UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended OCTOBER 3, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-81808
BUILDING MATERIALS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE 22-3276290
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1361 ALPS ROAD, WAYNE, NEW JERSEY 07470
(Address of Principal Executive Offices) (Zip Code)
(973) 628-3000
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
See Table of Additional Registrants Below.
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES / / NO /X/
As of November 17, 2004, 1,015,010 shares of Class A Common Stock, $.001 par
value of the registrant were outstanding. There is no trading market for the
common stock of the registrant. As of November 17, 2004, each of the additional
registrants had the number of shares outstanding which is shown on the table
below. There is no trading market for the common stock of the additional
registrants. As of November 17, 2004, no shares of the registrant or the
additional registrants were held by non-affiliates.
ADDITIONAL REGISTRANTS
Address, including zip code
and telephone number,
Exact name of State or other No. of including area code, of
registrant as jurisdiction of Shares Commission File No./I.R.S. registrant's principal
specified in its charter incorporation or organization Outstanding Employer Identification No. executive offices
- ------------------------ ----------------------------- ----------- --------------------------- ------------------------
Building Materials Delaware 10 333-69749-01/ 1361 Alps Road
Manufacturing Corporation 22-3626208 Wayne, NJ 07470
(973) 628-3000
Building Materials Delaware 10 333-69749-02/ 300 Delaware Avenue
Investment Corporation 22-3626206 Suite 303
Wilmington, DE 19801
(302) 427-5960
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPT. 28, OCT. 3, SEPT. 28, OCT. 3,
2003 2004 2003 2004
------------ ------------ ------------ ------------
Net sales.................................................... $ 459,887 $ 468,738 $ 1,209,142 $ 1,312,269
------------ ------------ ------------ ------------
Costs and expenses, net:
Cost of products sold...................................... 318,900 319,451 849,630 900,165
Selling, general and administrative........................ 91,315 101,905 246,855 286,541
Gain on sale of assets..................................... - - (5,739) -
------------ ------------ ------------ ------------
Total costs and expenses, net............................ 410,215 421,356 1,090,746 1,186,706
------------ ------------ ------------ ------------
Operating income............................................. 49,672 47,382 118,396 125,563
Interest expense............................................. (15,241) (18,237) (42,540) (46,917)
Other expense, net........................................... (737) (1,971) (5,014) (4,531)
------------ ------------ ------------ ------------
Income before income taxes................................... 33,694 27,174 70,842 74,115
Income tax expense........................................... (12,130) (10,122) (25,503) (27,608)
------------ ------------ ------------ ------------
Net income................................................... $ 21,564 $ 17,052 $ 45,339 $ 46,507
============ ============ ============ ============
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
3
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DEC. 31, OCT. 3,
2003 2004
ASSETS ---------- ----------
Current Assets:
Cash and cash equivalents.............................................................. $ 2,880 $ 10,880
Accounts receivable, trade, less allowance
of $1,363 and $1,624 at December 31, 2003
and October 3, 2004, respectively.................................................... 188,231 324,832
Accounts receivable, other............................................................. 5,864 2,894
Tax receivable from parent corporation................................................. 7,044 2,018
Inventories, net....................................................................... 135,960 184,512
Other current assets................................................................... 5,002 7,099
---------- ----------
Total Current Assets................................................................. 344,981 532,235
Property, plant and equipment, net....................................................... 342,216 362,418
Goodwill, net of accumulated amortization
of $16,370 at December 31, 2003 and
October 3, 2004, respectively........................................................ 63,294 63,294
Other noncurrent assets.................................................................. 31,989 32,572
---------- ----------
Total Assets............................................................................. $ 782,480 $ 990,519
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt................................................... $ 2,504 $ 152,456
Accounts payable....................................................................... 92,849 108,778
Payable to related parties............................................................. 9,074 12,855
Loans payable to parent corporation.................................................... 52,840 52,840
Accrued liabilities.................................................................... 63,096 80,535
Reserve for product warranty claims.................................................... 14,900 14,900
---------- ----------
Total Current Liabilities.............................................................. 235,263 422,364
---------- ----------
Long-term debt less current maturities................................................... 545,693 525,127
---------- ----------
Reserve for product warranty claims...................................................... 17,072 16,714
---------- ----------
Deferred income tax liabilities.......................................................... 3,308 9,077
---------- ----------
Other liabilities........................................................................ 23,212 23,130
---------- ----------
Stockholders' Equity (Deficit):
Series A Cumulative Redeemable Convertible
Preferred Stock, $.01 par value per share;
400,000 shares authorized; no shares issued.......................................... - -
Class A Common Stock, $.001 par value per share,
1,300,000 shares authorized; 1,015,010 shares
issued and outstanding............................................................... 1 1
Class B Common Stock, $.001 par value per share;
100,000 shares authorized; 15,000 and 0 shares
issued and outstanding in 2003 and 2004,
respectively......................................................................... - -
Loans receivable from parent corporation............................................... (55,587) (55,659)
Retained earnings...................................................................... 18,696 54,943
Accumulated other comprehensive loss................................................... (5,178) (5,178)
---------- ----------
Total Stockholders' Equity (Deficit)................................................. (42,068) (5,893)
---------- ----------
Total Liabilities and Stockholders' Equity (Deficit)..................................... $ 782,480 $ 990,519
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
4
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
SEPT. 28, OCT. 3,
2003 2004
--------- ---------
Cash and cash equivalents, beginning of period.......... $ 96,173 $ 2,880
--------- ---------
Cash provided by (used in) operating activities:
Net income ........................................... 45,339 46,507
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Gain on sale of assets............................ (5,739) -
Depreciation...................................... 29,180 32,103
Amortization...................................... 1,534 1,694
Deferred income taxes............................. 24,957 26,758
Noncash interest charges, net..................... 4,006 5,012
Increase in working capital items..................... (124,792) (150,727)
Decrease in long-term reserve for product
warranty claims...................................... (1,251) (358)
Repayments for repurchase of accounts receivable...... (105,388) -
Increase in other assets.............................. (879) (2,420)
Increase (decrease) in other liabilities.............. 1,128 (51)
Change in net receivable from/payable to related
parties/parent corporations......................... 60 (12,182)
Other, net............................................ 418 81
--------- ---------
Net cash used in operating activities ................. (131,427) (53,583)
--------- ---------
Cash provided by (used in) investing activities:
Capital expenditures.................................. (23,307) (29,386)
Acquisition of manufacturing facility................. - (23,185)
Proceeds from sale of assets.......................... 9,315 -
--------- ---------
Net cash used in investing activities................... (13,992) (52,571)
--------- ---------
Cash provided by (used in) financing activities:
Proceeds from loan payable to parent corporation...... 38,351 -
Proceeds from issuance of long-term debt.............. 327,407 682,465
Repayments of long-term debt.......................... (246,699) (553,611)
Distributions to parent corporation................... (15) (260)
Dividends to parent corporation....................... - (10,000)
Loans to parent corporation........................... (38,426) (72)
Financing fees and expenses........................... (9,115) (4,368)
--------- ---------
Net cash provided by financing activities............... 71,503 114,154
--------- ---------
Net change in cash and cash equivalents................. (73,916) 8,000
--------- ---------
Cash and cash equivalents, end of period................ $ 22,257 $ 10,880
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized of $500 and
$854 in 2003 and 2004, respectively).............. $ 39,511 $ 37,846
Income taxes (including federal income taxes paid
pursuant to a tax sharing agreement of $0 and
$15,963 in 2003 and 2004, respectively)........... 451 16,906
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
5
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Building Materials Corporation of America ("BMCA" or the "Company")
was formed on January 31, 1994 and is a wholly-owned subsidiary of BMCA Holdings
Corporation ("BHC"), which is a wholly-owned subsidiary of G-I Holdings Inc.
("G-I Holdings"). G-I Holdings is a wholly-owned subsidiary of G Holdings Inc.
The consolidated financial statements of the Company reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at October 3, 2004, and the results of operations and cash flows
for the third quarter and nine month periods ended September 28, 2003 and
October 3, 2004. All adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 2003 (the
"2003 Form 10-K").
Certain reclassifications have been made to conform to current year
presentation.
NOTE 1. NEW ACCOUNTING PRONOUNCEMENT
In May 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act")," ("FSP FAS No. 106-2") which supersedes
FSP FAS No. 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," ("FSP
FAS No. 106-1"). FSP FAS No. 106-2 provides guidance on accounting for the
effects of the Medicare Prescription Drug, Improvement and Modernization Act of
2003 to employers that sponsor postretirement health care plans which provide
prescription drug benefits.
FSP FAS 106-2 applies only to sponsors of single-employer defined
benefit postretirement health care plans for which (1) the employer has
concluded that prescription drug benefits available under the plan to some or
all participants, for some or all future years, are "actuarially equivalent" to
Medicare Part D and thus qualify for the subsidy provided by the Act, and (2)
the expected subsidy will offset or reduce the employer's share of the cost of
the underlying postretirement prescription drug coverage on which the subsidy is
based. In addition, FSP FAS 106-2 requires certain disclosures in financial
statements regarding the effect of the Act and the related subsidy on
postretirement health obligations and net periodic postretirement benefit cost.
FSP FAS 106-2 is effective for the first interim or annual period
beginning after June 15, 2004. The Company has adopted the provisions of FSP FAS
No. 106-2 effective for the quarterly period beginning July 5, 2004 and noted no
material impact on the accounting for its postretirement medical and life
insurance plan.
6
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 2. INVENTORIES
Inventories consist of the following:
DEC. 31, OCT. 3,
2003 2004
---------- ----------
(THOUSANDS)
Finished goods........................................................ $ 89,684 $ 121,586
Work-in process....................................................... 12,499 15,177
Raw materials and supplies............................................ 39,208 53,880
---------- ----------
Total................................................................. 141,391 190,643
Less LIFO reserve..................................................... (5,431) (6,131)
---------- ----------
Inventories, net...................................................... $ 135,960 $ 184,512
========== ==========
NOTE 3. ACQUISITION AND PROPERTY DISPOSITION
On May 7, 2004, the Company acquired certain assets of a
manufacturing facility located in Quakertown, Pennsylvania from Atlas Roofing
Corporation for a purchase price of $23.2 million. The acquisition was accounted
for under the purchase method of accounting. Accordingly, the purchase price was
allocated to the fair value of the identifiable assets acquired, including $23.0
million to property, plant and equipment and $0.2 million to inventories. The
operating results of the Quakertown manufacturing facility are included in the
Company's results of operations from the date of its acquisition.
In connection with the acquisition of the Quakertown manufacturing
facility, the Company entered into a long-term supply agreement with Atlas
Roofing Corporation, whereby the Company is obligated to purchase certain
minimum amounts of dry felt and other products at fair market value through
April 30, 2011. As of October 3, 2004 our minimum purchase obligation under the
Atlas Roofing Corporation long-term supply agreement aggregated to $24.0
million.
In May 2003, the Company sold property in Ontario, California for net
cash proceeds of approximately $9.3 million, which resulted in a pre-tax gain of
approximately $5.7 million.
NOTE 4. LONG-TERM DEBT
On May 7, 2004, the Company amended its $350 million Senior Secured
Revolving Credit Facility (the "Senior Secured Revolving Credit Facility"),
which reduced the floating rate of interest as defined in the Senior Secured
Revolving Credit Facility. On July 12 and July 19, 2004, the Senior Secured
Revolving Credit Facility was further amended to allow for the issuance of our
7 3/4% Senior Notes due 2014 (the "2014 Notes").
7
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. LONG-TERM DEBT - (CONTINUED)
On July 26, 2004, the Company issued $200.0 million in aggregate
principal amount of 7 3/4% Senior Notes due 2014, at 100.0% of the principal
amount. The net proceeds from the issuance of the 2014 Notes, after deducting
initial purchasers' discounts and commissions and offering expenses were
approximately $195.9 million. On August 26, 2004, the Company exercised a call
notice issued on July 26, 2004 and used approximately $101.8 million of the net
proceeds to redeem all of its issued and outstanding 8 5/8% Senior Notes due
2006 (the "2006 Notes"), including accrued and unpaid interest on such notes
through the date of redemption. In addition, the Company used the remaining net
proceeds of approximately $94.1 million to reduce amounts outstanding under its
Senior Secured Revolving Credit Facility. The redemption price of the 2006 Notes
was 101.438% of the principal amount outstanding and the premium of
approximately $1.4 million was recorded in interest expense in July 2004. In
connection with the extinguishment of the 2006 Notes, the Company expensed the
remaining deferred financing fees of approximately $0.7 million in July 2004 and
included this amount in interest expense.
Under the terms and conditions of the 2014 Notes, the noteholders
have the right under the indenture governing such notes to require the Company
to purchase the 2014 Notes at a price of 101% of the principal amount thereof,
plus any accrued and unpaid interest, in the event of a change in control, as
defined in the 2014 Notes. Upon the expiration of this right, the Company would
have the option to purchase the 2014 Notes at a purchase price equal to 100% of
the aggregate principal amount, plus the applicable premium, as defined in the
2014 Notes, together with any accrued and unpaid interest. The Company also has
the option to redeem some or all of the 2014 Notes beginning on August 1, 2009
at specified redemption premiums through August 1, 2012, as defined in the 2014
Notes. Finally, pursuant to the terms and conditions of the 2014 Notes, the
registration statement related to the exchange offer of the 2014 Notes is
required to be deemed effective by the Securities and Exchange Commission (the
"SEC") within a specified time period as outlined in the 2014 Notes. In the
event the 2014 Notes are not deemed effective by the SEC within the specified
time period, the Company is subject to an additional special interest provision,
as defined in the 2014 Notes.
The 2014 Notes, as well as the 7 3/4% Senior Notes due 2005, the 8%
Senior Notes due 2007 and the 8% Senior Notes due 2008 (collectively, the
"Senior Notes") are secured by a second priority lien on the assets securing the
Senior Secured Revolving Credit Facility for so long as the first priority lien
remains in effect, subject to certain limited exceptions and have been
guaranteed by the subsidiaries that guaranteed the Senior Secured Revolving
Credit Facility. As of October 3, 2004, the book value of the collateral
securing the Senior Notes and the Senior Secured Revolving Credit Facility was
approximately $973.6 million.
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 4. LONG-TERM DEBT - (CONTINUED)
Under the terms of the Senior Secured Revolving Credit Facility and
the indentures governing the Company's Senior Notes, the Company is subject to
certain financial covenants. These financial covenants include, among others,
interest coverage, minimum EBITDA (earnings before income taxes and
extraordinary items increased by interest expense, depreciation, goodwill and
other amortization) as defined, limitations on the amount of annual capital
expenditures and indebtedness, restrictions on restricted payments, including
dividends and distributions to the Company's parent corporations and on
incurring liens, and restrictions on investments and other payments. In
addition, if a change of control as defined in the Senior Secured Revolving
Credit Facility occurs, the Senior Secured Revolving Credit Facility could be
terminated and the loans under the Senior Secured Revolving Credit Facility
accelerated by the holders of that indebtedness. If that event occurred, it
would cause the Company's outstanding Senior Notes to be accelerated.
As of October 3, 2004, after giving effect to the most restrictive of
the aforementioned restrictions, the Company could have paid dividends or made
other restricted payments up to $5.0 million to its parent corporations. In
addition at October 3, 2004, the Company could repay demand loans to its parent
corporation amounting to $52.8 million, subject to certain conditions as
outlined in the Senior Secured Revolving Credit Facility. As of October 3, 2004,
the Company was in compliance with all covenants under the Senior Secured
Revolving Credit Facility and the indentures governing the Senior Notes.
As of October 3, 2004, the Company had total outstanding consolidated
indebtedness of $677.6 million, of which $152.5 million matures prior to the end
of the third quarter of 2005 and $31.0 million represents borrowings outstanding
under the Senior Secured Revolving Credit Facility. The Company anticipates
funding these obligations principally from its cash on hand, cash flows from
operations and/or additional borrowings under its Senior Secured Revolving
Credit Facility.
NOTE 5. WARRANTY CLAIMS
The Company provides certain limited warranties covering most of its
residential roofing products for periods generally ranging from 20 to 40 years,
with lifetime limited warranties on certain specialty shingle products. The
Company also offers certain limited warranties of varying duration covering most
of its commercial roofing products. Most of the Company's specialty building
products and accessories provide limited warranties for periods generally
ranging from 5 to 10 years, with lifetime limited warranties on certain
products.
The reserve for product warranty claims consists of the following for
the third quarter and nine month periods ended September 28, 2003 and October 3,
2004, respectively:
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 5. WARRANTY CLAIMS - (CONTINUED)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------- ---------------------
SEPT. 28, OCT. 3, SEPT. 28, OCT. 3,
2003 2004 2003 2004
--------- --------- --------- ---------
(THOUSANDS)
Beginning balance................... $ 32,266 $ 31,436 $ 33,287 $ 31,972
Charged to cost of products sold.... 5,968 6,116 15,519 17,155
Payments/deductions................. (6,198) (5,938) (16,770) (17,513)
--------- --------- --------- ---------
Ending balance...................... $ 32,036 $ 31,614 $ 32,036 $ 31,614
========= ========= ========= =========
NOTE 6. BENEFIT PLANS
In December 2003, the FASB issued a revision to Statement of
Financial Accounting Standards ("SFAS") No. 132, "Employer's Disclosures About
Pensions and Other Postretirement Benefits," ("SFAS No. 132") which revises
employers' disclosures about pension plans and other postretirement benefit
plans. The revised SFAS No. 132 requires disclosures in addition to those in the
original SFAS No. 132 related to the assets, obligations, cash flows and net
periodic benefit cost of defined pension plans and other defined benefit
postretirement plans, including interim disclosures regarding components of net
periodic benefit costs recognized during interim periods. The Company adopted
the interim disclosure provisions of SFAS No. 132 effective for the quarterly
period beginning January 1, 2004.
Defined Benefit Plans
The Company provides non-contributory defined benefit retirement
plans for certain hourly and salaried employees (the "Retirement Plans").
Benefits under these plans are based on stated amounts for each year of service.
The Company's funding policy is consistent with the minimum funding requirements
of the Employee Retirement Income Security Act of 1974.
The Company's net periodic pension cost for the Retirement Plans
included the following components for the third quarter and nine month periods
ended September 28, 2003 and October 3, 2004, respectively:
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS - (CONTINUED)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------- ---------------------
SEPT. 28, OCT. 3, SEPT. 28, OCT. 3,
2003 2004 2003 2004
--------- --------- --------- ---------
(THOUSANDS)
Service cost.................................................. $ 300 $ 349 $ 899 $ 1,047
Interest cost................................................. 452 484 1,356 1,452
Expected return on plan assets................................ (638) (672) (1,913) (2,015)
Amortization of unrecognized
prior service cost.......................................... 9 9 27 27
Amortization of net losses from
earlier periods............................................. 48 73 144 218
--------- --------- --------- ---------
Net periodic pension cost..................................... $ 171 $ 243 $ 513 $ 729
========= ========= ========= =========
At October 3, 2004, the Company does not expect to make any pension
contribution to the Retirement Plans in 2004, which is consistent with its
expectations at December 31, 2003.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997.
Net periodic postretirement benefit cost included the following
components for the third quarter and nine month periods ended September 28, 2003
and October 3, 2004, respectively:
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------- ---------------------
SEPT. 28, OCT. 3, SEPT. 28, OCT. 3,
2003 2004 2003 2004
--------- --------- --------- ---------
(THOUSANDS)
Service cost.................................................. $ 30 $ 35 $ 92 $ 106
Interest cost................................................. 77 76 230 228
Amortization of unrecognized
prior service cost.......................................... (24) (24) (71) (71)
Amortization of net gains
from earlier periods........................................ (65) (59) (195) (177)
--------- --------- --------- ---------
Net periodic postretirement
benefit cost................................................ $ 18 $ 28 $ 56 $ 86
========= ========= ========= =========
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS - (CONTINUED)
At October 3, 2004, the Company expects to make aggregate benefit
claim payments of approximately $0.3 million in 2004, which are related to
postretirement medical and life insurance expenses. This is consistent with the
Company's expectations at December 31, 2003.
NOTE 7. LONG-TERM INCENTIVE PLAN
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"), an
amendment of FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 148 provides alternative methods of transition for
any entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. It also amends the disclosure provisions
of SFAS No. 123 to require prominent disclosures about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. SFAS No. 148 also amends Accounting
Principles Board Opinion No. 28 "Interim Financial Reporting" ("APB No. 28"), to
require disclosures about those effects in interim financial information
beginning with the Company's first quarter ended March 30, 2003. The Company has
adopted the additional interim disclosure provisions of SFAS No. 148 as it
relates to its 2001 Long-Term Incentive Plan. Compensation expense for the
Company's incentive units was $0.8 and $1.7 million for the third quarter ended
September 28, 2003 and October 3, 2004, respectively, and $2.3 and $5.0 million
for the nine month period ended September 28, 2003 and October 3, 2004,
respectively. The Company's pro forma net income under SFAS No. 123 would have
been the same as actual net income.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company makes loans to and borrows from its parent corporations
from time to time at prevailing market rates. At October 3, 2004, BMCA Holdings
Corporation owed the Company $55.7 million, including interest of $0.4 million,
and the Company owed BMCA Holdings Corporation $52.8 million. Interest income on
the Company's loans to BMCA Holdings Corporation amounted to $0.7 and $2.1
million during the third quarter and nine month periods ended October 3, 2004,
respectively. Interest expense on the Company's loans from BMCA Holdings
Corporation amounted to $0.7 and $2.0 million during the third quarter and nine
month periods ended October 3, 2004, respectively. Loans payable to/receivable
from the Company's parent corporations are due on demand and provide each party
with the right to offset of its related obligation to the other party and are
subject to limitations outlined in the Company's Senior Secured Revolving Credit
Facility and its Senior Notes.
On February 25, 2004 and April 21, 2004, the Company declared and
paid cash dividends of $5.0 million and $5.0 million, respectively, to its
parent corporation.
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS - (CONTINUED)
On June 15, 2004 and September 15, 2004, the Company paid $6.4 and
$9.6 million, respectively, in federal income tax payments to its parent
corporation pursuant to a tax sharing agreement. These amounts have been
included in the "Change in net receivable from/payable to related parties/parent
corporations" in the Consolidated Statement of Cash Flows.
NOTE 9. CONTINGENCIES
Asbestos Litigation Against G-I Holdings
In connection with its formation, the Company contractually assumed
and agreed to pay the first $204.4 million of liabilities for asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber ("Asbestos
Claims") of its parent, G-I Holdings. As of March 30, 1997, the Company paid all
of its assumed asbestos-related liabilities. In January 2001, G-I Holdings filed
a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code due to Asbestos Claims. This proceeding remains pending.
Claimants in the G-I Holdings' bankruptcy, including judgment
creditors, might seek to satisfy their claims by asking the bankruptcy court to
require the sale of G-I Holdings' assets, including its holdings of BMCA
Holdings Corporation's common stock and its indirect holdings of the Company's
common stock. Such action could result in a change of control of the Company. In
addition, those creditors may seek to file Asbestos Claims against the Company
(with approximately 1,900 alleged Asbestos Claims having been filed against the
Company as of October 3, 2004). The Company believes that it will not sustain
any liability in connection with these or any other asbestos-related claims. On
February 2, 2001, the United States Bankruptcy Court for the District of New
Jersey issued a temporary restraining order enjoining any existing or future
claimant from bringing or prosecuting an Asbestos Claim against the Company. By
oral opinion, on June 22, 2001, and written order entered February 22, 2002, the
court converted the temporary restraints into a preliminary injunction,
prohibiting the bringing or prosecution of any such Asbestos Claim against the
Company. On February 7, 2001, G-I Holdings filed an action in the United States
Bankruptcy Court for the District of New Jersey seeking a declaratory judgment
that BMCA has no successor liability for Asbestos Claims against G-I Holdings
and that it is not the alter ego of G-I Holdings (the "BMCA Action"). On May 13,
2003 the United States District Court for the District of New Jersey overseeing
the G-I Holdings' Bankruptcy Court withdrew the reference of the BMCA Action
from the Bankruptcy Court, and this matter will be heard by the District Court
directly. The BMCA Action is in a pretrial discovery stage and no trial date has
been set by the court. As a result, it is not possible to predict the outcome of
this litigation although the Company believes its claims are meritorious. While
the Company cannot predict whether any additional Asbestos Claims will be
asserted against it or its assets, or the outcome of any litigation relating to
those claims, the Company believes that it has meritorious defenses to any claim
that it has asbestos-related liability, although there can be no assurances in
this regard.
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
On or about February 8, 2001, a creditors' committee established in
G-I Holdings' bankruptcy case filed a complaint in the United States Bankruptcy
Court, District of New Jersey against G-I Holdings and the Company. The
complaint requests substantive consolidation of the Company with G-I Holdings or
an order directing G-I Holdings to cause the Company to file for bankruptcy
protection. The Company and G-I Holdings intend to vigorously defend the
lawsuit. The plaintiffs also filed for interim relief absent the granting of
their requested relief described above. On March 21, 2001, the bankruptcy court
denied plaintiffs' application for interim relief. In November 2002, the
creditors' committee, joined in by the legal representative of future demand
holders, filed a motion for appointment of a trustee in the G-I Holdings'
bankruptcy. In December 2002, the bankruptcy court denied the motion. The
creditors' committee appealed the ruling to the United States District Court,
which denied the appeal on June 27, 2003. The creditors' committee appealed the
denial to the Third Circuit Court of Appeals, which denied the appeal on
September 24, 2004. The creditors' committee filed a petition with the Third
Circuit Court of Appeals for a rehearing of its denial of the creditors'
committee's appeal, which was denied by the Court on October 26, 2004.
On February 27, 2004, the creditors' committee, joined in by the
legal representative, filed a motion to modify the preliminary injunction and to
seek authority by the bankruptcy court to avoid, on various grounds, certain
liens granted in connection with the financing obtained by the Company in
December, 2000. G-I Holdings and the Company opposed the motion and a hearing on
the motion was held by the bankruptcy court on March 29, 2004. By opinion dated
June 8, 2004 the court granted the motion in part and denied it in part.
On July 7, 2004, the creditors' committee in the G-I Holdings'
bankruptcy case filed a claim challenging as a fraudulent conveyance the
transactions entered into in connection with the Company's formation in 1994
(the "1994 transaction"), in which G-I Holdings caused to be transferred to the
Company all of its roofing business and assets and in which the Company assumed
certain liabilities relating to those assets, as well as a specified amount of
asbestos liabilities. In addition, on July 7, 2004, the creditors' committee
filed a claim against holders of BMCA's bank and bond debt outstanding in 2000
seeking to avoid liens granted to them, based on the committee's theory that the
1994 transaction was a fraudulent conveyance. On August 3, 2004, the creditors'
committee filed an amended complaint adding the names of additional alleged
bondholders.
On July 20, 2004, the creditors' committee appealed the court's
decision, issued on June 8, 2004, seeking the authority to file a lawsuit
against the banks and bondholders discussed above, challenging the liens granted
to them in 2000 as a fraudulent conveyance and are appealing, among other
things, certain adverse rulings on statute of limitation issues. This appeal
remains pending before the District Court.
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
On August 3, 2004, the creditors' committee filed a motion with the
bankruptcy court seeking to impose certain conditions on the redemption of the
2006 Notes, or in the alternative, temporarily enjoin the Company from
satisfying such redemption. On August 5, 2004, the bankruptcy court, having
previously ruled on June 8, 2004, that the redemption could proceed without
restriction, refused to impose any conditions on the redemption or to enjoin, on
a preliminary basis, the Company from repaying the 2006 Notes pursuant to the
July 26, 2004 call notice, or from purchasing any of its Senior Notes on the
open market. The committee subsequently withdrew its motion as being moot, and
the redemption of the 2006 Notes concluded on August 26, 2004.
For a further discussion with respect to the history of the foregoing
litigation and asbestos-related matters, see Notes 5, 12, 17 and 18 to
consolidated financial statements contained in the Company's 2003 Form 10-K.
Environmental Litigation
The Company, together with other companies, is a party to a variety
of proceedings and lawsuits involving environmental matters under the
Comprehensive Environmental Response Compensation and Liability Act, and similar
state laws, in which recovery is sought for the cost of cleanup of contaminated
sites or remedial obligations are imposed, a number of which are in the early
stages or have been dormant for protracted periods. The Company refers to these
proceedings and lawsuits as "Environmental Claims." At most sites, the Company
anticipates that liability will be apportioned among the companies found to be
responsible for the presence of hazardous substances at the site. The Company
believes that the ultimate disposition of such matters will not, individually or
in the aggregate, have a material adverse effect on the liquidity, financial
position or results of operations of the Company.
Other Litigation
On or about February 17, 2004, litigation was commenced against the
Company in the United States District Court for the Eastern district of
Pennsylvania by CertainTeed Corporation alleging patent infringement in
connection with certain of its products representing less than 5% of its net
sales. The Company intends to defend itself vigorously in this matter, has
denied CertainTeed's claims and has filed counterclaims against CertainTeed for
patent infringement, violations of the antitrust laws and for trade libel.
Although this matter is in pretrial proceedings and there can be no assurances
made, the Company believes that CertainTeed's claims are without merit and will
not have a material adverse effect on the Company.
For a further discussion with respect to the history of environmental
matters and other litigation, reference is made to Notes 2 and 18 to
consolidated financial statements contained in the Company's 2003 Form 10-K.
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
Tax Claim Against G-I Holdings
The Company and certain of its subsidiaries were members of the
consolidated group (the "G-I Holdings Group") for federal income tax purposes
that included G-I Holdings in certain prior years and, accordingly, would be
severally liable for any tax liability of the G-I Holdings Group in respect of
those prior years.
On September 15, 1997, G-I Holdings received a notice from the
Internal Revenue Service (the "IRS") of a deficiency in the amount of $84.4
million (after taking into account the use of net operating losses and foreign
tax credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in this tax matter arising out of the surfactants partnership, although
there can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. On September 21, 2001,
the IRS filed a proof of claim with respect to such deficiency against G-I
Holdings in the G-I Holdings' bankruptcy. If such proof of claim is sustained,
the Company and/or certain of the Company's subsidiaries together with G-I
Holdings and several current and former subsidiaries of G-I Holdings would be
severally liable for a portion of those taxes and interest. G-I Holdings has
filed an objection to the proof of claim. If the IRS were to prevail for the
years in which the Company and/or certain of its subsidiaries were part of the
G-I Holdings Group, the Company would be severally liable for approximately
$40.0 million in taxes plus interest, although this calculation is subject to
uncertainty depending upon various factors including G-I Holdings' ability to
satisfy its tax liabilities and the application of tax credits and deductions.
NOTE 10. SUBSEQUENT EVENTS
Senior Note Offerings
On October 7, 2004, under the terms and conditions of the 2014 Notes,
the Company filed a registration statement with the Securities and Exchange
Commission on Form S-4 to register the 2014 Notes.
On November 5, 2004, the Company further amended its Senior Secured
Revolving Credit Facility to allow for the issuance of an additional $50.0
million of 2014 Notes.
On November 10, 2004, the Company issued an additional $50.0 million in
aggregate principal amount of its 2014 Notes. The additional 2014 Notes were
issued under an indenture dated July 26, 2004, pursuant to which the Company
previously issued its original $200.0 million of 7 3/4% Senior Notes due 2014.
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 10. SUBSEQUENT EVENTS - (CONTINUED)
These additional 2014 Notes rank equally with and formed a part of a single
series with such original 2014 Notes and have the same terms and conditions.
The net proceeds from the issuance of the additional 2014 Notes, after deducting
the offering expenses and including the addition of the applicable premium were
approximately $50.6 million. The Company will use the net proceeds from the
additional 2014 Notes to reduce amounts outstanding under its Senior Secured
Revolving Credit Facility. The premium of approximately $0.9 million will be
included in long-term debt and will be amortized over the life of the 2014
Notes.
NOTE 11. GUARANTOR FINANCIAL INFORMATION
At October 3, 2004, all of the Company's subsidiaries are guarantors
under the Company's $350.0 million Senior Secured Revolving Credit Facility and
its Senior Notes. These guarantees are full, unconditional and joint and
several. In addition, Building Materials Manufacturing Corporation ("BMMC"), a
wholly-owned subsidiary of the Company, is a co-obligor on the 8% Senior Notes
due 2007.
The Company and BMMC entered into license agreements, effective
January 1, 1999, for the right to use intellectual property, including patents,
trademarks, know-how, and franchise rights owned by Building Materials
Investment Corporation, a wholly-owned subsidiary of the Company, for a license
fee stated as a percentage of net sales. The license agreements are for a period
of one year and are subject to automatic renewal unless either party terminates
with 60 days written notice. Also, effective January 1, 1999, BMMC sells all
finished goods to the Company at a manufacturing profit.
Presented below is condensed consolidating financial information for
the Company, the guarantor subsidiaries and the non-guarantor subsidiary. This
financial information should be read in conjunction with the consolidated
financial statements and other notes related thereto. Separate financial
statements for the Company, the guarantor subsidiaries and the non-guarantor
subsidiary is not included herein, because management has determined that these
financial statements are not material to investors.
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED SEPTEMBER 28, 2003
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
Net sales............................................... $ 430,085 $ 29,802 $ - $ 459,887
Intercompany net sales.................................. 22,197 306,580 (328,777) -
---------- --------- ---------- ----------
Total net sales....................................... 452,282 336,382 (328,777) 459,887
---------- --------- ---------- ----------
Costs and expenses, net:
Cost of products sold................................. 348,161 299,516 (328,777) 318,900
Selling, general and administrative................... 72,365 18,950 - 91,315
Transition service agreement (income) expense......... 25 (25) - -
---------- --------- ---------- ----------
Total costs and expenses, net......................... 420,551 318,441 (328,777) 410,215
---------- --------- ---------- ----------
Operating income........................................ 31,731 17,941 - 49,672
Equity in earnings of subsidiaries...................... 21,122 - (21,122) -
Intercompany licensing income (expense), net............ (18,092) 18,092 - -
Interest expense........................................ (12,172) (3,069) - (15,241)
Other income (expense), net............................. (776) 39 - (737)
---------- --------- ---------- ----------
Income before income taxes.............................. 21,813 33,003 (21,122) 33,694
Income tax expense...................................... (249) (11,881) - (12,130)
---------- --------- ---------- ----------
Net income.............................................. $ 21,564 $ 21,122 $ (21,122) $ 21,564
========== ========= ========== ==========
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THIRD QUARTER ENDED OCTOBER 3, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
Net sales............................................... $ 439,131 $ 29,607 $ - $ 468,738
Intercompany net sales.................................. 4,256 318,889 (323,145) -
---------- --------- ---------- ----------
Total net sales....................................... 443,387 348,496 (323,145) 468,738
---------- --------- ---------- ----------
Costs and expenses, net:
Cost of products sold................................. 333,074 309,522 (323,145) 319,451
Selling, general and administrative................... 79,118 22,787 - 101,905
Transition service agreement (income) expense......... 25 (25) - -
---------- --------- ---------- ----------
Total costs and expenses, net......................... 412,217 332,284 (323,145) 421,356
---------- --------- ---------- ----------
Operating income........................................ 31,170 16,212 - 47,382
Equity in earnings of subsidiaries...................... 19,416 - (19,416) -
Intercompany licensing income (expense), net............ (17,735) 17,735 - -
Interest expense........................................ (15,116) (3,121) - (18,237)
Other income (expense), net............................. (2,086) 115 - (1,971)
---------- --------- ---------- ----------
Income before income taxes.............................. 15,649 30,941 (19,416) 27,174
Income tax (expense) benefit............................ 1,403 (11,525) - (10,122)
---------- --------- ---------- ----------
Net income.............................................. $ 17,052 $ 19,416 $ (19,416) $ 17,052
========== ========= ========== ==========
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 28, 2003
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
Net sales............................................... $ 1,122,975 $ 86,167 $ - $ 1,209,142
Intercompany net sales.................................. 62,140 818,487 (880,627) -
------------ ------------ ------------ ------------
Total net sales....................................... 1,185,115 904,654 (880,627) 1,209,142
------------ ------------ ------------ ------------
Costs and expenses, net:
Cost of products sold................................. 929,183 801,074 (880,627) 849,630
Selling, general and administrative................... 192,167 54,688 - 246,855
Gain on sale of assets................................ - (5,739) - (5,739)
Transition service agreement (income) expense......... 75 (75) - -
------------ ------------ ------------ ------------
Total costs and expenses, net......................... 1,121,425 849,948 (880,627) 1,090,746
------------ ------------ ------------ ------------
Operating income........................................ 63,690 54,706 - 118,396
Equity in earnings of subsidiaries...................... 59,089 - (59,089) -
Intercompany licensing income (expense), net............ (47,405) 47,405 - -
Interest expense........................................ (32,505) (10,035) - (42,540)
Other income (expense), net............................. (5,264) 250 - (5,014)
------------ ------------ ------------ ------------
Income before income taxes.............................. 37,605 92,326 (59,089) 70,842
Income tax (expense) benefit............................ 7,734 (33,237) - (25,503)
------------ ------------ ------------ ------------
Net income.............................................. $ 45,339 $ 59,089 $ (59,089) $ 45,339
============ ============ ============ ============
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED OCTOBER 3, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Net sales............................................. $ 1,224,854 $ 87,415 $ - $ 1,312,269
Intercompany net sales................................ 44,546 893,772 (938,318) -
------------ ------------ ------------ ------------
Total net sales..................................... 1,269,400 981,187 (938,318) 1,312,269
------------ ------------ ------------ ------------
Costs and expenses, net:
Cost of products sold............................... 971,261 867,222 (938,318) 900,165
Selling, general and administrative................. 221,673 64,868 - 286,541
Transition service agreement (income) expense....... 75 (75) - -
------------ ------------ ------------ ------------
Total costs and expenses, net....................... 1,193,009 932,015 (938,318) 1,186,706
------------ ------------ ------------ ------------
Operating income...................................... 76,391 49,172 - 125,563
Equity in earnings of subsidiaries.................... 57,183 - (57,183) -
Intercompany licensing income (expense), net.......... (50,776) 50,776 - -
Interest expense...................................... (37,901) (9,016) - (46,917)
Other income (expense), net........................... (4,727) 196 - (4,531)
------------ ------------ ------------ ------------
Income before income taxes............................ 40,170 91,128 (57,183) 74,115
Income tax (expense) benefit.......................... 6,337 (33,945) - (27,608)
------------ ------------ ------------ ------------
Net income............................................ $ 46,507 $ 57,183 $ (57,183) $ 46,507
============ ============ ============ ============
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 8 $ 2,872 $ - $ 2,880
Accounts receivable, trade, net......................... 173,945 14,286 - 188,231
Accounts receivable, other.............................. 5,115 749 - 5,864
Tax receivable from parent corporation.................. 7,044 - - 7,044
Inventories, net........................................ 87,399 48,561 - 135,960
Other current assets.................................... 2,434 2,568 - 5,002
------------ ------------ ------------ ------------
Total Current Assets.................................. 275,945 69,036 - 344,981
Investment in subsidiaries................................ 476,695 - (476,695) -
Intercompany loans including accrued
interest................................................ 30,582 (30,582) - -
Due from/(to) subsidiaries, net........................... (335,690) 335,690 - -
Property, plant and equipment, net........................ 40,769 301,447 - 342,216
Goodwill, net............................................. 40,080 23,214 - 63,294
Other noncurrent assets................................... 13,126 18,863 - 31,989
------------ ------------ ------------ ------------
Total Assets.............................................. $ 541,507 $ 717,668 $ (476,695) $ 782,480
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt.................... $ - $ 2,504 $ - $ 2,504
Accounts payable........................................ 43,331 49,518 - 92,849
Payable to related parties.............................. 1,969 7,105 - 9,074
Loans payable to parent corporation..................... 52,840 - - 52,840
Accrued liabilities..................................... 23,511 39,585 - 63,096
Reserve for product warranty claims..................... 14,900 - - 14,900
------------ ------------ ------------ ------------
Total Current Liabilities............................. 136,551 98,712 - 235,263
Long-term debt less current maturities.................... 404,297 141,396 - 545,693
Reserve for product warranty claims....................... 16,407 665 - 17,072
Deferred income tax liabilities........................... 3,308 - - 3,308
Other liabilities......................................... 23,012 200 - 23,212
------------ ------------ ------------ ------------
Total Liabilities......................................... 583,575 240,973 - 824,548
Total Stockholders' Equity (Deficit)...................... (42,068) 476,695 (476,695) (42,068)
------------ ------------ ------------ ------------
Total Liabilities and Stockholders'
Equity (Deficit) .................................... $ 541,507 $ 717,668 $ (476,695) $ 782,480
============ ============ ============ ============
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 3, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 12 $ 10,868 $ - $ 10,880
Accounts receivable, trade, net....................... 304,285 20,547 - 324,832
Accounts receivable, other............................ 2,410 484 - 2,894
Tax receivable from parent corporation................ 2,018 - - 2,018
Inventories, net...................................... 114,710 69,802 - 184,512
Other current assets.................................. 2,939 4,160 - 7,099
------------ ------------ ------------ ------------
Total Current Assets................................ 426,374 105,861 - 532,235
Investment in subsidiaries.............................. 538,878 - (538,878) -
Intercompany loans including accrued
interest.............................................. 49,731 (49,731) - -
Due from/(to) subsidiaries, net......................... (400,140) 400,140 - -
Property, plant and equipment, net...................... 41,955 320,463 - 362,418
Goodwill, net........................................... 40,080 23,214 - 63,294
Other noncurrent assets................................. 13,555 19,017 - 32,572
------------ ------------ ------------ ------------
Total Assets............................................ $ 710,433 $ 818,964 $ (538,878) $ 990,519
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt.................. $ 149,926 $ 2,530 $ - $ 152,456
Accounts payable...................................... 32,584 76,194 - 108,778
Payable to related parties............................ 2,061 10,794 - 12,855
Loans payable to parent corporation................... 52,840 - - 52,840
Accrued liabilities................................... 30,436 50,099 - 80,535
Reserve for product warranty claims................... 14,900 - - 14,900
------------ ------------ ------------ ------------
Total Current Liabilities........................... 282,747 139,617 - 422,364
Long-term debt less current maturities.................. 385,649 139,478 - 525,127
Reserve for product warranty claims..................... 15,916 798 - 16,714
Deferred income tax liabilities......................... 9,077 - - 9,077
Other liabilities....................................... 22,937 193 - 23,130
------------ ------------ ------------ ------------
Total Liabilities....................................... 716,326 280,086 - 996,412
Total Stockholders' Equity (Deficit).................... (5,893) 538,878 (538,878) (5,893)
------------ ------------ ------------ ------------
Total Liabilities and Stockholders'
Equity (Deficit)................................... $ 710,433 $ 818,964 $ (538,878) $ 990,519
============ ============ ============ ============
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 28, 2003
(THOUSANDS)
(UNAUDITED)
Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiary Consolidated
------------ ------------ ------------ ------------
Cash and cash equivalents, beginning of period....... $ 60 $ 96,113 $ - $ 96,173
------------ ------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income (loss).................................. (13,750) 59,089 - 45,339
Adjustments to reconcile net income(loss)to net
cash provided by (used in) operating activities:
Gain on sale of assets......................... - (5,739) - (5,739)
Depreciation................................... 2,003 27,177 - 29,180
Amortization................................... - 1,534 - 1,534
Deferred income taxes.......................... 24,957 - - 24,957
Noncash interest charges, net.................. 2,939 1,067 - 4,006
(Increase) decrease in working capital items....... (158,941) (636) 34,785 (124,792)
Increase (decrease) in long-term reserve for
product warranty claims........................... (1,346) 95 - (1,251)
Repayments from repurchase of accounts receivable.. (105,388) - - (105,388)
(Increase) decrease in other assets................ (557) (322) - (879)
Increase (decrease) in other liabilities........... 1,133 (5) - 1,128
Change in net receivable from/payable to
related parties/parent corporations............... 173,378 (138,533) (34,785) 60
Other, net......................................... (36) 454 - 418
------------ ------------ ------------ ------------
Net cash used in operating activities................ (75,608) (55,819) - (131,427)
------------ ------------ ------------ ------------
Cash provided by (used in) investing activities:
Capital expenditures............................... (4,438) (18,869) - (23,307)
Proceeds from sale of assets....................... - 9,315 - 9,315
------------ ------------ ------------ ------------
Net cash used in investing activities................ (4,438) (9,554) - (13,992)
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities:
Proceeds from loan payable to parent corporation... 38,351 - - 38,351
Proceeds from issuance of long-term debt........... 307,676 19,731 - 327,407
Repayments of long-term debt....................... (218,677) (28,022) - (246,699)
Distributions to parent corporations............... (15) - - (15)
Loans to parent corporation........................ (38,426) - - (38,426)
Financing fees and expenses........................ (8,910) (205) - (9,115)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities.. 79,999 (8,496) - 71,503
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents............ (47) (73,869) - (73,916)
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period............. $ 13 $ 22,244 $ - $ 22,257
============ ============ ============ ============
24
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 3, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Consolidated
------------ ------------ -------------
Cash and cash equivalents, beginning of period.......................... $ 8 $ 2,872 $ 2,880
------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income (loss)..................................................... (10,676) 57,183 46,507
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation..................................................... 2,648 29,455 32,103
Amortization..................................................... - 1,694 1,694
Deferred income taxes............................................ 26,758 - 26,758
Noncash interest charges, net.................................... 3,944 1,068 5,012
(Increase) decrease in working capital items.......................... (159,273) 8,546 (150,727)
Increase (decrease) in long-term reserve for
product warranty claims.............................................. (491) 133 (358)
(Increase) decrease in other assets................................... 242 (2,662) (2,420)
Decrease in other liabilities......................................... (44) (7) (51)
Change in net receivable from/payable to
related parties/parent corporations.................................. 47,615 (59,797) (12,182)
Other, net............................................................ (121) 202 81
------------ ------------ ------------
Net cash provided by (used in) investing activities..................... (89,398) 35,815 (53,583)
------------ ------------ ------------
Cash provided by (used in) financing activities:
Capital expenditures.................................................. (3,713) (25,673) (29,386)
Acquisition of manufacturing facility................................. (23,185) - (23,185)
------------ ------------ ------------
Net cash used in investing activities................................... (26,898) (25,673) (52,571)
------------ ------------ ------------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt.............................. 682,465 - 682,465
Repayments of long-term debt.......................................... (551,465) (2,146) (553,611)
Distributions to parent corporation................................... (260) - (260)
Dividends to parent corporation....................................... (10,000) - (10,000)
Loan to parent corporation............................................ (72) - (72)
Financing fees and expenses........................................... (4,368) - (4,368)
------------ ------------ ------------
Net cash provided by (used in) financing activities..................... 116,300 (2,146) 114,154
------------ ------------ ------------
Net change in cash and cash equivalents................................. 4 7,996 8,000
------------ ------------ ------------
Cash and cash equivalents, end of period................................ $ 12 $ 10,868 $ 10,880
============ ============ ============
25
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us" and "our" refer
to Building Materials Corporation of America and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to our Critical Accounting
Policies during the nine month period ended October 3, 2004. For a further
discussion on our Critical Accounting Policies, reference is made to
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Critical Accounting Policies" in our annual report on Form 10-K for
the fiscal year ended December 31, 2003, which we refer to as the 2003 Form
10-K.
RESULTS OF OPERATIONS
Roofing product sales is our dominant business, typically accounting
for approximately 95% of our consolidated net sales. The main drivers of our
roofing business include: the nation's aging housing stock; existing home sales;
new home construction; larger new homes; increased home ownership rates; and
severe weather and energy concerns. Our roofing business is also affected by raw
material costs, including asphalt, energy, and transportation and distribution
costs.
Third Quarter 2004 Compared With Third Quarter 2003
We recorded net income in the third quarter of 2004 of $17.1 million
compared to net income of $21.6 million in the third quarter of 2003. The
decrease in third quarter of 2004 net income was primarily attributable to lower
operating income together with higher interest expense and higher other
expenses.
Net sales for the third quarter of 2004 were $468.7 million, an
increase of $8.8 million over third quarter of 2003 net sales of $459.9 million,
with the increase primarily due to higher average selling prices of premium
residential and commercial roofing products together with higher unit volumes of
commercial roofing products.
Operating income in the third quarter of 2004 was $47.4 million
compared to $49.7 million in the third quarter of 2003. Operating results in the
third quarter of 2004 were lower primarily due to higher raw material costs,
including asphalt, and higher selling, general and administrative expenses
primarily resulting from higher transportation costs, principally due to a rise
in fuel costs. These higher operating costs were partially offset by higher
selling prices during the quarter through a price increase late in the third
quarter of 2004.
26
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Interest expense for the third quarter of 2004 increased to $18.2
million from $15.2 million for the same period in 2003. The increase in interest
expense for the third quarter of 2004 is primarily due to the issuance, in July
2004, of $200 million 7 3/4% Senior Notes due 2014, which we refer to as the
2014 Notes, partially offset by the redemption of the Company's $100 million
8 5/8% Senior Notes due 2006, which we refer to as the 2006 Notes, and a
reduction in the amount outstanding under the Company's $350 million Senior
Secured Revolving Credit Facility, which we refer to as the Senior Secured
Revolving Credit Facility. In connection with entering into this financing
transaction, the Company recorded additional interest expense of approximately
$2.2 million representing the write-off of deferred financing costs associated
with the 2006 Notes, the premium paid to exercise the call of the 2006 Notes and
other interest related expenses. Other expense net, was $2.0 million for the
third quarter of 2004 compared with $0.7 million for the same period in 2003.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the third quarter of
2004 increased to $448.4 million from $439.6 million for the third quarter of
2003, representing an increase of $8.8 million or 2.0%. The increase in net
sales of roofing products was primarily attributable to higher average selling
prices. Roofing product net sales were favorably impacted by an increase in net
sales of premium laminate shingles primarily due to higher average selling
prices. Net sales of specialty building products and accessories remained
constant at $20.3 million for the third quarter of 2004 compared to the same
period in 2003.
Gross Margin. Our overall gross margin increased from $141.0 million
or 30.7% for the third quarter of 2003 to $149.3 million or 31.9% for the third
quarter of 2004. The increase in our gross margin percentage is primarily
attributable to an increase in net sales due to an improved sales mix and higher
average selling prices, partially offset by higher raw material costs.
Operating Income. Operating income for the third quarter ended
October 3, 2004 decreased to $47.4 million or 10.1% of net sales, compared to
$49.7 million or 10.8% of net sales for the same period of 2003. The overall
decrease in operating income for the third quarter ended October 3, 2004 is
primarily attributable to higher raw material costs, including asphalt, and
higher selling, general and administrative expenses resulting from higher
transportation costs due to a rise in fuel prices. The higher raw material and
transportation costs were partially offset by higher average selling prices.
27
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Nine Months 2004 Compared With Nine Months 2003
We recorded net income of $46.5 million compared with net income of
$45.3 million for the first nine months of 2003. The net income for the first
nine months of 2003 included a $3.7 million ($5.7 million pre-tax) after-tax
gain from the sale of property in Ontario, California. The increase in the first
nine months of 2004 net income was attributable to higher operating income
together with slightly lower other expenses, partially offset by higher interest
expense.
Net sales for the first nine months of 2004 were $1,312.3 million, an
8.5% increase over the first nine months of 2003 net sales of $1,209.1 million,
with the increase primarily due to higher unit volumes and higher average
selling prices of residential and commercial roofing products.
Operating income for the first nine months of 2004 was $125.6 million
compared to $118.4 million for the first nine months of 2003, which included the
$5.7 million pre-tax gain on sale of property in Ontario, California. Higher
operating results for the first nine months of 2004 were positively affected by
higher net sales primarily resulting from higher unit volumes and higher average
selling prices. Partially offsetting these improvements were higher raw material
costs, including asphalt, and higher selling, general and administrative
expenses due to higher volume related distribution and selling costs, and higher
transportation costs, principally due to a rise in fuel costs.
Interest expense for the first nine months of 2004 increased to $46.9
million from $42.5 million for the same period in 2003, primarily due to higher
average borrowings due to the issuance, in July 2004, of the 2014 Notes,
partially offset by the redemption of the 2006 Notes and a reduction in the
amount outstanding under the Senior Secured Revolving Credit Facility. In
connection with entering into this financing transaction, the Company recorded
additional interest expense of approximately $2.2 million representing the
write-off of deferred financing costs associated with the 2006 Notes, the
premium paid to exercise the call of the 2006 Notes and other interest related
expenses. Partially offsetting the higher average borrowings was a lower average
interest rate. Other expense net, was $4.5 million for the first nine months of
2004 compared with $5.0 million for the same period in 2003.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first nine months of
2004 increased to $1,252.0 million from $1,152.5 million for the first nine
months of 2003, representing an increase of $99.5 million or 8.6%. The increase
in net sales of roofing products was primarily attributable to higher unit
volumes and, to a lesser extent, higher average selling prices. Roofing product
net sales were favorably impacted by an increase in net sales of
28
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
premium laminate shingles primarily due to higher unit volumes and higher
average selling prices. Net sales of specialty building products and accessories
increased by $3.7 million or 6.5% for the first nine months of 2004 to $60.3
million compared to $56.6 million in the same period in 2003.
Gross Margin. Our overall gross margin increased from $359.5 million or
29.7% for the first nine months of 2003 to $412.1 million or 31.4% for the first
nine months of 2004. The increase in our gross margin percentage is primarily
attributable to an increase in net sales due to an improved sales mix and higher
average selling prices, partially offset by slightly higher manufacturing costs.
Operating Income. Operating income for the nine months ended October 3,
2004 increased to $125.6 million or 9.6% of net sales, compared to $118.4
million or 9.8% of net sales for the same period of 2003. Operating income in
the first nine months of 2003 includes a $5.7 million pre-tax gain on the sale
of property in Ontario, California. The overall increase in operating income for
the nine months ended October 3, 2004 is primarily attributable to higher net
sales of roofing products driven by higher unit volumes and higher average
selling prices, partially offset by higher raw material costs and higher
selling, general and administrative expenses due to higher volume related
distribution and selling costs and higher transportation costs due to a rise in
fuel prices.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
Sales of roofing products and specialty building products and
accessories in the northern regions of the United States generally decline in
the late fall and winter months due to cold weather. In addition, adverse
weather conditions can result in higher customer demand during our peak
operating season depending on the extent and severity of the damage from these
severe weather conditions. Due to the seasonal demands of our business together
with extreme weather conditions, we generally have negative cash flows from
operations during the first six months of our fiscal year. Our negative cash
flows from operations are primarily driven by our cash invested in both accounts
receivable and inventories to meet these seasonal operating demands. Generally,
in the third quarter of our fiscal year, our cash flows from operations become
positive for the quarter, as our investment in inventories and accounts
receivable no longer continues to build like the first six months of our fiscal
year. Our seasonal working capital needs, together with our debt service
obligations, capital expenditure requirements and other contractual
arrangements, adversely impact our liquidity during this period. We rely on our
cash on hand and our Senior Secured Revolving Credit facility due November 2006
to support our overall cash flow requirements during these periods.
29
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Net cash outflow during the first nine months of 2004 from operating
and investing activities was $106.2 million, including the use of $53.6 million
of cash from operations, the reinvestment of $29.4 million for capital programs
and $23.2 million for the acquisition of the Quakertown, Pennsylvania
manufacturing facility (see below).
Cash invested in additional working capital totaled $150.7 million
during the first nine months of 2004, reflecting an increase in total accounts
receivable of $133.6 million, due to increased operating performance and the
seasonality of our business, a $48.4 million increase in inventories to meet our
seasonal operating demands and a $2.1 million increase in other current assets,
partially offset by a $33.4 million increase in accounts payable and accrued
liabilities. The net cash used for operating activities also included a $12.2
million net decrease in the payable to related parties/parent corporations,
primarily attributable to $16.0 million in federal income tax payments, paid
pursuant to our tax sharing agreement with our parent corporation, partially
offset by amounts due under our long-term granule supply agreement with an
affiliated company.
Net cash provided by financing activities totaled $114.2 million
during the first nine months of 2004, including $682.5 million of proceeds from
the issuance of long-term debt, of which $482.5 million related to 2004 year to
date cumulative borrowings under our Senior Secured Revolving Credit Facility
and $200.0 million related to proceeds from the issuance of our 2014 Notes.
Financing activities also included $553.6 million in repayments of long-term
debt, of which $451.4 million related to 2004 year to date cumulative repayments
under our Senior Secured Revolving Credit Facility and $100.0 million related to
the redemption of our 2006 Notes. In addition, repayments of long-term debt
included $1.9 million related to our Chester, South Carolina loan obligation,
$0.2 million related to our 10 1/2% Michigan City, Indiana Note and $0.1 million
related to our Shafter, California Industrial Development Revenue Bonds. In
addition, financing activities also included $10.0 million in dividends to our
parent corporation, $0.3 million in distributions and loans to our parent
corporation, as well as $4.4 million in financing fees and expenses. The
payments to our parent corporation are allowable under our Senior Secured
Revolving Credit Facility and our 7 3/4% Senior Notes due 2005, the 8% Senior
Notes due 2007, the 8% Senior Notes due 2008, and the 2014 Notes, which we refer
to collectively as the Senior Notes.
Long-Term Debt
In July 2003, we entered into a $350.0 million Senior Secured
Revolving Credit Facility. The initial borrowings under the Senior Secured
Revolving Credit Facility were primarily used to repay amounts outstanding under
our old $210.0 million Secured Revolving Credit Facility, to repay our $115.0
million Accounts Receivable Securitization Agreement and to repay our $7.0
million Precious Metal Note. The Senior Secured Revolving Credit Facility has a
final maturity date of November 15, 2006, subject to certain conditions, is
30
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
secured by a first priority lien on substantially all of our assets and the
assets of our subsidiaries and is guaranteed by all of our current and future
subsidiaries. Availability under the Senior Secured Revolving Credit Facility is
based upon eligible Accounts Receivable, Inventory, and Property, Plant and
Equipment (collectively the "Collateral"), as defined, in the Senior Secured
Revolving Credit Facility and includes a sub-limit for letters of credit of
$100.0 million. Advances under the Senior Secured Revolving Credit Facility bear
interest at a floating rate based, depending on the type of advance, on either
the lenders' Base Rate, the federal funds rate or the Eurodollar rate, each as
defined in the Senior Secured Revolving Credit Facility. On May 7, 2004, we
amended our Senior Secured Revolving Credit Facility, which reduced the floating
rate of interest as defined in the Senior Secured Revolving Credit Facility. On
July 12 and July 19, 2004, the Senior Secured Revolving Credit Facility was
further amended to allow for the issuance of our 2014 Notes (see below). The
Senior Secured Revolving Credit Facility requires mandatory repayments of excess
cash, as defined, on the tenth day of each month and contains a material adverse
change clause. We are also required to pay unused commitment fees associated
with the Senior Secured Revolving Credit Facility. Our Senior Secured Revolving
Credit Facility provides for optional and mandatory prepayments of borrowings
outstanding under the Senior Secured Revolving Credit Facility.
In connection with entering into the Senior Secured Revolving Credit
Facility, we entered into an Amended and Restated Security Agreement, which
grants a security interest in the Collateral in favor of the collateral agent on
behalf of the lenders under the Senior Secured Revolving Credit Facility and the
holders of our outstanding Senior Notes. We also entered into an Amended and
Restated Collateral Agent Agreement, which provides, among other things, that we
maintain a lockbox and depository control agreement for the benefit of the
secured parties and the sharing of proceeds with respect to any foreclosure or
other remedy in respect of the Collateral.
Under the terms of the Senior Secured Revolving Credit Facility and
the indentures governing our Senior Notes, we are subject to certain financial
covenants. These financial covenants include, among others,
o interest coverage, as defined,
o minimum consolidated EBITDA (earnings before income taxes and extraordinary
items increased by interest expense, depreciation, goodwill and other
amortization), as defined,
31
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
o limitations on the amount of annual capital expenditures and indebtedness,
o restrictions on restricted payments, including dividends and distributions
to our parent corporations and on incurring liens, and
o restrictions on investments and other payments. In addition, if a change of
control as defined in the Senior Secured Revolving Credit Facility occurs,
the Senior Secured Revolving Credit Facility could be terminated and the
loans under the Senior Secured Revolving Credit Facility accelerated by the
holders of that indebtedness. If that event occurred, it would cause our
outstanding Senior Notes to be accelerated.
As of October 3, 2004, after giving effect to the most restrictive of
the aforementioned restrictions, we could have paid dividends or made other
restricted payments up to $5.0 million to our parent corporations. In addition
at October 3, 2004, we could repay demand loans to our parent corporation
amounting to $52.8 million, subject to certain conditions as outlined in the
Senior Secured Revolving Credit Facility. As of October 3, 2004 we were in
compliance with all covenants under the Senior Secured Revolving Credit Facility
and the indentures governing the Senior Notes.
In July 2003, we exercised an Early Buyout Option on certain
machinery and equipment located at our Chester, South Carolina glass mat
manufacturing facility for $19.7 million. In addition, in July 2003, we entered
into a new $19.7 million Secured Loan, which we refer to as the Chester Loan,
with the proceeds being used to repay the $19.7 million obligation associated
with the Early Buyout Option discussed above. The Chester Loan is secured by a
sole security interest in the machinery and equipment, matures in July 2010,
requires monthly payments of principal and interest commencing in August 2003
and bears a fixed annual interest rate of 7.41%.
In September 2003, we used proceeds from the Senior Secured Revolving
Credit Facility to repay our outstanding 10 1/2% Senior Notes at maturity,
aggregating $35.0 million plus accrued interest.
On July 26, 2004, we issued $200.0 million in aggregate principal
amount of 7 3/4% Senior Notes due 2014, at 100.0% of the principal amount. The
net proceeds from the issuance of the 2014 Notes, after deducting initial
purchasers' discounts and commissions and offering expenses were approximately
$195.9 million. On August 26, 2004, we exercised a call notice issued on July
26, 2004 and used approximately $101.8 million of the net proceeds to redeem all
of our issued and outstanding 2006 Notes, including accrued and unpaid interest
on such notes through the date of redemption. In addition, we used the remaining
net proceeds of approximately $94.1 million to reduce amounts outstanding under
our Senior Secured Revolving Credit Facility. The redemption price of the 2006
Notes was 101.438% of the principal amount outstanding and the premium of
approximately $1.4 million was recorded in interest expense in
32
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
July 2004. In connection with the extinguishment of the 2006 Notes, we expensed
the remaining deferred financing fees of approximately $0.7 million in July 2004
and included this amount in interest expense.
Under the terms and conditions of the 2014 Notes, the noteholders
have the right under the indentures governing such notes to require us to
purchase the 2014 Notes at a price of 101% of the principal amount thereof, plus
any accrued and unpaid interest, in the event of a change in control, as defined
in the 2014 Notes. Upon the expiration of this right, we would have the option
to purchase the 2014 Notes at a purchase price equal to 100% of the aggregate
principal amount, plus the applicable premium, as defined in the 2014 Notes,
together with any accrued and unpaid interest. We also have the option to redeem
some or all of the 2014 Notes beginning on August 1, 2009 at specified
redemption premiums through August 1, 2012, as defined in the 2014 Notes.
Finally, pursuant to the terms and conditions of the 2014 Notes, the
registration statement related to the exchange offer of the 2014 Notes is
required to be deemed effective by the Securities and Exchange Commission, which
we refer to as the SEC, within a specified time period as outlined in the 2014
Notes. In the event the 2014 Notes are not deemed effective by the SEC within
the specified time period, we are subject to an additional special interest
provision, as defined in the 2014 Notes.
Our Senior Notes are secured by a second-priority lien on the assets
securing the Senior Secured Revolving Credit Facility for so long as the first
priority lien remains in effect, subject to certain limited exceptions and have
been guaranteed by our subsidiaries that guaranteed the Senior Secured Revolving
Credit Facility. As of October 3, 2004, the book value of the collateral
securing the Senior Notes and the Senior Secured Revolving Credit Facility was
approximately $973.6 million.
As of October 3, 2004, we had total outstanding consolidated
indebtedness of $677.6 million, of which $152.5 million matures prior to the end
of the third quarter of 2005 and $31.0 million represents borrowings outstanding
under our Senior Secured Revolving Credit Facility. We anticipate funding these
obligations principally from our cash on hand, cash flow from operations and/or
borrowings under our Senior Secured Revolving Credit Facility.
Termination of Accounts Receivable Securitization
In July 2003, we terminated our Accounts Receivable Securitization
Agreement, which we refer to as the Securitization Agreement, at which time we
repurchased our undivided interest in receivables previously sold to a special
purpose subsidiary of ours, BMCA Receivables Corporation, without recourse,
which in turn sold them to a third party, without recourse. In connection with
the termination of the Securitization Agreement in July 2003, we repaid $115.0
million of amounts outstanding under such agreement. At September 28, 2003, the
effect of the above transaction increased accounts receivable and long-term debt
by $105.4 million. We also liquidated BMCA Receivables Corporation effective
August 2003.
33
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Intercompany Transactions
We make loans to and borrow from, our parent corporations from time
to time at prevailing market rates. During 2001 and on July 1, 2003 and
December 29, 2003, the Company loaned BMCA Holdings Corporation $2.5, $37.8 and
$15.0 million, respectively, and on July 9, 2003 and December 29, 2003, BMCA
Holdings Corporation loaned the Company $37.8 and $15.0 million, respectively.
At October 3, 2004, BMCA Holdings Corporation owed us $55.7 million, including
interest of $0.4 million, and we owed BMCA Holdings Corporation $52.8 million.
Interest income on our loans to BMCA Holdings Corporation amounted to $0.7 and
$2.1 million during the third quarter and nine month periods ended October 3,
2004, respectively. Interest expense on our loans from BMCA Holdings Corporation
amounted to $0.7 and $2.0 million during the third quarter and nine month
periods ended October 3, 2004, respectively. Loans payable to/receivable from
our parent corporations are due on demand and provide each party with the right
to offset of its related obligation to the other party with the right to
limitations outlined in our Senior Secured Revolving Credit Facility and our
Senior Notes.
On February 25, 2004 and April 21, 2004, we declared and paid cash
dividends of $5.0 million and $5.0 million, respectively, to our parent
corporation.
On June 15, 2004 and September 15, 2004, we paid $6.4 and $9.6
million, respectively, in federal income tax payments to our parent corporation
pursuant to a tax sharing agreement. This amount is included in the "Change in
net receivable from/payable to related parties/parent corporations" in the
Consolidated Statement of Cash Flows.
Acquisition and Property Disposition
On May 7, 2004, we acquired certain assets of a manufacturing
facility located in Quakertown, Pennsylvania from Atlas Roofing Corporation at a
purchase price of $23.2 million. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the purchase price was allocated to
the fair value of the identifiable assets acquired, including $23.0 million to
property, plant and equipment and $0.2 million to inventories. The operating
results of the Quakertown manufacturing facility are included in our results of
operations from the date of its acquisition. With the acquisition of the
Quakertown manufacturing facility, we have decided we will not construct the new
shingle manufacturing facility in the Northeast, the anticipated construction of
which had been announced on February 9, 2004.
In May 2003, we sold property in Ontario, California for net cash
proceeds of approximately $9.3 million, which resulted in a pre-tax gain of
approximately $5.7 million.
34
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
As a result of the foregoing factors related to the first nine months
of 2004, cash and cash equivalents increased by $8.0 million during the first
nine months of 2004 to $10.9 million.
Contingencies
See Note 9 to Consolidated Financial Statements for information
regarding contingencies.
Economic Outlook
We do not believe that inflation has had an effect on our results of
operations during the first nine months of 2004. However, we cannot assure you
that our business will not be affected by inflation in the future, or by
increases in the cost of energy and asphalt purchases used in our manufacturing
process principally due to fluctuating oil prices.
During the first nine months of 2004, the cost of asphalt continued
to be high relative to historical levels. Due to the strength of our
manufacturing operations which allows us to use many types of asphalt together
with our ability to secure alternative sources of supply, we do not anticipate
that any future disruption in the supply of asphalt will have a material impact
on future net sales, although no assurances can be provided in that regard. To
mitigate these and other petroleum-based cost increases, we announced and
implemented multiple price increases during the first nine months of 2004. We
will attempt to pass on future additional unexpected cost increases from
suppliers as needed; however, no assurances can be provided that these price
increases will be accepted in the marketplace.
Contractual Obligations
We have contracts with two different asphalt terminal suppliers where
asphalt imported from Venezuela or other suppliers is stored prior to its use at
our plants. These asphalt terminals are located at the Ports of Tampa, Florida
and Savannah, Georgia and are used to service our plants at those sites. We are
obligated to pay these suppliers for use of these terminals under these
contracts through 2008 and 2005, respectively. Monthly pricing is fixed and
includes capital improvements made at each asphalt terminal by its owner. No
changes have been made to these contracts during the nine month period ended
October 3, 2004.
In connection with the acquisition of the Quakertown, Pennsylvania
manufacturing facility on May 7, 2004, we entered into a long-term supply
agreement with Atlas Roofing Corporation, whereby we are obligated to purchase
certain minimum amounts of dry felt and other products at fair market value
through April 30, 2011. As of October 3, 2004 our minimum purchase obligation
under the Atlas Roofing Corporation long-term supply agreement aggregated to
$24.0 million. No changes have been made to this contract during the third
quarter ended October 3, 2004.
35
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
We also have a management agreement with International Specialty
Products Inc., which we refer to as the ISP Management Agreement, to provide us
with certain management services. The management fees payable under the ISP
Management Agreement are adjusted annually. For a further discussion on the ISP
Management Agreement reference is made to Management's Discussion and Analysis
of Financial Condition and Results of Operations, "Intercompany Transactions" in
the 2003 Form 10-K.
At October 3, 2004, the future cost of our non-cancelable asphalt
terminal contracts and the Atlas Roofing Corporation supply agreement described
above are included in the table of contractual obligations under the caption
"Unconditional Purchase Obligations." In addition, we also include in the table
of contractual obligations below other obligations related to long-term debt,
which includes accretion of approximately $0.6 million, amounts due under the
ISP Management Agreement, fixed interest expenses associated with our Senior
Notes, other long-term fixed interest obligations and operating leases.
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------
LESS THAN 1-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
----------------------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS)
Long-term Debt............................................ $ 678.2 $ 152.6 $ 36.7 $ 270.0 $ 218.9
Unconditional Purchase Obligations........................ 27.1 5.5 9.5 9.0 3.1
Operating Leases.......................................... 68.8 16.9 26.5 21.9 3.5
Fixed Interest Expense.................................... 241.2 46.2 73.6 46.4 75.0
ISP Management Agreement.................................. 1.4 1.4 - - -
---------- ---------- ---------- ---------- ----------
Total.................................................. $ 1,016.7 $ 222.6 $ 146.3 $ 347.3 $ 300.5
========== ========== ========== ========== ==========
We purchase substantially all of our colored roofing granules and
algae-resistant granules under a long-term requirements contract with
International Specialty Products Inc., which we refer to as ISP. The amount of
mineral products purchased each year under the ISP contract is based on current
demand and is not subject to minimum purchase requirements. Since the total
annual amount of mineral products expected to be purchased cannot be determined
at this time, no amount is included in the above table related to this contract.
In 2003, and the nine months ended October 3, 2004, we purchased $77.7 million
and $73.9 million, respectively, of mineral products from ISP under this
contract.
Senior Note Offerings
On October 7, 2004, under the terms and conditions of the 2014 Notes,
we filed a registration statement with the Securities and Exchange Commission on
Form S-4 to register the 2014 Notes.
On November 5, 2004, we further amended our Senior Secured Revolving
Credit Facility to allow for the issuance of an additional $50.0 million of 2014
Notes.
36
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
On November 10, 2004, we issued an additional $50.0 million in
aggregate principal amount of our 2014 Notes. The additional 2014 Notes were
issued under an indenture dated July 26, 2004, pursuant to which we previously
issued our original $200.0 million of 7 3/4% Senior Notes due 2014. These
additional 2014 Notes rank equally with and formed a part of a single series
with such original 2014 Notes and have the same terms and conditions. The net
proceeds from the issuance of the additional 2014 Notes, after deducting the
offering expenses and including the addition of the applicable premium were
approximately $50.6 million. We will use the net proceeds from the additional
2014 Notes to reduce amounts outstanding under our Senior Secured Revolving
Credit Facility. The premium of approximately $0.9 million will be included in
long-term debt and will be amortized over the life of the 2014 Notes.
New Accounting Pronouncement
In May 2004, the Financial Accounting Standards Board, which we refer
to as FASB, issued FASB Staff Position No. FAS 106-2 "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act")," which we refer to as FSP FAS No. 106-2,
which supersedes FSP FAS No. 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," which we refer to as FSP FAS No. 106-1. FSP FAS No. 106-2 provides
guidance on accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 to employers that sponsor
postretirement health care plans which provide prescription drug benefits.
FSP FAS 106-2 applies only to sponsors of single-employer defined
benefit postretirement health care plans for which (1) the employer has
concluded that prescription drug benefits available under the plan to some or
all participants, for some or all future years, are "actuarially equivalent" to
Medicare Part D and thus qualify for the subsidy provided by the Act, and (2)
the expected subsidy will offset or reduce the employer's share of the cost of
the underlying postretirement prescription drug coverage on which the subsidy is
based. In addition, FSP FAS 106-2 requires certain disclosures in financial
statements regarding the effect of the Act and the related subsidy on
postretirement health obligations and net periodic postretirement benefit cost.
FSP FAS 106-2 is effective for the first interim or annual period
beginning after June 15, 2004. We adopted the provisions of FSP FAS No. 106-2
effective for the quarterly period beginning July 5, 2004 and noted no material
impact on the accounting for our postretirement medical and life insurance plan.
* * *
37
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act and section 21E of the Securities Exchange
Act of 1934. These forward-looking statements are only predictions and generally
can be identified by use of statements that include phrases such as "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. Our operations are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
contemplated by the relevant forward-looking statements. The forward-looking
statements included herein are made only as of the date of this quarterly report
on Form 10-Q and we undertake no obligation to publicly update any
forward-looking statements to reflect subsequent events or circumstances. We
cannot assure you that projected results or events will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations in the 2003 Form 10-K for a
discussion of "Market-Sensitive Instruments and Risk Management." There were no
material changes in such information as of October 3, 2004 and the Company has
no hedging arrangements as of October 3, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act.
Internal Control Over Financial Reporting: There were no significant
changes in our internal control over financial reporting identified in
management's evaluation during the third quarter of fiscal year 2004 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
38
BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of October 3, 2004, approximately 1,900 alleged asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber are pending
against Building Materials Corporation of America. See Note 9 to consolidated
financial statements in Part I.
ITEM 6. EXHIBITS
Exhibit Number
31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
39
SIGNATURES
-----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: November 17, 2004 BY: /s/John F. Rebele
----------------- ------------------------------
John F. Rebele
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
DATE: November 17, 2004 BY: /s/James T. Esposito
----------------- ------------------------------
James T. Esposito
Vice President and Controller
(Chief Accounting Officer)
40
SIGNATURES
-----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant listed below has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS INVESTMENT CORPORATION
DATE: November 17, 2004 BY: /s/John F. Rebele
----------------- ------------------------------
John F. Rebele
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
41