<PAGE>
- -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of October 31, 1998, Falcon Building Products, Inc. had the following shares
of its various classes of common stock outstanding:
985,529 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
- -------------------------------------------------------------------------------
<PAGE>
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
PART I. Financial Information: PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ....................... 3
Condensed Consolidated Statements of Income and
Comprehensive Income......................................... 4
Condensed Consolidated Statements of Cash Flows.............. 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............. 17
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K............................. 21
2
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45.6 $ 29.9
Inventories, net.......................................... 81.4 79.5
Other current assets...................................... 55.7 34.0
------------ -----------
Total current assets...................................... 182.7 143.4
Property, plant and equipment, net............................. 106.1 101.3
Goodwill....................................................... 59.9 57.0
Other long-term assets......................................... 28.3 32.1
------------ -----------
Total assets.............................................. $ 377.0 $ 333.8
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt............................ $ 2.0 $ 1.5
Accounts payable.......................................... 54.6 34.0
Accrued liabilities....................................... 62.2 43.2
------------ -----------
Total current liabilities................................. 118.8 78.7
Senior indebtedness............................................ 176.2 175.6
Senior subordinated notes...................................... 261.3 252.7
Accrued employee benefit obligations........................... 9.6 9.2
Other long-term liabilities.................................... 24.6 31.3
------------ -----------
Total liabilities......................................... 590.5 547.5
------------ -----------
Stockholders' equity (deficit):
Common stock.............................................. 0.1 0.1
Retained deficit.......................................... (211.8) (211.8)
Other..................................................... (1.8) (2.0)
------------ -----------
Total stockholders' equity (deficit)...................... (213.5) (213.7)
------------ -----------
Total liabilities and stockholders' equity..................... $ 377.0 $ 333.8
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ---------------------------------------
1998 1997 1998 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales...................................... $ 197.5 $ 172.7 $ 559.8 $ 528.6
Cost of sales (Note 4)......................... 166.5 143.6 468.9 434.5
------------ ------------- ------------- --------------
Gross earnings............................ 31.0 29.1 90.9 94.1
Selling and administrative expenses............ 16.3 15.9 47.5 45.8
Securitization expense......................... 0.9 1.0 2.8 3.1
Restructuring and Other Charges (Note 4)....... 7.3 -- 7.3 --
Recapitalization expenses...................... -- -- -- 36.3
------------ ------------- ------------- --------------
Operating income.......................... 6.5 12.2 33.3 8.9
Net interest expense........................... 11.0 10.8 32.7 17.6
------------ ------------- ------------- --------------
Income (loss) before income taxes.............. (4.5) 1.4 0.6 (8.7)
Provision (benefit) for income taxes........... (1.8) 0.6 0.2 2.8
------------ ------------- ------------- --------------
Income (loss) before extraordinary item........ (2.7) 0.8 0.4 (11.5)
Extraordinary item:
Early extinguishment of debt, net of tax
benefit of $0.9 million................... -- -- -- (1.5)
------------ ------------- ------------- --------------
Net income (loss).............................. $ (2.7) $ 0.8 $ 0.4 $(13.0)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Comprehensive income (loss).................... $ (2.7) $ 0.8 $ 0.4 $(13.0)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................ $ 0.4 $(13.0)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization .................................................. 14.9 13.5
Accretion of debt discount on subordinated debt ................................ 8.7 3.1
Restructuring and other charges ................................................ 8.3 --
Recapitalization expenses ...................................................... -- 36.3
Early extinguishment of debt ................................................... -- 1.5
Cash effect of changes in working capital balances, accrued employee
benefit obligations, and other long-term liabilities,
excluding the effects of acquisitions ........................................ 5.4 (31.7)
------ ------
Net cash from operating activities ............................................... 37.7 9.7
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses ........................................................... (4.0) --
Capital expenditures ............................................................. (15.4) (11.7)
Other ............................................................................ (1.5) (1.0)
------ ------
Net cash used in investing activities ............................................ (20.9) (12.7)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior credit facilities ........................................... -- 175.0
Repayment of senior credit facilities ............................................ -- (138.8)
Issuance of senior subordinated notes ............................................ -- 247.0
Issuance of common stock ......................................................... -- 134.6
Retirement of common stock ....................................................... -- (337.5)
Payment of Recapitalization fees and expenses .................................... -- (53.6)
Net borrowings (repayments) on debt .............................................. (1.1) 17.1
------ ------
Net cash (used in) from financing activities ..................................... (1.1) 43.8
------ ------
CHANGE IN CASH AND CASH EQUIVALENTS ................................................. 15.7 40.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................................... 29.9 3.9
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................ $ 45.6 $ 44.7
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial
Statements of Falcon Building Products, Inc. ("Falcon" or the "Company"),
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for a complete set of financial statements. In the
opinion of management, all adjustments considered necessary, consisting only
of normal recurring adjustments and the restructuring and other charges
described in Note 4, are included for fair presentation. Operating results
for the quarter and nine months ended September 30, 1998 are not necessarily
indicative of results that may be expected for the full year. The unaudited
Condensed Consolidated Financial Statements should be read in conjunction
with the audited Consolidated Financial Statements of the Company for the
year ended December 31, 1997.
COMPREHENSIVE INCOME:
Effective January 1, 1998, the Company adopted the provisions of
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. There was no material effect on the
Company's financial statements from the adoption of SFAS No. 130 for the
periods presented.
(2) INVENTORIES
Inventory consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------- ----------------
(UNAUDITED)
<S> <C> <C>
Raw materials and supplies.............. $ 31.2 $ 27.8
Work in process......................... 12.3 12.0
Finished goods.......................... 37.9 39.7
------------- -----------
$ 81.4 $ 79.5
------------- -----------
------------- -----------
</TABLE>
(3) ACCOUNTS RECEIVABLE
Included in the Company's financial statements as of September 30,
1998, in other current assets, is a net residual interest of $32.7 million
associated with the $115.8 million of receivables sold under the accounts
receivable securitization program as of that date, compared to $13.1 million
associated with the $88.6 million of receivables sold as of December 31,
1997. The expense incurred on the sale of receivables under this program is
presented as Securitization expense in the Condensed Consolidated Statement
of Income.
(4) RESTRUCTURING AND OTHER CHARGES
In the third quarter of 1998, the Company recorded restructuring and
other charges totaling $9.0 million, $7.9 million related to the
reorganization of its Plumbing Fixtures business (the "Reorganization Plan")
and a $1.1 million charge to write-down to market certain automotive product
line fixed assets, previously utilized in Air Power Products. The
Reorganization Plan involves: (1) the restructuring of the steel products
enameling operations and the closure of the bath-tub pressing operations; (2)
a reconfiguration of the Texas china plant, as new automated equipment is
employed and new process controls are instituted; and (3) increased
investment in manufacturing, finance, engineering and production control
personnel.
6
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
The following table summarizes the costs reflected in the Company's
Condensed Consolidated Financial Statements at September 30,1998; $7.3
million is reflected as Restructuring and Other Charges while $1.7 million is
included in Cost of Sales (in millions):
<TABLE>
<CAPTION>
RESTRUCTURING RESTRUCTURING
RESTRUCTURING OTHER AND OTHER CHARGES INCLUDED
CHARGES CHARGES CHARGES IN COST OF SALES TOTAL
------------- ----------- -------------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Inventory...................... $ -- $ -- $ -- $ 1.7 $ 1.7
Severance...................... 0.8 -- 0.8 -- 0.8
Professional fees.............. -- 0.6 0.6 -- 0.6
Fixed asset write-downs........ 3.5 -- 3.5 -- 3.5
Workers compensation........... 1.3 -- 1.3 -- 1.3
Other.......................... 0.3 0.8 1.1 -- 1.1
------------ ----------- -------------- ------------------- ----------
$ 5.9 $ 1.4 $ 7.3 $ 1.7 $ 9.0
------------ ----------- -------------- ------------------- ----------
------------ ----------- -------------- ------------------- ----------
</TABLE>
The Inventory adjustments relate primarily to a net realizable value
adjustment to the carrying value of existing raw material and work-in-process
inventories given the excess materials on hand as the Company exits its steel
tub pressing operations and the new china manufacturing technologies are
employed. The Severance costs are for 70 employees primarily in the steel
operations who will be terminated as a result of the Reorganization Plan.
These employees were notified during the third quarter of 1998. The
Professional fees represent costs incurred for projects related primarily to
the Company's china operations and fees for positions added as a result of
the Reorganization Plan. The fixed asset write-downs relate primarily to the
write-off of equipment which will no longer be used as a result of the
Reorganization Plan, and a $1.1 million charge associated with the disposal
of automotive product line assets. The Workers compensation costs represent
the increase in claim experience incurred and/or expected to be incurred as a
result of the Reorganization Plan. Other costs reflect relocation costs,
increased employee costs and product costs that were incurred either prior to
or as part of the implementation of the Reorganization Plan. Approximately
$0.7 million has been expended related to the Reorganization Plan through
September 30, 1998.
While not reflected in the table above, the Company anticipates
spending an additional $1.2 million in the next six to nine months in
connection with the Reorganization Plan. Additionally, the Company will
record a fourth quarter charge of approximately $1.0 million associated with
the reorganization of its flex duct product line which is part of the
Company's Air Distribution Business.
(5) ACQUISITIONS
On June 25, 1998, the Company acquired Warrior Glass & Aluminum Co.,
Inc. ("Warrior Glass"), a manufacturer of aluminum window wall systems used
in light commercial applications. The consideration for Warrior consisted of
$4.0 million in cash and a $2.7 million four-year, non-interest bearing note.
The note was recorded at a discounted value of $2.1 million. The acquisition
was accounted for as a purchase and resulted in $4.2 million of goodwill that
is being amortized over 40 years.
7
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(6) LONG-TERM DEBT
Senior indebtedness consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ -------------
(UNAUDITED)
<S> <C> <C>
Bank Credit Facility:
Revolver......................... $ -- $ --
Term............................. 174.0 174.5
--------------- ----------
Total............................ 174.0 174.5
Other ............................. 4.2 2.6
Less: Current Portion................ (2.0) (1.5)
--------------- ----------
Senior indebtedness.............. $ 176.2 $ 175.6
--------------- ----------
--------------- ----------
</TABLE>
At September 30, 1998, the Company was in compliance with all
covenants of the Bank Credit Facility. Availability under the revolving
portion of this facility was $122.5 million at September 30, 1998.
Senior Subordinated Notes consist of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ----------------
<S> <C> <C>
(UNAUDITED)
Notes................................. $ 145.0 $ 145.0
Discount Notes........................ 116.3 107.7
--------------- ----------
$ 261.3 $ 252.7
--------------- ----------
--------------- ----------
</TABLE>
(7) YEAR 2000 READINESS PROGRAM
As further discussed in Management's Discussion and Analysis, the
Company has implemented a Year 2000 readiness program. It is currently
estimated that the aggregate cost of the Company's Year 2000 readiness
program will be approximately $1.7 million, of which approximately $0.8
million has been spent as of September 30, 1998. Please refer to the
Management's Discussion and Analysis section of this report for a complete
discussion on the Year 2000 issue.
(8) 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 the subsidiaries of the Company
(collectively, the "Guarantor Subsidiaries"), other than Falcon Receivable
Program, Inc., 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.
8
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...... $ 44.6 $ 0.6 $ 0.4 $ -- $ 45.6
Inventories, net ............... -- 81.4 -- -- 81.4
Other current assets ........... 0.9 22.1 32.7 -- 55.7
------ ------ ------ ------ ------
Total current assets ........... 45.5 104.1 33.1 -- 182.7
Property, plant and equipment, net .. 0.5 105.6 -- -- 106.1
Goodwill ............................ -- 59.9 -- -- 59.9
Investment in and advances
to/from subsidiaries ........... 161.3 (77.6) (26.6) (57.1) --
Other long-term assets .............. 25.2 3.1 -- -- 28.3
------ ------ ------ ------ ------
Total assets ................... $232.5 $195.1 $ 6.5 $(57.1) $377.0
------ ------ ------ ------ ------
------ ------ ------ ------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt ..... $ 1.0 $ 1.0 $ -- $ -- $ 2.0
Accounts payable ................... 0.1 54.5 -- -- 54.6
Accrued liabilities ................ 5.9 55.9 0.4 -- 62.2
------ ------ ------ ------ ------
Total current liabilities .......... 7.0 111.4 0.4 -- 118.8
Long-term debt .......................... 434.4 3.1 -- -- 437.5
Other long-term liabilities ............. 4.6 29.6 -- -- 34.2
------ ------ ------ ------ ------
Total liabilities .................. 446.0 144.1 0.4 -- 590.5
------ ------ ------ ------ ------
Stockholders' equity (deficit):
Common stock ....................... 0.1 -- -- -- 0.1
Additional paid-in capital ......... -- 42.9 6.5 (49.4) --
Retained earnings (deficit) ........ (211.8) 8.1 (0.4) (7.7) (211.8)
Other .............................. (1.8) -- -- -- (1.8)
------ ------ ------ ------ ------
Total stockholders' equity (deficit) (213.5) 51.0 6.1 (57.1) (213.5)
------ ------ ------ ------ ------
Total liabilities and stockholders' equity $232.5 $195.1 $ 6.5 $(57.1) $377.0
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
9
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1998
(8) 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
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
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>
10
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ............................... $ -- $ 197.5 $ -- $ -- $ 197.5
Cost of sales ........................... -- 166.5 -- -- 166.5
------- -------- ----- -------- --------
Gross earnings ..................... -- 31.0 -- -- 31.0
Selling and administrative expenses ..... 1.9 14.4 -- -- 16.3
Securitization expense .................. 1.8 -- (0.9) -- 0.9
Restructuring and other charges ......... -- 7.3 -- -- 7.3
------- -------- ----- -------- --------
Operating income (loss) ............ (3.7) 9.3 0.9 -- 6.5
Net interest expense .................... 10.6 -- 0.4 -- 11.0
------- -------- ----- -------- --------
Income (loss) before income taxes ....... (14.3) 9.3 0.5 -- (4.5)
Provision (benefit) for income taxes .... (5.6) 3.6 0.2 -- (1.8)
------- -------- ----- -------- --------
Income (loss) before equity in
income of consolidated subsidiaries...... (8.7) 5.7 0.3 -- (2.7)
Equity in income of consolidated subsidiaries 6.0 -- -- (6.0) --
------- -------- ------ -------- --------
Net income (loss) ....................... $ (2.7) $ 5.7 $ 0.3 $ (6.0) $ (2.7)
---------- -------- ------- ------ --------
---------- ------- ------- ------ --------
</TABLE>
11
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 1997
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .................................... $ -- $172.7 $ -- $ -- $172.7
Cost of sales ................................ -- 143.6 -- -- 143.6
------ ------ ------ ------ ------
Gross earnings .......................... -- 29.1 -- -- 29.1
Selling and administrative expenses .......... 2.0 13.9 -- -- 15.9
Securitization expenses ...................... 1.3 -- (0.3) -- 1.0
------ ------ ------ ------ ------
Operating income (loss) ................. (3.3) 15.2 0.3 -- 12.2
Net interest expense ......................... 10.3 0.1 0.4 -- 10.8
------ ------ ------ ------ ------
Income (loss) before income taxes ............ (13.6) 15.1 (0.1) -- 1.4
Provision (benefit) for income taxes ......... (5.4) 6.0 -- -- 0.6
------ ------ ------ ------ ------
Income (loss) before equity in income of
consolidated subsidiaries ............... (8.2) 9.1 (0.1) -- 0.8
Equity in income of consolidated subsidiaries. 9.0 -- -- (9.0) --
------ ------ ------ ------ ------
Net income (loss) ............................ $ 0.8 $ 9.1 $ (0.1) $ (9.0) $ 0.8
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
12
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine months Ended September 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales .................................... $ -- $ 559.8 $ -- $ -- $ 559.8
Cost of sales ................................ -- 468.9 -- -- 468.9
------ ------ ------ ------ ------
Gross earnings .......................... -- 90.9 -- -- 90.9
Selling and administrative expenses .......... 5.3 42.2 -- -- 47.5
Securitization expense ....................... 4.8 -- (2.0) -- 2.8
Restructuring and other charges .............. -- 7.3 -- -- 7.3
------ ------ ------ ------ ------
Operating income (loss) ................. (10.1) 41.4 2.0 -- 33.3
Net interest expense ......................... 31.3 0.2 1.2 -- 32.7
------ ------ ------ ------ ------
Income (loss) before income taxes ............ (41.4) 41.2 0.8 -- 0.6
Provision (benefit) for income taxes ......... (16.0) 15.9 0.3 -- 0.2
------ ------ ------ ------ ------
Income (loss) before equity in income of ..... (25.4) 25.3 0.5 -- 0.4
consolidated subsidiaries
Equity in income of consolidated subsidiaries. 25.8 -- -- (25.8) --
------ ------ ------ ------ ------
Net income (loss) ............................ $ 0.4 $ 25.3 $ 0.5 $ (25.8) $ 0.4
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
13
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine months Ended September 30, 1997
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ..................................... $ -- $ 528.6 $-- $-- $ 528.6
Cost of sales ................................. -- 434.5 -- -- 434.5
-------- ------- ------ ------ --------
Gross earnings ........................... -- 94.1 -- -- 94.1
Selling and administrative expenses ........... 4.5 41.3 -- -- 45.8
Securitization expenses ....................... 4.4 -- (1.3) -- 3.1
Recapitalization expenses ..................... 36.3 -- -- -- 36.3
-------- ------- ------ ------ --------
Operating income (loss) .................. (45.2) 52.8 1.3 -- 8.9
Net interest expense .......................... 16.1 0.2 1.3 -- 17.6
-------- ------- ------ ------ --------
Income (loss) before income taxes ............. (61.3) 52.6 -- -- (8.7)
Provision (benefit) for income taxes .......... (18.0) 20.8 -- -- 2.8
-------- ------- ------ ------ --------
Income (loss) before extraordinary item and
equity in income of consolidated
subsidiaries ............................. (43.3) 31.8 -- -- (11.5)
Extraordinary item:
Early extinguishment of debt, net of tax
benefit of $0.9 million .................. (1.5) -- -- -- (1.5)
-------- ------- ------- ------- --------
Income (loss) before equity in income of
consolidated subsidiaries ................ (44.8) 31.8 -- -- (13.0)
Equity in income of consolidated subsidiaries.. 31.8 -- -- (31.8) --
-------- ------- ------ ------- --------
Net income (loss) ............................. $ (13.0) $ 31.8 $-- $ (31.8) $ (13.0)
-------- ------- ------ ------- --------
-------- ------- ------ ------- --------
</TABLE>
14
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months Ended September 30, 1998
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities $ (21.7) $ 78.1 $ (18.7) $ -- $ 37.7
-------- ------- ------- ------- --------
Cash flows used in investing activities:
Purchase of business ....................... -- (4.0) -- -- (4.0)
Capital expenditures ....................... (0.4) (15.0) -- -- (15.4)
Other ...................................... (0.8) (0.7) -- -- (1.5)
-------- ------- ------- ------- --------
Net cash used in investing activities ...... (1.2) (19.7) -- -- (20.9)
-------- ------- ------- ------- --------
Cash flows from (used in) financing activities:
Advances (to) from affiliate ............... 38.9 (57.9) 19.0 -- --
Net borrowings on debt ..................... (0.5) (0.6) -- -- (1.1)
-------- ------- ------- ------- --------
Net cash from (used in) financing activities 38.4 (58.5) 19.0 -- (1.1)
-------- ------- ------- ------- --------
Change in cash and cash equivalents .......... 15.5 (0.1) 0.3 -- 15.7
Cash and cash equivalents, beginning of
period ..................................... 29.1 0.7 0.1 -- 29.9
-------- ------- ------- ------- --------
Cash and cash equivalents, end of period ... $ 44.6 $ 0.6 $ 0.4 $ -- $ 45.6
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
15
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
(8) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine months Ended September 30, 1997
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities ... $ 11.4 $ 52.8 $(22.7) $(31.8) $ 9.7
-------- ------- ------- ------- --------
Cash flows from (used in) investing activities:
Capital expenditures ........................ -- (11.7) -- -- (11.7)
Other ....................................... (1.9) 0.7 0.2 -- (1.0)
-------- ------- ------- ------- --------
Net cash from (used in) investing activities (1.9) (11.0) 0.2 -- (12.7)
-------- ------- ------- ------- --------
Cash flows from (used in) financing activities:
Proceeds from senior credit facilities ...... 175.0 -- -- -- 175.0
Repayment of senior credit facilities ....... (138.8) -- -- -- (138.8)
Issuance of senior subordinated debt ........ 247.0 -- -- -- 247.0
Issuance of common stock .................... 134.6 -- -- -- 134.6
Retirement of common stock .................. (337.5) -- -- -- (337.5)
Payment of recapitalization fees and
expenses ................................. (53.6) -- -- -- (53.6)
Advances (to) from affiliate ................ (12.9) (41.9) 23.0 31.8 --
Net borrowings on debt ...................... 17.3 (0.2) -- -- 17.1
-------- ------- ------- ------- --------
Net cash from (used in) financing activities 31.1 (42.1) 23.0 31.8 43.8
-------- ------- ------- ------- --------
Change in cash and cash equivalents .............. 40.6 (0.3) 0.5 -- 40.8
Cash and cash equivalents, beginning of
period ..................................... 2.6 1.3 -- -- 3.9
-------- ------- ------- ------- --------
Cash and cash equivalents, end of period ......... $ 43.2 $ 1.0 $ 0.5 $-- $ 44.7
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
</TABLE>
16
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion of the results of operations of the
Company and its subsidiaries for the quarter and nine months ended September
30, 1998 as compared to the quarter and nine months ended September 30, 1997.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements included herein and the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
The following table reflects the Company's historical results of
operations for the quarter ended September 30, 1998 compared to the results for
the comparable period of 1997.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
AMOUNT % OF SALES AMOUNT % OF SALES
---------- ------------- ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales
Air Distribution Products............. $ 61.0 30.9% $ 50.4 29.2%
Plumbing Fixtures..................... 40.1 20.3 43.3 25.1
Air Power Products.................... 96.4 48.8 79.0 45.7
---------- -------------- ---------- -------------
Total.............................. $ 197.5 100.0% $ 172.7 100.0%
---------- -------------- ---------- -------------
---------- -------------- ---------- -------------
Gross earnings.......................... $ 31.0 15.7% $ 29.1 16.9%
Operating income before Restructuring
and other charges.................. $ 15.5 7.8% $ 12.2 7.1%
Operating income........................ $ 6.5 3.3% $ 12.2 7.1%
</TABLE>
Net sales for the quarter of $197.5 million were $24.8 million or
14.3% higher than the third quarter of 1997. Excluding $3.0 million of net
sales generated by acquisitions in Air Distribution Products, net sales
increased $21.8 million or 12.6%. The increased sales in Air Distribution
Products of $10.6 million was primarily due to increased sales volume across
all product segments as well as acquisitions. The decrease in Plumbing
Fixtures was primarily due to reduced volume of china products as the lack of
availability of certain steel and china products caused shortages in filling
certain orders. Backlog in Plumbing Fixtures continues at approximately $7.5
million. The increase in Air Power Products was primarily due to increased
sales of compressors of $11.5 million and generators of $8.6 million due to
penetration at new home improvement retailers and summer storm activity,
respectively, partially offset by decreased volume of tools and accessories.
Excluding $1.7 million of restructuring costs included in cost of
sales, gross earnings of $32.7 million were $3.6 million or 12.4% higher than
the comparable 1997 period. This increase was primarily due to increased
volume as well as cost reductions in Air Distribution and Air Power Products.
However, third quarter results continue to be affected by manufacturing
inefficiencies in Plumbing Fixtures. The Company has instituted a
reorganization plan for the Plumbing Fixtures business which includes exiting
the steel tub pressing operations, restructuring its steel enameling
operations, replacing various components of its china manufacturing
operations with more cost efficient and technologically improved
manufacturing techniques. Gross margin excluding restructuring charges
decreased to 16.6% in 1998 from 16.9 % in 1997 due to the above mentioned
factors.
Excluding restructuring and other charges of $9.0 million, of which
$1.7 million is in Cost of Sales, operating income for the third quarter of
1998 improved $3.3 million or 27.1% from the comparable 1997 period. Volume
increases in both Air Distribution Products and Air Power Products
contributed to improved operating results that were partially offset by
manufacturing inefficiencies in Plumbing Fixtures. As noted above, the
Company has initiated a restructuring plan for its Plumbing Fixtures
business. In addition, the September 1998 results include a $1.1 million
charge to value the Air Power automotive product line to estimated net
realizable value as the Company has elected to dispose of the product line.
The Plumbing Fixtures restructuring plan is more fully described in Note 4 to
the Condensed Consolidated Financial Statements.
17
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
The following table reflects the Company's historical results of
operations for the nine months ended September 30, 1998 compared to the results
for the comparable period of 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
AMOUNT % OF SALES AMOUNT % OF SALES
---------- ------------- ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales
Air Distribution Products ................. $158.1 28.2% $140.7 26.6%
Plumbing Fixtures ......................... 116.6 20.8 121.9 23.1
Air Power Products ........................ 285.1 51.0 266.0 50.3
------ ------ ------ ------
Total .................................. $559.8 100.0% $528.6 100.0%
------ ------ ------ ------
------ ------ ------ ------
Gross earnings .............................. $ 90.9 16.2% $ 94.1 17.8%
Operating income before Restructuring,
Recapitalization and other charges ..... $ 42.3 7.5% $ 45.2 8.5%
Operating income (loss) ..................... $ 33.3 5.9% $ 8.9 1.7%
</TABLE>
Net sales for the first nine months of 1998 were $559.8 million, an
increase of $31.2 million over 1997 comparable results. Excluding
acquisitions, net sales increased $28.2 million. Air Distribution Products
sales benefited from increased volume in all product categories, partially
offset by reduced pricing in flexible duct products. Plumbing Fixtures was
negatively affected by the lack of certain product availability that resulted
in lower sales volume of china products, increasing backlog. The increase in
Air Power Products was primarily due to strong sales of generators and
compressors. These increases were partially offset by a decrease in pressure
washer sales of $13.4 million due to the loss of customers resulting from the
Company's implementation of a "no returns policy", as well as decreased
volume of tools and accessories and $1.2 million of automotive products which
have been discontinued.
Excluding $1.7 million of restructuring costs included in cost of
sales, gross earnings of $92.6 million were $1.5 million or 1.6% lower than
the comparable 1997 period. This decrease is primarily due to manufacturing
inefficiencies within Plumbing Fixtures. The Company has instituted cost
controls, revised process flows, and instituted a restructuring plan, as more
fully described in Note 4, in order to improve its manufacturing costs. Gross
margin excluding restructuring charges declined from 17.8% to 16.5% due to
the above mentioned factors along with pricing accommodations to institute a
no returns policy for pressure washers.
Excluding restructuring and other charges of $9.0 million (of which
$1.7 million is in Cost of Sales) in 1998 and recapitalization expenses of
$36.3 million in 1997, operating income in 1998 was $2.9 million lower than
the comparable 1997 period. This decrease was primarily due to the
manufacturing inefficiencies in Plumbing Products as well as increased
operating expenses and reduced pricing noted above.
Net interest expense increased to $32.7 million from $17.6 million
in 1997 due to the new debt structure that resulted from the Recapitalization
in June 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that operating cash flows, availability under
the Bank Credit Facility and funds available under its accounts receivable
securitization program will be sufficient to pay interest on outstanding
debt, meet current maturities, pay income taxes, fund capital expenditures,
consummate the Plumbing Fixtures restructuring plan and meet other operating
needs for the foreseeable future.
18
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Net cash flow from operating activities amounted to $37.7 million in
the first nine months of 1998 compared to $9.7 million in the first nine
months of 1997. The increase of $28.0 million was due primarily to a reduced
level of investment in working capital during the first nine months of 1998
versus the comparable period in 1997, as well as the effects of the asset
securitization program. Additionally, the 1997 period reflects the prepayment
of a management advisory fee in connection with recapitalization.
The Company anticipates spending an additional $6.6 million on
capital expenditures in the fourth quarter, bringing the total for the year
to $22.0 million. These expenditures will be funded by cash flow from
operations.
In the fourth quarter of 1998, the Company anticipates recording a
charge of approximately $1.0 million for the reorganization of its flex duct
product line.
As discussed in Note 5 to the Company's Condensed Consolidated
Financial Statements, the Company acquired Warrior Glass on June 25, 1998.
The consideration for Warrior consisted of $4.0 million in cash and a $2.7
million four-year, non-interest bearing note. The note was recorded at a
discounted value of $2.1 million.
YEAR 2000 READINESS PROGRAM
The Year 2000 issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year,
resulting in an inability to distinguish between the year 1900 and the year
2000. This programming may put business and governmental entities at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, processing, distribution and financial
chains.
The Company and each of its operating subsidiaries are in the
process of implementing a Year 2000 readiness program with the objective of
having all of their significant business systems, including those that affect
facilities and manufacturing activities, functioning properly with respect to
the Year 2000 issues before January 1, 2000. While some of the Company's
systems are Year 2000 compliant, the Company is utilizing internal personnel,
contract programmers and vendors to identify Year 2000 noncompliance
problems, modify code and test the modifications or, if necessary, replace
non-compliant software and hardware. Executive management regularly monitors
the status of the Company's Year 2000 remediation plans. The process includes
an assessment of issues and development of remediation plans, where
necessary, as they relate to internally used software, computer hardware and
use of computer applications in the Company's manufacturing processes and
products. In addition, the Company is engaged in assessing the Year 2000
issue with significant suppliers and customers. Each operating subsidiary is
in a different stage of Year 2000 readiness.
The assessment phase of the Year 2000 readiness program is
substantially complete with all operating subsidiaries having identified the
business systems that may require remediation or replacement and established
priorities for repair or replacement. Those systems considered most critical
to continuing operations are being given the highest priority.
The second phase of the Year 2000 readiness program involves the
actual remediation and replacement of business systems. The Company and its
operating subsidiaries are using both internal and external resources to
complete this process. Systems ranked highest in priority have either been
remediated or replaced or scheduled for remediation or replacement. Systems
earmarked for retirement and replacement without regard to the Year 2000
issue have been evaluated for early replacement with Year 2000 compliant
systems. The Company's objective is to complete substantially all remediation
and replacement of internal business systems by the first quarter of 1999,
and to complete final testing by the third quarter of 1999.
As part of the Year 2000 readiness program, significant service
providers, vendors, suppliers and customers that are believed to be critical
to business operations after January 1, 2000, have been identified and steps
are being undertaken to reasonably ascertain their stage of Year 2000
readiness through questionnaires, interviews, on-site visits and other
available means. These activities are intended to provide a means of managing
risk, but cannot eliminate the potential for disruption due to third party
failure.
19
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Because of the number of business systems used by the Company, in
addition to the significant number of third parties that the Company depends
on, the Company presently believes that it may experience some disruption in
its business due to the Year 2000 issue. More specifically, because of the
interdependent nature of business systems, the Company and its operating
subsidiaries could be materially adversely affected if utilities, private
businesses and governmental entities with which they do business or that
provide essential services are not Year 2000 compliant.
The possible consequences of the Company or third parties not being
fully Year 2000 compliant by January 1, 2000 include, among other things,
delays in the delivery of products, delays in the receipt of supplies,
invoice and collection errors, inventory and supply obsolescence, and
possible temporary plant closings. Consequently, the business and results of
operations of the Company could be materially adversely affected by a
temporary inability of the Company and its operating subsidiaries to conduct
their businesses in the ordinary course for a period of time after January 1,
2000. The Company does not currently have a comprehensive contingency plan
with respect to the Year 2000 issue, but intends to establish such a plan
during 1999 as part of its Year 2000 readiness program. Failure to meet
critical milestones identified in our plans would precipitate alternative
actions, including an acceleration of any contingency plan.
It is currently estimated that the aggregate cost of the Company's
Year 2000 readiness program will be approximately $1.7 million, of which
approximately $0.8 million has been spent through September 30, 1998. These
costs are being expensed as incurred and are being funded through operating
cash flow. The costs associated with the replacement of computerized systems,
hardware or equipment, substantially all of which would be capitalized, are
not included in the above estimates.
THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING
STATEMENTS AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS.
RISKS TO COMPLETING THE COMPANY'S YEAR 2000 READINESS PLAN INCLUDE THE
AVAILABILITY OF RESOURCES, OUR ABILITY TO DISCOVER AND CORRECT THE POTENTIAL
YEAR 2000 SENSITIVE PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON SPECIFIC
FACILITIES, AND THE ABILITY OF SUPPLIERS TO BRING THEIR SYSTEMS INTO YEAR
2000 COMPLIANCE.
20
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
99.1 - Letter to Bondholders
b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON BUILDING PRODUCTS, INC.
By: /s/ Sam A. Cottone
------------------------------
Sam A. Cottone
Executive Vice President
and Chief Financial Officer
Dated: November 16, 1998
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 46
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 81
<CURRENT-ASSETS> 183
<PP&E> 217
<DEPRECIATION> (110)
<TOTAL-ASSETS> 377
<CURRENT-LIABILITIES> 119
<BONDS> 437
0
0
<COMMON> 0
<OTHER-SE> (213)
<TOTAL-LIABILITY-AND-EQUITY> 377
<SALES> 560
<TOTAL-REVENUES> 560
<CGS> 469
<TOTAL-COSTS> 469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 1
<INCOME-TAX> 0
<INCOME-CONTINUING> 1
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
November 16, 1998
Dear Falcon Building Products, Inc. Bondholders:
A copy of the Falcon Building Products, Inc (the "Company") Form 10-Q is
enclosed. A summary of the unaudited financial results follows (dollars in
millions):
<TABLE>
<CAPTION>
PERIODS ENDED SEPTEMBER 30
1998 1997(e)
------------------- ------------------
NINE NINE
QUARTER MONTHS QUARTER MONTHS
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales
Air Distribution Products ..................... $ 61.0 $158.1 $ 50.4 $140.7
Plumbing Fixtures ............................. 40.1 116.6 43.3 121.9
Air Power Products ............................ 96.4 285.1 79.0 266.0
-------- ------- -------- -------
Total.................................. $197.5 $559.8 $172.7 $528.6
-------- ------- -------- -------
-------- ------- -------- -------
Operating income before recapitalization and
restructuring costs and charges ............... $ 15.5 $ 42.3 $ 12.2 $ 45.2
Net interest expense (a) ........................ $ 10.4 $ 30.6 $ 10.1 $ 16.5
Cash interest expense (a) ....................... $ 7.2 $ 21.4 $ 7.3 $ 12.9
EBITDA (b) ...................................... $ 20.1 $ 55.5 $ 17.4 $ 59.8
EBITDA - for the four quarters ended ............ $ 70.6 -- $ 82.0 --
Ratio of EBITDA to interest expense (c) ......... 1.8 x -- -- --
Ratio of EBITDA to cash interest expense(c) ..... 2.5 x -- -- --
Leverage Ratios: ................................ -- -- --
Senior debt to EBITDA (d) ..................... 1.9 x -- -- --
Total debt to EBITDA (d) ...................... 5.5 x -- -- --
</TABLE>
(a) Excludes amortization of debt issuance costs.
(b) EBITDA represents operating earnings before non-recurring
recapitalization and Ultravent expenses, non-cash inventory reserves,
restructuring and other associated charges and depreciation and
amortization expense. EBITDA is presented as management believes it
provides useful information regarding a company's ability to incur
and/or service debt. However, EBITDA should not be considered in
isolation or as a substitute for net income or cash flow data prepared
in accordance with generally accepted accounting principles, or as a
measure of a company's profitability or liquidity.
(c) Ratios calculated for the twelve months ended September 30, 1998.
(d) Senior debt and total debt is net of unencumbered cash.
(e) Ratios have not been provided for the 1997 period due to
non-comparability of information due to the Merger and recapitalization
financing in June 1997.
For the quarter ended September 30, 1998, net sales amounted to $197.5 million,
an increase of $24.8 million or 14% above the third quarter of 1997, while sales
for the nine months ended September 30, 1998 amounted to $559.8 million, an
increase of $31.2 million over the 1997 period. Sales for the quarter and nine
months benefited from continued strong activity in residential and commercial
vent, register and diffuser product sales. The Company also benefited from
increased compressor and generator sales during 1998 for both the three and
nine-month periods compared to 1997. Increased compressor volume is the result
of penetration gains at home improvement centers, while increased generator
volume has resulted from severe weather and storm activity. Pressure washer
volumes were up for the quarter $1.2 million, yet down approximately $13.4
million for the nine months in 1998, compared with 1997 as the implementation of
the Company's "no-return" policy resulted in a smaller customer base for this
product line in 1998.
EBITDA and EBITDA margins of $20.1 million and 10.2%, respectively, for the
third quarter of 1998 have increased from the third quarter of 1997 levels of
$17.4 million and 10.0%, respectively. Both Air Distribution Products and Air
Power Products posted improvements in gross margins and operating earnings,
before restructuring charges, in the 1998 third quarter versus last year. EBITDA
for the nine months ended September 30, 1998 amounted to $55.5 million, a $4.3
million decrease from the first nine months of 1997, while EBITDA margins
decreased from 11.3% in 1997 to 9.9% in 1998.
<PAGE>
Year-to-date results continue to be affected by manufacturing inefficiencies
in Plumbing Fixtures. In the third quarter of 1998, the Company initiated a
reorganization of the Plumbing Fixtures business. This reorganization
includes: (1) the reorganization of the steel product enameling operations
and the closure of the bath-tub pressing operations; (2) a reconfiguration of
the Texas china plant, as new automated equipment is employed and new process
controls are instituted; (3) increased investment in manufacturing, finance,
engineering and production control personnel; and (4) a net realizable value
adjustment to the carrying value of existing raw material and work-in-process
inventories given the excess materials on hand as the Company exits the steel
tub pressing operations and the new china manufacturing technologies are
employed. Total costs recorded in 1998 related to the reorganization of the
Plumbing Fixtures business amounted to $7.9 million, substantially all of
which represents non-cash charges. While the Company expects long term
benefits from these actions, it is likely that operating results for the
fourth quarter of 1998 and the first quarter of 1999 will continue to be
adversely impacted until these improvements are fully integrated into the
manufacturing process. The Company anticipates spending approximately an
additional $1.2 million in the next six to nine months in connection with
this reorganization plan. Incoming order rates for Plumbing Fixtures for the
fourth quarter of 1998 continue to reflect a strong demand for the Company's
product.
In Air Power Products, the unfavorable comparison to 1997 is the result of:
a) lower margins as a result of implementing a "no returns" policy for
pressure washers in 1998; and b) higher margins reflected on pressure washer
sales in the first three quarters of 1997, which were based upon anticipated
return rates and related costs that ultimately developed to be significantly
higher than those originally assumed. This subsequent adverse development in
pressure washer returns resulted in the recognition of significant charges in
the fourth quarter of 1997. Additionally, in the third quarter of 1998, the
Company re-evaluated the carrying value of certain automotive product line
assets, previously utilized in Air Power Products, given recent efforts to
dispose of this product line resulting in a $1.1 million non-cash charge.
Pricing within the Company's flexible duct product line contributed to the
reduced operating profit in the second quarter and year-to-date periods of
1998 versus 1997. Pricing for this product line came under pressure in the
second half of 1997. The Company has initiated a plan to reorganize its
flexible duct manufacturing operations in the fourth quarter of 1998. The
estimated $1.0 million cost of this plan will be recorded in the fourth
quarter of 1998which is intended to lower manufacturing and logistic costs as
well as increase production capacity
The consolidated statement of income reflects an increased level of interest
expense for the current quarter and year-to-date over the 1997 periods due to
the merger financing entered into in June 1997.
The Company continues to have significant liquidity to fund operations and
make new investments. At September 30, 1998, the Company had $45.6 million of
unrestricted cash and $122.5 million of borrowing availability under its
revolving credit facility.
Falcon's business strategy continues to focus on strengthening the Company's
market leadership positions through domestic and international market
expansion, new products and product line extensions, expansion of our
distribution network, and strategic and complementary acquisitions. We
continue to work on and evaluate a number of projects and acquisition
candidates to expand our product offerings, customers and geographic base,
although we intend to remain disciplined in our acquisition approach in the
current highly competitive environment.
We thank you for your continued support and confidence.
WILLIAM K. HALL
CHAIRMAN, PRESIDENT & CHIEF
EXECUTIVE OFFICER
FORWARD-LOOKING STATEMENTS IN THIS LETTER ARE MADE PURSUANT TO THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995.
INVESTORS ARE CAUTIONED THAT ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM
SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO, CHANGES IN GENERAL ECONOMIC
CONDITIONS, FLUCTUATIONS IN INTEREST RATES, INCREASES IN RAW MATERIALS AND
LABOR COSTS, LEVELS OF COMPETITION AND OTHER FACTORS DETAILED FROM TIME TO
TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
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