ITEM 1. BUSINESS
GENERAL
Building Materials Corporation of America ("BMCA") is a leading national manufacturer of a broad line of asphalt roofing products and accessories for the residential and commercial roofing markets. We also manufacture specialty building products and accessories for the professional and do-it-yourself remodeling and residential construction industries. BMCA, incorporated under the laws of Delaware in 1994, is a 97%-owned subsidiary of GAF Building Materials Corporation. BMCA acquired the operating assets and certain liabilities of GAF Building Materials Corporation in 1994. GAF Building Materials Corporation is a wholly-owned subsidiary of G Industries Corp., which is a holding company that also owns all of the capital stock of GAF Fiberglass Corporation. G Industries is a wholly-owned subsidiary of G-I Holdings Inc., a wholly-owned subsidiary of GAF Corporation. Samuel J. Heyman, Chairman of the Board of Directors and Chief Executive Officer of GAF Corporation, G-I Holdings and GAF Fiberglass, Chairman of the Board of Directors of BMCA and Chief Executive Officer of G Industries and GAF Building Materials Corporation, beneficially owns (as defined in Rule 13d-3 of the Securities Exchange Act of 1934) approximately 97% of GAF Corporation. BMCA does business under the name "GAF Materials Corporation."
Effective January 1, 1999, BMCA transferred all of its investment assets and intellectual property assets to Building Materials Investment Corporation, a newly-formed, wholly-owned subsidiary of BMCA. In connection with this transfer, Building Materials Investment Corporation agreed to guarantee all of BMCA's obligations under its credit agreement and all of its senior notes. BMCA also transferred all of its manufacturing assets, other than those located in Texas, to Building Materials Manufacturing Corporation, another newly-formed, wholly-owned subsidiary of BMCA. In connection with this transfer, Building Materials Manufacturing Corporation agreed to become a co-obligor on BMCA's 8% Senior Notes due 2007 and to guarantee BMCA's obligations under its credit agreement and all of its other senior notes. Building Materials Manufacturing and Building Materials Investment were incorporated in Delaware in 1998.
On January 1, 1997, GAF Corporation completed a series of transactions involving its subsidiaries pursuant to which, among other things, (1) we transferred our glass fiber manufacturing facility located in Nashville, Tennessee and certain related assets and liabilities to GAF Fiberglass Corporation and (2) U.S. Intec, Inc., an indirect subsidiary of GAF Corporation, became one of our subsidiaries. In connection with these transactions, GAF Fiberglass entered into a long-term supply agreement with us pursuant to which GAF Fiberglass agreed to supply us with glass fiber. See Item 13,"Certain Relationships and Related Transactions."
Our executive offices and the executive offices of Building Materials Manufacturing and Building Materials Investment are located at 1361 Alps Road, Wayne, New Jersey 07470 and the telephone number is (973) 628-3000.
RESIDENTIAL ROOFING
We are a leading manufacturer of a complete line of premium residential roofing products. Residential roofing product sales represented approximately 65% of our net sales in 1998. We have improved our sales mix of residential roofing products in recent years by increasing our emphasis on laminated products which generally are sold at higher prices with more attractive profit margins than our standard strip shingle products. We believe that we are the largest manufacturer of laminated residential roofing shingles and the second largest manufacturer of strip shingles in the United States. (Statements contained in this report as to our competitive position are based on industry information which we believe is reliable.)
Our two principal lines of roofing shingles are the Timberline(Registered) series and the Sovereign(Registered) series. We also produce certain specialty shingles principally for regional markets.
The Timberline(Registered) Series. The Timberline(Registered) series offers a premium laminated product line that adds dramatic shadow lines and substantially improves the appearance of a roof. The series includes the Timberline(Registered) 25 shingle, a mid-weight laminated shingle which serves as an economic trade-up for consumers, with a 25-year limited warranty; the Timberline(Registered) shingle, with a 30-year limited warranty, offering a natural
random wood shake appearance with superior fire resistance and durability; and the Timberline Ultra(Registered) shingle, with a 40-year limited warranty, a super heavyweight laminated shingle with the same design features as the Timberline(Registered) 25 shingle, together with added durability.
The Sovereign(Registered) Series. The Sovereign(Registered) series includes the standard 3-tab Sentinel(Registered) shingle with a 20-year limited warranty; the Royal Sovereign(Registered) shingle, a heavier 3-tab shingle with a 25-year limited warranty, designed to capitalize on the "middle market" for quality shingles; and the Marquis(Registered) Weathermax(Trademark) shingle, a superior performing heavyweight 3-tab shingle with a 30-year limited warranty.
Specialty Shingles. Our specialty asphalt shingles include: Slateline(Registered) and Slateline(Registered) Color Contrast(Trademark) shingles, offering the appearance of slate, labor savings in installation because of their larger size and a 30-year limited warranty; the Grand Sequoia(Registered) shingle, a premier architectural shingle with a 40-year limited warranty; and the Country Mansion(Trademark) shingle, a distinctive high end architectural shingle with a limited lifetime warranty.
Weather Stopper(Trademark) Roofing System. In addition to shingles, we supply all the components necessary to install a complete roofing system. Our Weather Stopper(Trademark) Roofing System begins with Weather Watch(Registered) and Stormguard(Trademark) waterproof underlayments for eaves, valleys and flashings to prevent water seepage between the roof deck and the shingles caused by ice build-ups and wind-driven rains. Our Weather Stopper(Trademark) Roofing System also includes Shingle-Mate(Registered) glass reinforced underlayment, Timbertex(Registered), TimberRidge(Trademark), and Ridgetex(Trademark) Hip and Ridge shingles, which are significantly thicker and larger than standard hip and ridge shingles and provide dramatic accents to the slopes and planes of a roof and the Cobra(Registered) Ridge Vent which provides attic ventilation.
COMMERCIAL ROOFING
We manufacture a full line of modified bitumen and asphalt built-up roofing products, liquid applied membrane systems and roofing accessories for use in the application of commercial roofing systems. We also market thermoset and thermoplastic single-ply products. Commercial roofing represented approximately 30% of our net sales in 1998. Approximately 75% of commercial roofing industry unit sales utilize asphalt built-up roofing, modified bitumen products and thermoset and thermoplastic single-ply products, all of which we manufacture or market. We believe that we are the second largest manufacturer of asphalt built-up roofing products and the largest manufacturer of modified bitumen products in the United States.
We manufacture glass membranes under the trademarks GAFGLAS(Registered) and Permaglas(Registered), which are made from asphalt impregnated glass fiber mat for use as a component in asphalt built-up roofing systems. Most of our GAFGLAS(Registered)and Permaglas(Registered) products are assembled on the roof by applying successive layers of roofing membrane with asphalt and topped, in some applications, with gravel. Thermal insulation may be applied beneath the membrane. We also manufacture base sheets, flashings and other roofing accessories for use in these systems, the TOPCOAT(Registered) roofing system, a liquid-applied membrane system designed to protect and waterproof existing metal roofing, and roof maintenance products. In addition, we market perlite roofing insulation products, which consist of low thermal insulation that is installed as part of a commercial roofing application below the roofing membrane, isocyanurate foam as roofing insulation, packaged asphalt and accessories such as vent stacks, roof insulation fasteners, cements and coating.
We sell modified bitumen products under the Ruberoid(Registered) trademark, and U.S. Intec sells these products under the Brai(Registered) trademark. Modified bitumen products are used primarily in re-roofing applications or in combination with glass membranes in GAF CompositeRoof(Trademark) systems. These products consist of a roofing membrane utilizing polymer-modified asphalt, which strengthens and increases flexibility and is reinforced with a polyester non-woven mat or a glass mat. Modified bitumen systems provide high strength characteristics, such as weatherability, water resistance, and labor cost savings due to ease of application.
Effective December 1, 1998, we sold our perlite insulation manufacturing assets to Johns Manville Corporation. As part of the transaction, we entered into a long-term agreement with Johns Manville pursuant to which Johns Manville agreed to supply us with perlite insulation products. This agreement will enable us to continue to serve our commercial roofing customers that purchase those products from us.
SPECIALTY BUILDING PRODUCTS AND ACCESSORIES
In June 1998, we acquired substantially all of the assets of Leslie-Locke, Inc. for approximately $43.5 million. As a result of this acquisition, we manufacture and market a variety of specialty building products and accessories for the professional and do-it-yourself remodeling and residential construction industries. Specialty building products and accessories represented approximately 5% of our net sales in 1998. These products primarily consist of residential attic ventilation systems, metal and fiberglass air distribution products for the HVAC industry and ornamental iron security products (including doors, windows and fencing).
MARKETING AND SALES
We have one of the industry's largest sales forces. A staff of technical professionals who work directly with architects, consultants, contractors and building owners provide support to the sales force. We market our roofing and specialty building products and accessories through our own sales force of approximately 220 experienced, full-time employees and independent sales representatives operating from six regional sales offices located across the United States. A major portion of our roofing product sales are to wholesale distributors who resell our products to roofing contractors and retailers. We believe that the wholesale distribution channel offers the most attractive margins of all roofing market distribution channels and represents the principal distribution channel for professionally installed asphalt roofing products. We believe that our nationwide coverage has contributed to certain of our roofing products being among the most recognized and requested brands in the industry.
In September 1997, we launched our Customer Advantage(Trademark) Program to establish a nationwide network of MasterElite(Trademark) contractors and Authorized Installers. This program offers marketing and support services to residential roofing contractors. We view the Master Elite(Trademark) contractors and Authorized Installers as an effective extension of our sales force which takes our products directly to the homeowner.
No single customer accounted for 10% or more of our net sales in 1998, except for American Builders & Contractors Supply Company, Inc., which accounted for approximately 11% of 1998 net sales.
RAW MATERIALS
The major raw materials required for the manufacture of our roofing products are asphalt, mineral stabilizer, glass fiber, glass fiber mat, polyester mat and granules. Asphalt and mineral stabilizer are available from a large number of suppliers. We currently have contracts with several of these suppliers and others are available as substitutes. Prices of most raw materials have been relatively stable, rising moderately with general industrial prices, while the price of asphalt tends to move in step with the price of crude oil.
The major raw materials required for the manufacture of our specialty building products and accessories are steel tubes, sheet metal products, aluminum motors and cartons. These raw materials, other than motors, are commodity-type products, the pricing for which is driven by supply and demand. Prices of other raw materials used in the manufacture of specialty building products and accessories are more closely tied to movements in inflation rates. Substantially all of the motors used in our ventilation products are purchased from an overseas supplier. All of these raw materials, including motors, are available from a large number of suppliers.
Five of our roofing plants have easy access to deep water ports thereby permitting delivery of asphalt by ship, the most economical means of transport. Our Chester, South Carolina plant manufactures glass fiber mat substrate. We purchase all our requirements for colored roofing granules from an affiliate, International Specialty Products Inc. ("ISP"), (except for the requirements of our California and Oregon roofing plants and a portion of the requirements of our Indiana roofing plant which are supplied by a third party) under a requirements contract. Effective January 1, 1999, this contract was amended to cover, among other things, purchases of colored roofing granules by our subsidiaries and was renewed for 1999. This contract is subject to annual renewal unless terminated by either party to such agreement. We purchase a significant portion of our glass fiber requirements from an affiliate, GAF Fiberglass, a subsidiary of GAF, pursuant to a supply agreement.
SEASONAL VARIATIONS AND WORKING CAPITAL
Sales of roofing and specialty building products and accessories in the northern regions of the United States generally decline during the winter months due to adverse weather conditions. Generally, our inventory practice includes increasing inventory levels in the first and the second quarter in order to meet peak season demand (June through November).
WARRANTY CLAIMS
We provide certain limited warranties covering most of our residential roofing products for periods generally ranging from 20 to 40 years. Although terms of warranties vary, we believe that our warranties generally are consistent with those offered by our competitors. We also offer limited warranties and guarantees of varying duration on our commercial roofing products and limited warranties covering most of our specialty building products and accessories for periods generally ranging from 5 to 10 years. From time to time, we review the reserves established for estimated probable future warranty claims.
COMPETITION
The roofing products industry is highly competitive and includes a number of national competitors. These competitors in the residential roofing and accessories markets are Owens-Corning, Tamko, Elcor and Celotex, and in the commercial roofing market are Johns Manville, Celotex, Firestone and Carlisle. In addition, there are numerous regional competitors.
Competition is based largely upon products and service quality, distribution capability, price and credit terms. We believe that we are well positioned in the marketplace as a result of our broad product lines in both the residential and commercial markets, consistently high product quality, strong sales force and national distribution capabilities. As a result of the growth in demand for premium laminated shingles, a number of roofing manufacturers, including our company, have increased their laminated shingle production capacity in recent years. We have experienced increased competition in this area due to these factors.
Our specialty roofing products and accessories business is highly competitive with numerous competitors due to the breadth of the product lines we market. Major competitors include Certainteed, Solar Group, ATCO Rubber Products and Standex Air Distribution Products.
RESEARCH AND DEVELOPMENT
We primarily focus our research and development activities on the development of new products, process improvements and the testing of alternative raw materials and supplies. Our research and development activities, dedicated to residential, commercial and fiberglass products, are located at technical centers at Wayne, New Jersey, Nashville, Tennessee and Port Arthur, Texas. Our research and development expenditures were approximately $4.5 million, $5.4 million and $6.0 million in 1996, 1997 and 1998, respectively.
PATENTS AND TRADEMARKS
We own or license approximately 90 domestic and 81 foreign patents or patent applications. In addition, we own or license approximately 250 domestic and 72 foreign trademark registrations or applications. While we believe the patent protection covering certain of our products to be material to those products, we do not believe that any single patent, patent application or trademark is material to our business or operations. We believe that the duration of the existing patents and patent licenses is consistent with our business needs.
ENVIRONMENTAL COMPLIANCE
Since 1970, federal, state and local authorities have adopted and amended a wide variety of federal, state and local environmental laws and regulations relating to environmental matters. These regulations affect us because of the nature of our operations and that of our predecessor and certain of the substances that are, or have been used, produced or discharged at our or its plants or at other locations. We have made capital expenditures of less than $600,000 in each of the last three years in order to comply with these regulations (which expenditures are included in additions to property, plant and equipment) and anticipate that aggregate capital expenditures relating to environmental compliance in 1999 and 2000 will be approximately $800,000
and $1,000,000, respectively. We anticipate incurring additional capital expenditures of approximately $2,000,000 in the aggregate relating to environmental compliance in connection with two new manufacturing facilities that we expect to build in 1999 in Shafter, California and Michigan City, Indiana.
The regulations deal with air and water emissions or discharges into the environment, as well as the generation, storage, treatment, transportation and disposal of solid and hazardous waste, and the remediation of any releases of hazardous substances and materials to the environment. We believe that our manufacturing facilities comply in all material respects with applicable regulations. Although we cannot predict whether more burdensome requirements will be adopted in the future, we believe that any potential liability for compliance with the regulations will not materially affect our business, liquidity or financial position.
See Item 3, "Legal Proceedings--Environmental Litigation."
EMPLOYEES
At December 31, 1998, we employed approximately 3,300 people worldwide, approximately 1,000 of which were subject to 14 union contracts. The contracts are effective for three- to four-year periods. During 1998, four labor contracts expired and were renegotiated. We believe that our relations with our employees and their unions are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development laboratories are located at a 100-acre campus-like office and research park owned by a subsidiary of ISP, at 1361 Alps Road, Wayne, New Jersey 07470. We occupy our headquarters pursuant to our management agreement with ISP. See Item 13, "Certain Relationships and Related Transactions."
We own or lease the principal real properties described below. Unless otherwise indicated, the properties are owned in fee. In addition to the principal facilities listed below, we maintain sales offices and warehouses, substantially all of which are in leased premises under relatively short-term leases.
LOCATION FACILITY - ---------------------- ------------------------------------------------------ Alabama Mobile.............. Plant, Warehouses* California Compton............. Plant*, Warehouse* Fontana............. Plant, Sales Office Hollister........... Plant, Plant* Shafter............. Plant (under construction) Stockton............ Plant, Plant, Warehouse* Florida Tampa............... Plant, Sales Office Georgia Atlanta............. Sales Office* Monroe.............. Plant, Warehouse* Savannah............ Plant, Sales Office
LOCATION FACILITY - ---------------------- ------------------------------------------------------ Indiana Mount Vernon........ Plant, Sales Office Illinois Romeoville.......... Sales Office* Maryland Baltimore........... Plant Massachusetts Millis.............. Plant, Sales Office, Warehouse* Walpole............. Plant* Minnesota Minneapolis......... Plant, Sales Office, Warehouse* New Jersey North Branch........ Plant, Warehouse* North Brunswick..... Sales Office*, Warehouse* Wayne............... Headquarters*, Corporate Administrative Offices*, Research Center* New Mexico Albuquerque......... Plant North Carolina Burgaw.............. Plant Goldsboro........... Plant Ohio Wadsworth........... Plant*, Warehouse* Oregon Corvallis........... Plant Pennsylvania Erie................ Plant, Sales Office, Warehouse* Wind Gap............ Plant South Carolina Chester............. Plant Tennessee Nashville........... Research Center* Texas Dallas.............. Plant, Sales Office, Warehouse* Fannett............. Warehouse Port Arthur......... Plant, Plant, Warehouse, Sales Office, Research Center - ------------------ * Leased Property
We believe that our plants and facilities, which are of varying ages and are of different construction types, have been satisfactorily maintained, are in good condition, are suitable for their respective operations and generally provide sufficient capacity to meet production requirements. Each plant has adequate transportation facilities for both raw materials and finished products. In 1998, we made capital expenditures of $71.1 million relating to plant, property and equipment, which is the highest amount of capital expenditures in recent years.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Bodily Injury Claims. In connection with its formation, BMCA contractually assumed and agreed to pay the first $204.4 million of liabilities for asbestos-related bodily injury claims relating to the inhalation of asbestos fiber ("Asbestos Claims") of its parent, GAF Building Materials Corporation. As of March 30, 1997, BMCA had paid all of its assumed asbestos-related liabilities. G-I Holdings and GAF Building Materials Corporation have jointly and severally agreed to indemnify BMCA against any other existing or future claims related to asbestos-related liabilities if asserted against BMCA.
GAF Corporation has advised us that, as of December 28, 1998, it is defending approximately 113,800 pending alleged Asbestos Claims (having received notice of approximately 93,500 new Asbestos Claims during 1998) and has resolved approximately 293,500 Asbestos Claims (including approximately 59,000 in 1998). GAF Corporation has advised us that it believes that a significant portion of the claims filed in 1998 were already pending against other defendants for some period of time, with GAF Corporation being added as a defendant upon the lifting in 1997 of the injunction relating to the Georgine class action settlement. This injunction prevented plaintiffs from filing or proceeding with their Asbestos Claims other than in accordance with the Georgine class action settlement, which was rendered inoperable in 1997 by a United States Supreme Court ruling. GAF Corporation's current estimated average cost for Asbestos Claims resolved in 1998 (including Asbestos Claims disposed of at no cost to GAF Corporation) is approximately $3,500 per claim. Substantially all of the costs in respect of these Asbestos Claims will be paid over several years. There can be no assurance that the actual costs of resolving pending and future Asbestos Claims will approximate GAF Corporation's estimated average costs for the Asbestos Claims resolved in 1998.
GAF Corporation has stated that it is committed to effecting a comprehensive resolution of Asbestos Claims. It also has stated that it is exploring a number of options to accomplish such resolution, but there can be no assurance that this effort will be successful.
We believe that we will not sustain any additional liability in connection with asbestos-related claims. While we cannot predict whether any asbestos-related claims will be asserted against us or our assets, or the outcome of any litigation relating to such claims, we believe that we have meritorious defenses to such claims. In addition, G-I Holdings and GAF Building Materials Corporation have jointly and severally indemnified us with respect to such claims, and G-I Holdings has advised us that it believes it has and will have sufficient resources to enable it to satisfy these indemnification obligations, if any. Should GAF Corporation or GAF Building Materials Corporation, however, be unable to satisfy judgments against it in asbestos-related lawsuits, its judgment creditors might seek to enforce their judgments against the assets of GAF Corporation or GAF Building Materials Corporation, including its holdings of our common stock. This enforcement could result in a change of control with respect to our company. See Notes 10 and 15 to Consolidated Financial Statements.
Asbestos-in-Building Claims. GAF Corporation has also been named as a co-defendant in asbestos-in-buildings cases for economic and property damage or other injuries based upon an alleged present or future need to remove asbestos containing materials from public and private buildings ("Building Claims"). Since these actions were first initiated approximately 17 years ago, GAF Corporation has not only successfully disposed of approximately 145 such cases at an average disposition cost (including cases disposed of at no cost to GAF Corporation) of approximately $18,000 per case (all of which have been paid by insurance under reservation of rights), but is a co-defendant in only three remaining lawsuits. See "--Insurance Matters." BMCA has not assumed any liabilities with respect to Building Claims, and G-I Holdings and GAF Building Materials Corporation have jointly and severally agreed to indemnify BMCA against any such liabilities in the event any such claims are asserted against it.
Insurance Matters. GAF Corporation and G-I Holdings had available, as of December 31, 1998, to pay asbestos-related bodily injury claims aggregate insurance coverage of $140.7 million before discounting certain coverage (which amount is reduced as asbestos-related liabilities are satisfied), $12.2 million of which is the subject of negotiations with various insurers and/or the Coverage Action described below, and which $12.2 million of coverage GAF Corporation believes will be available to it either by agreement with its insurance carriers or, if necessary, by legal action.
In January 1993, the members of the Center for Claims Resolution, a non-profit organization of asbestos defendant companies, including GAF Corporation, filed an action with the United States District Court in Philadelphia against certain product liability insurers whose policies will or may be called upon to respond to asbestos-related bodily injury claims (the "Coverage Action"). The Coverage Action seeks a declaratory judgment on behalf of certain Center members, including GAF Corporation, against various third-party defendant product liability insurers to the effect that those insurers are obligated to provide coverage for Asbestos Claims. The insurers who are defendants in GAF Corporation's amended complaint are Atlanta International, Employers Mutual and Northbrook. The insurance carrier defendants have raised various defenses to the Coverage Action.
In October 1983, GAF Corporation filed a lawsuit in Los Angeles, California Superior Court against its past insurance carriers to obtain a judicial determination that such carriers were obligated to defend and indemnify it for Building Claims. GAF Corporation is seeking declaratory relief as well as compensatory damages. This action is presently in the pre-trial pleading stage. The parties have agreed to hold this action in abeyance until such time as they are better able to evaluate developments as they may occur in the Building Claims. Because such litigation is in early stages and evidence and interpretations of important legal questions are presently unavailable, it is not possible to predict the future of such litigation.
In all the Building Claims, GAF Corporation's defense costs have been paid by one of its primary carriers. While GAF Corporation expects that such primary carrier will continue to defend and indemnify GAF Corporation, such primary carrier has reserved its rights to later refuse to defend and indemnify GAF Corporation and to seek reimbursement for some or all of the fees paid to defend and resolve the Building Claims. GAF Corporation believes that it will be able to resolve such cases for amounts within the total indemnity obligations available from such primary carrier.
ENVIRONMENTAL LITIGATION
We, together with other companies, are a party to a variety of proceedings and lawsuits involving environmental matters ("Environmental Claims") under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") and similar state laws, in which recovery is sought for the cost of cleanup of contaminated sites, a number of which are in the early stages or have been dormant for protracted periods.
In connection with its formation, BMCA contractually assumed all environmental liabilities of GAF Building Materials Corporation relating to existing plant sites and the business of BMCA as then conducted. The estimates referred to below reflect those environmental liabilities assumed by BMCA and other environmental liabilities of our company. The environmental liabilities of GAF Building Materials Corporation which were not assumed by BMCA, for which G-I Holdings and GAF Building Materials Corporation have agreed to indemnify BMCA, relate primarily to closed manufacturing facilities. G-I Holdings estimates that, as of December 31, 1998, its liability in respect of the environmental liabilities of GAF Building Materials Corporation not assumed by BMCA was approximately $14.1 million, before insurance recoveries reflected on its balance sheet of $8.1 million. BMCA estimates its liability as of December 31, 1998 in respect of assumed and other environmental liabilities is $0.8 million and expects insurance recoveries reflected on its balance sheet (discussed below) of $0.8 million. Insurance recoveries reflected on such balance sheets relate to both past expenses and estimated future liabilities ("estimated recoveries").
At most sites, BMCA anticipates that liability will be apportioned among the companies found to be responsible for the presence of hazardous substances at the site. Although it is difficult to predict the ultimate resolution of these claims, based on BMCA's evaluation of the financial responsibility of the parties involved and their insurers, relevant legal issues and cost sharing arrangements now in place, BMCA estimates that its liability in respect of all Environmental Claims, including certain environmental compliance expenses, will be as discussed above.
After considering the relevant legal issues and other pertinent factors, BMCA believes that it will receive the estimated recoveries and the legal expenses incurred by GAF on BMCA's behalf and that recoveries could be well in excess of the estimated recoveries for all Environmental Claims, although there can be no assurances in this regard. BMCA believes it is entitled to substantially full defense and indemnity under its insurance policies for most Environmental Claims, although BMCA's insurers have not affirmed a legal obligation under the policies to provide indemnity for such claims.
In March 1995, GAF Corporation commenced litigation on behalf of itself and its predecessors, successors, subsidiaries and related corporate entities in the United States District Court for the District of New Jersey seeking amounts substantially in excess of the estimated recoveries. The court dismissed this action in December 1997 for lack of federal jurisdiction, and defendant insurers appealed the dismissal. The appeal was denied by the Third Circuit Court of Appeals in March 1999. In June 1997, GAF Corporation filed a similar action against the insurers in the Superior Court of New Jersey, Somerset County, which
action is pending. While BMCA believes that its claims are meritorious, there can be no assurance that BMCA will prevail in its efforts to obtain amounts equal to, or in excess of, the estimated recoveries.
We believe that we will not sustain any liability for environmental liabilities of GAF Building Materials Corporation other than those that we have contractually assumed or that relate to the operations of our business. While we cannot predict whether any claims for non-assumed environmental liabilities will be asserted against us or our assets, or the outcome of any litigation relative to such claims, we believe that we have meritorious defenses to such claims. In addition, G-I Holdings and GAF Building Materials Corporation have jointly and severally indemnified us with respect to such claims. G-I Holdings has advised us that it believes it has and will have sufficient resources to enable it to satisfy these indemnification obligations, if any. The possible consequences to us of the failure of G-I Holdings and GAF Building Materials Corporation to satisfy judgments against them in environmental-related lawsuits are described in the last paragraph of "Bodily Injury Claims."
OTHER LITIGATION
Litigation is pending between us and Elk Corporation of Dallas ("Elk") in the United States District Court for the Northern District of Texas relating to certain aspects of our laminated shingles, which Elk claims infringe design and utility patents issued to it. Elk also asserts that we have appropriated the trade dress of Elk's product. Elk seeks injunctive relief, damages and attorneys' fees. We have sued for a declaration that Elk's patents are invalid and unenforceable and that our shingles do not infringe any of Elk's rights, and have sought money damages for Elk's unfair competition. On October 10, 1997, the court issued an opinion holding that Elk's design patent is unenforceable because it was obtained through inequitable conduct. On February 11, 1999, the United States Court of Appeals for the Federal Circuit affirmed the lower court's ruling of enforceability. Elk filed a petition for rehearing on February 25, 1999. We believe that the petition will be denied, and that we will prevail on Elk's remaining claims in the United States District Court.
On or about April 29, 1996, an action was commenced in the Circuit Court of Mobile County, Alabama against GAF Building Materials Corporation on behalf of a purported nationwide class of purchasers of, or current owners of, buildings with certain asphalt shingles manufactured by GAF Building Materials Corporation. The action alleges, among other things, that such shingles were defective and seeks unspecified damages on behalf of the purported class. On September 25, 1998, we agreed to settle this litigation on a national, class-wide basis for asphalt shingles manufactured between January 1, 1973 and December 31, 1997. The court has granted preliminary approval of the class-wide settlement pending the outcome of a fairness hearing that was held on March 12, 1999. Under the terms of the settlement, we will provide property owners whose shingles were manufactured during this period and which suffer certain damages during the term of their original warranty period, and who file a qualifying claim, with an opportunity to receive certain limited benefits beyond those already provided in their existing warranty. In October and December 1998, the separate actions commenced in 1997 in the Superior Court of New Jersey, Middlesex County, the Superior Court of New Jersey, Passaic County and the Supreme Court of the State of New York, County of Nassau, and in 1996 in Pointe Coupee Parish, Louisiana, on behalf of purported classes alleging that our shingles were defective and seeking unspecified damages, were stayed pending the outcome of the fairness hearing on the settlement agreement in the Mobile County, Alabama action.
In October 1998, GAF brought suit in the Superior Court of New Jersey, Middlesex County, on behalf of itself and on our behalf, against certain of its insurers for recovery of the defense costs in connection with the Mobile County, Alabama class action and a declaration that the insurers are obligated to provide indemnification for all damages paid pursuant to the settlement of this class action and for other damages. This action is pending.
* * *
We believe that the ultimate disposition of the cases described above under "Environmental Litigation," "Asbestos-in-Building Claims" and "Other Litigation" will not, individually or in the aggregate, have a material adverse effect on our liquidity, financial position or results of operations.
TAX CLAIM AGAINST GAF CORPORATION
On September 15, 1997, GAF Corporation received a notice from the Internal Revenue Service of a deficiency in the amount of $84.4 million (after taking into account the use of net operating losses and foreign tax credits otherwise available for use in later years) in connection with the formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P., a partnership in which GAF Fiberglass holds an interest. The claim of the IRS for interest and penalties, after taking into account the effect on the use of net operating losses and foreign tax credits, could result in GAF Corporation incurring liabilities significantly in excess of the deferred tax liability of $131.4 million that it recorded in 1990 in connection with this matter. GAF Corporation has advised us that it believes that it will prevail in this matter, although we cannot assure you that will be the result. We believe that the ultimate disposition of this matter will not have a material adverse effect on our business, financial position or results of operations. GAF, G-I Holdings and certain subsidiaries of GAF Corporation have agreed to jointly and severally indemnify us against any tax liability associated with the surfactants partnership, for which we would be severally liable, together with GAF Corporation and several current and former subsidiaries of GAF Corporation, should GAF Corporation be unable to satisfy this liability. The possible consequences to us of the failure of GAF Corporation to satisfy this liability are described in the last paragraph of "Bodily Injury Claims."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
There is no trading market for BMCA's common stock. As of March 19, 1999, there were two holders of record of BMCA's Class A Common Stock and three holders of record of its Class B Common Stock. See Item 12, "Security Ownership of Certain Beneficial Owners and Management."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
See page.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See page.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Financial Condition--Market-Sensitive Instruments and Risk Management" on page.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index on page and Financial Statements and Supplementary Data on pages to.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age, position and other information with respect to the directors and executive officers of BMCA, Building Materials Manufacturing Corporation and Building Materials Investment Corporation. Under the By-laws of each of these companies, each director and executive officer continues in office until that Company's next annual meeting of stockholders and until his successor is elected and qualified. On July 15, 1998, ISP merged with and into its parent, ISP Holdings Inc., and ISP Holdings changed its name to International Specialty Products Inc. As used in this section, "ISP" refers to both companies.
PRESENT PRINCIPAL OCCUPATION NAME AND POSITION HELD(1)(2) AGE AND FIVE-YEAR EMPLOYMENT HISTORY - -------------------------------- --- ----------------------------------------- Samuel J. Heyman ............... 60 Mr. Heyman has been a director and Director and Chairman Chairman of BMCA since its formation. He was Chief Executive Officer of BMCA from June 1996 to January 1999 and has been Chief Executive Officer of GAF Building Materials Corporation since May 1994. He has served as a director and Chairman and Chief Executive Officer of ISP since its formation and has held the same offices with GAF Corporation, G-I Holdings and certain of its subsidiaries for more than five years. Mr. Heyman is also the Chief Executive Officer, Manager and General Partner of a number of closely held real estate development companies and partnerships whose investments include commercial real estate and a portfolio of publicly traded securities.
Sunil Kumar .................... 49 Mr. Kumar has been the President, Chief Director, President and Chief Executive Officer and a director of Executive Officer BMCA since July 1996, January 1999 and May 1995, respectively. He also has been Chief Executive Officer of Building Materials Manufacturing and Building Materials Investment since January 1999 and President and a director of such corporations since their formation. He was Chief Operating Officer of BMCA from March 1996 to January 1999 and of Building Materials Manufacturing and Building Materials Investment from their formation to January 1999. Mr. Kumar also was President, Commercial Roofing Products Division, and Vice President of BMCA from February 1995 to March 1996. Mr. Kumar has also served as a director of GAF Corporation since January 1999. From 1992 to February 1995, he was Executive Vice President of Bridgestone/Firestone Inc., a retail distributor and manufacturer of tires and provider of automobile services.
James P. Rogers ................ 48 Mr. Rogers has been a director of BMCA Director and Executive since its formation and Executive Vice Vice President President of BMCA since December 1996. He also has been Executive Vice President of Building Materials Manufacturing and Building Materials Investment since their formation. Mr. Rogers has been Executive Vice President and Chief Financial Officer of GAF Corporation, G-I Holdings and certain of its subsidiaries and Executive Vice President--Finance of ISP since December 1996. He was Senior Vice President of BMCA from its formation to December 1996 and of ISP from November 1993 to December 1996. Mr. Rogers was Treasurer of BMCA from its formation until December 1994. Mr. Rogers has served as Treasurer of G-I Holdings, GAF Corporation and certain of its subsidiaries since March 1992.
Richard A. Weinberg ............ 39 Mr. Weinberg has been Executive Vice Executive Vice President, President and General Counsel of BMCA Secretary and General since May 1998 and was Senior Vice Counsel President and General Counsel from May 1996 to May 1998. He also has been Executive Vice President and General Counsel of Building Materials Manufacturing and Building Materials Investment since their formation. He was Senior Vice President and General Counsel of GAF Corporation, G-I Holdings, ISP and certain of their subsidiaries from May 1996 to May 1998. He has served as Executive Vice President and General Counsel of these companies since May 1998. He was Vice President and General Counsel of BMCA from September 1994 to May 1996, Vice President--Law of BMCA from May 1994 to September 1994 and Vice President--Law of GAF Building Materials Corporation from April 1993 to May 1994.
William C. Lang ................ 55 Mr. Lang has been Senior Vice President Senior Vice President and and Chief Financial Officer of BMCA Chief Financial Officer since April 1997. He also has held the same position with Building Materials Manufacturing and Building Materials Investment since their formation. He was Senior Vice President and Chief Financial Officer of Duane Reade, a regional drug store chain, from 1993 to 1996.
Kem Scott ...................... 50 Mr. Scott has been President and Chief Senior Vice President and Operating Officer of U.S. Intec and General Manager, Commercial Senior Vice President and General Roofing Products, BMCA; Manager, Commercial Roofing Products of President and Chief Operating BMCA since October 1998. He also has Officer, U.S. Intec been Senior Vice President and General Manager, Commercial Roofing Products of Building Materials Manufacturing and Building Materials Investment since their formation. From 1973 to October 1998, Mr. Scott held various executive positions with the Carlisle group of companies, a manufacturer of elastomeric roofing systems, including President, Carlisle Syntec Systems and most recently from July 1997 to October 1998, President of Carlisle Europe.
William W. Collins ............. 48 Mr. Collins has been Senior Vice Senior Vice President-- President--Marketing and Sales, Marketing and Sales, Residential Roofing Products of BMCA Residential Roofing since November 1997. He also has held Products the same position with Building Materials Manufacturing and Building Materials Investment since their formation. He was Vice President-- Marketing and Sales, Commercial Roofing Products of BMCA from March 1996 to November 1997, Vice President--Sales, Commercial of BMCA from December 1995 to March 1996, Director of Insulation, Accessories and Cobra(Registered) Products of BMCA from February 1995 to December 1995 and Director of Special Projects of BMCA from July 1992 to February 1995.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer and the four other most highly compensated executive officers of BMCA as of December 31, 1998. The salaries and other compensation of Messrs. Heyman, Rogers and Weinberg for services provided by them to our company are paid by ISP in accordance with a management agreement between ISP and our company.
- ------------------ (1) Bonus amounts are payable pursuant to BMCA's Executive Incentive Compensation Program, except that a portion of the bonus amounts paid to Mr. Lang in 1997 and 1998 and to Dr. LaPalme in 1998 represented special bonus awards to those executive officers. The stock appreciation rights (S) relate to shares of GAF Corporation common stock. The options (O) relate to shares of redeemable convertible preferred stock of BMCA. See "--Options/ SARs".
(2) Included in "All Other Compensation" for Mr. Kumar are $11,450, $11,450 and $10,750 representing BMCA's contribution under the GAF Capital Accumulation Plan in 1998, 1997 and 1996, respectively; $3,316, $3,324 and $1,636 for the premiums paid by BMCA for a life insurance policy in 1998, 1997 and 1996, respectively; and $1,963, $1,963 and $1,175 for the premiums paid by BMCA for a long-term disability policy in 1998, 1997 and 1996, respectively. In connection with the July 1998 merger of ISP Holdings and ISP, all options to purchase shares of redeemable convertible preferred stock of ISP Holdings and stock appreciation rights relating to ISP Holdings common stock, including options and stock appreciation rights held by Mr. Kumar, were cancelled. In consideration for this cancellation, Mr. Kumar was granted 15,000 shares of Class A Common Stock of BMCA and 15,000 shares of Class B Common Stock of BMCA and, subject to satisfaction of certain future vesting requirements through December 2003 and to his remaining our employee at such vesting periods, Mr. Kumar is entitled to receive cash payments of $5,073,212 in the aggregate. Mr. Kumar received $1,428,158 of these cash payments in 1998. Included in "Restricted Stock Awards" is the value of the common stock granted to Mr. Kumar as of the date of grant. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Mr. Kumar was elected Chief Executive Officer of BMCA, effective January 1, 1999. (Footnotes continued on next page)
(Footnotes continued from previous page)
(3) Included in "All Other Compensation" for Mr. Lang are $11,200 and $2,010, representing BMCA's contribution under the GAF Capital Accumulation Plan in 1998 and 1997, respectively; $4,459 and $2,583 for the premiums paid by BMCA for a life insurance policy in 1998 and 1997, respectively; and $1,806 and $1,089 for the premiums paid on a long-term disability policy in 1998 and 1997, respectively. Mr. Lang commenced employment with us in April 1997.
(4) Included in "All Other Compensation" for Dr. LaPalme are: $9,442, $11,700, and $11,000, representing BMCA's contribution under the GAF Capital Accumulation Plan in 1998, 1997 and 1996, respectively; $5,022, $4,781 and $2,754 for the premiums paid by BMCA for a life insurance policy in 1998, 1997 and 1996, respectively; and $1,348, $1,275 and $765 for the premiums paid by BMCA for a long-term disability policy in 1998, 1997, and 1996, respectively.
(5) Included in these amounts for Mr. Collins are: $11,450, $11,513 and $10,633, representing BMCA's contribution under the GAF Capital Accumulation Plan in 1998, 1997 and 1996, respectively; $2,122, $1,884 and $849 for the premiums paid by BMCA for a life insurance policy in 1998, 1997 and 1996, respectively; and $1,327, $1,112 and $610 for the premiums paid by BMCA for a long-term disability policy in 1998, 1997 and 1996, respectively.
(6) The salary and other compensation of Mr. Heyman are paid by ISP pursuant to our management agreement with ISP. No allocation of compensation for services to BMCA is made pursuant to the management agreement, except that BMCA reimbursed ISP $115,351 and $133,989 under the management agreement in respect of bonus amounts earned by Messrs. Rogers and Weinberg, respectively, for 1997 in connection with services performed by them for BMCA during that year. In addition, BMCA reimburses ISP, through payment of the management fees payable under the management agreement, for the estimated costs ISP incurs for providing the services of these officers. See Item 13, "Certain Relationships and Related Transactions--Management Agreement."
(7) Excluded are options to purchase redeemable preferred stock of ISP Holdings. As described in Note 2 above, these options were cancelled in connection with the July 1998 merger of ISP Holdings and ISP.
OPTIONS/SARS
The following table summarizes options ("BMCA Preferred Options") to acquire BMCA's redeemable convertible preferred stock granted during 1998 to the executive officers named in the Summary Compensation Table above and the potential realizable value of BMCA Preferred Options held by such persons. No BMCA Preferred Options were exercised by such persons in 1998.
BMCA PREFERRED STOCK OPTION GRANTS IN 1998(1)
- ------------------ (1) The BMCA Preferred Options represent options to purchase shares of redeemable convertible preferred stock of BMCA. Each share of preferred stock is convertible, at the holder's option, into shares of Class A Common Stock of BMCA at a formula price based on Book Value (as defined in the option agreement) as of the date of grant. The BMCA Preferred Options vest over five years from the date of (Footnotes continued on next page)
(Footnotes continued from previous page)
grant. Dividends will accrue on the preferred stock from the date of issuance at the rate of 8% per annum. The preferred stock is redeemable, at BMCA's option, for a redemption price equal to the exercise price per share plus accrued and unpaid dividends. The Class A Common Stock of BMCA issuable upon conversion of the preferred stock is subject to repurchase by BMCA under certain circumstances at a price equal to current Book Value. The exercise price of the options is equal to the fair value per share of the preferred stock at the date of grant. The BMCA Preferred Options have no expiration date. The potential realizable values are calculated on the basis of a five-year period from the date of grant.
BMCA PREFERRED STOCK OPTIONS/GAF CORPORATION STOCK APPRECIATION RIGHTS AND OPTIONS/SAR VALUES AT DECEMBER 31, 1998
- ------------------ (1) The stock appreciation rights relating to GAF Corporation common stock represent the right to receive a cash payment based upon the appreciation in value of the specified number of shares of common stock of GAF Corporation over the determined initial book value per share of common stock of GAF Corportion (adjusted for the separation transactions) and interest on such book value at a specified rate. The GAF Corporation stock appreciation rights vest over a five-year period, subject to earlier vesting under certain circumstances, including in connection with a change of control, and have no expiration date.
(2) Options for 9,799, 3,837, 4,812 and 9,118 shares of preferred stock were in-the-money for Messrs. Kumar, Lang, LaPalme and Collins, respectively, at December 31, 1998.
COMPENSATION OF DIRECTORS
The directors of BMCA do not receive any compensation for their services as such.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONS
Compensation decisions are determined by our Board of Directors, each member of which is also one of our executive officers. Messrs. Rogers and Heyman are also executive officers of ISP, and Mr. Heyman is a member of the Board of Directors of ISP. See Item 13, "Certain Relationships and Related Transactions."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Approximately 98.5% of our outstanding Class A Common Stock is owned of record by GAF Building Materials Corporation. All of the outstanding common stock of GAF Building Materials Corporation is owned of record by G Industries which is 100% owned by G-I Holdings, which in turn is 100% owned by GAF Corporation. All of our outstanding Class B Common Stock is owned of record by trusts for the benefit of the children of Mr. Kumar.
The following table sets forth information with respect to the ownership of Common Stock, as of March 19, 1999, by each other person known to us to own beneficially more than 5% of either class of the
Common Stock outstanding on that date, by each of our directors and by all of our executive officers and directors as a group.
- ------------------ (1) The business address for each of Messrs. Heyman and Kumar is 1361 Alps Road, Wayne, New Jersey 07470.
(2) The number of shares shown as being beneficially owned (as defined in Rule 13d-3 of the Exchange Act) by Mr. Heyman and by all directors and executive officers of the Company as a group attributes ownership of GAF Building Materials Corporation's shares to Mr. Heyman. As of March 19, 1999, Mr. Heyman beneficially owned (as defined in Rule 13d-3 of the Exchange Act) approximately 97% of the capital stock of GAF Corporation.
(3) The shares of Class B Common Stock are owned of record by trusts for the benefit of Mr. Kumar's children. Mr. Kumar disclaims beneficial ownership of all of these shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
Pursuant to a management agreement which expires December 31, 1999, ISP (of which our Chairman, Samuel J. Heyman beneficially owns (as defined in Rule 13d-3 of the Exchange Act) approximately 76%) provides certain general management, administrative, legal, telecommunications, information and facilities services to us (including the use of our headquarters in Wayne, New Jersey). ISP charged us $4.3 million in 1998 for providing these services. These charges consist of management fees and other reimbursable expenses attributable to us, or incurred by ISP for our benefit. They are based on an estimate of the costs ISP incurs to provide such services. Effective January 1, 1999, the term of the management agreement was extended through the end of 1999, and the management fees payable under such agreement were increased. We also allocate a portion of the management fees payable by us under the management agreement to separate lease payments for the use of our headquarters. Based on the services provided by ISP in 1998 under the management agreement, the aggregate amount payable by us to ISP under the management agreement for 1999 is expected to be approximately $5.3 million. Certain of our executive officers receive their compensation from ISP. ISP is indirectly reimbursed for this compensation through payment of the management fee and other reimbursable expenses payable under the management agreement.
As of January 1, 1997, we entered into a separate management agreement with GAF Fiberglass under which we provide certain general management, administrative and financial services to GAF Fiberglass. Under the management agreement which was renewed for 1999 and expires December 31, 1999, GAF Fiberglass is obligated to pay us an annual management fee of $1.0 million.
Due to the unique nature of the services provided under the management agreements, comparisons with third party arrangements are difficult. However, we believe that the terms of each of the management agreements taken as a whole are no less favorable to us than could be obtained from an unaffiliated third party.
CERTAIN PURCHASES
We purchase all of our colored roofing granules requirements from ISP (except for the requirements of our California and Oregon roofing plants and a portion of the requirements of our Indiana roofing plant which are supplied by a third party) under a requirements contract. Effective January 1, 1999, this contract was amended to cover, among other things, purchases of colored roofing granules by our subsidiaries and was renewed for 1999. This contract is subject to annual renewal unless terminated by either party to such agreement. In 1997 and 1998, BMCA and its subsidiaries purchased in the aggregate approximately $51.1 million and $62.6 million, respectively, of mineral products from ISP.
As part of the separation transactions involving GAF and its subsidiaries in January 1997, we transferred to GAF Fiberglass our Nashville, Tennessee facility. GAF Fiberglass manufactures a significant portion of our glass fiber requirements pursuant to a supply agreement on terms which we believe are at least as favorable to us as could be obtained from an unaffiliated third party. In 1997 and 1998, we purchased approximately $24.5 million and $26.1 million, respectively, of glass fiber from GAF Fiberglass.
TAX SHARING AGREEMENT
We have entered into a tax sharing agreement dated January 31, 1994 with GAF Corporation and G-I Holdings with respect to the payment of federal income taxes and certain related matters. During the term of the tax sharing agreement, which is effective for the period during which we or any of our domestic subsidiaries is included in a consolidated federal income tax return filed by GAF Corporation, we are obligated to pay G-I Holdings an amount equal to those federal income taxes we would have incurred if we (on behalf of ourselves and our domestic subsidiaries) filed our own federal income tax return. Unused tax attributes will carry forward for use in reducing amounts payable by us to G-I Holdings in future years, but cannot be carried back. If we ever were to leave the GAF Corporation consolidated tax group (the "GAF Group"), we would be required to pay to G-I Holdings the value of any tax attributes to which we would succeed under the consolidated return regulations to the extent such attributes reduced the amounts otherwise payable by us under the tax sharing agreement. Under certain circumstances, the provisions of the tax sharing agreement could result in us having a greater liability under the agreement than we would have had if we (and our domestic subsidiaries) had filed our own separate federal income tax return. Under the tax sharing agreement, we and each of our domestic subsidiaries are responsible for any taxes that would be payable by reason of any adjustment to the tax returns of GAF Corporation or its subsidiaries for years prior to the adoption of the tax sharing agreement that relate to our business or assets or the business or assets of any of our domestic subsidiaries. Although, as a member of the GAF Group, we are severally liable for all federal income tax liabilities of the GAF Group, including tax liabilities not related to our business, G-I Holdings and GAF Corporation have agreed to indemnify us and our subsidiaries for all tax liabilities of the GAF Group other than tax liabilities (1) arising from our operations and the operations of our domestic subsidiaries and (2) for tax years pre-dating the tax sharing agreement that relate to our business or assets and the business or assets of any of our domestic subsidiaries. The tax sharing agreement provides for analogous principles to be applied to any consolidated, combined or unitary state or local income taxes. Under the tax sharing agreement, GAF Corporation makes all decisions with respect to all matters relating to taxes of the GAF Group. The provisions of the tax sharing agreement take into account both the federal income taxes we would have incurred if we filed our own separate federal income tax return and the fact that we are a member of the GAF Group for federal income tax purposes.
INTERCOMPANY BORROWINGS
BMCA makes loans to, and borrows from, G-I Holdings and its subsidiaries from time to time at prevailing market rates (between 5.82% and 5.96% per annum) during 1997 and 1998. The highest amount of loans made by BMCA to G-I Holdings during 1997 and 1998 was $6.2 million. No loans were made to BMCA by G-I Holdings and its subsidiaries during 1997 and 1998. As of December 31, 1998, no loans were owed to BMCA by G-I Holdings, and no loans were owed by BMCA to affiliates. In addition, BMCA makes non-interest bearing advances to affiliates, of which $1.5 million were outstanding at December 31, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a)(1) Financial Statements: See Index on page.
(a)(2) Financial Statement Schedules: See Index on page.
(a)(3) Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------- 2.1 -- Reorganization Agreement, dated as of December 31, 1998, by and among BMCA, Building Materials Manufacturing Corporation and Building Materials Investment Corporation (incorporated by reference to Exhibit 2.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-69749) (the "2008 Notes S-4")).
3.1 -- Certificate of Incorporation of BMCA (incorporated by reference to Exhibit 3.1 to BMCA's Form 10-Q for the quarter ended September 27, 1998).
3.2 -- By-laws of BMCA (incorporated by reference to Exhibit 3.2 to BMCA's Registration Statement on Form S-4 (Registration No. 33-81808)) (the "Deferred Coupon Note Registration Statement").
3.3 -- Certificate of Incorporation of Building Materials Manufacturing Corporation.
3.4 -- By-laws of Building Materials Manufacturing Corporation.
3.5 -- Certificate of Incorporation of Building Materials Investment Corporation.
3.6 -- By-laws of Building Materials Investment Corporation.
4.1 -- Indenture, dated as of December 3, 1998, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the 2008 Notes S-4).
4.2 -- First Supplemental Indenture dated as of January 1, 1999 to Indenture dated as of December 3, 1998 among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.4 to the 2008 Notes S-4).
4.3 -- Registration Rights Agreement, dated December 3, 1998, between BMCA, Bear, Stearns & Co. Inc. and Chase Securities, Inc. (incorporated by reference to Exhibit 4.3 to the 2008 Notes S-4).
4.4 -- Indenture, dated as of June 30, 1994, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Deferred Coupon Note Registration Statement).
4.5 -- Indenture, dated as of December 9, 1996, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-20859) (the "2006 Notes Registration Statement")).
4.6 -- Indenture, dated as of October 20, 1997, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-41531) (the "8% Notes Registration Statement")).
4.7 -- Indenture, dated as of July 17, 1998, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-60633) (the "2005 Notes S-4")).
4.8 -- First Supplemental Indenture, dated as of November 30, 1998, to Indenture dated as of June 30, 1994 between BMCA as issuer and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.5 to the 2008 Notes S-4).
4.9 -- Second Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of June 30, 1994, as previously amended, among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.6 to the 2008 Notes S-4).
4.10 -- First Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of December 9, 1996 among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.7 to the 2008 Notes S-4).
4.11 -- First Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of October 20, 1997 among BMCA, as issuer, Building Materials Manufacturing Corporation, as co-obligor, Building Materials Investment Corporation, as Guarantor and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.8 to the 2008 Notes S-4).
4.12 -- First Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of July 17, 1998 among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.9 to the 2008 Notes S-4).
10.1 -- Amended and Restated Management Agreement, dated as of January 1, 1999, among GAF, G-I Holdings, G Industries, Merick Inc., GAF Fiberglass, ISP, GAF Building Materials Corporation, GAF Broadcasting Company, Inc., BMCA and ISP Opco Holdings Inc.
10.2 -- Form of Option Agreement relating to Series A Cumulative Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 10.9 to BMCA's Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")).*
10.3 -- Forms of Amendment to Option Agreement relating to Series A Cumulative Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 10.12 to BMCA's Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K")).*
10.4 -- Form of Option Agreement relating to Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 10.13 to the 1997 Form 10-K).*
10.5 -- BMCA Preferred Stock Option Plan (incorporated by reference to Exhibit 4.2 to BMCA's Form S-8).*
10.6 -- Tax Sharing Agreement, dated as of January 31, 1994, among GAF, G-I Holdings and BMCA (incorporated by reference to Exhibit 10.6 to the Deferred Coupon Note Registration Statement).
10.7 -- Reorganization Agreement, dated as of January 31, 1994, among GAF Building Materials Corporation, G-I Holdings and BMCA (incorporated by reference to Exhibit 10.9 to the Deferred Coupon Note Registration Statement).
10.8 -- Stock Appreciation Right Agreement, dated January 1, 1997, between GAF Corporation and Sunil Kumar (incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K).*
10.9 -- Amended and Restated Stock Appreciation Right Agreement, dated January 1, 1997, between GAF Corporation and Sunil Kumar (incorporated by reference to Exhibit 10.12 to the 1996 Form 10-K).*
10.10 -- Letter Agreement, dated July 8, 1998, among BMCA, ISP Holdings and Sunil Kumar (incorporated by reference to Exhibit 10.18 to the 2005 Notes S-4).*
21 -- Subsidiaries of BMCA (incorporated by reference to Exhibit 21 to the 2008 Notes S-4).
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for fiscal year 1998, which is submitted electronically to the Securities and Exchange Commission for information only.
- ------------------ * Management and/or compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1998.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BUILDING MATERIALS CORPORATION OF AMERICA
By: /s/ WILLIAM C. LANG ------------------------------------- William C. Lang Senior Vice President and Chief Financial Officer Date: March 30, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - -------------------- ---------------------------------------- --------------
/s/ SAMUEL J. HEYMAN Chairman of the Board and Director March 30, 1999 - -------------------- Samuel J. Heyman
/s/ SUNIL KUMAR President, Chief Executive Officer and March 30, 1999 - -------------------- Director (Principal Executive Officer) Sunil Kumar
/s/ JAMES P. ROGERS Executive Vice President and Director March 30, 1999 - -------------------- James P. Rogers
/s/ WILLIAM C. LANG Senior Vice President and Chief March 30, 1999 - -------------------- Financial Officer (Principal Financial William C. Lang and Accounting Officer)
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANTS HAVE DULY CAUSED THIS REPORT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BUILDING MATERIALS MANUFACTURING CORPORATION
BUILDING MATERIALS INVESTMENT CORPORATION
By: /s/ WILLIAM C. LANG ------------------------------- William C. Lang Senior Vice President and Chief Financial Officer Date: March 30, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANTS AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - -------------------- ---------------------------------------- --------------
/s/ SUNIL KUMAR President, Chief Executive Officer and March 30, 1999 - -------------------- Director (Principal Executive Officer) Sunil Kumar
/s/ WILLIAM C. LANG Senior Vice President and Chief March 30, 1999 - -------------------- Financial Officer (Principal Financial William C. Lang and Accounting Officer)
BUILDING MATERIALS CORPORATION OF AMERICA FORM 10-K
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS, CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
BUILDING MATERIALS CORPORATION OF AMERICA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Building Materials Corporation of America (the "Company"), an indirect subsidiary of GAF Corporation ("GAF") and G-I Holdings Inc. ("G-I Holdings"), was formed in January 1994 to acquire the operating assets and certain liabilities of GAF Building Materials Corporation ("GAFBMC"), the Company's parent. See Note 1 to Consolidated Financial Statements.
RESULTS OF OPERATIONS
1998 Compared With 1997
The Company recorded a net loss in 1998 of $10.6 million compared with net income of $26.1 million in 1997. The net loss in 1998 reflected the impact of $27.6 million of pre-tax nonrecurring charges ($17.1 million after-tax impact) and after-tax extraordinary charges of $18.1 million. Excluding the effect of these charges, the Company's results reflected higher operating and other income, partially offset by increased interest expense.
Net sales for 1998 were $1.088 billion, a 15.2% increase over net sales for 1997 of $944.6 million, principally due to increased sales in the residential roofing product line and the acquisition of the Leslie-Locke business in June 1998 (see Note 4 to Consolidated Financial Statements), partially offset by lower sales in the commercial roofing product line. The increase in residential sales resulted from higher unit volumes and average selling prices, while the commercial roofing product line experienced declines in both unit volumes and average selling prices.
The Company recorded pre-tax nonrecurring charges in 1998 aggregating $27.6 million, of which $20.0 million related to the settlement of a national class action lawsuit involving asphalt shingles manufactured between January 1, 1973 and December 31, 1997. Under the terms of the September 1998 settlement, which has been granted preliminary approval by the court pending the outcome of a fairness hearing, the Company will provide property owners whose GAF shingles were manufactured during this period and which suffer certain damages during the term of their original warranty period, and who file a qualifying claim, with an opportunity to receive certain limited benefits beyond those already provided in their existing warranty. If the court grants final approval of this settlement, the settlement will resolve a class action filed against GAFBMC in Mobile County, Alabama. Several other class action lawsuits that had been brought against GAFBMC in 1996 and 1997 were stayed pending final approval of the Mobile County, Alabama class action. Each of these lawsuits had alleged that certain GAF shingles were defective and sought unspecified damages. The Company agreed to the settlement, payments against which will be made over a number of years, to avoid the expense required to defend such litigation. The Company believes the court will grant final approval of the settlement, although there can be no assurance in that regard. If the court does not grant final approval and the settlement agreement is rendered inoperable, the Mobile County, Alabama action would continue as if no settlement agreement had existed. In addition, the stays of the other class actions could be lifted and those actions could continue. In that event, the Company would reverse the pre-tax nonrecurring charge of $20.0 million related to the settlement. In July 1998, the Company recorded a pre-tax nonrecurring charge of $7.6 million related to a grant to its President and Chief Executive Officer of 30,000 shares of restricted common stock of the Company and related cash payments to be made over a specified period of time (substantially all of which is earned) in connection with the termination by an affiliate of preferred stock options and stock appreciation rights held by such officer.
Operating income, before the impact of the nonrecurring charges, was $73.5 million for 1998, a 4.9% increase over the $70.1 million recorded in 1997. This increase in operating income was primarily attributable to improved gross profit margins due to increased plant capacity utilization and the inclusion of the Leslie-Locke business since its acquisition in June 1998. Partially offsetting these improvements were higher distribution costs due to rail carrier service problems in the first nine months of 1998, and higher selling, general and administrative expenses resulting from broader marketing efforts.
Interest expense increased from $42.8 million in 1997 to $49.7 million in 1998, primarily due to higher debt levels, partially offset by lower average interest rates. The lower average interest rates resulted from the
refinancing of $279.7 million in aggregate principal amount at maturity of the Company's 11 3/4% Senior Deferred Coupon Notes due 2004 (the "Deferred Coupon Notes") with substantially all of the net proceeds from the issuances of the 7 3/4% Senior Notes due 2005 (the "2005 Notes") and 8% Senior Notes due 2008 (the "2008 Notes") on July 17 and December 3, 1998, respectively. See the discussion below under Liquidity and Financial Condition. In connection with these transactions, the Company recorded after-tax extraordinary losses of $18.1 million, related to premiums paid to purchase the Deferred Coupon Notes.
Other income, net, was $15.9 million in 1998 compared with $15.5 million in 1997, with the improvement due primarily to the absence of a $3.0 million provision recorded in 1997 for estimated obligations related to product warranty claims for a discontinued product, and lower other miscellaneous expenses, partially offset by $4.2 million lower investment income.
1997 Compared With 1996
The Company recorded net income in 1997 of $26.1 million compared with net income of $17.1 million in 1996. The 53.0% increase in net income was attributable to higher operating and other income, partially offset by higher interest expense.
Net sales for 1997 increased $92.7 million, or 10.9%, to $944.6 million compared with $852.0 million in 1996. The sales growth reflected increased unit volumes of both the residential and commercial roofing product lines, as well as the sales of the Leatherback Industries business of $30.2 million, which was acquired in March 1997.
Gross profit margin increased to 27.3% in 1997 compared with 27.0% in 1996, resulting primarily from lower manufacturing costs and improved product mix. Selling, general and administrative expenses increased 11.4% to $185.7 million in 1997 from $166.7 million in 1996, primarily reflecting increased costs of distribution. Selling, general and administrative expenses as a percentage of net sales increased slightly from 19.6% in 1996 to 19.7% in 1997.
Operating income in 1997 was $70.1 million, an increase of $8.7 million, or 14.2%, compared with $61.4 million in 1996. The increase in operating income was attributable to the higher sales levels and improved margins.
Interest expense was $42.8 million in 1997 compared with $32.0 million in 1996 due to higher debt levels, primarily resulting from the issuance in December 1996 of $100 million in aggregate principal amount of 8 5/8% Senior Notes due 2006 (the "8 5/8% Notes") and the issuance in October 1997 of $100 million in aggregate principal amount of 8% Senior Notes due 2007 (the "2007 Notes").
Other income, net, was $15.5 million in 1997 compared with other expense, net, of $1.5 million in 1996. The improvement was due principally to $20.0 million higher investment income, partially offset by a $3.0 million provision for estimated obligations related to product warranty claims for a discontinued product.
LIQUIDITY AND FINANCIAL CONDITION
Net cash inflow during 1998 was $61.6 million before financing activities, and included $88.0 million of cash generated from operations, the reinvestment of $71.1 million for capital programs, acquisitions of $59.2 million, including the acquisition of the Leslie-Locke business for $43.5 million, proceeds of $29.0 million from the sale of the Company's perlite insulation manufacturing assets, and the generation of $74.9 million from net sales of available-for-sale and held-to-maturity securities.
Cash invested in additional working capital totaled $27.9 million during 1998, primarily reflecting increases in accounts payable and accrued liabilities of $40.4 million, partially offset by a $10.9 million increase in inventories and a $4.0 million increase in receivables. Accrued liabilities, including the reserve for product warranty claims, increased by $40.7 million to $80.1 million as a result of additional accrued interest payable, increases in accrued distribution costs and other plant operating accruals and due to the $8.6 million short-term portion of the $27.6 million of nonrecurring charges. Cash from operating activities also reflected a $42.2 million cash inflow from related party transactions as a result of repayments of advances which were made by the Company in 1997, a $64.3 million cash outflow for net purchases of trading securities and $17.4 million of cash
inflow from an increase in other liabilities and other operating activities, mainly reflecting $19.0 million of the nonrecurring charges and $6.6 million of net unrealized losses on trading securities and other short-term investments.
Net cash used in financing activities totaled $49.5 million in 1998. The Company generated $303.5 million from the issuances in 1998 of the 2005 Notes and the 2008 Notes and $6.2 million from the repayment of a loan by a related party. Offsetting such cash inflows was $287.9 million of repayments of long-term debt, principally the repurchase of $279.7 million in aggregate principal amount at maturity of the Deferred Coupon Notes, a $34.0 million paydown of borrowings under the Company's bank credit facility, a $26.9 million paydown of short-term borrowings, and $6.1 million of financing fees and expenses.
As a result of the foregoing factors, cash and cash equivalents increased by $12.1 million during 1998 to $25.0 million, excluding $180.6 million of trading, available-for-sale and held-to-maturity securities and other short-term investments.
In December 1998, the Company issued $155 million in aggregate principal amount of the 2008 Notes and used substantially all of the net proceeds from such issuance to purchase, and subsequently cancel, $147.1 million in aggregate principal amount at maturity of the Deferred Coupon Notes.
In July 1998, the Company issued $150 million in aggregate principal amount of the 2005 Notes and used substantially all of the net proceeds from such issuance to purchase, and subsequently cancel, $132.6 million in aggregate principal amount at maturity of the Deferred Coupon Notes.
The Company's bank credit facilities were replaced in August 1997 with a new three-year, $75 million facility (the "Credit Agreement"). The terms of the Credit Agreement provide for a $75 million unsecured revolving credit facility, the full amount of which is available for letters of credit, provided that total borrowings and outstanding letters of credit may not exceed $75 million in the aggregate. As of December 31, 1998, no borrowings were outstanding under the Credit Agreement and $29.9 million of letters of credit were outstanding. Under the terms of the Credit Agreement, the Company is subject to certain financial covenants, including interest coverage and leverage ratios, and dividends and other restricted payments are limited. The Company was in compliance with such covenants as of December 31, 1998.
Additional borrowings by the Company are subject to certain covenants contained in the indentures relating to the 8 5/8% Notes, the 2007 Notes, the 2005 Notes, the 2008 Notes (collectively, the "Other Senior Notes"), the Deferred Coupon Notes and the Credit Agreement. The Company is currently limited by certain of these covenants from incurring additional debt, except under certain limited circumstances including under the Credit Agreement and the refinancing of existing debt.
The objectives of the Company in utilizing interest rate swap agreements ("swaps") are to lower funding costs, diversify sources of funding and manage interest rate exposure. In June 1998, the Company terminated its outstanding swaps related to its Deferred Coupon Notes with an aggregate ending notional principal amount of $60.0 million, resulting in gains of $0.7 million. The gains have been deferred and are being amortized as a reduction of interest expense over the remaining original life of the swaps. By utilizing swaps, the Company reduced its interest expense by $2.2, $2.0, and $1.9 million in 1996, 1997 and 1998, respectively. See Note 10 to Consolidated Financial Statements.
See Note 10 to Consolidated Financial Statements for further information regarding the debt instruments of the Company.
Upon its formation on January 31, 1994, the Company assumed the first $204.4 million of GAFBMC's liabilities relating to then-pending cases and previously settled asbestos-related bodily injury cases, all of which were paid as of March 30, 1997. See Item 3, "Legal Proceedings" for further information regarding asbestos-related matters. At December 31, 1998, the Company had total outstanding consolidated indebtedness of $592.7 million, of which $4.3 million matures prior to December 31, 1999, and stockholders' equity of $44.9 million. The Company anticipates funding such obligations from its cash and investments, operations and/or borrowings, which may include borrowings from affiliates.
In March 1993, the Company sold its trade accounts receivable ("receivables") to a trust, without recourse, pursuant to an agreement which provided for a maximum of $75 million in cash to be made available to the
Company based on eligible receivables outstanding from time to time. In November 1996, the Company repurchased the receivables sold pursuant to the 1993 agreement and sold them to a special purpose subsidiary of the Company, BMCA Receivables Corporation, without recourse, which in turn sold them to a new trust, without recourse, pursuant to new agreements. The new agreements provide for a maximum of $115 million in cash to be made available to the Company based on eligible receivables outstanding from time to time. This facility expires in December 2001.
The Company makes loans to, and borrows from, G-I Holdings and its subsidiaries at prevailing market rates. As of December 31, 1998, no loans were owed to the Company by G-I Holdings and no loans were owed by the Company to affiliates. In addition, the Company makes non-interest bearing advances to affiliates, of which $1.5 million were outstanding at December 31, 1998.
The parent corporations of the Company are essentially holding companies without independent businesses or operations and, as such, are presently dependent upon the cash flows of their subsidiaries, principally the Company, in order to satisfy their obligations, including asbestos-related claims and certain potential tax liabilities including tax liabilities relating to Rhone-Poulenc Surfactants & Specialties, L.P., a Delaware limited partnership which operates, among other businesses, GAF Fiberglass Corporation's ("GFC") former surfactants chemicals business. The parent corporations of the Company are GAF, G-I Holdings, G Industries Corp. and GAFBMC. Except for the Company, the only significant asset of such parent corporations is GFC. GAF has advised the Company that it expects to obtain funds to satisfy such obligations from, among other things, dividends and loans from subsidiaries, principally the Company, and from payments pursuant to the Tax Sharing Agreement between GAF and the Company. The indentures relating to the Deferred Coupon Notes, the Other Senior Notes and the Credit Agreement contain restrictions on the amount of dividends, loans and other restricted payments, as defined therein, which may be paid by the Company. As of December 31, 1998, after giving effect to the most restrictive of the aforementioned restrictions, the Company could have paid dividends and other restricted payments of up to $79.4 million. The Company does not believe that the dependence of its parent corporations on the cash flows of their subsidiaries should have a material adverse effect on the operations, liquidity or capital resources of the Company. For further information, see Notes 3, 6, 10, 14 and 15 to Consolidated Financial Statements.
The Company uses capital resources to maintain existing facilities, expand its operations and make acquisitions. In 1999, the Company expects to build a new fiberglass roofing mat manufacturing facility in Shafter, California and a new residential roofing shingle manufacturing facility in Michigan City, Indiana. Funding for the Company's capital program is expected to be generated from results of operations, additional borrowings and leasing transactions.
The Company does not believe that inflation has had an effect on its results of operations during the past three years. However, there can be no assurance that the Company's business will not be affected by inflation in the future.
Market-Sensitive Instruments and Risk Management
The Company's investment strategy is to seek returns in excess of money market rates on its available cash while minimizing market risks. There can be no assurance that the Company will be successful in implementing such a strategy. The Company invests primarily in international and domestic arbitrage and securities of companies involved in acquisition or reorganization transactions, including at times, common stock short positions which are offsets against long positions in securities which are expected, under certain circumstances, to be exchanged or converted into the short positions. With respect to its equity positions, the Company is exposed to the risk of market loss. See Note 2 to Consolidated Financial Statements.
The Company enters into financial instruments in the ordinary course of business in order to manage its exposure to market fluctuations in interest rates and on its short-term investments. The financial instruments the Company employs to reduce market risk include swaps, futures, and other hedging instruments. The financial instruments are primarily used to hedge the Company's debt and short-term investment portfolios. The counterparties to these financial instruments are major financial institutions with high credit standings. The amounts subject to credit risk are generally limited to the amounts, if any, by which the counterparties' obligations exceed the obligations of the Company. The Company controls credit risk through credit approvals,
limits and monitoring procedures. The Company does not anticipate nonperformance by counterparties to these instruments.
All of the financial instruments in the above table have a maturity of less than one year.
In connection with the Deferred Coupon Notes, the Company entered into fixed to floating interest rate swaps in order to balance out the Company's mix of fixed and floating rate debt. As a result of the swaps, the effective interest cost to the Company on the portion of the Deferred Coupon Notes covered by the swaps varied at a fixed spread over LIBOR. The swaps had a notional principal amount of $60 million and a final maturity of July 1, 1999, all of which were terminated as of June 28, 1998.
As of December 31, 1998, equity-related financial instruments employed by the Company to reduce market risk include long contracts valued at $35.2 million and short contracts valued at $143.2 million, which are marked-to-market each month, with unrealized gains and losses included in the results of operations. As such, there is no economic cost at December 31, 1998 to terminate these instruments and therefore the fair market value is zero.
Year 2000 Compliance
The Company has implemented a Year 2000 program (i) to address its Year 2000 issues, i.e., the inability by some IT and non-IT equipment, including embedded technology, to accurately read and process certain dates in the Year 2000 and afterwards, (ii) to investigate the Year 2000 issues of third parties significant to the Company's business, and (iii) to establish contingency plans where appropriate.
The Company has completed an internal study and believes that it has remediated substantially all of its core systems. The Company has also evaluated and believes that it has remediated subtantially all of its personal computers, mainframe computers and its computer network. The Company believes that the core IT systems remediation has corrected Year 2000 programming issues in all critical areas of the Company's business.
In addition, the Company is working with outside consultants to certify the compliance of the Company's core systems with externally developed and published certification standards. The Company expects to complete this certification by the third quarter of 1999. The Company's independent third party consultants have inventoried and evaluated substantially all of the Company's non-IT equipment, i.e., voice mail, telephone, fire and security systems and numerically controlled production machinery and computer-based production equipment, and the Company is in the process of remediating and testing this equipment. The Company expects to complete these activities by the second quarter of 1999.
The Company has requested compliance information in the form of direct questionnaires from vendors significant to the Company's business and is planning to solicit compliance information from its significant customers. The Company expects to complete this solicitation by June 1999. When appropriate, a lack of a response to these questionnaires is being followed by additional correspondence and finally direct contact. The Company has received compliance information from substantially all of its key vendors. Each of these vendors has advised the Company that they are or expect to be ready for the Year 2000 by the end of 1999. The Company is evaluating these responses and is requesting more information where appropriate to help the Company formulate contingency plans, including the identification of secondary suppliers, to minimize the impact of any Year 2000 related issues that may develop. The Company expects this phase of evaluation to be completed by June 1999.
The Company does not believe the costs of its Year 2000 program will be material to its financial position or results of operations. The Company has incurred outside costs of approximately $650,000 to date and anticipates
that additional outside costs should approximate no more than $1 million in the aggregate. The Company will charge these costs, as incurred, against results of operations.
Management believes it has taken reasonable steps in developing its Year 2000 program. Notwithstanding these actions, there can be no assurance that all of the Company's Year 2000 issues or those of its key suppliers, service providers or customers will be resolved or addressed satisfactorily before the Year 2000 commences. Management believes that the most reasonably likely "worst case scenario" resulting from Year 2000 issues could be the failure by the Company's key suppliers, service providers, customers and other third parties to address their Year 2000 issues. If this were to occur, then the Company's usual channels of supply and distribution could be disrupted and the Company could experience a material adverse impact on its business, results of operations or financial position.
* * *
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 of 1933 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 words or phrases of similar import. Similarly, statements that describe the Company's objectives, plans or goals also are forward-looking statements. The Company's operations are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. The forward-looking statements included herein are made only as of the date of this Annual Report on Form 10-K and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. No assurances can be given that projected results or events will be achieved.
BUILDING MATERIALS CORPORATION OF AMERICA
SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data of the Company. The historical financial information gives effect to the formation of the Company as if it had occurred on January 1, 1994 and the Company's financial statements have been prepared on a basis which retroactively reflects the formation of the Company at the beginning of the periods presented, except that the Company's assumption of the first $204.4 million of liability relating to pending and previously settled asbestos-related bodily injury cases and related income tax benefits of $79.7 million have been reflected as a charge of $124.7 million to stockholder's equity upon the Company's formation as of January 31, 1994. As of January 1, 1997, U.S. Intec, Inc. ("U.S. Intec") became a subsidiary of the Company through a capital contribution to the Company by G-I Holdings. Accordingly, the Company's historical consolidated financial statements include U.S. Intec's results of operations and cash flows from the date of its acquisition by G-I Holdings (October 20, 1995), including sales of $21.8 and $99.0 million for the years ended December 31, 1995 and 1996, respectively, and net income (loss) of $(0.5) and $1.3 million, respectively. See Note 1 to Consolidated Financial Statements. The results for the year 1997 include the results of the Leatherback Industries business from the date of its acquisition (March 14, 1997), including sales of $30.2 million. The results for the year 1998 include the results of the Leslie-Locke business from the date of its acquisition (June 1, 1998), including sales of $53.3 million.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Building Materials Corporation of America:
We have audited the accompanying consolidated balance sheets of Building Materials Corporation of America (a Delaware corporation and a 97%-owned subsidiary of GAF Building Materials Corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, appearing on Pages to of this Form 10-K, present fairly, in all material respects, the financial position of Building Materials Corporation of America and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule appearing on page S-1 of this Form 10-K is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP Roseland, New Jersey February 12, 1999
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
- ------------------ * Working capital items exclude cash and cash equivalents, short-term investments, short-term debt and net receivables from/payables to related parties. Working capital acquired in connection with acquisitions is reflected in "Acquisitions". The effects of reclassifications between noncurrent and current assets and liabilities are excluded from the amounts shown above. In addition, the increase in receivables shown above does not reflect the cash proceeds from the sale of certain of the Company's receivables (see Note 7); such proceeds are reflected in cash from financing activities. As discussed in Notes 1 and 2, in connection with the Separation Transactions, G-I Holdings made a noncash contribution to the Company in December 1996 of $2.8 million of available-for-sale securities, $7.1 million of held-to-maturity securities and $13.2 million of other short-term investments.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Building Materials Corporation of America ("BMCA" or the "Company") was formed on January 31, 1994 and is a 97%-owned subsidiary of GAF Building Materials Corporation ("GAFBMC"), which is a wholly-owned subsidiary of G Industries Corp. ("G Industries"). G Industries is a wholly-owned subsidiary of G-I Holdings Inc. ("G-I Holdings"), which is a wholly-owned subsidiary of GAF Corporation ("GAF").
NOTE 1. FORMATION OF THE COMPANY
Effective as of January 31, 1994, GAFBMC transferred to the Company all of its business and assets, other than three closed manufacturing facilities, certain deferred tax assets and receivables from affiliates. The Company recorded the assets and liabilities related to such transfer at GAFBMC's historical costs. The Company contractually assumed all of GAFBMC's liabilities, except (i) all of GAFBMC's environmental liabilities, other than environmental liabilities relating to the Company's plant sites and its business as then-conducted, (ii) all of GAFBMC's tax liabilities, other than tax liabilities arising from the operations or business of the Company and (iii) all of GAFBMC's asbestos-related liabilities, other than the first $204.4 million of such liabilities (whether for indemnity or defense) relating to then-pending asbestos-related bodily injury cases and previously settled asbestos-related bodily injury cases which the Company contractually assumed and agreed to pay. G-I Holdings and GAFBMC have agreed, jointly and severally, to indemnify the Company from liabilities not assumed by the Company, including asbestos-related and environmental liabilities not expressly assumed by the Company. See Note 3.
The Company's Consolidated Financial Statements have been prepared on a basis which retroactively reflects the formation of the Company, as discussed above, for all periods presented prior to 1995, except that the Company's assumption of $204.4 million of asbestos-related liabilities described above and related income tax benefits of $79.7 million have been reflected as a charge of $124.7 million to stockholder's equity upon the Company's formation as of January 31, 1994.
In October 1995, G-I Holdings acquired all of the outstanding shares of U.S. Intec, Inc. ("U.S. Intec"), which manufactures commercial roofing products, for a purchase price of $27.5 million and assumed $35.0 million of U. S. Intec's indebtedness. As of January 1, 1997, U.S. Intec became a wholly-owned subsidiary of the Company through a capital contribution to the Company by G-I Holdings. Accordingly, the Company's historical consolidated financial statements include U.S. Intec's results of operations and cash flows from the date of its acquisition by G-I Holdings (October 20, 1995), including sales and net income of $99.0 and $1.3 million, respectively, for the year ended December 31, 1996. The Company recorded the assets and liabilities of U.S. Intec at G-I Holdings' purchase accounting basis.
On January 1, 1997, GAF effected a series of transactions involving its subsidiaries (the "Separation Transactions") that resulted in, among other things, (i) the approximately 83.5% of the issued and outstanding common stock of International Specialty Products Inc. ("ISP"), an affiliate, owned by a subsidiary of GAF, being distributed to ISP Holdings Inc., a subsidiary of GAF, and the capital stock of ISP Holdings being distributed to the stockholders of GAF, (ii) the Company's glass fiber manufacturing facility in Nashville, Tennessee, and certain related assets and liabilities, being transferred to GAF Fiberglass Corporation ("GFC"), (iii) U.S. Intec becoming a subsidiary of the Company and (iv) G-I Holdings making a contribution to the Company in December 1996 of $82.5 million in cash and short-term investments. As a result of the Separation Transactions, ISP Holdings and ISP are no longer direct or indirect subsidiaries of GAF, while the Company and GFC have remained subsidiaries of GAF. On July 15, 1998, ISP merged with and into ISP Holdings and ISP Holdings changed its name to International Specialty Products Inc. The Company recorded the transfer of the Nashville facility as a distribution to its indirect parent, G-I Holdings, at its net book value. G-I Holdings then made a capital contribution to GFC equal to such net book value. The results of operations, cash flows and assets and liabilities of the Nashville facility are included in the Company's consolidated financial statements for all periods prior to the date of transfer of January 1, 1997.
The parent corporations of the Company are GAF, G-I Holdings, G Industries and GAFBMC. Except for the Company, the only other significant asset of such parent corporations is GFC. As a result of the Separation
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. FORMATION OF THE COMPANY--(CONTINUED)
Transactions, dividends from ISP are not available to GAF and G-I Holdings, and loans from ISP to GAF, G-I Holdings and the Company are prohibited by certain of ISP's debt instruments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All subsidiaries are consolidated and intercompany transactions have been eliminated.
Financial Statement Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates. Actual results could differ from those estimates. In the opinion of management, the financial statements herein contain all adjustments necessary to present fairly the financial position and the results of operations and cash flows of the Company for the periods presented. The Company has a policy to review the recoverability of long-lived assets and identify and measure any potential impairments. The Company does not anticipate any changes in management estimates that would have a material impact on operations, liquidity or capital resources, subject to the matters discussed in Note 15 (Commitments and Contingencies).
Short-term Investments
For securities classified as "trading" (including short positions), unrealized gains and losses are reflected in income. For securities classified as "available-for-sale," unrealized gains and losses, net of income tax effect, are included in a separate component of stockholders' equity, "Accumulated other comprehensive income (loss)," and were $11.1 and $(16.9) million as of December 31, 1997 and 1998, respectively. Investments classified as "held-to-maturity" securities are carried at amortized cost in the Consolidated Balance Sheets.
"Other income (expense), net" includes $6.4, $26.4 and $21.5 million of net realized and unrealized gains on securities in 1996, 1997 and 1998, respectively. The determination of cost in computing realized gains and losses is based on the specific identification method.
In connection with the Separation Transactions (see Note 1), in December 1996, G-I Holdings made a capital contribution to the Company of $2.8 million of available-for-sale securities, $7.1 million of held-to-maturity securities and $13.2 million of other short-term investments.
As of December 31, 1997 and 1998, the market value of the Company's equity securities held long was $223.0 and $172.5 million, respectively, and the Company had $18.6 and $144.1 million, respectively, of short positions in common stocks, based on market value. As of December 31, 1997 and 1998, the market value of the Company's held-to-maturity securities was $0.5 and $6.4 million, respectively. The Company enters into equity-related financial instruments with off-balance-sheet risk as a means to manage its exposure to market fluctuations on its short-term investments. As of December 31, 1998, the market value of equity-related short contracts was $143.2 million, while the value of equity-related long contracts was $35.2 million, both of which are marked-to- market each month, with unrealized gains and losses included in results of operations. The market values referred to above are based on quotations as reported by various stock exchanges and major broker-dealers. With respect to its investments in securities, the Company is exposed to the risk of market loss.
"Other short-term investments" are investments in limited partnerships which are accounted for by the equity method. Gains and losses are reflected in "Other income (expense), net." Liquidation of partnership interests generally require a 30 to 45 day notice period.
Cash and cash equivalents include cash on deposit and debt securities purchased with original maturities of three months or less.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories
Inventories are stated at the lower of cost or market. The LIFO (last-in, first-out) method is utilized to determine cost for a portion of the Company's inventories. All other inventories are determined principally based on the FIFO (first-in, first-out) method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method based on the estimated economic lives of the assets. The Company uses an economic life of 5-25 years for land improvements, 10-40 years for buildings and building equipment, and 3-20 years for machinery and equipment, which includes furniture and fixtures. Certain interest charges are capitalized during the period of construction as part of the cost of property, plant and equipment.
Excess of Cost Over Net Assets of Businesses Acquired ("Goodwill")
Goodwill is amortized on the straight-line method over a period of approximately 40 years. The Company believes that the goodwill is recoverable. To determine if goodwill is recoverable, the Company compares the net carrying amount to undiscounted projected cash flows of the underlying businesses to which the goodwill pertains. If goodwill is not recoverable, the Company would record an impairment based on the difference between the net carrying amount and fair value.
Debt Issuance Costs
Debt issuance costs are amortized to expense over the life of the related debt.
Revenue Recognition
Revenue is recognized at the time products are shipped to the customer.
Interest Rate Swaps
Gains (losses) on interest rate swap agreements ("swaps") are deferred and amortized as a reduction (increase) of interest expense over the shorter of the remaining life of the swaps or the remaining period to maturity of the debt issue with respect to which the swaps were entered.
Research and Development
Research and development expenses are charged to operations as incurred and were $4.5, $5.4 and $6.0 million in 1996, 1997 and 1998, respectively.
Warranty Claims
The Company provides certain limited warranties covering most of its residential roofing products for periods ranging from 20 to 40 years. The Company also offers limited warranties and guarantees of varying duration on its commercial roofing products and limited warranties covering most of its specialty building products and accessories for periods ranging from 5 to 10 years. Income from warranty contracts related to commercial roofing products is recognized over the life of the agreements. The Company believes that the reserves established for estimated probable future warranty claims are adequate.
The Company's 1997 Consolidated Statement of Operations includes a provision of $3.0 million in connection with the Company's estimated obligations related to product warranty claims for a discontinued product. See also Note 5.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Environmental Liability
The Company, together with other companies, is a party to a variety of proceedings and lawsuits involving environmental matters. The Company estimates that its liability in respect of such environmental matters, and certain other environmental compliance expenses, as of December 31, 1998, is $0.8 million, before reduction for insurance recoveries reflected on its balance sheet of $0.8 million. The Company's liability is reflected on an undiscounted basis. See Item 3, "Legal Proceedings--Environmental Litigation," which is incorporated herein by reference, for further discussion with respect to environmental liabilities and estimated insurance recoveries.
Accumulated Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting comprehensive income and its components in annual and interim financial statements. The Company adopted SFAS No. 130 as of January 1, 1998 and has reclassified financial statements for earlier periods. In the Company's case, comprehensive income includes net income, unrealized gains and losses from investments in available-for-sale securities, net of income tax effect, and minimum pension liability adjustments. The Company has chosen to disclose Comprehensive Income in the Consolidated Statements of Stockholders' Equity.
Changes in the components of "Accumulated other comprehensive income (loss)" for the years 1996, 1997 and 1998 are as follows:
New Accounting Standard
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, but may be adopted earlier. If the Company had adopted SFAS No. 133 for the year ended December 31, 1998, there would have been no significant impact on results of operations. The Company has not yet determined the timing, method or effect on the Consolidated Balance Sheets of adoption of SFAS No. 133.
NOTE 3. ASBESTOS-RELATED BODILY INJURY CLAIMS
In connection with its formation, the Company contractually assumed and agreed to pay the first $204.4 million of liabilities for asbestos-related bodily injury claims relating to the inhalation of asbestos fiber
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. ASBESTOS-RELATED BODILY INJURY CLAIMS--(CONTINUED)
("Asbestos Claims") of its parent, GAFBMC. As of March 30, 1997, the Company had paid all of its assumed asbestos-related liabilities. See also Note 1. G-I Holdings and GAFBMC have jointly and severally agreed to indemnify the Company against any other existing or future claims related to asbestos-related liabilities if asserted against the Company.
GAF has advised the Company that, as of December 28, 1998, it is defending approximately 113,800 pending alleged Asbestos Claims (having received notice of approximately 93,500 new Asbestos Claims during 1998) and has resolved approximately 293,500 Asbestos Claims (including approximately 59,000 in 1998). GAF has advised the Company that it believes that a significant portion of the claims filed in 1998 were already pending against other defendants for some period of time, with GAF being added as a defendant upon the lifting in 1997 of the injunction relating to the Georgine class action settlement. This injunction prevented plaintiffs from filing or proceeding with their Asbestos Claims other than in accordance with the Georgine class action settlement, which was rendered inoperable in 1997 by a United States Supreme Court ruling. GAF's current estimated average cost for Asbestos Claims resolved in 1998 (including Asbestos Claims disposed of at no cost to GAF) is approximately $3,500 per claim. Substantially all of the costs in respect of these Asbestos Claims will be paid over several years. There can be no assurance that the actual costs of resolving pending and future Asbestos Claims will approximate GAF's estimated average costs for the Asbestos Claims resolved in 1998.
GAF has stated that it is committed to effecting a comprehensive resolution of Asbestos Claims, that it is exploring a number of options to accomplish such resolution, but there can be no assurance that this effort will be successful.
The Company believes that it will not sustain any additional liability in connection with asbestos-related claims. While the Company cannot predict whether any asbestos-related claims will be asserted against it or its assets, or the outcome of any litigation relating to such claims, it believes that it has meritorious defenses to such claims. Moreover, it has been jointly and severally indemnified by G-I Holdings and GAFBMC with respect to such claims. Should GAF or GAFBMC be unable to satisfy judgments against it in asbestos-related lawsuits, its judgment creditors might seek to enforce their judgments against the assets of GAF or GAFBMC, including its holdings of common stock of the Company, and such enforcement could result in a change of control with respect to the Company. See Note 10 for information regarding the Company's debt instruments and facilities.
For a further discussion with respect to the foregoing, see Item 3, "Legal Proceedings," which is incorporated herein by reference.
NOTE 4. ACQUISITIONS AND DISPOSITION
On March 14, 1997, the Company acquired the assets of the Leatherback Industries division of Hollinee Corporation, which is engaged in the manufacture and sale of asphalt-saturated felts and other felt and construction paper products. The acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the estimated fair values of the identifiable net assets acquired, and the excess was recorded as goodwill. The results of the Leatherback business, including sales of $30.2 million for 1997, are included from the date of acquisition; the net effects of this acquisition were not material to 1997 results of operations.
Effective June 1, 1998, the Company purchased for approximately $43.5 million substantially all of the assets of Leslie-Locke Inc. ("Leslie-Locke"), a wholly-owned subsidiary of Leslie Building Products, Inc., which manufactures and markets a variety of specialty building products and accessories for the professional and do-it-yourself remodeling and residential construction industries from manufacturing facilities in Burgaw, North Carolina and Compton, California. The acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the estimated fair values of the identifiable net assets acquired, and the excess was recorded as goodwill. The results of the Leslie-Locke business, including sales of
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. ACQUISITIONS AND DISPOSITION--(CONTINUED)
$53.3 million for 1998, are included from the date of acquisition; the net effects of this acquisition were not material to 1998 results of operations.
Effective December 1, 1998, the Company sold its perlite insulation manufacturing assets to Johns Manville Corporation for net cash proceeds of approximately $29.0 million. The pre-tax gain as a result of this sale was not significant to the Company's results of operations. In addition, as part of the transaction, Johns Manville and the Company entered into a long-term agreement to supply the Company with perlite insulation products, which will enable the Company to continue to serve its commercial roofing customers. As a result, the sale is not expected to have a material impact on the Company's results of operations.
NOTE 5. NONRECURRING CHARGES
The Company recorded pre-tax nonrecurring charges in the third quarter of 1998 aggregating $27.6 million, of which $20.0 million related to the settlement of a national class action lawsuit involving asphalt shingles manufactured between January 1, 1973 and December 31, 1997. Under the terms of the September 1998 settlement, which has been granted preliminary approval by the court pending the outcome of a fairness hearing, the Company will provide property owners whose GAF shingles were manufactured during this period and which suffer certain damages during the term of their original warranty period, and who file a qualifying claim, with an opportunity to receive certain limited benefits beyond those already provided in their existing warranty. If the court grants final approval of this settlement, the settlement will resolve a class action filed against GAFBMC in Mobile County, Alabama. Several other class action lawsuits that had been brought against GAFBMC in 1996 and 1997 were stayed pending final approval of the Mobile County, Alabama class action. Each of these lawsuits had alleged that certain GAF shingles were defective and sought unspecified damages. The Company agreed to the settlement, payments against which will be made over a number of years, to avoid the expense required to defend such litigation. The Company believes the court will grant final approval of the settlement, although there can be no assurance in that regard. If the court does not grant final approval and the settlement agreement is rendered inoperable, the Mobile County, Alabama action would continue as if no settlement agreement had existed. In addition, the stays of the other class actions could be lifted and those actions could continue. In that event, the Company would reverse the pre-tax nonrecurring charge of $20.0 million related to the settlement.
In July 1998, the Company recorded a pre-tax nonrecurring charge of $7.6 million related to a grant to its President and Chief Executive Officer of 30,000 shares of restricted common stock of the Company and related cash payments to be made over a period of time (substantially all of which is earned) in connection with the termination by an affiliate of preferred stock options and stock appreciation rights held by such officer.
NOTE 6. INCOME TAXES
Income tax provision, which has been computed on a separate return basis, consists of the following:
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAXES--(CONTINUED)
The differences between the income tax provision computed by applying the statutory Federal income tax rate to pre-tax income, and the income tax provision reflected in the Consolidated Statements of Operations are as follows:
The components of the net deferred tax assets are as follows:
As of December 31, 1998, the Company had $73.0 million of net operating loss carryforwards available to offset future taxable income, as follows:
YEAR OF EXPIRATION (THOUSANDS) - ---------- ----------- 2009.... $26,705 2010.... 4,271 2011.... 41,982 ------- $72,958 ------- -------
Management has determined, based on the Company's history of prior earnings and its expectations for the future, that future taxable income will more likely than not be sufficient to utilize fully the deferred tax assets recorded.
The Company and its subsidiaries entered into a tax sharing agreement (the "Tax Sharing Agreement") dated January 31, 1994 with GAF and G-I Holdings under which the Company is obligated to pay G-I Holdings an amount equal to those Federal income taxes the Company would have incurred if the Company (on behalf of itself and its subsidiaries) filed its own Federal income tax return. Unused tax attributes will carry forward for use in reducing amounts payable by the Company to G-I Holdings in future years, but cannot be carried back. If the Company were no longer a member of the GAF consolidated tax group (the "GAF Group"), it would be required to pay to G-I Holdings the value of any tax attributes it would succeed to under the consolidated return regulations to the extent such attributes reduced the amounts otherwise payable by the Company under the Tax Sharing Agreement. Under certain circumstances, the provisions of the Tax Sharing Agreement could result in
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAXES--(CONTINUED)
the Company having a greater liability thereunder than it would have had if it (and its subsidiaries) had filed its own separate Federal income tax return. Under the Tax Sharing Agreement, the Company and each of its subsidiaries are responsible for any taxes that would be payable by reason of any adjustment to the tax returns of GAF or its subsidiaries for years prior to the adoption of the Tax Sharing Agreement that relate to the business or assets of the Company or any subsidiary of the Company. Although, as a member of the GAF Group, the Company is severally liable for all Federal income tax liabilities of every member of the GAF Group, including tax liabilities not related to the business of the Company, G-I Holdings and GAF have agreed to indemnify the Company and its subsidiaries for all tax liabilities of the GAF Group other than tax liabilities (i) arising from the operations of the Company and its subsidiaries and (ii) for tax years pre-dating the Tax Sharing Agreement that relate to the business or assets of the Company and its subsidiaries. The Tax Sharing Agreement provides for analogous principles to be applied to any consolidated, combined or unitary state or local income taxes. Under the Tax Sharing Agreement, GAF makes all decisions with respect to all matters relating to taxes of the GAF Group. The provisions of the Tax Sharing Agreement take into account both the Federal income taxes the Company would have incurred if it filed its own separate Federal income tax return and the fact that the Company is a member of the GAF Group for Federal income tax purposes. In accordance with the Tax Sharing Agreement, effective January 31, 1994, tax benefits generated by net operating losses and credits will reduce future tax sharing payments to G-I Holdings.
On September 15, 1997, GAF received a notice from the Internal Revenue Service (the "Service") of a deficiency in the amount of $84.4 million (after taking into account the use of net operating losses and foreign tax credits otherwise available for use in later years) in connection with the formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the "surfactants partnership"), a partnership in which GFC holds an interest. The claim of the Service for interest and penalties, after taking into account the effect on the use of net operating losses and foreign tax credits, could result in GAF incurring liabilities significantly in excess of the deferred tax liability of $131.4 million that it recorded in 1990 in connection with this matter. GAF has advised the Company that it believes that it will prevail in this matter, although there can be no assurance in this regard. However, if GAF is unsuccessful in challenging its tax deficiency notice, the ability of GAF to satisfy its tax obligation would be dependent on the cash flows of the Company and GFC. The Company believes that the ultimate disposition of this matter will not have a material adverse effect on its business, financial position or results of operations. GAF, G-I Holdings and certain subsidiaries of GAF have agreed to jointly and severally indemnify the Company against any tax liability associated with the surfactants partnership, which the Company would be severally liable for, together with GAF and several current and former subsidiaries of GAF, should GAF be unable to satisfy such liability.
NOTE 7. SALE OF ACCOUNTS RECEIVABLE
In March 1993, the Company sold its trade accounts receivable ("receivables") to a trust, without recourse, pursuant to an agreement which provided for a maximum of $75 million in cash to be made available to the Company based on eligible receivables outstanding from time to time. In November 1996, the Company entered into new agreements, pursuant to which it sold the receivables to a special purpose subsidiary of the Company, BMCA Receivables Corporation, without recourse, which in turn sold them to a new trust, without recourse. The new agreements provide for a maximum of $115 million in cash to be made available to the Company based on eligible receivables outstanding from time to time. This facility expires in December 2001. The excess of accounts receivable sold over the net proceeds received is included in "Accounts receivable, other." The effective cost to the Company varies with LIBOR and is included in "Other income (expense), net" and amounted to $5.2, $5.1 and $5.1 million in 1996, 1997 and 1998, respectively.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. INVENTORIES
At December 31, 1997 and 1998, $7.8 and $10.2 million, respectively, of inventories were valued using the LIFO method. Inventories consist of the following:
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
NOTE 10. LONG-TERM DEBT
Long-term debt consists of the following:
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. LONG-TERM DEBT--(CONTINUED)
On December 3, 1998, the Company issued $155 million in aggregate principal amount of 8% Senior Notes due 2008 (the "2008 Notes"). The Company used substantially all of the net proceeds from such issuance to purchase, and subsequently cancel, $147.1 million in aggregate principal amount at maturity of the Company's 11 3/4% Senior Deferred Coupon Notes due 2004 (the "Deferred Coupon Notes"). In connection with this purchase, the Company recorded an after-tax extraordinary charge of $8.8 million.
On July 17, 1998, the Company issued $150 million in aggregate principal amount of 7 3/4% Senior Notes due 2005 (the "2005 Notes"). The Company used substantially all of the net proceeds from such issuance to purchase, and subsequently cancel, $132.6 million in aggregate principal amount at maturity of the Company's Deferred Coupon Notes. In connection with this purchase, the Company recorded an after-tax extraordinary charge of $9.3 million.
In October 1997, the Company issued $100 million in aggregate principal amount of 8% Senior Notes due 2007 (the "2007 Notes"). In December 1996, the Company issued $100 million in aggregate principal amount of 8 5/8% Senior Notes due 2006 (the "8 5/8% Notes"). In June 1994, the Company issued $310 million in principal amount of Deferred Coupon Notes for net proceeds of $169.3 million. The Deferred Coupon Notes will accrete to face value on July 1, 1999, and cash interest will accrue from and after that date. Holders of the Deferred Coupon Notes, the 2005 Notes, the 2007 Notes, the 2008 Notes and the 8 5/8% Notes have the right under the indentures governing such notes to require the Company to purchase the Deferred Coupon Notes at a price of 101% of Accreted Value (as defined therein) and the 2005 Notes, the 2007 Notes, the 2008 Notes and the 8 5/8% Notes (collectively, the "Other Senior Notes") at a price of 101% of the principal amount thereof, and the Company has the right to redeem the Deferred Coupon Notes at Accreted Value and the Other Senior Notes at a price of 101% of the principal amount thereof, plus, in each case, the Applicable Premium (as defined therein), together with any accrued and unpaid interest, in the event of a Change of Control (as defined therein).
The indentures relating to the Deferred Coupon Notes, the Other Senior Notes and the Credit Agreement (see below) contain covenants that, among other things, limit the ability of the Company and its subsidiaries to pay certain dividends or make certain other restricted payments and restricted investments, incur liens, engage in transactions with affiliates, and agree to certain additional limitations on dividends and other payment restrictions affecting subsidiaries. As of December 31, 1998, after giving effect to the most restrictive of the aforementioned restrictions, the Company could have paid dividends and other restricted payments of up to $79.4 million. Additional borrowings by the Company are subject to certain covenants contained in the indentures relating to the Other Senior Notes and the Credit Agreement. The Company is currently limited by certain of these covenants from incurring additional debt, except under certain limited circumstances including under the Credit Agreement and the refinancing of existing debt.
In connection with the Deferred Coupon Notes, the Company entered into interest rate swap agreements ("swaps") with banks, with an aggregate ending notional principal amount of $142.0 million and a final maturity of July 1, 1999, all of which were terminated as of June 28, 1998. In 1997, the Company terminated swaps with an aggregate ending notional principal amount of $82.0 million, resulting in gains totaling $2.1 million. In June 1998, the Company terminated swaps with an aggregate ending notional principal amount of $60.0 million, resulting in gains of $0.7 million. The gains have been deferred and are being amortized as a reduction of interest expense over the remaining original life of the swaps. As a result of the swaps, the effective interest cost to the Company of the portion of the Deferred Coupon Notes covered by the swaps varied at a fixed spread over LIBOR.
In August 1997, the Company entered into a new three-year bank credit facility (the "Credit Agreement"). The terms of the Credit Agreement provide for a $75 million revolving credit facility, the full amount of which is available for letters of credit, provided that total borrowings and outstanding letters of credit may not exceed $75 million in the aggregate. As of December 31, 1998, $29.9 million of letters of credit were outstanding and no borrowings were outstanding under the Credit Agreement. Under the terms of the Credit Agreement, the
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. LONG-TERM DEBT--(CONTINUED)
Company is subject to certain financial covenants, including interest coverage and leverage ratios, and dividends and other restricted payments are limited. Additionally, if a change of control (as defined in the Credit Agreement) occurs, the credit facility could be terminated and the loans thereunder accelerated by the lenders party thereto, an event which could also cause the Deferred Coupon Notes and the Other Senior Notes to be accelerated. As of December 31, 1998, the Company was in compliance with such covenants. The Credit Agreement replaced previous bank credit facilities which provided up to $42 million in total borrowings and outstanding letters of credit.
In December 1995, the Company consummated a $40 million sale-leaseback of certain equipment located at its Chester, South Carolina roofing facility, in a transaction accounted for as a capital lease, and the gain has been deferred. The lessor was granted a security interest in certain equipment at the Chester facility. The lease term extends to December 2005. In December 1994, the Company consummated a $20.4 million sale-leaseback of certain equipment located at its Baltimore, Maryland roofing facility, in a transaction accounted for as a capital lease, and the gain has been deferred. The lessor was granted a security interest in the land, buildings, and certain equipment at the Baltimore facility. The lease term extends to December 2004. In December 1993, the Company obtained a loan of $7.3 million, which is secured by manufacturing equipment located at its Dallas plant. The loan is being repaid over a seven-year period and has a fixed interest rate. The Company has two industrial revenue bond issues outstanding, which bear interest at short-term floating rates. Interest rates on the foregoing obligations ranged between 3.60% and 8.87% as of December 31, 1998.
The Company believes that the fair value of its non-public indebtedness approximates the book value of such indebtedness, because the interest rates on such indebtedness are at floating short-term rates. With respect to the Company's publicly traded debt securities, the Company has obtained estimates of the fair values from an independent source believed to be reliable. The estimated fair value of the Deferred Coupon Notes as of December 31, 1997 and 1998 was $293.0 and $28.8 million, respectively. The estimated fair value of the 8 5/8% Notes as of December 31, 1997 and 1998 was $103.6 and $101.3 million, respectively. The estimated fair value of the 2007 Notes as of December 31, 1997 and 1998 was $99.6 and $99.1 million, respectively. The estimated fair value of the 2005 Notes and the 2008 Notes as of December 31, 1998 was $147.2 and $154.8 million, respectively.
The aggregate maturities of long-term debt as of December 31, 1998 for the next five years are as follows:
In the above table, maturities for the year 2002 include $11.7 million related to the Baltimore capital lease. Maturities for the year 2003 include $20.2 million related to the Chester capital lease.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS
Eligible, full-time employees of the Company are covered by various benefit plans, as described below.
Defined Contribution Plan
The Company provides a defined contribution plan for eligible employees. The Company contributes up to 7% of participants' compensation and also contributes fixed amounts, ranging from $50 to $750 per year depending on age, to the accounts of participants who are not covered by a Company-provided postretirement medical benefit plan. The aggregate contributions by the Company were $3.0, $3.5 and $4.2 million for 1996, 1997 and 1998, respectively.
U.S. Intec provides a defined contribution plan for eligible employees. U.S. Intec may contribute a discretionary matching contribution equal to 100% of each participant's eligible contributions each plan year up to a maximum of $500 for each participant. Such contributions by U.S. Intec were $0.2, $0.1 and $0.1 million for 1996, 1997, and 1998, respectively.
Defined Benefit Plans
The Company provides a noncontributory defined benefit retirement plan for hourly employees (the "Hourly Retirement Plan"). Benefits under this plan are based on stated amounts for each year of service. The Company's funding policy is consistent with the minimum funding requirements of ERISA.
The Company's net periodic pension cost for the Hourly Retirement Plan included the following components:
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS--(CONTINUED)
The following tables set forth, for the years 1997 and 1998, reconciliations of the beginning and ending balances of the benefit obligation, fair value of plan assets, funded status, amounts recognized in the Consolidated Balance Sheets and changes in Accumulated Other Comprehensive Income (Loss) related to the Hourly Retirement Plan:
In determining the projected benefit obligation, the weighted average assumed discount rate was 7.25% and 7% for 1997 and 1998, respectively. The expected long-term rate of return on assets, used in determining net periodic pension cost, was 11% for 1997 and 1998.
The Company also provides a nonqualified defined benefit retirement plan for certain key employees. Expense accrued for this plan was immaterial for 1996, 1997 and 1998.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS--(CONTINUED)
Book Value Appreciation Unit Plan
A Book Value Appreciation Unit Plan was implemented effective January 1, 1996. Under the plan, employees were granted units which vest over five years. Upon exercise, employees are entitled to receive a cash payment based on the increase in Book Value (as defined in the plan). Expense accrued under this plan was $0.1, $0.4 and $1.3 million for 1996, 1997 and 1998, respectively.
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and life insurance benefits, although it subsidizes such benefits for certain employees and certain retirees. Such subsidies were reduced or ended as of January 1, 1997.
Net periodic postretirement benefit cost included the following components:
The following table sets forth, for the years 1997 and 1998, reconciliations of the beginning and ending balances of the postretirement benefit obligation, funded status and amounts recognized in the Consolidated Balance Sheets related to postretirement medical and life insurance benefits:
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BENEFIT PLANS--(CONTINUED)
For purposes of calculating the accumulated postretirement benefit obligation, the following assumptions were made. Retirees as of December 31, 1998 who were formerly salaried employees (with certain exceptions) were assumed to receive a Company subsidy of $700 to $1,000 per year. For retirees over age 65, this subsidy may be replaced by participation in a managed care program. With respect to retirees who were formerly hourly employees, most such retirees are subject to a $5,000 per person lifetime maximum benefit. Subject to such lifetime maximum, a 12% and 6% annual rate of increase in the Company's per capita cost of providing postretirement medical benefits was assumed for 1999 for such retirees under and over age 65, respectively. To the extent that the lifetime maximum benefits have not been reached, the foregoing rates were assumed to decrease gradually to an ultimate rate of 7% and 6%, respectively, by the year 2003 and remain at that level thereafter. The weighted average assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 7% for 1997 and 1998, respectively.
The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 and 1998 by $410,000 and $90,000, respectively, and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the years 1997 and 1998 by $41,000 and $6,000, respectively. A decrease of one percentage point in each year would decrease the accumulated postretirement benefit obligation as of December 31, 1998 by $80,000 and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year 1998 by $6,000.
NOTE 12. PREFERRED STOCK OPTION PLAN
On January 1, 1996, the Company established a plan to issue options to certain employees to purchase shares of redeemable convertible preferred stock ("Preferred Stock") of the Company, exercisable at a price of $100 per share. Each share of Preferred Stock is convertible, at the holder's option, into shares of common stock of the Company at a formula price based on Book Value (as defined in the option agreement) as of the date of grant. The options vest over five years. Dividends will accrue on the Preferred Stock from the date of issuance at the rate of 8% per annum. The Preferred Stock is redeemable, at the Company's option, for a redemption price equal to $100 per share plus accrued and unpaid dividends. The Preferred Stock, and common stock issuable upon conversion of Preferred Stock into common stock, is subject to repurchase by the Company under certain circumstances, at a price equal to current Book Value (as defined in the option agreement). The exercise price of the options to purchase Preferred Stock was equal to estimated fair value per share of the Preferred Stock at the date of grant. No expense is recorded in connection with the Preferred Stock options.
The following is a summary of transactions pertaining to the plan:
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. BUSINESS SEGMENT INFORMATION
The Company is a leading national manufacturer of a broad line of asphalt roofing products and accessories for the residential and commercial roofing markets. The Company also manufactures and markets specialty building products and accessories for the professional and do-it-yourself remodeling and residential construction industries. The residential roofing product line primarily consists of premium laminated shingles, strip shingles, and certain specialty shingles principally for regional markets. Sales of residential roofing products represented 65% of the Company's net sales in 1998. The Company's commercial roofing product line includes a full line of modified bitumen products, asphalt built-up roofing, liquid applied membrane, and roofing accessories. Sales of commercial roofing products and accessories represented 30% of the Company's net sales in 1998. Sales of the specialty building products and accessories product line represented 5% of the Company's net sales in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for companies to report information about operating segments in annual financial statements, based on the approach that management utilizes to organize the segments within the Company for management reporting and decision making. In accordance with the provisions of SFAS No. 131, the Company aggregates the residential and commercial product lines into one operating segment, based on the fact that they have similar economic characteristics and are similar in each of the following areas: (i) the nature of the products and services are similar in that they perform the same function--the protection and covering of residential and commercial roofs; (ii) the nature of the production processes are similar; (iii) the type or class of customer for their products and services are similar; (iv) the residential and commercial products have the same distribution channels, whereby the main customers are wholesalers or distributors; and (v) regulatory requirements are generally the same for both the residential and commercial product lines. Sales of the specialty building products and accessories product line did not meet the quantitative thresholds in 1998 to be considered as a reportable segment.
Revenues in 1997 and 1998 included sales to American Builders & Contractors Supply Co., Inc., which accounted for approximately 10% and 11%, respectively, of the Company's net sales. No other customer accounted for as much as 10% of net sales in 1997 or 1998.
NOTE 14. RELATED PARTY TRANSACTIONS
Included in the Consolidated Balance Sheets are the following receivable (payable) balances with related parties, which arise from operating and financing transactions between the Company and its affiliates:
The Company makes loans to, and borrows from, G-I Holdings and its subsidiaries at prevailing market rates (between 5.82% and 5.96% during 1997 and 1998). The highest amount of loans made by the Company to G-I Holdings during 1997 and 1998 was $6.2 million. No loans were made to the Company by G-I Holdings and its subsidiaries during 1997 and 1998. As of December 31, 1997, $6.2 million in loans were owed to the Company by G-I Holdings, at a weighted average interest rate of 5.95%, and no loans were owed by the Company to affiliates. In addition, the Company advances funds on a non-interest bearing basis to GAF, G-I Holdings and their subsidiaries. The balance of such advances as of December 31, 1997 and 1998 was $41.7 and
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. RELATED PARTY TRANSACTIONS--(CONTINUED)
$1.5 million, respectively, of which $10.0 and $1.5 million, respectively, was classified as a short-term receivable from related parties, net, in the table above, and $31.7 million and $0, respectively, was classified as a long-term receivable from related parties in the Consolidated Balance Sheets. During 1997 and 1998, the Company made distributions of $91.0 million and $0, respectively, to its parent company.
Mineral Products: The Company purchases all of its colored roofing granules requirements (except for the requirements of its California and Oregon roofing plants and a portion of the requirements of its Indiana roofing plant, which are supplied by a third party) from ISP under a requirements contract. Effective January 1, 1999, this contract was amended to cover, among other things, purchases of colored roofing granules by the Company's subsidiaries and was renewed for 1999. This contract is subject to annual renewal unless terminated by either party to such agreement. Such purchases by the Company and its subsidiaries totaled $50.5, $51.1 and $62.6 million for 1996, 1997 and 1998, respectively. The amount payable to ISP at December 31, 1997 and 1998 for such purchases was $2.7 and $4.9 million, respectively.
Glass Fiber Supply Agreement: The Company purchases glass fiber from an affiliate, GFC, pursuant to an agreement which expires December 31, 2003. Purchases under this agreement totaled $24.5 and $26.1 million for 1997 and 1998, respectively.
Management Agreements: The Company is a party to a Management Agreement with ISP (the "Management Agreement"), which expires December 31, 1999, pursuant to which ISP provides certain general management, administrative, legal, telecommunications, information and facilities services to the Company (including the use of the Company's headquarters in Wayne, New Jersey). Charges to the Company by ISP for providing such services aggregated $5.0, $4.8 and $4.3 million for 1996, 1997 and 1998, respectively. Such charges consist of management fees and other reimbursable expenses attributable to, or incurred by ISP for the benefit of, the Company. Effective January 1, 1999, the term of the Management Agreement was extended through the end of 1999, and the management fees payable thereunder were increased. The Company and ISP also allocate a portion of the management fees payable by the Company under the Management Agreement to separate lease payments for the use of BMCA's headquarters. Based on the services provided by ISP to the Company in 1998 under the Management Agreement, the aggregate amount payable by the Company to ISP under the Management Agreement for 1999 is expected to be approximately $5.3 million. Certain of the Company's executive officers receive their compensation from ISP, with ISP being indirectly reimbursed therefor by virtue of the management fee and other reimbursable expenses payable under the Management Agreement.
As of January 1, 1997, the Company and GFC entered into a management agreement under which the Company provides certain general management, administrative and financial services to GFC. Under the management agreement, which expires December 31, 1999, GFC is obligated to pay the Company an annual management fee of $1.0 million.
Tax Sharing Agreement: See Note 6.
NOTE 15. COMMITMENTS AND CONTINGENCIES
The discussions as to legal matters involving the Company contained in Item 3, "Legal Proceedings--Environmental Litigation" and "--Other Litigation" are incorporated herein by reference.
GAF, G-I Holdings, G Industries and GAFBMC are presently dependent upon the earnings and cash flows of their subsidiaries, principally the Company, in order to satisfy their net obligations of approximately $252.3 million reflected on their books as of December 31, 1998, plus any obligation accrued after such date, including the asbestos-related liability discussed in Note 3 and various tax and other liabilities (net of certain insurance receivables), including tax liabilities relating to the surfactants partnership (discussed in Note 6). Of such obligations, approximately $75.0 million (net of estimated insurance recoveries of approximately
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
$57.0 million) is estimated to be payable during the twelve months ended December 31, 1999. GAF has advised the Company that it expects to obtain funds to satisfy such obligations from, among other things, dividends and loans from subsidiaries (principally the Company), as to which there are restrictions under the indentures relating to the Deferred Coupon Notes, the Other Senior Notes and the Credit Agreement, and from payments pursuant to the Tax Sharing Agreement between GAF and the Company. The Company does not believe that the dependence of its parent corporations on the cash flows of their subsidiaries should have a material adverse effect on the operations, liquidity or capital resources of the Company. See Notes 3, 6 and 10.
The leases for certain property, plant and equipment at certain of the Company's roofing facilities are accounted for as capital leases (see Note 10). The Company is also a lessee under operating leases principally for warehouses and production, transportation and computer equipment. Rental expense on operating leases was $8.3, $9.2 and $11.0 million for 1996, 1997 and 1998, respectively. Future minimum lease payments for properties which were held under long-term noncancellable leases as of December 31, 1998 were as follows:
NOTE 16. GUARANTOR FINANCIAL INFORMATION
Effective January 1, 1999, BMCA ("Parent Company") transferred all of its investment assets and intellectual property assets to Building Materials Investment Corporation ("BMIC"), a newly-formed, wholly-owned subsidiary. In connection with this transfer, BMIC agreed to guarantee all of the Company's obligations under the Credit Agreement, the Deferred Coupon Notes and the Other Senior Notes. BMCA also transferred all of its manufacturing assets, other than those located in Texas, to Building Materials Manufacturing Corporation ("BMMC"), another newly-formed, wholly-owned subsidiary. In connection with this transfer, BMMC agreed to become a co-obligor on the 2007 Notes and to guarantee the Company's obligations under the Credit Agreement, the Deferred Coupon Notes and the Other Senior Notes.
In addition, in connection with the above transactions, the Company and BMMC entered into license agreements, effective January 1, 1999, for the right to use intellectual property, including patents, trademarks, know-how, and franchise rights owned by BMIC for a license fee stated as a percentage of net sales. The license agreements are for a period of one year and can be terminated with 60 days written notice. Also, effective January 1, 1999, BMMC will sell all finished goods to the Company at a manufacturing profit.
Presented below is combined, condensed financial information for BMIC and BMMC, prepared on a basis which retroactively reflects the formation of such companies, as discussed above, for all periods presented. This financial information should be read in conjunction with the Consolidated Financial Statements and other notes related thereto.
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1997 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1998 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16. GUARANTOR FINANCIAL INFORMATION--(CONTINUED)
BUILDING MATERIALS CORPORATION OF AMERICA COMBINED CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (THOUSANDS)
BUILDING MATERIALS CORPORATION OF AMERICA
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------ * The operating loss for the third quarter of 1998 reflects $27.6 million of nonrecurring charges. See Note 5 to Consolidated Financial Statements.
SCHEDULE II
BUILDING MATERIALS CORPORATION OF AMERICA
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996 (THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 (THOUSANDS)
YEAR ENDED DECEMBER 31, 1998 (THOUSANDS)
- ------------------ Notes:
(a) Represents write-offs of uncollectible accounts net of recoveries.
(b) The balances at December 31, 1996, 1997 and 1998 primarily reflect a reserve for receivables sold to a trust (see Note 7 to Consolidated Financial Statements).
(c) Represents balance acquired in acquisitions.
S-1
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------- 2.1 -- Reorganization Agreement, dated as of December 31, 1998, by and among BMCA, Building Materials Manufacturing Corporation and Building Materials Investment Corporation (incorporated by reference to Exhibit 2.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-69749) (the "2008 Notes S-4")).
3.1 -- Certificate of Incorporation of BMCA (incorporated by reference to Exhibit 3.1 to BMCA's Form 10-Q for the quarter ended September 27, 1998).
3.2 -- By-laws of BMCA (incorporated by reference to Exhibit 3.2 to BMCA's Registration Statement on Form S-4 (Registration No. 33-81808)) (the "Deferred Coupon Note Registration Statement").
3.3 -- Certificate of Incorporation of Building Materials Manufacturing Corporation.
3.4 -- By-laws of Building Materials Manufacturing Corporation.
3.5 -- Certificate of Incorporation of Building Materials Investment Corporation.
3.6 -- By-laws of Building Materials Investment Corporation.
4.1 -- Indenture, dated as of December 3, 1998, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the 2008 Notes S-4).
4.2 -- First Supplemental Indenture dated as of January 1, 1999 to Indenture dated as of December 3, 1998 among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.4 to the 2008 Notes S-4).
4.3 -- Registration Rights Agreement, dated December 3, 1998, between BMCA, Bear, Stearns & Co. Inc. and Chase Securities, Inc. (incorporated by reference to Exhibit 4.3 to the 2008 Notes S-4).
4.4 -- Indenture, dated as of June 30, 1994, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Deferred Coupon Note Registration Statement).
4.5 -- Indenture, dated as of December 9, 1996, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-20859) (the "2006 Notes Registration Statement")).
4.6 -- Indenture, dated as of October 20, 1997, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-41531) (the "8% Notes Registration Statement")).
4.7 -- Indenture, dated as of July 17, 1998, between BMCA and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to BMCA's Registration Statement on Form S-4 (Registration No. 333-60633) (the "2005 Notes S-4")).
4.8 -- First Supplemental Indenture, dated as of November 30, 1998, to Indenture dated as of June 30, 1994 between BMCA as issuer and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.5 to the 2008 Notes S-4).
4.9 -- Second Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of June 30, 1994, as previously amended, among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.6 to the 2008 Notes S-4).
4.10 -- First Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of December 9, 1996 among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.7 to the 2008 Notes S-4).
4.11 -- First Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of October 20, 1997 among BMCA, as issuer, Building Materials Manufacturing Corporation, as co-obligor, Building Materials Investment Corporation, as Guarantor and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.8 to the 2008 Notes S-4).
4.12 -- First Supplemental Indenture, dated as of January 1, 1999, to Indenture dated as of July 17, 1998 among BMCA, as issuer, Building Materials Manufacturing Corporation and Building Materials Investment Corporation, as guarantors and The Bank of New York, as trustee (incorporated by reference to Exhibit 10.9 to the 2008 Notes S-4).
10.1 -- Amended and Restated Management Agreement, dated as of January 1, 1999, among GAF, G-I Holdings, G Industries, Merick Inc., GAF Fiberglass, ISP, GAF Building Materials Corporation, GAF Broadcasting Company, Inc., BMCA and ISP Opco Holdings Inc.
10.2 -- Form of Option Agreement relating to Series A Cumulative Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 10.9 to BMCA's Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")).*
10.3 -- Forms of Amendment to Option Agreement relating to Series A Cumulative Redeemable Convertible Preferred Stock (incorporated by reference to Exhibit 10.12 to BMCA's Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K")).*
10.4 -- Form of Option Agreement relating to Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 10.13 to the 1997 Form 10-K).*
10.5 -- BMCA Preferred Stock Option Plan (incorporated by reference to Exhibit 4.2 to BMCA's Form S-8).*
10.6 -- Tax Sharing Agreement, dated as of January 31, 1994, among GAF, G-I Holdings and BMCA (incorporated by reference to Exhibit 10.6 to the Deferred Coupon Note Registration Statement).
10.7 -- Reorganization Agreement, dated as of January 31, 1994, among GAF Building Materials Corporation, G-I Holdings and BMCA (incorporated by reference to Exhibit 10.9 to the Deferred Coupon Note Registration Statement).
10.8 -- Stock Appreciation Right Agreement, dated January 1, 1997, between GAF Corporation and Sunil Kumar (incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K).*
10.9 -- Amended and Restated Stock Appreciation Right Agreement, dated January 1, 1997, between GAF Corporation and Sunil Kumar (incorporated by reference to Exhibit 10.12 to the 1996 Form 10-K).*
10.10 -- Letter Agreement, dated July 8, 1998, among BMCA, ISP Holdings and Sunil Kumar (incorporated by reference to Exhibit 10.18 to the 2005 Notes S-4).*
21 -- Subsidiaries of BMCA (incorporated by reference to Exhibit 21 to the 2008 Notes S-4).
23 -- Consent of Arthur Andersen LLP.
27 -- Financial Data Schedule for fiscal year 1998, which is submitted electronically to the Securities and Exchange Commission for information only.
- ------------------ * Management and/or compensation plan or arrangement.