<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-13418
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3931893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two North Riverside Plaza
Chicago, Illinois 60606
(Address of Principal Executive Office)
(312) 906-9700
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
As of October 31, 1997, Falcon Building Products, Inc. had the
following shares of its various classes of common stock outstanding:
1,009,721 shares of Class A Common Stock
6,721,537 shares of Class B Common Stock
844,273 shares of Class C Common Stock
17,000 shares of Class D Common Stock
<PAGE>
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I. Financial Information: PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 20
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 24
2
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 44.7 $ 3.9
Inventories, net 86.4 76.2
Other current assets 39.9 15.6
------ ------
Total current assets 171.0 95.7
Property, plant and equipment, net 98.0 97.4
Goodwill 57.5 59.1
Other long-term assets 31.8 9.5
------ ------
Total assets $358.3 $261.7
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion long-term debt $ 1.1 $ 15.2
Accounts payable 52.8 50.1
Accrued liabilities 35.8 30.9
------ ------
Total current liabilities 89.7 96.2
Senior indebtedness 176.6 109.1
Senior subordinated notes 250.0 --
Accrued employee benefit obligations 9.4 8.7
Other long-term liabilities 20.3 19.8
------ ------
Total liabilities 546.0 233.8
------ ------
Stockholders' equity (deficit):
Preferred stock -- --
Class A Common Stock -- 0.2
Class B Common Stock 0.1 --
Class C Common Stock -- --
Class D Common Stock -- --
Common Stock -- --
Additional paid-in capital -- 18.0
Retained earnings (deficit) (185.3) 12.8
Other (2.5) (3.1)
------ ------
Total stockholders' equity (deficit) (187.7) 27.9
------ ------
Total liabilities and stockholders' equity (deficit) $358.3 $261.7
====== ======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 172.7 $ 162.7 $ 528.6 $ 475.4
Cost of sales 143.6 132.1 434.5 385.9
--------- ---------- ---------- ----------
Gross earnings 29.1 30.6 94.1 89.5
Selling and administrative expenses 15.9 13.9 45.8 43.3
Securitization expense 1.0 1.0 3.1 3.0
Recapitalization expenses -- -- 36.3 --
--------- ---------- ---------- ----------
Operating income 12.2 15.7 8.9 43.2
Net interest expense 10.8 2.7 17.6 8.3
--------- ---------- ---------- ----------
Income (loss) before income taxes 1.4 13.0 (8.7) 34.9
Provision for income taxes 0.6 5.0 2.8 13.4
--------- ---------- ---------- ----------
Income (loss) before extraordinary item 0.8 8.0 (11.5) 21.5
Extraordinary item:
Early extinguishment of debt, net of income
tax benefit of $0.9 million -- -- (1.5) --
--------- ---------- ---------- ----------
Net income (loss) $ 0.8 $ 8.0 $ (13.0) $ 21.5
========= ========== ========== ==========
Earnings (loss)per common share:
Income (loss) before extraordinary item $ 0.10 $ 0.40 $ (0.73) $ 1.07
Extraordinary item -- -- (0.09) --
--------- ---------- ---------- ----------
Net income (loss) $ 0.10 $ 0.40 $ (0.82) $ 1.07
========= ========== ========== ==========
Weighted average shares outstanding 8,616,827 20,070,500 15,651,808 20,070,500
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (13.0) $ 21.5
Adjustments to reconcile net income (loss) to net cash
from operations:
Depreciation and amortization 13.5 12.1
Accretion of debt discount on subordinated debt 3.1 --
Recapitalization expenses 36.3 --
Early extinguishment of debt 1.5 --
Cash effect of changes in other working capital balances,
accrued employee benefit obligations, and other
long-term liabilities, excluding the effects of
acquisitions (31.7) (14.8)
-------- ------
Net cash from operating activities 9.7 18.8
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses -- (18.8)
Capital expenditures (11.7) (13.1)
Other (1.0) (0.5)
-------- ------
Net cash used in investing activities (12.7) (32.4)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior credit facilities 175.0 --
Repayment of senior credit facilities (138.8) --
Issuance of senior subordinated debt 247.0 --
Issuance of common stock 134.6 --
Retirement of common stock (337.5) --
Payment of Recapitalization fees and expenses (53.6) --
Net borrowings on debt 17.1 17.1
-------- ------
Net cash from financing activities 43.8 17.1
-------- ------
CHANGE IN CASH AND CASH EQUIVALENTS 40.8 3.5
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3.9 1.1
-------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 44.7 $ 4.6
======== ======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial Statements
of Falcon Building Products, Inc. ("Falcon" or the "Company"), have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for a complete set of financial statements. In the opinion of
management, the unaudited Condensed Consolidated Financial Statements include
all adjustments considered necessary for fair presentation, consisting only
of normal recurring adjustments (except for the effects of the
recapitalization transaction described below). Operating results for the
quarter and nine months ended September 30, 1997 are not necessarily
indicative of results that may be expected for the full year. The unaudited
Condensed Consolidated Financial Statements should be read in conjunction
with the audited Consolidated Financial Statements of the Company for the
year ended December 31, 1996.
On June 17, 1997 the Company completed a merger transaction (the
"Merger" and together with the financings described below the
"Recapitalization") with FBP Acquisition Corp. ("FBP"), a newly formed
corporation organized on behalf of INVESTCORP S.A. ("Investcorp"), certain
affiliates of Investcorp and other international investors, whereby FBP was
merged with and into Falcon, with Falcon as the surviving corporation. The
Merger resulted in Investcorp, its affiliates and certain other international
investors owning approximately 88% of the capital stock of the Company. The
Merger was accounted for as a recapitalization and as such, the historical
basis of the assets and liabilities of the Company were not affected. See
Notes 4 and 5 for further discussion of the transaction and the financing
arrangements entered into in order to consummate the Recapitalization.
Certain amounts in the Company's historical financial statements have
been reclassified to be consistent with the presentation in the current
period.
(2) INVENTORIES
Inventory consists of the following (in millions):
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
Raw materials and supplies $ 33.5 $ 30.9
Work in process 12.1 12.7
Finished goods 40.8 32.6
------- -------
$ 86.4 $ 76.2
======= =======
(3) ACCOUNTS RECEIVABLE
In connection with the Recapitalization, the Company amended its existing
receivables securitization program to increase the maximum availability from
$85 million to $100 million and to extend the program until 2002. Included in
the Company's financial statements as of September 30, 1997 in other current
assets is a net residual interest of $24.6 million associated with the $111.7
million of receivables sold under the program as of that date. The expense
incurred on the sale of the receivables under this program was $3.1 million and
$3.0 million in the nine months ended September 30, 1997 and 1996,
respectively.
6
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(4) RECAPITALIZATION
On March 20, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with FBP. The Merger Agreement contemplated
that FBP would be merged with and into Falcon and each outstanding share of
the Company's Class A Common Stock ("Class A Stock") would be converted into
either (i) $17.75 in cash (the "Cash Price"), or (ii) at the election of the
holder of the Class A Stock, the right to retain one share of Class A Stock.
On June 17, 1997, the Merger and the adoption of the Merger Agreement were
approved by the vote of a majority of the stockholders of the Class A Stock
and FBP was merged with and into Falcon, with Falcon continuing as the
surviving corporation. At the consummation of the Merger, 19,014,258 of the
then issued and outstanding shares of Class A Stock were converted into cash
and 1,034,017 shares were retained by existing stockholders. In addition,
each person who, immediately prior to the consummation of the
Recapitalization, held an option to purchase shares of the Class A Stock
received a cash payment equal to the product of (i) the difference between
the Cash Price and the option exercise price multiplied by (ii) the number of
options held by such person. Approximately $337.5 million was paid to
holders of Class A Stock who converted their shares and approximately $5.2
million was paid to persons holding options to purchase shares of Class A
Stock.
Pursuant to the Merger Agreement, the certificate of incorporation of
FBP became the certificate of incorporation of the Company (the "Restated
Certificate of Incorporation") upon the effective date of the Merger. The
Restated Certificate of Incorporation authorizes five classes of common
stock. Each issued and outstanding share of capital stock of FBP was
converted into a share of capital stock of Falcon upon the consummation of
the Recapitalization.
The following table summarizes the capital stock of the Company at
September 30, 1997:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
Title AUTHORIZED SHARES AT SEPTEMBER 30, 1997
- ----- ----------------- ---------------------
<S> <C> <C>
Class A Common Stock, par value $0.01 per share 1,034,020 1,034,017
Class B Common Stock, par value $0.01 per share 6,900,000 6,721,537
Class C Common Stock, par value $0.01 per share 2,048,980 844,273
Class D Common Stock, par value $0.01 per share 17,000 17,000
Common Stock, par value $0.01 per share 10,000,000 0
---------- ---------
Total 20,000,000 8,616,827
========== =========
</TABLE>
Holders of the Class A Stock are entitled to one vote per share and
holders of Class D Common Stock are entitled to 446 votes for each share of
such stock held. Upon the occurrence of a sale of 100% of the outstanding
equity securities of Falcon or a public offering of any equity securities of
Falcon, each share of Class A, Class B, Class C and Class D Common Stock of
the Company will convert into one share of Common Stock of the Company. The
Restated Certificate of Incorporation no longer authorizes shares of
preferred stock.
The Recapitalization was funded by (i) $175.0 million of borrowings
under the Bank Credit Facility (as defined), (ii) $145.0 million from the
offering of the Old Notes (as defined), (iii) approximately $102.0 million of
proceeds from the offering of the Old Discount Notes (as defined) and (iv) an
equity contribution by Investcorp, its affiliates and certain other
international investors of approximately $134.6 million. The proceeds from
these financings funded: the payment of approximately $337.5 million to
holders of Class A Stock who converted their shares; the payment of
approximately $5.2 million to option holders; the repayment of approximately
$138.8 million of outstanding indebtedness under the then existing credit
facility; and the payment of approximately $58.5 million of fees and expenses
associated with the Recapitalization.
The transaction was accounted for as a recapitalization and, as such,
the historical basis of the Company's assets and liabilities was not
affected. Approximately $27.4 million of costs primarily representing
financing fees were capitalized while approximately $36.3 million of costs
were expensed and are reflected as a component of operating income in the
Company's Condensed Consolidated Statements of Income. The expensed costs
represent
7
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
investment banker fees, Investcorp merger and acquisition fees, legal and
accounting fees, transaction bonuses, payments to option holders and other
miscellaneous costs incurred in connection with the Recapitalization. In
addition, the Company recorded an extraordinary charge of $1.5 million, net
of a $0.9 million income tax benefit, in connection with the repayment of its
existing credit facility.
(5) DEBT
As part of the Recapitalization, the Company entered into a new senior
credit facility with a group of banks (the "Bank Credit Facility"), and
pursuant to indentures dated June 17, 1997 (the "Indentures"), issued $145
million of 9-1/2% Series A Senior Subordinated Notes (the "Old Notes") and $170
million aggregate principal amount of 10-1/2% Series A Senior Subordinated
Discount Notes (the "Old Discount Notes" and together with the Old Notes, the
"Old Securities"). The proceeds from the Bank Credit Facility and the Old
Securities were used to finance the conversion to cash of the Class A Common
Stock, to repay the then outstanding senior credit facility and to pay the
fees and expenses associated with the Recapitalization.
Although the Old Securities were sold through a confidential placement
memorandum, in September 1997, the Company filed an exchange offer
registration statement with the Securities and Exchange Commission with
respect to certain of the Old Securities (the "Exchange Offer"). Pursuant to
the Exchange Offer, $144.0 aggregate principal amount of 9-1/2% Series B Senior
Subordinated Notes Due 2007 (the "Notes") of the Company were exchanged for a
like amount of the Old Notes and $162.8 million aggregate principal amount at
maturity of 10-1/2% Series B Senior Subordinated Discount Notes Due 2007 (the
"Discount Notes" and together with the Notes, the "Securities") of the
Company were exchanged for a like amount of the Old Discount Notes. The
Exchange Offer was made pursuant to the terms of a Registration Rights
Agreement dated June 17, 1997, by and among the Company, the Guarantors (as
defined in the agreement), and the initial purchasers of the Old Securities.
The Exchange Offer was designed to provide the holders of the Securities an
opportunity to acquire securities which, unlike the Old Securities, are
freely transferable subject to certain restrictions. As the terms of the Old
Securities and the Securities are otherwise identical, for purposes of the
discussions below, the $1.0 million of Old Notes and the $7.2 million of Old
Discount Notes which were not exchanged are considered to be part of the
Notes and Discount Notes, respectively. The Company did not receive any
proceeds from the Exchange Offer.
Certain of the Company's subsidiaries have guaranteed the Bank Credit
Facility and the Securities, such guarantee of the Securities being
subordinate to the guarantee of the Bank Credit Facility. See Note 7.
SENIOR SUBORDINATED NOTES:
9-1/2% SENIOR SUBORDINATED NOTES:
The Company's $145 million of Notes mature on June 15, 2007. Interest
on the Notes is payable semi-annually in arrears on June 15 and December 15
commencing on December 15, 1997. The Notes are general unsecured obligations
of the Company ranking subordinate in right of payment to all existing and
future senior indebtedness of the Company. The Notes will rank PARI PASSU in
right of payment with all other indebtedness of the Company that is
subordinated to senior indebtedness of the Company.
The Notes are not redeemable at the Company's option prior to June 15,
2002. The Notes are redeemable at the Company's option at 104.750% during
the 12 months beginning June 15, 2002, 103.167% during the 12 months
beginning June 15, 2003, 101.583% during the 12 months beginning June 15,
2004 and at 100% thereafter (expressed as a percentage of principal amount).
In addition, prior to June 15, 2000, up to 35% of the Notes may be redeemed
at 109.5% of the principal amount out of the proceeds of certain equity
offerings.
8
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
10-1/2% SENIOR SUBORDINATED DISCOUNT NOTES:
The $170 million aggregate principal amount of Discount Notes mature on
June 15, 2007. The issue price of each Old Discount Note was $599.82 per
$1,000 principal amount at maturity, which represents a yield to June 15,
2002 of 10.5% per annum. Cash interest will not accrue on the Discount Notes
prior to June 15, 2002. Cash interest is payable semi-annually in arrears on
June 15 and December 15 of each year at a rate of 10.5% per annum commencing
December 15, 2002. The Discount Notes are general unsecured obligations of
the Company ranking subordinate in right of payment to all existing and
future senior indebtedness of the Company. The Discount Notes will rank PARI
PASSU in right of payment with all other indebtedness of the Company that is
subordinated to senior indebtedness of the Company.
The Discount Notes are not redeemable at the Company's option prior to
June 15, 2002. The Discount Notes are redeemable at the Company's option at
105.25% during the 12 months beginning June 15, 2002, 103.50% during the 12
months beginning June 15, 2003, 101.75% during the 12 months beginning June
15, 2004 and at 100% thereafter (expressed as a percentage of principal
amount). In addition, prior to June 15, 2000, up to 35% of the Discount Notes
may be redeemed out of the proceeds of certain equity offerings at 110.5% of
the accreted value.
Upon a Change of Control (as defined in the Indentures) the Company has
the option prior to June 15, 2002 to redeem the Notes and/or the Discount
Notes in whole, but not in part, at 100% of the principal amount of the Notes
or 100% of the accreted value of the Discount Notes plus an applicable
premium in each case, as defined in the Indentures. If the Company does not
redeem the Securities or if the Change in Control occurs subsequent to June
15, 2002, each holder of the Securities may require the Company to repurchase
such holders' Securities at 101% of the aggregate principal amount of the
Notes plus accrued interest, if any, and 101% of the accreted value of the
Discount Notes plus accrued interest, if any.
The Indentures contain restrictive covenants, which among other things
limit the Company's ability to incur additional indebtedness; pay dividends
or make other restricted payments; enter into transactions with affiliates;
make certain asset dispositions; and merge or consolidate with or transfer
substantially all of its assets to another person.
SENIOR INDEBTEDNESS:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
(UNAUDITED)
(IN MILLIONS)
Bank Credit Facility
Revolver $ - $ 39.0
Term 175.0 82.5
------- -------
Total 175.0 121.5
Other 2.7 2.8
Less: Current Portion (1.1) (15.2)
------- -------
Long-term debt $ 176.6 $ 109.1
======= =======
BANK CREDIT FACILITY:
On June 17, 1997, using a portion of the proceeds from the
Recapitalization, the Company repaid and terminated its then existing senior
credit facility. An extraordinary charge of $1.5 million, net of an income
tax benefit of $0.9 million was recorded in connection with this repayment,
primarily representing the write-off of associated deferred debt issuance
costs.
The Bank Credit Facility entered into on June 17, 1997, consists of a
$175 million term loan facility which matures in June 2005 and a $125 million
revolving credit facility which matures in June 2003. The term loan was
drawn in full as part of the Recapitalization and is due in semi-annual
installments of $0.5 million from
9
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
December 1997 through June 2002, quarterly installments of $9.5 million from
December 2002 through September 2003, quarterly installments of $15.0 million
from December 2003 through September 2004, installments of $18.0 million in
December 2004 and March 2005 and a final payment at maturity of $36.0 million
in June 2005. No amounts were outstanding under the revolving portion of the
Bank Credit Facility at September 30, 1997.
Borrowings under the Bank Credit Facility bear interest at alternative
floating rate structures at management's option (8.7% for the term loan at
September 30, 1997) and are secured by all the capital stock of each of the
Company's subsidiaries and substantially all of the inventory and property,
plant and equipment of the Company and its subsidiaries other than the
Securitization SPV. The Bank Credit Facility requires an annual commitment
fee of 0.5% on the average daily unused amount of the revolving portion of
the Bank Credit Facility.
The Bank Credit Facility contains various restrictive covenants
including restrictions on additional indebtedness, mergers, asset
dispositions, dividends and other restricted payments and prepayment and
amendments of subordinated indebtedness.
(6) COMMITMENTS AND CONTINGENCIES
In May 1994, Underwriters' Laboratories of Canada ("ULC") suspended its
recognition of high temperature plastic venting ("HTPV") for gas appliances
systems, including the Ultravent-Registered Trademark- product distributed by
the Company. This action resulted from reports of problems with high
temperature plastic venting, including improper installation, cracking,
inadequate joint adhesion, and related safety hazards, including potential
for carbon monoxide emission. In June 1994, as a result of the ULC action,
the Ontario Ministry of Consumer and Commercial Relations ("MCCR") suspended
sales of HTPV in the Province of Ontario. Other provinces of Canada have
taken similar action. Pursuant to an MCCR order, appliance systems in
Ontario with HTPV have been corrected. Gas appliance manufacturers in Canada
and the United States no longer certify HTPV for use with their products. As
a result, the Company discontinued sales of its HTPV product in 1997.
Company sales of Ultravent-Registered Trademark- products in the United
States and Canada in 1995, 1996 and 1997 were minimal.
The Company is a defendant in a suit in Canada that has been filed
against 24 entities representing heating appliance manufacturers, plastic
vent manufacturers and distributors, public utilities and listing agencies
brought by the Ontario New Home Warranty Program, which is responsible for
the cost of correcting appliances equipped with HTPV in new home construction
in Ontario. This suit seeks damages of Cdn $125 million from all of the
defendants. The Company is also a defendant in two cases brought by
appliance manufacturers. In a lawsuit filed by Peerless Heater Company
("Peerless") in Pennsylvania, the Company has been sued along with other
defendants for reimbursement of costs associated with its corrective action
program. In the other lawsuit, the Company and two other defendants have
been sued in Massachusetts by seven furnace manufacturers which are seeking
damages and declaratory relief for costs expected to be incurred as a result
of corrective action programs to be conducted in connection with furnace
systems vented with HTPV. The Company has filed and served its own legal
action in Michigan against Peerless, the seven furnace manufacturers that
have filed suit against the Company in Massachusetts, and all other
identifiable appliance manufacturers that certified HTPV for use with their
appliance systems. In that suit, the Company is seeking damages for costs it
has incurred and declaratory relief for costs that may be incurred in the
future as a result of the conduct of appliance manufacturers that certified
their products for use with HTPV. The Company has also been named in a class
action lawsuit which has been filed in Tennessee regarding HTPV. In that
case, the Company is a defendant along with its principal competitor in the
HTPV business, a resin supplier and a furnace manufacturer that has been
joined as a representative of a defendant class consisting of all appliance
manufacturers. The plaintiffs seek damages on behalf of all persons in the
United States with appliance systems that are vented with HTPV.
With respect to these matters, the Company, on September 16, 1996, filed
an action in state court in Illinois against certain insurance carriers. The
Company is seeking a declaratory judgment, damages for breach of contract and
specific relief requiring the insurance carriers, pursuant to the terms of
the Company's insurance policies, to defend and reimburse the Company for
costs and legal expenses arising from Ultravent-related claims. The amount
at issue cannot be determined at this time. The insurance carriers have
denied coverage on a number of grounds, including (i) that there has been no
property damage, bodily injury or occurrence, as those terms are
10
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
defined in the insurance policies; (ii) that various exclusions in the
insurance policies apply with respect to damage to the Company's own
products, the failure of its products to perform, and product recalls; (iii)
that the Company knew or should have known of the existence of alleged
problems with Ultravent; and (iv) that other insurance which should be called
on prior to the policies of these insurers is available. The insurance
carriers have filed motions to dismiss the Company's lawsuit.
The Company is engaged in ongoing discussions with the Consumer Product
Safety Commission ("CPSC") which has been advised of the ULC action and the
actions taken by the MCCR. The CPSC has met with manufacturers of HTPV,
various appliance manufacturers and other entities with technical expertise.
CPSC concerns focus on the heating appliance system, the plastic resin used
to manufacture the venting, and improper installation. While no definitive
action has been decided upon, the Company is aware that the CPSC is
considering a corrective action program involving HTPV, that would impact
heating appliance manufacturers, plastic resin manufacturers, and HTPV
manufacturers and distributors, including the Company. Certain appliance
manufacturers, the plastic resin manufacturer and the HTPV manufacturers and
distributors, including the Company, are currently participating in a
non-binding facilitative mediation process which seeks to develop and
implement a voluntary HTPV corrective action program. The CPSC has indicated
that it will delay initiating proceedings mandating a corrective action
program while these parties are involved in this mediation process. While it
is not possible to predict the final outcome of the mediation, substantial
progress has been made in developing an industry-wide corrective action
program for the replacement of HTPV with venting systems that are acceptable
to the CPSC.
While it is impossible at this time to give a firm estimate of the
ultimate cost to the Company, management continues to believe that the
after-tax cost to the Company of resolving the Ultravent-Registered
Trademark- matter will approximate an amount up to $20.0 million, after
considering reimbursements and insurance recoveries. Although no assurances
can be given, the Company believes at this time that the ultimate resolution
of these matters will not have a material effect on the Company's financial
condition, but may have a material effect on future results of operations in
the period recognized.
(7) GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes and the Discount Notes
are fully and unconditionally guaranteed on a joint and several basis
(collectively, the "Guarantees") by DeVilbiss Air Power Company, Ex-Cell
Manufacturing Company, Inc., Hart & Cooley, Inc., Mansfield Plumbing
Products, Inc. and SWC Industries, Inc. (collectively, the "Guarantor
Subsidiaries"). Each of the Guarantor Subsidiaries is a direct or indirect
wholly-owned subsidiary of the Company. The remaining subsidiaries, Falcon
Receivable Program, Inc. and Falcon Manufacturing, Inc., represent a special
purpose corporation formed for the Company's accounts receivable
securitization program and an intermediate holding company which owns all of
the capital stock of DeVilbiss Air Power Company, respectively. The
obligations of each Guarantor Subsidiary under its Guarantee are subordinated
to such subsidiary's obligations under its guarantee of the Bank Credit
Facility.
Presented below is condensed consolidating financial information for
Falcon Building Products, Inc. ("Parent Company"), the Guarantor Subsidiaries
(together with Falcon Manufacturing, Inc.) and Falcon Receivable Program,
Inc. (the "Non-Guarantor Subsidiary"). As the only asset of Falcon
Manufacturing, Inc., which is not a Guarantor Subsidiary, is the stock of
DeVilbiss Air Power Company, a Guarantor Subsidiary, financial information
regarding Falcon Manufacturing, Inc. is included with that of the Guarantor
Subsidiaries in this presentation. In the Company's opinion, separate
financial statements and other disclosures concerning each of the Guarantor
Subsidiaries would not provide additional information that is material to
investors. Therefore, the Guarantor Subsidiaries are combined in the
presentation below.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Parent Company's investments in and advances to/from
subsidiaries account and earnings. The elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
11
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43.2 $ 1.0 $ 0.5 $ -- $ 44.7
Inventories, net -- 86.4 -- -- 86.4
Other current assets 2.7 12.8 24.4 -- 39.9
------- ------ ------ ------- -------
Total current assets 45.9 100.2 24.9 -- 171.0
Property, plant and equipment, net -- 98.0 -- -- 98.0
Goodwill -- 57.5 -- -- 57.5
Investment in and advances
to/from subsidiaries 160.1 (55.7) (19.4) (85.0) --
Other long-term assets 28.4 3.4 -- -- 31.8
------- ------ ------ ------- -------
Total assets $ 234.4 $203.4 $ 5.5 $ (85.0) $ 358.3
======= ====== ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 1.0 $ 0.1 $ -- $ -- $ 1.1
Accounts payable 0.5 52.3 -- -- 52.8
Accrued liabilities (6.9) 42.7 -- -- 35.8
------- ------ ------ ------- -------
Total current liabilities (5.4) 95.1 -- -- 89.7
Senior indebtedness 174.0 2.6 -- -- 176.6
Senior subordinated notes 250.0 -- -- -- 250.0
Other long-term liabilities 3.0 26.7 -- -- 29.7
------- ------ ------ ------- -------
Total liabilities 421.6 124.4 -- -- 546.0
------- ------ ------ ------- -------
Stockholders' equity (deficit):
Common stock 0.1 -- -- -- 0.1
Additional paid-in capital -- 42.9 6.5 (49.4) --
Retained earnings (deficit) (185.3) 36.6 (1.0) (35.6) (185.3)
Other (2.0) (0.5) -- -- (2.5)
------- ------ ------ ------- -------
Total stockholders' equity (deficit) (187.2) 79.0 5.5 (85.0) (187.7)
------- ------ ------ ------- -------
Total liabilities and stockholders' equity $ 234.4 $203.4 $ 5.5 $ (85.0) $358.3
======= ====== ====== ======= =======
</TABLE>
12
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2.6 $ 1.3 $ -- $ -- $ 3.9
Inventories, net -- 76.2 -- -- 76.2
Other current assets 0.6 13.1 1.9 -- 15.6
------ ------ ------- ------- -------
Total current assets 3.2 90.6 1.9 -- 95.7
Property, plant and equipment, net -- 97.4 -- -- 97.4
Goodwill-- -- 59.1 -- -- 59.1
Investment in and advances
to/from subsidiaries 147.1 (97.5) 2.0 (51.6) --
Other long-term assets 5.5 3.8 0.2 -- 9.5
------ ------ ------- ------- -------
Total assets $155.8 $153.4 $ 4.1 $ (51.6) $ 261.7
====== ====== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 15.0 $ 0.2 $ -- $ -- $ 15.2
Accounts payable 4.8 45.2 0.1 -- 50.1
Accrued liabilities (1.9) 32.8 -- -- 30.9
------ ------ ------- ------- -------
Total current liabilities 17.9 78.2 0.1 -- 96.2
Senior indebtedness 106.5 2.6 -- -- 109.1
Other long-term liabilities 3.0 25.5 -- -- 28.5
------ ------ ------- ------- -------
Total liabilities 127.4 106.3 0.1 -- 233.8
------ ------ ------- ------- -------
Stockholders' equity (deficit):
Common stock 0.2 -- -- -- 0.2
Additional paid-in capital 18.0 42.9 5.0 (47.9) 18.0
Retained earnings (deficit) 12.8 4.7 (1.0) (3.7) 12.8
Other (2.6) (0.5) -- -- (3.1)
------ ------ ------- ------- -------
Total stockholders' equity (deficit) 28.4 47.1 4.0 (51.6) 27.9
------ ------ ------- ------- -------
Total liabilities and stockholders' equity $155.8 $153.4 $ 4.1 $ (51.6) $ 261.7
====== ====== ======= ======= =======
</TABLE>
13
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 172.7 $ -- $ -- $ 172.7
Cost of sales -- 143.6 -- -- 143.6
------- -------- ------- ------- --------
Gross earnings -- 29.1 -- -- 29.1
Selling and administrative expenses 2.0 13.9 -- -- 15.9
Securitization expense 1.3 -- (0.3) -- 1.0
------- -------- ------- ------- --------
Operating income (loss) (3.3) 15.2 0.3 -- 12.2
Net interest expense 10.3 0.1 0.4 -- 10.8
------- -------- ------- ------- --------
Income (loss) before income taxes (13.6) 15.1 (0.1) -- 1.4
Provision (benefit) for income taxes (5.4) 6.0 -- -- 0.6
------- -------- ------- ------- --------
Income (loss) before equity in income of
consolidated subsidiaries (8.2) 9.1 (0.1) -- 0.8
Equity in income of consolidated subsidiaries 9.1 -- -- (9.1) --
------- -------- ------- ------- --------
Net income (loss) $ 0.9 $ 9.1 $ (0.1) $ (9.1) $ 0.8
======= ======== ======= ======= ========
</TABLE>
14
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 162.7 $ -- $ -- $ 162.7
Cost of sales -- 132.1 -- -- 132.1
------- -------- ------- ------- --------
Gross earnings -- 30.6 -- -- 30.6
Selling and administrative expenses 1.4 12.5 -- -- 13.9
Securitization expenses 1.1 -- (0.1) -- 1.0
------- -------- ------- ------- --------
Operating income (loss) (2.5) 18.1 0.1 -- 15.7
Net interest expense 2.2 -- 0.5 -- 2.7
------- -------- ------- ------- --------
Income (loss) before income taxes (4.7) 18.1 (0.4) -- 13.0
Provision (benefit) for income taxes (1.8) 6.8 -- -- 5.0
------- -------- ------- ------- --------
Income (loss) before equity in income of
consolidated subsidiaries (2.9) 11.3 (0.4) -- 8.0
Equity in income of consolidated subsidiaries 10.9 -- -- (10.9) --
------- -------- ------- ------- --------
Net income $ 8.0 $ 11.3 $ (0.4) $ (10.9) $ 8.0
======= ======== ======= ======= ========
</TABLE>
15
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 528.6 $ -- $ -- $ 528.6
Cost of sales -- 434.5 -- -- 434.5
------- -------- ------- ------- --------
Gross earnings -- 94.1 -- -- 94.1
Selling and administrative expenses 4.5 41.3 -- -- 45.8
Securitization expense 4.4 -- (1.3) -- 3.1
Recapitalization expenses 36.3 -- -- -- 36.3
------- -------- ------- ------- --------
Operating income (loss) (45.2) 52.8 1.3 -- 8.9
Net interest expense 16.1 0.2 1.3 -- 17.6
------- -------- ------- ------- --------
Income (loss) before income taxes (61.3) 52.6 -- -- (8.7)
Provision (benefit) for income taxes (18.0) 20.8 -- -- 2.8
------- -------- ------- ------- --------
Income (loss) before extraordinary item
and equity in income of consolidated
subsidiaries (43.3) 31.8 -- -- (11.5)
Extraordinary item:
Early extinguishment of debt, net of
income tax benefit of $0.9 million (1.5) -- -- -- (1.5)
------- -------- ------- ------- --------
Income (loss) before equity in income of
consolidated subsidiaries (44.8) 31.8 -- -- (13.0)
Equity in income of consolidated subsidiaries 31.8 -- -- (31.8) --
------- -------- ------- ------- --------
Net income (loss) $ (13.0) $ 31.8 $ -- $ (31.8) $ (13.0)
======= ======== ======= ======= ========
</TABLE>
16
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended September 30, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 475.4 $ -- $ -- $ 475.4
Cost of sales -- 385.9 -- -- 385.9
------- -------- ------- ------- --------
Gross earnings -- 89.5 -- -- 89.5
Selling and administrative expenses 5.0 38.3 -- -- 43.3
Securitization expenses 3.5 -- (0.5) -- 3.0
------- -------- ------- ------- --------
Operating income (loss) (8.5) 51.2 0.5 -- 43.2
Net interest expense 6.7 0.7 0.9 -- 8.3
------- -------- ------- ------- --------
Income (loss) before income taxes (15.2) 50.5 (0.4) -- 34.9
Provision (benefit) for income taxes (5.6) 19.0 -- -- 13.4
------- -------- ------- ------- --------
Income (loss) before equity in income of
consolidated subsidiaries (9.6) 31.5 (0.4) -- 21.5
Equity in income of consolidated subsidiaries 31.1 -- -- (31.1) --
------- -------- ------- ------- --------
Net income $ 21.5 $ 31.5 $ (0.4) $ (31.1) $ 21.5
======= ======== ======= ======= ========
</TABLE>
17
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities $ 11.4 $ 52.8 $ (22.7) $ (31.8) $ 9.7
Cash flows from investing activities: ---------- --------- ----------- --------- ------
Capital expenditures -- (11.7) -- -- (11.7)
Other (1.9) 0.7 0.2 -- (1.0)
---------- -------- ---------- -------- --------
Net cash used in investing activities (1.9) (11.0) 0.2 -- (12.7)
Cash flows from financing activities: ---------- ------- --------- ------- -------
Proceeds from senior credit facilities 175.0 -- -- -- 175.0
Repayment of senior credit facilities (138.8) -- -- -- (138.8)
Issuance of senior subordinated debt 247.0 -- -- -- 247.0
Issuance of common stock 134.6 -- -- -- 134.6
Retirement of common stock (337.5) -- -- -- (337.5)
Payment of recapitalization fees and expenses (53.6) -- -- -- (53.6)
Advances (to) from affiliate (12.9) (41.9) 23.0 31.8 --
Net borrowings on debt 17.3 (0.2) -- -- 17.1
---------- -------- ---------- -------- --------
Net cash from financing activities 31.1 (42.1) 23.0 31.8 43.8
---------- -------- ---------- -------- --------
Change in cash and cash equivalents 40.6 (0.3) 0.5 -- 40.8
Cash and cash equivalents, beginning of period 2.6 1.3 -- -- 3.9
---------- -------- ---------- -------- --------
Cash and cash equivalents, end of period $ 43.2 $ 1.0 $ 0.5 $ -- $ 44.7
========= ======== ========== ======== ========
</TABLE>
18
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities $ 3.3 $ 45.8 $ 0.8 $ (31.1) $18.8
Cash flows from investing activities: ------- -------- ------- ---------- -------
Purchase of businesses -- (18.8) -- -- (18.8)
Capital expenditures -- (13.1) -- -- (13.1)
Other (0.3) -- (0.2) -- (0.5)
-------- -------- -------- --------- ------
Net cash used in investing activities (0.3) (31.9) (0.2) -- (32.4)
Cash flows from financing activities: -------- -------- ---------- --------- ------
Advances (to) from affiliate (19.9) (14.0) 2.8 31.1 --
Net borrowings on debt 17.3 (0.2) -- -- 17.1
------- ------- --------- -------- ------
Net cash from financing activities (2.6) (14.2) 2.8 31.1 17.1
------- ------- --------- -------- ------
Change in cash and cash equivalents 0.4 (0.3) 3.4 -- 3.5
Cash and cash equivalents, beginning of period (0.3) 1.4 -- -- 1.1
------- ------- --------- -------- ------
Cash and cash equivalents, end of period $ 0.1 $ 1.1 $ 3.4 $ -- $4.6
======== ======= ========= ======== =======
</TABLE>
19
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion of the results of operations of the Company and
its subsidiaries for the quarter and nine months ended September 30, 1997 as
compared to the quarter and nine months ended September 30, 1996 which should
be read in conjunction with the Condensed Consolidated Financial Statements
included herein and the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. Defined terms used herein have the meanings set forth in
the Condensed Consolidated Financial Statements included herein. The following
discussions contain, in addition to historical information, forward-looking
statements that include risks and uncertainties. The Company's actual results
may differ materially from those anticipated in the forward-looking statements.
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
The following table reflects the Company's historical results of
operations for the quarter ended September 30, 1997 compared to the results for
the comparable period of 1996.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
1997 1996
AMOUNT % OF SALES AMOUNT % OF SALES
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Air distribution accessories $ 50.4 29.2% $ 51.1 31.4%
Plumbing fixtures 43.3 25.1 41.9 25.8
Air power products 79.0 45.7 69.7 42.8
-------- ------- ------- -------
Total 172.7 100.0 162.7 100.0
Gross earnings 29.1 16.9 30.6 18.8
Operating income 12.2 7.1 15.7 9.7
</TABLE>
Net sales for the quarter were $172.7 million, an increase of $10.0
million over the third quarter of 1996. This increase was primarily due to
significant sales growth of pressure washers of $13.3 million, partially offset
by decreased volume in other air power products, primarily generators, of $4.2
million. The decline in generator sales was due to the absence of heavy storm
activity which was experienced in the 1996 period. The increased sales in
plumbing fixtures reflect increased penetration into the retail market. The
decrease in air distribution accessories reflects the effect of competitive
pricing pressures experienced in flexible duct products and, to a lesser
extent, the divestiture of a metal fittings product line.
Gross earnings decreased $1.5 million from $30.6 million in 1996 to $29.1
million in 1997. The significant growth in sales of pressure washer products
during 1997 has been accompanied by a significant increase in product returns
by consumers to our retail customers who, under our current sales terms, return
these products to the Company. Significant returns are an industry issue since
many of these returns have no product defects. We are working with our retail
customers to eliminate non-defective product returns by (i) increasing consumer
education through, among other things, improved product manuals, and (ii)
revising current sales terms to our retail customers. Costs related to returns
have increased $2.2 million for the quarter compared to the third quarter of
1996. Additionally, manufacturing inefficiencies encountered in the production
of certain china and steel plumbing fixtures products and the decreased sales
volume in air distribution accessories also contributed to the decrease in
gross earnings. Gross margin declined from 18.8% in 1996 to 16.9% in 1997
primarily as a result of the factors noted above, in addition to the increase
in the sale of pressure washers which carry lower margins.
Operating income decreased $3.5 million from $15.7 million in 1996 to
$12.2 million in 1997. This decrease resulted from the increase in returns of
pressure washers which more than offset the gains in air power products due to
increased sales volume, as well as, lower sales volume of air distribution
accessories and manufacturing inefficiencies in certain plumbing fixture
facilities.
Net interest expense increased to $10.8 million from $2.7 million in 1996
primarily due to the new debt structure which resulted from the
Recapitalization in June 1997. See Note 5 to the Company's Condensed
20
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Consolidated Financial Statements for a discussion of the Company's new debt
structure. The Company expects future interest expense to be significantly
higher than it has been in the prior years due to this new debt structure.
Income before income taxes of $1.4 for the current quarter compares to
$13.0 million in the third quarter of 1996. This decline is due primarily to
the increase in interest expense as well as the decrease in operating income.
Net income of $0.8 million for the third quarter of 1997 was significantly
lower than the $8.0 million for the third quarter of 1996 due to the above
mentioned factors. The effective income tax rate of 42.0% in 1997 increased
from a rate of 38.5% in the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
The following table reflects the Company's historical results of
operations for the nine months ended September 30, 1997 compared to the results
for the comparable period of 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
AMOUNT % OF SALES AMOUNT % OF SALES
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Air distribution accessories $ 140.7 26.6% $ 140.9 29.6%
Plumbing fixtures 121.9 23.1 119.4 25.1
Air power products 266.0 50.3 215.1 45.3
--------- -------- -------- -------
Total 528.6 100.0 475.4 100.0
Gross earnings 94.1 17.8 89.5 18.8
Operating income before
Recapitalization expenses 45.2 8.5 43.2 9.1
Operating income 8.9 1.7 43.2 9.1
</TABLE>
Year-to-date net sales were $528.6 million, an increase of $53.2 million
over 1996 comparable results. This increase was primarily due to increased
sales of pressure washers of $47.9 million, as well as increased volume in
other air power products of $3.1 million, primarily air compressors, partially
offset by lower sales of generators and automotive products. Favorable volume
variances in plumbing fixtures of $3.1 million also contributed to this
increase. Lower sales volume of flexible duct products was partially offset by
an increase in price for residential and light commercial registers as well as
higher sales due to a product line acquisition completed in May 1996.
Gross earnings increased $4.6 million to $94.1 million over 1996 results,
primarily due to the increased sales volume partially offset by the previously
discussed increased costs of pressure washer returns and manufacturing
inefficiencies in the plumbing products business. Costs related to pressure
washer returns have increased $5.7 million in the nine months ended September
30, 1997, compared to the same period in 1996. Gross margin declined from
18.8% in 1996 to 17.8% in 1997 due primarily to an increase in returns and
warranty services in air power products as well as manufacturing inefficiencies
in plumbing products. Additionally, the increased sales of pressure washers,
which yield lower margins, contributed to the decline in the gross margin.
The operating income of $8.9 million included $36.3 million of expenses
recorded in connection with the Recapitalization. Excluding the
Recapitalization expenses, operating income was $2.0 million higher than in the
1996 period. This increase was primarily due to increased sales volume and
favorable costs associated with the purchase of raw materials, partially offset
by manufacturing inefficiencies in plumbing products and a high level of
returns of pressure washers.
Interest expense increased from $8.3 million in 1996 to $17.6 million in
1997 due to the previously discussed change in debt structure resulting from
the Recapitalization.
21
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
The loss before income taxes of $8.7 million decreased from income of
$34.9 million in the nine months of 1996 due to the above mentioned factors.
The net loss of $13.0 million for the nine months ended September 30, 1997
is primarily due to $36.3 million of pretax expenses (approximately $28.4
million after taxes) and the extraordinary charge of $1.5 million recorded in
connection with the Recapitalization. The effective income tax rate of (32.2)%
in 1997 is due to the non-deductibility of various expenses recorded in
connection with the Recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operating activities amounted to $9.7 million in the
first nine months of 1997 compared to $18.8 million in the first nine months of
1996. The decrease of $9.1 million was due primarily to an increase in working
capital requirements and the effect of the stand-alone securitization facility
the Company entered into in May 1996. The increase in working capital is due
primarily to an increase in inventory resulting from an increase in pressure
washer returns, as well as an overall increase to support the higher sales
volume. Due to seasonal factors, the Company's level of receivables is
typically lower at the end of the fourth quarter when compared to the other
three quarters. With the increase in receivables sold in the first nine months
of 1997, the net residual interest retained by the Company in these sold
receivables increased $22.6 million from December 31, 1996. This residual
interest of $24.6 million at September 30, 1997 is reflected in other current
assets in the Company's financial statements.
Capital expenditures for the nine months ended September 30, 1997 were
$11.7 million compared to $13.1 million for the same period in 1996. By
December 31, 1997, the Company expects to have spent a total of approximately
$20.6 million for various capital projects during the year, including quality
enhancement, cost improvement, regulatory compliance, efficiency improvement,
increased capacity and normal maintenance projects.
As discussed in Note 4 to the Company's Condensed Consolidated Financial
Statements, the Company consummated the Recapitalization on June 17, 1997. The
Recapitalization was funded by (i) $175.0 million of borrowings under the Bank
Credit Facility; (ii) $145.0 million from the offering of the Old Notes; (iii)
approximately $102.0 million of proceeds from the offering of the Old Discount
Notes; and (iv) an equity contribution by Investcorp, its affiliates and
certain other international investors of approximately $134.6 million. The
proceeds from these financings funded: the payment of approximately $337.5
million to holders of Class A Stock who converted their shares; the payment of
approximately $5.2 million to option holders; the repayment of approximately
$138.8 million of outstanding indebtedness under the then existing credit
facility; and the payment of approximately $58.5 million of fees and expenses
associated with the Recapitalization.
The Company believes that operating cash flows, availability under the
Bank Credit Facility and funds available under its accounts receivable
securitization program will be sufficient to pay interest on outstanding debt,
meet current maturities, pay income taxes, fund capital expenditures and meet
other operating needs for the foreseeable future.
OTHER
In February 1997, the Financial Accounting Standards Boards ("FASB")
issued Statement No. 128 ("SFAS 128"), "Earnings per Share", which specifies
the computation, presentation, and disclosure requirements for earnings per
share. SFAS 128, which has an effective date of December 15, 1997, is not
expected to have a significant impact on the Company's reported earnings per
share.
In June 1997, the FASB issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income and its components. SFAS 130, which is effective for
financial statement periods beginning after December 15, 1997, is not expected
to have a significant impact on the Company's financial statement disclosures.
22
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Also in June 1997, the FASB issued Statement No. 131 ("SFAS 131"),
"Disclosure about Segments of an Enterprise and Related Information" which
requires the reporting of selected segment information quarterly and entity-
wide disclosures about products and services, major customers, and the
countries in which the entity holds assets and reports revenues. The Company
intends to make appropriate disclosures upon adoption of SFAS 131, which is
effective for financial statement periods beginning after December 15, 1997.
23
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
99.1 Letter to Bondholders dated November 14, 1997.
b) Reports on Form 8-K
Current report on Form 8-K dated October 13, 1997, regarding the
extension of the expiration date of the Exchange Offer.
24
<PAGE>
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.
FALCON BUILDING PRODUCTS, INC.
By: /s/ Sam A. Cottone
------------------------------
Sam A. Cottone
Executive Vice President
and Chief Financial Officer
Dated: November 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 86
<CURRENT-ASSETS> 171
<PP&E> 196
<DEPRECIATION> (98)
<TOTAL-ASSETS> 358
<CURRENT-LIABILITIES> 90
<BONDS> 427
0
0
<COMMON> 0
<OTHER-SE> (188)
<TOTAL-LIABILITY-AND-EQUITY> 358
<SALES> 529
<TOTAL-REVENUES> 529
<CGS> 435
<TOTAL-COSTS> 435
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> (9)
<INCOME-TAX> 3
<INCOME-CONTINUING> (12)
<DISCONTINUED> 0
<EXTRAORDINARY> (1)
<CHANGES> 0
<NET-INCOME> (13)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE MARCH 31, 1997, SEPTEMBER 30, 1996 AND JUNE 30, 1996 QUARTERLY REPORTS ON
FORM 10-Q AND THE DECEMBER 31, 1996 ANNUAL REPORT ON FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 1 4 5 4
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 86 76 72 66
<CURRENT-ASSETS> 134 96 116 105
<PP&E> 190 187 181 177
<DEPRECIATION> (93) (90) (87) (84)
<TOTAL-ASSETS> 299 262 272 262
<CURRENT-LIABILITIES> 95 96 103 95
<BONDS> 140 109 126 131
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 34 28 19 11
<TOTAL-LIABILITY-AND-EQUITY> 299 262 272 262
<SALES> 160 633 475 313
<TOTAL-REVENUES> 160 633 475 313
<CGS> 132 514 386 254
<TOTAL-COSTS> 132 514 386 254
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 3 11 8 6
<INCOME-PRETAX> 10 49 35 22
<INCOME-TAX> 4 19 13 8
<INCOME-CONTINUING> 6 30 22 14
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 6 30 22 14
<EPS-PRIMARY> 0.31 1.50 1.07 0.67
<EPS-DILUTED> 0.31 1.50 1.07 0.67
</TABLE>
<PAGE>
Exhibit 99.1
November 14, 1997
Dear Falcon Building Products, Inc. Bondholders:
A copy of the Falcon Building Products, Inc (the "Company") Form 10-Q is
enclosed. The financial statements for the nine months ended September 30,
1997, reflect the effects of the Merger of the Company with FBP Acquisition
Corp., a newly formed company controlled by Investcorp S.A. and certain
affiliates, on June 17, 1997, and the related financings. The Merger has
been accounted for as a recapitalization, thus the historical basis of the
assets and liabilities of the Company were not affected. A summary of the
unaudited financial results follows (dollars in millions):
<TABLE>
<CAPTION>
PERIODS ENDED SEPTEMBER 30
1997 1996
--------------------- ---------------------
NINE NINE
QUARTER MONTHS QUARTER MONTHS
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net sales $172.7 $528.6 $162.7 $475.4
Operating income before recapitalization
expenses 12.2 45.2 15.7 43.2
Net interest expense (a) 10.1 16.5 2.6 7.8
Cash interest expense 7.4 13.4 2.6 7.8
EBITDA (b) 16.7 57.6 19.5 54.8
EBITDA - for the four quarters ended 78.0 _ 70.1 _
Ratio of EBITDA to interest expense (a)(d) 1.7 x
Ratio of EBITDA to cash interest expense(d) 2.3 x
Leverage Ratios: (c)(d)
Senior debt to EBITDA 1.7 x
Total debt to EBITDA 4.9 x
</TABLE>
(a) Excludes amortization of debt issuance costs.
(b) EBITDA represents earnings before recapitalization expenses, interest
expense, income tax expense, and depreciation and amortization expense.
EBITDA is presented as management believes it provides useful information
regarding a company's ability to incur and/or service debt. However,
EBITDA should not be considered in isolation or as a substitute for net
income or cash flow data prepared in accordance with generally accepted
accounting principals, or as a measure of a company's profitability or
liquidity.
(c) Senior debt and total debt is net of unencumbered cash. Ratios are
calculated using EBITDA for the four quarters ended September 30, 1997.
(d) Ratios have not been provided for the nine-month period ended September
1997 or for the 1996 periods due to non-comparability of information due
to the Merger and recapitalization financing in June 1997.
For the quarter ended September 30, 1997, sales increased $10 million to
$172.7 million, or 6% over the third quarter of 1996, while sales for the
nine months ended September 30, 1997, increased $53.2 million or 11.2% over
the 1996 period. Significant growth in the Company's pressure washer products
contributed incremental sales volume of $13.3 million and $47.9 million
<PAGE>
during the three and nine months ended September 1997, respectively. The
Company also benefited from increased compressor sales during 1997 for both
the three and nine-month periods, compared to 1996. These sales gains have
been primarily the result of additional penetration at home improvement
centers including Lowes, Sam's Club, Home Depot and Wal-Mart. Generator
sales, which are significantly influenced by storm activity, have lagged 1996
sales levels for the three and nine-month periods, as the country has not
experienced the same level of damage from severe weather as last year.
Sales of the Company's products are dependent on the level of new home
construction, repair and replacement, and, to a lesser degree, commercial
construction. While annualized new housing start data has shown significant
fluctuations on a month to month basis, average annualized housing starts are
down approximately 2% for the three and nine month periods ended September
1997 compared with 1996. Sales of the Company's Air Distribution Accessories
for the current quarter and year-to-date are slightly below the levels
achieved in the 1996 periods due primarily to competitive pressure for
flexible duct product, partially offset by improved orders for commercial
products. The Company's extensive wholesale network has reported slow to
steady sales activity reflecting flat demand as a result of moderate national
temperatures during the air conditioning season. Sales of the Company's
Plumbing Fixtures increased $1.4 million and $2.5 million for the quarter and
nine-month period in 1997, respectively, compared to 1996 results, reflecting
continued gains in penetrating the retail market including new product
introductions. Offsetting these sales gains have been anticipated price
declines in certain ultra low flush products.
EBITDA and EBITDA margins of $16.7 million and 9.7%, respectively, for the
third quarter of 1997 have decreased from 1996 levels of $19.5 million and
12.0%, respectively. While EBITDA for the nine months ended September 30,
1997 increased $2.7 million to $57.5 million over 1996 results, year-to-date
EBITDA margins decreased from 11.5% in 1996 to 10.9% in 1997. The overall
product mix has significantly affected consolidated operating margins as
pressure washers, which provide margins below other Air Power Product lines,
have become a larger component of consolidated sales. The 11% and 23%
year-to-date growth in consolidated sales and sales of Air Power Products,
respectively, have required increased marketing, administrative and
engineering expenditures. While the Company has experienced significant
growth in the sales of its pressure washer products during 1997, this growth
has been accompanied by a significant increase in product returns by
consumers to our retail customers who, under our current sales terms, return
these products to Falcon. Significant returns are an industry issue since
many of these returns have no product defects. We are working with our
retail customers to eliminate non-defective product returns through increased
consumer education, including improving product manuals, and by revising
current sales terms to our retail customers. Costs related to returns have
increased $2.2 million and $5.7 million for the three and nine-month periods
in 1997 over last year. Additionally, operating earnings and margins were
impacted by certain manufacturing inefficiencies incurred in producing
certain lower volume plumbing products. New process controls and capital
have been employed to address these inefficiencies.
The consolidated statement of income reflects an increased level of interest
expense for the current quarter and year-to-date over the 1996 periods due to
the merger financings entered into
2
<PAGE>
in June 1997. The ratios of interest expense and net funded indebtedness to
EBITDA at September 30, 1997 are consistent with proforma financial data
presented in our public filings associated with the exchange offer for our
subordinated debt.
The Company continues to have significant liquidity to fund operations and
make new investments. At September 30, 1997, the Company had $44.7 million
of unrestricted cash and $112.5 million of borrowing availability under its
revolving credit facility.
Our business strategy continues to focus on strengthening the Company's
market leadership positions through domestic and international market
expansion, new products and product line extensions, expansion of our
distribution network, and strategic and complementary acquisitions. We
continue to work on and evaluate a number of projects and acquisition
candidates to expand our product offerings, customers and geographic base.
We thank you for your continued support and confidence.
William K. Hall
Chairman, President & Chief
Executive Officer
2
