<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1997 Commission file number: 1-13418
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3931893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
233 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
(Address of Principal Executive Office)
(312) 906-9700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
nonaffiliates of the Registrant.
There is currently no established public trading market for
the Registrant's voting stock.
As of March 1, 1998, Falcon Building Products, Inc. had the following
shares of its various classes of common stock outstanding:
985,872 shares of Class A Common Stock
6,721,536 shares of Class B Common Stock
844,174 shares of Class C Common Stock
17,000 shares of Class D Common Stock
Documents Incorporated herein by Reference: None
- --------------------------------------------------------------------------------
<PAGE>
FALCON BUILDING PRODUCTS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. PAGE
<S> <C>
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 7
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. . . . . . . . . . 8
Item 6. Selected Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . 9
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . 47
PART III.
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 47
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . 54
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 56
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . 56
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Falcon Building Products, Inc. ("Falcon" or the "Company") is a leading
domestic manufacturer and distributor of products for the residential and
commercial construction and home improvement markets. The Company's products
include air distribution products; ceramic, enameled steel and acrylic
plumbing fixtures; and air compressors, pressure washers, electric generators
and pneumatic tools. The products that contributed more than 10% of net
sales in 1997, 1996 and 1995 were as follows: residential grilles, registers
and diffusers as a group were 12%, 9% and 11%, respectively; ceramic china
bathroom fixtures were 16%, 17% and 22%, respectively; and air compressors
were 24%, 23% and 28%, respectively. Pressure washers accounted for 18% and
13% of net sales in 1997 and 1996, respectively. The Company believes that
its products are well regarded as being innovative, of high quality and
competitively priced.
The Company was incorporated in January 1994 as part of a
reorganization of all of the entities comprising the building products
segment of Eagle Industries, Inc. ("Eagle"). Eagle is a wholly owned
subsidiary of Great American Management and Investment, Inc., a Delaware
corporation ("GAMI"), which is wholly owned by Equity Holdings Limited, an
Illinois limited partnership ("EHL"). In November 1994, the Company
completed an initial public offering of 6,000,000 shares of Class A Common
Stock (the "Offering").
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 5 and 6 to the Company's Consolidated Financial Statements (the
"Financial Statements") for further discussion of the transaction and the
financing arrangements entered into in order to consummate the
Recapitalization.
Air Distribution Products - The Company is a leading supplier of air
distribution products and is the leading manufacturer of residential and
light commercial grilles, registers and diffusers 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 air distribution items, including metal grilles, registers and
diffusers, flexible duct, gas vent and chimney systems, louvers, terminal
units and electric duct heaters. Products are generally produced on a
high-volume, low-cost basis; however, the standard product line is
supplemented with custom-engineered products designed to meet specific size
or performance requirements.
Plumbing Fixtures - The Company is a leading domestic producer of
ceramic china bathroom fixtures, including toilets and lavatories. The
Company also produces enameled steel bathroom tubs and sinks, and acrylic
whirlpool tubs as well as brass and plastic trim and fittings. These
products are primarily sold to the residential construction market under the
Mansfield-Registered Trademark-and Swirl-way-Registered Trademark- brand
names.
Air Power Products - The Company is a leading producer of consumer and
commercial air compressors for home improvement 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 several brand names,
including Air America-Registered Trademark-, Charge Air Pro-Registered
Trademark-, Pro 4000-TM-, 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 Roebuck and Co. ("Sears").
In addition, the Company sells a variety of pneumatic tools such as paint
spray guns, nailers and staplers, sanders and air hoses for use in home
improvement applications. In 1995, several new product lines were
introduced, including electric generators, pressure washers and OEM
compressors. These new products, as is the case with compressors, are
marketed primarily into retail and home center outlets. In January 1996,
Falcon completed the acquisition of Ex-Cell Manufacturing Co., Inc.
("Ex-Cell"). Headquartered in Decatur, Arkansas, Ex-Cell is a leading
manufacturer of pressure washers, marketed through the retail/home center
distribution channel primarily under the Ex-Cell-Registered Trademark- brand
name. Effective December 31, 1997, Ex-Cell was merged with and into
DeVilbiss Air Power Company, another subsidiary of the Company.
3
<PAGE>
BUILDING PRODUCTS INDUSTRY
The building products industry depends primarily on the residential and
commercial construction markets. The level of activity in the residential
construction market depends on new housing starts and residential alteration
and repair projects, which are affected to varying degrees by mortgage rates,
inflation, unemployment, demographic trends, gross domestic product growth
and consumer confidence. According to the U.S. Department of Commerce,
domestic housing starts have fluctuated between 1.3 million and 1.5 million
from 1993 to 1997. According to the U.S. Department of Commerce, residential
alteration and repair expenditures have grown over the same period, from $108
billion in 1993 to approximately $115 billion in 1996. The Company
estimates, based upon management's industry experience, that the residential
alteration and repair market accounts for approximately 50% of the Company's
net sales. The level of activity of the commercial construction market
depends largely on vacancy rates and general economic conditions. According
to the U.S. Department of Commerce, commercial construction activity has
risen at an annualized rate of approximately 5% from 1992 to 1996.
MARKETING AND DISTRIBUTION
The Company markets and distributes its products nationwide through a
variety of distribution channels. Based on 1997 net sales, approximately 48%
of the Company's products are distributed to wholesalers and manufacturers'
representatives who sell to contractors serving the residential and
commercial construction markets. Approximately 52% of the Company's net
sales are made to mass merchandisers and retail chains, which sell to
homeowners and contractors.
The Company utilizes a combination of internal sales forces and various
representatives to market and sell its products. The Company markets its
residential and light commercial air distribution products nationwide to HVAC
contractors through over 750 wholesale distributors. The Company provides
sales support to these distributors through a direct field sales staff and a
customer service group. Independent representatives are also used to
supplement the field sales coverage. The Company markets its commercial and
industrial air distribution products nationwide primarily to HVAC contractors
through over 150 commercial representatives. The Company's commercial
representative organization is supported by regional sales managers and a
customer service group. The Company markets its ceramic china, acrylic
whirlpool baths and enameled steel bathroom fixtures and brass fittings
primarily through manufacturers' representatives, who sell to wholesale
distributors. These distributors sell to plumbers, building contractors and
remodelers. The Company also supplies bathroom fixture products to the
retail distribution channel, primarily through The Home Depot. The Company
markets its air power products primarily through consumer distribution
channels which include mass merchants, warehouse clubs, home centers,
hardware cooperatives and farm and fleet cooperatives. The Company services
these consumer channels through a direct sales staff and manufacturers'
representatives.
Sears is the Company's largest customer and in 1997 accounted for
approximately 13% of the Company's net sales. The Company is the primary
supplier of air compressors to Sears. Under its Craftsman-Registered
Trademark-brand, Sears is the largest domestic retailer of air compressors
for consumer use.
COMPETITION
The building products industry is highly competitive and the Company
competes with various international, national and regional suppliers in each
of its product areas. In Air Distribution Products, the Company competes
with divisions of three international manufacturers as well as various other
smaller, regional competitors. In Plumbing Fixtures, the Company competes
with divisions of three international manufacturers as well as various other
smaller competitors. In Air Power Products, the Company competes with two
large manufacturers as well as various smaller competitors. Some of the
Company's competitors are larger, have greater financial resources and are
less leveraged than the Company. The Company believes that it competes
successfully in its markets on the basis of quality, service and product
differentiation.
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.
4
<PAGE>
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-,
Kilgore-TM-, 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 ten-year term (expiring
in April 2000) and may be renewed at the Company's option for two successive
ten-year renewal periods. The Company believes that its trademarks and its
licenses are 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, electric motors, pumps and mylar. 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
worldwide shortage of mylar occurred, restricting availability and increasing
cost. By the end of 1995, availability had improved. 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,
double-digit inflation was encountered in certain of the basic raw materials
and components used in the manufacturing process. The total raw material
cost inflation in 1995 added approximately $18 million to Falcon's 1995 cost
of sales. During 1996, raw material costs eased and have remained relatively
stable throughout 1997.
BACKLOG
The Company's backlog at December 31, 1997 and 1996 was $17.1 million
and $22.0 million, respectively. The backlog at December 31, 1997 is
expected to be shipped during the first quarter of 1998.
EMPLOYEES
The Company employed approximately 4,200 persons as of December 31,
1997. Approximately 2,100 hourly employees are covered by seven collective
bargaining agreements expiring through 2001. 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. 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 agency on a remedial plan
for the closure of an on-site landfill at the Company's Holland, Michigan
facility that the Company currently estimates will cost approximately $0.4
million. The Company is also working with the appropriate agency 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 that the Company currently
estimates will cost approximately $0.8 million. 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; however, there can be no
assurance that 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 1997 attributable to environmental matters were not
material in relation to the Company's consolidated financial position or
results of operations.
REGULATORY
The Company's products, including Ultravent-Registered Trademark-, are
subject to extensive regulation by national, state, local and foreign
authorities. For discussion of a current matter involving high temperature
plastic venting systems, see Item 3, Legal Proceedings.
5
<PAGE>
ITEM 2. 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 do not have substantial
excess capacity. The Company's principal facilities consist of the following:
<TABLE>
<CAPTION>
APPROX. SQUARE
LOCATION PRINCIPAL USE FOOTAGE LEASED/OWNED
- ---------------------------------------- -------------------------------- -------------- ------------
<S> <C> <C> <C>
Holland, Michigan. . . . . . . . . . . . Office, Manufacturing, Warehouse 613,000 Owned
Kilgore, Texas . . . . . . . . . . . . . Office, Manufacturing, Warehouse 511,000 Owned
Perrysville, Ohio. . . . . . . . . . . . Office, Manufacturing 492,000 Owned
Walnut, California . . . . . . . . . . . Manufacturing 414,000 Owned
Jackson, Tennessee . . . . . . . . . . . Office, Manufacturing, Warehouse 341,000 Owned
Huntsville, Alabama. . . . . . . . . . . Office, Manufacturing 219,000 Owned
Geneva, Alabama. . . . . . . . . . . . . Office, Manufacturing 203,000 Owned
Sanger, California . . . . . . . . . . . Office, Manufacturing 127,000 Leased(1)
Henderson, Texas . . . . . . . . . . . . Office, Manufacturing 125,000 Owned
Decatur, Arkansas. . . . . . . . . . . . Office, Manufacturing, Warehouse 106,000 Owned
Jackson, Tennessee . . . . . . . . . . . Manufacturing, Warehouse 103,000 Leased(2)
Memphis, Tennessee . . . . . . . . . . . Office, Manufacturing, Warehouse 94,000 Leased(3)
Shelby, Ohio . . . . . . . . . . . . . . Warehouse 87,500 Leased(4)
Jackson, Tennessee . . . . . . . . . . . Warehouse 79,000 Leased(5)
Sparks, Nevada . . . . . . . . . . . . . Distribution Center 73,000 Leased(6)
Memphis, Tennessee . . . . . . . . . . . Warehouse 62,000 Leased(3)
Big Prairie, Ohio. . . . . . . . . . . . Manufacturing 60,000 Owned
</TABLE>
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(1) This facility is leased through December 2002.
(2) This facility is leased pursuant to a lease that expires in August 1998,
with renewal options to 1999.
(3) These facilities are leased pursuant to leases that expire in October 1998,
with options to cancel after April 1998 with a 30-day advance notice
requirement.
(4) This facility is leased on a month-to-month basis.
(5) This facility is leased pursuant to a lease that expires in December 1998.
(6) This facility is leased pursuant to a lease that expires in December 2000.
ITEM 3. 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 in Item 1 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 appliances systems,
including the Ultravent-Registered Trademark- product distributed by the
Company. This action resulted from reports of problems with high temperature
plastic venting, including improper installation, cracking, inadequate joint
adhesion, and related safety hazards, including potential for carbon monoxide
emission. In June 1994, as a result of the ULC action, the Ontario Ministry
of Consumer and Commercial Relations ("MCCR") suspended sales of HTPV in the
Province of Ontario. Other provinces of Canada have taken similar action.
Pursuant to an MCCR order, appliance systems in Ontario with HTPV have been
corrected. Gas appliance manufacturers in Canada and the United States no
longer certify HTPV for use with their products. As a result, the Company
discontinued sales of its HTPV product in 1997. Company sales of
Ultravent-Registered Trademark- products in the United States and Canada in
1995, 1996 and 1997 were minimal.
6
<PAGE>
The Company is a defendant in a lawsuit 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. The Company is also a defendant in two cases brought by appliance
manufacturers. In a lawsuit filed in Pennsylvania, the Company has been sued
along with other defendants for reimbursement of costs associated with its
corrective action program. In the other lawsuit, the Company and two other
defendants have been sued in Massachusetts by seven furnace manufacturers
which are seeking damages and declaratory relief for costs expected to be
incurred as a result of corrective action programs to be conducted in
connection with furnace systems vented with HTPV. The Company has filed and
served its own legal action in Michigan against the furnace manufacturers
that have filed suit against the Company 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
that 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.
The Company has been engaged in discussions with the United States
Consumer Product Safety Commission ("CPSC") regarding the use of HTPV in the
United States. Additionally, certain appliance manufacturers, the plastic
resin manufacturer and the HTPV manufacturer and distributor, including Hart
& Cooley, have participated in a non-binding facilitative mediation process,
the object of which was to develop and implement a voluntary HTPV corrective
action program. The CPSC agreed to delay initiating proceedings mandating a
corrective action program while these parties were involved in the mediation
process. As a result of the facilitative mediation process, the Company
entered into a Corrective Action Program and Settlement Agreement in January
1998, along with 25 appliance manufacturers, an HTPV manufacturer and a resin
manufacturer to correct certain HTPV mid-efficiency gas fired appliances with
a new venting system. The Corrective Action Program was approved by the CPSC
in February 1998. The Settlement Agreement provides for the dismissal of the
above referenced litigation in Massachusetts, Pennsylvania and Michigan.
In 1997, the Company recorded pretax charges of $32.8 million ($20.0
million, net) representing an estimate of its share of the cost of the
Corrective Action Program in the United States, resolution of the Canadian
litigation, the class action litigation, legal fees and other related costs.
The Company estimates that the costs associated with the Corrective Action
Program and other related HTPV matters will be expended during the next three
years. Actual amounts expended could differ depending on a number of factors
including, but not limited to, the estimated replacement cost per unit as
well as the number of units replaced.
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 and have filed motions to dismiss the
Company's lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote of
security holders of Falcon through a solicitation of proxies or otherwise.
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
There is currently no established public trading market for the Company's
common stock. The number of shareholders of record as of December 31, 1997 was
43. No dividends have been paid to shareholders in the last two years and no
dividends are expected to be declared in the near future. In addition, the
Company's Bank Credit Facility and Subordinated Notes contain covenants that
restrict the payment of dividends.
ITEM 6. SELECTED FINANCIAL INFORMATION
The selected financial information presented below has been derived from
the Company's audited Consolidated Financial Statements for the five years in
the period ended December 31, 1997, and should be read in conjunction with such
financial statements and notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales. . . . . . . . . . . . . . . . . . $686.4 $633.2 $471.3 $440.7 $372.3
Operating income (loss) (a). . . . . . . . . (20.9) 59.8 45.8 51.7 45.2
Net income (loss) before extraordinary
item and cumulative effect of changes
in accounting principles . . . . . . . . . (37.4) 30.0 22.1 25.9 22.1
Net income (loss) (b). . . . . . . . . . . . (38.9) 30.0 22.1 25.9 18.5
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . $333.8 $261.7 $210.8 $187.5 $218.9
Long-term debt (c) . . . . . . . . . . . . . 428.3 109.1 110.9 103.8 2.7
Total liabilities (c). . . . . . . . . . . . 547.5 233.8 213.0 212.1 145.3
Stockholders' equity (deficit) (d) . . . . . (213.7) 27.9 (2.2) (24.6) 73.6
</TABLE>
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a) Operating income (loss) for the year ended December 31, 1997
reflects pretax charges of $32.8 million relating to
Ultravent-Registered Trademark- and $36.3 million relating to the
Recapitalization.
b) Net income (loss) for the year ended December 31, 1997 reflects
an extraordinary charge of $1.5 million, net of tax, relating to
the early extinguishment of debt associated with the
Recapitalization. Net income for the year ended December 31,
1993 reflects a net charge of $3.6 million relating to the
cumulative effect of changes in the method of accounting for
income taxes and post-employment benefits.
c) As part of the Recapitalization in June 1997, the Company
entered into a new bank credit facility and issued Senior
Subordinated Notes and Senior Subordinated Discount Notes.
The bank credit facility which was replaced had been entered
into at the time of the Offering in November 1994.
Historical comparisons of long-term debt are not meaningful
as the debt structure of the Company was altered in these
periods.
d) The Company's equity capital structure was altered in connection
with both the Recapitalization in June 1997 and the Offering in
November 1994. As a result, historical comparisons of
stockholders' equity are not meaningful. The deficit in 1997 was
primarily a consequence of the repurchase of Class A stock,
partially offset by the issuance of Class B stock.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORMER RELATIONSHIP WITH EAGLE
Eagle incorporated the Company in January 1994 as part of a
reorganization of all the entities comprising Eagle's building products
segment. Pursuant to a corporate services agreement, Eagle provided certain
management, financial and administrative services to the Company prior to the
Merger. In addition, certain executive officers of the Company were also
executive officers of Eagle and spent approximately 50% of their time on the
business and affairs of Eagle. As a result of the Recapitalization, the
corporate services agreement was terminated and the executive officers
referred to above became full-time employees of the Company. Subsequent to
the Merger, the Company paid Eagle $0.3 million in fees for the utilization
of office space and administrative support. Between January 1994 and April
1996, the Company participated in Eagle's asset securitization program.
During the first quarter of 1996, Eagle decided to terminate its asset
securitization program. Eagle coordinated the termination of its program
with the Company to allow the Company to establish its own asset
securitization program, which began in May 1996.
INDUSTRY INFORMATION
Demand for the Company's products depends primarily on the residential
construction market and, to a lesser extent, on the commercial construction
market. The level of activity in the residential construction market depends
on new housing starts and residential alteration and repair projects which
are affected to varying degrees by many factors not within the Company's
control, including mortgage rates, inflation, unemployment, demographic
trends, gross domestic product growth and consumer confidence. The level of
activity in the commercial construction market depends largely on vacancy
rates and general economic conditions.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $686.4 100.0% $633.2 100.0% $471.3 100.0%
Gross earnings . . . . . . . . 109.9 16.0 119.6 18.9 92.8 19.7
Operating income
before Ultravent
and Recapitalization
expenses . . . . . . . . . . 48.2 7.0 59.8 9.4 45.8 9.7
EBITDA (a) . . . . . . . . . . 77.9 11.4 81.7 12.9 64.0 13.6
Operating income
(loss) . . . . . . . . . . . (20.9) (3.0) 59.8 9.4 45.8 9.7
</TABLE>
- --------------------------------
(a) 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-;
(iii) Recapitalization expenses; (iv) securitization expense; and (v)
non-cash charges. 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 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.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 increased $53.2 million
to $686.4 million, an 8.4% increase from the level achieved in 1996.
Substantially all of the revenue gains were attributable to Air Power
Products. The gains in Air Power Products were largely the result of a 48%
increase in the net sales of pressure washers and a 14% increase in the net
sales of compressors. Net sales of Plumbing Fixtures increased very modestly
as significant pressure in the wholesale channel was offset by increased
market penetration in retail. Net sales of Air Distribution Products were up
approximately 2% over the prior year as moderate summer and winter
temperatures reduced demand and significant price competition, primarily in
flexible duct products, limited the Company's ability to gain market share.
9
<PAGE>
Gross earnings of $109.9 million in 1997 were $9.7 million or 8.1% lower
than in 1996. The increase in net sales of pressure washers was accompanied
by a 57% increase in the pressure washer return rate. This resulted in a
$17.0 million increase in return costs over the 1996 period. Included in
these costs is an $8.0 million non-cash charge taken in the fourth quarter
for the establishment of reserves related primarily to returned pressure
washers in inventory. The Company attributes the increase in the rate of
returns to consumers' lack of familiarity with a relatively new and more
complicated product, certain retailers' liberal return policies and certain
purchased part quality problems. The Company has improved its pressure
washers through product design changes, more demanding purchase part quality
assurance and improved consumer literature for 1998. Additionally, the
Company negotiated a "no returns" policy for non-defective pressure washers
with its major retail customers in 1998.
Manufacturing inefficiencies in producing certain plumbing products also
impacted gross earnings in 1997. In addition, pricing for flexible duct and
certain plumbing products remained below 1996 levels, as competitors
maintained very aggressive pricing. The Company has initiated cost reduction
programs, including process control improvements, new capital expenditures to
reduce manufacturing costs, and organizational changes to address operational
inefficiencies as well as to increase the level of cost reductions.
The operating loss of $20.9 million in 1997 included $36.3 million of
expenses recorded in connection with the Recapitalization and $32.8 million
of expenses associated with Ultravent (see Notes 5 and 14 to the Company's
Consolidated Financial Statements for a complete discussion of these
expenses). Excluding these expenses, operating income was $11.6 million lower
than 1996. This decrease was primarily due to the costs associated with
pressure washer returns and increased sales and marketing expenses. These
costs were partially offset by increased earnings on favorable volume in all
businesses .
Net interest expense increased $17.5 million to $28.5 million. This
increase was primarily due to the new debt structure that resulted from the
Recapitalization in June 1997. See Note 6 to the Company's Consolidated
Financial Statements for a discussion of the Company's new debt structure.
The Company expects future interest expense to be considerably higher than it
has been in prior years due to this new debt structure.
The income tax benefit rate of 24.3% for the year reflected the effect
of state income taxes and non-deductible expenses, including certain expenses
incurred in connection with the Recapitalization and goodwill amortization.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased $161.9 million, or 34.4%, to $633.2 million in 1996
from $471.3 million in 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 increased $26.8 million, or 28.9%, to $119.6 million in
1996 from $92.8 million in 1995. This increase was primarily due to
increased volume and the impact of acquisitions. Gross margin declined to
18.9% in 1996 from 19.7% in 1995 due primarily to the sales contributed by
acquired businesses that carry lower margins and increased sales of certain
lower margin HVAC products.
Operating income increased $14.0 million, or 30.6%, to $59.8 million in
1996 from $45.8 million in 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 $10.5 million. As a percent of sales,
selling, general and administrative expenses declined slightly to 8.5% in
1996 from 9.2% in 1995.
Net interest expense increased $1.0 million to $11.0 million in 1996
from $10.0 million 1995. This increase was primarily due to the increased
average monthly debt levels resulting from acquisitions.
The income tax provision of 38.4% for the year reflected the effect of
state income taxes and non-deductible expenses, including goodwill.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Recapitalization, the Company entered into a new
senior credit facility with a group of banks (the "Bank Credit Facility") and
also issued $145 million of 9 1/2% Senior Subordinated Notes and $170 million
aggregate principal amount of 10 1/2% Senior Subordinated Discount Notes. The
Bank Credit Facility provides for a $175.0 million term loan facility (the
"Term Loan Facility"), and 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. The proceeds from the Bank
Credit Facility and the subordinated notes, together with the $134.6 million
equity contribution by Investcorp, its affiliates and certain other
international investors, 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. In
connection with the Recapitalization, the Company amended its current
receivables purchase facility to provide for a five-year receivables facility
(the "Receivables Securitization Program") and increased its maximum amount
from $85.0 million 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 expects that it will spend approximately
$10.0 million per year in each of the next three years for costs associated
with the Corrective Action Program and other related HTPV matters. The
Company anticipates funding these costs, 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. At December 31, 1997, $112.5 million was available to borrow under
the Revolving Facility.
Net cash flow from operating activities amounted to $10.9 million in
1997 compared to $41.1 million in 1996. The decrease of $30.2 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. The net residual interest retained by the Company in the receivables
sold by the Company increased $11.2 million from December 31, 1996. This
residual interest of $13.1 million at December 31, 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. This increase was primarily due to the
increase in net income and a decrease in working capital requirements. 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.
CAPITAL EXPENDITURES
Capital expenditures were $19.1 million, $20.0 million and $16.4 million
for 1997, 1996, and 1995, respectively. The Company's commitments for
capital expenditures at the end of 1997 were approximately $2.7 million.
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 1998.
YEAR 2000
In response to the Year 2000 issue, the Company initiated a project in
early 1997 to identify, evaluate and implement changes to its existing
computerized business systems. The Company is addressing the issue through a
combination of modifications to existing programs and conversions to Year
2000 compliant software. In addition, the Company is communicating with its
customers, suppliers, and other service providers to determine whether they
are actively involved in projects to ensure that their products and business
systems will be Year 2000 compliant. If modifications and conversions by the
Company and those it conducts business with are not made in a timely manner,
the Year 2000 issue may have a material adverse effect on the Company's
business, financial condition, and results of operations. The total cost
associated with the required modifications is not expected to be material to
the Company's consolidated results of operations and financial position, and
is being expensed as incurred.
11
<PAGE>
SEASONALITY, WORKING CAPITAL AND CYCLICALITY
Sales of certain products of the Company are subject to seasonal
variation. Seasonal factors historically have not had a significant effect on
working capital requirements, as the Company has been able to adjust its
production to meet seasonal demands. Due to seasonal factors associated with
the construction industry, sales of products 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 cost inflation had a material impact on 1995 operating
income. Increased raw material costs in 1995 over 1994 totaled approximately
$18.2 million. The effect of inflation on 1997 and 1996 operating results
was not material.
FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believes" and "expects" and
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, over which
the Company has no control, which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligations to republish revised
forward-looking statements to reflect events or circumstances after the date
thereof or to reflect the occurrence of unanticipated events. Readers are
also urged to carefully review and consider the various disclosures made by
the Company, in this report, as well as the Company's periodic reports filed
with the Securities and Exchange Commission.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
<S> <C>
Reports of Independent Accountants . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 20
Supplementary Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . 46
</TABLE>
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Falcon Building Products, Inc.:
We have audited the accompanying consolidated balance sheet of Falcon
Building Products, Inc. and Subsidiaries as of December 31, 1997, and the
related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 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, 1997, and
the results of their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 25, 1998
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Falcon Building Products, Inc.:
We have audited the accompanying Consolidated Balance Sheet for Falcon
Building Products, Inc. (a Delaware Corporation) and Subsidiaries as of
December 31, 1996 and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for each of the two 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, 1996,
and the results of their operations and cash flows for each of the two years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 5, 1997
15
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.9 $ 3.9
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.5 76.2
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0 15.6
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143.4 95.7
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.3 97.4
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57.0 59.1
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.1 9.5
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $333.8 $261.7
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.5 $ 15.2
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0 50.1
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.2 30.9
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.7 96.2
Senior indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175.6 109.1
Senior Subordinated Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252.7 --
Accrued employee benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 8.7
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.3 19.8
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547.5 233.8
-------- --------
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share, none issued . . . . . . . . . . . . . . . . . -- --
Class A stock, par value $.01 per share, 1,007,690 shares issued
in 1997, 20,070,500 issued in 1996.. . . . . . . . . . . . . . . . . . . . . . . . . -- 0.2
Class B stock, par value $.01 per share, 6,721,536 shares issued in
1997, none issued in 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 --
Class C stock, par value $.01 per share,
844,274 shares issued in 1997, none issued in 1996. . . . . . . . . . . . . . . . . -- --
Class D stock, par value $.01 per share, 17,000 shares issued in
1997, none issued in 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $.01 per share, none issued in 1997, none
issued in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 18.0
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (211.8) 12.8
Notes receivable arising from stock purchase plan . . . . . . . . . . . . . . . . . . . (2.0) (2.2)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (0.9)
-------- --------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . . . . . . . . . . . (213.7) 27.9
-------- --------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . $333.8 $261.7
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $686.4 $633.2 $471.3
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . 576.5 513.6 378.5
-------- ------ ------
Gross earnings. . . . . . . . . . . . . . . . . . . . . . . . 109.9 119.6 92.8
Selling, general and administrative expenses . . . . . . . . . . 57.7 53.9 43.4
Securitization expense . . . . . . . . . . . . . . . . . . . . . 4.0 4.1 3.3
Ultravent expense. . . . . . . . . . . . . . . . . . . . . . . . 32.8 1.8 0.3
Recapitalization expenses. . . . . . . . . . . . . . . . . . . . 36.3 -- --
-------- ------ ------
Operating income (loss) . . . . . . . . . . . . . . . . . . . (20.9) 59.8 45.8
Net interest expense . . . . . . . . . . . . . . . . . . . . . . 28.5 11.0 10.0
-------- ------- ------
Income (loss) before income taxes and extraordinary item . . . . (49.4) 48.8 35.8
Provision (benefit) for income taxes . . . . . . . . . . . . . . (12.0) 18.8 13.7
-------- ------- ------
Income (loss) before extraordinary item . . . . . . . . . . . (37.4) 30.0 22.1
Extraordinary item:
Early extinguishment of debt net of income tax
benefit of $0.9 million. . . . . . . . . . . . . . . . . . (1.5) -- --
-------- ------- ------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ (38.9) $ 30.0 $ 22.1
-------- ------ ------
-------- ------ ------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
17
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RETAINED FROM STOCK
CLASS A CLASS B PAID-IN EARNINGS PURCHASE
STOCK STOCK CAPITAL (DEFICIT) PLAN OTHER
--------- --------- ---------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . $ 0.1 $ 0.1 $ 18.0 $ (39.3) $ (2.2) $ (1.3)
Net income. . . . . . . . . . . . . . -- -- -- 22.1 -- --
Other . . . . . . . . . . . . . . . . -- -- -- -- -- 0.3
--------- --------- ---------- --------- ---------- -------
Balance at December 31, 1995 . . . . . . 0.1 0.1 18.0 (17.2) (2.2) (1.0)
Net income. . . . . . . . . . . . . . -- -- -- 30.0 -- --
Conversion of Class B Stock
to Class A Stock. . . . . . . . . . 0.1 (0.1) -- -- -- --
Other . . . . . . . . . . . . . . . . -- -- -- -- -- 0.1
--------- --------- ---------- --------- ---------- -------
Balance at December 31, 1996 . . . . . . 0.2 -- 18.0 12.8 (2.2) (0.9)
Net loss. . . . . . . . . . . . . . . -- -- -- (38.9) -- --
Repurchase of Class A Stock . . . . . (0.2) -- (18.0) (320.2) -- 0.4
Issuance of stock . . . . . . . . . . -- 0.1 -- 134.5 -- --
Other . . . . . . . . . . . . . . . . -- -- -- -- 0.2 0.5
--------- --------- ---------- --------- ---------- -------
Balance at December 31, 1997 . . . . . . $ -- $ 0.1 $ -- $(211.8) $ (2.0) $ --
--------- --------- ---------- --------- ---------- -------
--------- --------- ---------- --------- ---------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (38.9) $ 30.0 $ 22.1
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 13.7 12.9
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 1.8 2.1
Accretion of debt discount on subordinated debt. . . . . . . . . . . 5.8 -- --
Deferred income tax provision (benefit). . . . . . . . . . . . . . . (15.7) (2.9) 0.2
Ultravent expenses . . . . . . . . . . . . . . . . . . . . . . . . . 30.7 -- --
Recapitalization expenses. . . . . . . . . . . . . . . . . . . . . . 36.3 -- --
Early extinguishment of debt . . . . . . . . . . . . . . . . . . . . 1.5 -- --
Cash effects, excluding acquisitions, of changes in:
Accounts receivable, net of residual interest . . . . . . . . . . -- 6.2 0.3
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.1) (14.0) (10.2)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . (10.4) (1.5) 1.4
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . (16.1) 10.2 (13.0)
Accrued liabilities and accrued employee benefit obligations. . . 3.1 (2.4) 3.6
--------- -------- ---------
Net cash from operating activities: . . . . . . . . . . . . . . . . 10.9 41.1 19.4
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses. . . . . . . . . . . . . . . . . . . . . . . . . -- (18.8) (10.4)
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . (19.1) (20.0) (16.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.3) 0.2 (2.2)
--------- -------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (19.4) (38.6) (29.0)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior credit facilities. . . . . . . . . . . . . . . . . 175.0 -- --
Repayments of senior credit facilities. . . . . . . . . . . . . . . . . (138.8) -- --
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . 134.6 -- --
Retirement of common stock. . . . . . . . . . . . . . . . . . . . . . . (338.0) -- --
Payment of Recapitalization fees and expenses . . . . . . . . . . . . . (61.8) -- --
Issuance of senior subordinated notes . . . . . . . . . . . . . . . . . 247.0 -- --
Net borrowings on debt. . . . . . . . . . . . . . . . . . . . . . . . . 16.5 0.3 8.5
--------- -------- ---------
Net cash from financing activities. . . . . . . . . . . . . . . . . . . 34.5 0.3 8.5
--------- -------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . 26.0 2.8 (1.1)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . 3.9 1.1 2.2
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . $ 29.9 $ 3.9 $ 1.1
--------- -------- ---------
--------- -------- ---------
NET CASH PAID DURING THE PERIOD FOR:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20.7 $ 11.0 $ 10.3
Income taxes to affiliate . . . . . . . . . . . . . . . . . . . . . . . -- 4.6 --
Income taxes to third parties . . . . . . . . . . . . . . . . . . . . . 7.6 23.5 14.2
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
19
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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.
Eagle Industries, Inc. ("Eagle") incorporated the Company in January 1994
as part of a reorganization of all of the entities comprising Eagle's building
products segment. Eagle is a wholly owned subsidiary of Great American
Management and Investment, Inc., a Delaware corporation ("GAMI") that is wholly
owned by Equity Holdings Limited, an Illinois limited partnership ("EHL"). In
November 1994, the Company completed an initial public offering of 6,000,000
shares of Class A common stock (the "Offering"). In May 1996, Eagle distributed
its ownership of the Company's Class B common stock (14,000,000 shares) to EHL.
Pursuant to provisions in the Company's charter, the transfer of the Class B
common stock resulted in its conversion to Class A common stock.
On June 17, 1997, the Company completed a merger transaction (the "Merger",
and together with the financings described in Note 5, 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 5 and 6 for further
discussion of the transaction and the financing arrangements entered into in
order to consummate the Recapitalization.
Certain amounts in the Company's historical financial statements have been
reclassified to be consistent with the presentation in the current period.
(2) 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.
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.
CASH AND CASH EQUIVALENTS:
All highly liquid investment instruments with original maturities of three
months or less are considered to be cash equivalents.
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 was used for 41.1% of inventory at December 31,
1997 and 1996. The first-in, first-out ("FIFO") method of inventory valuation
was used for the remaining inventory.
20
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
NEW ACCOUNTING PRONOUNCEMENTS:
In February 1998 the Financial Accounting Standards Board (the "FASB")
issued Statement No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), which revises employers' disclosures
about pensions and other postretirement benefit plans. The Company intends to
make appropriate disclosures upon adoption of SFAS No. 132, which is effective
for years beginning after December 15, 1997.
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company does
not believe that the adoption of SFAS No. 130 will have a material effect on the
Company's financial statements.
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 $15.6 million and $13.6 million at December 31,
1997 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.
DEFERRED FINANCING FEES:
Deferred financing fees are amortized on a straight-line basis over the
life of the related debt and are included in Other assets in the Company's
Consolidated Balance Sheets.
21
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
ENVIRONMENTAL REMEDIATION:
In 1997, the Company adopted Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 provides additional
guidance for recognizing, measuring and disclosing environmental remediation
liabilities. The effect of initially applying the provisions of SOP 96-1 was
not material to the Consolidated Financial Statements. The Company accrues
for such losses when they are probable and reasonably estimable. Costs of
future expenditures do not reflect any claims for recoveries and are not
discounted to their present value. The accruals for environmental liabilities
are reflected in the Consolidated Balance Sheets primarily in Other long-term
liabilities.
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. Since the Offering, the Company has
filed a separate U.S. federal income tax return. The Company files separate
U.S. state income tax returns.
EARNINGS PER SHARE:
As a result of the Recapitalization, the Company's stock is no longer
traded in a public market. As such, earnings per share is no longer disclosed.
(3) ACQUISITIONS
On January 2, 1996, the Company acquired the stock of Ex-Cell Manufacturing
Company, Inc. ("Ex-Cell"), a manufacturer of cold-water pressure washers. The
Company paid a total of $20.2 million in cash for the stock of Ex-Cell. The
acquisition was accounted for as a purchase and resulted in $19.5 million of
goodwill. As of December 31, 1997, Ex-Cell was merged with and into DeVilbiss
Air Power Company, another subsidiary of the Company.
(4) 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". During the first quarter of 1996, Eagle decided to terminate
its securitization program and 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 affiliates (collectively, the "Bank Group")
whereby it sells, 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. In connection with the Recapitalization,
the Company amended its receivables securitization program to increase the
maximum availability from $85 million to $100 million and to extend its program
until 2002. To establish this stand-alone securitization program in 1996, 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; and (3) immediately sold
these re-acquired receivables through the special purpose company to the Bank
Group.
22
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
At December 31, 1997 and 1996, uncollected receivables sold under the
agreement were $88.6 million and $75.2 million, respectively. Included in the
Company's financial statements in other current assets is a net residual
interest of $13.1 million and $1.9 million at December 31, 1997 and 1996,
respectively. The expense incurred on the sale of the receivables under these
programs was $4.0 million, $4.1 million and $3.3 million in years ended December
31, 1997, 1996 and 1995, respectively.
(5) RECAPITALIZATION
On March 20, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with FBP. The Merger Agreement contemplated that FBP
would be merged with and into Falcon and each outstanding share of the Company's
Class A Common Stock ("Class A Stock") would be converted into either (i) $17.75
in cash (the "Cash Price"), or (ii) at the election of the holder of the Class A
Stock, the right to retain one share of Class A Stock. On June 17, 1997, the
Merger and the adoption of the Merger Agreement were approved by the vote of a
majority of the stockholders of the Class A Stock and FBP was merged with and
into Falcon, with Falcon continuing as the surviving corporation. As a result of
the Merger, 19,040,585 of the then issued and outstanding shares of Class A
Stock were converted into cash and 1,007,690 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 $338.0 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 Recapitalization was funded by (i) $175.0 million of borrowings under
the Bank Credit Facility (as defined), (ii) $145.0 million from the offering of
the Old Notes (as defined), (iii) approximately $102.0 million of proceeds from
the offering of the Old Discount Notes (as defined) and (iv) an equity
contribution by Investcorp, its affiliates and certain other international
investors of approximately $134.6 million. The proceeds from these financings
funded: the payment of approximately $338.0 million to holders of Class A Stock
who converted their shares; the payment of approximately $5.2 million to option
holders; the repayment of approximately $138.8 million of outstanding
indebtedness under the then existing credit facility; and the payment of
approximately $58.5 million of fees and expenses associated with the
Recapitalization.
The transaction was accounted for as a recapitalization and, as such, the
historical basis of the Company's assets and liabilities was not affected.
Approximately $27.4 million of costs primarily representing financing fees were
capitalized while approximately $36.3 million of costs were expensed and are
reflected as a component of operating income in the Company's 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.
(6) DEBT
As part of the Recapitalization, the Company entered into a new senior
credit facility with a group of banks (the "Bank Credit Facility"), and
pursuant to indentures dated June 17, 1997 (the "Indentures"), issued $145
million of 9 1/2% Series A Senior Subordinated Notes (the "Old Notes") and
$170 million aggregate principal amount of 10 1/2% Series A Senior
Subordinated Discount Notes (the "Old Discount Notes", and together with the
Old Notes, the "Old Securities"). The proceeds from the Bank Credit Facility
and the Old Securities were used to finance the conversion to cash of the
Class A Common Stock, to repay the then outstanding senior credit facility
and to pay the fees and expenses associated with the Recapitalization.
23
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
Although the Old Securities were sold through a confidential placement
memorandum, in September 1997, the Company filed an exchange offer registration
statement with the Securities and Exchange Commission with respect to certain of
the Old Securities (the "Exchange Offer"). Pursuant to the Exchange Offer,
$144.0 aggregate principal amount of 9 1/2% Series B Senior Subordinated Notes
Due 2007 (the "Notes") of the Company were exchanged for a like amount of the
Old Notes and $162.8 million aggregate principal amount at maturity of 10 1/2%
Series B Senior Subordinated Discount Notes Due 2007 (the "Discount Notes" and
together with the Notes, the "Securities") of the Company were exchanged for a
like amount of the Old Discount Notes. The Exchange Offer was made pursuant to
the terms of a Registration Rights Agreement dated June 17, 1997, by and among
the Company, the Guarantors (as defined in the Agreement), and the initial
purchasers of the Old Securities. The Exchange Offer was designed to provide
the holders of the Securities an opportunity to acquire securities that, unlike
the Old Securities, are freely transferable subject to certain restrictions. As
the terms of the Old Securities and the Securities are otherwise identical, for
purposes of the discussions below, the $1.0 million of Old Notes and the $7.2
million of Old Discount Notes that were not exchanged are considered to be part
of the Notes and Discount Notes, respectively. The Company did not receive any
proceeds from the Exchange Offer.
Certain of the Company's subsidiaries have guaranteed the Bank Credit
Facility and the Securities, such guarantee of the Securities being subordinate
to the guarantee of the Bank Credit Facility. See Note 15.
SENIOR INDEBTEDNESS :
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Bank Credit Facility
Revolver . . . . . . . . $ -- $ 39.0
Term . . . . . . . . . . 174.5 82.5
------- --------
Total. . . . . . . . . . 174.5 121.5
Other . . . . . . . . . . . . 2.6 2.8
Less: Current Portion. . . . (1.5) (15.2)
------- --------
Senior indebtedness. . . $ 175.6 $ 109.1
------- --------
------- --------
</TABLE>
The aggregate long-term debt maturities over the next five years are as
follows: 1998 - $1.5 million; 1999 -$1.5 million; 2000 - $1.5 million; 2001 -
$1.5 million; and 2002 - $10.4 million.
BANK CREDIT FACILITY:
In 1995 the Company amended and restated its then existing senior credit
facility, increasing it to a $250 million credit facility (the "Facility"). The
Facility consisted of a six year $100.0 million term loan, maturing in June
2001, due in quarterly installments, and a $150.0 million revolving credit
facility that was set to expire in 2001. Borrowings under the Facility bore
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 Facility
was secured by substantially all of the inventory, intangibles, property, plant,
equipment and capital stock of the Company's subsidiaries.
On June 17, 1997, using a portion of the proceeds from the
Recapitalization, the Company repaid and terminated the Facility. An
extraordinary charge of $1.5 million, net of an income tax benefit of $0.9
million was recorded in connection with this repayment, primarily representing
the write-off of associated deferred financing fees.
24
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
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 (the "Revolver") 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 were outstanding
under the Revolver at December 31, 1997. 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. At
December 31, 1997, $112.5 million was available to borrow under the Revolver.
Borrowings under the Bank Credit Facility bear interest at alternative
floating rate structures at management's option (8.9% for the term loan at
December 31, 1997) and are secured by all the capital stock of each of the
Company's subsidiaries and substantially all of the inventory and property,
plant and equipment of the Company and its subsidiaries other than the special
purpose entity established in connection with the receivables securitization
program. 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
the maintenance of certain financial ratios, restrictions on additional
indebtedness, mergers, asset dispositions, dividends and other restricted
payments and prepayment and amendments of subordinated indebtedness. As of
December 31, 1997, the Company was in compliance with all covenants of the Bank
Credit Facility.
Additional debt of the Company primarily consists of industrial revenue
bonds, which bear interest ranging from 6.2% to 7.5%. The average monthly debt
during 1997 was $314.3 million, an increase of $173.1 million over the
comparable 1996 average debt. This increase is primarily due to change in the
Company's debt structure as part of 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 rank PARI PASSU in right of
payment with all other indebtedness of the Company that is subordinated to
senior indebtedness of the Company.
The Notes are not redeemable at the Company's option prior to June 15,
2002. The Notes are redeemable at the Company's option at 104.750% during the
12 months beginning June 15, 2002, 103.167% during the 12 months beginning June
15, 2003, 101.583% during the 12 months beginning June 15, 2004 and at 100%
thereafter (expressed as a percentage of principal amount). In addition, prior
to June 15, 2000, up to 35% of the Notes may be redeemed at 109.5% of the
principal amount out of the proceeds of certain equity offerings.
10 1/2% SENIOR SUBORDINATED DISCOUNT NOTES:
The $170 million aggregate principal amount of Discount Notes mature on
June 15, 2007. The issue price of each Old Discount Note was $599.82 per $1,000
principal amount at maturity, which represents a yield to June 15, 2002 of 10.5%
per annum. Cash interest will not accrue on the Discount Notes prior to June
15, 2002. Cash interest is payable semi-annually in arrears on June 15 and
December 15 of each year at a rate of 10.5% per annum commencing December 15,
2002. The Discount Notes are general unsecured obligations of the Company
ranking subordinate in right of payment to all existing and future senior
indebtedness of the Company. The Discount Notes rank PARI PASSU in right of
payment with all other indebtedness of the Company that is subordinated to
senior indebtedness of the Company. The accreted value of the Discount Notes
was $107.7 million at December 31, 1997.
25
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
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.
(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. 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 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -------------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ASSETS EXCEED ACCUMULATED
ACCUMULATED ACCUMULATED BENEFITS
BENEFITS BENEFITS EXCEED ASSETS
----------------- ------------ -------------
<S> <C> <C> <C>
Actuarial present value of:
Accumulated benefit obligation . . . . . . $ 30.7 $ 21.1 $ 6.2
----------------- ------------ -------------
----------------- ------------ -------------
Vested benefits . . . . . . . . . . . . . $ 26.5 $ 17.7 $ 6.0
----------------- ------------ -------------
----------------- ------------ -------------
Projected benefit obligation . . . . . . . . . $ 30.7 $ 21.1 $ 6.2
Plan assets at fair value . . . . . . . . . . . 33.9 22.8 5.8
----------------- ------------ -------------
Plan assets in excess of (less than)
projected benefit obligation . . . . . . . 3.2 1.7 (0.4)
Net unrecognized loss . . . . . . . . . . . . . -- 2.7 0.7
Net unrecognized prior service costs
(benefits) . . . . . . . . . . . . . . . . 0.4 (0.3) 0.3
Unrecognized liability at August 1, 1987 . . . 0.2 -- 0.2
Additional minimum liability . . . . . . . . . -- -- (1.2)
----------------- ------------ -------------
Pension asset (liability) recognized
in Consolidated Financial Statements . . . $ 3.8 $ 4.1 $ (0.4)
----------------- ------------ -------------
----------------- ------------ -------------
</TABLE>
Plan assets generally consist of common stocks, fixed income instruments and
certain purchased annuities.
26
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
In accordance with Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," ("SFAS No. 87") the Company recorded an
additional minimum pension liability for underfunded plans at December 31,
1996, representing the excess of unfunded accumulated benefit obligations
over previously recorded pension cost. A corresponding amount was recognized
as an intangible asset except to the extent that these additional liabilities
exceeded related unrecognized prior service costs and net transition
obligations, in which case the increase in liabilities was charged directly
to stockholders' equity. At December 31, 1996, the excess minimum pension
liability resulted in a net reduction of equity of $0.5 million. There was
no additional minimum liability component at December 31, 1997.
Net periodic pension cost for defined benefit pension plans reporting
under the provisions of SFAS No. 87 was:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost . . . . . . . . . . . $ 1.8 $ 1.8 $ 1.1
Interest cost . . . . . . . . . . . 2.0 1.8 1.3
Actual return on assets . . . . . . (6.3) (2.9) (2.3)
Net amortization and deferral . . . 3.7 0.6 0.6
------- -------- -------
Net periodic pension cost . . $ 1.2 $ 1.3 $ 0.7
------- -------- -------
------- -------- -------
</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 all periods presented: 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. Employer contributions to these plans were $1.0
million, $1.4 million and $1.0 million in 1997, 1996 and 1995, 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 post-retirement life and health-care benefits to
certain of its employees. The Company has four plans that 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
post-retirement benefits liability. Contributions to the post-retirement plans
are made by the Company as claims are incurred.
The following table sets forth post-retirement benefit obligations
recognized in the Company's Consolidated Financial Statements :
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- --------
(IN MILLIONS)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . $ 6.5 $ 6.4
Other fully eligible participants . . . . . . . . . 1.8 2.1
Other active participants . . . . . . . . . . . . . 3.9 4.0
--------- --------
Subtotal . . . . . . . . . . . . . . . . . . . 12.2 12.5
Unrecognized actuarial loss . . . . . . . . . . . . (2.3) (3.4)
--------- --------
Post-retirement benefit liability recognized in
Consolidated Financial Statements . . . . . . . . . $ 9.9 $ 9.1
--------- --------
--------- --------
</TABLE>
27
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
Net post-retirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost. . . . . . . . . . . . . . . . . $ 0.5 $ 0.5 $ 0.4
Interest cost . . . . . . . . . . . . . . . . 1.0 0.9 0.7
Net amortization and deferral . . . . . . . . 0.1 0.2 0.1
------ ------ -----
Net post-retirement benefit cost. . . $ 1.6 $ 1.6 $ 1.2
------ ------ -----
------ ------ -----
</TABLE>
The accumulated post-retirement benefit obligation was determined using
an assumed discount rate of 7.5% and 8.0% for the years ended December 31,
1997 and 1996, respectively, and health care cost trend rates of 9.0% in 1997
and 10.5% in 1996, decreasing ratably to 6.0% by the year 1999. The effect
of a one percent increase in the health care cost trend rate assumption would
increase the accumulated post-retirement benefit obligation, resulting in an
increase to the aggregate annual service cost and interest expense components
by approximately $1.2 million and $0.2 million, respectively.
(8) INCOME TAXES
The Company's Consolidated Financial Statements reflect the following
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Inventory and receivable reserves. . . . . . . . . . . . $ 5.0 $ 4.5
Accrued employee benefit obligations . . . . . . . . . . 3.2 2.8
Insurance reserves . . . . . . . . . . . . . . . . . . . 5.6 5.5
Ultravent reserves . . . . . . . . . . . . . . . . . . . 12.8 0.4
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 5.4
------ ------
$34.3 $18.6
------ ------
Deferred tax liabilities:
Property, plant and equipment basis difference . . . . . $ 8.2 $ 8.1
------ ------
------ ------
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Provision (benefit) for income taxes:
Current:
U.S. federal . . . . . . . . . $ 2.7 $ 18.1 $ 11.8
U.S. state . . . . . . . . . . 1.0 3.6 1.7
-------- -------- -------
Subtotal. . . . . . . . . 3.7 21.7 13.5
-------- -------- -------
Deferred:
U.S. federal . . . . . . . . . (13.3) (2.3) 0.4
U.S. state . . . . . . . . . . (2.4) (0.6) (0.2)
-------- -------- --------
Subtotal. . . . . . . . . (15.7) (2.9) 0.2
-------- -------- --------
Total . . . . . . . . . . $ (12.0) $ 18.8 $ 13.7
-------- -------- --------
-------- -------- --------
</TABLE>
28
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
Reconciliation of income (loss) before income taxes computed at the U.S.
federal statutory rate to the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. federal statutory rate . . . . . . . . . . . . . . . . . . . 35% 35% 35%
Income taxes at U.S. federal statutory rate . . . . . . . . . . . $(17.3) $ 17.1 $ 12.5
U.S. state income taxes, net of U.S. federal tax impact . . . . . (0.8) 1.9 1.0
Amortization of intangibles . . . . . . . . . . . . . . . . . . . 0.7 0.6 0.5
Non-deductible expenses, net. . . . . . . . . . . . . . . . . . . 5.0 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 (0.8) (0.3)
------- ------- -------
Provision (benefit) for income taxes . . . . . . . . . . . . $(12.0) $ 18.8 $ 13.7
------- ------- -------
------- ------- -------
Effective income tax rate. . . . . . . . . . . . . . . . . . 24.3% 38.4% 38.4%
------- ------- -------
------- ------- -------
</TABLE>
(9) STOCKHOLDERS' EQUITY
CAPITAL STOCK:
Prior to the Merger, the Company's Certificate of Incorporation
authorized 30,000,000 shares of Class A Common Stock, $.0l par value (the
"Class A Stock"), 14,000,000 shares of Class B Common Stock, $.0l par value
(the "Class B Stock") and 10,000,000 shares of preferred stock. Upon
completion of the Offering in 1994, 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
management pursuant to the Company's 1994 Stock Option and Restricted Share
Plan; and (iii) 14,000,000 shares of Class B Stock outstanding, which were
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.
As discussed in Note 5, pursuant to the Merger Agreement, FBP merged
with and into the Company and the certificate of incorporation of FBP became
the certificate of incorporation of the Company (the "Restated Certificate of
Incorporation"). Each issued and outstanding share of capital stock of FBP
was converted into a share of capital stock of Falcon.
The Company's Restated Certificate of Incorporation authorizes five
classes of common stock. The following table summarizes the authorized
shares of capital stock of the Company at December 31, 1997:
<TABLE>
<CAPTION>
TITLE
-----
<S> <C>
Class A Common Stock, par value $0.01 per share . . . . 1,034,020
Class B Common Stock, par value $0.01 per share . . . . 6,900,000
Class C Common Stock, par value $0.01 per share . . . . 2,048,980
Class D Common Stock, par value $0.01 per share . . . . 17,000
Common Stock, par value $0.01 per share . . . . . . . . 10,000,000
----------
Total. . . . . . . . . . . . . . . . . . . . . . . 20,000,000
----------
----------
</TABLE>
29
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
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.
ADDITIONAL PAID-IN CAPITAL:
As part of the Recapitalization further discussed in Note 5, in June
1997 the Company eliminated its Additional paid-in capital balance.
NOTES RECEIVABLE:
Pursuant to the Company's Senior Executive Stock Purchase Plan (the
"Executive Stock Plan"), at the time of the Offering in 1994 certain
executive officers of the Company purchased a total of 196,500 shares of
Class A Stock for $0.2 million and notes of $2.2 million. These notes bear
interest at 7.5% per annum and are due no later than December 2001 or upon
sale of the shares. In January 1997, the Company repurchased 20,000 of these
shares due to the retirement of one of its officers and the related loan
amount of $0.2 million was repaid. In June 1997, as part of the Merger,
approximately 26,200 shares were either redeemed or prorated pursuant to the
terms of the Merger Agreement and approximately $0.4 million of the
outstanding loans were repaid. In connection with the Recapitalization, the
Executive Stock 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 Executive Stock Plan. Loans under
the 1997 Loan Plan are only available to executives who do not have loans
outstanding under the Executive Stock Plan. At the consummation of the
Recapitalization, loans in the aggregate amount of $0.3 million were issued
to purchase 32,140 shares of Class C Stock. These notes bear interest at
rates tied to interest rates paid on the Company's third party debt and are
due no later than June 2004 or upon sale of the shares.
At December 31,1997, $2.0 million of notes were outstanding under the
Executive Stock Plan and the 1997 Loan Plan. These notes have been
classified as a component of Stockholders' equity in the Company's
Consolidated Balance Sheet. All shares purchased pursuant to the terms of
these plans have been pledged to the Company.
(10) STOCK OPTION PLAN
1997 STOCK INCENTIVE PLAN:
In June 1997, the Company adopted the Senior Management Stock Incentive
Plan (the "1997 Plan"). Pursuant to the 1997 Plan certain directors,
employees and officers of the Company are given an opportunity to acquire
shares of Class C Common Stock (the "Class C Stock") through the grant of
non-qualified stock options, incentive stock options, stock appreciation
rights and restricted stock. The options granted pursuant to the 1997 Plan
are exercisable at no less than the fair market value of the Class C Stock at
the time of grant and vest immediately upon the seventh anniversary of the
grant with the possibility for accelerated vesting based, in part on the
achievement of an annual EBITDA amount, and in part on the achievement of
certain investment targets as defined in the plan. The plan also provides
for vesting of certain percentages of the options in the event of an Initial
Public Offering or an Authorized Sale as defined in the 1997 Plan. Options
issued pursuant to the 1997 Plan expire upon the 30th day following the tenth
anniversary of the grant date.
Options for 870,556 shares of Class C Stock have been granted under the
1997 Plan. A total of 947,851 shares of Class C Stock are reserved for
issuance under the 1997 Plan. The 1997 Plan is administered by the Board of
Directors.
30
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
Non-Qualified stock option activity is shown below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
-------------------------- -------------------------
NUMBER OF WEIGHTED AVG. NUMBER OF WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 . . . . . -- $ --
Granted. . . . . . . . . . . . . . . . 870,556 17.75
Exercised. . . . . . . . . . . . . . . -- --
Canceled . . . . . . . . . . . . . . . -- --
--------- --------------
Balance at December 31, 1997 . . . . . 870,556 $17.75 -- $--
--------- -------------- --------- --------------
--------- -------------- --------- --------------
</TABLE>
At December 31, 1997, the options outstanding had an exercise price of
$17.75. The weighted average remaining contractual life of the options
outstanding was 9 1/2 years. The weighted average fair value of options
granted in 1997 was $17.75.
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 1997, pro forma net loss would have been $39.2 million.
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>
1997
----
<S> <C>
Risk-Free Interest Rate. . . . . . . . . . . . . 6.4%
Average Life of Options (years). . . . . . . . . 7
Volatility . . . . . . . . . . . . . . . . . . . 0%
Dividend Yield . . . . . . . . . . . . . . . . . 0%
</TABLE>
1994 STOCK OPTION PLAN:
In June 1997, as part of the Merger, the Company paid $5.2 million to
holders of options which were granted under the 1994 Stock Option and
Restricted Stock Plan (the "1994 Plan"). Pursuant to the provisions of the
1994 Plan, the options became immediately exercisable upon a change in
control. The 1994 Plan was terminated subsequent to the Merger. SFAS 123
disclosure of 1996 information has been omitted as this information is not
meaningful.
As part of the Offering in 1994, the Company awarded 70,500 restricted
shares of Class A Stock to certain officers. 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 at December 31,
1996. Unearned compensation was amortized to expense over a four-year vesting
period. This expense amounted to $0.1 million in 1997 and $0.2 million in
1996. As a result of the Recapitalization, these shares became immediately
vested. Included in the Recapitalization expenses is $0.3 million related to
the accelerated vesting of these shares.
31
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(11) BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
(in millions)
Inventories:
Raw materials and supplies . . . . . . . . . . . . . . . . $27.8 $30.9
Work in process. . . . . . . . . . . . . . . . . . . . . . 12.0 12.7
Finished goods . . . . . . . . . . . . . . . . . . . . . . 39.7 32.6
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $79.5 $76.2
------- -------
------- -------
Excess of replacement cost over LIFO inventory cost. . . . $3.2 $3.0
------- -------
------- -------
Other current assets:
Deferred tax assets. . . . . . . . . . . . . . . . . . . . $18.2 $11.4
Residual interest in sold accounts receivable. . . . . . . 13.1 1.9
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.3
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $34.0 $15.6
------- -------
------- -------
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.8 $8.8
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . 51.2 48.0
Machinery and equipment. . . . . . . . . . . . . . . . . . 130.2 117.0
Construction in progress . . . . . . . . . . . . . . . . . 13.4 13.2
Less accumulated depreciation. . . . . . . . . . . . . . . (102.3) (89.6)
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $101.3 $97.4
------- -------
------- -------
Other assets:
Deferred financing fees. . . . . . . . . . . . . . . . . . $21.0 $2.5
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 7.0
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $32.1 $9.5
------- -------
------- -------
</TABLE>
32
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments.
SENIOR SUBORDINATED NOTES
The fair value of the Company's Subordinated Notes is based on quoted
market prices at December 31, 1997.
CREDIT FACILITIES
The carrying amount approximates fair value as the rates are tied to the
prime rate and LIBOR, which fluctuate based on current market conditions.
OTHER DEBT
The carrying amount approximates fair value as rates approximate borrowing
rates currently available to the Company for similar loans.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- ---------- --------
(in millions)
<S> <C> <C> <C> <C>
Cash and cash equivalents. . . . . $29.9 $29.9 $3.9 $3.9
Senior Subordinated Notes. . . . . 252.7 257.6 -- --
Credit Facilities. . . . . . . . . 174.5 174.5 121.5 121.5
Other Debt . . . . . . . . . . . . 2.6 2.6 2.8 2.8
</TABLE>
(13) RELATED PARTY 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 for a five-year term with III, pursuant to which the
Company prepaid III $5.0 million upon the consummation of the
Recapitalization. This amount is being amortized to expense over the
five-year period.
The Company has in the past entered into agreements or arrangements with
affiliates relating to legal services, acquisition services, financing
services and consulting arrangements that are described below. The Company
believes that the terms and resulting costs of all related party transactions
and agreements were no less favorable than those that could have been
obtained from non-affiliated parties.
33
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
The Company shared management, administrative and other services with
Eagle pursuant to a Corporate Services Agreement that renewed annually. The
fee under this agreement was intended to cover Eagle's expected costs in
providing these services to the Company. Total fees paid under this
agreement were $1.4 million in 1997, $2.6 million in 1996 and $2.3 million in
1995. As a result of the Recapitalization, the Corporate Services Agreement
was terminated. Subsequent to the Merger, the Company paid Eagle $0.3
million in fees for utilization of office space and administrative support.
Prior to 1996, the Company participated in an Eagle sponsored self-insurance
program that 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 $17.0 million in the year ended December 31, 1995.
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 former
Director is a member, rendered legal services to the Company. The Company
paid this law firm $0.4 million in 1997 and $0.1 million in 1996.
Also see Notes 1 and 5 for other information regarding related party
transactions.
(14) 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 $4.9 million, $4.7 million and $3.9 million for the
years ended December 31, 1997, 1996, and 1995, respectively.
Future minimum lease payments required as of December 31, 1997 (in
millions):
1998 . . . . . . . . . . . . . $ 1.4
1999 . . . . . . . . . . . . . 1.0
2000 . . . . . . . . . . . . . 1.0
2001 . . . . . . . . . . . . . 0.8
2002 and thereafter. . . . . . 1.4
---------
$ 5.6
---------
---------
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 are either 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.
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 appliances systems,
including the Ultravent-Registered Trademark- product distributed by the
Company. This action resulted from reports of problems with high temperature
plastic venting, including improper installation, cracking, inadequate joint
adhesion, and related safety hazards, including potential for carbon monoxide
emission. In June 1994, as a result of the ULC action, the Ontario Ministry
of Consumer and Commercial Relations ("MCCR") suspended sales of HTPV in the
Province of Ontario. Other provinces of Canada have taken similar action.
Pursuant to an MCCR order, appliance systems in Ontario with HTPV have been
corrected. Gas appliance manufacturers in Canada and the United States no
longer certify HTPV for use with their products. As a result, the Company
discontinued sales of its HTPV product in 1997. Company sales of
Ultravent-Registered Trademark- products in the United States and Canada in
1995, 1996 and 1997 were minimal.
34
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
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. The Company is also a defendant in two cases brought by appliance
manufacturers. In a lawsuit filed in Pennsylvania, the Company has been sued
along with other defendants for reimbursement of costs associated with its
corrective action program. In the other lawsuit, the Company and two other
defendants have been sued in Massachusetts by seven furnace manufacturers
which are seeking damages and declaratory relief for costs expected to be
incurred as a result of corrective action programs to be conducted in
connection with furnace systems vented with HTPV. The Company has filed and
served its own legal action in Michigan against the furnace manufacturers
that have filed suit against the Company , 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 that 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.
The Company has been engaged in discussions with the United States
Consumer Product Safety Commission ("CPSC") regarding the use of HTPV in the
United States. Additionally, certain appliance manufacturers, the plastic
resin manufacturer and the HTPV manufacturer and distributor, including Hart
& Cooley, have participated in a non-binding facilitative mediation process,
the object of which was to develop and implement a voluntary HTPV corrective
action program. The CPSC agreed to delay initiating proceedings mandating a
corrective action program while these parties were involved in the mediation
process. As a result of the facilitative mediation process, the Company
entered into a Corrective Action Program and Settlement Agreement in January
1998, along with 25 appliance manufacturers, an HTPV manufacturer and a resin
manufacturer to correct certain HTPV mid-efficiency gas fired appliances with
a new venting system. The Corrective Action Program was approved by the CPSC
in February 1998. The Settlement Agreement provides for the dismissal of the
above referenced litigation in Massachusetts, Pennsylvania and Michigan.
In 1997, the Company recorded pretax charges of $32.8 million ($20.0
million, net) representing an estimate of its share of the cost of the
Corrective Action Program in the United States, resolution of the Canadian
litigation, the class action litigation, legal fees and other related costs.
The Company estimates that the costs associated with the Corrective Action
Program and other related HTPV matters will be expended during the next three
years. Actual amounts expended could differ depending on a number of factors
including, but not limited to, the estimated replacement cost per unit as
well as the number of units replaced.
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 and have filed motions to dismiss the
Company's lawsuit.
35
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes and the Discount Notes
are fully and unconditionally guaranteed on a joint and several basis
(collectively, the "Guarantees") by DeVilbiss Air Power Company, Hart &
Cooley, Inc., Mansfield Plumbing Products, Inc., SWC Industries, Inc. and
Falcon Manufacturing, Inc. (collectively, the "Guarantor Subsidiaries").
Each of the Guarantor Subsidiaries is a direct or indirect wholly-owned
subsidiary of the Company. The Company's only other subsidiary, Falcon
Receivable Program, Inc., is a special purpose corporation formed for the
Company's accounts receivable securitization program. 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
and Falcon Receivable Program, Inc. (the "Non-Guarantor Subsidiary"). In the
Company's opinion, separate financial statements and other disclosures
concerning each of the Guarantor Subsidiaries would not provide additional
information that is material to investors. Therefore, the Guarantor
Subsidiaries are combined in the presentation below.
Investments in subsidiaries are accounted for by the Parent Company on
the equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Parent Company's investments in and advances to/from
subsidiaries account and earnings. The elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
36
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 29.1 $ 0.7 $ 0.1 $ -- $ 29.9
Inventories, net. . . . . . . . . . . . . . . -- 79.5 -- -- 79.5
Other current assets. . . . . . . . . . . . . 1.1 19.8 13.1 -- 34.0
------ ------- -------- ------- --------
Total current assets. . . . . . . . . . . . . 30.2 100.0 13.2 -- 143.4
Property, plant and equipment, net . . . . . . . . 0.2 101.1 -- -- 101.3
Goodwill . . . . . . . . . . . . . . . . . . . . . -- 57.0 -- -- 57.0
Investment in and advances
to/from subsidiaries. . . . . . . . . . . . . 174.4 (135.5) (7.6) (31.3) --
Other long-term assets . . . . . . . . . . . . . . 27.4 4.7 -- -- 32.1
-------- -------- -------- ------- --------
Total assets. . . . . . . . . . . . . . . . . $232.2 $ 127.3 $5.6 $(31.3) $333.8
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt. . . . . . . . $1.0 $0.5 $ -- $ -- $1.5
Accounts payable. . . . . . . . . . . . . . . 0.3 33.7 -- -- 34.0
Accrued liabilities . . . . . . . . . . . . . 14.2 29.0 -- -- 43.2
-------- -------- -------- ------- --------
Total current liabilities . . . . . . . . . . 15.5 63.2 -- -- 78.7
Long term debt . . . . . . . . . . . . . . . . . . 426.2 2.1 -- -- 428.3
Other long-term liabilities. . . . . . . . . . . . 4.2 36.3 -- -- 40.5
-------- -------- -------- ------- --------
Total liabilities . . . . . . . . . . . . . . 445.9 101.6 -- -- 547.5
-------- -------- -------- ------- --------
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . 0.1 -- -- -- 0.1
Additional paid-in capital. . . . . . . . . . -- 42.9 6.5 (49.4) --
Retained earnings (deficit) . . . . . . . . . (211.8) (17.2) (0.9) 18.1 (211.8)
Other . . . . . . . . . . . . . . . . . . . . (2.0) -- -- -- (2.0)
-------- -------- -------- ------- --------
Total stockholders' equity (deficit). . . . . (213.7) 25.7 5.6 (31.3) (213.7)
-------- -------- -------- ------- --------
Total liabilities and stockholders' equity . . . . $232.2 $ 127.3 $ 5.6 $(31.3) $333.8
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</TABLE>
37
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $2.6 $1.3 $-- $ -- $ 3.9
Inventories, net. . . . . . . . . . . . . . . -- 76.2 -- -- 76.2
Other current assets. . . . . . . . . . . . . 0.6 13.1 1.9 -- 15.6
------ ------ ---- ------ ------
Total current assets. . . . . . . . . . . . . 3.2 90.6 1.9 -- 95.7
Property, plant and equipment, net . . . . . . . . -- 97.4 -- -- 97.4
Goodwill . . . . . . . . . . . . . . . . . . . . . -- 59.1 -- -- 59.1
Investment in and advances
to/from subsidiaries. . . . . . . . . . . . . 147.1 (97.5) 2.0 (51.6) --
Other long-term assets . . . . . . . . . . . . . . 5.5 3.8 0.2 -- 9.5
------ ------ ---- ------- ------
Total assets. . . . . . . . . . . . . . . . . $155.8 $153.4 $4.1 $(51.6) $261.7
------ ------ ---- ------- ------
------ ------ ---- ------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt. . . . . . . . $15.0 $0.2 $-- $-- $15.2
Accounts payable. . . . . . . . . . . . . . . 4.8 45.2 0.1 -- 50.1
Accrued liabilities . . . . . . . . . . . . . (1.9) 32.8 -- -- 30.9
------ ------ ----- ------ ------
Total current liabilities . . . . . . . . . . 17.9 78.2 0.1 -- 96.2
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 (deficit). . . . . 28.4 47.1 4.0 (51.6) 27.9
------- ------- ------ ------- -------
Total liabilities and stockholders' equity . . . . $155.8 $153.4 $4.1 $(51.6) $261.7
------- ------- ------ ------- -------
------- ------- ------ ------- -------
</TABLE>
38
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . $-- $686.4 $-- $-- $686.4
Cost of sales. . . . . . . . . . . . . . . . . . . -- 576.5 -- -- 576.5
-------- ------------ ------------ ------------ -----------
Gross earnings. . . . . . . . . . . . . . . . -- 109.9 -- -- 109.9
Selling and administrative expenses. . . . . . . . 5.9 51.8 -- -- 57.7
Securitization expense . . . . . . . . . . . . . . 5.8 -- (1.8) -- 4.0
Ultravent expense. . . . . . . . . . . . . . . . . -- 32.8 -- -- 32.8
Recapitalization expense . . . . . . . . . . . . . 36.3 -- -- -- 36.3
-------- ------------ ------------ ------------ -----------
Operating income (loss) . . . . . . . . . . . (48.0) 25.3 1.8 -- (20.9)
Corporate allocation . . . . . . . . . . . . . . . (60.0) 60.0 -- -- --
Net interest expense . . . . . . . . . . . . . . . 26.7 0.2 1.6 -- 28.5
-------- ------------ ------------ ------------ -----------
Income (loss) before income taxes. . . . . . . . . (14.7) (34.9) 0.2 -- (49.4)
Provision (benefit) for income taxes . . . . . . . 0.9 (12.9) -- -- (12.0)
-------- ------------ ------------ ------------ -----------
Income (loss) before equity in income (loss) of
consolidated subsidiaries and extraordinary
item. . . . . . . . . . . . . . . . . . . . (15.6) (22.0) 0.2 -- (37.4)
Equity in income of consolidated subsidiaries. . . (21.8) -- -- 21.8 --
-------- ----------- ------------ ------------ -----------
Income (loss) before extraordinary item. . . . . . (37.4) (22.0) 0.2 21.8 (37.4)
Extraordinary item:
Early extinguishment of debt net of income
tax benefit of $0.9 million . . . . . . . . (1.5) -- -- -- (1.5)
-------- ----------- ------------ ------------ -----------
Net income (loss). . . . . . . . . . . . . . . . . $(38.9) $(22.0) $0.2 $21.8 $(38.9)
-------- ----------- ------------ ------------ -----------
-------- ----------- ------------ ------------ -----------
</TABLE>
39
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR 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 48.3 -- -- 53.9
Securitization expense . . . . . . . . . . . . . . 4.3 -- (0.2) -- 4.1
Ultravent expenses . . . . . . . . . . . . . . . . -- 1.8 -- -- 1.8
--------- -------------- ------------- --------------- ---------------
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>
40
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR 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 38.9 -- -- 43.4
Securitization expense . . . . . . . . . . . . . . 3.3 -- -- -- 3.3
Ultravent expense. . . . . . . . . . . . . . . . . -- 0.3 -- -- 0.3
--------- -------------- ------------- --------------- ---------------
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>
41
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 1997
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities . . . . . . . $41.5 $(19.5) $(11.1) $-- $10.9
------------ ------------- ------------ ------------- -------------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . (0.2) (18.9) -- -- (19.1)
Other . . . . . . . . . . . . . . . . . . . . (0.6) 0.1 0.2 -- (0.3)
------------ ------------- ------------ ------------- -------------
Net cash used in investing activities . . . . (0.8) (18.8) 0.2 -- (19.4)
------------ ------------- ------------ ------------- -------------
Cash flows from financing activities:
Advances (to) from affiliate. . . . . . . . . (49.1) 38.0 11.1 -- --
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. . . . . . . . . . (338.0) -- -- -- (338.0)
Payment of Recapitalization fees and
expenses . . . . . . . . . . . . . . . . . (61.8) -- -- -- (61.8)
Net borrowings on debt. . . . . . . . . . . . 16.8 (0.3) -- -- 16.5
------------ ------------- ------------ ------------- -------------
Net cash from financing activities. . . . . . (14.3) 37.7 11.1 -- 34.5
------------ ------------- ------------ ------------- -------------
Change in cash and cash equivalents. . . . . . . . 26.4 (0.6) 0.2 -- 26.0
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . . . . . . 2.6 1.3 -- -- 3.9
------------ ------------- ------------ ------------- -------------
Cash and cash equivalents, end of period . . . . . $29.0 $0.7 $0.2 $-- $29.9
------------ ------------- ------------ ------------- -------------
------------ ------------- ------------ ------------- -------------
</TABLE>
42
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 1996
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities . . . . . . . $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>
43
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(15) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 1995
(dollars in millions)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities . . . . . . . $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>
44
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1997
(16) 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 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 13.2%, 13.3% and 17.7% of total net sales
for the years ended December 31, 1997, 1996 and 1995, 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.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information", which requires the reporting of selected segment information and
entity-wide disclosures about products and services, major customers, and the
countries in which the entity holds assets and reports revenues. The Company is
evaluating the effect of adoption of SFAS 131, which is effective for financial
statement periods beginning after December 15, 1997.
45
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
(UNAUDITED)
QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited interim results of
operations for December 31, 1997 and 1996 (in millions).
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------------ ------------------ ------------------ ------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $160.2 $144.4 $195.7 $168.4 $172.7 $162.7 $157.8 $157.7
Gross earnings(1). . . . . . . 28.2 26.8 36.8 32.2 29.1 30.6 15.8 30.0
Income (loss)
before extra-
ordinary item. . . . . . . . 6.1 5.4 (18.4) 8.1 0.8 8.0 (25.9) 8.5
Net income (loss)(2)(3). . . . 6.1 5.4 (19.9) 8.1 0.8 8.0 (25.9) 8.5
</TABLE>
- ------------------------------------------
(1) Gross earnings for the quarter ended December 31, 1997 reflects $12.4
million of costs associated with pressure washer returns including an $8.0
million non-cash charge.
(2) Net income (loss) for the quarter ended June 30, 1997 reflects after tax
charges of $28.4 million relating to the Recapitalization and an
extraordinary charge of $1.5 million related to the early extinguishment of
debt associated with the Recapitalization.
(3) Net income (loss) for the quarter ended December 31, 1997 reflects after
tax charges of $19.0 million related to Ultravent-Registered Trademark-.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the name, age as of March 1, 1998, position,
offices and certain information with respect to the executive officers and
Directors of the Company. The term of office of each executive will expire
upon the appointment of his successor by the Board of Directors.
<TABLE>
<S> <C>
William K. Hall, 54 . . . . . . President, Chief Executive Officer and
Director of Falcon since 1994; Chairman
of the Board of Directors of Falcon since June
1997; President from 1988 and Chief Executive
Officer and Director from 1990 to June 1997 of
Eagle; Director of GenCorp and A.M. Castle.
William E. Allen, 53 . . . . . . President of DeVilbiss Air Power Company, a
subsidiary of Falcon, since 1989.
Gus J. Athas, 61 . . . . . . . Executive Vice President - Administration of
Falcon since June 1997; Senior Vice President,
General Counsel and Secretary of Falcon since
1994; Senior Vice President of GAMI from 1995
to June 1997; Served in various capacities at
Eagle from 1987 to June 1997 including Senior
Vice President (and prior thereto Vice
President), General Counsel, and Secretary
(and prior thereto Assistant Secretary) from
1995 to June 1997.
Sam A. Cottone, 57 . . . . . . Executive Vice President and Director of
Falcon since June 1997; Chief Financial
Officer of Falcon since 1994; Senior Vice
President - Finance and Treasurer of Falcon
from 1994 to June 1997; Senior Vice President
of GAMI from 1995 to June 1997; Senior Vice
President-Finance, Chief Financial Officer
and Director of Eagle from 1993 to 1995;
Partner with Arthur Andersen LLP from 1973 to
1993.
Edward G. Finnegan, Jr., 36 . . Vice President-Operations and Corporate
Development of Falcon since January 1996;
Served in various non-executive capacities at
Eagle, Equity Group Investments, Inc., and EGI
Corporate Investments, Inc. from 1988 to 1996.
Joseph W. Harbrecht, 53 . . . . President of Mansfield Plumbing Products,
Inc., a subsidiary of Falcon, since December
1997. President, Amana Home Appliances of the
Raytheon Appliance Company from 1996 to 1997;
Served in various capacities at the Kohler
Company from 1981 to 1996 including President,
Kohler Plumbing North America from 1993 to
1996.
Lawrence B. Lee, 55 . . . . . . President of Hart & Cooley, Inc., a subsidiary
of Falcon, since 1985.
Anthony J. Navitsky, 41 . . . . Vice President-Finance & Treasurer of Falcon
since March 1997. 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, 39. . . Director of Falcon since June 1997; Executive
of Investcorp or one or more of its wholly
owned subsidiaries since December 1993;
Managing Director of Mancuso & Company from
1989 to 1993; Director of Simmons Holdings,
Inc., Star Markets Holdings, Inc., CSK Auto
Corporation, and the William Carter Company.
47
<PAGE>
Charles J. Philippin, 47. . . . Director of Falcon since June 1997; Executive
of Investcorp or one or more of its wholly
owned subsidiaries since July 1994; partner
with Coopers & Lybrand L.L.P. from 1982 to
1994; Director of Saks Holdings, Inc., CSK
Auto Corporation, and the William Carter
Company.
Christopher J. Stadler, 33. . . Director of Falcon since June 1997; 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.
Director of CSK Auto Corporation, and The
William Carter Company.
</TABLE>
48
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information about the compensation
of the chief executive officer and the four other most highly compensated
executive officers of the Company (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
------------------------
SECURITIES ALL OTHER
ANNUAL COMPENSATION UNDERLYING COMPEN-
---------------------------------- OPTIONS SATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS ($)(2) (#) ($)(3)
- ------------------------------ ------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
William K. Hall (1) . . . . . . . . . . . . . . . 1997 425,000 83,333 241,271 706,415
President and Chief Executive Officer 1996 250,000 271,200 43,300 6,410
1995 241,551 -- 53,300 6,200
William E. Allen (4) . . . . . . . . . . . . . . 1997 226,768 63,804 51,706 817,830
President, DeVilbiss Air Power Co. 1996 186,162 208,157 19,500 11,402
1995 171,102 50,117 22,100 12,399
Gus J. Athas (1)(5) . . . . . . . . . . . . . . . 1997 252,692 37,500 86,168 306,415
Executive Vice President, General Counsel 1996 144,731 122,040 32,200 6,410
and Secretary 1995 126,174 -- 40,000 6,200
Sam A. Cottone (1)(5) . . . . . . . . . . . . . . 1997 275,000 37,500 120,636 306,415
Executive Vice President-Finance, Treasurer 1996 144,731 122,040 32,200 6,410
and Chief Financial Officer 1995 136,048 -- 40,000 6,200
Lawrence B. Lee . . . . . . . . . . . . . . . . . 1997 210,603 52,818 51,701 411,830
President, Hart & Cooley, Inc. 1996 194,750 73,148 18,450 8,960
1995 185,562 -- 22,100 12,399
</TABLE>
- ---------------------------------
(1) For periods prior to the Recapitalization, the annual compensation and all
other compensation (except for the transaction incentive bonus discussed in
Note 3 below) shown for Messrs. Hall, Athas and Cottone represents 50% of
such compensation paid to them by a subsidiary of Eagle and reimbursed by
the Company.
(2) Partial year bonuses were paid in June 1997 based on Company performance
through the date of the Recapitalization. No bonuses were earned or paid
for the remainder of 1997.
(3) All other compensation includes transaction incentive bonuses of $700,000,
$500,000, $300,000, $300,000 and $399,000 paid to the above named officers,
respectively, upon consummation of the Recapitalization. The remaining
amounts include amounts contributed to an employee savings plan and accrued
under an unfunded supplemental plan.
(4) In addition to the compensation discussed in footnote (3) above, All Other
Compensation for Mr. Allen includes a $275,000 payment for a three-year
non-competition agreement.
(5) In connection with the Recapitalization, Messrs. Athas and Cottone were
named Executive Vice Presidents. Prior to such time, Messrs. Athas and
Cottone were Senior Vice Presidents of the Company.
49
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------- -----------------------------------
NUMBER OF % OF TOTAL 5% ($) 10% ($)
SECURITIES OPTIONS (ASSUMES (ASSUMES
UNDERLYING GRANTED TO EXERCISE OR $28.91 PRICE $46.04 PRICE
OPTIONS EMPLOYEES IN BASE PRICE DATE OF AT END OF AT END OF
GRANTED (#) (1) FISCAL YEAR ($/SHARE) EXPIRATION 10 YEARS) (2) 10 YEARS) (2)
---------------- ------------- ------------ ------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
William K. Hall. . . . . 241,271 27.7% 17.75 7/17/07 2,721,309 6,912,656
William E. Allen . . . . 51,706 5.9% 17.75 7/17/07 583,195 1,481,429
Gus J. Athas . . . . . . 86,168 9.9% 17.75 7/17/07 971,894 2,469,799
Sam A. Cottone . . . . . 120,636 13.9% 17.75 7/17/07 1,360,660 3,456,342
Lawrence B. Lee. . . . . 51,701 5.9% 17.75 7/17/07 583,139 1,481,285
</TABLE>
- --------------------
(1) Options are for Class C Stock and vest immediately upon the seventh
anniversary of the grant with the possibility of accelerated vesting based,
in part, on the achievement of an annual EBITDA amount and in part on the
achievement of certain investment targets as defined in the plan.
(2) These numbers are for presentation purposes only and are not predictions of
future stock prices.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE (#)(1) REALIZED ($)(1) UNEXERCISABLE UNEXERCISABLE(2)
--------------------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C>
William K. Hall . . . 136,600 902,447 0/241,271 0 / N/A
William E. Allen . . 56,600 373,095 0/51,706 0 / N/A
Gus J. Athas . . . . 102,200 675,618 0/86,168 0 / N/A
Sam A. Cottone . . . 102,200 675,618 0/120,636 0 / N/A
Lawrence B. Lee . . . 56,850 378,566 0/51,701 0 / N/A
</TABLE>
- ------------------------
(1) Upon consummation of the Merger, all options outstanding became immediately
exercisable and were redeemed at the difference between $17.75 and the
exercise price of the option.
(2) As there is no public trading market for the Company's common stock, the
value of In-The-Money Options is not determinable.
PENSION PLAN TABLE
The Falcon Cash Balance Pension Plan is a qualified "cash balance" defined
benefit plan that covers eligible salaried and hourly employees of Falcon and
its subsidiaries that adopt the plan. Prior to the Recapitalization, certain
officers of the Company participated in an Eagle sponsored Cash Balance Plan
which mirrored the Falcon 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 an 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 account balances are further credited with interest. The
interest credit is 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, 1997 was 5.5%. Covered
compensation includes salary, annual bonus, 401(k) deferrals and overtime, but
excludes long-term incentive compensation.
50
<PAGE>
The estimated annual annuity benefits payable under the Pension Plans at
normal retirement are $17,432 , $47,884 , $4,828, $9,269 and $41,643 for
Messrs. Hall, Allen, Athas, Cottone, and Lee, respectively at December 31,
1997. Prior to the Recapitalization, the Company bore 50% of the current
costs of these benefits for Messrs. Hall, Cottone and Athas pursuant to the
Corporate Services Agreement described below. The Corporate Services
Agreement was terminated in connection with the Recapitalization and the
Company now bears all of the costs associated with these benefits.
COMPENSATION OF DIRECTORS
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.
EMPLOYMENT CONTRACTS AND TERMINATION OF
EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Messrs. Hall, Cottone and Athas 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 - Administration, 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 for Messrs. Cottone and Athas, (iii) the
receipt of 10-year stock options, (iv) that such officers have certain rights to
"put" to the Company and the Company has certain rights to "call" from such
officers unrestricted share of Falcon capital stock owned by such officers and
certain vested stock options held by such officers, and (v) that such officers
are each required to own a specific percentage of shares of Falcon capital
stock.
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 June 17, 2000 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
June 17, 2000 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 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.
51
<PAGE>
"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 and Lee
and Joseph W. Harbrecht, President of Mansfield Plumbing Products, Inc., a
subsidiary of the Company, 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 for Messrs.
Allen and Lee and December 10, 1999 for Mr. Harbrecht. 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 executive's cost of continuing certain health care benefits for up
to two years. Similar agreements have been entered into with twenty-three other
employees of the Company's subsidiaries which provide for a lump sum payment
equal to 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.
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. Prior to the consummation of the Recapitalization, 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 a member of the Board of Directors of GAMI and the Chief Executive
Officer and a director of its subsidiary, 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 the Zell Trust; Ms. Rosenberg 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.
Prior to the consummation of the Recapitalization, the Company shared
management, administrative and other services with Eagle pursuant to a Corporate
Services Agreement that renewed annually. The fee under this agreement was
intended to cover Eagle's expected costs in providing these services to the
Company and was reviewed by the Audit Committee of the Board of Directors of the
Company. The fee paid for 1997 was $1.4 million.
The law firm of Rosenberg & Liebentritt, P.C., of which Ms. Rosenberg is a
partner, provided legal service to the Company and was paid $0.4 million and
$0.1 million in 1997 and 1996, respectively, for these services.
The Company, until the Offering in November 1994, was included in the
consolidated federal income tax returns of GAMI. In addition, the Company filed
certain combined state tax returns with GAMI until the distribution to EHL in
1996. The Company has agreed to pay to GAMI amounts equal to the amounts the
Company would have paid had it filed its own income tax returns for these
periods. In December 1996, the Company paid GAMI $4.6 million pursuant to this
agreement.
52
<PAGE>
In connection with the 1994 public offering of its Common Stock, the
Company has agreed with the Pension Benefit Guaranty Corporation that through
November 1999 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 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 GAMI and Eagle 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 others' business.
In 1994, the Company loaned $0.9 million to Mr. Hall; $0.2 million to
Mr. Cottone; $0.2 million to Mr. Athas; $0.3 million to Mr. Allen; and $0.1
million to Mr. Lee. In addition, a total of $0.5 million was loaned to two
officers of the Company who are not Named Executive Officers. These loans
were to enable these officers to purchase Common Stock in the public offering
at $12 per share. 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, 1997, the
balances of these loans to the Named Executive Officers were $0.8 million,
$0.2 million, $0.2 million, $0.1 million, and $0.1 million, respectively. 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 are only 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 $0.3 million 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.
53
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1997, certain
information with respect to the beneficial ownership of the voting stock of the
Company by (i) each stockholder who is known by the Company to beneficially own
more than 5% of the Common Stock, (ii) each director of the Company who could be
deemed to be the beneficial owner of shares of voting stock, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, each beneficial owner has sole
investment power and sole voting power with respect to the securities
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
-----------------------
NUMBER OF % OF
SHARES(1) CLASS
---------- --------
<S> <C> <C>
CLASS A VOTING STOCK
EHL (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783,354 77.7%
William E. Allen (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,818 2.2
Gus J. Athas (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,636 1.4
Sam A Cottone (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,488 1.3
William K. Hall (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,182 6.8
Lawrence B. Lee (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,364 1.1
All directors and executive officers as a group, including the above
named persons (8 persons) . . . . . . . . . . . . . . . . . . . . . . . . 156,670 15.5
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.
(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, Hall and Lee is c/o Falcon
Building Products, Inc., 233 South Wacker Drive, Suite 3500, Chicago,
Illinois 60606.
54
<PAGE>
(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
(7) 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 entity 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.
55
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of transactions and relationships between the Company and
its directors, executive officers and more than 5% stockholders, see
"Compensation Committee Interlocks and Insider Participation" and Note 13 of the
Notes to the Company's Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Accountants. . . . . . . . . . . . . 14
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 16
Consolidated Statements of Income . . . . . . . . . . . . . 17
Consolidated Statements of Stockholders' Equity . . . . . . 18
Consolidated Statements of Cash Flows . . . . . . . . . . . 19
Notes to Consolidated Financial Statements. . . . . . . . . 20
</TABLE>
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, or are inapplicable, or the information
called for therein is included elsewhere in the financial statements or the
notes thereto. Accordingly, such schedules have been omitted.
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 24, 1998, relative to
the Corrective Action Program that was approved by the Consumer Products Safety
Commission regarding high temperature plastic venting systems.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Index to Exhibits, which is incorporated herein by reference.
56
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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/ WILLIAM K. HALL
----------------------------------------
William K. Hall
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 27, 1998
-------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ WILLIAM K. HALL Director and Chairman of the March 27, 1998
- --------------------------------- Board of Directors, President and
(William K. Hall) Chief Executive Officer (Principal
Executive Officer)
/s/ SAM A. COTTONE Executive Vice President-Finance, March 27, 1998
- --------------------------------- and Chief Financial Officer
(Sam A. Cottone) (Principal Financial Officer)
/s/ ANTHONY J. NAVITSKY Vice President--Finance and Treasurer March 27, 1998
- --------------------------------- (Principal Accounting Officer)
(Anthony J. Navitsky)
* /s/ CHRISTOPHER J. O'BRIEN Director March 27, 1998
- ---------------------------------
(Christopher J. O'Brien)
* /s/ CHARLES J. PHILIPIN Director March 27, 1998
- ---------------------------------
(Charles J. Philipin)
* /s/ CHRISTOPHER J. STADLER Director March 27, 1998
- ---------------------------------
(Christopher J. Stadler)
</TABLE>
* by /s/ Sam A. Cottone as attorney in fact for each person indicated.
---------------------
(Sam A. Cottone)
57
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2.1 Agreement and Plan of Merger, dated as of March 20, 1997, between
Falcon Building Products, Inc. (the "Company") and FBP Acquisition
Corporation, Inc. ("FBP"), including exhibits thereto (incorporated
by reference to Annex I to the Proxy Statement/Prospectus contained
in the Company's Registration Statement on Form S-4, File No.
333-24625, filed April 4, 1997, as amended).
2.2 Stockholder Voting Agreement, dated as of March 20, 1997, among the
Company, FBP and Equity Holdings Limited ("EHL") (incorporated by
referenced to Annex II-A to the Proxy Statement/Prospectus
contained in the Company's Registration Statement on Form S-4, File
No. 333-24625, filed April 4, 1997, as amended).
2.3 Form of Stockholder Voting Agreements, dated as of March 20, 1997,
among the Company, FBP and certain management stockholders
(incorporated by reference to Annex II-B to the Proxy
Statement/Prospectus contained in the Company's Registration
Statement on Form S-4, File No. 333-24525, filed April 4, 1997, as
amended).
3.1 Restated Certificate of Incorporation of the Company as filed with
the Delaware Secretary of State on June 17, 1997. (Incorporated by
reference to Exhibit 3.01 of the Company's Quarterly Report on Form
10-Q, dated June 30, 1997.)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.02
of the Company's Quarterly Report on Form 10-Q, dated June 30,
1997.)
4.1 Indenture between the Company, its subsidiaries DeVilbiss Air Power
Company , Ex-Cell Manufacturing Company, Inc. , Hart & Cooley,
Inc., Mansfield Plumbing Products, Inc. and SWC Industries, Inc.
(collectively, the "Guarantors"), and Harris Trust and Savings
Bank, as Trustee, dated as of June 17, 1997, relating to the
Company's 9 1/2% Senior Subordinated Notes due 2007 (the "Notes"),
including form of Note (incorporated by reference to Exhibit 4.1 of
the Company's Current Report on Form 8-K dated June 17, 1997).
4.2 Supplemental Indenture between Falcon Manufacturing, Inc. and
Harris Trust and Savings Bank, as Trustee, dated as of June 17,
1997 relating to the Company's Notes.
4.3 Indenture between the Company, the Guarantors and Harris Trust and
Savings Bank, as Trustee, dated as of June 17, 1997, relating to
the Company's 10 1/2% Senior Subordinated Discount Notes due 2007
(the "Discount Notes"), including form of Discount Note
(incorporated by reference to Exhibit 4.2 of the Company's Current
Report on Form 8-K dated June 17, 1997).
4.4 Supplemental Indenture between Falcon Manufacturing, Inc. and
Harris Trust and Savings Bank, as Trustee, dated as of June 17,
1997 relating to the Company's Discount Notes.
4.5 Form of Note. (Incorporated by reference to Exhibit 4.03 of the
Company's Registration Statement on Form S-4, filed August 28,
1997.)
4.6 Registration Rights Agreement, dated June 17, 1997, between the
Company, the Guarantors and Smith Barney, Inc., BT Securities
Corporation, Chase Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (Incorporated by reference to Exhibit
4.03 of the Company's Quarterly Report on Form 10-Q, dated June 30,
1997.)
4.7 Credit Agreement, dated as of June 17, 1997, among the Company, the
several Lenders from time to time parties thereto, and The Chase
Manhattan Bank, as administrative agent for the Lenders
(incorporated by reference to Exhibit 10.1 of the Company's Current
Report on Form 8-K dated June 17, 1997).
4.8 Form of Discount Note. (Incorporated by reference to Exhibit 4.04
of the Company's Registration Statement on Form S-4, filed August
28, 1997.)
4.9 Form of Note Guarantee. (Incorporated by reference to Exhibit 4.05
of the Company's Registration Statement on Form S-4, filed August
28, 1997.)
4.10 Form of Discount Note Guarantee. (Incorporated by reference to
Exhibit 4.06 of the Company's Registration Statement on Form S-4,
filed August 28, 1997.)
4.11 Form of Certificate for Class A Stock (Incorporated by reference
to Exhibit 4.1 of Falcon Building Products, Inc. Registration
Statement of Form S-1. Registration Number 33-79006, filed May 17,
1994, as amended.)
10.1 Financing Advisory Agreement, dated March 20, 1997, between FBP and
Investcorp International, Inc. (Incorporated by reference to
Exhibit 10.01 of the Company's Quarterly Report on Form 10-Q, dated
June 30, 1997.)
10.2 Standby Loan Commitment Letter Agreement, dated as of March 20,
1997, between FBP and Invifin S.A. (incorporated by reference to
Annex I to the Proxy Statement/Prospectus contained in the
Company's Registration Statement on Form S-4, File No. 333-24625,
filed April 4, 1997, as amended).
58
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.3 Agreement for Management Advisory, Strategic Planning and
Consulting Services, between FBP and Investcorp International,
Inc., dated as of June 17, 1997. (Incorporated by reference to
Exhibit 10.03 of the Company's Quarterly Report on Form 10-Q, dated
June 30, 1997.)
10.4 Employment Agreement, dated May 22, 1997, between the Company and
Gus J. Athas. (Incorporated by reference to Exhibit 10.04.1 of the
Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.5 First Amendment to the Employment Agreement between the Company and
Gus J. Athas. (Incorporated by reference to Exhibit 10.04.2 of the
Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.6 Employment Agreement, dated May 22, 1997, between the Company and
Sam A. Cottone. (Incorporated by reference to Exhibit 10.05.1 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.7 First Amendment to the Employment Agreement between the Company and
Sam A. Cottone. (Incorporated by reference to Exhibit 10.05.2 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.8 Employment Agreement, dated May 22, 1997, between the Company and
William K. Hall. (Incorporated by reference to Exhibit 10.06.1 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.9 First Amendment to the Employment Agreement between the Company and
William K. Hall. (Incorporated by reference to Exhibit 10.06.2 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.10 Employment Agreement, dated May 22, 1997, between the Company and
Anthony J. Navitsky. (Incorporated by reference to Exhibit 10.07.1 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.11 First Amendment to the Employment Agreement between the Company and
Anthony J. Navitsky. (Incorporated by reference to Exhibit 10.07.2 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.12 Employment Agreement, dated May 22, 1997, between the Company and
Edward G. Finnegan, Jr. (Incorporated by reference to Exhibit 10.08.1
of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.13 First Amendment to the Employment Agreement between the Company and
Edward G. Finnegan, Jr. (Incorporated by reference to Exhibit
10.08.2 of the Company's Quarterly Report on Form 10-Q, dated June
30, 1997.)
10.14 Non-Competition Agreement, dated as of March 31, 1997 between the
Company and William E. Allen. (Incorporated by reference to Exhibit
10.09 of the Company's Quarterly Report on Form 10-Q, dated June 30,
1997.)
10.15 Amended and Restated Receivables Purchase Agreement, dated as of
June 17, 1997 among Falcon Receivable Program, Inc., the Company,
Market Street Funding Corporation and PNC Bank, National
Association. (Incorporated by reference to Exhibit 10.10 of the
Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.16 Form of Director Indemnity Agreements, dated as of June 17, 1997,
between the Company and its Directors. (Incorporated by reference to
Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q, dated
June 30, 1997.)
10.17 1997 Senior Executive Stock Loan Plan. (Incorporated by reference to
Exhibit 10.13 of the Company's Quarterly Report on Form 10-Q, dated
June 30, 1997.)
10.18 Form of Stock Pledge Agreement between the Company and certain
management stockholders (schedule attached). (Incorporated by
reference to Exhibit 10.14 of the Company's Quarterly Report on Form
10-Q, dated June 30, 1997.)
10.19 Form of Common Stock Option Settlement Agreement, between the
Company and certain employees (schedule attached). (Incorporated by
reference to Exhibit 10.15 of the Company's Quarterly Report on Form
10-Q, dated June 30, 1997.)
10.20 Form of Restricted Settlement Agreements between the Company and
certain employees. (Incorporated by reference to Exhibit 10.16 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.21 Falcon Building Products, Inc. Employee Savings Plan as adopted
January 1, 1995. (Incorporated by reference to Exhibit 10.17 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.)
10.22 Management Stock Incentive Plan. (Incorporated by reference to
Exhibit 10.17 of the Company's Quarterly Report on Form 10-Q, dated
June 30, 1997.)
10.23 Falcon Building Products, Inc. Cash Balance Pension Plan as adopted
January 1, 1996. (Incorporated by reference to Exhibit 10.18 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.)
10.24 Form of Stock Option Agreement pursuant to the Company's Management
Stock Incentive Plan between the Company and certain employees
(schedule attached). (Incorporated by reference to Exhibit 10.18 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.25 Termination Benefits Agreement dated December 13, 1996 between Hart
& Cooley, Inc. and Lawrence B. Lee. (Incorporated by reference to
Exhibit 10.19 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.)
59
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.26 Form of Stockholder Agreement, dated June 17, 1997, by and among
Falcon, FBP and certain management stockholders (schedule attached).
(Incorporated by reference to Exhibit 10.19 of the Company's
Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.27 Termination Benefits Agreement dated December 18, 1996 between
Mansfield Plumbing Products, Inc. and Paul Fischer. (Incorporated by
reference to Exhibit 10.20 of the Company's Annual Report on Form 10-
K for the year ended December 31, 1996.)
10.28 Stockholder Rights Agreement, dated June 17, 1997, by and among the
Company, FBP and EHL. (Incorporated by reference to Exhibit 10.20 of
the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.29 Termination Benefits Agreement dated December 31, 1996 between
DeVilbiss Air Power Company and William E. Allen. (Incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on Form 10-
K for the year ended December 31, 1996.)
10.30 Amendment to the Company's Senior Executive Stock Purchase Plan,
dated as of June 17, 1997, among the Company and certain employees.
(Incorporated by reference to Exhibit 10.21 of the Company's
Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.31 Termination Benefits Agreement dated December 19, 1996 between
Falcon Building Products, Inc. and Daniel G. Ellis. (Incorporated by
reference to Exhibit 10.22 of the Company's Annual Report on Form 10-
K for the year ended December 31, 1996.)
10.32 Casualty Insurance Indemnity Agreement, dated as of March 20, 1997,
by and among the Company, DeVilbiss Air Power Company, Eagle
Industries, Inc., Great American Management and Investment, Inc.,
Hart & Cooley, Inc. and Mansfield Plumbing Products, Inc..
(Incorporated by reference to Exhibit 10.22 of the Company's
Quarterly Report on Form 10-Q, dated June 30, 1997.)
10.33 Tax Indemnity Agreement, dated as of March 20, 1997, by and among
the Company, DeVilbiss Air Power Company, Eagle Industries, Inc.,
Great American Management and Investment, Inc., Hart & Cooley, Inc.
and Mansfield Plumbing Products, Inc. (Incorporated by reference to
Exhibit 10.23 of the Company's Quarterly Report on Form 10-Q, dated
June 30, 1997.)
10.34 Pension Benefits Indemnity Agreement, dated as of March 20, 1997, by
and among the Company, DeVilbiss Air Power Company, Eagle Industries,
Inc., Great American Management and Investment, Inc., Hart & Cooley,
Inc. and Mansfield Plumbing Products, Inc. (Incorporated by
reference to Exhibit 10.24 of the Company's Quarterly Report on Form
10-Q, dated June 30, 1997.)
10.35 Termination Benefits Agreement dated December 20, 1997 between
Mansfield Plumbing Products, Inc. and Joseph W. Harbrecht.
21.1 Subsidiaries of the Company.
24.1 Power of Attorney of Directors
60
<PAGE>
Exhibit 4.2
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "SUPPLEMENTAL INDENTURE"), dated as of June
17, 1997, between Falcon Manufacturing, Inc. (the "GUARANTOR"), a subsidiary
of Falcon Building Products, Inc., A Delaware corporation (the "COMPANY"),
and Harris Trust and Savings Bank, as trustee under the indenture referred to
below (the "TRUSTEE").
W I T N E S S E T H
WHEREAS, the Company, as Issuer and Hart & Cooley, Inc., Mansfield
Plumbing Products, Inc., DeVilbiss Air Power Company, SWC Industries, Inc.
and Ex-Cell Manufacturing Company, Inc., as Guarantors have heretofore
executed and delivered to the Trustee an indenture (the "INDENTURE"), dated
as of June 17, 1997, providing for the issuance of an aggregate principal
amount of $145,000,000 of 91/2% Series A and B Senior Subordinated Notes due
2007 (the "NOTES");
WHEREAS, Section 4.17 of the Indenture provides that under certain
circumstances the Company is required to cause the Guarantor to execute and
deliver to the Trustee a supplemental indenture pursuant to which the
Guarantor shall unconditionally guarantee all of the Company's obligations
under the Notes pursuant to a Guarantee on the terms and conditions set forth
in Article 11 of the Indenture; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Guarantor and the Trustee mutually covenant and agree for the equal and
ratable benefit of the holders of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. The Guarantor hereby agrees, jointly and
severally with all other Guarantors, to guarantee the Company's Obligations
under the Notes on the terms and subject to the conditions set forth in
Article 11 of the Indenture and to be bound by all other applicable
provisions of the Indenture.
3. NO RECOURSE AGAINST OTHERS. No officer, employee, director,
incorporator or stockholder of the Company or a Guarantor shall have any
liability for any Obligations of the Company or a Guarantor under the Notes,
the Indenture or this Supplemental Indenture, or for any claim based on, in
respect of, or by reason of, such Obligations or the creation of any such
<PAGE>
Obligation. Each Holder by accepting a Note waives and releases all such
liability, and such waiver and release is part of the consideration for the
issuance of the Notes.
4. GOVERNING LAW. The internal laws of the State of New York shall
govern this Supplemental Indenture, without regard to the conflict of laws
provisions thereof.
5. COUNTERPARTS. This Supplemental Indenture may be executed in any
number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
6. EFFECT OF HEADINGS. The Section headings herein are for
convenience only and shall not affect the construction hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated as of June 17, 1997 FALCON MANUFACTURING, INC.
By: /s/ Anthony J. Navitsky
-----------------------------------
Name: Anthony J. Navitsky
Title: Vice President
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By: /s/ J. Bartolini
-----------------------------------
Name: J. Bartolini
Title: Vice President
Attest:
/s/ D.G. Donovan
- -----------------------------------
Name: D.G. Donovan
Title: Assistant Secretary
<PAGE>
Exhibit 4.4
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "SUPPLEMENTAL INDENTURE"), dated as of June
17, 1997, between Falcon Manufacturing, Inc. (the "GUARANTOR"), A subsidiary of
Falcon Building Products, Inc., A Delaware Corporation (the "COMPANY"), and
Harris Trust And Savings Bank, As Trustee under the indenture referred to below
(the "TRUSTEE").
W I T N E S S E T H
WHEREAS, the Company, as Issuer and Hart & Cooley, Inc., Mansfield Plumbing
Products, Inc., DeVilbiss Air Power Company, SWC Industries, Inc. and Ex-Cell
Manufacturing Company, Inc., as Guarantors have heretofore executed and
delivered to the Trustee an indenture (the "INDENTURE"), dated as of June 17,
1997, providing for the issuance of an aggregate principal amount at maturity of
$170,000,000 of 10 1/2% Series A and B Senior Subordinated Discount Notes due
2007 (the "NOTES");
WHEREAS, Section 4.17 of the Indenture provides that under certain
circumstances the Company is required to cause the Guarantor to execute and
deliver to the Trustee a supplemental indenture pursuant to which the Guarantor
shall unconditionally guarantee all of the Company's obligations under the Notes
pursuant to a Guarantee on the terms and conditions set forth in Article 11 of
the Indenture; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Guarantor and the Trustee mutually covenant and agree for the equal and ratable
benefit of the holders of the Notes as follows:
1. CAPITALIZED TERMS. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. AGREEMENT TO GUARANTEE. The Guarantor hereby agrees, jointly and
severally with all other Guarantors, to guarantee the Company's Obligations
under the Notes on the terms and subject to the conditions set forth in Article
11 of the Indenture and to be bound by all other applicable provisions of the
Indenture.
3. NO RECOURSE AGAINST OTHERS. No officer, employee, director,
incorporator or stockholder of the Company or a Guarantor shall have any
liability for any Obligations of the Company or a Guarantor under the Notes, the
Indenture or this Supplemental Indenture, or for any claim based on, in respect
of, or by reason of, such Obligations or the creation of any such
<PAGE>
Obligation. Each Holder by accepting a Note waives and releases all such
liability, and such waiver and release is part of the consideration for the
issuance of the Notes.
4. GOVERNING LAW. The internal laws of the State of New York shall
govern this Supplemental Indenture, without regard to the conflict of laws
provisions thereof.
5. COUNTERPARTS. This Supplemental Indenture may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
6. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and shall not affect the construction hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated as of June 17, 1997 FALCON MANUFACTURING, INC.
By: /s/ Anthony J. Navitsky
-----------------------------------
Name: Anthony J. Navitsky
Title: Vice President
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By: /s/ J. Bartolini
-----------------------------------
Name: J. Bartolini
Title: Vice President
Attest:
/s/ D.G. Donovan
- -----------------------------------
Name: D.G. Donovan
Title: Assistant Secretary
<PAGE>
TERMINATION BENEFITS AGREEMENT
This Termination Benefits Agreement ("Agreement") is entered into as
of the 20th day of December 1997, by and between Mansfield Plumbing Products,
Inc., a Delaware corporation ("Company") and Joseph W. Harbrecht ("Employee").
WITNESSETH:
WHEREAS, Employee is a key employee of the Company;
WHEREAS, the Company considers that providing Employee with certain
employment termination benefits will operate as an incentive for Employee to
remain employed by the Company during the period set forth below that the
Company may undertake to negotiate a change in control or ownership of the
Company or its parent, Falcon Building Products, Inc. (Falcon);
WHEREAS, this Agreement is intended to provide benefits only in the
event of a change in control or ownership of the Company or Falcon prior to
December 10, 1999 (the "Expiration Date");
NOW THEREFORE, to induce Employee to remain employed by the Company
through the Expiration Date, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the Company and
Employee agree as follows:
1. DEFINITIONS.
(a) "Change in Control" shall mean the sale by the Company
or Falcon of all or substantially all of their assets
and business to a person or entity other than a Related
Person or the sale of fifty-one percent (51 %) or more
of the voting securities and capital stock of the
Company or Falcon to a person or entity other than a
Related Person. "Related Person" shall mean any person
or entity directly or indirectly owned and controlled by
Investcorp International, Inc. ("Investcorp").
(b) "Termination Date" shall mean the date of termination of
Employee's employment relationship with the Company.
(c) "Termination Payments" shall mean any payment or
distribution of compensation or benefits made pursuant
to Section 3 of this Agreement.
<PAGE>
(d) "Termination With Cause" shall mean termination of Employee
by the Company for any of the following reasons:
(i) the failure of Employee to render services to the
Company in substantial accordance with the terms
of his employment, which failure amounts to gross
neglect of his duties to the Company;
(ii) any violation of Section 6 of this Agreement or
any employment agreement which Employee may have
with the Company;
(iii) taking any role in any buy-out of the Company or
Falcon without the approval of the Company's
majority shareholder; or
(iv) Employee's commission of any act of fraud, theft
or embezzlement against the Company.
(e) "Voluntary Termination" shall mean the voluntary
resignation by Employee of his employment with the
Company other than a voluntary resignation following
either:
(i) any reduction in compensation consisting of base
salary and incentive bonus;
(ii) a substantial diminution of his responsibilities;
or
(iii) a relocation by the Company of Employee's place
of employment outside a fifty (50) mile radius of
Employee's current place of employment.
2. TERMINATION OF EMPLOYEE. In the event of Employee's
termination of employment with the Company within two (2) years
immediately following the date on which there was a Change in
Control or ownership of the Company or Falcon, the Company
shall provide Employee with the Termination Payments outlined
in Section 3, unless the termination is for any of the
following reasons:
(a) Termination With Cause;
(b) Voluntary Termination;
(c) The death of the Employee. Nothing in this section shall
affect any entitlement of Employee's heirs to the benefits
of any life insurance plan; or
<PAGE>
(d) Termination as a result of Employee's incapacity (i.e.,
if in the reasonable opinion of the Company, Employee is
prevented from properly performing his duties by reason
of any physical or mental incapacity for a period of
more than one hundred twenty (120) days, in the
aggregate, in any twelve (12) month period). Nothing in
this section shall affect Employee's rights under any
disability plan in which he is a participant.
3. TERMINATION PAYMENTS. In the event that Employee is entitled
to Termination Payments pursuant to the terms of Section 2:
(a) COMPENSATION. The Company shall pay Employee an amount
equal to two (2) years base salary plus par bonus as of
the Termination Date, without giving effect to any
reduction in base salary or incentive bonus prior to the
Termination Date; payable within thirty (30) days of the
Termination Date following the Change in Control.
(b) EMPLOYEE BENEFITS:
(i) VACATION. Any accrued vacation pay due but not
yet taken at the Termination Date shall be paid
to Employee within thirty (30) days following the
Termination Date.
(ii) HEALTH BENEFITS. If Employee participated in any
health benefit plan in effect immediately prior
to the Termination Date, and if Employee elects
to continue participating in such plan pursuant
to the terms of said plan and the Comprehensive
Omnibus Budget Reconciliation Act ("COBRA"), the
Company shall pay for the costs of Employee's
participation in such plan from the Termination
Date until the earlier of: (a) the date which is
twenty-four (24) months following the Termination
Date; or (b) the date of Employee's eligibility
in any health benefit plan offered by Employee's
new employer, if any. Employee shall notify the
Company in writing within thirty (30) days of any
new employment.
(iii) RETIREMENT AND PROFIT-SHARING PLANS.
Notwithstanding anything in this Agreement to the
contrary, Employee's rights in any retirement,
pension or profit-sharing plans offered by the
Company shall be governed by the rules of such
plans as well as by applicable law; provided,
however, that on the Termination Date, Employee
shall become fully vested in all pension and 401
(k) account balances.
<PAGE>
(iv) OUTPLACEMENT ASSISTANCE. The Company will
provide Employee up to one year of employment
outplacement services with a nationally
recognized executive placement company.
4. AT-WILL EMPLOYMENT. The Company and Employee have, and will
continue to have, an at-will employment relationship. That is,
either party can terminate the employment relationship for any
reason at any time. Nothing contained in this Agreement shall
be interpreted to amend or alter this at-will employment
relationship.
5. LIMITATION OF PAYMENT. Notwithstanding anything in this
Agreement to the contrary, if receipt of the Termination
Payments would subject Employee to tax under Section 4999 of
the Internal Revenue Code of 1986, as amended, the Termination
Payments shall be "grossed up" to an amount that would allow
the Employee to receive the net after-tax amount he would have
received but for the application of said Section 4999.
6. CONTINUING OBLIGATIONS. In order to induce the Company to
enter into this Agreement, Employee hereby agrees that all
documents, records, techniques, business secrets and other
information which have come into his possession from time to
time during his continued employment by the Company or which
may come into his possession during his employment hereunder,
shall be deemed to be confidential and proprietary to the
Company, and Employee further agrees to retain in confidence
any confidential information known to him concerning the
Company and its subsidiaries and their respective businesses so
long as such information is not publicly disclosed. Employee
further agrees to cooperate fully as requested from time to
time by the controlling shareholder of the Company, the
Company's Board of Directors, or Company Management in
connection with any transaction involving the possible sale of
the Company or Falcon. Employee further agrees not to speak
about a possible sale of the Company or Falcon with or
otherwise respond to requests to or from any third parties
involving the possible sale of the Company or Falcon, unless
specifically authorized to do so by the Company or the
controlling shareholder of the Company. The obligations of
Employee under this Section 6 shall be in addition to, and
shall not limit, any other obligation of Employee to the
Company with respect to the matters set forth herein or
otherwise.
7. ASSIGNMENTS AND TRANSFERS. Employee agrees that he will not
assign, sell, transfer, delegate or otherwise dispose of,
whether voluntarily or involuntarily, or by operation of law,
any rights or obligations under this Agreement, nor shall
Employee's rights be subject to encumbrance or the claims of
creditors. Any purported assignment shall be null and void.
This Agreement shall inure to the benefit of and be enforceable
by Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. This Agreement shall be binding upon and shall inure
to the benefit of the
<PAGE>
Company and its successors and assigns, and the Company shall
require any successor or assign to expressly assume and agree
to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no
such succession or assignment had taken place, except no
assumption shall be required if this Agreement is automatically
assumed by operation of law. The term "the Company" as used
herein shall include such successors and assigns. The term
"successors and assigns" as used herein shall include a
corporation or other entity acquiring at least 51 % of the
outstanding shares of the Company or Falcon or all or
substantially all of the assets and business of the Company or
Falcon.
8. NOTICES. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and
shall be deemed to have been duly given and received when
delivered or mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed to
the Company at:
Mansfield Plumbing Products, Inc.
8425 Pulsar Place, Suite 220
Columbus, Ohio 43240
Attn: Chief Financial Officer
and to Employee at:
4882 Autumn Drive
Cedar Rapids, Iowa 52411-7834
or such address as either party may have furnished to the other
in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
9. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of
the State of Ohio.
10. ENTIRE AGREEMENT. The terms of this Agreement are intended by
the parties to be the final expression of their agreement with
respect to Employee's termination benefits and may not be
contradicted by evidence of any prior or contemporaneous
Agreement.
11. AMENDMENTS: WAIVERS. This Agreement may not be modified,
amended, or terminated except by an instrument in writing,
signed by Employee and by a duly authorized representative of
the Company other than Employee. No failure to exercise and no
delay in exercising any right, remedy, or power hereunder shall
operate as a waiver thereof, nor shall any single or partial
<PAGE>
exercise of any right, remedy, or power hereunder preclude any
other or further exercise thereof or the exercise of any other
right, remedy, or power provided herein or by law or in equity.
12. SEVERABILITY: ENFORCEMENT. If any provision of this Agreement,
or the application thereof to any person, place or
circumstance, shall be held by a court of competent
jurisdiction to be invalid, unenforceable, or void, the
remainder of this Agreement and such provisions as applied to
other persons, places, and circumstances shall remain in full
force and effect.
13. ARBITRATION. The parties agree to submit any dispute arising
under this Agreement to arbitration. Arbitration shall be by a
single arbitrator in the Chicago, Illinois area experienced in
the matters at issue selected by the Company and Employee in
accordance with the commercial arbitration rules of the
American Arbitration Association. The decision of the
arbitrator shall be final and binding as to any manner
submitted to him/her under this Agreement. All costs and
expenses incurred in connection with any such arbitration
proceeding shall be borne by the party against whom the
decision is rendered as provided by the arbitrator.
14. RELEASE.
(a) Employee, on behalf of himself, his heirs, executors,
legal representative, successors and assigns, hereby
fully and forever releases and discharges Investcorp,
Falcon, the Company, and their respective affiliates,
subsidiaries, parents, predecessors and successors, and
each of their officers, directors, trustees, employees,
agents and attorneys, past and present (the
"Releasees"), from any and all claims, demands or causes
of action, whether now known or unknown, which have
existed, which do exist, or which may exist in the
future, arising out of or relating in any way to
Employee's employment with the Company, his employment
compensation, his termination of employment or his
employment arrangement, the sale of the stock or assets
of the Company or Falcon and/or any other occurrence up
to and including the effective date of this Agreement,
except those claims statutorily precluded from waiver or
release by private parties and except those alleging
breach of this Agreement. Without in any way limiting
the generality of the foregoing language, this release
includes any claims for relief or causes of action under
the Age Discrimination in Employment Act, as amended, 29
U.S.C. Section 621, ET SEQ., and any other federal,
state or local statute, ordinance or regulation dealing
in any respect with discrimination in employment, and in
addition thereto, any claims under any Company severance
policy, practice or procedure, and any claims, demands
or actions brought on the basis of alleged wrongful or
retaliatory discharge and/or alleged breach of an
implied or explicit, written or oral employment
<PAGE>
or other contract or covenant under the common law of
any state, including, but not limited to, Ohio.
(b) Employee further agrees not to directly or indirectly
pursue or initiate any action or legal proceeding of any
kind against the Releasees arising out of or related to
the claims released in Section 14 (a) above, or the sale
of the stock or assets of the Company or Falcon and also
waives any right to recover any relief as a result of
any such proceedings initiated on his behalf.
15. TERMINATION DATE. This Agreement shall be null and void in the
event that a Change in Control does not occur on or before the
Expiration Date.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year set forth above.
MANSFIELD PLUMBING PRODUCTS, INC.
a Delaware corporation
/s/ Gus J. Athas /s/ Joseph W. Harbrecht
- ------------------------------- ------------------------------
Gus J. Athas Joseph W. Harbrecht
Executive Vice President
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Hart & Cooley, Inc.
Mansfield Plumbing Products, Inc.
Falcon Manufacturing, Inc.
DeVilbiss Air Power Company
SWC Industries, Inc.
Falcon Receivable Program, Inc.
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Falcon Building Products, Inc., a Delaware corporation (the "Company"),
which is about to file an Annual Report on Form 10-K with the Securities
and Exchange Commission under the provisions of the Securities Act of 1934,
as amended, hereby constitutes and appoints Sam A. Cottone, his true and
lawful attorney-in-fact and agent, with full power and all capacities, to
sign the Company's Annual Report on Form 10-K and any or all amendments
thereto, and any other documents in connection therewith, to be filed with
the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
seal as of the 26th day of March, 1998.
/s/ Charles J. Philippin
--------------------------------
Charles J. Philippin
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Falcon Building Products, Inc., a Delaware corporation (the "Company"),
which is about to file an Annual Report on Form 10-K with the Securities
and Exchange Commission under the provisions of the Securities Act of 1934,
as amended, hereby constitutes and appoints Sam A. Cottone, his true and
lawful attorney-in-fact and agent, with full power and all capacities, to
sign the Company's Annual Report on Form 10-K and any or all amendments
thereto, and any other documents in connection therewith, to be filed with
the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
seal as of the 26th day of March, 1998.
/s/ Christopher J. Stadler
---------------------------------
Christopher J. Stadler
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Falcon Building Products, Inc., a Delaware corporation (the "Company"),
which is about to file an Annual Report on Form 10-K with the Securities
and Exchange Commission under the provisions of the Securities Act of 1934,
as amended, hereby constitutes and appoints Sam A. Cottone, his true and
lawful attorney-in-fact and agent, with full power and all capacities, to
sign the Company's Annual Report on Form 10-K and any or all amendments
thereto, and any other documents in connection therewith, to be filed with
the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
seal as of the 26th day of March, 1998.
/s/ Christopher J. O'Brien
--------------------------------
Christopher J.O'Brien
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 30
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 79
<CURRENT-ASSETS> 143
<PP&E> 204
<DEPRECIATION> (102)
<TOTAL-ASSETS> 334
<CURRENT-LIABILITIES> 79
<BONDS> 428
0
0
<COMMON> 0
<OTHER-SE> (214)
<TOTAL-LIABILITY-AND-EQUITY> 334
<SALES> 686
<TOTAL-REVENUES> 686
<CGS> 577
<TOTAL-COSTS> 577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (49)
<INCOME-TAX> (12)
<INCOME-CONTINUING> (37)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (39)
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<EPS-DILUTED> 0
</TABLE>
