10-Q 1 l00438ae10vq.txt UNIFRAX CORPORATION 03-31-2003 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 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

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNIFRAX CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands, except share and per share amounts)

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)

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

UNIFRAX CORP 10-Q