<PAGE>
[LOGO]
OFFER FOR OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007 AND
10 1/2% SERIES A SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR, RESPECTIVELY,
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007 AND
10 1/2% SERIES B SENIOR SUBORDINATED DISCOUNT NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON OCTOBER 10, 1997, UNLESS EXTENDED.
Falcon Building Products, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth herein and in the related Letter of Transmittal, to
exchange up to $145.0 million aggregate principal amount of 9 1/2% Series B
Senior Subordinated Notes Due 2007 (the "Notes") of the Company for a like
amount of the privately placed 9 1/2% Series A Senior Subordinated Notes Due
2007 (the "Old Notes") of the Company issued on June 17, 1997, from the holders
thereof (together with the holders of Notes, "Noteholders") and to exchange up
to $169.317 million aggregate principal amount at maturity of 10 1/2% Series B
Senior Subordinated Discount Notes Due 2007 (the "Discount Notes") of the
Company for a like amount of the privately placed 10 1/2% Series A Senior
Subordinated Discount Notes Due 2007 (the "Old Discount Notes") of the Company
issued on June 17, 1997, from the holders thereof (together with the holders of
Discount Notes, "Discount Noteholders"). The Old Notes and the Old Discount
Notes are referred to collectively herein as the "Old Securities" and the Notes
and the Discount Notes are referred to collectively herein as the "Securities."
Simultaneously with the issuance of the Old Discount Notes, the Company issued
$683,000 aggregate principal amount at maturity of 10 1/2% Series A Senior
Subordinated Discount Notes to certain members of its senior management (the
"Management Discount Notes"). Although the terms of the Management Discount
Notes are identical to the Old Discount Notes, the Management Discount Notes are
not included in the Exchange Offer and are not, for the purposes of the Exchange
Offer and this Prospectus, deemed to be Old Discount Notes.
The Securities are being offered hereunder in order to satisfy the
obligations of the Company under a Registration Rights Agreement dated June 17,
1997 (the "Registration Rights Agreement") by and among the Company, the
Guarantors (as defined) and Smith Barney Inc., BT Securities Corporation, Chase
Securities and Merrill Lynch, Pierce Fenner & Smith Incorporated (the "Initial
Purchasers"). The Exchange Offer is designed to provide to Noteholders and
Discount Noteholders (collectively, "Holders") an opportunity to acquire
Securities which, unlike the Old Securities, are expected to be freely
transferable at all times, subject to state "blue sky" law restrictions,
PROVIDED that the Holder is not an "affiliate" of the Company within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"), and represents
that the Securities are being acquired in the ordinary course of such Holder's
business and the Holder is not engaged in, and does not intend to engage in, a
distribution of the Securities. With the exception of the freely transferable
nature of the Securities, the Securities are substantially identical to the Old
Securities. See "The Exchange Offer--Purpose of the Exchange Offer."
The Company will accept for exchange any and all validly tendered Old
Securities on or prior to 5:00 P.M., New York time, on October 10, 1997, unless
extended (the "Expiration Date"). Tenders of Old Securities made pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept any
Securities with respect to the Exchange Offer, the Company will promptly return
such Old Securities to the Holders thereof. The Company will not receive any
proceeds from the Exchange Offer.
The Securities will be general unsecured obligations of the Company ranking
subordinate in right of payment to all existing and future Senior Debt (as
defined) of the Company. The Securities will rank PARI PASSU in right of payment
with all other indebtedness of the Company that is subordinated to Senior Debt,
if any, and will rank senior to any indebtedness of the Company that is
subordinated to the Securities. As of June 30, 1997, the aggregate amount of
consolidated Indebtedness of the Company was $425.1 million, $177.7 million of
which was Senior Debt. The
(CONTINUED ON FOLLOWING PAGE)
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 HEREIN FOR A DISCUSSION OF CERTAIN
RISKS THAT HOLDERS OF OLD SECURITIES SHOULD CONSIDER IN CONNECTION WITH THE
EXCHANGE OFFER.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 9, 1997.
<PAGE>
Indentures (as defined) permit the Company to incur additional indebtedness,
including indebtedness under the $125.0 million revolving credit portion of the
Credit Facility (as defined). The Securities will be guaranteed (each, a "Senior
Subordinated Guarantee") fully, unconditionally, and jointly and severally on a
senior subordinated basis by the Company's Restricted Subsidiaries (the
"Guarantors"). The Senior Subordinated Guarantees will be subordinate in right
of payment to all Senior Debt of the Guarantors. See "Description of the
Securities."
Interest on the Notes will be payable, in cash, semi-annually on June 15 and
December 15 of each year, commencing December 15, 1997. The Securities will
mature on June 15, 2007. The Old Discount Notes were issued at a substantial
discount from their principal amount. Cash interest will not accrue on the
Discount Notes prior to June 15, 2002. Thereafter, interest will be payable, in
cash, semi-annually on June 15 and December 15 of each year, commencing December
15, 2002. The Securities are redeemable at the option of the Company, on one or
more occasions, in whole or in part, at any time on or after June 15, 2002 at
the redemption prices set forth therein, together with accrued and unpaid
interest, if any, to the date of redemption. See "Certain Federal Income Tax
Consequences." Prior to June 15, 2000, up to 35% of the aggregate principal
amount at maturity of each of the Notes and the Discount Notes will be
redeemable at the option of the Company, in whole or in part, with the net cash
proceeds of a public offering of common stock of the Company, at a price of
109.5% of the principal amount of the Notes together with accrued and unpaid
interest, if any, to the date of redemption or, with respect to the Discount
Notes, 110.5% of the Accreted Value (as defined) on the date of redemption;
PROVIDED that at least 65% of the original aggregate principal amount of Notes
or the Discount Notes, as applicable, remain outstanding after each such
redemption. Upon the occurrence of a Change of Control (as defined), (i) the
Company will have the option, at any time on or prior to June 15, 2002, to
redeem the Notes and/or the Discount Notes in whole, but not in part, at a
redemption price equal to 100% of the principal amount of the Notes, plus the
Applicable Premium (as defined), and accrued and unpaid interest, if any, to the
date of redemption, or in the case of the Discount Notes, a 100% of the Accreted
Value on the date of redemption plus the Applicable Premium and (ii) if the
Company does not so redeem the Notes or Discount Notes, or if a Change of
Control occurs after June 15, 2002, each Holder of Securities may require the
Company to repurchase all or a portion of such Holder's Securities at 101% of
the aggregate principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date of repurchase or, in the case of the Discount
Notes to be repurchased prior to June 15, 2002, at 101% of the Accreted Value on
the date of repurchase. See "Description of the Securities."
The Old Securities were sold by the Company on June 17, 1997 to the Initial
Purchasers in a transaction not registered under the Securities Act in reliance
upon an exemption under the Securities Act. The Initial Purchasers subsequently
placed the Old Securities with qualified institutional buyers in reliance upon
Rule 144A under the Securities Act and with a limited number of accredited
investors that agreed to comply with certain transfer restrictions and other
conditions. Accordingly, the Old Securities may not be reoffered, resold or
otherwise transferred in the United States unless registered under the
Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available.
Based on certain interpretive letters issued by the staff of the Securities
and Exchange Commission to third parties, the Company believes that a Holder of
Securities (other than (i) a broker-dealer who purchases such Securities
directly from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person who is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act) who exchanges
Old Securities for Securities in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the
Securities, will be allowed to resell the Securities to the public without
further registration under the Securities Act and without delivering to the
purchasers of the Securities a prospectus that satisfies the requirements of the
Securities Act. See "The Exchange Offer--Purpose of the Exchange Offer" and
"--Resales of Securities." However, a broker-dealer who holds Old Securities
that were acquired for its own account as a result of market-making or other
trading activities may be deemed to be an "underwriter" within the meaning of
the Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act. If any other Holder is deemed to be an
"underwriter" within the meaning of the Securities Act or acquires Securities in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the Securities, such holder must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is otherwise
available. For a period of one year from the Expiration Date, the Company will
make copies of this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resales. See "Plan of
Distribution."
There has been no public market for the Old Securities and it is not
currently anticipated that an active public market for the Securities will
develop. The Company currently does not intend to apply for the listing of the
Securities on any securities exchange or to seek approval for quotation through
any automated quotation system. The Initial Purchasers have advised the Company
that each of the Initial Purchasers currently intends to make a market in the
Securities; however, none are obligated to do so and any market-making may be
discontinued by any Initial Purchasers at any time without notice. Accordingly,
no assurance can be given as to the liquidity or the trading market for the
Securities.
The Exchange Offer is not conditioned upon any minimum principal amount of
Old Securities being tendered for exchange. However, the Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer." Old
Securities may be tendered only in integral multiples of $1,000.
i
<PAGE>
AVAILABLE INFORMATION AND INCORPORATION BY REFERENCE
The Company and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a registration statement relating to the
Securities offered hereby (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Statements made in this Prospectus as to the contents of
any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description thereof, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is and, upon effectiveness of the Registration Statement, the
Guarantors will be, subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith must file periodic reports and other information with the Commission.
All documents filed by the Company or any of the Guarantors pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Exchange Offer shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the respective dates of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which is or is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Registration Statement and the exhibits and schedules thereto and any
periodic reports or other information filed pursuant to the Exchange Act may be
inspected without charge and copies at prescribed rates at the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at 7 World Trade Center, Suite
1300, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a website
that contains reports, proxy and information statements and other information
filed electronically with the Commission at http:\\www.sec.gov.
The Company and the Guarantors have agreed to furnish to Holders of the
Securities and Old Securities and prospective purchasers and securities
analysts, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE
FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE ATTORNEY GENERAL OR THE
SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND
NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR
EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE ATTORNEY
GENERAL HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS
UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER,
OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS SECTION.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION AND INCORPORATION BY REFERENCE...................... ii
PROSPECTUS SUMMARY........................................................ 1
RISK FACTORS.............................................................. 12
FORWARD-LOOKING STATEMENTS................................................ 20
USE OF PROCEEDS........................................................... 20
THE EXCHANGE OFFER........................................................ 21
CAPITALIZATION............................................................ 29
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME..................... 30
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 38
BUSINESS.................................................................. 42
MANAGEMENT................................................................ 53
PRINCIPAL STOCKHOLDERS.................................................... 61
CERTAIN TRANSACTIONS...................................................... 63
THE RECAPITALIZATION...................................................... 65
DESCRIPTION OF THE SECURITIES............................................. 68
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 104
PLAN OF DISTRIBUTION...................................................... 106
LEGAL MATTERS............................................................. 107
EXPERTS................................................................... 107
CHANGE OF ACCOUNTANTS..................................................... 107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
AS USED HEREIN AND EXCEPT AS THE CONTEXT OTHERWISE MAY REQUIRE, THE "COMPANY" OR
"FALCON" MEANS FALCON BUILDING PRODUCTS, INC. AND ALL OF ITS CONSOLIDATED
SUBSIDIARIES. IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN,
CERTAIN STATEMENTS IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING STATEMENTS"
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT")
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE CAPTIONS
"RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS. SEE "FORWARD-LOOKING STATEMENTS."
THE COMPANY
The Company is a leading North American manufacturer and distributor of
highly engineered products for the residential and commercial construction and
home improvement markets. The Company markets its products through a variety of
distribution channels, such as wholesale distributors and commercial retailers,
including the growing do-it-yourself ("DIY") channel. The three principal
categories of products manufactured by Falcon are Air Distribution Accessories,
Plumbing Fixtures and Air Power Products. The Company has a long history in each
of its product categories, having sold products for the new construction and
remodeling markets since the early 1900s. For the twelve months ended June 30,
1997, the Company had consolidated net sales of $676.4 million and EBITDA (as
defined) of $82.6 million.
AIR DISTRIBUTION ACCESSORIES--The Company is a leading domestic supplier of
air distribution accessories for heating, ventilating and air conditioning
("HVAC") applications. These products are marketed under the Hart &
Cooley-Registered Trademark-, Metlvent-Registered Trademark-, Reliable-TM-,
Tuttle & Bailey-Registered Trademark-, Woodwinds-TM- and Valley-TM- brand names.
The Company manufactures more than 8,000 items, including metal grilles,
registers and diffusers, gas vent and chimney systems, flexible duct, louvers,
terminal units and electric duct heaters. The Company generally produces these
products on a high-volume, low-cost basis. In addition, the Company supplements
its standard product line with custom-engineered products designed to meet
specific size or performance requirements. For the twelve months ended June 30,
1997, the Company had net sales of $187.5 million in this product category.
PLUMBING FIXTURES--The Company is a leading domestic producer of
high-quality ceramic china bathroom fixtures, including toilets and lavatories.
The Company also produces enameled steel bathtubs and sinks, acrylic whirlpool
tubs and brass and plastic trim and fittings. The Company's Plumbing Fixtures
products are largely targeted at the high-volume, medium price point category
and are sold primarily to the residential new construction and remodeling
markets. The Company sells these products under the
Mansfield-Registered Trademark- and Swirl-way-Registered Trademark- brand names,
which are widely recognized among wholesale distributors and plumbing
contractors as high-quality, reasonably priced plumbing fixtures. For the twelve
months ended June 30, 1997, the Company had net sales of $160.3 million in this
product category.
AIR POWER PRODUCTS--The Company is the leading domestic producer of consumer
and commercial air compressors for home improvement applications and is also the
leading domestic manufacturer of pressure washers. The Company manufactures a
broad line of air compressors, marketed under a number of brand names, including
Air America-TM-, Charge Air Pro-Registered Trademark-, Pro 4000, Pro Air
II-Registered Trademark- and Steel Driver-Registered Trademark-. The Company
also manufactures air compressors under private-label programs, the most
significant of which is the Craftsman-Registered Trademark- label for Sears,
Roebuck and Co. ("Sears"). In addition, the Company manufactures a line of
electric generators and sells a variety of accessory items such as paint spray
guns, nailers and staplers, pneumatic tools, sanders and air hoses for use in
home improvement applications. New products introduced in the past two years
include pressure washers, electric generators and OEM compressors. With the
acquisition of Ex-Cell Manufacturing Company, Inc. ("Ex-Cell") in January 1996,
the Company became the leading domestic manufacturer of pressure washers. For
the twelve months ended June 30, 1997, the Company had net sales of $328.6
million in this product category.
1
<PAGE>
As a result of strong operating performance in all three of its principal
product categories as well as successful add-on acquisitions, Falcon has
experienced significant growth, with net sales and EBITDA increasing at compound
annual growth rates ("CAGR") of 18.6% and 11.0%, respectively, from January 1,
1993 through June 30, 1997. Management considers key elements of Falcon's
success to be its leading market positions, established brand names, emphasis on
quality and customer service, low-cost production, reputation for innovation,
strong distribution networks and successful history of acquisitions.
BUSINESS STRENGTHS
The Company attributes its market leadership and significant opportunities
for continued growth and increased profitability to the following competitive
strengths:
MARKET LEADERSHIP WITH STRONG BRAND NAMES. The Company holds leading market
positions and strong market shares in all of its major markets and the Company
believes it has successfully increased its market share in all three of its
principal product categories over the past three years. The Company believes
that it derives more than 75% of its sales from product lines in which the
Company holds either the number one or number two market position, as measured
in sales (except for Plumbing Fixtures where market position is measured in
units). The Company's leading brand names in each product category include Hart
& Cooley-Registered Trademark-, Metlvent-Registered Trademark- and Reliable-TM-
in Air Distribution Accessories, Mansfield-Registered Trademark- and Swirl-
way-Registered Trademark- in Plumbing Fixtures and Air
America-Registered Trademark-, Charge Air Pro-Registered Trademark-, Steel
Driver-Registered Trademark- and Ex-Cell-Registered Trademark- in Air Power
Products.
EMPHASIS ON QUALITY AND CUSTOMER SERVICE. The Company emphasizes
high-quality products and superior customer service. The Company stresses the
importance of product quality to all of its employees, incorporates high-quality
materials into its products and has implemented total quality management
initiatives at its operating locations. In recognition of the Company's
excellent value, quality and customer service, the Company has been named Vendor
of the Year by HomeBase (1996), Lowe's (1996) and Sears (1992). The Company also
received a "Partner of the Year" award from The Home Depot in 1996.
LOW-COST PRODUCTION. The Company believes that it is a low-cost producer in
each of the major markets it serves. The Company has consistently reduced costs
through the development and implementation of cost-effective product designs,
careful attention to manufacturing processes, employee involvement,
consolidation of manufacturing facilities and capital investment. The Company's
low-cost position and focus on productivity and efficiency have resulted in
sales per employee which, management believes, are high relative to the
industry. Productivity and efficiency, as measured by sales per employee, have
increased by approximately 30% since 1992. Management has identified additional
cost reductions as part of its strategic planning process.
TRADITION OF NEW PRODUCT DEVELOPMENT AND INTRODUCTIONS. The Company
believes that its tradition of product innovation and the breadth of its product
offerings differentiate the Company from its competitors. The Company has
developed significant product innovations, including the first viable oil-free
compressor and the use of a "universal motor" in its line of air compressors,
which delivers superior horsepower at lower product weights. During the past two
years, the Company has introduced several new products, including pressure
washers, electric generators, decorative residential registers, one-piece
plumbing fixtures, pneumatic nailers and staplers, and electric and OEM
compressors.
WELL-ESTABLISHED DISTRIBUTION CHANNELS. The Company has a broad and
well-established distribution network encompassing both wholesale and retail
channels throughout the United States and Canada. The Company has established
relationships with more than 1,500 wholesale distributors and with leading
consumer retailers, including mass merchants, warehouse clubs, home improvement
(DIY) centers, hardware cooperatives and farm and fleet cooperatives. The
Company's strong relationships with distributors are supported by the Company's
sales and marketing programs, tailored to suit each market and type of
distributor.
2
<PAGE>
HISTORY OF SUCCESSFUL ACQUISITIONS. Since 1988, the Company has
successfully completed 13 acquisitions, enabling the Company to broaden its
product categories, expand its market coverage and extend its channels of
distribution. The Company's management has demonstrated an ability to identify
complementary acquisitions, complete them at reasonable valuations and
successfully manage their integration into the Company's operations. The Company
has used acquisitions both to expand into new markets, as with the Company's
expansion into the acrylic whirlpool market with its 1995 acquisition of SWC
Industries, Inc. ("Swirlway"), and to augment its position in a particular
market, as with the Company's rise to market leader in the pressure washer
market with its 1996 acquisition of Ex-Cell.
BUSINESS STRATEGY
Falcon intends to strengthen its market leadership positions and further
increase sales and EBITDA by continuing to capitalize on its current business
strengths and by implementing the following business strategies:
DOMESTIC AND INTERNATIONAL MARKET EXPANSION. The Company intends to
continue to expand market share domestically, while pursuing further expansion
internationally. Management believes significant opportunities for domestic
growth exist given the fragmentation of the building products industry and the
trend by wholesalers and retailers towards consolidation of their vendor bases.
The Company also plans to extend its domestic market coverage by adding
additional DIY and home improvement customers in key regional markets.
Additionally, the Company has identified significant growth opportunities in
several international markets, particularly Canada, Mexico, Latin America and
Asia. The Company plans to pursue these opportunities by increasing exports and
entering into strategic alliances with local manufacturers and distributors.
NEW PRODUCTS AND PRODUCT LINE EXTENSIONS. The Company plans to expand its
offering of innovative and high-quality products at competitive prices. The
Company has invested significant resources in research and development, and
management intends to continue to introduce new products and product line
extensions across all of the Company's product categories. Many of the Company's
wholesale and retail customers are seeking to expand their product offerings
while simultaneously consolidating their vendor bases. Falcon is well positioned
to capitalize on new product introductions and product line extensions due to
its low-cost production capability, existing distribution network, customer
relationships and strong brand names.
DISTRIBUTION CHANNEL EXPANSION. The Company plans to expand its
distribution network by adding additional key wholesale and retail accounts
while further penetrating those channels in which it already has strong
relationships. In addition, the Company intends to leverage its existing retail
channel relationships by cross-selling additional products into DIY and home
improvement accounts. One particular area of continued focus for the Company is
capitalization on the growing trend among homeowners and small contractors of
purchasing building products through the DIY channel from home improvement
centers and other retail outlets.
STRATEGIC AND COMPLEMENTARY ACQUISITIONS. Management believes that the
highly fragmented building products industry presents numerous opportunities to
make strategic and complementary acquisitions. The Company intends to pursue
acquisitions that complement current manufacturing and distribution capabilities
and provide the Company with opportunities to add capacity, consolidate
operations and achieve economies of scale. The Company also plans to explore
strategic acquisitions of manufacturers and distributors of highly engineered
building products which can be integrated into the Company's business strategy.
3
<PAGE>
THE RECAPITALIZATION
On June 17, 1997, pursuant to an Agreement and Plan of Merger 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, FBP merged with and into Falcon, with Falcon as the
surviving corporation (the "Merger" and, together with the financing
arrangements described below, the "Recapitalization"). Each outstanding share of
Falcon's Class A Common Stock, par value $0.01 per share (the "Class A Stock")
was converted into either cash or, at the election of the holder of the Class A
Stock, the right to retain one share of Class A Stock. In addition, all
outstanding options to purchase shares of Class A Stock were redeemed for cash
consideration. In the Recapitalization, approximately 88% of the issued and
outstanding shares of Class A Stock were converted into cash. Shares of Class A
Stock representing approximately 12% of the outstanding equity capital and
voting power of the Company with a value of approximately $18.3 million, were
retained by existing stockholders, approximately $2.8 million of which was
retained by the Company's senior management. In the Recapitalization,
Investcorp, its affiliates and certain other international investors organized
by Investcorp invested approximately $134.6 million in return for approximately
88% of the capital stock of Falcon. See "The Recapitalization," "Principal
Stockholders" and "Certain Transactions."
The Recapitalization was funded by (i) $175.0 million of borrowings under a
new senior credit facility (the "Credit Facility"), (ii) approximately $247.0
million from the offering of the Old Notes, the Old Discount Notes and the
Management Discount Notes (the "Original Offering"), and (iii) an equity
contribution by Investcorp, its affiliates and certain other international
investors organized by Investcorp of approximately $134.6 million. The Credit
Facility and the Original Offering are collectively referred to herein as the
Recapitalization Financings. The consummation of the Recapitalization Financings
occurred simultaneously with the Merger.
RISK FACTORS
For a discussion of certain matters that should be considered by prospective
investors in connection with the Exchange Offer, see "Risk Factors" beginning on
page 12.
------------------------
The Company is a Delaware corporation. Its principal offices are located at
Two North Riverside Plaza, Suite 1100, Chicago, Illinois 60606 and its telephone
number is (312) 906-9700.
4
<PAGE>
THE EXCHANGE OFFER
SIMULTANEOUSLY WITH THE ISSUANCE OF THE OLD DISCOUNT NOTES, THE COMPANY
ISSUED $683,000 AGGREGATE PRINCIPAL AMOUNT AT MATURITY OF 10 1/2% SERIES A
SENIOR SUBORDINATED DISCOUNT NOTES TO CERTAIN MEMBERS OF ITS SENIOR MANAGEMENT
(THE "MANAGEMENT DISCOUNT NOTES"). ALTHOUGH THE TERMS OF THE MANAGEMENT DISCOUNT
NOTES ARE IDENTICAL TO THE OLD DISCOUNT NOTES, THE MANAGEMENT DISCOUNT NOTES ARE
NOT INCLUDED IN THE EXCHANGE OFFER AND ARE NOT, FOR THE PURPOSES OF THE EXCHANGE
OFFER AND THIS PROSPECTUS, DEEMED TO BE OLD DISCOUNT NOTES.
<TABLE>
<S> <C>
Securities Offered........... Up to $145,000,000 aggregate principal amount of 9 1/2%
Series B Senior Subordinated Notes Due June 15, 2007 (the
"Notes") and up to $169,317,000 aggregate principal amount
at maturity of 10 1/2% Series B Subordinated Discount Notes
Due June 15, 2007 (the "Discount Notes" and, together with
the Notes, the "Securities").
The Exchange Offer...........
The Securities are being offered in exchange for a like
principal amount of the Company's Old Securities. Old
Securities may be exchanged only in integral multiples of
$1,000. The issuance of the Securities is intended to
satisfy the obligations of the Company under the terms of
the Registration Rights Agreement. The Management Discount
Notes are not included in the Exchange Offer.
Tenders; Expiration Date;
Withdrawal.................
The Exchange Offer will expire at 5:00 P.M., New York City
time on October 10, 1997, or such later date and time to
which it is extended by the Company (the "Expiration Date").
Tenders of Old Securities pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration Date. In
the event the Company terminates the Exchange Offer and does
not accept for exchange any Old Securities pursuant to the
Exchange Offer, the Company will promptly return such Old
Securities to the Holders thereof.
Accrued Interest on the
Notes......................
The Notes will bear interest from and including the date of
issuance of the Old Notes. Accordingly, Holders who receive
Notes in exchange for Old Notes will forego accrued but
unpaid interest on their exchanged Old Notes for the period
from and including the date of issuance of the Old Notes to
the date of exchange, but will be entitled to such interest
under the Notes.
Accreted Value of the
Discount Notes.............
The Accreted Value (as defined) of the Discount Notes, when
issued, will equal the Accreted Value of the Old Discount
Notes exchanged therefor.
Conditions of the Exchange
Offer......................
The Exchange Offer is subject to certain customary
conditions, any or all of which may be waived by the
Company. The Company currently expects that each of the
conditions will be satisfied and that no waivers will be
necessary. See "The Exchange Offer--Conditions to the
Exchange Offer."
Procedures for Tendering Old
Securities.................
Each Holder wishing to accept the Exchange Offer must
complete and sign the Letter of Transmittal, in accordance
with the instructions contained therein, and submit the
Letter of Transmittal to the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Exchange Agent identified below. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures.................
Holders of Old Securities who wish to tender their Old
Securities and whose Old Securities are not immediately
available or who cannot deliver their Old Securities and
Letter of Transmittal and any other documents required by
the Letter of Transmittal to the Exchange Agent prior to the
Expiration Date, must tender their Old Securities according
to the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Acceptance of Old Securities
and Delivery of
Securities.................
The Company will accept for exchange any and all Old
Securities which are properly tendered in the Exchange Offer
prior to 5:00 P.M., New York City time on the Expiration
Date. See "The Exchange Offer--Acceptance of Old Securities
for Exchange; Delivery of Securities."
Rights of Dissenting
Holders....................
Holders of Old Securities do not have any appraisal or
dissenters' rights under the Delaware General Corporation
Law in connection with the Exchange Offer.
Exchange Agent...............
Harris Trust and Savings Bank; telephone (212) 701-7624. See
"The Exchange Offer--Exchange Agent."
Use of Proceeds..............
There will be no cash proceeds to the Company from exchanges
made pursuant to the Exchange Offer.
</TABLE>
CONSEQUENCES OF EXCHANGING OLD SECURITIES PURSUANT TO THE EXCHANGE OFFER
Based on certain interpretive letters issued by the staff of the Commission
to third parties in unrelated transactions, Holders of Old Securities (other
than any holder who is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) who exchange their Old Securities for Securities
pursuant to the Exchange Offer generally may offer such Securities for resale,
resell such Securities and otherwise transfer such Securities without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided such Securities are acquired in the ordinary course of the holder's
business and such holder has no arrangement with any person to participate in a
distribution of such Securities. Each broker-dealer that receives Securities for
its own account in exchange for Old Securities must acknowledge that it will
deliver a prospectus in connection with any resale of such Securities. See "Plan
of Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Securities may not be offered or sold unless
they have been registered or qualified for sale in such jurisdiction or an
exemption from registration or qualification is available and the conditions
thereto have been met. The Company has agreed, pursuant to the Registration
Rights Agreement and subject to certain specified limitations therein, to
register or qualify the Securities for offer or sale under the securities or
blue sky laws of such jurisdictions as any Holder of the Securities or the Old
Securities reasonably requests in writing. If a holder of Old Securities does
not exchange such Old Securities for Securities pursuant to the Exchange Offer,
such Old Securities will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Securities may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "The Exchange Offer--Purpose of the
Exchange Offer" and "--Resales of Securities."
6
<PAGE>
TERMS OF THE SECURITIES
THE TERMS OF THE SECURITIES ARE IDENTICAL IN ALL MATERIAL RESPECTS TO THE
TERMS OF THE OLD SECURITIES, EXCEPT THAT THE SECURITIES ARE EXPECTED TO BE
FREELY TRANSFERABLE AS DESCRIBED UNDER "THE EXCHANGE OFFER--RESALES OF
SECURITIES."
<TABLE>
<S> <C>
THE NOTES
Maturity Date................
June 15, 2007.
Interest Payment Dates.......
June 15 and December 15 of each year, commencing December
15, 1997.
Optional Redemption..........
The Notes will not be redeemable at the Company's option
prior to June 15, 2002. Thereafter, the Notes will be
subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30, nor
more than 60, days notice, at the redemption prices set
forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined) thereon, if any, to the
applicable redemption date. Notwithstanding the foregoing,
prior to June 15, 2000, the Company may, on any one or more
occasions, redeem up to 35% of the original aggregate
principal amount of Notes at a redemption price of 109.5% of
the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of a public
offering of common stock of the Company; PROVIDED that at
least 65% of the original aggregate principal amount of
Notes remains outstanding immediately after the occurrence
of such redemption; and PROVIDED FURTHER that such
redemption shall occur within 60 days of the date of the
closing of such public offering. See "Description of the
Securities--Optional Redemption."
THE DISCOUNT NOTES
Maturity Date................
June 15, 2007.
Interest Payment Dates.......
Cash interest will not accrue on the Discount Notes prior to
June 15, 2002, but the Accreted Value (as defined) will
accrete on a semi-annual bond equivalent basis using a
360-day year comprised of twelve 30-day months such that the
Accreted Value will equal the full principal amount of the
Discount Notes on June 15, 2002. From and after June 15,
2002, cash interest on the Discount Notes will accrue at
10.5% per annum and will be payable in cash, semi-annually
on each June 15 and December 15 beginning December 15, 2002.
Original Issue Discount......
For federal income tax purposes, the Old Discount Notes were
issued at an original issue discount. Each holder of a
Discount Note must include in gross income for federal
income tax purposes a portion of such original issue
discount for each day during each taxable year on which a
Discount Note is held, even though cash interest does not
begin to accrue until June 15, 2002. As a result, holders of
Discount Notes will be required to include amounts in gross
income for federal income tax purposes before receiving cash
payments in respect of such amounts. See "Certain Federal
Income Tax Consequences."
Optional Redemption..........
The Discount Notes will not be redeemable at the Company's
option prior to June 15, 2002. Thereafter, the Discount
Notes will be subject
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
to redemption at any time at the option of the Company, in
whole or in part, upon not less than 30, nor more than 60,
days notice, at the redemption prices set forth herein plus
accrued and unpaid interest and Liquidated Damages thereon,
if any, to the applicable redemption date. Notwithstanding
the foregoing, prior to June 15, 2000, the Company may, on
any one or more occasions, redeem up to 35% of the original
aggregate principal amount at maturity of the Discount Notes
at a redemption price of 110.5% of the Accreted Value
thereof (determined at the redemption date), plus accrued
and unpaid Liquidated Damages thereon, if any, to the
redemption date, with the net cash proceeds of a public
offering of common stock of the Company; PROVIDED that at
least 65% of the original aggregate principal amount at
maturity of Discount Notes remains outstanding immediately
after the occurrence of each such redemption; and PROVIDED,
FURTHER, that such redemption shall occur within 60 days of
the date of the closing of such public offering. See
"Description of the Securities--Optional Redemption."
THE NOTES AND THE DISCOUNT NOTES
Guarantees...................
The Company's payment obligations under the Securities will
be jointly and severally guaranteed on a senior subordinated
basis (the "Senior Subordinated Guarantees") by each of the
Company's current and future Restricted Subsidiaries (the
"Guarantors"). The Senior Subordinated Guarantees will be
subordinated to the guarantees of Senior Debt issued by the
Guarantors under the Credit Facility. See "Description of
the Securities--Subsidiary Guarantees."
Ranking......................
The Securities will be unsecured obligations of the Company
and will be subordinated in right of payment to all existing
and future Senior Debt of the Company. The Securities will
rank PARI PASSU in right of payment with all other
indebtedness of the Company that is subordinated to Senior
Debt, if any, and will rank senior to any indebtedness of
the Company that is subordinated to the Securities. As of
June 30, 1997, Falcon had $425.1 million of consolidated
indebtedness, of which $177.7 million was Senior Debt. See
"Description of the Securities--Subordination."
Restrictive Covenants........
The indenture under which the Old Notes were and the Notes
will be issued (the "Note Indenture") and the indenture
under which the Old Discount Notes and the Management
Discount Notes were and the Discount Notes will be issued
(the "Discount Note Indenture" and, together with the Note
Indenture, the "Indentures") contain certain covenants that,
among other things, limit the ability of the Company and/or
its Restricted Subsidiaries (as defined) to (i) incur
additional indebtedness, (ii) pay dividends or make certain
other restricted payments, (iii) make investments, (iv)
enter into transactions with affiliates, (v) make certain
asset dispositions and (vi) merge or consolidate with, or
transfer substantially all of its assets to, another person.
The Indentures also limit the ability of the Company's
Restricted Subsidiaries to issue Capital Stock (as defined)
and to create restrictions on the ability of such Restricted
Subsidiaries to pay dividends or make any other
distributions. In addition, the Company will be obligated,
under certain
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
circumstances, to offer to repurchase the Securities with
the net cash proceeds of certain sales or other dispositions
of assets. However, all of these limitations and
prohibitions are subject to a number of important
qualifications. See "Description of the Securities--Certain
Covenants."
Absence of a Prior Public
Market for the
Securities.................
There has been no public market for the Old Securities and
it is not currently anticipated that an active public market
for the Securities will develop. The Initial Purchasers have
advised the Company that each of them currently intends to
make a market in the Securities. However, none of the
Initial Purchasers are obligated to do so, and any market
making with respect to the Securities may be discontinued at
any time without notice. No assurance can be given as to the
liquidity of the trading market for the Securities following
the Exchange Offer.
Change of Control............
Upon the occurrence of a Change of Control (as defined), (i)
the Company will have the option, at any time on or prior to
June 15, 2002, to redeem the Notes and/or the Discount Notes
in whole, but not in part, at a redemption price equal to
100% of the principal amount of the Notes, plus accrued and
unpaid interest and Liquidated Damages, if any, to the date
of redemption, plus the Applicable Premium (as defined), or
in the case of Discount Notes, at a redemption price equal
to 100% of the Accreted Value on the date of redemption and
Liquidated Damages, if any, plus the Applicable Premium and
(ii) if the Company does not so redeem the Notes or Discount
Notes, or if a Change of Control occurs after June 15, 2002,
each Holder of Securities will have the right to require the
Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Securities
pursuant to the offer described below (the "Change of
Control Offer") at an offer price in cash equal to 101% of
the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to
the date of purchase (or, with respect to Discount Notes, if
such Change of Control Offer occurs prior to the Full
Accretion Date (as defined), 101% of the Accreted Value
thereof on the date of repurchase plus Liquidated Damages,
if any). See "Optional Redemption" and "Description of the
Securities--Repurchase at the Option of Holders--Change of
Control."
</TABLE>
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical and pro forma consolidated
operating data, consolidated balance sheet data and other data of the Company.
The summary historical financial and other data for the five years ended
December 31, 1996 have been derived from the historical Consolidated Financial
Statements of the Company, which have been audited by Arthur Andersen LLP and
which, in the case of the three most recent years, should be read in conjunction
with the audited Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus. The summary historical unaudited
financial data at June 30, 1997 and for the six months ended June 30, 1996 and
June 30, 1997 have been derived from and should be read in conjunction with the
Company's historical unaudited Condensed Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus. In the opinion of
the Company's management, the Company's unaudited Condensed Consolidated
Financial Statements include all adjustments, consisting only of normal
recurring adjustments (except for the effects of the Recapitalization),
necessary to present fairly the data for such periods. The results for the six
months ended June 30, 1997 are not necessarily indicative of the results
expected for the year ended December 31, 1997 or for any future periods. The
unaudited pro forma statements of income reflect the Recapitalization as if it
had occurred on January 1, 1996; the unaudited pro forma statement of income for
the year ended December 31, 1996 excludes certain nonrecurring items directly
attributable to the Recapitalization. The pro forma financial data do not
purport to represent what the Company's financial position or results of
operations would actually have been had the Recapitalization in fact occurred on
the assumed date or to project the Company's financial position or results of
operations for any future date or period. The following table should also be
read in conjunction with "Unaudited Pro Forma Consolidated Statements of
Income," "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------- JUNE 30,
PRO FORMA --------------
1992 1993 1994 1995 1996 1996 1996 1997
------ ------ ------ ------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
OPERATING DATA:
Net sales.................................... $345.2 $372.3 $440.7 $471.3 $633.2 $633.2 $312.7 $355.9
Cost of sales................................ 270.2 291.0 344.9 378.5 513.6 513.6 253.8 290.9
------ ------ ------ ------ ------ --------- ------ ------
Gross earnings............................... 75.0 81.3 95.8 92.8 119.6 119.6 58.9 65.0
Selling, general and administrative
expenses................................... 32.6 36.1 42.2 43.7 55.7 57.5(a) 29.5 29.9
Securitization expense(b).................... -- -- 1.9 3.3 4.1 4.1 1.9 2.1
Recapitalization expenses(c)................. -- -- -- -- -- -- -- 36.3
------ ------ ------ ------ ------ --------- ------ ------
Operating income (loss)...................... 42.4 45.2 51.7 45.8 59.8 58.0 27.5 (3.3)
Net interest expense......................... 10.0 8.0 8.3 10.0 11.0 44.1 5.5 6.8
------ ------ ------ ------ ------ --------- ------ ------
Income (loss) before income taxes............ 32.4 37.2 43.4 35.8 48.8 13.9 22.0 (10.1)
Provision (benefit) for income taxes......... 13.7 15.1 17.5 13.7 18.8 5.4 8.5 2.2
------ ------ ------ ------ ------ --------- ------ ------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principles................................. 48.7 22.1 25.9 22.1 30.0 8.5 13.5 (12.3)
Extraordinary item:
Early extinguishment of debt, net.......... -- -- -- -- -- -- -- (1.5)
------ ------ ------ ------ ------ --------- ------ ------
Income (loss) before cumulative effect of
change in accounting principles............ 18.7 22.1 25.9 22.1 30.0 8.5 13.5 (13.8)
Cumulative effect of change in accounting
principles, net(d)......................... -- (3.6) -- -- -- -- -- --
------ ------ ------ ------ ------ --------- ------ ------
Net income (loss)............................ $ 18.7 $ 18.5 $ 25.9 $ 22.1 $ 30.0 $ 8.5 $ 13.5 $(13.8)
------ ------ ------ ------ ------ --------- ------ ------
------ ------ ------ ------ ------ --------- ------ ------
(TABLE CONTINUED ON FOLLOWING PAGE)
<CAPTION>
PRO FORMA PRO FORMA
6 MONTHS 12 MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
--------- ---------
<S> <C> <C>
OPERATING DATA:
Net sales.................................... $355.9 $676.4
Cost of sales................................ 290.9 550.8
--------- ---------
Gross earnings............................... 65.0 125.6
Selling, general and administrative
expenses................................... 30.8(a) 57.9(a)
Securitization expense(b).................... 2.1 4.3
Recapitalization expenses(c)................. 36.3 36.3
--------- ---------
Operating income (loss)...................... (4.2) 27.1
Net interest expense......................... 22.1 43.8
--------- ---------
Income (loss) before income taxes............ (26.3) (16.7)
Provision (benefit) for income taxes......... (4.0) (0.4)
--------- ---------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principles................................. (22.3) (16.3)
Extraordinary item:
Early extinguishment of debt, net.......... (1.5) (1.5)
--------- ---------
Income (loss) before cumulative effect of
change in accounting principles............ (23.8) (17.8)
Cumulative effect of change in accounting
principles, net(d)......................... -- --
--------- ---------
Net income (loss)............................ $(23.8) $(17.8)
--------- ---------
--------- ---------
(TABLE CONTINUED ON FOLLOWING PAGE)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------- JUNE 30,
PRO FORMA --------------
1992 1993 1994 1995 1996 1996 1996 1997
------ ------ ------ ------ ------ --------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(e).................................... $ 53.7 $ 57.3 $ 65.8 $ 60.6 $ 77.1 $ 76.3 $ 36.4 $ 41.9
Depreciation and amortization(f)............. 11.3 12.1 12.8 14.5 15.5 16.5 7.9 7.9
Capital expenditures(g)...................... 8.5 10.1 19.7 16.4 20.0 20.0 8.6 6.5
Cash interest expense........................ 10.0 8.0 8.2 9.8 10.6 30.3 5.4 6.2
Total interest expense(f).................... 10.0 8.0 8.2 9.8 10.6 41.3 5.4 6.6
Ratio of EBITDA to cash interest expense..... 2.5x
Ratio of EBITDA to total interest expense.... 1.8x
Ratio of earnings to fixed charges(h)........ 1.3x
Deficiency of earnings to cover fixed
charges.................................... --
<CAPTION>
PRO FORMA PRO FORMA
6 MONTHS 12 MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
--------- ---------
<S> <C> <C>
OTHER DATA:
EBITDA(e).................................... $ 41.5 $ 81.8
Depreciation and amortization(f)............. 8.4 16.6
Capital expenditures(g)...................... 6.5 18.0
Cash interest expense........................ 14.8 29.4
Total interest expense(f).................... 20.7 41.0
Ratio of EBITDA to cash interest expense..... 2.8x 2.8x
Ratio of EBITDA to total interest expense.... 2.0x 2.0x
Ratio of earnings to fixed charges(h)........ -- --
Deficiency of earnings to cover fixed
charges.................................... $ 26.3 $ 16.7
</TABLE>
<TABLE>
<S> <C>
<CAPTION>
<S> <C>
AT JUNE 30, 1997
---------------------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 41.7
Total assets.............................................................................. 357.9
Total debt (including current maturities)................................................. 425.1
Total stockholders' deficit............................................................... (188.5)(i)
</TABLE>
- ----------------------------------
(a) Includes an estimate of incremental administrative expenses which would have
been incurred by the Company and amortization of prepaid management fees
totaling $1.8 million for the pro forma year ended December 31, 1996 and the
pro forma 12 months ended June 30, 1997 and $0.9 million for the pro forma
six months ended June 30, 1997.
(b) Represents expenses incurred by the Company in connection with its
receivables securitization agreements.
(c) Represents expenses incurred in connection with the Recapitalization
including those for investment banking services, transaction bonuses and
conversion of outstanding stock options, and legal, accounting and other
costs.
(d) Reflects the impact of the adoption in 1993 of Statement of Financial
Accounting Standards No. 112 relating to post-employment benefits and
Statement of Financial Accounting Standards No. 109 relating to income
taxes.
(e) EBITDA represents income before interest expense and income taxes excluding
the following charges: (i) depreciation and amortization expense; (ii) costs
associated with Ultravent-Registered Trademark- as follows: $1.3 million,
$0.3 million and $1.8 million in 1994, 1995 and 1996, respectively, $1.0
million for the six months ended June 30, 1996 and 1997 and the pro forma
six months ended June 30, 1997, and $1.8 million for the pro forma year
ended December 31, 1996 and the pro forma twelve months ended June 30, 1997
(See "Business--Legal Proceedings"); and (iii) $36.3 million of
Recapitalization expenses for the six months ended June 30, 1997, the pro
forma six months ended June 30, 1997 and the pro forma twelve months ended
June 30, 1997. The Company has included information concerning EBITDA
because it is commonly used by certain investors as a measure of a company's
ability to service and/or incur debt. However, EBITDA should not be
considered in isolation or as a substitute for net income, cash flows or
other consolidated income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of a company's
profitability or liquidity.
(f) Excludes amortization of debt issuance costs.
(g) Management estimates that approximately $8.0 million to $10.0 million of the
amount expended for each of the years ended December 31, 1994, 1995 and 1996
has been for the renewal and replacement of existing facilities and
equipment.
(h) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. Fixed
charges consist of interest expense, amortization of deferred debt issuance
costs and the interest portion of the Company's rent expense.
(i) The stockholders' deficit at June 30, 1997 was the result of the
Recapitalization and the recording of related expenses, net of income tax
benefits. In connection with the Recapitalization, Investcorp, certain
affiliates and a group of international investors organized by Investcorp
made an equity investment of approximately $134.6 million, representing
approximately 88% of the outstanding capital stock and voting power of the
Company.
11
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CONSIDER CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION SET FORTH ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INCLUDE RISKS AND OTHER
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE THOSE DISCUSSED BELOW, AS WELL AS GENERAL ECONOMIC AND
BUSINESS CONDITIONS, COMPETITION AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS
PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR
PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS SET FORTH BELOW.
SUBSTANTIAL LEVERAGE; DEBT SERVICE OBLIGATIONS; LIQUIDITY
In connection with the Recapitalization, the Company incurred a significant
amount of indebtedness. As of June 30, 1997, Falcon had $425.1 million of
consolidated indebtedness, of which $177.7 million was Senior Debt, and a
deficit of $188.5 million in stockholders' equity. Falcon may incur additional
indebtedness in connection with its business strategy of pursuing strategic
acquisitions. In addition, the Company will maintain a Receivables
Securitization Program (as defined).
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance, its indebtedness (including the
Securities), or to fund planned capital expenditures and finance acquisitions
will depend on its future performance, which to a certain extent is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based on the current and anticipated level
of operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Credit Facility and liquidity
under its Receivables Securitization Program, will be adequate to meet the
Company's anticipated future requirements for working capital, budgeted capital
expenditures, future acquisition financing and scheduled payments of principal
and interest on its indebtedness, including the Securities, for the foreseeable
future. The Company, however, may need to refinance all or a portion of the
principal of the Securities on or prior to maturity. There can be no assurance
that the Company's business will generate sufficient cash flow from operations
or that future borrowings will be available under the Credit Facility or that
sufficient liquidity will exist under the Receivables Securitization Program in
an amount sufficient to enable the Company to service its indebtedness,
including the Securities, or make anticipated capital expenditures and fund
future acquisitions. In addition, there can be no assurance that the Company
will be able to effect any refinancing on commercially reasonable terms, or at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to Holders of the Securities, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest on the Securities and its other existing
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the agreements governing the Company's long-term indebtedness
contain certain restrictive financial and operating covenants; (iv) certain
indebtedness under the Credit Facility is at variable rates of interest, which
could cause the Company to be vulnerable to increases in interest rates; (v) all
of the indebtedness outstanding under the Credit Facility is secured by
substantially all the assets of the Company and will become due prior to the
time the principal on the Securities will become due; (vi) future liquidity
under the Company's Receivable Securitization Program is dependent on the
historical performance of its customers under the terms of their obligations to
the Company; (vii) significant delinquencies could affect the future level of
proceeds available under the Receivable Securitization Program; (viii) the
Company is substantially more leveraged than certain of its competitors, which
might place the Company at a competitive disadvantage; (ix) the Company may be
hindered in its ability to adjust rapidly to changing market conditions; and (x)
the Company's substantial degree of leverage could make it
12
<PAGE>
more vulnerable in the event of a downturn in general economic conditions or in
its business. In addition, the degree to which the Company is leveraged could
prevent it from repurchasing all of the Securities tendered to it upon the
occurrence of a Change of Control. See "Description of the Securities--
Repurchase at the Option of Holders--Change of Control" and "The
Recapitalization--The Credit Facility" and "--Description of the Receivables
Securitization Program."
SUBORDINATION OF SECURITIES; ASSET ENCUMBRANCE
The Securities will be subordinated to all Senior Debt, including Senior
Debt incurred after the date of the Indentures. As of June 30, 1997, the Company
had $177.7 million of Senior Debt outstanding including debt under the Credit
Facility. The Indentures permit the Company to incur indebtedness under the
$125.0 million revolving credit portion of the Credit Facility, as well as
additional Senior Debt provided certain financial or other conditions are met.
The Company's Restricted Subsidiaries have guaranteed the obligations of the
Company under the Indentures and the Securities, but such guarantees will be
subordinated to all Senior Debt of such Guarantors, which include the guarantees
of the Company's indebtedness under the Credit Facility. The Securities will be
subordinated in right of payment to all existing and future Senior Debt of the
Company and the Guarantors, including the principal, premium (if any) and
interest with respect to the Senior Debt under the Credit Facility. However, the
Indentures provide that the Company may not incur or otherwise become liable for
any indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Securities.
The Company may not pay principal of, premium on (if any), or interest on
the Securities, make any deposit pursuant to defeasance provisions or repurchase
or redeem or otherwise retire any Securities (i) if any Senior Debt is not paid
when due or (ii) if any other default on Senior Debt occurs that permits the
holders of such Senior Debt to accelerate maturity of such Senior Debt, in
accordance with its terms, and the applicable Trustee receives a notice of such
default unless, in either case, the default has been cured or waived, any such
acceleration has been rescinded or such Senior Debt has been paid in full or, in
the case of any default other than a payment default, 179 days have passed since
the default notice is given. Upon any payment or distribution of the assets of
the Company or any Guarantor in connection with a total or partial liquidation
or dissolution or reorganization of or similar proceeding relating to the
Company or such Guarantor, the holders of Senior Debt will be entitled to
receive payment in full before the holders of the Securities are entitled to
receive any payment (other than Permitted Junior Securities (as defined)). See
"Description of the Securities--Subordination." The Securities are also
unsecured and thus, in effect, will rank junior to any secured indebtedness of
the Company or the Guarantors. The indebtedness outstanding under the Credit
Facility is collateralized by liens on substantially all of the assets of the
Company.
In addition, under certain circumstances, the Senior Subordinated Guarantee
provided by any Subsidiary of the Company could be set aside under fraudulent
conveyance or similar laws. See "-- Fraudulent Conveyance; Preferential
Transfer." In any such case, the Securities would be effectively subordinate to
all liabilities of such Subsidiary, including trade debt.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Old Discount Notes were issued at a substantial discount from their
principal amount. Consequently, the Holders of the Discount Notes generally will
be required to include amounts in gross income for federal income tax purposes
in advance of receipt of any cash payment on the Discount Notes to which the
income is attributable. See "Certain Federal Income Tax Considerations" for a
more detailed discussion of the federal income tax consequences to the holders
of the Discount Notes of the purchase, ownership and disposition of the Discount
Notes.
13
<PAGE>
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the
Discount Notes, the claim of a Holder of Discount Notes with respect to the
principal amount thereof will likely be limited to an amount equal to the sum of
the Accreted Value (as defined in the Discount Note Indenture) as of the
commencement of such case.
RESTRICTIVE LOAN COVENANTS
The Credit Facility includes certain covenants that, among other things,
restrict: (i) the making of investments, loans and advances and the paying of
dividends and other restricted payments; (ii) the incurrence of additional
indebtedness; (iii) the granting of liens, other than liens created pursuant to
the Credit Facility and certain permitted liens; (iv) mergers, consolidations,
and sales of all or a substantial part of the Company's business or property;
(v) the sale of assets; and (vi) the making of capital expenditures. The Credit
Facility also requires the Company to maintain certain financial ratios,
including interest coverage and leverage ratios. All of these restrictive
covenants may restrict the Company's ability to expand or to pursue its business
strategies. The ability of the Company to comply with these and other provisions
of the Credit Facility may be affected by changes in economic or business
conditions, results of operations or other events beyond the Company's control.
The breach of any of these covenants could result in a default under the Credit
Facility, in which case, depending on the actions taken by the lenders
thereunder or their successors or assignees, such lenders could elect to declare
all amounts borrowed under the Credit Facility, together with accrued interest,
to be due and payable, and the Company could be prohibited from making payments
with respect to the Securities until the default is cured or all Senior Debt is
paid or satisfied in full. If the Company were unable to repay such borrowings,
such lenders could proceed against their collateral. If the indebtedness under
the Credit Facility were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full such indebtedness and
the other indebtedness of the Company, including the Securities. See "The
Recapitalization--The Credit Facility" and "Description of the
Securities--Subordination."
CONTROL OF FALCON
Shares representing approximately 88% of the voting power of Falcon are held
by a subsidiary of Investcorp and certain affiliates of Investcorp which have
entered into revocable management services or similar agreements with an
affiliate of Investcorp pursuant to which such affiliate has the authority to
direct the voting of such shares for as long as such agreements are in effect.
Accordingly, Investcorp and its affiliates control Falcon, and have the power to
elect the majority of its directors, to appoint new management and to approve
any action requiring the approval of the holders of its capital stock voting as
a single class, including adoption of most amendments to Falcon's certificate of
incorporation and approval of mergers or sales of substantially all of Falcon's
assets. The directors so elected will have the authority to make decisions
affecting the capital structure of Falcon, including the issuance of additional
capital stock, the implementation of stock repurchase programs and the
declaration of dividends.
In addition, the existence of a small group of controlling stockholders of
Falcon may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from seeking to acquire, a majority of
the outstanding equity securities of Falcon. A third party would be required to
negotiate any such transaction with such stockholders and the interests of such
stockholders may be different from the interests of other Falcon stockholders.
Although Investcorp and its affiliates own approximately 88% of the voting
power of Falcon, there is no current intention to engage in any transaction
which would eliminate the approximately 12% of the outstanding equity of Falcon
held by other stockholders of Falcon. While it is, therefore, highly unlikely
that such a transaction would occur in the forseeable future, no assurance can
be given that such a transaction will not occur.
14
<PAGE>
ACHIEVING BUSINESS STRATEGY; ABILITY TO COMPLETE ACQUISITIONS
The Company's ability to implement its business strategy successfully is
dependent on a number of factors including competition, availability of working
capital and general economic conditions. In addition, a significant element of
the Company's business strategy is to pursue strategic acquisitions that either
expand or complement the Company's products or markets. There can be no
assurance that the Company will be able to identify and make acquisitions on
acceptable terms, that the Company will be able to obtain financing for such
acquisitions on acceptable terms or that the Company will be able successfully
to integrate such acquisitions into its existing operations. The Indentures and
the Credit Facility substantially limit the Company's ability to incur
additional debt to finance such acquisitions. See "Business--Business Strategy,"
"Description of the Securities" and "The Recapitalization--The Credit Facility."
COMPETITION
The Company competes in each of its markets with several national and
regional suppliers of building products. Some of the Company's competitors are
larger, have greater financial resources and are less leveraged than the
Company. The Company competes on the basis of, among other things, competitive
prices, prompt availability, product differentiation, quality products and
services and a broad product offering. See "Business--Competition."
SENSITIVITY TO ECONOMIC CYCLES; AVAILABILITY AND PRICING OF RAW MATERIALS
A significant percentage of the Company's sales of residential and
commercial building products is attributable to new residential and
nonresidential construction, which are affected by such cyclical factors as
interest rates, inflation, consumer spending habits and employment. In addition,
the Company is dependent upon raw materials and components (including, among
others, steel, mylar, clay, electric motors and aluminum) purchased from third
parties. Accordingly, the Company's results of operations and financial
condition in the past have been, and may again in the future be, adversely
affected by increases in raw material or component costs or their lack of
availability. See "Business--Industry" and "Business-- Raw Materials and
Suppliers."
DEPENDENCE ON KEY CUSTOMERS
The Company's four largest customers accounted for approximately 35% of the
Company's 1996 net sales, including Sears, which accounted for approximately 13%
of the Company's 1996 net sales. The Company does not have contractual
agreements with any of these customers for the supply of products. The loss of
any of these customers or a significant decrease in the volume of products
supplied to any of such customers could have a material adverse effect on the
Company. See "Business--Marketing and Distribution."
ENVIRONMENTAL REGULATION AND PROCEEDINGS
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharge to
waters, the generation, handling, storage, transportation, treatment and
disposal of waste and other materials and health and safety matters. The Company
believes that its operations and facilities have been and are being operated in
compliance in all material respects with applicable environmental and health and
safety laws and regulations, many of which provide for substantial fines and
criminal sanctions for violations. However, the operation of manufacturing
plants entails risks in these areas, and the Company is currently involved in
various proceedings that are expected to result in the incurrence of costs for
clean-up and other remedial activities. The Company believes that its
liabilities for these matters will not have a material adverse effect on its
financial condition, results of operations or competitive position; however,
there can be no assurance that the Company will not incur costs in the future
that will have a material adverse effect on the Company. In addition,
potentially
15
<PAGE>
significant expenditures could be required in order to comply with evolving
environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future. See "Business-- Environmental Matters."
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings and
claims incident to the normal conduct of its business, including the
environmental matters described above. Although it is impossible to predict the
outcome of any pending legal proceeding, the Company believes that such legal
proceedings and claims, individually and in the aggregate, are either without
merit, are covered by insurance or are adequately reserved for, and will not
have a material adverse effect on its financial condition or results of
operations.
In addition to the matters covered by the preceding paragraph, in May 1994,
Underwriters' Laboratories of Canada ("ULC") suspended its recognition of high
temperature plastic venting ("HTPV") for gas appliance systems, including the
Ultravent-Registered Trademark- product distributed by the Company. This action
resulted from reports of problems with HTPV, including improper installation,
cracking, inadequate joint adhesion, and related safety hazards, including the
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 remediated. Most 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 and 1996 were minimal.
The Company is a defendant in a suit in Canada captioned ONTARIO NEW HOME
WARRANTY PROGRAM V. CHEVRON CHEMICAL CORP. ET AL--Ontario Court--General
Division--No. 22487/96, which was filed on February 27, 1996 against 24 entities
including heating appliance manufacturers, plastic vent manufacturers and
distributors, public utilities and listing agencies 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 a lawsuit captioned GOODMAN MANUFACTURING COMPANY V. CHEVRON CHEMICAL CORP.
ET AL-- County Court--Harris County, Texas--No. 96-15816, in which the Company
has been sued along with two other defendants for reimbursement of costs
associated with the plaintiff's HTPV corrective action program. In a lawsuit
captioned RHEEM CORP. ET AL V. GENERAL ELECTRIC CO.--Superior Court--Suffolk
County, Massachusetts--No. 97-1709-B, filed March 31, 1997, the Company and two
other defendants have been sued by seven furnace manufacturers which are seeking
reimbursement for costs incurred 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. On April 1, 1997, the Company filed its
own legal action captioned HART & COOLEY, INC. V. AMANA REFRIGERATION,
INC.--Circuit Court--Ottawa County, Michigan--No. 97-27729-NP against all
identifiable appliance manufacturers that certified HTPV for use with their
appliance systems, including the plaintiffs in the Texas and Massachusetts
actions. In its 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 regarding
HTPV captioned ENGEL V. CHEVRON CHEMICAL CORP. ET AL--Circuit Court--Rutherford
County, Tennessee--No. 37715, filed January 9, 1997. In this 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.
The Company is engaged in ongoing discussions with the United States
Consumer Product Safety Commission ("CPSC"), which has been advised of the ULC
action and the actions taken by the MCCR.
16
<PAGE>
The CPSC continues to investigate HTPV and has met with all of the manufacturers
of HTPV, various appliance manufacturers and other entities with technical
expertise. The CPSC's 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. However, 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. It is
not possible at this time to predict the outcome of the mediation.
With respect to these matters, the Company, on September 16, 1996, filed an
action in state court in Illinois against certain insurance carriers captioned
HART & COOLEY, INC. V. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
ET AL--Circuit Court of Cook County, Illinois--No. 96-CH-9947. 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 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.
While it is impossible at this time to give a firm estimate of the ultimate
cost to the Company, management currently believes that the after-tax cost to
the Company of resolving the Ultravent matters, discussed above, should range
from a non-material amount to $20.0 million, after considering numerous factors
including, in certain scenarios, the possibility of third-party reimbursements
and insurance recoveries. It is possible that, in the event that a number of the
factors referenced above were resolved adversely to the Company and no
third-party reimbursements or insurance recoveries were received, the upper
limit of such range would be exceeded. While no assurance 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.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
A Change of Control would require the Company to refinance substantial
amounts of indebtedness. Upon the occurrence of a Change of Control, when the
Securities are called for redemption, (i) the holders of the Notes would be
entitled to require the Company to purchase the Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date and (ii) the holders of the Discount Notes would be
entitled to require the Company to purchase the Discount Notes at a purchase
price equal to 101% of the Accreted Value thereof at the repurchase date plus,
in the case of any purchase after the Full Accretion Date, accrued and unpaid
interest to the repurchase date. However, the Credit Facility prohibits the
purchase of the Securities by the Company in the event of a Change of Control,
unless and until such time as the indebtedness under the Credit Facility is
repaid in full. The Company's failure to purchase the Securities would result in
a default under the Indentures, the Credit Facility and the Receivables
Securitization Program. The inability to repay the indebtedness under the Credit
Facility, if accelerated, would also constitute an event of default under the
Indentures, which could have adverse consequences to the Company and the holders
of the Securities. In the event of a Change of Control, there can be no
assurance that the Company would have sufficient assets
17
<PAGE>
to satisfy all of its obligations under the Credit Facility and the Securities
or to replace the liquidity provided through the Receivables Securitization
Program. See "The Recapitalization" and "Description of the
Securities--Repurchase at the Option of Holders--Change of Control."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the
abilities and experience of its senior management team. The loss of the services
of one or more of these senior executives without a suitable replacement could
have a material adverse effect on the Company's business and future operations.
The Company does not maintain key man life insurance with respect to any of its
executive officers. See "Management--Executive Compensation--Compensation
Related to the Recapitalization."
FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER
If the court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company or any Guarantor as a
debtor-in-possession, were to find under relevant federal and state fraudulent
conveyance statutes that the Company or any Guarantor did not receive fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Securities or its Senior Subordinated Guarantees, and that,
at the time of such incurrence, the Company or such Guarantor (i) was insolvent,
(ii) was rendered insolvent by reason of such incurrence or grant, (iii) was
engaged in a business or transaction for which the assets remaining with the
Company or such Guarantor constituted unreasonably small capital or (iv)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, such court, subject to applicable statutes of
limitation, could avoid the Company's obligations under the Securities or the
Guarantor's obligations under the Senior Subordinated Guarantees, subordinate
the Securities or the Senior Subordinated Guarantees to other indebtedness of
the Company or the Guarantors or take other action detrimental to the holders of
the Securities.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all that company's property at a fair valuation, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could avoid an
incurrence of indebtedness, including the Securities, if it determined that such
transaction was made with intent to hinder, delay or defraud creditors, or a
court could subordinate the indebtedness, including the Securities, to the
claims of all existing and future creditors on similar grounds. Based upon
financial and other information available to it, management believes the Company
was solvent at the time of the Recapitalization and continues to be solvent.
However, there can be no assurance as to what standard a court would apply in
order to determine whether the Company or the Guarantors were "insolvent."
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Guarantor within 90 days after any payment by the Company or any
Guarantor with respect to the Securities or the Senior Subordinated Guarantees
or if the Company or any Guarantor anticipated becoming insolvent at the time of
such payment, all or a portion of such payment could be avoided as a
preferential transfer and the recipient of such payment could be required to
return such payment.
OPERATION THROUGH SUBSIDIARIES
The Company conducts substantially all of its operations through its
Subsidiaries. As a result, the Company is required to rely, at least in part,
upon payment from its Subsidiaries for the funds necessary to meet its
obligations, including the payment of interest on and principal of the
Securities. The ability of the
18
<PAGE>
Subsidiaries to make such payments will be subject to, among other things,
applicable state laws. Claims of creditors of the Company's Subsidiaries will
generally have priority as to the assets of such Subsidiaries over the claims of
the Company.
Although the Senior Subordinated Guarantees provide the holders of the
Securities with a direct claim against the assets of the Guarantors, enforcement
of the Senior Subordinated Guarantees against any Guarantor would be subject to
certain "suretyship" defenses available to guarantors generally, and such
enforcement would also be subject to certain defenses available to the
Guarantors in certain circumstances. See "--Fraudulent Conveyance; Preferential
Transfer." Although the Indentures contain waivers of most "suretyship"
defenses, certain of those waivers may not be enforced by a court in a
particular case. To the extent that the Senior Subordinated Guarantees are not
enforceable, the Securities would be effectively subordinated to all liabilities
of the Guarantors, including trade payables of such Guarantors, whether or not
such liabilities otherwise constitute Senior Debt under the applicable
Indenture. In addition, the payment of dividends to the Company by its
Subsidiaries is contingent upon the earnings of those Subsidiaries and is
subject to various business considerations and, for certain Subsidiaries, the
Indentures permit restrictive loan covenants to be contained in the instruments
governing the indebtedness of such Subsidiaries, including covenants which
restrict in certain circumstances the payment of dividends and distributions and
the transfer of assets to the Company. See "The Recapitalization--The Credit
Facility," and "Description of the Securities--Dividend and Other Payment
Restrictions Affecting Subsidiaries."
LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
There is currently no established market for the Old Securities. No
assurance can be given as to the liquidity of the trading market for the
Securities, or, in the case of non-tendering holders of Old Securities, the
trading market for the Old Securities following the Exchange Offer. If such
markets were to exist, the Securities could trade at prices that may be higher
or lower than the initial market values thereof depending on many factors,
including prevailing interest rates and the markets for similar securities. The
Exchange Offer will not be conditioned upon any minimum or maximum aggregate
principal amount of Securities being tendered for exchange. The Initial
Purchasers have advised the Company that each of them currently intends to make
a market in the Securities. However, none of the Initial Purchasers are
obligated to do so, and any market making with respect to the Securities may be
discontinued at any time without notice.
The Company does not intend to apply for listing of the Securities on any
securities exchange or for quotation through the Nasdaq National Market. The
liquidity of, and trading market for, the Securities may be adversely affected
by general declines in the market for similar securities, independent of the
financial performance of, and prospects for, the Company.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
various provisions of the Reform Act. All statements, other than statements of
historical facts, included in this Prospectus that address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, including such things as future capital expenditures (including the
amount and nature thereof), business strategy and measures to implement
strategy, competitive strengths, goals, expansion and growth of the Company's
and its subsidiaries' business and operations, plans, references to future
success and other such matters are forward-looking statements. These statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. However, whether actual results and
developments will conform to the Company's expectations and predictions is
subject to a number of risks and uncertainties, including the significant
considerations and risks discussed in this Prospectus; general economic, market
or business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by the Company and its subsidiaries, competitive
actions by other companies; changes in laws or regulations; and other factors,
many of which are beyond the control of the Company and its subsidiaries.
Consequently, all of the forward-looking statements made in this Prospectus are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on the Company and its subsidiaries or their business or operations.
USE OF PROCEEDS
The Company will receive no proceeds from the exchange of the Securities for
the Old Securities pursuant to the Exchange Offer.
20
<PAGE>
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is designed to provide Holders of Old Securities with an
opportunity to acquire Securities which, unlike the Old Securities, will be
freely tradable at all times, subject to any restrictions on transfer imposed by
state "blue sky" laws and provided that the Holder is not an affiliate of the
Company within the meaning of the Securities Act and represents that the
Securities are being acquired in the ordinary course of such Holder's business
and the Holder is not engaged in, and does not intend to engage in a
distribution of the Securities. The outstanding Old Securities in the aggregate
principal amount at maturity of $314.317 million were originally issued and sold
on June 17, 1997 (the "Original Issue Date") in order to provide financing for
the Recapitalization. The original sale to the Initial Purchasers was not
registered under the Securities Act in reliance upon the exemption provided by
Section 4(2) of the Securities Act and the concurrent resale of the Old
Securities to investors was not registered under the Securities Act in reliance
upon the exemption provided by Rule 144A promulgated under the Securities Act.
The Old Securities may not be reoffered, resold or transferred other than
pursuant to a registration statement filed pursuant to the Securities Act or
unless an exemption from the registration requirements of the Securities Act is
available. Pursuant to Rule 144, Old Securities may generally be resold (a)
commencing one year after the Original Issue Date, in an amount up to, for any
three-month period, the greater of 1% of the Old Securities then outstanding or
the average weekly trading volume of the Old Securities during the four calendar
weeks immediately preceding the filing of the required notice of sale with the
Commission and (b) commencing two years after the Original Issue Date, in any
amount and otherwise without restriction by a Holder who is not, and has not
been for the preceding 90 days, an affiliate of the Company. The Old Securities
are eligible for trading in the PORTAL Market, and may be resold to certain
Qualified Institutional Buyers pursuant to Rule 144A. Certain other exemptions
may also be available under other provisions of the federal securities laws for
the resale of the Old Securities.
In connection with the original issue and sale of the Old Securities, the
Company entered into a Registration Rights Agreement, pursuant to which it
agreed to file with the Commission a registration statement covering the
exchange by the Company of the Securities for the Old Securities (the "Exchange
Offer Registration Statement"). The Registration Rights Agreement provides that
(i) the Company will file the Exchange Offer Registration Statement with the
Commission on or prior to 90 days after the Original Issue Date, (ii) the
Company will use its best efforts to have the Exchange Offer Registration
Statement declared effective by the Commission on or prior to 180 days after the
Original Issue Date, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue, on or prior to 30 business days after
the date on which the Exchange Offer Registration Statement is declared
effective by the Commission, Securities in exchange for all Old Securities
tendered prior thereto in the Exchange Offer and (iv) if obligated to file a
shelf registration statement covering the Old Securities (a "Shelf Registration
Statement"), the Company will file the Shelf Registration Statement with the
Commission on or prior to 90 days after such filing obligation arises and use
its best efforts to cause the Shelf Registration Statement to be declared
effective by the Commission on or prior to 135 days after such obligation arises
and cause such Shelf Registration Statement to remain effective and usable for a
period of two years following the initial effectiveness thereof. If (a) the
Company fails to file any of the registration statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness, (c) the
Company fails to consummate the offer within 30 business days after the date on
which the Exchange Offer Registration Statement is declared effective, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in connection
with resales of Transfer Restricted Securities (as defined below) during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses
21
<PAGE>
(a) through (d) above a "Registration Default"), then the Company will pay
liquidated damages ("Liquidated Damages") to each Holder of Transfer Restricted
Securities, with respect to the first 90-day period immediately following the
occurrence of such Registration Default in an amount equal to $.05 per week per
$1,000 principal amount of Transfer Restrictive Securities held by such person.
The amount of the Liquidated Damages will increase by an additional $.05 per
week per $1,000 principal amount of Transfer Restricted Securities with respect
to each subsequent 90-day period until all Registration Defaults have been cured
up to a maximum amount of Liquidated Damages of $.20 per week per $1,000
principal amount of Transfer Restricted Securities (regardless of whether one or
more than one Registration Default is outstanding). Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. For
purposes of the foregoing, "Transfer Restricted Securities" means each Old
Security until (i) the date on which such Old Security has been exchanged by a
person other than a broker-dealer for a Security in the Exchange Offer, (ii) the
date on which such Old Security has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement, (iii) the date on which such Old Security is distributed to the
public pursuant to Rule 144 under the Securities Act, or (iv) the date on which
such Old Security is salable pursuant to Rule 144(k) under the Securities Act.
The staff of the Commission has issued certain interpretive letters that
concluded, in circumstances similar to those contemplated by the Exchange Offer,
that new debt securities issued in a registered exchange for outstanding debt
securities, which new securities are intended to be substantially identical to
the securities for which they are exchanged, may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such securities from the issuer to resell pursuant to Rule 144A or
any other available exemption under the Securities Act or (ii) a person who is
an affiliate of the issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provision
of the Securities Act, PROVIDED that the new securities are acquired in the
ordinary course of such holder's business and such holder has no arrangement
with any person to participate in the distribution of the new securities.
However, a broker-dealer who holds outstanding debt securities that were
acquired for its own account as a result of market-making or other trading
activities may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the new
securities received by the broker-dealer in any such exchange. See "--Resales of
Securities." The Company has not requested or obtained an interpretive letter
from the Commission staff with respect to this Exchange Offer, and the Company
and the Holders are not entitled to rely on interpretive advice provided by the
staff to other persons, which advice was based on the facts and conditions
represented in such letters. However, the Exchange Offer is being conducted in a
manner intended to be consistent with the facts and conditions represented in
such letters. If any Holder has any arrangement or understanding with respect to
the distribution of the Securities to be acquired pursuant to the Exchange
Offer, such Holder (i) could not rely on the applicable interpretations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. In addition, each broker-dealer that receives Securities for
its own account in exchange for the Old Securities, where such Old Securities
were acquired by such broker-dealers as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Securities. See "Plan of Distribution." By
delivering the Letter of Transmittal, a Holder tendering Old Securities for
exchange will represent and warrant to the Company that the Holder is acquiring
the Securities in the ordinary course of its business and that the Holder is not
engaged in, and does not intend to engage in, a distribution of the Securities.
Any Holder using the Exchange Offer to participate in a distribution of the
Securities to be acquired in the Exchange Offer must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Holders who do not exchange
their Old Securities pursuant to this Exchange Offer will continue to hold Old
Securities that are subject to restrictions on transfer.
22
<PAGE>
It is expected that the Securities will be freely transferable by the
Holders thereof, subject to the limitations described in the immediately
preceding paragraph and in "--Resales of Securities." Sales of Securities
acquired in the Exchange Offer by Holders who are "affiliates" of the Company
within the meaning of the Securities Act will be subject to certain limitation
on resale under Rule 144 of the Securities Act. Such persons will only be
entitled to sell Securities in compliance with the volume limitations set forth
in Rule 144, and sales of Securities by affiliates will be subject to certain
Rule 144 requirements as to the manner of sale, notice and the availability of
current public information regarding the Company. The foregoing is a summary
only of Rule 144 as it may apply to affiliates of the Company. Any such persons
must consult their own legal counsel for advice as to any restrictions that
might apply to the resale of their Securities.
The Securities otherwise will be substantially identical in all material
respects (including interest rate, maturity, security and restrictive covenants)
to the Old Securities for which they may be exchanged pursuant to this Exchange
Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth herein and in the
accompanying Letter of Transmittal, the Company will exchange $1,000 principal
amount of Securities for each $1,000 principal amount of its outstanding Old
Securities. Securities will be issued only in integral multiplies of $1,000 to
each tendering Holder of Old Securities whose Old Securities are accepted in the
Exchange Offer.
The Notes will bear interest from and including the Original Issue Date.
Accordingly, Holders who receive Notes in exchange for Old Notes will forego
accrued but unpaid interest on their exchanged Old Notes for the period from and
including the Original Issue Date to the date of exchange, but will be entitled
to such interest under the Securities. The Accreted Value (as defined) of the
Discount Notes will accrete from and including the Original Issue Date.
Accordingly, the Accreted Value of the Discount Notes, when issued, will equal
the Accreted Value of the Old Discount Notes surrendered in exchange therefor.
As of September 9, 1997, $314.317 million aggregate principal amount at
maturity of Old Securities were outstanding. This Prospectus, the Letter of
Transmittal and Notice of Guaranteed Delivery are being sent to all registered
Holders of Old Securities as of that date. Tendering Holders will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Securities pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain transfer taxes which may be imposed, in connection
with the Exchange Offer. See "--Payment of Expenses."
Holders of Old Securities do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law in connection with the Exchange
Offer.
EXPIRATION DATE; EXTENSIONS; TERMINATION
The Exchange Offer will expire at 5:00 P.M., New York City time, on October
10, 1997, subject to extension by the Company by notice to the Exchange Agent as
herein provided. The Company reserves the right to extend the Exchange Offer at
its discretion, in which event the term "Expiration Date" shall mean the time
and date on which the Exchange Offer as so extended shall expire. The Company
shall notify the Exchange Agent of any extension by oral or written notice and
shall mail to the registered holders of Old Securities an announcement thereof,
each prior to 9:00 A.M., New York City time, on the next business day after the
previously scheduled Expiration Date.
The Company reserves the right to extend or terminate the Exchange Offer and
not accept for exchange any Old Securities if any of the events set forth below
under "--Conditions to the Exchange Offer" occur and are not waived by the
Company, by giving oral or written notice of such delay or
23
<PAGE>
termination to the Exchange Agent. See "--Conditions to the Exchange Offer." The
rights reserved by the Company in this paragraph are in addition to the
Company's rights set forth below under the caption "--Conditions to the Exchange
Offer."
PROCEDURES FOR TENDERING
The tender to the Company of Old Securities by a Holder thereof pursuant to
one of the procedures set forth below and the acceptance thereof by the Company
will constitute an agreement between such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
Except as set forth below, a holder who wishes to tender Old Securities for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth below
under "Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Securities must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Securities, if
such procedure is available, into the Exchange Agent's account at The Depository
Trust Company pursuant to the procedure of book-entry transfer described below,
must be received by the Exchange Agent prior to the Expiration Date, or (iii)
the holder must comply with the guaranteed delivery procedures described below.
LETTERS OF TRANSMITTAL AND OLD SECURITIES SHOULD NOT BE SENT TO THE COMPANY. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Signatures on a Letter of Transmittal must be guaranteed unless the Old
Securities tendered pursuant thereto are tendered (i) by a registered Holder of
Old Securities who has not completed the box entitled "Special Issuance and
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
any firm that is a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. (the "NASD") or a
commercial bank or trust company having an office in the United States (an
"Eligible Institution"). In the event that signatures on a Letter of Transmittal
are required to be guaranteed, such guarantee must be by an Eligible
Institution.
The method of delivery of Old Securities and other documents to the Exchange
Agent is at the election and risk of the Holder, but if delivery is by mail it
is suggested that the mailing be made sufficiently in advance of the Expiration
Date to permit delivery to the Exchange Agent before the Expiration Date.
If the Letter of Transmittal is signed by a person other than a registered
Holder of any Old Security tendered therewith, such Old Security must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name of the registered Holder appears on the Old Security.
If the Letter of Transmittal or any Old Securities or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Old Securities will be resolved by the
Company, whose determination will be final and binding. The Company reserves the
absolute right to reject any or all tenders that are not in proper form or the
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Old Securities. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding. Unless
waived, any irregularities in connection with tenders must be cured within such
time as the Company shall determine. Neither the Company nor the
24
<PAGE>
Exchange Agent shall be under any duty to give notification of defects in such
tenders or shall incur liabilities for failure to give such notification.
Tenders of Old Securities will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Securities received by the
Exchange Agent that are not properly tendered and as to which the irregularities
have not been cured or waived will be returned by the Exchange Agent to the
tendering Holder, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
The Company's acceptance for exchange of Old Securities tendered pursuant to
the Exchange Offer will constitute a binding agreement between the tendering
person and the Company upon the terms and subject to the conditions of the
Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will notify the Depository Trust Company that it is
acting as exchange agent with respect to the Old Securities and will take such
actions or enter into such customary letters or agreements on such terms as are
consistent with the ordinary business practices of the Depository Trust Company
for purposes of the Exchange Offer within two business days after the date of
this Prospectus, and any financial institution that is a participant in the
Depository Trust Company's systems may make book-entry delivery of Old
Securities in accordance with such Depository Trust Company's procedures for
transfer. However, although delivery of Old Securities may be effected through
book-entry transfer at the Depository Trust Company, the Letter of Transmittal
or facsimile thereof with any required signature guarantees and any other
required documents must, in any case, be transmitted to and received by the
Exchange Agent at one of the addresses set forth below under the caption
"--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Securities and (i) whose Old Securities
are not immediately available, or (ii) who cannot deliver their Old Securities,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder of the Old Securities, the certificate number or
numbers of such Old Securities and the principal amount of Old Securities
tendered, stating that the tender is being made thereby and guaranteeing that,
within five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Securities, or a Book-Entry Confirmation, as the case may
be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Old Securities
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery (as well
as a copy of this Prospectus and the Letter of Transmittal) will be sent to
Holders who wish to tender their Old Securities according to the guaranteed
delivery procedures set forth above.
25
<PAGE>
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Securities in
respect of any properly tendered Old Securities not previously accepted, and may
terminate the Exchange Offer by oral or written notice to the Exchange Agent and
the Holders, or at its option, modify or otherwise amend the Exchange Offer, if
any material change occurs that is likely to affect the Exchange Offer,
including, but not limited to, the following:
(a) there shall be instituted or threatened any action or proceeding before
any court or governmental agency challenging the Exchange Offer or otherwise
directly or indirectly relating to the Exchange Offer or otherwise affecting the
Company;
(b) there shall occur any development in any pending action or proceeding
that, in the sole judgment of the Company, would or might (i) have an adverse
effect on the business of the Company, (ii) prohibit, restrict or delay
consummation of the Exchange Offer, or (iii) impair the contemplated benefits of
the Exchange Offer;
(c) any statute, rule or regulation shall have been proposed or enacted, or
any action shall have been taken by any governmental authority which, in the
sole judgment of the Company, would or might (i) have an adverse effect on the
business of the Company, (ii) prohibit, restrict or delay consummation of the
Exchange Offer, or (iii) impair the contemplated benefits of the Exchange Offer;
or
(d) there exists, in the sole judgment of the Company, any actual or
threatened legal impediment (including a default or prospective default under an
agreement, indenture or other instrument or obligation to which the Company is a
party or by which it is bound) to the consummation of the transactions
contemplated by the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Securities upon the occurrence of any of the
foregoing conditions. In addition, the Company may amend the Exchange Offer at
any time prior to 5:00 P.M., New York City time, on the Expiration Date if any
of the conditions set forth above occur. Moreover, regardless of whether any of
such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to the Holders.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its reasonable discretion. Any
determination made by the Company concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
ACCEPTANCE OF OLD SECURITIES FOR EXCHANGE; DELIVERY OF SECURITIES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept all Old Securities validly tendered prior to 5:00 P.M., New
York City time, on the Expiration Date. The Company will deliver Securities in
exchange for Old Securities promptly following the Expiration Date.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Securities when, as and if the Company has given
oral or written notice thereof to the Exchange Agent. The Exchange Agent will
act as agent for the tendering Holders for the purpose of receiving the
Securities. Under no circumstances will interest be paid by the Company or the
Exchange Agent by reason of any delay in making such payment or delivery.
If any tendered Old Securities are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Securities will be returned, at the Company's
expense, to the tendering Holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
26
<PAGE>
WITHDRAWAL RIGHTS
Tenders of Old Securities may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Old Securities to be withdrawn, identify the Old Securities to be
withdrawn (including the principal amount of such Old Securities), and (where
certificates for Old Securities have been transmitted) specify the name in which
such Old Securities are registered, if different from that of the withdrawing
Holder. If certificates for Old Securities have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Securities have been tendered to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the Depository Trust Company to be credited
with the withdrawn Old Securities and otherwise comply with the procedures of
such facility. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Securities so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Securities which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
Holder thereof without cost to such Holder (or, in the case of Old Securities
tendered by book-entry transfer into the Exchange Agent's account at the
Depository Trust Company pursuant to the book-entry transfer procedures
described above, such Old Securities will be credited to an account maintained
with the Depository Trust Company for the Old Securities) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Securities may be retendered by following one of the
procedures described under "--Procedures for Tendering" above at any time on or
prior to the Expiration Date.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and the
Letter of Transmittal should be addressed to the Exchange Agent as follows:
<TABLE>
<S> <C>
BY HAND DELIVERY OR OVERNIGHT
BY REGISTERED OR CERTIFIED MAIL: COURIER:
Harris Trust and Savings Bank Harris Trust and Savings Bank
c/o Harris Trust Company of New
York c/o Harris Trust Company of New York
P.O. Box 1010 77 Water Street
Wall Street Station 4th Floor
New York, New York 10268-1010 New York, New York 10005
</TABLE>
FACSIMILE TRANSMISSION:
(212) 701-7636
CONFIRM BY TELEPHONE:
(212) 701-7624
Requests for additional copies of the Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
27
<PAGE>
PAYMENT OF EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company,
however, will pay reasonable and customary fees and reasonable out-of-pocket
expenses to the Exchange Agent in connection therewith. The Company will also
pay the cash expenses to be incurred in connection with the Exchange Offer,
including accounting, legal, printing, and related fees and expenses.
ACCOUNTING TREATMENT
The Securities will be recorded at the same carrying value as the Old
Securities, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized.
RESALES OF SECURITIES
With respect to resales of Securities, based on certain interpretive letters
issued by the staff of the Commission to third parties, the Company believes
that a Holder of Securities (other than (i) a broker-dealer who purchases such
Securities directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person who is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act) who exchanged Old Securities for Securities in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the Securities, will be allowed to resell the Securities to the
public without further registration under the Securities Act and without
delivering to the purchasers of the Securities a prospectus that satisfies the
requirements of the Securities Act. However, a broker-dealer who holds Old
Securities that were acquired for its own account as a result of market making
or other trading activities may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus meeting
the requirements of the Securities Act. If any other Holder is deemed to be an
"underwriter" within the meaning of the Securities Act or acquires Securities in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the Securities, such holder must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is otherwise
available. For a period of one year from the Expiration Date, the Company will
make copies of this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
28
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated cash and cash
equivalents and the capitalization of the Company at June 30, 1997. This table
should be read in conjunction with the "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------
(DOLLARS IN
MILLIONS)
<S> <C>
Cash and cash equivalents........................................................ $ 41.7
-------
-------
Long-term debt (including current portion):
Credit Facility:
Revolving credit facility(a)................................................. $ --
Term loan facility........................................................... 175.0
9 1/2% Series A Senior Subordinated Notes due 2007............................. 145.0
10 1/2% Series A Senior Subordinated Discount Notes due 2007................... 102.4
Other indebtedness............................................................. 2.7
-------
Total long-term debt....................................................... 425.1
Total stockholders' deficit...................................................... (188.5)(b)
-------
Total capitalization....................................................... $ 236.6
-------
-------
</TABLE>
- ------------------------
(a) Permits maximum borrowings of $125.0 million.
(b) The stockholders' deficit at June 30, 1997 was the result of the
Recapitalization and the recording of related expenses, net of income tax
benefits. In connection with the Recapitalization, Investcorp, certain
affiliates and other international investors organized by Investcorp made an
equity investment of approximately $134.6 million, representing
approximately 88% of the outstanding capital stock and voting power of the
Company.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following unaudited pro forma consolidated statements of income (the
"Unaudited Pro Forma Consolidated Statements of Income") have been derived by
the application of pro forma adjustments to the Consolidated Financial
Statements included elsewhere in this Prospectus. The Unaudited Pro Forma
Consolidated Statements of Income for the periods presented give effect to the
Recapitalization, as if such transactions were consummated as of January 1,
1996. The adjustments are described in the accompanying notes thereto. The
Unaudited Pro Forma Consolidated Statements of Income should not be considered
indicative of actual results that would have been achieved had the
Recapitalization been consummated on January 1, 1996 and do not purport to
indicate results of operations as of any future date or for any future period.
The Unaudited Pro Forma Consolidated Statements of Income should be read in
conjunction with the audited Consolidated Financial Statements and the notes
thereto and the unaudited Condensed Consolidated Financial Statements and the
notes thereto which appear elsewhere in this Prospectus.
No pro forma balance sheet has been presented as the Recapitalization is
reflected in the unaudited Condensed Consolidated Balance Sheet as of June 30,
1997 included elsewhere in this Prospectus.
30
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECAPITALIZATION
HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- -----------
<S> <C> <C> <C>
Net sales................................................................ $ 633.2 $ -- $ 633.2
Cost of sales............................................................ 513.6 -- 513.6
----------- ------ -----------
Gross earnings........................................................... 119.6 -- 119.6
Selling, general and administrative expenses............................. 55.7 1.8(a) 57.5
Securitization expense................................................... 4.1 -- 4.1
----------- ------ -----------
Operating income......................................................... 59.8 (1.8) 58.0
Net interest expense..................................................... 11.0 33.1(b) 44.1
----------- ------ -----------
Income before income taxes............................................... 48.8 (34.9) 13.9
Provision for income taxes............................................... 18.8 (13.4)(c) 5.4
----------- ------ -----------
Net income............................................................... $ 30.0 $ (21.5) $ 8.5
----------- ------ -----------
----------- ------ -----------
Weighted average shares outstanding...................................... 20.1 8.6
----------- -----------
----------- -----------
Earnings per share....................................................... $ 1.50 $ 0.99
----------- -----------
----------- -----------
OTHER DATA:
EBITDA (d)............................................................. $ 77.1 $ (0.8) $ 76.3
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income.
31
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECAPITALIZATION
HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- -----------
<S> <C> <C> <C>
Net sales................................................................ $ 355.9 $ -- $ 355.9
Cost of sales............................................................ 290.9 -- 290.9
----------- ------ -----------
Gross earnings........................................................... 65.0 -- 65.0
Selling, general and administrative expenses............................. 29.9 0.9(a) 30.8
Securitization expense................................................... 2.1 -- 2.1
Recapitalization expenses................................................ 36.3 -- 36.3
----------- ------ -----------
Operating loss........................................................... (3.3) (0.9) (4.2)
Net interest expense..................................................... 6.8 15.3(b) 22.1
----------- ------ -----------
Loss before income taxes................................................. (10.1) (16.2) (26.3)
Provision (benefit) for income taxes..................................... 2.2 (6.2)(c) (4.0)
----------- ------ -----------
Loss before extraordinary item........................................... (12.3) (10.0) (22.3)
Extraordinary item:
Early extinguishment of debt, net...................................... (1.5) -- (1.5)
----------- ------ -----------
Net loss................................................................. $ (13.8) $ (10.0) $ (23.8)
----------- ------ -----------
----------- ------ -----------
Weighted average shares outstanding...................................... 19.2 8.6
----------- -----------
----------- -----------
Loss per share:..........................................................
Loss before extraordinary item......................................... $ (0.64) $ (2.59)
Extraordinary item..................................................... (0.08) (0.17)
----------- -----------
Net loss............................................................... $ (0.72) $ (2.76)
----------- -----------
----------- -----------
OTHER DATA:
EBITDA (d)............................................................. $ 41.9 $ (0.4) $ 41.5
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income.
32
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE 12 MONTHS ENDED JUNE 30, 1997
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECAPITALIZATION
HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- -----------
<S> <C> <C> <C>
Net sales................................................................ $ 676.4 $ -- $ 676.4
Cost of sales............................................................ 550.8 -- 550.8
----------- ------ -----------
Gross earnings........................................................... 125.6 -- 125.6
Selling, general and administrative expenses............................. 56.1 1.8(a) 57.9
Securitization expense................................................... 4.3 -- 4.3
Recapitalization expenses................................................ 36.3 -- 36.3
----------- ------ -----------
Operating income......................................................... 28.9 (1.8) 27.1
Net interest expense..................................................... 12.2 31.6(b) 43.8
----------- ------ -----------
Income (loss) before income taxes........................................ 16.7 (33.4) (16.7)
Provision (benefit) for income taxes..................................... 12.5 (12.9)(c) (0.4)
----------- ------ -----------
Income (loss) before extraordinary item.................................. 4.2 (20.5) (16.3)
Extraordinary item:
Early extinguishment of debt, net...................................... (1.5) -- (1.5)
----------- ------ -----------
Net income (loss)...................................................... $ 2.7 $ (20.5) $ (17.8)
----------- ------ -----------
----------- ------ -----------
Weighted average shares outstanding...................................... 19.7 8.6
----------- -----------
----------- -----------
Earnings (loss) per share:
Income (loss) before extraordinary item................................ $ 0.21 $ (1.90)
Extraordinary item..................................................... (0.08) (0.17)
----------- -----------
Net income (loss)...................................................... $ 0.14 $ (2.07)
----------- -----------
----------- -----------
OTHER DATA:
EBITDA (d)............................................................. $ 82.6 $ (0.8) $ 81.8
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Income.
33
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
The Unaudited Pro Forma Consolidated Statements of Income for the year ended
December 31, 1996, the six months ended June 30, 1997 and the 12 months ended
June 30, 1997 reflect the Recapitalization as if it had occurred on January 1,
1996; the Unaudited Pro Forma Consolidated Statements of Income for the year
ended December 31, 1996 excludes certain nonrecurring items directly
attributable to the Recapitalization. The pro forma adjustments are based on
available information and certain assumptions that management believes are
reasonable.
<TABLE>
<CAPTION>
SIX MONTHS 12 MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997 JUNE 30, 1997
----------------- ------------- -------------
<S> <C> <C> <C>
(a) Reflects the following:
Incremental administrative expenses anticipated to be
incurred by the Company.................................. $ 0.8 $ 0.4 $ 0.8
Amortization of prepaid management fees.................... 1.0 0.5 1.0
------ ------ ------
$ 1.8 $ 0.9 $ 1.8
------ ------ ------
------ ------ ------
(b) Reflects the following:
Elimination of historical net interest expense including
amortization of debt issuance costs of $0.6, $0.8 and
$1.1 million, respectively............................... $ (11.0) $ (6.8) $ (12.2)
Interest resulting from borrowings under the $125.0 million
revolving credit facility under the Credit Facility
(8.1%, 8.1% and 8.0%, respectively)...................... 1.4 0.4 0.7
Interest resulting from $175.0 million term loan under the
Credit Facility (8.6%, 8.6% and 8.5%, respectively)...... 15.1 7.5 14.9
Interest resulting from $145.0 million of debt issued under
the Note Indenture....................................... 13.8 6.9 13.8
Interest resulting from $102.0 million of gross proceeds
related to debt issued under the Discount Note
Indenture................................................ 11.0 5.9 11.6
Amortization of debt issuance costs associated with the
Credit Facility, the debt issued under the Indentures,
and extension of the Receivables Securitization
Program.................................................. 2.8 1.4 2.8
------ ------ ------
$ 33.1 $ 15.3 $ 31.6
------ ------ ------
------ ------ ------
(c) Reflects the tax effect of items (a) and (b) above at an
assumed effective tax rate of 38.5%.......................... $ 13.4 $ 6.2 $ 12.9
------ ------ ------
------ ------ ------
</TABLE>
(d) EBITDA represents income before interest and income taxes, excluding the
following charges: (i) depreciation and amortization expense; (ii) costs
associated with Ultravent-Registered Trademark- of $1.8, $1.0 and $1.8
million for the pro forma year ended December 31, 1996, six months ended
June 30, 1997 and 12 months ended June 30, 1997, respectively; and (iii)
$36.3 million of Recapitalization expenses for the six months ended June 30,
1997, the pro forma six months ended June 30, 1997 and the pro forma 12
months ended June 30, 1997.
34
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(DOLLARS IN MILLIONS)
The Unaudited Pro Forma Consolidated Statements of Income for the six months
and 12 months ended June 30, 1997 include the following nonrecurring items that
are directly attributable to the Recapitalization:
(1) Compensation charges totaling $3.1 million for amounts paid to
management in connection with the Recapitalization, and related income
tax benefit of $1.2 million;
(2) Estimated other charges totaling $27.7 million for expenses incurred by
the Company in connection with the Recapitalization, and related income
tax benefit of $4.6 million;
(3) Charge of $5.2 million resulting from the conversion of outstanding
stock options in connection with the Recapitalization, and related income
tax benefit of $2.0 million;
(4) Charge of $0.3 million associated with the accelerated vesting of
restricted stock and related income tax benefit of $0.1 million;
(5) Extraordinary item representing the write-off of $2.4 million of debt
issuance costs on debt retired in connection with the Recapitalization,
and related income tax benefit of $0.9 million.
The Unaudited Pro Forma Consolidated Statement of Income for the year ended
December 31, 1996 excludes the items listed above.
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated operating data,
consolidated balance sheet data and other data of the Company. The selected
consolidated financial and other data for the five years ended December 31, 1996
have been derived from the historical Consolidated Financial Statements of the
Company, which have been audited by Arthur Andersen LLP and which, in the case
of the balance sheet data at December 31, 1995 and December 31, 1996 and the
operating data for the three most recent years, should be read in conjunction
with the audited Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus. The selected unaudited consolidated
financial data at June 30, 1997 and for the six months ended June 30, 1996 and
June 30, 1997 have been derived from and should be read in conjunction with the
Company's unaudited Condensed Consolidated Financial Statements and related
notes thereto included elsewhere in this Prospectus. In the opinion of the
Company's management, the Company's unaudited Condensed Consolidated Financial
Statements include all adjustments, consisting only of normal recurring
adjustments (except for the effects of the Recapitalization), necessary to
present fairly the data for such periods. The results for the six months ended
June 30, 1997 are not necessarily indicative of the results expected for the
year ended December 31, 1997 or for any future periods. The following table
should also be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales........................... $345.2 $372.3 $440.7 $471.3 $633.2 $312.7 $355.9
Cost of sales....................... 270.2 291.0 344.9 378.5 513.6 253.8 290.9
------ ------ ------ ------ ------ ------ ------
Gross earnings...................... 75.0 81.3 95.8 92.8 119.6 58.9 65.0
Selling, general and administrative
expenses.......................... 32.6 36.1 42.2 43.7 55.7 29.5 29.9
Securitization expense(a)........... -- -- 1.9 3.3 4.1 1.9 2.1
Recapitalization expenses(b)........ -- -- -- -- -- -- 36.3
------ ------ ------ ------ ------ ------ ------
Operating income (loss)............. 42.4 45.2 51.7 45.8 59.8 27.5 (3.3)
Net interest expense................ 10.0 8.0 8.3 10.0 11.0 5.5 6.8
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes... 32.4 37.2 43.4 35.8 48.8 22.0 (10.1)
Provision for income taxes.......... 13.7 15.1 17.5 13.7 18.8 8.5 2.2
------ ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principles... 18.7 22.1 25.9 22.1 30.0 13.5 (12.3)
Extraordinary item:
Early extinguishment of debt,
net............................. -- -- -- -- -- -- (1.5)
------ ------ ------ ------ ------ ------ ------
Income (loss) before cumulative
effect of change in
accounting principles............. 18.7 22.1 25.9 22.1 30.0 13.5 (13.8)
Cumulative effect of change in
accounting principles, net(c)..... -- (3.6) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss)................... $ 18.7 $ 18.5 $ 25.9 $ 22.1 $ 30.0 $ 13.5 $(13.8)
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
OTHER DATA:
EBITDA(d)........................... $ 53.7 $ 57.3 $ 65.8 $ 60.6 $ 77.1 $ 36.4 $ 41.9
Depreciation and amortization(e).... 11.3 12.1 12.8 14.5 15.5 7.9 7.9
Capital expenditures(f)............. 8.5 10.1 19.7 16.4 20.0 8.6 6.5
Ratio of earnings to fixed
charges(g)........................ 4.2x 5.6x 6.1x 4.4x 5.2x 4.7x --
Deficiency of earnings to cover
fixed charges..................... -- -- -- -- -- -- $ 10.1
BALANCE SHEET DATA:
(end of period)
Cash and cash equivalents........... $ 0.7 $ 1.5 $ 2.2 $ 1.1 $ 3.9 $ 4.3 $ 41.7
Total assets........................ 212.2 218.9 187.5 210.8 261.7 262.1 357.9
Total debt (including current
maturities)....................... 96.2 65.6 115.2 123.6 124.3 145.9 425.1
Total stockholders' equity
(deficit)(h)(i)................... 55.6 73.6 (24.6) (2.2) 27.9 11.4 (188.5)
</TABLE>
See Notes to Selected Consolidated Financial Data.
36
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(a) Represents expenses incurred by the Company in connection with its
Receivables Securitization Program.
(b) Represents expenses incurred in connection with the Recapitalization
including those for investment banking services, transaction bonuses and
conversion of outstanding stock options, and legal, accounting and other
costs.
(c) Reflects the impact of the adoption in 1993 of Statement of Financial
Accounting Standards No. 112 relating to post-employment benefits and
Statement of Financial Accounting Standards No. 109 relating to income
taxes.
(d) EBITDA represents income before interest expense and income taxes excluding
the following charges: (i) depreciation and amortization expense; (ii) costs
associated with Ultravent-Registered Trademark- as follows: $1.3, $0.3 and
$1.8 million in 1994, 1995 and 1996, respectively, and $1.0 million in the
six months ended June 30, 1996 and 1997; and (iii) $36.3 million of
Recapitalization expenses for the six months ended June 30, 1997. The
Company has included information concerning EBITDA because it is commonly
used by certain investors as a measure of a company's ability to service
and/or incur debt. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows or other consolidated income or cash
flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(e) Excludes amortization of debt issuance costs.
(f) Management estimates that approximately $8.0 million to $10.0 million of the
amount expended in each of the years ended December 31, 1994, 1995 and 1996
has been for the renewal and replacement of existing facilities and
equipment.
(g) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges. Fixed
charges consist of interest expense, amortization of deferred debt issuance
costs and the interest portion of the Company's rent expense.
(h) The stockholders' deficit at December 31, 1994 was the result of a dividend
that was declared in May 1994 in connection with the Company's November 1994
initial public offering.
(i) The stockholders' deficit at June 30, 1997 was the result of the
Recapitalization and the recording of related expenses, net of income tax
benefits. In connection with the Recapitalization, Investcorp, certain
affiliates and a group of international investors organized by Investcorp
made an equity investment of approximately $134.6 million, representing
approximately 88% of the outstanding capital stock and voting power of the
Company.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
CONSOLIDATED FINANCIAL DATA," "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE
NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS,
IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT INCLUDE
RISKS AND OTHER UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
GENERAL
The Company has experienced strong growth, with net sales and EBITDA
increasing at CAGRs of 18.6% and 11.0%, respectively, from January 1, 1993 to
June 30, 1997. The Company's growth has been driven by strong performance in all
product categories as well as successful add-on acquisitions. Since 1994, the
Company has successfully completed seven acquisitions including Ex-Cell and
Swirlway. The most important factors influencing demand for the Company's Air
Distribution Accessories and Plumbing Fixtures are residential and commercial
new construction activity as well as residential repair and remodeling. For Air
Power Products, the growth in the DIY and home improvement retail channel is one
of the greatest factors driving demand. Accordingly, demand for the Company's
products is affected by residential housing starts and existing home sales,
commercial construction activity, the age and size of the U.S. housing stock,
and overall home improvement expenditures. The expected continuing growth of the
DIY and home improvement retail distribution channel provides the Company with
an opportunity to increase its market share as this sector continues to
experience rapid growth and consolidation among the large, well-positioned
retailers with whom the Company has strong relationships.
As part of the Recapitalization, Investcorp, its affiliates and a group of
international investors organized by Investcorp made an equity investment of
approximately $134.6 million and existing shareholders retained common stock
with a value of approximately $18.3 million in the Company. In addition,
pursuant to the Recapitalization Financings, the Company completed the Original
Offering, entered into the Credit Facility and amended the Receivables
Securitization Program. The Recapitalization has been accounted for as such and,
accordingly, had no impact on the historical basis of assets and liabilities. As
a result of the Recapitalization, the Company incurred approximately $63.7
million in fees and expenses. See "Certain Transactions."
The table below sets forth the Company's results of operations for the
periods indicated.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30
------------------------------------------------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1996
------------------------ -------------------------- ------------------------ ------------------------
<CAPTION>
(DOLLARS IN MILLIONS)
% OF % OF % OF % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT SALES
----------- ----- ------------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $ 440.7 100.0% $ 471.3 100.0% $ 633.2 100.0% $ 312.7 100.0%
Gross earnings......... 95.8 21.7 92.8 19.7 119.6 18.9 58.9 18.9
Operating income before
Recapitalization
expenses............. 51.7 11.7 45.8 9.7 59.8 9.4 27.5 8.8
Operating income
(loss)............... 51.7 11.7 45.8 9.7 59.8 9.4 27.5 8.8
EBITDA................. 65.8 14.9 60.6 12.9 77.1 12.2 36.4 11.6
<CAPTION>
<S> <C> <C>
1997
------------------------
% OF
AMOUNT SALES
----------- -----
<S> <C> <C>
Net sales.............. $ 355.9 100.0%
Gross earnings......... 65.0 18.3
Operating income before
Recapitalization
expenses............. 33.0 9.3
Operating income
(loss)............... (3.3) (0.9)
EBITDA................. 41.9 11.8
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET SALES. Year-to-date net sales were $355.9 million, an increase of $43.2
million over 1996 comparable results. This increase was primarily due to
increased sales of pressure washers of $29.1 million,
38
<PAGE>
as well as increased volume in other air power products of $11.3 million.
Favorable volume variances in plumbing fixtures of $2.8 million also contributed
to this increase.
GROSS EARNINGS. Gross earnings increased $6.1 million to $65.0 million over
1996 results, primarily due to the increased sales volume. Gross margin declined
from 18.9% in 1996 to 18.3% in 1997 due to increased sales of pressure washers
which yield lower margins.
OPERATING INCOME. The operating loss of $3.3 million included $36.3 million
of expenses recorded in connection with the Recapitalization. Excluding the
Recapitalization expenses, operating income was $5.5 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 increased operating costs.
NET INTEREST EXPENSE. Interest expense increased from $5.5 million in 1996
to $6.8 million in 1997 due to the previously discussed change in debt structure
resulting from the Recapitalization.
FISCAL YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
NET SALES. Net sales increased $161.9 million, or 34.4%, to $633.2 million
in fiscal 1996 from $471.3 million in fiscal 1995. In January 1996, the Company
acquired Ex-Cell, a manufacturer of pressure washers. In addition, in May 1996,
the Company acquired a product line of decorative metal and wooden grilles and
registers. Excluding the impact of acquisitions, net sales increased $54.4
million. This increase was due to increased sales volume in all product
categories resulting, in part, from an increase in housing starts, as well as
market share gains. New product sales, primarily electric generators,
contributed $16.2 million to the increase. Favorable pricing in Air Distribution
Accessories was offset by strong price competition in Plumbing Fixtures.
GROSS EARNINGS. Gross earnings increased $26.8 million, or 28.9%, to $119.6
million in fiscal 1996 from $92.8 million in fiscal 1995. This increase was
primarily due to increased volume and the impact of acquisitions. Gross margin
declined to 18.9% in fiscal 1996 from 19.7% in fiscal 1995 due primarily to the
sales contributed by acquired businesses that carry lower margins and increased
sales of lower margin HVAC products.
OPERATING INCOME. Operating income increased $14.0 million, or 30.6%, to
$59.8 million in fiscal 1996 from $45.8 million in fiscal 1995. This increase
was primarily due to increased sales volume and the impact of acquisitions,
partially offset by an increase in securitization expense of $0.8 million and
increased selling, general and administrative expenses of $12.0 million. As a
percent of sales, selling, general and administrative expenses declined slightly
to 8.8% in fiscal 1996 from 9.2% in fiscal 1995.
NET INTEREST EXPENSE. Net interest expense increased $1.0 million to $11.0
million in fiscal 1996 from $10.0 million in fiscal 1995. This increase was
primarily due to the increased average monthly debt levels resulting from
acquisitions.
FISCAL YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1994
NET SALES. Net sales increased $30.6 million, or 7.0%, to $471.3 million in
fiscal 1995 from $440.7 million in fiscal 1994. This increase in sales resulted
primarily from growth in existing products, new product introductions in Air
Power Products, as well as the acquisition of the acrylic whirlpool bath
business, Swirlway. Further sales growth was restricted by a general softness in
housing starts in fiscal 1995, down 7.0% from fiscal 1994 levels, and inventory
destocking programs in both the retail and the wholesale distribution channels.
These factors combined to limit the Company's flexibility, precluding additional
pricing action during the year, as competitive pressures remained strong.
GROSS EARNINGS. Gross earnings declined $3.0 million, or 3.1%, to $92.8
million in fiscal 1995 from $95.8 million in fiscal 1994. The gains recorded in
pricing, volume, new products and acquisitions were not
39
<PAGE>
adequate to cover the raw material and component part cost inflation which the
Company encountered with respect to steel, aluminum, mylar, corrugated packaging
and electric motors. As a result of such cost inflation, gross margin decreased
to 19.7% in fiscal 1995 from 21.7% in fiscal 1994. The Company has added
additional suppliers in these, as well as certain other raw materials and
component parts categories, which has alleviated a portion of the impact of such
pricing pressures.
OPERATING INCOME. Operating income declined $5.9 million, or 11.4% to $45.8
million in fiscal 1995 from $51.7 million in fiscal 1994. Excluding
securitization expense, selling, general and administrative expenses increased
by $1.5 million. In addition, securitization expense increased $1.4 million,
reflecting the accounts receivable activity associated with the sales increases
recorded during the year. The combination of these gross earnings and operating
expense items caused operating margins to decline to 9.7% in fiscal 1995 from
11.7% in fiscal 1994.
NET INTEREST EXPENSE. Net interest expense increased $1.7 million to $10.0
million in fiscal 1995 from $8.3 million in fiscal 1994. This was a result of
the combination of increased debt levels and higher interest rates encountered
during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a significant amount of indebtedness in connection with
the Recapitalization. As of June 30, 1997, the Company had approximately $425.1
million of consolidated indebtedness, including $247.4 million of indebtedness
pursuant to the Securities. The Credit Facility provides for a $175.0 million
term loan facility (the "Term Loan Facility") and for a $125.0 million revolving
credit facility (the "Revolving Facility"). The Company drew all $175.0 million
of the Term Loan Facility at the time of the Recapitalization. In connection
with the Recapitalization, the Company amended its current receivables purchase
facility to provide for a five-year receivables purchase facility (the
"Receivables Securitization Program") in an amount up to $100.0 million.
The Company historically has met its working capital needs and capital
expenditure requirements primarily through a combination of operating cash flow,
and availability under its prior credit facility and the Receivables
Securitization Program. The Company anticipates satisfying its debt service
requirements and meeting its working capital and capital expenditure needs
through a combination of operating cash flow, availability under the Revolving
Facility and funds available through the Receivables Securitization Program. See
"The Recapitalization."
Prior to November 1994, the Company was included in the consolidated federal
income tax returns of Great American Management and Investment, Inc. ("GAMI"),
the parent company of Eagle Industries, Inc. ("Eagle"). In addition, the Company
filed certain combined state tax returns with GAMI until the distribution of
Eagle's ownership in the Company to Equity Holdings Limited, an Illinois limited
partnership ("EHL"), in 1996. In December 1996, the Company paid GAMI $4.6
million for a final tax sharing payment for tax liabilities incurred while it
was included in GAMI's income tax returns, pursuant to the GAMI-Falcon
Disaffiliation Tax Sharing Agreement.
Net cash flow from operating activities amounted to $0.1 million in the
first six months of 1997 compared to $9.8 million in the first six months of
1996. The decrease of $9.7 million was primarily due to an increase in working
capital requirements and the effect of the stand-alone securitization facility
the Company entered into in May 1996. 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 six months of 1997, the net residual interest retained by the Company
in these sold receivables increased $17.7 million from December 31, 1996. This
residual interest of $19.6 million at June 30, 1997 is reflected in other
current assets in the Company's financial statements. Net cash flow from
operating activities increased $21.7 million to $41.1 million in fiscal 1996
from $19.4 million in fiscal 1995.
40
<PAGE>
This increase was primarily due to the increase in net income and a decrease in
working capital requirements.
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance, its indebtedness (including the
Securities), or to fund planned capital expenditures and finance acquisitions
will depend on its future performance, which to a certain extent is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based on the current and anticipated level
of operations, management believes that cash flow from operations and available
cash, together with available borrowings under the Credit Facility and liquidity
under its Receivables Securitization Program, will be adequate to meet the
Company's anticipated future requirements for working capital, budgeted capital
expenditures, acquisition financing and scheduled payments of principal and
interest on its indebtedness, including the Securities, for the foreseeable
future. There can be no assurance that the Company's business will generate
sufficient cash flow from operations or that future borrowings will be available
under the Credit Facility or that sufficient liquidity will exist under the
Receivables Securitization Program to enable the Company to service its
indebtedness, including the Securities, make anticipated capital expenditures,
fund future acquisitions or, if required, refinance all or a portion of the
outstanding principal of the Securities.
CAPITAL EXPENDITURES
Capital expenditures were $19.7 million, $16.4 million and $20.0 million in
fiscal 1994, 1995 and 1996, respectively. Management estimates that
approximately $8.0 million to $10.0 million of the amount expended in each of
such years has been for the renewal and replacement of existing facilities and
equipment. Thus, in an economic downturn, the Company believes it has
significant latitude to adjust the amount spent on capital expenditures without
compromising the basic needs of its operations. The Company expects to spend
approximately $24.0 million in fiscal 1997 for various capital projects,
including quality enhancement, cost improvement, regulatory compliance,
efficiency improvement, increased capacity and normal maintenance projects.
Capital expenditures attributable to environmental matters were not material in
any of these years, nor does the Company believe that such expenditures will be
material in fiscal 1997. However, there can be no assurance that the Company
will not incur capital expenditures or other costs or liabilities in the future
for environmental matters that will have a material adverse effect on the
Company. See "Business--Environmental Matters."
SEASONALITY, WORKING CAPITAL AND CYCLICALITY
Sales of certain products of the Company are subject to seasonal variation.
Due to seasonal factors associated with the construction industry, sales of
products and working capital are typically higher during the second and third
quarters than at other times of the year. The residential and commercial
construction markets are sensitive to cyclical changes in the economy.
INFLATION
Raw material and component part cost inflation had a material impact on
operating income in fiscal 1995. Raw material and component part costs increased
approximately $18.2 million, largely due to cost increases from its suppliers
with respect to steel, aluminum, mylar, corrugated packaging and electric
motors. The Company has added additional suppliers in these, as well as certain
other raw material and component part categories, which has alleviated a portion
of the impact of such pricing pressures. The effect of raw materials cost
inflation on operating results in fiscal 1996 was not material.
41
<PAGE>
BUSINESS
The Company is a leading North American manufacturer and distributor of
highly engineered products for the residential and commercial construction and
home improvement markets. The Company markets its products through a variety of
distribution channels, such as wholesale distributors and commercial retailers,
including the growing DIY channel. The three principal categories of products
manufactured by Falcon are Air Distribution Accessories, Plumbing Fixtures and
Air Power Products. The Company has a long history in each of its product
categories, having sold products for the new construction and remodeling markets
since the early 1900s. For the twelve months ended June 30, 1997, the Company
had consolidated net sales of $676.4 million and EBITDA of $82.6 million.
As a result of strong operating performance in all three of its principal
product categories as well as successful add-on acquisitions, Falcon has
experienced significant growth, with net sales and EBITDA increasing at a CAGR
of 18.6% and 11.0%, respectively, from January 1, 1993 through June 30, 1997.
Management considers key elements of Falcon's success to be its leading market
positions, established brand names, emphasis on quality and customer service,
low-cost production, reputation for innovation, strong distribution networks and
successful history of acquisitions.
BUSINESS STRENGTHS
The Company attributes its market leadership and significant opportunities
for continued growth and increased profitability to the following competitive
strengths:
MARKET LEADERSHIP WITH STRONG BRAND NAMES. The Company holds leading market
positions and strong market shares in all of its major markets and the Company
believes it has successfully increased its market share in all three of its
principal product categories over the past three years. The Company believes
that it derives more than 75% of its sales from product lines in which the
Company holds either the number one or number two market position, as measured
in sales (except for Plumbing Fixtures where market position is measured in
units). The Company's leading brand names in each product category include Hart
& Cooley-Registered Trademark-, Metlvent-Registered Trademark- and Reliable-TM-
in Air Distribution Accessories, Mansfield-Registered Trademark- and Swirl-
way-Registered Trademark- in Plumbing Fixtures and Air
America-Registered Trademark-, Charge Air Pro-Registered Trademark-, Steel
Driver-Registered Trademark- and Ex-Cell-Registered Trademark- in Air Power
Products.
EMPHASIS ON QUALITY AND CUSTOMER SERVICE. The Company emphasizes
high-quality products and superior customer service. The Company stresses the
importance of product quality to all of its employees, incorporates high-quality
materials into its products and has implemented total quality management
initiatives at its operating locations. In recognition of the Company's
excellent value, quality and customer service, the Company has been named Vendor
of the Year by HomeBase (1996), Lowe's (1996) and Sears (1992). The Company also
received a "Partner of the Year" award from The Home Depot in 1996.
LOW-COST PRODUCTION. The Company believes that it is a low-cost producer in
each of the major markets it serves. The Company has consistently reduced costs
through the development and implementation of cost-effective product designs,
careful attention to manufacturing processes, employee involvement,
consolidation of manufacturing facilities and capital investment. The Company's
low-cost position and focus on productivity and efficiency have resulted in
sales per employee which, management believes, are high relative to the
industry. Productivity and efficiency, as measured by sales per employee, have
increased by approximately 30% since 1992. Management has identified additional
cost reductions as part of its strategic planning process.
TRADITION OF NEW PRODUCT DEVELOPMENT AND INTRODUCTIONS. The Company
believes that its tradition of product innovation and the breadth of its product
offerings differentiate the Company from its competitors. The Company has
developed significant product innovations, including the first viable oil-free
compressor and the use of a "universal motor" in its line of air compressors,
which delivers superior horsepower at lower product weights. During the past two
years, the Company has introduced several new
42
<PAGE>
products, including pressure washers, electric generators, decorative
residential registers, one-piece plumbing fixtures, pneumatic nailers and
staplers and electric and OEM compressors.
WELL-ESTABLISHED DISTRIBUTION CHANNELS. The Company has a broad and
well-established distribution network encompassing both wholesale and retail
channels throughout the United States and Canada. The Company has established
relationships with more than 1,500 wholesale distributors and with leading
consumer retailers, including mass merchants, warehouse clubs, home improvement
(DIY) centers, hardware cooperatives and farm and fleet cooperatives. The
Company's strong relationships with distributors are supported by the Company's
sales and marketing programs, tailored to suit each market and type of
distributor.
HISTORY OF SUCCESSFUL ACQUISITIONS. Since 1988, the Company has
successfully completed 13 acquisitions, enabling the Company to broaden its
product categories, expand its market coverage and extend its channels of
distribution. The Company's management has demonstrated an ability to identify
complementary acquisitions, complete them at reasonable valuations and
successfully manage their integration into the Company's operations. The Company
has used acquisitions both to expand into new markets, as with the Company's
expansion into the acrylic whirlpool market with its 1995 acquisition of
Swirlway, and to augment its position in a particular market, as with the
Company's rise to market leader in the pressure washer market with its 1996
acquisition of Ex-Cell.
BUSINESS STRATEGY
Falcon intends to strengthen its market leadership positions and further
increase sales and EBITDA by continuing to capitalize on its current business
strengths and by implementing the following business strategies:
DOMESTIC AND INTERNATIONAL MARKET EXPANSION. The Company intends to
continue to expand market share domestically, while pursuing further expansion
internationally. Management believes significant opportunities for domestic
growth exist given the fragmentation of the building products industry and the
trend by wholesalers and retailers towards consolidation of their vendor bases.
The Company also plans to extend its domestic market coverage by adding
additional DIY and home improvement customers in key regional markets.
Additionally, the Company has identified significant growth opportunities in
several international markets, particularly Canada, Mexico, Latin America and
Asia. The Company plans to pursue these opportunities by increasing exports and
entering into strategic alliances with local manufacturers and distributors.
NEW PRODUCTS AND PRODUCT LINE EXTENSIONS. The Company plans to expand its
offering of innovative and high-quality products at competitive prices. The
Company has invested significant resources in research and development, and
management intends to continue to introduce new products and product line
extensions across all of the Company's product categories. Many of the Company's
wholesale and retail customers are seeking to expand their product offerings
while simultaneously consolidating their vendor bases. Falcon is well positioned
to capitalize on new product introductions and product line extensions due to
its low-cost production capability, existing distribution network, customer
relationships and strong brand names.
DISTRIBUTION CHANNEL EXPANSION. The Company plans to expand its
distribution network by adding additional key wholesale and retail accounts,
while further penetrating those channels in which it already has strong
relationships. In addition, the Company intends to leverage its existing retail
channel relationships by cross-selling additional products into DIY and home
improvement accounts. One particular area of focus for the Company is to
continue to capitalize on the growing trend among homeowners and small
contractors of purchasing building products through the DIY channel from home
improvement centers and other retail outlets.
43
<PAGE>
STRATEGIC AND COMPLEMENTARY ACQUISITIONS. Management believes that the
highly fragmented building products industry presents numerous opportunities to
make strategic and complementary acquisitions. The Company intends to pursue
acquisitions that complement current manufacturing and distribution capabilities
and provide the Company with opportunities to add capacity, consolidate
operations and achieve economies of scale. The Company also plans to explore
strategic acquisitions of manufacturers and distributors of highly engineered
building products that can be integrated into the Company's business strategy.
COMPANY HISTORY
The Company was incorporated in January 1994 as part of a reorganization of
all entities formerly comprising the building products group of Eagle and its
affiliates. Eagle and its affiliates purchased the three principal product
categories that comprise Falcon in two separate transactions. Air Distribution
Accessories and Plumbing Fixtures, formerly divisions of the Clevepak
Corporation, were purchased by GAMI in April 1986 and subsequently contributed
to Eagle. Eagle purchased Air Power Products in February 1988. In May 1996,
Eagle's approximately 70% interest in Falcon was distributed to EHL, GAMI's
parent company. Neither Eagle nor GAMI has any continuing ownership interest in
Falcon. See "The Recapitalization."
Although Falcon was organized in 1994, its principal product categories have
long histories, having sold products for the residential and commercial
construction markets since the early 1900s. The original businesses which are
now the Company's Air Distribution Accessories, Plumbing Fixtures and Air Power
Products were founded in 1901, 1925 and 1888, respectively.
ACQUISITION HISTORY
Falcon has completed 13 successful, complementary acquisitions spanning all
three of Falcon's product categories. These acquisitions have enabled Falcon to
increase market share by broadening its product categories, expanding market
coverage and leveraging its existing national distribution networks. Falcon has
been highly successful in integrating these acquisitions into its existing
operations, realizing cost savings and synergies, thereby creating attractive
returns. The Company's acquisitions since 1988 include:
<TABLE>
<CAPTION>
DATE ACQUISITION PRODUCT CATEGORY
- --------- ----------------------------------------------- -----------------------------------------------
<C> <S> <C>
11/96 Compressor Division-Dee Blast Air Power Products
05/96 Woodwinds Air Distribution Accessories
01/96 Ex-Cell Manufacturing Company, Inc. Air Power Products
11/95 Cody West Air Distribution Accessories
05/95 Flexible Air Movers Air Distribution Accessories
04/95 WinPower Division-Pierce Co. Air Power Products
04/95 SWC Industries, Inc. Plumbing Fixtures
04/91 Energair Division-Ingersoll Rand Air Power Products
09/90 Norris Division-Masco Plumbing Fixtures
10/89 Air Devices Division-Continental Air Distribution Accessories
04/89 Norflex Division-Rachels Air Distribution Accessories
12/88 Reliable Metal Products Air Distribution Accessories
11/88 Kilgore Plumbing Products, Inc. Plumbing Fixtures
</TABLE>
INDUSTRY OVERVIEW
The building products industry consists of a large number of companies that
manufacture materials and equipment used primarily in two end markets: (i) the
repair, renovation and remodeling of existing buildings and (ii) the
construction of new buildings. Both of these end markets are further subdivided
into residential and non-residential categories, with the non-residential
category consisting of construction or
44
<PAGE>
renovation of buildings and structures for the industrial, commercial,
government and infrastructure markets. According to the United States Department
of Commerce (the "USDC"), new construction spending in the United States totaled
$569 billion in 1996.
The most important factors influencing demand for the Company's Air
Distribution Accessories and Plumbing Fixtures are new residential and
commercial construction activity as well as residential repair and remodeling.
For Air Power Products, the growth in the DIY and home improvement retail
channel is one of the greatest factors driving demand. Accordingly, demand for
the Company's products is affected by residential housing starts and existing
home sales, commercial construction activity, the age and size of the U.S.
housing stock, and overall home improvement expenditures. The expected
continuing growth of the DIY and home improvement retail distribution channel
provides the Company with an opportunity to increase share as this sector
continues to experience rapid growth and consolidation among the large, well-
positioned retailers with whom the Company has strong relationships.
RENOVATION/REPAIR. Management believes that approximately 45% of the
Company's 1996 sales were derived from spending associated with renovation and
repair activities, which encompass spending associated with renovation, repair
and remodeling activities for both residential and non-residential buildings and
structures. According to the USDC, the residential portion of the
renovation/repair category is large and fragmented, and has experienced
significant growth over the last 25 years, expanding from approximately $15
billion of expenditures in 1970 to $115 billion of expenditures in 1995,
representing a CAGR of 9%. There are a number of reasons for this growth,
including an expansion in the total number of existing homes sold as a
percentage of total home sales in the United States, an increase in the average
size of single-family homes and an increase in the average age of existing
homes. The National Association of Homebuilders (the "NAH") calculates that
existing home sales as a percentage of total U.S. housing transactions have
grown from 47% in 1970 to 69% in 1996, and that the average age of a U.S. home
increased from 23 years in 1985 to 28 years in 1993. Management believes that
the relatively high percentage of existing home sales and the increased age of
U.S. housing inventory suggest that repair and remodeling expenditures will
continue to experience significant growth as a greater proportion of such
spending occurs shortly before and after a home sale and that an increased
average home age encourages greater demand for renovation. Additionally, the
rapid expansion of building product retail chains, which have made building
products more accessible for "do-it-yourselfers," has contributed to the overall
growth in the renovation/repair category.
RESIDENTIAL CONSTRUCTION. This category encompasses spending associated
with the construction of both single-family and multi-family residences.
Building activity in the residential construction market is often measured in
terms of housing starts, which vary with job growth, population growth and other
demographic trends, as well as the state of the economy and interest rates.
According to the NAH, housing starts in 1996 totaled 1.48 million units,
consisting of 1.16 million single family and 0.32 million multi-family housing
starts. Since 1985, single family housing starts have exceeded one million units
in all but two years (1990 and 1991), while multi-family housing starts have
averaged 350,000 units per year during the same period. Another factor driving
increased demand for building products has been an increase in the average size
of homes built in the United States. In 1996, the average single-family home
contained 1,950 square feet of space, compared to 1,385 square feet in 1970 and
1,595 square feet in 1980. According to the USDC, total spending in the United
States for new housing units in 1996 totaled approximately $176 billion, which
represented an 8% increase over 1995 levels.
NON-RESIDENTIAL CONSTRUCTION. This category encompasses spending associated
with the construction of new buildings and structures for the commercial,
industrial, government and infrastructure markets. Commercial construction is
currently enjoying a resurgence in the United States after being depressed in
the early years of this decade. The reasons behind the weakness in commercial
construction in the early 1990s included an oversupply of space caused by
tax-driven and speculative overbuilding in the 1980s, a reduction in the
availability of bank and other financing for new building construction and a
recession which diminished demand for office and retail space. Commercial
construction activity began to rebound
45
<PAGE>
in 1992 and continues to increase as evidenced by contracts awarded for new
office space, which grew from 85 million square feet in 1992 to 134 million
square feet in 1996 and is projected to continue to grow for the next several
years according to The Economic and Real Estate Outlook. Factors driving this
growth include a strengthening economy, increased availability of financing and
falling vacancy rates. According to The Economic and Real Estate Outlook,
vacancy rates of downtown office space are the lowest in 10 years, having
declined steadily from a high of 18% in 1992 to 14% in 1996, and are projected
to continue to decline. Suburban office space vacancy rates have declined
rapidly from a high of 24% in 1986 to a historic low of 11% in 1996. Demand for
new commercial construction is projected to remain strong as growth in office
employment continues to rebound from no growth in 1992. According to the USDC,
total spending in the United States for non-residential construction in 1996
totaled approximately $322 billion, which represented a 4% increase over 1995
levels.
COMPANY PRODUCTS
AIR DISTRIBUTION ACCESSORIES. The Company is a leading domestic supplier of
air distribution accessories for HVAC applications. Within the HVAC market, the
Company competes in four major product market categories including (i)
residential and light commercial registers, (ii) residential vent systems, (iii)
duct products and (iv) heavy commercial products. Management believes the
Company is one of the largest North American manufacturers of products for the
distribution of conditioned air and the venting of combustion by-products and
that the Company has a leading market position in the United States in the
residential and light commercial register market. The Company is aggressively
leveraging this market share position to increase its presence in the
residential vent systems and duct products market categories. The Company
markets its products under the Hart & Cooley-Registered Trademark-,
Metlvent-Registered Trademark-, Reliable-TM-, Tuttle &
Bailey-Registered Trademark-, Woodwinds-TM- and Valley-TM- brand names. The
Company manufactures more than 8,000 air distribution items, including metal
grilles, registers and diffusers, gas vent and chimney systems, flexible duct,
louvers, terminal units and electric duct heaters. The Company generally
produces products on a high-volume, low-cost basis. In addition, the Company
supplements its product line with custom-engineered products designed to meet
specific size or performance requirements.
PLUMBING FIXTURES. The Company is a leading domestic producer of
high-quality ceramic china bathroom fixtures, including toilets and lavatories.
The Company also produces enameled steel bathtubs and sinks, and acrylic
whirlpool tubs as well as brass and plastic trim and fittings. The Company's
Plumbing Fixtures products are largely targeted at the high-volume, medium price
point category and are primarily sold to the residential new construction and
remodeling market. The Company sells these products under the
Mansfield-Registered Trademark- and Swirl-way-Registered Trademark- brand names,
which are widely recognized among wholesale distributors and plumbing
contractors as high-quality, reasonably priced plumbing fixtures. The Company
has recently increased its kiln capacity and expanded its casting operations.
The Company believes its short lead times have enabled it to capture market
share from other producers who are less able to deliver product in a timely
fashion. Due to its long history, strong reputation with plumbers and
contractors nationwide and broad distribution network, management believes the
Company has leading market positions in its primary product categories including
ceramic china and enameled steel.
AIR POWER PRODUCTS. Within the Air Power Products market, the Company
competes in four major products market categories including (i) compressors,
(ii) pressure washers, (iii) portable generators and (iv) air tools. The Company
is the leading domestic producer of consumer and commercial air compressors for
home improvement applications and is also the leading domestic manufacturer of
pressure washers. Air compressors are used as an alternative to electricity in a
wide variety of industrial, manufacturing and general home-use applications. The
Company manufactures a broad line of air compressors in the 3/4 to 10 horsepower
range. These air compressors are electric or gasoline-driven with either
oil-lubricated or oil-free pumps and are marketed under a number of brand names,
including Air America-Registered Trademark-, Charge Air
Pro-Registered Trademark-, Pro 4000, Pro Air II-TM- and Steel
Driver-Registered Trademark-. The Company also manufactures air compressors
under private-label programs, the most significant of which is the
Craftsman-Registered Trademark- label for Sears, for which the Company is
46
<PAGE>
the sole supplier. With the recent acquisition of Ex-Cell in January 1996, the
Company has become the leading domestic manufacturer of pressure washers and has
made significant advances in product depth, manufacturing capability and overall
market presence. In addition, the Company manufactures a line of electric
generators and sells a variety of accessory items such as paint spray guns,
nailers and staplers, pneumatic tools, sanders and air hoses for use in home
improvement applications. New products introduced in the past two years include
pressure washers, electric generators, and OEM compressors.
Certain of the Company's products accounted for more than 10% of
consolidated net sales in 1994, 1995 and 1996. Such products included
residential grilles, registers and diffusers as a group, which contributed 11%,
11% and 9% to net sales in 1994, 1995 and 1996, respectively; ceramic china
bathroom fixtures, which contributed 25%, 22% and 17% in 1994, 1995 and 1996,
respectively; and air compressors, which contributed 27%, 28% and 23% in 1994,
1995 and 1996, respectively. Pressure washers accounted for 13% of net sales in
1996.
MARKETING AND DISTRIBUTION
The Company markets and distributes its products nationwide through a
variety of distribution channels. Based on 1996 net sales, approximately 52% of
the Company's products are distributed to wholesalers and manufacturers'
representatives who sell to contractors serving the residential and commercial
construction markets. Approximately 48% of the Company's net sales are made to
mass merchandisers, retail chains and DIY outlets, which sell to homeowners and
contractors. Falcon has a broad and established distribution network
encompassing both wholesale and retail channels throughout the United States and
Canada.
WHOLESALE DISTRIBUTION. The Company has developed one of the most extensive
wholesale distribution networks in the building products industry. The Company
markets its residential and light commercial Air Distribution Accessories
throughout the United States through more than 750 wholesale distributors who
sell to HVAC contractors. The Company markets its ceramic china, acrylic
whirlpool baths and enameled steel bathroom fixtures and brass fittings through
more than 750 wholesale distributors through manufacturers' representatives.
These wholesale distributors sell to plumbers, building contractors and
remodelers. The Company is an important supplier to these wholesale
distributors, and management believes it typically represents between five and
ten percent of many of the leading wholesalers' total revenues. The Company
provides sales support to distributors through a direct field sales staff and a
customer service group and uses independent representatives to supplement the
field sales coverage. The Company markets its heavy commercial products
nationwide to HVAC contractors through more than 150 commercial representatives,
supported by the Company's regional sales managers and customer service group.
RETAIL DISTRIBUTION. The Company supplies an increasing amount of Air
Distribution Accessories, Plumbing Fixtures and substantially all of its Air
Power Products through the DIY and home improvement channels, which in turn sell
to consumers and contractors. These channels are comprised of mass merchants,
warehouse clubs, home centers, hardware cooperatives and farm and fleet
cooperatives, including leading retailers such as Sears, Sam's Club, Wal-Mart,
Lowe's, Price-Costco, The Home Depot and HomeBase. The Company services these
consumer channels through a direct sales staff and manufacturers'
representatives. The Company uses electronic data interchange technology with
all of its customers that possess such capability, which allows the Company to
respond quickly to shifts in the marketplace.
Falcon plans to unveil a number of additional initiatives that will help to
expand retail penetration for all of its product categories. Such initiatives
include consumer-oriented marketing brochures and literature targeted at DIY and
home improvement customers. The Company plans to initiate a quick delivery, low
minimum order program for certain product categories, offering a selection of
products that are not normally inventoried by most retailers. This new special
order program, combined with new product styles, will enable retailers to place
more dependence on the Company for all their program requirements.
47
<PAGE>
MANUFACTURING
The Company has focused on being a low-cost producer in each of the markets
it serves, primarily through cost reduction initiatives at the manufacturing
level, including product design, capital investment, total quality management
and employee involvement programs. The Company has realized significant
productivity growth due to the use of new equipment, improvements in plant
layout, alignment of operations and a more flexible work environment, and
expects to continue to improve operational efficiencies, cost structure and
service capabilities through implementation of proposed expansion projects.
The Company manufactures its products in thirteen primary manufacturing
facilities throughout the United States. The Company's main plant for the
manufacture of Air Distribution Accessories is located in Holland, Michigan with
four additional manufacturing and warehouse facilities located primarily in the
Midwest where steel, aluminum and mylar are fabricated into grilles, registers,
diffusers, gas venting, chimney products and flexible duct. Falcon's main plant
for the production of Plumbing Fixtures in Perrysville, Ohio produces ceramic
china and brass valve products using internally developed manufacturing
processes which generate through-put levels that management believes are among
the highest in the industry. The Kilgore, Texas and Walnut, California
facilities produce both ceramic china and enameled steel products. Acrylic
whirlpools are produced in the Henderson, Texas plant. The Company manufactures
Air Power Products in Jackson, Tennessee and Decatur, Arkansas, using the latest
manufacturing methods for the manufacture of air compressors, pressure washers
and generator products.
The Company believes that its manufacturing facilities are up-to-date and,
in some cases, state-of-the-art. Falcon has invested significant capital
promoting technological developments with two specific focuses: (i) accelerating
new product introductions; and (ii) developing more cost-effective product
designs. In early 1995, Falcon installed new kilns in two of its Plumbing
Fixtures facilities which resulted in an increase of approximately 15% in
overall manufacturing capacity. To reduce labor costs and further increase
yields in its ceramic china manufacturing facilities, in 1997, Falcon plans to
install additional new refire kilns and to automate finishing and handling
tasks. In its enameled steel facilities, Falcon plans to automate certain
welding, washing and press lines. The Company has recently completed a capital
improvement project at its Decatur, Arkansas facility and is expanding its
principal Jackson, Tennessee facility. In addition, the Company has consolidated
two manufacturing facilities into the Decatur, Arkansas facility.
COMPETITION
The Company competes in each of its markets with several national and
regional suppliers of building products. In the HVAC market, the Company
competes primarily with one other large HVAC manufacturer and with several other
national and regional suppliers of HVAC products. In the plumbing fixtures
market, the Company competes with three national manufacturers of plumbing
products as well as with several other regional producers. In the air compressor
market, the Company is the largest of the three primary suppliers of consumer
and commercial air compressors. Some of the Company's competitors are larger,
have greater financial resources and are less leveraged than the Company. The
Company competes on the basis of competitive prices, prompt availability,
product differentiation, quality products and services and a broad product
offering.
PATENTS, TRADEMARKS AND LICENSES
The Company has been issued several patents worldwide. The Company believes
that its patents are important to its business operations; however, the Company
does not believe that the expiration or loss of any of its patents would have a
material adverse effect on the Company.
The Company owns a number of trademarks, including Hart &
Cooley-Registered Trademark-, Metlvent-Registered Trademark-, Reliable-TM-,
Tuttle & Bailey-Registered Trademark-, Woodwinds-TM-, Valley-TM-,
Mansfield-Registered Trademark-, Swirl-way-Registered Trademark-, Air
America-Registered Trademark-, Charge Air Pro-Registered Trademark-,
Ex-Cell-Registered Trademark- and Pro Air II-TM-. The Company also has several
licenses for various trademarks, including a license to use the DeVilbiss
trademark. The DeVilbiss license has a 10-year term which expires in April 2000
and may be renewed for two successive 10-year periods. The Company believes that
its trademarks and its licenses are
48
<PAGE>
important to its business operations, but does not believe that the expiration
or loss of any trademark or license would have a material adverse effect on the
Company.
RAW MATERIALS AND SUPPLIERS
The raw materials and component parts used in the Company's operations
include steel, aluminum, clay, mylar and electric motors. Most of the Company's
purchases are sourced domestically and nearly all of the Company's purchases are
readily available through multiple sources. During 1995, a world-wide shortage
of mylar occurred, restricting availability and increasing cost. By the end of
1995, availability had improved due to the Company's shift from single source
purchasing to multisource purchasing. In the last five years, the Company has
not experienced any other shortages that materially affected production.
Purchases are typically made through blanket order releases that span a period
from several months up to one year. In 1995, the Company encountered
double-digit inflation in prices of certain basic raw materials and components
used in the manufacturing process. The total raw material and component parts
cost inflation in 1995 increased Falcon's 1995 cost of sales approximately $18.2
million. During 1996 these costs eased and, for some specific items, declined
below year-end 1995 levels.
BACKLOG
The Company's backlog at June 30, 1996 and June 30, 1997 was $22.9 million
and $26.1 million, respectively. Historically, substantially all of the
Company's backlog has been shipped within the next month.
EMPLOYEES
The Company had approximately 4,100 employees as of December 31, 1996.
Approximately 2,700 hourly employees are covered by seven collective bargaining
agreements expiring through 2001. The Company anticipates that it will
renegotiate and renew its union contracts as they expire and does not anticipate
any material labor disruptions as a result of renewal of any of its union
contracts. The Company believes that its labor relations are satisfactory at all
of its facilities.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharge to
waters, the generation, handling, storage, transportation, treatment and
disposal of waste and other materials and health and safety matters. The Company
believes that its business, operations and facilities have been and are being
operated in compliance in all material respects with applicable environmental
and health and safety laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. However, the operation
of manufacturing plants entails risks in these areas, and there can be no
assurance that the Company will not incur material costs or liabilities in the
future. In addition, potentially significant expenditures could be required in
order to comply with evolving environmental and health and safety laws,
regulations or requirements that may be adopted or imposed in the future.
The Company is involved in environmental proceedings initiated by state or
local governmental agencies pertaining to two of its facilities. The Company is
currently working with the appropriate agencies on a remedial plan for the
closure of an on-site landfill at the Company's Holland, Michigan facility that
is currently estimated to cost approximately $0.4 million. The Company is also
working with the appropriate agencies on a remedial plan for the closure of one
on-site and four off-site landfills at or near the Company's Perrysville, Ohio
facility, which is currently estimated to cost approximately $1.0 million. In
addition, the Company is in the process of making capital alterations at its
Perrysville, Ohio foundry in response to an environmental compliance variance.
The Company believes that its reserves are adequate and that its liabilities for
these matters will not have a material adverse effect on the Company's financial
condition, annual results of operations or competitive position; however, there
can be no assurance that
49
<PAGE>
the Company will not incur costs or liabilities in the future that will have a
material adverse effect on the Company. Capital expenditures and expenses
(including ordinary course of business hauling and disposal expenses) in 1996
attributable to environmental matters were not material in relation to the
Company's consolidated financial position or results of operations.
PROPERTIES
The Company believes its manufacturing, warehouse and office facilities are
suitable, adequate and have sufficient manufacturing capacity for its current
requirements. The Company also believes that its facilities are being utilized
consistent with the Company's plans and have ample capacity. The Company's
principal facilities consist of the following:
<TABLE>
<CAPTION>
OWNED/
LEASE APPROX.
LOCATION PRINCIPAL USE EXPIRATION SQUARE FOOTAGE
- ---------------------------------------- -------------------------------------- --------------- --------------
<S> <C> <C> <C>
Holland, Michigan Office, Manufacturing Owned 613,000
Kilgore, Texas Office, Manufacturing, Warehouse Owned 544,000
Perrysville, Ohio Office, Manufacturing, Warehouse Owned 494,200
Walnut, California Office, Manufacturing, Warehouse Owned 414,000
Jackson, Tennessee Office, Manufacturing, Warehouse Owned 341,100
Huntsville, Alabama Office, Manufacturing Owned 219,000
Memphis, Tennessee Office, Manufacturing, Warehouse 10/97 (1) 204,000
Geneva, Alabama Office, Manufacturing Owned 203,000
Shelby, Ohio Warehouse (2) 171,500
Sanger, California Office, Manufacturing, Warehouse 12/97 (3) 142,000
Henderson, Texas Manufacturing, Warehouse Owned 124,600
Decatur, Arkansas Office, Manufacturing, Warehouse Owned 105,980
Jackson, Tennessee Manufacturing, Warehouse 8/98 103,000
Jackson, Tennessee Warehouse 12/97 90,000
Sparks, Nevada Distribution Center 12/00 73,000
Big Prairie, Ohio Manufacturing Owned 60,000
</TABLE>
- ------------------------
(1) Subject to one-year option to renew.
(2) Month-to-month tenancy.
(3) Subject to five-year option to renew.
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings and
claims incident to the normal conduct of its business, including the
environmental matters described above. Although it is impossible to predict the
outcome of any pending legal proceeding, the Company believes that such legal
proceedings and claims, individually and in the aggregate, either are without
merit, are covered by insurance or are adequately reserved for, and will not
have a material adverse effect on its financial condition or results of
operations.
In addition to the matters covered by the preceding paragraph, in May 1994,
the ULC suspended its recognition of HTPV for gas appliance systems, including
the Ultravent-Registered Trademark- product distributed by the Company. This
action resulted from reports of problems with HTPV, including improper
installation, cracking, inadequate joint adhesion, and related safety hazards,
including the potential for carbon monoxide emission. In June 1994, as a result
of the ULC action, the 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 remediated. Most gas appliance
manufacturers in Canada and the United States no longer certify HTPV for use
with their products. As a result, the
50
<PAGE>
Company discontinued sales of its HTPV product in 1997. Company sales of
Ultravent-Registered Trademark- products in the United States and Canada in 1995
and 1996 were minimal.
The Company is a defendant in a suit in Canada captioned ONTARIO NEW HOME
WARRANTY PROGRAM V. CHEVRON CHEMICAL CORP. ET AL--Ontario Court--General
Division--No. 22487/96, which was filed on February 27, 1996 against 24 entities
including heating appliance manufacturers, plastic vent manufacturers and
distributors, public utilities and listing agencies 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 a lawsuit captioned GOODMAN MANUFACTURING COMPANY V. CHEVRON CHEMICAL CORP.
ET AL-- County Court--Harris County, Texas--No. 96-15816 in which the Company
has been sued along with two other defendants for reimbursement of costs
associated with Goodman Manufacturing Company's HPTV corrective action program.
In a lawsuit captioned RHEEM CORP. ET AL V. GENERAL ELECTRIC CO.--Superior
Court--Suffolk Country, Massachusetts--No. 97-1709-B, filed March 31, 1997, the
Company and two other defendants have been sued by seven furnace manufacturers
which are seeking reimbursement for costs expected to be incurred as a result of
corrective action programs to be conducted in connection with furnace systems
vented with HTPV. On April 1, 1997, the Company filed its own legal action
captioned HART & COOLEY, INC. V. AMANA REFRIGERATION, INC.--Circuit
Court--Ottowa County, Michigan--No. 9727729-NP against all identifiable
appliance manufacturers that certified HTPV for use with their appliance system
including the plaintiffs in the Texas and Massachusetts actions. In its 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 regarding HTPV captioned
ENGEL V. CHEVRON CHEMICAL CORP. ET AL--Circuit Court--Rutherford County,
Tennessee--No. 37715, filed January 9, 1997. In this 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.
The Company is engaged in ongoing discussions with the CPSC, which has been
advised of the ULC action and the actions taken by the MCCR. The CPSC continues
to investigate HTPV and has met with all of the manufacturers of HTPV, various
appliance manufacturers and other entities with technical expertise. The CPSC's
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, including the
Company. However, 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. It is not possible at this time to predict the outcome of the
mediation.
With respect to these matters, the Company, on September 16, 1996, filed an
action in state court in Illinois against certain insurance carriers captioned
HART & COOLEY, INC. V. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
ET AL--Circuit Court of Cook County, Illinois--No. 96-CH-9947. The Company is
seeking a declaratory judgment, damages for breach of contract and specific
relief requiring the insurance carrier, 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 defined in the insurance policies, (ii) that
various exclusion 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,
51
<PAGE>
(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.
While it is impossible at this time to give a firm estimate of the ultimate
cost to the Company, management currently believes that the after-tax cost to
the Company of resolving the Ultravent matters, discussed above, should range
from a non-material amount to $20.0 million, after considering numerous factors
including, in certain scenarios, the possibility of third-party reimbursements
and insurance recoveries. It is possible that, in the event that a number of the
factors referenced above were resolved adversely to the Company and no third
party reimbursements or insurance recoveries were received, the upper limit of
such range would be exceeded. While no assurance 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.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company.
Each director of the Company will hold office until the next annual meeting
of shareholders of the Company or until his successor has been elected and
qualified. Officers of the Company will be elected by the Board of Directors of
the Company and will serve at the discretion of the Board of Directors, subject
to any applicable employment agreements.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
William K. Hall..................... 53 President, Chief Executive Officer, Chairman
William E. Allen.................... 52 President, Air Power Products
Gus J. Athas........................ 61 Executive Vice President, General Counsel and Secretary
Sam A. Cottone...................... 56 Executive Vice President and Chief Financial Officer, Director
Edward G. Finnegan, Jr.............. 35 Vice President-Corporate Development
Paul G. Fischer..................... 50 President, Plumbing Products
Lawrence B. Lee..................... 55 President, Air Distribution Accessories
Anthony J. Navitsky................. 41 Vice President-Finance and Treasurer
Christopher J. O'Brien.............. 39 Director
Charles J. Philippin................ 47 Director
Christopher J. Stadler.............. 33 Director
</TABLE>
WILLIAM K. HALL has been a director, the President and Chief Executive
Officer of Falcon since 1994, and was the President of Eagle from 1988 until
June 1997. Mr. Hall became Chairman of the Board of Falcon upon the consummation
of the Recapitalization. Mr. Hall was the Chief Executive Officer and a director
of Eagle from 1990 to June 1997. Mr. Hall is a director of Gencorp and A.M.
Castle & Co.
WILLIAM E. ALLEN has served the Company as Vice President of Air Power
Products from 1986 to 1989 and as President of Air Power Products since 1989.
Prior to 1986, Mr. Allen was a director of marketing and sales at TRW Inc.
GUS J. ATHAS has served as Senior Vice President, General Counsel and
Secretary of Falcon since 1994. In connection with the Recapitalization, Mr.
Athas was named Executive Vice President of the Company. He served as Senior
Vice President of GAMI and as Senior Vice President, General Counsel and
Secretary of Eagle from 1995 until June 1997. Prior to 1995, he served as Vice
President and Assistant Secretary of Eagle.
SAM A. COTTONE has served as Senior Vice President-Finance, Treasurer and
Chief Financial Officer of Falcon since 1994. In connection with the
Recapitalization, Mr. Cottone was named Executive Vice President of the Company.
Mr. Cottone also became a director of Falcon upon the consummation of the
Recapitalization. He was Senior Vice President of GAMI from 1995 until June 1997
and Senior Vice President-Finance, Chief Financial Officer and a director of
Eagle from 1993 until 1995. He was a partner with Arthur Andersen LLP from 1973
to 1993.
EDWARD G. FINNEGAN, JR. has served as Vice President-Corporate Development
of Falcon since January 1996. From 1988 to 1996, he served in various executive
capacities at Eagle, Equity Group Investments, Inc., and EGI Corporate
Investments, Inc.
PAUL G. FISCHER joined the Company in 1983 and has served as President of
Plumbing Fixtures since 1988. Prior to 1983, Mr. Fischer served in various
executive capacities for Interspace Corporation.
LAWRENCE B. LEE has served as President of Air Distribution Accessories
since 1985. Prior to 1985, Mr. Lee served in various capacities at Raybestos
Manhattan, Inc.
53
<PAGE>
ANTHONY J. NAVITSKY has served as Vice President-Finance and Treasurer of
the Company since March 1997. He served as Vice President and Treasurer of Eagle
from 1990 to 1997 and as Vice President and Controller of GAMI from 1983 to
1990.
CHRISTOPHER J. O'BRIEN became a director of Falcon upon the consummation of
the Recapitalization. He has been an executive of Investcorp or one or more of
its wholly-owned subsidiaries since December 1993. Prior to joining Investcorp,
Mr. O'Brien was a Managing Director of Mancuso & Company for four years. Mr.
O'Brien is a director of Simmons Holdings, Inc., Star Markets Holdings, Inc.,
Prime Services Inc., CSK Auto, Inc. and The William Carter Company.
CHARLES J. PHILIPPIN became a director of Falcon upon consummation of the
Recapitalization. He has been an executive of Investcorp or one or more of its
wholly-owned subsidiaries since July 1994. Prior to joining Investcorp, Mr.
Philippin was a partner of Coopers & Lybrand L.L.P. Mr. Philippin is a director
of Saks Holdings, Inc., Prime Service, Inc., CSK Auto, Inc. and The William
Carter Company.
CHRISTOPHER J. STADLER became a director of Falcon upon the consummation of
the Recapitalization. He has been an executive of Investcorp or one or more of
its wholly-owned subsidiaries since April 1, 1996. Prior to joining Investcorp,
Mr. Stadler was a Director with CS First Boston Corporation. Mr. Stadler is a
director of Prime Service, Inc., CSK Auto, Inc. and The William Carter Company.
DIRECTOR COMPENSATION
Prior to the Recapitalization, the Company paid each of its directors who
was not an officer or an employee of the Company or a subsidiary an annual
retainer of $20,000 and a fee of $1,000 for each board and committee meeting
attended. Directors were reimbursed for any expenses they incurred in attending
meetings. In addition, each director was granted upon initial election and at
each annual meeting of stockholders thereafter a 10-year option (vesting at the
rate of 25% per year) to purchase 2,000 shares of Class A Stock with a per share
exercise price equal to the fair market value per share Class A Stock on the
date of grant. All of such options were redeemed in connection with the
Recapitalization. See "The Recapitalization."
The Company does not pay any additional remuneration to its employees or to
executives of Investcorp for serving as directors, although such directors are
reimbursed for expenses incurred in attending board meetings. See "--Executive
Compensation." There are no familial relationships among any of the directors or
executive officers.
54
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation earned in the previous
three fiscal years by the Company's Chief Executive Officer and each of the
other six most highly compensated executive officers whose remuneration exceeded
$100,000 (the "Named Executive Officers"). The current compensation arrangements
for each of these officers are described in "--Employment Arrangements Following
the Recapitalization" below.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
---------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS AWARDS OPTIONS SATION
- --------------------------------------------------------------------- ---- ------- ------- ---------- ---------- ----------
<CAPTION>
($) ($) ($) (1) (#) ($) (2)
<S> <C> <C> <C> <C> <C> <C>
William K. Hall (3).................................................. 1996 250,000 271,200 -- 43,300 6,410
President and Chief Executive Officer 1995 241,551 -- -- 53,300 6,200
1994 234,058 214,500 79,800 40,000 5,938
William E. Allen..................................................... 1996 186,162 208,157 -- 19,500 11,402
President, Air Power Products 1995 171,102 50,117 -- 22,100 12,399
1994 162,537 160,796 198,000 15,000 9,313
Gus J. Athas (3)(4).................................................. 1996 144,731 122,040 -- 32,200 6,410
Executive Vice President, General 1995 126,174 -- -- 40,000 6,200
Counsel and Secretary 1994 127,193 91,000 53,400 30,000 5,938
C. Clifford Brake (3)................................................ 1996 289,433 235,944 -- -- 12,820
Retired; Former Senior Vice 1995 142,164 -- -- -- 6,200
President-Operations 1994 132,500 132,000 53,400 -- 5,938
Sam A. Cottone (3)(4)................................................ 1996 144,731 122,040 -- 32,200 6,410
Executive Vice President--Finance, 1995 136,048 -- -- 40,000 6,200
Treasurer and Chief Financial Officer 1994 127,193 91,000 53,400 30,000 5,938
Paul G. Fischer...................................................... 1996 183,475 82,013 -- 17,350 7,680
President, Plumbing Fixtures 1995 172,000 -- -- 22,100 13,881
1994 161,250 161,573 198,000 15,000 10,022
Lawrence B. Lee...................................................... 1996 194,750 73,148 -- 18,450 8,960
President, Air Distribution Accessories 1995 185,562 -- -- 23,400 12,399
1994 173,472 164,764 210,000 15,000 11,876
</TABLE>
- ------------------------------
(1) Value on date of grant, November 3, 1994, of 6,650, 16,500, 4,450, 4,450,
4,450, 16,500 and 17,500 restricted shares of Class A Stock granted to the
above named officers, respectively. On December 31, 1996, the remaining
shares of 3,325, 8,250, 2,225, 2,225, 2,225, 8,250 and 8,750 had a value of
$49,044, $121,688, $32,819, $32,819, $32,819, $121,688 and $129,063,
respectively. Subject to forfeiture for non-vesting, the grantees were
entitled to any dividends declared on these shares. Shares vested at the
rate of 25% over a four-year period from date of grant. All of such shares
vested in connection with the Recapitalization, at which time they were
repurchased by the Company.
(2) Amounts contributed to the Eagle Employee Savings Plan and accrued under an
unfunded Supplemental Plan for Messrs. Hall, Cottone and Athas represent 50%
of the actual contributions made. Amounts contributed and accrued for Mr.
Brake under these plans represent 100% in 1996 and 50% in 1995 and 1994 of
actual contributions made. Amounts shown in the table represent the amounts
paid by the Company as a reimbursement to Eagle pursuant to the Corporate
Services Agreement.
(3) The amounts for Salary and All Other Compensation for Messrs. Hall, Cottone
and Athas, who also devoted 50% of their working time to Eagle, were neither
set nor paid by the Company, but were determined and paid by Eagle. Such
amounts reflect 50% of the total amounts paid to such executives for Salary
and All Other Compensation by Eagle and the Company, which equal the amounts
reimbursed to Eagle by the Company pursuant to the corporate services
agreement between the Company and Eagle (the "Corporate Services
Agreement"). The amounts for Salary and All Other Compensation paid to Mr.
Brake were determined and paid by Eagle. Such amounts reflect 100% of the
total amounts paid to Mr. Brake in 1996 and 50% of the total amounts paid to
Mr. Brake in 1995 and 1994 for Salary and All Other Compensation by Eagle
and the Company, which equal the amounts reimbursed to Eagle by the Company
pursuant to the Corporate Services Agreement. Annual bonus targets were set
by the Company and annual bonuses were remitted by the Company to Eagle for
payment to these executives. All compensation and employment relationships
with Eagle were terminated in connection with the Recapitalization.
(4) In connection with the Recapitalization, Messrs. Athas and Cottone were
named Executive Vice Presidents. Prior to such times, Messrs. Athas and
Cottone were Senior Vice Presidents of the Company.
55
<PAGE>
COMPENSATION RELATED TO THE RECAPITALIZATION
Upon the consummation of the Recapitalization, 11 employees of the Company,
including Messrs. Allen, Athas, Cottone, Fischer, Hall and Lee, received
transaction incentive bonuses as a result of arrangements approved by the
Company's pre-Recapitalization Board of Directors. These bonuses totaled
approximately $3.1 million.
Each person who, immediately prior to the consummation of the
Recapitalization, held an option to purchase shares of Class A Stock granted
under the Company's 1994 Stock Option and Restricted Share Plan (the "1994
Plan"), whether or not then exercisable, received from the Company for each
share subject to such option an amount in cash equal to the excess, if any, of
the Cash Price (as defined) over the per share exercise price of such option,
and such option was canceled.
The following table reflects the payments received by certain executive
officers of the Company upon consummation of the Recapitalization under the
transaction incentive arrangements and the 1994 Plan described above:
<TABLE>
<CAPTION>
TRANSACTION
INCENTIVE NET OPTION
NAME BONUS PROCEEDS
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
William E. Allen...................................................................... $ 500,000 $ 373,095
Gus J. Athas.......................................................................... 300,000 675,618
Sam A. Cottone........................................................................ 300,000 675,618
Paul G. Fischer....................................................................... 375,900 361,936
William K. Hall....................................................................... 700,000 902,447
Lawrence B. Lee....................................................................... 399,000 378,566
Certain other employees............................................................... 557,040 561,022
------------ ------------
Total............................................................................... $ 3,131,940 $ 3,928,302
------------ ------------
------------ ------------
</TABLE>
The total amount of all bonuses and payments with respect to options to
executive officers was approximately $7.1 million.
Shares of Class A Stock held by executive officers and directors of the
Company were converted into the right to receive the same consideration as
shares of Class A Stock held by other stockholders. Options held by executive
officers and directors of the Company were treated in the same manner as options
held by other option holders. See "Certain Transactions--Agreements with Certain
Stockholders."
EMPLOYMENT ARRANGEMENTS FOLLOWING THE RECAPITALIZATION
Messrs. Hall, Cottone and Athas, as well as two other officers, have entered
into employment agreements with the Company, effective as of the consummation of
the Recapitalization (collectively, the "Employment Agreements"). Under the
terms of the Employment Agreements, Mr. Hall serves as Chairman, President and
Chief Executive Officer and receives a minimum base salary payable at an annual
rate of $600,000, subject to adjustment. Mr. Cottone serves as Executive Vice
President and Chief Financial Officer and receives a minimum base salary payable
at an annual rate of $400,000, subject to adjustment, and Mr. Athas serves as
Executive Vice President, General Counsel and Secretary and receives a minimum
base salary payable at an annual rate of $330,000, subject to adjustment.
The Employment Agreements also provide (i) for an annual bonus to be paid to
the officers in accordance with goals to be mutually agreed upon by the Company
and such officers, (ii) that the Company will establish a funded supplemental
executive retirement plan in the cases of Messrs. Cottone and Athas or, in the
case of Mr. Hall, a mutually satisfactory alternative plan, (iii) that such
officers will receive 10-year stock options with respect to various percentages
of the outstanding Falcon capital stock as of the consummation of the
Recapitalization, (iv) that such officers have certain rights to "put" to the
Company and the Company has certain rights to "call" from such officers
unrestricted shares of Falcon
56
<PAGE>
capital stock owned by such officers and certain vested stock options held by
such officers, and (v) that such officers are each required to retain or
purchase a specific percentage of shares of Falcon capital stock as of the
consummation of the Recapitalization.
Each Employment Agreement is subject to a fixed term, unless earlier
terminated by the Company or an officer. If an Employment Agreement is
terminated by the Company, the termination is not effective until the later of
three years after the consummation of the Recapitalization or two years after
the notice of termination, unless the termination is for "Good Cause." If an
Employment Agreement is terminated by an officer, the termination is not
effective until 60 days after the notice of termination. Under the Employment
Agreements if the Company terminates the employment of an officer without Good
Cause or the officer terminates his employment for "Good Reason," the officer is
entitled to receive severance benefits which include (i) the ability to exercise
vested and outstanding stock options for the period ending on the earlier of the
date that is 18 months from the date his employment is terminated or the
specific expiration date stated in the options and (ii) for the period ending on
the later of three years after the consummation of the Recapitalization or two
years after notice of such termination, payment of the officer's base
compensation at the rate most recently determined and an annual bonus in an
amount equal to the latest bonus that would be paid if then targeted goals were
achieved; the continuation of health, life and disability benefits; the
provision of office space and secretarial services; the reimbursement for
outplacement services; and the full vesting in all retirement and savings plans.
If the officer dies while he is receiving severance benefits, such benefits will
continue to be paid to his spouse, and if such spouse subsequently dies, to the
officer's estate.
"Good Cause" is defined as (i) the officer's conviction of any embezzlement
or any felony involving fraud or breach of trust relating to the performance of
the officer's duties, (ii) the officer's willful engagement in gross misconduct
in the performance of his duties, (iii) the officer's death, or (iv) permanent
disability which materially impairs the officer's performance of his duties.
"Good Reason" exists if (i) the Company continues a reduction in
compensation or expenditures for benefit plans, relocates outside the Chicago
area or commits another material breach of the Employment Agreement for more
than 30 days after being notified by the officer of such breach provided the
officer has given notice to the Company within 30 days of first becoming aware
of the facts constituting such breach, (ii) the Company gives the officer a
notice of termination without Good Cause provided the officer terminates the
Employment Agreement within 30 days of receiving such notice, (iii) a "change in
control" occurs and the officer's employment is terminated by either party for
any reason other than Good Cause, or (iv) the officer retires from the Company
on a date that is mutually agreed upon by the Company and the officer.
The Company has entered into agreements with each of Messrs. Allen, Ellis,
Fischer and Lee that provide benefits in the event that the executives'
employment is terminated, other than by reason of death, disability, Voluntary
Termination or Termination with Cause (as defined in the agreements) within two
years following a change in control of ownership of the subsidiary employer or
the Company that occurs prior to September 30, 1997. Upon a covered termination,
the executive will be entitled to receive a payment equal to two times the sum
of base salary and bonus in effect at the time of termination. In addition, the
Company will provide up to one year of outplacement assistance and will pay the
executives' cost of continuing certain health care benefits for up to two years.
Similar agreements have been entered into with twenty-two other employees of the
Company's subsidiaries which provide for a lump sum payment equal to from six to
18 months of the employee's base salary plus bonus at the time of such
employee's termination and the Company's payment of the costs for continuation
of certain benefits for a specified period of time after such employee's
termination.
57
<PAGE>
STOCK OPTION PLAN
In order to attract, retain and motivate selected employees and officers,
and to encourage such persons to devote their best efforts to the business and
financial success of the Company, the Company adopted the Falcon Building
Products, Inc. Stock Option Plan (the "Stock Option Plan") in connection with
the consummation of the Recapitalization. The Stock Option Plan provides for the
grant of options to purchase approximately 11% of the number of shares of
capital stock of Falcon outstanding at the consummation of the Recapitalization.
The Stock Option Plan provides that it may be administered by Falcon's Board
of Directors (the "Board") or a committee designated by the Board. As of the
date of this Prospectus, the Board has not designated such a committee and is
administering the Stock Option Plan itself. The Board designates the employees
of the Company who shall be eligible to receive awards under the Stock Option
Plan, and the amount, timing and other terms and conditions applicable to such
awards. Notwithstanding the foregoing, the Employment Agreements provide that
each executive officer will receive a certain specified percentage of 10-year
options with a per share exercise price equal to the Cash Price. Messrs. Hall,
Cottone and Athas and other current executive officers and employees of the
Company and its subsidiaries received options for approximately ten percent of
the number of shares of capital stock of Falcon outstanding at the consummation
of the Recapitalization. Approximately one percent of the outstanding shares of
such stock has been reserved for future grants. Options will be exercisable in
accordance with the terms established by the Board. Options will expire on the
date determined by the Board, which shall not be later than the tenth
anniversary of the grant date. The Stock Option Plan gives an optionee certain
rights to "put" to the Company and gives the Company certain rights to "call"
from the optionee, certain vested stock options and shares acquired upon
exercise thereof.
OPTION GRANTS IN FISCAL 1996
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during fiscal 1996. In connection with
the Recapitalization, all options held by the Named Executive Officers were
accelerated and the holders of such options received the difference between the
Cash Price ($17.75 per share) over the per share exercise price of such option.
See "-- Compensation Related to the Recapitalization."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
FOR OPTION TERM(2)
------------------------
<S> <C> <C> <C> <C> <C> <C>
5% ($) 10% ($)
NUMBER OF % OF TOTAL (ASSUMES (ASSUMES
SECURITIES OPTIONS $20.46 $32.58
UNDERLYING GRANTED TO PRICE PRICE
OPTIONS EMPLOYEES EXERCISE AT END OF AT END OF
GRANTED IN FISCAL PRICE EXPIRATION 10 10
NAME (#)(1) YEAR ($/SHARE) DATE YEARS) YEARS)
- ----------------------------------------- ----------- ------------- ----------- ----------- ----------- -----------
William K. Hall.......................... 43,300 14.2% 12.56 11/13/06 342,023 866,754
William E. Allen......................... 19,500 6.4% 12.56 11/13/06 154,029 390,339
Gus J. Athas............................. 32,200 10.5% 12.56 11/13/06 254,345 644,560
Sam A. Cottone........................... 32,200 10.5% 12.56 11/13/06 254,345 644,560
Paul G. Fischer.......................... 17,350 5.7% 12.56 11/13/06 137,046 347,302
Lawrence B. Lee.......................... 18,450 6.0% 12.56 11/13/06 145,735 369,321
</TABLE>
- ------------------------
(1) Options were for Class A Stock and were scheduled to vest at the rate of 25%
per year over a four year period from the date of grant.
(2) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of its Class A Stock. The actual
value, if any, which a Named Executive Officer could have realized
58
<PAGE>
upon the exercise of stock options at December 31, 1996 was based upon the
difference between the market value of the Company's Class A Stock on such
date and the exercise price.
AGGREGATE OPTION EXERCISES IN 1996 AND 1996 YEAR-END OPTION VALUES
The following table sets forth for the Chief Executive Officer and the other
Named Executive Officers information with respect to December 31, 1996 as to
securities underlying unexercised options and year-end option values, in each
case with respect to options to purchase shares of the Company's Class A Stock.
None of such Named Executive Officers exercised any options during fiscal 1996.
All of such options were accelerated and canceled in connection with the
Recapitalization. See "--Compensation Related to the Recapitalization."
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS
AS OF DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996 ($)
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE NONEXERCISABLE EXERCISABLE NONEXERCISABLE
- --------------------------------------------------------
William K. Hall......................................... 33,325 103,275 126,955 365,692
William E. Allen........................................ 13,025 43,575 50,460 152,835
Gus J. Athas............................................ 25,000 77,200 95,250 273,768
Sam A. Cottone.......................................... 25,000 77,200 95,250 273,768
Paul G. Fischer......................................... 13,025 41,425 50,460 148,126
Lawrence B. Lee......................................... 13,350 43,500 52,215 155,800
</TABLE>
PENSION PLANS
During fiscal 1996, eligible employees of the Company participated in the
Falcon Cash Balance Pension Plan (the "Existing Cash Balance Plan"), a qualified
"cash balance" defined benefit plan that covered eligible salaried and hourly
employees of Falcon and its subsidiaries that adopted the plan. Certain officers
of the Company participated in an Eagle sponsored Cash Balance Plan which
mirrors the Existing Cash Balance Plan (collectively, the "Pension Plans"). The
normal form of retirement benefit under the Pension Plans is an annuity payable
at age 65 (the normal retirement age), although, in lieu of an annuity, a
participant may elect to receive a lump sum payment at retirement or other
termination of service. A participant's benefit is based on a bookkeeping
account balance, which is the sum of 5% of the participant's compensation for
each of the first 15 years of service and 6.5% of compensation for each year of
service thereafter. The bookkeeping account balances are further credited with
interest based on the One Year Treasury Constant Maturities as published in the
Federal Reserve Statistical Release over the one-month period ending on the
November 30 immediately preceding the applicable plan year. The interest rate
for the plan year ending December 31, 1996 was 5.5%. Covered compensation
includes salary, annual bonus, 401(k) deferrals and overtime, but excludes
long-term incentive compensation.
As of December 31, 1996, the estimated annual annuity benefits payable under
the Pension Plans at normal retirement were $12,680, $51,541, $5,984, $18,077,
$7,714, $53,066 and $39,450 for Messrs. Hall, Allen, Athas, Brake, Cottone,
Fischer and Lee, respectively. Prior to the Recapitalization, the Company was
responsible for a portion of the current costs of these benefits for Messrs.
Hall, Cottone, Athas and Brake pursuant to a Corporate Service Agreement with
Eagle. The Corporate Service Agreement was terminated in connection with the
Recapitalization and the Company now bears all of the cost of these benefits for
Messrs. Hall, Cottone and Athas, as well as its other employees. See "Certain
Transactions."
Subject to the provisions of the plans, the employee benefit plans
maintained by the Company immediately prior to the consummation of the
Recapitalization will continue to be maintained by the Company.
59
<PAGE>
STOCK PURCHASE PLAN
In 1994, pursuant to the Company's senior executive stock purchase plan (the
"Stock Purchase Plan"), certain executives purchased shares of Class A Stock
coincident with the Company's Initial Public Offering and the Company loaned
money to certain officers of the Company to enable them to purchase shares in
the Company's Initial Public Offering. The loans were made on a full recourse
basis and bear interest at the rate of 7.5% per annum, compounded semi-annually.
The Company has agreed to repurchase shares of Class A Stock acquired pursuant
to the Stock Purchase Plan by any such officer if, prior to November 2, 1997,
his employment is terminated coupled with a change in control of the Company.
The officers who purchased shares pursuant to the Stock Purchase Plan include
Messrs. Hall (80,000 shares), Cottone (20,000 shares), Brake (20,000 shares),
Athas (16,000 shares), Allen (24,000 shares), Fischer (24,000 shares), and Lee
(12,500 shares). Pursuant to the Stock Purchase Plan, in the event of a change
in control of the Company, or a termination of employment for any reason other
than for cause, or death or disability, or retirement on or after age 65, the
price at which the Company will repurchase an officer's shares of Class A Stock
will be the higher of market value or original purchase price plus accumulated
interest on such officer's related loan by the Company, less any distributions
received on these shares. In the event of an officer's voluntary resignation
prior to age 65, the purchase price will be the lower of these two prices. See
"Certain Transactions."
In connection with the Recapitalization, the Stock Purchase Plan was amended
to permit the loans outstanding thereunder to remain outstanding. Concurrently,
the Company adopted the Falcon Building Products, Inc. 1997 Senior Executive
Stock Loan Plan (the "1997 Loan Plan") containing loan provisions similar to the
Stock Purchase Plan. Loans under the 1997 Loan Plan will only be available to
executives who do not have loans outstanding under the Stock Purchase Plan. At
the consummation of the Recapitalization, loans in aggregate amount of
approximately $342,000 to purchase shares of Class C Stock were made under the
1997 Loan Plan to four employees of the Company who are not Named Executive
Officers.
COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
Prior to the consummation of the Recapitalization, the Board of Directors of
Falcon consisted of Mr. Hall, Rod F. Dammeyer, Bradbury Dyer, III, Philip C.
Kantz, Sheli Z. Rosenberg, Richard G. Sim, Robert L. Smialek and B. Joseph
White. Of this group, only Mr. Hall currently serves as a director of the
Company.
Prior to the consummation of the Recapitalization, the Compensation
Committee of the Board of Directors determined the Company's policy with respect
to the nature and amount of all compensation of the Company's executive
officers. In 1996, the Compensation Committee was comprised of Messrs. Dammeyer,
Kantz and White. .
Prior to the consummation of the Recapitalization, the following
relationships existed: Mr. Hall, President and Chief Executive Officer of
Falcon, was the Chief Executive Officer and a director of Eagle; Mr. Dammeyer
was the Chief Executive Officer and a director of GAMI and Chairman of the Board
of Directors of Eagle; EHL owned 100% of the outstanding common stock of GAMI;
GAMI owned 100% of the outstanding common stock of Eagle; EHL's sole general
partners were the Samuel Zell Revocable Trust and the Robert H. and Ann Lurie
Trust; Mr. Zell was the trustee of such Zell Trust; Mark Slezak and Ms. Lurie
were co-trustees of the Robert H. and Ann Lurie Trust; Messrs. Athas and Cottone
were executive officers and directors of the Company and were executive officers
of GAMI and Eagle and, in the case of Mr. Cottone, a director of Eagle. Mr. Dyer
was a director of GAMI.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the capital stock of the Company. The table sets forth for such
periods (i) each person known by the Company to be beneficial owner of more than
5% of each class of voting stock of the Company, (ii) each person who is a
director or executive officer of the Company who beneficially owns shares of
capital stock of the Company and (iii) all directors and executive officers of
the Company as a group. Unless otherwise indicated, each of the stockholders
shown in the table below has sole voting and investment power with respect to
the shares beneficially owned.
Holders of the Class A Stock are entitled to one vote per share and in the
aggregate represent approximately 12% of the voting stock of Falcon. The holders
of Class D Common Stock, $0.01 par value per share (the "Class D Stock"), are
entitled to 446 votes per share and have approximately 88% of the voting power
of Falcon.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
-----------------------
<S> <C> <C>
NUMBER
OF SHARES % OF
(1) CLASS
------------ ---------
CLASS A VOTING STOCK
EHL (2).................................................................................... 783,354 75.8%
William E. Allen (3)....................................................................... 21,818 2.1
Gus J. Athas (3)........................................................................... 13,636 1.3
Sam A. Cottone (3)......................................................................... 13,488 1.3
Paul G. Fischer (3)........................................................................ 21,818 2.1
William K. Hall (3)........................................................................ 68,182 6.6
Lawrence B. Lee (3)........................................................................ 11,364 1.1
All directors and officers as a group, including the above-named persons................... 156,669 15.2
CLASS D VOTING STOCK
INVESTCORP S.A. (4)(5)..................................................................... 17,000 100.0%
SIPCO Limited (6).......................................................................... 17,000 100.0
CIP Limited (7)(8)......................................................................... 15,640 92.0
Ballet Limited (7)(8)...................................................................... 1,564 9.2
Denary Limited (7)(8)...................................................................... 1,564 9.2
Gleam Limited (7)(8)....................................................................... 1,564 9.2
Highlands Limited (7)(8)................................................................... 1,564 9.2
Nobel limited (7)(8)....................................................................... 1,564 9.2
Outrigger Limited (7)(8)................................................................... 1,564 9.2
Quill Limited (7)(8)....................................................................... 1,564 9.2
Radial Limited (7)(8)...................................................................... 1,564 9.2
Shoreline Limited (7)(8)................................................................... 1,564 9.2
Zinnia Limited (7)(8)...................................................................... 1,564 9.2
INVESTCORP Investment Equity Limited (5)................................................... 1,360 8.0
</TABLE>
- ------------------------
(1) As used in the table above, a beneficial owner of a security includes any
person who, directly or indirectly, through contract, arrangement,
understanding, relationship, or otherwise has or shares (i) the power to
vote, or direct the voting, of such security or (ii) investment power which
includes the power to dispose, or to direct the disposition of, such
security. In addition, a person is deemed to be the beneficial owner of a
security if that person has the right to acquire beneficial ownership of
such security within 60 days.
61
<PAGE>
(2) EHL's general partners are the Samuel Zell Revocable Trust and the Robert H.
and Ann Lurie Trust. Samuel Zell is the trustee of the Zell Trust. Mark
Slezak and Ms. Lurie are co-trustees of the Robert H. and Ann Lurie Trust.
Messrs. Zell and Slezak and Ms. Lurie disclaim beneficial ownership of the
shares of Class A Stock beneficially owned by EHL. The address of EHL,
Messrs. Zell and Slezak and Ms. Lurie is Two North Riverside Plaza, Chicago,
Illinois 60606.
(3) The address of Messrs. Allen, Athas, Cottone, Fischer, Hall and Lee is c/o
Falcon Building Products, Inc., Two North Riverside Plaza, Chicago, Illinois
60606.
(4) Investcorp does not directly own any stock in Falcon. The number of shares
shown as owned by Investcorp includes all of the shares owned by INVESTCORP
Investment Equity Limited (see (5) below). Investcorp owns no stock in
Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble
Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline
Limited, Zinnia Limited, or in the beneficial owners of these entities (see
(8) below). Investcorp may be deemed to share beneficial ownership of the
shares of voting stock held by these entities because the entities have
entered into revocable management services or similar agreements with an
affiliate of Investcorp, pursuant to which each such entities has granted
such affiliate the authority to direct the voting and disposition of the
Falcon voting stock owned by such entity for so long as such agreement is in
effect. Investcorp is a Luxembourg corporation with its address at 37 rue
Notre-Dame, Luxembourg.
(5) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a
wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111,
West Wind Building, George Town, Grand Cayman, Cayman Islands.
(6) SIPCO Limited may be deemed to control Investcorp through its control of a
company that indirectly is the beneficial owner of 100% of Investcorp's
shares. SIPCO Limited's address is P.O. Box 1111, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
(7) CIP Limited ("CIP") owns no stock in Falcon. CIP indirectly owns less than
0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited (see (8) below). CIP may be
deemed to share beneficial ownership of the shares of voting stock of Falcon
held by such entities because CIP acts as a director of such entities, and
the ultimate beneficial shareholders of each of those entities have granted
to CIP revocable proxies in companies that own those entities' stock. None
of the ultimate beneficial owners of such entities beneficially owns
individually more than 5% of Falcon's voting stock.
(8) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited,
Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial
Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands
corporation with its address at P.O. Box 2197, West Wind Building, George
Town, Grand Cayman, Cayman Islands.
62
<PAGE>
CERTAIN TRANSACTIONS
Financing for the Recapitalization was provided in part by approximately
$134.6 million of capital provided by Investcorp, its affiliates and other
international investors organized by Investcorp. An affiliate of Investcorp was
paid a fee of $5.0 million for services rendered outside of the United States in
connection with the raising of the equity capital from the international
investors.
In connection with the Recapitalization, the Company paid Investcorp
International, Inc. ("III"), an affiliate of Investcorp, advisory fees
aggregating $4.2 million, and Invifin S.A., an affiliate of Investcorp, received
fees aggregating $5.8 million for providing a standby commitment to fund the
amount of the senior subordinated indebtedness and the Credit Facility. The
Company also entered into an agreement for management advisory and consulting
services (the "Management Agreement") for a five-year term with III, pursuant to
which the Company prepaid III $5.0 million upon the consummation of the
Recapitalization.
The Company has in the past entered into agreements or arrangements with
affiliates relating to legal services, acquisition services, financing services,
and consulting arrangements. The fairness and reasonableness of any compensation
paid to such affiliates and any material transactions between the Company and
such affiliates in the future will be approved by a majority of the
disinterested members of the Board of Directors or by an independent firm
selected by such Board members. The Company believes that the terms and
resulting costs of all related party transactions and agreements are no less
favorable than those which could have been obtained from non-affiliated parties.
In the past, the Company shared management, administrative and other
responsibilities with Eagle pursuant to a Corporate Services Agreement. Total
fees paid under this agreement were $2.4 million in 1994, $2.3 million in 1995
and $2.6 million in 1996. Pursuant to the Merger Agreement, the Corporate
Services Agreement was terminated upon consummation of the Recapitalization and
replaced with a similar agreement covering a transition period ending December
31, 1997, which does not cover management services and reduces the other
services provided by Eagle thereunder.
The law firm of Rosenberg & Liebentritt, P.C., of which Sheli Z. Rosenberg
is a member, has rendered legal services to the Company. The Company paid this
law firm $0.4 million in 1995 and $0.1 million in 1996.
Prior to November 1994, the Company was included in the consolidated federal
income tax returns of GAMI, the parent company of Eagle. In addition, the
Company filed certain combined state tax returns with GAMI until the
distribution to EHL in 1996. In December 1996, the Company paid GAMI $4.6
million for a final tax sharing payment for tax liabilities incurred while it
was included in GAMI's income tax returns, pursuant to the GAMI-Falcon
Disaffiliation Tax Sharing Agreement.
In connection with the Initial Public Offering, the Company agreed with the
Pension Benefit Guaranty Corporation that for five years it will remain jointly
and severally liable for certain pension liabilities of GAMI, Eagle and their
subsidiaries without regard to whether or not the sale of the Company's common
stock to the public was sufficient to remove the Company from the group having
joint and several liability for these pension plan liabilities. GAMI and Eagle
have agreed to hold the Company harmless from any pension plan liabilities not
attributable to the Company's pension plans, and the Company has agreed to hold
them harmless from any liabilities attributable to such plans. The Company and
Eagle have agreed to hold each other harmless from certain liabilities unrelated
to the other's business.
In 1994, the Company loaned money to certain officers of the Company to
enable such officers to purchase shares in the Initial Public Offering at $12.00
per share. The Company loaned $0.9 million to Mr. Hall, $0.2 million to Mr.
Cottone, $0.2 million to Mr. Brake, $0.2 million to Mr. Athas, $0.3 million to
Mr. Allen, $0.3 million to Mr. Fischer and $0.1 million to Mr. Lee. The loans
mature in seven years or earlier in certain circumstances and bear interest at
the rate of 7.5% per year, compounded semi-annually payable upon maturity of the
loans. At December 31, 1996, the balances of these loans were $1.04 million,
63
<PAGE>
$0.26 million, $0.26 million, $0.21 million, $0.31 million, $0.31 million and
$0.16 million for Messrs. Hall, Cottone, Brake, Athas, Allen, Fischer and Lee,
respectively. See "Management--Executive Compensation--Stock Purchase Plan." In
connection with the Recapitalization, the Stock Purchase Agreement pursuant to
which the loans were issued was amended to permit the loans to remain
outstanding.
Certain members of Falcon's management and other accredited investors
purchased an aggregate of $0.683 million in aggregate principal amount at
maturity of Old Discount Notes and Management Discount Notes in the Original
Offering. The Management Discount Notes are not included in the Exchange Offer.
In addition, following the Recapitalization, certain members of Falcon's
management purchased 62,800 shares of the non-voting Class C Stock at a price of
$17.75 per share from Investcorp or its affiliates in order to provide
management with the opportunity to increase its aggregate ownership from the
amount that management retained in the Merger. In addition, the Company made
loans, in amounts equal to 50% of the aggregate price of the shares to be
purchased, to certain of such members of management who did not already have
loans outstanding from the Company in connection with the loan program described
in the prior paragraph. Such loans will mature in seven years, will bear
interest at the same rate as Falcon's new senior secured revolving credit
facility, and must be repaid with 20% of the after-tax portion of such
employee's annual bonus.
AGREEMENTS WITH CERTAIN STOCKHOLDERS
Prior to the consummation of the Recapitalization, FBP and Falcon entered
into voting agreements (collectively, the "Voting Agreements") with EHL and with
certain other stockholders who are members of Falcon's management (collectively,
the "Subject Stockholders"). Pursuant to the Voting Agreements, the Subject
Stockholders, who owned, as of the Record Date, an aggregate of approximately
71% of the outstanding shares of Class A Stock, agreed, among other things and
subject to certain conditions, to vote in favor of the Merger Agreement and the
Merger. The Voting Agreements also provided that the Subject Stockholders would
make elections to retain 1,034,020 shares of Class A Stock. As a result of other
stockholders also electing to retain shares of Class A Stock and the resulting
proration, the Subject Stockholders retained approximately 940,000 shares of
Class A Stock.
The Voting Agreement among EHL, FBP and Falcon created certain rights and
obligations in addition to those set forth in the Voting Agreements among
certain officers of Falcon, FBP and Falcon. Among other things, this agreement
provided that EHL would cause Eagle, its wholly-owned subsidiary, to provide
certain corporate services to Falcon after the Recapitalization at commercially
reasonable rates. This agreement also provided that, prior to the
Recapitalization, EHL and Falcon, along with the investors in FBP who receive
Falcon voting stock pursuant to the Recapitalization ("Voting Stock Investors"),
would enter into a Stockholder Rights Agreement. The Stockholder Rights
Agreement, as entered into at the consummation of the Recapitalization, contains
the following provisions: (i) the right of first offer in favor of Falcon and
Investcorp Investment Equity Limited in the event that EHL proposes to sell its
Falcon stock to another person; (ii) the right in favor of the investors in FBP
who received voting and non-voting stock in the Recapitalization to require EHL
to sell its entire equity interest in Falcon upon the same terms and conditions
agreeable to such investors; (iii) the right in favor of EHL to purchase
securities offered by the Company in certain equity financings in order to allow
EHL to maintain its level of equity ownership interest; (iv) the right in favor
of EHL to sell shares in a change-of-control transaction proposed by Voting
Stock Investors; (v) certain registration rights in favor of EHL; (vi) the
obligation of EHL to enter certain "lock-up" agreements with underwriters in
future public offers; and (vii) so long as EHL holds a certain percentage of the
Class A stock, the right of EHL to receive certain information about the
business and financial performance of Falcon. In connection with the
consummation of the Recapitalization, the eight members of management of Falcon
who are listed under the heading "Management--Directors and Executive Officers
of the Company" entered into certain Stockholder Agreements containing
provisions restricting the transfer of their Falcon shares, providing certain
put and call rights and granting Falcon the right to purchase the shares of its
stock held by an employee upon his or her termination.
64
<PAGE>
THE RECAPITALIZATION
THE MERGER
On March 20, 1997, the Company entered into the Merger Agreement with FBP.
The Merger Agreement contemplated that FBP would be merged with and into Falcon,
and each outstanding share of the 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 (a "Non-Cash
Election"). On June 17, 1997, the Merger and the adoption of the Merger
Agreement were approved by the vote of a majority of the shares of Falcon Class
A Stock entitled to vote thereon, 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. 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.
CAPITAL STOCK FOLLOWING THE RECAPITALIZATION
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE AUTHORIZED SHARES AT JUNE 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 on all matters as to which stockholders may be entitled to vote pursuant to
the DGCL. Upon the occurrence, at any future date, 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 CREDIT FACILITY
GENERAL. As part of the Recapitalization, the Company entered into the
Credit Facility with The Chase Manhattan Bank ("Chase"), as administrative
agent, and the several lenders from time to time parties thereto, pursuant to a
commitment letter and related term sheet, both of which are dated May 7, 1997
(the "Commitment Letter" and the "Term Sheet", respectively). The Credit
Facility consists of the Term Loan Facility in an aggregate principal amount of
$175.0 million and the Revolving Facility in an aggregate principal amount of up
to $125.0 million (together with the Term Loan Facility, the "Loans"). The Term
Loan Facility will mature in June 2005 and the Revolving Facility will mature in
June 2003.
All obligations of the Company are unconditionally guaranteed by each of the
Subsidiaries of the Company other than special purpose vehicles ("SPVs") in
connection with the Receivables Securitization Program and subsidiaries deemed
to be immaterial. Indebtedness under the Credit Facility is secured by a first
priority security interest in (i) all of the capital stock of each of the
Company's Subsidiaries and 65% of the capital stock of any foreign subsidiary
owned by the Company or any of its Subsidiaries other than
65
<PAGE>
SPVs, (ii) substantially all of the inventory, equipment and real property of
the Company and its Subsidiaries other than SPVs and (iii) substantially all
other tangible and intangible assets of the Company and its Subsidiaries other
than SPVs, but excluding, among other things, receivables sold in connection
with the Receivables Securitization Program.
TERM LOAN FACILITY. The Term Loan Facility consists of a term loan in an
aggregate principal amount of $175.0 million, made in a single drawing upon the
consummation of the Recapitalization. The Term Loan Facility will mature on June
17, 2005 and installments of the Term Loan Facility will be due in aggregate
principal amounts of $1.0 million per annum for the first five years after the
Recapitalization. Thereafter, the Company will make repayments in quarterly
installments increasing from $9.5 million to $18.0 million, with a final payment
of $36.0 million on June 17, 2005.
REVOLVING CREDIT FACILITY. The Revolving Facility consists of a revolving
credit facility in an aggregate principal amount of $125.0 million. The Company
is entitled to draw amounts under the New Credit Facility to finance
acquisitions and to meet the Company's working capital requirements. The
Revolving Facility includes sub-limits for letters of credit and for swing line
loans ("Swing Line Loans") available on same-day notice. The Revolving Facility
will mature on June 17, 2003.
INTEREST RATES. Interest accrues on the Loans with reference to the
alternate base rate (the "Alternate Base Rate") plus the applicable interest
margin. The Company may elect that all or a portion of the Loans, other than
Swing Line Loans, bear interest at the eurodollar rate (the "Eurodollar Rate")
plus the applicable interest margin. The Alternate Base Rate is defined as, on
any date, the highest of (i) the Federal Funds Rate, as published by the Federal
Reserve Bank of New York, plus 1/2 of 1%, (ii) the secondary market rate for
three-month certificates of deposit of money center banks, adjusted for reserves
and assessments, plus 1.0% and (iii) the prime commercial lending rate of Chase.
The Eurodollar Rate is defined as the rate at which eurodollar deposits for one,
two, three or six months or (if and when available to all of the relevant
lenders) nine or 12 months are offered to Chase in the interbank eurodollar
market. The applicable interest margin for the Term Loan Facility is 2.0% for
Base Rate loans and 3.0% for Eurodollar Rate loans. The applicable interest
margin for the Revolving Facility is 1.5% for Base Rate loans and 2.5% for
Eurodollar Rate loans. The interest margins on the Revolving Facility are
subject to reduction based on the Company's ability to meet certain financial
tests.
MANDATORY AND OPTIONAL PREPAYMENT. The Term Loan Facility shall be prepaid,
subject to certain conditions and exceptions, with (i) 100% of the net proceeds
of any incurrence of indebtedness (other than permitted indebtedness) by the
Company or its subsidiaries, (ii) after the repayment of the Securities in
connection with the exercise by the Company of certain redemption options
available to the Company in connection with a public offering described under
"Description of the Securities," 50% of the net proceeds of issuances of equity
after the Recapitalization by the Company or any subsidiary and (iii) 100% of
the net proceeds of certain asset dispositions. In addition, commencing in
fiscal 1998, the Company will be required to make annual prepayments or
commitment reductions on the Term Loan Facility and the Revolving Facility in an
amount equal to 50% of the excess cash flow (as defined in the Credit Facility)
of the Company and its Subsidiaries on a consolidated basis. The Credit Facility
provides that the Company may prepay Loans in whole or in part without penalty,
subject to minimum prepayments and reimbursement of the lenders' breakage and
redeployment costs in the case of prepayment of Eurodollar Rate loans.
COVENANTS. The Credit Facility contains certain covenants and other
requirements of the Company and its Subsidiaries. In general, the affirmative
covenants provide for mandatory reporting by the Company of financial and other
information to the agent and notice by the Company to the agent upon the
occurrence of certain events. The affirmative covenants also include standard
covenants requiring the Company to operate its business in an orderly manner and
consistent with past practice.
The Credit Facility also contains certain negative covenants and
restrictions on actions by the Company including, without limitation,
restrictions on indebtedness, liens, guarantee obligations, mergers,
66
<PAGE>
asset dispositions not in the ordinary course of business, investments, loans,
advances and acquisitions, dividends and other restricted payments, capital
expenditures, transactions with affiliates, change in business conducted and
prepayment and amendments of subordinated indebtedness. The Credit Facility
requires the Company to comply with certain financial covenants including
interest coverage ratios and a maximum leverage ratio.
EVENTS OF DEFAULT. The Credit Facility contains certain customary events of
default including, without limitation, non-payment of principal, interest or
fees, violation of covenants, inaccuracy of representations and warranties in
any material respect, cross default to certain other indebtedness and
agreements, bankruptcy and insolvency events, material judgments and
liabilities, defaults or judgments under ERISA, and change of control.
RECEIVABLES SECURITIZATION PROGRAM
In connection with the Recapitalization, the Company amended its Receivables
Securitization Program, which provides the Company with the ability to sell,
with limited recourse, on a continuous basis, an undivided interest in all of
its accounts receivable for cash, while maintaining a residual interest in the
receivables. Market Street Funding Corporation, an affiliate of PNC Bank
National Association ("PNC"), provides the five-year, $100.0 million Receivables
Securitization Program. PNC serves as program administrator and liquidity agent
with respect to an associated liquidity facility.
67
<PAGE>
DESCRIPTION OF THE SECURITIES
THE TERMS OF THE NOTES AND THE DISCOUNT NOTES ARE IDENTICAL IN ALL MATERIAL
RESPECTS TO THE OLD NOTES AND THE OLD DISCOUNT NOTES, RESPECTIVELY, EXCEPT FOR
CERTAIN TRANSFER RESTRICTIONS AND REGISTRATION RIGHTS RELATING TO THE OLD NOTES
AND OLD DISCOUNT NOTES. THE DESCRIPTION OF THE SECURITIES CONTAINED HEREIN
ASSUMES THAT ALL OLD NOTES AND OLD DISCOUNT NOTES ARE EXCHANGED FOR NOTES AND
DISCOUNT NOTES, RESPECTIVELY, IN THE EXCHANGE OFFER. TO THE EXTENT THAT OLD
NOTES REMAIN OUTSTANDING AFTER THE CONSUMMATION OF THE EXCHANGE OFFER, OLD NOTES
AND NOTES WILL BE REDEEMED OR REPURCHASED PRO RATA PURSUANT TO THE PROVISIONS
CONTAINED HEREIN. SIMILARLY, TO THE EXTENT THAT OLD DISCOUNT NOTES AND THE
MANAGEMENT DISCOUNT NOTES, WHICH ARE NOT INCLUDED IN THE EXCHANGE OFFER, REMAIN
OUTSTANDING AFTER CONSUMMATION OF THE EXCHANGE OFFER, OLD DISCOUNT NOTES,
MANAGEMENT DISCOUNT NOTES AND DISCOUNT NOTES WILL BE REDEEMED OR REPURCHASED PRO
RATA PURSUANT TO THE PROVISIONS CONTAINED HEREIN. IN ADDITION, AS THE OLD NOTES
WERE, AND THE NOTES WILL BE, ISSUED UNDER THE NOTE INDENTURE, TO THE EXTENT THAT
OLD NOTES REMAIN OUTSTANDING AFTER CONSUMMATION OF THE EXCHANGE OFFER, ANY
ACTION DESCRIBED HEREIN AS PERMITTED OR REQUIRED TO BE TAKEN THEREUNDER BY A
SPECIFIED PORTION OF THE HOLDERS OF THE NOTES MAY ONLY BE TAKEN BY SUCH PORTION
OF THE HOLDERS OF THE OLD NOTES AND THE NOTES, COUNTED AS A SINGLE SERIES.
SIMILARLY, AS THE OLD DISCOUNT NOTES AND THE MANAGEMENT DISCOUNT NOTES WERE, AND
THE DISCOUNT NOTES WILL BE, ISSUED UNDER THE DISCOUNT NOTE INDENTURE, TO THE
EXTENT THAT OLD DISCOUNT NOTES AND THE MANAGEMENT DISCOUNT NOTES REMAIN
OUTSTANDING AFTER CONSUMMATION OF THE EXCHANGE OFFER, ANY ACTION DESCRIBED
HEREIN AS PERMITTED OR REQUIRED TO BE TAKEN THEREUNDER BY A SPECIFIED PORTION OF
THE HOLDERS OF THE DISCOUNT NOTES MAY ONLY BE TAKEN BY SUCH PORTION OF THE
HOLDERS OF THE OLD DISCOUNT NOTES, THE MANAGEMENT DISCOUNT NOTES AND THE NOTES,
COUNTED AS A SINGLE SERIES.
THE DEFINITIONS OF CERTAIN TERMS USED IN THE FOLLOWING SUMMARY ARE SET FORTH
BELOW UNDER "--CERTAIN DEFINITIONS." FOR PURPOSES OF THIS SUMMARY, THE TERM
"COMPANY" REFERS ONLY TO FALCON BUILDING PRODUCTS, INC. AND NOT TO ANY OF ITS
SUBSIDIARIES.
GENERAL
The Old Notes were and the Notes will be issued pursuant to an indenture
(the "Note Indenture") by and among the Company, the Guarantors and Harris Trust
and Savings Bank, as trustee (the "Note Trustee"). The Old Discount Notes (and
the Management Discount Notes) were and the Discount Notes will be issued
pursuant to an indenture (the "Discount Note Indenture" and, together with the
Note Indenture, the "Indentures") by and among the Company, the Guarantors, and
Harris Trust and Savings Bank, as trustee (the "Discount Note Trustee" and,
together with the Senior Subordinated Note Trustee, the "Trustees"). The terms
of the Securities include those stated in the Indentures and those made part of
the Indentures by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Securities are subject to all such terms, and
Holders of Securities are referred to the Indentures and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of the
Indentures does not purport to be complete and is qualified in its entirety by
reference to the Indentures, including the definitions therein of certain terms
used below.
The Securities will be general unsecured obligations of the Company and will
be subordinated in right of payment to all current and future Senior Debt. As of
June 30, 1997, after giving pro forma effect to the Recapitalization as if it
had occurred on such date, the aggregate amount of consolidated indebtedness of
the Company would have been $425.1 million, $177.7 million of which would have
been Senior Debt. The Indentures will permit the incurrence of additional Senior
Debt in the future. The Notes and the Discount Notes will rank PARI PASSU in
right of payment.
As of the issuance of the Securities, all of the Company's Subsidiaries,
except the SPV, will be Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indentures.
68
<PAGE>
PRINCIPAL AND MATURITY OF AND INTEREST ON THE NOTES
The Notes will be general unsecured obligations of the Company, limited in
aggregate principal amount to $145.0 million, and will mature on June 15, 2007.
Interest on the Notes will accrue at the rate of 9 1/2% per annum and will be
payable, in cash, semi-annually in arrears on June 15 and December 15,
commencing on December 15, 1997, to Holders of record on the immediately
preceding June 1 and December 1. Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance. Additionally, interest on the Notes will
accrue from the last interest payment date on which interest was paid on the Old
Notes surrendered in exchange therefor or, if no interest has been paid on the
Old Notes, from the date of the issuance of the Old Notes. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, interest and Liquidated Damages, if any, on the
Notes will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest and Liquidated Damages, if any, may be made by check mailed
to the Holders of the Notes at their respective addresses set forth in the
register of Holders of Notes; PROVIDED that all payments of principal, premium,
if any, interest and Liquidated Damages, if any, with respect to any Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Note Trustee maintained for such purpose. The Notes will be issued in
denominations of $1,000 and integral multiples thereof.
PRINCIPAL AND MATURITY OF AND INTEREST ON THE DISCOUNT NOTES
The Discount Notes will be limited to $169.317 million in aggregate
principal amount at maturity and will mature on June 15, 2007. The Old Discount
Notes were offered at a substantial discount from their principal amount at
maturity. See "Risk Factors--Original Issue Discount Consequences" and "Certain
Federal Income Tax Consequences." No interest will accrue on the Discount Notes
until June 15, 2002 (the "Full Accretion Date"). Prior to the Full Accretion
Date, the Accreted Value will accrete (representing the amortization of original
issue discount) between the date of original issuance and such date, on a semi-
annual bond equivalent basis using a 360-day year comprised of twelve 30-day
months, such that the Accreted Value shall be equal to the full principal amount
of the Discount Notes on the Full Accretion Date. Additionally, the Accreted
Value of the Discount Notes, when issued, will equal the Accreted Value of the
Old Discount Notes surrendered in exchange therefor. The initial Accreted Value
per $1,000 principal amount of Discount Notes will be $599.82 (representing the
original purchase price of the Old Discount Notes) plus any Accreted Value which
had accreted on the Old Discount Notes exchanged therefor. Beginning on June 15,
2002, interest on the Discount Notes will accrue at the rate of 10 1/2% per
annum and will be payable in cash semi-annually, in arrears, on June 15 and
December 15, commencing on December 15, 2002, to Holders of record on the
immediately preceding June 1 and December 1. Interest on the Discount Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Full Accretion Date. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. Principal,
premium, if any, interest and Liquidated Damages, if any, on the Discount Notes
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of interest and Liquidated Damages, if any, may be made by check mailed
to the Holders of the Discount Notes at their respective addresses set forth in
the register of Holders of Discount Notes; PROVIDED that all payments of
principal, premium, if any, interest and Liquidated Damages, if any, with
respect to any Discount Notes the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York will be the office of the Discount Note Trustee maintained for such
purpose. The Discount Notes will be issued in denominations of $1,000 and
integral multiples thereof.
69
<PAGE>
SUBORDINATION
The payment of principal, premium, if any, interest and Liquidated Damages,
if any, on the Securities will be subordinated in right of payment, as set forth
in the Indentures, to the prior payment in full of all Senior Debt, whether
outstanding on the Original Issue Date or thereafter incurred.
Upon any payment or distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, the holders of Senior Debt will be entitled to
receive payment in full, in cash or Cash Equivalents, of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt, whether or
not allowed or allowable in such proceeding) before the Holders of Securities
will be entitled to receive any payment with respect to the Securities, and
until all Obligations with respect to Senior Debt are paid in full, in cash or
Cash Equivalents, any payment or distribution to which the Holders of Securities
would be entitled shall be made to the holders of Senior Debt (except that
Holders of Securities may receive and retain (i) Permitted Junior Securities and
(ii) payments made from the trust described under "--Legal Defeasance and
Covenant Defeasance"). The term "payment" means, with respect to the Securities,
any payment, whether in cash or other assets or property, of interest, principal
(including redemption price and purchase price), premium, Liquidated Damages or
any other amount on, of or in respect of the Securities, any other acquisition
of Securities and any deposit into the trust described under "--Legal Defeasance
and Covenant Defeasance," below. The verb "pay" has a correlative meaning.
The Company also may not make any payment or distribution upon or in respect
of the Securities (except in Permitted Junior Securities or from the trust
described under "--Legal Defeasance and Covenant Defeasance") if (i) a default
in the payment of any Obligations with respect to Designated Senior Debt occurs
and is continuing (a "payment default") or any other default on Designated
Senior Debt occurs and the maturity of such Designated Senior Debt is
accelerated in accordance with its terms or (ii) a default, other than a payment
default, occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity (a "non-payment default") and, in the case of this
clause (ii) only, the appropriate Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Payments on the Securities may and shall be resumed (a) in the case
of a payment default, upon the date on which such default is cured or waived
and, in the case of Designated Senior Debt that has been accelerated, such
acceleration has been rescinded, and (b) in case of a non-payment default, the
earlier of the date on which such non-payment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received,
unless the maturity of any Designated Senior Debt has been accelerated. No new
period of payment blockage may be commenced on account of any non-payment
default unless and until 360 days have elapsed since the initial effectiveness
of the immediately prior Payment Blockage Notice. No non-payment default that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the appropriate Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been cured or waived for
a period of not less than 90 days.
The Indentures further require the Company to promptly notify holders of
Senior Debt if payment of the Securities is accelerated because of an Event of
Default. The Company may not pay any such accelerated Securities until five
Business Days after such holders receive notice of such acceleration and,
thereafter, may make such payment only if otherwise permissible under the
subordination provisions of the Indentures.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Securities may recover less ratably than
other creditors of the Company including holders of Senior Debt and trade
creditors. The Indentures limit, subject to certain financial tests and
exceptions, the
70
<PAGE>
amount of additional Indebtedness, including Senior Debt, that the Company and
its Subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under each of the Notes and the Discount
Notes will be jointly and severally guaranteed (the "Subsidiary Guarantees") by
the Guarantors. The Subsidiary Guarantees of each Guarantor will be subordinated
to the prior payment in full of all Senior Debt of such Guarantors on
substantially the same terms as the Securities are subordinated to Senior Debt
of the Company. The obligations of each Guarantor under its Subsidiary
Guarantees will be limited so as not to constitute a fraudulent conveyance under
applicable law.
The Indentures provide that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another Person
(other than the Company or another Guarantor) unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustees, under the Securities and the
Indentures; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; and (iii) the Company will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, either (x) be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or (y) have a Fixed Charge Coverage Ratio at least
equal to the actual Fixed Charge Coverage Ratio for such four-quarter reference
period. Notwithstanding the foregoing clauses (ii) and (iii), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to any Guarantor and (b) any Guarantor may merge with an
Affiliate incorporated solely for the purpose of reincorporating such Guarantor
in another jurisdiction.
The Indentures provide that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor will be released and relieved of any obligations
under its Subsidiary Guarantees; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indentures. See "--Repurchase at Option of Holders-- Asset Sales."
OPTIONAL REDEMPTION
THE NOTES. Except as described in the following paragraphs, the Notes will
not be redeemable at the Company's option prior to June 15, 2002. Thereafter,
the Notes will be subject to redemption at any time at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on June 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------- -----------
<S> <C>
2002...................................................... 104.750%
2003...................................................... 103.167%
2004...................................................... 101.583%
2005 and thereafter....................................... 100.000%
</TABLE>
In addition, at any time and from time to time, prior to June 15, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of Notes
at a redemption price of 109.5% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the
71
<PAGE>
redemption date, with the net cash proceeds of a public offering of common stock
of the Company; provided that at least 65% of the original aggregate principal
amount of Notes remain outstanding immediately after the occurrence of such
redemption; and PROVIDED, further, that such redemption shall occur within 60
days of the date of the closing of such public offering.
THE DISCOUNT NOTES. Except as described in the following paragraphs, the
Discount Notes will not be redeemable at the Company's option prior to June 15,
2002. Thereafter, the Discount Notes will be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the applicable redemption date, if
redeemed during the twelve-month period beginning on June 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------- -----------
<S> <C>
2002...................................................... 105.250%
2003...................................................... 103.500%
2004...................................................... 101.750%
2005 and thereafter....................................... 100.000%
</TABLE>
In addition, at any time and from time to time, prior to June 15, 2000, the
Company may, on any one or more occasions, redeem up to 35% of the aggregate
principal amount at maturity of Discount Notes at a redemption price of 110.5%
of the Accreted Value thereof (determined at the redemption date), plus accrued
and unpaid Liquidated Damages thereon, if any, to the redemption date, with the
net cash proceeds of a public offering of common stock of the Company; provided
that at least 65% of the aggregate principal amount at maturity of Discount
Notes remain outstanding immediately after the occurrence of each such
redemption; and provided, further, that such redemption shall occur within 60
days of the date of the closing of such public offering.
CHANGE OF CONTROL CALL. At any time on or prior to June 15, 2002, either
series of Securities may be redeemed as a whole but not in part at the option of
the Company upon the occurrence of a Change of Control, upon not less than 30
nor more than 60 days' prior notice (but in no event may any such redemption
occur more than 90 days after the occurrence of such Change of Control) mailed
by first-class mail to each Holder's registered address, at a redemption price
equal to 100% of the principal amount thereof plus the Applicable Premium as of,
and accrued but unpaid interest and Liquidated Damages, if any, to, the
redemption date, subject to the right of Holders on the relevant record date to
receive interest due on the relevant interest payment date.
"APPLICABLE PREMIUM" means, with respect to a Security at any redemption
date, the greater of (i) 1.0% of the principal amount (or, with respect to the
Discount Notes prior to the Full Accretion Date, the Accreted Value thereof) of
such Security or (ii) the excess of (A) the present value at such time of (1)
the redemption price of such Security at June 15, 2002 (such redemption price
being set forth in the tables above) plus (2) with respect to the Notes only,
all required interest payments due on such Notes through June 15, 2002
(excluding accrued but unpaid interest), computed using a discount rate equal to
the Treasury Rate plus 75 basis points, over (B) the principal amount (or, with
respect to the Discount Notes prior to the Full Accretion Date, the Accreted
Value thereof) of such Security, if greater.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
redemption date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the redemption date to June 15, 2002, provided, however, that if the
period from the redemption date to June 15, 2002 is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given, except
72
<PAGE>
that if the period from the redemption date to June 15, 2002 is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE
If less than all of the Notes or the Discount Notes, as the case may be, are
to be redeemed at any time, selection of Securities for redemption will be made
by the Trustees in compliance with the requirements of the principal national
securities exchange, if any, on which the Securities are listed, or, if the
Securities are not so listed, on a pro rata basis (among the Securities of such
series only), by lot or by such method as the Trustees shall deem fair and
appropriate; provided that no Securities of $1,000 or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Securities to
be redeemed at its registered address. Notices of redemption may not be
conditional. If any Security is to be redeemed in part only, the notice of
redemption that relates to such Security shall state the portion of the
principal amount thereof to be redeemed. A new Security in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Security. Securities called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Securities or portions of them
called for redemption (or, with respect to redemptions of Discount Notes only,
if such redemption date is prior to the Full Accretion Date, the Discount Notes,
or any portion of them called for redemption, cease to accrete).
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Securities.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, unless all Securities of such
series have been called for redemption pursuant to the provisions described
above under the caption "Optional Redemption," each Holder of Securities will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Securities pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash (the "Change of Control Payment") equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and Liquidated Damages thereon,
if any, to the date of purchase (or, with respect to Discount Notes only, if
such Change of Control Offer occurs prior to the Full Accretion Date, 101% of
the Accreted Value thereof on the date of repurchase plus accrued and unpaid
Liquidated Damages, if any). Within 30 days following any Change of Control,
unless notice of redemption of all Securities of the applicable series has then
been given pursuant to the provisions described under the caption "Optional
Redemption" above, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Securities on the date specified in such notice, which date shall
be no earlier than 30 days and no later than 60 days from the date such notice
is mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indentures and described in such notice. The Company will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations to the extent such laws and regulations are
applicable in connection with the repurchase of the Securities as a result of a
Change of Control. To the extent that the provisions of any applicable
securities laws or regulations conflict with provisions of this covenant, the
Company will comply with such securities laws and regulations and will not be
deemed to have breached its obligations under this paragraph by virtue thereof.
73
<PAGE>
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Securities or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Securities or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustees the Securities so accepted together with an Officers'
Certificate stating the aggregate principal amount (or, with respect to the
Discount Notes, if prior to the Full Accretion Date, the aggregate Accreted
Value) of Securities or portions thereof being purchased by the Company. The
Paying Agent will promptly mail to each Holder of Securities so tendered the
Change of Control Payment for such Securities, and the Trustees will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note or Discount Note, as the case may be, equal in principal amount to
any unpurchased portion of the Note or Discount Notes surrendered, if any;
provided that each such new Note or Discount Note will be in a principal amount
of $1,000 or an integral multiple thereof. The Indentures provide that, prior to
complying with the provisions of this covenant, but in any event within 90 days
following a Change of Control, the Company will either repay all outstanding
Senior Debt or obtain the requisite consents, if any, under all agreements
governing outstanding Senior Debt to permit the repurchase of Securities
required by this covenant, unless notice of redemption of all Securities of the
applicable series has then been given pursuant to the provisions described under
the caption "Optional Redemption" above and such redemption is permitted by the
terms of outstanding Senior Debt. The Company will publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indentures are applicable. Except as
described above with respect to a Change of Control, the Indentures do not
contain provisions that permit the Holders of the Securities to require that the
Company repurchase or redeem the Securities in the event of a takeover,
recapitalization or similar transaction. The Change of Control purchase feature
is a result of negotiations between the Company and the Initial Purchasers.
Management has no present intention to engage in a transaction involving a
Change of Control, although it is possible that the Company would decide to do
so in the future. Subject to the limitations discussed below, the Company could,
in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indentures, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect the Company's capital structure or
credit ratings.
The Senior Credit Facility currently prohibits the Company from purchasing
any Securities, and also provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing Securities, the Company could seek the consent of its lenders to the
purchase of Securities or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Securities. In
such case, the Company's failure to purchase tendered Securities would
constitute an Event of Default under the Indentures which would, in turn,
constitute as default under the Senior Credit Facility. In such circumstances,
the subordination provisions in the Indentures would restrict payments to the
Holders of Securities.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indentures applicable to a Change of Control Offer made by the Company
and purchases all Securities validly tendered and not withdrawn under such
Change of Control Offer.
"CHANGE OF CONTROL" means such time as (i) any "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than one
or more members of the Initial Control Group, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 and 13d-5 under the Exchange Act, except
74
<PAGE>
that a person shall be deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 40% of the total voting power of the Voting Stock of the Company; provided
that the Initial Control Group "beneficially owns" (as defined in Rule 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company than
such other person and does not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the board
of directors of the Company (for purposes of this definition, such other person
shall be deemed to beneficially own any Voting Stock of a specified corporation
held by a parent corporation, if such other person "beneficially owns" (as
defined in this definition), directly or indirectly, more than 40% of the voting
power of the Voting Stock of such parent corporation, and the Initial Control
Group "beneficially owns" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate, a lesser percentage of
the voting power of the Voting Stock of such parent corporation and does not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such parent
corporation) or (ii) following the first public offering of Voting Stock of the
Company after the Original Issue Date, any person (as defined above) other than
the Initial Control Group, (A) nominates one or more individuals for election to
the Board of Directors of the Company, (B) solicits proxies, authorization or
consents in connection therewith and (C) such number of nominees elected to
serve on the board of directors in such election and all previous elections
after the Original Issue Date represents a majority of the Board of Directors of
the Company following such election.
"INITIAL CONTROL GROUP" means Investcorp, its Affiliates, members of the
Management Group, the investors who are the initial holders of the Capital Stock
of the Company, any Person acting in the capacity of an underwriter or initial
purchaser in connection with a public or private offering of the Company's
Capital Stock, any employee benefit plan of the Company or any of its
Subsidiaries or any participant therein, a trustee or other fiduciary holding
securities under any such employee benefit plan or any Permitted Transferee of
any of the foregoing Persons.
"PERMITTED TRANSFEREE" means, with respect to any Person, (i) any other
Person, directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person, (ii) the spouse, former
spouse, lineal descendants, heirs, executors, administrators, testamentary
trustees, legatees or beneficiaries of any such Person, (iii) a trust, the
beneficiaries of which, or a corporation or partnership or limited liability
company, the stockholders, general or limited partners or members of which,
include only such Person or his or her spouse, lineal descendants or heirs, in
each case to whom such Person has transferred the beneficial ownership of any
securities of the Company and (iv) any investment fund or investment entity that
is a subsidiary of such Person or a Permitted Transferee of such Person.
ASSET SALES
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 75%
of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet), of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Securities or, in the case of liabilities of a Restricted Subsidiary, the
Subsidiary Guarantee of such Subsidiary) that are assumed by the transferee of
any such assets and (y) any securities, notes or other obligations received by
the Company or any such Restricted Subsidiary from such transferee that are
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received) within 180 days after receipt, shall be deemed to be cash
for purposes of this provision; provided further, however, that this clause (ii)
shall not apply to any sale of interests in Unrestricted Subsidiaries.
75
<PAGE>
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay Senior Debt
or Pari Passu Indebtedness (provided that if the Company shall so reduce Pari
Passu Indebtedness, it will equally and ratably make an Asset Sale Offer (in
accordance with the procedures set forth below for an Asset Sale Offer) to all
Holders), (b) to invest properties and assets that will be used or useful in the
business of the Company or any of its Subsidiaries or (c) to the acquisition of
a controlling interest in another business, the making of a capital expenditure
or the acquisition of other assets, in each case, in the same or a similar line
of business as the Company was engaged in on the Original Issue Date. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce borrowings under a Credit Facility or otherwise invest such Net Proceeds
in any manner that is not prohibited by the Indentures. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, each Indenture will
provide that the Company will (i) make an offer to all Holders of Securities,
and (ii) prepay, purchase or redeem (or make an offer to do so) any other Pari
Passu Indebtedness of the Company in accordance with provisions requiring the
Company to prepay, purchase or redeem such Indebtedness with the proceeds from
any asset sales (or offer to do so), pro rata in proportion to the respective
principal amounts (or accreted value, as applicable) of the Securities and such
other Indebtedness required to be prepaid, purchased or redeemed or tendered for
pursuant to such offer (an "Asset Sale Offer") to purchase the maximum principal
amount of Securities that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest and Liquidated Damages thereon, if any (or, if
such Asset Sale Offer is with respect to the Discount Notes prior to the Full
Accretion Date, 100% of the Accreted Value thereof on the date of purchase, plus
accrued and unpaid Liquidated Damages, if any), to the date of purchase, in
accordance with the procedures set forth in the Indentures. To the extent that
the aggregate principal amount of Securities (or, with respect to Discount Notes
prior to the Full Accretion Date only, the aggregate Accreted Value of Discount
Notes) tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount and/or Accreted Value, as
the case may be, of Securities surrendered by Holders thereof exceeds the amount
of Excess Proceeds, the Trustees shall select the Securities to be purchased on
a pro rata basis (among the Holders of each series of Securities and between the
two series, based upon the outstanding principal amount (or Accreted Value, as
applicable) thereof). Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Securities pursuant to an Asset Sale Offer. To the extent that the
provisions of any applicable securities laws or regulations conflict with the
provisions of the Indentures, the Company will comply with such securities laws
and regulations and shall not be deemed to have breached its obligations
described in the Indentures by virtue thereof.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution (including, without
limitation, any payment in connection with any merger or consolidation) on
account of the Company's or any of its Restricted Subsidiaries' Equity Interests
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire
or retire for value (including without limitation, in connection with any merger
or consolidation) any Equity Interests of the Company or any direct or indirect
parent of the Company; (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire
76
<PAGE>
or retire for value any Indebtedness that is subordinated to the Securities,
except (A) a payment of interest or principal at Stated Maturity and (B) the
purchase, repurchase or other acquisition or retirement of Indebtedness in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of purchase,
repurchase or other acquisition or retirement; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Original Issue Date (excluding Restricted Payments
permitted by the next succeeding paragraph), is less than the sum (without
duplication) of (i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the Original Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate net cash proceeds received by the
Company from the issue or sale (other than to a Subsidiary) since the
Original Issue Date of, or from capital contributions with respect to,
Equity Interests of the Company (other than Disqualified Stock), plus (iii)
the aggregate principal amount (or accreted value, if less) of Indebtedness
of the Company or any Restricted Subsidiary issued since the Original Issue
Date (other than to a Subsidiary) that has been converted into Equity
Interests (other than Disqualified Stock) of the Company, plus (iv) 100% of
the aggregate net cash received by the Company or a Restricted Subsidiary of
the Company since the Original Issue Date from (A) Restricted Investments,
whether through interest payments, principal payments, dividends or other
distributions and payments, or the sale or other disposition (other than to
the Company or a Restricted Subsidiary) thereof made by the Company and its
Restricted Subsidiaries or (B) a cash dividend from, or the sale (other than
to the Company or a Restricted Subsidiary) of the stock of, an Unrestricted
Subsidiary, plus (v) upon the redesignation of an Unrestricted Subsidiary as
a Restricted Subsidiary, the fair market value of the Investments of the
Company and its Restricted Subsidiaries (other than such Subsidiary) in such
Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indentures;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Equity Interests or subordinated Indebtedness of the Company
in exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of the Company) of, other Equity
Interests of, or a capital contribution to, the Company (other than any
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph;
77
<PAGE>
(iii) the defeasance, redemption, repurchase, retirement or other
acquisition of subordinated Indebtedness made by an exchange for, or with the
net cash proceeds from an incurrence of, Permitted Refinancing Indebtedness;
(iv) the payment of any dividend by a Restricted Subsidiary of the Company
to the holders of its common Equity Interests on a pro rata basis;
(v) to the extent constituting Restricted Payments, the Specified Affiliate
Payments;
(vi) the Subsidiary Distribution; and
(vii) payments that would otherwise be Restricted Payments in an aggregate
amount not to exceed $10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. The amount of such
outstanding Investments will be equal to the portion of the fair market value of
the net assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary that is represented by the interest of
the Company and its Restricted Subsidiaries in such Subsidiary, in each case as
determined in good faith by the Board of Directors of the Company. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined in good
faith by the Board of Directors of the Company.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; provided, however, that the Company and its
Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock and the Restricted Subsidiaries may issue
preferred stock, if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock or preferred stock is issued
would have been at least 1.75 to 1, if such Indebtedness is incurred or such
Disqualified Stock or preferred stock is issued on or prior to June 30, 1999,
and 2.00 to 1, if such Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued thereafter, in each case, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of term and revolving Indebtedness and
letters of credit (with letters of credit being deemed to have a principal
amount equal to the undrawn face amount thereof) under Credit Facilities;
PROVIDED that the aggregate principal amount of such Indebtedness
78
<PAGE>
after giving effect to such incurrence, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (i), does not exceed an amount equal to
$300.0 million less (A) the aggregate amount of any Net Proceeds of Asset
Sales that have been applied since the Original Issue Date to repay
Indebtedness incurred under this clause (i) (or any such Permitted
Refinancing Indebtedness) pursuant to clause (a) of the first sentence of
the second paragraph of the covenant described above under the caption
"--Asset Sales" and less (B) subsequent to any Subsidiary Distribution, an
amount equal to the product of (1) the maximum amount of Indebtedness
otherwise permitted to be outstanding under the terms of this clause (i) at
the date of such Subsidiary Distribution and (2) a fraction, the numerator
of which shall be (x) the Consolidated Cash Flow of the Company and all of
its Restricted Subsidiaries (including the Distributed Subsidiary) for the
four full fiscal quarters immediately preceding such Subsidiary Distribution
minus (y) the Consolidated Cash Flow of the Company and its remaining
Restricted Subsidiaries for such four-quarter reference period, calculated
giving PRO FORMA effect to such Subsidiary Distribution, and the denominator
of which shall be the Consolidated Cash Flow of the Company and all of its
Restricted Subsidiaries (including the Distributed Subsidiary) for such
four-quarter reference period;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Securities and by the Guarantors of Indebtedness represented by the
Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of (A) Acquired Debt or (B) Indebtedness (including Capital Lease
Obligations) for the purpose of financing or refinancing all or any part of
the lease, purchase price or cost of construction or improvement of any
property (real or personal) or other assets that are used or useful in the
business of the Company or such Restricted Subsidiary (whether through the
direct purchase of assets or the Capital Stock of any Person owning such
assets and whether such Indebtedness is owed to the seller or Person
carrying out such construction or improvement or to any third party), in an
aggregate principal amount at the date of such incurrence (including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any other Indebtedness incurred pursuant to this clause (iv)) not to exceed
an amount equal to 10.0% of Total Assets; PROVIDED that, in the case of
Indebtedness exceeding $2.0 million incurred pursuant to this clause (iv),
such Indebtedness exists at the date of such purchase or transaction or is
created within 180 days thereafter;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace, Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indentures to be
incurred;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries, including, without limitation, any Indebtedness
arising in connection with a Receivables Facility; PROVIDED, HOWEVER, that
(A) any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the case
may be, that was not permitted by this clause (vi);
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred (A) for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indentures to be outstanding or (B)
for the purpose of fixing or hedging currency exchange rate risk incurred in
the ordinary course of business;
79
<PAGE>
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(ix) the incurrence of Indebtedness secured by Receivables, PROVIDED
that the aggregate principal amount of such Indebtedness incurred pursuant
to this clause (ix) does not, at any time, exceed an amount equal to $100.0
million less the aggregate Receivable Financing Amount of all Receivables
Facilities of the Company and its Restricted Subsidiaries;
(x) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness under (or constituting reimbursement obligations with
respect to) letters of credit issued in the ordinary course of business,
including without limitation letters of credit in respect of workers'
compensation claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims;
PROVIDED, HOWEVER, that upon the drawing of such letters of credit, such
obligations are reimbursed within 30 days following such drawing;
(xi) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness (which may comprise Indebtedness under the Senior
Credit Facility) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any other Indebtedness
incurred pursuant to this clause (xi), not to exceed an amount equal to
$30.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xi) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Indebtedness in any manner that
complies with this covenant and such item of Indebtedness will be treated as
having been incurred pursuant to only one of such clauses or pursuant to the
first paragraph hereof; PROVIDED that all outstanding Indebtedness under the
Senior Credit Facility immediately following the Recapitalization shall be
deemed to have been incurred pursuant to clause (i) of the definition of
Permitted Debt. Accrual of interest and the accretion of accreted value will not
be deemed to be an incurrence of Indebtedness for purposes of this covenant.
LIENS
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien of any kind securing Indebtedness
or trade payables (other than Permitted Liens) upon any of their property or
assets, now owned or hereafter acquired, unless all payments due under the
Indentures and the Securities are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the Original Issue Date, (b)
the provisions of security or pledge agreements (or similar agreements)
restricting transfers of the assets secured thereby, (c) the Indentures, the
Securities and the Subsidiary Guarantees, (d) any agreement or other instrument
of
80
<PAGE>
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (but not created in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, (e) by reason
of customary non-assignment provisions in leases entered into in the ordinary
course of business, (f) purchase money obligations (including Capital Lease
Obligations) for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, (g) restrictions created in connection with any
Receivables Facility that, in the good faith determination of the Board of
Directors or senior management of the Company, are necessary or advisable to
effect such Receivables Facility, (h) in the case of clause (iii), any
encumbrance or restriction (1) that restricts in a customary manner the
subletting, assignment, or transfer of any property or asset that is subject to
a lease, license or similar contract, (2) by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indentures or (3) contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrance or
restrictions restrict the transfer of the property subject to such security
agreements or mortgages, (i) contracts for the sale of assets, including,
without limitation, any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition, (j) contractual
encumbrances or restrictions in effect on the Original Issue Date, including,
without limitation, pursuant to the Senior Credit Facility and its related
documentation, (k) restrictions on cash or other deposits or net worth imposed
by leases, credit agreements or other agreements entered into in the ordinary
course of business, (l) customary provisions in joint venture agreements and
other similar agreements, (m) any encumbrances or restrictions created with
respect to Indebtedness of Restricted Subsidiaries permitted to be incurred
subsequent to the Original Issue Date pursuant to the provision of the covenant
described under the caption "--Limitation on Incurrence of Indebtedness and
Issuance of Preferred Stock" and (n) any encumbrances or restrictions of the
type referred to in clauses (i), (ii) and (iii) imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of the contracts, instruments or obligations
referred to in clauses (a) through (n), provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the Company, no
more restrictive with respect to such dividend and other payment restrictions
than those contained in the dividend or other payment restrictions prior to such
amendment, modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The Indentures provide that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Securities and the Indentures pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustees; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made will, at the time of such transaction and after giving
81
<PAGE>
pro forma effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, either (x) be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock" or (y)
have a Fixed Charge Coverage Ratio at least equal to the Fixed Charge Coverage
Ratio of the Company for such four-quarter reference period. The foregoing
provisions shall not apply to the Merger or the Subsidiary Distribution.
Notwithstanding the foregoing clauses (iii) and (iv), (a) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company, and (b) the Company may merge with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another jurisdiction.
TRANSACTIONS WITH AFFILIATES
The Indentures provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
Trustees (a) with respect to any Affiliate Transaction entered into after the
Original Issue Date involving aggregate consideration in excess of $3.0 million,
a resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the members
of the Board of Directors and (b) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $10.0 million, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial point
of view issued by an investment banking, appraisal or accounting firm of
national standing. In addition, the following will not be deemed to be Affiliate
Transactions: (1) the provision of administrative or management services by the
Company or any of its officers to any of its Restricted Subsidiaries in the
ordinary course of business, (2) any employment agreement, collective bargaining
agreement, employee benefit plan, related trust agreement or any similar
arrangement heretofore or hereafter entered into in the ordinary course of
business, (3) transactions between or among the Company and/or its Restricted
Subsidiaries, (4) Restricted Payments that are permitted by the provisions of
the Indentures described above under the caption "--Restricted Payments" (other
than clause (viii) of the second paragraph thereof), (5) payment of compensation
to employees, officers, directors or consultants in the ordinary course of
business, (6) maintenance in the ordinary course of business (and payments
required thereby) of benefit programs, or arrangements for employees, officers
or directors, including vacation plans, health and life insurance plans,
deferred compensation plans, directors' and officers' indemnification agreements
and retirement or savings plans and similar plans, (7) loans or advances to
employees (or guarantees of third party loans to employees) in the ordinary
course of business, (8) sales of Receivables to a Receivables Subsidiary, (9)
the payment of annual management, consulting and advisory fees and related
expenses to Investcorp and its Affiliates (whether or not such Persons are
Affiliates of the Company), (10) payments by the Company or any of its
Restricted Subsidiaries to Investcorp and its Affiliates (whether or not such
Persons are Affiliates of the Company) made for any financial advisory,
financing, underwriting or placement services or in respect of other investment
banking activities, including, without limitation, in connection with
acquisitions or divestitures, which payments are approved by the Board of
Directors of the Company in good faith, (11) any agreement as in effect as of
the date of the Indenture or any amendment thereto (so long as any such
amendment is not disadvantageous to the Holders in any material respect) or any
transaction contemplated thereby, (12) the payment of all fees and expenses
related to the Merger and the Recapitalization, (13) transactions with
customers, clients, suppliers, or purchasers or sellers of goods or services, in
each case in the ordinary course of business and
82
<PAGE>
otherwise in compliance with the terms of the Indentures which are fair to the
Company or its Restricted Subsidiaries, in the reasonable determination of the
Board of Directors of the Company or the senior management thereof, or are on
terms at least as favorable as might reasonably have been obtained at such time
from an unaffiliated party, (14) the existence of, or the performance by the
Company or any of its Restricted Subsidiaries of its obligations under the terms
of, any stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it was a party as of the Original
Issue Date, any amendments thereto and any similar agreements which it may enter
into thereafter; PROVIDED, HOWEVER, that the existence of, or the performance by
the Company or any of its Restricted Subsidiaries of obligations under any such
future amendment to any such existing agreement or under any such similar
agreement entered into after the Original Issue Date shall only be permitted by
this clause (14) to the extent that the terms of any such amendment or new
agreement are not more disadvantageous to the Holders in any material respect
than those in effect on the Original Issue Date, and (15) Indebtedness permitted
by paragraph (vi) or, to the extent such Indebtedness is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction with an unrelated
Person, paragraph (xi) of the covenant described under the caption "Incurrence
of Indebtedness and Issuance of Preferred Stock."
ADDITIONAL SUBSIDIARY GUARANTEES
The Indentures provide that all current and future Subsidiaries of the
Company substantially all of whose assets are located in the United States or
that conduct substantially all of their business in the United States, other
than Subsidiaries that have been properly been designated as Unrestricted
Subsidiaries in accordance with the Indentures for so long as they continue to
constitute Unrestricted Subsidiaries, will be Guarantors in accordance with the
terms of the Indentures. Each Subsidiary Guarantee will be limited in amount to
an amount not to exceed the maximum amount that can be guaranteed by that
Subsidiary without rendering the Subsidiary Guarantee, as it relates to such
Subsidiary, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
Each such Subsidiary Guarantee will be subordinated to Senior Indebtedness
of the respective Guarantor on the same basis and to the same extent as the
Securities are subordinated to Senior Indebtedness of the Company. See
"--Ranking." Each Guarantor may consolidate with or merge or sell its assets,
and may be released from its obligations under its Guarantee, upon the terms and
conditions set forth in the Indentures.
NO SENIOR SUBORDINATED DEBT
The Indentures provide that (i) the Company will not incur any Indebtedness
that is subordinate or junior in right of payment to any Senior Debt and senior
in any respect in right of payment to the Securities and (ii) no Guarantor will
incur any Indebtedness that is subordinate or junior in right of payment to the
Senior Debt and senior in any respect in right of payment to the Subsidiary
Guarantees.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent as
is not material to the Company and its Restricted Subsidiaries taken as a whole.
REPORTS
The Indentures provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Securities are outstanding, the Company will furnish to the Holders
of Securities (i) all quarterly and annual financial information that would be
83
<PAGE>
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
its consolidated Subsidiaries and, with respect to the annual information only,
a report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports, in each case, within 15
days after the Company would be required to file such information in accordance
with the time periods specified in the Commission's rules and regulations. In
addition, commencing after the consummation of the Exchange Offer, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) within the
time periods specified in the Commission's rules and regulations. In addition,
the Company has agreed that, for so long as any Securities remain outstanding,
it will furnish to the Holders upon their request, the information required to
be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indentures provide that each of the following constitutes an Event of
Default with respect to the Notes or the Discount Notes, as the case may be: (i)
default for 30 days in the payment when due of interest on, or Liquidated
Damages with respect to, the Securities (whether or not prohibited by the
subordination provisions of the Indentures); (ii) default in payment when due of
the principal of or premium, if any, on the Securities (whether or not
prohibited by the subordination provisions of the Indentures); (iii) failure by
the Company for 30 days after notice to comply with the provisions described
under the captions "--Repurchase at the Option of Holders--Change of Control,"
"--Repurchase at the Option of Holders--Asset Sales," "--Certain
Covenants--Restricted Payments," "--Certain Covenants-- Incurrence of
Indebtedness and Issuance of Preferred Stock" or "--Certain Covenants--Merger,
Consolidation, or Sale of Assets"; (iv) failure by the Company for 60 days after
notice to comply with any of its other agreements in the Indentures or the
Securities; (v) the failure by the Company or any Restricted Subsidiary that is
a Significant Subsidiary to pay any Indebtedness within any applicable grace
period after final maturity or acceleration by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$20.0 million; (vi) failure by the Company or any of its Restricted Subsidiaries
that is a Significant Subsidiary to pay final non-appealable judgments
aggregating in excess of $20.0 million, which judgments are not paid, discharged
or stayed for a period of 60 days; (vii) except as permitted by the Indentures,
any Subsidiary Guarantee by a Guarantor that is a Significant Subsidiary shall
be held in any judicial proceeding to be unenforceable or invalid or shall cease
for any reason to be in full force and effect, or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations under
its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Restricted Subsidiaries that is a
Significant Subsidiary.
If any Event of Default occurs and is continuing, (a) the Note Trustee or
the Holders of at least 25% in principal amount of the then outstanding Notes
may declare all the Notes to be due and payable immediately and (b) the Discount
Note Trustee or the Holders of at least 25% in principal amount of the then
outstanding Discount Notes may declare all the Discount Notes to be due and
payable immediately. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency with respect to
the Company or any of its Restricted Subsidiaries that is a Significant
Subsidiary, all outstanding Securities will become due and payable without
further action or notice. Holders of the Securities may not enforce the
Indentures or the Securities except as provided in the Indentures. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Securities may direct the applicable Trustee in its exercise of any
trust or power. The Trustees may withhold from Holders of the Securities notice
of any continuing Default or Event of Default (except a
84
<PAGE>
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes or the
Discount Notes, as the case may be, then outstanding by notice to the applicable
Trustee may on behalf of the Holders of all of the Notes or the Discount Notes,
as the case may be, waive any existing Default or Event of Default and its
consequences under the Indentures except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes or the
Discount Notes, as the case may be.
The Company is required to deliver to the Trustees annually a statement
regarding compliance with the Indentures, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustees a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder or Affiliate of
the Company, as such, shall have any liability for any obligations of the
Company under the Securities, the Indentures or for any claim based on, in
respect of, or by reason of, such obligations or their creation. No director,
officer, employee, incorporator or stockholder or Affiliate of any of the
Guarantors, as such, shall have any liability for any obligations of the
Guarantors under the Subsidiary Guarantees, the Indentures or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Securities and Subsidiary Guarantees by accepting a Security and
a Subsidiary Guarantee waives and releases all such liabilities. The waiver and
release are part of the consideration for issuance of the Securities and the
Subsidiary Guarantees. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that such
a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its and
any Guarantor's obligations discharged with respect to the outstanding Notes
and/or the outstanding Discount Notes and any Subsidiary Guarantees, as the case
may be ("Legal Defeasance"), and cure all then existing Events of Default,
except for (i) the rights of Holders of outstanding Securities to receive
payments in respect of the principal of, premium, if any, and interest and
Liquidated Damages on such Securities when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Securities
concerning issuing temporary Securities, registration of Securities, mutilated,
destroyed, lost or stolen Securities and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the applicable Trustee, and the
Company's obligations in connection therewith, and (iv) the Legal Defeasance
provisions of the Indentures. In addition, the Company may, at its option and at
any time, elect to have the obligations of the Company and the Guarantors
released with respect to certain covenants that are described in the Indentures
and the Subsidiary Guarantees ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes or the Discount Notes, as the case may be,
and the Subsidiary Guarantees. In the event Covenant Defeasance occurs, certain
events (not including non-payment, and, solely with respect to the Company,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes or the Discount Notes, as the case may be, and the Subsidiary
Guarantees.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company or the Guarantors must irrevocably deposit with the appropriate Trustee,
in trust, for the benefit of the Holders of the Notes or Discount Notes, as the
case may be, cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest
85
<PAGE>
and Liquidated Damages on the outstanding Notes or Discount Notes, as the case
may be, on the stated maturity or on the applicable redemption date, as the case
may be, and the Company and the Guarantors must specify whether the Notes or
Discount Notes, as the case may be, are being defeased to maturity or to a
particular redemption date; (ii) in the case of Legal Defeasance, the Company or
the Guarantors shall have delivered to the appropriate Trustee an opinion of
counsel in the United States reasonably acceptable to such Trustee confirming
that, subject to customary assumptions and exclusions, (A) the Company and the
Guarantors have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the applicable Indenture,
there has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon, such opinion of counsel shall confirm
that, subject to customary assumptions and exclusions, the Holders of the
outstanding Notes or Discount Notes, as the case may be, will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company or the Guarantors shall have delivered to the appropriate Trustee an
opinion of counsel in the United States reasonably acceptable to such Trustee
confirming that, subject to customary assumptions and exclusions, the Holders of
the outstanding Notes or Discount Notes, as the case may be, will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit and the grant of any Lien securing such borrowing) or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indentures) to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries is bound; (vi) the Company or
the Guarantors must have delivered to the appropriate Trustee an opinion of
counsel, subject to customary assumptions and exclusions, to the effect that
after the 91st day following the deposit, the trust funds will not be part of
any "estate" formed by the bankruptcy or reorganization of the Company or
subject to the "automatic stay" under the Bankruptcy Code; (vii) the Company or
the Guarantors must deliver to the appropriate Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of Notes or Discount Notes, as the case may be, over the
other creditors of the Company or the Guarantors, as applicable, with the intent
of defeating, hindering, delaying or defrauding creditors of the Company or the
Guarantors, as applicable, or others; and (viii) the Company must deliver to the
appropriate Trustee an Officers' Certificate and an opinion of counsel (which
opinion of counsel may be subject to customary assumptions and exclusions), each
stating that all conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Securities in accordance with the
appropriate Indenture. The Registrar and the Trustees may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indentures. The Company is not required to transfer or
exchange any Security selected for redemption or repurchase. Also, the Company
is not required to transfer or exchange any Security for a period of 15 days
before a selection of Securities to be redeemed or before any repurchase offer.
The Securities will be issued in registered form and the registered Holder
of a Security will be treated as the owner of it for all purposes.
86
<PAGE>
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indentures or
the Securities may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Notes or Discount Notes, as the
case may be, then outstanding (including, without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for,
Securities), and any existing default or compliance with any provision of the
Indentures or the Securities may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes or Discount Notes, as
the case may be (including consents obtained in connection with a tender offer
or exchange offer for Securities).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Securities held by a non-consenting Holder): (i) reduce the
principal amount of Securities whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Security or alter the provisions with respect to the redemption or
repurchase of the Securities (other than provisions relating to the covenants
described above under the caption "--Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any
Security, or reduce the rate of accretion on the Accreted Value or extend the
period during which no interest accrues on the Discount Notes, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Securities (except a rescission of acceleration of the
Securities by the Holders of at least a majority in aggregate principal amount
of the Securities and a waiver of the payment default that resulted from such
acceleration), (v) make any Security payable in money other than that stated in
the Securities, (vi) reduce the principal amount of such series of Securities
that need to consent to any waiver of past Defaults or the rights of Holders of
Securities to receive payments of principal of or premium, if any, or interest
on the Securities, (vii) waive a redemption payment with respect to any Security
(other than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Securities, the Company and the applicable Trustee may amend or supplement the
Indentures or the Securities to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Securities in addition to or in place of certificated
Securities, to provide for the assumption of the Company's or any Guarantor's
obligations to Holders of Securities in the case of a merger, consolidation or
sale of assets, to release any Subsidiary Guarantee in accordance with the
provisions of the Indentures (including in connection with a Subsidiary
Distribution), to provide for additional Guarantors, to make any change that
would provide any additional rights or benefits to the Holders of Securities or
that does not adversely affect the legal rights under the Indentures of any such
Holder, or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indentures under the Trust Indenture Act.
CONCERNING THE TRUSTEES
The Indentures contain certain limitations on the rights of the Trustees,
should either Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustees will be permitted to
engage in other transactions; however, if either Trustee acquires any
conflicting interest such Trustee must eliminate such conflict within 90 days,
apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
or Discount Notes, as the case may be, will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustees, subject to certain exceptions. The Indentures provide
that in case an Event of Default shall occur (which shall not be cured), the
Trustees will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject
87
<PAGE>
to such provisions, the Trustees will be under no obligation to exercise any of
its rights or powers under the Indentures at the request of any Holder of
Securities, unless such Holder shall have offered to the Trustees security and
indemnity satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The Securities initially will be issued in registered, global form without
interest coupons (in such form, collectively, the "Global Securities"). The
Global Securities will be deposited upon issuance with the Trustees as custodian
for The Depository Trust Company ("DTC"), in New York, New York, and registered
in the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant as described below.
Except as set forth below, the Global Securities may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Securities may not be
exchanged for Securities in certificated form except in the limited
circumstances described below. See "--Exchange of Book-Entry Securities for
Certificated Securities."
The Securities may be presented for registration of transfer and exchange at
the offices of the Registrar.
DEPOSITORY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organization. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or Indirect Participants. The ownership interest and
transfer of ownership interest of each actual purchaser of each security held by
or on behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Global Securities, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of Global Securities and (ii) ownership of such interests in the Global
Securities will be shown on, and the transfer ownership thereof will be effected
only through, records maintained by DTC (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Securities). Investors in the Global
Securities may hold their interests therein directly through DTC, if they are
Participants in such system, or indirectly through organizations that are
Participants in such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a Global Security to such persons may be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants and certain banks, the ability of a
person having a beneficial interests in a Global Security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Securities, see "--Exchange of
Book-Entry Securities for Certificated Securities."
88
<PAGE>
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL SECURITIES WILL
NOT HAVE SECURITIES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF SECURITIES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURES FOR ANY PURPOSE.
Payments in respect of the principal and premium, if any, and Liquidated
Damages, if any, and interest on a Global Security registered in the name of DTC
or its nominee will be payable by the applicable Trustee to DTC or its nominee
in its capacity as the registered holder under the applicable Indenture. Under
the terms of the applicable Indenture, the Company and the applicable Trustee
will treat the persons in whose names the Securities, including the Global
Securities, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the Company, the applicable Trustee nor any agent of the Company or the
applicable Trustee has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's records
relating to, or payments made on account of, beneficial ownership interests in
the Global Securities, or for maintaining, supervising or reviewing any of DTC's
records or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Securities or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the Securities (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Securities as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of
Securities will be governed by standing instructions and customary practices and
will not be the responsibility of DTC, either Trustee or the Company. None of
the Company or either Trustee will be liable for any delay by DTC or its
Participants in identifying the beneficial owners of the Securities, and the
Company and the Trustees may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
Securities for all purposes.
Interests in the Global Securities will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants. Transfers between Participants
in DTC will be effected in accordance with DTC's procedures, and will be settled
in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Securities only at the direction of one or more
Participants to whose account DTC interests in the Global Securities are
credited and only in respect of such portion of the aggregate principal amount
of the Securities as to which such Participant or Participants has or have given
direction. However, if there is an Event of Default under the Securities, DTC
reserves the right to exchange Global Securities for legended Securities in
certificated form, and to distribute such Securities to its Participants.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Securities among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company or either
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of its obligations under the rules and
procedures governing its operations.
89
<PAGE>
EXCHANGE OF BOOK-ENTRY SECURITIES FOR CERTIFICATED SECURITIES
A Global Security is exchangeable for definitive Securities in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Security and the Company
thereupon fails to appoint a successor depositary or (y) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the Company, at its
option, notifies the applicable Trustee in writing that it elects to cause the
issuance of the Securities in certificated form or (iii) there shall have
occurred and be continuing to occur a Default or an Event of Default with
respect to the Securities. In addition, beneficial interests in a Global
Security may be exchanged for certificated Securities upon request but only upon
at least 20 days prior written notice given to the applicable Trustee by or on
behalf of DTC in accordance with customary procedures. In all cases,
certificated Securities delivered in exchange for any Global Security or
beneficial interest therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
CERTIFICATED SECURITIES
Subject to the conditions specified above, any person having a beneficial
interest in the Global Security may, upon request to the applicable Trustee,
exchange such beneficial interest for Securities in the form of Certificated
Securities. Upon any such issuance, such Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). In addition, if (i) the
Company notifies the applicable Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the applicable Trustee in writing that it elects to cause the issuance
of Securities in the form of Certificated Securities under the Indentures, then,
upon surrender by the Global Security Holder of its Global Security, Securities
in such form will be issued to each person that the Global Security Holder and
the Depositary identify as being the beneficial owner of the related Securities.
None of the Company or the Trustees will be liable for any delay by the
Global Security Holder or the Depositary in identifying the beneficial owners of
Securities and the Company and the Trustees may conclusively rely on, and will
be protected in relying on, instructions from the Global Security Holder or the
Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indentures require that payments in respect of the Securities
represented by the Global Security (including principal, premium, if any,
interest and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Security Holder. With
respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address. The Company expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ACCRETED VALUE" means, as of any date of determination prior to the Full
Accretion Date, the sum of (a) the initial offering price of each Discount Note
and (b) the portion of the excess of the principal amount of each Discount Note
over such initial offering price which shall have been accreted thereon
90
<PAGE>
through such date, such amount to be so accreted on a daily basis at 10 1/2% per
annum of the initial offering price of the Discount Notes, compounded
semi-annually on each June 15 and December 15 from the date of issuance of the
Discount Notes through the date of determination; PROVIDED that, on and after
the Full Accretion Date, the Accreted Value shall be equal to the principal
amount of the outstanding Discount Notes.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person's merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means (i) any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any Person who is a director or
officer (a) of such Person, (b) of any Subsidiary of such Person or (c) of any
Person described in clause (i) above. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) (PROVIDED that the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indentures described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of the Restricted
Subsidiaries of Equity Interests of any of the Company's Subsidiaries (other
than director's qualifying shares), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following will not be
Asset Sales: (i) a transfer of assets by the Company to a Restricted Subsidiary
or by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary, (iii) a sale of Receivables to
or by a Receivables Subsidiary, (iv) a Restricted Payment or Permitted
Investment that is permitted by the covenant described above under the caption
"--Certain Covenants-- Restricted Payments" (including, without limitation, any
formation of or contribution of assets to a joint venture), (v) leases or
subleases, in the ordinary course of business, to third parties of real property
owned in fee or leased by the Company or its Subsidiaries, (vi) a disposition,
in the ordinary course of business, of a lease of real property, (vii) any
disposition of property of the Company or any of its Subsidiaries that, in the
reasonable judgment of the Company, has become uneconomic, obsolete or worn out,
(viii) any disposition of property or assets (including, without limitation,
accounts receivables and inventory) in the ordinary course of business, (ix) the
sale of Cash Equivalents and Investment Grade Securities and (x) any exchange of
like property pursuant to Section 1031 of the Internal Revenue Code of 1986, as
amended.
"BOARD OF DIRECTORS" means, with respect to any Person, the Board of
Directors of such Person, or any authorized committee of the Board of Directors
of such Person.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company,
91
<PAGE>
partnership or membership interests (whether general or limited) and (iv) any
similar participation in profits and losses or equity of a Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any commercial bank or trust company having capital
and surplus in excess of $300 million, (iv) repurchase obligations with a term
of not more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution meeting
the qualifications specified in clause (iii) above, (v) commercial paper having
the highest rating obtainable from Moody's Investors Service, Inc. ("Moody's")
or Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies,
Inc. ("S&P") and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness with a rating of "A" or
higher from S&P or "A2" or higher from Moody's.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period (A) plus, to the
extent deducted in computing such Consolidated Net Income, (i) Fixed Charges and
the amortization of debt issuance costs, commissions, fees and expenses of such
Person and its Restricted Subsidiaries for such period, (ii) provision for taxes
based on income or profits (including franchise taxes) of such Person and its
Restricted Subsidiaries for such period, (iii) depreciation and amortization
expense, including, but not limited to, amortization of inventory write-up under
APB 16, amortization of intangibles (including, but not limited to, goodwill and
the costs of Interest Rate Agreements or Currency Agreements, license agreements
and non-competition agreements) and organization costs, (iv) non-cash expenses
related to the amortization of management fees paid on or prior to the Original
Issue Date, (v) expenses and charges related to any equity offering or
incurrence of Indebtedness permitted to be incurred by the Indentures (including
any such expenses or charges relating to the Recapitalization), (vi) the amount
of any restructuring charge or reserve, (vii) non-cash amortization of Capital
Lease Obligations, (viii) unrealized gains and losses from hedging and foreign
currency translations and transactions, (ix) expenses consisting of internal
software development costs that are expensed during the period but could have
been capitalized in accordance with GAAP, (x) any write-downs, write-offs, and
other non-cash charges and expenses, and (xi) the amount of any minority
interest expense and (B) minus (i) non-cash items increasing such Consolidated
Net Income for such period and (ii) any cash payment or expense for which a
reserve or charge of the kind described in the clause (vi) and (x) above was
taken in a prior period.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary of such Person, (ii) the
Net Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, prohibited by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders unless such restriction with respect to the payment of dividends
has been permanently waived, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the
92
<PAGE>
cumulative effect of a change in accounting principles shall be excluded
(effected either through cumulative effect adjustment or a retroactive
application, in each case, in accordance with GAAP) and (v) to the extent
deducted in determining Net Income, the expenses incurred in connection with the
Recapitalization, including, without limitation, management bonuses and payments
under the management incentive and equity participation plans, in each case, to
the extent that such payment or expense was disclosed in the Offering Memorandum
used in connection with the Original Offering, shall be excluded.
"CREDIT FACILITIES" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facility) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including through
the sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit or other
credit facilities, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement to which the Company or any
Subsidiary is a party or of which it is a beneficiary.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under the
Senior Credit Facility and (ii) any other Senior Debt permitted under the
Indentures the principal amount of which is $10.0 million or more and that has
been designated by the Company as "Designated Senior Debt."
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than as a result of a
Change of Control), matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date that is 91 days after the date on
which the Securities mature; PROVIDED, HOWEVER, that if such Capital Stock is
issued to any plan for the benefit of employees of the Company or its
Subsidiaries or by any such plan to such employees, such Capital Stock shall not
constitute Disqualified Stock solely because it may be required to be
repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the Original Issue Date, until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expenses of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings or any Receivables
Facility, and net payments (if any) pursuant to Hedging Obligations) excluding,
however, (A) amortization of debt issuance costs, commissions, fees and expenses
and (B) customary commitment, administrative and transaction fees and charges
and (ii) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period, and (iii) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
one of its Restricted Subsidiaries or secured by a Lien on assets of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon), (iv) all dividend payments, whether or not in cash, on any series
of preferred stock any of Restricted Subsidiary of
93
<PAGE>
such Person and (v) all dividend payments, whether or not in cash, on any series
of preferred stock of such person other than dividend payments or accruals
payable solely in Equity Interests (other than Disqualified Stock) of such
Person, in each case, on a consolidated basis and in accordance with GAAP.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee or redemption of Indebtedness, or such
issuance or redemption of preferred stock, as if the same had occurred at the
beginning of the applicable four-quarter reference period. For purposes of
making the computation referred to above, Investments, acquisitions,
dispositions, mergers and consolidations that have been made by the Company or
any of its Restricted Subsidiaries during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date, and
discontinued operations determined in accordance with GAAP on or prior to the
Calculation Date, shall be given effect on a PRO FORMA basis assuming that all
such Investments, acquisitions, dispositions, mergers and consolidations or
discontinued operations (and the reduction or increase of any associated fixed
charge obligations and the change in Consolidated Cash Flow resulting therefrom)
had occurred on the first day of the four-quarter reference period. If since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into the Company or any Restricted Subsidiary
since the beginning of such period) shall have made any Investment, acquisition,
disposition, merger or consolidation or determined a discontinued operation,
that would have required adjustment pursuant to this definition, then the Fixed
Charge Coverage Ratio shall be calculated giving PRO FORMA effect thereto for
such period as if such Investment, acquisition, disposition, merger or
consolidation or discontinued operations had occurred at the beginning of the
applicable four-quarter period. For purposes of this definition, whenever PRO
FORMA effect is to be given to a transaction, the PRO FORMA calculations shall
be made in good faith by a responsible financial or accounting officer of the
Company. If any Indebtedness to which PRO FORMA effect is given bears interest
at a floating rate, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the Calculation Date had been the
applicable interest rate for the entire period (taking into account any Interest
Rate Agreement in effect on the Calculation Date). Interest on a Capital Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
by a responsible financial or accounting officer of the Company to be the rate
of interest implicit in such Capital Lease Obligation in accordance with GAAP.
For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a PRO FORMA basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period. Interest on Indebtedness that may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession. All ratios and computations based on GAAP contained in the
Indentures shall be computed in conformity with GAAP as in effect as of the
Original Issue Date.
94
<PAGE>
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTORS" means each of (i) Hart & Cooley, Inc., Mansfield Plumbing
Products, Inc., DeVilbiss Air Power Company, SWC Industries, Inc. and Ex-Cell
Manufacturing Company, Inc. and (ii) any other Subsidiary that executes a
Subsidiary Guarantee in accordance with the provisions of the Indentures, and
their respective successors and assigns, in each case, until released from its
Subsidiary Guarantee in accordance with the terms of the Indentures.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"INDEBTEDNESS" means, with respect to any Person (without duplication), (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property, which purchase price
is due more than six months after the date of placing such property in service
or taking delivery thereof, or representing any Hedging Obligations, except any
such balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, (ii) all indebtedness under clause (i)
of others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and (iii) to the extent not otherwise
included, the Guarantee by such Person of any indebtedness under clause (i) of
any other Person; PROVIDED, HOWEVER, that Indebtedness shall not include (a) any
servicing or guarantee of servicing obligations with respect to Receivables, (b)
obligations of the Company or any of its Restricted Subsidiaries arising from
agreements of the Company or a Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or a Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition; PROVIDED, HOWEVER, that (x) such
obligations are not reflected on the balance sheet of the Company or any
Restricted Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance sheet will not
be deemed to be reflected on such balance sheet for purposes of this clause (x))
and (y) the maximum assumable liability in respect of all such obligations shall
at no time exceed the gross proceeds including noncash proceeds (the fair market
value of such noncash proceeds being measured at the time received and without
giving effect to any subsequent changes in value) actually received by the
Company and its Restricted Subsidiaries in connection with such disposition; or
(c) obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary in the ordinary
course of business. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest, and (ii) the principal amount
thereof in the case of any other Indebtedness.
"INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Subsidiary
against fluctuations in interest rates.
"INVESTMENT GRADE SECURITIES" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such rating by such rating organization, or, if no
rating of S&P or Moody's
95
<PAGE>
then exists, the equivalent of such rating by any other nationally recognized
securities rating agency, but excluding any debt securities or instruments
constituting loans or advances among the Company and its Subsidiaries, and (iii)
investments in any fund that invests exclusively in investments of the type
described in clauses (i) and (ii) which fund may also hold immaterial amounts of
cash pending investment and/or distribution.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations, but
excluding advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person), advances
or capital contributions (excluding commission, travel, payroll, entertainment,
relocation and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Subsidiary
of the Company such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "--Restricted Payments."
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement or any lease in the
nature thereof); PROVIDED that in no event shall an operating lease be deemed to
constitute a Lien.
"MANAGEMENT GROUP" means the senior management of the Company or its
Restricted Subsidiaries.
"NET INCOME" means, with respect to any Person, the net income (or loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any extraordinary
or non-recurring gains or losses or charges and gains or losses or charges from
the sale of assets outside the ordinary course of business, together with any
related provision for taxes on such gain or loss or charges and (ii) deferred
financing costs written off in connection with the early extinguishment of
Indebtedness.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and brokerage and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of principal, premium (if any) and interest on Indebtedness that
is not subordinated to the Securities required (other than required by clause
(a) of the second paragraph of "--Repurchase at the Option of Holders--Asset
Sales") to be paid as a result of such transaction, all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Sale, and any deduction of appropriate
amounts to be provided by the Company as a reserve in accordance with GAAP
against any liabilities associated with the asset disposed of in such
transaction and retained by the Company after such sale or other disposition
thereof, including, without limitation, pension and other post-employment
benefit liabilities and liabilities related to environmental matters or against
any indemnification obligations associated with such transaction.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or
96
<PAGE>
instrument that would constitute Indebtedness), or (b) is directly or indirectly
liable (as a guarantor or otherwise); and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness (other than the Securities
being offered hereby) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries;
provided that, notwithstanding the foregoing, the Company and any of its other
Subsidiaries that sell Receivables to the Person incurring such Indebtedness
shall be allowed to provide such representations, warranties, covenants and
indemnities as are customarily required in such transactions so long as no such
representations, warranties, covenants or indemnities constitute a Guarantee of
payment or recourse against credit losses.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages, guarantees and other liabilities
payable under the documentation governing any Indebtedness, in each case whether
now or hereafter existing, renewed or restructured, whether or not from time to
time decreased or extinguished and later increased, created or incurred, whether
or not arising on or after the commencement of a proceeding under Title 11, U.S.
Code or any similar federal or state law for the relief of debtors (including
post-petition interest) and whether or not allowed or allowable as a claim in
any such proceeding.
"PARI PASSU INDEBTEDNESS" means any Indebtedness of the Company that ranks
PARI PASSU with the Securities.
"PERMITTED BUSINESS" means the building products, home improvement products
and decorative accessory products businesses and any other business reasonably
related or incidental thereto.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Restricted Subsidiary (including in any Equity Interests of a Restricted
Subsidiary); (b) any Investment in Cash Equivalents or Investment Grade
Securities; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Restricted Subsidiary or (ii) such Person, in one transaction or a
series of substantially concurrent related transactions, is merged, consolidated
or amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary; (d)
any securities received or other Investments made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales" or in connection with any other disposition
of assets not constituting an Asset Sale; (e) any acquisition of assets solely
in exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (f) any Investments relating to a Receivables Subsidiary; (g)
loans or advances to employees (or guarantees of third party loans to employees)
in the ordinary course of business; (h) stock, obligations or securities
received in satisfaction of judgments or settlement of debts; (i) receivables
owing to the Company or any Restricted Subsidiary, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms (including such concessionary terms as the Company or such
Restricted Subsidiary deems reasonable); (j) any Investment existing on the
Original Issue Date; (k) Hedging Obligations and Currency Agreements otherwise
permitted under the Indentures; (l) any transaction to the extent it constitutes
an Investment that is permitted and made in accordance with the provisions of
clause (12) of the covenant described under the caption "--Transactions with
Affiliates"; (m) any Investment in a Permitted Business (other than an
Unrestricted Subsidiary) having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (m) that are at that
time outstanding, not to exceed 15.0% of Total Assets at the time of such
Investment (with the fair market value of each Investment being measured at the
time made and without giving effect to subsequent changes in value); and (n)
additional Investments having an aggregate fair market value, taken together
with all other Investments made pursuant to this clause (n) that are at that
time outstanding, not to exceed
97
<PAGE>
10.0% of Total Assets at the time of such Investment (with the fair market value
of each Investment being measured at the time made and without giving effect to
subsequent changes in value).
"PERMITTED JUNIOR SECURITIES" shall mean debt or equity securities of the
Company or any successor corporation issued pursuant to a plan of reorganization
or readjustment of the Company that are subordinated to the payment of all then
outstanding Senior Debt at least to the same extent that the Securities are
subordinated to the payment of all Senior Debt on the Original Issue Date, so
long as (i) the effect of the use of this defined term in the subordination
provisions described under the caption "Subordination" is not to cause the
Securities to be treated as part of (a) the same class of claims as the Senior
Debt or (b) any class of claims pari passu with, or senior to, the Senior Debt
for any payment or distribution in any case or proceeding or similar event
relating to the liquidation, insolvency, bankruptcy, dissolution, winding up or
reorganization of the Company and (ii) to the extent that any Senior Debt
outstanding on the date of consummation of any such plan of reorganization for
readjustment are not paid in full in cash on such date, either (a) the holders
of any such Senior Debt not so paid in full in cash have consented to the terms
of such plan of reorganization or readjustment or (b) such holders receive
securities which constitute Senior Debt and which have been determined by the
relevant court to constitute satisfaction in full in money or money's worth of
any Senior Debt not paid in full in cash.
"PERMITTED LIENS" means (i) Liens securing Senior Debt of the Company or a
Restricted Subsidiary that was permitted by the terms of the Indentures to be
incurred; (ii) Liens in favor of the Company or any Restricted Subsidiary; (iii)
Liens on property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary of the Company;
PROVIDED that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company or a Restricted Subsidiary,
as the case may be; (iv) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the Company, PROVIDED
that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of bids, tenders, trade or
government contracts (other than for borrowed money), leases, licenses,
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
without limitation of clause (i), Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (v) of the second paragraph of
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness; (vii) Liens
existing on the Original Issue Date; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings, provided that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor; (ix) Liens on Receivables to reflect sales of
Receivables to and by the Receivables Subsidiary pursuant to the Receivables
Facility or securing Indebtedness permitted by paragraph (ix) of the covenant
described under the caption "Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock;" (x) Liens incurred in the ordinary course of
business of the Company or any Restricted Subsidiary of the Company with respect
to obligations that do not exceed $5.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary; (xi) carriers',
warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business in respect of obligations that
are not yet due or that are bonded or that are being contested in good faith and
by appropriate proceedings if adequate reserves with respect thereto are
maintained on the books of the Company or such Restricted Subsidiary, as the
case may be, in accordance with GAAP; (xii) pledges or deposits in connection
with workmen's compensation, unemployment insurance and other social security
legislation; (xiii) easements (including reciprocal easement agreements),
rights-of-way, building, zoning and similar restrictions, utility agreements,
covenants, reservations, restrictions, encroachments, changes, and other similar
encumbrances or title defects incurred, or leases or subleases granted to
98
<PAGE>
others, in the ordinary course of business, that do not in the aggregate
materially detract from the aggregate value of the properties of the Company and
its Subsidiaries, taken as a whole, or in the aggregate materially interfere
with or adversely affect in any material respect the ordinary conduct of the
business of the Company and its Subsidiaries on the properties subject thereto,
taken as a whole; (xiv) Liens on goods (and the proceeds thereof) and documents
of title and the property covered thereby securing Indebtedness in respect of
commercial letters of credit; (xv) (i) mortgages, liens, security interests,
restrictions, encumbrances or any other matters of record that have been placed
by any developer, landlord or other third party on property over which the
Company or any Restricted Subsidiary of the Company has easement rights or on
any real property leased by the Company on the Original Issue Date and
subordination or similar agreements relating thereto and (ii) any condemnation
or eminent domain proceedings affecting any real property; (xvi) leases or
subleases to third parties; (xvii) Liens in connection with workmen's
compensation obligations and general liability exposure of the Company and its
Restricted Subsidiaries; (xviii) Liens arising by reason of a judgment, decree
or court order, to the extent not otherwise resulting in an Event of Default;
(xix) Liens securing Hedging Obligations and Currency Agreements entered into in
the ordinary course of business; (xx) without limitation of clause (i), Liens
securing Refinancing Indebtedness permitted to be incurred under the Indentures
or amendments or renewals of Liens that were permitted to be incurred, provided,
in each case, that such Liens do not extend to an additional property or asset;
and (xxi) Liens that secure Indebtedness of a Person existing at the time such
Person becomes a Restricted Subsidiary of the Company, PROVIDED such Liens do
not extend to any property or asset of any other Restricted Subsidiary or the
Company.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
PROVIDED that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable premium and fees and expenses incurred in connection
therewith); (ii) in the case of term Indebtedness, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Securities, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Securities on terms at least as
favorable to the Holders of Securities as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"RECEIVABLES" means, collectively, (a) the Indebtedness and other
obligations owed to the Company or any of its Subsidiaries (before giving effect
to any sale or transfer thereof pursuant to a Receivables Facility), whether
constituting an account, chattel paper, an instrument, a document or general
intangible, arising in connection with the sale of goods, insurance and/or
services by the Company or such Subsidiary, including, without limitation, the
obligation to pay any late fees, interest or other finance charges with respect
thereto (each of the foregoing, collectively, an "ACCOUNT RECEIVABLE"), (b) all
of the Company's or such Subsidiary's interest in the goods (including returned
goods), if any, the sale of which gave rise to any Account Receivable, and all
insurance contracts with respect thereto, (c) all other security interests or
Liens and property subject thereto from time to time, if any, purporting to
secure payment of any Account Receivable, together with all financing statements
and security agreements describing any collateral securing such Account
Receivable, (d) all Guarantees, insurance and other agreements or arrangements
of whatever character from time to time supporting or securing payment of any
Account Receivable, (e) all contracts, invoices, books and records of any kind
related to any Account Receivable, (f) all cash
99
<PAGE>
collections in respect of, and cash proceeds of, any of the foregoing and any
and all lockboxes, lockbox accounts, collection accounts, concentration accounts
and similar accounts in or into which such collections and cash proceeds are now
or hereafter deposited, collected or concentrated, and (g) all proceeds of any
of the foregoing.
"RECEIVABLES FACILITY" means, with respect to any Person, any Receivables
securitization or factoring program pursuant to which such Person receives
proceeds pursuant to a sale, pledge or other encumbrance of its Receivables.
"RECEIVABLES FINANCING AMOUNT" means at any date, with respect to any
Receivables Facility of any Person that does not represent an incurrence of
Indebtedness, the sum on such date of (a) the aggregate uncollected balances of
Accounts Receivable (as defined in the definition of "Receivable") transferred
("Transferred Receivables") in such Receivables Facility plus (b) the aggregate
amount of all collections of Transferred Receivables theretofore received by
such Person but not yet remitted to the purchaser, net of all reserves and
holdbacks retained by or for the benefit of the purchaser and net of any
interest retained by such Person and reasonable costs and expenses (including,
without limitation, fees and commissions and taxes other than income taxes)
incurred by such Person in connection therewith and not payable to any Affiliate
of such Person.
"RECEIVABLES SUBSIDIARY" means any Subsidiary created primarily to purchase
or finance the receivables of the Company and/or its Subsidiaries pursuant to a
Receivables Facility, so long as it: (a) has no Indebtedness other than
Non-Recourse Debt and (b) is a Person with respect to which neither the Company
nor any of its other Subsidiaries has any direct obligation to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results other than to act as servicer of
Receivables. If, at any time, such Receivables Subsidiary would fail to meet the
foregoing requirements as a Receivables Subsidiary, it shall thereafter cease to
be a Receivables Subsidiary for purposes of the Indentures and any Indebtedness
of such Receivables Subsidiary shall be deemed to be incurred by a Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"--Certain Covenants-- Incurrence of Indebtedness and Issuance of Preferred
Stock," the Company shall be in default of such covenant).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SENIOR CREDIT FACILITY" means the Credit Agreement dated as of June 17,
1997 among the Company and the financial institutions named therein, The Chase
Manhattan Bank, as administrative agent, and Chase Securities Inc., as arranger,
and any related notes, collateral documents, letters of credit and guarantees,
including any appendices, exhibits or schedules to any of the foregoing (as the
same may be in effect from time to time), in each case, as such agreements may
be amended, modified, supplemented or restated from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid or extended from time to
time (whether with the original agents and lenders or other agents or lenders or
otherwise, and whether provided under the original credit agreement or other
credit agreements or otherwise).
"SENIOR DEBT" means (i) all Indebtedness of the Company or any of its
Restricted Subsidiaries outstanding under Senior Credit Facility and all Hedging
Obligations with respect thereto, (ii) any other Indebtedness (including
Acquired Debt) permitted to be incurred by the Company or one of its Restricted
Subsidiaries under the terms of the Indentures, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a parity
with or subordinated in right of payment to the Securities or any Subsidiary
Guarantee and (iii) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt will not
include (w) any liability for federal, state, local or other taxes owed or owing
by the Company, (x) any Indebtedness of the Company or any of its
100
<PAGE>
Restricted Subsidiaries to any of its Subsidiaries or other Affiliates, (y) any
trade payables or (z) any Indebtedness that is incurred in violation of the
Indentures.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such regulation is in effect on the Original
Issue Date.
"SPECIFIED AFFILIATE PAYMENTS" means: (i) the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
or any Restricted Subsidiary of the Company held by any future, present or
former employee, director, officer or consultant of the Company (or any of its
Restricted Subsidiaries) pursuant to any management equity subscription
agreement, stock option agreement, put agreement or similar agreement that may
be in effect from time to time; PROVIDED that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $2.5 million in any calendar year (with unused amounts in any calendar
year being carried over to succeeding calendar years subject to a maximum amount
of repurchases, redemptions or other acquisitions pursuant to this clause (i)
(without giving effect to the immediately following proviso) of $7.5 million in
any calendar year) and no payment default on Senior Debt or the Securities shall
have occurred and be continuing; PROVIDED FURTHER that such amount in any
calendar year may be increased by an amount not to exceed (A) the cash proceeds
received by the Company since the Original Issue Date from the sale of Equity
Interests of the Company to employees, directors, officers or consultants of the
Company and its Subsidiaries that occurs in such calendar year (provided that
such cash proceeds shall be excluded from clause (c)(ii) of the first paragraph
under the covenant described under the caption "Restricted Payments") plus (B)
the cash proceeds from key man life insurance policies received by the Company
and its Restricted Subsidiaries in such calendar year; and PROVIDED FURTHER that
cancellation of Indebtedness owing to the Company from employees, directors,
officers or consultants of the Company or any of its Subsidiaries in connection
with a repurchase of Equity Interests of the Company will not be deemed to
constitute a Restricted Payment for purposes of the Indentures; (ii) repurchases
of Equity Interests deemed to occur upon exercise of stock options or warrants
as a result of the payment of all or a portion of the exercise price of such
options or warrants with Equity Interests; (iii) payments by the Company to
members of management of the Company under the management incentive and equity
participation plans as a result of and upon the Recapitalization to the extent
disclosed in this Offering Memorandum used in connection with the Original
Offering; and (iv) payments permitted under clauses (5), (6), (8), (9) and (11)
of the second paragraph of the covenant described under "--Transaction with
Affiliates."
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"SUBSIDIARY DISTRIBUTION" means the dividend or distribution by the Company
of all the Equity Interests in any one Subsidiary and its direct or indirect
Subsidiaries (collectively, a "Distributed Subsidiary") owned by the Company or
any of its Restricted Subsidiaries; PROVIDED that (A) prior to such dividend or
distribution, the Company shall make an offer (a "Subsidiary Distribution
Offer") to all Holders of
101
<PAGE>
Securities to purchase the principal amount (or, with respect to the Discount
Notes prior to the Full Accretion Date, the Accreted Value) of Securities equal
to the product of (1) the outstanding principal amount (or, with respect to the
Discount Notes prior to the Full Accretion Date, the Accretion Value) of
Securities immediately prior to such dividend or distribution, MULTIPLIED BY (2)
such portion of the Consolidated Cash Flow of the Company and its Restricted
Subsidiaries (including the Distributed Subsidiary) for the most recently ended
four full fiscal quarters of the Company (expressed as a decimal) as is
attributable to the Distributed Subsidiary (calculated as set forth in the
definition of Fixed Charge Coverage Ratio), at an offer price in cash in an
amount equal to 101% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any (or, with respect to the
Discount Notes prior to the Full Accretion Date, 101% of the Accreted Value
thereof plus Liquidated Damages thereon, if any), to the date of purchase, in
accordance with the procedures set forth in the Indentures, (B) each of S&P and
Moody's confirms, in writing, prior to such dividend or distribution, but
following the announcement of the results of the Subsidiary Distribution Offer,
that it will not downgrade its rating of the Securities, (C) immediately
following the transaction, the Fixed Charge Coverage Ratio of the Company for
the most recently ended four full fiscal quarters of the Company, calculated
giving PRO FORMA effect to (1) such dividend or distribution, (2) the repurchase
of all Securities irrevocably tendered for purchase pursuant to the Subsidiary
Distribution Offer and (3) any reduction of Indebtedness of the Company and its
Restricted Subsidiaries that occurs concurrently with such dividend or
distribution, is greater than the Fixed Charge Coverage Ratio for such
four-quarter reference period immediately prior to such dividend or distribution
and Subsidiary Distribution Offer, (D) no Default or Event of Default exists
immediately following the dividend or distribution or Subsidiary Distribution
Offer, (E) the Consolidated Cash Flow of the Company and its remaining
Restricted Subsidiaries for the most recently ended four full fiscal quarters of
the Company, calculated giving PRO FORMA effect to such dividend or
distribution, is not less than 60% of the Consolidated Cash Flow of the Company
and all of its Restricted Subsidiaries (including the Distributed Subsidiary)
for such four-quarter reference period (calculated as set forth in the
definition of Fixed Charge Coverage Ratio, but without giving PRO FORMA effect
to such dividend or distribution) and (F) no other dividend or distribution of
Equity Interests in any Subsidiary has been made pursuant to clause (vi) of the
covenant described under the caption "--Restricted Payments" subsequent to the
Original Issue Date.
"TOTAL ASSETS" means, at any time, the total consolidated assets of the
Company and its Restricted Subsidiaries at such time. For the purposes of
paragraph (iv) of the covenant described under the caption "Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," Total
Assets shall be determined giving pro forma effect to the lease, acquisition,
construction or improvement of the assets being leased, acquired, constructed or
improved with the proceeds of the relevant Indebtedness.
"UNRESTRICTED SUBSIDIARY" means (i) any Receivables Subsidiary in existence
on the Original Issue Date and (ii) any other Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; and (d) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustees by filing with the
Trustees a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would
102
<PAGE>
fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indentures
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of the Company as of such date (and, if such Indebtedness
is not permitted to be incurred as of such date under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," the Company shall be in default of such covenant). The
Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "--Certain Covenants-- Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period, and (ii) no Default or Event of Default would be in existence
following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
103
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Gibson, Dunn & Crutcher LLP, the following is a general
description of the material United States federal income tax consequences of the
Exchange Offer and the purchase, ownership and disposition of the Securities to
Holders of the Securities. This discussion does not purport to deal with all
aspects of federal income taxation that may be relevant to Holders in light of
their personal investment circumstances, nor to certain types of Holders subject
to special treatment under the federal income tax laws (for example, banks, life
insurance companies, foreign persons and persons holding the Securities as part
of a hedging or conversion transaction) and is generally limited to investors
who will hold the Securities as capital assets. In addition, this description
does not consider the effect of any applicable foreign, state or local tax laws.
Investors are urged to consult their own tax advisors as to the precise federal,
state, local and other tax consequences of the Exchange Offer and the purchase,
ownership and disposition of the Securities.
This discussion is based on current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing and proposed Treasury Regulations
thereunder, rulings of the Internal Revenue Service (the "Service") and judicial
decisions now in effect, all of which are subject to change, possibly
retroactively. No ruling will be sought from the Service with respect to the
federal income tax consequences of the Exchange Offer, and there can be no
assurance that the Service will not assert positions contrary to the views
expressed herein, or that any such contrary position would not be sustained.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MIGHT BE RELEVANT TO AN INVESTOR'S DECISION TO PARTICIPATE IN THE
EXCHANGE OFFER. EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR
SITUATION BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER.
THE EXCHANGE OFFER
The exchange of Old Notes for Notes and of Old Discount Notes for Discount
Notes pursuant to the Exchange Offer will not constitute a material modification
of the terms of the Old Notes, the Notes, the Old Discount Notes or the Discount
Notes and, accordingly, such exchange will not constitute an exchange for
federal income tax purposes. Accordingly, such exchange will have no federal
income tax consequences to the Holders, regardless of whether such Holders
participate in the Exchange Offer and each Holder will continue to be required
to include interest (including, in the case of the Discount Notes, original
issue discount, or "OID") on such Note or Discount Note in its gross income in
accordance with such Holder's method of accounting for federal income tax
purposes and in accordance with the rules regarding the inclusion in income of
OID as discussed below. The Company intends, to the extent required, to treat
the Exchange Offer for federal income tax purposes in accordance with the
position described above.
TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at their stated principal amount and, accordingly,
were not issued with OID within the meaning of Section 1273 of the Code. Thus,
stated interest on the Notes will be includable in gross income as ordinary
income when received or accrued by Noteholders in accordance with their
respective methods of tax accounting.
The Discount Notes were offered at a substantial discount from their stated
principal amount, and, accordingly, Holders of Discount Notes will be required
to include stated interest and original issue discount on the Discount Notes in
gross income in accordance with the OID provisions of the Code discussed below,
and may be required to include amounts in income with respect to such Discount
Notes prior to the receipt of cash payments attributable to such income, without
regard to whether the Holder is a cash or accrual method taxpayer.
104
<PAGE>
A Discount Noteholder (including a cash basis Discount Noteholder) generally
will be required to accrue the OID on a Discount Note in income for federal
income tax purposes on a constant yield basis, which ordinarily will result in
the inclusion of increasing amounts of OID in income in successive accrual
periods.
A subsequent purchaser of a Discount Note also will be required to include
annual accruals of OID in gross income in accordance with the rules described
above, but the amount of OID includable in income may vary depending upon the
price paid for the Discount Note by such subsequent purchaser. If a subsequent
purchaser purchases a Discount Note at a cost that is less than its stated
redemption amount at maturity but that is in excess of its adjusted issue price
(i.e., its issue price increased by the OID previously includable in gross
income of prior holders and decreased by prior cash payments), the includable
OID will be reduced by an amount equal to the OID multiplied by a fraction the
numerator of which is such excess and the denominator of which is the amount of
OID for the period remaining after the subsequent purchaser's purchase until
maturity.
Interest (including OID inclusions) received on the Securities will
constitute "investment income" for purposes of certain limitations of the Code
concerning the deductibility of "investment interest" expense.
MARKET DISCOUNT. A Holder that purchases a Security at a discount (the
"Market Discount") from its adjusted issue price that exceeds a specified DE
MINIMIS amount may be subject to the "market discount" rules of sections 1276
through 1278 of the Code. These rules provide, in part, that gain on the sale or
other disposition of a debt instrument and partial principal payments on a debt
instrument are treated as ordinary income to the extent of accrued market
discount. Unless the Holder elects to include market discount in income on a
constant yield basis, the accrued market discount at any time generally would be
the amount calculated by multiplying the market discount by a fraction, the
numerator of which is the number of days the obligation has been held by the
Holder and the denominator of which is the number of days after the Holder's
acquisition of the obligation up to and including its maturity date. As an
alternative to the inclusion of the market discount in income on the foregoing
basis, the Holder may elect to include market discount in income currently as it
accrues on all market discount instruments acquired by such Holder in that
taxable year or thereafter, in which case the interest deferral rule described
below will not apply. This election would apply to all market discount
obligations acquired by the electing Holder on or after the first day of the
first taxable year to which the election applies. The election may be revoked
only with the consent of the Service. Purchasers that acquire a Security with
market discount should consult their tax advisors regarding the manner in which
accrued market discount is calculated and the election to include such market
discount currently in income.
The market discount rules also provide for the deferral of interest
deductions with respect to debt incurred to purchase or carry a debt instrument
that has market discount in excess of the aggregate amount of interest
(including OID) includable in such holder's gross income for the taxable year
with respect to such debt instrument.
BOND PREMIUM. A Holder that purchases a Security for an amount that exceeds
the sum of all amounts payable on the Security, other than payments of qualified
stated interest, will be considered to have purchased the Security at a premium.
The Holder may elect to amortize such premium as an offset to interest income
(and not as a separate deduction item) on a constant yield method. If a Holder
makes an election to amortize premium on a Security, such election will apply to
all taxable debt instruments held by the Holder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by such Holder. Such election may be revoked only with the consent of
the Service. Purchasers that purchase the Securities at a premium should consult
their tax advisors regarding the election to amortize premium and the method to
be employed.
GAIN OR LOSS ON DISPOSITION OF THE SECURITIES. If a Security is sold,
exchanged or otherwise disposed of, the Holder generally will recognize gain or
loss in an amount equal to the difference between the amount
105
<PAGE>
realized on the sale, exchange or other disposition and such Holder's adjusted
basis in the Security. The adjusted basis of the Security generally will equal
the Holder's cost, increased by any OID or market discount previously includable
in income by the Holder with respect to the Security, and reduced by the
payments, if any, previously received by the Holder and any premium amortized by
the Holder with respect to the Security. Any such gain or loss will, subject to
the preceding discussion of the market discount rules, be capital gain or loss
if the Security was held as a capital asset. Capital gain or loss will be
long-term if the Security is held by the Holder for more than one year. Recently
enacted legislation provides that for individual Holders, the maximum rate of
United States federal income taxation on net long-term capital gains is 28% if
the Security was held for more than one year but not more than eighteen months,
and 20% if the Security was held for over eighteen months.
BACKUP WITHHOLDING
A Holder may be subject to backup withholding at the rate of 31%, with
respect to interest paid on, or proceeds from the disposition of, a Security,
unless such Holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a correct
taxpayer identification number, certifies as to the Holder's exemption from
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. A Holder who does not provide the Company or the
Holder's broker with such Holder's correct taxpayer identification number may be
subject to penalties imposed by the Service. Any amount paid as backup
withholding will be credited against the Holder's income tax liability. The
Company will report to the Holders and the Service the amount of any "reportable
payments" for each calendar year and the amount of tax withheld, if any, with
respect to payments made with respect to the Securities.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Securities for its own account pursuant to
the Exchange Offer (a "Participating Broker") must acknowledge that it will
deliver a prospectus in connection with any resale of such Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker in connection with any resale of Securities received
in exchange for Old Securities where such Old Securities were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of one year from the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating Broker
for use in connection with any such resale. In addition, until December 9, 1997
(90 days from the date of this Prospectus), all dealers effecting transactions
in the Securities may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Securities by
broker-dealers. Securities received by any Participating Broker may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Securities. Any Participating Broker that resells Securities that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Securities may be deemed to
be an "underwriter" within the meaning of the Securities Act and any profit on
any such resale of Securities and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver, and by delivering, a prospectus as required, a Participating Broker
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of one year from the Expiration Date, the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any
106
<PAGE>
Participating Broker that requests such documents in the Letter of Transmittal.
The Company will pay all the expenses incident to the Exchange Offer (which
shall not include the expenses of any Holder in connection with resales of the
Securities). The Company has agreed to indemnify Holders of the Securities,
including any Participating Broker, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP and, as to certain matters governed by
the laws of the State of Arkansas, Gus J. Athas, General Counsel to the Company
and the Guarantors.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and December 31, 1995 and for each of the three years in the period ended
December 31, 1996, included herein have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto included herein. Such consolidated financial statements are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
CHANGE IN ACCOUNTANTS
Following the consummation of the Recapitalization and with the approval of
the board of directors of the Company, Arthur Andersen LLP was dismissed by
management as the Company's independent accountants and Coopers & Lybrand L.L.P.
was engaged as the Company's new independent accountants.
The reports of Arthur Andersen LLP with respect to the financial statements
of the Company for each of the three fiscal years in the period ended December
31, 1996 did not contain any adverse opinion or disclaimer of opinion, and were
not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with its audits for each of the three fiscal years in
the period ended December 31, 1996 and through July 21, 1997 there were no
disagreements between the Company and Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
Arthur Andersen LLP, would have caused it to make reference to the subject
matter thereof in connection with its reports on the financial statements for
such years.
107
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED YEAR-END FINANCIAL STATEMENTS
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)................................................................... F-30
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets...................................................................... F-31
Condensed Consolidated Statements of Income................................................................ F-32
Condensed Consolidated Statements of Cash Flows............................................................ F-33
Notes to Condensed Consolidated Financial Statements....................................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Falcon Building Products, Inc.:
We have audited the accompanying Consolidated Balance Sheets for Falcon
Building Products, Inc. (a Delaware Corporation) and Subsidiaries as of December
31, 1995 and 1996, and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects, the consolidated financial position of
Falcon Building Products, Inc. and Subsidiaries as of December 31, 1995 and
1996, and the results of their operations and cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 5, 1997 (except with respect
to the matter discussed in Note 15, as to
which the date is June 17, 1997)
F-2
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 1.1 $ 3.9
Accounts receivable, net............................................................. 5.1 --
Inventories, net..................................................................... 56.9 76.2
Other current assets................................................................. 9.7 15.6
----------- -----------
Total current assets................................................................. 72.8 95.7
Property, plant and equipment, net..................................................... 88.7 97.4
Goodwill............................................................................... 39.4 59.1
Other assets........................................................................... 9.9 9.5
----------- -----------
Total assets......................................................................... $ 210.8 $ 261.7
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt....................................................... $ 12.7 $ 15.2
Accounts payable..................................................................... 37.5 50.1
Accrued liabilities.................................................................. 27.2 30.9
----------- -----------
Total current liabilities............................................................ 77.4 96.2
Long-term debt......................................................................... 110.9 109.1
Accrued employee benefit obligations................................................... 9.0 8.7
Other long-term liabilities............................................................ 15.7 19.8
----------- -----------
Total liabilities.................................................................... 213.0 233.8
----------- -----------
Stockholders' equity:
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized, none issued
and outstanding.................................................................... -- --
Class A stock, par value $.01 per share, 30,000,000 shares authorized, 6,070,500
issued and outstanding at December 31, 1995, 20,070,500 shares issued and
outstanding at December 31, 1996................................................... 0.1 0.2
Class B stock, par value $.01 per share, 14,000,000 shares authorized, 14,000,000
shares issued and outstanding at December 31, 1995, none issued and outstanding at
December 31, 1996.................................................................. 0.1 --
Additional paid-in capital........................................................... 18.0 18.0
Retained earnings (deficit).......................................................... (17.2) 12.8
Pension liability adjustment......................................................... (0.4) (0.5)
Unearned compensation................................................................ (0.6) (0.4)
Notes receivable arising from stock purchase plan.................................... (2.2) (2.2)
----------- -----------
Total stockholders' equity........................................................... (2.2) 27.9
----------- -----------
Total liabilities and stockholders' equity........................................... $ 210.8 $ 261.7
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales.............................................................. $ 440.7 $ 471.3 $ 633.2
Cost of sales.......................................................... 344.9 378.5 513.6
--------- --------- ---------
Gross earnings....................................................... 95.8 92.8 119.6
Selling, general and administrative expenses........................... 42.2 43.7 55.7
Securitization expense................................................. 1.9 3.3 4.1
--------- --------- ---------
Operating income..................................................... 51.7 45.8 59.8
Net interest expense................................................... 8.3 10.0 11.0
--------- --------- ---------
Income before income taxes............................................. 43.4 35.8 48.8
Provision for income taxes............................................. 17.5 13.7 18.8
--------- --------- ---------
Net income........................................................... $ 25.9 $ 22.1 $ 30.0
--------- --------- ---------
--------- --------- ---------
Earnings per share:
Net income........................................................... $ 1.29 $ 1.10 $ 1.50
--------- --------- ---------
--------- --------- ---------
Shares outstanding for all periods: 20,070,500
SUPPLEMENTARY PRO FORMA INCOME DATA - UNAUDITED (NOTE 3)
Operating income....................................................... $ 50.6 -- --
Net income............................................................. $ 26.0 -- --
Earnings per share common share:
Net income........................................................... $ 1.30 -- --
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED PENSION
PAID-IN EARNINGS LIABILITY UNEARNED
CLASS A STOCK CLASS B STOCK CAPITAL (DEFICIT) ADJUSTMENT COMPENSATION
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ $ -- $ -- $ 28.2 $ 45.8 $ (0.5) $ --
Net income.................. -- -- -- 25.9 -- --
Sales of Class A Stock...... 0.1 -- 63.4 -- -- --
Conversion of Common Stock
to Class B Stock.......... -- 0.1 (0.1) -- -- --
Stock purchase plan......... -- -- 2.4 -- -- --
Unearned compensation
restricted stock.......... -- -- 0.8 -- -- (0.8)
Assumption of deferred
financing fees from
affiliate................. -- -- 3.0 -- -- --
Dividends paid to
affiliate................. -- -- -- (111.0) -- --
Assumption of debt from
affiliate................. -- -- (114.9) -- -- --
Forgiveness of advances from
affiliate................. -- -- 35.2 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31,
1994........................ 0.1 0.1 18.0 (39.3) (0.5) (0.8)
Net income.................. -- -- -- 22.1 -- --
Other....................... -- -- -- -- 0.1 0.2
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31,
1995........................ 0.1 0.1 18.0 (17.2) (0.4) (0.6)
Net income.................. -- -- -- 30.0 -- --
Conversion of Class B Stock
to Class A Stock.......... 0.1 (0.1) -- -- -- --
Other....................... -- -- -- -- (0.1) 0.2
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31,
1996........................ $ 0.2 $ -- $ 18.0 $ 12.8 $ (0.5) $ (0.4)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
NOTES FROM
STOCK
PURCHASE PLAN
-------------
<S> <C>
Balance at December 31,
1993........................ $ --
Net income.................. --
Sales of Class A Stock...... --
Conversion of Common Stock
to Class B Stock.......... --
Stock purchase plan......... (2.2)
Unearned compensation
restricted stock.......... --
Assumption of deferred
financing fees from
affiliate................. --
Dividends paid to
affiliate................. --
Assumption of debt from
affiliate................. --
Forgiveness of advances from
affiliate................. --
-------------
Balance at December 31,
1994........................ (2.2)
Net income.................. --
Other....................... --
-------------
Balance at December 31,
1995........................ (2.2)
Net income.................. --
Conversion of Class B Stock
to Class A Stock.......... --
Other....................... --
-------------
Balance at December 31,
1996........................ $ (2.2)
-------------
-------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................................... $ 25.9 $ 22.1 $ 30.0
Adjustments to reconcile net income to net cash from operations:
Depreciation..................................................................... 11.0 12.9 13.7
Amortization..................................................................... 1.9 2.1 1.8
Deferred income tax provision (benefit).......................................... (1.3) 0.2 (2.9)
Proceeds from the initial sale of accounts receivable............................ 54.3 -- --
Cash effects, excluding acquisitions, of changes in:
Accounts receivable, net of residual interest.................................. (4.5) 0.3 6.2
Inventories.................................................................... (5.7) (10.2) (14.0)
Other current assets........................................................... 1.7 1.4 (1.5)
Accounts payable............................................................... 19.6 (13.0) 10.2
Accrued liabilities and accrued employee benefit obligations................... 6.0 3.6 (2.4)
--------- --------- ---------
Net cash from operations........................................................... 108.9 19.4 41.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses............................................................. -- (10.4) (18.8)
Capital expenditures............................................................... (19.7) (16.4) (20.0)
Other.............................................................................. (0.4) (2.2) 0.2
--------- --------- ---------
Net cash used in investing activities.............................................. (20.1) (29.0) (38.6)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock......................................... 63.3 -- --
Proceeds from bank credit facility................................................. 115.0 -- --
Net payments to affiliate.......................................................... (263.7) -- --
Net borrowings (repayments) of debt................................................ (2.6) 8.5 0.3
--------- --------- ---------
Net cash provided by(used in) financing activities................................. (88.0) 8.5 0.3
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS.................................................. 0.8 (1.1) 2.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................................... 1.4 2.2 1.1
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................. $ 2.2 $ 1.1 $ 3.9
--------- --------- ---------
--------- --------- ---------
NET CASH PAID DURING THE PERIOD FOR:
Interest........................................................................... $ 7.6 $ 10.3 $ 11.0
Income taxes to affiliate.......................................................... 18.8 -- 4.6
Income taxes to third parties...................................................... 1.5 14.2 23.5
NON-CASH ACTIVITY:
Forgiveness of debt by affiliate................................................... $ 35.2 $ -- $ --
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) BASIS OF PRESENTATION
Falcon Building Products, Inc. (the "Company") is a manufacturer and
distributor of products for the residential and commercial construction and home
improvement markets.
Pursuant to a reorganization in contemplation of a public offering to sell
common stock, the Company was restructured and recapitalized as an indirect
wholly-owned subsidiary of Eagle Industries, Inc. ("Eagle"). Eagle is a
wholly-owned subsidiary of Great American Management and Investment, Inc.
("GAMI") which is wholly-owned by Equity Holdings Limited, an Illinois limited
partnership ("EHL"). In connection therewith, Eagle contributed to the Company
the stock and certain assets and liabilities of the companies comprising Eagle's
building products segment. This contribution has been accounted for in a manner
similar to that utilized in pooling-of-interest accounting. On November 9, 1994,
the Company completed an initial public offering of 6,000,000 shares (30%) of
its Class A common stock (the "Offering"). In May 1996, Eagle distributed its
ownership of the Company's Class B common stock to EHL. Pursuant to provisions
in the Company's charter, the transfer of the Class B common stock to EHL
resulted in its conversion to Class A common stock.
The Company's 1994 financial information included herein is not necessarily
indicative of the results that would have been reported if the Company had
operated as an unaffiliated enterprise. The Consolidated Statements of Income
include a proportional allocation of costs incurred by Eagle that benefited the
Company. Such expenses relate to strategic direction, operating oversight,
legal, finance and administration of benefit and insurance programs. Management
believes that the allocation method is reasonable (see Note 12). If the Company
had not operated as a subsidiary of Eagle, but rather had operated as an
unaffiliated public company, management believes operating expenses would have
been approximately $0.9 million higher in the year ended December 31, 1994. The
increased expenses include additional personnel, investor relations, director
and officer insurance and director fees and expenses.
(2) SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION:
The accompanying Consolidated Financial Statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain historical data have
been restated to conform to the 1996 presentation.
USE OF ESTIMATES:
These Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on estimates and assumptions by management. Actual results could differ
from those amounts.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost includes raw
materials, labor and manufacturing overhead. The last-in, first-out ("LIFO")
method of inventory valuation is used for 62.4% and 41.1% of inventory at
December 31, 1995 and 1996, respectively. The first-in, first-out ("FIFO")
method of inventory valuation is used for the remaining inventory.
F-7
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(2) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS:
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
SFAS No. 121 prescribes that an impairment loss is recognized in the event that
facts and circumstances indicate that the carrying amount of an asset may not be
recoverable and an estimate of future undiscounted cash flows is less than the
carrying amount of the asset. There was no material effect on the financial
statements from the adoption of SFAS No. 121 as the Company's prior impairment
recognition practice was consistent with the major provisions of the statement.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. The straight-line method
is generally used to provide for depreciation over the estimated useful lives of
the assets, which range from 10 to 40 years for buildings and 3 to 12 years for
machinery and equipment.
GOODWILL:
Goodwill represents the purchase price associated with acquired businesses
in excess of the fair value of the net assets acquired. Goodwill is amortized on
a straight-line basis, primarily over forty years. Accumulated amortization was
$11.8 million and $13.6 million at December 31, 1995 and 1996, respectively. The
recoverability of goodwill is reassessed periodically to determine if current
operating income is sufficient to recover the current amortization. When events
and circumstances indicate that future operating income and cash flow may be
negatively affected, the recoverability is evaluated based upon the estimated
future operating income and undiscounted cash flow of the related entity during
the remaining period of goodwill amortization.
REVENUE RECOGNITION:
The Company recognizes revenues as products are shipped to customers.
INCOME TAXES:
The Company was included in GAMI's consolidated U.S. federal income tax
return until the consummation of the Offering in November 1994. In addition, the
Company filed certain combined state tax returns with GAMI until the
distribution to EHL in 1996. Under the terms of the GAMI-Falcon Disaffiliation
Tax Sharing Agreement (the "Tax Sharing Agreement"), the Company computed and
paid to GAMI its liability for U.S. federal income taxes as if the Company filed
a separate U.S. federal income tax return. For periods subsequent to the
Offering, a separate U.S. federal income tax return will be filed for the
Company. The Company files separate U.S. state income tax returns.
EARNINGS PER SHARE:
Earnings per share amounts were calculated based on 20,070,500 shares
outstanding, the number of shares outstanding as a result of the consummation of
the Offering. This does not reflect the Company's historical capital structure.
F-8
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(3) PRO FORMA INFORMATION
The supplementary pro forma net income and per share data included in the
Consolidated Statements of Income reflects the results of operations for the
year ended December 31, 1994 adjusted to reflect (i) the sale of 6,000,000
shares of common stock by the Company in the Offering, (ii) incremental stand-
alone costs for operating as a public entity, (iii) costs associated with the
Company's participation in Eagle's asset securitization program (see Note 5),
(iv) the change in interest expense associated with the new Bank Credit Facility
(prior to the amendment and restatement in June 1995), and (v) the tax effects
of these adjustments, as if the Offering (and resulting adjustments) had been
consummated at the beginning of the period presented.
(4) ACQUISITIONS
On January 2, 1996, the Company acquired the stock of Ex-Cell Manufacturing
Company, Inc. ("Ex-Cell"), a manufacturer of cold-water power washers. The
Company paid $18.8 million in cash for the stock of Ex-Cell and estimates that
it will pay an additional $6.5 million over the next three years beginning in
February 1997. This additional payment represents a contingent portion of the
purchase price pursuant to the purchase agreement based on achievement of
certain sales targets. The acquisition was accounted for as a purchase and
resulted in $19.5 million of goodwill, which, consistent with the Company's
policy, will be amortized over 40 years. The operations of Ex-Cell were included
in the Company's operations beginning on January 2, 1996.
(5) ACCOUNTS RECEIVABLE
Between January 1994 and April 1996, the Company participated in Eagle's
securitization program, selling its receivables to Eagle, which in turn sold
certain of its receivables, including those acquired from the Company, to a
"Master Trust." Due to the number of business divestitures at Eagle during the
first quarter of 1996, Eagle decided to terminate its securitization program.
Eagle coordinated the termination of its program with the Company to allow the
Company to establish its own securitization program.
In April 1996, the Company entered into receivable sale agreements with a
financial institution and its affiliate (collectively, the "Bank Group") whereby
it will sell, with limited recourse, on a continuous basis, an undivided
interest in all of its accounts receivable for cash, while maintaining a
residual interest in the receivables. Under these agreements, which expire in
1999, the maximum amount of proceeds which may be accessed at any one time is
$85 million, subject to change based on the level of eligible receivables. To
establish this new securitization program, the Company: (1) acquired a special
purpose company from Eagle to facilitate the establishment of the Falcon
securitization program; 2) acquired from the Master Trust the receivables it had
previously sold to Eagle; (3) immediately sold these re-acquired receivables
through the special purpose company to the Bank Group; and (4) sold the
receivables of two of its subsidiaries, which were not previously participating
in the Eagle securitization program, through the special purpose company to the
Bank Group. The Company paid $69 million to acquire its receivables from the
Master Trust utilizing the $55 million of proceeds received from selling these
receivables to the Bank Group plus a $14 million draw on the Company's revolving
credit facility. This $14 million represented the Company's residual interest in
the receivables sold to the Bank Group. Additionally, the Company received $11
million in cash and retained a residual interest of $3 million from the initial
sale of the receivables from subsidiaries not previously participating in the
Eagle securitization program.
F-9
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(5) ACCOUNTS RECEIVABLE (CONTINUED)
At December 31, 1996, uncollected receivables sold under the agreement were
$75.2 million. Included in the Company's financial statements in other current
assets is a net residual interest of $1.9 million. The expense incurred on the
sale of the receivables under these programs was $1.9 million, $3.3 million and
$4.1 million in years ended December 31, 1994, 1995 and 1996, respectively.
(6) DEBT
BANK CREDIT FACILITY:
In connection with the Offering, the Company entered into a senior credit
facility with a group of banks. On June 30, 1995, the Company amended and
restated its senior credit facility, increasing it to a $250 million credit
facility (the "Bank Credit Facility"). The Bank Credit Facility consists of a
six-year $100.0 million term loan, maturing in June 2001, due in quarterly
installments increasing in amount from $2.5 million at September 30, 1995 to
$6.25 million per quarter beginning in September 2000, and a $150.0 million
revolving credit facility (the "Revolver") that expires in 2001, which may be
extended through 2002. Borrowings under the Bank Credit Facility bear interest,
at management's option, at rates equal to London Interbank Offered Rates
("LIBOR") plus a margin, or at the prime rate plus a margin. The Bank Credit
Facility is secured by substantially all of the inventory, intangibles,
property, plant, equipment and capital stock of the Company's subsidiaries. At
December 31, 1996, the term loan and revolver loan portions outstanding under
the Bank Credit Facility were $82.5 million and $39.0 million, respectively. The
Bank Credit Facility also allows for $25.0 million to be used in the form of
letters of credit. The use of letters of credit reduces the availability of
funds under the Revolver.
The Bank Credit Facility contains various covenants pertaining to the
maintenance of certain cash flow and expense coverage ratios, the incurrence of
additional indebtedness and restrictions on the payment of dividends.
In May 1995, the Company entered into a five-year interest rate swap
agreement. This agreement, covering $100.0 million of the Company's floating
rate debt, fixed the interest rate at 6.52% per annum, plus the then current
applicable margin. The effect on net income of this swap was not material.
Additional debt of the Company consists of three industrial revenue bonds,
two in the amount of $1.0 million each which bear interest at 7.4% and 7.5% and
another in the amount of $0.3 million which bears interest ranging from 6.2% to
6.7% and a capital lease obligation of $0.5 million. The average monthly debt
during 1996 was $141.2 million, an increase of $13.9 million over the comparable
1995 average debt. This increase is primarily due to increased borrowing to fund
acquisitions and the establishment of the Company's securitization program.
(7) EMPLOYEE RETIREMENT AND BENEFIT PLANS
PENSION:
Substantially all hourly employees are covered by Company or union sponsored
defined benefit plans. The Company's salaried and certain hourly employees
participate in a pension plan which provides benefits that are based on the
employee's years of service with the Company and the employee's compensation.
Prior to 1996, this plan was sponsored by Eagle and amounts presented in the
following tables related to this plan for periods prior to 1996 represent the
portion of the plan allocated to the
F-10
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(7) EMPLOYEE RETIREMENT AND BENEFIT PLANS (CONTINUED)
Company as calculated by Eagle's consulting actuary. In January 1996, a separate
plan sponsored by the Company, which mirrored the Eagle plan, was established.
For other employees, pension benefits are provided based on a stated amount for
each year of service. The Company's funding policy for all plans is to make no
less than the minimum annual contributions required by applicable governmental
regulations.
The following table sets forth the funded status for all defined benefit
pension plans and related amounts recognized in the Company's Consolidated
Financial Statements:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------- --------------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
--------------- --------------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of:
Accumulated benefit obligation...................... $ 18.6 $ 5.8 $ 21.1 $ 6.2
----- ----- ----- -----
----- ----- ----- -----
Vested benefits..................................... $ 17.5 $ 5.7 $ 17.7 $ 6.0
----- ----- ----- -----
----- ----- ----- -----
Projected benefit obligation.......................... $ 18.6 $ 5.8 $ 21.1 $ 6.2
Plan assets at fair value............................. 21.2 5.4 22.8 5.8
----- ----- ----- -----
Plan assets in excess of (less than) projected benefit
obligation.......................................... 2.6 (0.4) 1.7 (0.4)
Net unrecognized (gain) loss.......................... 2.5 0.6 2.7 0.7
Net unrecognized prior service costs (benefits)....... (0.5) 0.3 (0.3) 0.3
Unrecognized liability at August 1, 1987.............. -- 0.2 -- 0.2
Additional minimum liability.......................... -- (1.1) -- (1.2)
----- ----- ----- -----
Pension asset (liability) recognized in Consolidated
Financial Statements................................ $ 4.6 $ (0.4) $ 4.1 $ (0.4)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Plan assets generally consist of common stocks, fixed income instruments,
and certain purchased annuities.
In accordance with Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" ("SFAS No. 87"), the Company has recorded
an additional minimum pension liability for underfunded plans at December 31,
1995 and December 31, 1996, representing the excess of unfunded accumulated
benefit obligations over previously recorded pension cost. A corresponding
amount is recognized as an intangible asset except to the extent that these
additional liabilities exceed related unrecognized prior service costs and net
transition obligations, in which case the increase in liabilities is charged
directly to stockholders' equity. At December 31, 1995 and 1996, the excess
minimum pension liability resulted in a net reduction of equity of $0.4 million
and $0.5 million, respectively.
F-11
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(7) EMPLOYEE RETIREMENT AND BENEFIT PLANS (CONTINUED)
Net periodic pension cost for defined benefit pension plans reporting under
the provisions of SFAS No. 87 was:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.......................................................... $ 2.1 $ 1.1 $ 1.8
Interest cost......................................................... 1.9 1.3 1.8
Actual return on assets............................................... (0.5) (2.3) (2.9)
Net amortization and deferral......................................... (2.7) 0.6 0.6
--------- --------- ---------
Net periodic pension cost........................................... $ 0.8 $ 0.7 $ 1.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following assumptions were used in determining the actuarial present
value of the projected benefit obligation for the Company's defined benefit
plans for the years ended December 31, 1995 and 1996: weighted-average discount
rate of 7.5%; rate of increase in future compensation levels of 4.0%; and
expected long-term rate of return on assets of 9.0%.
The Company and its subsidiaries also have several defined contribution
plans for certain employees. Prior to 1995, the Company and its subsidiaries
participated in an Eagle sponsored defined contribution plan for certain
employees. In January 1995, a separate Falcon sponsored plan which mirrored the
Eagle sponsored plan was established. Employer contributions to these plans were
$1.0 million, $1.0 million and $1.4 million in 1994, 1995 and 1996,
respectively. Contributions to this plan by the Company are determined based on
a percentage of the contribution made by the employee.
OTHER POSTRETIREMENT BENEFITS:
The Company provides postretirement life and health-care benefits to certain
of its employees. The Company has four plans which provide these benefits to
employees retiring from the Company. Benefits are determined on varying formulas
based on age at retirement and years of active service. Two of the plans are
non-contributory. The Company has not funded any of this postretirement benefits
liability. Contributions to the postretirement plans are made by the Company as
claims are incurred.
F-12
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(7) EMPLOYEE RETIREMENT AND BENEFIT PLANS (CONTINUED)
The following table sets forth postretirement benefits recognized in the
Company's Consolidated Balance Sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................... $ 6.6 $ 6.4
Other fully eligible participants.......................................... 2.2 2.1
Other active participants.................................................. 3.9 4.0
--------- ---------
Subtotal................................................................. 12.7 12.5
Unrecognized actuarial loss................................................ (4.0) (3.4)
Unrecognized prior service cost............................................ (0.1) --
--------- ---------
Postretirement benefit liability recognized in Consolidated Financial
Statements................................................................. $ 8.6 $ 9.1
--------- ---------
--------- ---------
</TABLE>
Net postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost............................................................ $ 0.3 $ 0.4 $ 0.5
Interest cost........................................................... 0.6 0.7 0.9
Net amortization and deferral........................................... -- 0.1 0.2
--- --- ---
Net postretirement benefit cost..................................... $ 0.9 $ 1.2 $ 1.6
--- --- ---
--- --- ---
</TABLE>
The accumulated postretirement benefit obligation was determined using an
assumed discount rate of 7.5% and 8.0% for the years ended December 31, 1995 and
1996, respectively, and health care cost trend rates of 12.0% in 1995 and 10.5%
in 1996, decreasing ratably to 6.0% by the year 1998. The effect of a one
percent increase in the health care cost trend rate assumption would increase
the accumulated postretirement benefit obligation, resulting in an increase to
the aggregate annual service cost and interest expense components by
approximately $0.2 million and $1.4 million, respectively.
(8) INCOME TAXES
As further discussed in Note 1, the Company was included in GAMI's
consolidated federal income tax return until the consummation of the Offering in
November 1994. In addition, the Company filed certain combined state returns
with GAMI until the distribution to EHL in 1996. Pursuant to the Tax Sharing
Agreement with GAMI, in December 1996, the Company paid GAMI $4.6 million for
tax liabilities it had incurred during these periods.
F-13
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(8) INCOME TAXES (CONTINUED)
The Company's Consolidated Financial Statements reflect the following
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Deferred tax assets:
Inventory and receivable reserves.................................... $ 2.6 $ 4.5
Accrued employee benefit obligations................................. 2.8 2.8
Insurance reserves................................................... 4.0 5.5
Other................................................................ 5.4 5.8
--------- ---------
$ 14.8 $ 18.6
--------- ---------
--------- ---------
Deferred tax liabilities:
Property, plant and equipment basis difference....................... $ 7.3 $ 8.1
--------- ---------
--------- ---------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Provision (benefit) for income taxes:
Current:
U.S. federal............................................................... $ 17.2 $ 11.8 $ 18.1
U.S. state................................................................. 1.6 1.7 3.6
--------- --------- ---------
Subtotal................................................................. 18.8 13.5 21.7
--------- --------- ---------
Deferred:
U.S. federal............................................................... (1.4) 0.4 (2.3)
U.S. state................................................................. 0.1 (0.2) (0.6)
--------- --------- ---------
Subtotal................................................................. (1.3) 0.2 (2.9)
--------- --------- ---------
Total.................................................................... $ 17.5 $ 13.7 $ 18.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
Reconciliations of income taxes computed at the U.S. federal statutory rate
to the consolidated provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. federal statutory rate............................................. 35% 35% 35%
Income taxes at U.S. federal statutory rate............................. $ 15.2 $ 12.5 $ 17.1
U.S. state income taxes, net of U.S. federal............................ 1.1 1.0 1.9
Amortization of intangibles............................................. 0.5 0.5 0.6
Other................................................................... 0.7 (0.3) (0.8)
----- ----- -----
Provision for income taxes............................................ $ 17.5 $ 13.7 $ 18.8
----- ----- -----
----- ----- -----
Effective income tax rate............................................. 40.4% 38.4% 38.4%
----- ----- -----
----- ----- -----
</TABLE>
F-14
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(9) STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING:
In November 1994, the Company completed an initial public offering of
6,000,000 shares of par value $.01 Class A Common Stock. The net proceeds to the
Company were approximately $63.4 million.
CAPITAL STOCK:
The Company's Restated Certificate of Incorporation authorized 30,000,000
shares of Class A Common Stock, $.01 par value (the "Class A Stock"), 14,000,000
shares of Class B Common Stock, $.01 par value (the "Class B Stock" and,
together with the Class A Stock, the "Common Stock") and 10,000,000 shares of
preferred stock. Upon completion of the Offering, the Company had 6,070,500
shares of Class A Stock outstanding, including (i) 196,500 shares sold to the
Company's management in the public offering, (ii) 70,500 restricted shares
granted to them pursuant to the Company's 1994 Stock Option and Restricted Share
Plan, and 14,000,000 shares of Class B Stock outstanding, which was beneficially
owned by Eagle. In May 1996, Eagle transferred its ownership of the Company's
Class B Stock to EHL. Pursuant to provisions in the Company's charter, the
transfer of the Class B Stock to EHL resulted in its conversion to Class A
Stock. Therefore, at December 31, 1996, there were 20,070,500 shares of Class A
Stock outstanding and no shares of Class B Stock outstanding. No shares of
preferred stock have been issued.
ADDITIONAL PAID-IN CAPITAL:
In contemplation of the Offering, the Company assumed $114.9 million of
Eagle's outstanding indebtedness in May 1994 through the issuance of unsecured
notes at an interest rate of LIBOR plus 1.75%. These notes were repaid using the
proceeds from the Offering and the Bank Credit Facility. As part of the
Offering, the Company assumed $3.0 million of deferred financing fees of Eagle.
The Company's Class A Stock was issued at $12.00 per share resulting in a
net contribution to Additional paid-in capital of $66.6 million. In addition,
Eagle forgave $35.2 million of advances to affiliate which was treated as
additional paid-in capital.
NOTES RECEIVABLE:
Pursuant to the Company's Senior Executive Stock Purchase Plan (the
"Executive Stock Plan"), certain executive officers of the Company purchased a
total of 196,500 shares of Class A Stock for cash of $0.2 million and notes of
$2.2 million. These notes, which bear interest at 7.5% per annum, are due no
later than December 2001 or upon sale of the shares. These notes have been
classified as a component of Stockholders' equity in the Company's Consolidated
Balance Sheets. The shares cannot be sold prior to November 1997 and have been
pledged to the Company pursuant to the terms of the Executive Stock Plan.
DIVIDENDS PAID:
In May 1994, the Company declared and paid a dividend of $111.0 million
through the issuance of unsecured notes at an interest rate of 7% per annum.
These notes were repaid, in part, through proceeds from the Offering and the
issuance of the Bank Credit Facility. Any remaining obligations under these
notes were forgiven by Eagle.
F-15
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(10) STOCK OPTION PLAN
In November 1994, the Company adopted the 1994 Stock Option and Restricted
Share Plan (the "1994 Plan"). Pursuant to the 1994 Plan, certain directors,
employees and officers of the Company are given the opportunity to acquire
shares of Class A Stock through the grant of non-qualified and qualified stock
options, stock appreciation rights and restricted shares. Options granted
pursuant to the 1994 Plan are exercisable at no less than the fair market value
of the Class A Stock at the time of grant. Qualified stock options shall expire
no more than ten years after the date of grant. Restricted shares awarded
pursuant to the 1994 Plan shall generally vest in equal portions over a
four-year period from the date of award. Upon a change in control, all options
shall become immediately exercisable and all restricted shares shall become
vested. The 1994 Plan also provides for the annual award of 2,000 nonqualified
stock options of Class A Stock to each director who is not an employee of Eagle
or its subsidiaries. A total of 1,700,000 shares of Common Stock is reserved for
issuance under the 1994 Plan. The 1994 Plan is administered by a committee of
the Board of Directors.
Non-Qualified stock option activity is shown below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
------------------------- -------------------------
WEIGHTED WEIGHTED
AVG. AVG.
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993....................... -- $ --
Granted.......................................... 196,000 12.00
Exercised........................................ -- --
Canceled......................................... -- --
-----------
Balance at December 31, 1994....................... 196,000 12.00 -- $ --
-----------
-----------
Granted.......................................... 309,500 9.59
Exercised........................................ -- --
Canceled......................................... (6,000) 11.50
-----------
Balance at December 31, 1995....................... 499,500 10.51 48,000 $ 12.00
-----------
-----------
Granted.......................................... 305,600 12.29
Exercised........................................ -- --
Canceled......................................... (6,800) 10.53
-----------
Balance at December 31, 1996....................... 798,300 $ 11.19 170,426 $ 10.93
----------- -----------
----------- -----------
</TABLE>
At December 31, 1996, the options outstanding and exercisable options
outstanding had exercise prices ranging from $8.85 to $12.56 and $9.35 to
$12.00, respectively. The weighted average remaining contractual life of the
options outstanding was 9 years. The weighted average fair value of options
granted in 1995 and 1996 was $9.65 and $12.39, respectively.
The Company measures compensation cost using the intrinsic value-based
method of accounting pursuant to the provisions of APB Opinion No. 25. Had
compensation cost been determined on the fair market value-based accounting
method prescribed by Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS No. 123") for options granted
in 1996, pro forma net income would have been $29.8 million. Pro forma earnings
per share for 1996 would have been $1.48. There would have been no effect on
1995 results.
F-16
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(10) STOCK OPTION PLAN (CONTINUED)
For purposes of fair market value disclosures, the fair market value of an
option grant is estimated using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Risk-Free Interest Rate......................................................... 6.0% 6.0%
Average Life of Options (years)................................................. 5 5
Volatility...................................................................... 39.6% 39.1%
Dividend Yield.................................................................. -- --
</TABLE>
As part of the Offering, the Company awarded 70,500 restricted shares of
Class A Stock to certain officers, of which 35,250 shares were vested at
December 31, 1996. The market value of the shares awarded was $0.8 million. This
amount was recorded as unearned compensation and is shown as a separate
component of Stockholders' equity. Unearned compensation is being amortized to
expense over a four-year vesting period. This expense amounted to $0.2 million
in 1995 and 1996.
(11) BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Inventories:
Raw materials and supplies................................................... $ 21.6 $ 30.9
Work in process.............................................................. 10.0 12.7
Finished goods............................................................... 25.3 32.6
--------- ---------
Total...................................................................... $ 56.9 $ 76.2
--------- ---------
--------- ---------
Excess of replacement cost over LIFO inventory cost.......................... $ 3.0 $ 3.0
--------- ---------
--------- ---------
Property, plant and equipment:
Land......................................................................... $ 8.7 $ 8.8
Buildings.................................................................... 42.1 48.0
Machinery and equipment...................................................... 102.8 117.0
Construction in progress..................................................... 12.2 13.2
Less accumulated depreciation................................................ (77.1) (89.6)
--------- ---------
Total...................................................................... $ 88.7 $ 97.4
--------- ---------
--------- ---------
</TABLE>
(12) RELATED PARTY TRANSACTIONS
The Company has in the past entered into agreements or arrangements with
affiliates relating to legal services, acquisition services, financing services,
and consulting arrangements which are described below. The fairness and
reasonableness of any compensation paid to such affiliates and any material
transactions between the Company and such affiliates in the future will be
approved by a majority of the independent members of the Board of Directors or
by an independent firm selected by such Board members. The Company believes that
the terms and resulting costs of all related party transactions and agreements
are no less favorable than those which could have been obtained from
non-affiliated parties.
F-17
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company shares management, administrative and other services with Eagle
pursuant to a Corporate Services Agreement which renews annually in the absence
of termination by either party. The fee under this agreement is intended to
cover Eagle's expected costs in providing these services to the Company and is
reviewed annually. Total fees paid under this agreement were $2.4 million in
1994, $2.3 million in 1995 and $2.6 million in 1996. Prior to 1996, the Company
participated in an Eagle sponsored self-insurance program which included
coverage for medical, workers' compensation, product liability and general
liability insurance. The Company reimbursed Eagle for amounts paid on behalf of
the Company. Payments made either to Eagle or directly to the third party
administrator for Falcon's participation in these shared coverages totaled $12.0
million and $17.0 million in the years ended December 31, 1994 and 1995,
respectively.
Prior to the Offering, the Company was included in GAMI's consolidated
federal income tax returns. In addition, the Company filed certain combined
state tax returns with GAMI until the distribution to EHL in 1996. Pursuant to
the Tax Sharing Agreement, the Company paid GAMI $4.6 million in 1996 for tax
liabilities it incurred during the periods it was included in GAMI's federal and
certain combined state tax returns.
The law firm of Rosenberg & Liebentritt, P.C., of which a Company Director
is a member, has rendered legal services to the Company. The Company paid this
law firm $0.4 million in 1995 and $0.1 million in 1996.
Also see Notes 1, 5 and 8 for other information regarding related party
transactions.
(13) COMMITMENTS AND CONTINGENCIES
The Company conducts manufacturing operations at various leased facilities
and also leases warehouses, manufacturing equipment, office space, computers and
office equipment. Most of the realty leases contain renewal options and
escalation clauses. Total rent expense, including related real estate taxes,
amounted to $3.6 million, $3.9 million and $4.7 million for the years ended
December 31, 1994, 1995, and 1996, respectively.
Future minimum lease payments required as of December 31, 1996 (in
millions):
<TABLE>
<S> <C>
1997.......................................................... $ 1.5
1998.......................................................... 1.1
1999.......................................................... 0.8
2000.......................................................... 0.8
2001 and thereafter........................................... 1.8
---
$ 6.0
---
---
</TABLE>
The Company and certain of its subsidiaries are involved in several lawsuits
and environmental matters arising in the ordinary course of business. However,
it is the opinion of the Company's management, based upon the advice of legal
counsel, that these lawsuits either are without merit, are covered by insurance,
or are adequately reserved for in the Consolidated Balance Sheets, and the
ultimate disposition of pending litigation will not be material in relation to
the Company's consolidated financial position or results of operations.
F-18
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition to the matters covered by the preceding paragraph, in May 1994,
Underwriters' Laboratories of Canada ("ULC") suspended its recognition of high
temperature plastic venting systems for gas appliances, including the Ultravent
system manufactured by the Company. This action resulted from reports of
problems with high temperature plastic venting systems, 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") banned sales of these plastic venting systems in the Province of
Ontario. Other provinces of Canada have taken similar action. Pursuant to an
MCCR order, high temperature plastic venting systems in Ontario have been
corrected.
The Company is a defendant in a suit that has been filed against 24 entities
representing heating appliance manufacturers, plastic vent manufacturers, public
utilities and listing agencies by the Ontario New Home Warranty Program, which
is responsible for the cost of replacing vent material in new home construction
in Ontario. This suit seeks damages of Cdn $125 million from all of the
defendants. Most gas appliance manufacturers in Canada and the United States no
longer certify these venting systems for use with their products. The Company is
also a defendant in a lawsuit filed by Goodman Manufacturing, an appliance
manufacturer that is replacing its own installations and has sued three
defendants for reimbursement of its costs. The Company has been named as a
defendant in a class action lawsuit which has been filed in the United States
regarding high temperature plastic venting.
The Company is engaged in ongoing discussions with the United States
Consumer Product Safety Commission, ("CPSC") which has been advised of the ULC
action and the actions taken by the MCCR. The CPSC continues to investigate high
temperature plastic venting and has met with all of the manufacturers of high
temperature plastic vents, 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, vent sealant compounds 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 plastic venting and it is probable that in the near term the CPSC will
mandate a corrective action program which would impact heating appliance
manufacturers, plastic resin manufacturers, and plastic venting manufacturers,
including the Company. Several appliance manufacturers have announced their
intention to replace plastic vent product with alternative systems which have
been approved by the CPSC. Company sales of Ultravent products in the United
States and Canada in 1995 and 1996 were minimal.
While it is impossible at this time to give a firm estimate of the ultimate
cost to the Company, management currently believes that the after-tax cost to
the Company of resolving the Ultravent matter could range from a non-material
amount to $20.0 million, after considering reimbursements and insurance
recoveries. With respect to this matter, the Company has filed a lawsuit against
its insurance carriers. 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.
(14) BUSINESS SEGMENT INFORMATION
The Company's current operations are in one industry segment, building and
construction related products, serving the residential and commercial
construction and home improvement markets. These
F-19
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(14) BUSINESS SEGMENT INFORMATION (CONTINUED)
businesses are influenced primarily by housing starts, construction and
remodeling activity, and consumer spending.
The Company's export sales are less than 10% of total revenues. Sales to
Sears, Roebuck and Co. accounted for 19.3%, 17.7% and 13.3% of total net sales
for the years ended December 31, 1994, 1995 and 1996, respectively. The
Company's revenues and identifiable assets are predominantly related to its U.S.
operations and no one other geographic area accounts for more than 10% of total
revenue or 10% of total assets.
(15) SUBSEQUENT EVENT
On March 20, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with FBP Acquisition Corp. ("FBP"), a newly formed
corporation organized by INVESTCORP S.A. ("Investcorp"), certain of its
affiliates and other institutional investors. The Merger Agreement contemplated
that FBP would be merged with and into the Company 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, or (ii) 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 the Company, with the Company 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. 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. These and other related costs were funded by (i) $175.0
million of borrowings under a new bank credit facility, (ii) $145.0 million from
the offering of the 9 1/2% Senior Subordinated Notes Due 2007, (iii)
approximately $102.0 million of proceeds from the offering of the 10 1/2% Senior
Subordinated Discount Notes Due 2007 and (iv) an equity contribution by
Investcorp, its affiliates and certain other international investors of
approximately $134.6 million.
The Company's payment obligations under the 9 1/2% Senior Subordinated Notes
Due 2007 and the 10 1/2% Senior Subordinated Discount Notes Due 2007 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.
These subsidiaries represent substantially all of the operations of the Company.
The remaining subsidiaries, Falcon Receivables Program, Inc. and Falcon
Manufacturing, Inc., represent a special purpose corporation formed in April
1996 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 Company's new bank credit facility.
F-20
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
Presented below is condensed consolidating financial information for Falcon
Building Products, Inc. ("Parent Company"), the Guarantor Subsidiaries (together
with Falcon Manufacturing, Inc.) and Falcon Receivables 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 Company on the equity
method of accounting. Earnings of subsidiaries are, therefore, reflected in the
Company's investment in and advances to/from subsidiaries account and earnings.
The elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions.
F-21
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ (0.3) $ 1.4 $ -- $ -- $ 1.1
Accounts receivable.......................... -- 5.1 -- -- 5.1
Inventories, net............................. -- 56.9 -- -- 56.9
Other current assets......................... 0.1 9.6 -- -- 9.7
----------- ----------- ----------- ------------ ------------
Total current assets......................... (0.2) 73.0 -- -- 72.8
Property, plant and equipment, net............. -- 88.7 -- -- 88.7
Goodwill....................................... -- 39.4 -- -- 39.4
Investment in and advances to/from
subsidiaries................................. 122.0 1.8 -- (123.8) --
Other long-term assets......................... 6.0 3.9 -- -- 9.9
----------- ----------- ----------- ------------ ------------
Total assets................................. $ 127.8 $ 206.8 $ -- $ (123.8) $ 210.8
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt............... $ 12.5 $ 0.2 $ -- $ -- $ 12.7
Accounts payable............................. -- 37.5 -- -- 37.5
Accrued liabilities.......................... 0.4 26.8 -- -- 27.2
----------- ----------- ----------- ------------ ------------
Total current liabilities.................... 12.9 64.5 -- -- 77.4
Long-term debt................................. 108.5 2.4 -- -- 110.9
Other long-term liabilities.................... 8.2 16.5 -- -- 24.7
----------- ----------- ----------- ------------ ------------
Total liabilities............................ 129.6 83.4 -- -- 213.0
----------- ----------- ----------- ------------ ------------
Stockholders' equity (deficit):
Common Stock................................. 0.2 -- -- -- 0.2
Additional paid-in capital................... 18.0 42.9 -- (42.9) 18.0
Retained earnings (deficit).................. (17.2) 80.9 -- (80.9) (17.2)
Other........................................ (2.8) (0.4) -- -- (3.2)
----------- ----------- ----------- ------------ ------------
Total stockholders' equity (deficit)......... (1.8) 123.4 -- (123.8) (2.2)
----------- ----------- ----------- ------------ ------------
Total liabilities and stockholders' equity..... $ 127.8 $ 206.8 $ -- $ (123.8) $ 210.8
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-22
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2.6 $ 1.3 $ -- $ -- $ 3.9
Accounts receivable.......................... -- -- -- -- --
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
Long-term debt................................. 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:
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................... 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>
F-23
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 440.7 $ -- $ -- $ 440.7
Cost of sales................................ -- 344.9 -- -- 344.9
----------- ----------- ------ ------ ------
Gross earnings............................. -- 95.8 -- -- 95.8
Selling and administrative expenses.......... 3.7 38.5 -- -- 42.2
Securitization expense....................... 1.9 -- -- -- 1.9
----------- ----------- ------ ------ ------
Operating income (loss).................... (5.6) 57.3 -- -- 51.7
Corporate allocation......................... (21.0) 21.0 -- -- --
Net interest expense......................... 8.5 (0.2) -- -- 8.3
----------- ----------- ------ ------ ------
Income before income taxes................... 6.9 36.5 -- -- 43.4
Provision for income taxes................... 3.2 14.3 -- -- 17.5
----------- ----------- ------ ------ ------
Income before equity in income of
consolidated subsidiaries.................. 3.7 22.2 -- -- 25.9
Equity in income of consolidated
subsidiaries............................... 22.2 -- -- (22.2) --
----------- ----------- ------ ------ ------
Net income................................... $ 25.9 $ 22.2 $ -- $ (22.2) $ 25.9
----------- ----------- ------ ------ ------
----------- ----------- ------ ------ ------
</TABLE>
F-24
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 471.3 $ -- $ -- $ 471.3
Cost of sales................................ -- 378.5 -- -- 378.5
----------- ----------- ------ ------ ------
Gross earnings............................. -- 92.8 -- -- 92.8
Selling and administrative expenses.......... 4.5 39.2 -- -- 43.7
Securitization expense....................... 3.3 -- -- -- 3.3
----------- ----------- ------ ------ ------
Operating income (loss).................... (7.8) 53.6 -- -- 45.8
Corporate allocation......................... (16.8) 16.8 -- -- --
Net interest expense......................... 10.7 (0.7) -- -- 10.0
----------- ----------- ------ ------ ------
Income (loss) before income taxes............ (1.7) 37.5 -- -- 35.8
Provision (benefit) for income taxes......... (0.9) 14.6 -- -- 13.7
----------- ----------- ------ ------ ------
Income (loss) before equity in income of
consolidated subsidiaries.................. (0.8) 22.9 -- -- 22.1
Equity in income of consolidated
subsidiaries............................... 22.9 -- -- (22.9) --
----------- ----------- ------ ------ ------
Net income................................... $ 22.1 $ 22.9 $ -- $ (22.9) $ 22.1
----------- ----------- ------ ------ ------
----------- ----------- ------ ------ ------
</TABLE>
F-25
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 633.2 $ -- $ -- $ 633.2
Cost of sales................................ -- 513.6 -- -- 513.6
----------- ----------- ------ ------ ------
Gross earnings............................. -- 119.6 -- -- 119.6
Selling and administrative expenses.......... 5.6 50.1 -- -- 55.7
Securitization expense....................... 4.3 -- (0.2) -- 4.1
----------- ----------- ------ ------ ------
Operating income (loss).................... (9.9) 69.5 0.2 -- 59.8
Corporate allocation......................... (20.4) 20.4 -- -- --
Net interest expense......................... 9.5 0.3 1.2 -- 11.0
----------- ----------- ------ ------ ------
Income (loss) before income taxes............ 1.0 48.8 (1.0) -- 48.8
Provision (benefit) for income taxes......... (0.9) 19.7 -- -- 18.8
----------- ----------- ------ ------ ------
Income (loss) before equity in income of
consolidated subsidiaries.................. 1.9 29.1 (1.0) -- 30.0
Equity in income of consolidated
subsidiaries............................... 28.1 -- -- (28.1) --
----------- ----------- ------ ------ ------
Net income (loss)............................ $ 30.0 $ 29.1 $ (1.0) $ (28.1) $ 30.0
----------- ----------- ------ ------ ------
----------- ----------- ------ ------ ------
</TABLE>
F-26
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........... $ 6.7 $ 102.2 $ -- $ -- $ 108.9
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... -- (19.7) -- -- (19.7)
Other........................................ 2.5 (2.9) -- -- (0.4)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities........ 2.5 (22.6) -- -- (20.1)
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock... 63.3 -- -- -- 63.3
Proceeds from bank credit facility........... 115.0 -- -- -- 115.0
Advances (to) from affiliate................. (193.3) (70.4) -- -- (263.7)
Net repayments on debt....................... (2.5) (0.1) -- -- (2.6)
----------- ----------- ----------- ------------ ------------
Net cash from financing activities........... (17.5) (70.5) -- -- (88.0)
----------- ----------- ----------- ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS............ (8.3) 9.1 -- -- 0.8
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................... 9.9 (8.5) -- -- 1.4
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 1.6 $ 0.6 $ -- $ -- $ 2.2
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-27
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........... $ 4.6 $ 14.8 $ -- $ -- $ 19.4
----------- ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses....................... -- (10.4) -- -- (10.4)
Capital expenditures......................... -- (16.4) -- -- (16.4)
Other........................................ (0.9) (1.3) -- -- (2.2)
----------- ------ ------ ------ ------
Net cash used in investing activities........ (0.9) (28.1) -- -- (29.0)
----------- ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (to) from affiliate................. (14.1) 14.1 -- -- --
Net borrowings on debt....................... 8.5 -- -- -- 8.5
----------- ------ ------ ------ ------
Net cash from financing activities........... (5.6) 14.1 -- -- 8.5
----------- ------ ------ ------ ------
CHANGE IN CASH AND CASH EQUIVALENTS............ (1.9) 0.8 -- -- (1.1)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................... 1.6 0.6 -- -- 2.2
----------- ------ ------ ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ (0.3) $ 1.4 $ -- $ -- $ 1.1
----------- ------ ------ ------ ------
----------- ------ ------ ------ ------
</TABLE>
F-28
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(15) SUBSEQUENT EVENT (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........... $ 11.5 $ 6.6 $ 23.0 $ -- $ 41.1
----------- ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses....................... -- (18.8) -- -- (18.8)
Capital expenditures......................... -- (20.0) -- -- (20.0)
Other........................................ 0.5 (0.1) (0.2) -- 0.2
----------- ------ ------ ------ ------
Net cash used in investing activities........ 0.5 (38.9) (0.2) -- (38.6)
----------- ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (to) from affiliate................. (9.6) 32.4 (22.8) -- --
Net borrowings on debt....................... 0.5 (0.2) -- -- 0.3
----------- ------ ------ ------ ------
Net cash from financing activities........... (9.1) 32.2 (22.8) -- 0.3
----------- ------ ------ ------ ------
CHANGE IN CASH AND CASH EQUIVALENTS............ 2.9 (0.1) -- -- 2.8
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................... (0.3) 1.4 -- -- 1.1
----------- ------ ------ ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 2.6 $ 1.3 $ -- $ -- $ 3.9
----------- ------ ------ ------ ------
----------- ------ ------ ------ ------
</TABLE>
F-29
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited interim results of operations
for December 31, 1995 and 1996.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH QUARTER ENDED JUNE QUARTER ENDED QUARTER ENDED
31, 30, SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------- -------------------- --------------------
1995 1996 1995 1996 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................. $ 112.9 $ 144.4 $ 116.6 $ 168.4 $ 120.0 $ 162.7 $ 121.8 $ 157.7
Gross earnings............................. 24.3 26.8 24.5 32.2 21.1 30.6 22.9 30.0
Net income................................. 6.1 5.4 6.0 8.1 4.4 8.0 5.6 8.5
Earnings per common share:
Net income............................... $ 0.31 $ 0.27 $ 0.30 $ 0.40 $ 0.22 $ 0.40 $ 0.28 $ 0.42
</TABLE>
F-30
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 3.9 $ 41.7
Accounts receivable................................................................. -- --
Inventories, net.................................................................... 76.2 93.5
Other current assets................................................................ 15.6 35.1
------------ -----------
Total current assets................................................................ 95.7 170.3
Property, plant and equipment, net.................................................... 97.4 96.7
Goodwill.............................................................................. 59.1 58.0
Other long-term assets................................................................ 9.5 32.9
------------ -----------
Total assets........................................................................ $ 261.7 $ 357.9
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt...................................................... $ 15.2 $ 1.2
Accounts payable.................................................................... 50.1 58.0
Accrued liabilities................................................................. 30.9 34.3
------------ -----------
Total current liabilities........................................................... 96.2 93.5
Senior indebtedness................................................................... 109.1 176.5
Senior subordinated notes............................................................. -- 247.4
Accrued employee benefit obligations.................................................. 8.7 9.3
Other long-term liabilities........................................................... 19.8 19.7
------------ -----------
Total liabilities................................................................... 233.8 546.4
------------ -----------
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)......................................................... 12.8 (186.1)
Pension liability adjustment........................................................ (0.5) (0.5)
Unearned compensation............................................................... (0.4) --
Notes receivable arising from stock purchase plan................................... (2.2) (2.0)
------------ -----------
Total stockholders' equity (deficit)................................................ 27.9 (188.5)
------------ -----------
Total liabilities and stockholders' equity............................................ $ 261.7 $ 357.9
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-31
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales........................................... $ 168.4 $ 195.7 $ 312.7 $ 355.9
Cost of sales....................................... 136.2 158.9 253.8 290.9
------------- ------------- ------------- -------------
Gross earnings.................................... 32.2 36.8 58.9 65.0
Selling and administrative expenses................. 15.2 15.4 29.5 29.9
Securitization expense.............................. 1.0 1.2 1.9 2.1
Recapitalization expenses........................... -- 36.3 -- 36.3
------------- ------------- ------------- -------------
Operating income (loss)........................... 16.0 (16.1) 27.5 (3.3)
Net interest expense................................ 2.8 4.0 5.5 6.8
------------- ------------- ------------- -------------
Income (loss) before income taxes................... 13.2 (20.1) 22.0 (10.1)
Provision (benefit) for income taxes................ 5.1 (1.7) 8.5 2.2
------------- ------------- ------------- -------------
Income (loss) before extraordinary item............. 8.1 (18.4) 13.5 (12.3)
Extraordinary item:
Early extinguishment of debt, net of income tax
benefit of $0.9 million......................... -- (1.5) -- (1.5)
------------- ------------- ------------- -------------
Net income (loss)................................... $ 8.1 $ (19.9) $ 13.5 $ (13.8)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings (loss) per common share:
Income (loss) before extraordinary item........... $ 0.40 $ (1.00) $ 0.67 $ (0.64)
Extraordinary item................................ -- (0.08) -- (0.08)
------------- ------------- ------------- -------------
Net income (loss)................................. $ 0.40 $ (1.08) $ 0.67 $ (0.72)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding................. 20,070,500 18,415,211 20,070,500 19,227,600
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-32
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ 13.5 $ (13.8)
Adjustments to reconcile net income (loss) to net cash from operations:
Depreciation and amortization........................................................... 8.2 8.2
Accretion of debt discount on subordinated debt......................................... -- 0.4
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... (11.9) (32.5)
--------- ---------
Net cash from operating activities...................................................... 9.8 0.1
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses.................................................................... (18.8) --
Capital expenditures...................................................................... (8.6) (6.5)
Other..................................................................................... (1.1) (1.2)
--------- ---------
Net cash used in investing activities................................................... (28.5) (7.7)
--------- ---------
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............................................. -- (52.0)
Net borrowings on debt.................................................................... 21.9 17.1
--------- ---------
Net cash from financing activities...................................................... 21.9 45.4
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS......................................................... 3.2 37.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................................. 1.1 3.9
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................... $ 4.3 $ 41.7
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-33
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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, all
adjustments considered necessary, consisting only of normal recurring
adjustments (except for the effects of the recapitalization transaction
described below), are included for fair presentation. Operating results for the
quarter and six months ended June 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 financial 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):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
--------------- -------------
(UNAUDITED)
<S> <C> <C>
Raw materials and supplies........................................ $ 30.9 $ 37.6
Work in process................................................... 12.7 12.5
Finished goods.................................................... 32.6 43.4
----- -----
$ 76.2 $ 93.5
----- -----
----- -----
</TABLE>
(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.
F-34
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 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) 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 June 30,
1997:
<TABLE>
<CAPTION>
SHARES OUTSTANDING
TITLE AUTHORIZED SHARES AT JUNE 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 Notes (as defined), (iii) approximately $102.0 million of proceeds from the
offering of the 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 will fund: 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
F-35
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(4) RECAPITALIZATION (CONTINUED)
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 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% Senior Subordinated Notes (the "Notes") and $170 million aggregate
principal amount of 10 1/2% Senior Subordinated Discount Notes (the "Discount
Notes" and together with the Notes, the "Securities"). Each of the Company's
subsidiaries, except the special purpose vehicle ("Securitization SPV") which is
utilized to sell the accounts receivable in the Company's receivables
securitization program, have guaranteed the Bank Credit Facility and the
Securities, such guarantee of the Securities being subordinate to the guarantee
of the Bank Credit Facility. The Securities were sold through a confidential
placement memorandum, however, the Company has agreed to file an exchange offer
registration statement or under certain circumstances a shelf registration with
respect to the Securities. The proceeds from the Bank Credit Facility and the
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.
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
F-36
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(5) DEBT (CONTINUED)
June 15, 2002, up to 35% of the Notes may be redeemed at 109.5% of the principal
amount out of the proceeds of certain equity offerings.
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 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.
F-37
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(5) DEBT (CONTINUED)
SENIOR INDEBTEDNESS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
(UNAUDITED)
(IN MILLIONS)
Bank Credit Facility
Revolver........................................................ $ 39.0 $ --
Term............................................................ 82.5 175.0
------------ -----------
Total........................................................... 121.5 175.0
Other............................................................. 2.8 2.7
Less:
Current Portion................................................. (15.2 ) (1.2 )
------------ -----------
Long-term debt.................................................. $ 109.1 $ 176.5
------------ -----------
------------ -----------
</TABLE>
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, representing primarily
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 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 have been drawn under the revolving
portion of the Bank Credit Facility.
Borrowings under the Bank Credit Facility bear interest at alternative
floating rate structures at management's option (8.7% for the term loan at June
30, 1997) and are collateralized 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.
F-38
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(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. Most 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
and 1996 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 Goodman Manufacturing Company ("Goodman") in Texas, the
Company has been sued along with two 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 Goodman, 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 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
F-39
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(6) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 continues to investigate HTPV and 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. However, certain
appliance manufacturers, the plastic resin manufacturer and the HTPV
manufacturers, 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. It is not possible at this time
to predict the outcome of the mediation.
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 would range
from a non-material amount 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 Senior Subordinated Notes and
the Senior Subordinated 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. These subsidiaries represent
substantially all of the operations of the Company. The remaining subsidiaries,
Falcon Receivables Program, Inc. and Falcon Manufacturing, Inc., represent a
special purpose corporation formed in April 1996 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 Receivables 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
F-40
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
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.
F-41
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2.6 $ 1.3 $ -- $ -- $ 3.9
Accounts receivable.......................... -- -- -- -- --
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................................. 51.6 (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
Senior subordinated notes...................... -- -- -- -- --
Other long-term liabilities.................... 3.0 29.5 -- -- 28.5
----------- ----------- ----------- ------------ ------------
Total liabilities............................ 127.4 106.3 0.1 -- 233.8
Stockholders' equity:
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................... 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>
F-42
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 39.8 $ 1.4 $ 0.5 $ -- $ 41.7
Accounts receivable.......................... -- -- -- -- --
Inventories, net............................. -- 93.5 -- -- 93.5
Other current assets......................... 2.2 13.3 19.6 -- 35.1
----------- ----------- ----------- ------------ ------------
Total current assets......................... 42.0 108.2 20.1 -- 170.3
Property, plant and equipment, net............. -- 96.7 -- -- 96.7
Goodwill....................................... -- 58.0 -- -- 58.0
Investment in and advances to/from
subsidiaries................................. 154.7 (64.3) (14.5) (75.9) --
Other long-term assets......................... 29.4 3.5 -- -- 32.9
----------- ----------- ----------- ------------ ------------
Total assets................................. $ 226.1 $ 202.1 $ 5.6 $ (75.9) $ 357.9
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt............... $ 1.0 $ 0.2 $ -- $ -- $ 1.2
Accounts payable............................. 0.3 57.7 -- -- 58.0
Accrued liabilities.......................... (11.3) 45.6 -- -- 34.3
----------- ----------- ----------- ------------ ------------
Total current liabilities.................... (10.0) 103.5 -- -- 93.5
Senior indebtedness............................ 174.0 2.5 -- -- 176.5
Senior subordinated notes...................... 247.4 -- -- -- 247.4
Other long-term liabilities.................... 2.7 26.3 -- -- 29.0
----------- ----------- ----------- ------------ ------------
Total liabilities............................ 414.1 132.3 -- -- 546.4
----------- ----------- ----------- ------------ ------------
Stockholders' equity (deficit):
Common Stock................................. 0.1 -- -- -- 0.1
Additional paid-in capital................... -- 42.9 6.5 (49.4) --
Retained earnings (deficit).................. (186.1) 27.4 (0.9) (26.5) (186.1)
Other........................................ (2.0) (0.5) -- -- (2.5)
----------- ----------- ----------- ------------ ------------
Total stockholders' equity (deficit)......... (188.0) 69.8 5.6 (75.9) (188.5)
----------- ----------- ----------- ------------ ------------
Total liabilities and stockholders' equity..... $ 226.1 $ 202.1 $ 5.6 $ (75.9) $ 357.9
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-43
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ -- $ 312.7 $ -- $ -- $ 312.7
Cost of sales........................................ -- 253.8 -- -- 253.8
----------- ----------- ----------- ------ ------
Gross earnings..................................... -- 58.9 -- -- 58.9
Selling and administrative expenses.................. 3.7 25.8 -- -- 29.5
Securitization expense............................... 2.3 -- (0.4) -- 1.9
----------- ----------- ----------- ------ ------
Operating income (loss)............................ (6.0) 33.1 0.4 -- 27.5
Net interest expense................................. 4.5 0.6 0.4 -- 5.5
----------- ----------- ----------- ------ ------
Income (loss) before income taxes.................... (10.5) 32.5 -- -- 22.0
Provision (benefit) for income taxes................. (3.8) 12.3 -- -- 8.5
----------- ----------- ----------- ------ ------
Income (loss) before equity in income of consolidated
subsidiaries....................................... (6.7) 20.2 -- -- 13.5
Equity in income of consolidated subsidiaries........ 20.2 -- -- (20.2) --
----------- ----------- ----------- ------ ------
Net income........................................... $ 13.5 $ 20.2 $ 0.0 $ (20.2) $ 13.5
----------- ----------- ----------- ------ ------
----------- ----------- ----------- ------ ------
</TABLE>
F-44
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ -- $ 355.9 $ -- $ -- $ 355.9
Cost of sales........................................ -- 290.9 -- -- 290.9
----------- ----------- ----------- ------------ ------------
Gross earnings..................................... -- 65.0 -- -- 65.0
Selling and administrative expenses.................. 2.5 27.4 -- -- 29.9
Securitization expense............................... 3.0 -- (0.9) -- 2.1
Recapitalization expenses............................ 36.3 -- -- -- 36.3
----------- ----------- ----------- ------------ ------------
Operating income (loss)............................ (41.8) 37.6 0.9 -- (3.3)
Net interest expense................................. 5.8 0.1 0.9 -- 6.8
----------- ----------- ----------- ------------ ------------
Income (loss) before income taxes.................... (47.6) 37.5 -- -- (10.1)
Provision (benefit) for income taxes................. (12.6) 14.8 -- -- 2.2
----------- ----------- ----------- ------------ ------------
Income (loss) before extraordinary item and equity in
income of consolidated subsidiaries................ (35.0) 22.7 -- -- (12.3)
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....................................... (36.5) 22.7 -- -- (13.8)
Equity in income of consolidated subsidiaries........ 22.7 -- -- (22.7) --
----------- ----------- ----------- ------------ ------------
Net income (loss).................................... $ (13.8) $ 22.7 $ -- $ (22.7) $ (13.8)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-45
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON- GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.............. $ (4.6) $ 13.3 $ 1.1 $ -- $ 9.8
----------- ------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses.......................... -- (18.8) -- -- (18.8)
Capital expenditures............................ -- (8.6) -- -- (8.6)
Other........................................... (0.1) (1.0) -- -- (1.1)
----------- ------ ------ ------ ------
Net cash used in investing activities........... (0.1) (28.4) -- -- (28.5)
----------- ------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (to) from affiliate.................... (16.9) 15.1 1.8 -- --
Net borrowings on debt.......................... 22.0 (0.1) -- 21.9
----------- ------ ------ ------ ------
Net cash from financing activities.............. 5.1 15.0 1.8 -- 21.9
----------- ------ ------ ------ ------
CHANGE IN CASH AND CASH EQUIVALENTS............... 0.4 (0.1) 2.9 -- 3.2
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... (0.3) 1.4 -- -- 1.1
----------- ------ ------ ------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 0.1 $ 1.3 $ 2.9 $ -- $ 4.3
----------- ------ ------ ------ ------
----------- ------ ------ ------ ------
</TABLE>
F-46
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(UNAUDITED)
(7) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.............. $ (21.6) $ 39.6 $ (17.9) $ -- $ 0.1
----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ -- (6.5) -- -- (6.5)
Other........................................... (1.9) 0.5 0.2 -- (1.2)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities........... (1.9) (6.0) 0.2 -- (7.7)
----------- ----------- ----------- ------------ ------------
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... (52.0) -- -- -- (52.0)
Advances (to) from affiliate.................... 15.2 (33.3) 18.1 -- 0.0
Net borrowings on debt.......................... 17.2 (0.1) -- -- 17.1
----------- ----------- ----------- ------------ ------------
Net cash from financing activities.............. 60.7 (33.4) 18.1 -- 45.4
----------- ----------- ----------- ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS............... 37.2 0.2 0.4 -- 37.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 2.6 1.3 -- -- 3.9
----------- ----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 39.8 $ 1.5 $ 0.4 $ -- $ 41.7
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
F-47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALL TENDERED OLD SECURITIES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER
RELATED DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND
REQUESTS FOR ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS,
THE LETTER OF TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE
EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
P.O. Box 1010
Wall Street Station
New York, New York 10268-1010
BY HAND DELIVERY OR OVERNIGHT COURIER:
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
77 Water Street
4th Floor
New York, New York 10005
FACSIMILE TRANSMISSION:
(212) 701-7636
CONFIRM BY TELEPHONE:
(212) 701-7624
(Originals of all documents submitted by facsimile
should be sent promptly by hand,
overnight courier, or registered or certified mail)
NO BROKER, DEALER OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFER
MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL DECEMBER 9, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
FALCON BUILDING
PRODUCTS, INC.
[LOGO]
OFFER FOR OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED
NOTES DUE 2007 AND
10 1/2% SERIES A SENIOR SUBORDINATED
DISCOUNT NOTES DUE 2007
IN EXCHANGE FOR, RESPECTIVELY,
9 1/2% SERIES B SENIOR SUBORDINATED
NOTES DUE 2007 AND
10 1/2% SERIES B SENIOR SUBORDINATED
DISCOUNT NOTES DUE 2007
-------------------
PROSPECTUS
-------------------
SEPTEMBER 9, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
