-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FKaMaKf+wYDeM/TmoJ4/O6st7CU5VJQWKVCKd84kFqBHIxUvRTttLtKQLpBxPfrv jC0kBrJ76AUyQ91tPfd9Bw== 0001047469-99-012895.txt : 19990402 0001047469-99-012895.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012895 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FALCON BUILDING PRODUCTS INC CENTRAL INDEX KEY: 0000923286 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED STRUCTURAL METAL PRODUCTS [3440] IRS NUMBER: 363931893 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13418 FILM NUMBER: 99582252 BUSINESS ADDRESS: STREET 1: 233 S WACKER DR STREET 2: STE 3500 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129069700 MAIL ADDRESS: STREET 1: TWO NORTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 10-K405 1 10-K405 - ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1998 Commission file number: 1-13418 FALCON BUILDING PRODUCTS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 36-3931893 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 233 SOUTH WACKER DRIVE CHICAGO, ILLINOIS 60606 (Address of Principal Executive Office) (312) 906-9700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by nonaffiliates of the Registrant. There is currently no established public trading market for the Registrant's voting stock. As of March 1, 1999, Falcon Building Products, Inc. had the following shares of its various classes of common stock outstanding: 985,438 shares of Class A Common Stock 6,721,536 shares of Class B Common Stock 838,574 shares of Class C Common Stock 17,000 shares of Class D Common Stock Documents Incorporated herein by Reference: None - ----------------------------------------------------------------------------- FALCON BUILDING PRODUCTS, INC. TABLE OF CONTENTS PART I. PAGE Item 1. Business.................................................. 3 Item 2. Properties................................................ 6 Item 3. Legal Proceedings......................................... 6 Item 4. Submission of Matters to a Vote of Security Holders....... 7 PART II. Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................. 8 Item 6. Selected Financial Information............................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 9 Item 8. Financial Statements and Supplementary Data............... 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 51 PART III. Item 10. Directors and Executive Officers of the Registrant........ 51 Item 11. Executive Compensation.................................... 53 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................... 57 Item 13. Certain Relationships and Related Transactions............ 59 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 59 2 PART I ITEM 1. BUSINESS GENERAL Falcon Building Products, Inc. ("Falcon" or the "Company") is a leading domestic manufacturer and distributor of products for the residential and commercial construction and home improvement markets. The Company's products include air distribution products including residential grilles, registers and diffusers; ceramic, enameled steel and acrylic plumbing fixtures; and air compressors, pressure washers, electric generators and pneumatic tools. The products that contributed more than 10% of net sales in 1998, 1997 and 1996 were as follows: residential grilles, registers and diffusers as a group were 12%, 12% and 9%, respectively; ceramic china bathroom fixtures were 15%, 16% and 17%, respectively; air compressors were 27%, 24% and 23%, respectively; and pressure washers were 15%, 18% and 13%, respectively. The Company believes that its products are well regarded as being innovative, of high quality and competitively priced. The Company was incorporated in January 1994 as part of a reorganization of all of the entities comprising the building products segment of Eagle Industries, Inc. ("Eagle"). Eagle is controlled by Equity Holdings Limited, an Illinois limited partnership ("EHL"). In November 1994, the Company completed an initial public offering of 6,000,000 shares of Class A Common Stock (the "Offering"). On June 17, 1997, the Company completed a merger transaction (the "Merger", and together with the financings described below, the "Recapitalization") with FBP Acquisition Corp. ("FBP"), a newly formed corporation organized on behalf of INVESTCORP S.A. ("Investcorp"), certain affiliates of Investcorp and other international investors, whereby FBP was merged with and into Falcon, with Falcon as the surviving corporation. The Merger resulted in Investcorp, its affiliates and certain other international investors owning approximately 88% of the capital stock of the Company. The Merger was accounted for as a recapitalization and, as such, the historical basis of the assets and liabilities of the Company were not affected. See Notes 5 and 7 to the Company's Consolidated Financial Statements (the "Financial Statements") for further discussion of the transaction and the financing arrangements entered into in order to consummate the Recapitalization. Air Distribution Products - The Company is a leading supplier of air distribution products and is the leading manufacturer of residential and light commercial grilles, registers and diffusers for heating, ventilating and air conditioning ("HVAC") applications. These products are marketed under the Hart & Cooley(R), Metlvent(R), Reliable(TM), Tuttle & Bailey(R), Woodwinds(TM) and Valley(TM) brand names. The Company manufactures more than 8,000 air distribution items, including metal grilles, registers and diffusers, flexible duct, gas vent and chimney systems, louvers, terminal units and electric duct heaters. Products are generally produced on a high-volume, low-cost basis; however, the standard product line is supplemented with custom-engineered products designed to meet specific size or performance requirements. In June 1998, the Company acquired a manufacturer of aluminum window wall systems used in light commercial applications. In January 1999, the Company acquired the assets and business of the Penn Ventilation Companies, Inc., a manufacturer of air moving and control equipment for commercial and industrial applications. See Note 18 to the Company's Consolidated Financial Statements for further discussion of this transaction. Air Power Products - The Company is a leading producer of consumer and commercial air compressors for home improvement applications. The Company manufactures a broad line of air compressors in the 3/4 to 10 horsepower range. These air compressors are electric or gasoline-driven with either oil-lubricated or oil-free pumps and are marketed under several brand names, including Air America(R), Charge Air Pro(R), Pro 4000(TM), Pro Air II(TM) and Steel Driver(R). The Company also manufactures air compressors under private-label programs, the most significant of which is the Craftsman(R) label for Sears Roebuck and Co. ("Sears"). In addition, the Company sells a variety of pneumatic tools such as paint spray guns, nailers and staplers, sanders and air hoses for use in home improvement applications. In 1995, several new product lines were introduced, including electric generators, pressure washers and OEM compressors. These new products, as is the case with compressors, are marketed primarily into retail and home center outlets. In January 1996, Falcon completed the acquisition of Ex-Cell Manufacturing Co., Inc. ("Ex-Cell"). Headquartered in Decatur, Arkansas, Ex-Cell is a leading manufacturer of pressure washers, marketed through the retail/home center distribution channel primarily under the Ex-Cell(R) brand name. 3 Plumbing Fixtures - The Company is a leading domestic producer of high quality ceramic china bathroom fixtures, including toilets and lavatories. The Company also produces enameled steel bathroom tubs and sinks, and acrylic whirlpool tubs as well as brass and plastic trim and fittings. Products are largely targeted at the high volume, medium price point category and are primarily sold through wholesale and home center outlets to the residential construction and remodeling markets under the Mansfield(R) and Swirl-way(R) brand names. In December 1998, the Company sold an option to its shareholders which gives them an option to purchase its Plumbing Fixtures segment. See Note 14 of the Company's Consolidated Financial Statements for further discussion of the option. BUILDING PRODUCTS INDUSTRY The building products industry depends primarily on the residential and commercial construction markets. The level of activity in the residential construction market depends on new housing starts and residential alteration and repair projects, which are affected to varying degrees by mortgage rates, inflation, unemployment, demographic trends, gross domestic product growth and consumer confidence. According to the U.S. Department of Commerce, domestic housing starts have fluctuated between 1.4 million and 1.6 million from 1994 to 1998. According to the U.S. Department of Commerce, residential alteration and repair expenditures have grown over the same period, from $115 billion in 1994 to approximately $119 billion in 1997. The Company estimates, based upon management's industry experience, that the residential alteration and repair market accounts for approximately 55% of the Company's net sales. The level of activity of the commercial construction market depends largely on vacancy rates and general economic conditions. According to the U.S. Department of Commerce, commercial construction activity has risen at an annualized rate of approximately 6% from 1993 to 1998. MARKETING AND DISTRIBUTION The Company markets and distributes its products nationwide through a variety of distribution channels. Based on 1998 net sales, approximately 46% of the Company's products are distributed to wholesalers and manufacturers' representatives who sell to contractors serving the residential and commercial construction markets. Approximately 54% of the Company's net sales are made to mass merchandisers and retail chains, which sell to homeowners and contractors. The Company utilizes a combination of internal sales forces and various representatives to market and sell its products. The Company markets its residential and light commercial air distribution products nationwide to HVAC contractors through over 750 wholesale distributors. The Company provides sales support to these distributors through a direct field sales staff and a customer service group. Independent representatives are also used to supplement the field sales coverage. The Company markets its commercial and industrial air distribution products nationwide primarily to HVAC contractors through over 150 commercial representatives. The Company's commercial representative organization is supported by regional sales managers and a customer service group. The Company markets its ceramic china, acrylic whirlpool baths and enameled steel bathroom fixtures and brass fittings primarily through manufacturers' representatives, who sell to over 750 wholesale distributors with more than 1,300 locations throughout the U.S. These distributors sell to plumbers, building contractors and remodelers. The Company also supplies bathroom fixture products to the retail distribution channel, primarily through The Home Depot. The Company markets its air power products primarily through consumer distribution channels which include mass merchants, warehouse clubs, home centers, hardware cooperatives and farm and fleet cooperatives. The Company services these consumer channels through a direct sales staff and manufacturers' representatives. The Company's Air Power Products and Plumbing Fixtures segments reported net sales to Sears that accounted for approximately 17% of the Company's net sales in 1998. All of the Company's segments had net sales to The Home Depot that accounted for approximately 11% of the Company's net sales in 1998. COMPETITION The building products industry is highly competitive and the Company competes with various international, national and regional suppliers in each of its product areas. In Air Distribution Products, the Company competes with divisions of three international manufacturers as well as various other smaller, regional competitors. In Plumbing Fixtures, the Company competes with divisions of three international manufacturers as well as various other smaller competitors. In Air Power Products, the Company competes with three large manufacturers as well as various smaller competitors. Some of the Company's competitors are larger, have greater financial resources and are less leveraged than the Company. The Company believes that it competes successfully in its markets on the basis of quality, service and product differentiation. 4 PATENTS, TRADEMARKS AND LICENSES The Company has been issued several patents worldwide. The Company believes that its patents are important to its business operations; however, the Company does not believe that the expiration or loss of any of its patents would have a material adverse effect on the Company. The Company owns a number of trademarks, including Hart & Cooley(R), Metlvent(R), Reliable(TM), Tuttle & Bailey(R), Woodwinds(TM), Valley(TM), Mansfield(R), Swirl-Way(R), Air America(R), Charge Air Pro(R), Ex-Cell(R) and Pro Air II(TM). The Company believes that its trademarks and its licenses are important to its business operations, but does not believe that the expiration or loss of any trademark or license would have a material adverse effect on the Company. RAW MATERIALS AND SUPPLIERS The raw materials and component parts used in the Company's operations include steel, aluminum, clay, electric motors, pumps and mylar. Most of the Company's purchases are sourced domestically and nearly all of the Company's purchases are readily available through multiple sources. Raw material costs have remained relatively stable throughout 1998. BACKLOG The Company's backlog at December 31, 1998 and 1997 was $32.8 million and $17.1 million, respectively. The increase was primarily the result of increased year-end orders and acquisitions. The backlog at December 31, 1998 is expected to be shipped during the first quarter of 1999. EMPLOYEES The Company employed approximately 4,900 persons as of December 31, 1998. Approximately 2,300 hourly employees are covered by seven collective bargaining agreements expiring through 2003. The Company believes that its labor relations are satisfactory at all of its facilities. ENVIRONMENTAL MATTERS The Company's operations are subject to federal, state and local laws and regulations governing, among other things, emissions to air, discharge to waters, the generation, handling, storage, transportation, treatment and disposal of waste and other materials and health and safety matters. The Company believes that its business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations. However, the operation of manufacturing plants entails risks in these areas, and there can be no assurance that the Company will not incur material costs or liabilities in the future. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future. Capital expenditures and expenses (including ordinary course of business hauling and disposal expenses) in 1998 attributable to environmental matters were not material in relation to the Company's consolidated financial position or results of operations. REGULATORY The Company's products are subject to extensive regulation by national, state, local and foreign authorities. For discussion of a current matter involving high temperature plastic venting systems, see Item 3, Legal Proceedings. 5 ITEM 2. PROPERTIES The Company believes its manufacturing, warehouse and office facilities are suitable, adequate and have sufficient manufacturing capacity for its current requirements. The Company also believes that its facilities are being utilized consistent with the Company's plans and do not have substantial excess capacity. The Company's principal facilities consist of the following:
APPROX. SQUARE LOCATION PRINCIPAL USE FOOTAGE LEASED/OWNED ------------------------------------ --------------------------------------- ------------------- ------------------ Air Distribution Products: Holland, Michigan............... Office, Manufacturing, Warehouse 613,000 Owned Jackson, Tennessee.............. Manufacturing, Warehouse 260,000 Leased(1) Huntsville, Alabama............. Manufacturing 219,000 Owned Geneva, Alabama................. Manufacturing 203,000 Owned Sanger, California.............. Manufacturing 127,000 Leased(2) Air Power Products: Jackson, Tennessee.............. Office, Manufacturing, Warehouse 461,000 Owned Decatur, Arkansas............... Manufacturing, Warehouse 106,000 Owned Plumbing Fixtures: Kilgore, Texas.................. Manufacturing, Warehouse 511,000 Owned Perrysville, Ohio............... Manufacturing 492,000 Owned Walnut, California.............. Manufacturing 414,000 Owned Henderson, Texas................ Manufacturing 125,000 Owned Big Prairie, Ohio............... Manufacturing 60,000 Owned - -----------------------------
(1) This facility is leased pursuant to a lease that expires in February, 2002, with renewal options to 2005. (2) This facility is leased pursuant to a lease that expires in December, 2002. ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business, including environmental matters. Although it is impossible to predict the outcome of any pending legal proceeding, the Company believes that such legal proceedings and claims, individually and in the aggregate, are either without merit, are covered by insurance or are adequately reserved for, and will not have a material adverse effect on its financial condition or results of operations. In addition to the matters covered by the preceding paragraph, in May 1994, Underwriters' Laboratories of Canada ("ULC") suspended its recognition of high temperature plastic venting ("HTPV") for gas appliances systems, including the Ultravent(R) product distributed by the Company. This action resulted from reports of problems with HTPV, including improper installation and related safety hazards, including potential for carbon monoxide emission. In June 1994, as a result of the ULC action, the Ontario Ministry of Consumer and Commercial Relations suspended sales of HTPV in the Province of Ontario. Other provinces of Canada have taken similar action. Gas appliance manufacturers in Canada and the United States no longer certify HTPV for use with their products. As a result, the Company discontinued sales of its HTPV product in 1997. Company sales of Ultravent(R) products in the United States and Canada in 1996 and 1997 were minimal. The Company is a defendant in a lawsuit in Canada that has been filed against 24 entities representing heating appliance manufacturers, plastic vent manufacturers and distributors, public utilities and listing agencies brought by the Ontario New Home Warranty Program, which is responsible for the cost of correcting appliances equipped with HTPV in new home construction in Ontario. The Company engaged in discussions with the United States Consumer Product Safety Commission ("CPSC") regarding the use of HTPV in the United States. Additionally, certain appliance manufacturers, the plastic resin manufacturer and the HTPV manufacturers and distributors, including Hart & Cooley, Inc. (the Company's Air Distribution Products segment), participated in a non-binding facilitative mediation process, the object of which was to develop and implement a voluntary HTPV corrective action program. As a result of the facilitative mediation process, the Company entered into a Corrective Action Program and Settlement Agreement in January 1998, along with 25 appliance manufacturers, an HTPV manufacturer and a resin manufacturer to correct certain HTPV mid-efficiency gas fired appliances by replacing the venting system. The Corrective Action Program was approved by the CPSC in February 1998. 6 In 1997, the Company recorded pretax charges of $32.8 million ($20.0 million, net of income taxes) representing an estimate of its share of the cost of the Corrective Action Program in the United States, resolution of the Canadian litigation, various related litigation, legal fees and other related costs. The Company estimates that the costs associated with the Corrective Action Program and other related HTPV matters will be expended during the next two to three years. Actual amounts expended could differ depending on a number of factors including, but not limited to, the estimated replacement cost per unit as well as the number of units replaced. The Company paid $4.1 million in 1998 related to HTPV matters. With respect to these matters, the Company, on September 16, 1996, filed an action in state court in Illinois against certain insurance carriers. The Company is seeking a declaratory judgment, damages for breach of contract and specific relief requiring the insurance carriers, pursuant to the terms of the Company's insurance policies, to defend and reimburse the Company for costs and legal expenses arising from Ultravent-related claims. The amount at issue cannot be determined at this time. The insurance carriers have denied coverage on a number of grounds and have filed motions to dismiss the Company's lawsuit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1998 to a vote of security holders of Falcon through a solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS There is currently no established public trading market for the Company's common stock. The number of shareholders of record as of December 31, 1998 was 43. No dividends have been paid to shareholders in the last two years and no dividends are expected to be declared in the near future. In addition, the Company's Bank Credit Facility and Subordinated Notes contain covenants that restrict the payment of dividends. ITEM 6. SELECTED FINANCIAL INFORMATION The selected financial information presented below has been derived from the Company's audited Consolidated Financial Statements for the five years in the period ended December 31, 1998, and should be read in conjunction with such financial statements and notes thereto.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- --------- -------- --------- (in millions) INCOME STATEMENT DATA: Net sales................................... $765.8 $686.4 $633.2 $471.3 $440.7 Operating income (loss) (a)................. 48.9 (20.9) 59.8 45.8 51.7 Net income (loss) before extraordinary item ..................................... 2.5 (37.4) 30.0 22.1 25.9 Net income (loss) (b)....................... 2.5 (38.9) 30.0 22.1 25.9 BALANCE SHEET DATA: Total assets................................ $381.4 $333.8 $261.7 $210.8 $187.5 Long-term debt (c).......................... 440.0 428.3 109.1 110.9 103.8 Total liabilities (c)....................... 596.1 547.5 233.8 213.0 212.1 Stockholders' equity (deficit) (d).......... (214.7) (213.7) 27.9 (2.2) (24.6)
___________________ a) Operating income for the year ended December 31, 1998 reflects pretax restructuring and other charges of $9.9 million. Operating loss for the year ended December 31, 1997 reflects pretax charges of $32.8 million relating to Ultravent(R), $36.3 million relating to the Recapitalization, and $8.0 million relating to pressure washer reserves. b) Net loss for the year ended December 31, 1997 reflects an extraordinary charge of $1.5 million, net of tax, relating to the early extinguishment of debt associated with the Recapitalization. c) As part of the Recapitalization in June 1997, the Company entered into a new bank credit facility and issued Senior Subordinated Notes and Senior Subordinated Discount Notes. Historical comparisons of long-term debt are not meaningful as the debt structure of the Company was altered in this period. d) The Company's equity capital structure was altered in connection with the Recapitalization in June 1997. As a result, historical comparisons of stockholders' equity are not meaningful. The deficit in 1998 and 1997 was primarily a consequence of the Recapitalization. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORMER RELATIONSHIP WITH EAGLE Eagle incorporated the Company in January 1994 as part of a reorganization of all the entities comprising Eagle's building products segment. Pursuant to a corporate services agreement, Eagle provided certain management, financial and administrative services to the Company prior to the Merger. In addition, certain executive officers of the Company were also executive officers of Eagle and spent approximately 50% of their time on the business and affairs of Eagle. As a result of the Recapitalization, the corporate services agreement was terminated and the executive officers referred to above became full-time employees of the Company. INDUSTRY INFORMATION Demand for the Company's products depends primarily on the residential construction market and, to a lesser extent, on the commercial construction market. The level of activity in the residential construction market depends on new housing starts and residential alteration and repair projects which are affected to varying degrees by many factors not within the Company's control, including mortgage rates, inflation, unemployment, demographic trends, gross domestic product growth and consumer confidence. The level of activity in the commercial construction market depends largely on vacancy rates and general economic conditions. RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1998 1997 1996 --------------------- -------------------------- -------------------------- (DOLLARS IN MILLIONS) % OF % OF % OF AMOUNT SALES AMOUNT SALES AMOUNT SALES ---------- ---------- ---------- ---------- ---------- ---------- Net Sales: Air Distribution Products... $219.4 28.7% $191.2 27.9% $187.0 29.6% Air Power Products.......... 389.1 50.8 335.4 48.9 287.1 45.3 Plumbing Fixtures........... 157.3 20.5 159.8 23.2 159.1 25.1 ---------- ---------- ---------- ---------- ---------- --------- Total Net Sales.......... $765.8 100.0% $686.4 100.0% $633.2 100.0% ---------- ---------- ---------- ---------- ---------- --------- Profitability: (a) Air Distribution Products... $ 32.9 4.3% $ 28.8 4.2% $ 29.6 4.7% Air Power Products.......... 39.0 5.1 29.7 4.3 29.1 4.6 Plumbing Fixtures........... 14.6 1.9 24.8 3.6 28.5 4.5 ---------- ---------- ---------- ---------- ---------- --------- Segment total ........... 86.5 11.3 83.3 12.1 87.2 13.8 Corporate................... (5.9) (0.8) (5.3) (0.8) (5.6) (0.9) ---------- ---------- ---------- ---------- ---------- --------- Total.................... $ 80.6 10.5% $ 78.0 11.3% $ 81.6 12.9% ---------- ---------- ---------- ---------- ---------- ---------
(a) Profitability represents income before interest expense and income taxes, excluding the following charges: (i) depreciation and amortization expense; (ii) costs associated with Ultravent(R) and the Recapitalization; (iii) securitization expense; and (iv) restructuring and non-cash charges. YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997 NET SALES Air Distribution Products net sales increased $28.2 million to $219.4 million, or 14.8% over 1997 results. Excluding the effect of acquisitions in 1998, net sales increased $22.1 million. This increase was primarily due to increased volume in all product categories as a result of increased market penetration and generally favorable market conditions, slightly offset by reduced pricing in flexible duct products primarily in the first nine months of 1998. Air Power Products net sales increased $53.7 million to $389.1 million, an increase of 16.0% over 1997 results. This increase was primarily driven by increased volume of compressors and generators due to increased market penetration and high storm activity. These increases were partially offset by a decrease in pressure washer sales due to the loss of customers resulting from the Company's implementation of a "no returns policy". 9 Plumbing Fixtures net sales decreased $2.5 million to $157.3 million or 1.6% from 1997. This decrease was primarily due to decreased volume of china and steel products due primarily to production inefficiencies discussed below. PROFITABILITY Air Distribution Products profitability increased $4.1 million to $32.9 million in 1998 from $28.8 million in 1997. This increase was primarily due to increased volume and cost reduction programs, partially offset by reduced pricing in flexible duct products as well as increased operating and distribution expenses. Air Power Products profitability increased $9.3 million to $39.0 million from $29.7 million in 1997. This increase was primarily due to net increased volume, principally in generators and compressors, as well as reduced direct material costs. This increase was partially offset by increased operating expenses primarily associated with promotional programs. Lower levels of returns of pressure washers that resulted from the Company's implementation of a "no returns" policy were partially offset by increased costs associated with this implementation. Plumbing Fixtures profitability decreased $10.2 million to $14.6 million from $24.8 million in 1997. This decrease was primarily due to manufacturing inefficiencies as well as increased warranty and distribution expenses. The Company has instituted cost controls, revised process flows and instituted a capital and restructuring plan which it believes will improve its manufacturing process. See Note 6 to the Company's Consolidated Financial Statements for a further discussion of the restructuring plan. Corporate expense increased $0.6 million due to increased costs associated with the Company's organization subsequent to the Recapitalization. Depreciation and amortization increased from 1997 due to capital additions and amortization of costs associated with the Recapitalization in June 1997. See Note 14 to the Company's Consolidated Financial Statements for further discussion of the Recapitalization costs being amortized. Special charges in 1998 consisted of restructuring and other charges of $9.9 million. See Note 6 to the Company's Consolidated Financial Statements for further discussion of these charges. Net interest expense increased $15.3 million to $43.8 million. This increase was primarily due to the debt structure that resulted from the Recapitalization in June 1997. See Note 7 to the Company's Consolidated Financial Statements for a discussion of the Company's debt structure. The effective income tax rate of 50.3% for the year reflected the effect of state income taxes and non-deductible expenses, including goodwill amortization. YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996 NET SALES Air Distribution Products net sales increased $4.2 million to $191.2 million, an increase of 2.2% over 1996 results. Moderate summer and winter temperatures reduced demand and significant price competition, primarily in flex duct products, limited the Company's ability to gain market share. Air Power Products net sales increased $48.3 million to $335.4 million, an increase of 16.8% from the level achieved in 1996. This increase was primarily the result of a 48% increase in the net sales of pressure washers and a 14% increase in net sales of compressors. Partially offsetting these gains were reduced shipments of generators, as well as the elimination of automotive products in 1997. Plumbing Fixtures net sales increased $0.7 million to $159.8 million in 1997, from $159.1 million in 1996. This modest increase was primarily due to significant pressure in the wholesale channel, which was partially offset by increased market penetration in retail markets. 10 PROFITABILITY Air Distribution Products profitability decreased $0.8 million to $28.8 million in 1997, from $29.6 million in 1996. This decrease was primarily due to the competitive pricing on flex duct products, increased manufacturing costs and selling and administrative expenses, partially offset by positive results of cost reduction programs and increased volume in all product categories. Air Power Products profitability increased $0.6 million to $29.7 million in 1997 from $29.1 million in 1996. The increase in sales of generators and pressure washers was offset by an unexpected high level of pressure washer product returns, as well as increased selling and administrative costs. The increase in net sales of pressure washers was accompanied by a 57% increase in the pressure washer return rate. This resulted in a significant increase in return costs over the 1996 period. The Company attributes the increase in the rate of returns to consumers' lack of familiarity with a relatively new and more complicated product, certain retailers' liberal return policies and certain purchased part quality problems. The Company improved its pressure washers through product design changes, more demanding purchase part quality assurance and improved consumer literature for 1998. Additionally, the Company negotiated a "no returns" policy for non-defective pressure washers with its major retail customers in 1998. Plumbing Fixtures profitability decreased $3.7 million to $24.8 million in 1997 from $28.5 million in 1996. This decrease was primarily due to manufacturing inefficiencies in certain plumbing products and reduced vitreous china pricing. Corporate expense remained constant between the 1997 and 1996 periods. Depreciation and amortization expense increased from 1996 primarily due to capital expenditures and increased amortization of costs associated with the Recapitalization. See Note 14 of the Company's Consolidated Financial Statements for further discussion of the Recapitalization costs being amortized. Special charges in 1997 included $36.3 million of expenses associated with the Recapitalization and $32.8 million of expenses associated with Ultravent(R) (see Notes 5 and 15 to the Company's Consolidated Financial Statements for a complete discussion of these expenses), as well as $8.0 million related to the establishment of reserves related primarily to returned pressure washer inventory. Special charges in 1996 included $1.8 million of expenses associated with Ultravent(R). Net interest expense increased $17.5 million to $28.5 million. This increase was primarily due to the new debt structure that resulted from the Recapitalization in June 1997. See Note 7 to the Company's Consolidated Financial Statements for a discussion of the Company's debt structure. The effective income tax benefit rate of 24.3% for the year reflected the effect of state income taxes and non-deductible expenses, including certain expenses incurred in connection with the Recapitalization and goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES Net cash flow from operating activities amounted to $65.1 million in 1998 compared to $10.9 million in 1997. The increase of $54.2 million was primarily due to a decrease in working capital through inventory reduction programs and an increased focus on vendor payment terms. The net residual interest retained by the Company in the accounts receivable sold by the Company increased $9.4 million from December 31, 1997 as a result of growth in the level of accounts receivable sold under the Accounts Receivable Securitization Program. This residual interest of $22.5 million at December 31, 1998 is reflected in other current assets in the Company's financial statements. Net cash flow from operating activities decreased $30.2 million to $10.9 million in 1997 from $41.1 million in 1996. This decrease was primarily due to an increase in working capital requirements and the effect of the stand-alone securitization facility the Company entered into in April 1996. In December 1996, the Company paid the parent of Eagle $4.6 million for a final tax sharing payment for tax liabilities incurred while it was included in its consolidated income tax returns, pursuant to a disaffiliation tax sharing agreement. 11 The Company historically has met its working capital needs and capital expenditure requirements primarily through a combination of operating cash flow, and availability under its credit facilities and the Receivables Securitization Program. The Company estimates that the costs associated with the Corrective Action Program and other related HTPV matters will be expended during the next two to three years. The Company anticipates funding these costs, satisfying its debt service requirements, and meeting its working capital and capital expenditure needs through a combination of operating cash flow, availability under the Revolving Facility and funds available through the Receivables Securitization Program. At December 31, 1998, $122.5 million was available to borrow under the Revolving Facility. In December 1998, the Company sold to its stockholders, an option to purchase Mansfield Plumbing Products, Inc. ("Mansfield"), its Plumbing Fixtures segment, based on an enterprise value for such segment of $80 million. The option exercise price is $10 million, plus the amount by which the indebtedness which Mansfield will incur as a result of this transaction (the proceeds of which would be distributed to Falcon) is less than $70 million. The option is exercisable at any time on or prior to June 30, 1999. The proceeds from this transaction, if the option is ultimately exercised, are expected to be utilized to reduce outstanding indebtedness under the Company's credit facility. CAPITAL EXPENDITURES Capital expenditures were $22.8 million, $19.1 million and $20.0 million for 1998, 1997, and 1996, respectively. Capital expenditures attributable to environmental matters were not material in any of these years, nor does the Company believe that such expenditures will be material in 1999. The Company expects to spend approximately $30 million for capital expenditures in 1999. YEAR 2000 READINESS PROGRAM The Year 2000 issue is the result of computer programs having been written using two digits, rather than four, to define the applicable year, resulting in an inability to distinguish between the year 1900 and the year 2000. This may put business and governmental entities at risk for possible miscalculations or systems failures causing disruptions in their business operations. The Year 2000 issue can arise at any point in the Company's supply, manufacturing, processing, distribution and financial activities. The Company and each of its operating subsidiaries have implemented a Year 2000 readiness program with the objective of having all of their significant business systems, including those that affect facilities and manufacturing activities, functioning properly with respect to the Year 2000 issues before January 1, 2000. While some of the Company's systems are Year 2000 compliant, the Company has utilized internal personnel, contract programmers and vendors to identify Year 2000 noncompliance problems, modify code and test the modifications or, if necessary, replace non-compliant software and hardware. Executive management regularly monitors the status of the Company's Year 2000 remediation plans. The process included an assessment of issues and development of remediation plans, where necessary, as they relate to internally used software, computer hardware and use of computer applications in the Company's manufacturing processes and products. In addition, the Company is engaged in assessing the Year 2000 issue with significant suppliers and customers. Each segment is in a different stage of Year 2000 readiness. The assessment phase of the Year 2000 readiness program is complete with all operating subsidiaries having identified the business systems that may require remediation or replacement and established priorities for repair or replacement. Those systems considered most critical to operations have been given the highest priority. The second phase of the Year 2000 readiness program involves the actual remediation and replacement of business systems. The Company and its operating subsidiaries are using both internal and external resources to complete this process. Systems ranked highest in priority have either been remediated or replaced or scheduled for remediation or replacement. Systems earmarked for retirement and replacement without regard to the Year 2000 issue have been evaluated for early replacement with Year 2000 compliant systems. The Company's objective is to complete substantially all remediation and replacement of internal business systems by the second quarter of 1999, and to complete final testing by the third quarter of 1999. As part of the Year 2000 readiness program, significant service providers, vendors, suppliers and customers that are believed to be critical to business operations after January 1, 2000, have been identified and steps have been undertaken to reasonably ascertain their stage of Year 2000 readiness through questionnaires, interviews, on-site visits and other available means. These activities are intended to provide a means of managing risk, but cannot eliminate the potential for disruption due to third party failure. 12 Because of the number of business systems used by the Company, in addition to the significant number of third parties that the Company depends on, the Company presently believes that it may experience some disruption in its business due to the Year 2000 issue. More specifically, because of the interdependent nature of business systems, the Company and its operating subsidiaries could be materially adversely affected if utilities, private businesses and governmental entities with which they do business or that provide essential services are not Year 2000 compliant. The possible consequences of the Company or third parties not being fully Year 2000 compliant by January 1, 2000 include, among other things, delays in the delivery of products, delays in the receipt of supplies, invoice and collection errors, inventory and supply obsolescence, and possible temporary plant closings. Consequently, the business and results of operations of the Company could be materially adversely affected by a temporary inability of the Company and its operating subsidiaries to conduct their businesses in the ordinary course for a period of time after January 1, 2000. The Company does not currently have a comprehensive contingency plan with respect to the Year 2000 issue, but intends to establish such a plan during 1999 as part of its Year 2000 readiness program. Failure to meet critical milestones identified in the Company's plans would precipitate alternative actions, including an acceleration of any contingency plan. It is currently estimated that the aggregate cost of the Company's Year 2000 readiness program will be approximately $1.3 million, of which approximately $0.8 million has been expensed through December 31, 1998. These costs are being expensed as incurred and are being funded through operating cash flow. The costs associated with the replacement of computerized systems or equipment, substantially all of which would be capitalized, are not included in the above estimates. SEASONALITY, WORKING CAPITAL AND CYCLICALITY Sales of certain products of the Company are subject to seasonal variation. Seasonal factors historically have not had a significant effect on working capital requirements, as the Company has been able to adjust its production to meet seasonal demands. Due to seasonal factors associated with the construction industry, sales of products are typically higher during the second and third quarters than at other times of the year. The residential and commercial construction markets are sensitive to cyclical changes in the economy. INFLATION The effect of inflation on 1998, 1997 and 1996 operating results was not material. FORWARD-LOOKING STATEMENTS When used in this discussion, the words "believes" and "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, over which the Company has no control, which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligations to republish revised forward-looking statements to reflect events or circumstances after the date thereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this report, as well as the Company's periodic reports filed with the Securities and Exchange Commission. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE Reports of Independent Accountants.................................. 15 Consolidated Balance Sheets......................................... 17 Consolidated Statements of Income and Comprehensive Income.......... 18 Consolidated Statements of Stockholders' Equity..................... 19 Consolidated Statements of Cash Flows............................... 20 Notes to Consolidated Financial Statements.......................... 21 Supplementary Financial Data (Unaudited)............................ 50 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Falcon Building Products, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Falcon Building Products, Inc. and Subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP March 5, 1999 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Falcon Building Products, Inc.: We have audited the accompanying Consolidated Statements of Income, Stockholders' Equity and Cash Flows for Falcon Building Products, Inc. (a Delaware Corporation) and Subsidiaries as of December 31, 1996 for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Falcon Building Products, Inc. and Subsidiaries as of December 31, 1996, and the results of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois February 5, 1997 16
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) DECEMBER 31, ----------------------------- 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents......................................... $ 66.4 $ 29.9 Inventories, net.................................................. 78.8 79.5 Other current assets.............................................. 42.2 34.0 ------------ ------------ Total current assets.............................................. 187.4 143.4 Property, plant and equipment, net..................................... 109.8 101.3 Goodwill, net.......................................................... 59.4 57.0 Other assets........................................................... 24.8 32.1 ------------ ------------ Total assets...................................................... $381.4 $333.8 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion long-term debt.................................... $ 2.0 $ 1.5 Accounts payable.................................................. 58.0 34.0 Accrued liabilities............................................... 57.0 43.2 ------------ ------------ Total current liabilities......................................... 117.0 78.7 Senior indebtedness ................................................... 175.7 175.6 Senior subordinated notes.............................................. 264.3 252.7 Accrued employee benefit obligations................................... 13.3 9.2 Other long-term liabilities............................................ 25.8 31.3 ------------ ------------ Total liabilities................................................. 596.1 547.5 ------------ ------------ Stockholders' equity (deficit): Class A stock, par value $.01 per share, 985,529 shares issued in 1998, 1,007,690 issued in 1997............................. -- -- Class B stock, par value $.01 per share, 6,721,536 shares issued.. 0.1 0.1 Class C stock, par value $.01 per share, 844,174 shares issued in 1998, 844,274 shares issued in 1997........................... -- -- Class D stock, par value $.01 per share, 17,000 shares issued..... -- -- Common stock, par value $.01 per share, none issued............... -- -- Additional paid-in capital........................................ -- -- Retained deficit.................................................. (209.7) (211.8) Notes receivable arising from stock purchase plan................. (1.8) (2.0) Accumulated other comprehensive loss.............................. (3.3) -- ------------ ------------ Total stockholders' equity (deficit).............................. (214.7) (213.7) ------------ ------------ Total liabilities and stockholders' equity ....................... $381.4 $333.8 ------------ ------------ ------------ ------------ The accompanying notes to consolidated financial statements are an integral part of these statements.
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN MILLIONS) YEAR ENDED DECEMBER 31, -------------------------------------------------- 1998 1997 1996 -------------- ------------- -------------- Net sales................................................... $765.8 $686.4 $ 633.2 Cost of sales............................................... 640.0 576.5 513.6 -------------- ------------- -------------- Gross earnings......................................... 125.8 109.9 119.6 Selling, general and administrative expenses................ 64.9 57.7 53.9 Securitization expense...................................... 3.8 4.0 4.1 Restructuring and other charges............................. 8.2 -- -- Ultravent expenses.......................................... -- 32.8 1.8 Recapitalization expenses................................... -- 36.3 -- -------------- ------------- -------------- Operating income (loss)................................ 48.9 (20.9) 59.8 Net interest expense........................................ 43.8 28.5 11.0 -------------- ------------- -------------- Income (loss) before income taxes and extraordinary item.... 5.1 (49.4) 48.8 Provision (benefit) for income taxes........................ 2.6 (12.0) 18.8 -------------- ------------- -------------- Income (loss) before extraordinary item................ 2.5 (37.4) 30.0 Extraordinary item: Early extinguishment of debt net of income tax benefit of $0.9...................................... -- (1.5) -- -------------- ------------- -------------- Net income (loss)...................................... $ 2.5 $ (38.9) $ 30.0 -------------- ------------- -------------- -------------- ------------- -------------- Other comprehensive income (loss): Minimum pension liability adjustment net of income tax expense (benefit) of ($2.3) in 1998, $0.2 in 1997 and ($0.1) in 1996...................................... (3.3) 0.5 (0.1) -------------- ------------- -------------- Comprehensive income (loss).................................... $ (0.8) $ (38.4) $ 29.9 -------------- ------------- -------------- -------------- ------------- -------------- The accompanying notes to consolidated financial statements are an integral part of these statements.
18
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN MILLIONS) NOTES ACCUMULATED ADDITIONAL RETAINED FROM STOCK OTHER CLASS A CLASS B PAID-IN EARNINGS PURCHASE COMPREHENSIVE UNEARNED STOCK STOCK CAPITAL (DEFICIT) PLAN INCOME(LOSS) COMPENSATION -------- --------- ----------- ---------- ------------ --------------- ------------ Balance at December 31, 1995. $ 0.1 $0.1 $ 18.0 $ (17.2) $ (2.2) $ (0.4) $ (0.6) Net income................. -- -- -- 30.0 -- -- -- Conversion of Class B Stock to Class A Stock.......... 0.1 (0.1) -- -- -- -- -- Minimum pension liability adjustment................ -- -- -- -- -- (0.1) -- Other...................... -- -- -- -- -- -- 0.2 -------- --------- ----------- ---------- ------------ --------------- ---------- Balance at December 31, 1996. 0.2 -- 18.0 12.8 (2.2) (0.5) (0.4) Net loss................... -- -- -- (38.9) -- -- -- Repurchase of Class A Stock (0.2) -- (18.0) (320.2) -- -- 0.4 Issuance of stock.......... -- 0.1 -- 134.5 -- -- -- Minimum pension liability adjustment................ -- -- -- -- -- 0.5 Other...................... -- -- -- -- 0.2 -- -- -------- --------- ----------- ---------- ------------ --------------- ---------- Balance at December 31, 1997. -- 0.1 -- (211.8) (2.0) -- -- Net income................. -- -- -- 2.5 -- -- -- Repurchase of Class A Stock -- -- -- (0.4) -- -- -- Minimum pension liability adjustment................ -- -- -- -- -- (3.3) -- Other...................... -- -- -- -- 0.2 -- -- -------- --------- ----------- ---------- ------------ --------------- ---------- Balance at December 31, 1998. $ -- $ 0.1 $ -- $(209.7) $ (1.8) $ (3.3) $ -- -------- --------- ----------- ---------- ------------ --------------- ---------- -------- --------- ----------- ---------- ------------ --------------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 19
FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..................................................... $ 2.5 $ (38.9) $ 30.0 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation........................................................ 14.2 14.2 13.7 Amortization........................................................ 6.0 4.5 1.8 Accretion of debt discount on subordinated debt..................... 11.6 5.8 -- Deferred income tax provision (benefit)............................. 5.9 (15.7) (2.9) Restructuring and other charges..................................... 9.0 -- -- Ultravent expenses.................................................. (4.1) 30.7 -- Recapitalization expenses........................................... -- 36.3 -- Early extinguishment of debt........................................ -- 1.5 -- Cash effects, excluding acquisitions, of changes in: Accounts receivable, net of residual interest................... -- -- 6.2 Inventories..................................................... (0.3) (4.1) (14.0) Other current assets............................................ (8.8) (10.4) (1.5) Accounts payable................................................ 23.8 (16.1) 10.2 Accrued liabilities and accrued employee benefit obligations.... 5.3 3.1 (2.4) ---------- ---------- ---------- Net cash from operating activities.................................... 65.1 10.9 41.1 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses................................................ (4.0) -- (18.8) Capital expenditures.................................................. (22.8) (19.1) (20.0) Other................................................................. (0.2) (0.3) 0.2 ---------- ---------- ---------- Net cash used in investing activities................................. (27.0) (19.4) (38.6) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from senior credit facilities................................ -- 175.0 -- Repayments of senior credit facilities................................ -- (138.8) -- Issuance of common stock.............................................. -- 134.6 -- Retirement of common stock............................................ -- (338.0) -- Payment of Recapitalization fees and expenses......................... -- (61.8) -- Issuance of senior subordinated notes................................. -- 247.0 -- Net borrowings (repayments) on debt................................... (1.6) 16.5 0.3 ---------- ---------- ---------- Net cash from (used in) financing activities.......................... (1.6) 34.5 0.3 ---------- ---------- ---------- CHANGE IN CASH AND CASH EQUIVALENTS...................................... 36.5 26.0 2.8 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 29.9 3.9 1.1 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $ 66.4 $ 29.9 $ 3.9 ---------- ---------- ---------- NET CASH PAID (RECEIVED) DURING THE PERIOD FOR: Interest.............................................................. $ 27.4 $ 20.7 $ 11.0 Income taxes to affiliate............................................. -- -- 4.6 Income taxes to (from) third parties.................................. $ (6.6) $ 7.6 $ 23.5
The accompanying notes to consolidated financial statements are an integral part of these statements. 20 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (1) BASIS OF PRESENTATION Falcon Building Products, Inc. (the "Company") is a manufacturer and distributor of products for the residential and commercial construction and home improvement markets. Eagle Industries, Inc. ("Eagle") incorporated the Company in January 1994 as part of a reorganization of all of the entities comprising Eagle's building products segment. On June 17, 1997, the Company completed a merger transaction (the "Merger", and together with the financings described in Note 5, the "Recapitalization") with FBP Acquisition Corp. ("FBP"), a newly formed corporation organized on behalf of INVESTCORP S.A. ("Investcorp"), certain affiliates of Investcorp and other international investors, whereby FBP was merged with and into Falcon, with Falcon as the surviving corporation. The Merger resulted in Investcorp, its affiliates and certain other international investors owning approximately 88% of the capital stock of the Company. The Merger was accounted for as a recapitalization and, as such, the historical basis of the assets and liabilities of the Company were not affected. See Notes 5 and 7 for further discussion of the transaction and the financing arrangements entered into in order to consummate the Recapitalization. Certain amounts in the Company's historical financial statements have been reclassified to be consistent with the presentation in the current period. (2) SIGNIFICANT ACCOUNTING POLICIES: BASIS OF CONSOLIDATION: The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES: These Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. CASH AND CASH EQUIVALENTS: All highly liquid investment instruments with original maturities of three months or less are considered to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost or market. Cost includes raw materials, labor and manufacturing overhead. The last-in, first-out ("LIFO") method of inventory valuation was used for 38.4% and 41.1% of inventory at December 31, 1998 and 1997, respectively. The first-in, first-out ("FIFO") method of inventory valuation was used for the remaining inventory. 21 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 NEW ACCOUNTING PRONOUNCEMENTS: Effective January 1, 1998, the Company adopted the provisions of Statement No. 132 "Employers' Disclosure about Pensions and Other Postretirement Benefits" ("SFAS No. 132"), which revises employers' disclosures about pensions and other postretirement benefit plans. Effective January 1, 1998, the Company adopted the provisions of Statement No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Effective January 1, 1998, The Company adopted the provisions of Statement No. 131 ("SFAS No. 131"), "Disclosure about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. IMPAIRMENT OF LONG-LIVED ASSETS: An impairment loss is recognized in the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. The straight-line method is generally used to provide for depreciation over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and 3 to 12 years for machinery and equipment. GOODWILL: Goodwill represents the purchase price associated with acquired businesses in excess of the fair value of the net assets acquired. Goodwill is amortized on a straight-line basis, primarily over forty years. Accumulated amortization was $17.7 million and $15.6 million at December 31, 1998 and 1997, respectively. The recoverability of goodwill is reassessed periodically to determine if current operating income is sufficient to recover the current amortization. When events and circumstances indicate that future operating income and cash flow may be negatively affected, the recoverability is evaluated based upon the estimated future operating income and undiscounted cash flow of the related entity during the remaining period of goodwill amortization. DEFERRED FINANCING FEES: Deferred financing fees are amortized on a straight-line basis over the life of the related debt and are included in Other assets in the Company's Consolidated Balance Sheets. This method of amortization approximates the effective yield method. 22 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONINUED) DECEMBER 31, 1998 REVENUE RECOGNITION: The Company recognizes revenues as products are shipped to customers. EARNINGS PER SHARE: As a result of the Recapitalization, the Company's stock is no longer traded in a public market. As such, earnings per share is no longer disclosed. (3) ACQUISITIONS On June 25, 1998, the Company acquired Warrior Glass & Aluminum Co., Inc., a manufacturer of aluminum window wall systems used in light commercial applications. The consideration consisted of $4.0 million in cash and a $2.7 million four-year, non-interest bearing note. The note was recorded at a discounted value of $2.1 million. The acquisition was accounted for as a purchase and resulted in $4.2 million of goodwill that is being amortized over 40 years. (4) ACCOUNTS RECEIVABLE Between January 1994 and April 1996, the Company participated in Eagle's securitization program, selling its receivables to Eagle, which in turn sold certain of its receivables, including those acquired from the Company, to a "Master Trust". During the second quarter of 1996, Eagle terminated its securitization program and coordinated the termination of its program with the Company to allow the Company to establish its own securitization program. In April 1996, the Company entered into receivable sale agreements with a financial institution and its affiliates (collectively, the "Bank Group") whereby it sells, with limited recourse, on a continuous basis, an undivided interest in all of its accounts receivable for cash, while maintaining a residual interest in the receivables. In connection with the Recapitalization, the Company amended its receivables securitization program to increase the maximum availability from $85 million to $100 million and to extend its program until 2002. At December 31, 1998 and 1997, uncollected receivables sold under the agreement were $106.7 million and $88.6 million, respectively. Included in the Company's financial statements in other current assets is a net residual interest of $22.5 million and $13.1 million at December 31, 1998 and 1997, respectively. The expense incurred on the sale of the receivables under these programs was $3.8 million, $4.0 million and $4.1 million in 1998, 1997 and 1996, respectively. (5) RECAPITALIZATION On March 20, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with FBP. The Merger Agreement contemplated that FBP would be merged with and into Falcon and each outstanding share of the Company's Class A Common Stock ("Class A Stock") would be converted into either (i) $17.75 in cash (the "Cash Price"), or (ii) at the election of the holder of the Class A Stock, the right to retain one share of Class A Stock. On June 17, 1997, the Merger and the adoption of the Merger Agreement were approved by the vote of a majority of the stockholders of the Class A Stock and FBP was merged with and into Falcon, with Falcon continuing as the surviving corporation. As a result of the Merger, 19,040,585 of the then issued and outstanding shares of Class A Stock were converted into cash and 1,007,690 shares were retained by existing stockholders. In addition, each person who, immediately prior to the consummation of the Recapitalization, held an option to purchase shares of the Class A Stock, received a cash payment equal to the product of (i) the difference between the Cash Price and the option exercise price multiplied by (ii) the number of options held by such person. Approximately $338.0 million was paid to holders of Class A Stock who converted their shares and approximately $5.2 million was paid to persons holding options to purchase shares of Class A Stock. 23 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 Pursuant to the Merger Agreement, the certificate of incorporation of FBP became the certificate of incorporation of the Company (the "Restated Certificate of Incorporation") upon the effective date of the Merger. The Restated Certificate of Incorporation authorizes five classes of common stock. Each issued and outstanding share of capital stock of FBP was converted into a share of capital stock of Falcon upon the consummation of the Recapitalization. The Recapitalization was funded by (i) $175.0 million of borrowings under the Bank Credit Facility (as defined), (ii) $145.0 million from the offering of the Old Notes (as defined), (iii) approximately $102.0 million of proceeds from the offering of the Old Discount Notes (as defined) and (iv) an equity contribution by Investcorp, its affiliates and certain other international investors of approximately $134.6 million. The proceeds from these financings funded: the payment of approximately $338.0 million to holders of Class A Stock who converted their shares; the payment of approximately $5.2 million to option holders; the repayment of approximately $138.8 million of outstanding indebtedness under the then existing credit facility; and the payment of approximately $58.5 million of fees and expenses associated with the Recapitalization. The transaction was accounted for as a recapitalization and, as such, the historical basis of the Company's assets and liabilities was not affected. Approximately $27.4 million of costs primarily representing financing fees were capitalized while approximately $36.3 million of costs were expensed and are reflected as a component of operating income in the Company's Consolidated Statements of Income. The expensed costs represent investment banker fees, Investcorp merger and acquisition fees, legal and accounting fees, transaction bonuses, payments to option holders and other miscellaneous costs incurred in connection with the Recapitalization. In addition, the Company recorded an extraordinary charge of $1.5 million, net of a $0.9 million income tax benefit, in connection with the repayment of its existing credit facility. (6) RESTRUCTURING AND OTHER CHARGES In the third quarter of 1998, the Company recorded restructuring and other charges totaling $9.0 million, $7.9 million related to the reorganization of its Plumbing Fixtures business (the "Reorganization Plan") and a $1.1 million charge to write-down to market certain automotive product line fixed assets, previously utilized in Air Power Products. The Reorganization Plan involves: (1) the restructuring of the steel products enameling operations and the closure of the bath-tub pressing operations; (2) a reconfiguration of the Texas china plant, as new automated equipment is employed and new process controls are instituted; and (3) increased investment in manufacturing, finance, engineering and production control personnel. In the fourth quarter of 1998, the Company recorded restructuring charges of $0.9 million related to the consolidation of two Air Distribution Products manufacturing plants. 24 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 The following table summarizes the costs reflected in the Company's Consolidated Financial Statements at December 31,1998; $8.2 million is reflected as Restructuring and Other Charges while $1.7 million is included in Cost of Sales (in millions):
RESTRUCTURING RESTRUCTURING CHARGES RESTRUCTURING OTHER AND OTHER INCLUDED CHARGES CHARGES CHARGES IN COST OF SALES TOTAL ---------------- ----------- ----------------- -------------------- ----------- Inventory...................... $ -- $ -- $ -- $ 1.7 $ 1.7 Severance...................... 0.7 -- 0.7 -- 0.7 Professional fees.............. 0.1 0.6 0.7 -- 0.7 Fixed asset write-downs........ 3.3 -- 3.3 -- 3.3 Workers compensation........... 2.0 -- 2.0 -- 2.0 Other.......................... 0.7 0.8 1.5 -- 1.5 --------- -------- ------- -------- ------- $ 6.8 $ 1.4 $ 8.2 $ 1.7 $ 9.9 --------- -------- ------- -------- ------- --------- -------- ------- -------- -------
The inventory adjustments relate primarily to a net realizable value adjustment to the carrying value of existing raw material and work-in-process inventories given the excess materials on hand as the Company exits its steel tub pressing operations and the new china manufacturing technologies are employed as well as adjustments related to the plant consolidation. The severance costs are for 70 employees primarily in the steel operations that were terminated as a result of the Reorganization Plan and employees associated with the Air Distribution plant consolidation. The professional fees represent costs incurred for projects related primarily to the Company's china operations and fees for positions added as a result of the Reorganization Plan. The fixed asset write-downs relate primarily to the write-off of equipment which will no longer be used as a result of the Reorganization Plan and plant consolidation, and a $1.1 million charge associated with the disposal of automotive product line assets. The workers compensation costs represent the increase in claim experience incurred and/or expected to be incurred as a result of the Reorganization Plan and plant consolidation. Other costs reflect relocation costs, increased employee costs and product costs that were incurred either prior to or as part of the implementation of the Reorganization Plan. Of the $9.9 million of Restructuring and Other charges recorded, $4.2 million are non-cash charges and $5.7 million are cash charges. Approximately $0.9 million of the cash charges have been expended through December 31, 1998. The above restructuring activities are anticipated to be completed within 1999. (7) DEBT As part of the Recapitalization, the Company entered into a new senior credit facility with a group of banks (the "Bank Credit Facility"), and pursuant to indentures dated June 17, 1997 (the "Indentures"), issued $145 million of 9 1/2% Series A Senior Subordinated Notes (the "Old Notes") and $170 million aggregate principal amount of 10 1/2% Series A Senior Subordinated Discount Notes (the "Old Discount Notes", and together with the Old Notes, the "Old Securities"). The proceeds from the Bank Credit Facility and the Old Securities were used to finance the conversion to cash of the Class A Common Stock, to repay the then outstanding senior credit facility and to pay the fees and expenses associated with the Recapitalization. 25 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 Although the Old Securities were sold through a confidential placement memorandum, in September 1997, the Company filed an exchange offer registration statement with respect to certain of the Old Securities (the "Exchange Offer"). Pursuant to the Exchange Offer, $144.0 million aggregate principal amount of 9 1/2% Series B Senior Subordinated Notes Due 2007 (the "Notes") of the Company were exchanged for a like amount of the Old Notes and $162.8 million aggregate principal amount at maturity of 10 1/2% Series B Senior Subordinated Discount Notes Due 2007 (the "Discount Notes" and together with the Notes, the "Securities") of the Company were exchanged for a like amount of the Old Discount Notes. As the terms of the Old Securities and the Securities are otherwise identical, for purposes of the discussions below, the $1.0 million of Old Notes and the $7.2 million of Old Discount Notes that were not exchanged are considered to be part of the Notes and Discount Notes, respectively. The Company did not receive any proceeds from the Exchange Offer. Certain of the Company's subsidiaries have guaranteed the Bank Credit Facility and the Securities, such guarantee of the Securities being subordinate to the guarantee of the Bank Credit Facility. See Note 16. SENIOR INDEBTEDNESS:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------------- ----------------- (IN MILLIONS) Bank Credit Facility Revolver.................................... $ -- $ -- Term........................................ 173.5 174.5 ------------- ------------ Total....................................... 173.5 174.5 Other ........................................ 4.2 2.6 Less: Current Portion......................... (2.0) (1.5) ------------- ------------ Senior indebtedness......................... $ 175.7 $ 175.6 ------------- ------------ ------------- ------------
The aggregate long-term debt maturities over the next five years are as follows: 1999 - $2.0 million; 2000 - $2.1 million; 2001 - $2.4 million; 2002 - - $10.8 million; and 2003 - $43.6 million. BANK CREDIT FACILITY: The Bank Credit Facility entered into on June 17, 1997, consists of a $175 million term loan facility which matures in June 2005 and a $125 million revolving credit facility (the "Revolver") which matures in June 2003. The term loan was drawn in full as part of the Recapitalization and is due in semi-annual installments of $0.5 million from December 1997 through June 2002, quarterly installments of $9.5 million from December 2002 through September 2003, quarterly installments of $15.0 million from December 2003 through September 2004, installments of $18.0 million in December 2004 and March 2005 and a final payment at maturity of $36.0 million in June 2005. No amounts were outstanding under the Revolver at December 31, 1998. The Bank Credit Facility also allows for $25.0 million to be used in the form of letters of credit. The use of letters of credit reduces the availability of funds under the Revolver. At December 31, 1998, $122.5 million was available to borrow under the Revolver. Borrowings under the Bank Credit Facility bear interest at alternative floating rate structures at management's option (8.2% for the term loan at December 31, 1998) and are secured by all the capital stock of each of the Company's subsidiaries and substantially all of the inventory and property, plant and equipment of the Company and its subsidiaries other than the special purpose entity established in connection with the receivables securitization program. The Bank Credit Facility requires an annual commitment fee of 0.5% on the average daily unused amount of the revolving portion of the Bank Credit Facility. The Bank Credit Facility contains various restrictive covenants including the maintenance of certain financial ratios, restrictions on additional indebtedness, mergers, asset dispositions, dividends and other restricted payments and prepayment and amendments of subordinated indebtedness. As of December 31, 1998, the Company was in compliance with all covenants of the Bank Credit Facility. 26 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 Additional debt of the Company primarily consists of industrial revenue bonds, which bear interest ranging from 6.2% to 7.5%. The average monthly debt during 1998 was $436.6 million, an increase of $122.3 million over the comparable 1997 average debt. This increase is primarily due to change in the Company's debt structure as part of the Recapitalization. SENIOR SUBORDINATED NOTES: 9 1/2% SENIOR SUBORDINATED NOTes: The Company's $145 million of Notes mature on June 15, 2007. Interest on the Notes is payable semi-annually in arrears on June 15 and December 15 commencing on December 15, 1997. The Notes are general unsecured obligations of the Company ranking subordinate in right of payment to all existing and future senior indebtedness of the Company. The Notes rank PARI PASSU in right of payment with all other indebtedness of the Company that is subordinated to senior indebtedness of the Company. The Notes are not redeemable at the Company's option prior to June 15, 2002. The Notes are redeemable at the Company's option at 104.750% during the 12 months beginning June 15, 2002, 103.167% during the 12 months beginning June 15, 2003, 101.583% during the 12 months beginning June 15, 2004 and at 100% thereafter (expressed as a percentage of principal amount). In addition, prior to June 15, 2000, up to 35% of the Notes may be redeemed at 109.5% of the principal amount out of the proceeds of certain equity offerings. 10 1/2% SENIOR SUBORDINATED DISCOUNT NOTes: The $170 million aggregate principal amount of Discount Notes mature on June 15, 2007. The issue price of each Old Discount Note was $599.82 per $1,000 principal amount at maturity, which represents a yield to June 15, 2002 of 10.5% per annum. Cash interest will not accrue on the Discount Notes prior to June 15, 2002. Cash interest is payable semi-annually in arrears on June 15 and December 15 of each year at a rate of 10.5% per annum commencing December 15, 2002. The Discount Notes are general unsecured obligations of the Company ranking subordinate in right of payment to all existing and future senior indebtedness of the Company. The Discount Notes rank PARI PASSU in right of payment with all other indebtedness of the Company that is subordinated to senior indebtedness of the Company. The accreted value of the Discount Notes was $119.3 million at December 31, 1998. The Discount Notes are not redeemable at the Company's option prior to June 15, 2002. The Discount Notes are redeemable at the Company's option at 105.25% during the 12 months beginning June 15, 2002, 103.50% during the 12 months beginning June 15, 2003, 101.75% during the 12 months beginning June 15, 2004 and at 100% thereafter (expressed as a percentage of principal amount). In addition, prior to June 15, 2000, up to 35% of the Discount Notes may be redeemed out of the proceeds of certain equity offerings at 110.5% of the accreted value. Upon a Change of Control (as defined in the Indentures) the Company has the option prior to June 15, 2002 to redeem the Notes and/or the Discount Notes in whole, but not in part, at 100% of the principal amount of the Notes or 100% of the accreted value of the Discount Notes plus an applicable premium in each case, as defined in the Indentures. If the Company does not redeem the Securities or if the Change in Control occurs subsequent to June 15, 2002, each holder of the Securities may require the Company to repurchase such holders' Securities at 101% of the aggregate principal amount of the Notes plus accrued interest, if any, and 101% of the accreted value of the Discount Notes plus accrued interest, if any. The Indentures contain restrictive covenants, which among other things limit the Company's ability to incur additional indebtedness; pay dividends or make other restricted payments; enter into transactions with affiliates; make certain asset dispositions; and merge or consolidate with or transfer substantially all of its assets to another person. 27 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (8) EMPLOYEE RETIREMENT AND BENEFIT PLANS Substantially all hourly employees are covered by Company or union sponsored defined benefit plans. The Company's salaried and certain hourly employees participate in a pension plan which provides benefits that are based on the employee's years of service with the Company and the employee's compensation. For other employees, pension benefits are provided based on a stated amount for each year of service. The Company's funding policy for all plans is to make no less than the minimum annual contributions required by applicable governmental regulations. The Company provides post-retirement life and health-care benefits to certain of its employees. The Company has six plans that provide these benefits to employees retiring from the Company. Benefits are determined on varying formulas based on age at retirement and years of active service. Health care benefits are contributory for two of the plans; the life insurance plans are noncontributory. The Company has not funded any of this post-retirement benefits liability. Contributions to the post-retirement plans are made by the Company as claims are incurred. Following is a summary of amounts recognized in the Company's Consolidated Financial Statements related to these plans.
PENSION BENEFITS OTHER BENEFITS ---------------------------- --------------------------- 1998 1997 1998 1997 ----------- ------------ ----------- ------------ (IN MILLIONS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year.......... $ 30.8 $ 27.2 $ 12.2 $ 12.5 Service cost................................ 1.9 1.8 0.5 0.5 Interest cost............................... 2.2 2.0 0.9 1.0 Amendments.................................. -- 0.5 -- -- Actuarial loss (gain)....................... 4.9 1.0 0.1 (0.9) Benefits paid............................... (2.8) (1.7) (0.9) (0.9) ----------- ------------ ----------- ------------ Benefit obligation at end of year................ $ 37.0 $ 30.8 $ 12.8 $ 12.2 ----------- ------------ ----------- ------------ CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year....................................... $ 33.9 $ 28.5 $ -- $ -- Actual return on plan assets................ 1.3 6.9 -- -- Company contribution........................ 1.2 0.2 0.8 0.9 Plan participant contribution............... -- -- 0.1 -- Benefits paid............................... (2.8) (1.7) (0.9) (0.9) ----------- ------------ ----------- ------------ Fair value of plan assets at end of year......... $ 33.6 $ 33.9 $ -- $ -- ----------- ------------ ----------- ------------ Funded status.................................... $ (3.4) $ 3.1 $(12.8) $(12.2) Unrecognized actuarial loss...................... 6.2 0.1 2.3 2.3 Unrecognized prior service cost.................. 0.5 0.4 -- -- Unrecognized net transition obligation........... 0.2 0.2 -- -- ----------- ------------ ----------- ------------ Prepaid (accrued) benefit cost................... $ 3.5 $ 3.8 $(10.5) $ (9.9) ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------ Amounts recognized in the Consolidated Balance Sheet consist of: Prepaid (accrued) benefit cost.............. $ 3.5 $ 3.8 $(10.5) $ (9.9) Accrued benefit liability................... (6.9) -- -- -- Intangible asset............................ 1.2 -- -- -- Accumulated other comprehensive loss........ (3.3) -- -- -- ----------- ------------ ----------- ------------ Net amount recognized............................ $ (5.5) $ 3.8 $(10.5) $ (9.9) ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
28 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998
PENSION BENEFITS OTHER BENEFITS ---------------------- -------------------------------------------------- 1998 1997 1998 1997 --------- --------- ----------------------- ------------------------ WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate..................... 7.00% 7.50% 7.00% 7.50% Expected return on plan assets.... 9.00% 9.00% -- -- Rate of compensation increase..... 4.00% 4.00% -- -- Health care cost trend rate....... -- -- 7.00% for 1999 8.00% for 1998 decreasing to 5.00% decreasing to 5.50% for 2001 and later for 2001 and later
Net periodic benefit cost components were as follows:
PENSION BENEFITS OTHER BENEFITS ---------------------------------------- ---------------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ---------- ---------- ----------- ----------- ---------- (IN MILLIONS) (IN MILLIONS) Service cost............................. $ 1.9 $ 1.8 $ 1.8 $ 0.5 $ 0.5 $ 0.5 Interest cost............................ 2.2 2.0 1.8 0.9 1.0 0.9 Expected return on plan assets........... (2.7) (2.6) (2.4) -- -- -- Recognized actuarial loss................ 0.1 -- 0.1 0.1 0.1 0.2 ----------- ---------- ---------- ----------- ----------- ---------- Net periodic benefit cost................ $ 1.5 $ 1.2 $ 1.3 $ 1.5 $ 1.6 $ 1.6 ----------- ---------- ---------- ----------- ----------- ---------- ----------- ---------- ---------- ----------- ----------- ----------
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $37.0 million, $37.0 million, and $33.6 million, respectively, as of December 31, 1998. A one-percentage-point change in the assumed health care cost trend rate would have the following effects :
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT INCREASE DECREASE -------------------------- ---------------------- (IN MILLIONS) Effect on total of service and interest cost components....... $ 0.1 $ (0.1) Effect on post-retirement benefit obligation............. $ 1.1 $ (1.1)
The Company and its subsidiaries also have several defined contribution plans for certain employees. Employer contributions to these plans were $1.3 million, $1.0 million and $1.4 million in 1998, 1997 and 1996, respectively. Contributions to this plan by the Company are determined based on a percentage of the contribution made by the employee. 29 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (9) INCOME TAXES The Company's Consolidated Balance Sheets reflect the following deferred tax assets and liabilities:
DECEMBER 31, ------------------------ 1998 1997 ---------- ---------- (IN MILLIONS) Deferred tax assets: Inventory and receivable reserves...................... $ 1.8 $ 5.0 Accrued employee benefit obligations................... 5.4 3.2 Insurance reserves..................................... 4.6 5.6 Ultravent reserves..................................... 11.1 12.8 Other.................................................. 8.7 7.7 ---------- ---------- $ 31.6 $ 34.3 ---------- ---------- ---------- ---------- Deferred tax liabilities: Property, plant and equipment basis difference......... $ 8.7 $ 8.2 ---------- ----------
Based on management's assessment, it is more likely than not that all the net deferred tax assets will be realized through future taxable earnings or implementation of tax planning strategies. The components of the provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (IN MILLIONS) Provision (benefit) for income taxes: Current: U.S. federal.......................... $ (2.9) $ 2.7 $ 18.1 U.S. state............................ (0.4) 1.0 3.6 ---------- ---------- ---------- Subtotal............................ (3.3) 3.7 21.7 ---------- ---------- ---------- Deferred: U.S. federal.......................... 4.8 (13.3) (2.3) U.S. state............................ 1.1 (2.4) (0.6) ---------- ---------- ---------- Subtotal............................ 5.9 (15.7) (2.9) ---------- ---------- ---------- Total............................ $ 2.6 $ (12.0) $ 18.8 ---------- ---------- ----------
Reconciliation of income (loss) before income taxes computed at the U.S. federal statutory rate to the provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 -------------- ------------ ---------- (DOLLARS IN MILLIONS) U.S. federal statutory rate............................ 34% 35% 35% Income taxes at U.S. federal statutory rate............ $ 1.7 $(17.3) $ 17.1 State income taxes, net of U.S. federal tax impact..... 0.3 (0.8) 1.9 Amortization of intangibles............................ 0.7 0.7 0.6 Non-deductible expenses, net........................... -- 5.0 -- Other.................................................. (0.1) 0.4 (0.8) --------- ------------ ------------ Provision (benefit) for income taxes................ $ 2.6 $(12.0) $ 18.8 --------- ------------ ------------ --------- ------------ ------------ Effective income tax rate.......................... 50.3% 24.3% 38.4% --------- ------------ ------------ --------- ------------ ------------
30 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (10) STOCKHOLDERS' EQUITY CAPITAL STOCK: Prior to the Merger, the Company's Certificate of Incorporation authorized 30,000,000 shares of Class A Common Stock, $.0l par value (the "Class A Stock"), 14,000,000 shares of Class B Common Stock, $.0l par value (the "Class B Stock") and 10,000,000 shares of preferred stock. As discussed in Note 5, pursuant to the Merger Agreement, FBP merged with and into the Company and the certificate of incorporation of FBP became the certificate of incorporation of the Company (the "Restated Certificate of Incorporation"). Each issued and outstanding share of capital stock of FBP was converted into a share of capital stock of Falcon. The Company's Restated Certificate of Incorporation authorizes five classes of common stock. The following table summarizes the authorized shares of capital stock of the Company at December 31, 1998 and 1997:
TITLE Class A Common Stock, par value $0.01 per share....... 1,034,020 Class B Common Stock, par value $0.01 per share....... 6,900,000 Class C Common Stock, par value $0.01 per share....... 2,048,980 Class D Common Stock, par value $0.01 per share....... 17,000 Common Stock, par value $0.01 per share............... 10,000,000 ---------------- Total............................................. 20,000,000 ---------------- ----------------
Holders of the Class A Stock are entitled to one vote per share and holders of Class D Common Stock are entitled to 446 votes for each share of such stock held. Upon the occurrence of a sale of 100% of the outstanding equity securities of Falcon or a public offering of any equity securities of Falcon, each share of Class A, Class B, Class C and Class D Common Stock of the Company will convert into one share of Common Stock of the Company. The Restated Certificate of Incorporation no longer authorizes shares of preferred stock. ADDITIONAL PAID-IN CAPITAL: As part of the Recapitalization further discussed in Note 5, in June 1997 the Company eliminated its Additional paid-in capital balance. 31 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 NOTES RECEIVABLE: Pursuant to the Company's Senior Executive Stock Purchase Plan (the "Executive Stock Plan"), at the time of the Offering in 1994 certain executive officers of the Company purchased a total of 196,500 shares of Class A Stock for $0.2 million and notes of $2.2 million. These notes bear interest at 7.5% per annum and are due no later than December 2001 or upon sale of the shares. In January 1997, the Company repurchased 20,000 of these shares due to the retirement of one of its officers and the related loan amount of $0.2 million was repaid. In June 1997, as part of the Merger, approximately 26,200 shares were either redeemed or prorated pursuant to the terms of the Merger Agreement and approximately $0.4 million of the outstanding loans were repaid. In February 1998, the Company repurchased 21,818 of these shares due to the retirement of one of its officers and the related loan amount of $0.2 million was repaid. In connection with the Recapitalization, the Executive Stock Plan was amended to permit the loans outstanding thereunder to remain outstanding. Concurrently, the Company adopted the Falcon Building Products, Inc. 1997 Senior Executive Stock Loan Plan (the "1997 Loan Plan") containing loan provisions similar to the Executive Stock Plan. Loans under the 1997 Loan Plan are only available to executives who do not have loans outstanding under the Executive Stock Plan. At the consummation of the Recapitalization, loans in the aggregate amount of $0.3 million were issued to purchase 32,140 shares of Class C Stock. These notes bear interest at rates tied to interest rates paid on the Company's third party debt and are due no later than June 2004 or upon sale of the shares. There were $1.8 million and $2.0 million of notes outstanding under the Executive Stock Plan and the 1997 Loan Plan at December 31, 1998 and 1997, respectively. These notes have been classified as a component of Stockholders' equity in the Company's Consolidated Balance Sheet. All shares purchased pursuant to the terms of these plans have been pledged to the Company. (11) STOCK OPTION PLAN 1997 STOCK INCENTIVE PLAN: In June 1997, the Company adopted the Senior Management Stock Incentive Plan (the "1997 Plan"). Pursuant to the 1997 Plan certain directors, employees and officers of the Company are given an opportunity to acquire shares of Class C Common Stock (the "Class C Stock") through the grant of non-qualified stock options, incentive stock options, stock appreciation rights and restricted stock. The options granted pursuant to the 1997 Plan are exercisable at no less than the fair market value of the Class C Stock at the time of grant and vest immediately upon the seventh anniversary of the grant with the possibility for accelerated vesting based, in part on the achievement of an annual EBITDA amount, and in part on the achievement of certain investment targets as defined in the plan. The plan also provides for vesting of certain percentages of the options in the event of an Initial Public Offering or an Authorized Sale as defined in the 1997 Plan. Options issued pursuant to the 1997 Plan expire upon the 30th day following the tenth anniversary of the grant date. A total of 947,851 shares of Class C Stock are reserved for issuance under the 1997 Plan. The 1997 Plan is administered by the Board of Directors. Non-Qualified stock option activity is shown below:
OPTIONS OUTSTANDING EXERCISABLE OPTIONS ------------------------------------- ----------------------------------- NUMBER OF WEIGHTED AVG. NUMBER OF WEIGHTED AVG. SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------------- ----------------- ------------- ------------------ Balance at December 31, 1996.......... -- $ -- -- $ -- Granted.......................... 926,140 17.75 -- -- Exercised........................ -- -- -- -- Canceled......................... -- -- -- -- --------------- ----------------- ------------- ------------------ Balance at December 31, 1997.......... 926,140 17.75 -- -- Granted.......................... 40,100 17.75 -- -- Exercised........................ -- -- -- -- Canceled......................... (51,701) 17.75 -- -- ------------- ------------------ --------------- ----------------- Balance at December 31, 1998.......... 914,539 $ 17.75 -- $ -- --------------- ----------------- ------------- ------------------ --------------- ----------------- ------------- ------------------
32 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 At December 31, 1998, the options outstanding had an exercise price of $17.75. The weighted average remaining contractual life of the options outstanding was 8 1/2 years. The Company measures compensation cost using the intrinsic value-based method of accounting pursuant to the provisions of APB Opinion No. 25. Had compensation cost been determined on the fair market value-based accounting method prescribed by Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS No. 123") for options granted in 1998 and 1997, pro forma net income (loss) would have been $2.0 million and $(39.2) million, respectively. For purposes of fair market value disclosures, the fair market value of an option grant is estimated using the Black-Scholes option pricing model with the following assumptions:
1998 1997 ---------- ---------- Risk-Free Interest Rate.................. 5.2% 6.4% Average Life of Options (years).......... 7 7 Volatility............................... 0% 0% Dividend Yield........................... 0% 0%
1994 STOCK OPTION PLAN: In June 1997, as part of the Merger, the Company paid $5.2 million to holders of options which were granted under the 1994 Stock Option and Restricted Stock Plan (the "1994 Plan"). Pursuant to the provisions of the 1994 Plan, the options became immediately exercisable upon a change in control. The 1994 Plan was terminated subsequent to the Merger. SFAS 123 disclosure of 1996 information has been omitted as this information is not meaningful. As part of the Offering in 1994, the Company awarded 70,500 restricted shares of Class A Stock to certain officers. The market value of the shares awarded was $0.8 million. This amount was recorded as unearned compensation and is shown as a separate component of Stockholders' equity at December 31, 1997. Unearned compensation was amortized to expense over a four-year vesting period. This expense amounted to $0.1 million in 1997 and $0.2 million in 1996. As a result of the Recapitalization, these shares became immediately vested. Included in the Recapitalization expenses is $0.3 million related to the accelerated vesting of these shares. 33 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (12) BALANCE SHEET DETAIL
DECEMBER 31, ---------------------------- 1998 1997 ----------- ----------- (IN MILLIONS) Inventories: Raw materials and supplies............................... $ 28.7 $ 27.8 Work in process.......................................... 12.0 12.0 Finished goods........................................... 38.1 39.7 ----------- ----------- Total.................................................. $ 78.8 $ 79.5 ----------- ----------- ----------- ----------- Excess of replacement cost over LIFO inventory cost...... $ 3.8 $ 3.2 ----------- ----------- ----------- ----------- Other current assets: Deferred tax assets...................................... $ 15.2 $ 18.2 Residual interest in sold accounts receivable............ 22.5 13.1 Other ................................................... 4.5 2.7 ----------- ----------- Total.................................................. $ 42.2 $ 34.0 ----------- ----------- ----------- ----------- Property, plant and equipment: Land $ 9.2 $ 8.8 Buildings................................................ 51.8 51.2 Machinery and equipment.................................. 150.4 130.2 Construction in progress................................. 11.4 13.4 Less accumulated depreciation............................ (113.0) (102.3) ----------- ----------- Total.................................................. $ 109.8 $ 101.3 ----------- ----------- ----------- ----------- Other assets: Deferred financing fees.................................. $ 18.2 $ 21.0 Other ................................................... 6.6 11.1 ----------- ----------- Total.................................................. $ 24.8 $ 32.1 ----------- ----------- ----------- ----------- Other accrued expenses: Accrued warranty......................................... $ 10.1 $ 5.7 Accrued wages and benefits............................... 9.0 6.8 Accrued rebates.......................................... 8.5 6.9 Ultravent reserve........................................ 10.0 10.2 Other ................................................... 19.4 13.6 ----------- ----------- Total.................................................. $ 57.0 $ 43.2 ----------- ----------- ----------- -----------
34 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (13) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. SENIOR SUBORDINATED NOTES The fair value of the Company's Subordinated Notes is based on quoted market prices at December 31, 1998 and 1997. CREDIT FACILITIES The carrying amount approximates fair value as the rates are tied to the prime rate and LIBOR, which fluctuate based on current market conditions. OTHER DEBT The carrying amount approximates fair value as rates approximate borrowing rates currently available to the Company for similar loans. The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------ ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ----------- ---------- (IN MILLIONS) Cash and cash equivalents.......... $ 66.4 $ 66.4 $ 29.9 $ 29.9 Senior Subordinated Notes.......... 264.3 232.5 252.7 257.6 Credit Facilities.................. 173.5 173.5 174.5 174.5 Other Debt......................... 4.2 4.2 2.6 2.6
(14) RELATED PARTY TRANSACTIONS On December 30, 1998, the Company entered into an option agreement (the "Agreement") for the benefit of the Company's stockholders of record on the date of the Agreement (the "Holders") whereby the Company sold to the Holders, for the aggregate purchase price of $1.0 million, an option (the "Option") to purchase all of the issued and outstanding capital stock of Mansfield Plumbing Products, Inc. ("Mansfield"), its Plumbing Fixtures segment, based upon an enterprise value for such segment of $80 million. The option exercise price is $10 million, plus the amount by which the indebtedness which Mansfield will incur as a result of this transaction (the proceeds of which would be distributed to Falcon) is less than $70 million.. This Option is exercisable by the Holders at any time on or prior to June 30, 1999. The value of the option and the purchase price were determined through an independent valuation. The Option has been included in Other long-term liabilities in the Company's Consolidated Balance Sheet. Financing for the Recapitalization was provided in part by approximately $134.6 million of capital provided by Investcorp, its affiliates and other international investors organized by Investcorp. An affiliate of Investcorp was paid a fee of $5.0 million in 1997 for services rendered outside of the United States in connection with the raising of the equity capital from the international investors. In connection with the Recapitalization, the Company paid Investcorp International, Inc. ("III"), an affiliate of Investcorp, advisory fees aggregating $4.2 million, and Invifin S.A., an affiliate of Investcorp, received fees aggregating $5.8 million for providing a standby commitment to fund the amount of the senior subordinated indebtedness and the Credit Facility. The Company also entered into an agreement for management advisory and consulting services for a five-year term with III, pursuant to which the Company prepaid III $5.0 million upon the consummation of the Recapitalization. This amount is being amortized to expense over the five-year period. 35 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 The Company shared management, administrative and other services with Eagle pursuant to a Corporate Services Agreement that renewed annually. The fee under this agreement was intended to cover Eagle's expected costs in providing these services to the Company. Total fees paid under this agreement were $1.4 million in 1997 and $2.6 million in 1996. As a result of the Recapitalization, the Corporate Services Agreement was terminated. Subsequent to the Merger, the Company paid Eagle $0.3 million in fees for utilization of office space and administrative support. Prior to the Offering, the Company was included in its parent's consolidated federal income tax returns. In addition, the Company filed certain combined state tax returns until the distribution to EHL in 1996. Pursuant to the Tax Sharing Agreement, the Company paid $4.6 million in 1996 for tax liabilities it incurred during the periods it was included in consolidated federal and certain combined state tax returns. The law firm of Rosenberg & Liebentritt, P.C., of which a former Director is a member, rendered legal services to the Company. The Company paid this law firm $0.4 million in 1997. Also see Notes 1 and 5 for other information regarding related party transactions. (15) COMMITMENTS AND CONTINGENCIES The Company conducts manufacturing operations at various leased facilities and also leases warehouses, manufacturing equipment, office space, computers and office equipment. Most of the realty leases contain renewal options and escalation clauses. Total rent expense, including related real estate taxes, amounted to $5.5 million, $4.9 million and $4.7 million for the years ended December 31, 1998, 1997, and 1996, respectively. Future minimum lease payments required as of December 31, 1998 (in millions):
1999......................... $ 2.3 2000........................ 2.1 2001........................ 1.9 2002........................ 1.4 2003 and thereafter......... 1.2 --------- $ 8.9 --------- ---------
The Company and certain of its subsidiaries are involved in several lawsuits and environmental matters arising in the ordinary course of business. However, it is the opinion of the Company's management, based upon the advice of legal counsel, that these lawsuits are either without merit, are covered by insurance or are adequately reserved for in the Consolidated Balance Sheets, and the ultimate disposition of pending litigation will not be material in relation to the Company's consolidated financial position or results of operations. In addition to the matters covered by the preceding paragraph, in May 1994, Underwriters' Laboratories of Canada ("ULC") suspended its recognition of high temperature plastic venting ("HTPV") for gas appliances systems, including the Ultravent(R) product distributed by the Company. This action resulted from reports of problems with high temperature plastic venting, including improper installation, cracking, inadequate joint adhesion, and related safety hazards, including potential for carbon monoxide emission. In June 1994, as a result of the ULC action, the Ontario Ministry of Consumer and Commercial Relations suspended sales of HTPV in the Province of Ontario. Other provinces of Canada have taken similar action. Pursuant to an order, appliance systems in Ontario with HTPV have been corrected. Gas appliance manufacturers in Canada and the United States no longer certify HTPV for use with their products. As a result, the Company discontinued sales of its HTPV product in 1997. Company sales of Ultravent(R) products in the United States and Canada in 1996 and 1997 were minimal. 36 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 The Company is a defendant in a suit in Canada that has been filed against 24 entities representing heating appliance manufacturers, plastic vent manufacturers and distributors, public utilities and listing agencies brought by the Ontario New Home Warranty Program, which is responsible for the cost of correcting appliances equipped with HTPV in new home construction in Ontario. The Company engaged in discussions with the United States Consumer Product Safety Commission ("CPSC") regarding the use of HTPV in the United States. Additionally, certain appliance manufacturers, the plastic resin manufacturer and the HTPV manufacturer and distributor, including Hart & Cooley, participated in a non-binding facilitative mediation process, the object of which was to develop and implement a voluntary HTPV corrective action program. As a result of the facilitative mediation process, the Company entered into a Corrective Action Program and Settlement Agreement in January 1998, along with 25 appliance manufacturers, an HTPV manufacturer and a resin manufacturer to correct certain HTPV mid-efficiency gas fired appliances by replacing the venting system. The Corrective Action Program was approved by the CPSC in February 1998. In 1997, the Company recorded pretax charges of $32.8 million ($20.0 million, net of income tax) representing an estimate of its share of the cost of the Corrective Action Program in the United States, resolution of the Canadian litigation, the class action litigation, legal fees and other related costs. The Company estimates that the costs associated with the Corrective Action Program and other related HTPV matters will be expended during the next three years. Actual amounts expended could differ depending on a number of factors including, but not limited to, the estimated replacement cost per unit as well as the number of units replaced. The Company paid $4.1 million in 1998 related to this matter. With respect to these matters, the Company, on September 16, 1996, filed an action in state court in Illinois against certain insurance carriers. The Company is seeking a declaratory judgment, damages for breach of contract and specific relief requiring the insurance carriers, pursuant to the terms of the Company's insurance policies, to defend and reimburse the Company for costs and legal expenses arising from Ultravent-related claims. The amount at issue cannot be determined at this time. The insurance carriers have denied coverage on a number of grounds and have filed motions to dismiss the Company's lawsuit. 37 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES The Company's payment obligations under the Notes and the Discount Notes are fully and unconditionally guaranteed on a joint and several basis (collectively, the "Guarantees") by DeVilbiss Air Power Company, Hart & Cooley, Inc., Warrior Glass and Aluminum, Inc., Mansfield Plumbing Products, Inc., SWC Industries, Inc. and Falcon Manufacturing, Inc. (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company. The Company's only other subsidiary, Falcon Receivable Program, Inc., is a special purpose corporation formed for the Company's accounts receivable securitization program. The obligations of each Guarantor Subsidiary under its Guarantee are subordinated to such subsidiary's obligations under its guarantee of the Bank Credit Facility. Presented below is condensed consolidating financial information for Falcon Building Products, Inc. ("Parent Company"), the Guarantor Subsidiaries and Falcon Receivable Program, Inc. (the "Non-Guarantor Subsidiary"). In the Company's opinion, separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries would not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below. Investments in subsidiaries are accounted for by the Parent Company on the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Parent Company's investments in and advances to/from subsidiaries account and earnings. The elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. 38 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET December 31, 1998 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents............. $ 62.7 $ 0.9 $ 2.8 $ -- $ 66.4 Inventories, net...................... -- 78.8 -- -- 78.8 Other current assets.................. 0.5 19.2 22.5 -- 42.2 ------- ------------ ----------- ------------ ------------ Total current assets.................. 63.2 98.9 25.3 -- 187.4 Property, plant and equipment, net......... 0.5 109.3 -- -- 109.8 Goodwill................................... -- 59.4 -- -- 59.4 Investment in and advances to/from subsidiaries.................. 163.2 (109.6) (18.9) (34.7) -- Other long-term assets..................... 21.8 3.0 -- -- 24.8 ------- ------------ ----------- ------------ ------------ Total assets.......................... $248.7 $161.0 $ 6.4 $(34.7) $381.4 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion long-term debt........ $ 1.0 $ 1.0 $ -- $ -- $ 2.0 Accounts payable...................... 0.1 57.9 -- -- 58.0 Accrued liabilities................... 18.4 38.3 0.3 -- 57.0 ------- ------------ ----------- ------------ ------------ Total current liabilities............. 19.5 97.2 0.3 -- 117.0 Long term debt............................. 436.8 3.2 -- -- 440.0 Other long-term liabilities................ 6.3 32.8 -- -- 39.1 ------- ------------ ----------- ------------ ------------ Total liabilities..................... 462.6 133.2 0.3 -- 596.1 ------- ------------ ----------- ------------ ------------ Stockholders' equity (deficit): Common stock.......................... 0.1 -- -- -- 0.1 Additional paid-in capital............ -- 42.9 6.5 (49.4) -- Retained earnings (deficit)........... (209.7) (14.3) (0.4) 14.7 (209.7) Accumulated other comprehensive income............................. (2.5) (0.8) -- -- (3.3) Other................................. (1.8) -- -- -- (1.8) ------- ------------ ----------- ------------ ------------ Total stockholders' equity (deficit).. (213.9) 27.8 6.1 (34.7) (214.7) ------- ------------ ----------- ------------ ------------ Total liabilities and stockholders' equity. $248.7 $161.0 $ 6.4 $(34.7) $381.4 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
39 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET December 31, 1997 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents............. $ 29.1 $ 0.7 $ 0.1 $ -- $ 29.9 Inventories, net...................... -- 79.5 -- -- 79.5 Other current assets.................. 1.1 19.8 13.1 -- 34.0 ------- ------------ ----------- ------------ ------------ Total current assets.................. 30.2 100.0 13.2 -- 143.4 Property, plant and equipment, net......... 0.2 101.1 -- -- 101.3 Goodwill................................... -- 57.0 -- -- 57.0 Investment in and advances to/from subsidiaries.................. 174.4 (135.5) (7.6) (31.3) -- Other long-term assets..................... 27.4 4.7 -- -- 32.1 ------- ------------ ----------- ------------ ------------ Total assets.......................... $ 232.2 $ 127.3 $ 5.6 $ (31.3) $ 333.8 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion long-term debt........ $ 1.0 $ 0.5 $ -- $ -- $ 1.5 Accounts payable...................... 0.3 33.7 -- -- 34.0 Accrued liabilities................... 14.2 29.0 -- -- 43.2 ------- ------------ ----------- ------------ ------------ Total current liabilities............. 15.5 63.2 -- -- 78.7 Long term debt............................. 426.2 2.1 -- -- 428.3 Other long-term liabilities................ 4.2 36.3 -- -- 40.5 ------- ------------ ----------- ------------ ------------ Total liabilities..................... 445.9 101.6 -- -- 547.5 ------- ------------ ----------- ------------ ------------ Stockholders' equity: Common stock.......................... 0.1 -- -- -- 0.1 Additional paid-in capital............ -- 42.9 6.5 (49.4) -- Retained earnings (deficit)........... (211.8) (17.2) (0.9) 18.1 (211.8) Other................................. (2.0) -- -- -- (2.0) ------- ------------ ----------- ------------ ------------ Total stockholders' equity (deficit).. (213.7) 25.7 5.6 (31.3) (213.7) ------- ------------ ----------- ------------ ------------ Total liabilities and stockholders' equity. $ 232.2 $ 127.3 $ 5.6 $ (31.3) $ 333.8 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
40 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 1998 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ Net sales........................................ $ -- $765.8 $ -- $ -- $765.8 Cost of sales.................................... -- 640.0 -- -- 640.0 ------- ------------ ----------- ------------ ------------ Gross earnings.............................. -- 125.8 -- -- 125.8 Selling and administrative expenses.............. 7.1 57.8 -- -- 64.9 Securitization expense........................... 6.3 -- (2.5) -- 3.8 Restructuring and other charges.................. -- 8.2 -- -- 8.2 Ultravent expense................................ -- -- -- -- -- Recapitalization expense......................... -- -- -- -- -- ------- ------------ ----------- ------------ ------------ Operating income (loss)..................... (13.4) 59.8 2.5 -- 48.9 Corporate allocation............................. (54.0) 54.0 -- -- -- Net interest expense............................. 41.8 0.2 1.8 -- 43.8 ------- ------------ ----------- ------------ ------------ Income (loss) before income taxes................ (1.2) 5.6 0.7 -- 5.1 Provision (benefit) for income taxes............. (0.3) 2.6 0.3 -- 2.6 ------- ------------ ----------- ------------ ------------ Income (loss) before equity in income (loss) of consolidated subsidiaries................... (0.9) 3.0 0.4 -- 2.5 Equity in income of consolidated subsidiaries.... 3.4 -- -- (3.4) -- ------- ------------ ----------- ------------ ------------ Net income (loss)................................ $ 2.5 $ 3.0 $ 0.4 $ (3.4) $ 2.5 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------ Other comprehensive loss: Minimum pension liability adjustment net of income tax benefit of $2.3............. (2.5) (0.8) -- -- (3.3) ------- ------------ ----------- ------------ ------------ Comprehensive income (loss)...................... $ -- $ 2.2 $ 0.4 $ (3.4) $ (0.8) ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
41 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 1997 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ Net sales........................................ $ -- $686.4 $ -- $ -- $686.4 Cost of sales.................................... -- 576.5 -- -- 576.5 ------- ------------ ----------- ------------ ------------ Gross earnings.............................. -- 109.9 -- -- 109.9 Selling and administrative expenses.............. 5.9 51.8 -- -- 57.7 Securitization expense........................... 5.8 -- (1.8) -- 4.0 Ultravent expense................................ -- 32.8 -- -- 32.8 Recapitalization expense......................... 36.3 -- -- -- 36.3 ------- ------------ ----------- ------------ ------------ Operating income (loss)..................... (48.0) 25.3 1.8 -- (20.9) Corporate allocation............................. (60.0) 60.0 -- -- -- Net interest expense............................. 26.7 0.2 1.6 -- 28.5 ------- ------------ ----------- ------------ ------------ Income (loss) before income taxes................ (14.7) (34.9) 0.2 -- (49.4) Provision (benefit) for income taxes............. 0.9 (12.9) -- -- (12.0) ------- ------------ ----------- ------------ ------------ Income (loss) before equity in income (loss) of consolidated subsidiaries and extraordinary item...................................... (15.6) (22.0) 0.2 -- (37.4) Equity in income of consolidated subsidiaries.... (21.8) -- -- 21.8 -- ------- ------------ ----------- ------------ ------------ Income (loss) before extraordinary item.......... (37.4) (22.0) 0.2 21.8 (37.4) Extraordinary item: Early extinguishment of debt net of income tax benefit of $0.9 million............... (1.5) -- -- -- (1.5) ------- ------------ ----------- ------------ ------------ Net income (loss)................................ $(38.9) $(22.0) $ 0.2 $ 21.8 $(38.9) ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------ Other comprehensive income: Minimum pension liability adjustment net of income tax expense of $0.2............. -- 0.5 -- -- 0.5 ------- ------------ ----------- ------------ ------------ Comprehensive income (loss)...................... $(38.9) $(21.5) $ 0.2 $ 21.8 $(38.4) ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
42 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 1996 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ Net sales........................................ $ -- $ 633.2 $ -- $ -- $ 633.2 Cost of sales.................................... -- 513.6 -- -- 513.6 ------- ------------ ----------- ------------ ------------ Gross earnings.............................. -- 119.6 -- -- 119.6 Selling and administrative expenses.............. 5.6 48.3 -- -- 53.9 Securitization expense........................... 4.3 -- (0.2) -- 4.1 Ultravent expenses............................... -- 1.8 -- -- 1.8 ------- ------------ ----------- ------------ ------------ Operating income (loss)..................... (9.9) 69.5 0.2 -- 59.8 Corporate allocation............................. (20.4) 20.4 -- -- -- Net interest expense............................. 9.5 0.3 1.2 -- 11.0 ------- ------------ ----------- ------------ ------------ Income (loss) before income taxes................ 1.0 48.8 (1.0) -- 48.8 Provision (benefit) for income taxes............. (0.9) 19.7 -- -- 18.8 ------- ------------ ----------- ------------ ------------ Income (loss) before equity in income of consolidated subsidiaries................... 1.9 29.1 (1.0) -- 30.0 Equity in income of consolidated subsidiaries.... 28.1 -- -- (28.1) -- ------- ------------ ----------- ------------ ------------ Net income (loss)................................ $ 30.0 $ 29.1 $ (1.0) $ (28.1) $ 30.0 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------ Other comprehensive loss: Minimum pension liability adjustment net of income tax benefit of $0.1............. -- (0.1) -- -- (0.1) ------- ------------ ----------- ------------ ------------ Comprehensive income (loss)...................... $ 30.0 $ 29.0 $ (1.0) $ (28.1) $ 29.9 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
43 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 1998 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ Cash flows from operating activities......... $ 20.2 $ 53.6 $ (8.7) $ -- $ 65.1 ------- ------------ ----------- ------------ ------------ Cash flows from investing activities: Purchase of business.................... -- (4.0) -- -- (4.0) Capital expenditures.................... (0.4) (22.4) -- -- (22.8) Other................................... 0.4 (0.6) -- -- (0.2) ------- ------------ ----------- ------------ ------------ Net cash used in investing activities... -- (27.0) -- -- (27.0) ------- ------------ ----------- ------------ ------------ Cash flows from financing activities: Advances (to) from affiliate............ 14.6 (25.9) 11.3 -- -- Net borrowings on debt.................. (1.0) (0.6) -- -- (1.6) ------- ------------ ----------- ------------ ------------ Net cash from financing activities...... 13.6 (26.5) 11.3 -- (1.6) ------- ------------ ----------- ------------ ------------ Change in cash and cash equivalents.......... 33.8 0.1 2.6 -- 36.5 Cash and cash equivalents, beginning of period............................... 29.0 0.7 0.2 -- 29.9 ------- ------------ ----------- ------------ ------------ Cash and cash equivalents, end of period..... $ 62.8 $ 0.8 $ 2.8 $ -- $ 66.4 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
44 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 1997 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ Cash flows from operating activities......... $ 41.5 $ (19.5) $ (11.1) $ -- $ 10.9 ------- ------------ ----------- ------------ ------------ Cash flows from investing activities: Capital expenditures.................... (0.2) (18.9) -- -- (19.1) Other................................... (0.6) 0.1 0.2 -- (0.3) ------- ------------ ----------- ------------ ------------ Net cash used in investing activities... (0.8) (18.8) 0.2 -- (19.4) ------- ------------ ----------- ------------ ------------ Cash flows from financing activities: Advances (to) from affiliate............ (49.1) 38.0 11.1 -- -- Proceeds from senior credit facilities.. 175.0 -- -- -- 175.0 Repayment of senior credit facilities... (138.8) -- -- -- (138.8) Issuance of senior subordinated debt.... 247.0 -- -- -- 247.0 Issuance of common stock................ 134.6 -- -- -- 134.6 Retirement of common stock.............. (338.0) -- -- -- (338.0) Payment of Recapitalization fees and expenses............................. (61.8) -- -- -- (61.8) Net borrowings on debt.................. 16.8 (0.3) -- -- 16.5 ------- ------------ ----------- ------------ ------------ Net cash from financing activities...... (14.3) 37.7 11.1 -- 34.5 ------- ------------ ----------- ------------ ------------ Change in cash and cash equivalents.......... 26.4 (0.6) 0.2 -- 26.0 Cash and cash equivalents, beginning of period............................... 2.6 1.3 -- -- 3.9 ------- ------------ ----------- ------------ ------------ Cash and cash equivalents, end of period..... $ 29.0 $ 0.7 $ 0.2 $ -- $ 29.9 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
45 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (16) GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 1996 (in millions) NON- PARENT GUARANTOR GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------- ------------ ----------- ------------ ------------ Cash flows from operating activities......... $ 11.5 $ 6.6 $ 23.0 $ -- $ 41.1 ------- ------------ ----------- ------------ ------------ Cash flows from investing activities: Purchase of businesses.................. -- (18.8) -- -- (18.8) Capital expenditures.................... -- (20.0) -- -- (20.0) Other................................... 0.5 (0.1) (0.2) -- 0.2 ------- ------------ ----------- ------------ ------------ Net cash used in investing activities... 0.5 (38.9) (0.2) -- (38.6) ------- ------------ ----------- ------------ ------------ Cash flows from financing activities: Advances (to) from affiliate............ (9.6) 32.4 (22.8) -- -- Net borrowings on debt.................. 0.5 (0.2) -- -- 0.3 ------- ------------ ----------- ------------ ------------ Net cash from financing activities...... (9.1) 32.2 (22.8) -- 0.3 ------- ------------ ----------- ------------ ------------ Change in cash and cash equivalents.......... 2.9 (0.1) -- -- 2.8 Cash and cash equivalents, beginning of period............................... (0.3) 1.4 -- -- 1.1 ------- ------------ ----------- ------------ ------------ Cash and cash equivalents, end of period..... $ 2.6 $ 1.3 $ -- $ -- $ 3.9 ------- ------------ ----------- ------------ ------------ ------- ------------ ----------- ------------ ------------
46 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (17) BUSINESS SEGMENT INFORMATION Effective January 1, 1998, the Company adopted the provisions of Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. Prior year amounts have been restated to conform to the current year's presentation. The Company has three operating segments under this Statement: Air Distribution Products, Air Power Products and Plumbing Fixtures. Air Distribution Products: The Company is a leading supplier of air distribution products and is the leading manufacturer of residential and light commercial grilles, registers and diffusers for heating, ventilating and air conditioning applications. Air Power Products: The Company is the leading producer of consumer and commercial air compressors for home improvement applications. The Company also produces generators and pressure washers marketed primarily into retail and home center outlets. In addition, the Company sells a variety of pneumatic tools for use in home improvement applications. Plumbing Fixtures: The Company is a leading domestic producer of ceramic china bathroom fixtures, including toilets and lavatories. The Company also produces enameled steel bathroom tubs and sinks, and acrylic whirlpool tubs as well as brass and plastic trim and fittings. These products are primarily sold to the residential construction market. The accounting policies of the segments are the same as those disclosed in the "Summary of Significant Accounting Policies." The Company evaluates the performance of its segments based on their Profitability which is defined as earnings before interest expense and income taxes, excluding the following charges: (i) depreciation and amortization expense; (ii) costs associated with Ultravent(R) and the Recapitalization; (iii) securitization expense; and (iv) restructuring and non-cash charges. 47 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------ ----------- ------------- (IN MILLIONS) NET SALES: Air Distribution Products................................. $219.4 $191.2 $187.0 Air Power Products........................................ 389.1 335.4 287.1 Plumbing Fixtures......................................... 157.3 159.8 159.1 ----------- ----------- ----------- Total.................................................. $765.8 $686.4 $633.2 ----------- ----------- ----------- ----------- ----------- ----------- SEGMENT PROFITABILITY: Air Distribution Products................................. $ 32.9 $ 28.8 $ 29.6 Air Power Products........................................ 39.0 29.7 29.1 Plumbing Fixtures......................................... 14.6 24.8 28.5 ----------- ----------- ----------- Total.................................................. $ 86.5 $ 83.3 $ 87.2 ----------- ----------- ----------- ----------- ----------- ----------- RECONCILIATION OF SEGMENT PROFITABILITY TO INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM: Total segment profitability.................................. $ 86.5 $ 83.3 $ 87.2 Corporate.................................................... (5.9) (5.3) (5.6) Non-cash retiree medical..................................... (0.6) (0.9) (0.4) Depreciation and amortization................................ (17.4) (16.9) (15.5) Restructuring and other charges.............................. (9.9) (8.0) -- Ultravent expense............................................ -- (32.8) (1.8) Recapitalization expense..................................... -- (36.3) -- Net interest expense......................................... (43.8) (28.5) (11.0) Securitization expense....................................... (3.8) (4.0) (4.1) ----------- ----------- ----------- Income (loss) before incomes taxes and extraordinary item. $ 5.1 $(49.4) $ 48.8 ----------- ----------- ----------- ----------- ----------- ----------- SEGMENT ASSETS(A): Air Distribution Products................................. $110.3 $101.7 $100.7 Air Power Products........................................ 166.7 150.4 127.6 Plumbing Fixtures......................................... 100.0 99.3 97.5 ----------- ----------- ----------- Total Segment Assets................................... $377.0 $351.4 $325.8 ----------- ----------- ----------- ----------- ----------- ----------- RECONCILIATION OF SEGMENT ASSETS TO TOTAL ASSETS: Total Segment Assets.................................... $377.0 $351.4 $325.8 Securitized Receivables................................. (106.7) (88.6) (75.2) Corporate and other(b).................................. 111.1 71.0 11.1 ---------- ----------- ------------ Total Assets...................................... $381.4 $333.8 $261.7 ---------- ----------- ------------ ---------- ----------- ------------
(a) Segment assets include accounts receivable sold under the securitization program. (b) Corporate and other represents corporate assets, primarily consisting of cash, deferred financing fees and residual interest in accounts receivable sold under the securitization program. The Company's export sales are less than 10% of total revenues. The Company reported revenues from two individual customers that represented sales of more than 10% of the Company's consolidated net sales. The Company's Air Power Products and Plumbing Fixtures segments reported net sales to Sears of $129.6 million, $90.5 million and $84.0 million for 1998, 1997 and 1996, respectively. All of the Company's segments had net sales to The Home Depot totaling $83.2 million for 1998. The Company's revenues and identifiable assets are predominantly related to its U.S. operations and no one other geographic area accounts for more than 10% of total revenue or 10% of total assets. 48 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1998 (18) SUBSEQUENT EVENT On January 22, 1999, the Company acquired the assets and business of the Penn Ventilation Companies, Inc. ("Penn Ventilation") a manufacturer of air moving and control equipment for commercial and industrial applications. The consideration for Penn Ventilation consisted of $26.0 million in cash, a $3.0 million three-year interest bearing note and non-compete agreement payments totaling $3.0 million payable over three years. The acquisition will be accounted for as a purchase. Penn Ventilation reported approximately $80.0 million of net sales in 1998. Penn Ventilation will be part of the Company's Air Distribution Products segment. 49 FALCON BUILDING PRODUCTS, INC. AND SUBSIDIARIES SUPPLEMENTARY FINANCIAL DATA (UNAUDITED) QUARTERLY FINANCIAL DATA The following is a summary of the unaudited interim results of operations for the years ended December 31, 1998 and 1997 (in millions).
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------------------- -------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 1998 1997 -------- --------- -------- -------- -------- -------- -------- -------- Net sales.............. $171.4 $160.2 $190.9 $195.7 $197.5 $172.7 $206.0 $157.8 Gross earnings(1)...... 25.1 28.2 34.8 36.8 31.0 29.1 34.9 15.8 Income (loss) before extra- ordinary item....... (0.7) 6.1 3.8 (18.4) (2.7) 0.8 2.1 (25.9) Net income (loss)(2) (0.7) 6.1 3.8 (19.9) (2.7) 0.8 2.1 (25.9)
- -------------------- (1) Gross earnings for the quarter ended September 30, 1998 reflects $1.7 million of costs associated with the Reorganization Plan. Gross earnings for the quarter ended December 31, 1997 reflects $12.4 million of costs associated with pressure washer returns including an $8.0 million non-cash charge. (2) Net loss for the quarter ended September 30, 1998 reflects $9.0 million of pretax costs associated with the Reorganization Plan, and write down of automotive assets. Net income for the quarter ended December 31, 1998 reflects $0.9 million of pretax costs associated with the consolidation of manufacturing plants. Net loss for the quarter ended June 30, 1997 reflects after tax charges of $28.4 million relating to the Recapitalization and an extraordinary charge of $1.5 million related to the early extinguishment of debt associated with the Recapitalization. Net loss for the quarter ended December 31, 1997 reflects after tax charges of $19.0 million related to Ultravent(R). 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the name, age as of March 1, 1999, position, offices and certain information with respect to the executive officers and Directors of the Company. The term of office of each executive will expire upon the appointment of his successor by the Board of Directors.
William K. Hall, 55..................... President, Chief Executive Officer and Director of Falcon since 1994; Chairman of the Board of Directors of Falcon since June 1997; President from 1988 and Chief Executive Officer and Director from 1990 to June 1997 of Eagle; Director of GenCorp and A.M. Castle. William E. Allen, 54.................... President of DeVilbiss Air Power Company, a subsidiary of Falcon, since 1989. Gus J. Athas, 62........................ Executive Vice President - Administration of Falcon since June 1997; Senior Vice President, General Counsel and Secretary of Falcon since 1994; Senior Vice President of Great American Management and Investment, Inc. ("GAMI") from 1995 to June 1997; Served in various capacities at Eagle from 1987 to June 1997 including Senior Vice President (and prior thereto Vice President), General Counsel, and Secretary (and prior thereto Assistant Secretary) from 1995 to June 1997. Sam A. Cottone, 58...................... Executive Vice President and Director of Falcon since June 1997; Chief Financial Officer of Falcon since 1994; Senior Vice President - Finance and Treasurer of Falcon from 1994 to June 1997; Senior Vice President of GAMI from 1995 to June 1997; Senior Vice President-Finance, Chief Financial Officer and Director of Eagle from 1993 to 1995. Edward G. Finnegan, Jr., 37............. Vice President-Operations and Corporate Development of Falcon since January 1996; Served in various non-executive capacities at Eagle, Equity Group Investments, Inc., and EGI Corporate Investments, Inc. from 1988 to 1996. Joseph W. Harbrecht, 54................. President of Mansfield Plumbing Products, Inc., a subsidiary of Falcon, since December 1997. President, Amana Home Appliances of the Raytheon Appliance Company from 1996 to 1997; Served in various capacities at the Kohler Company from 1981 to 1996 including President, Kohler Plumbing North America from 1993 to 1996. Lawrence B. Lee, 56..................... President of Hart & Cooley, Inc., a subsidiary of Falcon, since 1985. Anthony J. Navitsky, 42................. Vice President-Finance & Treasurer of Falcon since March 1997. Served as Vice President and Treasurer of Eagle from 1990 to 1997. Christopher J. O'Brien, 40.............. Director of Falcon since June 1997; Executive of Investcorp or one or more of its wholly owned subsidiaries since December 1993; Managing Director of Mancuso & Company from 1989 to 1993; Director of Star Markets Holdings, Inc., CSK Auto Corporation, and The William Carter Company.
51
Charles J. Philippin, 48................ Director of Falcon since June 1997; Executive of Investcorp or one or more of its wholly owned subsidiaries since July 1994; partner with Coopers & Lybrand L.L.P. from 1982 to 1994; Director of Saks Holdings, Inc., CSK Auto Corporation, The William Carter Company, Harborside Healthcare and Stratus Computer, Inc. Christopher J. Stadler, 34.............. Director of Falcon since June 1997; Executive of Investcorp or one or more of its wholly owned subsidiaries since April 1, 1996. Prior to joining Investcorp, Mr. Stadler was a director with CS First Boston Corporation. Director of CSK Auto Corporation, and The William Carter Company.
52 ITEM 11. EXECUTIVE COMPENSATION The following tables set forth information about the compensation of the chief executive officer and the four other most highly compensated executive officers of the Company (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION AWARDS ---------------------------------- SECURITIES ALL OTHER ANNUAL COMPENSATION UNDERLYING COMPEN- -------------------------------------- OPTIONS SATION NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($)(2) (#) ($) (3) - ----------------------------- ------- ---------- ------------ -------------- ------------ William K. Hall (1)....................... 1998 598,900 366,012 -- 13,600 President and Chief Executive Officer 1997 425,000 83,333 241,271 706,415 1996 250,000 271,200 43,300 6,410 Sam A. Cottone (1)(5)..................... 1998 405,585 167,552 -- 13,600 Executive Vice President-Finance, 1997 275,000 37,500 120,636 306,415 Treasurer and Chief Financial Officer 1996 144,731 122,040 32,200 6,410 Gus J. Athas (1)(5)....................... 1998 347,731 138,271 -- 13,600 Executive Vice President, General 1997 252,692 37,500 86,168 306,415 Counsel and Secretary 1996 144,731 122,040 32,200 6,410 Joseph W. Harbrecht....................... 1998 275,000 -- -- 13,600 President, Mansfield Plumbing 1997 19,920 -- 51,000 -- Products, Inc. 1996 -- -- -- -- William E. Allen (4)...................... 1998 250,020 222,100 -- 12,000 President, DeVilbiss Air Power Co. 1997 226,768 63,804 51,706 817,830 1996 186,162 208,157 19,500 11,402 Lawrence B. Lee........................... 1998 225,000 152,645 -- 10,400 President, Hart & Cooley, Inc. 1997 210,603 52,818 51,701 411,830 1996 194,750 73,148 18,450 8,960
- --------------------- (1) For periods prior to the Recapitalization, the annual compensation and all other compensation (except for the transaction incentive bonus discussed in Note 3 below) shown for Messrs. Hall, Athas and Cottone represents 50% of such compensation paid to them by a subsidiary of Eagle and reimbursed by the Company. (2) Partial year bonuses were paid in June 1997 based on Company performance through the date of the Recapitalization. No bonuses were earned or paid for the remainder of 1997. (3) All other compensation in 1997 includes transaction incentive bonuses of $700,000, $500,000, $300,000, $300,000 and $399,000 paid to the above named officers (excluding Mr. Harbrecht), respectively, upon consummation of the Recapitalization. The remaining amounts include amounts contributed to an employee savings plan and accrued under an unfunded supplemental plan. (4) In addition to the compensation discussed in footnote (3) above, All Other Compensation in 1997 for Mr. Allen includes a $275,000 payment for a three-year non-competition agreement. (5) In connection with the Recapitalization in 1997, Messrs. Athas and Cottone were named Executive Vice Presidents. Prior to such time, Messrs. Athas and Cottone were Senior Vice Presidents of the Company. 53 OPTION GRANTS IN LAST FISCAL YEAR NONE
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND FISCAL YEAR OPTION VALUE NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END (#) FY-END ($) SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1) ------------------- --------------- ------------------- ----------------- William K. Hall................ -- -- 0/241,271 0 / N/A William E. Allen............... -- -- 0/51,706 0 / N/A Gus J. Athas................... -- -- 0/86,168 0 / N/A Sam A. Cottone................. -- -- 0/120,636 0 / N/A Joseph W. Harbrecht............ -- -- 0/51,000 0 / N/A Lawrence B. Lee................ -- -- 0/51,701 0 / N/A
- --------------------- (1) As there is no public trading market for the Company's common stock, the value of In-The-Money Options is not determinable. PENSION PLAN TABLE The Falcon Cash Balance Pension Plan is a qualified "cash balance" defined benefit plan that covers eligible salaried and hourly employees of Falcon and its subsidiaries that adopt the plan. Prior to the Recapitalization, certain officers of the Company participated in an Eagle sponsored Cash Balance Plan which mirrored the Falcon Cash Balance Plan (collectively the "Pension Plans"). The normal form of retirement benefit under the Pension Plans is an annuity payable at age 65 (the normal retirement age), although, in lieu of an annuity, a participant may elect to receive a lump sum payment at retirement or other termination of service. A participant's benefit is based on an account balance, which is the sum of 5% of the participant's compensation for each of the first 15 years of service and 6.5% of compensation for each year of service thereafter. The account balances are further credited with interest. The interest credit is based on the One Year Treasury Constant Maturities as published in the Federal Reserve Statistical Release over the one month period ending on the November 30 immediately preceding the applicable plan year. The interest rate for the plan year ending December 31, 1998 was 5.7%. Covered compensation includes salary, annual bonus, 401(k) deferrals and overtime, but excludes long-term incentive compensation. The estimated annual annuity benefits payable under the Pension Plans at normal retirement are $17,471, $48,025, $4,848, $10,498, $16,229 and $41,774 for Messrs. Hall, Allen, Athas, Cottone, Harbrecht, and Lee, respectively at December 31, 1998. Prior to the Recapitalization, the Company bore 50% of the current costs of these benefits for Messrs. Hall, Cottone and Athas pursuant to the Corporate Services Agreement described below. The Corporate Services Agreement was terminated in connection with the Recapitalization and the Company now bears all of the costs associated with these benefits. COMPENSATION OF DIRECTORS The Company does not pay any additional remuneration to its employees or to executives of Investcorp for serving as directors. 54 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Messrs. Hall, Cottone and Athas have entered into employment agreements with the Company, effective as of the consummation of the Recapitalization (collectively, the "Employment Agreements"). Under the terms of the Employment Agreements, Mr. Hall serves as Chairman, President and Chief Executive Officer, Mr. Cottone serves as Executive Vice President and Chief Financial Officer, and Mr. Athas serves as Executive Vice President Administration, General Counsel and Secretary. These Employment Agreements stipulated base salary amounts that are subject to adjustment. The Employment Agreements also provide (i) for an annual bonus to be paid to the officers in accordance with goals to be mutually agreed upon by the Company and such officers, (ii) that the Company will establish a supplemental executive retirement plan for Messrs. Cottone and Athas, (iii) the receipt of 10-year stock options, (iv) that such officers have certain rights to "put" to the Company and the Company has certain rights to "call" from such officers unrestricted share of Falcon capital stock owned by such officers and certain vested stock options held by such officers, and (v) that such officers are each required to own a specific percentage of shares of Falcon capital stock . Each Employment Agreement is subject to a fixed term, unless earlier terminated by the Company or an officer. If an Employment Agreement is terminated by the Company, the termination is not effective until the later of June 17, 2000 or two years after the notice of termination, unless the termination is for "Good Cause". If an Employment Agreement is terminated by an officer, the termination is not effective until 60 days after the notice of termination. Under the Employment Agreements if the Company terminates the employment of an officer without Good Cause or the officer terminates his employment for "Good Reason", the officer is entitled to receive severance benefits which include (i) the ability to exercise vested and outstanding stock options for the period ending on the earlier of the date that is 18 months from the date his employment is terminated or the specific expiration date stated in the options and (ii) for the period ending on the later of June 17, 2000 or two years after notice of such termination, payment of the officer's base compensation at the rate most recently determined and an annual bonus in an amount equal to the bonus that would be paid if then targeted goals were achieved; the continuation of health, life and disability benefits; the provision of office space and secretarial services; the reimbursement for outplacement services; and the full vesting in all retirement and savings plans. If the officer dies while he is receiving severance benefits, such benefits will continue to be paid to his spouse, and if such spouse subsequently dies, to the officer's estate. "Good Cause" is defined as (i) the officer's conviction of any embezzlement or any felony involving fraud or breach of trust relating to the performance of the officer's duties, (ii) the officer's willful engagement in gross misconduct in the performance of his duties, (iii) the officer's death, or (iv) permanent disability which materially impairs the officer's performance of his duties. "Good Reason" exists if (i) the Company continues a reduction in compensation or expenditures for benefit plans, relocates outside the Chicago area or commits another material breach of the Employment Agreement for more than 30 days after being notified by the officer of such breach provided the officer has given notice to the Company within 30 days of first becoming aware of the facts constituting such breach, (ii) the Company gives the officer a notice of termination without Good Cause provided the officer terminates the Employment Agreement within 30 days of receiving such notice, (iii) a "change in control" occurs and the officer's employment is terminated by either party for any reason other than Good Cause, or (iv) the officer retires from the Company on a date that is mutually agreed upon by the Company and the officer. The Company has entered into agreements with each of Messrs. Allen, Lee and Harbrecht, that provide benefits in the event that the executives' employment is terminated, other than by reason of death, disability, Voluntary Termination or Termination with Cause (as defined in the agreements) within two years following a change in control of ownership of the subsidiary employer or the Company that occurs prior to September 30, 1997 for Messrs. Allen and Lee and December 10, 1999 for Mr. Harbrecht. Upon a covered termination, the executive will be entitled to receive a payment equal to two times the sum of base salary and bonus in effect at the time of termination. In addition, the Company will provide up to one year of outplacement assistance and will pay the executive's cost of continuing certain health care benefits for up to two years. Similar agreements have been entered into with twenty-two other employees of the Company's subsidiaries which provide for a lump sum payment from six to 18 months of the employee's base salary plus bonus at the time of such employee's termination and the Company's payment of the costs for continuation of certain benefits for a specified period of time after such employee's termination. 55 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company does not have a compensation committee. Mr. Hall makes recommendations to the Board of Directors regarding executive officer compensation. The Board of Directors makes decisions regarding compensation with Messrs. Hall and Cottone abstaining from voting regarding such matters. Prior to the consummation of the Recapitalization, the Company shared management, administrative and other services with Eagle pursuant to a Corporate Services Agreement that renewed annually. The fee under this agreement was intended to cover Eagle's expected costs in providing these services to the Company and was reviewed by the Audit Committee of the Board of Directors of the Company. The fee paid for 1997 was $1.4 million. The law firm of Rosenberg & Liebentritt, P.C., of which Sheli Z. Rosenberg (a former director) is a partner, provided legal service to the Company and was paid $0.4 million and $0.1 million in 1997 and 1996, respectively, for these services. The Company, until the Offering in November 1994, was included in the consolidated federal income tax returns of GAMI. In addition, the Company filed certain combined state tax returns with GAMI until the distribution to EHL in 1996. The Company has agreed to pay to GAMI amounts equal to the amounts the Company would have paid had it filed its own income tax returns for these periods. In December 1996, the Company paid GAMI $4.6 million pursuant to this agreement. In connection with the 1994 public offering of its Common Stock, the Company has agreed with the Pension Benefit Guaranty Corporation that through November 1999 it will remain jointly and severally liable for certain pension liabilities of GAMI, Eagle and their subsidiaries without regard to whether or not the sale of the Common Stock to the public was sufficient to remove the Company from the group having joint and several liability for these pension plan liabilities. GAMI and Eagle have agreed to hold the Company harmless from any pension plan liabilities not attributable to the Company's pension plans and the Company has agreed to hold GAMI and Eagle harmless from any liabilities attributable to such plans. The Company and Eagle have agreed to hold each other harmless from certain liabilities unrelated to the others' business. In 1994, the Company loaned $0.9 million to Mr. Hall; $0.2 million to Mr. Cottone; $0.2 million to Mr. Athas; $0.3 million to Mr. Allen; and $0.1 million to Mr. Lee. In addition, a total of $0.5 million was loaned to two officers of the Company who are not Named Executive Officers. These loans were to enable these officers to purchase Common Stock in the public offering at $12 per share. The loans mature in seven years or earlier in certain circumstances and bear interest at the rate of 7.5% per year, compounded semi-annually payable upon maturity of the loans. At December 31, 1998, the balances of these loans including accrued interest to the Named Executive Officers were $1.0 million, $0.2 million, $0.2 million, $0.3 million, and $0.2 million, respectively. In connection with the Recapitalization, the Stock Purchase Plan was amended to permit the loans outstanding thereunder to remain outstanding. Concurrently, the Company adopted the Falcon Building Products, Inc. 1997 Senior Executive Stock Loan Plan (the "1997 Loan Plan") containing loan provisions similar to the Stock Purchase Plan. Loans under the 1997 Loan Plan are only available to executives who do not have loans outstanding under the Stock Purchase Plan. At the consummation of the Recapitalization, loans in aggregate amount of approximately $0.3 million to purchase shares of Class C Stock were made under the 1997 Loan Plan to three employees of the Company who are not Named Executive Officers. 56 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 31, 1998, certain information with respect to the beneficial ownership of the voting stock of the Company by (i) each stockholder who is known by the Company to beneficially own more than 5% of the Common Stock, (ii) each director of the Company who could be deemed to be the beneficial owner of shares of voting stock, (iii) each Named Executive Officer and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, each beneficial owner has sole investment power and sole voting power with respect to the securities beneficially owned. Holders of the Class A Stock are entitled to one vote per share and in the aggregate represent approximately 12% of the voting stock of Falcon. The holders of Class D Common Stock, $0.01 par value per share (the "Class D Stock"), are entitled to 446 votes per share and have approximately 88% of the voting power of Falcon.
SHARES BENEFICIALLY OWNED --------------------------- NUMBER OF % OF SHARES (1) CLASS ------------- ---------- CLASS A VOTING STOCK EHL (2).................................................................. 783,354 77.7% William E. Allen (3)..................................................... 21,818 2.2 Gus J. Athas (3)......................................................... 13,636 1.4 Sam A Cottone (3)........................................................ 13,488 1.3 William K. Hall (3)...................................................... 68,182 6.8 Lawrence B. Lee (3)...................................................... 11,364 1.1 All directors and executive officers as a group, including the above named persons (8 persons)............................................. 134,852 13.7 CLASS D VOTING STOCK INVESTCORP S.A. (4)(5)................................................... 17,000 100.0% SIPCO Limited (6)........................................................ 17,000 100.0 CIP Limited (7)(8)....................................................... 15,640 92.0 Ballet Limited (7)(8).................................................... 1,564 9.2 Denary Limited (7)(8).................................................... 1,564 9.2 Gleam Limited (7)(8)..................................................... 1,564 9.2 Highlands Limited (7)(8)................................................. 1,564 9.2 Nobel Limited (7)(8)..................................................... 1,564 9.2 Outrigger Limited (7)(8)................................................. 1,564 9.2 Quill Limited (7)(8)..................................................... 1,564 9.2 Radial Limited (7)(8).................................................... 1,564 9.2 Shoreline Limited (7)(8)................................................. 1,564 9.2 Zinnia Limited (7)(8).................................................... 1,564 9.2 INVESTCORP Investment Equity Limited (5)................................. 1,360 8.0
- --------------------- (1) As used in the table above, a beneficial owner of a security includes any person who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise has or shares (i) the power to vote, or direct the voting, of such security or (ii) investment power which includes the power to dispose, or to direct the disposition of, such security. In addition, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days. (2) EHL's general partners are the Samuel Zell Revocable Trust and the Robert H. and Ann Lurie Trust. Samuel Zell is the trustee of the Zell Trust. Mark Slezak and Ms. Lurie are co-trustees of the Robert H. and Ann Lurie Trust. Messrs. Zell and Slezak and Ms. Lurie disclaim beneficial ownership of the shares of Class A Stock beneficially owned by EHL. The address of EHL, Messrs. Zell and Slezak and Ms. Lurie is Two North Riverside Plaza, Chicago, Illinois 60606. (3) The address of Messrs. Allen, Athas, Cottone, Hall and Lee is c/o Falcon Building Products, Inc., 233 South Wacker Drive, Suite 3500, Chicago, Illinois 60606. 57 (4) Investcorp does not directly own any stock in Falcon. The number of shares shown as owned by Investcorp includes all of the shares owned by INVESTCORP Investment Equity Limited (see (5) below). Investcorp owns no stock in Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited, Zinnia Limited, or in the beneficial owners of these entities (see (7) below). Investcorp may be deemed to share beneficial ownership of the shares of voting stock held by these entities because the entities have entered into revocable management services or similar agreements with an affiliate of Investcorp, pursuant to which each such entity has granted such affiliate the authority to direct the voting and disposition of the Falcon voting stock owned by such entity for so long as such agreement is in effect. Investcorp is a Luxembourg corporation with its address at 37 rue Notre-Dame, Luxembourg. (5) INVESTCORP Investment Equity Limited is a Cayman Islands corporation, and a wholly-owned subsidiary of Investcorp, with its address at P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands. (6) SIPCO Limited may be deemed to control Investcorp through its control of a company that indirectly is the beneficial owner of 100% of Investcorp's shares. SIPCO Limited's address is P.O. Box 1111, West Wind Building, George Town, Grand Cayman, Cayman Islands. (7) CIP Limited ("CIP") owns no stock in Falcon. CIP indirectly owns less than 0.1% of the stock in each of Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited (see (8) below). CIP may be deemed to share beneficial ownership of the shares of voting stock of Falcon held by such entities because CIP acts as a director of such entities, and the ultimate beneficial shareholders of each of those entities have granted to CIP revocable proxies in companies that own those entities' stock. None of the ultimate beneficial owners of such entities beneficially owns individually more than 5% of Falcon's voting stock. (8) Each of CIP Limited, Ballet Limited, Denary Limited, Gleam Limited, Highlands Limited, Noble Limited, Outrigger Limited, Quill Limited, Radial Limited, Shoreline Limited and Zinnia Limited is a Cayman Islands corporation with its address at P.O. Box 2197, West Wind Building, George Town, Grand Cayman, Cayman Islands. 58 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For a description of transactions and relationships between the Company and its directors, executive officers and more than 5% stockholders, see "Compensation Committee Interlocks and Insider Participation" and Note 14 of the Notes to the Company's Consolidated Financial Statements. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements
Reports of Independent Accountants.......................... 15 Consolidated Balance Sheets................................. 17 Consolidated Statements of Income and Comprehensive Income.. 18 Consolidated Statements of Stockholders' Equity............. 19 Consolidated Statements of Cash Flows....................... 20 Notes to Consolidated Financial Statements.................. 21
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the information called for therein is included elsewhere in the financial statements or the notes thereto. Accordingly, such schedules have been omitted. (b) Reports on Form 8-K Current Report on Form 8-K dated December 30, 1998, relative to the issuance of the Option to purchase Mansfield Plumbing Products, Inc. Current Report on Form 8-K dated January 22, 1999, regarding the acquisition of the assets and business of the Penn Ventilation Companies, Inc. (c) Exhibits Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits, which is incorporated herein by reference. 59 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. FALCON BUILDING PRODUCTS, INC. By: /S/ WILLIAM K. HALL --------------------------------------- William K. Hall PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 26, 1999 -------------------------------------- PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE DATE /S/ WILLIAM K. HALL Director and Chairman of the March 26, 1999 - ------------------------------ Board of Directors, President and (William K. Hall) Chief Executive Officer (Principal Executive Officer) /S/ SAM A. COTTONE Executive Vice President-Finance, March 26, 1999 - ------------------------------ and Chief Financial Officer (Sam A. Cottone) (Principal Financial Officer) /S/ ANTHONY J. NAVITSKY Vice President - Finance and Treasurer March 26, 1999 - ------------------------------ (Principal Accounting Officer) (Anthony J. Navitsky) * /S/ CHRISTOPHER J. O'BRIEN Director March 26, 1999 ---------------------------- (Christopher J. O'Brien) * /S/ CHARLES J. PHILIPPIN Director March 26, 1999 ---------------------------- (Charles J. Philippin) * /S/ CHRISTOPHER J. STADLER Director March 26, 1999 ---------------------------- (Christopher J. Stadler)
* by /s/ Sam A. Cottone as attorney in fact for each person indicated. ------------------ (Sam A. Cottone) 60
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 2.1 Agreement and Plan of Merger, dated as of March 20, 1997, between Falcon Building Products, Inc. (the "Company") and FBP Acquisition Corporation, Inc. ("FBP"), including exhibits thereto (incorporated by reference to Annex I to the Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4, File No. 333-24625, filed April 4, 1997, as amended). 2.2 Stockholder Voting Agreement, dated as of March 20, 1997, among the Company, FBP and Equity Holdings Limited ("EHL") (incorporated by referenced to Annex II-A to the Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4, File No. 333-24625, filed April 4, 1997, as amended). 2.3 Form of Stockholder Voting Agreements, dated as of March 20, 1997, among the Company, FBP and certain management stockholders (incorporated by reference to Annex II-B to the Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4, File No. 333-24525, filed April 4, 1997, as amended). 3.1 Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on June 17, 1997. (Incorporated by reference to Exhibit 3.01 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.02 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 4.1 Indenture between the Company, its subsidiaries DeVilbiss Air Power Company, Ex-Cell Manufacturing Company, Inc., Hart & Cooley, Inc., Mansfield Plumbing Products, Inc. and SWC Industries, Inc. (collectively, the "Guarantors"), and Harris Trust and Savings Bank, as Trustee, dated as of June 17, 1997, relating to the Company's 9 1/2% Senior Subordinated Notes due 2007 (the "Notes"), including form of Note (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K dated June 17, 1997). 4.2 Supplemental Indenture between Falcon Manufacturing, Inc. and Harris Trust and Savings Bank, as Trustee, dated as of June 17, 1997 relating to the Company's Notes (Incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 4.3 Indenture between the Company, the Guarantors and Harris Trust and Savings Bank, as Trustee, dated as of June 17, 1997, relating to the Company's 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Discount Notes"), including form of Discount Note (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated June 17, 1997). 4.4 Supplemental Indenture between Falcon Manufacturing, Inc. and Harris Trust and Savings Bank, as Trustee, dated as of June 17, 1997 relating to the Company's Discount Notes (Incorporated by reference to Exhibit 4.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 4.5 Form of Note. (Incorporated by reference to Exhibit 4.03 of the Company's Registration Statement on Form S-4, filed August 28, 1997.) 4.6 Registration Rights Agreement, dated June 17, 1997, between the Company, the Guarantors and Smith Barney, Inc., BT Securities Corporation, Chase Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Incorporated by reference to Exhibit 4.03 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 4.7 Credit Agreement, dated as of June 17, 1997, among the Company, the several Lenders from time to time parties thereto, and The Chase Manhattan Bank, as administrative agent for the Lenders (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated June 17, 1997). 4.8 Form of Discount Note. (Incorporated by reference to Exhibit 4.04 of the Company's Registration Statement on Form S-4, filed August 28, 1997.) 4.9 Form of Note Guarantee. (Incorporated by reference to Exhibit 4.05 of the Company's Registration Statement on Form S-4, filed August 28, 1997.) 4.10 Form of Discount Note Guarantee. (Incorporated by reference to Exhibit 4.06 of the Company's Registration Statement on Form S-4, filed August 28, 1997.) 4.11 Form of Certificate for Class A Stock (Incorporated by reference to Exhibit 4.1 of Falcon Building Products, Inc. Registration Statement of Form S-1. Registration Number 33-79006, filed May 17, 1994, as amended.) 10.1 Financing Advisory Agreement, dated March 20, 1997, between FBP and Investcorp International, Inc. (Incorporated by reference to Exhibit 10.01 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.2 Standby Loan Commitment Letter Agreement, dated as of March 20, 1997, between FBP and Invifin S.A. (incorporated by reference to Annex I to the Proxy Statement/Prospectus contained in the Company's Registration Statement on Form S-4, File No. 333-24625, filed April 4, 1997, as amended).
61
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.3 Agreement for Management Advisory, Strategic Planning and Consulting Services, between FBP and Investcorp International, Inc., dated as of June 17, 1997. (Incorporated by reference to Exhibit 10.03 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.4 Employment Agreement, dated May 22, 1997, between the Company and Gus J. Athas. (Incorporated by reference to Exhibit 10.04.1 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.5 First Amendment to the Employment Agreement between the Company and Gus J. Athas. (Incorporated by reference to Exhibit 10.04.2 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.6 Employment Agreement, dated May 22, 1997, between the Company and Sam A. Cottone. (Incorporated by reference to Exhibit 10.05.1 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.7 First Amendment to the Employment Agreement between the Company and Sam A. Cottone. (Incorporated by reference to Exhibit 10.05.2 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.8 Employment Agreement, dated May 22, 1997, between the Company and William K. Hall. (Incorporated by reference to Exhibit 10.06.1 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.9 First Amendment to the Employment Agreement between the Company and William K. Hall. (Incorporated by reference to Exhibit 10.06.2 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.10 Employment Agreement, dated May 22, 1997, between the Company and Anthony J. Navitsky. (Incorporated by reference to Exhibit 10.07.1 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.11 First Amendment to the Employment Agreement between the Company and Anthony J. Navitsky. (Incorporated by reference to Exhibit 10.07.2 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.12 Employment Agreement, dated May 22, 1997, between the Company and Edward G. Finnegan, Jr. (Incorporated by reference to Exhibit 10.08.1 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.13 First Amendment to the Employment Agreement between the Company and Edward G. Finnegan, Jr. (Incorporated by reference to Exhibit 10.08.2 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.14 Non-Competition Agreement, dated as of March 31, 1997 between the Company and William E. Allen. (Incorporated by reference to Exhibit 10.09 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.15 Amended and Restated Receivables Purchase Agreement, dated as of June 17, 1997 among Falcon Receivable Program, Inc., the Company, Market Street Funding Corporation and PNC Bank, National Association. (Incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.16 Form of Director Indemnity Agreements, dated as of June 17, 1997, between the Company and its Directors. (Incorporated by reference to Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.17 1997 Senior Executive Stock Loan Plan. (Incorporated by reference to Exhibit 10.13 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.18 Form of Stock Pledge Agreement between the Company and certain management stockholders (schedule attached). (Incorporated by reference to Exhibit 10.14 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.19 Form of Common Stock Option Settlement Agreement, between the Company and certain employees (schedule attached). (Incorporated by reference to Exhibit 10.15 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.20 Form of Restricted Settlement Agreements between the Company and certain employees. (Incorporated by reference to Exhibit 10.16 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.21 Falcon Building Products, Inc. Employee Savings Plan as adopted January 1, 1995. (Incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.22 Management Stock Incentive Plan. (Incorporated by reference to Exhibit 10.17 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.23 Falcon Building Products, Inc. Cash Balance Pension Plan as adopted January 1, 1996. (Incorporated by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.24 Form of Stock Option Agreement pursuant to the Company's Management Stock Incentive Plan between the Company and certain employees (schedule attached). (Incorporated by reference to Exhibit 10.18 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.25 Termination Benefits Agreement dated December 13, 1996 between Hart & Cooley, Inc. and Lawrence B. Lee. (Incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996.)
62
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.26 Form of Stockholder Agreement, dated June 17, 1997, by and among Falcon, FBP and certain management stockholders (schedule attached). (Incorporated by reference to Exhibit 10.19 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.27 Stockholder Rights Agreement, dated June 17, 1997, by and among the Company, FBP and EHL. (Incorporated by reference to Exhibit 10.20 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.28 Termination Benefits Agreement dated December 31, 1996 between DeVilbiss Air Power Company and William E. Allen. (Incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.29 Amendment to the Company's Senior Executive Stock Purchase Plan, dated as of June 17, 1997, among the Company and certain employees. (Incorporated by reference to Exhibit 10.21 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.30 Casualty Insurance Indemnity Agreement, dated as of March 20, 1997, by and among the Company, DeVilbiss Air Power Company, Eagle Industries, Inc., Great American Management and Investment, Inc., Hart & Cooley, Inc. and Mansfield Plumbing Products, Inc.. (Incorporated by reference to Exhibit 10.22 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.31 Tax Indemnity Agreement, dated as of March 20, 1997, by and among the Company, DeVilbiss Air Power Company, Eagle Industries, Inc., Great American Management and Investment, Inc., Hart & Cooley, Inc. and Mansfield Plumbing Products, Inc. (Incorporated by reference to Exhibit 10.23 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.32 Pension Benefits Indemnity Agreement, dated as of March 20, 1997, by and among the Company, DeVilbiss Air Power Company, Eagle Industries, Inc., Great American Management and Investment, Inc., Hart & Cooley, Inc. and Mansfield Plumbing Products, Inc. (Incorporated by reference to Exhibit 10.24 of the Company's Quarterly Report on Form 10-Q, dated June 30, 1997.) 10.33 Termination Benefits Agreement dated December 20, 1997 between Mansfield Plumbing Products, Inc. and Joseph W. Harbrecht. (Incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997.) 10.34 Option Agreement dated December 30, 1998 between the Company and its shareholders. 21.1 Subsidiaries of the Company. 24.1 Power of Attorney of Directors.
63 EX-10.34 2 EXHIBIT 10.34 EXHIBIT 10.34 OPTION AGREEMENT THIS OPTION AGREEMENT (this "Option Agreement"), dated as of December 30, 1998, is by and among Falcon Building Products, Inc., a Delaware corporation ("Falcon"), IFOH Limited, a corporation incorporated in the Cayman Islands ("IFOH"), and those stockholders of Falcon listed on Exhibit A hereto. RECITALS A. Mansfield Plumbing Products, Inc., a Delaware corporation (the "Company"), is a wholly owned subsidiary of Falcon. B. The Board of Directors of Falcon has determined that it is in the best interests of Falcon and all of its stockholders for Falcon to sell to (i) the stockholders of record of Falcon on December 29, 1998 listed on Exhibit A hereto (the "Exhibit A Stockholders," and collectively with IFOH, the "Holders") and (ii) IFOH an option (the "Option") to purchase up to all the capital stock of the Company outstanding at the time the Option is exercised (the "Shares"). C. IFOH has agreed to offer its interest in the Option to the stockholders of record of Falcon on December 29, 1998 listed on Exhibit B hereto (the "Exhibit B Stockholders"). D. Subject to the terms and conditions hereof, Falcon wishes to sell and the Holders wish to purchase the Option. AGREEMENT THEREFORE, in consideration of the promises and the mutual representations, warranties and covenants contained herein, the parties agree as follows: 1. SALES OF OPTION. Subject to the other terms and conditions of this Option Agreement, Falcon hereby grants, sells, transfers and delivers to each of the Holders and their successors and assigns, free and clear of all security interests, liens, and encumbrances, an undivided percentage interest (a "Percentage Interest") in the Option equal to (i) in the case of the Exhibit A Stockholders, the percentage interest each Exhibit A Stockholder held on December 29, 1998 (the "Record Date") of the total of all outstanding capital stock of Falcon, and (ii) in the case of IFOH, the percentage interest of the total of all outstanding capital stock of Falcon held on the Record Date by the Exhibit B Stockholders. Falcon contemplates that the capital structure of the Company will be amended between the date hereof and the date of the Closing (as hereinafter defined) such that the Company will have authorized classes of capital stock with rights, preferences and privileges substantially similar to the classes of capital stock of Falcon. If, on the date of the Closing, the capital structure of the Company consists of substantially similar classes of capital stock as were present in the capital structure of Falcon on the Record Date, upon the exercise of the Option each Holder delivering to Falcon a Notice of Exercise (as defined in Section 6 below) (an "Exercising Holder") will be entitled to receive the same percentage of the same class of capital stock of the Company that such Holder (or in the case of IFOH, the Exhibit B Stockholders) held of Falcon's capital stock on the Record Date. If the capital structure of the Company on the date of the Closing does not consist of the same classes of capital stock as were present in the capital structure of Falcon on the Record Date, upon the exercise of the Option, each Exercising Holder will be entitled to receive its Percentage Interest of the outstanding shares of the single class of common stock of the Company then outstanding or of such other capital stock of the Company as may then be outstanding. 2. PAYMENT OF THE PURCHASE PRICE. The purchase price (the "Purchase Price") for the Option to be paid by wire transfer to Falcon upon the execution of this Option Agreement is set forth on Exhibit C hereto. 3. TERM. The ability of the Holders to exercise their Percentage Interests in the Option shall expire on June 30, 1999 at 5:00 p.m. Chicago, Illinois time (the "Expiration Date"). 4. EXCLUSIVITY. During the period from the execution of this Option Agreement (the "Execution Date") until the earlier of (i) the Closing or (ii) if the Option is not exercised, the Expiration Date, Falcon shall not enter into or continue any negotiations with respect to the sale or transfer of the Shares or any other form of business combination transaction, license, sale, liquidation, dissolution or recapitalization involving the Company or its assets. 5. RESTRICTIONS ON TRANSFER OF SHARES. During the period from the Execution Date until the earlier of (i) the Closing or (ii) if the Option is not exercised, the Expiration Date, Falcon shall not sell, transfer, pledge or grant a security interest in, or otherwise dispose of or encumber, the Shares; provided, it being understood that the Shares are currently pledged to Chase Manhattan Bank ("Chase") as administrative agent under the Credit Agreement, dated as of June 17, 1997, by and among Falcon, the Company, certain of Falcon's other subsidiaries, Chase and the other lenders party thereto. 6. NOTICE OF EXERCISE AND CLOSING. If a Holder elects to exercise its Percentage Interest in the Option, such Holder shall deliver to Falcon a "Notice of Exercise." The Notice of Exercise shall; (i) be written, (ii) be executed by such Exercising Holder, (iii) state the Exercising Holder's intention to exercise its rights under the Option, (iv) be delivered to Falcon at its principal place of business no later than the Expiration Date and (v) specify the time and date (not more than five business days after the Expiration Date) on which such Exercising Holder will be prepared to close. Following receipt of a Notice of Exercise from Exercising Holders of the Option holding more than fifty percent (50%) of the Percentage Interests (the "Notice Date"), Falcon (i) shall schedule the time, date and place of the closing of the Option Exercise (the "Closing") with respect to such Percentage Interests, which shall not be later than fifteen (15) business days after the Notice Date, and (ii) shall provide written notice of the Closing to all Holders within two (2) business days following the Notice Date. Any Holders who are not then Exercising Holders shall have until the close of business of the third business day preceding the Closing to file a Notice of Exercise and exercise their Percentage Interests in the Option. 7. EXERCISE PRICE. The price at which the Option can be exercised (the "Exercise Price") shall be equal to: (i) $10,000,000 plus (ii) to the extent that the total amount of indebtedness for borrowed money ("Indebtedness") for which the Company will be liable immediately before, on or after the Closing (the "Closing Indebtedness") is less than $70,000,000, the difference between the amount of such Indebtedness and $70,000,000 plus (minus) (iii) the difference between (y) the sum of the fair market value of any capital contributions to the Company (other than loans which increase the amount of Indebtedness) ("Capital Contributions") and the aggregate amount of after tax net income of the Company during the Option Period ("Option Period Net Income") and (z) the fair market value of any distributions (other than amounts paid by the Company with respect to any Indebtedness, and other than an amount of distributions equal to the difference between the amount of Closing Indebtedness and the amount of Indebtedness of the Company at December 31, 1998) made by the Company in the form of cash, property or otherwise during the Option Period, minus (iv) to the extent that the total amount of Closing Indebtedness is more than $70,000,000 the difference between the amount of such Indebtedness and $70,000,000 plus (v) the amount of cash or cash equivalents on the books of the Company at the Closing. An amount equal to each Exercising Holder's Percentage Interest of the exercise price shall be paid by wire transfer on the day of the Closing. 8. INTERESTS IN THE OPTION. Each of the entities listed on Exhibit A hereto shall hold an undivided Percentage Interest in the Option in the amount set forth opposite its name on such Exhibit A. Interests in the Option will not be transferable, other than to holders of record of capital stock of Falcon on the Record Date. If a majority of the Holders do not deliver a Notice of Exercise prior to the Expiration Date, the Option shall expire unexercised. A Holder can only exercise its Percentage Interest in the option in full and not in part. 9. REPRESENTATIONS AND WARRANTIES. Falcon hereby makes the representations and warranties with respect to the Company and other matters set forth on Exhibit D hereto to the Holders on and as of the Execution Date and agrees that all such representations and warranties shall be true on the day of the Closing as if made on such day. All of the representations and warranties set forth on Exhibit D shall expire at, and be terminated and extinguished by, the Closing and thereafter be without force or effect, except for those set forth in Sections 9.1.2 and 9.2. 10. COVENANTS AND AGREEMENTS. Falcon hereby makes the covenants and agreements with respect to its actions and the actions of the Company during the Option Period set forth on Exhibit E hereto. 11. CONDITIONS TO CLOSING. The conditions set forth on Exhibit F hereto shall constitute the conditions to the obligation of each of the Exercising Holders to pay an amount equal to their Percentage Interest of the Exercise Price to Falcon at the Closing and, in the case of the condition set forth in Section 11.2 of Exhibit F relating to the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR"), shall also constitute a condition to the obligation of Falcon to sell the Shares at the Closing. If any of the conditions to closing set forth on Exhibit F have not been satisfied prior to the Closing, the Holders shall be entitled to the return of the Purchase Price by Falcon, plus interest at the rate of 8% per annum, and any damages that may be imposed under Section 13(c) of this Option Agreement as a result of a willful violation of a provision of this Option Agreement; provided, that in no event shall Falcon be liable in an amount in excess of the Purchase Price. Falcon hereby agrees to pay all such amounts to the Holders in accordance with their Percentage Interests. 12. LIMITED RIGHTS OF OPTION HOLDER. The Holders of the Option shall not have any of the rights of a holder of voting securities of the Company, either at law or in equity, until the Option shall have been duly exercised and the Closing shall have occurred. 13. MISCELLANEOUS. a) APPLICABLE LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, BUT NOT THE CHOICE OF LAW PROVISIONS, OF THE STATE OF DELAWARE. b) HEADINGS. The headings herein are for convenience only and are not part of this Option Agreement and shall not affect the interpretation thereof. c) ARBITRATION. Any controversy, dispute, or claim arising out of, in connection with, or in relation to, the interpretation, performance or breach of this Option Agreement, including, without limitation, the validity, scope, and enforceability of this Section 13(c), may at the election of any party be solely and finally settled by arbitration conducted in Illinois, by and in accordance with the then-existing rules for commercial arbitration of the American Arbitration Association, or any successor organization. Judgment upon any award rendered by the arbitrator(s) may be entered by the State or Federal Court having jurisdiction thereof. Any of the parties may demand arbitration by written notice to the other and to the American Arbitration Association ("Demand for Arbitration"). Any Demand for Arbitration pursuant to this Section 13(c) shall be made within one (1) year from the date that the dispute upon which the demand is based arose. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. d) ATTORNEY'S FEES. If any suit, action or arbitration arising out of or related to this Option Agreement is brought by any party, the prevailing party or parties shall be entitled to recover the costs and fees (including without limitation reasonable attorneys' fees, the fees and costs of experts and consultants, copying, courier and telecommunication costs, and deposition costs and all other costs of discovery) incurred by such party of parties in such suit or action, including without limitation any post-trial or appellate proceeding, or in the collection of enforcement of any judgment or award entered or made in such suit or action. e) BINDING EFFECT. This Option Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, permitted assigns, heirs and legal representatives, as the case may be. f) AUTHORITY. Each of the signatories to the Option Agreement personally warrants that he has been duly authorized and has full authority (i) to sign this Option Agreement on behalf of the entity on whose behalf he is signing and (ii) to bind such party and its successors and assigns to the terms hereof. g) COUNTERPART EXECUTION. This Option Agreement may be executed in counterparts, and when each party has signed and delivered to the other party at least one such counterpart, each counterpart shall be deemed an original, and when taken together with the other signed counterpart, shall constitute one agreement. [the remainder of this page is intentionally left blank] EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Hart & Cooley, Inc. Warrior Glass and Aluminum Co., Inc. Mansfield Plumbing Products, Inc. Falcon Manufacturing, Inc. Devilbiss Air Power Company SWC Industries, Inc. Falcon Receivable Program, Inc. EX-24.1 4 EXHIBIT 24.1 Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Falcon Building Products, Inc., a Delaware Corporation (the "Company"), which is about to file an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Act of 1934, as amended, hereby constitutes and appoints Sam A. Cottone, his true and lawful attorney-in-fact and agent, with full power and all capacities, to sign the Company's Annual Report on Form 10-K and any or all amendments thereto, and any other documents in connection therewith, to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the 26th day of March, 1999. /s/ Charles J. Philippin ------------------------- Charles J. Philippin Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Falcon Building Products, Inc., a Delaware Corporation (the "Company"), which is about to file an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Act of 1934, as amended, hereby constitutes and appoints Sam A. Cottone, his true and lawful attorney-in-fact and agent, with full power and all capacities, to sign the Company's Annual Report on Form 10-K and any or all amendments thereto, and any other documents in connection therewith, to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the 26th day of March, 1999. /s/ Christopher J. Stadler --------------------------- Christopher J. Stadler Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Falcon Building Products, Inc., a Delaware Corporation (the "Company"), which is about to file an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Act of 1934, as amended, hereby constitutes and appoints Sam A. Cottone, his true and lawful attorney-in-fact and agent, with full power and all capacities, to sign the Company's Annual Report on Form 10-K and any or all amendments thereto, and any other documents in connection therewith, to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal as of the 26th day of March, 1999. /s/ Christopher J. O'Brien --------------------------- Christopher J. O'Brien Director EX-27.1 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 66 0 0 0 79 187 223 (113) 381 117 440 0 0 0 (215) 381 766 766 640 640 0 0 44 5 2 3 0 0 0 3 0 0
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