UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended JULY 3, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-81808
BUILDING MATERIALS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE 22-3276290
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1361 ALPS ROAD, WAYNE, NEW JERSEY 07470
(Address of Principal Executive Offices) (Zip Code)
(973) 628-3000
(Registrant's telephone number, including area code)
NONE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
See Table of Additional Registrants Below.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES / / NO /X/
As of August 17, 2005, 1,015,010 shares of Class A Common Stock, $.001 par value
of the registrant were outstanding. There is no trading market for the common
stock of the registrant. As of August 17, 2005, the additional registrant had
the number of shares outstanding which is shown on the table below. There is no
trading market for the common stock of the additional registrant. As of August
17, 2005, no shares of the registrant or the additional registrant were held by
non-affiliates.
ADDITIONAL REGISTRANTS
State or other Address, including zip code and
jurisdiction of telephone number, including area
Exact name of registrant as incorporation or No. of Shares Commission File No./I.R.S. code, of registrant's principal
specified in its charter organization Outstanding Employer Identification No. executive offices
- --------------------------- ---------------- ------------- --------------------------- --------------------------------
Building Materials Delaware 10 333-69749-01/ 1361 Alps Road
Manufacturing Corporation 22-3626208 Wayne, NJ 07470
(973) 628-3000
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- -----------------
JULY 3, JULY 4, JULY 3, JULY 4,
2005 2004 2005 2004
-------- -------- -------- --------
Net Sales............................. $497,637 $451,549 $976,435 $843,531
-------- -------- -------- --------
Costs and expenses:
Cost of products sold............... 341,511 306,678 677,228 580,714
Selling, general and administrative. 107,656 98,576 212,941 184,636
-------- -------- -------- --------
Total costs and expenses......... 449,167 405,254 890,169 765,350
-------- -------- -------- --------
Operating income...................... 48,470 46,295 86,266 78,181
Interest expense...................... (16,415) (14,526) (32,519) (28,680)
Other expense, net.................... (2,163) (1,777) (3,162) (2,561)
-------- -------- -------- --------
Income before income taxes............ 29,892 29,992 50,585 46,940
Income tax expense.................... (11,360) (11,172) (19,223) (17,485)
-------- -------- -------- --------
Net income............................ $ 18,532 $ 18,820 $ 31,362 $ 29,455
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 3, DECEMBER 31,
ASSETS 2005 2004
Current Assets: ---------- ----------
Cash and cash equivalents................................................. $ 57,127 $ 129,482
Accounts receivable, trade, less allowance
of $1,447 and $1,139 in 2005 and 2004,
respectively......................................................... 329,559 250,543
Accounts receivable, other................................................ 6,887 3,826
Tax receivable from parent corporation.................................... 824 -
Inventories, net.......................................................... 188,774 174,914
Deferred income tax assets, net........................................... 45,994 43,398
Other current assets...................................................... 12,259 6,499
---------- ----------
Total Current Assets.................................................... 641,424 608,662
Property, plant and equipment, net.......................................... 360,455 364,514
Goodwill, net of accumulated amortization
of $16,370 in 2005 and 2004, respectively................................. 63,199 63,294
Other noncurrent assets..................................................... 30,778 29,075
---------- ----------
Total Assets................................................................ $1,095,856 $1,065,545
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt...................................... $ 152,665 $ 152,525
Accounts payable.......................................................... 94,357 120,337
Payable to related parties................................................ 15,510 16,900
Loans payable to parent corporation....................................... 52,840 52,840
Accrued liabilities....................................................... 116,016 93,467
Reserve for product warranty claims....................................... 14,900 14,900
---------- ----------
Total Current Liabilities................................................. 446,288 450,969
---------- ----------
Long-term debt less current maturities...................................... 534,653 535,952
---------- ----------
Reserve for product warranty claims......................................... 16,339 17,213
---------- ----------
Deferred income tax liabilities............................................. 47,940 44,773
---------- ----------
Other liabilities........................................................... 22,063 19,349
---------- ----------
Stockholders' Equity (Deficit):
Series A Cumulative Redeemable Convertible
Preferred Stock, $.01 par value per share;
400,000 shares authorized; no shares issued............................. - -
Class A Common Stock, $.001 par value per share,
1,300,000 shares authorized; 1,015,010 shares
issued and outstanding.................................................. 1 1
Class B Common Stock, $.001 par value per share;
100,000 shares authorized; no shares issued............................. - -
Loans receivable from parent corporation.................................. (55,759) (55,691)
Retained earnings......................................................... 89,684 58,332
Accumulated other comprehensive loss...................................... (5,353) (5,353)
---------- ----------
Total Stockholders' Equity (Deficit).................................... 28,573 (2,711)
---------- ----------
Total Liabilities and Stockholders'
Equity (Deficit)......................................................... $1,095,856 $1,065,545
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
BUILDING MATERIALS CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
---------------------
JULY 3, JULY 4,
2005 2004
-------- ---------
Cash and cash equivalents, beginning of period............................... $129,482 $ 2,880
-------- ---------
Cash provided by (used in) operating activities:
Net income................................................................. 31,362 29,455
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation........................................................... 22,019 20,848
Amortization........................................................... 1,174 1,114
Deferred income taxes.................................................. 571 3,592
Noncash interest charges, net.......................................... 2,850 2,794
Increase in working capital items.......................................... (105,128) (144,090)
Decrease in long-term reserve for product warranty claims.................. (874) (536)
Increase in other assets................................................... (4,918) (1,396)
Increase in other liabilities.............................................. 2,661 16
Change in net receivable from/payable to related
parties/parent corporations.............................................. (2,214) 11,131
Other, net................................................................. 200 117
-------- ---------
Net cash used in operating activities........................................ (52,297) (76,955)
-------- ---------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of manufacturing facility
in 2004.................................................................. (22,877) (43,467)
Proceeds from sale of assets............................................... 4,717 -
-------- ---------
Net cash used in investing activities........................................ (18,160) (43,467)
-------- ---------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt................................... 127,000 325,000
Repayments of long-term debt............................................... (128,374) (187,489)
Distributions to parent corporation........................................ (10) (85)
Dividends to parent corporation............................................ - (10,000)
Loan to parent corporation................................................. (68) (48)
Financing fees and expenses................................................ (446) (544)
-------- ---------
Net cash provided by (used in) financing activities.......................... (1,898) 126,834
-------- ---------
Net change in cash and cash equivalents...................................... (72,355) 6,412
-------- ---------
Cash and cash equivalents, end of period..................................... $ 57,127 $ 9,292
======== =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized of $358 and $518
in 2005 and 2004, respectively)......................................... $ 28,150 $ 24,818
Income taxes (including federal income taxes paid pursuant
to a tax sharing agreement of $21,953 and $6,401 in
2005 and 2004, respectively)............................................ 22,171 7,126
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Building Materials Corporation of America ("BMCA" or the "Company")
was formed on January 31, 1994 and is a wholly-owned subsidiary of BMCA Holdings
Corporation ("BHC"), which is a wholly-owned subsidiary of G-I Holdings Inc.
("G-I Holdings"). G-I Holdings is a wholly-owned subsidiary of G Holdings Inc.
The consolidated financial statements of the Company reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
of the Company at July 3, 2005, and the results of operations and cash flows for
the second quarter and six month periods ended July 3, 2005 and July 4, 2004,
respectively. All adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended December 31, 2004 (the
"2004 Form 10-K").
Certain reclassifications have been made to conform to current year
presentation.
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 151 "Inventory
Costs" ("SFAS No. 151") which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS No. 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4
"Inventory Pricing" ("ARB No. 43") and requires abnormal inventory costs to be
recognized as current period charges regardless of whether they meet the "so
abnormal" criterion outlined in ARB No. 43. SFAS No. 151 also introduces the
concept of "normal capacity" and requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an expense in the period
in which they are incurred. SFAS No. 151 is effective for costs occurring in
fiscal reporting years beginning after June 15, 2005. As of January 1, 2006 the
Company will adopt the provisions of SFAS No. 151 and does not anticipate any
material effect on its consolidated financial statements.
In December 2004, the FASB issued a revised SFAS No. 123 "Accounting
for Stock-Based Compensation," ("SFAS No. 123(R)") which will require
compensation costs related to share-based payment transactions to be recognized
in the financial statements. SFAS No. 123(R) establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees. SFAS No. 123(R)
replaces the original SFAS No. 123 and supersedes Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No.
123(R) becomes effective beginning with the first annual reporting period after
June 15, 2005. As of July 3, 2005, the Company currently accounts for its 2001
Long-Term Incentive Plan under the accounting prescribed by FASB Interpretation
No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock
6
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
Option and Award Plans," ("FIN 28"). Since compensation expense related to the
Company's incentive units is currently included in its consolidated statements
of income, the Company does not expect SFAS No. 123(R) to have an impact on its
consolidated financial statements. See Note 7.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets" ("SFAS No. 153") which replaces the exception from fair
value measurement in APB Opinion No. 29 "Accounting for Nonmonetary
Transactions," for nonmonetary exchanges of similar productive assets. SFAS
No. 153 replaces this exception with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in
fiscal reporting periods beginning after June 15, 2005. As of July 4, 2005, the
Company will adopt the provisions of SFAS No. 153 and does not anticipate having
any nonmonetary asset exchanges.
In March 2005, the FASB issued FASB Staff Position ("FSP") FIN
46(R)-5 "Implicit Variable Interests Under FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities," ("FSP FIN 46(R)-5"). FSP FIN
46(R)-5 offers additional guidance to FIN 46(R) stating that implicit variable
interests are implied financial interests in an entity that change in accordance
with changes in the fair value of the entity's net assets, exclusive of variable
interests. FSP FIN 46(R)-5 is effective during a company's first reporting
period after March 3, 2005; accordingly the Company adopted FSP FIN 46(R)-5
during its second quarter ended July 3, 2005. At July 3, 2005, the Company did
not have any interests in variable interest entities; therefore, FSP FIN 46(R)-5
or FIN 46(R) did not have any impact on the Company's financial condition or
results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47 "Accounting
for Conditional Asset Retirement Obligations," ("FIN 47"), which clarifies how
the term conditional asset retirement obligation is used in SFAS No. 143
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143
provides for a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. FIN 47 provides factors for
when a reasonable estimate of the fair value of the obligation can be determined
and indicators which would preclude an entity from recognizing a liability for
such obligations. FIN 47 is effective for fiscal years ending after December 15,
2005. The Company will adopt FIN 47 during its fourth quarter in fiscal year
ending December 31, 2005 and does not expect there to be an impact on its
financial condition or results of operations.
7
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED)
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS No. 154"), which eliminates the requirement of APB
Opinion No. 20, "Accounting Changes," to include the cumulative effect
adjustment resulting from a change in an accounting principle in the income
statement in the period of change. SFAS No. 154 requires that a change in an
accounting principle or reporting entity be retrospectively applied. Under
retrospective application, SFAS No. 154 is applied as of the beginning of the
first accounting period presented in the financial statements and the cumulative
effect of the change is reflected in the carrying value of assets and
liabilities as of the first period presented and the offsetting adjustments are
recorded to opening retained earnings. Each period presented is adjusted to
reflect the period-specific effects of applying the change. Changes in
accounting estimate and corrections of errors continue to be accounted for in
the same manner as prior to the issuance of SFAS No. 154. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. As of January 1, 2006, the Company will adopt
the provisions of SFAS No. 154 and does not anticipate any material effect on
its consolidated financial statements.
NOTE 2. INVENTORIES
Inventories consisted of the following as of July 3, 2005 and
December 31, 2004, respectively:
JULY 3, DECEMBER 31,
2005 2004
-------- --------
(THOUSANDS)
Finished goods....................... $130,440 $119,649
Work-in-process...................... 11,727 13,829
Raw materials and supplies........... 57,108 50,237
-------- --------
Total................................ 199,275 183,715
Less LIFO reserve.................... (10,501) (8,801)
-------- --------
Inventories.......................... $188,774 $174,914
======== ========
8
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 3. ACQUISITION AND PROPERTY DISPOSITION
On May 7, 2004, the Company acquired certain assets of a
manufacturing facility located in Quakertown, Pennsylvania from Atlas Roofing
Corporation. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the fair value of
the identifiable assets acquired, which consisted almost entirely of property,
plant and equipment. The operating results of the Quakertown manufacturing
facility are included in the Company's results of operations from the date of
its acquisition.
In June 2005, the Company sold property in Houston, Texas for cash
proceeds of approximately $4.1 million, which approximated carrying value.
NOTE 4. LONG-TERM DEBT
On May 7, 2004, the Company amended its $350 million Senior Secured
Revolving Credit Facility (the "Senior Secured Revolving Credit Facility"),
which reduced the floating rate of interest as defined in the Senior Secured
Revolving Credit Facility.
NOTE 5. WARRANTY CLAIMS
The Company provides certain limited warranties covering most of its
residential roofing products for periods generally ranging from 20 to 40 years,
with lifetime limited warranties on certain specialty shingle products. The
Company also offers certain limited warranties of varying duration covering most
of its commercial roofing products. Most of the Company's specialty building
products and accessories provide limited warranties for periods generally
ranging from 5 to 10 years, with lifetime limited warranties on certain
products.
The reserve for product warranty claims consists of the following for
the second quarter and six month periods ended July 3, 2005 and July 4, 2004,
respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- -------------------
JULY 3, JULY 4, JULY 3, JULY 4,
2005 2004 2005 2004
-------- --------- -------- ---------
(THOUSANDS)
Beginning balance................... $ 31,851 $ 32,122 $ 32,113 $ 31,972
Charged to cost of products sold.... 6,021 5,828 11,910 11,039
Payments/deductions................. (6,633) (6,514) (12,784) (11,575)
-------- -------- -------- --------
Ending balance...................... $ 31,239 $ 31,436 $ 31,239 $ 31,436
======== ======== ======== ========
9
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS
Defined Benefit Plans
The Company provides non-contributory defined benefit retirement
plans for certain hourly and salaried employees (the "Retirement Plans").
Benefits under these plans are based on stated amounts for each year of service.
The Company's funding policy is consistent with the minimum funding requirements
of the Employee Retirement Income Security Act of 1974.
The Company's net periodic pension cost for the Retirement Plans
included the following components for the second quarter and six month periods
ended July 3, 2005 and July 4, 2004, respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- -------------------
JULY 3, JULY 4, JULY 3, JULY 4,
2005 2004 2005 2004
-------- --------- -------- ---------
(THOUSANDS)
Service cost....................... $ 360 $ 349 $ 721 $ 698
Interest cost...................... 520 484 1,039 968
Expected return on plan assets..... (708) (671) (1,416) (1,343)
Amortization of unrecognized prior
service cost..................... 9 9 18 18
Amortization of net losses from
earlier periods.................. 77 72 154 145
-------- --------- -------- ---------
Net periodic pension cost.......... $ 258 $ 243 $ 516 $ 486
======== ========= ======== =========
At July 3, 2005, the Company does not expect to make any pension
contribution to the Retirement Plans in 2005, which is consistent with its
expectations at December 31, 2004.
10
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 6. BENEFIT PLANS - (CONTINUED)
Postretirement Medical and Life Insurance
The Company generally does not provide postretirement medical and
life insurance benefits, although it subsidizes such benefits for certain
employees and certain retirees. Such subsidies were reduced or ended as of
January 1, 1997.
Net periodic postretirement benefit cost included the following
components for the second quarter and six month periods ended July 3, 2005 and
July 4, 2004, respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------- -------------------
JULY 3, JULY 4, JULY 3, JULY 4,
2005 2004 2005 2004
-------- --------- -------- ---------
(THOUSANDS)
Service cost....................... $ 34 $ 36 $ 69 $ 71
Interest cost...................... 71 76 143 152
Amortization of unrecognized prior
service cost..................... (23) (23) (47) (47)
Amortization of net gains from
earlier periods.................. (61) (60) (123) (118)
-------- --------- -------- ---------
Net periodic postretirement
benefit cost..................... $ 21 $ 29 $ 42 $ 58
======== ========= ======== =========
At July 3, 2005, the Company expects to make benefit claim payments
of approximately $0.3 million in 2005, which are related to postretirement
medical and life insurance expenses. This is consistent with the Company's
expectations at December 31, 2004.
11
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 7. 2001 LONG-TERM INCENTIVE PLAN
The Company currently accounts for its 2001 Long-Term Incentive Plan
units granted to certain employees under the accounting prescribed by applying
FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option and Award Plans" ("FIN 28"), which requires an entity to
measure compensation as the amount by which the Book Value (as defined in the
plan) of the incentive units covered by the grant exceeds the option price or
value specified of such incentive units at the date of grant. Changes, either
increases or decreases, in the Book Value of those incentive units between the
date of grant and the measurement date result in a change in the measure of
compensation for the right or award. The Company has also adopted the additional
disclosure provisions prescribed in SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"), which requires
additional disclosures on both an annual and interim basis about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. The Company expects to continue to account
for its long-term incentive units under the accounting prescribed by FIN 28 and
the additional disclosure provisions of SFAS No. 148. Compensation expense for
the Company's incentive units was $2.8 and $1.7 million for the second quarter
ended July 3, 2005 and July 4, 2004, respectively, and $5.8 and $3.3 million for
the six month period ended July 3, 2005 and July 4, 2004 respectively. At July
3, 2005 and July 4, 2004, the 2001 Long-Term Incentive Plan liability amounted
to $23.9 and $14.3 million, respectively and was included in accrued
liabilities. The Company's pro forma net income for the quarter ended and six
month period ended July 3, 2005 and July 4, 2004, respectively, as it relates to
compensation expense is the same as actual net income.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company makes loans to, and borrows from, its parent corporations
from time to time at prevailing market rates. As of July 3, 2005 and July 4,
2004, BMCA Holdings Corporation owed the Company $55.8 and $55.6 million,
including interest of $0.5 and $0.4 million, respectively, and the Company owed
BMCA Holdings Corporation $52.8 and $52.8 million, with no unpaid interest
payable to BMCA Holdings Corporation, respectively. Interest income on the
Company's loans to BMCA Holdings Corporation amounted to $0.9 and $0.7 million
during the second quarter ended July 3, 2005 and July 4, 2004, respectively and
$1.8 and $1.4 million during the six month period ended July 3, 2005 and July 4,
2004, respectively. Interest expense on the Company's loans from BMCA Holdings
Corporation amounted to $0.9 and $0.6 million during the second quarter ended
July 3, 2005 and July 4, 2004, respectively and $1.8 and $1.3 million during the
six month period ended July 3, 2005 and July 4, 2004, respectively. Loans
payable to/receivable from any parent corporation are due on demand and provide
each party with the right of offset of its related obligation to the other party
and are subject to limitations as outlined in the Company's Senior Secured
Revolving Credit Facility and its 7 3/4% Senior Notes due 2005, the 8% Senior
Notes due 2007, the 8% Senior Notes due 2008 and the 7 3/4% Senior Notes due
2014 (collectively, the "Senior Notes"). Under the terms of the Senior Secured
12
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS - (CONTINUED)
Revolving Credit Facility and the indentures governing the Company's Senior
Notes at July 3, 2005, the Company could repay demand loans to its parent
corporation amounting to $52.8 million, subject to certain conditions. The
Company also makes non-interest bearing advances to affiliates, of which no
balance was outstanding as of July 3, 2005 and July 4, 2004. In addition, for
the six month period ended July 3, 2005 and July 4, 2004, no loans were owed or
other lending activities were entered into by the Company to other affiliates.
During the six month period ended July 3, 2005, the Company updated
its management agreement with International Specialty Products Inc., an
affiliate, (the "ISP Management Agreement") to provide the Company with certain
management services. Based on services provided to the Company in 2005 under the
ISP Management Agreement, the aggregate amount payable to ISP under the ISP
Management Agreement for 2005, inclusive of the services provided to G-I
Holdings, is approximately $5.9 million.
For the six month period ended July 3, 2005 and July 4, 2004, the
Company paid $22.0 and $6.4 million, respectively in federal income tax payments
to its parent corporation pursuant to a tax sharing agreement. These amounts are
included in the change in net receivable from/payable to related parties/parent
corporations in the consolidated statement of cash flows.
On February 25, 2004 and April 21, 2004 the Company declared and paid
cash dividends of $5.0 million and $5.0 million, respectively to its parent
corporation.
NOTE 9. CONTINGENCIES
Asbestos Litigation Against G-I Holdings
In connection with its formation, the Company contractually assumed
and agreed to pay the first $204.4 million of liabilities for asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber ("Asbestos
Claims") of its parent, G-I Holdings. As of March 30, 1997, the Company paid all
of its assumed asbestos-related liabilities. In January 2001, G-I Holdings filed
a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code due to Asbestos Claims. Most asbestos claims do not specify the amount of
damages sought. This Chapter 11 proceeding remains pending.
Claimants in the G-I Holdings' bankruptcy, including judgment
creditors, might seek to satisfy their claims by asking the bankruptcy court to
require the sale of G-I Holdings' assets, including its holdings of BMCA
Holdings Corporation's common stock and its indirect holdings of the Company's
common stock. Such action could result in a change of control of the Company. In
addition, those creditors may seek to file Asbestos Claims against the Company
(with approximately 1,900 alleged Asbestos Claims having been filed against the
Company as of July 3, 2005). The Company believes that it will not sustain any
13
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
liability in connection with these or any other asbestos-related claims. On
February 2, 2001, the United States Bankruptcy Court for the District of New
Jersey issued a temporary restraining order enjoining any existing or future
claimant from bringing or prosecuting an Asbestos Claim against the Company. By
oral opinion on June 22, 2001, and written order entered February 22, 2002, the
court converted the temporary restraints into a preliminary injunction,
prohibiting the bringing or prosecution of any such Asbestos Claim against the
Company. On February 7, 2001, G-I Holdings filed an action in the United States
Bankruptcy Court for the District of New Jersey seeking a declaratory judgment
that BMCA has no successor liability for Asbestos Claims against G-I Holdings
and that it is not the alter ego of G-I Holdings (the "BMCA Action"). On May 13,
2003 the United States District Court for the District of New Jersey overseeing
the G-I Holdings' Bankruptcy Court withdrew the reference of the BMCA Action
from the Bankruptcy Court, and this matter will be heard by the District Court
directly. On July 26, 2005, one party in the BMCA Action, the legal
representative of future demand holders in the G-I Holdings bankruptcy, was
dismissed from the case. The BMCA Action continues against the creditors'
committee in the G-I Holdings bankruptcy. The BMCA Action is in a pretrial
discovery stage and no trial date has been set by the court. As a result, it is
not possible to predict the outcome of this litigation, although the Company
believes its claims are meritorious. While the Company cannot predict whether
any additional Asbestos Claims will be asserted against it or its assets, or the
outcome of any litigation relating to those claims, the Company believes that it
has meritorious defenses to any claim that it has asbestos-related liability,
although there can be no assurances in this regard.
On or about February 8, 2001, the creditors' committee established in
G-I Holdings' bankruptcy case filed a complaint in the United States Bankruptcy
Court, District of New Jersey against G-I Holdings and the Company. The
complaint requests substantive consolidation of the Company with G-I Holdings or
an order directing G-I Holdings to cause the Company to file for bankruptcy
protection. The Company and G-I Holdings intend to vigorously defend the
lawsuit. The plaintiffs also filed for interim relief absent the granting of
their requested relief described above. On March 21, 2001, the bankruptcy court
denied plaintiffs' application for interim relief. In November 2002, the
creditors' committee, joined in by the legal representative of future demand
holders, filed a motion for appointment of a trustee in the G-I Holdings'
bankruptcy. In December 2002, the bankruptcy court denied the motion. The
creditors' committee appealed the ruling to the United States District Court,
which denied the appeal on June 27, 2003. The creditors' committee has appealed
the denial to the Third Circuit Court of Appeals, which denied the appeal on
September 24, 2004. The creditors' committee filed a petition with the Third
Circuit Court of Appeals for a rehearing of its denial of the creditors'
committee's appeal, which was denied by the Court on October 26, 2004.
14
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
On February 27, 2004, the creditors' committee, joined in by the
legal representative, filed a motion to modify the preliminary injunction and to
seek authority by the bankruptcy court to avoid, on various grounds, certain
liens granted in connection with the financing obtained by the Company in
December, 2000. G-I Holdings and the Company have opposed the motion and a
hearing on the motion was held by the bankruptcy court on March 29, 2004. By
opinion dated June 8, 2004, the court granted the motion in part and denied it
in part. On July 7, 2004, the creditors' committee filed a claim challenging, as
a fraudulent conveyance, the transactions entered into in connection with the
Company's formation in 1994, in which G-I Holdings caused to be transferred to
the Company all of its roofing business and assets and in which the Company
assumed certain liabilities relating to those assets, including a specified
amount of asbestos liabilities (the "1994 transaction"). In addition, on July 7,
2004, the creditors' committee filed a claim against holders of the Company's
bank and bond debt outstanding in 2000, seeking to avoid the liens granted to
them, based on the committee's theory that the 1994 transaction was a fraudulent
conveyance. On August 3, 2004, the creditors' committee filed an amended
complaint adding the names of additional alleged bondholders. On July 20, 2004,
the creditors' committee appealed the court's decision, issued on June 8, 2004,
seeking the authority to file a lawsuit against the banks and bondholders
discussed above, challenging the liens granted to them in 2000 as a fraudulent
conveyance and is appealing, among other things, certain adverse rulings
relating to statute of limitation issues. G-I Holdings, the holders of the
Company's bank and bond debt and the Company have filed cross appeals. These
appeals remain pending before the District Court.
The Company believes that the claims of the creditors' committee are
without merit. However, if the Company is not successful defending against one
or more of these claims, the Company may be forced to file for bankruptcy
protection and/or contribute all or a substantial portion of its assets to
satisfy the claims of G-I Holdings' creditors. Either of these events, or the
substantive consolidation of G-I Holdings and the Company, would weaken its
operations and cause it to divert a material amount of its cash flow to satisfy
the asbestos claims of G-I Holdings, and may render it unable to pay interest or
principal on its credit obligations.
On May 17, 2005, the creditors' committee filed a motion before the
bankruptcy court seeking an order directing that approximately $150 million of
payments falling due on July 15, 2005, to holders of notes issued by the Company
on July 17, 1998, be made in escrow pending further order of the Court. By order
dated July 12, 2005, the Court denied the committee's motion.
For a further discussion with respect to the history of the foregoing
litigation, and asbestos-related matters and other litigation, see Notes 5, 13
and 18 to consolidated financial statements contained in the Company's 2004 Form
10-K.
15
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
Environmental Litigation
The Company, together with other companies, is a party to a variety
of proceedings and lawsuits involving environmental matters under the
Comprehensive Environmental Response Compensation and Liability Act, and similar
state laws, in which recovery is sought for the cost of cleanup of contaminated
sites or remedial obligations are imposed, a number of which are in the early
stages or have been dormant for protracted periods. The Company refers to these
proceedings and lawsuits as "Environmental Claims." Most of the Environmental
Claims do not seek to recover an amount of specific damages. At most sites, the
Company anticipates that liability will be apportioned among the companies found
to be responsible for the presence of hazardous substances at the site. The
Company believes that the ultimate disposition of such matters will not,
individually or in the aggregate, have a material adverse effect on the
liquidity, financial position or results of operations of the Company.
Other Litigation
On or about February 17, 2004, litigation was commenced against the
Company in the United States District Court for the Eastern District of
Pennsylvania by CertainTeed Corporation alleging patent infringement in
connection with certain of the Company's products representing less than 5% of
the Company's net sales. No specific amount of damages have been sought in the
litigation. The Company intends to defend itself vigorously in this matter, has
denied CertainTeed's claims and has filed counterclaims against CertainTeed for
patent infringement, violations of the antitrust laws and for trade libel.
Although this matter is in its preliminary stages and there can be no assurances
made, the Company believes that the claims filed by CertainTeed Corporation are
without merit and will not have a material adverse effect against it. In
addition, although the Company's counterclaims against CertainTeed are in their
preliminary stages, the Company believes its counterclaims are meritorious.
For a further discussion with respect to the history of environmental
matters and other litigation, reference is made to Notes 2 and 18 to
consolidated financial statements contained in the Company's 2004 Form 10-K.
Tax Claim Against G-I Holdings
The Company and certain of its subsidiaries were members of the
consolidated group (the "G-I Holdings Group") for federal income tax purposes
that included G-I Holdings in certain prior years and, accordingly, would be
severally liable for any tax liability of the G-I Holdings Group in respect of
those prior years.
16
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 9. CONTINGENCIES - (CONTINUED)
On September 15, 1997, G-I Holdings received a notice from the
Internal Revenue Service (the "IRS") of a deficiency in the amount of $84.4
million (after taking into account the use of net operating losses and foreign
tax credits otherwise available for use in later years) in connection with the
formation in 1990 of Rhone-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an
interest. G-I Holdings has advised the Company that it believes that it will
prevail in this tax matter arising out of the surfactants partnership, although
there can be no assurance in this regard. The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position or results of operations. On September 21, 2001,
the IRS filed a proof of claim with respect to such deficiency against G-I
Holdings in the G-I Holdings' bankruptcy. If such proof of claim is sustained,
the Company and/or certain of the Company's subsidiaries together with G-I
Holdings and several current and former subsidiaries of G-I Holdings would be
severally liable for a portion of those taxes and interest. G-I Holdings has
filed an objection to the proof of claim. If the IRS were to prevail for the
years in which the Company and/or certain of its subsidiaries were part of the
G-I Holdings Group, the Company would be severally liable for approximately
$40.0 million in taxes plus interest, although this calculation is subject to
uncertainty depending upon various factors including G-I Holdings' ability to
satisfy its tax liabilities and the application of tax credits and deductions.
Other Contingencies
In the ordinary course of business, the Company has several supply
agreements that include minimum annual purchase requirements. In the event these
purchase requirements are not met, the Company may be required to make payments
under these supply agreements.
NOTE 10. SUBSEQUENT EVENT
On July 15, 2005, the Company used cash and cash equivalents on hand
and proceeds from its Senior Secured Revolving Credit Facility to redeem its
7 3/4% Senior Notes due 2005 at maturity, aggregating $150.0 million plus
accrued interest of $2.9 million.
NOTE 11. GUARANTOR FINANCIAL INFORMATION
At July 3, 2005, all of the Company's subsidiaries, each of which is
wholly owned by the Company are guarantors under the Company's $350.0 million
Senior Secured Revolving Credit Facility and the indentures governing the 7 3/4%
Senior Notes due 2005, the 8% Senior Notes due 2007 (the "2007 Notes"), the 8%
Senior Notes due 2008 and the 7 3/4% Senior Notes due 2014. These guarantees are
full, unconditional and joint and several. In addition, Building Materials
Manufacturing Corporation ("BMMC"), a wholly-owned subsidiary of the Company, is
a co-obligor on the 2007 Notes.
17
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
The Company and BMMC entered into license agreements, effective
January 1, 1999, for the right to use intellectual property, including patents,
trademarks, know-how, and franchise rights owned by Building Materials
Investment Corporation, a wholly-owned subsidiary of the Company, for a license
fee stated as a percentage of net sales. The license agreements are for a period
of one year and are subject to automatic renewal unless either party terminates
with 60 days written notice. Also, effective January 1, 1999, BMMC sells all
finished goods to the Company at a manufacturing profit.
Presented below is condensed consolidating financial information for
the Company and the guarantor subsidiaries. This financial information should be
read in conjunction with the consolidated financial statements and other notes
related thereto. Separate financial statements for the Company and the guarantor
subsidiaries are not included herein because the guarantees are full,
unconditional and joint and several.
18
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SECOND QUARTER ENDED JULY 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
Net sales............................................... $464,997 $ 32,640 $ - $ 497,637
Intercompany net sales.................................. 863 295,197 (296,060) -
--------- --------- --------- ---------
Total net sales....................................... 465,860 327,837 (296,060) 497,637
--------- --------- --------- ---------
Cost and expenses, net:
Costs of products sold................................ 349,201 288,370 (296,060) 341,511
Selling, general and administrative................... 81,450 26,206 - 107,656
Transition service agreement (income) expense......... 25 (25) - -
--------- --------- --------- ---------
Total costs and expenses, net......................... 430,676 314,551 (296,060) 449,167
--------- --------- --------- ---------
Operating income........................................ 35,184 13,286 - 48,470
Equity in earnings of subsidiaries...................... 17,068 - (17,068) -
Intercompany licensing income (expense), net............ (18,634) 18,634 - -
Interest expense........................................ (12,008) (4,407) - (16,415)
Other income (expense), net............................. (2,179) 16 - (2,163)
--------- --------- --------- ---------
Income before income taxes.............................. 19,431 27,529 (17,068) 29,892
Income tax expense...................................... (899) (10,461) - (11,360)
--------- --------- --------- ---------
Net income.............................................. $ 18,532 $ 17,068 $ (17,068) $ 18,532
========= ========= ========= =========
19
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SECOND QUARTER ENDED JULY 4, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
Net sales............................................... $ 419,070 $ 32,479 $ - $ 451,549
Intercompany net sales.................................. 20,491 305,279 (325,770) -
--------- --------- --------- ---------
Total net sales....................................... 439,561 337,758 (325,770) 451,549
--------- --------- --------- ---------
Cost and expenses, net:
Costs of products sold................................ 335,531 296,917 (325,770) 306,678
Selling, general and administrative................... 76,296 22,280 - 98,576
Transition service agreement (income) expense......... 25 (25) - -
--------- --------- --------- ---------
Total costs and expenses, net......................... 411,852 319,172 (325,770) 405,254
--------- --------- --------- ---------
Operating income........................................ 27,709 18,586 - 46,295
Equity in earnings of subsidiaries...................... 20,882 - (20,882) -
Intercompany licensing income (expense), net............ (17,583) 17,583 - -
Interest expense........................................ (11,594) (2,932) - (14,526)
Other income (expense), net............................. (1,818) 41 - (1,777)
--------- --------- --------- ---------
Income before income taxes.............................. 17,596 33,278 (20,882) 29,992
Income tax (expense) benefit............................ 1,224 (12,396) - (11,172)
--------- --------- ---------- ---------
Net income.............................................. $ 18,820 $ 20,882 $ (20,882) $ 18,820
========= ========= ========== =========
20
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JULY 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
Net sales............................................... $918,292 $ 58,143 $ - $ 976,435
Intercompany net sales.................................. 1,724 620,529 (622,253) -
--------- --------- --------- ---------
Total net sales....................................... 920,016 678,672 (622,253) 976,435
--------- --------- --------- ---------
Cost and expenses, net:
Costs of products sold................................ 700,679 598,802 (622,253) 677,228
Selling, general and administrative................... 161,000 51,941 - 212,941
Transition service agreement (income) expense......... 50 (50) - -
--------- --------- --------- ---------
Total costs and expenses, net......................... 861,729 650,693 (622,253) 890,169
--------- --------- --------- ---------
Operating income........................................ 58,287 27,979 - 86,266
Equity in earnings of subsidiaries...................... 35,421 - (35,421) -
Intercompany licensing income (expense), net............ (36,800) 36,800 - -
Interest expense........................................ (24,611) (7,908) - (32,519)
Other income (expense), net............................. (3,421) 259 - (3,162)
--------- --------- --------- ---------
Income before income taxes.............................. 28,876 57,130 (35,421) 50,585
Income tax (expense) benefit............................ 2,486 (21,709) - (19,223)
--------- --------- --------- ---------
Net income.............................................. $ 31,362 $ 35,421 $ (35,421) $ 31,362
========= ========= ========= =========
21
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
SIX MONTHS ENDED JULY 4, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
Net sales............................................... $ 785,723 $ 57,808 $ - $ 843,531
Intercompany net sales.................................. 40,290 574,883 (615,173) -
--------- --------- --------- ---------
Total net sales....................................... 826,013 632,691 (615,173) 843,531
--------- --------- --------- ---------
Cost and expenses, net:
Costs of products sold................................ 638,187 557,700 (615,173) 580,714
Selling, general and administrative................... 142,556 42,080 - 184,636
Transition service agreement (income) expense......... 50 (50) - -
--------- --------- --------- ---------
Total costs and expenses, net......................... 780,793 599,730 (615,173) 765,350
--------- --------- --------- ---------
Operating income........................................ 45,220 32,961 - 78,181
Equity in earnings of subsidiaries...................... 37,767 - (37,767) -
Intercompany licensing income (expense), net............ (33,040) 33,040 - -
Interest expense........................................ (22,785) (5,895) - (28,680)
Other income (expense), net............................. (2,641) 80 - (2,561)
--------- --------- --------- ---------
Income before income taxes.............................. 24,521 60,186 (37,767) 46,940
Income tax (expense) benefit............................ 4,934 (22,419) - (17,485)
--------- --------- --------- ---------
Net income.............................................. $ 29,455 $ 37,767 $ (37,767) $ 29,455
========= ========= ========= =========
22
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor Elim-
Company Subsidiaries inations Consolidated
----------- ----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 4 $ 57,123 $ - $ 57,127
Accounts receivable, trade, net........ 306,031 23,528 - 329,559
Accounts receivable, other............. 4,241 2,646 - 6,887
Tax receivable from parent
corporation.......................... 824 - - 824
Inventories, net....................... 126,780 61,994 - 188,774
Deferred income tax assets, net........ 45,994 - - 45,994
Other current assets................... 6,704 5,555 - 12,259
----------- ----------- ----------- -----------
Total Current Assets................. 490,578 150,846 - 641,424
Investment in subsidiaries............... 546,831 - (546,831) -
Intercompany loans including accrued
interest............................... 141,760 (141,760) - -
Due from/(to) subsidiaries, net.......... (443,424) 443,424 - -
Property, plant and equipment, net....... 36,892 323,563 - 360,455
Goodwill, net............................ 40,080 23,119 - 63,199
Other noncurrent assets.................. 11,379 19,399 - 30,778
----------- ----------- ----------- -----------
Total Assets............................. $ 824,096 $ 818,591 $ (546,831) $1,095,856
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt... $ 149,995 $ 2,670 $ - $ 152,665
Accounts payable....................... 40,393 53,964 - 94,357
Payable to related parties............. 6,252 9,258 - 15,510
Loans payable to parent corporation.... 52,840 - - 52,840
Accrued liabilities.................... 40,302 75,714 - 116,016
Reserve for product warranty claims.... 14,900 - - 14,900
----------- ----------- ----------- -----------
Total Current Liabilities............ 304,682 141,606 - 446,288
Long-term debt less current maturities... 405,526 129,127 - 534,653
Reserve for product warranty claims...... 15,499 840 - 16,339
Deferred income tax liabilities.......... 47,940 - - 47,940
Other liabilities........................ 21,876 187 - 22,063
----------- ----------- ----------- -----------
Total Liabilities........................ 795,523 271,760 - 1,067,283
Total Stockholders' Equity............... 28,573 546,831 (546,831) 28,573
----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity.............................. $ 824,096 $ 818,591 $ (546,831) $1,095,856
=========== =========== =========== ===========
23
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor Elim-
Company Subsidiaries inations Consolidated
----------- ----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents............... $ 12 $ 129,470 $ - $ 129,482
Accounts receivable, trade, net......... 234,733 15,810 - 250,543
Accounts receivable, other.............. 2,630 1,196 - 3,826
Inventories, net........................ 114,643 60,271 - 174,914
Deferred income tax assets, net......... 43,398 - - 43,398
Other current assets.................... 2,311 4,188 - 6,499
----------- ----------- ----------- -----------
Total Current Assets.................. 397,727 210,935 - 608,662
Investment in subsidiaries................ 556,410 - (556,410) -
Intercompany loans including accrued
interest................................ 58,807 (58,807) - -
Due from (to) subsidiaries, net........... (309,854) 309,854 - -
Property, plant and equipment, net........ 41,356 323,158 - 364,514
Goodwill, net............................. 40,080 23,214 - 63,294
Other noncurrent assets................... 8,329 20,746 - 29,075
----------- ----------- ----------- -----------
Total Assets.............................. $ 792,855 $ 829,100 $ (556,410) $1,065,545
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt.... $ 149,949 $ 2,576 $ - $ 152,525
Accounts payable........................ 53,216 67,121 - 120,337
Payable to related parties, net......... 6,625 10,275 - 16,900
Loans payable to parent corporation..... 52,840 - - 52,840
Accrued liabilities..................... 32,020 61,447 - 93,467
Reserve for product warranty claims..... 14,900 - - 14,900
----------- ----------- ----------- -----------
Total Current Liabilities............. 309,550 141,419 - 450,969
Long-term debt less current maturities.... 405,530 130,422 - 535,952
Reserve for product warranty claims....... 16,553 660 - 17,213
Deferred income tax liabilities........... 44,773 - - 44,773
Other liabilities......................... 19,160 189 - 19,349
----------- ----------- ----------- -----------
Total Liabilities......................... 795,566 272,690 - 1,068,256
Total Stockholders' Equity (Deficit)...... (2,711) 556,410 (556,410) (2,711)
----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit)..................... $ 792,855 $ 829,100 $ (556,410) $1,065,545
=========== =========== =========== ===========
24
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 3, 2005
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Consolidated
------------ ------------ ------------
Cash and cash equivalents, beginning of period...... $ 12 $ 129,470 $ 129,482
------------ ------------ ------------
Cash provided by (used in) operating activities:
Net income (loss)................................. (4,059) 35,421 31,362
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation.................................... 1,748 20,271 22,019
Amortization.................................... - 1,174 1,174
Deferred income taxes........................... 571 - 571
Noncash interest charges, net................... 2,195 655 2,850
Increase in working capital items................. (93,979) (11,149) (105,128)
Increase (decrease) in long-term reserve for
product warranty claims.......................... (1,055) 181 (874)
Increase in other assets.......................... (4,608) (310) (4,918)
Increase in other liabilities..................... 2,569 92 2,661
Change in net receivable from/payable to
related parties/parent corporations............. 94,419 (96,633) (2,214)
Other, net........................................ (29) 229 200
------------ ------------ ------------
Net cash used in operating activities............... (2,228) (50,069) (52,297)
------------ ------------ ------------
Cash provided by (used in) investing activities:
Capital expenditures.............................. (1,388) (21,489) (22,877)
Proceeds from sale of assets...................... 4,132 585 4,717
------------ ------------ ------------
Net cash provided by (used in) investing activities. 2,744 (20,904) (18,160)
------------ ------------ ------------
Cash provided by (used in) financing activities:
Proceeds from the issuance of long-term debt...... 127,000 - 127,000
Repayments of long-term debt...................... (127,000) (1,374) (128,374)
Distribution to parent corporation................ (10) - (10)
Loan to parent corporation........................ (68) - (68)
Financing fees and expenses....................... (446) - (446)
------------ ------------ ------------
Net cash used in financing activities............... (524) (1,374) (1,898)
------------ ------------ ------------
Net change in cash and cash equivalents............. (8) (72,347) (72,355)
------------ ------------ ------------
Cash and cash equivalents, end of period............ $ 4 $ 57,123 $ 57,127
============ ============ ============
25
BUILDING MATERIALS CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)- (CONTINUED)
NOTE 11. GUARANTOR FINANCIAL INFORMATION - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 4, 2004
(THOUSANDS)
(UNAUDITED)
Parent Guarantor
Company Subsidiaries Consolidated
-------------- -------------- --------------
Cash and cash equivalents, beginning of period....... $ 8 $ 2,872 $ 2,880
-------------- -------------- --------------
Cash provided by (used in) operating activities:
Net income (loss).................................. (8,312) 37,767 29,455
Adjustments to reconcile net income (loss)to net
cash provided by (used in) operating activities:
Depreciation..................................... 1,487 19,361 20,848
Amortization..................................... - 1,114 1,114
Deferred income taxes............................ 3,592 - 3,592
Noncash interest charges, net.................... 2,074 720 2,794
(Increase) decrease in working capital items....... (145,197) 1,107 (144,090)
Increase (decrease) in long-term reserve for
product warranty claims.......................... (1,020) 484 (536)
(Increase) decrease in other assets................ 272 (1,668) (1,396)
Increase (decrease) in other liabilities........... 21 (5) 16
Change in net receivable from/payable to
related parties/parent corporations.............. 44,983 (33,852) 11,131
Other, net......................................... 44 73 117
-------------- -------------- --------------
Net cash provided by (used in) operating activities.. (102,056) 25,101 (76,955)
-------------- -------------- --------------
Cash provided by (used in) investing activities:
Capital expenditures and acquisition of
manufacturing facility........................... (26,263) (17,204) (43,467)
-------------- -------------- --------------
Net cash used in investing activities................ (26,263) (17,204) (43,467)
-------------- -------------- --------------
Cash provided by (used in) financing activities:
Proceeds from issuance of long-term debt........... 325,000 - 325,000
Repayments of long-term debt....................... (186,000) (1,489) (187,489)
Distribution to parent corporation................. (85) - (85)
Dividends to parent corporation.................... (10,000) - (10,000)
Loan to parent corporation......................... (48) - (48)
Financing fees and expenses........................ (544) - (544)
-------------- -------------- --------------
Net cash provided by (used in) financing activities.. 128,323 (1,489) 126,834
-------------- -------------- --------------
Net change in cash and cash equivalents.............. 4 6,408 6,412
-------------- -------------- --------------
Cash and cash equivalents, end of period............. $ 12 $ 9,280 $ 9,292
============== ============== ==============
26
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated by the context, "we," "us" and "our" refer
to Building Materials Corporation of America and its consolidated subsidiaries.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes to our Critical Accounting
Policies during the six month period ended July 3, 2005. For a further
discussion on our Critical Accounting Policies, reference is made to
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Critical Accounting Policies" in our annual report on Form 10-K for
the fiscal year ended December 31, 2004, which we refer to as the 2004 Form
10-K.
RESULTS OF OPERATIONS
Roofing product sales is our dominant business, typically accounting
for approximately 95% of our consolidated net sales. The main drivers of our
roofing business include: the nation's aging housing stock; existing home sales;
new home construction; larger new homes; increased home ownership rates; and
severe weather and energy concerns. Our roofing business is also affected by raw
material costs, including asphalt and other petroleum-based raw materials,
energy, and transportation and distribution costs.
Second Quarter 2005 Compared With
Second Quarter 2004
We recorded net income in the second quarter of 2005 of $18.5 million
compared with net income of $18.8 million in the second quarter of 2004. The
decrease in second quarter of 2005 net income was primarily attributable to
higher operating income, offset by higher interest expense and slightly higher
other expenses.
Net sales for the second quarter of 2005 were $497.6 million, a 10.2%
increase over second quarter of 2004 net sales of $451.5 million, with the
increase primarily due to higher average selling prices and higher unit volumes
of both residential and commercial roofing products.
Operating income in the second quarter of 2005 was $48.5 million
compared to $46.3 million in the second quarter of 2004, representing an
increase of 4.8%. Operating income in the second quarter of 2005 was positively
affected by increased net sales primarily resulting from higher average selling
prices and higher unit volumes of both residential and commercial roofing
products. Partially offsetting these improvements in operating results were
higher raw material costs, including asphalt, and higher selling, general and
administrative expenses, mostly due to higher distribution costs, primarily
resulting from higher sales volume and a rise in fuel prices.
27
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Interest expense for the second quarter of 2005 increased to $16.4
million from $14.5 million for the second quarter of 2004, primarily due to a
higher average interest rate. Other expense, net was $2.2 million for the second
quarter of 2005 compared with $1.8 million for the second quarter of 2004.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the second quarter of 2005
increased to $474.7 million from $428.2 million for the second quarter of 2004,
representing an increase of $46.5 million or 10.9%. The increase in net sales of
roofing products was primarily attributable to higher average selling prices and
higher unit volumes. Roofing product net sales were favorably impacted by an
increase in net sales of premium laminate shingles primarily due to higher
average selling prices and higher unit volumes. Net sales of specialty building
products and accessories decreased to $22.9 million for the second quarter of
2005 from $23.3 million for the second quarter of 2004.
Gross Margin. Our overall gross margin increased to $156.1 million or 31.4% for
the second quarter of 2005 from $144.9 million or 32.1% for the second quarter
of 2004. The increase in our overall gross margin is primarily attributable to
an increase in net sales due to higher average selling prices and an improved
sales mix, partially offset by higher raw material costs.
Operating Income. Operating income for the second quarter of 2005 increased to
$48.5 million or 9.7% of net sales, compared to $46.3 million or 10.3% of net
sales for the second quarter of 2004. The overall increase in operating income
for the second quarter of 2005 is primarily attributable to increased net sales
of roofing products driven by higher average selling prices and higher unit
volumes, partially offset by higher raw material costs, including asphalt, and
higher selling, general and administrative expenses resulting from higher
distribution costs, primarily due to higher sales volume and a rise in fuel
prices.
Six Months 2005 Compared With
Six Months 2004
We recorded net income in the first six months of 2005 of $31.4
million compared with net income of $29.5 million in the first six months of
2004. The increase in the first six months of 2005 net income was primarily
attributable to higher operating income, partially offset by higher interest
expense and slightly higher other expenses.
Net sales for the first six months of 2005 were $976.4 million, a
15.8% increase over the first six months of 2004 net sales of $843.5 million,
with the increase primarily due to higher average selling prices and higher unit
volumes of both residential and commercial roofing products.
28
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Operating income for the first six months of 2005 was $86.3 million
compared with $78.2 million for the first six months of 2004. Operating income
for the first six months of 2005 was positively affected by increased net sales
primarily resulting from higher average selling prices and higher unit volumes
of both residential and commercial roofing products. Partially offsetting these
improvements in operating results were higher raw material costs, including
asphalt, and higher selling, general and administrative expenses, mostly due to
higher distribution costs, primarily resulting from higher sales volume and a
rise in fuel prices.
Interest expense for the first six months of 2005 increased to $32.5
million from $28.7 million for the first six months of 2004, primarily due to a
higher average interest rate and higher average borrowings. The higher interest
expense in the first six months of 2005 was primarily due to the issuance, in
July 2004, of $200 million 7 3/4% Senior Notes due 2014, together with an
issuance, in November 2004,of an additional $50 million of 7 3/4% Senior Notes
due 2014, which we refer to collectively as the 2014 Notes, partially offset by
the redemption of the Company's $100 million 8 5/8% Senior Notes due 2006, which
we refer to as the 2006 Notes, and a reduction in the amount outstanding under
the Company's $350 million Senior Secured Revolving Credit Facility, which we
refer to as the Senior Secured Revolving Credit Facility. Other expense, net was
$3.2 million for the first six months of 2005 compared with $2.5 million for the
first six months of 2004.
BUSINESS SEGMENT INFORMATION
Net Sales. Net sales of roofing products for the first six months of 2005
increased to $937.0 million from $803.6 million for the first six months of
2004, representing an increase of $133.4 million or 16.6%. The increase in net
sales of roofing products was primarily attributable to higher average selling
prices and higher unit volumes. Roofing product net sales were favorably
impacted by an increase in net sales of premium laminate shingles primarily due
to higher average selling prices and higher unit volumes. Net sales of specialty
building products and accessories decreased to $39.4 million for the first six
months of 2005 from $39.9 million for the first six months of 2004.
Gross Margin. Our overall gross margin increased to $299.2 million or 30.6% for
the first six months of 2005 from $262.8 million or 31.2% for the first six
months of 2004. The increase in our overall gross margin is primarily
attributable to an increase in net sales due to higher average selling prices
and an improved sales mix, partially offset by higher raw material costs.
29
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Operating Income. Operating income for the first six months of 2005 increased to
$86.3 million or 8.8% of net sales, compared to $78.2 million or 9.3% of net
sales for the first six months of 2004. The overall increase in operating income
for the first six months of 2005 is primarily attributable to increased net
sales of roofing products driven by higher average selling prices and higher
unit volumes, partially offset by higher raw material costs, including asphalt,
and higher selling, general and administrative expenses resulting from higher
distribution costs, primarily due to higher sales volume and a rise in fuel
prices.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows and Cash Position
Sales of roofing products and specialty building products and
accessories in the northern regions of the United States generally decline in
the late fall and winter months due to cold weather. In addition, adverse
weather conditions can result in higher customer demand during our peak
operating season depending on the extent and severity of the damage from these
severe weather conditions. Due to the seasonal demands of our business together
with extreme weather conditions, we generally have negative cash flows from
operations during the first six months of our fiscal year. Our negative cash
flows from operations are primarily driven by our cash invested in both accounts
receivable and inventories to meet these seasonal operating demands. Generally,
in the third and fourth quarters of our fiscal year, our cash flows from
operations become positive for each quarter, as our investment in inventories
and accounts receivable no longer continues to increase, as is customary in the
first six months of our fiscal year. Our seasonal working capital needs,
together with our debt service obligations, capital expenditure requirements and
other contracted arrangements, adversely impact our liquidity during this
period. We rely on our cash and cash equivalents on hand and our Senior Secured
Revolving Credit Facility due November 2006 to support our overall cash flow
requirements during these periods. We expect to continue to rely on our cash and
cash equivalents on hand and external financings to maintain operations over the
short and long-term and to continue to have access to the financing markets,
subject to the then prevailing market terms and conditions.
Net cash outflow during the first six months of 2005 from operating
and investing activities was $70.5 million, including the use of $52.3 million
of cash from operations and the reinvestment of $22.9 million for capital
programs, partially offset by $4.7 million of proceeds from the sale of assets.
30
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Cash invested in additional working capital totaled $105.1 million
during the first six months of 2005, reflecting an increase in total accounts
receivable of $82.1 million, due to our increased operating performance and the
seasonality of our business, a $13.9 million increase in inventories to meet our
seasonal operating demands, a $5.7 million increase in other current assets, and
a $3.4 million net decrease in accounts payable and accrued liabilities. The net
cash used for operating activities also included a $2.2 million net decrease in
the payable to related parties/parent corporations, primarily attributable to a
$4.7 million net decrease in federal income taxes payable, pursuant to our tax
sharing agreement with our parent corporation and a $2.5 million increase in
amounts due under our long-term granule supply agreement with an affiliated
company. In addition, cash used in operating activities also included a $5.0
million increase in other assets, primarily reflecting a payment to our glass
fiber supplier in connection with a requirements contract entered into in
December 2004, coupled with a $2.7 million decrease in other liabilities.
Net cash used in financing activities totaled $1.9 million during the
first six months of 2005, including $127.0 million of proceeds from the issuance
of long-term debt related to 2005 year to date cumulative borrowings under our
Senior Secured Revolving Credit Facility. Financing activities also included
$128.4 million in repayments of long-term debt, of which $127.0 million related
to 2005 year to date cumulative repayments under our Senior Secured Revolving
Credit Facility, $1.2 million related to our Chester, South Carolina loan
obligation, $0.1 million related to our 10 1/2% Michigan City, Indiana note, and
$0.1 million related to our Shafter, California Industrial Development Revenue
Bonds. In addition, financing activities included $0.5 million in financing fees
and expenses.
Intercompany Transactions
We make loans to, and borrow from, our parent corporations from time
to time at prevailing market rates. As of July 3, 2005 and July 4, 2004, BMCA
Holdings Corporation owed us $55.8 and $55.6 million, including interest of $0.5
and $0.4 million, respectively, and we owed BMCA Holdings Corporation $52.8 and
$52.8 million, with no unpaid interest payable to BMCA Holdings Corporation,
respectively. Interest income on our loans to BMCA Holdings Corporation amounted
to $0.9 and $0.7 million during the second quarter ended July 3, 2005 and July
4, 2004, respectively and $1.8 and $1.4 million during the six month period July
3, 2005 and July 4, 2004, respectively. Interest expense on our loans from BMCA
Holdings Corporation amounted to $0.9 and $0.6 million during the second quarter
ended July 3, 2005 and July 4, 2004, respectively and $1.8 and $1.3 million
during the six month period ended July 3, 2005 and July 4, 2004, respectively.
Loans payable to/receivable from any parent corporation are due on demand and
provide each party with the right of offset of its related obligation to the
31
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
other party and are subject to limitations as outlined in our Senior Secured
Revolving Credit Facility and our 7 3/4% Senior Notes due 2005, the 8% Senior
Notes due 2007, the 8% Senior Notes due 2008, and the 2014 Notes, which we refer
to collectively as the Senior Notes. Under the terms of the Senior Secured
Revolving Credit Facility and the indentures governing our Senior Notes, at July
3, 2005, we could repay demand loans to our parent corporation amounting to
$52.8 million, subject to certain conditions. We also make non-interest bearing
advances to affiliates, of which no balance was outstanding as of July 3, 2005
and July 4, 2004. In addition, for the six month period ended July 3, 2005 and
July 4, 2004, no loans were owed or other lending activities were entered into
by us to other affiliates.
For the six month period ended July 3, 2005 and July 4, 2004, we paid
$22.0 and $6.4 million, respectively in federal income tax payments to our
parent corporation pursuant to a tax sharing agreement. These amounts are
included in the change in net receivable from/payable to related parties/parent
corporations in the consolidated statement of cash flows.
On February 25, 2004 and April 21, 2004, we declared and paid cash
dividends of $5.0 million and $5.0 million, respectively to our parent
corporation.
Long-Term Debt
As of July 3, 2005 we had total outstanding consolidated indebtedness
of $740.2 million, including $52.8 million of demand loans to our parent
corporation, of which $152.7 million matures prior to the end of the second
quarter of 2006. We anticipate funding these obligations principally from our
cash and cash equivalents on hand, cash flow from operations and/or borrowings
under our Senior Secured Revolving Credit Facility. As of July 3, 2005, we were
in compliance with all covenants under our Senior Secured Revolving Credit
Facility and our Senior Notes. As of July 3, 2005, the book value of the
collateral securing the Senior Notes and the Senior Secured Revolving Credit
Facility was approximately $1,080.8 million.
On May 7, 2004, we amended our Senior Secured Revolving Credit
Facility, which reduced the floating rate of interest as defined in the Senior
Secured Revolving Credit Facility.
Acquisition and Property Disposition
On May 7, 2004, we acquired certain assets of a manufacturing
facility located in Quakertown, Pennsylvania from Atlas Roofing Corporation. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price was allocated to the fair value of the
identifiable assets acquired, which consisted almost entirely of property, plant
and equipment. The operating results of the Quakertown manufacturing facility
are included in our results of operation from the date of its acquisition.
32
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
In June 2005, we sold property in Houston, Texas for cash proceeds of
approximately $4.1 million, which approximated carrying value.
As a result of the foregoing factors, cash and cash equivalents
decreased by $72.4 million during the first six months of 2005 to $57.1 million.
Contingencies
See Note 9 to Consolidated Financial Statements for information
regarding contingencies.
Economic Outlook
We do not believe that inflation has had a material effect on our
results of operations during the first six months of 2005. However, we cannot
assure you that our business will not be affected by inflation in the future, or
by increases in the cost of energy and asphalt purchases used in our
manufacturing process principally due to fluctuating oil prices.
During the first six months of 2005, the cost of asphalt continued to
be high relative to historical levels. Due to the strength of the Company's
manufacturing operations, which allows us to use many types of asphalt, together
with our ability to secure alternative sources of supply, we do not anticipate
that any future disruption in the supply of asphalt will have a material impact
on future net sales, although no assurances can be provided in that regard.
To mitigate these and other petroleum-based cost increases, we
announced and implemented multiple price increases during the first six months
of 2005. We will attempt to pass on future additional unexpected cost increases
from suppliers as needed; however, no assurances can be provided that these
price increases will be accepted in the marketplace.
Contractual Obligations
We have contracts with several different asphalt terminal suppliers
where asphalt imported from Venezuela or other suppliers is stored prior to its
use at our plants. These asphalt terminals are located at several locations
including the ports of Tampa, Florida and Savannah, Georgia and are used to
service our plants at those sites. We are obligated to pay these suppliers for
use of the terminals under these contracts through 2008. Monthly pricing is
fixed and includes capital improvements made at each asphalt terminal by its
owner. No changes have been made to these contracts during the first six months
of 2005.
33
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
On May 7, 2004, we entered into a long-term supply agreement, whereby
we are obligated to purchase certain minimum amounts of dry felt and other
products at fair market value through April 30, 2011. Effective January 31,
2005, this agreement was modified to reduce our minimum purchase obligation for
dry felt and other products by fifty percent. Based on the modification to this
agreement, as of July 3, 2005, our minimum purchase obligation for the life of
the agreement aggregated to $10.8 million.
In December 2004, we entered into a requirements contract with a
supplier to purchase certain glass fiber. Under this contract, we are required
to purchase specified annual quantities of glass fiber through 2014. Pricing for
the glass fiber under this contract may be adjusted upward or downward relating
to various factors including changes in the cost of energy and freight, among
others. Under the requirements contract we have the right to terminate the
contract if, during any two consecutive calendar years, we purchase less than a
specified percentage of our glass fiber requirements. As of December 31, 2004,
if we were to terminate this contract on or after December 31, 2006, as a result
of not having purchased specified quantities of glass fiber during the prior
two-year period, we would be required to pay an amount of not more than $37.3
million to the supplier, although we believe that the actual payment amount
would be substantially less based on the terms of the contract. No changes have
been made to this contract during the first six months of 2005.
We also have a management agreement with International Specialty
Products Inc., an affiliate, which we refer to as the ISP Management Agreement,
to provide us with certain management services. The management fees payable
under the ISP Management Agreement are adjusted annually. Based on services
provided to us in 2005 under the ISP Management Agreement, the aggregate amount
payable to ISP under the ISP Management Agreement for 2005, inclusive of the
services provided to G-I Holdings, is approximately $5.9 million. For a further
discussion on the ISP Management Agreement reference is made to Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Intercompany Transactions" in our 2004 Form 10-K.
We purchase substantially all of our colored roofing granules and
algae-resistant granules under a long-term requirements contract with
International Specialty Products, Inc., which we refer to as ISP. The amount of
mineral products purchased each year under the ISP contract is based on current
demand and is not subject to minimum purchase requirements. For the six month
period ended July 3, 2005 and the year ended December 31, 2004, we purchased
$54.7 and $98.2 million, respectively, of mineral products from ISP under this
contract.
2005 7 3/4% Senior Notes Redemption
On July 15, 2005, we used cash and cash equivalents on hand and
proceeds from our Senior Secured Revolving Credit Facility to redeem our 7 3/4%
Senior Notes due 2005 at maturity, aggregating $150.0 million plus accrued
interest of $2.9 million.
34
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board, which we
refer to as FASB issued Statement of Financial Accounting Standards, which we
refer to as SFAS, No. 151 "Inventory Costs," which we refer to as SFAS No. 151,
which clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). SFAS No. 151 amends
Accounting Research Bulletin, which we refer to as ARB, No. 43, Chapter 4
"Inventory Pricing," which we refer to as ARB No. 43, and requires abnormal
inventory costs to be recognized as current period charges regardless of whether
they meet the "so abnormal" criterion outlined in ARB No. 43. SFAS No. 151 also
introduces the concept of "normal capacity" and requires the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an expense in the period
in which they are incurred. SFAS No. 151 is effective for costs occurring in
fiscal reporting years beginning after June 15, 2005. As of January 1, 2006 we
will adopt the provisions of SFAS No. 151 and do not anticipate any material
effect on our consolidated financial statements.
In December 2004, the FASB issued a revised SFAS No. 123 "Accounting
for Stock-Based Compensation," which we refer to as SFAS No. 123(R), which will
require compensation costs related to share-based payment transactions to be
recognized in the financial statements. SFAS No. 123(R) establishes fair value
as the measurement objective in accounting for share-based payment arrangements
and requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees. SFAS No. 123(R)
replaces the original SFAS No. 123 and supersedes Accounting Principles Board,
which we refer to as APB, Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS No. 123(R) becomes effective beginning with the first annual
reporting period after June 15, 2005. As of July 3, 2005, we currently account
for our 2001 Long-Term Incentive Plan under the accounting prescribed by FASB
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option and Award Plans," which we refer to as FIN 28. Since
compensation expense related to our incentive units is currently included in our
consolidated statements of income, we do not expect SFAS No. 123(R) to have an
impact on our consolidated financial statements. See Note 7 to Consolidated
Financial Statements.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Nonmonetary Assets," which we refer to as SFAS No. 153, which replaces the
exception from fair value measurement in APB Opinion No. 29 "Accounting for
Nonmonetary Transactions," for nonmonetary exchanges of similar productive
assets. SFAS No. 153 replaces this exception with a general exception from fair
value measurement for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
35
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges
occurring in fiscal reporting periods beginning after June 15, 2005. As of July
4, 2005, we will adopt the provisions of SFAS No. 153 and do not anticipate
having any nonmonetary asset exchanges.
In March 2005, the FASB issued FASB Staff Position, which we refer to
as FSP, FIN 46(R)-5 "Implicit Variable Interests Under FASB Interpretation No.
46(R), Consolidation of Variable Interest Entities," which we refer to as FSP
FIN 46(R)-5. FSP FIN 46(R)-5 offers additional guidance to FIN 46(R) stating
that implicit variable interests are implied financial interests in an entity
that change in accordance with changes in the fair value of the entity's net
assets, exclusive of variable interests. FSP FIN 46(R)-5 is effective during a
company's first reporting period after March 3, 2005; accordingly we adopted FSP
FIN 46(R)-5 during our second quarter ended July 3, 2005. At July 3, 2005, we
did not have any interests in variable interest entities; therefore, FSP FIN
46(R)-5 or FIN 46(R) did not have any impact on our financial condition or
results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47 "Accounting
for Conditional Asset Retirement Obligations," which we refer to as FIN 47,
which clarifies how the term conditional asset retirement obligation is used in
SFAS No. 143 "Accounting for Asset Retirement Obligations," which we refer to as
SFAS No. 143. SFAS No. 143 provides for a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN 47 provides factors for when a reasonable estimate of the fair value
of the obligation can be determined and indicators which would preclude an
entity from recognizing a liability for such obligations. FIN 47 is effective
for fiscal years ending after December 15, 2005. We will adopt FIN 47 during our
fourth quarter in fiscal year ending December 31, 2005 and do not expect there
to be an impact on our financial condition or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections," which we refer to as SFAS No. 154, which eliminates the
requirement of APB Opinion No. 20, "Accounting Changes," to include the
cumulative effect adjustment resulting from a change in an accounting principle
in the income statement in the period of change. SFAS No. 154 requires that a
change in an accounting principle or reporting entity be retrospectively
applied. Under retrospective application, SFAS No. 154 is applied as of the
beginning of the first accounting period presented in the financial statements
and the cumulative effect of the change is reflected in the carrying value of
assets and liabilities as of the first period presented and the offsetting
adjustments are recorded to opening retained earnings. Each period presented is
36
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
adjusted to reflect the period-specific effects of applying the change. Changes
in accounting estimate and corrections of errors continue to be accounted for in
the same manner as prior to the issuance of SFAS No. 154. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. As of January 1, 2006, we will adopt the
provisions of SFAS No. 154 and do not anticipate any material effect on our
consolidated financial statements.
* * *
37
BUILDING MATERIALS CORPORATION OF AMERICA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act and section 21E of the Securities Exchange
Act of 1934. These forward-looking statements are only predictions and generally
can be identified by use of statements that include phrases such as "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. Our operations are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
contemplated by the relevant forward-looking statements. The forward-looking
statements included herein are made only as of the date of this quarterly report
on Form 10-Q and we undertake no obligation to publicly update any
forward-looking statements to reflect subsequent events or circumstances. We
cannot assure you that projected results or events will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Reference is made to Management's Discussion and Analysis of
Financial Condition and Results of Operations in the 2004 Form 10-K for a
discussion of "Market-Sensitive Instruments and Risk Management." There were no
material changes in such information as of July 3, 2005 and we have no hedging
arrangements as of July 3, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports filed, furnished or submitted
under the Exchange Act.
Internal Control Over Financial Reporting: There were no significant
changes in our internal control over financial reporting identified in
management's evaluation during the second quarter of fiscal year 2005 that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
38
BUILDING MATERIALS CORPORATION OF AMERICA
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of July 3, 2005, approximately 1,900 alleged asbestos-related
bodily injury claims relating to the inhalation of asbestos fiber are pending
against Building Materials Corporation of America. See Note 9 to consolidated
financial statements in Part I.
ITEM 5. OTHER INFORMATION
During the second quarter of 2005, the Company amended its ISP
Management Agreement with International Specialty Products Inc., an affiliate,
effective January 1, 2005, to provide the Company with certain management
services. The purpose of the amendment was to adjust the management fees payable
by the Company to ISP under the ISP Management Agreement. Accordingly, the
aggregate amount payable to ISP under the ISP Management Agreement for services
provided to the Company in 2005, inclusive of the services provided to G-I
Holdings, is approximately $5.9 million. A more detailed explanation of charges
with respect to each party to the agreement is set forth in the Amendment to the
ISP Management Agreement, which is filed as Exhibit 10.1 to this report and
incorporated by reference herein.
ITEM 6. EXHIBITS
Exhibit Number
10.1 Amendment No. 7 to the Amended and Restated Management
Agreement, dated as of January 1, 2005, by and among G-I
Holdings Inc., Merick Inc., International Specialty Products
Inc., International Specialty Holdings Inc., ISP Synthetic
Elastomers LP, ISP Investco LLC, GAF Broadcasting Company,
Inc., Building Materials Corporation of America and ISP
Management Company, Inc. as assignee of ISP Chemco, Inc.
10.2 Form of BMCA 2001 Long-Term Incentive Plan Incentive Unit
Grant Agreement
31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Executive Officer.
31.3 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
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SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS CORPORATION OF AMERICA
BUILDING MATERIALS MANUFACTURING CORPORATION
DATE: August 17, 2005 BY: /s/John F. Rebele
----------------- ----------------------------------------
John F. Rebele
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
DATE: August 17, 2005 BY: /s/James T. Esposito
----------------- ----------------------------------------
James T. Esposito
Vice President and Controller
(Chief Accounting Officer)
40