<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, 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)
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, 1999, Falcon Building Products, Inc. had the
following shares of its various classes of common stock
outstanding:
985,438 shares of Class A Common Stock
6,721,536 shares of Class B Common Stock
838,574 shares of Class C Common Stock
17,000 shares of Class D Common Stock
Documents Incorporated herein by Reference: None
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<PAGE>
FALCON BUILDING PRODUCTS, INC.
TABLE OF CONTENTS
PART I. PAGE
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............... 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 51
PART III.
Item 10. Directors and Executive Officers of the Registrant........ 51
Item 11. Executive Compensation.................................... 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 57
Item 13. Certain Relationships and Related Transactions............ 59
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................... 59
2
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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 including residential grilles,
registers and diffusers; 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
1998, 1997 and 1996 were as follows: residential grilles, registers and
diffusers as a group were 12%, 12% and 9%, respectively; ceramic china
bathroom fixtures were 15%, 16% and 17%, respectively; air compressors were
27%, 24% and 23%, respectively; and pressure washers were 15%, 18% and 13%,
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 controlled 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 7 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(R), Metlvent(R), Reliable(TM), Tuttle & Bailey(R),
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. In June 1998, the Company acquired a
manufacturer of aluminum window wall systems used in light commercial
applications. In January 1999, the Company acquired the assets and business
of the Penn Ventilation Companies, Inc., a manufacturer of air moving and
control equipment for commercial and industrial applications. See Note 18 to
the Company's Consolidated Financial Statements for further discussion of
this transaction.
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(R), Charge Air Pro(R), Pro 4000(TM), Pro Air II(TM) and
Steel Driver(R). The Company also manufactures air compressors under
private-label programs, the most significant of which is the Craftsman(R)
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(R) brand name.
3
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Plumbing Fixtures - The Company is a leading domestic producer of
high quality ceramic china bathroom fixtures, including toilets and
lavatories. The Company also produces enameled steel bathroom tubs and sinks,
and acrylic whirlpool tubs as well as brass and plastic trim and fittings.
Products are largely targeted at the high volume, medium price point category
and are primarily sold through wholesale and home center outlets to the
residential construction and remodeling markets under the Mansfield(R) and
Swirl-way(R) brand names. In December 1998, the Company sold an option to its
shareholders which gives them an option to purchase its Plumbing Fixtures
segment. See Note 14 of the Company's Consolidated Financial Statements for
further discussion of the option.
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 1.4 million and 1.6 million
from 1994 to 1998. According to the U.S. Department of Commerce, residential
alteration and repair expenditures have grown over the same period, from $115
billion in 1994 to approximately $119 billion in 1997. The Company estimates,
based upon management's industry experience, that the residential alteration
and repair market accounts for approximately 55% 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 6% from 1993 to 1998.
MARKETING AND DISTRIBUTION
The Company markets and distributes its products nationwide through
a variety of distribution channels. Based on 1998 net sales, approximately
46% of the Company's products are distributed to wholesalers and
manufacturers' representatives who sell to contractors serving the
residential and commercial construction markets. Approximately 54% 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 over
750 wholesale distributors with more than 1,300 locations throughout the U.S.
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.
The Company's Air Power Products and Plumbing Fixtures segments
reported net sales to Sears that accounted for approximately 17% of the
Company's net sales in 1998. All of the Company's segments had net sales to
The Home Depot that accounted for approximately 11% of the Company's net
sales in 1998.
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 three
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.
4
<PAGE>
PATENTS, TRADEMARKS AND LICENSES
The Company has been issued several patents worldwide. The Company
believes that its patents are important to its business operations; however,
the Company does not believe that the expiration or loss of any of its
patents would have a material adverse effect on the Company.
The Company owns a number of trademarks, including Hart & Cooley(R),
Metlvent(R), Reliable(TM), Tuttle & Bailey(R), Woodwinds(TM), Valley(TM),
Mansfield(R), Swirl-Way(R), Air America(R), Charge Air Pro(R), Ex-Cell(R) and
Pro Air II(TM). 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. Raw
material costs have remained relatively stable throughout 1998.
BACKLOG
The Company's backlog at December 31, 1998 and 1997 was $32.8
million and $17.1 million, respectively. The increase was primarily the
result of increased year-end orders and acquisitions. The backlog at December
31, 1998 is expected to be shipped during the first quarter of 1999.
EMPLOYEES
The Company employed approximately 4,900 persons as of December 31,
1998. Approximately 2,300 hourly employees are covered by seven collective
bargaining agreements expiring through 2003. 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.
Capital expenditures and expenses (including ordinary course of
business hauling and disposal expenses) in 1998 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 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>
Air Distribution Products:
Holland, Michigan............... Office, Manufacturing, Warehouse 613,000 Owned
Jackson, Tennessee.............. Manufacturing, Warehouse 260,000 Leased(1)
Huntsville, Alabama............. Manufacturing 219,000 Owned
Geneva, Alabama................. Manufacturing 203,000 Owned
Sanger, California.............. Manufacturing 127,000 Leased(2)
Air Power Products:
Jackson, Tennessee.............. Office, Manufacturing, Warehouse 461,000 Owned
Decatur, Arkansas............... Manufacturing, Warehouse 106,000 Owned
Plumbing Fixtures:
Kilgore, Texas.................. Manufacturing, Warehouse 511,000 Owned
Perrysville, Ohio............... Manufacturing 492,000 Owned
Walnut, California.............. Manufacturing 414,000 Owned
Henderson, Texas................ Manufacturing 125,000 Owned
Big Prairie, Ohio............... Manufacturing 60,000 Owned
- -----------------------------
</TABLE>
(1) This facility is leased pursuant to a lease that expires in February, 2002,
with renewal options to 2005.
(2) This facility is leased pursuant to a lease that expires in December, 2002.
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 environmental matters. 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(R) product distributed by the Company. This
action resulted from reports of problems with HTPV, including improper
installation 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 suspended sales of HTPV in the
Province of Ontario. Other provinces of Canada have taken similar action. 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(R) products in the
United States and Canada in 1996 and 1997 were minimal.
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 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 manufacturers and distributors, including Hart &
Cooley, Inc. (the Company's Air Distribution Products segment), participated
in a non-binding facilitative mediation process, the object of which was to
develop and implement a voluntary HTPV corrective action program. 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 by replacing the
venting system. The Corrective Action Program was approved by the CPSC in
February 1998.
6
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In 1997, the Company recorded pretax charges of $32.8 million ($20.0
million, net of income taxes) representing an estimate of its share of the
cost of the Corrective Action Program in the United States, resolution of the
Canadian litigation, various related 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 two to 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. The Company paid $4.1
million in 1998 related to HTPV matters.
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 1998 to a
vote of security holders of Falcon through a solicitation of proxies or
otherwise.
<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,
1998 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, 1998, and should be read in
conjunction with such financial statements and notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- ---------
(in millions)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................... $765.8 $686.4 $633.2 $471.3 $440.7
Operating income (loss) (a)................. 48.9 (20.9) 59.8 45.8 51.7
Net income (loss) before extraordinary
item ..................................... 2.5 (37.4) 30.0 22.1 25.9
Net income (loss) (b)....................... 2.5 (38.9) 30.0 22.1 25.9
BALANCE SHEET DATA:
Total assets................................ $381.4 $333.8 $261.7 $210.8 $187.5
Long-term debt (c).......................... 440.0 428.3 109.1 110.9 103.8
Total liabilities (c)....................... 596.1 547.5 233.8 213.0 212.1
Stockholders' equity (deficit) (d).......... (214.7) (213.7) 27.9 (2.2) (24.6)
</TABLE>
___________________
a) Operating income for the year ended December 31, 1998 reflects pretax
restructuring and other charges of $9.9 million. Operating loss for the
year ended December 31, 1997 reflects pretax charges of $32.8 million
relating to Ultravent(R), $36.3 million relating to the
Recapitalization, and $8.0 million relating to pressure washer
reserves.
b) Net 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.
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. Historical comparisons of long-term
debt are not meaningful as the debt structure of the Company was
altered in this period.
d) The Company's equity capital structure was altered in connection with
the Recapitalization in June 1997. As a result, historical comparisons
of stockholders' equity are not meaningful. The deficit in 1998 and
1997 was primarily a consequence of the Recapitalization.
8
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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.
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,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------------- --------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
% OF % OF % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
---------- ---------- ---------- ---------- ---------- ----------
Net Sales:
Air Distribution Products... $219.4 28.7% $191.2 27.9% $187.0 29.6%
Air Power Products.......... 389.1 50.8 335.4 48.9 287.1 45.3
Plumbing Fixtures........... 157.3 20.5 159.8 23.2 159.1 25.1
---------- ---------- ---------- ---------- ---------- ---------
Total Net Sales.......... $765.8 100.0% $686.4 100.0% $633.2 100.0%
---------- ---------- ---------- ---------- ---------- ---------
Profitability: (a)
Air Distribution Products... $ 32.9 4.3% $ 28.8 4.2% $ 29.6 4.7%
Air Power Products.......... 39.0 5.1 29.7 4.3 29.1 4.6
Plumbing Fixtures........... 14.6 1.9 24.8 3.6 28.5 4.5
---------- ---------- ---------- ---------- ---------- ---------
Segment total ........... 86.5 11.3 83.3 12.1 87.2 13.8
Corporate................... (5.9) (0.8) (5.3) (0.8) (5.6) (0.9)
---------- ---------- ---------- ---------- ---------- ---------
Total.................... $ 80.6 10.5% $ 78.0 11.3% $ 81.6 12.9%
---------- ---------- ---------- ---------- ---------- ---------
</TABLE>
(a) Profitability represents income before interest expense and income taxes,
excluding the following charges: (i) depreciation and amortization expense;
(ii) costs associated with Ultravent(R) and the Recapitalization; (iii)
securitization expense; and (iv) restructuring and non-cash charges.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES
Air Distribution Products net sales increased $28.2 million to
$219.4 million, or 14.8% over 1997 results. Excluding the effect of
acquisitions in 1998, net sales increased $22.1 million. This increase was
primarily due to increased volume in all product categories as a result of
increased market penetration and generally favorable market conditions,
slightly offset by reduced pricing in flexible duct products primarily in the
first nine months of 1998.
Air Power Products net sales increased $53.7 million to $389.1
million, an increase of 16.0% over 1997 results. This increase was primarily
driven by increased volume of compressors and generators due to increased
market penetration and high storm activity. These increases were partially
offset by a decrease in pressure washer sales due to the loss of customers
resulting from the Company's implementation of a "no returns policy".
9
<PAGE>
Plumbing Fixtures net sales decreased $2.5 million to $157.3 million
or 1.6% from 1997. This decrease was primarily due to decreased volume of
china and steel products due primarily to production inefficiencies discussed
below.
PROFITABILITY
Air Distribution Products profitability increased $4.1 million to
$32.9 million in 1998 from $28.8 million in 1997. This increase was primarily
due to increased volume and cost reduction programs, partially offset by
reduced pricing in flexible duct products as well as increased operating and
distribution expenses.
Air Power Products profitability increased $9.3 million to $39.0
million from $29.7 million in 1997. This increase was primarily due to net
increased volume, principally in generators and compressors, as well as
reduced direct material costs. This increase was partially offset by
increased operating expenses primarily associated with promotional programs.
Lower levels of returns of pressure washers that resulted from the Company's
implementation of a "no returns" policy were partially offset by increased
costs associated with this implementation.
Plumbing Fixtures profitability decreased $10.2 million to $14.6
million from $24.8 million in 1997. This decrease was primarily due to
manufacturing inefficiencies as well as increased warranty and distribution
expenses. The Company has instituted cost controls, revised process flows and
instituted a capital and restructuring plan which it believes will improve
its manufacturing process. See Note 6 to the Company's Consolidated Financial
Statements for a further discussion of the restructuring plan.
Corporate expense increased $0.6 million due to increased costs
associated with the Company's organization subsequent to the Recapitalization.
Depreciation and amortization increased from 1997 due to capital
additions and amortization of costs associated with the Recapitalization in
June 1997. See Note 14 to the Company's Consolidated Financial Statements for
further discussion of the Recapitalization costs being amortized.
Special charges in 1998 consisted of restructuring and other charges
of $9.9 million. See Note 6 to the Company's Consolidated Financial
Statements for further discussion of these charges.
Net interest expense increased $15.3 million to $43.8 million. This
increase was primarily due to the debt structure that resulted from the
Recapitalization in June 1997. See Note 7 to the Company's Consolidated
Financial Statements for a discussion of the Company's debt structure.
The effective income tax rate of 50.3% for the year reflected the
effect of state income taxes and non-deductible expenses, including goodwill
amortization.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Air Distribution Products net sales increased $4.2 million to $191.2
million, an increase of 2.2% over 1996 results. Moderate summer and winter
temperatures reduced demand and significant price competition, primarily in
flex duct products, limited the Company's ability to gain market share.
Air Power Products net sales increased $48.3 million to $335.4
million, an increase of 16.8% from the level achieved in 1996. This increase
was primarily the result of a 48% increase in the net sales of pressure
washers and a 14% increase in net sales of compressors. Partially offsetting
these gains were reduced shipments of generators, as well as the elimination
of automotive products in 1997.
Plumbing Fixtures net sales increased $0.7 million to $159.8 million
in 1997, from $159.1 million in 1996. This modest increase was primarily due
to significant pressure in the wholesale channel, which was partially offset
by increased market penetration in retail markets.
10
<PAGE>
PROFITABILITY
Air Distribution Products profitability decreased $0.8 million to
$28.8 million in 1997, from $29.6 million in 1996. This decrease was
primarily due to the competitive pricing on flex duct products, increased
manufacturing costs and selling and administrative expenses, partially offset
by positive results of cost reduction programs and increased volume in all
product categories.
Air Power Products profitability increased $0.6 million to $29.7
million in 1997 from $29.1 million in 1996. The increase in sales of
generators and pressure washers was offset by an unexpected high level of
pressure washer product returns, as well as increased selling and
administrative costs. The increase in net sales of pressure washers was
accompanied by a 57% increase in the pressure washer return rate. This
resulted in a significant increase in return costs over the 1996 period. 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 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.
Plumbing Fixtures profitability decreased $3.7 million to $24.8
million in 1997 from $28.5 million in 1996. This decrease was primarily due
to manufacturing inefficiencies in certain plumbing products and reduced
vitreous china pricing.
Corporate expense remained constant between the 1997 and 1996
periods.
Depreciation and amortization expense increased from 1996 primarily
due to capital expenditures and increased amortization of costs associated
with the Recapitalization. See Note 14 of the Company's Consolidated
Financial Statements for further discussion of the Recapitalization costs
being amortized.
Special charges in 1997 included $36.3 million of expenses
associated with the Recapitalization and $32.8 million of expenses associated
with Ultravent(R) (see Notes 5 and 15 to the Company's Consolidated Financial
Statements for a complete discussion of these expenses), as well as $8.0
million related to the establishment of reserves related primarily to
returned pressure washer inventory. Special charges in 1996 included $1.8
million of expenses associated with Ultravent(R).
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 7 to the Company's Consolidated
Financial Statements for a discussion of the Company's debt structure.
The effective 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow from operating activities amounted to $65.1 million in
1998 compared to $10.9 million in 1997. The increase of $54.2 million was
primarily due to a decrease in working capital through inventory reduction
programs and an increased focus on vendor payment terms. The net residual
interest retained by the Company in the accounts receivable sold by the
Company increased $9.4 million from December 31, 1997 as a result of growth
in the level of accounts receivable sold under the Accounts Receivable
Securitization Program. This residual interest of $22.5 million at December
31, 1998 is reflected in other current assets in the Company's financial
statements. Net cash flow from operating activities decreased $30.2 million
to $10.9 million in 1997 from $41.1 million in 1996. This decrease was
primarily due to an increase in working capital requirements and the effect
of the stand-alone securitization facility the Company entered into in April
1996. In December 1996, the Company paid the parent of Eagle $4.6 million for
a final tax sharing payment for tax liabilities incurred while it was
included in its consolidated income tax returns, pursuant to a disaffiliation
tax sharing agreement.
11
<PAGE>
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 credit facilities and the Receivables
Securitization Program. The Company estimates that the costs associated with
the Corrective Action Program and other related HTPV matters will be expended
during the next two to three years. 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, 1998, $122.5 million
was available to borrow under the Revolving Facility.
In December 1998, the Company sold to its stockholders, an option to
purchase Mansfield Plumbing Products, Inc. ("Mansfield"), its Plumbing
Fixtures segment, based on an enterprise value for such segment of $80
million. The option exercise price is $10 million, plus the amount by which
the indebtedness which Mansfield will incur as a result of this transaction
(the proceeds of which would be distributed to Falcon) is less than $70
million. The option is exercisable at any time on or prior to June 30, 1999.
The proceeds from this transaction, if the option is ultimately exercised,
are expected to be utilized to reduce outstanding indebtedness under the
Company's credit facility.
CAPITAL EXPENDITURES
Capital expenditures were $22.8 million, $19.1 million and $20.0
million for 1998, 1997, and 1996, respectively. 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 1999. The Company expects to spend approximately $30 million for capital
expenditures in 1999.
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 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 activities.
The Company and each of its operating subsidiaries have implemented
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 has utilized 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 included 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 segment is in a different stage of
Year 2000 readiness.
The assessment phase of the Year 2000 readiness program is 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 operations have
been 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 second 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
have been 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.
12
<PAGE>
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 the Company's 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 $1.3 million, of which
approximately $0.8 million has been expensed through December 31, 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
or equipment, substantially all of which would be capitalized, are not
included in the above estimates.
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
The effect of inflation on 1998, 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.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Reports of Independent Accountants.................................. 15
Consolidated Balance Sheets......................................... 17
Consolidated Statements of Income and Comprehensive Income.......... 18
Consolidated Statements of Stockholders' Equity..................... 19
Consolidated Statements of Cash Flows............................... 20
Notes to Consolidated Financial Statements.......................... 21
Supplementary Financial Data (Unaudited)............................ 50
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Falcon Building Products, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Falcon Building Products, Inc. and Subsidiaries (the "Company")
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
March 5, 1999
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Falcon Building Products, Inc.:
We have audited the accompanying Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for Falcon Building Products, Inc. (a
Delaware Corporation) and Subsidiaries as of December 31, 1996 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 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 the year
then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 5, 1997
16
<PAGE>
<TABLE>
<CAPTION>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------------
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 66.4 $ 29.9
Inventories, net.................................................. 78.8 79.5
Other current assets.............................................. 42.2 34.0
------------ ------------
Total current assets.............................................. 187.4 143.4
Property, plant and equipment, net..................................... 109.8 101.3
Goodwill, net.......................................................... 59.4 57.0
Other assets........................................................... 24.8 32.1
------------ ------------
Total assets...................................................... $381.4 $333.8
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt.................................... $ 2.0 $ 1.5
Accounts payable.................................................. 58.0 34.0
Accrued liabilities............................................... 57.0 43.2
------------ ------------
Total current liabilities......................................... 117.0 78.7
Senior indebtedness ................................................... 175.7 175.6
Senior subordinated notes.............................................. 264.3 252.7
Accrued employee benefit obligations................................... 13.3 9.2
Other long-term liabilities............................................ 25.8 31.3
------------ ------------
Total liabilities................................................. 596.1 547.5
------------ ------------
Stockholders' equity (deficit):
Class A stock, par value $.01 per share, 985,529 shares issued
in 1998, 1,007,690 issued in 1997............................. -- --
Class B stock, par value $.01 per share, 6,721,536 shares issued.. 0.1 0.1
Class C stock, par value $.01 per share, 844,174 shares issued in
1998, 844,274 shares issued in 1997........................... -- --
Class D stock, par value $.01 per share, 17,000 shares issued..... -- --
Common stock, par value $.01 per share, none issued............... -- --
Additional paid-in capital........................................ -- --
Retained deficit.................................................. (209.7) (211.8)
Notes receivable arising from stock purchase plan................. (1.8) (2.0)
Accumulated other comprehensive loss.............................. (3.3) --
------------ ------------
Total stockholders' equity (deficit).............................. (214.7) (213.7)
------------ ------------
Total liabilities and stockholders' equity ....................... $381.4 $333.8
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN MILLIONS)
YEAR ENDED
DECEMBER 31,
--------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Net sales................................................... $765.8 $686.4 $ 633.2
Cost of sales............................................... 640.0 576.5 513.6
-------------- ------------- --------------
Gross earnings......................................... 125.8 109.9 119.6
Selling, general and administrative expenses................ 64.9 57.7 53.9
Securitization expense...................................... 3.8 4.0 4.1
Restructuring and other charges............................. 8.2 -- --
Ultravent expenses.......................................... -- 32.8 1.8
Recapitalization expenses................................... -- 36.3 --
-------------- ------------- --------------
Operating income (loss)................................ 48.9 (20.9) 59.8
Net interest expense........................................ 43.8 28.5 11.0
-------------- ------------- --------------
Income (loss) before income taxes and extraordinary item.... 5.1 (49.4) 48.8
Provision (benefit) for income taxes........................ 2.6 (12.0) 18.8
-------------- ------------- --------------
Income (loss) before extraordinary item................ 2.5 (37.4) 30.0
Extraordinary item:
Early extinguishment of debt net of income tax
benefit of $0.9...................................... -- (1.5) --
-------------- ------------- --------------
Net income (loss)...................................... $ 2.5 $ (38.9) $ 30.0
-------------- ------------- --------------
-------------- ------------- --------------
Other comprehensive income (loss):
Minimum pension liability adjustment net of income tax
expense (benefit) of ($2.3) in 1998, $0.2 in 1997
and ($0.1) in 1996...................................... (3.3) 0.5 (0.1)
-------------- ------------- --------------
Comprehensive income (loss).................................... $ (0.8) $ (38.4) $ 29.9
-------------- ------------- --------------
-------------- ------------- --------------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
NOTES ACCUMULATED
ADDITIONAL RETAINED FROM STOCK OTHER
CLASS A CLASS B PAID-IN EARNINGS PURCHASE COMPREHENSIVE UNEARNED
STOCK STOCK CAPITAL (DEFICIT) PLAN INCOME(LOSS) COMPENSATION
-------- --------- ----------- ---------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995. $ 0.1 $0.1 $ 18.0 $ (17.2) $ (2.2) $ (0.4) $ (0.6)
Net income................. -- -- -- 30.0 -- -- --
Conversion of Class B Stock
to Class A Stock.......... 0.1 (0.1) -- -- -- -- --
Minimum pension liability
adjustment................ -- -- -- -- -- (0.1) --
Other...................... -- -- -- -- -- -- 0.2
-------- --------- ----------- ---------- ------------ --------------- ----------
Balance at December 31, 1996. 0.2 -- 18.0 12.8 (2.2) (0.5) (0.4)
Net loss................... -- -- -- (38.9) -- -- --
Repurchase of Class A Stock (0.2) -- (18.0) (320.2) -- -- 0.4
Issuance of stock.......... -- 0.1 -- 134.5 -- -- --
Minimum pension liability
adjustment................ -- -- -- -- -- 0.5
Other...................... -- -- -- -- 0.2 -- --
-------- --------- ----------- ---------- ------------ --------------- ----------
Balance at December 31, 1997. -- 0.1 -- (211.8) (2.0) -- --
Net income................. -- -- -- 2.5 -- -- --
Repurchase of Class A Stock -- -- -- (0.4) -- -- --
Minimum pension liability
adjustment................ -- -- -- -- -- (3.3) --
Other...................... -- -- -- -- 0.2 -- --
-------- --------- ----------- ---------- ------------ --------------- ----------
Balance at December 31, 1998. $ -- $ 0.1 $ -- $(209.7) $ (1.8) $ (3.3) $ --
-------- --------- ----------- ---------- ------------ --------------- ----------
-------- --------- ----------- ---------- ------------ --------------- ----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
19
<PAGE>
<TABLE>
<CAPTION>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED
DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 2.5 $ (38.9) $ 30.0
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation........................................................ 14.2 14.2 13.7
Amortization........................................................ 6.0 4.5 1.8
Accretion of debt discount on subordinated debt..................... 11.6 5.8 --
Deferred income tax provision (benefit)............................. 5.9 (15.7) (2.9)
Restructuring and other charges..................................... 9.0 -- --
Ultravent expenses.................................................. (4.1) 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
Inventories..................................................... (0.3) (4.1) (14.0)
Other current assets............................................ (8.8) (10.4) (1.5)
Accounts payable................................................ 23.8 (16.1) 10.2
Accrued liabilities and accrued employee benefit obligations.... 5.3 3.1 (2.4)
---------- ---------- ----------
Net cash from operating activities.................................... 65.1 10.9 41.1
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses................................................ (4.0) -- (18.8)
Capital expenditures.................................................. (22.8) (19.1) (20.0)
Other................................................................. (0.2) (0.3) 0.2
---------- ---------- ----------
Net cash used in investing activities................................. (27.0) (19.4) (38.6)
---------- ---------- ----------
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 (repayments) on debt................................... (1.6) 16.5 0.3
---------- ---------- ----------
Net cash from (used in) financing activities.......................... (1.6) 34.5 0.3
---------- ---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS...................................... 36.5 26.0 2.8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 29.9 3.9 1.1
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $ 66.4 $ 29.9 $ 3.9
---------- ---------- ----------
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest.............................................................. $ 27.4 $ 20.7 $ 11.0
Income taxes to affiliate............................................. -- -- 4.6
Income taxes to (from) third parties.................................. $ (6.6) $ 7.6 $ 23.5
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
20
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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.
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 7 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 38.4% and 41.1% of
inventory at December 31, 1998 and 1997, respectively. The first-in,
first-out ("FIFO") method of inventory valuation was used for the remaining
inventory.
21
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
NEW ACCOUNTING PRONOUNCEMENTS:
Effective January 1, 1998, the Company adopted the provisions of
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.
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.
Effective January 1, 1998, The Company adopted the provisions of
Statement No. 131 ("SFAS No. 131"), "Disclosure about Segments of an
Enterprise and Related Information." This statement establishes standards
for reporting information about operating segments and related disclosures
about products and services, geographic areas and major customers.
IMPAIRMENT OF LONG-LIVED ASSETS:
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.
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 $17.7 million and $15.6 million at December 31,
1998 and 1997, 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. This method of amortization approximates the
effective yield method.
22
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONINUED)
DECEMBER 31, 1998
REVENUE RECOGNITION:
The Company recognizes revenues as products are shipped to customers.
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 June 25, 1998, the Company acquired Warrior Glass & Aluminum Co.,
Inc., a manufacturer of aluminum window wall systems used in light commercial
applications. The consideration 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.
(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 second quarter of 1996, Eagle
terminated 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.
At December 31, 1998 and 1997, uncollected receivables sold under the
agreement were $106.7 million and $88.6 million, respectively. Included in
the Company's financial statements in other current assets is a net residual
interest of $22.5 million and $13.1 million at December 31, 1998 and 1997,
respectively. The expense incurred on the sale of the receivables under these
programs was $3.8 million, $4.0 million and $4.1 million in 1998, 1997 and
1996, 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.
23
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
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) 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. In the fourth quarter of 1998, the Company recorded restructuring
charges of $0.9 million related to the consolidation of two Air Distribution
Products manufacturing plants.
24
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
The following table summarizes the costs reflected in the Company's
Consolidated Financial Statements at December 31,1998; $8.2 million is
reflected as Restructuring and Other Charges while $1.7 million is included
in Cost of Sales (in millions):
<TABLE>
<CAPTION>
RESTRUCTURING
RESTRUCTURING CHARGES
RESTRUCTURING OTHER AND OTHER INCLUDED
CHARGES CHARGES CHARGES IN COST OF SALES TOTAL
---------------- ----------- ----------------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Inventory...................... $ -- $ -- $ -- $ 1.7 $ 1.7
Severance...................... 0.7 -- 0.7 -- 0.7
Professional fees.............. 0.1 0.6 0.7 -- 0.7
Fixed asset write-downs........ 3.3 -- 3.3 -- 3.3
Workers compensation........... 2.0 -- 2.0 -- 2.0
Other.......................... 0.7 0.8 1.5 -- 1.5
--------- -------- ------- -------- -------
$ 6.8 $ 1.4 $ 8.2 $ 1.7 $ 9.9
--------- -------- ------- -------- -------
--------- -------- ------- -------- -------
</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 as well as adjustments related to the plant consolidation. The
severance costs are for 70 employees primarily in the steel operations that
were terminated as a result of the Reorganization Plan and employees
associated with the Air Distribution plant consolidation. 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 plant consolidation, 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 and plant
consolidation. 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. Of the $9.9 million of
Restructuring and Other charges recorded, $4.2 million are non-cash charges
and $5.7 million are cash charges. Approximately $0.9 million of the cash
charges have been expended through December 31, 1998. The above restructuring
activities are anticipated to be completed within 1999.
(7) 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.
25
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
Although the Old Securities were sold through a confidential placement
memorandum, in September 1997, the Company filed an exchange offer
registration statement with respect to certain of the Old Securities (the
"Exchange Offer"). Pursuant to the Exchange Offer, $144.0 million 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. 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 16.
SENIOR INDEBTEDNESS:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Bank Credit Facility
Revolver.................................... $ -- $ --
Term........................................ 173.5 174.5
------------- ------------
Total....................................... 173.5 174.5
Other ........................................ 4.2 2.6
Less: Current Portion......................... (2.0) (1.5)
------------- ------------
Senior indebtedness......................... $ 175.7 $ 175.6
------------- ------------
------------- ------------
</TABLE>
The aggregate long-term debt maturities over the next five years are as
follows: 1999 - $2.0 million; 2000 - $2.1 million; 2001 - $2.4 million; 2002
- - $10.8 million; and 2003 - $43.6 million.
BANK CREDIT FACILITY:
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, 1998. 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, 1998, $122.5 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 (8.2% for the term loan at
December 31, 1998) 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, 1998, the Company was in compliance with all
covenants of the Bank Credit Facility.
26
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
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 1998 was $436.6 million, an increase of $122.3 million over the
comparable 1997 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 $119.3 million at December 31, 1998.
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.
27
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(8) EMPLOYEE RETIREMENT AND BENEFIT PLANS
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 Company provides post-retirement life and health-care benefits to
certain of its employees. The Company has six 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.
Health care benefits are contributory for two of the plans; the life
insurance plans are noncontributory. 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.
Following is a summary of amounts recognized in the Company's
Consolidated Financial Statements related to these plans.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ------------ ----------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year.......... $ 30.8 $ 27.2 $ 12.2 $ 12.5
Service cost................................ 1.9 1.8 0.5 0.5
Interest cost............................... 2.2 2.0 0.9 1.0
Amendments.................................. -- 0.5 -- --
Actuarial loss (gain)....................... 4.9 1.0 0.1 (0.9)
Benefits paid............................... (2.8) (1.7) (0.9) (0.9)
----------- ------------ ----------- ------------
Benefit obligation at end of year................ $ 37.0 $ 30.8 $ 12.8 $ 12.2
----------- ------------ ----------- ------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning
of year....................................... $ 33.9 $ 28.5 $ -- $ --
Actual return on plan assets................ 1.3 6.9 -- --
Company contribution........................ 1.2 0.2 0.8 0.9
Plan participant contribution............... -- -- 0.1 --
Benefits paid............................... (2.8) (1.7) (0.9) (0.9)
----------- ------------ ----------- ------------
Fair value of plan assets at end of year......... $ 33.6 $ 33.9 $ -- $ --
----------- ------------ ----------- ------------
Funded status.................................... $ (3.4) $ 3.1 $(12.8) $(12.2)
Unrecognized actuarial loss...................... 6.2 0.1 2.3 2.3
Unrecognized prior service cost.................. 0.5 0.4 -- --
Unrecognized net transition obligation........... 0.2 0.2 -- --
----------- ------------ ----------- ------------
Prepaid (accrued) benefit cost................... $ 3.5 $ 3.8 $(10.5) $ (9.9)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid (accrued) benefit cost.............. $ 3.5 $ 3.8 $(10.5) $ (9.9)
Accrued benefit liability................... (6.9) -- -- --
Intangible asset............................ 1.2 -- -- --
Accumulated other comprehensive loss........ (3.3) -- -- --
----------- ------------ ----------- ------------
Net amount recognized............................ $ (5.5) $ 3.8 $(10.5) $ (9.9)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
28
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------- --------------------------------------------------
1998 1997 1998 1997
--------- --------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS
AS OF DECEMBER 31:
Discount rate..................... 7.00% 7.50% 7.00% 7.50%
Expected return on plan assets.... 9.00% 9.00% -- --
Rate of compensation increase..... 4.00% 4.00% -- --
Health care cost trend rate....... -- -- 7.00% for 1999 8.00% for 1998
decreasing to 5.00% decreasing to 5.50%
for 2001 and later for 2001 and later
</TABLE>
Net periodic benefit cost components were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
----------- ---------- ---------- ----------- ----------- ----------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Service cost............................. $ 1.9 $ 1.8 $ 1.8 $ 0.5 $ 0.5 $ 0.5
Interest cost............................ 2.2 2.0 1.8 0.9 1.0 0.9
Expected return on plan assets........... (2.7) (2.6) (2.4) -- -- --
Recognized actuarial loss................ 0.1 -- 0.1 0.1 0.1 0.2
----------- ---------- ---------- ----------- ----------- ----------
Net periodic benefit cost................ $ 1.5 $ 1.2 $ 1.3 $ 1.5 $ 1.6 $ 1.6
----------- ---------- ---------- ----------- ----------- ----------
----------- ---------- ---------- ----------- ----------- ----------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $37.0 million, $37.0 million, and
$33.6 million, respectively, as of December 31, 1998.
A one-percentage-point change in the assumed health care cost trend
rate would have the following effects :
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
-------------------------- ----------------------
(IN MILLIONS)
<S> <C> <C>
Effect on total of service and
interest cost components....... $ 0.1 $ (0.1)
Effect on post-retirement
benefit obligation............. $ 1.1 $ (1.1)
</TABLE>
The Company and its subsidiaries also have several defined contribution
plans for certain employees. Employer contributions to these plans were $1.3
million, $1.0 million and $1.4 million in 1998, 1997 and 1996, respectively.
Contributions to this plan by the Company are determined based on a
percentage of the contribution made by the employee.
29
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(9) INCOME TAXES
The Company's Consolidated Balance Sheets reflect the following
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Inventory and receivable reserves...................... $ 1.8 $ 5.0
Accrued employee benefit obligations................... 5.4 3.2
Insurance reserves..................................... 4.6 5.6
Ultravent reserves..................................... 11.1 12.8
Other.................................................. 8.7 7.7
---------- ----------
$ 31.6 $ 34.3
---------- ----------
---------- ----------
Deferred tax liabilities:
Property, plant and equipment basis difference......... $ 8.7 $ 8.2
---------- ----------
</TABLE>
Based on management's assessment, it is more likely than not that all
the net deferred tax assets will be realized through future taxable earnings or
implementation of tax planning strategies.
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Provision (benefit) for income taxes:
Current:
U.S. federal.......................... $ (2.9) $ 2.7 $ 18.1
U.S. state............................ (0.4) 1.0 3.6
---------- ---------- ----------
Subtotal............................ (3.3) 3.7 21.7
---------- ---------- ----------
Deferred:
U.S. federal.......................... 4.8 (13.3) (2.3)
U.S. state............................ 1.1 (2.4) (0.6)
---------- ---------- ----------
Subtotal............................ 5.9 (15.7) (2.9)
---------- ---------- ----------
Total............................ $ 2.6 $ (12.0) $ 18.8
---------- ---------- ----------
</TABLE>
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,
----------------------------------------
1998 1997 1996
-------------- ------------ ----------
(DOLLARS IN MILLIONS)
<S> <S> <C>
U.S. federal statutory rate............................ 34% 35% 35%
Income taxes at U.S. federal statutory rate............ $ 1.7 $(17.3) $ 17.1
State income taxes, net of U.S. federal tax impact..... 0.3 (0.8) 1.9
Amortization of intangibles............................ 0.7 0.7 0.6
Non-deductible expenses, net........................... -- 5.0 --
Other.................................................. (0.1) 0.4 (0.8)
--------- ------------ ------------
Provision (benefit) for income taxes................ $ 2.6 $(12.0) $ 18.8
--------- ------------ ------------
--------- ------------ ------------
Effective income tax rate.......................... 50.3% 24.3% 38.4%
--------- ------------ ------------
--------- ------------ ------------
</TABLE>
30
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(10) 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.
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, 1998 and 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>
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.
31
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
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 February 1998, the Company repurchased
21,818 of these shares due to the retirement of one of its officers and the
related loan amount of $0.2 million was 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.
There were $1.8 million and $2.0 million of notes outstanding under
the Executive Stock Plan and the 1997 Loan Plan at December 31, 1998 and
1997, respectively. 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.
(11) 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. 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.
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.......................... 926,140 17.75 -- --
Exercised........................ -- -- -- --
Canceled......................... -- -- -- --
--------------- ----------------- ------------- ------------------
Balance at December 31, 1997.......... 926,140 17.75 -- --
Granted.......................... 40,100 17.75 -- --
Exercised........................ -- -- -- --
Canceled......................... (51,701) 17.75 -- --
------------- ------------------
--------------- -----------------
Balance at December 31, 1998.......... 914,539 $ 17.75 -- $ --
--------------- ----------------- ------------- ------------------
--------------- ----------------- ------------- ------------------
</TABLE>
32
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
At December 31, 1998, the options outstanding had an exercise price of
$17.75. The weighted average remaining contractual life of the options
outstanding was 8 1/2 years.
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 1998 and 1997, pro forma net income (loss) would have been $2.0
million and $(39.2) million, respectively.
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>
1998 1997
---------- ----------
<S> <C> <C>
Risk-Free Interest Rate.................. 5.2% 6.4%
Average Life of Options (years).......... 7 7
Volatility............................... 0% 0%
Dividend Yield........................... 0% 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, 1997.
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.
33
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(12) BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Inventories:
Raw materials and supplies............................... $ 28.7 $ 27.8
Work in process.......................................... 12.0 12.0
Finished goods........................................... 38.1 39.7
----------- -----------
Total.................................................. $ 78.8 $ 79.5
----------- -----------
----------- -----------
Excess of replacement cost over LIFO inventory cost...... $ 3.8 $ 3.2
----------- -----------
----------- -----------
Other current assets:
Deferred tax assets...................................... $ 15.2 $ 18.2
Residual interest in sold accounts receivable............ 22.5 13.1
Other ................................................... 4.5 2.7
----------- -----------
Total.................................................. $ 42.2 $ 34.0
----------- -----------
----------- -----------
Property, plant and equipment:
Land $ 9.2 $ 8.8
Buildings................................................ 51.8 51.2
Machinery and equipment.................................. 150.4 130.2
Construction in progress................................. 11.4 13.4
Less accumulated depreciation............................ (113.0) (102.3)
----------- -----------
Total.................................................. $ 109.8 $ 101.3
----------- -----------
----------- -----------
Other assets:
Deferred financing fees.................................. $ 18.2 $ 21.0
Other ................................................... 6.6 11.1
----------- -----------
Total.................................................. $ 24.8 $ 32.1
----------- -----------
----------- -----------
Other accrued expenses:
Accrued warranty......................................... $ 10.1 $ 5.7
Accrued wages and benefits............................... 9.0 6.8
Accrued rebates.......................................... 8.5 6.9
Ultravent reserve........................................ 10.0 10.2
Other ................................................... 19.4 13.6
----------- -----------
Total.................................................. $ 57.0 $ 43.2
----------- -----------
----------- -----------
</TABLE>
34
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(13) 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, 1998 and 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, 1998 DECEMBER 31, 1997
------------------------ -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 66.4 $ 66.4 $ 29.9 $ 29.9
Senior Subordinated Notes.......... 264.3 232.5 252.7 257.6
Credit Facilities.................. 173.5 173.5 174.5 174.5
Other Debt......................... 4.2 4.2 2.6 2.6
</TABLE>
(14) RELATED PARTY TRANSACTIONS
On December 30, 1998, the Company entered into an option agreement (the
"Agreement") for the benefit of the Company's stockholders of record on the date
of the Agreement (the "Holders") whereby the Company sold to the Holders, for
the aggregate purchase price of $1.0 million, an option (the "Option") to
purchase all of the issued and outstanding capital stock of Mansfield Plumbing
Products, Inc. ("Mansfield"), its Plumbing Fixtures segment, based upon an
enterprise value for such segment of $80 million. The option exercise price is
$10 million, plus the amount by which the indebtedness which Mansfield will
incur as a result of this transaction (the proceeds of which would be
distributed to Falcon) is less than $70 million.. This Option is exercisable by
the Holders at any time on or prior to June 30, 1999. The value of the option
and the purchase price were determined through an independent valuation. The
Option has been included in Other long-term liabilities in the Company's
Consolidated Balance Sheet.
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 in 1997 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.
35
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
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 and $2.6 million in 1996. 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 the Offering, the Company was included in its parent's
consolidated federal income tax returns. In addition, the Company filed
certain combined state tax returns until the distribution to EHL in 1996.
Pursuant to the Tax Sharing Agreement, the Company paid $4.6 million in 1996
for tax liabilities it incurred during the periods it was included in
consolidated 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.
Also see Notes 1 and 5 for other information regarding related party
transactions.
(15) 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 $5.5 million, $4.9 million and $4.7 million for the
years ended December 31, 1998, 1997, and 1996, respectively.
Future minimum lease payments required as of December 31, 1998 (in
millions):
<TABLE>
<CAPTION>
<S> <C>
1999......................... $ 2.3
2000........................ 2.1
2001........................ 1.9
2002........................ 1.4
2003 and thereafter......... 1.2
---------
$ 8.9
---------
---------
</TABLE>
The Company and certain of its subsidiaries are involved in several
lawsuits and environmental matters arising in the ordinary course of
business. However, it is the opinion of the Company's management, based upon
the advice of legal counsel, that these lawsuits 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(R) 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
suspended sales of HTPV in the Province of Ontario. Other provinces of Canada
have taken similar action. Pursuant to an 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(R) products in the United States and Canada in 1996 and 1997 were
minimal.
36
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
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 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, participated in a non-binding facilitative mediation process, the
object of which was to develop and implement a voluntary HTPV corrective
action program. 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 by replacing the venting system. The Corrective Action Program was
approved by the CPSC in February 1998.
In 1997, the Company recorded pretax charges of $32.8 million ($20.0
million, net of income tax) 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. The
Company paid $4.1 million in 1998 related to this matter.
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.
37
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) 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., Warrior Glass and Aluminum, 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.
38
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1998
(in millions)
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 62.7 $ 0.9 $ 2.8 $ -- $ 66.4
Inventories, net...................... -- 78.8 -- -- 78.8
Other current assets.................. 0.5 19.2 22.5 -- 42.2
------- ------------ ----------- ------------ ------------
Total current assets.................. 63.2 98.9 25.3 -- 187.4
Property, plant and equipment, net......... 0.5 109.3 -- -- 109.8
Goodwill................................... -- 59.4 -- -- 59.4
Investment in and advances
to/from subsidiaries.................. 163.2 (109.6) (18.9) (34.7) --
Other long-term assets..................... 21.8 3.0 -- -- 24.8
------- ------------ ----------- ------------ ------------
Total assets.......................... $248.7 $161.0 $ 6.4 $(34.7) $381.4
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt........ $ 1.0 $ 1.0 $ -- $ -- $ 2.0
Accounts payable...................... 0.1 57.9 -- -- 58.0
Accrued liabilities................... 18.4 38.3 0.3 -- 57.0
------- ------------ ----------- ------------ ------------
Total current liabilities............. 19.5 97.2 0.3 -- 117.0
Long term debt............................. 436.8 3.2 -- -- 440.0
Other long-term liabilities................ 6.3 32.8 -- -- 39.1
------- ------------ ----------- ------------ ------------
Total liabilities..................... 462.6 133.2 0.3 -- 596.1
------- ------------ ----------- ------------ ------------
Stockholders' equity (deficit):
Common stock.......................... 0.1 -- -- -- 0.1
Additional paid-in capital............ -- 42.9 6.5 (49.4) --
Retained earnings (deficit)........... (209.7) (14.3) (0.4) 14.7 (209.7)
Accumulated other comprehensive
income............................. (2.5) (0.8) -- -- (3.3)
Other................................. (1.8) -- -- -- (1.8)
------- ------------ ----------- ------------ ------------
Total stockholders' equity (deficit).. (213.9) 27.8 6.1 (34.7) (214.7)
------- ------------ ----------- ------------ ------------
Total liabilities and stockholders' equity. $248.7 $161.0 $ 6.4 $(34.7) $381.4
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
</TABLE>
39
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1997
(in millions)
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:
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>
40
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1998
(in millions)
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $765.8 $ -- $ -- $765.8
Cost of sales.................................... -- 640.0 -- -- 640.0
------- ------------ ----------- ------------ ------------
Gross earnings.............................. -- 125.8 -- -- 125.8
Selling and administrative expenses.............. 7.1 57.8 -- -- 64.9
Securitization expense........................... 6.3 -- (2.5) -- 3.8
Restructuring and other charges.................. -- 8.2 -- -- 8.2
Ultravent expense................................ -- -- -- -- --
Recapitalization expense......................... -- -- -- -- --
------- ------------ ----------- ------------ ------------
Operating income (loss)..................... (13.4) 59.8 2.5 -- 48.9
Corporate allocation............................. (54.0) 54.0 -- -- --
Net interest expense............................. 41.8 0.2 1.8 -- 43.8
------- ------------ ----------- ------------ ------------
Income (loss) before income taxes................ (1.2) 5.6 0.7 -- 5.1
Provision (benefit) for income taxes............. (0.3) 2.6 0.3 -- 2.6
------- ------------ ----------- ------------ ------------
Income (loss) before equity in income (loss) of
consolidated subsidiaries................... (0.9) 3.0 0.4 -- 2.5
Equity in income of consolidated subsidiaries.... 3.4 -- -- (3.4) --
------- ------------ ----------- ------------ ------------
Net income (loss)................................ $ 2.5 $ 3.0 $ 0.4 $ (3.4) $ 2.5
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
Other comprehensive loss:
Minimum pension liability adjustment net
of income tax benefit of $2.3............. (2.5) (0.8) -- -- (3.3)
------- ------------ ----------- ------------ ------------
Comprehensive income (loss)...................... $ -- $ 2.2 $ 0.4 $ (3.4) $ (0.8)
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
</TABLE>
41
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1997
(in millions)
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)
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
Other comprehensive income:
Minimum pension liability adjustment net
of income tax expense of $0.2............. -- 0.5 -- -- 0.5
------- ------------ ----------- ------------ ------------
Comprehensive income (loss)...................... $(38.9) $(21.5) $ 0.2 $ 21.8 $(38.4)
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
</TABLE>
42
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1996
(in millions)
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
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
Other comprehensive loss:
Minimum pension liability adjustment net
of income tax benefit of $0.1............. -- (0.1) -- -- (0.1)
------- ------------ ----------- ------------ ------------
Comprehensive income (loss)...................... $ 30.0 $ 29.0 $ (1.0) $ (28.1) $ 29.9
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
</TABLE>
43
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
(in millions)
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities......... $ 20.2 $ 53.6 $ (8.7) $ -- $ 65.1
------- ------------ ----------- ------------ ------------
Cash flows from investing activities:
Purchase of business.................... -- (4.0) -- -- (4.0)
Capital expenditures.................... (0.4) (22.4) -- -- (22.8)
Other................................... 0.4 (0.6) -- -- (0.2)
------- ------------ ----------- ------------ ------------
Net cash used in investing activities... -- (27.0) -- -- (27.0)
------- ------------ ----------- ------------ ------------
Cash flows from financing activities:
Advances (to) from affiliate............ 14.6 (25.9) 11.3 -- --
Net borrowings on debt.................. (1.0) (0.6) -- -- (1.6)
------- ------------ ----------- ------------ ------------
Net cash from financing activities...... 13.6 (26.5) 11.3 -- (1.6)
------- ------------ ----------- ------------ ------------
Change in cash and cash equivalents.......... 33.8 0.1 2.6 -- 36.5
Cash and cash equivalents, beginning
of period............................... 29.0 0.7 0.2 -- 29.9
------- ------------ ----------- ------------ ------------
Cash and cash equivalents, end of period..... $ 62.8 $ 0.8 $ 2.8 $ -- $ 66.4
------- ------------ ----------- ------------ ------------
------- ------------ ----------- ------------ ------------
</TABLE>
44
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 1997
(in millions)
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>
45
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(16) GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 1996
(in millions)
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>
46
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(17) BUSINESS SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the provisions of
Statement No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. Prior year amounts have been restated
to conform to the current year's presentation.
The Company has three operating segments under this Statement: Air
Distribution Products, Air Power Products and Plumbing Fixtures.
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 applications. Air Power Products: The Company is the
leading producer of consumer and commercial air compressors for home
improvement applications. The Company also produces generators and pressure
washers marketed primarily into retail and home center outlets. In addition,
the Company sells a variety of pneumatic tools for use in home improvement
applications. 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.
The accounting policies of the segments are the same as those disclosed
in the "Summary of Significant Accounting Policies." The Company evaluates
the performance of its segments based on their Profitability which is defined
as earnings before interest expense and income taxes, excluding the following
charges: (i) depreciation and amortization expense; (ii) costs associated
with Ultravent(R) and the Recapitalization; (iii) securitization expense; and
(iv) restructuring and non-cash charges.
47
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ----------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
NET SALES:
Air Distribution Products................................. $219.4 $191.2 $187.0
Air Power Products........................................ 389.1 335.4 287.1
Plumbing Fixtures......................................... 157.3 159.8 159.1
----------- ----------- -----------
Total.................................................. $765.8 $686.4 $633.2
----------- ----------- -----------
----------- ----------- -----------
SEGMENT PROFITABILITY:
Air Distribution Products................................. $ 32.9 $ 28.8 $ 29.6
Air Power Products........................................ 39.0 29.7 29.1
Plumbing Fixtures......................................... 14.6 24.8 28.5
----------- ----------- -----------
Total.................................................. $ 86.5 $ 83.3 $ 87.2
----------- ----------- -----------
----------- ----------- -----------
RECONCILIATION OF SEGMENT PROFITABILITY TO INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM:
Total segment profitability.................................. $ 86.5 $ 83.3 $ 87.2
Corporate.................................................... (5.9) (5.3) (5.6)
Non-cash retiree medical..................................... (0.6) (0.9) (0.4)
Depreciation and amortization................................ (17.4) (16.9) (15.5)
Restructuring and other charges.............................. (9.9) (8.0) --
Ultravent expense............................................ -- (32.8) (1.8)
Recapitalization expense..................................... -- (36.3) --
Net interest expense......................................... (43.8) (28.5) (11.0)
Securitization expense....................................... (3.8) (4.0) (4.1)
----------- ----------- -----------
Income (loss) before incomes taxes and extraordinary item. $ 5.1 $(49.4) $ 48.8
----------- ----------- -----------
----------- ----------- -----------
SEGMENT ASSETS(A):
Air Distribution Products................................. $110.3 $101.7 $100.7
Air Power Products........................................ 166.7 150.4 127.6
Plumbing Fixtures......................................... 100.0 99.3 97.5
----------- ----------- -----------
Total Segment Assets................................... $377.0 $351.4 $325.8
----------- ----------- -----------
----------- ----------- -----------
RECONCILIATION OF SEGMENT ASSETS TO TOTAL ASSETS:
Total Segment Assets.................................... $377.0 $351.4 $325.8
Securitized Receivables................................. (106.7) (88.6) (75.2)
Corporate and other(b).................................. 111.1 71.0 11.1
---------- ----------- ------------
Total Assets...................................... $381.4 $333.8 $261.7
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
(a) Segment assets include accounts receivable sold under the securitization
program.
(b) Corporate and other represents corporate assets, primarily consisting of
cash, deferred financing fees and residual interest in accounts receivable
sold under the securitization program.
The Company's export sales are less than 10% of total revenues. The
Company reported revenues from two individual customers that represented
sales of more than 10% of the Company's consolidated net sales. The Company's
Air Power Products and Plumbing Fixtures segments reported net sales to Sears
of $129.6 million, $90.5 million and $84.0 million for 1998, 1997 and 1996,
respectively. All of the Company's segments had net sales to The Home Depot
totaling $83.2 million for 1998. 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.
48
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1998
(18) SUBSEQUENT EVENT
On January 22, 1999, the Company acquired the assets and business of
the Penn Ventilation Companies, Inc. ("Penn Ventilation") a manufacturer of
air moving and control equipment for commercial and industrial applications.
The consideration for Penn Ventilation consisted of $26.0 million in cash, a
$3.0 million three-year interest bearing note and non-compete agreement
payments totaling $3.0 million payable over three years. The acquisition will
be accounted for as a purchase. Penn Ventilation reported approximately $80.0
million of net sales in 1998. Penn Ventilation will be part of the Company's
Air Distribution Products segment.
49
<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 the years ended December 31, 1998 and 1997 (in millions).
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------------- -------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $171.4 $160.2 $190.9 $195.7 $197.5 $172.7 $206.0 $157.8
Gross earnings(1)...... 25.1 28.2 34.8 36.8 31.0 29.1 34.9 15.8
Income (loss)
before extra-
ordinary item....... (0.7) 6.1 3.8 (18.4) (2.7) 0.8 2.1 (25.9)
Net income (loss)(2) (0.7) 6.1 3.8 (19.9) (2.7) 0.8 2.1 (25.9)
</TABLE>
- --------------------
(1) Gross earnings for the quarter ended September 30, 1998 reflects $1.7
million of costs associated with the Reorganization Plan. 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 loss for the quarter ended September 30, 1998 reflects $9.0 million of
pretax costs associated with the Reorganization Plan, and write down of
automotive assets. Net income for the quarter ended December 31, 1998
reflects $0.9 million of pretax costs associated with the consolidation of
manufacturing plants. Net 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. Net loss for the quarter ended
December 31, 1997 reflects after tax charges of $19.0 million related to
Ultravent(R).
50
<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, 1999, 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>
<CAPTION>
<S> <C>
William K. Hall, 55..................... 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, 54.................... President of DeVilbiss Air Power Company, a subsidiary of Falcon, since
1989.
Gus J. Athas, 62........................ Executive Vice President - Administration of Falcon since June 1997;
Senior Vice President, General Counsel and Secretary of Falcon since
1994; Senior Vice President of Great American Management and
Investment, Inc. ("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, 58...................... 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.
Edward G. Finnegan, Jr., 37............. 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, 54................. 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, 56..................... President of Hart & Cooley, Inc., a subsidiary of Falcon, since 1985.
Anthony J. Navitsky, 42................. Vice President-Finance & Treasurer of Falcon since March 1997. Served
as Vice President and Treasurer of Eagle from 1990 to 1997.
Christopher J. O'Brien, 40.............. 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 Star
Markets Holdings, Inc., CSK Auto Corporation, and The William Carter
Company.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Charles J. Philippin, 48................ 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, The William Carter Company, Harborside
Healthcare and Stratus Computer, Inc.
Christopher J. Stadler, 34.............. 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>
52
<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"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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)....................... 1998 598,900 366,012 -- 13,600
President and Chief Executive Officer 1997 425,000 83,333 241,271 706,415
1996 250,000 271,200 43,300 6,410
Sam A. Cottone (1)(5)..................... 1998 405,585 167,552 -- 13,600
Executive Vice President-Finance, 1997 275,000 37,500 120,636 306,415
Treasurer and Chief Financial Officer 1996 144,731 122,040 32,200 6,410
Gus J. Athas (1)(5)....................... 1998 347,731 138,271 -- 13,600
Executive Vice President, General 1997 252,692 37,500 86,168 306,415
Counsel and Secretary 1996 144,731 122,040 32,200 6,410
Joseph W. Harbrecht....................... 1998 275,000 -- -- 13,600
President, Mansfield Plumbing 1997 19,920 -- 51,000 --
Products, Inc. 1996 -- -- -- --
William E. Allen (4)...................... 1998 250,020 222,100 -- 12,000
President, DeVilbiss Air Power Co. 1997 226,768 63,804 51,706 817,830
1996 186,162 208,157 19,500 11,402
Lawrence B. Lee........................... 1998 225,000 152,645 -- 10,400
President, Hart & Cooley, Inc. 1997 210,603 52,818 51,701 411,830
1996 194,750 73,148 18,450 8,960
</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 in 1997 includes transaction incentive bonuses of
$700,000, $500,000, $300,000, $300,000 and $399,000 paid to the above named
officers (excluding Mr. Harbrecht), 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 in 1997 for Mr. Allen includes a $275,000 payment for a
three-year non-competition agreement.
(5) In connection with the Recapitalization in 1997, Messrs. Athas and Cottone
were named Executive Vice Presidents. Prior to such time, Messrs. Athas and
Cottone were Senior Vice Presidents of the Company.
53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
NONE
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR OPTION VALUE
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END (#) FY-END ($)
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1)
------------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C>
William K. Hall................ -- -- 0/241,271 0 / N/A
William E. Allen............... -- -- 0/51,706 0 / N/A
Gus J. Athas................... -- -- 0/86,168 0 / N/A
Sam A. Cottone................. -- -- 0/120,636 0 / N/A
Joseph W. Harbrecht............ -- -- 0/51,000 0 / N/A
Lawrence B. Lee................ -- -- 0/51,701 0 / N/A
</TABLE>
- ---------------------
(1) 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, 1998 was 5.7%. Covered
compensation includes salary, annual bonus, 401(k) deferrals and overtime, but
excludes long-term incentive compensation.
The estimated annual annuity benefits payable under the Pension Plans
at normal retirement are $17,471, $48,025, $4,848, $10,498, $16,229 and $41,774
for Messrs. Hall, Allen, Athas, Cottone, Harbrecht, and Lee, respectively at
December 31, 1998. 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.
54
<PAGE>
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,
Mr. Cottone serves as Executive Vice President and Chief Financial Officer, and
Mr. Athas serves as Executive Vice President Administration, General Counsel and
Secretary. These Employment Agreements stipulated base salary amounts that are
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 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.
"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, Lee
and Harbrecht, 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-two other employees of the
Company's subsidiaries which provide for a lump sum payment from six to 18
months of the employee's base salary plus bonus at the time of such employee's
termination and the Company's payment of the costs for continuation of certain
benefits for a specified period of time after such employee's termination.
55
<PAGE>
COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. Mr. Hall makes
recommendations to the Board of Directors regarding executive officer
compensation. The Board of Directors makes decisions regarding compensation with
Messrs. Hall and Cottone abstaining from voting regarding such matters.
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 Sheli Z.
Rosenberg (a former director) 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.
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, 1998, the balances of these loans
including accrued interest to the Named Executive Officers were $1.0 million,
$0.2 million, $0.2 million, $0.3 million, and $0.2 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 three employees of the Company who are not Named Executive Officers.
56
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, 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)............................................. 134,852 13.7
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.
57
<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.
58
<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 14 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.......................... 15
Consolidated Balance Sheets................................. 17
Consolidated Statements of Income and Comprehensive Income.. 18
Consolidated Statements of Stockholders' Equity............. 19
Consolidated Statements of Cash Flows....................... 20
Notes to Consolidated Financial Statements.................. 21
</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 December 30, 1998, relative to
the issuance of the Option to purchase Mansfield Plumbing Products, Inc.
Current Report on Form 8-K dated January 22, 1999, regarding the
acquisition of the assets and business of the Penn Ventilation Companies, Inc.
(c) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Index to Exhibits, which is incorporated herein by reference.
59
<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 26, 1999
--------------------------------------
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 26, 1999
- ------------------------------ Board of Directors, President and
(William K. Hall) Chief Executive Officer (Principal
Executive Officer)
/S/ SAM A. COTTONE Executive Vice President-Finance, March 26, 1999
- ------------------------------ and Chief Financial Officer
(Sam A. Cottone) (Principal Financial Officer)
/S/ ANTHONY J. NAVITSKY Vice President - Finance and Treasurer March 26, 1999
- ------------------------------ (Principal Accounting Officer)
(Anthony J. Navitsky)
* /S/ CHRISTOPHER J. O'BRIEN Director March 26, 1999
----------------------------
(Christopher J. O'Brien)
* /S/ CHARLES J. PHILIPPIN Director March 26, 1999
----------------------------
(Charles J. Philippin)
* /S/ CHRISTOPHER J. STADLER Director March 26, 1999
----------------------------
(Christopher J. Stadler)
</TABLE>
* by /s/ Sam A. Cottone as attorney in fact for each person indicated.
------------------
(Sam A. Cottone)
60
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
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 (Incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
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 (Incorporated by reference
to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997).
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).
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
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.)
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
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 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.)
10.28 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.)
10.29 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.)
10.30 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.)
10.31 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.)
10.32 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.)
10.33 Termination Benefits Agreement dated December 20, 1997 between
Mansfield Plumbing Products, Inc. and Joseph W. Harbrecht.
(Incorporated by reference to Exhibit 10.35 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.34 Option Agreement dated December 30, 1998 between the Company and
its shareholders.
21.1 Subsidiaries of the Company.
24.1 Power of Attorney of Directors.
</TABLE>
63
<PAGE>
EXHIBIT 10.34
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Option Agreement"), dated as of
December 30, 1998, is by and among Falcon Building Products, Inc., a
Delaware corporation ("Falcon"), IFOH Limited, a corporation incorporated
in the Cayman Islands ("IFOH"), and those stockholders of Falcon listed on
Exhibit A hereto.
RECITALS
A. Mansfield Plumbing Products, Inc., a Delaware corporation (the
"Company"), is a wholly owned subsidiary of Falcon.
B. The Board of Directors of Falcon has determined that it is in the
best interests of Falcon and all of its stockholders for Falcon
to sell to (i) the stockholders of record of Falcon on
December 29, 1998 listed on Exhibit A hereto (the "Exhibit A
Stockholders," and collectively with IFOH, the "Holders") and
(ii) IFOH an option (the "Option") to purchase up to all the
capital stock of the Company outstanding at the time the Option
is exercised (the "Shares").
C. IFOH has agreed to offer its interest in the Option to the
stockholders of record of Falcon on December 29, 1998 listed on
Exhibit B hereto (the "Exhibit B Stockholders").
D. Subject to the terms and conditions hereof, Falcon wishes to sell
and the Holders wish to purchase the Option.
AGREEMENT
THEREFORE, in consideration of the promises and the mutual
representations, warranties and covenants contained herein, the parties agree
as follows:
1. SALES OF OPTION. Subject to the other terms and conditions of this Option
Agreement, Falcon hereby grants, sells, transfers and delivers to each of
the Holders and their successors and assigns, free and clear of all
security interests, liens, and encumbrances, an undivided percentage
interest (a "Percentage Interest") in the Option equal to (i) in the case
of the Exhibit A Stockholders, the percentage interest each Exhibit A
Stockholder held on December 29, 1998 (the "Record Date") of the total of
all outstanding capital stock of Falcon, and (ii) in the case of IFOH, the
percentage interest of the total of all outstanding capital stock of
Falcon held on the Record Date by the Exhibit B Stockholders. Falcon
contemplates that the capital structure of the Company will be amended
between the date hereof and the date of the Closing (as hereinafter
defined) such that the Company will have authorized classes of capital
stock with rights, preferences
<PAGE>
and privileges substantially similar to the classes of capital stock of
Falcon. If, on the date of the Closing, the capital structure of the
Company consists of substantially similar classes of capital stock as
were present in the capital structure of Falcon on the Record Date,
upon the exercise of the Option each Holder delivering to Falcon a
Notice of Exercise (as defined in Section 6 below) (an "Exercising
Holder") will be entitled to receive the same percentage of the same
class of capital stock of the Company that such Holder (or in the
case of IFOH, the Exhibit B Stockholders) held of Falcon's capital stock
on the Record Date. If the capital structure of the Company on the date of
the Closing does not consist of the same classes of capital stock as were
present in the capital structure of Falcon on the Record Date, upon the
exercise of the Option, each Exercising Holder will be entitled to receive
its Percentage Interest of the outstanding shares of the single class of
common stock of the Company then outstanding or of such other capital
stock of the Company as may then be outstanding.
2. PAYMENT OF THE PURCHASE PRICE. The purchase price (the "Purchase Price")
for the Option to be paid by wire transfer to Falcon upon the execution of
this Option Agreement is set forth on Exhibit C hereto.
3. TERM. The ability of the Holders to exercise their Percentage Interests in
the Option shall expire on June 30, 1999 at 5:00 p.m. Chicago, Illinois
time (the "Expiration Date").
4. EXCLUSIVITY. During the period from the execution of this Option Agreement
(the "Execution Date") until the earlier of (i) the Closing or (ii) if the
Option is not exercised, the Expiration Date, Falcon shall not enter into
or continue any negotiations with respect to the sale or transfer of the
Shares or any other form of business combination transaction, license,
sale, liquidation, dissolution or recapitalization involving the Company
or its assets.
5. RESTRICTIONS ON TRANSFER OF SHARES. During the period from the Execution
Date until the earlier of (i) the Closing or (ii) if the Option is not
exercised, the Expiration Date, Falcon shall not sell, transfer, pledge or
grant a security interest in, or otherwise dispose of or encumber, the
Shares; provided, it being understood that the Shares are currently
pledged to Chase Manhattan Bank ("Chase") as administrative agent under
the Credit Agreement, dated as of June 17, 1997, by and among Falcon, the
Company, certain of Falcon's other subsidiaries, Chase and the other
lenders party thereto.
6. NOTICE OF EXERCISE AND CLOSING. If a Holder elects to exercise its
Percentage Interest in the Option, such Holder shall deliver to Falcon a
"Notice of Exercise." The Notice of Exercise shall; (i) be written, (ii)
be executed by such Exercising Holder, (iii) state the Exercising Holder's
intention to exercise its rights under the Option, (iv) be delivered to
Falcon at its principal place of business no later than the Expiration
Date and (v) specify the time and date (not more than five business days
after the Expiration Date) on which such Exercising Holder will be
prepared
<PAGE>
to close. Following receipt of a Notice of Exercise from Exercising
Holders of the Option holding more than fifty percent (50%) of the
Percentage Interests (the "Notice Date"), Falcon (i) shall schedule
the time, date and place of the closing of the Option Exercise (the
"Closing") with respect to such Percentage Interests, which shall not
be later than fifteen (15) business days after the Notice Date, and (ii)
shall provide written notice of the Closing to all Holders within two (2)
business days following the Notice Date. Any Holders who are not then
Exercising Holders shall have until the close of business of the third
business day preceding the Closing to file a Notice of Exercise and
exercise their Percentage Interests in the Option.
7. EXERCISE PRICE. The price at which the Option can be exercised (the
"Exercise Price") shall be equal to:
(i) $10,000,000 plus
(ii) to the extent that the total amount of indebtedness for borrowed
money ("Indebtedness") for which the Company will be liable
immediately before, on or after the Closing (the "Closing
Indebtedness") is less than $70,000,000, the difference between the
amount of such Indebtedness and $70,000,000 plus (minus)
(iii) the difference between (y) the sum of the fair market value of any
capital contributions to the Company (other than loans which
increase the amount of Indebtedness) ("Capital Contributions") and
the aggregate amount of after tax net income of the Company during
the Option Period ("Option Period Net Income") and (z) the fair
market value of any distributions (other than amounts paid by the
Company with respect to any Indebtedness, and other than an amount
of distributions equal to the difference between the amount of
Closing Indebtedness and the amount of Indebtedness of the Company
at December 31, 1998) made by the Company in the form of cash,
property or otherwise during the Option Period, minus
(iv) to the extent that the total amount of Closing Indebtedness is more
than $70,000,000 the difference between the amount of such
Indebtedness and $70,000,000 plus
(v) the amount of cash or cash equivalents on the books of the Company
at the Closing.
An amount equal to each Exercising Holder's Percentage Interest of the
exercise price shall be paid by wire transfer on the day of the
Closing.
8. INTERESTS IN THE OPTION. Each of the entities listed on Exhibit A hereto
shall hold an undivided Percentage Interest in the Option in the amount
set forth opposite its
<PAGE>
name on such Exhibit A. Interests in the Option will not be transferable,
other than to holders of record of capital stock of Falcon on the Record
Date. If a majority of the Holders do not deliver a Notice of Exercise
prior to the Expiration Date, the Option shall expire unexercised. A
Holder can only exercise its Percentage Interest in the option in full
and not in part.
9. REPRESENTATIONS AND WARRANTIES. Falcon hereby makes the representations
and warranties with respect to the Company and other matters set forth on
Exhibit D hereto to the Holders on and as of the Execution Date and agrees
that all such representations and warranties shall be true on the day of
the Closing as if made on such day. All of the representations and
warranties set forth on Exhibit D shall expire at, and be terminated and
extinguished by, the Closing and thereafter be without force or effect,
except for those set forth in Sections 9.1.2 and 9.2.
10. COVENANTS AND AGREEMENTS. Falcon hereby makes the covenants and agreements
with respect to its actions and the actions of the Company during the
Option Period set forth on Exhibit E hereto.
11. CONDITIONS TO CLOSING. The conditions set forth on Exhibit F hereto shall
constitute the conditions to the obligation of each of the Exercising
Holders to pay an amount equal to their Percentage Interest of the
Exercise Price to Falcon at the Closing and, in the case of the condition
set forth in Section 11.2 of Exhibit F relating to the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR"),
shall also constitute a condition to the obligation of Falcon to sell the
Shares at the Closing. If any of the conditions to closing set forth on
Exhibit F have not been satisfied prior to the Closing, the Holders shall
be entitled to the return of the Purchase Price by Falcon, plus interest
at the rate of 8% per annum, and any damages that may be imposed under
Section 13(c) of this Option Agreement as a result of a willful violation
of a provision of this Option Agreement; provided, that in no event shall
Falcon be liable in an amount in excess of the Purchase Price. Falcon
hereby agrees to pay all such amounts to the Holders in accordance with
their Percentage Interests.
12. LIMITED RIGHTS OF OPTION HOLDER. The Holders of the Option shall not have
any of the rights of a holder of voting securities of the Company, either
at law or in equity, until the Option shall have been duly exercised and
the Closing shall have occurred.
13. MISCELLANEOUS.
a) APPLICABLE LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, BUT NOT THE CHOICE OF
LAW PROVISIONS, OF THE STATE OF DELAWARE.
<PAGE>
b) HEADINGS. The headings herein are for convenience only and are not
part of this Option Agreement and shall not affect the interpretation
thereof.
c) ARBITRATION. Any controversy, dispute, or claim arising out of, in
connection with, or in relation to, the interpretation, performance
or breach of this Option Agreement, including, without limitation, the
validity, scope, and enforceability of this Section 13(c), may at the
election of any party be solely and finally settled by arbitration
conducted in Illinois, by and in accordance with the then-existing
rules for commercial arbitration of the American Arbitration
Association, or any successor organization. Judgment upon any
award rendered by the arbitrator(s) may be entered by the State
or Federal Court having jurisdiction thereof. Any of the parties may
demand arbitration by written notice to the other and to the American
Arbitration Association ("Demand for Arbitration"). Any Demand for
Arbitration pursuant to this Section 13(c) shall be made within one
(1) year from the date that the dispute upon which the demand is
based arose. The parties intend that this agreement to arbitrate be
valid, enforceable and irrevocable.
d) ATTORNEY'S FEES. If any suit, action or arbitration arising out of or
related to this Option Agreement is brought by any party, the
prevailing party or parties shall be entitled to recover the costs
and fees (including without limitation reasonable attorneys' fees,
the fees and costs of experts and consultants, copying, courier and
telecommunication costs, and deposition costs and all other costs of
discovery) incurred by such party of parties in such suit or action,
including without limitation any post-trial or appellate proceeding,
or in the collection of enforcement of any judgment or award entered
or made in such suit or action.
e) BINDING EFFECT. This Option Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors, permitted assigns, heirs and legal representatives, as the
case may be.
f) AUTHORITY. Each of the signatories to the Option Agreement personally
warrants that he has been duly authorized and has full authority
(i) to sign this Option Agreement on behalf of the entity on whose
behalf he is signing and (ii) to bind such party and its successors
and assigns to the terms hereof.
g) COUNTERPART EXECUTION. This Option Agreement may be executed in
counterparts, and when each party has signed and delivered to the
other party at least one such counterpart, each counterpart shall be
deemed an original, and when taken together with the other signed
counterpart, shall constitute one agreement.
[the remainder of this page is intentionally left blank]
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Hart & Cooley, Inc.
Warrior Glass and Aluminum Co., 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, 1999.
/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, 1999.
/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, 1999.
/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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 79
<CURRENT-ASSETS> 187
<PP&E> 223
<DEPRECIATION> (113)
<TOTAL-ASSETS> 381
<CURRENT-LIABILITIES> 117
<BONDS> 440
0
0
<COMMON> 0
<OTHER-SE> (215)
<TOTAL-LIABILITY-AND-EQUITY> 381
<SALES> 766
<TOTAL-REVENUES> 766
<CGS> 640
<TOTAL-COSTS> 640
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 5
<INCOME-TAX> 2
<INCOME-CONTINUING> 3
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
