<PAGE>
- -------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number: 1-13418
FALCON BUILDING PRODUCTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-3931893
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
233 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
(Address of Principal Executive Office)
(312) 906-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of October 31, 1999, Falcon Building Products, Inc. had the
following shares of its various classes of common stock outstanding:
963,623 shares of Class A Common Stock
6,721,536 shares of Class B Common Stock
838,474 shares of Class C Common Stock
17,000 shares of Class D Common Stock
- -------------------------------------------------------------------------------
<PAGE>
FALCON BUILDING PRODUCTS, INC.
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ......................................................... 3
Condensed Consolidated Statements of Income and Comprehensive Income........................... 4
Condensed Consolidated Statements of Cash Flows................................................ 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............................................... 21
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K.............................................................. 25
</TABLE>
2
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 199.5 $ 66.0
Trade receivables, net................................................... 62.4 --
Inventories, net......................................................... 51.3 39.9
Other current assets..................................................... 14.9 35.8
Net assets of discontinued operations.................................... -- 49.9
------------- ------------
Total current assets..................................................... 328.1 191.6
Property, plant and equipment, net............................................ 92.3 74.9
Goodwill...................................................................... 51.0 40.1
Other long-term assets........................................................ 16.7 24.1
------------- ------------
Total assets............................................................. $ 488.1 $ 330.7
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt........................................... $ 1.1 $ 2.0
Accounts payable......................................................... 30.4 24.0
Accrued income taxes..................................................... 54.8 3.0
Accrued liabilities...................................................... 61.2 42.7
------------- ------------
Total current liabilities................................................ 147.5 71.7
Senior indebtedness........................................................... 4.8 175.5
Senior subordinated notes..................................................... 251.8 264.3
Accrued employee benefit obligations.......................................... 14.7 11.6
Other long-term liabilities................................................... 19.2 22.3
------------- ------------
Total liabilities........................................................ 438.0 545.4
------------- ------------
Stockholders' equity (deficit):
Common stock............................................................. 0.1 0.1
Notes receivable arising from stock purchase plan........................ (1.5) (1.8)
Retained earnings (deficit).............................................. 53.3 (209.7)
Pension liability adjustment............................................. (1.8) (3.3)
------------- ------------
Total stockholders' equity (deficit)..................................... 50.1 (214.7)
------------- ------------
Total liabilities and stockholders' equity.................................... $ 488.1 $ 330.7
============= ============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------
1999 1998 1999 1998
--------- ---------- -------- ---------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Net sales.............................................. $ 125.3 $ 101.1 $ 356.2 $ 274.6
Cost of sales.......................................... 104.6 84.5 294.1 226.1
--------- ---------- -------- --------
Gross earnings.................................... 20.7 16.6 62.1 48.5
Selling and administrative expenses.................... 14.4 9.1 42.6 26.7
Ultravent.............................................. (0.8) -- (12.8) --
Restructuring charges.................................. 8.8 6.2 8.8 6.2
Securitization expense................................. 0.4 0.4 1.2 1.2
--------- ---------- -------- --------
Operating income.................................. (2.1) 0.9 22.3 14.4
Net interest expense................................... 5.1 10.1 24.4 29.1
--------- ---------- -------- --------
Loss from continuing operations before
income taxes...................................... (7.2) (9.2) (2.1) (14.7)
Income tax benefit from continuing
operations........................................ (2.8) (3.7) (0.5) (5.5)
--------- ---------- -------- --------
Loss from continuing operations........................ (4.4) (5.5) (1.6) (9.2)
Discontinued operations, net of taxes:
Income from operations............................ 4.5 2.8 20.3 9.6
Gain on disposal, net of income taxes of $60.8 ... 247.7 -- 247.7 --
--------- ---------- -------- --------
Income (loss) before extraordinary item................ 247.8 (2.7) 266.4 0.4
Extraordinary item:
Loss from early retirement of debt, net of
income tax benefit of $1.7.................... (3.0) -- (3.0) --
--------- ---------- -------- --------
Net income (loss)...................................... $ 244.8 $ (2.7) $ 263.4 $ 0.4
========= ========== ======== ========
Other comprehensive income:
Minimum pension liability adjustment, net of
income taxes of $1.1.......................... 1.5 -- 1.5 --
--------- ---------- -------- --------
Comprehensive income (loss)............................ $ 246.3 $ (2.7) $ 264.9 $ 0.4
========= ========== ======== ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 263.4 $ 0.4
Adjustments to reconcile net income to net cash from (used in) continuing
operating activities:
Depreciation and amortization......................................... 13.3 11.1
Accretion of debt discount on subordinated debt....................... 9.7 8.7
Deferred income tax provision......................................... 5.5 --
Repurchase of accounts receivable..................................... (77.0) --
Early extinguishment of debt.......................................... 3.0 --
Restructuring charges................................................. 11.3 7.2
Ultravent reserve reduction........................................... (12.0) --
Gain on sale of business.............................................. (308.5) --
Accrual of taxes for gain on sale of business......................... 60.8 --
Cash effect of changes in working capital balances, accrued
employee benefit obligations, and other long-term liabilities,
excluding the effects of acquisitions and dispositions.............. (62.6) (18.8)
----------- ---------
Net cash from (used in) continuing operating activities ................ (93.1) 8.6
----------- ---------
Net cash from (used by) discontinued operations......................... (6.8) 23.3
----------- ---------
Net cash from (used in) operations...................................... (99.9) 31.9
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business.......................................... 470.6 --
Purchase of businesses.................................................. (26.0) (4.0)
Capital expenditures.................................................... (14.1) (9.8)
Other................................................................... 0.1 (1.4)
----------- ---------
Net cash from (used in) investing activities............................ 430.6 (15.2)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of term loan.................................................. (173.0) --
Repurchase of senior subordinated debt.................................. (21.6) --
Net payments on debt.................................................... (2.6) (1.0)
----------- ---------
Net cash used in financing activities................................... (197.2) (1.0)
----------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 133.5 15.7
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 66.0 29.7
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................... $ 199.5 $ 45.4
=========== ==========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The accompanying unaudited Condensed Consolidated Financial
Statements of Falcon Building Products, Inc. ("Falcon" or the "Company"),
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for a complete set of financial statements. In the
opinion of management, all adjustments considered necessary, consisting only
of normal recurring adjustments except for the Ultravent adjustment and the
Restructuring charges are included for fair presentation. Operating results
for the quarter and nine months ended September 30, 1999 are not necessarily
indicative of results that may be expected for the full year. The unaudited
Condensed Consolidated Financial Statements should be read in conjunction
with the audited Consolidated Financial Statements of the Company for the
year ended December 31, 1998.
As further discussed in Note 3, on September 3, 1999, the Company
sold the stock of Falcon Manufacturing Inc., the parent company of DeVilbiss
Air Power Company (together "DeVilbiss") to Pentair, Inc. As a result,
DeVilbiss has been reflected as a discontinued operation for all periods
presented.
(2) ACQUISITIONS
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. The acquisition was accounted for as a purchase and
resulted in $12.4 million of goodwill that is being amortized over 40 years. The
allocation of the purchase price to both tangible and intangible assets is still
in process, however, the Company does not believe that the final purchase price
allocation will differ significantly from the preliminary price allocation at
September 30, 1999. Penn Ventilation is part of the Company's Air Distribution
Products segment.
(3) DISCONTINUED OPERATIONS
In September 1999, the Company sold its Air Power Products segment
through the sale of DeVilbiss to Pentair Inc. for cash proceeds of $470.6
million subject to customary purchase price adjustments. The Company recorded a
pre-tax gain of $308.5 million and applicable income taxes of $60.8 million with
respect to the sale of DeVilbiss. Approximately $15.8 million of expenses were
incurred in connection with the sale which primarily represented investment
banker fees, legal and accounting fees, transaction bonuses and a settlement
loss associated with the transfer of DeVilbiss's portion of the Falcon Cash
Balance Plan.
The following table summarizes key financial data related to the
discontinued operations of DeVilbiss.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.......................................... $ 102.5 $ 96.4 $ 371.9 $ 285.2
Allocated interest and securitization expense...... 4.8 1.5 8.7 5.2
Income tax provision applicable to
discontinued operations............................ 2.7 1.8 13.1 5.7
Income from operations of discontinued business,
net of applicable income taxes............... 4.5 2.8 20.3 9.6
</TABLE>
6
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
Certain interest and securitization expense related to the Company
has been allocated to discontinued operations. The interest expense allocated
to discontinued operations was based on the ratio of net assets sold to total
consolidated net assets of the Company plus indebtedness outstanding under
the Bank Credit Facility and its Senior Subordinated Notes. The
securitization expense allocated to discontinued operations was based on the
ratio of the accounts receivable of the subsidiary sold to the total
receivables of the Company sold under the accounts receivable securitization
program. The Company feels that the methods used to allocated interest and
securitization expense to discontinued businesses are reasonable.
The net current assets of discontinued operations included in the
Consolidated Balance Sheet at December 31, 1998 amounted to $49.9 million and
consisted primarily of inventories and property, plant and equipment, net of
accounts payable, accrued liabilities and accrued employee benefit obligations.
These amounts have all been classified as current based on the fact that the
disposition of these assets was within one year of the balance sheet date.
(4) INVENTORIES
Inventory consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED) (RESTATED)
<S> <C> <C>
Raw materials and supplies..................... $ 18.2 $ 13.4
Work in process................................ 13.1 11.4
Finished goods................................. 20.0 15.1
------------- -------------
$ 51.3 $ 39.9
============= =============
</TABLE>
(5) ACCOUNTS RECEIVABLE
In connection with the sale of DeVilbiss and using a portion of the
proceeds therefrom, the Company terminated its accounts receivable
securitization program on September 3, 1999 and repurchased the receivables
previously sold under this program. Therefore, the Consolidated Balance Sheet
at September 30, 1999 reflects accounts receivable. The 1999 expense incurred
on the sale of the receivables through the termination date of the program
was $1.2 million and is presented as Securitization expense in the Condensed
Consolidated Statement of Income, net of amounts allocated to discontinued
operations.
(6) RESTRUCTURING CHARGES
In the third and fourth quarters of 1998, the Company recorded
restructuring and other charges totaling $8.8 million, of which $7.9 million
related to the reorganization of its Plumbing Fixtures business (the
"Reorganization Plan") and $0.9 million related to the consolidation of two
Air Distribution Products manufacturing plants. In the third quarter of 1999,
the Company revised its estimate of workers compensation claims related to
the Reorganization Plan due to higher than expected claims incurred and
recorded an additional $0.8 million of restructuring charges. Of the $9.6
million of restructuring charges recorded, $3.1 million were non-cash charges
and $6.5 million were cash charges. Approximately $4.2 million of the cash
charges have been expended through September 30, 1999.
7
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
The Reorganization Plan previously mentioned involved, among other
items, the restructuring of its steel operations component of its Plumbing
Fixtures segment. In the third quarter of 1999, the Company decided to exit
the manufacturing of steel products and recorded additional restructuring
charges of $10.6 million related to the closure of all of its steel
manufacturing operations (the "Steel Restructuring Plan").
The following table summarizes the costs reflected in the Company's
Condensed Consolidated Financial Statements at September 30, 1999; $8.8 million
is reflected as Restructuring charges while $2.6 million is included in Cost of
sales (in millions):
<TABLE>
<CAPTION>
RESTRUCTURING
RESTRUCTURING CHARGES INCLUDED IN
CHARGES COST OF SALES TOTAL
------------- ------------------- ---------
<S> <C> <C> <C>
Inventory................................. $ -- $ 2.6 $ 2.6
Severance .................................... 0.7 -- 0.7
Fixed asset write-downs ...................... 6.1 -- 6.1
Workers compensation ......................... 1.7 -- 1.7
Other ........................................ 0.3 -- 0.3
------------- ------------------- ---------
$ 8.8 $ 2.6 $ 11.4
============= =================== =========
</TABLE>
The Inventory adjustments relate primarily to a net realizable value
adjustment of the carrying value of existing raw material and work in process
inventories as the Company closes its steel manufacturing operations. The
Severance costs are for 140 employees who were terminated as a result of the
closure. The Fixed asset write-downs relate to the write-down of equipment to
the estimated realizable values, which will no longer be used as a result of the
Steel Restructuring Plan. The Workers compensation costs represent the increase
in claim experience incurred and/or expected to be incurred as a result of the
closure of the plants as well as $0.8 million related to a revised estimate of
claims associated with the Reorganization Plan of 1998. Approximately $0.1
million has been expended related to the Steel Restructuring Plan through
September 30, 1999.
(7) LONG-TERM DEBT
On September 3, 1999, using a portion of the proceeds from the sale of
DeVilbiss, the Company repaid the term loan portion of the Bank Credit Facility
and amended and restated the credit agreement to terminate the term loan portion
of the agreement and retain the $125 million revolving credit portion. An
extraordinary charge of $2.8 million, net of an income tax benefit of $1.6
million was recorded in conjunction with this repayment, primarily representing
the write-off of associated deferred debt issuance costs.
Senior indebtedness consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (RESTATED)
<S> <C> <C>
Bank Credit Facility:
Revolver......................... $ -- $ --
Term............................. -- 173.5
------------- ------------
Total............................ -- 173.5
Other ................................ 5.9 4.0
Less: Current Portion................. (1.1) (2.0)
------------- ------------
Senior indebtedness.............. $4.8 $175.5
============= ============
</TABLE>
8
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
At September 30, 1999, the Company was in compliance with all
covenants of the Bank Credit Facility. Availability under the Bank Credit
Facility was $121.2 million at September 30, 1999.
During the quarter, the Company repurchased $20.6 million face value
of its Notes and $2.0 million face value of its Discount Notes. An
extraordinary charge of $0.2 million, net of an income tax benefit of $0.1
million was recorded in conjunction with these transactions primarily
representing the write-off of associated deferred debt issuance costs.
Senior Subordinated Notes consist of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Notes................................. $ 124.4 $ 145.0
Discount Notes........................ 127.4 119.3
------------- -------------
$ 251.8 $ 264.3
============= =============
</TABLE>
In conjunction with the sale of DeVilbiss, the Company amended the
indentures covering the 9 1/2% Senior Subordinated Notes and 10 1/2% Senior
Subordinated Discount Notes to release Falcon Manufacturing, Inc. and DeVilbiss
Air Power Company as guarantors of these obligations.
During October 1999, the Company repurchased an additional $104.4
million face value of its Notes and $81.3 million face value of its Discount
Notes. An extraordinary charge of $1.9 million, net of an income tax benefit of
$1.1 million will be recorded in the fourth quarter in conjunction with these
transactions primarily representing the write-off of associated deferred debt
issuance costs.
(8) COMMITMENTS AND CONTINGENCIES
As further discussed in the Company's Annual Report on Form 10-K, in
1997, the Company recorded a pre-tax charge of $32.8 million ($20.0 million,
net of income tax) for an estimate of its share of the cost of a Corrective
Action Program in the United States, resolution of litigation in Canada and
the United States including class action litigation, legal fees and other
costs related to an issue regarding high temperature plastic venting. In
April of 1999, the first full heating season covered by the Corrective Action
Program was completed. The detailed, Company specific information regarding
the estimated replacement cost and the number of units replaced during the
heating season enabled the Company to revise certain assumptions including a
reduction in both the estimated replacement cost and the number of units to
be replaced over the life of the program. The revision of the above
assumptions resulted in a $12.0 million pre-tax reduction of the
aforementioned reserve in the first quarter of 1999. Additionally, the
Company received an insurance reimbursement representing a partial settlement
of a previously filed lawsuit against certain insurance carriers for
reimbursement of costs associated with the Corrective Action Program, which
resulted in a $0.8 million pre-tax gain in the third quarter of 1999.
(9) GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes and the Discount
Notes are fully and unconditionally guaranteed on a joint and several basis
(collectively, the "Guarantees") by the subsidiaries of the Company
(collectively, the "Guarantor Subsidiaries"), other than Falcon Receivable
Program, Inc., a special purpose corporation formed for the Company's accounts
receivable securitization program. The obligations of each Guarantor Subsidiary
under its Guarantee are subordinated to such subsidiary's obligations under its
guarantee of the Bank Credit Facility. As discussed in Note 7, due to the sale
to Pentair, Inc., Falcon Manufacturing, Inc. and DeVilbiss Air Power Company
were released as guarantors of the Notes and Discount Notes. As such, they are
now reflected as discontinued operations in the guarantor subsidiaries column of
the consolidating financial statements.
9
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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. Parent Company
pre-tax expense has been allocated to the Guarantor Subsidiaries on a quarterly
basis in 1999 as compared to an annual basis in December 1998.
10
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 1999
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 197.7 $ 1.8 $ -- $ -- $ 199.5
Trade receivables, net................ -- 62.4 -- -- 62.4
Inventories, net...................... -- 51.3 -- -- 51.3
Other current assets.................. 1.4 13.5 -- -- 14.9
---------- -------------- ------------- --------------- --------------
Total current assets.................. 199.1 129.0 -- -- 328.1
Property, plant and equipment, net......... 0.4 91.9 -- -- 92.3
Goodwill................................... -- 51.0 -- -- 51.0
Investment in and advances
to/from subsidiaries.................. 172.7 (126.4) 5.9 (52.2) --
Other long-term assets..................... 13.7 3.0 -- -- 16.7
---------- -------------- ------------- --------------- --------------
Total assets.......................... $ 385.9 $ 148.5 $ 5.9 $ (52.2) $ 488.1
========== ============== ============= =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt........ $ -- $ 1.1 $ -- $ -- $ 1.1
Accounts payable...................... 0.1 30.3 -- -- 30.4
Accrued income taxes.................. 60.0 (5.2) -- -- 54.8
Accrued liabilities................... 16.5 44.7 -- -- 61.2
---------- -------------- ------------- --------------- --------------
Total current liabilities............. 76.6 70.9 -- -- 147.5
Long-term debt............................. 251.8 4.8 -- -- 256.6
Other long-term liabilities................ 6.6 27.3 -- -- 33.9
---------- -------------- ------------- --------------- --------------
Total liabilities..................... 335.0 103.0 -- -- 438.0
---------- -------------- ------------- --------------- --------------
Stockholders' equity (deficit):
Common stock.......................... 0.1 -- -- -- 0.1
Additional paid-in capital............ -- 42.9 6.5 (49.4) --
Retained earnings (deficit)........... 53.3 3.4 (0.6) (2.8) 53.3
Pension liability adjustment.......... (1.0) (0.8) -- -- (1.8)
Other................................. (1.5) -- -- -- (1.5)
---------- -------------- ------------- --------------- --------------
Total stockholders' equity (deficit).. 50.9 45.5 5.9 (52.2) 50.1
---------- -------------- ------------- --------------- --------------
Total liabilities and stockholders' equity. $ 385.9 $ 148.5 $ 5.9 $ (52.2) $ 488.1
========== ============== ============= ================ ==============
</TABLE>
11
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1999
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 1998
(dollars in millions)
(Restated)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 62.7 $ 0.5 $ 2.8 $ -- $ 66.0
Inventories, net...................... -- 39.9 -- -- 39.9
Other current assets.................. 0.5 12.8 22.5 -- 35.8
Net assets of discontinued operations. -- 49.9 -- -- 49.9
---------- -------------- ------------- --------------- --------------
Total current assets.................. 63.2 103.1 25.3 -- 191.6
Property, plant and equipment, net......... 0.5 74.4 -- -- 74.9
Goodwill................................... -- 40.1 -- -- 40.1
Investment in and advances
to/from subsidiaries.................. 163.2 (98.2) (18.9) (46.1) --
Other long-term assets..................... 21.8 2.3 -- -- 24.1
---------- -------------- ------------- --------------- --------------
Total assets.......................... $248.7 $121.7 $ 6.4 $ (46.1) $330.7
========== ============== ============= =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion long-term debt........ $ 1.0 $ 1.0 $ -- $ -- $ 2.0
Accounts payable...................... 0.1 23.9 -- -- 24.0
Accrued liabilities................... 18.4 27.0 0.3 -- 45.7
---------- -------------- ------------- --------------- --------------
Total current liabilities............. 19.5 51.9 0.3 -- 71.7
Long-term debt............................. 436.8 3.0 -- -- 439.8
Other long-term liabilities................ 6.3 27.6 -- -- 33.9
---------- -------------- ------------- --------------- --------------
Total liabilities..................... 462.6 82.5 0.3 -- 545.4
---------- -------------- ------------- --------------- --------------
Stockholders' equity (deficit):
Common stock.......................... 0.1 -- -- -- 0.1
Additional paid-in capital............ -- 431.6 6.5 (438.1) --
Retained earnings (deficit)........... (209.7) (391.6) (0.4) 392.0 (209.7)
Pension liability adjustment.......... (2.5) (0.8) -- -- (3.3)
Other................................. (1.8) -- -- -- (1.8)
---------- -------------- ------------- --------------- --------------
Total stockholders' equity (deficit).. (213.9) 39.2 6.1 (46.1) (214.7)
---------- -------------- ------------- --------------- --------------
Total liabilities and stockholders' equity. $248.7 $121.7 $ 6.4 $(46.1) $330.7
========== ============== ============= =============== ==============
</TABLE>
12
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT
OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, 1999
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $ 125.3 $ -- $ -- $ 125.3
Cost of sales.................................... -- 104.6 -- -- 104.6
-------- --------- ----------- ------------ ------------
Gross earnings.............................. -- 20.7 -- -- 20.7
Selling and administrative expenses.............. 2.1 12.3 -- -- 14.4
Ultravent........................................ -- (0.8) -- -- (0.8)
Restructuring charges............................ -- 8.8 -- -- 8.8
Securitization expense........................... 0.9 -- (0.5) -- 0.4
-------- --------- ----------- ------------ ------------
Operating income (loss)..................... (3.0) 0.4 0.5 -- (2.1)
Corporate allocation............................. (8.4) 8.4 -- -- --
Net interest expense............................. 4.4 0.1 0.6 -- 5.1
-------- --------- ----------- ------------ ------------
Income (loss) from continuing operations
before income taxes......................... 1.0 (8.1) (0.1) -- (7.2)
Provision (benefit) for income taxes............. 0.3 (3.1) -- -- (2.8)
-------- --------- ----------- ------------ ------------
Income (loss) from continuing
operations.................................. 0.7 (5.0) (0.1) -- (4.4)
Discontinued operations, net of taxes:
Income from operations..................... -- 4.5 -- -- 4.5
Gain on disposal, net of income taxes of
$60.8....................................... 247.7 -- -- -- 247.7
-------- --------- ----------- ------------ ------------
Income (loss) before extraordinary item.......... 248.4 (0.5) (0.1) -- 247.8
Extraordinary item:
Loss from early retirement of debt, net of
income tax benefit of $1.7.............. (3.0) -- -- -- (3.0)
-------- --------- ----------- ------------ ------------
Income (loss) before equity in income of
consolidated subsidiaries.............. 245.4 (0.5) (0.1) -- 244.8
Equity in income of consolidated subsidiaries.... (0.6) -- -- 0.6 --
-------- --------- ----------- ------------ ------------
Net income (loss)................................ $ 244.8 $ (0.5) $ (0.1) $ 0.6 $ 244.8
========= ========= =========== ============ ============
Other comprehensive income:
Minimum pension liability adjustment net
of income taxes of $1.1 ............... 1.5 -- -- -- 1.5
-------- --------- ----------- ------------ ------------
Comprehensive income (loss)...................... $ 246.3 $ (0.5) $ (0.1) $ 0.6 $ 246.3
========= ========= =========== ============ ============
</TABLE>
13
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 1998
(dollars in millions)
(Unaudited)
(Restated)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $ 101.1 $ -- $ -- $ 101.1
Cost of sales.................................... -- 84.5 -- -- 84.5
------------- ------------- ----------- ------------ ------------
Gross earnings................................. -- 16.6 -- -- 16.6
Selling and administrative expenses.............. 1.9 7.2 -- -- 9.1
Restructuring charges............................ -- 6.2 -- -- 6.2
Securitization expense........................... 1.3 -- (0.9) -- 0.4
------------- ------------- ----------- ------------ ------------
Operating income (loss)........................ (3.2) 3.2 0.9 -- 0.9
Net interest expense............................. 9.7 -- 0.4 -- 10.1
------------- ------------- ----------- ------------ ------------
Income (loss) before income taxes................ (12.9) 3.2 0.5 -- (9.2)
Provision (benefit) for income taxes............. (5.1) 1.2 0.2 -- (3.7)
------------- ------------- ----------- ------------ ------------
Income (loss) from continuing operations......... (7.8) 2.0 0.3 -- (5.5)
Discontinued operations, net of taxes:
Income from operations...................... -- 2.8 -- -- 2.8
------------- ------------- ----------- ------------ ------------
Income (loss) before equity in income of
consolidated subsidiaries................... (7.8) 4.8 0.3 -- (2.7)
Equity in income of consolidated subsidiaries.... 5.1 -- -- (5.1) --
------------- ------------- ----------- ------------ ------------
Net income (loss)................................ $ (2.7) $ 4.8 $ 0.3 $ (5.1) $ (2.7)
============= ============= =========== ============ ============
</TABLE>
14
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT
OF INCOME AND COMPREHENSIVE INCOME
Nine months Ended September 30, 1999
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $ 356.2 $ -- $ -- $ 356.2
Cost of sales.................................... -- 294.1 -- -- 294.1
------------- ------------- ------------ ------------ ------------
Gross earnings.............................. -- 62.1 -- -- 62.1
Selling and administrative expenses.............. 6.0 36.6 -- -- 42.6
Ultravent........................................ -- (12.8) -- -- (12.8)
Restructuring charges............................ -- 8.8 -- -- 8.8
Securitization expense........................... 3.0 -- (1.8) -- 1.2
------------- ------------- ------------ ------------ ------------
Operating income (loss)..................... (9.0) 29.5 1.8 -- 22.3
Corporate allocation............................. (24.8) 24.8 -- -- --
Net interest expense............................. 22.0 0.5 1.9 -- 24.4
------------- ------------- ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes................................ (6.2) 4.2 (0.1) -- (2.1)
Provision (benefit) for income taxes............. (2.2) 1.7 -- -- (0.5)
------------- ------------- ------------ ------------ ------------
Income (loss) before continuing operations....... (4.0) 2.5 (0.1) -- (1.6)
Discontinued operations, net of taxes:
Income from operations...................... -- 20.3 -- -- 20.3
Gain on disposal net of income taxes
of $60.8............................... 247.7 -- -- -- 247.7
------------- ------------- ------------ ------------ ------------
Income (loss) before extraordinary item.......... 243.7 22.8 (0.1) -- 266.4
Extraordinary item:
Loss from early retirement of debt, net of
income tax benefit of $1.7............. (3.0) -- -- -- (3.0)
------------- ------------- ------------ ------------ ------------
Income (loss) before equity in income of
consolidated subsidiaries.................... 240.7 22.8 (0.1) -- 263.4
Equity in income of consolidated subsidiaries.... 22.7 -- -- (22.7) --
------------- ------------- ------------ ------------ ------------
Net income....................................... $ 263.4 $ 22.8 $ (0.1) $ (22.7) 263.4
============= ============= ============ ============ ============
Other comprehensive income:
Minimum pension liability adjustment net
of income taxes of $1.1 ............... 1.5 -- -- -- 1.5
------------- ------------- ------------ ------------ ------------
Comprehensive income (loss)...................... $ 264.9 $ 22.8 $ (0.1) $ (22.7) $ 264.9
============= ============= ============ ============ ============
</TABLE>
15
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine months Ended September 30, 1998
(dollars in millions)
(Unaudited)
(Restated)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ -- $ 274.6 $ -- $ -- $ 274.6
Cost of sales.................................... -- 226.1 -- -- 226.1
------------- ------------- ------------ ------------ ------------
Gross earnings.............................. -- 48.5 -- -- 48.5
Selling and administrative expenses.............. 5.3 21.4 -- -- 26.7
Restructuring charges............................ -- 6.2 -- -- 6.2
Securitization expense........................... 3.2 -- (2.0) -- 1.2
------------- ------------- ------------ ------------ ------------
Operating income (loss)..................... (8.5) 20.9 2.0 -- 14.4
Net interest expense............................. 27.7 0.2 1.2 -- 29.1
------------- ------------- ------------ ------------ ------------
Income (loss) before income taxes................ (36.2) 20.7 0.8 -- (14.7)
Provision (benefit) for income taxes............. (13.9) 8.1 0.3 -- (5.5)
------------- ------------- ------------ ------------ ------------
Income (loss) from continuing operations......... (22.3) 12.6 0.5 -- (9.2)
Discontinued operations, net of tax:
Income from operations...................... -- 9.6 -- -- 9.6
------------- ------------- ------------ ------------ ------------
Income (loss) before equity in income of
consolidated subsidiaries................... (22.3) 22.2 0.5 -- 0.4
Equity in income of consolidated subsidiaries.... 22.7 -- -- (22.7) --
------------- ------------- ------------ ------------ ------------
Net income....................................... $ 0.4 $ 22.2 $ 0.5 $ (22.7) $ 0.4
============= ============= ============ ============ ============
</TABLE>
16
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1999
(dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities... $ (79.9) $ 16.9 $ (36.9) $ -- $ (99.9)
------------- ------------- ------------ ------------ ------------
Cash flows from (used in) investing activities:
Proceeds from sale of business.............. 470.6 -- -- -- 470.6
Purchase of business........................ -- (26.0) -- -- (26.0)
Capital expenditures........................ -- (14.1) -- -- (14.1)
Other....................................... 0.3 (0.2) -- -- 0.1
------------- ------------- ------------ ------------ ------------
Net cash from (used in) investing activities 470.9 (40.3) -- -- 430.6
------------- ------------- ------------ ------------ ------------
Cash flows from (used in) financing activities:
Advances (to) from affiliate................ (60.9) 26.8 34.1 -- --
Repayment of term loan...................... (173.0) -- -- -- (173.0)
Repurchase of senior subordinated debt...... (21.6) -- -- -- (21.6)
Net payments on debt........................ (0.5) (2.1) -- -- (2.6)
------------- ------------- ------------ ------------ ------------
Net cash from (used in) financing activities (256.0) 24.7 34.1 -- (197.2)
------------- ------------- ------------ ------------ ------------
Change in cash and cash equivalents.............. 135.0 1.3 (2.8) -- 133.5
Cash and cash equivalents, beginning of
period...................................... 62.7 0.5 2.8 -- 66.0
------------- ------------- ------------ ------------ ------------
Cash and cash equivalents, end of period......... $ 197.7 $ 1.8 $ -- $ -- $ 199.5
============= ============= ============ ============ ============
</TABLE>
17
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(RESTATED)
(9) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1998
(dollars in millions)
(Unaudited)
(Restated)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities... $ (18.6) $ 69.2 $ (18.7) $ -- $ 31.9
------------- ------------- ------------ ------------ ------------
Cash flows used in investing activities:
Purchase of business........................ -- (4.0) -- -- (4.0)
Capital expenditures........................ (0.4) (9.4) -- -- (9.8)
Other....................................... (0.8) (0.6) -- -- (1.4)
------------- ------------- ------------ ------------ ------------
Net cash used in investing activities....... (1.2) (14.0) -- -- (15.2)
------------- ------------- ------------ ------------ ------------
Cash flows from (used in) financing activities:
Advances (to) from affiliate................ 35.8 (54.8) 19.0 -- --
Net payments on debt........................ (0.5) (0.5) -- -- (1.0)
------------- ------------- ------------ ------------ ------------
Net cash from (used in) financing activities 35.3 (55.3) 19.0 -- (1.0)
------------- ------------- ------------ ------------ ------------
Change in cash and cash equivalents.............. 15.5 (0.1) 0.3 -- 15.7
Cash and cash equivalents, beginning of
period...................................... 29.1 0.5 0.1 -- 29.7
------------- ------------- ------------ ------------ ------------
Cash and cash equivalents, end of period......... $ 44.6 $ 0.4 $ 0.4 $ -- $ 45.4
============= ============= ============= ============ ============
</TABLE>
18
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(10) BUSINESS SEGMENT INFORMATION
As discussed in Note 3, DeVilbiss, which comprised the Company's Air
Power Products segment, was sold to Pentair, Inc. The Company has two remaining
operating segments: Air Distribution Products, and Plumbing Fixtures. In January
1999 the Company acquired Penn Ventilation (see Note 2), which is included as
part of the Air Distribution Products segment.
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------
1999 1998 1999 1998
------------ -------------- ---------- -----------
(RESTATED) (RESTATED)
(IN MILLIONS) (IN MILLIONS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES:
Air Distribution Products..................... $ 85.7 $ 61.0 $ 239.0 $ 158.0
Plumbing Fixtures............................. 39.6 40.1 117.2 116.6
------------ -------------- ---------- -----------
Total...................................... $ 125.3 $ 101.1 $ 356.2 $ 274.6
------------ -------------- ---------- -----------
------------ -------------- ---------- -----------
SEGMENT PROFITABILITY:(a)
Air Distribution Products..................... $ 12.1 $ 9.5 $ 32.0 $ 23.6
Plumbing Fixtures............................. 2.6 4.6 7.0 13.8
------------ -------------- ---------- -----------
Total...................................... $ 14.7 $ 14.1 $ 39.0 $ 37.4
============ ============== ============ =========
RECONCILIATION OF SEGMENT PROFITABILITY TO LOSS
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES:
Total segment profitability...................... $ 14.7 $ 14.1 $ 39.0 $ 37.4
Corporate........................................ (1.8) (1.6) (5.1) (4.4)
Non-cash retiree medical......................... (0.2) (0.2) (0.5) (0.5)
Ultravent........................................ 0.8 -- 12.8 --
Depreciation and amortization.................... (3.8) (3.1) (11.3) (9.0)
Restructuring charges............................ (11.4) (7.9) (11.4) (7.9)
Net interest expense............................. (5.1) (10.1) (24.4) (29.1)
Securitization expense........................... (0.4) (0.4) (1.2) (1.2)
------------ -------------- ------------ ---------
Loss from continuing operations before
income taxes.............................. $ (7.2) $ (9.2) $ (2.1) $ (14.7)
============ ============== ============ =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(IN MILLIONS)
(UNAUDITED) (RESTATED)
<S> <C> <C>
SEGMENT ASSETS(b):
Air Distribution Products......................................................... $ 175.7 $ 110.3
Plumbing Fixtures................................................................. 99.2 100.0
------------- -------------
Total Segment Assets........................................................... $ 274.9 $ 210.3
============= =============
RECONCILIATION OF SEGMENT ASSETS TO TOTAL ASSETS:
Total Segment Assets.............................................................. $ 274.9 $ 210.3
Securitized Receivables........................................................... -- (40.6)
Corporate and other(c)............................................................ 213.2 111.1
Net assets of discontinued operations............................................. -- 49.9
------------- -------------
Total Assets................................................................... $ 488.1 $ 330.7
============= =============
</TABLE>
- -----------------------
(a) Profitability represents income before interest expense and income taxes,
excluding the following: (i) depreciation and amortization expense; (ii)
Ultravent-Registered Trademark-; (iii) restructuring charges; (iv)
securitization expense; and (v) certain non-cash charges.
(b) Segment assets in 1998 include accounts receivable sold under the
securitization program.
(c) Corporate and other represents corporate assets, primarily consisting of
cash, deferred financing fees and in 1998, residual interest in accounts
receivable sold under the securitization program.
19
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(11) OTHER MATTERS
On June 30, 1999, an outstanding option to purchase all of the
issued and outstanding capital stock of Mansfield Plumbing Products, Inc., a
wholly owned subsidiary of the Company, expired without being exercised
pursuant to the terms of the option. The option was granted on December 30,
1998 to the Company's stockholders in exchange for a payment to the Company
of $1.0 million. See the Company's Annual Report on Form 10-K for further
discussion about the option. In the second quarter of 1999, the Company
recorded a gain of $0.3 million (net of legal, advisory and accounting
expenses of $0.7 million) associated with this transaction. The net gain has
been included in Selling and administrative expense in the Company's
Condensed Consolidated Statement of Income.
20
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion of the results of operations of the Company
and its subsidiaries for the quarter and nine months ended September 30, 1999 as
compared to the quarter and nine months ended September 30, 1998, which should
be read in conjunction with the Condensed Consolidated Financial Statements
included herein and the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. As discussed in Note 3 to the Company's Condensed
Consolidated Financial Statements, the Company sold its Air Power Products
segment in the third quarter of 1999. The Company, therefore, has two remaining
segments.
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
The following table reflects the Company's historical results of
operations for the quarter ended September 30, 1999 compared to the results for
the comparable period of 1998. Historical amounts have been restated to exclude
the results of discontinued operations.
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
------------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
------------- ------------- ------------- -------------
(RESTATED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales:
Air Distribution Products.... $ 85.7 68.4% $ 61.0 60.3%
Plumbing Fixtures............ 39.6 31.6 40.1 39.7
------------- ------------- ------------- -------------
Total Net Sales........... $ 125.3 100.0% $ 101.1 100.0%
============= ============= ============= =============
Profitability: (a)
Air Distribution Products.... $ 12.1 14.1% $ 9.5 15.6%
Plumbing Fixtures............ 2.6 6.6% 4.6 11.5%
------------- -------------
Segment total ............ 14.7 11.7% 14.1 14.0%
Corporate.................... (1.8) N/A (1.6) N/A
------------- -------------
Total..................... $ 12.9 10.3% $ 12.5 12.4%
============= =============
</TABLE>
- ---------------
(a) Profitability represents income before interest expense and income taxes,
excluding the following: (i) depreciation and amortization expense; (ii)
Ultravent-Registered Trademark-; (iii) restructuring charges; (iv)
securitization expense; and (v) certain non-cash charges. The percentage
of sales for profitability by segment is relative to each segment's
sales.
NET SALES
Air Distribution Products net sales for the quarter increased $24.7
million to $85.7 million, an increase of 40.5% over the comparable 1998 period.
Excluding the effects of acquisitions in 1999, net sales increased $3.0 million.
This increase was primarily the result of increased market penetration partially
offset by reduced pricing.
Plumbing Fixtures net sales decreased $0.5 million to $39.6 million for
the third quarter of 1999 versus $40.1 million in 1998 primarily due to reduced
volume of steel products as the Company continues to de-emphasize sales of this
product line of the business.
PROFITABILITY
Air Distribution Products profitability increased $2.6 million or 27.4%
over the third quarter of 1998. Excluding the effect of acquisitions in 1999,
profitability increased $0.6 million. This increase was primarily due to
increased volume and cost reduction programs, partially offset by reduced
pricing. The overall decline in profitability margin is due to the acquisition
of Penn Ventilation, which currently operates at lower margins than the
remaining product lines within the Air Distribution business.
21
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
Plumbing Fixtures profitability decreased $2.0 million to $2.6 million
from the third quarter of 1998. This decrease was due principally to increased
manufacturing inefficiencies, primarily in the Company's Texas plant, increased
workers compensation costs, increased medical insurance costs due to the
severity of claims in 1999, and increased marketing and distribution costs.
The Company will be replaced beginning in the fourth quarter of 1999 as
a supplier of china and steel product to its largest plumbing product customer.
While the future loss of this customer is not material to the Company's
financial condition, results of operations or cash flows, net sales in the
Plumbing Fixtures segment would have been 13% lower in 1998 and 17% lower in the
nine months ended September 30, 1999 without sales to that customer. The Company
is currently exploring what impact this future loss of business, if not replaced
with other customers, may have on the Plumbing Fixtures segment's operations in
the future.
Depreciation and amortization increased from the third quarter of 1998
primarily as a result of the Penn Ventilation acquisition.
Special charges consisted of restructuring charges of $11.4 and $7.9
million in 1999 and 1998, respectively. See Note 6 to the Company's Condensed
Consolidated Financial Statements for further discussion of these charges.
Additionally, as discussed in Note 8 to the Company's Condensed Consolidated
Financial Statements, in August of 1999, the Company received a partial
settlement of a previously filed lawsuit against certain insurance carriers for
reimbursement of costs associated with the Corrective Action Program in the
amount of $0.8 million.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
The following table reflects the Company's historical results of
operations for the nine months ended September 30, 1999 compared to the results
for the comparable period of 1998. Historical amounts have been restated to
exclude the results of discontinued operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
% OF % OF
AMOUNT SALES AMOUNT SALES
------------- ------------- ------------- -------------
(RESTATED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales:
Air Distribution Products.... $ 239.0 67.1% $ 158.0 57.5%
Plumbing Fixtures............ 117.2 32.9 116.6 42.5
------------- ------------- ------------- -------------
Total Net Sales........... $ 356.2 100.0% $ 274.6 100.0%
============= ============= ============= =============
Profitability: (a)
Air Distribution Products.... $ 32.0 13.4% $ 23.6 14.9%
Plumbing Fixtures............ 7.0 6.0% 13.8 11.8%
------------- -------------
Segment total ............ 39.0 11.0% 37.4 13.6%
Corporate.................... (5.1) N/A (4.4) N/A
------------- -------------
Total..................... $ 33.9 9.5% $ 33.0 12.0%
============= =============
</TABLE>
- -------------
(a) Profitability represents income before interest expense and income taxes,
excluding the following: (i) depreciation and amortization expense; (ii)
Ultravent-Registered Trademark-; (iii) restructuring charges; (iv)
securitization expense; and (v) certain non-cash charges. The percentage
of sales for profitability by segment is relative to each segment's
sales.
22
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
NET SALES
Air Distribution Products net sales increased $81.0 million to $239.0
million or 51.2% over 1998 results. Excluding the effect of acquisitions in 1998
and 1999, net sales increased $19.4 million. This increase was primarily due to
increased volume in all product lines as a result of increased market
penetration, partially offset by reduced pricing.
Plumbing Fixtures net sales increased $0.6 million to $117.2 million
over the comparable 1998 period. This increase was primarily due to favorable
pricing on selected products and product mix, partially offset by reduced volume
of steel.
PROFITABILITY
Air Distribution Products profitability increased $8.4 million to $32.0
million or 35.6% over the comparable 1998 period. Excluding the effect of
acquisitions in 1998 and 1999, profitability increased $3.6 million. This
increase was primarily due to increased volume and cost reduction programs,
partially offset by reduced pricing and increased distribution costs. The
overall decline in profitability margin is due to the acquisition of Penn
Ventilation, which operates at lower operating margins than the remaining
product lines within the Air Distribution business.
Plumbing Fixtures profitability decreased $6.8 million to $7.0 million
in 1999 versus $13.8 million in 1998. This decrease was due principally to
increased manufacturing inefficiencies, primarily in the Company's Texas plant,
increased workers compensation costs, increased medical insurance costs due to
the severity of claims in 1999, and increased marketing and distribution costs.
Depreciation and amortization increased from 1998 primarily as a result
of acquisitions.
Special charges consisted of restructuring charges of $11.4 and $7.9
million in 1999 and 1998, respectively. See Note 6 to the Company's Condensed
Consolidated Financial Statements for further discussion of these charges.
Additionally, as discussed in Note 8 to the Company's Condensed Consolidated
Financial Statements, the Company reduced its accrual for its share of a
Corrective Action Program related to high temperature plastic venting and other
related costs by $12 million in the first quarter of 1999. In April of 1999, the
first full heating season covered by the Corrective Action Program was
completed. The detailed, Company specific information regarding the estimated
replacement cost and the number of units replaced during the heating season
enabled the Company to revise certain assumptions, including a reduction in both
the estimated replacement cost and the number of units to be replaced over the
life of the program. In August of 1999, the Company received a partial
settlement related to a previously filed lawsuit against certain insurance
carriers for reimbursement of costs associated with the Corrective Action
Program in the amount of $0.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in continuing operating activities was $93.1 million for
the first nine months of 1999, compared to a source of $8.6 million for the
comparable 1998 period. The decrease of $101.7 million was primarily due to the
$77.0 million cash paid to terminate the Company's asset securitization program
and an increase in working capital requirements to support the growth in overall
sales volume.
As discussed in Note 2 to the Company's Condensed Consolidated
Financial Statements, the Company acquired the assets and business of Penn
Ventilation on January 22, 1999. 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.
23
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
As discussed in Notes 3, 5 and 7 to the Company's Condensed
Consolidated Financial Statements, the Company received cash proceeds of $470.6
million related to the sale of DeVilbiss. Using a portion of the proceeds, the
Company paid $77.0 million to repurchase previously sold receivables and
terminate its accounts receivable securitization program and $173.0 million to
repay the outstanding balance on the term loan portion of its Bank Credit
Facility. Approximately $15.8 million of the proceeds was or will be used to
fund expenses associated with the sale including investment banker fees, legal
and accounting fees and DeVilbiss transaction bonuses. Additionally, the Company
paid $22.2 million in the third quarter related to the repurchase of a portion
of its 9 1/2% Senior Subordinated Notes and 10 1/2% Senior Subordinated Discount
Notes. In October 1999, the Company paid $166.7 million related to additional
repurchases of its Subordinated Notes.
The Company believes that operating cash flows, and availability under
the Bank Credit Facility will be sufficient to pay interest on outstanding debt,
meet current maturities, pay income taxes, fund capital expenditures and meet
other operating needs for the foreseeable future.
The Company will continue to explore strategic alternatives with
respect to its Air Distribution Products segment and Plumbing Fixtures segment,
including potential acquisitions to enhance the businesses and potential
divestitures or other transactions to maximize shareholder value.
YEAR 2000 READINESS PROGRAM
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. Executive management and the Board of Directors
continue to regularly monitor the status of the Company's Year 2000 remediation
plans. In addition, the Company is engaged in assessing the Year 2000 issue with
significant suppliers and customers.
The assessment phase of the Year 2000 readiness program, which
identified the business systems that may require remediation or replacement and
established priorities for repair or replacement, has been completed. The second
phase of the Year 2000 readiness program, which involves the actual remediation
and replacement of business systems, is substantially complete. The Company
anticipates completing final testing early in the fourth 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.
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 is possible 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 is
continuing to develop and implement contingency plans with respect to the Year
2000 issue, and expects that such plans will be completed prior to year-end.
Failure to meet critical milestones identified in the Company's plans would
precipitate alternative actions, including an acceleration of any contingency
plan.
24
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- (CONTINUED)
It is currently estimated that the aggregate cost of the Company's Year
2000 readiness program will approximate between $1.3 and $1.5 million, of which
approximately $1.3 million has been expensed through September 30, 1999. 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.
THE ESTIMATES AND CONCLUSIONS HEREIN CONTAIN FORWARD-LOOKING STATEMENTS
AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF FUTURE EVENTS. RISKS TO
COMPLETING THE COMPANY'S YEAR 2000 READINESS PLAN INCLUDE THE AVAILABILITY OF
RESOURCES, OUR ABILITY TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 SENSITIVE
PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON SPECIFIC FACILITIES, AND THE
ABILITY OF SUPPLIERS TO BRING THEIR SYSTEMS INTO YEAR 2000 COMPLIANCE.
25
<PAGE>
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
99.1 - Letter to Bondholders
b) Reports on Form 8-K
Current report on Form 8-K, dated September 3, 1999 related to
the sale of DeVilbiss.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALCON BUILDING PRODUCTS, INC.
By: /s/ Anthony J. Navitsky
------------------------------
Anthony J. Navitsky
Vice President -Finance
and Treasurer
Dated: November 15, 1999
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 200
<SECURITIES> 0
<RECEIVABLES> 65
<ALLOWANCES> (3)
<INVENTORY> 51
<CURRENT-ASSETS> 328
<PP&E> 195
<DEPRECIATION> (103)
<TOTAL-ASSETS> 488
<CURRENT-LIABILITIES> 148
<BONDS> 257
0
0
<COMMON> 0
<OTHER-SE> 50
<TOTAL-LIABILITY-AND-EQUITY> 488
<SALES> 356
<TOTAL-REVENUES> 356
<CGS> 294
<TOTAL-COSTS> 294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (2)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2)
<DISCONTINUED> 268
<EXTRAORDINARY> (3)
<CHANGES> 0
<NET-INCOME> 263
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE RESPECTIVE QUARTERLY REPORTS ON FORM 10-Q FOR THE PERIODS PRESENTED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> JUN-30-1999 MAR-31-1999
<CASH> 22 16
<SECURITIES> 0 0
<RECEIVABLES> 16 15
<ALLOWANCES> (1) (1)
<INVENTORY> 53 51
<CURRENT-ASSETS> 189 190
<PP&E> 195 191
<DEPRECIATION> (101) (99)
<TOTAL-ASSETS> 358 360
<CURRENT-LIABILITIES> 74 84
<BONDS> 448 447
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (196) (205)
<TOTAL-LIABILITY-AND-EQUITY> 358 360
<SALES> 231 106
<TOTAL-REVENUES> 231 106
<CGS> 190 88
<TOTAL-COSTS> 190 88
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 19 9
<INCOME-PRETAX> 5 7
<INCOME-TAX> 2 3
<INCOME-CONTINUING> 3 4
<DISCONTINUED> 16 6
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19 10
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RESPECTIVE QUARTERLY REPORTS ON FORM 10-Q AND THE ANNUAL REPORT ON FORM 10-K FOR
THE PERIODS PRESENTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 SEP-30-1998 JUN-30-1998 MAR-31-1998
<CASH> 66 46 36 19
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 40 41 45 43
<CURRENT-ASSETS> 192 180 126 123
<PP&E> 170 166 164 160
<DEPRECIATION> (95) (93) (91) (88)
<TOTAL-ASSETS> 331 321 316 307
<CURRENT-LIABILITIES> 72 69 60 60
<BONDS> 440 437 435 431
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> (215) (213) (211) (215)
<TOTAL-LIABILITY-AND-EQUITY> 331 321 316 307
<SALES> 377 275 173 82
<TOTAL-REVENUES> 377 275 173 82
<CGS> 313 226 142 68
<TOTAL-COSTS> 313 226 142 68
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 38 29 19 9
<INCOME-PRETAX> (19) (15) (6) (4)
<INCOME-TAX> (7) (5) (2) (1)
<INCOME-CONTINUING> (12) (10) (4) (3)
<DISCONTINUED> 15 10 7 2
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 3 0 3 (1)
<EPS-BASIC> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
<PAGE>
Exhibit 99.1
November 15, 1999
Dear Falcon Building Products, Inc. Bondholders:
A copy of the Falcon Building Products, Inc (the "Company") Form 10-Q is
enclosed. As discussed below, the Company sold its Air Power Products segment in
the third quarter of 1999. The Company, therefore, has two remaining segments. A
summary of the unaudited financial results follows (dollars in millions):
<TABLE>
<CAPTION>
PERIODS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
NINE NINE
QUARTER MONTHS QUARTER MONTHS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales
Air Distribution Products..... $85.7 $239.0 $61.0 $158.0
Plumbing Fixtures............. 39.6 117.2 40.1 158.0
------------- ------------- ------------- -------------
Total....................... $125.3 $356.2 $101.1 $274.6
============= ============= ============= =============
Profitability(a)
Air Distribution Products..... $12.1 $32.0 $9.5 $23.6
Plumbing Fixtures............. 2.6 7.0 4.6 13.8
------------- ------------- ------------- -------------
Segment profitability....... 14.7 39.0 14.1 37.4
Corporate..................... (1.8) (5.1) (1.6) (4.4)
------------- ------------- ------------- -------------
Total....................... $12.9 $33.9 $12.5 $33.0
============= ============= ============= =============
</TABLE>
- ---------------
(a) Profitability represents operating earnings before non-recurring Ultravent
adjustments, restructuring charges, certain non-cash charges, and depreciation
and amortization expense.
For the quarter ended September 30, 1999, net sales amounted to $125.3 million,
an increase of $24.2 million or 23.9% above the third quarter of 1998, while
sales for the nine months ended September 30, 1999 amounted to $356.2 million,
an increase of $81.6 million over the 1998 period. The Warrior Glass and Penn
Ventilation acquisitions within our Air Distribution segment collectively
contributed $21.7 and $61.9 million to the sales increase in the third quarter
of 1999 and year-to-date, respectively. Continued strength in residential
construction along with wholesaler consolidation continues to benefit our Air
Distribution business primarily in residential and light commercial vents and
registers as well as duct products. Third Quarter sales in the Plumbing Fixtures
segment were slightly below those of last year while year-to-date sales were
slightly ahead of last year.
Segment profitability of $14.7 million for the third quarter of 1999 was
slightly ahead of last year, however, as a percentage of sales, the margin
declined from 14.0% in 1998 to 11.7% in 1999. While overall earnings increased
within our Air Distribution segment, operating margin as a percentage of sales
decreased due to the integration of the two acquisitions discussed above. Cost
reduction opportunities for these acquisitions through capital investment,
manufacturing process changes, and distribution and procurement synergies should
serve to enhance margins as our integration plan is successfully executed. Our
Plumbing Fixtures segment's profitability continues to be negatively impacted
primarily by manufacturing inefficiencies within our Texas operations,
<PAGE>
driven partially by the lack of adequately skilled labor resources in this
area of the country. Additionally, this segment has experienced abnormally
high employee medical and workers compensation costs in 1999. As part of the
ongoing analysis of the Plumbing Fixtures segment, the Company decided to
exit the manufacturing of all steel products and recorded a restructuring
charge of $11.4 million in the third quarter of 1999. The decision to exit
steel manufacturing was three-fold. First, the operating efficiencies thought
to be derived from the steel restructuring project initiated in 1998 were not
achieved. Secondly, the loss of this segment's largest customer resulted in a
reduction in the volume of steel products, which will be sold going forward.
Lastly, the capacity to outsource all of our steel volume became available
subsequent to the first restructuring.
As disclosed in an 8-K filed in September, the Company's Air Power Products
segment was sold to Pentair, Inc. for cash proceeds of $470.6 subject to
customary purchase price adjustments. The Company recorded a pre-tax gain of
$308.5 million and related income taxes of $60.8 million associated with the
sale. Approximately $15.8 million of expenses were incurred in connection with
the sale, reflecting investment banker fees, legal and accounting fees,
transaction bonuses and a settlement loss associated with the transfer of the
liability associated with DeVilbiss's portion of the Falcon Cash Balance Plan.
The cash proceeds were or will be used as follows: $77 million for the
repurchase of accounts receivable previously sold under the accounts receivable
securitization program which has now been terminated; $173 million to repay the
outstanding balance under the term loan portion of the Bank Credit Facility
which has now been reduced to a $125 million revolving credit facility; $208
million through October has been used to repurchase a portion of its 9 1/2%
Senior Subordinated Notes and 10 1/2% Senior Subordinated Discounts Notes in
open market transactions; and approximately $10.0 million for fees and expenses
incurred in connection with the sale. The tax liability incurred as a result of
the sale will be paid in the fourth quarter.
The Company continues to have significant liquidity to fund operations and make
new investments. At September 30, 1999, the Company had $121.2 million of
borrowing availability under its revolving credit facility. The cash balance of
$199.5 million at September 30, 1999 was reduced in October by $167 million for
the repurchase of Senior Subordinated Notes and Senior Subordinated Discount
Notes.
Falcon will continue to explore strategic alternatives with respect to its Air
Distribution Products segment and Plumbing Fixtures segment, including potential
acquisitions to enhance the businesses and potential divestitures or other
transactions to maximize shareholder value.
We thank you for your continued support and confidence.
William K. Hall
Chairman, President & Chief
Executive Officer
FORWARD-LOOKING STATEMENTS IN THIS LETTER ARE MADE PURSUANT TO THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995. INVESTORS ARE
CAUTIONED THAT ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM SUCH FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO, CHANGES IN GENERAL ECONOMIC CONDITIONS,
FLUCTUATIONS IN INTEREST RATES, INCREASES IN RAW MATERIALS AND LABOR COSTS,
LEVELS OF COMPETITION AND OTHER FACTORS DETAILED FROM TIME TO TIME IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
