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Filed pursuant to Rule 424(b)(3)
Registration No. 333-69749
PROSPECTUS
EXCHANGE OFFER FOR
$155,000,000 8% SENIOR NOTES DUE 2008
OF
BUILDING MATERIALS CORPORATION OF AMERICA
ISSUER
BUILDING MATERIALS MANUFACTURING CORPORATION
BUILDING MATERIALS INVESTMENT CORPORATION
GUARANTORS
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MATERIAL TERMS OF THE EXCHANGE OFFER
o Expires at 12:00 Midnight, New York City time, on June 7, 1999, unless
extended.
o The only conditions to completing the exchange offer are that the
exchange offer not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission and
no injunction, order or decree has been issued which would prohibit,
prevent or materially impair our ability to proceed with the exchange
offer.
o All old notes that are validly tendered and not validly withdrawn will be
exchanged.
o Tenders of old notes may be withdrawn at any time prior to the expiration
of the exchange offer.
o The terms of the registered notes to be issued in the exchange offer are
substantially identical to the old notes that we issued on December 3,
1998, except for certain transfer restrictions, registration rights and
liquidated damages.
o The old notes are, and the registered notes will be, fully and
unconditionally guaranteed, jointly and severally, on a senior, unsecured
basis by Building Materials Manufacturing Corporation and Building
Materials Investment Corporation.
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CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS
PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS MAY 10, 1999.
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TABLE OF CONTENTS
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Prospectus Summary......................................................................................... 1
Summary of the Terms of the Exchange Offer............................................................... 2
Summary of the Terms of the Registered Notes............................................................. 6
Summary Financial Data................................................................................... 8
Risk Factors............................................................................................... 11
Where You Can Find More Information........................................................................ 14
Forward-Looking Statements................................................................................. 14
The Exchange Offer......................................................................................... 15
Capitalization............................................................................................. 22
Selected Financial Data.................................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25
Business................................................................................................... 30
Management................................................................................................. 41
Executive Compensation..................................................................................... 43
Security Ownership of Certain Beneficial Owners and Management............................................. 46
Certain Relationships...................................................................................... 47
Description of the Registered Notes........................................................................ 49
Federal Income Tax Considerations.......................................................................... 73
Plan of Distribution....................................................................................... 73
Legal Matters.............................................................................................. 74
Experts.................................................................................................... 74
Index to Consolidated Financial Statements................................................................. F-1
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all information that may be important to you. This prospectus
includes specific terms of the exchange offer, as well as information regarding
our business and detailed financial data. We encourage you to read the detailed
information and financial statements appearing elsewhere in this prospectus.
Building Materials Corporation of America was incorporated in 1994. Any
information regarding us in this prospectus that relates to information prior to
this date has been prepared as if BMCA existed during this period.
THE EXCHANGE OFFER
On December 3, 1998, we issued in a private placement $155 million in
aggregate principal amount of our 8% Senior Notes due 2008. We entered into a
registration rights agreement with the initial purchasers of these notes in
which we agreed to deliver to you this prospectus and to complete the exchange
offer on or prior to June 1, 1999. The exchange offer is scheduled to expire on
June 7, 1999. As a result, you will receive additional interest for the period
from June 1, 1999 through the completion of the exchange offer. You are entitled
to exchange your old notes in the exchange offer for registered notes with
substantially identical terms. We believe that the registered notes to be issued
in the exchange offer may be resold by you without compliance with the
registration and prospectus delivery requirements of the Securities Act of 1933,
subject to certain limited conditions. You should read the discussion under the
headings "The Exchange Offer" and "Description of the Registered Notes" for
further information regarding the registered notes.
WHO WE ARE
We are a leading national manufacturer of a broad line of asphalt roofing
products and accessories for the residential and commercial roofing markets. We
also manufacture specialty building products and accessories for the
professional and do-it-yourself remodeling and residential construction
industries. Our products are produced at 25 manufacturing facilities. We believe
that we hold the number one or two market position in each of the asphalt
roofing product lines in which we compete (based on unit sales), including
leadership of the fast growing, premium laminated residential shingle market.
Effective January 1, 1999, BMCA transferred all of its investment assets
and intellectual property assets to Building Materials Investment Corporation, a
newly-formed, wholly-owned subsidiary of BMCA. In connection with this transfer,
Building Materials Investment Corporation agreed to guarantee all of BMCA's
obligations under its revolving credit facility, the old notes, the registered
notes and its other outstanding senior notes. BMCA also transferred all of its
manufacturing assets, other than those located in Texas, to Building Materials
Manufacturing Corporation, another newly-formed, wholly-owned subsidiary of
BMCA. In connection with this transfer, Building Materials Manufacturing
Corporation agreed to become a co-obligor on BMCA's 8% Senior Notes due 2007 and
to guarantee BMCA's obligations under its revolving credit facility and all of
BMCA's other outstanding senior notes, including the old notes, and the
registered notes. Building Materials Manufacturing Corporation and Building
Materials Investment Corporation were incorporated in Delaware in 1998.
* * *
Our executive offices and the executive offices of Building Materials
Manufacturing Corporation are located at 1361 Alps Road, Wayne, New Jersey 07470
and our telephone number is (973) 628-3000. The executive offices of Building
Materials Investment Corporation are located at 300 Delaware Avenue, Wilmington,
Delaware 19801 and its telephone number is (302) 427-5960. Industry information
is based upon our estimates and data from the Asphalt Roofing Manufacturers
Association.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to $155 million aggregate
principal amount of old notes for an equal aggregate principal amount of
registered notes. On December 3, 1998, we issued and sold $155 million in
aggregate principal amount of the old notes in a private placement. The form and
terms of the registered notes are substantially the same as the form and terms
of the old notes, except that the registered notes have been registered under
the Securities Act of 1933 and will not bear legends restricting their transfer.
We issued the old notes under an indenture which grants you certain rights. The
registered notes also will be issued under that indenture and you will have the
same rights under the indenture as the holders of the old notes. See
"Description of the Registered Notes."
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Registration Rights Agreement............. You are entitled under the registration rights agreement to exchange
your old notes for registered notes with substantially identical
terms. The exchange offer is intended to satisfy these rights. After
the exchange offer is complete, except as set forth in the next
paragraph, you will no longer be entitled to any exchange or
registration rights with respect to your old notes.
The registration rights agreement requires us to file a registration
statement for a continuous offering in accordance with Rule 415
under the Securities Act for your benefit if you would not receive
freely tradeable registered notes in the exchange offer or you are
ineligible to participate in the exchange offer and indicate that you
wish to have your old notes registered under the Securities Act. See
"The Exchange Offer--Procedures for Tendering."
The Exchange Offer........................ We are offering to exchange $1,000 principal amount of Series B 8%
Senior Notes due 2008 which have been registered under the Securities
Act for each $1,000 principal amount of 8% Senior Notes due 2008
which were issued on December 3, 1998 in a private placement. In
order to be exchanged, an old note must be properly tendered and
accepted. All old notes that are validly tendered and not validly
withdrawn will be exchanged.
As of this date, there are $155 million aggregate principal amount of
old notes outstanding.
We will issue the registered notes promptly after the expiration of
the exchange offer.
Resales of the Registered Notes........... We believe that registered notes to be issued in the exchange offer
may be offered for resale, resold and otherwise transferred by you
without compliance with the registration and prospectus delivery
provisions of the Securities Act if you meet the following
conditions:
(1) the registered notes are acquired by you in the ordinary
course of your business;
(2) you are not engaging in and do not intend to engage in a
distribution of the registered notes;
(3) you do not have an arrangement or understanding with any
person to participate in the distribution of the registered
notes; and
(4) you are not an affiliate of ours, as that term is defined in
Rule 405 under the Securities Act.
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If you do not meet the above conditions, you may incur liability
under the Securities Act if you transfer any registered note without
delivering a prospectus meeting the requirements of the Securities
Act. We do not assume or indemnify you against that liability.
Each broker-dealer that is issued registered notes in the exchange
offer for its own account in exchange for old notes which were
acquired by that broker-dealer as a result of market-making
activities or other trading activities must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act
in connection with any resales of the registered notes. A
broker-dealer may use this prospectus for an offer to resell or to
otherwise transfer these registered notes.
Expiration Date........................... The exchange offer will expire at 12:00 Midnight, New York City time,
on June 7, 1999, unless we decide to extend the exchange offer. We do
not intend to extend the exchange offer, although we reserve the
right to do so. If we determine to extend the exchange offer, we do
not intend to extend it beyond June 11, 1999.
Conditions to the Exchange Offer.......... The only conditions to completing the exchange offer are that the
exchange offer not violate applicable law or any applicable
interpretation of the staff of the Commission and no injunction,
order or decree has been issued which would prohibit, prevent or
materially impair our ability to proceed with the exchange offer. See
"The Exchange Offer--Conditions."
Procedures for Tendering Old Notes Held in
the Form of Book-Entry Interests........ The old notes were issued as global securities in fully registered
form without coupons. Beneficial interests in the old notes which are
held by direct or indirect participants in The Depository Trust
Company through certificateless depositary interests are shown on,
and transfers of the notes can be made only through, records
maintained in book-entry form by DTC with respect to its
participants.
If you are a holder of an old note held in the form of a book-entry
interest and you wish to tender your old note for exchange pursuant
to the exchange offer, you must transmit to The Bank of New York, as
exchange agent, on or prior to the expiration of the exchange offer
either:
o a written or facsimile copy of a properly completed and
executed letter of transmittal and all other required
documents to the address set forth on the cover page of the
letter of transmittal; or
o a computer-generated message transmitted by means of DTC's
Automated Tender Offer Program system and forming a part of a
confirmation of book-entry transfer in which you acknowledge
and agree to be bound by the terms of the letter of
transmittal.
The exchange agent must also receive on or prior to the expiration of
the exchange offer either:
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o a timely confirmation of book-entry transfer of your old notes
into the exchange agent's account at DTC, in accordance with
the procedure for book-entry transfers described in this
prospectus under the heading "The Exchange Offer--Book-Entry
Transfer," or
o the documents necessary for compliance with the guaranteed
delivery procedures described below.
A letter of transmittal accompanies this prospectus. By executing the
letter of transmittal or delivering a computer-generated message
through DTC's Automated Tender Offer Program system, you will
represent to us that, among other things:
(1) the registered notes to be acquired by you in the exchange
offer are being acquired in the ordinary course of your
business;
(2) you are not engaging in and do not intend to engage in a
distribution of the registered notes;
(3) you do not have an arrangement or understanding with any
person to participate in the distribution of the registered
notes; and
(4) you are not our affiliate.
Procedures for Tendering Certificated Old
Notes................................... If you are a holder of book-entry interests in the old notes, you are
entitled to receive, in limited circumstances, in exchange for your
book-entry interests, certificated notes which are in equal principal
amounts to your book-entry interests. See "Description of the
Registered Notes--Form of Registered Notes." No certificated notes
are issued and outstanding as of the date of this prospectus. If you
acquire certificated old notes prior to the expiration of the
exchange offer, you must tender your certificated old notes in
accordance with the procedures described in this prospectus under the
heading "The Exchange Offer--Procedures for Tendering--Certificated
Notes."
Special Procedures for
Beneficial Owner........................ If you are the beneficial owner of old notes and they are registered
in the name of a broker, dealer, commercial bank, trust company or
other nominee, and you wish to tender your old notes, you should
promptly contact the person in whose name your old notes are
registered and instruct that person to tender on your behalf. If you
wish to tender on your own behalf, you must, prior to completing and
executing the letter of transmittal and delivering your old notes,
either make appropriate arrangements to register ownership of the old
notes in your name or obtain a properly completed bond power from the
person in whose name your old notes are registered. The transfer of
registered ownership may take considerable time. See "The Exchange
Offer--Procedures for Tendering--Procedures Applicable to All
Holders."
Guaranteed Delivery Procedures............ If you wish to tender your old notes and:
(1) they are not immediately available,
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(2) time will not permit your old notes or other required
documents to reach the exchange agent before the expiration
of the exchange offer or
(3) you cannot complete the procedure for book-entry transfer on
a timely basis,
you may tender your old notes in accordance with the guaranteed
delivery procedures set forth in "The Exchange Offer--Procedures for
Tendering--Guaranteed Delivery Procedures."
Acceptance of Old Notes and Delivery of
Registered Notes........................ Except under the circumstances described above under "Conditions to
the Exchange Offer," we will accept for exchange any and all old
notes which are properly tendered in the exchange offer prior to
12:00 Midnight, New York City time, on the expiration date. The
registered notes to be issued to you in the exchange offer will be
delivered promptly following the expiration date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal................................ You may withdraw the tender of your old notes at any time prior to
12:00 Midnight, New York City time, on the expiration date. We will
return to you any old notes not accepted for exchange for any reason
without expense to you as promptly as we can after the expiration or
termination of the Exchange Offer.
Exchange Agent............................ The Bank of New York is serving as the exchange agent in connection
with the exchange offer.
Consequences of Failure to
Exchange................................ If you do not participate in the exchange offer, upon completion of
the exchange offer, the liquidity of the market for your old notes
could be adversely affected. See "The Exchange Offer--Consequences of
Failure to Exchange."
Federal Income Tax
Consequences............................ The exchange of the old notes will not be a taxable event for federal
income tax purposes. See "Federal Income Tax Considerations."
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SUMMARY OF THE TERMS OF THE REGISTERED NOTES
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Issuer.................................... Building Materials Corporation of America.
Issue..................................... $155 million aggregate principal amount of Series B 8% Senior Notes
due 2008.
Maturity.................................. December 1, 2008.
Interest Payment Dates.................... The registered notes to be issued in the exchange offer will pay
interest in cash at a rate of 8% per annum, payable on June 1 and
December 1, commencing June 1, 1999.
Change of Control Put and Call............ Upon a change of control, you will have the right to require us to
repurchase your notes at a purchase price equal to 101% of their
aggregate principal amount on the date of repurchase, plus any
accrued interest. If a change of control were to occur, however, we
may not have sufficient funds to repurchase your notes at the time we
are required to do so. After the expiration of your right to require
us to repurchase your notes, we will have the option to purchase all
of the outstanding notes at a purchase price equal to 100% of their
aggregate principal amount, plus the applicable premium, together
with any accrued and unpaid interest to the purchase date. We cannot
otherwise redeem the notes. See "Description of the Registered
Notes--Certain Definitions" for the definitions of change of control
and applicable premium.
Guarantees................................ The registered notes to be issued in the exchange offer are fully and
unconditionally guaranteed, jointly and severally, on a senior,
unsecured basis by Building Materials Manufacturing Corporation and
Building Materials Investment Corporation. The obligations with
respect to these guarantees will rank equally with all existing and
future unsecured and unsubordinated obligations of each of the
guarantors. See "Description of the Registered Notes--Guarantees."
Ranking................................... The notes are BMCA's senior, unsecured obligations. The notes will
rank equally with all of BMCA's other unsecured and unsubordinated
obligations, including:
o its Deferred Coupon Notes,
o its 7 3/4% Senior Notes due 2005,
o its 8 5/8% Senior Notes due 2006,
o its 8% Senior Notes due 2007, and
o its revolving credit facility.
As of December 31, 1998, our outstanding indebtedness from borrowings
was $592.7 million, of which $530.8 million was senior debt. Our
other outstanding liabilities, at that date, as reflected on our
consolidated balance sheet, including trade payables and accrued
expenses, were $209.9 million. Subject to certain restrictions
contained in our revolving credit facility, the indenture governing
the old notes and the registered notes and the indentures governing
our other outstanding senior notes, we may incur additional senior
debt. The restrictions on our ability to incur additional senior debt
contained in the indentures governing our other outstanding senior
notes are substantially similar to those contained in the indenture
governing the notes. The revolving credit facility contains more
restrictive limitations on our ability to incur debt than under those
indentures. The credit
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facility includes financial covenants and a specific debt limitation
covenant that, unlike the indentures, restrict our ability to incur
debt regardless of our interest coverage ratio.
Certain Covenants......................... The indenture governing the notes contains covenants which, among
other things and subject to certain exceptions, restrict our ability
to:
o incur indebtedness;
o make certain payments and dividends;
o issue capital stock of certain of our subsidiaries;
o issue guarantees;
o enter into transactions with stockholders and affiliates;
o create liens;
o sell assets; and
o consolidate, merge with or sell all or substantially all of
our assets to another person.
Registration Rights....................... The registration rights agreement required us to complete the
exchange offer by June 1, 1999. The exchange offer is scheduled to
expire on June 7, 1999. As a result, additional interest will accrue
on the old notes from and including June 1, 1999 at a rate per annum
equal to 0.50% of the principal amount of the old notes. This
additional interest will cease to accrue upon the completion of the
exchange offer. This additional interest will be payable in cash
semiannually in arrears on June 1 and December 1. See "Description of
the Registered Notes--Principal, Maturity and Interest" and "The
Exchange Offer--Purpose and Effect."
Form of Registered Notes.................. The registered notes to be issued in the exchange offer will be
represented by one or more global securities deposited with The Bank
of New York for the benefit of DTC. You will not receive registered
notes in certificated form unless one of the events set forth under
the heading "Description of the Registered Notes--Form of Registered
Notes" occurs. Instead, beneficial interests in the registered notes
to be issued in the exchange offer will be shown on, and transfers of
these interests will be effected only through, records maintained in
book-entry form by DTC with respect to its participants.
Use of Proceeds........................... We will not receive any cash proceeds upon completion of the exchange
offer.
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SUMMARY FINANCIAL DATA
The following table presents our summary consolidated financial data which
are derived from our Consolidated Financial Statements beginning on page F-1. As
of January 1, 1997, G-I Holdings Inc. contributed all of the capital stock of
U.S. Intec, Inc. to BMCA, and U.S. Intec became BMCA's subsidiary. Accordingly,
our historical consolidated financial statements include U.S. Intec's results of
operations from the date of its acquisition by G-I Holdings (October 20, 1995),
including sales and net income of $99.0 million and $1.3 million, respectively,
for the year ended December 31, 1996. See Note 1 to Consolidated Financial
Statements. The results for the year ended December 31, 1997 include the results
of the Leatherback Industries business from its date of acquisition (March 14,
1997), including sales of $30.2 million. The results for the year ended December
31, 1998 include the results of the Leslie-Locke business from its date of
acquisition (June 1, 1998), including sales of $53.3 million.
The pro forma operating data is intended to give you a better picture of
what our business would have looked like if the following transactions had each
occurred on January 1, 1998:
o the issuance of the old notes;
o the issuance of the 2005 Notes;
o the purchases of $279.7 million in aggregate principal amount of the
Deferred Coupon Notes; and
o the acquisition of substantially all of the assets of Leslie-Locke, Inc.
The pro forma financial information does not project the financial position or
the results of operations for any future period or represent what the financial
position or results of operations would have been if the transactions described
above had been completed at the date indicated.
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YEAR ENDED DECEMBER 31,
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1996 1997 1998
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(IN MILLIONS)
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OPERATING DATA:
Net sales.................................................................... $852.0 $ 944.6 $1,088.0
Operating income(1).......................................................... 61.4 70.1 46.0
Interest expense............................................................. 32.0 42.8 49.7
Income before income taxes and extraordinary losses.......................... 27.9 42.8 12.2
Income before extraordinary losses........................................... 17.1 26.1 7.6
Net income (loss)............................................................ 17.1 26.1 (10.6)
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DECEMBER 31,
1998
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(IN
MILLIONS)
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BALANCE SHEET DATA:
Cash and short-term investments................................................................... $205.6
Total working capital............................................................................. 220.7
Total assets...................................................................................... 847.5
Long-term debt less current maturities(2)......................................................... 588.4
Total stockholders' equity........................................................................ 44.9
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YEAR ENDED DECEMBER 31,
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1996 1997 1998
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(IN MILLIONS, EXCEPT RATIO
DATA)
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OTHER DATA:
Depreciation.................................................................... $ 23.9 $ 22.9 $ 26.6
Goodwill amortization........................................................... 1.7 1.9 2.1
Capital expenditures and acquisitions........................................... 25.6 77.7 130.3
Cash flows from:
Operating activities......................................................... 53.1 (10.3) 88.0
Investing activities......................................................... (64.5) (121.2) (26.4)
Financing activities......................................................... 90.0 19.9 (49.5)
EBITDA(3)....................................................................... 85.4 110.4 90.5
Ratio of earnings to fixed charges(4)........................................... 1.8x 1.9x 1.2x
Ratio of EBITDA to interest expense(3).......................................... 2.7x 2.6x 1.8x
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YEAR ENDED DECEMBER 31, 1998
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(IN MILLIONS, EXCEPT RATIO
DATA)
(UNAUDITED)
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PRO FORMA OPERATING DATA(5):
Adjusted EBITDA(6)................................................................ $ 92.6
Interest expense.................................................................. 47.7
Income before extraordinary losses................................................ 10.1
Ratio of earnings to fixed charges(4)............................................. 1.3x
Ratio of Adjusted EBITDA to interest expense(6)................................... 1.9x
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(1) Operating income for the year ended December 31, 1998 includes
$27.6 million of nonrecurring charges. See Note 5 to Consolidated Financial
Statements.
(2) See "Capitalization" and Note 10 to Consolidated Financial Statements.
(3) EBITDA is calculated as income before income taxes and extraordinary items,
increased by interest expense, depreciation and goodwill amortization. As an
indicator of our operating performance, EBITDA should not be considered as
an alternative to net income or any other measure of performance under
generally accepted accounting principles.
(4) For purposes of these computations, earnings consist of income before income
taxes plus fixed charges and extraordinary items. Fixed charges consist of
interest on indebtedness, including amortization of debt issuance costs,
plus that portion of lease rental expense representative of interest,
estimated to be one-third of lease rental expense.
(5) The net effect of the pro forma adjustments was to increase our pro forma
income before income taxes and extraordinary losses by $4.1 million for the
year 1998. As a result, our pro forma provision for income taxes increased
by $1.5 million for the year 1998, based on an effective marginal income tax
rate of 38.0%.
(6) The Adjusted EBITDA data are being presented because this data relate to
debt covenants under the indentures governing our indebtedness. You should
refer to these indentures for further information. Excluded from the
Adjusted EBITDA calculation is $18.1 million in extraordinary charges, net
of related income tax benefits, related to the purchases of the Deferred
Coupon Notes in July and December 1998.
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The details of the calculations of Adjusted EBITDA are set forth below:
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PRO FORMA
YEAR ENDED DEC. 31, 1998
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
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(THOUSANDS)
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Income before income taxes and extraordinary losses*....... $ 12,180 $ 14,160
Add:
EBITDA adjustment related to the acquisition of Leslie-
Locke.................................................... -- 2,094
Interest expense........................................... 49,674 47,694
Goodwill amortization...................................... 2,111 2,111
Depreciation............................................... 26,579 26,579
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Adjusted EBITDA............................................ $ 90,544 $ 92,638
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* The adjustments to reconcile historical and pro forma income before income
taxes and extraordinary losses reflect the adjustments to interest expense to
reflect the issuances of the old notes and the 2005 notes, the purchases of
$279.7 million in aggregate principal amount of the Deferred Coupon Notes, and
the acquisition of the Leslie-Locke business as if each of those transactions
had occurred as of January 1, 1998, as follows:
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YEAR ENDED
DECEMBER 31, 1998
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(THOUSANDS)
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Historical income before income taxes and extraordinary losses................................. $ 12,180
Pro Forma adjustments:
Interest expense on old notes................................................................ (11,749)
Interest expense on 2005 Notes............................................................... (6,723)
Reduction of interest expense for repurchases of Deferred Coupon Notes....................... 20,610
Interest expense of Leslie-Locke business.................................................... (158)
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Pro Forma income before income taxes and extraordinary losses.................................. $ 14,160
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RISK FACTORS
An investment in the registered notes is subject to a number of risks. You
should carefully consider the following factors, as well as the more detailed
descriptions elsewhere in this prospectus in evaluating the exchange offer. Any
reference to "notes" in this prospectus refers to both old notes and registered
notes, unless the context otherwise requires.
WE ARE SUBSTANTIALLY LEVERAGED WHICH COULD AFFECT OUR ABILITY TO FULFILL OUR
OBLIGATIONS UNDER THE NOTES.
Our substantial outstanding debt has important consequences to you,
including the risk that we may not generate sufficient cash flow from operations
to pay principal and interest on our indebtedness, including the notes, or to
invest in our businesses. While we believe, based upon our historical and
anticipated performance, that we will be able to satisfy our obligations,
including under the notes, from our cash flow from operations and refinancings,
we cannot assure you of this ability. While we can raise cash to satisfy our
obligations through potential sales of assets or equity, our ability to raise
funds by selling either assets or equity depends on our results of operations,
market conditions, restrictions contained in our revolving credit facility and
the indentures relating to the notes and our other outstanding senior notes and
other factors. If we are unable to refinance indebtedness or raise funds through
sales of assets or equity or otherwise, we may be unable to pay principal of and
interest on the notes.
At December 31, 1998, we had total outstanding consolidated long-term debt
of $592.7 million and stockholders' equity of $44.9 million. Our interest
expense for the year ended December 31, 1998 was $49.7 million. There is no
outstanding debt senior to the notes. In addition, subject to covenants
contained in our revolving credit facility and the indentures relating to the
notes and our other outstanding senior notes, we may incur additional
indebtedness. We are currently limited by covenants in these agreements from
incurring additional debt, except under limited circumstances. These
circumstances include incurring additional indebtedness under our revolving
credit facility and the refinancing of existing debt. Any additional
indebtedness we may incur may rank equally or junior to the notes and will not
by its terms rank senior to the notes.
IF A CHANGE OF CONTROL OCCURS, WE MAY BE UNABLE TO REPURCHASE YOUR NOTES. THIS
FAILURE WOULD CONSTITUTE AN EVENT OF DEFAULT UNDER THE INDENTURE RELATING TO THE
NOTES AND OUR OTHER DEBT INSTRUMENTS.
If a change of control as defined in the indenture relating to the notes
occurs, we cannot assure you that we will have available, or be able to obtain,
sufficient funds, or will be permitted by our debt instruments, to repurchase
your notes. The indenture relating to the notes provides that if a change of
control occurs, you will have the right to require us to repurchase your notes
at 101% of their principal amount, plus any accrued and unpaid interest to the
repurchase date. Our revolving credit facility currently prohibits us from
repurchasing any notes. Our failure to repurchase your notes would constitute an
event of default under the indenture, which would in turn constitute a default
under the revolving credit facility and the indentures governing our other
outstanding senior notes. See "Description of the Registered Notes--Repurchase
at Your Option." In addition, if a change of control as defined in the revolving
credit facility occurs, the facility could be terminated and the outstanding
loans accelerated. This event could cause the notes and our other outstanding
senior notes to be accelerated. If any of these events of default were to occur,
we may be unable to pay the accelerated principal amount of and interest on the
notes.
THE LIQUIDITY OF ANY MARKET FOR THE OLD NOTES COULD BE ADVERSELY AFFECTED AFTER
COMPLETION OF THE EXCHANGE OFFER. IN ADDITION, THERE MAY BE NO ACTIVE TRADING
MARKET FOR THE REGISTERED NOTES TO BE ISSUED IN THE EXCHANGE OFFER.
There has been no public market for the old notes. If most holders of the
old notes tender their notes in the exchange offer, the liquidity for the old
notes not tendered in the exchange offer could be adversely affected upon
completion of the exchange offer. In addition, we cannot assure you with respect
to:
(1) the liquidity of any market for the registered notes that may develop,
(2) your ability to sell registered notes or
(3) the price at which you will be able to sell those registered notes.
If a public market were to exist, the registered notes could trade at prices
that may be higher or lower than their principal amount or purchase price,
depending on many factors, including prevailing interest rates, the market for
similar notes, and our financial performance. We do not intend to list the
registered notes to be
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issued to you in the exchange offer on any securities exchange or to seek
approval for quotations through any automated quotation system. No active market
for the registered notes is currently anticipated. Bear, Stearns & Co. Inc. and
Chase Securities Inc., the initial purchasers of the old notes, have advised us
that they currently anticipate making a secondary market for the registered
notes, but they are not obligated to do so. We cannot assure you that an active
or liquid public trading market will develop for the registered notes.
OUR PARENT CORPORATIONS ARE DEPENDENT UPON OUR CASH FLOW TO SATISFY THEIR
OBLIGATIONS AND COULD CAUSE US TO MAKE DISTRIBUTIONS TO THEM WHICH WOULD REDUCE
CASH FLOW AVAILABLE TO US.
If our parent corporations are unable to meet their cash requirements, they
might take various actions that could reduce our cash flows. This reduction
could adversely affect our ability to pay principal and interest on the notes.
GAF Corporation, G-I Holdings, G Industries Corp. and GAF Building Materials
Corporation, our parent corporations, are dependent upon the cash flow of our
company and their other subsidiaries in order to satisfy their obligations,
including asbestos-related claims and tax liabilities. In order to satisfy those
obligations, those corporations might take various actions, including
o causing us to make distributions to our stockholders by means of
dividends or otherwise,
o causing us to make loans to them, or
o causing GAF Building Materials Corporation to sell our common stock.
In addition, creditors of those corporations could also seek to cause GAF
Building Materials Corporation to sell our common stock or take similar action
in order to satisfy liabilities owed to them. The only significant assets of our
parent corporations are the stock of our company and the stock of GAF Fiberglass
Corporation. However, GAF Corporation has advised us that it expects to obtain
funds to satisfy its obligations from, among other things, dividends and loans
principally from us and from payments from us pursuant to a tax sharing
agreement we entered into with it.
We cannot assure you that GAF Corporation will be able to satisfy its
obligations in this manner or if any of the actions discussed above could be
effected on satisfactory terms. See the risk factor below regarding
asbestos-related claims filed against our parent corporations, the risk factor
on page 13 regarding GAF Group federal income tax liability and Notes to
Consolidated Financial Statements.
ASBESTOS-RELATED CLAIMS FILED AGAINST CERTAIN OF OUR PARENT CORPORATIONS COULD
RESULT IN A CHANGE IN CONTROL OF OUR COMPANY.
If GAF Corporation or GAF Building Materials Corporation is unable to
satisfy judgments against it in asbestos-related lawsuits, its judgment
creditors might seek to enforce their judgments against the assets of GAF
Corporation or GAF Building Materials Corporation, including GAF Building
Materials Corporation's holdings of our common stock. These actions could result
in a change of control with respect to our company. GAF Corporation has advised
us that, as of December 28, 1998, it is defending approximately 113,800 pending
alleged asbestos-related bodily injury claims relating to the inhalation of
asbestos fiber, having received notice of approximately 93,500 new
asbestos-related bodily injury claims during 1998, and has resolved
approximately 293,500 asbestos-related bodily injury claims, including
approximately 59,000 in 1998. GAF Corporation has advised us that it believes
that a significant portion of the claims filed in 1998 were already pending
against other defendants for some period of time, with GAF Corporation being
added as a defendant upon the lifting in 1997 of the injunction relating to the
Georgine class action settlement. This injunction prevented plaintiffs from
filing or proceeding with their asbestos-related bodily injury claims relating
to the inhalation of asbestos fiber other than in accordance with the Georgine
class action settlement, which was rendered inoperable in 1997 by a United
States Supreme Court ruling. GAF Corporation's current estimated average cost
for asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber resolved in 1998, including any claims disposed of at no cost to GAF
Corporation, is approximately $3,500 per claim. Substantially all of the costs
in respect of these asbestos-related bodily injury claims will be paid over
several years. We cannot assure you that the actual costs of resolving pending
and future asbestos-related bodily injury claims relating to the inhalation of
asbestos fiber will approximate GAF Corporation's estimated average costs for
the asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber resolved in 1998.
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GAF Corporation has stated that it is committed to effecting a
comprehensive resolution of asbestos-related bodily injury claims relating to
the inhalation of asbestos fiber and that it is exploring a number of options to
accomplish such resolution. We cannot assure you that this effort will be
successful.
We believe that we will not sustain any liability in connection with
asbestos-related claims. While we cannot predict whether any asbestos-related
claims will be asserted against us or our assets, or the outcome of any
litigation relating to these claims, we believe that we have meritorious
defenses to those claims. Moreover, we have been jointly and severally
indemnified by G-I Holdings and GAF Building Materials Corporation against any
future or existing claims related to asbestos-related liabilities if asserted
against BMCA.
For additional information regarding asbestos-related matters, see
"Business--Legal Proceedings" and Note 3 to Consolidated Financial Statements.
OUR PARENT CORPORATIONS ARE DEPENDENT UPON OUR CASH FLOWS TO SATISFY THEIR
OBLIGATIONS. IF GAF CORPORATION IS UNSUCCESSFUL IN CHALLENGING ITS TAX
DEFICIENCY NOTICE, IT COULD CAUSE US TO MAKE DISTRIBUTIONS WHICH WOULD REDUCE
OUR CASH FLOW.
On September 15, 1997, GAF Corporation received a tax deficiency notice for
the 1990 fiscal year relating to Rhone-Poulenc Surfactants and Specialties,
L.P., a partnership in which GAF Fiberglass Corporation, a subsidiary of GAF
Corporation, holds an interest. This notice could result in GAF Corporation
incurring liabilities significantly in excess of its deferred tax liability. If
GAF Corporation is unsuccessful in challenging its tax deficiency notice and is
unable to satisfy its tax obligations, it might take various actions that could
reduce our cash flows as described in the risk factor on page 12 regarding our
parent corporations' dependence on our cash flows. This reduction could
adversely affect our ability to pay principal and interest on the notes.
As a member of the GAF Corporation consolidated group for federal income
tax purposes, we are jointly and severally liable for federal income tax
liabilities of the GAF consolidated group. We are indemnified under certain
circumstances for those tax liabilities, principally by GAF Corporation and G-I
Holdings.
GAF Corporation has advised us that it believes it will prevail in the
surfactants partnership matter, although there can be no assurance in this
regard. See "Business--Tax Claim Against GAF Corporation," "Certain
Relationships--Tax Sharing Agreement" and Note 6 to Consolidated Financial
Statements.
OUR CONTROLLING STOCKHOLDER HAS THE ABILITY TO ELECT OUR ENTIRE BOARD OF
DIRECTORS AND CAN CONTROL THE OUTCOME OF ANY MATTER SUBMITTED TO OUR
STOCKHOLDERS.
We are an indirect subsidiary of GAF Corporation, which is approximately
97% beneficially owned (as defined in Rule 13d-3 of the Securities Exchange Act
of 1934) by Samuel J. Heyman, Chairman of the Board of Directors and Chief
Executive Officer of GAF Corporation and G-I Holdings, our Chairman of the Board
of Directors and Chief Executive Officer of GAF Building Materials Corporation.
Accordingly, Mr. Heyman has the ability to elect our entire Board of Directors
and to determine the outcome of any other matter submitted to our stockholders
for approval, including, subject to the terms of the indenture relating to the
notes, mergers, consolidations and the sale of all, or substantially all, of our
assets. See "Security Ownership of Certain Beneficial Owners and Management."
THE YEAR 2000 TECHNOLOGY ISSUES MAY DISRUPT OUR USUAL CHANNELS OF SUPPLY AND
DISTRIBUTION.
Our key suppliers, service providers, customers and other third parties may
fail to address adequately their respective Year 2000 technology issues. If this
failure were to occur, our usual channels of supply and distribution could be
disrupted and we could experience a material adverse effect on our business,
results of operations or financial position. We have implemented a Year 2000
program that includes investigating and evaluating the Year 2000 issues of third
parties significant to our business. We expect to complete this investigation
and evaluation by the end of June 1999. The ability of third parties with whom
we transact business, or companies that we may acquire, to adequately address
their Year 2000 issues is outside of our control. We cannot assure you that all
of our Year 2000 issues or those of our key suppliers, service providers or
customers will be resolved or addressed satisfactorily before the year 2000
commences or that the failure to satisfactorily resolve or address these issues
will not have a material adverse impact on our business, results of operations
or financial position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and, accordingly, file annual, quarterly and other information with
the Securities and Exchange Commission. You may read and copy the reports and
other information that we file with the Commission at the Commission's public
reference facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the public reference
facilities by calling the Commission at 1-800-SEC-0330. You may also obtain
information about us from the following regional offices of the Commission:
Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601-2511.
Copies of these materials also can be obtained from the Public Reference Section
of the Commission at prescribed rates. Our filings with the Commission are also
available to the public on the Commission's home page on the Internet at
http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-4 with
respect to the registered notes. This prospectus, which is a part of the
registration statement, omits certain information included in the registration
statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to that exhibit for a more complete
description of the matter involved, and each of those statements is deemed
qualified in its entirety to that reference.
FORWARD-LOOKING STATEMENTS
This prospectus contains both historical and forward-looking statements.
All statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements within the meaning of section 27A of the
Securities Act and section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are only predictions and generally can be identified
by use of statements that include phrases such as "believe," "expect,"
"anticipate," "intend," "plan," "foresee" or other similar words or phrases.
Similarly, statements that describe our objectives, plans or goals also are
forward-looking statements. Our operations are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
contemplated by the relevant forward-looking statement. You are urged to
consider these factors carefully in evaluating the forward-looking statements,
including the factors described under "Risk Factors." The forward-looking
statements included in this prospectus are made only as of the date of this
prospectus and we undertake no obligation to publicly update any forward-looking
statements to reflect subsequent events or circumstances. We cannot assure you
that projected results or events will be achieved.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
We issued the old notes on December 3, 1998 in a private placement. In
connection with this issuance, we entered into the indenture relating to the
notes and the registration rights agreement. These agreements require that we
file a registration statement under the Securities Act with respect to the
registered notes to be issued in the exchange offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your
notes for a like principal amount of registered notes. These registered notes
will be issued without a restrictive legend and, except as set forth below, may
be reoffered and resold by you without registration under the Securities Act.
After we complete the exchange offer, our obligations with respect to the
registration of the old notes and the registered notes will terminate, except as
provided in the last paragraph of this section. A copy of the indenture relating
to the notes and the registration rights agreement have been filed as exhibits
to the registration statement of which this prospectus is a part. We refer to
this indenture in this prospectus as the "Indenture." The registration rights
agreement required us to complete the exchange offer by June 1, 1999. The
exchange offer is scheduled to expire on June 7, 1999. As a result, additional
interest will accrue on the old notes from and including June 1, 1999 at a rate
per annum equal to 0.50% of the principal amount of the old notes. This
additional interest will cease to accrue upon the completion of the exchange
offer. This additional interest will be payable in cash semiannually in arrears
on June 1 and December 1. See "Description of the Registered Notes--Principal,
Maturity and Interest."
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that registered notes to be issued to you in
the exchange offer may be offered for resale, resold and otherwise transferred
by you, without compliance with the registration and prospectus delivery
provisions of the Securities Act. This interpretation, however, is based on your
representation to us that:
(1) the registered notes to be issued to you in the exchange offer are
acquired in the ordinary course of your business;
(2) you are not engaging in and do not intend to engage in a
distribution of the registered notes to be issued to you in the
exchange offer; and
(3) you have no arrangement or understanding with any person to
participate in the distribution of the registered notes to be
issued to you in the exchange offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the registered notes to be issued to you in the exchange offer,
you cannot rely on this interpretation by the staff of the Commission. Under
those circumstances, you must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. Each broker-dealer that receives registered notes in the
exchange offer for its own account in exchange for old notes that were acquired
by the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those
registered notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years or such shorter period that will terminate
when all of the old notes covered by the shelf registration statement have been
sold pursuant to the shelf registration statement. Other than as set forth in
this paragraph, you will not have the right to require us to register your old
notes under the Securities Act. See "--Procedures for Tendering."
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CONSEQUENCES OF FAILURE TO EXCHANGE
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your old notes could be
adversely affected upon completion of the exchange offer if you do not
participate in the exchange offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 12:00 Midnight, New York City time, on the
expiration date. We will issue $1,000 principal amount of registered notes in
exchange for each $1,000 principal amount of old notes accepted in the exchange
offer. You may tender some or all of your old notes pursuant to the exchange
offer. However, old notes may be tendered only in integral multiples of $1,000
in principal amount.
The form and terms of the registered notes are substantially the same as
the form and terms of the old notes, except that the registered notes to be
issued in the exchange offer have been registered under the Securities Act and
will not bear legends restricting their transfer. The registered notes will be
issued pursuant to, and entitled to the benefits of, the Indenture. The
Indenture also governs the old notes. The registered notes and the old notes
will be deemed one issue of notes under the Indenture.
As of the date of this prospectus, $155 million aggregate principal amount
of the old notes were outstanding. This prospectus, together with the letter of
transmittal, is being sent to all registered holders and to others believed to
have beneficial interests in the old notes. You do not have any appraisal or
dissenters' rights in connection with the exchange offer under the General
Corporation Law of the State of Delaware or the Indenture. We intend to conduct
the exchange offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission promulgated under
the Exchange Act.
We will be deemed to have accepted validly tendered outstanding notes when,
as, and if we have given oral or written notice of our acceptance to the
exchange agent. The exchange agent will act as our agent for the tendering
holders for the purpose of receiving the registered notes from us. If we do not
accept any tendered notes because of an invalid tender, the occurrence of
certain other events set forth in this prospectus or otherwise, we will return
certificates for any unaccepted old notes without expense, to the tendering
holder as promptly as practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer Taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and Expenses" below.
EXPIRATION DATE; AMENDMENTS
The exchange offer will expire at 12:00 Midnight, New York City time, on
June 7, 1999, unless we determine, in our sole discretion, to extend the
exchange offer, in which case, it will expire at the later date and time to
which it is extended. We do not intend to extend the exchange offer, although we
reserve the right to do so. If we determine to extend the exchange offer, we do
not intend to extend it beyond June 11, 1999. If we extend the exchange offer,
we will give oral or written notice of the extension to the exchange agent and
give each registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
(1) to delay accepting any old notes or, if any of the conditions set
forth below under "--Conditions" have not been satisfied or
waived, to terminate the exchange offer or
(2) to amend the terms of the exchange offer in any manner, by giving
oral or written notice of such delay or termination to the
exchange agent, and by complying with Rule 14e-l(d) under the
Exchange Act to the extent that rule applies.
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We acknowledge and undertake to comply with the provisions of
Rule 14e-l(c) under the Exchange Act, which requires us to pay the consideration
offered, or return the old notes surrendered for exchange, promptly after the
termination or withdrawal of the exchange offer. We will notify you as promptly
as we can of any extension, termination or amendment.
PROCEDURES FOR TENDERING
BOOK-ENTRY INTERESTS
The old notes were issued as global securities in fully registered form
without interest coupons. Beneficial interests in the global securities, held by
direct or indirect participants in DTC, are shown on, and transfers of these
interests are effected only through, records maintained in book-entry form by
DTC with respect to its participants.
If you hold your old notes in the form of book-entry interests and you wish
to tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date either:
(1) a written or facsimile copy of a properly completed and duly
executed letter of transmittal, including all other documents
required by such letter of transmittal, to the exchange agent at
the address set forth on the cover page of the letter of
transmittal; or
(2) a computer-generated message transmitted by means of DTC's
Automated Tender Offer Program system and received by the exchange
agent and forming a part of a confirmation of book-entry transfer,
in which you acknowledge and agree to be bound by the terms of the
letter of transmittal.
In addition, in order to deliver old notes held in the form of book-entry
interests:
(A) a timely confirmation of book-entry transfer of such notes into
the exchange agent's account at DTC pursuant to the procedure
for book-entry transfers described below under "--Book-Entry
Transfer" must be received by the exchange agent prior to the
expiration date; or
(B) you must comply with the guaranteed delivery procedures
described below.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK.
INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. YOU SHOULD NOT SEND
THE LETTER OF TRANSMITTAL OR OLD NOTES TO US. YOU MAY REQUEST YOUR BROKER,
DEALER, COMMERCIAL BANK, TRUST COMPANY, OR NOMINEE TO EFFECT THE ABOVE
TRANSACTIONS FOR YOU.
CERTIFICATED OLD NOTES
Only registered holders of certificated old notes may tender those notes in
the exchange offer. If your old notes are certificated notes and you wish to
tender those notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date, a written or
facsimile copy of a properly completed and duly executed letter of transmittal,
including all other required documents, to the address set forth below under
"--Exchange Agent." In addition, in order to validly tender your certificated
old notes:
(1) the certificates representing your old notes must be received by
the exchange agent prior to the expiration date or
(2) you must comply with the guaranteed delivery procedures described
below.
PROCEDURES APPLICABLE TO ALL HOLDERS
If you tender an old note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
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If your old notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender your
notes, you should contact the registered holder promptly and instruct the
registered holder to tender on your behalf. If you wish to tender on your own
behalf, you must, prior to completing and executing the letter of transmittal
and delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(A) old notes tendered in the exchange offer are tendered either
(1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery
Instructions" on the letter of transmittal or
(2) for the account of an eligible institution; and
(B) the box entitled "Special Registration Instructions" on the letter
of transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange Medallion Program or the Stock Exchanges Medallion
Program.
If the letter of transmittal is signed by a person other than you, your old
notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered old notes. This determination will be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
You must cure any defects or irregularities in connection with tenders of
your old notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of old notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
this notification. Your tender will not be deemed to have been made and your
notes will be returned to you if:
(1) you improperly tender your old notes;
(2) you have not cured any defects or irregularities in your tender;
and
(3) we have not waived those defects, irregularities or improper
tender.
The exchange agent will return your notes, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration of the
exchange offer.
In addition, we reserve the right in our sole discretion to:
(1) purchase or make offers for, or offer registered notes for, any
old notes that remain outstanding subsequent to the expiration of
the exchange offer;
(2) terminate the exchange offer; and
(3) to the extent permitted by applicable law, purchase notes in the
open market, in privately negotiated transactions or otherwise.
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The terms of any of these purchases or offers could differ from the terms
of the exchange offer.
By tendering, you will represent to us that, among other things:
(1) the registered notes to be acquired by you in the exchange offer
are being acquired in the ordinary course of your business,
(2) you are not engaging in and do not intend to engage in a
distribution of the registered notes to be acquired by you in the exchange
offer,
(3) you do not have an arrangement or understanding with any person to
participate in the distribution of the registered notes to be acquired by
you in the exchange offer and
(4) you are not our "affiliate," as defined under Rule 405 of the
Securities Act.
In all cases, issuance of registered notes for old notes that are accepted
for exchange in the exchange offer will be made only after timely receipt by the
exchange agent of certificates for your old notes or a timely book-entry
confirmation of your old notes into the exchange agent's account at DTC, a
properly completed and duly executed letter of transmittal, or a
computer-generated message instead of the letter of transmittal, and all other
required documents. If any tendered old notes are not accepted for any reason
set forth in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than you desire to exchange, the
unaccepted or non-exchanged old notes, or old notes in substitution therefor,
will be returned without expense to you. In addition, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry transfer procedures described below, the
non-exchanged old notes will be credited to your account maintained with DTC, as
promptly as practicable after the expiration or termination of the exchange
offer.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your old notes and your old notes are not
immediately available or one of the situations described in the immediately
preceding paragraph occurs, you may tender if:
(1) you tender through an eligible financial institution;
(2) on or prior to 12:00 Midnight, New York City time, on the
expiration date, the exchange agent receives from an eligible
institution, a written or facsimile copy of a properly completed
and duly executed letter of transmittal and notice of guaranteed
delivery, substantially in the form provided by us; and
(3) the certificates for all certificated old notes, in proper form
for transfer, or a book-entry confirmation, and all other
documents required by the letter of transmittal, are received by
the exchange agent within three NYSE trading days after the date
of execution of the notice of guaranteed delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1) your name and address;
(2) the amount of old notes you are tendering; and
(3) a statement that your tender is being made by the notice of
guaranteed delivery and that you guarantee that within three New
York Stock Exchange trading days after the execution of the notice
of guaranteed delivery, the eligible institution will deliver the
following documents to the exchange agent:
(A) the certificates for all certificated old notes being tendered,
in proper form for transfer or a book-entry confirmation of
tender;
(B) a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal;
and
(C) any other documents required by the letter of transmittal.
19
<PAGE>
BOOK-ENTRY TRANSFER
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the exchange offer promptly after the date of
this prospectus. You must deliver your book-entry interest by book-entry
transfer to the account maintained by the exchange agent at DTC. Any financial
institution that is a participant in DTC's systems may make book-entry delivery
of book-entry interests by causing DTC to transfer the book-entry interests into
the exchange agent's account at DTC in accordance with DTC's procedures for
transfer.
If one of the following situations occur:
(1) you cannot deliver a book-entry confirmation of book-entry
delivery of your book-entry interests into the exchange agent's
account at DTC; or
(2) you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date,
then you must tender your book-entry interests according to the guaranteed
delivery procedures discussed above.
WITHDRAWAL RIGHTS
You may withdraw tenders of your old notes at any time prior to
12:00 Midnight, New York City time, on the expiration date.
For your withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
below under "--Exchange Agent" prior to 12:00 Midnight, New York City time, on
the expiration date.
The notice of withdrawal must:
(1) state your name;
(2) identify the specific old notes to be withdrawn, including the
certificate number or numbers and the principal amount of
withdrawn notes;
(3) be signed by you in the same manner as you signed the letter of
transmittal when you tendered your old notes, including any
required signature guarantees or be accompanied by documents of
transfer sufficient for the exchange agent to register the
transfer of the old notes into your name; and
(4) specify the name in which the old notes are to be registered, if
different from yours.
We will determine all questions regarding the validity, form, and
eligibility, including time of receipt, of withdrawal notices. Our determination
will be final and binding on all parties. Any old notes withdrawn will be deemed
not to have been validly tendered for exchange for purposes of the exchange
offer. Any old notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to you without cost as soon as
practicable after withdrawal, rejection of tender, or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described under "--Procedures for Tendering" above at any time
on or prior to 12:00 Midnight, New York City time, on the expiration date.
CONDITIONS
Notwithstanding any other provision of the exchange offer and subject to
our obligations under the registration rights agreement, we will not be required
to accept for exchange, or to issue registered notes in exchange for, any old
notes and may terminate or amend the exchange offer, if at any time before the
acceptance of any old notes for exchange any of the following events shall
occur:
(1) any injunction, order or decree shall have been issued by any
court or any governmental agency that would prohibit, prevent or
otherwise materially impair our ability to proceed with the
exchange offer; or
20
<PAGE>
(2) the exchange offer shall violate any applicable law or any
applicable interpretation of the staff of the Commission.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition, subject to applicable law. We
also may waive in whole or in part at any time and from time to time any
particular condition in our sole discretion. If we waive a condition, we may be
required in order to comply with applicable securities laws, to extend the
expiration date of the exchange offer. Our failure at any time to exercise any
of the foregoing rights will not be deemed a waiver of these rights and these
rights will be deemed ongoing rights which may be asserted at any time and from
time to time.
In addition, we will not accept for exchange any old notes tendered, and no
registered notes will be issued in exchange for any of those old notes, if at
the time the notes are tendered any stop order shall be threatened by the
Commission or be in effect with respect to the registration statement of which
this prospectus is a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
The exchange offer is not conditioned on any minimum principal amount of
old notes being tendered for exchange.
EXCHANGE AGENT
We have appointed The Bank of New York as exchange agent for the exchange
offer. Questions, requests for assistance and requests for additional copies of
the prospectus, the letter of transmittal and other related documents should be
directed to the exchange agent addressed as follows:
By Registered or Certified Mail, by Hand
or by Overnight Courier:
The Bank of New York
Attention: Martha James
Reorganization Section
101 Barclay Street-7E
New York, New York 10286
By Facsimile: By Telephone:
(212) 815-4699 (212) 815-6335
The exchange agent also acts as trustee under the Indenture.
FEES AND EXPENSES
We will not pay brokers, dealers, or others soliciting acceptances of the
exchange offer. The principal solicitation is being made by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer. These are estimated in the aggregate to be approximately
$250,000 which includes fees and expenses of the exchange agent, accounting,
legal, printing and related fees and expenses.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with a
tender of your old notes for exchange unless you instruct us to register
registered notes in the name of, or request that old notes not tendered or not
accepted in the exchange offer be returned to, a person other than the
registered tendering holder, in which event the registered tendering holder will
be responsible for the payment of any applicable transfer tax.
ACCOUNTING TREATMENT
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize the expense of the exchange
offer over the term of the registered notes under generally accepted accounting
principles.
21
<PAGE>
CAPITALIZATION
The following table presents our short-term debt and current maturities of
long-term debt and consolidated capitalization as of December 31, 1998. This
table should be read in conjunction with our Consolidated Financial Statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------
(THOUSANDS)
<S> <C>
Short-term Debt and current maturities of Long-term Debt:
Short-term debt.............................................................................. $ --
Current maturities of long-term debt......................................................... 4,273
---------
Total................................................................................... $ 4,273
---------
---------
Long-term Debt (excluding current maturities)(1):
11 3/4% Senior Deferred Coupon Notes due 2004................................................ $ 28,273
7 3/4% Senior Notes due 2005................................................................. 149,401
8 5/8% Senior Notes due 2006................................................................. 99,604
8% Senior Notes due 2007..................................................................... 99,343
8% Senior Notes due 2008..................................................................... 154,165
Borrowings under the revolving credit facility............................................... --
Industrial revenue bonds..................................................................... 11,125
Obligations on mortgaged properties.......................................................... 2,204
Obligations under capital leases............................................................. 43,798
Other notes payable.......................................................................... 500
---------
Total Long-term Debt (excluding current maturities)..................................... $ 588,413
---------
---------
Stockholders' Equity:
Series A Cumulative Redeemable Convertible Preferred Stock, $.01 par value per share; 200,000
shares authorized; no shares issued....................................................... $ --
Common stock and additional paid-in capital.................................................. 89,401
Accumulated deficit.......................................................................... (24,644)
Accumulated other comprehensive income (loss)................................................ (19,884)
---------
Total Stockholders' Equity.............................................................. $ 44,873
---------
---------
Total Capitalization.................................................................... $ 633,286
---------
---------
</TABLE>
- ------------------
(1) For a description of long-term debt, see Note 10 to Consolidated Financial
Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data which
have been derived from the Consolidated Financial Statements beginning on page
F-1. The historical financial information gives effect to our formation as if it
had occurred on January 1, 1994 and our financial statements have been prepared
on a basis which retroactively reflects our formation at the beginning of the
periods presented, except that our assumption of the first $204.4 million of
liability relating to pending and previously settled asbestos-related bodily
injury cases and related income tax benefits of $79.7 million have been
reflected as a charge of $124.7 million to stockholder's equity upon our
formation as of January 31, 1994. As of January 1, 1997, G-I Holdings
contributed all of the capital stock of U.S. Intec to BMCA, and U.S. Intec
became BMCA's subsidiary. Accordingly, our historical consolidated financial
statements include U.S. Intec's results of operations from the date of its
acquisition by G-I Holdings (October 20, 1995), including sales of
$21.8 million and $99.0 million for the years ended December 31, 1995 and 1996,
respectively, and net income (loss) of $(0.5) and $1.3 million, respectively.
See Note 1 to Consolidated Financial Statements. The results for the year ended
December 31, 1997 include the results of the Leatherback Industries business
from its date of acquisition (March 14, 1997), including sales of
$30.2 million. The results for the year ended December 31, 1998 include the
results of the Leslie-Locke business from its date of acquisition (June 1,
1998), including sales of $53.3 million. See the summary financial data on page
8 for the details of the assumptions used in preparing the pro forma operating
data.
The pro forma financial information does not project the financial position
or the results of operations for any future period or represent what the
financial position or results of operations would have been if the transactions
described above had been completed at the date indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.............. $593.1 $687.2 $852.0 $944.6 $1,088.0
Operating income(1).... 44.7 45.9 61.4 70.1 46.0
Interest expense....... 13.1 24.8 32.0 42.8 49.7
Income before income
taxes and
extraordinary
losses.............. 27.8 16.5 27.9 42.8 12.2
Income before
extraordinary
losses.............. 16.7 10.1 17.1 26.1 7.6
Net income (loss)...... 16.7 10.1 17.1 26.1 (10.6)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total working
capital............. $ 36.2 $ 54.6 $247.3 $284.8 $220.7
Total assets........... 452.3 559.3 701.6 807.3 847.5
Long-term debt less
current
maturities(2)....... 229.2 310.3 405.7 555.4 588.4
Total stockholders'
equity (deficit).... (28.9) 15.8 143.2 83.0 44.9
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Depreciation........... $ 16.8 $ 20.3 $ 23.9 $ 22.9 $ 26.6
Goodwill
amortization........ 1.1 1.2 1.7 1.9 2.1
Capital expenditures
and
acquisitions........ 54.3 54.1 25.6 77.7 130.3
Cash flows from:
Operating
activities........ 28.5 50.6 53.1 (10.3) 88.0
Investing
activities........ (54.3) (93.5) (64.5) (121.2) (26.4)
Financing
activities........ 53.9 59.8 90.0 19.9 (49.5)
EBITDA(3).............. 58.8 62.8 85.4 110.4 90.5
Ratio of earnings to
fixed
charges(4).......... 2.7x 1.6x 1.8x 1.9x 1.2x
Ratio of EBITDA to
interest
expense(3).......... 4.5x 2.5x 2.7x 2.6x 1.8x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN MILLIONS,
EXCEPT RATIO
DATA)
(UNAUDITED)
<S> <C>
PRO FORMA OPERATING
DATA(5):
Adjusted EBITDA(6)..... $ 92.6
Interest expense....... 47.7
Income before
extraordinary
losses.............. 10.1
Ratio of earnings to
fixed charges(4).... 1.3x
Ratio of Adjusted
EBITDA to interest
expense(6).......... 1.9x
</TABLE>
- ------------------
(1) Operating income for the year ended December 31, 1998 includes
$27.6 million of nonrecurring charges. See Note 5 to Consolidated Financial
Statements.
(2) See "Capitalization" and Note 10 to Consolidated Financial Statements.
(3) EBITDA is calculated as income before income taxes and extraordinary items,
increased by interest expense, depreciation and goodwill amortization. As an
indicator of our operating performance, EBITDA should not be considered as
an alternative to net income or any other measure of performance under
generally accepted accounting principles.
(4) For purposes of these computations, earnings consist of income before income
taxes plus fixed charges and extraordinary items. Fixed charges consist of
interest on indebtedness, including amortization of debt issuance costs,
plus that portion of lease rental expense representative of interest,
estimated to be one-third of lease rental expense.
(5) The net effect of the pro forma adjustments was to increase our pro forma
income before income taxes and extraordinary losses by $4.1 million for the
year 1998. As a result, our pro forma provision for income taxes increased
by $1.5 million for the year 1998, based on an effective marginal income tax
rate of 38.0%.
(6) The Adjusted EBITDA data are being presented because this data relates to
debt covenants under the indentures governing our indebtedness. You should
refer to these indentures for further information. Excluded from the
Adjusted EBITDA calculation is $18.1 million in extraordinary charges, net
of related income tax benefits, related to the purchases of the Deferred
Coupon Notes in July and December 1998. See "Summary Financial Data" for the
details of the calculations of Adjusted EBITDA.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BMCA, an indirect subsidiary of GAF Corporation and G-I Holdings, was
formed in January 1994 to acquire the operating assets and certain liabilities
of GAF Building Materials Corporation, BMCA's parent. See Note 1 to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
1998 Compared With 1997
We recorded a net loss in 1998 of $10.6 million compared with net income of
$26.1 million in 1997. The net loss in 1998 reflected the impact of
$27.6 million of pre-tax nonrecurring charges ($17.1 million after-tax impact)
and after-tax extraordinary charges of $18.1 million. Excluding the effect of
these charges, our results reflected higher operating and other income,
partially offset by increased interest expense.
Net sales for 1998 were $1.088 billion, a 15.2% increase over net sales for
1997 of $944.6 million, principally due to increased sales in the residential
roofing product line and the acquisition of the Leslie-Locke business in June
1998 (see Note 4 to Consolidated Financial Statements), partially offset by
lower sales in the commercial roofing product line. The increase in residential
sales resulted from higher unit volumes and average selling prices, while the
commercial roofing product line experienced declines in both unit volumes and
average selling prices.
We recorded pre-tax nonrecurring charges in 1998 aggregating
$27.6 million, of which $20.0 million related to the settlement of a national
class action lawsuit involving asphalt shingles manufactured between January 1,
1973 and December 31, 1997. Under the terms of the September 1998 settlement,
which has been granted final approval by the court after a fairness hearing, we
will provide property owners whose GAF shingles were manufactured during this
period and which suffer certain damages during the term of their original
warranty period, and who file a qualifying claim, with an opportunity to receive
certain limited benefits beyond those already provided in their existing
warranty. These limited benefits consist of the right of an eligible claimant to
receive replacement materials and, in some cases, installment labor, prorated
over the term of the original warranty period. An eligible claimant has the
option to receive these limited benefits in cash, materials or a combination of
both. The settlement agreement does not include provisions for the creation of a
settlement fund. The settlement resolves a class action filed against GAF
Building Materials Corporation in Mobile County, Alabama that alleged that
certain GAF shingles were defective and sought unspecified damages. Several
other class action lawsuits involving similar allegations had been brought
against GAF Building Materials Corporation in 1996 and 1997 and were stayed
pending final approval of the Mobile County, Alabama class action. We expect
that these other class actions will be dismissed in light of the final approval
of the settlement agreement in the Mobile County, Alabama action. We agreed to
the settlement to avoid the expense required to defend these lawsuits.
In July 1998, we recorded a pre-tax nonrecurring charge of $7.6 million
related to a grant to our President and Chief Executive Officer of 30,000 shares
of our restricted common stock and related cash payments to be made over a
specified period of time (substantially all of which is earned) in connection
with the termination by an affiliate of preferred stock options and stock
appreciation rights held by this officer.
Operating income, before the impact of the nonrecurring charges, was
$73.5 million for 1998, a 4.9% increase over the $70.1 million recorded in 1997.
This increase in operating income was primarily attributable to improved gross
profit margins due to increased plant capacity utilization and the inclusion of
the Leslie-Locke business since its acquisition in June 1998. Partially
offsetting these improvements were higher distribution costs due to rail carrier
service problems in the first nine months of 1998, and higher selling, general
and administrative expenses resulting from broader marketing efforts.
Interest expense increased from $42.8 million in 1997 to $49.7 million in
1998, primarily due to higher debt levels, partially offset by lower average
interest rates. The lower average interest rates resulted from the refinancing
of $279.7 million in aggregate principal amount at maturity of our Deferred
Coupon Notes with substantially all of the net proceeds from the issuances of
the 2005 Notes and the old notes on July 17 and December 3, 1998, respectively.
See the discussion below under Liquidity and Financial Condition. In connection
with these transactions, we recorded after-tax extraordinary losses of
$18.1 million, related to premiums paid to purchase the Deferred Coupon Notes.
Other income, net, was $15.9 million in 1998 compared with $15.5 million in
1997, with the improvement due primarily to the absence of a $3.0 million
provision recorded in 1997 for estimated
25
<PAGE>
obligations related to product warranty claims for a discontinued product, and
lower other miscellaneous expenses, partially offset by $4.2 million lower
investment income.
1997 Compared With 1996
We recorded net income in 1997 of $26.1 million compared with net income of
$17.1 million in 1996. The 53.0% increase in net income was attributable to
higher operating and other income, net, partially offset by higher interest
expense.
Net sales for 1997 increased $92.7 million, or 10.9%, to $944.6 million
compared with $852.0 million in 1996. The sales growth reflected increased unit
volumes of both residential and commercial roofing products as well as the sales
of the Leatherback Industries business of $30.2 million, which we acquired in
March 1997.
Gross profit margin increased to 27.3% in 1997 compared with 27.0% in 1996,
resulting primarily from lower manufacturing costs and improved product mix.
Selling, general and administrative expenses increased 11.4% to $185.7 million
in 1997 from $166.7 million in 1996, primarily reflecting increased costs of
distribution. Selling, general and administrative expenses as a percentage of
net sales increased slightly from 19.6% in 1996 to 19.7% in 1997.
Operating income in 1997 was $70.1 million, an increase of $8.7 million, or
14.2%, compared with $61.4 million in 1996. We attribute the increase in
operating income to the higher sales levels and improved margins.
Interest expense was $42.8 million in 1997 compared with $32.0 million in
1996, due to higher debt levels, primarily resulting from the issuance in
December 1996 of $100 million in aggregate principal amount of the 2006 Notes
and the issuance in October 1997 of $100 million in aggregate principal amount
of the 2007 Notes.
Other income, net, was $15.5 million in 1997 compared with other expense,
net, of $1.5 million in 1996. This improvement was due principally to
$20.0 million higher investment income, partially offset by a $3.0 million
provision for estimated obligations related to product warranty claims for a
discontinued product.
LIQUIDITY AND FINANCIAL CONDITION
Net cash inflow during 1998 was $61.6 million before financing activities,
and included $88.0 million of cash generated from operations, the reinvestment
of $71.1 million for capital programs, acquisitions of $59.2 million, including
the acquisition of the Leslie-Locke business for $43.5 million, proceeds of
$29.0 million from the sale of our perlite insulation manufacturing assets, and
the generation of $74.9 million from net sales of available-for-sale and
held-to-maturity securities.
Cash invested in additional working capital totaled $27.9 million during
1998, primarily reflecting increases in accounts payable and accrued liabilities
of $40.4 million, partially offset by a $10.9 million increase in inventories
and a $4.0 million increase in receivables. Accrued liabilities, including the
reserve for product warranty claims, increased by $40.7 million to
$80.1 million as a result of additional accrued interest payable, increases in
accrued distribution costs and other plant operating accruals and due to the
$8.6 million short-term portion of the $27.6 million of nonrecurring charges.
Cash from operating activities also reflected a $42.2 million cash inflow from
related party transactions as a result of repayments of advances which we made
in 1997, a $64.3 million cash outflow for net purchases of trading securities
and $17.4 million of cash inflow from an increase in other liabilities and other
operating activities, mainly reflecting $19.0 million of the nonrecurring
charges and $6.6 million of net unrealized losses on trading securities and
other short-term investments.
Net cash used in financing activities totaled $49.5 million in 1998. We
generated $303.5 million from the issuances in 1998 of the 2005 Notes and the
old notes and $6.2 million from the repayment of a loan by a related party.
Offsetting these cash inflows was $287.9 million of repayments of long-term
debt, principally the repurchase of $279.7 million in aggregate principal amount
at maturity of the Deferred Coupon Notes, a $34.0 million paydown of borrowings
under our bank credit facility, a $26.9 million paydown of short-term
borrowings, and $6.1 million of financing fees and expenses.
As a result of the foregoing factors, cash and cash equivalents increased
by $12.1 million during 1998 to $25.0 million, excluding $180.6 million of
trading, available-for-sale and held-to-maturity securities and other short-term
investments.
26
<PAGE>
In December 1998, we issued $155 million in aggregate principal amount of
the old notes and used substantially all of the net proceeds from this issuance
to purchase, and subsequently cancel, $147.1 million in aggregate principal
amount at maturity of the Deferred Coupon Notes.
In July 1998, we issued $150 million in aggregate principal amount of the
2005 Notes and used substantially all of the net proceeds from this issuance to
purchase, and subsequently cancel, $132.6 million in aggregate principal amount
at maturity of the Deferred Coupon Notes.
Our bank credit facilities were replaced in August 1997 with a new
three-year, $75 million facility. We frequently refer to our revolving credit
facility in this prospectus as the "Credit Agreement." The terms of the Credit
Agreement provide for a $75 million unsecured revolving credit facility, the
full amount of which is available for letters of credit, provided that total
borrowings and outstanding letters of credit may not exceed $75 million in the
aggregate. As of December 31, 1998, no borrowings were outstanding under the
Credit Agreement and $29.9 million of letters of credit were outstanding. Under
the terms of the Credit Agreement, we are subject to certain financial
covenants, including interest coverage and leverage ratios, and dividends and
other restricted payments are limited. We were in compliance with these
covenants as of December 31, 1998.
Our additional borrowings are subject to certain covenants contained in the
indentures relating to our other outstanding senior notes, the Indenture and the
Credit Agreement. We are currently limited by certain of these covenants from
incurring additional debt, except under certain limited circumstances including
under the Credit Agreement and the refinancing of existing debt. We frequently
refer to the Deferred Coupon Notes, the 2005 Notes, the 2006 Notes and the 2007
Notes in this prospectus as the "Other Senior Notes."
Our objectives in utilizing interest rate swap agreements are to lower
funding costs, diversify sources of funding and manage interest rate exposure.
In June 1998, we terminated our outstanding swaps related to our Deferred Coupon
Notes, with an aggregate ending notional principal amount of $60.0 million,
resulting in gains of $0.7 million. The gains have been deferred and are being
amortized as a reduction of interest expense over the remaining original life of
the swaps. By utilizing swaps, we reduced our interest expense by $2.2, $2.0,
and $1.9 million in 1996, 1997 and 1998, respectively. See Note 10 to
Consolidated Financial Statements.
See Note 10 to Consolidated Financial Statements for further information
regarding our debt instruments.
Upon its formation on January 31, 1994, BMCA assumed the first
$204.4 million of GAF Building Materials Corporation's liabilities relating to
then-pending cases and previously settled asbestos-related bodily injury cases,
all of which were paid as of March 30, 1997. See "Business--Legal Proceedings"
for further information regarding asbestos-related matters. At December 31,
1998, we had total outstanding consolidated indebtedness of $592.7 million, of
which $4.3 million matures prior to December 31, 1999, and stockholders' equity
of $44.9 million. See the risk factor on page 11 regarding substantial leverage.
We anticipate funding those obligations from our cash and investments,
operations and/or borrowings, which may include borrowings from affiliates.
In March 1993, we sold our trade accounts receivable to a trust, without
recourse, under an agreement which provided for a maximum of $75 million in cash
to be made available to us based on eligible receivables outstanding from time
to time. In November 1996, we repurchased the receivables sold under the 1993
agreement and sold them to a special purpose subsidiary, BMCA Receivables
Corporation, without recourse, which in turn sold them to a new trust, without
recourse, under new agreements. The new agreements provide for a maximum of
$115 million in cash to be made available to us based on eligible receivables
outstanding from time to time. This facility expires in December 2001.
BMCA makes loans to, and borrows from, G-I Holdings and its subsidiaries at
prevailing market rates. As of December 31, 1998, G-I Holdings owed no loans to
BMCA and BMCA owed no loans to affiliates. In addition, BMCA makes non-interest
bearing advances to affiliates, of which $1.5 million were outstanding at
December 31, 1998.
Our parent corporations are essentially holding companies without
independent businesses or operations. As a result, they are presently dependent
upon the cash flow of their subsidiaries, principally our company, in order to
satisfy their obligations, including asbestos-related claims and certain
potential tax liabilities. These potential tax liabilities include tax
liabilities relating to the surfactants partnership, which operates, among other
businesses, GAF Fiberglass' former surfactants chemicals business. Our parent
corporations are GAF Corporation, G-I Holdings, G Industries Corp. and GAF
Building Materials Corporation, and, except for our company, the only
significant asset of our parent corporations is GAF Fiberglass. GAF Corporation
has
27
<PAGE>
advised us that it estimates that approximately $75.0 million, net of estimated
insurance recoveries of approximately $57.0 million, is expected to be payable
during the twelve months ended December 31, 1999. GAF Corporation has advised us
that it expects to obtain funds to satisfy its obligations from, among other
things, dividends and loans from subsidiaries, principally our company, and from
payments pursuant to the tax sharing agreement between GAF Corporation and our
company. The Indenture and the indentures relating to the Other Senior Notes and
the Credit Agreement contain restrictions on the amount of dividends, loans and
other restricted payments described in those agreements, which may be paid by
us. As of December 31, 1998, after giving effect to the most restrictive of the
aforementioned restrictions, we could have paid dividends and other Restricted
Payments, as defined in the Indenture, of up to $79.4 million. We do not believe
that the dependence of our parent corporations on the cash flows of their
subsidiaries should have a material adverse effect on our operations, liquidity
or capital resources. For further information, see Notes 3, 6, 10, 14 and 15 to
Consolidated Financial Statements and the risk factor on page 12 regarding our
parent corporations' dependence on our cash flows.
We use capital resources to maintain existing facilities, expand our
operations and make acquisitions. In 1999, we expect to build a new fiberglass
roofing mat manufacturing facility in Shafter, California and a new residential
roofing shingle manufacturing facility in Michigan City, Indiana. Funding for
our capital program is expected to be generated from results of operations,
additional borrowings and leasing transactions.
We do not believe that inflation has had an effect on our results of
operations during the past three years. However, we cannot assure you that our
business will not be affected by inflation in the future.
Market-Sensitive Instruments and Risk Management
Our investment strategy is to seek returns in excess of money market rates
on our available cash while minimizing market risks. We cannot assure you that
we will be successful in implementing this strategy. We invest primarily in
international and domestic arbitrage and securities of companies involved in
acquisition or reorganization transactions, including at times, common stock
short positions which are offsets against long positions in securities which are
expected, under certain circumstances, to be exchanged or converted into the
short positions. With respect to our equity positions, we are exposed to the
risk of market loss. See Note 2 to Consolidated Financial Statements.
We enter into financial instruments in the ordinary course of business in
order to manage our exposure to market fluctuations in interest rates and on our
short-term investments. The financial instruments we employ to reduce market
risk include swaps, futures, and other hedging instruments. The financial
instruments are primarily used to hedge our debt and short-term investment
portfolios. The counterparties to these financial instruments are major
financial institutions with high credit standings. The amounts subject to credit
risk are generally limited to the amounts, if any, by which the counterparties'
obligations exceed our obligations. We control credit risk through credit
approvals, limits and monitoring procedures. We do not anticipate nonperformance
by counterparties to these instruments.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
----------------- -----------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(MILLIONS)
<S> <C> <C> <C> <C>
Equity-related financial instruments.......................................... $ -- $ -- $178.4 $ 0
Interest rate financial instruments........................................... $ 60.0 $3.1 $ -- $ --
</TABLE>
All of the financial instruments in the above table have a maturity of less
than one year.
In connection with the Deferred Coupon Notes, we entered into fixed to
floating interest rate swaps in order to balance out our mix of fixed and
floating rate debt. As a result of the swaps, the effective interest cost to us
on the portion of the Deferred Coupon Notes covered by the swaps varied at a
fixed spread over LIBOR. The swaps had a notional principal amount of
$60 million and a final maturity of July 1, 1999, all of which were terminated
as of June 28, 1998.
As of December 31, 1998, equity-related financial instruments employed by
us to reduce market risk include long contracts valued at $35.2 million and
short contracts valued at $143.2 million, which are marked-to-market each month,
with unrealized gains and losses included in the results of operations. As such,
there is no economic cost at December 31, 1998 to terminate these instruments
and therefore the fair market value is zero.
28
<PAGE>
YEAR 2000 COMPLIANCE
We have implemented a Year 2000 program:
(1) to address our Year 2000 issues, i.e., the inability by some IT and
non-IT equipment, including embedded technology, to accurately read and process
certain dates in the Year 2000 and afterwards,
(2) to investigate the Year 2000 issues of third parties significant to our
business, and
(3) to establish contingency plans where appropriate.
We have completed an internal study and believe we have remediated
substantially all of our core systems. We also have evaluated and believe we
have remediated substantially all of our personal computers, mainframe computers
and our computer network. We believe that the core IT systems remediation has
corrected Year 2000 programming issues in all critical areas of our business.
In addition, we are working with outside consultants to certify the
compliance of our core systems with externally developed and published
certification standards. We expect to complete this certification by the third
quarter of 1999. Our independent third party consultants have inventoried and
evaluated substantially all of our non-IT equipment, i.e., voice mail,
telephone, fire and security systems and numerically controlled production
machinery and computer-based production equipment, and we are in the process of
remediating and testing this equipment. We expect to complete these activities
by the second quarter of 1999.
We have requested compliance information in the form of direct
questionnaires from vendors significant to our business and are planning to
solicit compliance information from our significant customers. We expect to
complete this solicitation by June 1999. When appropriate, a lack of a response
to these questionnaires is being followed by additional correspondence and
finally direct contact. We have received compliance information from
substantially all of our key vendors. Each of these vendors has advised us that
they are or expect to be ready for the year 2000 by the end of 1999. We are
evaluating these responses and are requesting more information where appropriate
to help us formulate contingency plans, including the identification of
secondary suppliers, to minimize the impact of any Year 2000 related issues that
may develop. We expect this phase of evaluation to be completed by June 1999.
We do not believe the costs of our Year 2000 program will be material to
our financial position or results of operations. We have incurred outside costs
of approximately $650,000 to date, and we anticipate that additional outside
costs should approximate no more than $1 million in the aggregate. We will
charge these costs, as incurred, against results of operations.
We believe we have taken reasonable steps in developing our Year 2000
program. Notwithstanding these actions, we cannot assure you that all of our
Year 2000 issues or those of our key suppliers, service providers or customers
will be resolved or addressed satisfactorily before the year 2000 commences. We
believe that the most reasonably likely "worst case scenario" resulting from
Year 2000 issues could be the failure by our key suppliers, service providers,
customers and other third parties to address their Year 2000 issues. If this
were to occur, our usual channels of supply and distribution could be disrupted
and we could experience a material adverse impact on our business, results of
operations or financial position. See the risk factor on page 13 regarding Year
2000 issues.
29
<PAGE>
BUSINESS
BMCA, incorporated under the laws of Delaware in 1994, is a 97%-owned
subsidiary of GAF Building Materials Corporation. BMCA acquired the operating
assets and certain liabilities of GAF Building Materials Corporation in 1994.
GAF Building Materials Corporation is a wholly-owned subsidiary of G Industries
Corp., which is a holding company that also owns all of the capital stock of GAF
Fiberglass. G Industries is a wholly-owned subsidiary of G-I Holdings Inc., a
wholly-owned subsidiary of GAF Corporation. Samuel J. Heyman, Chairman of the
Board of Directors and Chief Executive Officer of GAF Corporation, G-I Holdings
and GAF Fiberglass, Chairman of the Board of Directors of BMCA and Chief
Executive Officer of G Industries and GAF Building Materials Corporation,
beneficially owns (as defined in Rule 13d-3 of the Exchange Act) approximately
97% of GAF Corporation. BMCA does business under the name "GAF Materials
Corporation." Effective January 1, 1999, BMCA transferred all of its investment
assets and intellectual property assets to Building Materials Investment
Corporation, a newly-formed, wholly-owned subsidiary of BMCA. In addition, BMCA
transferred all of its manufacturing assets, other than those located in Texas,
to Building Materials Manufacturing Corporation, another newly-formed,
wholly-owned subsidiary of BMCA.
We are a leading national manufacturer of a broad line of asphalt roofing
products and accessories for the residential and commercial roofing markets. We
also manufacture specialty building products and accessories for the
professional and do-it-yourself remodeling and residental construction
industries. Our products are produced at 25 manufacturing facilities. We believe
that we hold the number one or two market position in each of the asphalt
product lines in which we compete (based on unit sales), including leadership of
the fast growing, premium laminated residential shingles and modified bitumen
commercial roofing markets. Based on brand awareness studies, our
Timberline(Registered) product is the leading brand in residential roofing, and
our Ruberoid(Registered) product is the leading brand in the built-up roofing
and modified bitumen commercial roofing markets.
Our 25 manufacturing facilities consist of 15 roofing manufacturing
facilities, five roofing accessory plants, one glass mat manufacturing plant,
one liquid roofing membrane and adhesive plant, one fiber-cement shingle and
siding plant, one attic ventilation and air distribution products plant and one
iron security door and fencing products plant. During the five-year period ended
December 31, 1998, our net sales have increased at an average annual compound
rate of approximately 14.2%. We believe that our growth is primarily
attributable to
o improvement in our product mix, driven by a business strategy which
emphasizes our higher-margin products;
o our low cost manufacturing operations;
o substantial capital spending programs for new property, plant and
equipment that have enabled us to expand capacity and reduce
manufacturing costs;
o the strength of our national distribution system; and
o broadening our product lines through niche-type acquisitions.
Effective as of January 31, 1994, GAF Building Materials Corporation
transferred to BMCA all of its business and assets, other than three closed
manufacturing facilities, certain deferred tax assets and receivables from
affiliates. BMCA contractually assumed all of GAF Building Materials
Corporation's liabilities, except
(1) all of GAF Building Materials Corporation's environmental liabilities,
other than environmental liabilities relating to existing plant sites and the
business of BMCA as then conducted,
(2) all of GAF Building Materials Corporation's tax liabilities, other than
tax liabilities arising from our operations or business, and
(3) all of GAF Building Materials Corporation's asbestos-related
liabilities, other than the first $204.4 million of those liabilities, whether
for indemnity or defense, relating to then-pending asbestos-related bodily
injury cases and previously settled asbestos-related bodily injury cases which
BMCA contractually assumed and agreed to pay. All of BMCA's assumed
asbestos-related liabilities were satisfied as of March 30, 1997. G-I Holdings
and GAF Building Materials Corporation have agreed, jointly and severally, to
indemnify BMCA from liabilities not assumed by the BMCA, including
asbestos-related and environmental liabilities not expressly assumed by BMCA and
for all tax liabilities of the GAF consolidated tax group other
30
<PAGE>
than tax liabilities arising from the operations or business of BMCA. See
Note 3 to Consolidated Financial Statements, the risk factor relating to our
parent corporations' dependence on our cash flows on page 12 and "Certain
Relationships--Tax Sharing Agreement."
G-I Holdings acquired U.S. Intec in October 1995. On January 1, 1997, GAF
Corporation, our indirect parent, completed a series of transactions involving
its subsidiaries in which, among other things:
(1) we transferred our glass fiber manufacturing facility located in
Nashville, Tennessee and certain related assets and liabilities to GAF
Fiberglass Corporation, a subsidiary of GAF Corporation, and
(2) U.S. Intec, an indirect subsidiary of GAF Corporation, became one of
our subsidiaries.
Unless stated otherwise, our financial and statistical data presented in this
prospectus reflect the results of U.S. Intec from and after October 20, 1995,
the date on which G-I Holdings acquired U.S. Intec. For pro forma information,
see "Selected Financial Data."
INDUSTRY OVERVIEW
The United States residential roofing industry comprises manufacturers of
asphalt, tile, wood, slate and metal roofing materials, with asphalt roofing
representing approximately 93% of industry residential roofing unit sales in
1997. Residential asphalt roofing materials consist of strip shingles and higher
margin, premium laminated shingles, which represented approximately 64% and 36%,
respectively, of industry asphalt roofing unit sales in 1998. While total
asphalt residential unit sales grew during the past five years (from January 1,
1994 through December 31, 1998) at an average annual compound rate of
approximately 1%, unit sales of laminated shingles grew at an average annual
compound rate of approximately 12%. During the same period, sales of strip
shingles declined at a compound annual rate of approximately 3%. While we
believe that growth of laminated shingle sales will continue to exceed the
growth of the overall residential asphalt roofing market, we have experienced
increased competition in this product line.
The United States commercial roofing industry comprises manufacturers of
asphalt built-up roofing, modified bitumen, thermoset and thermoplastic
single-ply products and other roofing products. Approximately 75% of commercial
roofing industry unit sales utilize asphalt built-up roofing, modified bitumen
products and thermoset and thermoplastic single-ply products, all of which we
manufacture or market.
Over the past five years, approximately 80% of industry sales, as well as
our sales, of both residential and commercial roofing products were for
re-roofing, as opposed to new construction. As a result, our exposure and the
industry's exposure to cyclical downturns in the new construction market is
substantially lower than for other building material manufacturers which
produce, for example, gypsum, wood and cement. We expect that demand for
re-roofing will continue to increase as the existing housing stock ages and as
homeowners upgrade from standard strip roofing shingles to premium laminated
shingles for enhanced aesthetics and durability.
RESIDENTIAL ROOFING
We are a leading manufacturer of a complete line of premium residential
roofing products. Residential roofing product sales represented approximately
65% of our net sales in 1998. We have improved our sales mix of residential
roofing products in recent years by increasing our emphasis on laminated
products which generally are sold at higher prices with more attractive profit
margins than our standard strip shingle products. We believe that we are the
largest manufacturer of laminated residential roofing shingles and the second
largest manufacturer of strip shingles in the United States.
Our two principal lines of roofing shingles are the Timberline(Registered)
series and the Sovereign(Registered) series. We also produce certain specialty
shingles principally for regional markets.
The Timberline(Registered) Series. The Timberline(Registered) series
offers a premium laminated product line that adds dramatic shadow lines and
substantially improves the appearance of a roof. The series includes:
o the Timberline(Registered) 25 shingle, a mid-weight laminated shingle
which serves as an economic trade-up for consumers, with a 25-year limited
warranty;
o the Timberline(Registered) shingle, with a 30-year limited warranty,
offering a natural random wood shake appearance with superior fire resistance
and durability;
31
<PAGE>
o and the Timberline Ultra(Registered) shingle, with a 40-year limited
warranty, a super heavyweight laminated shingle with the same design features as
the Timberline(Registered) 25 shingle, together with added durability.
The Sovereign(Registered) Series. The Sovereign(Registered) series
includes:
o the standard 3-tab Sentinel(Registered) shingle with a 20-year limited
warranty;
o the Royal Sovereign(Registered) shingle, a heavier 3-tab shingle with a
25-year limited warranty, designed to capitalize on the "middle market" for
quality shingles; and
o the Marquis(Registered) Weathermax(Trademark) shingle, a superior
performing heavyweight 3-tab shingle with a 30-year limited warranty.
Specialty Shingles. Our specialty asphalt shingles include:
o Slateline(Registered) and Slateline(Registered) Color Contrast(Trademark)
shingles, offering the appearance of slate, labor savings in installation
because of their larger size and a 30-year limited warranty;
o the Grand Sequoia(Registered) shingle, a premier architectural shingle
with a 40-year limited warranty; and
o the Country Mansion(Trademark) shingle, a distinctive high end
architectural shingle with a limited lifetime warranty.
Weather Stopper(Trademark) Roofing System. In addition to shingles, we
supply all the components necessary to install a complete roofing system. Our
Weather Stopper(Trademark) Roofing System begins with Weather Watch(Registered)
and Stormguard(Trademark) waterproof underlayments for eaves, valleys and
flashings to prevent water seepage between the roof deck and the shingles caused
by ice build-ups and wind-driven rains. Our Weather Stopper(Trademark) Roofing
System also includes Shingle-Mate(Registered) glass reinforced underlayment,
Timbertex(Registered), TimberRidge(Trademark), and Ridgetex(Trademark) Hip and
Ridge shingles, which are significantly thicker and larger than standard hip and
ridge shingles and provide dramatic accents to the slopes and planes of a roof
and the Cobra(Registered) Ridge Vent which provides attic ventilation.
COMMERCIAL ROOFING
We manufacture a full line of modified bitumen and asphalt built-up roofing
products, liquid applied membrane systems and roofing accessories for use in the
application of commercial roofing systems. We also market thermoset and
thermoplastic single-ply products. Commercial roofing represented approximately
30% of our net sales in 1998. We believe that we are the second largest
manufacturer of asphalt built-up roofing products and the largest manufacturer
of modified bitumen products in the United States.
We manufacture glass membranes under the trademarks GAFGLAS(Registered) and
Permaglas(Registered), which are made from asphalt impregnated glass fiber mat
for use as a component in asphalt built-up roofing systems. Most of our
GAFGLAS(Registered)and Permaglas(Registered) products are assembled on the roof
by applying successive layers of roofing membrane with asphalt and topped, in
some applications, with gravel. Thermal insulation may be applied beneath the
membrane. We also manufacture base sheets, flashings and other roofing
accessories for use in these systems, the TOPCOAT(Registered) roofing system, a
liquid-applied membrane system designed to protect and waterproof existing metal
roofing, and roof maintenance products. In addition, we market perlite roofing
insulation products, which consist of low thermal insulation that is installed
as part of a commercial roofing application below the roofing membrane,
isocyanurate foam as roofing insulation, packaged asphalt and accessories such
as vent stacks, roof insulation fasteners, cements and coating.
We sell modified bitumen products under the Ruberoid(Registered) trademark,
and U.S. Intec sells these products under the Brai(Registered) trademark.
Modified bitumen products are used primarily in re-roofing applications or in
combination with glass membranes in GAF CompositeRoof(Trademark) systems. These
products consist of a roofing membrane utilizing polymer-modified asphalt, which
strengthens and increases flexibility and is reinforced with a polyester
non-woven mat or a glass mat. Modified bitumen systems provide high strength
characteristics, such as weatherability, water resistance, and labor cost
savings due to ease of application.
SPECIALTY BUILDING PRODUCTS AND ACCESSORIES
In June 1998, we acquired substantially all of the assets of Leslie-Locke,
Inc. for approximately $43.5 million. As a result of this acquisition, we
manufacture and market a variety of specialty building products and accessories
for the professional and do-it-yourself remodeling and residential construction
industries.
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<PAGE>
Specialty building products and accessories represented approximately 5% of our
net sales in 1998. These products primarily consist of residential attic
ventilation systems, metal and fiberglass air distribution products for the HVAC
industry and ornamental iron security products, including doors, windows and
fencing.
SUBSTANTIAL CAPITAL PROGRAMS
We believe that our plants are among the most modern in the industry. Since
1985 and through December 31, 1998, we have invested almost $360 million in new
property, plant and equipment, principally in order to increase capacity and
implement process improvements to reduce manufacturing costs. This capital
program included the installation of efficient in-line lamination equipment in a
number of our roofing plants, as well as the modernization of our glass mat
facilities. We have reduced our manufacturing costs as a result of this capital
program, along with the rigorous application of our process and quality control
standards.
NEW PRODUCT DEVELOPMENT
We believe that we have been among the most innovative industry leaders in
terms of the introduction of new products, having been the first to develop the
three-dimensional laminated roofing shingle, Timberline(Registered), which
created an entire new product line within the asphalt roofing industry. Our new
products introduced in just the last five years include:
o the Timberline(Registered) 25 and Timberline Ultra(Registered) shingles,
which offer a wood shake appearance, enhanced visual depth and contrast
simulating shadows;
o the Marquis(Registered) shingle, a heavyweight three-tab shingle designed
for Northern markets which offers greater flexibility and added durability in
cold temperatures;
o the Grand Sequoia(Registered) shingle, a premier architectural shingle;
o the Country Mansion(Trademark) shingle, a distinctive high end
architectural shingle; and
o Ruberoid(Registered) 20/30, a polymer modified bitumen roofing system
which utilizes fiberglass reinforcements coated with modified asphalt to form a
durable high performance two-ply roofing membrane and which requires no
additional treatment or coating to qualify for an Underwriters Laboratory
Class A rating.
In 1995, we introduced GAF CompositeRoof(Trademark), a new commercial
roofing product that combines the tensile strength of built-up roofing with the
flexibility and superior elongation of modified bitumen membranes. In 1997, we
introduced Flexply(Trademark) 6, an enhanced performing premium built-up roofing
felt, and Stratavent(Registered), a premium venting base sheet used in built-up
roofing systems.
ACQUISITIONS
Our acquisition strategy is focused on niche-type acquisitions, designed to
either complement existing product lines, further the geographic reach of our
business or increase our market share. We are primarily interested in acquiring
businesses which can benefit from our strong national distribution network,
manufacturing technology and marketing expertise. Our recent acquisitions
include:
o substantially all of the assets of Leslie-Locke, a manufacturer and
marketer of specialty building products and accessories for the professional and
do-it-yourself remodeling and residential construction industries;
o the assets of the Leatherback Industries division of Hollinee
Corporation, which is engaged in the manufacture and sale of asphalt-saturated
roofing felts and other felt and construction paper products;
o the assets of Major Group, Incorporated, the manufacturer of the
TOPCOAT(Registered) Roofing System, a liquid-applied polymer membrane system
designed to protect and waterproof existing metal roofing; and
o U.S. Intec, a leading national manufacturer of commercial roofing
products.
MARKETING AND SALES
We have one of the industry's largest sales forces. A staff of technical
professionals who work directly with architects, consultants, contractors and
building owners provide support to the sales force. We market our roofing and
specialty building products and accessories through our own sales force of
approximately 220 experienced, full-time employees and independent sales
representatives operating from six regional sales offices located across the
United States. A major portion of our roofing product sales are to wholesale
distributors who resell our products to roofing contractors and retailers. We
believe that the wholesale
33
<PAGE>
distribution channel offers the most attractive margins of all roofing market
distribution channels and represents the principal distribution channel for
professionally installed asphalt roofing products. We believe that our
nationwide coverage has contributed to certain of our roofing products being
among the most recognized and requested brands in the industry.
In September 1997, we launched our Customer Advantage(Trademark) Program to
establish a nationwide network of MasterElite(Trademark) contractors and
Authorized Installers. This program offers marketing and support services to
residential roofing contractors. We view the Master Elite(Trademark) contractors
and Authorized Installers as an effective extension of our sales force which
takes our products directly to the homeowner.
No single customer accounted for 10% or more of our net sales in 1998,
except for American Builders & Contractors Supply Company, Inc., which accounted
for approximately 11% of our 1998 net sales.
RAW MATERIALS
The major raw materials required for the manufacture of our roofing
products are asphalt, mineral stabilizer, glass fiber, glass fiber mat,
polyester mat and granules. Asphalt and mineral stabilizer are available from a
large number of suppliers. We currently have contracts with several of these
suppliers and others are available as substitutes. Prices of most raw materials
have been relatively stable, rising moderately with general industrial prices,
while the price of asphalt tends to move in step with the price of crude oil.
The major raw materials required for the manufacture of our specialty
building products and accessories are steel tubes, sheet metal products,
aluminum, motors and cartons. These raw materials, other than motors, are
commodity-type products, the pricing for which is driven by supply and demand.
Prices of other raw materials used in the manufacture of specialty building
products and accessories are more closely tied to movements in inflation rates.
Substantially all of the motors used in our ventilation products are purchased
from an overseas supplier. All of these raw materials, including motors, are
available from a large number of suppliers.
Five of our roofing plants have easy access to deep water ports thereby
permitting delivery of asphalt by ship, the most economical means of transport.
Our Chester, South Carolina plant manufactures glass fiber mat substrate. We
purchase all of our requirements for colored roofing granules from an affiliate,
International Specialty Products Inc., under a requirements contract, except for
the requirements of our California and Oregon roofing plants and a portion of
the requirements of our Indiana roofing plant, which are supplied by a third
party. This contract is subject to annual renewal unless terminated by either
party to the agreement. We purchase a significant portion of our glass fiber
requirements from an affiliate, GAF Fiberglass Corporation, a subsidiary of GAF
Corporation, under a supply agreement.
SEASONAL VARIATIONS AND WORKING CAPITAL
Sales of roofing and specialty building products and accessories in the
northern regions of the United States generally decline during the winter months
due to adverse weather conditions. Generally, our inventory practice includes
increasing inventory levels in the first and the second quarter in order to meet
peak season demand (June through November).
WARRANTY CLAIMS
We provide certain limited warranties covering most of our residential
roofing products for periods generally ranging from 20 to 40 years. Although
terms of warranties vary, we believe that our warranties generally are
consistent with those offered by our competitors. We also offer limited
warranties and guarantees of varying duration on our commercial roofing products
and limited warranties covering most of our specialty building products and
accessories for periods generally ranging from 5 to 10 years. From time to time,
we review the reserves established for estimated probable future warranty
claims.
COMPETITION
The roofing products industry is highly competitive and includes a number
of national competitors. These competitors in the residential roofing and
accessories markets are Owens-Corning, Tamko, Elcor and Celotex, and in the
commercial roofing market are Johns Manville, Celotex, Firestone and Carlisle.
In addition, there are numerous regional competitors.
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<PAGE>
Competition is based largely upon products and service quality,
distribution capability, price and credit terms. We believe that we are well
positioned in the marketplace as a result of our broad product lines in both the
residential and commercial markets, consistently high product quality, strong
sales force and national distribution capabilities. As a result of the growth in
demand for premium laminated shingles, a number of roofing manufacturers,
including our company, have increased their laminated shingle production
capacity in recent years. We have experienced increased competition in this area
due to these factors.
Our specialty roofing products and accessories business is highly
competitive with numerous competitors due to the breadth of the product lines we
market. Major competitors include Certainteed, Solar Group, ATCO Rubber Products
and Standex Air Distribution Products.
RESEARCH AND DEVELOPMENT
We primarily focus our research and development activities on the
development of new products, process improvements and the testing of alternative
raw materials and supplies. Our research and development activities, dedicated
to residential, commercial and fiberglass products, are located at technical
centers at Wayne, New Jersey and Nashville, Tennessee. Our research and
development expenditures were approximately $4.5 million, $5.4 million and
$6.0 million in 1996, 1997 and 1998, respectively.
PROPERTIES
Our corporate headquarters and principal research and development
laboratories are located at a 100-acre campus-like office and research park
owned by a subsidiary of ISP, at 1361 Alps Road, Wayne, New Jersey 07470. We
occupy our headquarters pursuant to our management agreement with ISP. See
"Certain Relationships--Management Agreements."
We own or lease the principal real properties described below. Unless
otherwise indicated, the properties are owned in fee. In addition to the
principal facilities listed below, we maintain sales offices and warehouses,
substantially all of which are in leased premises under relatively short-term
leases.
<TABLE>
<CAPTION>
LOCATION FACILITY
- ------------------------------------------------ ------------------------------------------------------
<S> <C>
Alabama
Mobile........................................ Plant, Warehouses*
California
Compton....................................... Plant*, Warehouse*
Fontana....................................... Plant, Sales Office
Hollister..................................... Plant, Plant*
Shafter....................................... Plant (under construction)
Stockton...................................... Plant, Plant, Warehouse*
Florida
Tampa......................................... Plant, Sales Office
Georgia
Atlanta....................................... Sales Office*
Monroe........................................ Plant, Warehouse*
Savannah...................................... Plant, Sales Office
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
LOCATION FACILITY
- ------------------------------------------------ ------------------------------------------------------
Indiana
<S> <C>
Mount Vernon.................................. Plant, Sales Office
Michigan City................................. Plant (under construction)
Illinois
Romeoville.................................... Sales Office*
Maryland
Baltimore..................................... Plant
Massachusetts
Millis........................................ Plant, Sales Office, Warehouse*
Walpole....................................... Plant*
Minnesota
Minneapolis................................... Plant, Sales Office, Warehouse*
New Jersey
North Branch.................................. Plant, Warehouse*
North Brunswick............................... Sales Office*, Warehouse*
Wayne......................................... Headquarters*, Corporate Administrative Offices*,
Research Center*
New Mexico
Albuquerque................................... Plant
North Carolina
Burgaw........................................ Plant
Goldsboro..................................... Plant
Ohio
Wadsworth..................................... Plant*, Warehouse*
Oregon
Corvallis..................................... Plant
Pennsylvania
Erie.......................................... Plant, Sales Office, Warehouse*
Wind Gap...................................... Plant
South Carolina
Chester....................................... Plant
Tennessee
Nashville..................................... Research Center*
Texas
Dallas........................................ Plant, Sales Office, Warehouse*
Fannett....................................... Warehouse
Port Arthur................................... Plant, Plant, Warehouse, Sales Office
</TABLE>
- ------------------
* Leased Property
We believe that our plants and facilities, which are of varying ages and
are of different construction types, have been satisfactorily maintained, are in
good condition, are suitable for their respective operations and generally
provide sufficient capacity to meet production requirements. Each plant has
adequate transportation facilities for both raw materials and finished products.
In 1998, we made capital expenditures of $71.1 million relating to plant,
property and equipment, which is the highest amount of capital expenditures in
recent years.
PATENTS AND TRADEMARKS
We own or license approximately 90 domestic and 81 foreign patents or
patent applications. In addition, we own or license approximately 250 domestic
and 72 foreign trademark registrations or applications. While we believe the
patent protection covering certain of our products to be material to those
products, we do not believe that any single patent, patent application or
trademark is material to our business or operations. We believe that the
duration of the existing patents and patent licenses is consistent with our
business needs.
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<PAGE>
ENVIRONMENTAL COMPLIANCE
Since 1970, federal, state and local authorities have adopted and amended a
wide variety of federal, state and local environmental laws and regulations
relating to environmental matters. These regulations affect us because of the
nature of our operations and that of our predecessor and certain of the
substances that are, or have been used, produced or discharged at our or its
plants or at other locations. We have made capital expenditures of less than
$600,000 in each of the last three years in order to comply with these
regulations, which expenditures are included in additions to property, plant and
equipment, and anticipate that aggregate capital expenditures relating to
environmental compliance in 1999 and 2000 will be approximately $800,000 and
$1,000,000, respectively. We anticipate incurring additional capital
expenditures of approximately $2,000,000 in the aggregate relating to
environmental compliance in connection with two new manufacturing facilities
that we expect to build in 1999 in Shafter, California and Michigan City,
Indiana.
The regulations deal with air and water emissions or discharges into the
environment, as well as the generation, storage, treatment, transportation and
disposal of solid and hazardous waste, and the remediation of any releases of
hazardous substances and materials to the environment. We believe that our
manufacturing facilities comply in all material respects with applicable
regulations. Although we cannot predict whether more burdensome requirements
will be adopted in the future, we believe that any potential liability for
compliance with the regulations will not materially affect our business,
liquidity or financial position.
See "--Environmental Litigation."
LEGAL PROCEEDINGS
BODILY INJURY CLAIMS. In connection with its formation, BMCA contractually
assumed and agreed to pay the first $204.4 million of liabilities for
asbestos-related bodily injury claims relating to the inhalation of asbestos
fiber of its parent, GAF Building Materials Corporation. As of March 30, 1997,
BMCA had paid all of its assumed asbestos-related liabilities. G-I Holdings and
GAF Building Materials Corporation have jointly and severally agreed to
indemnify BMCA against any other existing or future claims related to asbestos-
related liabilities if asserted against BMCA. We frequently refer to asbestos
related bodily injury claims relating to the inhalation of asbestos fiber in
this prospectus as "Asbestos Claims."
GAF Corporation has advised us that, as of December 28, 1998, it is
defending approximately 113,800 pending alleged Asbestos Claims, having received
notice of approximately 93,500 new Asbestos Claims during 1998, and has resolved
approximately 293,500 Asbestos Claims, including approximately 59,000 in 1998.
GAF Corporation has advised us that it believes that a significant portion of
the claims filed in 1998 were already pending against other defendants for some
period of time, with GAF Corporation being added as a defendant upon the lifting
in 1997 of the injunction relating to the Georgine class action settlement. This
injunction prevented plaintiffs from filing or proceeding with their Asbestos
Claims other than in accordance with the Georgine class action settlement, which
was rendered inoperable in 1997 by a United States Supreme Court ruling. GAF
Corporation's current estimated average cost for Asbestos Claims resolved in
1998, including Asbestos Claims disposed of at no cost to GAF Corporation, is
approximately $3,500 per claim. Substantially all of the costs in respect of
these Asbestos Claims will be paid over several years. There can be no assurance
that the actual costs of resolving pending and future Asbestos Claims will
approximate GAF Corporation's estimated average costs for the Asbestos Claims
resolved in 1998.
GAF Corporation has stated that it is committed to effecting a
comprehensive resolution of Asbestos Claims. It also has stated that it is
exploring a number of options to accomplish this resolution, but there can be no
assurance that this effort will be successful.
We believe that we will not sustain any additional liability in connection
with asbestos-related claims. While we cannot predict whether any
asbestos-related claims will be asserted against us or our assets, or the
outcome of any litigation relating to those claims, we believe that we have
meritorious defenses to those claims. In addition, G-I Holdings and GAF Building
Materials Corporation have jointly and severally indemnified us with respect to
those claims, and G-I Holdings has advised us that it believes it has and will
have sufficient resources to enable it to satisfy these indemnification
obligations, if any. Should GAF Corporation or GAF Building Materials
Corporation, however, be unable to satisfy judgments against it in
asbestos-related lawsuits, its judgment creditors might seek to enforce their
judgments against the assets of GAF Corporation or GAF Building Materials
Corporation, including its holdings of our common stock. This enforcement could
result in a change of control with respect to our company. See Notes 10 and 15
to Consolidated Financial Statements.
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<PAGE>
ASBESTOS-IN-BUILDING CLAIMS. GAF Corporation has also been named as a
co-defendant in asbestos-in-buildings cases for economic and property damage or
other injuries based upon an alleged present or future need to remove asbestos
containing materials from public and private buildings. We refer to the
asbestos-in-building claims in this prospectus as the "Building Claims." Since
these actions were first initiated approximately 17 years ago, GAF Corporation
has not only successfully disposed of approximately 145 of these cases at an
average disposition cost, including cases disposed of at no cost to GAF
Corporation, of approximately $18,000 per case, all of which have been paid by
insurance under reservation of rights, but is a co-defendant in only three
remaining lawsuits. See "--Insurance Matters." BMCA has not assumed any
liabilities with respect to Building Claims, and G-I Holdings and GAF Building
Materials Corporation have jointly and severally agreed to indemnify BMCA
against those liabilities in the event any claims are asserted against it.
INSURANCE MATTERS. GAF Corporation and G-I Holdings had available, as of
December 31, 1998, to pay asbestos-related bodily injury claims aggregate
insurance coverage of $140.7 million before discounting certain coverage, which
amount is reduced as asbestos-related liabilities are satisfied. Approximately
$12.2 million of this coverage is the subject of negotiations with various
insurers and/or the coverage action described below, and which $12.2 million of
coverage GAF Corporation believes will be available to it either by agreement
with its insurance carriers or, if necessary, by legal action.
In January 1993, the members of the Center for Claims Resolution, a
non-profit organization of asbestos defendant companies, including GAF
Corporation, filed an action with the United States District Court in
Philadelphia against certain product liability insurers whose policies will or
may be called upon to respond to asbestos-related bodily injury claims. This
action seeks a declaratory judgment on behalf of certain Center members,
including GAF Corporation, against various third-party defendant product
liability insurers to the effect that those insurers are obligated to provide
coverage for Asbestos Claims. The insurers who are defendants in GAF
Corporation's amended complaint are Atlanta International, Employers Mutual and
Northbrook. The insurance carrier defendants have raised various defenses to
this action.
In October 1983, GAF Corporation filed a lawsuit in Los Angeles, California
Superior Court against its past insurance carriers to obtain a judicial
determination that those carriers were obligated to defend and indemnify it for
Building Claims. GAF Corporation is seeking declaratory relief as well as
compensatory damages. This action is presently in the pre-trial pleading stage.
The parties have agreed to hold this action in abeyance until such time as they
are better able to evaluate developments as they may occur in the Building
Claims. Because this litigation is in early stages and evidence and
interpretations of important legal questions are presently unavailable, it is
not possible to predict the future of this litigation.
In all the Building Claims, GAF Corporation's defense costs have been paid
by one of its primary carriers. While GAF Corporation expects that this primary
carrier will continue to defend and indemnify GAF Corporation, this primary
carrier has reserved its rights to later refuse to defend and indemnify GAF
Corporation and to seek reimbursement for some or all of the fees paid to defend
and resolve the Building Claims. GAF Corporation believes that it will be able
to resolve those cases for amounts within the total indemnity obligations
available from this primary carrier.
ENVIRONMENTAL LITIGATION
We, together with other companies, are a party to a variety of proceedings
and lawsuits involving environmental matters under the Comprehensive
Environmental Response Compensation and Liability Act and similar state laws, in
which recovery is sought for the cost of cleanup of contaminated sites, a number
of which are in the early stages or have been dormant for protracted periods.
In connection with its formation, BMCA contractually assumed all
environmental liabilities of GAF Building Materials Corporation relating to
existing plant sites and the business of BMCA as then conducted. The estimates
referred to below reflect those environmental liabilities assumed by BMCA and
other environmental liabilities of our company. The environmental liabilities of
GAF Building Materials Corporation which were not assumed by BMCA, for which G-I
Holdings and GAF Building Materials Corporation have agreed to indemnify BMCA,
relate primarily to closed manufacturing facilities. G-I Holdings estimates
that, as of December 31, 1998, its liability in respect of the environmental
liabilities of GAF Building Materials Corporation not assumed by BMCA was
approximately $14.1 million, before insurance recoveries reflected on its
balance sheet of $8.1 million. BMCA estimates its liability as of December 31,
1998 in respect of assumed and other environmental liabilities is $0.8 million,
and expects
38
<PAGE>
insurance recoveries reflected on its balance sheet, as discussed below, of
$0.8 million. Insurance recoveries reflected on these balance sheets relate to
both past expenses and estimated future liabilities. We refer to these
recoveries below as "estimated recoveries".
At most sites, BMCA anticipates that liability will be apportioned among
the companies found to be responsible for the presence of hazardous substances
at the site. Although it is difficult to predict the ultimate resolution of
these claims, based on BMCA's evaluation of the financial responsibility of the
parties involved and their insurers, relevant legal issues and cost sharing
arrangements now in place, BMCA estimates that its liability in respect of all
environmental claims, including certain environmental compliance expenses, will
be as discussed above.
After considering the relevant legal issues and other pertinent factors,
BMCA believes that it will receive the estimated recoveries and the legal
expenses incurred by GAF Corporation on BMCA's behalf. We also believe that
recoveries could be well in excess of the estimated recoveries for all
environmental claims, although there can be no assurances in this regard. BMCA
believes it is entitled to substantially full defense and indemnity under its
insurance policies for most environmental claims, although BMCA's insurers have
not affirmed a legal obligation under the policies to provide indemnity for
those claims.
In March 1995, GAF Corporation commenced litigation on behalf of itself and
its predecessors, successors, subsidiaries and related corporate entities in the
United States District Court for the District of New Jersey seeking amounts
substantially in excess of the estimated recoveries. The court dismissed this
action in December 1997 for lack of federal jurisdiction, and defendant insurers
appealed the dismissal. The appeal was denied by the Third Circuit Court of
Appeals in March 1999. In June 1997, GAF Corporation filed a similar action
against the insurers in the Superior Court of New Jersey, Somerset County, which
action is pending. While BMCA believes that its claims are meritorious, there
can be no assurance that BMCA will prevail in its efforts to obtain amounts
equal to, or in excess of, the estimated recoveries.
We believe that we will not sustain any liability for environmental
liabilities of GAF Building Materials Corporation other than those that we have
contractually assumed or that relate to the operations of our business. While we
cannot predict whether any claims for non-assumed environmental liabilities will
be asserted against us or our assets, or the outcome of any litigation relative
to those claims, we believe that we have meritorious defenses to those claims.
In addition, G-I Holdings and GAF Building Materials Corporation have jointly
and severally indemnified us with respect to those claims. G-I Holdings has
advised us that it believes it has and will have sufficient resources to enable
it to satisfy these indemnification obligations, if any. The possible
consequences to us of the failure of G-I Holdings and GAF Building Materials
Corporation to satisfy judgments against them in environmental-related lawsuits
are described in the last paragraph of "Bodily Injury Claims."
OTHER LITIGATION
Litigation is pending between us and Elk Corporation of Dallas in the
United States District Court for the Northern District of Texas relating to
certain aspects of our laminated shingles, which Elk claims infringe design and
utility patents issued to it. Elk also asserts that we have appropriated the
trade dress of Elk's product. Elk seeks injunctive relief, damages and
attorneys' fees. We have sued for a declaration that Elk's patents are invalid
and unenforceable and that our shingles do not infringe any of Elk's rights, and
have sought money damages for Elk's unfair competition. On October 10, 1997, the
court issued an opinion holding that Elk's design patent is unenforceable
because it was obtained through inequitable conduct. On February 11, 1999, the
United States Court of Appeals for the Federal Circuit affirmed the lower
court's ruling of enforceability. Elk filed a petition for rehearing on February
25, 1999. We believe that the petition will be denied, and that we will prevail
on Elk's remaining claims in the United States District Court.
On or about April 29, 1996, an action was commenced in the Circuit Court of
Mobile County, Alabama against GAF Building Materials Corporation on behalf of a
purported nationwide class of purchasers of, or current owners of, buildings
with certain asphalt shingles manufactured by GAF Building Materials
Corporation. The action alleges, among other things, that those shingles were
defective and seeks unspecified damages on behalf of the purported class. On
September 25, 1998, we agreed to settle this litigation on a national,
class-wide basis for asphalt shingles manufactured between January 1, 1973 and
December 31, 1997. Following a fairness hearing, the court granted final
approval of the class-wide settlement in April 1999. Under the terms of the
settlement, we will provide property owners whose shingles were manufactured
during this period and which suffer certain damages during the term of their
original warranty period, and
39
<PAGE>
who file a qualifying claim, with an opportunity to receive certain limited
benefits beyond those already provided in their existing warranty. In October
and December 1998, the separate actions commenced in 1997 in the Superior Court
of New Jersey, Middlesex County, the Superior Court of New Jersey, Passaic
County and the Supreme Court of the State of New York, County of Nassau, and in
1996 in Pointe Coupee Parish, Louisiana, on behalf of purported classes alleging
that our shingles were defective and seeking unspecified damages, were stayed
pending the outcome of the fairness hearing on the settlement agreement in the
Mobile County, Alabama action. We expect that these actions will be dismissed in
light of the final approval of the settlement agreement in the Mobile County,
Alabama action.
In October 1998, GAF Corporation brought suit in the Superior Court of New
Jersey, Middlesex County, on behalf of itself and on our behalf, against certain
of its insurers for recovery of the defense costs in connection with the Mobile
County, Alabama class action and a declaration that the insurers are obligated
to provide indemnification for all damages paid pursuant to the settlement of
this class action and for other damages. This action is pending.
* * *
We believe that the ultimate disposition of the cases described above under
"Environmental Litigation," "Asbestos-in-Building Claims" and "Other Litigation"
will not, individually or in the aggregate, have a material adverse effect on
our liquidity, financial position or results of operations.
TAX CLAIM AGAINST GAF CORPORATION
On September 15, 1997, GAF Corporation received a notice from the Internal
Revenue Service of a deficiency in the amount of $84.4 million (after taking
into account the use of net operating losses and foreign tax credits otherwise
available for use in later years) in connection with the formation in 1990 of
Rhone-Poulenc Surfactants and Specialties, L.P., a partnership in which GAF
Fiberglass holds an interest. The claim of the IRS for interest and penalties,
after taking into account the effect on the use of net operating losses and
foreign tax credits, could result in GAF Corporation incurring liabilities
significantly in excess of the deferred tax liability of $131.4 million that it
recorded in 1990 in connection with this matter. GAF Corporation has advised us
that it believes that it will prevail in this matter, although we cannot assure
you that will be the result. We believe that the ultimate disposition of this
matter will not have a material adverse effect on our business, financial
position or results of operations. GAF, G-I Holdings and certain subsidiaries of
GAF Corporation have agreed to jointly and severally indemnify us against any
tax liability associated with the surfactants partnership, for which we would be
severally liable, together with GAF Corporation and several current and former
subsidiaries of GAF Corporation, should GAF Corporation be unable to satisfy
this liability. The possible consequences to us of the failure of GAF
Corporation to satisfy this liability are described above in the last paragraph
of "Legal Proceedings--Bodily Injury Claims."
EMPLOYEES
At December 31, 1998, we employed approximately 3,300 people worldwide,
approximately 1,000 of which were subject to 14 union contracts. The contracts
are effective for three- to four-year periods. During 1998, four labor contracts
expired and were renegotiated. We believe that our relations with our employees
and their unions are satisfactory.
We have in effect various benefit plans. These plans include
o a non-qualified retirement plan for a group of executives,
o a capital accumulation plan for our salaried and certain hourly
employees,
o a flexible benefit plan for our salaried employees,
o a retirement plan for certain of our hourly employees, and
o group insurance agreements providing life, accidental death, disability,
hospital, surgical, medical and dental coverage.
In addition, we have contracted with various health maintenance organizations to
provide medical benefits. We and, in many cases, our employees contribute to the
cost of these plans.
40
<PAGE>
MANAGEMENT
The following table sets forth the name, age, position and other
information with respect to the directors and executive officers of BMCA,
Building Materials Manufacturing Corporation and Building Materials Investment
Corporation. Under the By-laws of each of these companies, each director and
executive officer continues in office until that company's next annual meeting
of stockholders and until his successor is elected and qualified. On July 15,
1998, ISP merged with and into its parent, ISP Holdings Inc., and ISP Holdings
changed its name to International Specialty Products Inc. As used in this
section, "ISP" refers to both companies.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION
NAME AND POSITION HELD AGE AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
Samuel J. Heyman ............... 60 Mr. Heyman has been a director and Chairman of BMCA since its
Director and Chairman formation. He was Chief Executive Officer of BMCA from June 1996 to
January 1999 and has been Chief Executive Officer of GAF Building
Materials Corporation since May 1994. He has served as a director and
Chairman and Chief Executive Officer of ISP since its formation and
has held the same offices with GAF Corporation, G-I Holdings and
certain of its subsidiaries for more than five years. Mr. Heyman is
also the Chief Executive Officer, Manager and General Partner of a
number of closely held real estate development companies and
partnerships whose investments include commercial real estate and a
portfolio of publicly traded securities.
Sunil Kumar .................... 49 Mr. Kumar has been the President, Chief Executive Officer and a
Director, President and Chief director of BMCA since July 1996, January 1999 and May 1995,
Executive Officer respectively. He also has been Chief Executive Officer of Building
Materials Manufacturing Corporation and Building Materials Investment
Corporation since January 1999 and President and a director of those
corporations since their formation. He was Chief Operating Officer of
BMCA from March 1996 to January 1999 and of Building Materials
Manufacturing Corporation and Building Materials Investment
Corporation from their formation to January 1999. Mr. Kumar also was
President, Commercial Roofing Products Division, and Vice President
of BMCA from February 1995 to March 1996. Mr. Kumar has also served
as a director of GAF Corporation since January 1999. From 1992 to
February 1995, he was Executive Vice President of
Bridgestone/Firestone Inc., a retail distributor and manufacturer of
tires and provider of automobile services.
James P. Rogers ................ 48 Mr. Rogers has been a director of BMCA since its formation and
Director and Executive Executive Vice President of BMCA since December 1996. He also has
Vice President been Executive Vice President of Building Materials Manufacturing
Corporation and Building Materials Investment Corporation since their
formation. Mr. Rogers has been Executive Vice President and Chief
Financial Officer of GAF Corporation, G-I Holdings and certain of its
subsidiaries and Executive Vice President--Finance of ISP since
December 1996. He was Senior Vice President of BMCA from its
formation to December 1996 and of ISP from November 1993 to December
1996. Mr. Rogers was Treasurer of BMCA from its formation until
December 1994. Mr. Rogers has served as Treasurer of G-I Holdings,
GAF Corporation and certain of its subsidiaries since March 1992.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
Richard A. Weinberg ............ 39 Mr. Weinberg has been Executive Vice President and General Counsel of
Executive Vice President, BMCA since May 1998 and was Senior Vice President and General Counsel
Secretary and General from May 1996 to May 1998. He also has been Executive Vice President
Counsel and General Counsel of Building Materials Manufacturing Corporation
and Building Materials Investment Corporation since their formation.
He was Senior Vice President and General Counsel of GAF Corporation,
G-I Holdings, ISP and certain of their subsidiaries from May 1996 to
May 1998. He has served as Executive Vice President and General
Counsel of these companies since May 1998. He was Vice President and
General Counsel of BMCA from September 1994 to May 1996, Vice
President--Law of BMCA from May 1994 to September 1994 and Vice
President--Law of GAF Building Materials Corporation from April 1993
to May 1994.
William C. Lang ................ 55 Mr. Lang has been Senior Vice President and Chief Financial Officer of
Senior Vice President and BMCA since April 1997. He also has held the same position with
Chief Financial Officer Building Materials Manufacturing Corporation and Building Materials
Investment Corporation since their formation. He was Senior Vice
President and Chief Financial Officer of Duane Reade, a regional drug
store chain, from 1993 to 1996.
Kem Scott ...................... 50 Mr. Scott has been President and Chief Operating Officer of U.S. Intec
Senior Vice President and and Senior Vice President and General Manager, Commercial Roofing
General Manager, Commercial Products of BMCA since October 1998. He also has been Senior Vice
Roofing Products, BMCA; President and General Manager, Commercial Roofing Products of
President and Chief Operating Building Materials Manufacturing Corporation and Building Materials
Officer, U.S. Intec Investment Corporation since their formation. From 1973 to October
1998, Mr. Scott held various executive positions with the Carlisle
group of companies, a manufacturer of elastomeric roofing systems,
including President, Carlisle Syntec Inc. and most recently from July
1997 to October 1998, President of Carlisle Europe.
William W. Collins ............. 49 Mr. Collins has been Senior Vice President--Marketing and Sales,
Senior Vice President-- Residential Roofing Products of BMCA since November 1997. He also has
Marketing and Sales, held the same position with Building Materials Manufacturing
Residential Roofing Corporation and Building Materials Investment Corporation since their
Products formation. He was Vice President--Marketing and Sales, Commercial
Roofing Products of BMCA from March 1996 to November 1997, Vice
President--Sales, Commercial of BMCA from December 1995 to March
1996, Director of Insulation, Accessories and
Cobra(Registered) Products of BMCA from February 1995 to December
1995 and Director of Special Projects of BMCA from July 1992 to
February 1995.
</TABLE>
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer and the four other most highly compensated executive officers of BMCA as
of December 31, 1998. The salaries and other compensation of Messrs. Heyman,
Rogers and Weinberg for services provided by them to our company are paid by ISP
in accordance with a management agreement between ISP and our company.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
------------------------------- STOCK SARS (S)/ ALL OTHER
NAME AND PRINCIPAL POSITION(6) YEAR SALARY BONUS(1) AWARDS OPTIONS(O)(1) COMPENSATION
- ------------------------------------ ------ -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Samuel J. Heyman ................... 1998 (6) (6) (6) (6)
Chairman and Chief 1997 (6) (6) (6) (6)
Executive Officer 1996 (6) (6) (6) (6)
Sunil Kumar ........................ 1998 $305,325 $250,000 $2,490,000(2) -- $1,444,887(2)
President and Chief 1997 293,550 256,238 7,609(O) 16,737(2)
Operating Officer 1996 274,500 165,000 2,190(O)/ 13,561(2)
8,609(S)(7)
William C. Lang .................... 1998 $207,083 $ 94,145 4,200(O) $ 17,465(3)
Senior Vice President and Chief 1997 133,888(3) 87,094(3) 3,837(O)(3) 5,682(3)
Financial Officer 1996 (3) (3) (3) (3)
Donald W. LaPalme .................. 1998 $169,575 $ 53,199 2,285(O) $ 15,812(4)
Senior Vice President-- 1997 162,481 55,601 3,612(O) 17,756(4)
Operations 1996 154,750 59,774 1,200(O) 14,519(4)
William W. Collins ................. 1998 $168,000 $ 69,871 3,000(O) $ 14,899(5)
Senior Vice President--Marketing & 1997 148,242 57,497 8,218(O) 14,509(5)
Sales, Residential Roofing 1996 128,333 42,588 900(O) 12,092(5)
Products
</TABLE>
- ------------------
(1) Bonus amounts are payable pursuant to BMCA's Executive Incentive
Compensation Program, except that a portion of the bonus amounts paid to Mr.
Lang in 1997 and 1998 and to Dr. LaPalme in 1998 represented special bonus
awards to those executive officers. The stock appreciation rights
(S) relate to shares of GAF Corporation common stock. The options
(O) relate to shares of redeemable convertible preferred stock of BMCA. See
"--Options/SARs".
(2) Included in "All Other Compensation" for Mr. Kumar are $11,450, $11,450 and
$10,750 representing BMCA's contribution under the Capital Accumulation Plan
for Employees of GAFMC and ISP in 1998, 1997 and 1996, respectively; $3,316,
$3,324 and $1,636 for the premiums paid by BMCA for a life insurance policy
in 1998, 1997 and 1996, respectively; and $1,963, $1,963 and $1,175 for the
premiums paid by BMCA for a long-term disability policy in 1998, 1997 and
1996, respectively. In connection with the July 1998 merger of ISP Holdings
and ISP, all options to purchase shares of redeemable convertible preferred
stock of ISP Holdings and stock appreciation rights relating to ISP Holdings
common stock, including options and stock appreciation rights held by
Mr. Kumar, were cancelled. In consideration for this cancellation,
Mr. Kumar was granted 15,000 shares of Class A Common Stock of BMCA and
15,000 shares of Class B Common Stock of BMCA and, subject to satisfaction
of certain future vesting requirements through December 2003 and to his
remaining our employee at such vesting periods, Mr. Kumar is entitled to
receive cash payments of $5,073,212 in the aggregate. Mr. Kumar received
$1,428,158 of these cash payments in 1998. Included in "Restricted Stock
Awards" is the value of the common stock granted to Mr. Kumar as of the date
of grant. See "Management's Discussion and
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
Analysis of Financial Condition and Results of Operations." Mr. Kumar was
elected Chief Executive Officer of BMCA, effective January 1, 1999.
(3) Included in "All Other Compensation" for Mr. Lang are $11,200 and $2,010,
representing BMCA's contribution under the Capital Accumulation Plan for
Employees of GAFMC and ISP in 1998 and 1997, respectively; $4,459 and $2,583
for the premiums paid by BMCA for a life insurance policy in 1998 and 1997,
respectively; and $1,806 and $1,089 for the premiums paid on a long-term
disability policy in 1998 and 1997, respectively. Mr. Lang commenced
employment with us in April 1997.
(4) Included in "All Other Compensation" for Dr. LaPalme are: $9,442, $11,700,
and $11,000, representing BMCA's contribution under the Capital Accumulation
Plan for Employees of GAFMC and ISP in 1998, 1997 and 1996, respectively;
$5,022, $4,781 and $2,754 for the premiums paid by BMCA for a life insurance
policy in 1998, 1997 and 1996, respectively; and $1,348, $1,275 and $765 for
the premiums paid by BMCA for a long-term disability policy in 1998, 1997,
and 1996, respectively.
(5) Included in these amounts for Mr. Collins are: $11,450, $11,513 and $10,633,
representing BMCA's contribution under the Capital Accumulation Plan for
Employees of GAFMC and ISP in 1998, 1997 and 1996, respectively; $2,122,
$1,884 and $849 for the premiums paid by BMCA for a life insurance policy in
1998, 1997 and 1996, respectively; and $1,327, $1,112 and $610 for the
premiums paid by BMCA for a long-term disability policy in 1998, 1997 and
1996, respectively.
(6) The salary and other compensation of Mr. Heyman are paid by ISP pursuant to
our management agreement with ISP. No allocation of compensation for
services to BMCA is made pursuant to the management agreement, except that
BMCA reimbursed ISP $115,351 and $133,989 under the management agreement in
respect of bonus amounts earned by Messrs. Rogers and Weinberg,
respectively, for 1997 in connection with services performed by them for
BMCA during that year. In addition, BMCA reimburses ISP, through payment of
the management fees payable under the management agreement, for the
estimated costs ISP incurs for providing the services of these officers. See
"Certain Relationships--Management Agreement."
(7) Excluded are options to purchase redeemable preferred stock of ISP Holdings.
As described in Note 2 above, these options were cancelled in connection
with the July 1998 merger of ISP Holdings and ISP.
OPTIONS/SARS
The following table summarizes options to acquire BMCA's redeemable
convertible preferred stock granted during 1998 to the executive officers named
in the Summary Compensation Table above and the potential realizable value of
these options held by those persons. No options were exercised by those persons
in 1998.
BMCA PREFERRED STOCK OPTION GRANTS IN 1998(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL RATES
OF
BOOK VALUE
NUMBER OF SECURITIES % OF TOTAL OPTIONS APPRECIATION
UNDERLYING OPTIONS GRANTED TO EMPLOYEES --------------------
GRANTED IN FISCAL 1998 5% 10%
-------------------- -------------------- -------- --------
<S> <C> <C> <C> <C>
Sunil Kumar................................... -- -- -- --
William C. Lang............................... 4,200 7.5% $100,902 $222,967
Donald W. LaPalme............................. 2,285 4.0 54,895 121,305
William W. Collins............................ 3,000 5.3 72,073 159,262
</TABLE>
- ------------------
(1) The BMCA preferred stock options represent options to purchase shares of
redeemable convertible preferred stock of BMCA. Each share of preferred
stock is convertible, at the holder's option, into shares
(Footnotes continued on next page)
44
<PAGE>
(Footnotes continued from previous page)
of Class A Common Stock of BMCA at a formula price based on Book Value (as
defined in the option agreement) as of the date of grant. The options vest
over five years from the date of grant. Dividends will accrue on the
preferred stock from the date of issuance at the rate of 8% per annum. The
preferred stock is redeemable, at BMCA's option, for a redemption price
equal to the exercise price per share plus accrued and unpaid dividends. The
Class A Common Stock of BMCA issuable upon conversion of the preferred stock
is subject to repurchase by BMCA under certain circumstances at a price
equal to current Book Value. The exercise price of the options is equal to
the fair value per share of the preferred stock at the date of grant. The
options have no expiration date. The potential realizable values are
calculated on the basis of a five-year period from the date of grant.
BMCA PREFERRED STOCK OPTIONS/GAF CORPORATION STOCK APPRECIATION RIGHTS AND
OPTIONS/SAR VALUES
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED BMCA PREFERRED IN-THE-MONEY BMCA PREFERRED
OPTIONS(O)/GAF CORPORATION OPTIONS (O)/GAF CORPORATION
SARS(S)(1) AT 12/31/98 SARS(S) AT 12/31/98
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------------ -------------------------- ---------------------------
<S> <C> <C>
Sunil Kumar........................................... 5,521/12,289(S) $ 0/$ 0
2,836/6,963(O) 55,110/82,127(2)
William C. Lang....................................... 767/7,270(O) 6,799/27,545(2)
Donald W. LaPalme..................................... 1,442/5,655(O) 28,565/37,948(2)
William W. Collins.................................... 2,184/9,934(O) 23,568/36,319(2)
</TABLE>
- ------------------
(1) The stock appreciation rights relating to GAF Corporation common stock
represent the right to receive a cash payment based upon the appreciation in
value of the specified number of shares of common stock of GAF Corporation
over the determined initial book value per share of common stock of GAF
Corporation, adjusted for the separation transactions, and interest on such
book value at a specified rate. The GAF Corporation stock appreciation
rights vest over a five-year period, subject to earlier vesting under
certain circumstances, including in connection with a change of control, and
have no expiration date.
(2) Options for 9,799, 3,837, 4,812 and 9,118 shares of preferred stock were
in-the-money for Messrs. Kumar, Lang, LaPalme and Collins, respectively, at
December 31, 1998.
COMPENSATION OF DIRECTORS
The directors of BMCA do not receive any compensation for their services as
such.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONS
We do not have a separate compensation committee. Compensation decisions
are determined by our Board of Directors, each member of which is also one of
our executive officers. Messrs. Rogers and Heyman are also executive officers of
ISP, and Mr. Heyman is a member of the Board of Directors of ISP. See "Certain
Relationships."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Approximately 98.5% of our outstanding Class A Common Stock is owned of
record by GAF Building Materials Corporation. All of the outstanding common
stock of GAF Building Materials Corporation is owned of record by G Industries
which is 100% owned by G-I Holdings, which in turn is 100% owned by GAF
Corporation. All of our outstanding Class B Common Stock is owned of record by
trusts for the benefit of the children of Mr. Kumar.
The following table sets forth information with respect to the ownership of
Common Stock, as of March 19, 1999, by each other person known to us to own
beneficially more than 5% of either class of the Common Stock outstanding on
that date, by each of our directors and by all of our executive officers and
directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF TOTAL VOTING
TITLE OF CLASS BENEFICIAL OWNER(1) OWNERSHIP CLASS POWER
- --------------------------------------- ---------------------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Class A Common Stock................... Samuel J. Heyman 1,000,010 98.5%(2) 97.0%(2)
Sunil Kumar 15,000 1.5% 1.5%
All directors and executive
officers of BMCA as a
group (7 persons) 1,015,010 100.0%(2) 98.5%(2)
Class B Common Stock................... Sunil Kumar 15,000(3) 100.0% 1.5%
All directors and executive
officers of BMCA as a
group (7 persons) 15,000(3) 100.0% 1.5%
</TABLE>
- ------------------
(1) The business address for both Messrs. Heyman and Kumar is 1361 Alps Road,
Wayne, New Jersey 07470.
(2) The number of shares shown as being beneficially owned (as defined in
Rule 13d-3 of the Exchange Act) by Mr. Heyman and by all directors and
executive officers of the Company as a group attributes ownership of GAF
Building Materials Corporation's shares to Mr. Heyman. As of March 19, 1999,
Mr. Heyman beneficially owned (as defined in Rule 13d-3 of the Exchange Act)
approximately 97% of the capital stock of GAF Corporation.
(3) The shares of Class B Common Stock are owned of record by trusts for the
benefit of Mr. Kumar's children. Mr. Kumar disclaims beneficial ownership of
all of these shares.
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<PAGE>
CERTAIN RELATIONSHIPS
MANAGEMENT AGREEMENTS
Pursuant to a management agreement which expires December 31, 1999, ISP (of
which our Chairman, Samuel J. Heyman beneficially owns (as defined in Rule 13d-3
of the Exchange Act) approximately 76%) provides certain general management,
administrative, legal, telecommunications, information and facilities services
to us, including the use of our headquarters in Wayne, New Jersey. ISP charged
us $4.3 million in 1998 for providing these services. These charges consist of
management fees and other reimbursable expenses attributable to us, or incurred
by ISP for our benefit. They are based on an estimate of the costs ISP incurs to
provide such services. Effective January 1, 1999, the term of the management
agreement was extended through the end of 1999, and the management fees payable
under the agreement were increased. We also allocate a portion of the management
fees payable by us under the management agreement to separate lease payments for
the use of our headquarters. Based on the services provided by ISP in 1998 under
the management agreement, the aggregate amount payable by us to ISP under the
management agreement for 1999 is expected to be approximately $5.3 million.
Certain of our executive officers receive their compensation from ISP. ISP is
indirectly reimbursed for this compensation through payment of the management
fee and other reimbursable expenses payable under the management agreement.
As of January 1, 1997, we entered into a separate management agreement with
GAF Fiberglass under which we provide certain general management, administrative
and financial services to GAF Fiberglass. Under the management agreement which
was renewed for 1999 and expires December 31, 1999, GAF Fiberglass is obligated
to pay us an annual management fee of $1.0 million.
Due to the unique nature of the services provided under the management
agreements, comparisons with third party arrangements are difficult. However, we
believe that the terms of each of the management agreements taken as a whole are
no less favorable to us than could be obtained from an unaffiliated third party.
CERTAIN PURCHASES
We purchase all of our colored roofing granules requirements from ISP under
a requirements contract, except for the requirements of our California and
Oregon roofing plants and a portion of the requirements of our Indiana roofing
plant, which are supplied by a third party. Effective January 1, 1999, we
amended this contract to cover, among other things, purchases of colored roofing
granules by our subsidiaries and renewed it for 1999. This contract is subject
to annual renewal unless terminated by either party to the agreement. In 1997
and 1998, BMCA and its subsidiaries purchased in the aggregate approximately
$51.1 million and $62.6 million, respectively, of mineral products from ISP.
As part of the separation transactions involving GAF Corporation and its
subsidiaries in January 1997, we transferred to GAF Fiberglass our Nashville,
Tennessee facility. GAF Fiberglass manufactures a significant portion of our
glass fiber requirements pursuant to a supply agreement on terms which we
believe are at least as favorable to us as could be obtained from an
unaffiliated third party. In 1997 and 1998, we purchased approximately $24.5
million and $26.1 million, respectively, of glass fiber from GAF Fiberglass.
TAX SHARING AGREEMENT
We have entered into a tax sharing agreement dated January 31, 1994 with
GAF Corporation and G-I Holdings with respect to the payment of federal income
taxes and certain related matters. During the term of the tax sharing agreement,
which is effective for the period during which we or any of our domestic
subsidiaries is included in a consolidated federal income tax return filed by
GAF Corporation, we are obligated to pay G-I Holdings an amount equal to those
federal income taxes we would have incurred if we, on behalf of ourselves and
our domestic subsidiaries, filed our own federal income tax return. Unused tax
attributes will carry forward for use in reducing amounts payable by us to G-I
Holdings in future years, but cannot be carried back. If we ever were to leave
the GAF Corporation consolidated tax group, we would be required to pay to G-I
Holdings the value of any tax attributes to which we would succeed under the
consolidated return regulations to the extent the tax attributes reduced the
amounts otherwise payable by us under the tax sharing agreement. Under certain
circumstances, the provisions of the tax sharing agreement
47
<PAGE>
could result in us having a greater liability under the agreement than we would
have had if we and our domestic subsidiaries had filed our own separate federal
income tax return. Under the tax sharing agreement, we and each of our domestic
subsidiaries are responsible for any taxes that would be payable by reason of
any adjustment to the tax returns of GAF Corporation or its subsidiaries for
years prior to the adoption of the tax sharing agreement that relate to our
business or assets or the business or assets of any of our domestic
subsidiaries. Although, as a member of the GAF tax group, we are severally
liable for all federal income tax liabilities of the GAF tax group, including
tax liabilities not related to our business, G-I Holdings and GAF Corporation
have agreed to indemnify us and our subsidiaries for all tax liabilities of the
GAF tax group other than tax liabilities
(1) arising from our operations and the operations of our domestic
subsidiaries and
(2) for tax years pre-dating the tax sharing agreement that relate to our
business or assets and the business or assets of any of our domestic
subsidiaries.
The tax sharing agreement provides for analogous principles to be applied to any
consolidated, combined or unitary state or local income taxes. Under the tax
sharing agreement, GAF Corporation makes all decisions with respect to all
matters relating to taxes of the GAF tax group. The provisions of the tax
sharing agreement take into account both the federal income taxes we would have
incurred if we filed our own separate federal income tax return and the fact
that we are a member of the GAF tax group for federal income tax purposes.
INTERCOMPANY BORROWINGS
BMCA makes loans to, and borrows from, G-I Holdings and its subsidiaries
from time to time at prevailing market rates. These rates were between 5.82% and
5.96% per annum during 1997 and 1998. The highest amount of loans made by BMCA
to G-I Holdings during 1997 and 1998 was $6.2 million. No loans were made to
BMCA by G-I Holdings and its subsidiaries during 1997 and 1998. As of
December 31, 1998, no loans were owed to BMCA by G-I Holdings, and no loans were
owed by BMCA to affiliates. In addition, BMCA makes non-interest bearing
advances to affiliates, of which $1.5 million were outstanding at December 31,
1998.
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<PAGE>
DESCRIPTION OF THE REGISTERED NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this section, the words "we,"
"our" and "us" refer only to Building Materials Corporation of America, as a
separate entity, and do not include any of its subsidiaries.
We will issue the registered notes under the Indenture we entered into with
The Bank of New York, as trustee in connection with the issuance of the old
notes. The terms of the registered notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939. You may obtain a copy of the Indenture by sending us a request to our
address identified under "Where You Can Find More Information."
The following description is a summary of all material provisions of the
Indenture. It does not restate those agreements in their entirety. We urge you
to read the Indenture because it, and not this description, defines your rights
as holders of registered notes. We have filed the Indenture as an exhibit to the
registration statement which includes this prospectus.
BRIEF DESCRIPTION OF THE REGISTERED NOTES
The registered notes:
o are our general unsecured obligations;
o are senior in right of payment to all our subordinated debt;
o rank equally in right of payment to our Other Senior Notes and the Credit
Agreement and to all of our other unsubordinated indebtedness;
o are subordinated in right of payment to all of our secured indebtedness
to the extent of the assets securing such indebtedness; and
o are unconditionally guaranteed by the guarantors.
GUARANTEES
The notes are guaranteed by two of our subsidiaries:
o Building Materials Manufacturing Corporation; and
o Building Materials Investment Corporation.
The guarantees:
o are joint and several obligations of each guarantor;
o are senior indebtedness of each guarantor; and
o are equal in right of payment to all existing and future unsecured and
unsubordinated indebtedness of each guarantor.
Upon the sale or disposition, by merger or otherwise, of all of the capital
stock of a guarantor to an entity which is not one of our subsidiaries, that
guarantor will be deemed released from all obligations under its guarantee. The
other guarantor will remain liable for the full amount of principal and interest
on the notes as provided in its guarantee.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the guarantees could be voided, or claims in respect
of the guarantees could be subordinated to all other debts of that guarantor if,
among other things, the guarantor, at the time it incurred the indebtedness
evidenced by its guarantee:
o received less than reasonably equivalent value or fair consideration for
the incurrence of the guarantee;
o was insolvent or rendered insolvent by reason of that incurrence;
o was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
49
<PAGE>
o intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In the event that a guarantee would constitute or result in a violation of
the federal bankruptcy law or any applicable fraudulent conveyance or similar
law of any relevant jurisdiction, the liability of the guarantor under its
guarantee will be reduced to the maximum amount permissible under the applicable
fraudulent conveyance or similar law.
PRINCIPAL, MATURITY AND INTEREST
We will issue registered notes with a maximum aggregate principal amount of
$155 million in denominations of $1,000 and integral multiples of $1,000. The
notes will mature on December 1, 2008.
Interest on the registered notes will accrue at the rate of 8% per annum
and will be payable semi-annually on June 1 and December 1, commencing on
June 1, 1999. We will make each interest payment to holders of record of the
registered notes on the immediately preceding May 15 and November 15.
If we fail to pay interest on the notes, we will pay the unpaid interest,
plus, to the extent permitted by law, any interest payable on the unpaid
interest, to the persons who are registered holders of the notes on a subsequent
special record date. This special record date will be the fifteenth day before
the date fixed by us for the payment of unpaid interest, whether or not that day
is a business day. At least 15 days before the special record date, we will mail
or cause to be mailed to each registered holder and the Trustee a notice that
states the special record date, the payment date and the amount of unpaid
interest to be paid.
Interest on the registered notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. If you tender your old notes and they are accepted for exchange,
you will receive accrued interest on your old notes to, but not including, the
date of issuance of the registered notes. This interest will be payable with the
first interest payment on the registered notes and you will not receive any
payment in respect of interest on your old notes accrued after the issuance of
such registered notes. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
We are not obligated to set aside funds or to establish a separate account
for your benefit to make the required interest and principal payments on the
registered notes.
METHODS OF RECEIVING PAYMENTS ON THE REGISTERED NOTES
If a registered holder of the notes gives us wire transfer instructions, we
will make all principal, premium, if any, and interest payments on those notes
in accordance with those instructions. All other payments on the registered
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless we elect to make interest payments
by check mailed to the holders at their address set forth in the register of
holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as paying agent and registrar. We may change
the paying agent or registrar without prior notice to you.
TRANSFER AND EXCHANGE
You may transfer or exchange your notes in accordance with the Indenture.
The registrar and the Trustee may require you to furnish, among other things,
appropriate endorsements and transfer documents and we may require you to pay
any taxes and fees required by law or permitted by the Indenture. We are not
required to transfer or exchange any note selected for redemption. We also are
not required to transfer or exchange any note for a period of 15 days before a
selection of notes to be redeemed.
The registered holder of a registered note will be treated as the owner of
the registered note for all purposes.
50
<PAGE>
REPURCHASE AT YOUR OPTION
Change of Control
If a Change of Control occurs, you will have the right to require us to
repurchase all or any part, equal to $1,000 or an integral multiple of $1,000,
of your notes on the date which is 25 business days after the date the Change of
Control notice is mailed or required to be mailed. In the Change of Control
offer, we will offer cash equal to 101% of the aggregate principal amount of
notes repurchased plus accrued and unpaid interest on the repurchased notes, if
any, to the payment date. Within ten business days following any Change of
Control, we will mail a notice to you describing the transaction or transactions
that constitute the Change of Control and offering to repurchase notes on the
payment date specified in the Change of Control notice. The procedures for this
purchase will be described in the notice. We will comply with all applicable
federal and state securities laws in connection with the repurchase of the notes
as a result of a Change of Control.
Each Change of Control notice will state:
(1) that the Change of Control offer is being made in accordance with the
Indenture and that all notes tendered will be accepted for payment;
(2) the purchase price and the payment date;
(3) that any note not tendered will continue to accrue interest;
(4) that, unless we fail to pay for a note in the Change of Control offer,
any note accepted for payment will cease to accrue interest after the
payment date;
(5) that, if you elect to have a note purchased pursuant to a Change of
Control offer, you will be required to surrender the note in accordance
with the instructions set forth in the Change of Control notice;
(6) that we have the right, as described in the next paragraph, to purchase
any notes not tendered at the call price; and
(7) the circumstances and relevant facts regarding the Change of Control.
If a Change of Control occurs, we may purchase all, but not less than all,
of the outstanding notes at the following price:
(1) 100% of the principal amount of the notes then outstanding; plus
(2) accrued interest to the date of purchase; plus
(3) the Applicable Premium.
We must give you notice of any purchase to be made as described in this
paragraph no later than 10 days after the payment date applicable to the Change
of Control giving rise to the purchase. We must purchase the notes within
30 days of the date of this notice.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. We urge you to read the Indenture for the full definition of all of
these terms.
"Acquired Debt", with respect to any Person, means:
(1) Debt, including any then unutilized commitment under any revolving
working capital facility, of an entity, which entity is acquired by that
Person or any of its subsidiaries after December 3, 1998; provided that the
Debt, including any revolving working capital facility,
(A) is outstanding at the time of the acquisition of the acquired
entity,
(B) is not created in contemplation of the acquisition and
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<PAGE>
(C) is not, directly or indirectly, recourse, including by way of
set-off, to that Person or its subsidiaries or any of their respective
assets other than to the entity and its subsidiaries acquired and the
assets of the entity and its subsidiaries acquired;
(2) Debt of that Person that is not, directly or indirectly, recourse,
including by way of set-off, to that Person and its subsidiaries or any of
their respective assets other than to specified assets acquired by that
Person or its subsidiaries after December 3, 1998, which Debt is
outstanding at the time of the acquisition of those assets and is not
created in contemplation of the acquisition; or
(3) refinancings of Debt described in clause (1) or (2), provided that
the recourse with respect to the refinancing Debt is limited to the same
extent as the Debt refinanced.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of the Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have the correlative meanings. For the avoidance
of doubt, ISP and its Affiliates, so long as they are under common control with
us, will be deemed to be our Affiliates.
"Applicable Premium" means, with respect to any note, the greater of:
(1) 1.0% of the principal amount of the note; and
(2) the excess, if any, of:
(A) the present value of the remaining interest payments, principal
and future optional redemption premium of the note, discounted on a
semi-annual bond equivalent basis from the maturity date of the note to
the applicable date of purchase at a per annum interest rate equal to
the Treasury Yield for the purchase date plus 100 basis points, over
(B) the sum of the principal amount of the note plus accrued and
unpaid interest to the purchase date.
"Asset Sale" means, with respect to any Person, the sale, lease, assignment
or other disposition, including without limitation, dispositions pursuant to any
consolidation, merger or sale and leaseback transaction, by that Person or any
of its subsidiaries in any single transaction or series of related transactions
which consists of the disposition of:
(1) any Capital Stock of any subsidiary; or
(2) all or substantially all of the properties and assets of any
division or line of business of that Person or any subsidiary of that
Person, other than of a Non-Recourse Subsidiary, to any other Person other
than our company or one of our subsidiaries.
For the purposes of this definition, the term "Asset Sale" will not
include:
(1) any sale, lease, assignment or other disposition of properties or
assets that is governed by the provisions described under "--Limitation on
Merger or Sale of Assets" or
(2) any sale, lease, assignment or other disposition by a Person that
has outstanding senior debt securities all of which
(A) are rated BBB- or higher by S&P and have not been placed on
credit watch by S&P for a possible downgrade or
(B) are rated Baa3 or higher by Moody's and have not been placed on
credit watch by Moody's for a possible downgrade.
"Average Life" means, with respect to any Debt, the quotient obtained by
dividing
(1) the sum of the products of
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<PAGE>
(A) the number of years from the date of the transaction or event
giving rise to the need to calculate the Average Life of the Debt to the
date, or dates, of each successive scheduled principal payment of the
Debt multiplied by
(B) the amount of each principal payment by
(2) the sum of all principal payments.
"Capitalized Lease Obligation" means any rental obligation that, in
accordance with GAAP, is required to be classified and accounted for as a
capitalized lease. The amount of Debt represented by the rental obligation will
be the capitalized amount of the rental obligation determined in accordance with
GAAP and the stated maturity of the rental obligation will be the date of the
last payment of rent or any other amount due in respect of the rental
obligation.
"Capital Stock" of any Person means any and all shares, interests,
including partnership interests, warrants, rights, options or other interests,
participations or other equivalents of or interests in, however designated,
equity of such Person, including common or preferred stock, whether now
outstanding or issued after December 3, 1998, but excluding any debt securities
convertible into or exchangeable for such equity.
"Cash Equivalents" means:
(1) marketable direct obligations Issued by, or unconditionally
Guaranteed by, the United States government or Issued by any agency of the
United States government and backed by the full faith and credit of the
United States, in each case maturing within one year from the date of their
acquisition;
(2) marketable direct obligations Issued by any state of the United
States or any political subdivision of any state or any public
instrumentality of any state maturing within one year from the date their
acquisition and, at the time of their acquisition, having one of the two
highest ratings obtainable from either S&P or Moody's;
(3) commercial paper maturing no more than one year from the date of
its creation and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within
one year from the date of their acquisition issued by any commercial bank
organized under the laws of the United States or any state in the United
States or the District of Columbia or any U.S. branch of a foreign bank
having at the date of acquisition of the certificates of deposit or
bankers' acceptances combined capital surplus of not less than
$500,000,000;
(5) Eurodollar time deposits maturing within one year from the date of
acquisition of the time deposits and issued or accepted by any commercial
bank having at the date of acquisition of the time deposits combined
capital and surplus of not less than $500,000,000;
(6) repurchase obligations with a term of not more than thirty days
for underlying securities of the types described in clause (1) above
entered into with any bank meeting the qualifications specified in clause
(4) above; and
(7) investments in money market funds having assets in excess of
$500,000,000 and which invest substantially all their assets in securities
of the types described in clauses (1) through (6) above.
"Change of Control" means the occurrence of any of the following events:
(1) prior to the time that at least 15% of our then outstanding voting
stock or the then outstanding voting stock of Parent or any subsidiary of
Parent of which we are also a subsidiary is publicly traded on a national
securities exchange or in the NASDAQ national market system, the Permitted
Holders cease to be the "beneficial owner", as defined in Rules 13d-3 and
13d-5 under the Exchange Act, directly or indirectly, of majority voting
power of our voting stock, whether as a result of issuance of our
securities or securities of any of our Affiliates, any merger,
consolidation, liquidation or dissolution of our company or any of our
Affiliates, any direct or indirect transfer of securities by any Permitted
Holder or by Parent or any of its subsidiaries or otherwise. For purposes
of this clause (1) and clause (2) below, the Permitted Holders will be
deemed to beneficially own any voting stock of a corporation
53
<PAGE>
held by any other corporation so long as the Permitted Holders beneficially
own, directly or indirectly, a majority of the voting stock of the parent
corporation;
(2) any "Person", as that term is used in sections 13(d) and 14(d) of
the Exchange Act, other than one or more Permitted Holders, is or becomes
the beneficial owner, as defined in clause (1) above, except that a Person
will be deemed to have "beneficial ownership" of all shares that the Person
has the right to acquire, whether the right is exercisable immediately or
only after the passage of time, directly or indirectly, of more than 35% of
our voting stock or the voting stock of Parent; provided that the Permitted
Holders beneficially own, as defined in clause (1) above, directly or
indirectly, in the aggregate a lesser percentage of our voting stock or the
voting stock of Parent than the other Person and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of our Board of Directors or the Board of Directors of
Parent; or
(3) during any period of two consecutive years, individuals who at the
beginning of the period constituted our Board of Directors, together with
any new directors whose election by that Board or whose nomination for
election by our shareholders including predecessors, was approved by a vote
of a majority of our directors then still in office who were either
directors at the beginning of the period or whose election or nomination
for election was previously approved, cease for any reason to constitute a
majority of our Board of Directors, then in office.
"Common Stock" of any Person means any and all shares, interests,
participations, or other equivalents, however designated, of the Person's common
stock whether now outstanding or issued after December 3, 1998.
"Consolidated EBITDA Coverage Ratio" with respect to any Person for any
period means the ratio of:
(1) the aggregate amount of EBITDA of that Person for that period to
(2) Consolidated Interest Expense of that Person for that period;
provided, that:
(A) if the Person or any subsidiary of the Person has Issued any Debt
or Capital Stock since the beginning of the period that remains outstanding
on the date the calculation is made or if the transaction giving rise to
the need to calculate the Consolidated EBITDA Coverage Ratio is an Issuance
of Debt or Capital Stock, or both, EBITDA and Consolidated Interest Expense
for that period will be calculated after giving effect, on a pro forma
basis, to the issuance of that Debt or Capital Stock as if that Debt or
Capital Stock had been Issued on the first day of that period and the
discharge of any other Debt or Capital Stock refinanced or otherwise
discharged with the proceeds of the new Debt or Capital Stock as if the
discharge had occurred on the first day of that period;
(B) if since the beginning of the period the Person or any subsidiary
of the Person will have made any asset sales out of the ordinary course of
business, EBITDA for that period will be reduced by an amount equal to the
EBITDA, if positive, directly attributable to the assets which are the
subject of the asset sale for that period, or increased by an amount equal
to the EBITDA, if negative, directly attributable to the assets for that
period and Consolidated Interest Expense for that period will be reduced by
an amount equal to the Consolidated Interest Expense directly attributable
to any Debt or Capital Stock of that Person or any subsidiary of that
Person refinanced or otherwise discharged with respect to that Person and
its continuing subsidiaries, including as a result of the assumption of the
Debt or Capital Stock by the purchaser of the assets, provided that the
Person or any of its subsidiaries is no longer liable for that Debt or
Capital Stock, in connection with that asset sale for that period, or if
the Capital Stock of any subsidiary of the Person is sold, the Consolidated
Interest Expense for that period directly attributable to the Debt of the
subsidiary to the extent the Person and its continuing subsidiaries are no
longer liable for the Debt after the sale; and
(C) if since the beginning of the period that Person or any subsidiary
of that Person, by merger or otherwise, shall have made an Investment in
any subsidiary of that Person, or any Person which becomes a subsidiary of
that Person, or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction causing a calculation to
be made under this clause (c), which
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constitutes all of an operating unit of a business, EBITDA and Consolidated
Interest Expense for that period shall be calculated after giving pro forma
effect thereto, as if that Investment or acquisition occurred on the first
day of the period.
For purposes of this definition, pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Person
with respect to which the calculation is being made. If any Debt or Capital
Stock bears a floating rate of interest and is being given pro forma effect, the
interest on the Debt and the dividends on the Capital Stock shall be calculated
as if the rate in effect on the date of determination had been the applicable
rate for the entire period.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the sum of:
(1) the interest expense of that Person and its consolidated
subsidiaries, other than interest expense related to Non-Recourse Debt, for
the period as determined in accordance with GAAP consistently applied, plus
(2) the amount of all dividends paid or accrued on any series of
Preferred Stock, other than non-Redeemable Stock, of that Person and its
subsidiaries, other than Non-Recourse Subsidiaries.
"Consolidated Net Income" or "Consolidated Net Loss" means, with respect to
any Person, for any period, the consolidated net income or net loss of that
Person and its consolidated subsidiaries for the period as determined in
accordance with GAAP, adjusted to the extent included in calculating the net
income or net loss, by excluding:
(1) all extraordinary gains or losses in the period;
(2) net income or net loss of any other Person attributable to any
period prior to the date of combination of that other Person with that
Person or any of its subsidiaries on a "pooling of interests" basis;
(3) net gains or net losses in respect of dispositions of assets by
that Person or any of its subsidiaries, including pursuant to a
sale-and-leaseback arrangement, other than in the ordinary course of
business;
(4) the net income or net loss of any subsidiary of that Person to the
extent that the declaration of dividends or distributions by that
subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that subsidiary or its shareholders;
(5) the net income or net loss of any other Person that is not a
subsidiary of the first Person with respect to which Consolidated Net
Income is being calculated and in which any other Person, other than the
first Person and/or any of its subsidiaries, has an equity interest or of a
Non-Recourse Subsidiary of the first Person, except to the extent of the
amount of dividends or other distributions actually paid or made to the
first Person or any of its subsidiaries by the other Person during the
period, subject, in the case of a dividend or distribution received by a
subsidiary of the first Person, to the limitations contained in clause
(4) above;
(6) any interest income resulting from loans or investments in
Affiliates, other than cash interest income actually received;
(7) any reserve established at the time our Affiliates first acquired
U.S. Intec; and
(8) the cumulative effect of a change in accounting principles.
In determining Consolidated Net Income or Consolidated Net Loss, gains or losses
resulting from the early retirement, extinguishment or refinancing of
indebtedness for money borrowed, including any associated fees and expenses
shall be deducted or added back, respectively.
"Consolidated Net Worth" of any Person means, at any date, all amounts that
would, in conformity with GAAP, be included under shareholders' equity on a
consolidated balance sheet of the Person as at that date less, to the extent
otherwise included, any amounts attributable to Redeemable Stock.
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"Credit Agreement" means the credit agreement, dated as of August 29, 1997,
among us, the Lenders party thereto and The Bank of New York, as administrative
agent, as amended and supplemented from time to time.
"Debt" of any Person means, without duplication:
(1) the principal in respect of:
(A) indebtedness of the Person for money borrowed; and
(B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which the Person is responsible
or liable, other than those payable to government agencies to defer the
payment of workers' compensation liabilities, taxes, assessments or
other obligations, and provided in the ordinary course of business of
the Person;
(2) all Capital Lease Obligations of the Person;
(3) all obligations of the Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of the Person
and all obligations of the Person under any title retention agreement, but
excluding trade accounts payable and other accrued current liabilities
arising in the ordinary course of business;
(4) all obligations of the Person for the reimbursement of any obligor
on any letter of credit, bankers' acceptance or similar credit transaction.
This clause does not include obligations with respect to letters of credit
securing obligations, other than obligations described in (1) through
(3) above, entered into in the ordinary course of business of the Person to
the extent the letters of credit are not drawn upon or, if and to the
extent drawn upon, the drawing is reimbursed no later than the third
business day following receipt by the Person of a demand for reimbursement
following payment on the letter of credit;
(5) the amount of all obligations of the Person with respect to the
redemption, repayment or other repurchase of any Preferred Stock, but
excluding any accrued dividends;
(6) all obligations of the type referred to in clauses (1) through
(5) of other Persons and all dividends of other Persons for the payment of
which, in either case, the Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including guarantees of
those obligations and dividends; and
(7) all obligations of the type referred to in clauses (1) through
(6) of other Persons secured by any lien on any property or asset of that
Person whether or not the obligation is assumed by that Person, the amount
of the obligation being deemed to be the lesser of the value of that
property or assets or the amount of the obligation secured.
For purposes of the "Limitation on Asset Sales" covenant our Debt or Debt
of any of our subsidiaries will include the provision for existing or future
asbestos-related bodily injury claims, as set forth in our then most recent
consolidated financial statement.
"EBITDA" with respect to any Person for any period means the Consolidated
Net Income of that Person for the period, adjusted to the extent deducted in
calculating the Consolidated Net Income by adding back, without duplication:
(1) income tax expense of that Person and its subsidiaries accrued in
accordance with GAAP for the period, other than income taxes attributable
to extraordinary items or other items excluded from the definition of
Consolidated Net Income;
(2) Consolidated Interest Expense of that Person for the period;
(3) depreciation expense of that Person for the period;
(4) amortization expense of that Person for the period; and
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(5) minority interest in any non Wholly-Owned Recourse Subsidiary that
is otherwise consolidated in the financial statements of that Person, but
only so long as the subsidiary is consolidated with that Person for the
period for U.S. federal income tax purposes.
"Granules Contracts" means (1) the supply agreement, dated as of
January 1, 1995 between us and ISP Technologies, Inc., as amended by amendment
dated as of December 31, 1995 and (2) the letter dated November 9, 1995 from ISP
Mineral Products Inc. to U.S. Intec.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
the Person directly or indirectly guaranteeing any Debt or other obligation,
contingent or otherwise, of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of the Person:
(1) to purchase or pay, or advance or supply funds for the purchase or
payment of, that Debt or other obligation of the other Person, whether
arising by virtue of participation arrangements, by agreement to keep well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise; or
(2) entered into for the purpose of assuring the obligee of that Debt
or other obligation in any other manner of the payment of the obligation or
to protect the obligee against loss in respect of the obligation, in whole
or in part;
provided, that the term "guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Investment" means any direct or indirect advance, loan or other extension
of credit or capital contribution to, by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others, or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities Issued by, any other Person. An Investment does
not include advances or loans to customers in the ordinary course of business,
which are recorded in accordance with GAAP, at the time made as accounts
receivable on the balance sheet of the Person making the advances or loans.
"Issue" means issue, assume, Guarantee, incur or otherwise become liable
for; provided that any Debt or Capital Stock of a Person existing at the time a
Person becomes a subsidiary of another Person, whether by merger, consolidation,
acquisition or otherwise, shall be deemed to be issued by the subsidiary at the
time it becomes a subsidiary of the other Person.
"Management Agreement" means the amended and restated management agreement,
dated as of March 3, 1992, between us and ISP, as amended through December 3,
1998.
"Margin Stock" shall have the meaning provided in Regulation U.
"Material Assets" means assets, singly or in the aggregate, the book or
fair market value of which equals 5% or more of our consolidated tangible
assets, as set forth on our most recently publicly available balance sheet.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
received by us or any of our subsidiaries from the Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to the Asset
Sale, including without limitation, legal, accounting and investment
banking fees and sales commissions;
(2) taxes paid or payable
(A) including, without limitation, income taxes reasonably
estimated to be actually payable as a result of any disposition of
property within two years of the date of disposition, including under
any tax sharing arrangements and
(B) after taking into account any reduction in tax liability due to
available tax credits or deductions applicable to the transaction;
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(3) a reasonable reserve for the after-tax cost of any indemnification
obligations, fixed and/or contingent, attributable to seller's indemnities
to the purchaser undertaken by us or any of our subsidiaries in connection
with the Asset Sale; and
(4) repayment of Debt that is required to be repaid in connection with
the Asset Sale, under the agreements governing the Debt or Asset Sale.
"Non-Recourse Debt" of any Person means Debt or the portion of Debt:
(1) as to which neither Parent nor any of its subsidiaries, other than
a Non-Recourse Subsidiary:
(A) provides credit support, including any undertaking, agreement
or instrument which would constitute Debt;
(B) is directly or indirectly liable; or
(C) constitutes the lender; and
(2) no default with respect to which, including any rights which the
holders of the Debt may have to take enforcement action against the assets
of a Non-Recourse Subsidiary, would permit, upon notice, lapse of time or
both, any holder of any other Debt of the Person or its subsidiaries, other
than Non-Recourse Subsidiaries, to declare a default on the other Debt or
cause the payment of the other Debt to be accelerated or payable prior to
its stated maturity.
"Non-Recourse Subsidiary" of any Person means a subsidiary:
(1) which has been designated as a Non-Recourse Subsidiary;
(2) which has not acquired any assets directly or indirectly from
Parent or any of its subsidiaries other than at fair market value,
including by the receipt of Capital Stock of the Non-Recourse Subsidiary;
provided that, if any acquisition or series of related acquisitions
involves assets having a value in excess of $2,000,000, the acquisition or
series of related acquisitions shall be approved by a majority of our Board
of Directors in a board resolution which shall set forth that the
acquisitions are being, or have been, made at fair market value; and
(3) which has no Debt other than Non-Recourse Debt.
"Parent" means GAF Corporation so long as it owns, and any other Person
which acquires or owns, directly or indirectly, 80% or more of our voting stock.
"Permitted Holders" means
(1) Samuel J. Heyman, his heirs, administrators, executors and entities of
which a majority of the voting stock is owned by Samuel J. Heyman, his heirs,
administrators or executors and
(2) any Person controlled, directly or indirectly, by Samuel J. Heyman or
his heirs, administrators or executors.
"Permitted Lien" means:
(1) liens for taxes, assessments and governmental charges to the
extent not required to be paid under the Indenture;
(2) statutory liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like liens arising in
the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by an appropriate process of
law, and for which a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made;
(3) pledges or deposits in the ordinary course of business to secure
lease obligations or non-delinquent obligations under workers'
compensation, unemployment insurance or similar legislation;
(4) liens to secure the performance of public statutory obligations
that are not delinquent, appeal bonds, performance bonds or other
obligations of a like nature, other than for borrowed money;
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(5) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with our business and the businesses of
our subsidiaries, taken as a whole;
(6) liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of nondelinquent customs duties in
connection with the importation of goods;
(7) judgment and attachment liens not giving rise to a default or
event of default;
(8) leases or subleases granted to others not interfering in any
material respect with our business and the business of our subsidiaries,
taken as a whole;
(9) liens encumbering deposits made in the ordinary course of business
to secure non-delinquent obligations arising from statutory, regulatory,
contractual or warranty requirements of us or any of our subsidiaries for
which a reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made;
(10) any interest or title of a lessor in the property subject to any
lease, whether characterized as capitalized or operating other than any
interest or title resulting from or arising out of default by us or any of
our subsidiaries of our obligations under any lease which is material;
(11) liens arising from filing UCC financing statements for
precautionary purposes in connection with true leases or conditional sales
of personal property that are otherwise permitted under the Indenture and
under which we or any of our subsidiaries is lessee;
(12) broker's liens securing the payment of commissions and management
fees in the ordinary course of business;
(13) liens on cash and cash equivalents posted as margin pursuant to
the requirements of any bona fide hedge agreement relating to interest
rates, foreign exchange or commodities listed on public exchanges, but only
to the extent these liens are required from customers generally, regardless
of creditworthiness, in accordance with customary market practice;
(14) liens on cash collateralizing reimbursement obligations in
respect of letters of credit issued for our account or the account of any
of our subsidiaries in the ordinary course of business, other than letters
of credit issued as credit support for any Debt;
(15) liens arising in respect of accounts receivable arising as a
result of non-recourse sales of accounts receivable; and
(16) liens on stock or assets of any Non-Recourse Subsidiary securing
Debt owing by the Non-Recourse Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes, however designated, which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of the corporation,
over shares of Capital Stock of any other class of the corporation. Preferred
Stock of any Person shall include Redeemable Stock of the Person.
"Private Exchange Notes" mean a like principal amount of our debt
securities identical in all material respects to the notes that may be issued to
the initial purchasers under the circumstances set forth in the registration
rights agreement.
"Receivables Financing Agreement" means the Pooling and Servicing
Agreement, dated as of November 1, 1996, among us, BMCA Receivables Corporation
and The Bank of New York, as Trustee, and related agreements, as amended or
supplemented.
"Recourse Subsidiaries" of any Person means all subsidiaries of that Person
other than Non-Recourse Subsidiaries of that Person.
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"Redeemable Stock" means, with respect to any Person, Capital Stock of that
Person that by its terms or otherwise
(1) is required, directly or indirectly, to be redeemed on or prior to
the ninetieth day after the stated maturity of the notes,
(2) is redeemable or puttable, directly or indirectly, at the option
of the holder at any time on or prior to the ninetieth day after the stated
maturity of the notes, or
(3) is exchangeable or convertible into another security, other than a
security that is not itself Redeemable Stock.
"Restricted Investment" means, with respect to us or any of our
subsidiaries, an Investment in one of our Affiliates; provided, that the
following shall not be Restricted Investments:
(1) Investments in our company or any of our Recourse Subsidiaries;
(2) Investments in Unrestricted Affiliates; and
(3) Investments in Affiliates that become, as a result of the
Investment, Recourse Subsidiaries.
"Restricted Payment" means
(1) the declaration or making of any dividend or of any other payment
or distribution, other than dividends, payments or distributions payable
solely in shares of our Capital Stock other than Redeemable Stock, on or
with respect to our Capital Stock, other than Redeemable Stock; and
(2) any payment on account of the purchase, redemption, retirement or
other acquisition for value of our Capital Stock, other than Redeemable
Stock.
"Restricted Security" has the meaning set forth in Rule 144(a)(3) under the
Securities Act.
"Significant Subsidiary" means
(1) any of our subsidiaries, other than a Non-Recourse Subsidiary,
which at the time of determination either:
(A) had assets which, as of the date of our most recent quarterly
consolidated balance sheet, constituted at least 5% of our total assets
on a consolidated basis as of that date, in each case determined in
accordance with GAAP; or
(B) had revenues for the 12-month period ending on the date of our
most recent quarterly consolidated statement of income which constituted
at least 5% of our total revenues on a consolidated basis for that
period; or
(2) any of our subsidiaries, other than a Non-Recourse Subsidiary,
which, if merged with all of our defaulting subsidiaries, would at the time
of determination either:
(A) have had assets which, as of the date of our most recent
quarterly consolidated balance sheet, would have constituted at least
10% of our total assets on a consolidated basis as of that date; or
(B) have had revenues for the 12-month period ending on the date of
our most recent quarterly consolidated statement of income which would
have constituted at least 10% of our total revenues on a consolidated
basis for that period, each determination being made in accordance with
GAAP.
"Treasury Yield" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity, as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
applicable redemption date or, if the Statistical Release is no longer
published, any publicly available source of similar data, most nearly equal to
the then remaining Average Life of the notes; provided that, if the Average Life
of the notes is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Yield shall be
obtained by linear interpolation calculated to the nearest one-twelfth of a year
from the weekly average yields of United States Treasury securities for which
yields
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are given, except that if the average life of the notes is less than one year,
the weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
"Unrestricted Affiliate" means a Person, other than one of our subsidiaries
except a Non-Recourse Subsidiary, controlled by, or under common control with,
us in which no Affiliate of ours, other than (1) our company or a Wholly-Owned
Recourse Subsidiary, (2) any of our directors or officers or director or officer
of any of our subsidiaries, whose primary employment is by us or any of our
subsidiaries other than a Non-Recourse Subsidiary, except for Permitted Holders
or members of their immediate family and (3) another Unrestricted Affiliate, has
an Investment.
"U.S. Government Obligations" means money or direct non-callable
obligations of the United States of America for the payment of which the full
faith and credit of the United States is pledged.
"Wholly-Owned Recourse Subsidiary" means a subsidiary of a Person, other
than a Non-Recourse Subsidiary, all the Capital Stock of which, other than
directors' qualifying shares, is owned by that Person or another Wholly-Owned
Recourse Subsidiary of that Person.
"Wholly-Owned Subsidiary" means a subsidiary all the Capital Stock of
which, other than directors' qualifying shares, is owned by the applicable
corporation or another Wholly-Owned Subsidiary of the applicable corporation.
MATERIAL OPERATING RESTRICTIONS
Summary
In general, subject to several exceptions, the Indenture will limit, among
other things:
o the incurrence of additional debt by us and certain of our subsidiaries
unless certain leverage ratios are met;
o the issuance of preferred stock by us and our subsidiaries;
o the payment of dividends on our capital stock and investments in other
persons in excess of certain maximum aggregate dollar amounts;
o the creation of liens;
o transactions with affiliates, other than transactions permitted by other
sections of the Indenture, unless those transactions are on arms' length
terms and approved by our Board of Directors and, in transactions that
exceed a specified dollar amount or if each member of our Board of
Directors has a personal stake in the transactions, a nationally
recognized investment banking firm has given a written opinion regarding
the fairness of the transaction;
o the ability of any of our subsidiaries to create restrictions on the
subsidiary's ability to pay dividends or debt owed to us or any of our
other subsidiaries;
o sales of assets, unless the sales are for fair market value,
substantially for cash, and, in certain circumstances, the proceeds from
the sales are used to prepay debt, including the notes, or to invest in
additional assets;and
o consolidations, mergers and transfers of all or substantially all of our
assets, unless the successor entity expressly agrees to assume our
obligations under the Indenture, no event of default has occurred or is
continuing, additional debt could be incurred and the surviving person
has a net worth not less than ours.
This bullet-point summary discusses only material provisions of some of the
covenants applicable to the notes. We urge you to read the Indenture and the
more detailed description of these terms set forth below.
The Indenture contains, among others, the following covenants:
Limitation on Debt. (a) The Indenture provides that we shall not, and
shall not permit any of our subsidiaries to Issue, directly or indirectly, any
Debt unless, at the time of the Issuance and after giving effect to the
Issuance:
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(1) no default or event of default shall have occurred and be
continuing; and
(2) our Consolidated EBITDA Coverage Ratio for our most recently
completed four consecutive fiscal quarters ending at least 45 days prior to
the date the Debt is Issued is at least 2.00 to 1.00.
(b) Even if we do not meet the above conditions, the Indenture provides
that we may Issue the following Debt:
(1) The old notes, the registered notes and the Private Exchange
Notes;
(2) (A) Debt Issued by us to, and held by, one of our Wholly-Owned
Recourse Subsidiaries and (B) Debt of one of our Recourse Subsidiaries
Issued to, and held by, us or one of our Wholly-Owned Recourse
Subsidiaries; provided that any subsequent transfer of this Debt, other
than to us or to one of our Wholly-Owned Recourse Subsidiaries, shall be
deemed, in each case, to constitute the Issuance of this Debt by us or the
Subsidiary;
(3) Debt the proceeds of which are used by us to acquire assets;
provided, that, after giving effect to the Issuance of this Debt that
otherwise complies with this clause (3), the aggregate amount of all Debt
then outstanding at any time under this clause (3), including all
refinancings of debt then outstanding, shall not at any time exceed
$80,000,000;
(4) Acquired Debt;
(5) (A) Debt outstanding on December 3, 1998, including the Deferred
Coupon Notes, the 2005 Notes, the 2006 Notes and the 2007 Notes, and
(B) Debt Issued to refinance any Debt permitted by paragraph (a) above,
this clause (5) or by clauses (1) or (3) above; provided, that, in the case
of a refinancing:
(a) the amount of the Debt Issued shall not exceed the principal
amount or the accreted value, in the case of Debt Issued at a discount,
of the Debt refinanced plus, in each case, the reasonable costs incurred
by the issuer in connection with the refinancing;
(b) the Average Life and Stated Maturity of the Debt Issued shall
equal or exceed that of the Debt refinanced;
(c) the Debt Issued shall not rank senior in right of payment to
the Debt being refinanced;
(d) if the Debt being refinanced does not bear interest in cash
prior to a specified date, the refinancing Debt shall not bear interest
in cash prior to the specified date;
(e) if the Debt being refinanced is Debt permitted by clause (3)
above, the refinancing Debt is not secured by any assets not securing
the Debt refinanced or securing any improvements, additions or
replacements of those assets; and
(f) the obligors with respect to the refinancing Debt shall not
include any Persons who were not obligors, including predecessors of
those Persons, with respect to the Debt being refinanced;
(6) Non-Recourse Debt of one of our Non-Recourse Subsidiaries and
Guarantees of Non-Recourse Debt of Non-Recourse Subsidiaries which
Guarantees are recourse only to the stock of the Non-Recourse Subsidiaries;
(7) Debt under the Credit Agreement or any refinancing of that
agreement; provided, that the aggregate outstanding amount under the Credit
Agreement does not at any time exceed $150,000,000;
(8) Debt secured by receivables, including to refinance the
Receivables Financing Agreement, provided that the Debt does not exceed 85%
of the face amount of the receivables; and
(9) Debt, other than Debt identified in clauses (1) through
(8) above, in an aggregate principal amount outstanding at any one time not
to exceed $100,000,000.
Limitation on Preferred Stock. The Indenture provides that we may, and our
subsidiaries may, issue the following Preferred Stock:
(1) Preferred Stock of our company or Preferred Stock of any of our
subsidiaries issued to and held by us or one of our Wholly-Owned Recourse
Subsidiaries; provided that any subsequent transfer of that
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Preferred Stock, other than to us or to one of our Wholly-Owned Recourse
Subsidiaries, or if the Wholly-Owned Recourse Subsidiary ceases to be one
of our Wholly-Owned Recourse Subsidiaries shall be deemed, in each case, to
constitute the Issuance of that Preferred Stock by us or the subsidiary;
(2) Preferred Stock, other than Preferred Stock described in clause
(1) but including the Preferred Stock referred to in the proviso to clause
(1) above; provided that the liquidation value of any Preferred Stock
issued pursuant to this clause (2) shall constitute Debt for purposes of
this covenant and dividends on such Preferred Stock shall be included in
determining our Consolidated Interest Expense for purposes of calculating
our Consolidated EBITDA Coverage Ratio under paragraph (a) of "Limitation
on Debt;" and
(3) Preferred Stock of our company, other than Redeemable Stock.
Guarantees. To the extent we or any of our subsidiaries Guarantee any of
our Debt or Debt of any other subsidiary, the Guarantee and the Debt will be
deemed to be the same Debt and only the amount of the Debt will be deemed to be
outstanding. If we or any of our subsidiaries Guarantee any Debt of a Person
that, subsequent to the Issuance of the Guarantee, becomes one of our
subsidiaries, the Guarantee and the Debt Guaranteed shall be deemed to be the
same Debt, which shall be deemed to have been Issued when the Guarantee was
Issued and shall be deemed to be permitted to the extent the Guarantee was
permitted when Issued.
Limitation on Restricted Payments and Restricted Investments. (a) So long
as no default or an event of default shall have occurred and be continuing, we
may make, and our subsidiaries may make, directly or indirectly, any Restricted
Payment or Restricted Investment so long as, at the time of the Restricted
Payment or Restricted Investment and immediately after giving effect to the
Restricted Payment or Restricted Investment, the aggregate amount of Restricted
Payments made since December 3, 1998 and the aggregate amount of Restricted
Investments made since December 3, 1998 and then outstanding shall not exceed
the sum of:
(1) 75% of our cumulative Consolidated Net Income, or minus 100% of
our cumulative Consolidated Net Loss, accrued during the period beginning
April 3, 1994 and ending on the last day of the fiscal quarter for which
financial information has been made publicly available by us but ending no
more than 135 days prior to the date of the Restricted Payment or
Restricted Investment, treating the period as a single accounting period;
(2) 100% of the net cash proceeds, including the fair market value of
property other than cash as determined by our Board of Directors in good
faith, as evidenced by a board resolution, received by us from any Person,
other than one of our subsidiaries, from the Issuance and sale subsequent
to April 3, 1994 of our Capital Stock, other than Redeemable Stock, or as a
capital contribution; provided that, if the value of the non-cash
contribution is in excess of $10,000,000, we shall have received the
written opinion of a nationally recognized investment banking firm that the
terms thereof, from a financial point of view, are fair to our shareholders
or the shareholders of the subsidiary, in their capacity as shareholders,
the determination as to the value of any non-cash consideration referred to
in this clause (2) to be made by the investment banking firm, and the
opinion shall have been delivered to the Trustee;
(3) 100% of the net cash proceeds received by us from the exercise of
options or warrants on our Capital Stock, other than Redeemable Stock,
since April 3, 1994;
(4) 100% of the net cash proceeds received by us from the conversion
into Capital Stock, other than Redeemable Stock, of convertible Debt or
convertible Preferred Stock issued and sold, other than to a subsidiary of
ours, since April 3, 1994; and
(5) $60,000,000.
The amount expended for purposes of calculating the aggregate amount
of Restricted Payments and Restricted Investments, if other than in cash,
shall be the fair market value of the property as determined by our Board
of Directors in good faith as of the date of payment or investment.
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Our designation, or the designation by any of our subsidiaries, of a
subsidiary as a Non-Recourse Subsidiary shall be deemed to be the making of a
Restricted Investment by us in an amount equal to the outstanding Investments
made by us and our subsidiaries in the Person being designated a Non-Recourse
Subsidiary at the time of the designation.
(b) As long as no default or event of default shall have occurred and be
continuing, the Indenture provides that, notwithstanding the limitations in
clause (a) above, we can make the following payments and investments:
(1) the making of any Restricted Payment or Restricted Investment
within 60 days after (A) the date of declaration of the Restricted Payment
or Restricted Investment or (B) the making of a binding commitment in
respect of the Restricted Payment or Restricted Investment; provided that
at the date of declaration or commitment the Restricted Payment or
Restricted Investment complied with paragraph (a) of this covenant;
(2) any Restricted Payment or Restricted Investment made out of the
net cash proceeds we received from the substantially concurrent sale of our
Common Stock, other than to a subsidiary of ours; provided that the net
cash proceeds utilized shall not be included in paragraph (a) in
determining the amount of Restricted Payments or Restricted Investments we
could make under paragraph (a) of this covenant;
(3) cumulative Investments in Non-Recourse Subsidiaries not in excess
of $50,000,000 in the aggregate determined as of the date of the
Investment, the amount expended, if other than cash, to be determined by
our Board of Directors, as evidenced by a board resolution; and
(4) repurchases of our Capital Stock, in each case, from our employees
or employees of any of our subsidiaries, other than any Permitted Holder;
provided, however, that the aggregate amount of Restricted Payments made
under this clause shall not exceed $1,500,000 in any fiscal year.
Restricted Payments or Restricted Investments made pursuant to clause (2),
(3) or (4) shall not be deducted in determining the amount of Restricted
Payments or Restricted Investments made or then outstanding under paragraph
(a) of this covenant.
Limitation on Liens. The Indenture provides that we shall not, and our
subsidiaries shall not, directly or indirectly, incur or suffer to exist the
following liens upon their respective property or assets whether owned on
December 3, 1998 or acquired after that date, or on any income or profits from,
those assets other than the following:
(1) liens existing on December 3, 1998;
(2) Permitted Liens;
(3) Purchase money liens on our assets or improvements or additions to
those assets existing or created within 180 days after the time of
acquisition of or improvements or additions to those assets, or
replacements of those assets; provided that
(A) the acquisition, improvement or addition is otherwise permitted
by the Indenture,
(B) the principal amount of Debt, including Debt in respect of
Capitalized Lease Obligations, secured by each lien in each asset shall
not exceed the cost, including all Debt secured thereby, whether or not
assumed, of the item subject thereto, and the liens shall attach solely
to the particular item of property so acquired, improved or added and
any additions or accessions to the assets, or replacements of the
assets, and
(C) the aggregate amount of Debt secured by liens permitted by this
clause (3) shall not at any time exceed $40,000,000;
(4) liens to secure refinancing of any Debt secured by liens described
in clauses (1) through (3) above and (5) below; provided that
(A) refinancing does not increase the principal amount of Debt
being refinanced and
(B) the lien of the refinancing Debt does not extend to any asset
not securing the Debt being refinanced or improvements or additions to
the assets, or replacements of the assets;
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(5) liens securing Acquired Debt; provided that
(A) any lien secured the Acquired Debt at the time of the
incurrence of the Acquired Debt and the lien and Acquired Debt were not
incurred by us or any of our subsidiaries or by the Person being
acquired or from whom the assets were acquired in connection with, or in
anticipation of, the incurrence of the Acquired Debt by us or by one of
our subsidiaries and
(B) any lien does not extend to or cover any property or assets of
ours or of any of our subsidiaries other than the property or assets
that secured the Acquired Debt prior to the time the Debt became
Acquired Debt of ours or of one of our subsidiaries;
(6) liens on receivables securing Debt permitted by clause
(b)(8) under the "Limitation on Debt" covenant;
(7) liens securing intercompany Debt permitted by paragraph
(b)(2) under the "Limitation on Debt" covenant; and
(8) liens on our assets and assets of our subsidiaries in addition to
those referred to in clauses (1) through (7), provided that the liens only
secure our Debt and Debt of our subsidiaries in an aggregate amount not to
exceed at any one time outstanding $60,000,000.
Limitation on Transactions with Affiliates.
(a) The Indenture provides that we shall not enter, and our subsidiaries
shall not enter, directly or indirectly, into any transaction or series of
related transactions with any of our Affiliates, other than
(1) the making of a Restricted Payment or Restricted Investment
otherwise permitted by the "Limitation on Restricted Payments and
Restricted Investments" covenant or those transactions specifically
permitted by paragraph (b) under that covenant,
(2) transactions between or among our Non-Recourse Subsidiaries or
(3) subject to the next paragraph, transactions between or among us
and our subsidiaries, other than Non-Recourse Subsidiaries, including,
without limitation, any loan, advance or investment or any purchase, sale,
lease or exchange of property or the rendering of any service, unless the
terms of the transaction or series of transactions are set forth in writing
and are at least as favorable as those available in a comparable
transaction in arms-length dealings from an unrelated Person.
With respect to transactions entered into in reliance on paragraph (3),
if any transaction or series of related transactions involves aggregate
payments or other consideration in excess of $10,000,000, the transaction or
series of related transactions must be approved by a majority of those members
of our Board of Directors or the Board of Directors of the subsidiary, having no
personal stake in the business, transaction or transactions. These provisions do
not apply to any purchase or sale of inventory in the ordinary course of
business, but shall apply to any long-term arrangement involving the purchase of
granules or glass fiber from, or the provision of management services of the
type currently provided under the Management Agreement by, an Affiliate of ours,
including ISP or one of its subsidiaries. In addition, if that transaction or
series of related transactions, other than any purchase or sale of inventory in
the ordinary course of business or other than purchases of granules or glass
fiber from an Affiliate of ours, including ISP or one of its subsidiaries,
involves aggregate payments or other consideration in excess of $35,000,000, we
or the subsidiary must have also received a written opinion from a nationally
recognized investment banking firm that the transaction or series of related
transactions is fair to our shareholders or the shareholders of the subsidiary
from a financial point of view and the opinion has been delivered to the
Trustee. The value of any noncash consideration in transactions entered into in
reliance on paragraph (3) will be determined by a majority of those members of
our Board of Directors or the Board of Directors of the subsidiary, having no
personal stake in the business, transaction or transactions.
In addition, if each member of our Board of Directors or the Board of
Directors of the subsidiary proposing to engage in a transaction or series of
related transactions described in the immediately preceding paragraph has a
personal stake in the business, transaction or transactions, we or the
subsidiary may enter into the transaction or series of transactions if we or the
subsidiary shall have received the written opinion of a nationally recognized
investment banking firm that the terms thereof, from a financial point of view,
are
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fair to our shareholders or the shareholders of the subsidiary, in their
capacity as such and the opinion shall have been delivered to the Trustee. The
determination as to the value of any non-cash consideration referred to in the
immediately preceding paragraph will be made by that investment banking firm.
(b) The Indenture provides that notwithstanding the limitations in
clause (a) above, the following transactions are permitted:
(1) the purchase of granules from an Affiliate of ours, including ISP
or a subsidiary of ISP; provided that
(A) subject to paragraph (c) of this covenant, the price and other
terms shall not be less favorable to us than those set forth in the
Granules Contracts or
(B) a nationally recognized investment banking firm or accounting
firm has delivered a written opinion to us to the effect that either the
terms thereof are fair to us from a financial point of view or are on
terms at least as favorable to us as those available in comparable
transactions in arms'-length dealings from an unrelated third party;
(2) the continuance of the Management Agreement, including with an
Affiliate of ours other than ISP;
(A) in accordance with its terms or on terms no less favorable to
us than those contained in the Management Agreement or
(B) on other terms provided that we shall have received the written
opinion of a nationally recognized investment banking firm or accounting
firm that either the terms thereof, from a financial point of view, are
fair to us or are on terms at least as favorable to us as those
available in comparable transactions in arms'-length dealings from an
unrelated Person;
(3) any transaction between us or one of our subsidiaries and its own
employee stock ownership or benefit plan;
(4) any transaction with an officer or director of ours or of any
subsidiary of ours entered into in the ordinary course of business,
including compensation or employee benefit arrangements with any officer or
director;
(5) any business or transaction with an Unrestricted Affiliate;
(6) borrowings by us or our subsidiaries from Affiliates of ours;
provided that the loans are unsecured, are prepayable at any time without
penalty, contain no restrictive covenants and the effective cost of
borrowings do not exceed the interest rate then in effect from time to time
under the Credit Agreement or any refinancings of the Credit Agreement, or,
if that agreement is not outstanding, under our unsecured bank debt;
(7) payments made pursuant to the tax sharing agreement; or
(8) purchases made pursuant to the glass fiber contract; provided that
the terms of that contract are set forth in writing and are at least as
favorable to us as those available in a comparable transaction in
arms-length dealings with an unrelated Person.
(1) We shall not, and our subsidiaries shall not, amend, modify or waive
any provision of the tax sharing agreement, the Granules Contracts or the glass
fiber contract in any manner which is significantly adverse to us or to you. An
extension or modification of any of the Granules Contracts, or any similar
granules purchase contract, or the glass fiber contract on terms at least as
favorable to us as those available at the time of the extension or modification,
or any such new agreement, in a comparable transaction in arms-length dealings
with an unrelated Person shall not be deemed significantly adverse to us or you.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that we shall not, and our subsidiaries,
other than Non-Recourse Subsidiaries, shall not, directly or indirectly, create
or otherwise cause to exist or become effective any encumbrance or restriction
on the ability of any subsidiary to:
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(1) pay dividends or make any other distributions on its Capital Stock
or pay any Debt owed to us or any of our subsidiaries,
(2) make loans or advances to us or any of our subsidiaries,
(3) transfer any of its properties or assets to us or
(4) incur or suffer to exist liens in favor of the holders.
The preceding restrictions will not apply to encumbrances or restrictions
existing under or by reason of any of the following:
(1) applicable law;
(2) the Indenture and the indentures governing the Deferred Coupon
Notes, 2005 Notes, 2006 Notes and 2007 Notes;
(3) customary provisions restricting subletting or assignment of any
lease or license or other commercial agreement;
(4) any instrument governing Acquired Debt of any Person, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than that Person and its
subsidiaries, or the property or assets of that Person and its
subsidiaries, acquired;
(5) the liens specifically permitted by the provisions described under
"--Limitation on Liens;" provided that those liens and the terms governing
those liens do not, directly or indirectly, restrict us or our subsidiaries
from granting other liens, except as to the assets subject to those liens;
(6) the Credit Agreement, the Receivables Financing Agreement or other
Debt existing on December 3, 1998; and
(7) any refinancing of the Credit Agreement, the Receivables Financing
Agreement or any other Debt existing on December 3, 1998; provided that the
terms and conditions of any refinancing agreements relating to the terms
described in paragraphs (1) through (4) above are no less favorable to us
than those contained in the agreements governing the Debt being refinanced.
Limitation on Asset Sales. The Indenture provides that we shall not, and
our subsidiaries shall not, directly or indirectly, consummate an Asset Sale
unless:
(1) we or such subsidiary, receives consideration, including non-cash
consideration, whose fair market value shall be determined in good faith by
our Board of Directors or the Board of Directors of such subsidiary, as
evidenced by a board resolution, at the time of such Asset Sale at least
equal to the fair market value of the assets sold or otherwise disposed of,
as determined in good faith by its Board of Directors, as evidenced by a
board resolution;
(2) at least 75% of the consideration received by us or such
subsidiary, shall be cash or Cash Equivalents; provided that this clause
(2) shall not prohibit any Asset Sale for which we or the subsidiary,
receives 100% of the consideration, directly or through the acquisition of
capital stock of a Person, in operating assets; and
(3) in the case of an Asset Sale by us or any of our subsidiaries, we
shall commit to apply the Net Cash Proceeds of such Asset Sale within
300 days of the consummation of the Asset Sale, and shall apply the Net
Cash Proceeds within 360 days of receipt of the proceeds:
(A) to invest in the businesses that we and our Recourse
Subsidiaries are engaged in at the time of the Asset Sale or any like or
related business;
(B) to pay or satisfy any of our Debt or any Debt of our
subsidiaries, other than Debt which is subordinated by its terms to the
notes, or Preferred Stock of a subsidiary, including the Debt referred
to in the last sentence of the definition thereof or make provision for
the payment of Preferred Stock, through an escrow or other fund, and/or
(C) to offer to purchase the notes in a tender offer, a "Net
Proceeds Offer," at a redemption price equal to 100% of the principal
amount of the notes plus accrued interest on the notes to the
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date of purchase; provided, however, that we shall, to the extent
required under the indentures governing the Deferred Coupon Notes, the
2005 Notes, the 2006 Notes and 2007 Notes,
(a) first offer to purchase any outstanding Deferred Coupon
Notes in a tender offer at a redemption price equal to 100% of the
accreted value of the notes to the date of purchase,
(b) then offer to purchase any outstanding 2006 Notes, in a
tender offer at a redemption price equal to 100% of the principal
amount of the notes plus accrued interest on the notes to the date of
purchase,
(c) then offer to purchase any outstanding 2007 Notes in a
tender offer at a redemption price equal to 100% of the principal
amount of the notes plus accrued interest on the notes to the date of
purchase, and
(d) then offer to purchase any outstanding 2005 Notes in a
tender offer at a redemption price equal to 100% of the principal
amount of the notes plus accrued interest on the notes to the date of
purchase;
provided further, however, that we may defer making a Net Proceeds
Offer until the aggregate Net Cash Proceeds from Asset Sales to be
applied pursuant to this clause (3)(C) equal or exceed $25,000,000;
provided that (1) we may retain up to $7,000,000 of Net Cash
Proceeds from Asset Sales in any twelve-month period, without
complying with clause (3), and (2) any Asset Sale that would result
in a Change of Control shall not be governed by this covenant but
shall be governed by the provisions described above under
"Repurchase at Your Option--Change of Control."
We will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations under the Exchange Act to
the extent such laws and regulations are applicable in connection with the
repurchase of notes pursuant to a Net Proceeds Offer.
Restriction on Transfer of Certain Assets to Subsidiaries. The Indenture
provides that if we transfer or cause to be transferred, in one transaction or a
series of related transactions, Material Assets to any one or more of our
Non-Recourse Subsidiaries, we shall cause the transferee subsidiary to
(1) execute and deliver to the Trustee a supplemental indenture in
form reasonably satisfactory to the Trustee pursuant to which such
transferee subsidiary shall unconditionally Guarantee, on a senior basis,
all of our obligations under the notes and
(2) deliver to the Trustee an opinion of counsel that the supplemental
indenture has been duly executed and delivered by the transferee
subsidiary.
Investment Company Act. The Indenture provides that we will not take any
action that would require us or any of our subsidiaries to register as an
investment company under the Investment Company Act of 1940.
Reports to the Securities and Exchange Commission and You. We will file
with the Trustee and provide to you, within 15 days after we file them with the
Commission, copies of our annual report and the information, documents and other
reports, or copies of such portions of any of the foregoing as the Commission
may by rules and regulations prescribe, which we are required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act, without exhibits
in your case, unless you make such request in writing. Notwithstanding that we
may not be required to remain subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, we will continue to file with the
Commission and provide the Trustee and you with the annual reports and
information, documents and other reports, or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe, which
are specified in Sections 13 and 15(d) of the Exchange Act, without exhibits in
your case, unless you make that request in writing. We also will comply with the
other provisions of Section 314(a) of the Trust Indenture Act of 1939.
So long as any of the notes remain outstanding, we shall cause each annual,
quarterly and other financial report mailed or otherwise furnished by us
generally to public stockholders to be filed with the Trustee and mailed to the
holders of record at their addresses appearing in the register of notes
maintained by the Registrar, in each case at the time of such mailing or
furnishing to the stockholders.
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We shall provide to you or any beneficial owner of notes any information
reasonably requested by you or the beneficial owner concerning us and our
subsidiaries, including financial statements, necessary in order to permit you
or the beneficial owner to sell or transfer notes in compliance with Rule 144A
under the Securities Act or any similar rule or regulation adopted by the
Commission.
LIMITATION ON MERGER OR SALE OF ASSETS
The Indenture provides that we shall not consolidate with or merge with or
into or sell, assign, transfer or lease all or substantially all of our
properties and assets, either in one transaction or in a series of related
transactions, to any person, unless:
(1) we are the continuing Person, or the resulting, surviving or
transferee Person, if other than us, is a corporation organized and
existing under the laws of the United States or any state or the District
of Columbia and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, in form reasonably satisfactory to
the Trustee, all of our obligations under the notes and the Indenture, and
the Indenture shall remain in full force and effect;
(2) immediately before and immediately after giving effect to the
transaction, and treating any Debt which becomes an obligation of the
resulting, surviving or transferee Person or any of its subsidiaries as a
result of the transaction as having been issued by that Person or that
subsidiary at the time of the transaction, no default or event of default
shall have occurred and be continuing;
(3) immediately before and after giving effect to the transaction, the
resulting, surviving or transferee Person could incur at least $1.00 of
additional Debt under paragraph (a) of the "Limitation on Debt" covenant;
and
(4) immediately after giving effect to the transaction, the resulting,
surviving or transferee Person has a Consolidated Net Worth in an amount
which is not less than our Consolidated Net Worth immediately prior to the
transaction.
In connection with any consolidation, merger, sale, assignment, transfer or
lease contemplated by this covenant, we will deliver, or cause to be delivered,
to the Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each stating that the
consolidation, merger, sale, assignment, transfer or lease and the accompanying
supplemental indenture comply with this covenant and the Trust Indenture Act and
that all conditions precedent provided for in the Indenture relating to the
transaction have been complied with.
Upon any consolidation or merger or any sale, assignment, transfer or lease
of all or substantially all of our assets in accordance with the preceding two
paragraphs, the successor corporation formed by the consolidation or into which
we are merged or to which the sale, assignment, transfer or lease is made, shall
succeed to, and be substituted for, and may exercise every right and power of,
our company under the Indenture, with the same effect as if the successor
corporation had been named as the company under the Indenture, and, except in
the case of a lease, we will be discharged from all obligations and covenants
under the Indenture and the notes.
EVENTS OF DEFAULT
An event of default will occur under the Indenture if:
(1) we fail to pay interest on any note when the same becomes due and
payable and the failure continues for a period of 30 days;
(2) (A) we fail to pay the principal of any note when the same becomes
due and payable at maturity or otherwise or (B) we fail to redeem or
repurchase notes when required pursuant to the Indenture or the notes;
(3) we fail to comply with provisions described under "--Limitation on
Merger or Sale of Assets;"
(4) we fail to comply for 30 days after notice with any of our
obligations described under "Repurchase at Your Option--Change of Control"
and "--Certain Operating Restrictions;"
(5) we fail to comply for 60 days after notice with our other
agreements contained in the Indenture or the notes, other than those
referred to in clauses (1) through (4) above;
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(6) principal of or interest on our Debt or Debt of any of our
Significant Subsidiaries is not paid within any applicable grace period or
is accelerated by the holders of the Debt because of a default and the
total amount that is unpaid or accelerated exceeds $15,000,000 or its
foreign currency equivalent and the default continues for 5 days after
notice;
(7) certain events of bankruptcy, insolvency or reorganization of our
company or any of our Significant Subsidiaries occurs pursuant to or within
the meaning of any bankruptcy law; or
(8) any judgment or order for the payment of money in excess of
$15,000,000 in the aggregate is rendered against us or any of our
Significant Subsidiaries and
(A) there is a period of 60 days following the entry of the
judgment or order during which the judgment or order is not discharged,
waived or the execution of the judgment stayed and the default continues
for 10 days after the notice specified below or
(B) foreclosure proceedings have begun and have not been stayed
within five days of the commencement of the foreclosure proceeding.
A default under clauses (4), (5), (6) or (8) is not an event of default
until the Trustee or the holders of at least 25% in aggregate principal amount
of the outstanding notes notify us in writing of the default, and we do not cure
the default within the time specified in the clause after receipt of the notice.
The notice shall be given by the Trustee if requested in writing by the
holders of at least 25% in aggregate principal amount of the outstanding notes.
When a default under clause (4), (5), (6) or (8) is cured or remedied within the
specified period, it ceases to exist.
If an event of default, other than an event of default with respect to our
company specified in clause (7) above, occurs and is continuing, the Trustee, by
written notice to us, or the holders of at least 25% in aggregate principal
amount of the outstanding notes, by written notice to us and the Trustee, may
declare all unpaid principal of and accrued interest on the notes then
outstanding to be due and payable. Upon a declaration of acceleration, such
amount shall be due and payable immediately.
If an Event of Default with respect to our company specified in clause
(7) above occurs, all unpaid principal of and interest on the notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of you or the Trustee.
Under certain circumstances, the holders of a majority in aggregate
principal amount of the notes then outstanding may rescind an acceleration with
respect to the notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an event of default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the notes unless
those holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal and premium, or interest, if any, when due, no holder may
pursue any remedy with respect to the Indenture or the notes unless:
(1) the holder has previously given the Trustee notice that an event
of default is continuing;
(2) holders of at least 25% in principal amount at maturity of the
outstanding notes have requested the Trustee to pursue the remedy;
(3) those holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with the request within 60 days after
the receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount at maturity of the
outstanding notes have not given the Trustee a direction inconsistent with
the request within that 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount at maturity of the outstanding notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the
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Trustee determines is unduly prejudicial to the rights of any other noteholder
or that would involve the Trustee in personal liability.
The Indenture provides that, if a default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each noteholder notice of the
default within 90 days after it occurs. Except in the case of a default in the
payment of principal of or interest on any note, the Trustee may withhold notice
if and so long as a committee of its trust officers in good faith determines
that withholding notice is in the interests of the holders. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers of the certificate know of
any default that occurred during the previous year. We are also required to
deliver to the Trustee, within 10 days after the occurrence thereof, written
notice of any event which would constitute certain defaults, their status, and
what action we are taking or propose to take in respect thereof.
ABILITY TO TERMINATE OUR OBLIGATIONS
We may terminate at any time all our obligations under the notes and the
Indenture, except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the
notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a
registrar and paying agent in respect of the notes. This is known as "legal
defeasance." At any time we may terminate our obligations under the covenants
described under "--Certain Covenants" and "Repurchase at Your Option--Change of
Control," above and the operation of clauses (3), (4), (5), (6), (7), with
respect only to Significant Subsidiaries, or (8) described under "--Events of
Default" above and the limitations contained in clause (3) or (4) described
under "--Limitation on Merger or Sale of Assets"above. This is known as
"covenant defeasance."
We may exercise our legal defeasance option notwithstanding the prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an event of
default with respect thereto. If we exercise our covenant defeasance option,
payment of the notes may not be accelerated because of an event of default
specified in clause (3), (4), (5), (6), (7), with respect only to Significant
Subsidiaries, or (8) described under "--Events of Default" above, or because of
our failure to comply with clause (3) or (4) described under "--Limitation on
Merger or Sale of Assets" above.
In order to exercise either defeasance option, we must irrevocably deposit
in trust with the Trustee money or U.S. government obligations for the payment
of principal and interest, if any, on the notes to redemption or maturity, and
must comply with certain other conditions, including, unless the notes will
mature or be redeemed within 30 days, delivering to the Trustee an opinion of
counsel to the effect that holders of the notes will not recognize income, gain
or loss for federal income tax purposes as a result of the deposit and
defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been in the case if such
deposit and defeasance had not occurred, and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law.
PROCEDURES TO MODIFY OR AMEND THE INDENTURE
Modifications and amendments of the Indenture may be made by us and by the
Trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding notes; provided that no modification or amendment may,
without the consent of the holder of each outstanding note affected thereby:
(1) change the stated maturity of the principal of, or any installment
of interest on, any note or reduce the principal amount of any note, the
rate of interest on any note or any premium payable upon the redemption of
any note, or change the coin or currency in which any note or any premium
or the interest on any note is payable, or impair the right to institute
suit for the enforcement of any payment after the stated maturity of any
note;
(2) reduce the percentage in principal amount of the outstanding
notes, the consent of the holders of which is required for any supplemental
indenture or the consent of the holders is required for any waiver of
compliance with certain provisions of the Indenture or certain defaults
thereunder and their consequences provided for in the Indenture;
71
<PAGE>
(3) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past defaults
or relating to the waiver of certain covenants, except to increase any
percentage of outstanding notes required for those actions or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of each noteholder affected thereby; or
(4) except as otherwise permitted by the covenants described under
"--Limitation on Merger or Sale of Assets" consent to the assignment or
transfer by us of any of our rights and obligations under the Indenture.
It shall not be necessary for the consent of the holders to approve the
particular form of any proposed amendment, supplement or waiver, but it shall be
sufficient if the consent approves the substance of the amendment, supplement or
waiver. Any amendment, supplement or waiver shall be deemed effective upon
receipt by the Trustee of the necessary consents and shall not require execution
of any supplemental indenture to be effective.
The holders of a majority in aggregate principal amount of the notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Neither we nor any of our subsidiaries shall, directly or indirectly, pay
or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any noteholder for or as an inducement to any consent, waiver or
amendment of any terms or provisions of the notes unless the consideration is
offered to be paid or agreed to be paid to all noteholders which consent, waive
or agree to amend in the time frame set forth in solicitation documents relating
to the consent, waiver or amendment.
GOVERNING LAW
The Indenture and the notes will be governed by, and construed in
accordance with, the laws of the state of New York.
FORM OF REGISTERED NOTES
The certificates representing the registered notes will be issued in fully
registered form, without coupons. Except as described in the next paragraph, the
registered notes will be deposited with, or on behalf of, DTC, and registered in
the name of Cede & Co., as DTC's nominee in the form of a global note. Holders
of the registered notes will own book-entry interests in the global note
evidenced by records maintained by DTC.
Book-entry interests may be exchanged for certificated notes of like tenor
and equal aggregate principal amount, if
(1) DTC notifies us that it is unwilling or unable to continue as
depositary or we determine that DTC is unable to continue as
depositary and we fail to appoint a successor depositary within 90
days,
(2) we provide for the exchange pursuant to the terms of the Indenture
or
(3) we determine that the book-entry interests will no longer be
represented by global notes and we execute and deliver to the
Trustee instructions to that effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
72
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences to you of the exchange of your old notes for registered notes.
This summary is based upon provisions of the Internal Revenue Code of 1986,
Treasury Regulations promulgated under the Code, including temporary
regulations, administrative rulings and judicial decisions now in effect, all of
which are subject to change, possibly with retroactive effect. This summary does
not discuss all aspects of federal income taxation that may be relevant to you
in light of your individual investment circumstances or if you are subject to
special treatment under the federal income tax laws; for example, if you are a
dealer in securities or foreign currency, a bank, a life insurance company,
another financial institution, a tax-exempt organization or a person who holds,
or will hold, the notes as a position in a "straddle" or as part of a synthetic
security or "hedge," "conversion transaction" or other integrated investment, or
a person that has a "functional currency" other than the U.S. dollar. Further,
no aspect of state, local or foreign taxation is discussed in this prospectus.
The following discussion assumes that the old notes and registered notes are,
and will be, held by you as "capital assets" within the meaning of Section 1221
of the Code.
THE FOLLOWING SUMMARY IS INCLUDED IN THIS PROSPECTUS FOR GENERAL
INFORMATIONAL PURPOSES ONLY. ACCORDINGLY, YOU SHOULD CONSULT WITH YOUR OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF PARTICIPATION IN THE
EXCHANGE OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS OR OF UNITED STATES GIFT OR ESTATE TAXATION.
FEDERAL INCOME TAX CONSEQUENCES OF TENDERING NOTES
The exchange of your old notes for registered notes in the exchange offer
will not constitute an exchange for federal income tax purposes. Accordingly,
the exchange offer should have no federal income tax consequences to you if you
exchange your old notes for registered notes. For example, there should be no
change in your tax basis and your holding period should carry over to the
registered notes. In addition, the federal income tax consequences of holding
and disposing of your registered notes should be the same as those applicable to
your old notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives registered notes in the exchange offer for
its own account must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such notes.
We reserve the right in our sole discretion to purchase or make offers for, or
to offer registered notes for, any notes that remain outstanding subsequent to
the expiration of the exchange offer pursuant to this prospectus or otherwise
and, to the extent permitted by applicable law, purchase notes in the open
market, in privately negotiated transactions or otherwise. This prospectus, as
it may be amended or supplemented from time to time, may be used by all persons
subject to the prospectus delivery requirements of the Securities Act, including
broker-dealers in connection with resales of registered notes received in the
exchange offer, where such notes were acquired as a result of market-making
activities or other trading activities and may be used by us to purchase any
notes outstanding after expiration of the exchange offer. We have agreed that,
for a period of 180 days after the expiration of the exchange offer, it will
make this prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale.
We will not receive any proceeds from any sale of registered notes by
broker-dealers. Notes received by broker-dealers in the exchange offer for their
own account may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the registered notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such registered notes. Any broker-
dealer that resells notes that were received by it in the exchange offer for its
own account and any broker or
73
<PAGE>
dealer that participates in a distribution of such notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of such notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus meeting the requirements of the
Securities Act, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer, including the reasonable fees and expenses of counsel to the
initial purchasers of the old notes, other than commissions or concessions of
any brokers or dealers and will indemnify holders of the notes, including any
broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the registered notes and the guarantees of
the registered notes will be passed upon for us by Weil, Gotshal & Manges LLP,
New York, New York. Weil, Gotshal & Manges LLP has from time to time
represented, and continues to represent, Bear, Stearns & Co. Inc., one of the
initial purchasers of the old notes, in connection with various legal matters.
Weil, Gotshal & Manges LLP has from time to time represented, and may continue
to represent, GAF Corporation and its affiliates (including G-I Holdings,
International Specialty Products Inc. and Building Materials Corporation of
America) in connection with various legal matters.
EXPERTS
The audited consolidated financial statements and schedule of Building
Materials Corporation of America included herein have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included in this prospectus in reliance upon the
authority of said firm as experts in giving said reports.
74
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations for the three years ended December 31, 1998.......................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 1998.......................... F-5
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998................ F-7
Notes to Consolidated Financial Statements................................................................. F-8
Supplementary Data (Unaudited):
Quarterly Financial Data (Unaudited)..................................................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Building Materials Corporation of America:
We have audited the accompanying consolidated balance sheets of Building
Materials Corporation of America (a Delaware corporation and a 97%-owned
subsidiary of GAF Building Materials Corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, appearing on
Pages F-3 to F-33 of this Registration Statement on Form S-4, present fairly, in
all material respects, the financial position of Building Materials Corporation
of America and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule appearing on page S-2 of
this Registration Statement on Form S-4 is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 12, 1999
F-2
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- -------- ----------
(THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................................. $851,967 $944,629 $1,087,957
-------- -------- ----------
Costs and expenses:
Cost of products sold.................................................... 622,234 686,992 776,908
Selling, general and administrative...................................... 166,706 185,653 235,416
Goodwill amortization.................................................... 1,664 1,891 2,111
Nonrecurring charges..................................................... -- -- 27,563
-------- -------- ----------
Total costs and expenses................................................. 790,604 874,536 1,041,998
-------- -------- ----------
Operating income........................................................... 61,363 70,093 45,959
Interest expense........................................................... (32,044) (42,784) (49,674)
Other income (expense), net................................................ (1,455) 15,462 15,895
-------- -------- ----------
Income before income taxes and extraordinary losses........................ 27,864 42,771 12,180
Income taxes............................................................... (10,809) (16,680) (4,628)
-------- -------- ----------
Income before extraordinary losses......................................... 17,055 26,091 7,552
Extraordinary losses, net of income tax benefits of $11,101................ -- -- (18,113)
-------- -------- ----------
Net income (loss).......................................................... $ 17,055 $ 26,091 $ (10,561)
-------- -------- ----------
-------- -------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................................... $ 12,921 $ 24,987
Investments in trading securities....................................................... 62,059 95,134
Investments in available-for-sale securities............................................ 161,290 56,461
Investments in held-to-maturity securities.............................................. 499 6,358
Other short-term investments............................................................ 19,488 22,671
Accounts receivable, trade, less reserve of $2,752 and $4,035, respectively............. 13,643 24,249
Accounts receivable, other.............................................................. 50,839 54,795
Receivable from related parties, net.................................................... 11,303 --
Inventories............................................................................. 72,254 93,364
Other current assets.................................................................... 6,243 4,144
-------- --------
Total Current Assets.................................................................. 410,539 382,163
Property, plant and equipment, net........................................................ 241,946 314,400
Excess of cost over net assets of businesses acquired, net of accumulated amortization
of $8,780 and $10,891, respectively..................................................... 70,046 72,093
Deferred income tax benefits.............................................................. 35,981 60,427
Receivable from related parties........................................................... 31,661 --
Other assets.............................................................................. 17,113 18,410
-------- --------
Total Assets.............................................................................. $807,286 $847,493
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt......................................................................... $ 26,944 $ --
Current maturities of long-term debt.................................................... 3,801 4,273
Accounts payable........................................................................ 55,642 71,613
Payable to related parties, net......................................................... -- 5,430
Accrued liabilities..................................................................... 26,298 59,893
Reserve for product warranty claims..................................................... 13,100 20,239
-------- --------
Total Current Liabilities............................................................. 125,785 161,448
-------- --------
Long-term debt less current maturities.................................................... 555,446 588,413
-------- --------
Reserve for product warranty claims....................................................... 23,881 28,393
-------- --------
Other liabilities......................................................................... 19,175 24,366
-------- --------
Commitments and Contingencies.............................................................
Stockholders' Equity:.....................................................................
Series A Cumulative Redeemable Convertible Preferred Stock, $.01 par value per share;
100,000 and 200,000 shares authorized, respectively; no shares issued................. -- --
Class A Common Stock, $.001 par value per share; 1,050,000 and 1,300,000 shares
authorized, respectively; 1,000,010 and 1,015,010 shares issued and outstanding,
respectively.......................................................................... 1 1
Class B Common Stock, $.001 par value per share; 0 and 100,000 shares authorized,
respectively; 0 and 15,000 shares issued and outstanding, respectively................ -- --
Additional paid-in capital.............................................................. 86,910 89,400
Accumulated deficit..................................................................... (14,083) (24,644)
Accumulated other comprehensive income (loss)........................................... 10,171 (19,884)
-------- --------
Stockholders' Equity...................................................................... 82,999 44,873
-------- --------
Total Liabilities and Stockholders' Equity................................................ $807,286 $847,493
-------- --------
-------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents, beginning of year............................... $ 45,989 $ 124,560 $ 12,921
--------- --------- ---------
Cash provided by (used in) operating activities:
Net income (loss)........................................................ 17,055 26,091 (10,561)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Extraordinary losses................................................ -- -- 18,113
Depreciation........................................................ 23,857 22,936 26,579
Goodwill amortization............................................... 1,664 1,891 2,111
Deferred income taxes............................................... 10,609 16,481 4,128
Noncash interest charges............................................ 23,718 27,222 23,877
(Increase) decrease in working capital items............................. (14,905) 17,859 27,898
Purchases of trading securities.......................................... (33,824) (123,483) (189,197)
Proceeds from sales of trading securities................................ 30,394 55,378 124,931
(Increase) decrease in other assets...................................... (1,711) 1,773 483
Increase (decrease) in other liabilities................................. (4,158) (9,356) 7,779
Change in net receivable from/payable to related parties................. (341) (39,099) 42,242
Other, net............................................................... 787 (8,001) 9,581
--------- --------- ---------
Net cash provided by (used in) operating activities........................ 53,145 (10,308) 87,964
--------- --------- ---------
Cash provided by (used in) investing activities:
Capital expenditures..................................................... (25,629) (46,844) (71,073)
Acquisitions............................................................. -- (30,861) (59,187)
Proceeds from sale of assets............................................. -- -- 29,019
Purchases of available-for-sale securities............................... (139,355) (223,804) (89,324)
Purchases of held-to-maturity securities................................. -- (4,591) (6,357)
Purchases of other short-term investments................................ (660) -- --
Proceeds from sales of available-for-sale securities..................... 101,095 173,547 170,055
Proceeds from held-to-maturity securities................................ -- 11,361 499
--------- --------- ---------
Net cash used in investing activities...................................... (64,549) (121,192) (26,368)
--------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds (repayments) from sale of accounts receivable................... 8,015 (35,332) (4,754)
Increase (decrease) in short-term debt................................... -- 26,944 (26,944)
(Increase) decrease in loan receivable from related party................ -- (6,152) 6,152
Proceeds from issuance of debt........................................... 99,502 99,916 304,019
Increase (decrease) in borrowings under revolving credit facility........ -- 34,000 (34,000)
Repayments of long-term debt............................................. (34,856) (3,521) (287,904)
Capital contribution from (distributions to) parent company.............. 86,077 (91,000) --
Payments of asbestos claims.............................................. (66,224) (3,062) --
Financing fees and expenses.............................................. (2,539) (1,932) (6,099)
--------- --------- ---------
Net cash provided by (used in) financing activities........................ 89,975 19,861 (49,530)
--------- --------- ---------
Net change in cash and cash equivalents.................................... 78,571 (111,639) 12,066
--------- --------- ---------
Cash and cash equivalents, end of year..................................... $ 124,560 $ 12,921 $ 24,987
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-5
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Effect on cash from (increase) decrease in working capital items*:
Accounts receivable................................................... $ (5,122) $ 7,773 $ (4,018)
Inventories........................................................... (8,123) 8,001 (10,853)
Other current assets.................................................. 756 (3,029) 2,367
Accounts payable...................................................... (4,096) 10,210 10,228
Accrued liabilities................................................... 1,680 (5,096) 30,174
--------- --------- ---------
Net effect on cash from (increase) decrease in working capital items....... $ (14,905) $ 17,859 $ 27,898
--------- --------- ---------
--------- --------- ---------
Cash paid during the period for:
Interest (net of amount capitalized)..................................... $ 6,442 $ 14,001 $ 19,714
Income taxes (including taxes paid pursuant to the Tax Sharing
Agreement)............................................................ 537 346 1,174
Acquisition of Leatherback Industries business, net of $8 cash acquired:
Fair market value of assets acquired.................................. $ 27,167
Purchase price of acquisition......................................... 25,531
---------
Liabilities assumed................................................... $ 1,636
---------
---------
Acquisition of Leslie-Locke business:
Fair market value of assets acquired.................................. $ 59,318
Purchase price of acquisition......................................... 43,468
---------
Liabilities assumed................................................... $ 15,850
---------
---------
</TABLE>
- ------------------
* Working capital items exclude cash and cash equivalents, short-term
investments, short-term debt and net receivables from/payables to related
parties. Working capital acquired in connection with acquisitions is reflected
in "Acquisitions". The effects of reclassifications between noncurrent and
current assets and liabilities are excluded from the amounts shown above. In
addition, the increase in receivables shown above does not reflect the cash
proceeds from the sale of certain of the Company's receivables (see Note 7);
such proceeds are reflected in cash from financing activities. As discussed in
Notes 1 and 2, in connection with the Separation Transactions, G-I Holdings
made a noncash contribution to the Company in December 1996 of $2.8 million of
available-for-sale securities, $7.1 million of held-to-maturity securities and
$13.2 million of other short-term investments.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL
STOCK AND ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE
CAPITAL INCOME (LOSS) DEFICIT INCOME (LOSS)
---------- ------------- ----------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C>
Balance, December 31, 1995.................................. $ 73,374 $ (363) $ (57,229)
Comprehensive income--year ended December 31, 1996:
Net income.............................................. -- -- 17,055 $ 17,055
---------
Other comprehensive income, net of tax:
Unrealized holding gains, net of income taxes of
$1,883............................................... 3,020 3,020
Less: Reclassification adjustment for gains included in
net income, net of income tax effect of $1,550....... 2,498 2,498
--------- ---------
Unrealized gains on available-for-sale securities....... -- 522 -- 522
Minimum pension liability adjustment.................... -- 552 -- 552
---------
Comprehensive income...................................... $ 18,129
---------
---------
Capital contribution from parent company.................. 109,326 -- --
-------- --------- ---------
Balance, December 31, 1996.................................. $182,700 $ 711 $ (40,174)
Comprehensive income--year ended December 31, 1997:
Net income.............................................. -- -- 26,091 $ 26,091
---------
Other comprehensive income, net of tax:
Unrealized holding gains, net of income taxes of
$5,043............................................... 7,886 7,886
Less: Reclassification adjustment for losses included in
net income, net of income tax effect of $1,548....... (2,422) (2,422)
--------- ---------
Unrealized gains on available-for-sale securities....... -- 10,308 -- 10,308
Minimum pension liability adjustment.................... -- (848) -- (848)
---------
Comprehensive income...................................... $ 35,551
---------
---------
Distributions to parent company........................... (91,000) -- --
Transfer of Nashville, Tennessee plant to GAF Fiberglass
Corporation............................................. (4,789) -- --
-------- --------- ---------
Balance, December 31, 1997.................................. $ 86,911 $ 10,171 $ (14,083)
Comprehensive income (loss)--year ended December 31, 1998:
Net loss................................................ -- -- (10,561) $ (10,561)
---------
Other comprehensive income, net of tax:
Unrealized holding losses, net of income tax benefit of
$10,409.............................................. (16,504) (16,504)
Less: Reclassification adjustment for gains included in
net loss, net of income tax effect of $7,064......... 11,526 11,526
--------- ---------
Change in unrealized loss on available-for-sale
securities........................................... -- (28,030) -- (28,030)
Minimum pension liability adjustment.................... -- (2,025) -- (2,025)
---------
Comprehensive income (loss)............................... $ (40,616)
---------
---------
Issuance of 30,000 shares of restricted common stock...... 2,490 -- --
-------- --------- ---------
Balance, December 31, 1998.................................. $ 89,401 $ (19,884) $ (24,644)
-------- --------- ---------
-------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-7
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Building Materials Corporation of America ("BMCA" or the "Company") was
formed on January 31, 1994 and is a 97%-owned subsidiary of GAF Building
Materials Corporation ("GAFBMC"), which is a wholly-owned subsidiary of G
Industries Corp. ("G Industries"). G Industries is a wholly-owned subsidiary of
G-I Holdings Inc. ("G-I Holdings"), which is a wholly-owned subsidiary of GAF
Corporation ("GAF").
NOTE 1. FORMATION OF THE COMPANY
Effective as of January 31, 1994, GAFBMC transferred to the Company all of
its business and assets, other than three closed manufacturing facilities,
certain deferred tax assets and receivables from affiliates. The Company
recorded the assets and liabilities related to such transfer at GAFBMC's
historical costs. The Company contractually assumed all of GAFBMC's liabilities,
except (i) all of GAFBMC's environmental liabilities, other than environmental
liabilities relating to the Company's plant sites and its business as
then-conducted, (ii) all of GAFBMC's tax liabilities, other than tax liabilities
arising from the operations or business of the Company and (iii) all of GAFBMC's
asbestos-related liabilities, other than the first $204.4 million of such
liabilities (whether for indemnity or defense) relating to then-pending
asbestos-related bodily injury cases and previously settled asbestos-related
bodily injury cases which the Company contractually assumed and agreed to pay.
G-I Holdings and GAFBMC have agreed, jointly and severally, to indemnify the
Company from liabilities not assumed by the Company, including asbestos-related
and environmental liabilities not expressly assumed by the Company. See Note 3.
The Company's Consolidated Financial Statements have been prepared on a
basis which retroactively reflects the formation of the Company, as discussed
above, for all periods presented prior to 1995, except that the Company's
assumption of $204.4 million of asbestos-related liabilities described above and
related income tax benefits of $79.7 million have been reflected as a charge of
$124.7 million to stockholder's equity upon the Company's formation as of
January 31, 1994.
In October 1995, G-I Holdings acquired all of the outstanding shares of
U.S. Intec, Inc. ("U.S. Intec"), which manufactures commercial roofing products,
for a purchase price of $27.5 million and assumed $35.0 million of U. S. Intec's
indebtedness. As of January 1, 1997, U.S. Intec became a wholly-owned subsidiary
of the Company through a capital contribution to the Company by G-I Holdings.
Accordingly, the Company's historical consolidated financial statements include
U.S. Intec's results of operations and cash flows from the date of its
acquisition by G-I Holdings (October 20, 1995), including sales and net income
of $99.0 and $1.3 million, respectively, for the year ended December 31, 1996.
The Company recorded the assets and liabilities of U.S. Intec at G-I Holdings'
purchase accounting basis.
On January 1, 1997, GAF effected a series of transactions involving its
subsidiaries (the "Separation Transactions") that resulted in, among other
things, (i) the approximately 83.5% of the issued and outstanding common stock
of International Specialty Products Inc. ("ISP"), an affiliate, owned by a
subsidiary of GAF, being distributed to ISP Holdings Inc., a subsidiary of GAF,
and the capital stock of ISP Holdings being distributed to the stockholders of
GAF, (ii) the Company's glass fiber manufacturing facility in Nashville,
Tennessee, and certain related assets and liabilities, being transferred to GAF
Fiberglass Corporation ("GFC"), (iii) U.S. Intec becoming a subsidiary of the
Company and (iv) G-I Holdings making a contribution to the Company in December
1996 of $82.5 million in cash and short-term investments. As a result of the
Separation Transactions, ISP Holdings and ISP are no longer direct or indirect
subsidiaries of GAF, while the Company and GFC have remained subsidiaries of
GAF. On July 15, 1998, ISP merged with and into ISP Holdings and ISP Holdings
changed its name to International Specialty Products Inc. The Company recorded
the transfer of the Nashville facility as a distribution to its indirect parent,
G-I Holdings, at its net book value. G-I Holdings then made a capital
contribution to GFC equal to such net book value. The results of operations,
cash flows and assets and liabilities of the Nashville facility are included in
the Company's consolidated financial statements for all periods prior to the
date of transfer of January 1, 1997.
The parent corporations of the Company are GAF, G-I Holdings, G Industries
and GAFBMC. Except for the Company, the only other significant asset of such
parent corporations is GFC. As a result of the Separation
F-8
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. FORMATION OF THE COMPANY--(CONTINUED)
Transactions, dividends from ISP are not available to GAF and G-I Holdings, and
loans from ISP to GAF, G-I Holdings and the Company are prohibited by certain of
ISP's debt instruments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All subsidiaries are consolidated and intercompany transactions have been
eliminated.
Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates.
Actual results could differ from those estimates. In the opinion of management,
the financial statements herein contain all adjustments necessary to present
fairly the financial position and the results of operations and cash flows of
the Company for the periods presented. The Company has a policy to review the
recoverability of long-lived assets and identify and measure any potential
impairments. The Company does not anticipate any changes in management estimates
that would have a material impact on operations, liquidity or capital resources,
subject to the matters discussed in Note 15 (Commitments and Contingencies).
Short-term Investments
For securities classified as "trading" (including short positions),
unrealized gains and losses are reflected in income. For securities classified
as "available-for-sale," unrealized gains and losses, net of income tax effect,
are included in a separate component of stockholders' equity, "Accumulated other
comprehensive income (loss)," and were $11.1 and $(16.9) million as of
December 31, 1997 and 1998, respectively. Investments classified as
"held-to-maturity" securities are carried at amortized cost in the Consolidated
Balance Sheets.
"Other income (expense), net" includes $6.4, $26.4 and $21.5 million of net
realized and unrealized gains on securities in 1996, 1997 and 1998,
respectively. The determination of cost in computing realized gains and losses
is based on the specific identification method.
In connection with the Separation Transactions (see Note 1), in December
1996, G-I Holdings made a capital contribution to the Company of $2.8 million of
available-for-sale securities, $7.1 million of held-to-maturity securities and
$13.2 million of other short-term investments.
As of December 31, 1997 and 1998, the market value of the Company's equity
securities held long was $223.0 and $172.5 million, respectively, and the
Company had $18.6 and $144.1 million, respectively, of short positions in common
stocks, based on market value. As of December 31, 1997 and 1998, the market
value of the Company's held-to-maturity securities was $0.5 and $6.4 million,
respectively. The Company enters into equity-related financial instruments with
off-balance-sheet risk as a means to manage its exposure to market fluctuations
on its short-term investments. As of December 31, 1998, the market value of
equity-related short contracts was $143.2 million, while the value of
equity-related long contracts was $35.2 million, both of which are marked-to-
market each month, with unrealized gains and losses included in results of
operations. The market values referred to above are based on quotations as
reported by various stock exchanges and major broker-dealers. With respect to
its investments in securities, the Company is exposed to the risk of market
loss.
"Other short-term investments" are investments in limited partnerships
which are accounted for by the equity method. Gains and losses are reflected in
"Other income (expense), net." Liquidation of partnership interests generally
require a 30 to 45 day notice period.
Cash and cash equivalents include cash on deposit and debt securities
purchased with original maturities of three months or less.
F-9
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for a portion of the Company's
inventories. All other inventories are determined principally based on the FIFO
(first-in, first-out) method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line method
based on the estimated economic lives of the assets. The Company uses an
economic life of 5-25 years for land improvements, 10-40 years for buildings and
building equipment, and 3-20 years for machinery and equipment, which includes
furniture and fixtures. Certain interest charges are capitalized during the
period of construction as part of the cost of property, plant and equipment.
Excess of Cost Over Net Assets of Businesses Acquired ("Goodwill")
Goodwill is amortized on the straight-line method over a period of
approximately 40 years. The Company believes that the goodwill is recoverable.
To determine if goodwill is recoverable, the Company compares the net carrying
amount to undiscounted projected cash flows of the underlying businesses to
which the goodwill pertains. If goodwill is not recoverable, the Company would
record an impairment based on the difference between the net carrying amount and
fair value.
Debt Issuance Costs
Debt issuance costs are amortized to expense over the life of the related
debt.
Revenue Recognition
Revenue is recognized at the time products are shipped to the customer.
Interest Rate Swaps
Gains (losses) on interest rate swap agreements ("swaps") are deferred and
amortized as a reduction (increase) of interest expense over the shorter of the
remaining life of the swaps or the remaining period to maturity of the debt
issue with respect to which the swaps were entered.
Research and Development
Research and development expenses are charged to operations as incurred and
were $4.5, $5.4 and $6.0 million in 1996, 1997 and 1998, respectively.
Warranty Claims
The Company provides certain limited warranties covering most of its
residential roofing products for periods ranging from 20 to 40 years. The
Company also offers limited warranties and guarantees of varying duration on its
commercial roofing products and limited warranties covering most of its
specialty building products and accessories for periods ranging from 5 to
10 years. Income from warranty contracts related to commercial roofing products
is recognized over the life of the agreements. The Company believes that the
reserves established for estimated probable future warranty claims are adequate.
The Company's 1997 Consolidated Statement of Operations includes a
provision of $3.0 million in connection with the Company's estimated obligations
related to product warranty claims for a discontinued product. See also Note 5.
F-10
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Environmental Liability
The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters. The Company estimates
that its liability in respect of such environmental matters, and certain other
environmental compliance expenses, as of December 31, 1998, is $0.8 million,
before reduction for insurance recoveries reflected on its balance sheet of
$0.8 million. The Company's liability is reflected on an undiscounted basis. See
Item 3, "Legal Proceedings--Environmental Litigation," which is incorporated
herein by reference, for further discussion with respect to environmental
liabilities and estimated insurance recoveries.
Accumulated Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting comprehensive income and its components in annual and interim
financial statements. The Company adopted SFAS No. 130 as of January 1, 1998 and
has reclassified financial statements for earlier periods. In the Company's
case, comprehensive income includes net income, unrealized gains and losses from
investments in available-for-sale securities, net of income tax effect, and
minimum pension liability adjustments. The Company has chosen to disclose
Comprehensive Income in the Consolidated Statements of Stockholders' Equity.
Changes in the components of "Accumulated other comprehensive income
(loss)" for the years 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
UNREALIZED GAINS MINIMUM ACCUMULATED
(LOSSES) ON PENSION OTHER
AVAILABLE-FOR-SALE LIABILITY COMPREHENSIVE
SECURITIES ADJUSTMENT INCOME (LOSS)
------------------ ---------- -------------
(THOUSANDS)
<S> <C> <C> <C>
Balance, December 31, 1995............................... $ 272 $ (635) $ (363)
Change for the year 1996................................. 522 552 1,074
-------- -------- ---------
Balance, December 31, 1996............................... $ 794 $ (83) $ 711
Change for the year 1997................................. 10,308 (848) 9,460
-------- -------- ---------
Balance, December 31, 1997............................... $ 11,102 $ (931) $ 10,171
Change for the year 1998................................. (28,030) (2,025) (30,055)
-------- -------- ---------
Balance, December 31, 1998............................... $(16,928) $ (2,956) $ (19,884)
-------- -------- ---------
-------- -------- ---------
</TABLE>
New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999, but may be adopted
earlier. If the Company had adopted SFAS No. 133 for the year ended
December 31, 1998, there would have been no significant impact on results of
operations. The Company has not yet determined the timing, method or effect on
the Consolidated Balance Sheets of adoption of SFAS No. 133.
NOTE 3. ASBESTOS-RELATED BODILY INJURY CLAIMS
In connection with its formation, the Company contractually assumed and
agreed to pay the first $204.4 million of liabilities for asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber
F-11
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. ASBESTOS-RELATED BODILY INJURY CLAIMS--(CONTINUED)
("Asbestos Claims") of its parent, GAFBMC. As of March 30, 1997, the Company had
paid all of its assumed asbestos-related liabilities. See also Note 1. G-I
Holdings and GAFBMC have jointly and severally agreed to indemnify the Company
against any other existing or future claims related to asbestos-related
liabilities if asserted against the Company.
GAF has advised the Company that, as of December 28, 1998, it is defending
approximately 113,800 pending alleged Asbestos Claims (having received notice of
approximately 93,500 new Asbestos Claims during 1998) and has resolved
approximately 293,500 Asbestos Claims (including approximately 59,000 in 1998).
GAF has advised the Company that it believes that a significant portion of the
claims filed in 1998 were already pending against other defendants for some
period of time, with GAF being added as a defendant upon the lifting in 1997 of
the injunction relating to the Georgine class action settlement. This injunction
prevented plaintiffs from filing or proceeding with their Asbestos Claims other
than in accordance with the Georgine class action settlement, which was rendered
inoperable in 1997 by a United States Supreme Court ruling. GAF's current
estimated average cost for Asbestos Claims resolved in 1998 (including Asbestos
Claims disposed of at no cost to GAF) is approximately $3,500 per claim.
Substantially all of the costs in respect of these Asbestos Claims will be paid
over several years. There can be no assurance that the actual costs of resolving
pending and future Asbestos Claims will approximate GAF's estimated average
costs for the Asbestos Claims resolved in 1998.
GAF has stated that it is committed to effecting a comprehensive resolution
of Asbestos Claims, that it is exploring a number of options to accomplish such
resolution, but there can be no assurance that this effort will be successful.
The Company believes that it will not sustain any additional liability in
connection with asbestos-related claims. While the Company cannot predict
whether any asbestos-related claims will be asserted against it or its assets,
or the outcome of any litigation relating to such claims, it believes that it
has meritorious defenses to such claims. Moreover, it has been jointly and
severally indemnified by G-I Holdings and GAFBMC with respect to such claims.
Should GAF or GAFBMC be unable to satisfy judgments against it in
asbestos-related lawsuits, its judgment creditors might seek to enforce their
judgments against the assets of GAF or GAFBMC, including its holdings of common
stock of the Company, and such enforcement could result in a change of control
with respect to the Company. See Note 10 for information regarding the Company's
debt instruments and facilities.
For a further discussion with respect to the foregoing, see
"Business--Legal Proceedings," which is incorporated herein by reference.
NOTE 4. ACQUISITIONS AND DISPOSITION
On March 14, 1997, the Company acquired the assets of the Leatherback
Industries division of Hollinee Corporation, which is engaged in the manufacture
and sale of asphalt-saturated felts and other felt and construction paper
products. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the estimated fair
values of the identifiable net assets acquired, and the excess was recorded as
goodwill. The results of the Leatherback business, including sales of
$30.2 million for 1997, are included from the date of acquisition; the net
effects of this acquisition were not material to 1997 results of operations.
Effective June 1, 1998, the Company purchased for approximately $43.5
million substantially all of the assets of Leslie-Locke Inc. ("Leslie-Locke"), a
wholly-owned subsidiary of Leslie Building Products, Inc., which manufactures
and markets a variety of specialty building products and accessories for the
professional and do-it-yourself remodeling and residential construction
industries from manufacturing facilities in Burgaw, North Carolina and Compton,
California. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the estimated fair
values of the identifiable net assets acquired, and the excess was recorded as
goodwill. The results of the Leslie-Locke business, including sales of
$53.3 million for 1998, are included from the date of acquisition; the net
effects of this acquisition were not material to 1998 results of operations.
F-12
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. ACQUISITIONS AND DISPOSITION--(CONTINUED)
Effective December 1, 1998, the Company sold its perlite insulation
manufacturing assets to Johns Manville Corporation for net cash proceeds of
approximately $29.0 million. The pre-tax gain as a result of this sale was not
significant to the Company's results of operations. In addition, as part of the
transaction, Johns Manville and the Company entered into a long-term agreement
to supply the Company with perlite insulation products, which will enable the
Company to continue to serve its commercial roofing customers. As a result, the
sale is not expected to have a material impact on the Company's results of
operations.
NOTE 5. NONRECURRING CHARGES
The Company recorded pre-tax nonrecurring charges in the third quarter of
1998 aggregating $27.6 million, of which $20.0 million related to the settlement
of a national class action lawsuit involving asphalt shingles manufactured
between January 1, 1973 and December 31, 1997. Under the terms of the September
1998 settlement, which has been granted preliminary approval by the court
pending the outcome of a fairness hearing, the Company will provide property
owners whose GAF shingles were manufactured during this period and which suffer
certain damages during the term of their original warranty period, and who file
a qualifying claim, with an opportunity to receive certain limited benefits
beyond those already provided in their existing warranty. These limited benefits
consist of the right of an eligible claimant to receive replacement materials
and, in some cases, installment labor, pro rated over the term of the original
warranty period. An eligible claimant has the option to receive these limited
benefits in cash, materials or a combination of both. The settlement agreement
does not include provisions for the creation of a settlement fund. If the court
grants final approval of this settlement, the settlement will resolve a class
action filed against GAFBMC in Mobile County, Alabama. Several other class
action lawsuits that had been brought against GAFBMC in 1996 and 1997 were
stayed pending final approval of the Mobile County, Alabama class action. Each
of these lawsuits had alleged that certain GAF shingles were defective and
sought unspecified damages. The Company agreed to the settlement to avoid the
expense required to defend such litigation. The Company believes the court will
grant final approval of the settlement, although there can be no assurance in
that regard. If the court does not grant final approval and the settlement
agreement is rendered inoperable, the Mobile County, Alabama action would
continue as if no settlement agreement had existed. In addition, the stays of
the other class actions could be lifted and those actions could continue. In
that event, the Company would reverse the pre-tax nonrecurring charge of
$20.0 million related to the settlement.
In July 1998, the Company recorded a pre-tax nonrecurring charge of
$7.6 million related to a grant to its President and Chief Executive Officer of
30,000 shares of restricted common stock of the Company and related cash
payments to be made over a period of time (substantially all of which is earned)
in connection with the termination by an affiliate of preferred stock options
and stock appreciation rights held by such officer.
NOTE 6. INCOME TAXES
Income tax provision, which has been computed on a separate return basis,
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- -------
(THOUSANDS)
<S> <C> <C> <C>
Federal--deferred..................................................... $ (9,241) $(14,081) $(4,082)
-------- -------- -------
State and local:
Current............................................................. (200) (200) (500)
Deferred............................................................ (1,368) (2,399) (46)
-------- -------- -------
Total state and local............................................ (1,568) (2,599) (546)
-------- -------- -------
Income tax provision.................................................. $(10,809) $(16,680) $(4,628)
-------- -------- -------
-------- -------- -------
</TABLE>
F-13
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAXES--(CONTINUED)
The differences between the income tax provision computed by applying the
statutory Federal income tax rate to pre-tax income, and the income tax
provision reflected in the Consolidated Statements of Operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- -------
(THOUSANDS)
<S> <C> <C> <C>
Statutory provision................................................... $ (9,752) $(14,970) $(4,263)
Impact of:
State and local taxes, net of Federal benefits...................... (1,019) (1,689) (355)
Nondeductible goodwill amortization................................. (484) (564) (641)
Other, net.......................................................... 446 543 631
-------- -------- -------
Income tax provision.................................................. $(10,809) $(16,680) $(4,628)
-------- -------- -------
-------- -------- -------
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(THOUSANDS)
<S> <C> <C>
Deferred tax liabilities related to property, plant and equipment...... $(14,742) $(14,803)
-------- --------
Deferred tax assets related to:
Expenses not yet deducted for tax purposes........................... 29,294 47,507
Net operating losses not yet utilized under the Tax Sharing
Agreement......................................................... 21,429 27,723
-------- --------
Total deferred tax assets.............................................. 50,723 75,230
-------- --------
Net deferred tax assets................................................ $ 35,981 $ 60,427
-------- --------
-------- --------
</TABLE>
As of December 31, 1998, the Company had $73.0 million of net operating
loss carryforwards available to offset future taxable income, as follows:
YEAR OF
EXPIRATION (THOUSANDS)
- ---------- -----------
2009.... $26,705
2010.... 4,271
2011.... 41,982
-------
$72,958
-------
-------
Management has determined, based on the Company's history of prior earnings
and its expectations for the future, that future taxable income will more likely
than not be sufficient to utilize fully the deferred tax assets recorded.
The Company and its subsidiaries entered into a tax sharing agreement (the
"Tax Sharing Agreement") dated January 31, 1994 with GAF and G-I Holdings under
which the Company is obligated to pay G-I Holdings an amount equal to those
Federal income taxes the Company would have incurred if the Company (on behalf
of itself and its subsidiaries) filed its own Federal income tax return. Unused
tax attributes will carry forward for use in reducing amounts payable by the
Company to G-I Holdings in future years, but cannot be carried back. If the
Company were no longer a member of the GAF consolidated tax group (the "GAF
Group"), it would be required to pay to G-I Holdings the value of any tax
attributes it would succeed to under the consolidated return regulations to the
extent such attributes reduced the amounts otherwise payable by the Company
under the Tax Sharing Agreement. Under certain circumstances, the provisions of
the Tax Sharing Agreement could result in the Company having a greater liability
thereunder than it would have had if it (and its subsidiaries) had filed its own
separate Federal income tax return. Under the Tax Sharing Agreement, the Company
and each of its
F-14
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAXES--(CONTINUED)
subsidiaries are responsible for any taxes that would be payable by reason of
any adjustment to the tax returns of GAF or its subsidiaries for years prior to
the adoption of the Tax Sharing Agreement that relate to the business or assets
of the Company or any subsidiary of the Company. Although, as a member of the
GAF Group, the Company is severally liable for all Federal income tax
liabilities of every member of the GAF Group, including tax liabilities not
related to the business of the Company, G-I Holdings and GAF have agreed to
indemnify the Company and its subsidiaries for all tax liabilities of the GAF
Group other than tax liabilities (i) arising from the operations of the Company
and its subsidiaries and (ii) for tax years pre-dating the Tax Sharing Agreement
that relate to the business or assets of the Company and its subsidiaries. The
Tax Sharing Agreement provides for analogous principles to be applied to any
consolidated, combined or unitary state or local income taxes. Under the Tax
Sharing Agreement, GAF makes all decisions with respect to all matters relating
to taxes of the GAF Group. The provisions of the Tax Sharing Agreement take into
account both the Federal income taxes the Company would have incurred if it
filed its own separate Federal income tax return and the fact that the Company
is a member of the GAF Group for Federal income tax purposes. In accordance with
the Tax Sharing Agreement, effective January 31, 1994, tax benefits generated by
net operating losses and credits will reduce future tax sharing payments to G-I
Holdings.
On September 15, 1997, GAF received a notice from the Internal Revenue
Service (the "Service") of a deficiency in the amount of $84.4 million (after
taking into account the use of net operating losses and foreign tax credits
otherwise available for use in later years) in connection with the formation in
1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants
partnership"), a partnership in which GFC holds an interest. The claim of the
Service for interest and penalties, after taking into account the effect on the
use of net operating losses and foreign tax credits, could result in GAF
incurring liabilities significantly in excess of the deferred tax liability of
$131.4 million that it recorded in 1990 in connection with this matter. GAF has
advised the Company that it believes that it will prevail in this matter,
although there can be no assurance in this regard. However, if GAF is
unsuccessful in challenging its tax deficiency notice, the ability of GAF to
satisfy its tax obligation would be dependent on the cash flows of the Company
and GFC. The Company believes that the ultimate disposition of this matter will
not have a material adverse effect on its business, financial position or
results of operations. GAF, G-I Holdings and certain subsidiaries of GAF have
agreed to jointly and severally indemnify the Company against any tax liability
associated with the surfactants partnership, which the Company would be
severally liable for, together with GAF and several current and former
subsidiaries of GAF, should GAF be unable to satisfy such liability.
NOTE 7. SALE OF ACCOUNTS RECEIVABLE
In March 1993, the Company sold its trade accounts receivable
("receivables") to a trust, without recourse, pursuant to an agreement which
provided for a maximum of $75 million in cash to be made available to the
Company based on eligible receivables outstanding from time to time. In November
1996, the Company entered into new agreements, pursuant to which it sold the
receivables to a special purpose subsidiary of the Company, BMCA Receivables
Corporation, without recourse, which in turn sold them to a new trust, without
recourse. The new agreements provide for a maximum of $115 million in cash to be
made available to the Company based on eligible receivables outstanding from
time to time. This facility expires in December 2001. The excess of accounts
receivable sold over the net proceeds received is included in "Accounts
receivable, other." The effective cost to the Company varies with LIBOR and is
included in "Other income (expense), net" and amounted to $5.2, $5.1 and $5.1
million in 1996, 1997 and 1998, respectively.
F-15
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. INVENTORIES
At December 31, 1997 and 1998, $7.8 and $10.2 million, respectively, of
inventories were valued using the LIFO method. Inventories consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(THOUSANDS)
<S> <C> <C>
Finished goods.......................................................... $38,459 $58,266
Work in process......................................................... 10,180 8,488
Raw materials and supplies.............................................. 24,670 27,296
------- -------
Total................................................................. 73,309 94,050
Less LIFO reserve....................................................... (1,055) (686)
------- -------
Inventories............................................................. $72,254 $93,364
------- -------
------- -------
</TABLE>
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(THOUSANDS)
<S> <C> <C>
Land and land improvements............................................ $ 26,052 $ 26,851
Buildings and building equipment...................................... 48,525 55,917
Machinery and equipment (including equipment under capitalized leases
of $15,466 and $12,468--see Note 10)................................ 183,108 217,094
Construction in progress.............................................. 40,775 78,337
-------- --------
Total............................................................... 298,460 378,199
Less accumulated depreciation and amortization........................ (56,514) (63,799)
-------- --------
Property, plant and equipment, net.................................... $241,946 $314,400
-------- --------
-------- --------
</TABLE>
NOTE 10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(THOUSANDS)
<S> <C> <C>
11 3/4% Senior Deferred Coupon Notes due 2004......................... $261,203 $ 28,273
7 3/4% Senior Notes due 2005.......................................... -- 149,401
8 5/8% Senior Notes due 2006.......................................... 99,554 99,604
8% Senior Notes due 2007.............................................. 99,268 99,343
8% Senior Notes due 2008.............................................. -- 154,165
Borrowings under revolving credit facility............................ 34,000 --
Industrial revenue bonds with various interest rates and maturity
dates to 2012....................................................... 11,125 11,125
Obligations on mortgaged properties................................... 4,230 3,248
Obligations under capital leases (Note 15)............................ 49,594 46,814
Other notes payable................................................... 273 713
-------- --------
Total............................................................... 559,247 592,686
Less current maturities............................................... (3,801) (4,273)
-------- --------
Long-term debt less current maturities................................ $555,446 $588,413
-------- --------
-------- --------
</TABLE>
F-16
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. LONG-TERM DEBT--(CONTINUED)
On December 3, 1998, the Company issued $155 million in aggregate principal
amount of 8% Senior Notes due 2008 (the "2008 Notes"). The Company used
substantially all of the net proceeds from such issuance to purchase, and
subsequently cancel, $147.1 million in aggregate principal amount at maturity of
the Company's 11 3/4% Senior Deferred Coupon Notes due 2004 (the "Deferred
Coupon Notes"). In connection with this purchase, the Company recorded an
after-tax extraordinary charge of $8.8 million.
On July 17, 1998, the Company issued $150 million in aggregate principal
amount of 7 3/4% Senior Notes due 2005 (the "2005 Notes"). The Company used
substantially all of the net proceeds from such issuance to purchase, and
subsequently cancel, $132.6 million in aggregate principal amount at maturity of
the Company's Deferred Coupon Notes. In connection with this purchase, the
Company recorded an after-tax extraordinary charge of $9.3 million.
In October 1997, the Company issued $100 million in aggregate principal
amount of 8% Senior Notes due 2007 (the "2007 Notes"). In December 1996, the
Company issued $100 million in aggregate principal amount of 8 5/8% Senior Notes
due 2006 (the "8 5/8% Notes"). In June 1994, the Company issued $310 million in
principal amount of Deferred Coupon Notes for net proceeds of $169.3 million.
The Deferred Coupon Notes will accrete to face value on July 1, 1999, and cash
interest will accrue from and after that date. Holders of the Deferred Coupon
Notes, the 2005 Notes, the 2007 Notes, the 2008 Notes and the 8 5/8% Notes have
the right under the indentures governing such notes to require the Company to
purchase the Deferred Coupon Notes at a price of 101% of Accreted Value (as
defined therein) and the 2005 Notes, the 2007 Notes, the 2008 Notes and the
8 5/8% Notes (collectively, the "Other Senior Notes") at a price of 101% of the
principal amount thereof, and the Company has the right to redeem the Deferred
Coupon Notes at Accreted Value and the Other Senior Notes at a price of 101% of
the principal amount thereof, plus, in each case, the Applicable Premium (as
defined therein), together with any accrued and unpaid interest, in the event of
a Change of Control (as defined therein).
The indentures relating to the Deferred Coupon Notes, the Other Senior
Notes and the Credit Agreement (see below) contain covenants that, among other
things, limit the ability of the Company and its subsidiaries to pay certain
dividends or make certain other restricted payments and restricted investments,
incur liens, engage in transactions with affiliates, and agree to certain
additional limitations on dividends and other payment restrictions affecting
subsidiaries. As of December 31, 1998, after giving effect to the most
restrictive of the aforementioned restrictions, the Company could have paid
dividends and other restricted payments of up to $79.4 million. Additional
borrowings by the Company are subject to certain covenants contained in the
indentures relating to the Other Senior Notes and the Credit Agreement. The
Company is currently limited by certain of these covenants from incurring
additional debt, except under certain limited circumstances including under the
Credit Agreement and the refinancing of existing debt.
In connection with the Deferred Coupon Notes, the Company entered into
interest rate swap agreements ("swaps") with banks, with an aggregate ending
notional principal amount of $142.0 million and a final maturity of July 1,
1999, all of which were terminated as of June 28, 1998. In 1997, the Company
terminated swaps with an aggregate ending notional principal amount of $82.0
million, resulting in gains totaling $2.1 million. In June 1998, the Company
terminated swaps with an aggregate ending notional principal amount of $60.0
million, resulting in gains of $0.7 million. The gains have been deferred and
are being amortized as a reduction of interest expense over the remaining
original life of the swaps. As a result of the swaps, the effective interest
cost to the Company of the portion of the Deferred Coupon Notes covered by the
swaps varied at a fixed spread over LIBOR.
In August 1997, the Company entered into a new three-year bank credit
facility (the "Credit Agreement"). The terms of the Credit Agreement provide for
a $75 million revolving credit facility, the full amount of which is available
for letters of credit, provided that total borrowings and outstanding letters of
credit may not exceed $75 million in the aggregate. As of December 31, 1998,
$29.9 million of letters of credit were outstanding and no borrowings were
outstanding under the Credit Agreement. Under the terms of the Credit Agreement,
the
F-17
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. LONG-TERM DEBT--(CONTINUED)
Company is subject to certain financial covenants, including interest coverage
and leverage ratios, and dividends and other restricted payments are limited.
Additionally, if a change of control (as defined in the Credit Agreement)
occurs, the credit facility could be terminated and the loans thereunder
accelerated by the lenders party thereto, an event which could also cause the
Deferred Coupon Notes and the Other Senior Notes to be accelerated. As of
December 31, 1998, the Company was in compliance with such covenants. The Credit
Agreement replaced previous bank credit facilities which provided up to $42
million in total borrowings and outstanding letters of credit.
In December 1995, the Company consummated a $40 million sale-leaseback of
certain equipment located at its Chester, South Carolina roofing facility, in a
transaction accounted for as a capital lease, and the gain has been deferred.
The lessor was granted a security interest in certain equipment at the Chester
facility. The lease term extends to December 2005. In December 1994, the Company
consummated a $20.4 million sale-leaseback of certain equipment located at its
Baltimore, Maryland roofing facility, in a transaction accounted for as a
capital lease, and the gain has been deferred. The lessor was granted a security
interest in the land, buildings, and certain equipment at the Baltimore
facility. The lease term extends to December 2004. In December 1993, the Company
obtained a loan of $7.3 million, which is secured by manufacturing equipment
located at its Dallas plant. The loan is being repaid over a seven-year period
and has a fixed interest rate. The Company has two industrial revenue bond
issues outstanding, which bear interest at short-term floating rates. Interest
rates on the foregoing obligations ranged between 3.60% and 8.87% as of
December 31, 1998.
The Company believes that the fair value of its non-public indebtedness
approximates the book value of such indebtedness, because the interest rates on
such indebtedness are at floating short-term rates. With respect to the
Company's publicly traded debt securities, the Company has obtained estimates of
the fair values from an independent source believed to be reliable. The
estimated fair value of the Deferred Coupon Notes as of December 31, 1997 and
1998 was $293.0 and $28.8 million, respectively. The estimated fair value of the
8 5/8% Notes as of December 31, 1997 and 1998 was $103.6 and $101.3 million,
respectively. The estimated fair value of the 2007 Notes as of December 31, 1997
and 1998 was $99.6 and $99.1 million, respectively. The estimated fair value of
the 2005 Notes and the 2008 Notes as of December 31, 1998 was $147.2 and
$154.8 million, respectively.
The aggregate maturities of long-term debt as of December 31, 1998 for the
next five years are as follows:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
1999......................................................... $ 4,273
2000......................................................... 6,228
2001......................................................... 5,026
2002......................................................... 14,988
2003......................................................... 20,244
</TABLE>
In the above table, maturities for the year 2002 include $11.7 million
related to the Baltimore capital lease. Maturities for the year 2003 include
$20.2 million related to the Chester capital lease.
F-18
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS
Eligible, full-time employees of the Company are covered by various benefit
plans, as described below.
Defined Contribution Plan
The Company provides a defined contribution plan for eligible employees.
The Company contributes up to 7% of participants' compensation and also
contributes fixed amounts, ranging from $50 to $750 per year depending on age,
to the accounts of participants who are not covered by a Company-provided
postretirement medical benefit plan. The aggregate contributions by the Company
were $3.0, $3.5 and $4.2 million for 1996, 1997 and 1998, respectively.
U.S. Intec provides a defined contribution plan for eligible employees.
U.S. Intec may contribute a discretionary matching contribution equal to 100% of
each participant's eligible contributions each plan year up to a maximum of $500
for each participant. Such contributions by U.S. Intec were $0.2, $0.1 and
$0.1 million for 1996, 1997, and 1998, respectively.
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan for
hourly employees (the "Hourly Retirement Plan"). Benefits under this plan are
based on stated amounts for each year of service. The Company's funding policy
is consistent with the minimum funding requirements of ERISA.
The Company's net periodic pension cost for the Hourly Retirement Plan
included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................... $ 631 $ 658 $ 754
Interest cost................................................... 686 754 842
Expected return on plan assets.................................. (829) (1,034) (1,296)
Amortization of unrecognized prior service cost................. 35 30 31
----- ------- -------
Net periodic pension cost....................................... $ 523 $ 408 $ 331
----- ------- -------
----- ------- -------
</TABLE>
F-19
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS--(CONTINUED)
The following tables set forth, for the years 1997 and 1998,
reconciliations of the beginning and ending balances of the benefit obligation,
fair value of plan assets, funded status, amounts recognized in the Consolidated
Balance Sheets and changes in Accumulated Other Comprehensive Income (Loss)
related to the Hourly Retirement Plan:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year............................... $10,028 $11,817
Service cost.......................................................... 658 754
Interest cost......................................................... 754 842
Actuarial losses...................................................... 765 492
Benefits paid......................................................... (388) (450)
------- -------
Benefit obligation at end of year..................................... 11,817 13,455
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year........................ 9,530 11,472
Actual return on plan assets.......................................... 951 (237)
Employer contributions................................................ 1,379 757
Benefits paid......................................................... (388) (450)
------- -------
Fair value of plan assets at end of year.............................. 11,472 11,542
------- -------
Reconciliation of funded status:
Funded status......................................................... (345) (1,913)
Unrecognized prior service cost....................................... 307 277
Unrecognized actuarial losses......................................... 931 2,956
------- -------
Net amount recognized in Consolidated Balance Sheets.................. $ 893 $ 1,320
------- -------
------- -------
Amounts recognized in Consolidated Balance Sheets:
Accrued benefit cost.................................................. $ (345) $(1,913)
Intangible asset...................................................... 307 277
Accumulated other comprehensive (income) loss......................... 931 2,956
------- -------
Net amount recognized................................................. $ 893 $ 1,320
------- -------
------- -------
Change for the year in accumulated other comprehensive (income) loss:
Change in intangible asset............................................ $ 30 $ 30
Change in additional minimum liability................................ 818 1,995
------- -------
Total................................................................. $ 848 $ 2,025
------- -------
------- -------
</TABLE>
In determining the projected benefit obligation, the weighted average
assumed discount rate was 7.25% and 7% for 1997 and 1998, respectively. The
expected long-term rate of return on assets, used in determining net periodic
pension cost, was 11% for 1997 and 1998.
The Company also provides a nonqualified defined benefit retirement plan
for certain key employees. Expense accrued for this plan was immaterial for
1996, 1997 and 1998.
F-20
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS--(CONTINUED)
Book Value Appreciation Unit Plan
A Book Value Appreciation Unit Plan was implemented effective January 1,
1996. Under the plan, employees were granted units which vest over five years.
Upon exercise, employees are entitled to receive a cash payment based on the
increase in Book Value (as defined in the plan). Expense accrued under this plan
was $0.1, $0.4 and $1.3 million for 1996, 1997 and 1998, respectively.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997.
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
(THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................................. $ 95 $ 98 $ 104
Interest cost................................................................. 597 554 467
Amortization of unrecognized prior service cost............................... -- (88) (88)
Amortization of net gains from earlier periods................................ (232) (186) (240)
----- ----- -----
Net periodic postretirement benefit cost...................................... $ 460 $ 378 $ 243
----- ----- -----
----- ----- -----
</TABLE>
The following table sets forth, for the years 1997 and 1998,
reconciliations of the beginning and ending balances of the postretirement
benefit obligation, funded status and amounts recognized in the Consolidated
Balance Sheets related to postretirement medical and life insurance benefits:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year.............................. $ 7,421 $ 7,926
Service cost......................................................... 98 104
Interest cost........................................................ 554 467
Actuarial (gains) losses............................................. 209 (905)
Benefits paid........................................................ (356) (457)
-------- --------
Benefit obligation at end of year.................................... 7,926 7,135
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year....................... -- --
Employer contributions............................................... 356 457
Benefits paid........................................................ (356) (457)
-------- --------
Fair value of plan assets at end of year............................. -- --
-------- --------
Reconciliation of funded status:
Funded status........................................................ (7,926) (7,135)
Unrecognized prior service cost...................................... (790) (702)
Unrecognized actuarial losses........................................ (2,766) (3,431)
-------- --------
Net amount recognized in Consolidated Balance Sheets
as accrued benefit cost.............................................. $(11,482) $(11,268)
-------- --------
-------- --------
</TABLE>
F-21
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS--(CONTINUED)
For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. Retirees as of December 31,
1998 who were formerly salaried employees (with certain exceptions) were assumed
to receive a Company subsidy of $700 to $1,000 per year. For retirees over age
65, this subsidy may be replaced by participation in a managed care program.
With respect to retirees who were formerly hourly employees, most such retirees
are subject to a $5,000 per person lifetime maximum benefit. Subject to such
lifetime maximum, a 12% and 6% annual rate of increase in the Company's per
capita cost of providing postretirement medical benefits was assumed for 1999
for such retirees under and over age 65, respectively. To the extent that the
lifetime maximum benefits have not been reached, the foregoing rates were
assumed to decrease gradually to an ultimate rate of 7% and 6%, respectively, by
the year 2003 and remain at that level thereafter. The weighted average assumed
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% and 7% for 1997 and 1998, respectively.
The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 and 1998 by $410,000 and $90,000,
respectively, and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the years 1997 and 1998 by
$41,000 and $6,000, respectively. A decrease of one percentage point in each
year would decrease the accumulated postretirement benefit obligation as of
December 31, 1998 by $80,000 and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for the year 1998 by
$6,000.
NOTE 12. PREFERRED STOCK OPTION PLAN
On January 1, 1996, the Company established a plan to issue options to
certain employees to purchase shares of redeemable convertible preferred stock
("Preferred Stock") of the Company, exercisable at a price of $100 per share.
Each share of Preferred Stock is convertible, at the holder's option, into
shares of common stock of the Company at a formula price based on Book Value (as
defined in the option agreement) as of the date of grant. The options vest over
five years. Dividends will accrue on the Preferred Stock from the date of
issuance at the rate of 8% per annum. The Preferred Stock is redeemable, at the
Company's option, for a redemption price equal to $100 per share plus accrued
and unpaid dividends. The Preferred Stock, and common stock issuable upon
conversion of Preferred Stock into common stock, is subject to repurchase by the
Company under certain circumstances, at a price equal to current Book Value (as
defined in the option agreement). The exercise price of the options to purchase
Preferred Stock was equal to estimated fair value per share of the Preferred
Stock at the date of grant. No expense is recorded in connection with the
Preferred Stock options.
The following is a summary of transactions pertaining to the plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------ ------- -------
(NUMBER OF SHARES)
<S> <C> <C> <C>
Outstanding, January 1.................................................. -- 23,290 102,595
Granted................................................................. 23,290 84,953 57,073
Exercised............................................................... -- -- --
Forfeited............................................................... -- (5,648) (19,616)
------ ------- -------
Outstanding, December 31................................................ 23,290 102,595 140,052
------ ------- -------
------ ------- -------
Options exercisable, December 31........................................ -- 4,278 20,663
------ ------- -------
------ ------- -------
</TABLE>
F-22
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. BUSINESS SEGMENT INFORMATION
The Company is a leading national manufacturer of a broad line of asphalt
roofing products and accessories for the residential and commercial roofing
markets. The Company also manufactures and markets specialty building products
and accessories for the professional and do-it-yourself remodeling and
residential construction industries. The residential roofing product line
primarily consists of premium laminated shingles, strip shingles, and certain
specialty shingles principally for regional markets. Sales of residential
roofing products represented 65% of the Company's net sales in 1998. The
Company's commercial roofing product line includes a full line of modified
bitumen products, asphalt built-up roofing, liquid applied membrane, and roofing
accessories. Sales of commercial roofing products and accessories represented
30% of the Company's net sales in 1998. Sales of the specialty building products
and accessories product line represented 5% of the Company's net sales in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for
companies to report information about operating segments in annual financial
statements, based on the approach that management utilizes to organize the
segments within the Company for management reporting and decision making. In
accordance with the provisions of SFAS No. 131, the Company aggregates the
residential and commercial product lines into one operating segment, based on
the fact that they have similar economic characteristics and are similar in each
of the following areas: (i) the nature of the products and services are similar
in that they perform the same function--the protection and covering of
residential and commercial roofs; (ii) the nature of the production processes
are similar; (iii) the type or class of customer for their products and services
are similar; (iv) the residential and commercial products have the same
distribution channels, whereby the main customers are wholesalers or
distributors; and (v) regulatory requirements are generally the same for both
the residential and commercial product lines. Sales of the specialty building
products and accessories product line did not meet the quantitative thresholds
in 1998 to be considered as a reportable segment.
Revenues in 1997 and 1998 included sales to American Builders & Contractors
Supply Co., Inc., which accounted for approximately 10% and 11%, respectively,
of the Company's net sales. No other customer accounted for as much as 10% of
net sales in 1997 or 1998.
NOTE 14. RELATED PARTY TRANSACTIONS
Included in the Consolidated Balance Sheets are the following receivable
(payable) balances with related parties, which arise from operating and
financing transactions between the Company and its affiliates:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(THOUSANDS)
<S> <C> <C>
Receivable from (payable to):
GAF/G-I Holdings/G Industries......................................... $ 9,684 $ 251
Loan receivable from G-I Holdings..................................... 6,152 --
GAFBMC................................................................ 713 1,168
GFC................................................................... (1,559) (1,304)
ISP................................................................... (3,687) (5,545)
------- -------
Receivable from (payable to) related parties, net..................... $11,303 $(5,430)
------- -------
------- -------
</TABLE>
The Company makes loans to, and borrows from, G-I Holdings and its
subsidiaries at prevailing market rates (between 5.82% and 5.96% during 1997 and
1998). The highest amount of loans made by the Company to G-I Holdings during
1997 and 1998 was $6.2 million. No loans were made to the Company by G-I
Holdings and its subsidiaries during 1997 and 1998. As of December 31, 1997,
$6.2 million in loans were owed to the Company by G-I Holdings, at a weighted
average interest rate of 5.95%, and no loans were owed by the Company to
affiliates. Company advances funds on a non-interest bearing basis to GAF, G-I
Holdings and their subsidiaries. The balance of such advances as of
December 31, 1997 and 1998 was $41.7 and $1.5 million,
F-23
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. RELATED PARTY TRANSACTIONS--(CONTINUED)
respectively, of which $10.0 and $1.5 million, respectively, was classified as a
short-term receivable from related parties, net, in the table above, and
$31.7 million and $0, respectively, was classified as a long-term receivable
from related parties in the Consolidated Balance Sheets. During 1997 and 1998,
the Company made distributions of $91.0 million and $0, respectively, to its
parent company.
Mineral Products: The Company purchases all of its colored roofing
granules requirements (except for the requirements of its California and Oregon
roofing plants and a portion of the requirements of its Indiana roofing plant,
which are supplied by a third party) from ISP under a requirements contract.
Effective January 1, 1999, this contract was amended to cover, among other
things, purchases of colored roofing granules by the Company's subsidiaries and
was renewed for 1999. This contract is subject to annual renewal unless
terminated by either party to such agreement. Such purchases by the Company and
its subsidiaries totaled $50.5, $51.1 and $62.6 million for 1996, 1997 and 1998,
respectively. The amount payable to ISP at December 31, 1997 and 1998 for such
purchases was $2.7 and $4.9 million, respectively.
Glass Fiber Supply Agreement: The Company purchases glass fiber from an
affiliate, GFC, pursuant to an agreement which expires December 31, 2003.
Purchases under this agreement totaled $24.5 and $26.1 million for 1997 and
1998, respectively.
Management Agreements: The Company is a party to a Management Agreement
with ISP (the "Management Agreement"), which expires December 31, 1999, pursuant
to which ISP provides certain general management, administrative, legal,
telecommunications, information and facilities services to the Company
(including the use of the Company's headquarters in Wayne, New Jersey). Charges
to the Company by ISP for providing such services aggregated $5.0, $4.8 and $4.3
million for 1996, 1997 and 1998, respectively. Such charges consist of
management fees and other reimbursable expenses attributable to, or incurred by
ISP for the benefit of, the Company. Effective January 1, 1999, the term of the
Management Agreement was extended through the end of 1999, and the management
fees payable thereunder were increased. The Company and ISP also allocate a
portion of the management fees payable by the Company under the Management
Agreement to separate lease payments for the use of BMCA's headquarters. Based
on the services provided by ISP to the Company in 1998 under the Management
Agreement, the aggregate amount payable by the Company to ISP under the
Management Agreement for 1999 is expected to be approximately $5.3 million.
Certain of the Company's executive officers receive their compensation from ISP,
with ISP being indirectly reimbursed therefor by virtue of the management fee
and other reimbursable expenses payable under the Management Agreement.
As of January 1, 1997, the Company and GFC entered into a management
agreement under which the Company provides certain general management,
administrative and financial services to GFC. Under the management agreement,
which expires December 31, 1999, GFC is obligated to pay the Company an annual
management fee of $1.0 million.
Tax Sharing Agreement: See Note 6.
NOTE 15. COMMITMENTS AND CONTINGENCIES
The discussions as to legal matters involving the Company contained in
"Business--Legal Proceedings--Environmental Litigation" and "--Other Litigation"
are incorporated herein by reference.
GAF, G-I Holdings, G Industries and GAFBMC are presently dependent upon the
earnings and cash flows of their subsidiaries, principally the Company, in order
to satisfy their net obligations of approximately $252.3 million reflected on
their books as of December 31, 1998, plus any obligation accrued after such
date, including the asbestos-related liability discussed in Note 3 and various
tax and other liabilities (net of certain insurance receivables), including tax
liabilities relating to the surfactants partnership (discussed in Note 6). Of
such obligations, approximately $75.0 million (net of estimated insurance
recoveries of approximately
F-24
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
$57.0 million) is estimated to be payable during the twelve months ended
December 31, 1999. GAF has advised the Company that it expects to obtain funds
to satisfy such obligations from, among other things, dividends and loans from
subsidiaries (principally the Company), as to which there are restrictions under
the indentures relating to the Deferred Coupon Notes, the Other Senior Notes and
the Credit Agreement, and from payments pursuant to the Tax Sharing Agreement
between GAF and the Company. The Company does not believe that the dependence of
its parent corporations on the cash flows of their subsidiaries should have a
material adverse effect on the operations, liquidity or capital resources of the
Company. See Notes 3, 6 and 10.
The leases for certain property, plant and equipment at certain of the
Company's roofing facilities are accounted for as capital leases (see Note 10).
The Company is also a lessee under operating leases principally for warehouses
and production, transportation and computer equipment. Rental expense on
operating leases was $8.3, $9.2 and $11.0 million for 1996, 1997 and 1998,
respectively. Future minimum lease payments for properties which were held under
long-term noncancellable leases as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
(THOUSANDS)
<S> <C> <C>
1999................................................................... $ 6,953 $ 4,708
2000................................................................... 7,463 3,838
2001................................................................... 8,108 2,828
2002................................................................... 17,558 1,348
2003................................................................... 21,407 827
Later years............................................................ -- 2,861
-------- -------
Total minimum payments................................................. 61,489 $16,410
-------
-------
Less interest included above........................................... (14,675)
--------
Present value of net minimum lease payments............................ $ 46,814
--------
--------
</TABLE>
NOTE 16. GUARANTOR FINANCIAL INFORMATION
Effective January 1, 1999, BMCA ("Parent Company") transferred all of its
investment assets and intellectual property assets to Building Materials
Investment Corporation ("BMIC"), a newly-formed, wholly-owned subsidiary. In
connection with this transfer, BMIC agreed to guarantee all of the Company's
obligations under the Credit Agreement, the Deferred Coupon Notes and the Other
Senior Notes. BMCA also transferred all of its manufacturing assets, other than
those located in Texas, to Building Materials Manufacturing Corporation
("BMMC"), another newly-formed, wholly-owned subsidiary. In connection with this
transfer, BMMC agreed to become a co-obligor on the 2007 Notes and to guarantee
the Company's obligations under the Credit Agreement, the Deferred Coupon Notes
and the Other Senior Notes. The guarantees of BMIC and BMMC are full,
unconditional and joint and several.
In addition, in connection with the above transactions, the Company and
BMMC entered into license agreements, effective January 1, 1999, for the right
to use intellectual property, including patents, trademarks, know-how, and
franchise rights owned by BMIC for a license fee stated as a percentage of net
sales. The license agreements are for a period of one year and can be terminated
with 60 days written notice. Also, effective January 1, 1999, BMMC will sell all
finished goods to the Company at a manufacturing profit.
Presented below is condensed combining financial information for BMIC and
BMMC, prepared on a basis which retroactively reflects the formation of such
companies, as discussed above, for all periods presented. This financial
information should be read in conjunction with the Consolidated Financial
Statements and other notes related thereto.
F-25
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $745,576 $ -- $106,391 $ -- $851,967
Intercompany net sales......................... 5,400 479,283 60,500 (545,183) --
-------- -------- -------- ---------- --------
Total net sales................................ 750,976 479,283 166,891 (545,183) 851,967
-------- -------- -------- ---------- --------
Costs and expenses:
Cost of products sold........................ 575,959 454,051 137,407 (545,183) 622,234
Selling, general and administrative.......... 119,100 25,232 22,374 166,706
Goodwill amortization........................ 641 1,023 1,664
-------- -------- -------- ---------- --------
Total costs and expenses.................. 695,700 479,283 160,804 (545,183) 790,604
-------- -------- -------- ---------- --------
Operating income............................... 55,276 -- 6,087 -- 61,363
Equity in loss of subsidiaries................. (787) 787 --
Interest expense, net.......................... (17,726) (5,073) (9,245) (32,044)
Other income (expense), net.................... (8,397) 6,946 (4) (1,455)
-------- -------- -------- ---------- --------
Income (loss) before income taxes.............. 28,366 1,873 (3,162) 787 27,864
Income tax (provision) benefit................. (11,311) (731) 1,233 (10,809)
-------- -------- -------- ---------- --------
Net income (loss).............................. $ 17,055 $ 1,142 $ (1,929) $ 787 $ 17,055
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
</TABLE>
F-26
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents, beginning of year............. $ 1 $ 45,594 $ 394 $ 45,989
--------- ---------- ------- ----------
Cash provided by (used in) operating activities:
Net income (loss)........................................ 17,842 1,142 (1,929) 17,055
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................ 2,551 17,044 4,262 23,857
Goodwill amortization............................... 641 1,023 1,664
Deferred income taxes............................... 10,609 10,609
Noncash interest charges............................ 23,718 23,718
(Increase) decrease in working capital items........... (17,932) 8,182 (5,155) (14,905)
Purchases of trading securities........................ (33,824) (33,824)
Proceeds from sales of trading securities.............. 30,394 30,394
(Increase) decrease in other assets.................... (1,885) 120 54 (1,711)
Decrease in other liabilities.......................... (3,098) (1,060) (4,158)
Change in net receivable from/payable to related
parties............................................. (157,095) 117,094 39,660 (341)
Other, net............................................. 2,346 1,017 (2,576) 787
--------- ---------- ------- ----------
Net cash provided by (used in) operating activities...... (122,303) 141,169 34,279 53,145
--------- ---------- ------- ----------
Cash provided by (used in) investing activities:
Capital expenditures................................... (1,705) (17,299) (6,625) (25,629)
Purchases of available-for-sale securities............. (139,355) (139,355)
Purchases of other short-term investments.............. (660) (660)
Proceeds from sales of available-for-sale securities... 101,095 101,095
--------- ---------- ------- ----------
Net cash used in investing activities.................... (1,705) (56,219) (6,625) (64,549)
--------- ---------- ------- ----------
Cash provided by (used in) financing activities:
Proceeds from sale of accounts receivable.............. 8,015 8,015
Proceeds from issuance of debt......................... 99,502 99,502
Repayments of long-term debt........................... (822) (7,960) (26,074) (34,856)
Capital contribution from parent company............... 86,077 86,077
Payments of asbestos claims............................ (66,224) (66,224)
Financing fees and expenses............................ (2,539) (2,539)
--------- ---------- ------- ----------
Net cash provided by (used in) financing activities...... 124,009 (7,960) (26,074) 89,975
--------- ---------- ------- ----------
Net change in cash and cash equivalents.................. 1 76,990 1,580 78,571
--------- ---------- ------- ----------
Cash and cash equivalents, end of year................... $ 2 $ 122,584 $ 1,974 $ 124,560
--------- ---------- ------- ----------
--------- ---------- ------- ----------
</TABLE>
F-27
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $793,566 $ -- $151,063 $ -- $944,629
Intercompany net sales......................... 2,683 519,452 64,699 (586,834) --
-------- -------- -------- ---------- --------
Total net sales................................ 796,249 519,452 215,762 (586,834) 944,629
-------- -------- -------- ---------- --------
Costs and expenses:
Cost of products sold........................ 609,542 494,087 170,197 (586,834) 686,992
Selling, general and administrative.......... 128,153 25,365 32,135 185,653
Goodwill amortization........................ 641 1,250 1,891
-------- -------- -------- ---------- --------
Total costs and expenses.................. 738,336 519,452 203,582 (586,834) 874,536
-------- -------- -------- ---------- --------
Operating income............................... 57,913 -- 12,180 -- 70,093
Equity in earnings of subsidiaries............. 13,997 (13,997) --
Interest expense, net.......................... (26,258) (5,810) (10,716) (42,784)
Other income (expense), net.................... (11,830) 27,292 15,462
-------- -------- -------- ---------- --------
Income before income taxes..................... 33,822 21,482 1,464 (13,997) 42,771
Income taxes................................... (7,731) (8,378) (571) (16,680)
-------- -------- -------- ---------- --------
Net income..................................... $ 26,091 $ 13,104 $ 893 $ (13,997) $ 26,091
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
</TABLE>
F-28
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1997
(THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 35 $ 12,061 $ 825 $ -- $ 12,921
Investments in trading securities................. 62,059 62,059
Investments in available-for-sale securities...... 161,290 161,290
Investments in held-to-maturity securities........ 499 499
Other short-term investments...................... 19,488 19,488
Accounts receivable, trade........................ 13,643 13,643
Accounts receivable, other........................ 48,392 2,297 150 50,839
Receivable from (payable to) related
parties, net................................... 13,413 (2,059) (51) 11,303
Inventories....................................... 29,701 22,183 20,370 72,254
Other current assets.............................. 2,064 2,719 1,460 6,243
-------- -------- -------- ---------- --------
Total Current Assets........................... 93,605 280,537 36,397 -- 410,539
Investment in subsidiaries.......................... 233,627 (233,627) --
Intercompany loans including accrued interest....... 80,199 (80,199) --
Due from (to) subsidiaries, net..................... 23,724 171 (23,895) --
Property, plant and equipment, net.................. 32,847 138,889 70,210 241,946
Excess of cost over net assets of businesses
acquired, net..................................... 20,021 50,025 70,046
Deferred income tax benefits........................ 35,981 35,981
Receivable from related parties..................... 31,661 31,661
Other assets........................................ 12,691 3,990 432 17,113
-------- -------- -------- ---------- --------
Total Assets........................................ $564,356 $423,587 $ 52,970 $ (233,627) $807,286
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term debt................................... $ -- $ 26,944 $ -- $ -- $ 26,944
Current maturities of long-term debt.............. 938 2,775 88 3,801
Accounts payable.................................. 27,147 12,424 16,071 55,642
Accrued liabilities............................... 7,088 13,749 5,461 26,298
Reserve for product warranty claims............... 12,000 1,100 13,100
-------- -------- -------- ---------- --------
Total Current Liabilities...................... 47,173 55,892 22,720 -- 125,785
Long-term debt less current maturities.............. 397,926 157,212 308 555,446
Reserve for product warranty claims................. 18,078 5,803 23,881
Other liabilities................................... 18,180 995 19,175
-------- -------- -------- ---------- --------
Total Liabilities................................... 481,357 213,104 29,826 -- 724,287
-------- -------- -------- ---------- --------
Stockholders' equity, net........................... 82,999 210,483 23,144 (233,627) 82,999
-------- -------- -------- ---------- --------
Total Liabilities and Stockholders' Equity.......... $564,356 $423,587 $ 52,970 $ (233,627) $807,286
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
</TABLE>
F-29
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents, beginning of year............. $ 2 $ 122,584 $ 1,974 $ 124,560
--------- ---------- ------- ----------
Cash provided by (used in) operating activities:
Net income............................................. 12,094 13,104 893 26,091
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................ 3,062 14,689 5,185 22,936
Goodwill amortization............................... 641 1,250 1,891
Deferred income taxes............................... 16,481 16,481
Noncash interest charges............................ 27,222 27,222
(Increase) decrease in working capital items........... 32,601 (19,305) 4,563 17,859
Purchases of trading securities........................ (123,483) (123,483)
Proceeds from sales of trading securities.............. 55,378 55,378
(Increase) decrease in other assets.................... 3,735 (1,924) (38) 1,773
Decrease in other liabilities.......................... (7,422) (1,934) (9,356)
Change in net receivable from/payable to related
parties............................................. 46,608 (93,374) 7,667 (39,099)
Other, net............................................. 3,882 (8,507) (3,376) (8,001)
--------- ---------- ------- ----------
Net cash provided by (used in) operating activities...... 138,904 (163,422) 14,210 (10,308)
--------- ---------- ------- ----------
Cash provided by (used in) investing activities:
Capital expenditures................................... (5,436) (26,049) (15,359) (46,844)
Acquisitions........................................... (30,861) (30,861)
Purchases of available-for-sale securities............. (223,804) (223,804)
Purchases of held-to-maturity securities............... (4,591) (4,591)
Proceeds from sales of available-for-sale securities... 173,547 173,547
Proceeds from held-to-maturity securities.............. 11,361 11,361
--------- ---------- ------- ----------
Net cash used in investing activities.................... (36,297) (69,536) (15,359) (121,192)
--------- ---------- ------- ----------
Cash provided by (used in) financing activities:
Repayments from sale of accounts receivable............ (35,332) (35,332)
Increase in short-term debt............................ 26,944 26,944
Increase in loan receivable from related party......... (6,152) (6,152)
Proceeds from issuance of debt......................... 99,916 99,916
Increase in borrowings under revolving credit
facility............................................ 34,000 34,000
Repayments of long-term debt........................... (1,028) (2,493) (3,521)
Distributions to parent company........................ (91,000) (91,000)
Payments of asbestos claims............................ (3,062) (3,062)
Financing fees and expenses............................ (1,932) (1,932)
--------- ---------- ------- ----------
Net cash provided by (used in) financing activities...... (102,574) 122,435 -- 19,861
--------- ---------- ------- ----------
Net change in cash and cash equivalents.................. 33 (110,523) (1,149) (111,639)
--------- ---------- ------- ----------
Cash and cash equivalents, end of year................... $ 35 $ 12,061 $ 825 $ 12,921
--------- ---------- ------- ----------
--------- ---------- ------- ----------
</TABLE>
F-30
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $885,364 $ -- $202,593 $ -- $1,087,957
Intercompany net sales......................... 3,413 571,038 72,188 (646,639) --
-------- -------- -------- ---------- ----------
Total net sales................................ 888,777 571,038 274,781 (646,639) 1,087,957
-------- -------- -------- ---------- ----------
Costs and expenses:
Cost of products sold........................ 658,587 538,499 226,461 (646,639) 776,908
Selling, general and administrative.......... 155,184 32,539 47,693 235,416
Goodwill amortization........................ 641 1,470 2,111
Nonrecurring charges......................... 27,563 27,563
-------- -------- -------- ---------- ----------
Total costs and expenses..................... 841,975 571,038 275,624 (646,639) 1,041,998
-------- -------- -------- ---------- ----------
Operating income (loss)........................ 46,802 -- (843) -- 45,959
Equity in loss of subsidiaries................. (581) 581 --
Interest expense, net.......................... (26,535) (11,000) (12,139) (49,674)
Other income (expense), net.................... (7,150) 23,114 (69) 15,895
-------- -------- -------- ---------- ----------
Income (loss) before income taxes and
extraordinary losses......................... 12,536 12,114 (13,051) 581 12,180
Income tax (provision) benefit................. (4,984) (4,603) 4,959 (4,628)
-------- -------- -------- ---------- ----------
Income (loss) before extraordinary losses...... 7,552 7,511 (8,092) 581 7,552
Extraordinary losses, net of income tax
benefits..................................... (18,113) (18,113)
-------- -------- -------- ---------- ----------
Net income (loss).............................. $(10,561) $ 7,511 $ (8,092) $ 581 $ (10,561)
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
</TABLE>
F-31
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING BALANCE SHEET
DECEMBER 31, 1998
(THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 3 $ 21,746 $ 3,238 $ -- $ 24,987
Investments in trading securities............ 95,134 95,134
Investments in available-for-sale
securities................................ 56,461 56,461
Investments in held-to-maturity securities... 6,358 6,358
Other short-term investments................. 22,671 22,671
Accounts receivable, trade................... 24,249 24,249
Accounts receivable, other................... 52,806 323 1,666 54,795
Inventories.................................. 44,886 18,825 29,653 93,364
Other current assets......................... 125 2,893 1,126 4,144
-------- -------- -------- ---------- --------
Total Current Assets...................... 97,820 224,411 59,932 -- 382,163
Investment in subsidiaries..................... 250,156 (250,156) --
Intercompany loans including accrued
interest..................................... 140,298 (140,298) --
Due from (to) subsidiaries, net................ (27,369) 42,972 (15,603) --
Property, plant and equipment, net............. 34,620 167,587 112,193 314,400
Excess of cost over net assets of businesses
acquired, net................................ 19,380 52,713 72,093
Deferred income tax benefits................... 60,427 60,427
Other assets................................... 14,844 3,229 337 18,410
-------- -------- -------- ---------- --------
Total Assets................................... $590,176 $438,199 $ 69,274 $ (250,156) $847,493
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt......... $ 1,170 $ 3,016 $ 87 $ -- $ 4,273
Accounts payable............................. 22,688 33,248 15,677 71,613
Payable to related parties, net.............. 1,721 3,495 214 5,430
Accrued liabilities.......................... 20,257 26,181 13,455 59,893
Reserve for product warranty claims.......... 19,139 1,100 20,239
-------- -------- -------- ---------- --------
Total Current Liabilities................. 64,975 65,940 30,533 -- 161,448
Long-term debt less current maturities......... 433,929 154,265 219 588,413
Reserve for product warranty claims............ 24,159 4,234 28,393
Other liabilities.............................. 22,240 2,126 24,366
-------- -------- -------- ---------- --------
Total Liabilities.............................. 545,303 220,205 37,112 -- 802,620
-------- -------- -------- ---------- --------
Stockholders' equity, net...................... 44,873 217,994 32,162 (250,156) 44,873
-------- -------- -------- ---------- --------
Total Liabilities and Stockholders' Equity .... $590,176 $438,199 $ 69,274 $ (250,156) $847,493
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
</TABLE>
F-32
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA
CONDENSED COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents, beginning of year............. $ 35 $ 12,061 $ 825 $ 12,921
--------- ---------- ------- ----------
Cash provided by (used in) operating activities:
Net income (loss)........................................ (9,980) 7,511 (8,092) (10,561)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary losses................................ 18,113 18,113
Depreciation........................................ 3,383 16,217 6,979 26,579
Goodwill amortization............................... 641 1,470 2,111
Deferred income taxes............................... 4,128 4,128
Noncash interest charges............................ 23,877 23,877
(Increase) decrease in working capital items........... 4,583 38,414 (15,099) 27,898
Purchases of trading securities........................ (189,197) (189,197)
Proceeds from sales of trading securities.............. 124,931 124,931
(Increase) decrease in other assets.................... (482) 761 204 483
Increase in other liabilities.......................... 7,568 211 7,779
Change in net receivable from/payable to related
parties............................................. 28,210 4,138 9,894 42,242
Other, net............................................. 3,703 7,324 (1,446) 9,581
--------- ---------- ------- ----------
Net cash provided by (used in) operating activities...... 83,744 10,099 (5,879) 87,964
--------- ---------- ------- ----------
Cash provided by (used in) investing activities:
Capital expenditures................................... (4,799) (45,637) (20,637) (71,073)
Acquisitions........................................... (59,187) (59,187)
Proceeds from sale of assets........................... 29,019 29,019
Purchases of available-for-sale securities............. (89,324) (89,324)
Purchases of held-to-maturity securities............... (6,357) (6,357)
Proceeds from sales of available-for-sale securities... 170,055 170,055
Proceeds from held-to-maturity securities.............. 499 499
--------- ---------- ------- ----------
Net cash provided by (used in) investing activities...... (63,986) 29,236 8,382 (26,368)
--------- ---------- ------- ----------
Cash provided by (used in) financing activities:
Repayments from sale of accounts receivable............ (4,754) (4,754)
Decrease in short-term debt............................ (26,944) (26,944)
Decrease in loan receivable from related party......... 6,152 6,152
Proceeds from issuance of debt......................... 304,019 304,019
Decrease in borrowings under revolving credit
facility............................................ (34,000) (34,000)
Repayments of long-term debt........................... (285,108) (2,706) (90) (287,904)
Financing fees and expenses............................ (6,099) (6,099)
--------- ---------- ------- ----------
Net cash used in financing activities.................... (19,790) (29,650) (90) (49,530)
--------- ---------- ------- ----------
Net change in cash and cash equivalents.................. (32) 9,685 2,413 12,066
--------- ---------- ------- ----------
Cash and cash equivalents, end of year................... $ 3 $ 21,746 $ 3,238 $ 24,987
--------- ---------- ------- ----------
--------- ---------- ------- ----------
</TABLE>
F-33
<PAGE>
BUILDING MATERIALS CORPORATION OF AMERICA
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997 BY QUARTER 1998 BY QUARTER
------------------------------------ ------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------ ------ ------ ------ ------ ------ ------ ------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. $193.3 $255.9 $274.4 $221.0 $212.4 $286.3 $313.6 $275.7
Cost of products sold................. 143.2 180.2 197.9 165.7 158.0 200.5 220.3 198.1
------ ------ ------ ------ ------ ------ ------ ------
Gross profit.......................... $ 50.1 $ 75.7 $ 76.5 $ 55.3 $ 54.4 $ 85.8 $ 93.3 $ 77.6
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss)*.............. $ 9.3 $ 24.9 $ 25.6 $ 10.3 $ 6.0 $ 26.7 $ (1.2) $ 14.5
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Interest expense...................... $ 9.8 $ 10.3 $ 10.4 $ 12.3 $ 12.7 $ 12.7 $ 12.3 $ 12.0
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes and
extraordinary losses................ $ 2.9 $ 16.6 $ 18.7 $ 4.6 $ 3.6 $ 18.1 $ (7.0) $ (2.5)
Income tax (provision) benefit........ (1.1) (6.5) (7.3) (1.8) (1.4) (7.1) 2.8 1.0
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before extraordinary
losses.............................. 1.8 10.1 11.4 2.8 2.2 11.0 (4.2) (1.5)
Extraordinary losses.................. -- -- -- -- -- -- (9.3) (8.8)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)..................... $ 1.8 $ 10.1 $ 11.4 $ 2.8 $ 2.2 $ 11.0 $(13.5) $(10.3)
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
- ------------------
* The operating loss for the third quarter of 1998 reflects $27.6 million of
nonrecurring charges. See Note 5 to Consolidated Financial Statements.
F-34
<PAGE>
================================================================================
WE HAVE NOT AUTHORIZED ANY DEALER, SALES REPRESENTATIVE, OR ANY OTHER
PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY ANY SECURITIES IN
ANY JURISDICTION WHERE IT IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................ 1
Risk Factors.................................. 11
Where You Can Find More Information........... 14
Forward-Looking Statements.................... 14
The Exchange Offer............................ 15
Capitalization................................ 22
Selected Financial Data....................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 25
Business...................................... 30
Management.................................... 41
Executive Compensation........................ 43
Security Ownership of
Certain Beneficial Owners
and Management.............................. 46
Certain Relationships......................... 47
Description of the Registered Notes........... 49
Federal Income Tax Considerations............. 73
Plan of Distribution.......................... 73
Legal Matters................................. 74
Experts....................................... 74
Index to Consolidated Financial Statements.... F-1
</TABLE>
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$155,000,000
BUILDING MATERIALS
CORPORATION OF AMERICA
ISSUER
BUILDING MATERIALS
MANUFACTURING CORPORATION
BUILDING MATERIALS
INVESTMENT
CORPORATION
GUARANTORS
SERIES B
8% SENIOR NOTES DUE 2008
--------------------
PROSPECTUS
--------------------
MAY 10, 1999
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