 to $11.9 million in 2002. SG&A expenses were lower in 2002 compared to 2001 due principally to reduced volume-related expenses in 2002 combined with the fact that during 2001, the Company incurred certain one-time costs associated with the consolidation and integration of the businesses acquired during the fourth quarter of 2000 which did not recur during 2002. Selling, general, and administrative expenses as a percentage of net sales increased from 28.6% in 2001 to 29.8% in 2002. Operating income decreased by $0.7 or 8.7% from $8.0 million in 2001 to $7.3 million 2002, as a result of the factors previously indicated. Operating income as a percentage of net sales decreased from 18.8% in 2001 to 18.1% in 2002. 10 UNIFRAX CORPORATION Other income and expense increased from $0.0 million in 2001 to $0.6 million income in 2002 due primarily to exchange gains resulting from the weakness of the US Dollar against the Euro. Interest expense remained at $3.1 million in 2001 and in 2002. During June 2001, the Company received a one-time payment of interest income from Saint-Gobain of $0.5 million. Interest expense increased as a percentage of net sales from 7.3% in 2001 to 7.7% in 2002. Provision for income taxes increased by $0.3 million or 20.8% from $1.5 million in 2001 to $1.8 million in 2002. The effective income tax rate increased from 31.1% in 2001 to 38.2% in 2002 primarily as a result of the reversal, in 2001, of a portion of the deferred tax asset valuation allowance that was established in connection with the Recapitalization, which decreased the effective income tax rate of the Company's North American operations in 2001 from 38% to 35%. In addition, the complete utilization of the net operating loss carryovers in one of the Company's foreign subsidiaries in 2002, resulted in an increased effective tax rate for that country. Net income decreased by $0.4 million or 12.2% from $3.3 million in 2001 to $2.9 million in 2002, as a result of the factors previously indicated. Net income as a percentage of net sales reduced from 7.8% in 2001 to 7.2% in 2002. SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001 Net Sales in the first six months of 2002 decreased by $7.8 million or 9.1% from $86.0 million in 2001 to $78.2 million in 2002. Sales reflect the weaker demand year-over-year in North America and Europe, particularly in furnace-related markets, including primary metals, petrochemical, power, glass and ceramics, offset somewhat by higher sales of Automotive Catalytic Converter Mat. Gross profit decreased by $4.4 million or 10.8% from $40.9 million in 2001 to $36.5 million in 2002. Gross profit as a percentage of net sales decreased from 47.6% in 2001 to 46.7% in 2002. The decrease in gross profit dollars was due to the lower sales volume. The lower overall gross profit percentage is primarily the result of continued adverse competitive pressure on prices due to lower global demand, particularly in the furnace-related markets, offset somewhat by improved plant utilization in North and South America during the second quarter of 2002. Selling, general, and administrative expenses decreased by $1.4 million or 5.7% from $24.9 million in 2001 to $23.5 million in 2002. SG&A expenses were lower in 2002 compared to 2001 due principally to reduced volume-related expenses in 2002 combined with the fact that during 2001, the Company incurred certain one-time costs associated with the consolidation and integration of the businesses acquired during the fourth quarter of 2000 which did not recur during 2002. Selling, general, and administrative expenses as a percentage of net sales increased from 29.0% in 2001 to 30.1% in 2002. Operating income decreased by $3.0 million or 18.7% from $16.0 million in 2001 to $13.0 million in 2002, as a result of the factors previously indicated. Operating income as a percentage of net sales decreased from 18.5% in 2001 to 16.6% in 2002. Interest expense decreased by $0.3 million or 4.6% from $6.6 million in 2001 to $6.3 million in 2002 due to lower levels of bank borrowings and lower interest rates on certain variable rate borrowings. In addition, the Company received a one-time payment of $0.5 from Saint-Gobain in June 2001. Interest expense increased as a percentage of net sales from 7.7% in 2001 to 8.1% in 2002. 11 UNIFRAX CORPORATION Other income and expense changed by $0.5 million from an expense of $0.1 million in 2001 to an income of $0.4 million is 2002 due primarily to exchange gains resulting from the weakness of the US Dollar against the Euro. Provision for income taxes decreased by $0.5 million or 15.8% from $3.0 million in 2001 to $2.5 million in 2002. The effective income tax rate increased from 32.8% in 2001 to 36.0% in 2002, primarily as a result of the reversal, in 2001, of a portion of the deferred tax asset valuation allowance that was established in connection with the Recapitalization, which decreased the effective income tax rate of the Company's North American operations in 2001 from 38% to 35%. In addition, the complete utilization of the net operating loss carryovers in one of the Company's foreign subsidiaries in 2002, resulted in an increased effective tax rate for that country. Net income decreased by $1.7 million or 27.5% from $6.1 million in 2001 to $4.4 million in 2002, as a result of the factors previously indicated. Net income as a percentage of net sales decreased from 7.0% in 2001 to 5.6% in 2002. LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended June 30, 2002, the Company's cash flows from operating activities decreased by $7.7 million or 48.9%, from $15.8 million in 2001 to $8.1 million in 2002. This decrease was the result of lower net income before depreciation and amortization, net increases in working capital in 2002 and the one-time receipt in 2001 of $9.0 million from Saint-Gobain, associated with the reimbursement of certain liabilities relating to the acquisition of businesses in 2000. Cash used by investing activities was lower by $1.3 million, or 39.5%, from $3.2 million in 2001 to $1.9 million in 2002. This decrease was principally the result of decreased capital expenditures and a reduction in cash paid for shares of Orient Cerlane Ltd. Cash used by financing activities decreased by $4.6 million or 47.0% from $9.8 million in 2001 to $5.2 million in 2002. During the first half of 2002 the Company repaid $2.3 million on its term loans, paid a dividend of $1.4 million on its Redeemable cumulative Series A preferred stock to Unifrax Holding Co., repaid $0.1 million on its revolving loans and repurchased $1.5 million of its 10.5% Senior Notes. Management believes that cash flows from operations and the available credit facility will be sufficient to fund normal 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 its operations are now 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, 2001, the Company had Federal and State net operating loss carryforwards totaling approximately $13 million which will be available to offset future taxable income. These net operating loss carryforwards expire in 2012 through 2022. 12 UNIFRAX CORPORATION 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 PRONOUNCEMENT Reference is made to the information included in Note G 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. 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. Effective January 30, 2002, the Company entered into an interest rate swap agreement with Bank of America N.A. which will mature November 1, 2003, to effectively convert fixed-rate debt with a notional principal amount of $25,000,000 to variable-rate debt. Under the terms of the agreement, Unifrax will receive 10.50% and will pay 3 month LIBOR plus 7.30%, compounded quarterly and paid semi-annually on the interest payment dates associated with the Senior Notes. The calculated variable rate at June 30, 2002 was 9.2125%. 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 2000, 2001, and the six-month period ended June 30, 2002, the Company did not enter into any foreign exchange contracts. The significant devaluation of the Argentinean peso in the first six months of 2002 resulted in charges to earnings during the six-month period ended June 30, 2002 of $275,000. 13 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) 4.2(i) Form of Stockholders Agreement among the Company, BPX and Holding 14 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 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 15 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. 16 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: August 12, 2002 By: /s/ William P. Kelly --------------------- -------------------------------------- William P. Kelly, President and Chief Executive Officer Date: August 12, 2002 By: /s/ Mark D. Roos --------------------- -------------------------------------- Mark D. Roos, Sr. Vice President and Chief Financial Officer 17

UNIFRAX CORP 10-Q