<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number: 1-13419
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3931893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
(Address of Principal Executive Office)
(312) 906-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
20,048,275 shares of Common Stock as of April 18, 1997
<PAGE>
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
PART I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. Other Information:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1.3 $ 3.9
Accounts receivable, net -- --
Inventories, net 85.7 76.2
Other current assets 47.2 15.6
Total current assets 134.2 95.7
Property, plant and equipment, net 96.8 97.4
Goodwill 58.5 59.1
Other assets 9.1 9.5
Total assets $ 298.6 $ 261.7
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt $ 15.2 $ 15.2
Accounts payable 49.7 50.1
Accrued liabilities 30.4 30.9
Total current liabilities 95.3 96.2
Long-term debt 140.3 109.1
Accrued employee benefit obligations 9.0 8.7
Other long-term liabilities 20.0 19.8
Total liabilities 264.6 233.8
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,
20,048,275 issued and outstanding at
March 31, 1997, 20,070,500 issued and
outstanding at December 31, 1996 0.2 0.2
Additional paid-in capital 18.0 18.0
Retained earnings 18.9 12.8
Pension liability adjustment (0.5) (0.5)
Unearned compensation (0.3) (0.4)
Notes receivable arising from stock
purchase plan (2.0) (2.2)
Common stock in treasury, at cost
(22,225 shares in 1997) (0.3) --
Total stockholders' equity 34.0 27.9
Total liabilities and stockholders' equity $ 298.6 $ 261.7
The accompanying notes are an integral part of
these condensed consolidated financial statements.
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED MARCH 31,
1997 1996
Net sales $ 160.2 $ 144.4
Cost of sales 133.4 119.1
Gross earnings 26.8 25.3
Selling and administrative expenses 13.1 12.8
Securitization expense 0.9 0.9
Operating income 12.8 11.6
Net interest expense 2.8 2.8
Income before income taxes 10.0 8.8
Provision for income taxes 3.9 3.4
Net income $ 6.1 $ 5.4
Net income per common share $ 0.31 $ 0.27
Average shares outstanding 20,048,275 20,070,500
The accompanying notes are an integral part of
these condensed consolidated financial statements.
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Quarter Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6.1 $ 5.4
Adjustments to reconcile net income
to net cash from operations:
Depreciation 3.4 3.4
Amortization 0.7 0.6
Cash effect of changes in working
capital, accrued employee benefit obligations,
and other long-term liabilities (41.0) (7.5)
Net cash (used in) from operating activities (30.8) 1.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3.0) (4.5)
Purchase of business -- (18.8)
Other 0.2 1.1
Net cash flow used in investing activities (2.8) (22.2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit facility 31.2 21.4
Other (0.2) --
Net cash flow from financing activities 31.0 21.4
CHANGE IN CASH AND CASH EQUIVALENTS (2.6) 1.1
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3.9 1.1
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1.3 $ 2.2
The accompanying notes are an integral part of
these condensed consolidated financial statements.
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial
Statements of Falcon Building Products, Inc. (the "Company"), a
subsidiary of Equity Holdings Limited, an Illinois limited
partnership ("EHL"), 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, are
included for fair presentation. Operating results for the
quarter ended March 31, 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.
(2) INVENTORIES
Inventory consists of the following (in millions):
March 31, December 31,
1997 1996
Raw materials and supplies $ 31.2 $ 30.9
Work in process 13.0 12.7
Finished goods 41.5 32.6
$ 85.7 $ 76.2
(3) LONG-TERM DEBT
Long-term debt consists of the following (in millions):
March 31, December 31,
1997 1996
Bank Credit Facility
Revolver $ 74.0 $ 39.0
Term 78.7 82.5
Total 152.7 121.5
Other 2.8 2.8
Less: Current Portion (15.2) (15.2)
Total long-term $ 140.3 $ 109.1
At March 31, 1997, the Company was in compliance with all
covenants of the Bank Credit Facility. Availability under the
revolving portion of this facility was $63.5 million at March 31,
1997.
(4) COMMITMENT AND CONTINGENCIES
In May 1994, Underwriters' Laboratories of Canada ("ULC")
suspended its recognition of high temperature plastic venting
("HTPV") for gas appliance systems, including the Ultraventr
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 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 has
discontinued sales of its HTPV product.
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 26, 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 replacing
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
caption Goodman Manufacturing Company v. Chevron Chemical 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 the 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 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 this suit,
the Company is seeking damages for costs it has incurred an
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. 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. 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, and it is probably that in the near term the CPSC
will mandate a corrective action program that would impact
heating appliance manufacturers, plastic resin manufacturers, and
HTPV manufacturers and distributors, including the Company.
Several appliance manufacturers have announced their intention to
take corrective action regarding gas appliance systems equipped
with HTPV. Company sales of Ultravent products in the United
States and Canada in 1995 and 1996 were minimal.
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 injuries 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 material effect
on future results of operations in the period recognized.
<PAGE>
(5) OTHER
During the quarter, the Company entered into a merger
agreement with an affiliate of Investcorp SA ("Investcorp").
Under the merger agreement, each current shareholder of the
Company will have the right either to retain his/her shares of
the Company, subject to proration, or receive $17.75 per share in
cash. The agreement was structured such that upon completion of
the merger, Investcorp will own 88% of the equity of the Company
while existing shareholders will own 12%. The merger is subject
to certain regulatory approvals as well as approval by a majority
of Falcon's shareholders at a special meeting to be held as soon
as practicable.
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion of the results of operations of
the Company and its subsidiaries for the quarter ended March 31,
1997 as compared to the quarter ended March 31, 1996 and should
be read in conjunction with the Condensed Consolidated Financial
Statements included herein and the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
The following table reflects the Company's historical
results of operations.
QUARTER ENDED MARCH 31, 1997 1996
(dollars in millions) % of % of
Amount Sales Amount Sales
Net sales $ 160.2 100.0% $ 144. 4 100.0%
Gross earnings 26.8 16.7 25.3 17.5
Operating income 12.8 8.0 11.6 8.0
Income before income taxes 10.0 6.2 8.8 6.1
Net income 6.1 3.8 5.4 3.7
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH
31, 1996
Sales for the quarter of $160.2 million were $15.8 million
or 10.9% higher than 1996. This increase was primarily due to
significant sales growth in power washers of $11.3 million, as
well as increased volume in bathroom fixtures and air power
products totaling $4.6 million. These increases were partially
offset by a decline in sales of air distribution products of $0.3
million.
Gross earnings of $26.8 million were $1.5 million or 5.9%
higher than the comparable 1996 period. This increase was
primarily due to increased volume, as well as minor pricing
gains. Gross margin declined from 17.5% in 1996 to 16.7% in 1997
as a result of lower margins realized on power washers.
Operating income increased from $11.6 million in 1996 to
$12.8 million in 1997. This increase was primarily due to
increased sales volume and decreased corporate expenses,
partially offset by increased operating costs at the businesses.
Income before income taxes of $10.0 million was $1.2 million
higher than the comparable 1996 period due to the factors
mentioned above.
The effective tax rate was 38.4% in both periods. Net
income for the quarter was $6.1 million, an increase of $0.7 from
the $5.4 million recorded in 1996 due to the aforementioned
reasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it will meet its working capital
and capital expenditure needs in 1997 through a combination of
operating cash flow, availability under its Bank Credit Facility
and through funds available through the accounts receivable
securitization program.
Net cash flow used in operating activities was $30.8 million
for the quarter ended March 31, 1997, compared to a source of
$1.9 million for the comparable 1996 period. The decrease of
$32.7 million was primarily due to the effect of the stand-alone
Falcon securitization program that was 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. This has resulted in an increase of
$29.2 million in the net residual interest retained by the
Company in the sold receivables from December 31, 1996 to March
31, 1997. This residual interest is reflected in Other current
assets in the Company's Condensed Consolidated Financial
Statements. In addition, operating cash flow decreased $3.9
million, due to an increase in working capital requirements.
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved from time to time in various legal
proceedings and claims incident to the normal conduct of its
business. 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 operation.
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
Ultraventr 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 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 has discontinued sales of its HTPV product.
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 26, 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 replacing
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
caption Goodman Manufacturing Company v. Chevron Chemical 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 the 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 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 this suit,
the Company is seeking damages for costs it has incurred an
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. 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. 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, and it is probably that in the near term the CPSC
will mandate a corrective action program that would impact
heating appliance manufacturers, plastic resin manufacturers, and
HTPV manufacturers and distributors, including the Company.
Several appliance manufacturers have announced their intention to
take corrective action regarding gas appliance systems equipped
with HTPV. Company sales of Ultravent products in the United
States and Canada in 1995 and 1996 were minimal.
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
injuries 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 material effect
on future results of operations in the period recognized.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None
b) Reports on Form 8-K
Current Report on Form 8-K dated March 20, 1997 related
to the execution of a merger agreement between Falcon
and an affiliate of Investcorp SA.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FALCON BUILDING PRODUCTS INC.
By: /s/ Sam A. Cottone
-------------------
Sam A. Cottone
Senior Vice President and
Chief Financial Officer
Dated: May 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1997 QUARTERLY REPORT ON FORM 10-Q/A AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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