-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TFDeQjxmvbA+m9m7waspQG1m7Xf37AuWTSs+YK+/HkGv8as3tAXUph4W2M19QDdz 5HthMmXJP5hYvevU12rTjQ== 0000909518-07-000766.txt : 20070815 0000909518-07-000766.hdr.sgml : 20070815 20070815160435 ACCESSION NUMBER: 0000909518-07-000766 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070701 FILED AS OF DATE: 20070815 DATE AS OF CHANGE: 20070815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUILDING MATERIALS CORP OF AMERICA CENTRAL INDEX KEY: 0000927314 STANDARD INDUSTRIAL CLASSIFICATION: ASPHALT PAVING & ROOFING MATERIALS [2950] IRS NUMBER: 223276290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-81808 FILM NUMBER: 071059847 BUSINESS ADDRESS: STREET 1: 1361 ALPS RD CITY: WAYNE STATE: NJ ZIP: 07470 BUSINESS PHONE: 2016283000 MAIL ADDRESS: STREET 1: 1361 ALPS ROAD CITY: WAYNE STATE: NJ ZIP: 07470 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUILDING MATERIALS MANUFACTURING CORP CENTRAL INDEX KEY: 0001078706 STANDARD INDUSTRIAL CLASSIFICATION: ASPHALT PAVING & ROOFING MATERIALS [2950] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-69749-01 FILM NUMBER: 071059848 BUSINESS ADDRESS: STREET 1: 1361 ALPS ROAD CITY: WAYNE STATE: NJ ZIP: 07470 BUSINESS PHONE: 9736283000 MAIL ADDRESS: STREET 1: 1361 ALPS ROAD CITY: WAYNE STATE: NJ ZIP: 07470 10-Q 1 mm08-1407_10q.txt 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 1, 2007 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| As of August 15, 2007, 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 15, 2007, 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 15, 2007, no shares of the registrant or the additional registrant were held by non-affiliates. ADDITIONAL REGISTRANTS
Address, including zip Exact name of State or other Commission File code and telephone number, registrant as jurisdiction of No. of No./I.R.S. including area code, of specified in its incorporation or Shares Employer registrant's principal charter organization Outstanding 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 OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS)
SECOND QUARTER ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- JULY 1, JULY 2, JULY 1, JULY 2, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net sales ....................................... $ 663,270 $ 535,888 $ 1,193,261 $ 1,040,863 ----------- ----------- ----------- ----------- Costs and expenses, net: Cost of products sold ......................... 485,945 369,110 878,883 728,590 Selling, general and administrative............ 137,830 118,283 248,990 232,881 Restructuring and other expenses.. ............ 54,993 -- 54,993 -- Other income, net ............................. (797) (191) (378) (517) ----------- ----------- ----------- ----------- Total costs and expenses, net.. ............ 677,971 487,202 1,182,488 960,954 ----------- ----------- ----------- ----------- Income (loss) before interest expense and income taxes ............................... (14,701) 48,686 10,773 79,909 Interest expense ................................ (45,670) (16,054) (94,948) (30,580) ----------- ----------- ----------- ----------- Income (loss) before income taxes ............... (60,371) 32,632 (84,175) 49,329 Income tax (expense) benefit .................... 15,889 (12,400) 24,410 (18,745) ----------- ----------- ----------- ----------- Net income (loss) ............................... $ (44,482) $ 20,232 $ (59,765) $ 30,584 =========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 BUILDING MATERIALS CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 1, 2007 DECEMBER 31, (UNAUDITED) 2006 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents ................................. $ 51,777 $ 7,777 Accounts receivable, trade, less allowance of $2,669 and $1,319 in 2007 and 2006, respectively ................... 467,459 190,859 Accounts receivable, other ................................ 4,384 5,599 Tax receivable from parent corporation .................... 9,132 9,132 Inventories, net .......................................... 316,219 238,709 Deferred income tax assets, net ........................... 75,946 21,710 Other current assets ...................................... 22,544 12,209 Discontinued operations - current assets .................. 2,844 -- ----------- ----------- Total Current Assets .................................... 950,305 485,995 Property, plant and equipment, net .......................... 813,444 411,729 Goodwill .................................................... 677,658 64,794 Intangible assets ........................................... 15,887 -- Other noncurrent assets ..................................... 138,973 67,323 Discontinued operations - noncurrent assets ................. 1,355 -- ----------- ----------- Total Assets ................................................ $ 2,597,622 $ 1,029,841 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ...................... $ 16,304 $ 102,918 Accounts payable .......................................... 116,987 90,951 Payable to related parties ................................ 14,054 5,952 Loans payable to parent corporation ....................... 52,840 52,840 Accrued liabilities ....................................... 179,650 101,382 Product warranty claims ................................... 13,500 9,000 Discontinued operations - current liabilities ............. 931 -- ----------- ----------- Total Current Liabilities ................................. 394,266 363,043 ----------- ----------- Long-term debt............................................... 1,946,925 484,406 ----------- ----------- Product warranty claims ..................................... 27,673 17,972 ----------- ----------- Deferred income tax liabilities ............................. 127,551 39,551 ----------- ----------- Other liabilities ........................................... 90,801 62,664 ----------- ----------- Commitments and Contingencies - Note 13 Stockholders' Equity: 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; 0 shares issued and outstanding in 2007 and 2006 ............................ -- -- Loans receivable from parent corporation .................. (56,130) (56,031) Retained earnings ......................................... 58,265 118,201 Accumulated other comprehensive income .................... 8,270 34 ----------- ----------- Total Stockholders' Equity .............................. 10,406 62,205 ----------- ----------- Total Liabilities and Stockholders' Equity .................. $ 2,597,622 $ 1,029,841 =========== ===========
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 1, JULY 2, 2007 2006 ----------- ----------- Cash and cash equivalents, beginning of period ..................................... $ 7,777 $ 6,882 ----------- ----------- Cash used in operating activities: Net income (loss) ................................................................ (59,765) 30,584 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation ................................................................. 33,632 24,026 Amortization ................................................................. 2,057 1,355 Restructuring and other expenses ............................................. 65,793 -- Deferred income taxes ........................................................ (33,163) (1,293) Noncash interest charges, net ................................................ 6,093 2,619 Increase in working capital items ................................................ (116,110) (152,789) Increase in product warranty claims .............................................. 526 2,738 Increase in other assets ......................................................... (1,650) (1,247) Increase (decrease) in other liabilities ......................................... 2,136 (118) Change in net receivable from/payable to related parties/parent corporations .................................................... 8,102 7,988 Other, net ....................................................................... 867 382 ----------- ----------- Net cash used in operating activities .............................................. (91,482) (85,755) ----------- ----------- Cash used in investing activities: Acquisition of ElkCorp, net of cash acquired of $0.1 million ..................... (945,643) -- Capital expenditures and acquisitions ............................................ (55,520) (33,729) ----------- ----------- Net cash used in investing activities .............................................. (1,001,163) (33,729) ----------- ----------- Cash provided by financing activities: Proceeds from issuance of long-term debt ......................................... 2,188,749 472,000 Purchase of industrial development revenue bond certificates issued by the Company........................................................... -- (6,325) Repayments of long-term debt ..................................................... (1,018,013) (340,516) Distribution to parent corporation ............................................... (171) (477) Loan to parent corporation ....................................................... (98) (92) Financing fees and expenses ...................................................... (33,822) -- ----------- ----------- Net cash provided by financing activities .......................................... 1,136,645 124,590 ----------- ----------- Net change in cash and cash equivalents ............................................ 44,000 5,106 ----------- ----------- Cash and cash equivalents, end of period ........................................... $ 51,777 $ 11,988 =========== =========== Supplemental Cash Flow Information: Effect on cash from changes in working capital items*: Increase in accounts receivable trade and accounts receivable other ............................................................... $ (177,813) $ (83,895) (Increase) decrease in inventories, net .......................................... 45,559 (60,927) (Increase) decrease in other current assets ...................................... (4,095) 2,088 Increase (decrease) in accounts payable .......................................... 5,582 (16,150) Increase in accrued liabilities .................................................. 20,041 6,095 Net (payments) for restructuring and other expenses .............................. (5,384) -- ----------- ----------- Net effect on cash from increase in working capital items ........................ $ (116,110) $ (152,789) =========== ===========
5 BUILDING MATERIALS CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (CONTINUED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED ------------------- JULY 1, JULY 2, 2007 2006 ------- ------- Cash paid during the period for: Interest (net of amount capitalized of $1,727 and $1,055 in 2007 and 2006, respectively) ........................ $58,050 $25,678 Income taxes (including federal income taxes paid pursuant to a tax sharing agreement of $0 and $13,801 in 2007 and 2006, respectively) ........................... 1,542 14,414
* Working capital items exclude cash and cash equivalents, tax receivable from parent corporation, deferred income tax assets, net, discontinued operations - current assets, current maturities of long-term debt, product warranty claims, discontinued operations - current liabilities and net receivables and loans from/payable to related parties/parent corporations. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 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. On February 22, 2007, a subsidiary of BMCA acquired approximately 90% of the outstanding shares of ElkCorp ("Elk"), a Dallas, Texas-based manufacturer of roofing products and building materials, and the remaining shares of Elk were acquired on March 26, 2007, resulting in Elk becoming an indirect wholly-owned subsidiary of BMCA. See Note 2. 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 1, 2007, and the results of its operations and its cash flows for the second quarter and six months ended July 1, 2007 and July 2, 2006, respectively. All adjustments are of a normal recurring nature, except restructuring and other expenses recorded in the Company's second quarter ended July 1, 2007 due to the acquisition of Elk. Net sales of roofing products and specialty business products and accessories are generally seasonal in nature. Accordingly, the results of operations and liquidity in the respective quarterly ended periods will vary depending on the time of the year. These financial statements should be read in conjunction with the annual audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which was filed with the Securities and Exchange Commission (the "SEC") on February 16, 2007 (the "2006 Form 10-K"). NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109," ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. A reporting entity must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 became effective for fiscal years beginning after December 15, 2006. In May 2007, the FASB issued FASB Staff Position ("FSP") FIN 48-1 "Definition of Settlement in FASB Interpretation No. 48" ("FSP FIN 48-1"), which amended FIN 48 to provide guidance on how a reporting entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position will be considered effectively settled and any previously unrecognized tax benefits should be recognized based on the terms of settlement if (a) the taxing authority has completed its examination, including all appeals, (b) the reporting entity does not intend to appeal 7 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED) or litigate any aspect of the tax position and (c) based on the taxing authority's policies and practices, the reporting entity considers it remote that the taxing authority will re-examine the tax position. The Company adopted FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1, and as a result of the adoption, the Company reviewed certain tax positions and did not recognize any material adjustment to its accruals for uncertain tax positions. See Note 12. In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"), which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company will adopt the provisions of SFAS No. 157 beginning in its first quarter of 2008 and, therefore, has not yet determined the effect, if any, the adoption of SFAS No. 157 will have on its results of operations or financial position. In September 2006, the FASB issued FSP AUG AIR-1 "Accounting for Planned Major Maintenance Activities" ("FSP AUG AIR-1") which prohibits the use of the accrue-in-advance method of accounting in annual and interim financial reporting periods for planned major maintenance activities. FSP AUG AIR-1 had previously allowed companies the right to recognize planned major maintenance costs by accruing a liability over several reporting periods before the maintenance was performed. FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and deferral methods of accounting as acceptable, however it mandates that companies apply the same method of accounting in both interim and annual financial reporting periods and that the method be retrospectively applied if applicable. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FSP AUG AIR-1 in its first quarter of 2007. FSP AUG AIR-1 has not had a material effect on the Company's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the "fair value option," will enable some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently, and it is simpler than using the complex hedge-accounting 8 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 1. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED) provisions of SFAS No. 133 to achieve similar results. SFAS No. 159 applies to all entities and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. SFAS No. 159 is expected to expand the use of fair value measurements for financial instruments. SFAS No. 159 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2007. Retrospective application is not permitted. The Company will adopt the provisions of SFAS No. 159 beginning in its first quarter of 2008 and, therefore, has not yet determined the effect, if any, the adoption of SFAS No. 159 will have on its results of operations or financial position. NOTE 2. ACQUISITIONS On February 9, 2007, BMCA Acquisition Sub Inc. ("BMCA Acquisition Sub") and BMCA Acquisition Inc. (collectively the "Purchasers"), both wholly-owned subsidiaries of BMCA, entered into a merger agreement with Elk (the "Merger Agreement"). On February 22, 2007, an equity tender offer closed and, as a result thereof (and the purchase of shares from one of its affiliates), BMCA Acquisition Sub owned approximately 90% of Elk's shares at a purchase price of $43.50 per share. In accordance with the Merger Agreement, the remaining Elk shares were converted in a second step merger into the right to receive $43.50 per share in cash. On March 26, 2007, BMCA completed the merger, pursuant to which BMCA Acquisition Sub was merged with and into Elk, which then became an indirect wholly-owned subsidiary of BMCA. The acquisition of the Elk shares was completed at a purchase price of approximately $945.6 million, net of $0.1 million of cash acquired and net of the repayment of $195.0 million of the then outstanding Elk senior notes, which were repaid in March 2007. The Company financed the purchase of Elk and refinanced certain of BMCA's then outstanding debt and repaid all of Elk's then outstanding senior notes of $195.0 million with the proceeds from its new senior secured credit facilities. The Company's new senior secured credit facilities consist of a $600.0 million five-year senior secured revolving credit facility, a $975.0 million seven-year senior secured term loan facility and a $325.0 million junior lien term loan facility maturing on September 15, 2014. See Note 5. 9 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) The Company believes the acquisition of Elk will strategically position the Company for future growth in the roofing industry and other building products markets. The acquisition is expected to provide the Company with an increased market leadership position, create comprehensive market-leading product offerings, generate natural cost savings from synergies, including plant rationalization and re-alignment of distribution networks, raw material procurement, administrative and logistical efficiencies, and leverage the organizational strengths of both BMCA and Elk. The Elk acquisition was accounted for under the purchase method of accounting as prescribed by SFAS No. 141 "Business Combinations," ("SFAS No. 141") which requires the total purchase price to be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date, with amounts exceeding their fair value being recorded as goodwill. The allocation process will require an analysis of plant, property and equipment, inventories, customer lists and relationships, contractual commitments and brand strategies, among others, to identify and record the fair value of assets acquired and liabilities assumed. In connection with the acquisition, the Company used an economic life of 5 to 40 years for land improvements, 10 to 40 years for buildings and building improvements, 3 to 30 years for machinery and equipment, which includes furniture and fixtures, and 5 to 14 years for intangible assets. In valuing acquired assets and assumed liabilities, fair values will be based on, but not limited to: future expected discounted cash flows for trade names and customer relationships; current replacement costs for similar capacity and obsolescence for certain fixed assets and inventory; and comparable market rates for contractual obligations, including real estate and liabilities. The Company will utilize an independent valuation of the assets and liabilities acquired from Elk and expects this valuation to be completed by the end of 2007. At July 1, 2007, the Company recorded $612.9 million of goodwill and $15.9 million of intangible assets, net of amortization since the date of acquisition, related to the acquisition of Elk based on its best estimate at such date. Once the independent valuation is completed, changes to the amounts recorded at July 1, 2007 will be recorded and material adjustments to goodwill may result. The operating results of the Elk acquisition are included in the Company's results of operations from the date of acquisition. 10 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) The following unaudited pro-forma consolidated results of operations assume the acquisition of Elk was completed as of January 1st for each of the three-month and six month periods presented below:
SECOND QUARTER ENDED SIX MONTHS ENDED ---------------------- ------------------------ JULY 1, JULY 2, JULY 1, JULY 2, 2007 2006 2007 2006 --------- --------- ---------- ---------- (MILLIONS) Net sales ....................... $ 663.3 $ 777.7 $ 1,267.0 $ 1,525.8 --------- --------- ---------- ---------- Income (loss) before interest and income taxes ................... (13.5) 74.2 (15.7) 126.1 --------- --------- ---------- ---------- Net income (loss) ............... $ (42.0) $ 23.8 $ (87.3) $ 33.4 ========= ========= ========== ==========
The unaudited pro-forma consolidated results of operations for the three-month and six-month periods ended July 1, 2007 include $65.8 million pre-tax ($46.7 million after-tax) of restructuring and other expenses, of which $10.8 million pre-tax ($7.7 million after-tax) was included in cost of products sold, related to the acquisition of Elk. In addition, the unaudited pro-forma consolidated results of operations for the six-month period ended July 1, 2007 above includes $13.6 million of merger-related expenses of Elk and $23.2 million of debt restructuring costs of both BMCA and Elk related to the acquisition of Elk. The Company's pro-forma results include a reduction in compensation expense related to Elk employees who were terminated due to the acquisition of Elk of $1.3 and $2.5 million for the three-month periods ended July 1, 2007 and July 2, 2006, respectively and $3.6 and $4.9 million for the six-month periods ended July 1, 2007 and July 2, 2006, respectively. In addition, the Company's pro-forma results for the three-month period ended July 2, 2006 and the six-month periods ended July 1, 2007 and July 2, 2006 include additional interest expense associated with variable rate debt instruments based on LIBOR plus a specified fixed margin, due to the acquisiton of Elk. A 1/8% change in these variable interest rates would result in a plus or minus $0.5 million in interest expense for the three-month period ended July 2, 2006 and a plus or minus $0.3 and $1.0 million in interest expense for the six-month periods ended July 1, 2007 and July 2, 2006, respectively. Pro-forma data may not be indicative of the results that would have been achieved had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. 11 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) On March 2, 2007, the Company acquired two parcels of land and buildings located in Fresno, California. 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 land and buildings. The operating results of the Fresno land and buildings are included in the Company's results of operations from the date of acquisition. During the second quarter of 2007, the Company initiated the implementation of a restructuring plan (the "2007 Restructuring Plan"), which was formulated upon the acquisition of Elk on February 22, 2007 (see Note 3). In connection with the acquisition of Elk, the Company has currently identified $69.7 million in purchase accounting adjustments, which primarily relate to the establishment of a change of control accrual, employee severance payments and integration-related expenses, which include inventory-related valuation write-downs, lease termination expenses and other integration-related expenses. Furthermore, the Company plans to utilize its independent valuation of property, plant and equipment and intangible assets acquired from Elk to complete its purchase price allocation by the end of 2007. The Company accounts for its purchase accounting adjustments in accordance with the guidance in FASB Emerging Issues Task Force ("EITF") No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," ("EITF No. 95-3"). The Company has incurred $60.8 million of the aforementioned purchase accounting adjustments as of July 1, 2007, of which $54.6 million was incurred in the second quarter of 2007 and $6.2 million was incurred in the first quarter of 2007(see table below), as adjustments to goodwill and is included in the purchase price of Elk. The Company expects to accrue the remaining $8.9 million of identified purchase accounting adjustments as incurred and effectively utilize its accrual by its first quarter ending 2008. The Company's employee severance payments included the termination of approximately 100 Elk employees, including certain management positions, in the manufacturing and selling and administrative functional areas. 12
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 2. ACQUISITIONS - (CONTINUED) DISCON- EMPLOYEE TINUED CHANGE INTEGRATION SEVERANCE OPERATIONS OF PURCHASE ACCOUNTING ACCRUALS EXPENSES PAYMENTS EXPENSES CONTROL TOTAL - ---------------------------- -------- -------- -------- -------- -------- (THOUSANDS) Beginning Balance, as of December 31, 2006 $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk .................... 5,785 -- 415 -- 6,200 -------- -------- -------- -------- -------- Balance, as of April 1, 2007 ........... 5,785 -- 415 -- 6,200 Additional accrued costs incurred due to the acquisition of Elk ................ 19,624 2,400 -- -- 22,024 Accrued costs incurred related to change in control escrow account ............. -- -- -- 32,574 32,574 Cash Payments .......................... (224) (1,773) -- -- (1,997) Amount charged to directly write-off inventory ............................. (4,071) -- -- -- (4,071) Non-cash items ......................... -- -- -- (8,889) (8,889) -------- -------- -------- -------- -------- Ending Balance, as of July 1, 2007 ..... $ 21,114 $ 627 $ 415 $ 23,685 $ 45,841 ======== ======== ======== ======== ========
On June 1, 2006, the Company acquired a manufacturing facility located in Gainesville, Texas. The purchase price was allocated to the fair value of the identifiable assets acquired, which consisted entirely of property, plant and equipment. NOTE 3. RESTRUCTURING AND OTHER EXPENSES During the second quarter of 2007, the Company initiated its 2007 Restructuring Plan, which was formulated upon the acquisition of Elk on February 22, 2007. The 2007 Restructuring Plan was created to eliminate cost redundancies recognized due to the acquisition of Elk, to reduce the Company's current cost structure and is expected to be fully implemented by the end of the Company's first quarter of 2008. The Company accounts for its restructuring activities in accordance with the guidance of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," ("SFAS No. 146") and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"). In connection with the acquisition of Elk, the Company has identified $89.2 million in restructuring and other expenses, of which $41.9 million relates to property, plant and equipment write-downs at certain of its manufacturing facilities and $18.0 million of plant closing expenses. The plants included in restructuring and other expenses reflected above were Erie, Pennsylvania, Stockton, California, Millis, Massachusetts and Hollister, California. Restructuring and other expenses also include $2.0 million in employee severance payments and $27.3 million in integration-related expenses, which primarily consist of $12.2 million of inventory-related valuation write-downs, $1.4 million of lease termination expenses and $13.7 million of 13 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 3. RESTRUCTURING AND OTHER EXPENSES - (CONTINUED) other integration expenses. The Company recorded $65.8 million of the aforementioned restructuring and other expenses as of July 1, 2007, all of which was recorded in the second quarter of 2007 (see table below), of which $10.8 million was charged to cost of products sold and $55.0 million was charged to restructuring and other expenses in the Company's statement of operations. The Company expects to incur the remaining $23.4 million of identified restructuring and other expenses and effectively utilize its accrual by its first quarter ending 2008. The Company's employee severance payments included the termination of approximately 50 BMCA employees, including certain management positions, in the manufacturing and selling and administrative functional areas.
PP&E PLANT EMPLOYEE RESTRUCTURING AND WRITE- CLOSING SEVERANCE INTEGRATION OTHER EXPENSES DOWN EXPENSES PAYMENTS EXPENSES TOTAL - ----------------- -------- -------- -------- -------- -------- (THOUSANDS) Beginning Balance, as of December 31, 2006 ............ $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk ....... -- -- -- -- -- -------- -------- -------- -------- -------- Balance, as of April 1,2007 ... -- -- -- -- -- Additional accrued costs incurred due to the acquisition of Elk ........... 41,919 7,234 2,000 14,640 65,793 Cash Payments ................. -- (2,784) (800) (1,800) (5,384) Amount charged to property, plant and equipment for asset write-down ....... (41,919) -- -- -- (41,919) -------- -------- -------- -------- -------- Ending Balance, as of July 1, 2007 $ -- $ 4,450 $ 1,200 $ 12,840 $ 18,490 ======== ======== ======== ======== ========
14 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 4. INVENTORIES Inventories consisted of the following as of July 1, 2007 and December 31, 2006, respectively. Inventories as of July 1, 2007, include Elk from the date of acquisition. JULY 1, DECEMBER 31, 2007 2006 --------- --------- (THOUSANDS) Finished goods ......................... $ 231,302 $ 173,338 Work-in process ........................ 25,955 25,930 Raw materials and supplies ............. 80,864 64,686 --------- --------- Total .................................. 338,121 263,954 Less LIFO reserve ...................... (21,902) (25,245) --------- --------- Inventories ............................ $ 316,219 $ 238,709 ========= ========= NOTE 5. LONG-TERM DEBT Long-term debt consists of the following at July 1, 2007 and December 31, 2006: JULY 1, DECEMBER 31, 2007 2006 ----------- ----------- (THOUSANDS) 8% Senior Notes due 2007 ................. $ 2,455 $ 99,940 8% Senior Notes due 2008 ................. 4,872 154,838 7 3/4% Senior Notes due 2014 ............. 250,635 250,680 Borrowings under the Old Senior Secured Revolving Credit Facility ....... -- 60,000 Borrowings under the Senior Secured Revolving Credit Facility ............... 384,000 -- Term Loan ................................ 970,131 -- Junior Lien Term Loan .................... 325,000 -- Industrial development revenue bonds with various interest rates and maturity dates to 2029 .................. 7,710 7,795 Chester Loan ............................. 9,714 11,133 Other notes payable ...................... 8,712 2,938 ----------- ----------- Total ................................ 1,963,229 587,324 Less current maturities .................. (16,304) (102,918) ----------- ----------- Long-term debt less current maturities .............................. $ 1,946,925 $ 484,406 =========== =========== 15 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 5. LONG-TERM DEBT - (CONTINUED) On February 22, 2007, BMCA and the Purchasers entered into senior secured credit facilities consisting of a new $975 million term loan facility (the "Term Loan"), a new $600 million revolving credit facility (the "Senior Secured Revolving Credit Facility") and a $325 million bridge loan facility (the "Bridge Loan"), which was replaced by a $325 million junior lien term loan facility (the "Junior Lien Term Loan") collectively (the "Credit Facilities"). The initial borrowings under these Credit Facilities were used (i) to pay for shares tendered by Elk shareholders in an equity tender offer, (ii) to repay amounts outstanding under BMCA's old $450.0 million Senior Secured Revolving Credit Facility (the "Old Senior Secured Revolving Credit Facility"), (iii) to make payments in connection with the completion by BMCA and Building Materials Manufacturing Corporation ("BMMC") of the tender offer and consent solicitation for their 8% Senior Notes due 2007 (the "2007 Notes"), (iv) to make payments in connection with the completion by BMCA of its previously announced tender offer and consent solicitation for its outstanding 8% Senior Notes due 2008 (the "2008 Notes"), (v) to pay for transaction fees and expenses incurred in connection with each of the foregoing transactions and (vi) to repay all of the existing Elk senior note debt. The Senior Secured Revolving Credit Facility has a maturity date of February 22, 2012. All amounts outstanding under the Senior Secured Revolving Credit Facility are secured by a first priority perfected security interest in all receivables, inventory, precious metals, deposit accounts and other current assets of BMCA and its domestic subsidiaries and all proceeds thereof (the "Senior Secured Revolving Credit Facility Collateral"). Availability under the Senior Secured Revolving Credit Facility is based upon eligible accounts receivable, inventory and precious metals used in the production of inventory, as defined, and includes a sub-limit for letters of credit of $150 million. Loans under the Senior Secured Revolving Credit Facility will bear interest at a variable rate based upon either the Base Rate or the Eurodollar Rate as defined in the Senior Secured Revolving Credit Facility, at the borrower's option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate or Eurodollar Rate and also based on an availability based pricing grid. The Senior Secured Revolving Credit Facility requires the Company to pay unused commitment fees. The Senior Secured Revolving Credit Facility provides for optional reductions in the overall $600 million commitment, under certain conditions. In addition, the Senior Secured Revolving Credit Facility provides for optional and mandatory pre-payments of borrowings outstanding under the Senior Secured Revolving Credit Facility, subject to certain conditions. The Senior Secured Revolving Credit Facility also provides the borrowers with the ability to increase the size of the facility by up to $350 million, depending on the ability to obtain commitments from lenders and meeting specified conditions. 16 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 5. LONG-TERM DEBT - (CONTINUED) Under the terms of the Senior Secured Revolving Credit Facility, the borrowers are subject to an interest coverage ratio financial covenant when liquidity falls below a specified threshold. In addition, the borrowers are also required to comply with other customary covenants and various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the Senior Secured Revolving Credit Facility could be accelerated by the holders of that indebtedness. On March 12, 2007, the Senior Secured Revolving Credit Facility was amended, which did not result in any material changes to the facility. The Term Loan will mature on February 22, 2014. All amounts outstanding under the Term Loan are secured by (i) a first priority perfected security interest in substantially all of the assets and properties of BMCA and its domestic subsidiaries, other than the Senior Secured Revolving Credit Facility Collateral (the "Term Loan Collateral"), and (ii) a second priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Amounts due under the Term Loan will bear interest at a variable rate based upon either the Base Rate or Eurodollar Rate, as defined in the Term Loan, at the borrower's option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate and Eurodollar Rate, if applicable. The Term Loan requires the Company to pay unused commitment fees. In addition, the Term Loan provides for optional and mandatory pre-payments under certain conditions. The Term Loan also provides the borrowers with the ability to increase the size of the facility by up to $250 million (less any increase in the Senior Secured Revolving Credit Facility in excess of $100 million), depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Term Loan, the borrowers are subject to an interest coverage ratio financial covenant, as defined, and a leverage ratio financial covenant, as defined, each of which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. In addition, the borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the Term Loan could be accelerated by the holders of that indebtedness. On March 15, 2007, the Term Loan was amended, which did not result in any material changes to the facility. 17 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 5. LONG-TERM DEBT - (CONTINUED) The Bridge Loan would have converted into a term loan maturing on February 22, 2015, however it was amended and restated on March 15, 2007, and redesignated as the Junior Lien Term Loan. The Junior Lien Term Loan matures on September 15, 2014. All amounts outstanding under the Junior Lien Term Loan are secured by (i) a second priority perfected security interest in the Term Loan Collateral, and (ii) a third priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Loans under the Junior Lien Term Loan will bear interest at a variable rate based upon either the Base Rate or Eurodollar Rate, as defined in the Junior Lien Term Loan at the borrower's option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate or Eurodollar Rate, as applicable. The Junior Lien Term Loan provides for optional and mandatory prepayments under certain conditions. Under the terms of the Junior Lien Term Loan, the borrowers are subject to a leverage ratio financial covenant, as defined, which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. The borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations and making certain investments. In the event of a change of control of BMCA, as defined, the Junior Lien Term Loan could be accelerated by the holders of that indebtedness. On February 22, 2007, BMCA repurchased approximately $97.5 million, or 97.5%, of the aggregate principal amount outstanding of the 2007 Notes and $150.1 million, or 96.9%, of the aggregate principal amount outstanding of the 2008 Notes. In connection with the completion of the tender offer for the 2007 Notes and the 2008 Notes in February 2007, substantially all of the covenants included in the indentures governing the 2007 Notes and 2008 Notes were eliminated. On March 26, 2007, the Company repurchased all of Elk's then outstanding $25.0 million in aggregate principal amount of 4.69% Senior Notes due 2007, $60.0 million in aggregate principal amount of 6.99% Senior Notes due 2009, $60.0 million in aggregate principal amount of 7.49% Senior Notes due 2012 and $50.0 million in aggregate principal amount of 6.28% Senior Notes due 2014. 18 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 5. LONG-TERM DEBT - (CONTINUED) As of July 1, 2007, the Company had total outstanding consolidated indebtedness of $2,016.0 million, which amount includes $52.8 million of demand loans to our parent corporation and $16.3 million which matures prior to the end of the second quarter of 2008. The Company's total outstanding consolidated indebtedness also includes $384.0 million of borrowings outstanding under its $600.0 million Senior Secured Revolving Credit Facility. The Company anticipates funding these obligations principally from its cash and cash equivalents on hand, cash flow from operations and/or borrowings under its Senior Secured Revolving Credit Facility. As of July 1, 2007, the Company was in compliance with all covenants under the Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and the indentures governing the remaining 2007 Notes, the remaining 2008 Notes and the 7 3/4% Senior Notes due 2014 (the "2014 Notes") (collectively, the "Senior Notes"). As of July 1, 2007, the book value of the collateral securing the Senior Notes, the Term Loan, the Junior Lien Term Loan and the Senior Secured Revolving Credit Facility was approximately $2,587.9 million. At July 1, 2007, the Company had outstanding letters of credit of approximately $51.3 million, which includes approximately $10.5 million of standby letters of credit related to certain obligations of G-I Holdings. On January 3, 2006, the Company purchased and retired $6.3 million of industrial revenue bond certificates issued by the Company in 1990 with respect to the Fontana, California Industrial Revenue Development Bond, resulting in BMCA becoming the primary holder of such bond. NOTE 6. FIXED INCOME INTEREST RATE SWAPS In March 2007, the Company began entering into forward-starting Eurodollar rate ("LIBOR") based pay fixed income interest rate swaps related to the Company's Term Loan with an effective date of April 23, 2007 and a maturity date of April 23, 2012. If forward interest rates increase during the term of the Term Loan agreement, the swaps become assets on BMCA's consolidated balance sheet and BMCA will receive interest payments on BMCA's quarterly interest payment due date for its Term Loan. If forward interest rates decline, the swaps become a liability on BMCA's consolidated balance sheet and BMCA will be obligated to make payments on its quarterly interest payment date for its Term Loan. 19 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 6. FIXED INCOME INTEREST RATE SWAPS - (CONTINUED) According to SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), BMCA's hedging activity is treated as cash flow hedges. At July 1, 2007, BMCA had no ineffectiveness in its hedging transactions. Therefore, for the quarter ended July 1, 2007, the Company, based on the change in the LIBOR rate, reflected in other noncurrent assets the cumulative changes in the fair value of the derivative instrument when compared to cumulative changes in the present value of the expected future interest cash flows that are attributable to changes in the benchmark LIBOR swap rate. BMCA's offset to the related asset was reflected in other comprehensive income, net of tax. The current period activity therefore marks the swaps to market or fair value and adjusts other comprehensive income, net of tax, to the cumulative effect change. On each LIBOR reset date, BMCA will test its fixed income interest rate swaps to determine if the swaps contain any ineffectiveness. If BMCA's fixed income swaps contain any ineffectiveness as of any subsequent test date, the Company will reflect the effective portion of the offset to its related asset or liability as a component of other comprehensive income and the ineffective portion will be recorded through results of operations. At July 1, 2007, based on changes in the closing LIBOR rate as of July 1, 2007, BMCA recorded a fair value gain on its fixed income interest rate swaps of $13.3 million to other noncurrent assets, while the offset was recorded to other comprehensive income, net of tax of $5.0 million. The Company also recorded $0.6 million in interest income related to its fixed income interest rate swaps. NOTE 7. WARRANTY CLAIMS The Company provides certain limited warranties covering most of its residential roofing products for periods generally ranging from 20 to 50 years, with lifetime limited warranties on certain premium designer 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 products carry limited warranties for periods generally ranging from 5 to 20 years, with lifetime limited warranties on certain products. 20 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 7. WARRANTY CLAIMS - (CONTINUED) The accrual for product warranty claims consisted of the following for the second quarter and six month periods ended July 1, 2007, which includes Elk from the date of acquisition and July 2, 2006, respectively: SECOND QUARTER ENDED SIX MONTHS ENDED ---------------------- ---------------------- JULY 1, JULY 2, JULY 1, JULY 2, 2007 2006 2007 2006 -------- -------- -------- -------- (THOUSANDS) Beginning balance . $ 41,609 $ 33,014 $ 26,971 $ 31,202 Charged to cost of products sold ... 4,541 6,758 8,311 13,499 Payments/deductions (4,977) (5,832) (7,784) (10,761) Acquisition of Elk -- -- 13,675 -- -------- -------- -------- -------- Ending balance .... $ 41,173 $ 33,940 $ 41,173 $ 33,940 ======== ======== ======== ======== The Company adopted, as of December 31, 2006, the provisions of Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements" ("SAB No. 108") issued by the Securities and Exchange Commission ("SEC") in September 2006. In accordance with the transition provisions of SAB No. 108, related to the method the Company uses to recognize revenue on sales of separately priced commercial and residential warranties in accordance with FASB Technical Bulletin Number 90-1 "Accounting of Separately Priced Extended Warranty and Product Maintenance Contracts" ("FTB No. 90-1"), the Company reclassified $10.3 million of its commercial warranty accrual to deferred revenue and costs. In addition, the Company recorded an additional residential warranty accrual of $7.8 million related to the accrual for future residential warranty costs related to warranties that are not separately priced, in accordance with the transition provisions of SAB No. 108. 21 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 8. BENEFIT PLANS Defined Benefit Plans The Company provides a non-contributory defined benefit retirement plan for certain hourly and salaried employees (the "Retirement Plan"). Benefits under this plan are based on stated amounts for each year of service. The Company's funding policy is consistent with the minimum funding requirements of the Employee Retirement Income Security Act of 1974. In September 2006, the FASB issued SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"), which requires the net amount by which the defined-benefit or postretirement obligation plan is over- or underfunded to be reported on a company's balance sheet. SFAS No. 158 replaces FASB Statement No. 87's requirement to report at least a minimum pension liability, measured as the excess of the accumulated benefit obligation over the fair value of the plan assets. The funded status amount to be recognized by SFAS No. 158 is measured as the difference between the fair value of plan assets and the plan's benefit obligation, with the benefit obligation including all actuarial gains and losses, prior service cost, and any remaining transition amounts. SFAS No. 158 does not change the components of net periodic benefit cost. All items currently deferred when applying FASB Statement Nos. 87 and 106 are now recognized as a component of accumulated other comprehensive income, net of all applicable taxes. The Company adopted SFAS No. 158 during its fourth quarter of the fiscal year ended December 31, 2006. The Company's net periodic pension cost for the Retirement Plan included the following components for the second quarter and six month periods ended July 1, 2007 and July 2, 2006, respectively:
SECOND QUARTER ENDED SIX MONTHS ENDED -------------------- -------------------- JULY 1, JULY 2, JULY 1, JULY 2, 2007 2006 2007 2006 ------- ------- ------- ------- (THOUSANDS) Service cost ..................... $ 381 $ 370 $ 762 $ 740 Interest cost .................... 567 523 1,134 1,046 Expected return on plan assets ... (826) (748) (1,652) (1,496) Amortization of unrecognized prior service cost ................... 10 10 20 20 Amortization of net losses from earlier periods ................ 41 86 83 172 ------- ------- ------- ------- Net periodic pension cost ........ $ 173 $ 241 $ 347 $ 482 ======= ======= ======= =======
22 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 8. BENEFIT PLANS - (CONTINUED) As of the quarter ended July 1, 2007, the Company expects to make pension contributions of $1.0 million to the Retirement Plan in 2007, which is consistent with its expectations as of December 31, 2006. In April 2007 and July 2007, the Company made Retirement Plan contributions of $0.3 million, respectively. Postretirement Medical and Life Insurance The Company generally does not provide postretirement medical and life insurance benefits, although it subsidizes such benefits for certain employees and certain retirees. Such subsidies were reduced or ended as of January 1, 1997. Effective March 1, 2005, the Company amended the plan eliminating postretirement medical benefits affecting all current and future retirees. Net periodic postretirement (benefit) cost included the following components for the second quarter and six month periods ended July 1, 2007 and July 2, 2006, respectively: SECOND QUARTER ENDED SIX MONTHS ENDED ---------------- ---------------- JULY 1, JULY 2, JULY 1, JULY 2, 2007 2006 2007 2006 ----- ----- ----- ----- (THOUSANDS) Service cost ..................... $ 3 $ 3 $ 6 $ 6 Interest cost .................... 30 29 60 59 Amortization of unrecognized prior service cost ................... (143) (155) (285) (310) Amortization of net gains from earlier periods ................ (56) (61) (113) (122) ----- ----- ----- ----- Net periodic postretirement (benefit) cost ................. $(166) $(184) $(332) $(367) ===== ===== ===== ===== As of the quarter ended July 1, 2007 the Company expects to make aggregate benefit claim payments of approximately $0.2 million in 2007, which are related to postretirement life insurance expenses. This is consistent with the Company's expectations as of December 31, 2006. 23 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 8. BENEFIT PLANS - (CONTINUED) In connection with the acquisition of Elk, the Company has assumed the Elk 401(k) Plan, which was established effective January 1, 1990. Under the Elk 401(k) Plan, the Company may contribute a percentage of each Elk participant's annual compensation into the 401(k) Plan to be invested among various defined alternatives at the participants' direction. Employees are vested immediately in the Company's matching contributions. All full-time Elk employees, except those covered by plans established through collective bargaining agreements, are eligible for participation upon date of hire. The Company contributes a 3% basic contribution and an additional $.50 for every $1.00 of employee contributions into the Elk 401(k) Plan limited to a maximum matching Company contribution of 2% of an employee's compensation. NOTE 9. STOCK/LOAN PLAN In connection with the Company's acquisition of Elk, the Company assumed obligations of Elk's Stock/Loan Plan, under which certain Elk employees were granted loans for the purpose of purchasing Elk's common stock, which loans were based on a percentage of their salaries, the performance of their operating units, and also as long-term incentive compensation awards. Under the Stock/Loan Plan, a ratable portion of the loans, which are unsecured, and any accrued interest are forgiven and recognized as compensation expense over five years of continuing service with the Company. If employment is terminated for any reason except death, disability or retirement, the balance of the loan becomes due and payable. No further loans will be made under this plan. Loans outstanding at July 1, 2007 were $4.1 million and are included in other noncurrent assets. NOTE 10. 2001 LONG-TERM INCENTIVE PLAN The incentive units under the Company's 2001 Long-Term Incentive Plan are valued at Book Value (as defined in the Plan) or the 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 award. Compensation expense for the Company's incentive units was $0.8 and $2.5 million for the second quarter ended July 1, 2007 and July 2, 2006, respectively, and $1.0 and $5.5 million for the six-month period ended July 1, 2007 and July 2, 2006, respectively. At July 1, 2007 and July 2, 2006, the 2001 Long-Term Incentive Plan liability amounted to $12.0 and $29.4 million, respectively, and was included in accrued liabilities. 24 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 10. 2001 LONG-TERM INCENTIVE PLAN - (CONTINUED) The following is a summary of activity for incentive units related to the 2001 Long-Term Incentive Plan: JULY 1, DECEMBER 31, 2007 2006 -------- -------- Incentive Units outstanding, beginning of period ................................ 98,633 146,814 Granted .................................... 37,589 6,200 Exercised .................................. (29,242) (41,087) Forfeited .................................. (3,530) (13,294) -------- -------- Incentive Units outstanding, end of period ................................ 103,450 98,633 ======== ======== The initial value of the incentive units granted on January 1, 2007, July 1, 2006 and January 1, 2006 was $583.08, $569.74 and $534.19, respectively. NOTE 11. 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 1, 2007 and July 2, 2006, BMCA Holdings Corporation owed the Company $56.1 and $55.9 million, including interest of $0.8 and $0.6 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 $1.2 and $1.2 million during the second quarter ended July 1, 2007 and July 2, 2006, respectively, and $2.5 and $2.4 million during the six month period ended July 1, 2007 and July 2, 2006, respectively. Interest expense on the Company's loans from BMCA Holdings Corporation amounted to $1.2 and $1.2 million during the second quarter ended July 1, 2007 and July 2, 2006, respectively, and $2.4 and $2.3 million during the six month period ended July 1, 2007 and July 2, 2006, 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 Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and its Senior Notes. Under the terms of the Senior Secured Revolving Credit Facility and the indentures governing the Company's Senior Notes at July 1, 2007, the Company could repay demand loans to its parent corporation amounting to $52.8 million, subject to 25 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 11. RELATED PARTY TRANSACTIONS - (CONTINUED) certain conditions. The Company also makes non-interest bearing advances to affiliates, of which no balance was outstanding as of July 1, 2007 and July 2, 2006. In addition, for the six months ended July 1, 2007 and July 2, 2006, no loans were owed or other lending activities were entered into by the Company to other affiliates. The Company also has a management agreement with ISP Management Company, Inc., a subsidiary of International Specialty Products Inc. (which, together with its subsidiaries, is referred to as "ISP"), an affiliate, (the "ISP Management Agreement") to provide the Company with certain management services. The aggregate amount payable to ISP Management Company, Inc. under the ISP Management Agreement for 2007, inclusive of the services provided to G-I Holdings, has not yet been finalized; however, based on services provided to date in 2007 and after adjusting for inflationary factors, it is estimated to be similar to the $6.1 million paid in 2006. The Company does not expect any changes to the ISP Management Agreement to have a material impact on the Company's results of operations. The Company purchases a substantial portion of its colored roofing granules and algae-resistant granules under a long-term requirements contract with ISP Minerals Inc. ("Minerals"), an affiliate of the Company and of ISP. The amount of mineral products purchased each year under the Minerals contract is based on current demand and is not subject to minimum purchase requirements. For the second quarter ended July 1, 2007 and the year ended December 31, 2006, the Company purchased $52.1 and $102.3 million, respectively, of mineral products from Minerals under this contract. Included in current assets as a tax receivable from parent corporation is $9.1 and $9.1 million at July 1, 2007 and December 31, 2006, respectively, representing amounts paid in excess of amounts due to G-I Holdings under the 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. NOTE 12. INCOME TAXES The Company adopted FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1, and, as a result of the adoption, the Company reviewed certain tax positions and did not need to recognize any material adjustment to its accruals for uncertain tax positions. At January 1, 2007 and July 1, 2007, the Company had approximately $13.1 and $15.1 million, respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. 26 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 12. INCOME TAXES - (CONTINUED) For years prior to 2007, the Company and its subsidiaries were subject to United States federal income tax as well as the income tax of multiple state jurisdictions. The Company has substantially concluded all United States federal income tax matters for years through 2004. The tax years 2005 and 2006 remain open to examination by the Internal Revenue Service ("IRS"). Substantially all material state and local matters have been concluded for tax years through 2001. The tax years 2002 through 2006 remain open to examination by the major state taxing jurisdictions to which the Company is subject. The Company's continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007 and July 1, 2007, the Company had $1.7 and $2.2 million, respectively of accrued interest and $2.1 million, respectively of accrued penalties. The Company's effective tax rate changed from 35.8% at the end of the first quarter of 2007 to 29.0% at the end of the first six months of 2007 primarily due to the impact of the estimated annual restructuring and other expense charges to be taken in 2007, of which $65.8 million was included in the Company's income before interest expense and income taxes for the six month period ended July 1, 2007. In addition, the change in the effective tax rate was due to incremental state taxes, resulting from the application of the provisions of FIN 48. NOTE 13. 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 indirect 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, but has been stayed (see below). 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 27 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. CONTINGENCIES - (CONTINUED) addition, those creditors may attempt to assert Asbestos Claims against the Company. (Approximately 1,900 Asbestos Claims were filed against the Company prior to February 2, 2001). The Company believes that it will not sustain any liability in connection with these or any other Asbestos 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 Bankruptcy Court converted the temporary restraints into a preliminary injunction, prohibiting the bringing or prosecution of any such Asbestos Claims 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"). One of the parties to this matter, the Official Committee of Asbestos Claimants (the "creditors' committee"), subsequently filed a counterclaim against the Company seeking a declaration that BMCA has successor liability for Asbestos Claims against G-I Holdings and that it is the alter ego of G-I Holdings. 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 therefore be heard by the District Court. The Company believes it will prevail on its claim for a declaratory judgment. Although the Company believes its claims are meritorious, and that it does not have asbestos-related liability, it is not possible to predict the outcome of this litigation, or, if it does not prevail, the outcome of any subsequent litigation regarding the continuation of the preliminary injunction and/or prosecution of Asbestos Claims against BMCA. On or about February 8, 2001, the creditors' committee filed a complaint in the United States Bankruptcy Court, District of New Jersey against G-I Holdings and BMCA. The complaint requests substantive consolidation of BMCA with G-I Holdings or an order directing G-I Holdings to cause BMCA to file for bankruptcy protection. The Company and G-I Holdings intend to vigorously defend the lawsuit. The plaintiffs also filed for interim relief absent the granting of their requested relief described above. On March 21, 2001, the Bankruptcy Court denied plaintiffs' application for interim relief. In November 2002, the creditors' committee, joined in by the legal representative of future demand holders, filed a motion for appointment of a trustee in the G-I Holdings' bankruptcy. In December 2002, the Bankruptcy Court denied the motion. The creditors' committee appealed the ruling to the United States District Court, which denied the appeal on June 27, 2003. The creditors' committee appealed the denial to the Third Circuit Court of 28 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. CONTINGENCIES - (CONTINUED) 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 of Appeals on October 26, 2004. On July 7, 2004, the Bankruptcy Court entered an order authorizing the creditors' committee to commence an adversary proceeding against the Company and others challenging, as a fraudulent conveyance, certain 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"). The Bankruptcy Court also permitted the creditors' committee to pursue a claim against holders of the Company's bank and bond debt outstanding in 2000, seeking recovery from them, based on the creditors' committee's theory that the 1994 transaction was a fraudulent conveyance. On July 20, 2004, the creditors' committee appealed certain aspects of the Bankruptcy Court's order (and a June 8, 2004 decision upon which the order was based). G-I Holdings, the holders of the Company's bank and bond debt and BMCA cross-appealed. The District Court entered an order on June 21, 2006 affirming in part and vacating in part the Bankruptcy Court's July 7, 2004 order. Among other things, the District Court vacated that aspect of the Bankruptcy Court's order authorizing the creditors' committee to pursue avoidance claims against the Company and the holders of the Company's bank and bond debt as of 2000. This issue has been remanded to the Bankruptcy Court for further proceedings consistent with the District Court's opinion. The Company believes the creditors' committee's avoidance claims are without merit and that the Bankruptcy Court should not permit the committee to pursue such claims against the Company and the holders of its bank and bond debt as of 2000. In March 2007, after participating in a mediation which resulted in the parties agreeing to an outline of the principal terms of a settlement of the G-I Holdings bankruptcy and all related litigations, the parties agreed to a stay of proceedings pending the completion of their negotiations. The judges presiding over the G-I Holdings bankruptcy proceeding and the related litigations, including the BMCA action and the fraudulent conveyance action, have each entered stipulated orders dated March 22, 2007, March 23, 2007 and April 4, 2007, respectively, implementing the stay. There can be no assurance whether the negotiations will result in a settlement to the G-I Holdings bankruptcy and related proceedings. If the stay ceases to be in effect and the Company is not successful in 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 29 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. CONTINGENCIES - (CONTINUED) 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. Tax Claims Against G-I Holdings On September 15, 1997, G-I Holdings received a notice from 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. 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. G-I Holdings filed an objection to the proof of claim, which is the subject of an adversary proceeding pending in the United States District Court for the District of New Jersey. By opinion and order dated September 8, 2006, the District Court ruled on the parties' respective motions for Partial Summary Judgment, granting the government summary judgment on the issue of "adequate disclosure" for statutes of limitation purposes and denying G-I Holdings summary judgment on its other statutes of limitation defense (finding material issues of fact that must be tried). If the IRS were to prevail on its claims relating to the formation of the surfactants partnership, the Company could 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. If the IRS were to lose on its claims relating to the formation of the surfactants partnership but prevail on its claims relating to the 1999 distribution of U.S. Treasury bonds, the Company could be severally liable for all or a portion of the taxes and interest on the deficiency. In an opinion dated June 8, 2007, the District Court decided that G-I Holdings cannot avail itself of the "binding contract" transitional relief with respect to the 1999 distribution of U.S. Treasury Bonds to G-I Holdings. 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. For a further discussion with respect to the history of the foregoing litigation, and asbestos-related matters, see Notes 5, 11, and 16 to the consolidated financial statements contained in the Company's 2006 Form 10-K. 30 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 13. CONTINGENCIES - (CONTINUED) Environmental Litigation We, together with other companies, are a party to a variety of proceedings and lawsuits involving environmental matters under the Comprehensive Environmental Response Compensation and Liability Act, and similar state laws, in which recovery is sought for the cost of cleanup of contaminated sites or remedial obligations are imposed, a number of which are in the early stages or have been dormant for protracted periods. We refer to these proceedings and lawsuits below 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 these matters will not have a material adverse effect on the liquidity, results of operations, cash flows or financial position of the Company. However, adverse decisions or events, particularly as to increases in remedial costs, discovery of new contamination, assertion of natural resource damages, and the liability and the financial responsibility of our insurers and of the other parties involved at each site and their insurers, could cause us to increase our estimate of our liability in respect of those matters. It is not currently possible to estimate the amount or range of any additional liability. For information relating to other environmental compliance expenses, reference is made to Note 2, "Environmental Liabilities" in the Company's 2006 Form 10-K and Note 12, "Environmental Litigation" in the Company's Quarterly Report on Form 10-Q for the first quarter ended April 1, 2007, which was filed with the SEC on May 16, 2007. 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. There have been no material changes to these contracts in the second quarter of 2007. 31 BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION At July 1, 2007, all of the Company's subsidiaries, including Elk, each of which is wholly owned by the Company, are guarantors under the Company's Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and the indentures governing the Senior Notes. These guarantees are full, unconditional and joint and several. In addition, BMMC, a wholly-owned subsidiary of the Company, is a co-obligor on the 8% Senior Notes due 2007. The Company and BMMC entered into license agreements, effective January 1, 1999, for the right to use intellectual property, including patents, trademarks, know-how, and franchise rights owned by Building Materials Investment Corporation ("BMIC"), a wholly-owned subsidiary of the Company, for a license fee stated as a percentage of net sales. The license agreements were for a period of one year and were subject to automatic renewal unless either party terminated with 60 days written notice. Also, effective January 1, 1999, BMMC started selling all finished goods to the Company at a manufacturing profit. Such agreements and the related sale of finished goods were terminated on December 31, 2006. Effective January 1, 2007, BMMC and BMIC entered into a new contract manufacturing agreement allowing BMIC the right to purchase all production at the BMMC owned plant locations at a specified transfer price. In addition, effective January 1, 2007, BMCA and BMIC entered into a purchase agreement granting BMCA the right to purchase production sufficient to meet required customer demand from BMIC at a specified transfer price. Also, in connection with entering these agreements, BMCA transferred certain employees and operations of BMCA to BMIC. 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. 32
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SECOND QUARTER ENDED JULY 1, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- --------- --------- --------- --------- Net sales ............................. $ 440,350 $ -- $ 222,920 $ -- $ 663,270 Intercompany net sales ................ -- 345,762 389,925 (735,687) -- --------- --------- --------- --------- --------- Total net sales ................... 440,350 345,762 612,845 (735,687) 663,270 --------- --------- --------- --------- --------- Costs and expenses, net: Cost of products sold ............... 382,730 288,577 550,325 (735,687) 485,945 Selling, general and administrative .................... 46,611 47,155 44,064 -- 137,830 Restructuring and other expenses .......................... 54,993 -- -- -- 54,993 Other (income) expense, net ......... (977) (53) 233 -- (797) --------- --------- --------- --------- --------- Total costs and expenses, net...... 483,357 335,679 594,622 (735,687) 677,971 --------- --------- --------- --------- --------- Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes ............................... (43,007) 10,083 18,223 -- (14,701) Equity in earnings of subsidiaries ......................... 10,383 -- -- (10,383) -- Interest income (expense) ............. (32,778) 225 (13,117) -- (45,670) --------- --------- --------- --------- --------- Income (loss) before income taxes...... (65,402) 10,308 5,106 (10,383) (60,371) Income tax (expense) benefit .......... 20,920 (2,508) (2,523) -- 15,889 --------- --------- --------- --------- --------- Net income (loss) ..................... $ (44,482) $ 7,800 $ 2,583 $ (10,383) $ (44,482) ========= ========= ========= ========= =========
33
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF INCOME SECOND QUARTER ENDED JULY 2, 2006 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated --------- --------- --------- --------- --------- Net sales ............................. $ 503,243 $ -- $ 32,645 $ -- $ 535,888 Intercompany net sales ................ 162 310,773 22,548 (333,483) -- --------- --------- --------- --------- --------- Total net sales ................... 503,405 310,773 55,193 (333,483) 535,888 --------- --------- --------- --------- --------- Costs and expenses, net: Cost of products sold ............... 379,094 274,669 48,830 (333,483) 369,110 Selling, general and administrative.. 88,263 21,331 8,689 -- 118,283 Intercompany licensing (income) expense, net ...................... 20,136 7,064 (27,200) -- -- Other (income) expense, net ......... (195) 16 (12) -- (191) Transition service agreement (income) expense .................. 25 (25) -- -- -- --------- --------- --------- --------- --------- Total costs and expenses, net ..... 487,323 303,055 30,307 (333,483) 487,202 --------- --------- --------- --------- --------- Income before equity in earnings of subsidiaries, interest expense and income taxes ........................ 16,082 7,718 24,886 -- 48,686 Equity in earnings of subsidiaries .... 16,222 -- -- (16,222) -- Interest expense ...................... (9,615) (2,060) (4,379) -- (16,054) --------- --------- --------- --------- --------- Income before income taxes ............ 22,689 5,658 20,507 (16,222) 32,632 Income tax expense .................... (2,457) (2,150) (7,793) -- (12,400) --------- --------- --------- --------- --------- Net income ............................ $ 20,232 $ 3,508 $ 12,714 $ (16,222) $ 20,232 ========= ========= ========= ========= =========
34
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JULY 1, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- ----------- Net sales .......................... $ 854,282 $ -- $ 338,979 $ -- $ 1,193,261 Intercompany net sales ............. -- 662,402 749,253 (1,411,655) -- ----------- ----------- ----------- ----------- ----------- Total net sales .................. 854,282 662,402 1,088,232 (1,411,655) 1,193,261 ----------- ----------- ----------- ----------- ----------- Cost and expenses, net: Costs of products sold ........... 729,236 567,163 994,139 (1,411,655) 878,883 Selling, general and administrative ................. 103,689 75,727 69,574 -- 248,990 Restructuring and other expenses . 54,993 -- -- -- 54,993 Other (income) expense, net ...... (611) (105) 338 -- (378) ----------- ----------- ----------- ----------- ----------- Total costs and expenses, net .... 887,307 642,785 1,064,051 (1,411,655) 1,182,488 ----------- ----------- ----------- ----------- ----------- Income (loss) before equity in earnings of subsidiaries, interest expense and income taxes ......... (33,025) 19,617 24,181 -- 10,773 Equity in earnings of subsidiaries . 5,098 -- -- (5,098) -- Interest expense ................... (58,331) (2,224) (34,393) -- (94,948) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes .. (86,258) 17,393 (10,212) (5,098) (84,175) Income tax (expense) benefit ....... 26,493 (5,044) 2,961 -- 24,410 ----------- ----------- ----------- ----------- ----------- Net income (loss) .................. $ (59,765) $ 12,349 $ (7,251) $ (5,098) $ (59,765) =========== =========== =========== =========== ===========
35
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF INCOME SIX MONTHS ENDED JULY 2, 2006 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- ----------- Net sales ............................ $ 984,855 $ -- $ 56,008 $ -- $ 1,040,863 Intercompany net sales ............... 213 600,817 44,178 (645,208) -- ----------- ----------- ----------- ----------- ----------- Total net sales .................. 985,068 600,817 100,186 (645,208) 1,040,863 ----------- ----------- ----------- ----------- ----------- Costs and expenses, net: Cost of products sold .............. 751,901 530,817 91,080 (645,208) 728,590 Selling, general and administrative. 174,976 41,440 16,465 -- 232,881 Intercompany licensing (income) expense, net ..................... 39,403 13,550 (52,953) -- -- Other (income) expense, net ........ (537) 37 (17) -- (517) Transition service agreement (income) expense ................. 50 (50) -- -- -- ----------- ----------- ----------- ----------- ----------- Total costs and expenses, net .... 965,793 585,794 54,575 (645,208) 960,954 ----------- ----------- ----------- ----------- ----------- Income before equity in earnings of subsidiaries, interest expense and income taxes ....................... 19,275 15,023 45,611 -- 79,909 Equity in earnings of subsidiaries ... 30,263 -- -- (30,263) -- Interest expense ..................... (18,758) (4,176) (7,646) -- (30,580) ----------- ----------- ----------- ----------- ----------- Income before income taxes ........... 30,780 10,847 37,965 (30,263) 49,329 Income tax expense ................... (196) (4,122) (14,427) -- (18,745) ----------- ----------- ----------- ----------- ----------- Net income ........................... $ 30,584 $ 6,725 $ 23,538 $ (30,263) $ 30,584 =========== =========== =========== =========== ===========
36
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET JULY 1, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- ----------- ASSETS Current Assets: Cash and cash equivalents ............ $ -- $ 233 $ 51,544 $ -- $ 51,777 Accounts receivable, trade, net ...... 316,626 -- 150,833 -- 467,459 Accounts receivable, other ........... 3,561 553 270 -- 4,384 Tax receivable from parent corporation ........................ 9,132 -- -- -- 9,132 Inventories, net ..................... -- 189,726 126,493 -- 316,219 Deferred income tax assets, net ...... 75,946 -- -- -- 75,946 Other current assets ................. 9,383 4,848 8,313 -- 22,544 Discontinued operations - current assets ............................. -- -- 2,844 -- 2,844 ----------- ----------- ----------- ----------- ----------- Total Current Assets ............... 414,648 195,360 340,297 -- 950,305 Investment in subsidiaries ............. 1,664,502 -- -- (1,664,502) -- Intercompany loans including accrued interest ............................. 680,647 -- (680,647) -- -- Due from/(to) subsidiaries, net ........ (578,486) (225,840) 804,326 -- -- Property, plant and equipment, net ..... -- 243,775 569,669 -- 813,444 Goodwill, net .......................... 40,080 3,946 633,632 -- 677,658 Intangible assets ...................... -- -- 15,887 -- 15,887 Other noncurrent assets ................ 88,846 21,006 29,121 -- 138,973 Discontinued operations - non-current assets ............................... -- -- 1,355 -- 1,355 ----------- ----------- ----------- ----------- ----------- Total Assets ........................... $ 2,310,237 $ 238,247 $ 1,713,640 $(1,664,502) $ 2,597,622 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt.. $ 9,702 $ 5,735 $ 867 $ -- $ 16,304 Accounts payable ..................... 234 71,571 45,182 -- 116,987 Payable to related parties ........... 683 12,205 1,166 -- 14,054 Loans payable to parent corporation .. 52,840 -- -- -- 52,840 Accrued liabilities .................. 93,799 50,605 35,246 -- 179,650 Product warranty claims .............. 9,000 -- 4,500 -- 13,500 Discontinued operations - current liabilities ........................ -- -- 931 -- 931 ----------- ----------- ----------- ----------- ----------- Total Current Liabilities .......... 166,258 140,116 87,892 -- 394,266 Long-term debt.......................... 1,924,937 17,172 4,816 -- 1,946,925 Product warranty claims ................ 18,786 -- 8,887 -- 27,673 Deferred income tax liabilities ........ 127,551 -- -- -- 127,551 Other liabilities ...................... 62,299 2,015 26,487 -- 90,801 ----------- ----------- ----------- ----------- ----------- Total Liabilities ...................... 2,299,831 159,303 128,082 -- 2,587,216 Total Stockholders' Equity ............. 10,406 78,944 1,585,558 (1,664,502) 10,406 ----------- ----------- ----------- ----------- ----------- Total Liabilities and Stockholders' Equity ............................ $ 2,310,237 $ 238,247 $ 1,713,640 $(1,664,502) $ 2,597,622 =========== =========== =========== =========== ===========
37
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2006 (THOUSANDS) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Eliminations Consolidated ---------- ---------- ---------- ---------- ---------- ASSETS Current Assets: Cash and cash equivalents .............. $ 18 $ 1,870 $ 5,889 $ -- $ 7,777 Accounts receivable, trade, net ........ 177,137 -- 13,722 -- 190,859 Accounts receivable, other ............. 4,957 537 105 -- 5,599 Tax receivable from parent corporation.. 9,132 -- -- -- 9,132 Inventories, net ....................... 165,538 49,318 23,853 -- 238,709 Deferred income tax assets, net ........ 21,710 -- -- -- 21,710 Other current assets ................... 7,753 4,235 221 -- 12,209 ---------- ---------- ---------- ---------- ---------- Total Current Assets ................. 386,245 55,960 43,790 -- 485,995 Investment in subsidiaries ............... 626,836 -- -- (626,836) -- Intercompany loans including accrued interest ............................... 378,725 16,515 (395,240) -- -- Due from (to) subsidiaries, net .......... (720,388) (68,470) 788,858 -- -- Property, plant and equipment, net ....... 45,274 250,100 116,355 -- 411,729 Goodwill, net ............................ 40,080 -- 24,714 -- 64,794 Other noncurrent assets .................. 44,723 22,543 57 -- 67,323 ---------- ---------- ---------- ---------- ---------- Total Assets ............................. $ 801,495 $ 276,648 $ 578,534 $ (626,836) $1,029,841 ========== ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ... $ -- $ 102,913 $ 5 $ -- $ 102,918 Accounts payable ....................... 53,312 28,436 9,203 -- 90,951 Payable to related parties ............. 1,172 4,780 -- -- 5,952 Loans payable to parent corporation .... 52,840 -- -- -- 52,840 Accrued liabilities .................... 39,533 60,490 1,359 -- 101,382 Product warranty claims ................ 9,000 -- -- -- 9,000 ---------- ---------- ---------- ---------- ---------- Total Current Liabilities ............ 155,857 196,619 10,567 -- 363,043 Long-term debt............................ 465,518 18,885 3 -- 484,406 Product warranty claims .................. 17,571 -- 401 -- 17,972 Deferred income tax liabilities .......... 39,551 -- -- -- 39,551 Other liabilities ........................ 60,793 1,694 177 -- 62,664 ---------- ---------- ---------- ---------- ---------- Total Liabilities ........................ 739,290 217,198 11,148 -- 967,636 Total Stockholders' Equity ............... 62,205 59,450 567,386 (626,836) 62,205 ---------- ---------- ---------- ---------- ---------- Total Liabilities and Stockholders' Equity .............................. $ 801,495 $ 276,648 $ 578,534 $ (626,836) $1,029,841 ========== ========== ========== ========== ==========
38
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JULY 1, 2007 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Consolidated ----------- ----------- ----------- ----------- Cash and cash equivalents, beginning of period ............ $ 18 $ 1,870 $ 5,889 $ 7,777 ----------- ----------- ----------- ----------- Cash provided by (used in) operating activities: Net income (loss) ....................................... (64,863) 12,349 (7,251) (59,765) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation .......................................... -- 18,802 14,830 33,632 Amortization .......................................... -- 1,694 363 2,057 Restructuring and other expenses ...................... 65,793 -- -- 65,793 Deferred income taxes ................................. (33,163) -- -- (33,163) Noncash interest charges, net ......................... 5,368 212 513 6,093 (Increase) decrease in working capital items ............ (157,530) 14,746 26,674 (116,110) Increase (decrease) in product warranty claims........... 1,215 -- (689) 526 (Increase) decrease in other assets ..................... (2,286) (150) 786 (1,650) Increase in other liabilities ........................... 1,506 321 309 2,136 Change in net receivable from/payable to related parties/parent corporations ................... (1,250,975) 73,841 1,185,236 8,102 Other, net .............................................. 1 206 660 867 ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities .............................................. (1,434,934) 122,021 1,221,431 (91,482) ----------- ----------- ----------- ----------- Cash used in investing activities: Acquisition of ElkCorp, net of cash acquired of $0.1 million ............................... -- -- (945,643) (945,643) Capital expenditures and acquisitions ................... -- (24,548) (30,972) (55,520) ----------- ----------- ----------- ----------- Net cash used in investing activities ..................... -- (24,548) (976,615) (1,001,163) ----------- ----------- ----------- ----------- Cash provided by (used in) financing activities: Proceeds from issuance of long-term debt ................ 2,162,849 -- 25,900 2,188,749 Repayments of long-term debt ............................ (693,842) (99,110) (225,061) (1,018,013) Distribution to parent corporation ...................... (171) -- -- (171) Loan to parent corporation .............................. (98) -- -- (98) Financing fees and expenses ............................. (33,822) -- -- (33,822) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities............................................... 1,434,916 (99,110) (199,161) 1,136,645 ----------- ----------- ----------- ----------- Net change in cash and cash equivalents ................... (18) (1,637) 45,655 44,000 ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period .................. $ -- $ 233 $ 51,544 $ 51,777 =========== =========== =========== ===========
39
BUILDING MATERIALS CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) NOTE 14. GUARANTOR FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JULY 2, 2006 (THOUSANDS) (UNAUDITED) Parent Co-Obligor Guarantor Company Subsidiary Subsidiaries Consolidated --------- --------- --------- --------- Cash and cash equivalents, beginning of period .......... $ 9 $ 180 $ 6,693 $ 6,882 --------- --------- --------- --------- Cash provided by (used in) operating activities: Net income ............................................ 321 6,725 23,538 30,584 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ........................................ 1,959 18,604 3,463 24,026 Amortization ........................................ -- 1,355 -- 1,355 Deferred income taxes ............................... (1,293) -- -- (1,293) Noncash interest charges, net ....................... 1,955 663 1 2,619 Increase in working capital items ..................... (139,975) (479) (12,335) (152,789) Increase (decrease) in long-term reserve for product warranty claims ............................. 2,788 -- (50) 2,738 Increase (decrease) in other assets ................... 23 (1,342) 72 (1,247) Decrease in other liabilities ......................... (114) -- (4) (118) Change in net receivable from/payable to related parties/parent corporations ................. 7,846 (7,020) 7,162 7,988 Other, net ............................................ (12) (33) 427 382 --------- --------- --------- --------- Net cash provided by (used in) operating activities...... (126,502) 18,473 22,274 (85,755) --------- --------- --------- --------- Cash provided by (used in) investing activities: Capital expenditures and acquisition of a manufacturing facility ............................................ (5,927) (10,256) (17,546) (33,729) --------- --------- --------- --------- Net cash used in investing activities ................... (5,927) (10,256) (17,546) (33,729) --------- --------- --------- --------- Cash provided by (used in) financing activities: Proceeds from Senior Secured Revolving Credit Facility ............................................ 472,000 -- -- 472,000 Purchase of industrial development revenue bond certificates issued by the Company .................. -- (6,325) -- (6,325) Repayments of long-term debt .......................... (339,000) (1,514) (2) (340,516) Distribution to parent corporation .................... (477) -- -- (477) Loan to parent corporation ............................ (92) -- -- (92) --------- --------- --------- --------- Net cash provided by (used in) financing activities.. ... 132,431 (7,839) (2) 124,590 --------- --------- --------- --------- Net change in cash and cash equivalents ................. 2 378 4,726 5,106 --------- --------- --------- --------- Cash and cash equivalents, end of period ................ $ 11 $ 558 $ 11,419 $ 11,988 ========= ========= ========= =========
40 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On February 22, 2007, a subsidiary of Building Materials Corporation of America, which we refer to as BMCA, acquired approximately 90% of the outstanding shares of ElkCorp, which we refer to as Elk, a Dallas, Texas-based manufacturer of roofing products and building materials. The remaining shares of Elk were acquired on March 26, 2007, resulting in Elk becoming an indirect wholly-owned subsidiary of BMCA. See Acquisitions. Unless otherwise indicated by the context, "we," "us," and "our" refer to Building Materials Corporation of America and its consolidated subsidiaries, including Elk. CRITICAL ACCOUNTING POLICIES There have been no significant changes to our Critical Accounting Policies during the six month period ended July 1, 2007. 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, 2006, which was filed with the Securities and Exchange Commission, which we refer to as the SEC, on February 16, 2007, which we refer to as the 2006 Form 10-K. RESULTS OF OPERATIONS Sales of roofing products are 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, as well as energy, and transportation and distribution costs. Second Quarter 2007 Compared With Second Quarter 2006 We recorded a net loss of $44.5 million in the second quarter of 2007 compared to net income of $20.2 million in the second quarter of 2006. Our net loss in the second quarter of 2007 included $46.7 million of after-tax ($65.8 million pre-tax) restructuring and other expenses, of which $7.7 million after-tax ($10.8 million pre-tax) was included in cost of products sold related to the integration of Elk operations. Included in restructuring and other expenses are plant closure related expenses related to the closure of these facilities along with the write-down of certain plant assets of the closed facilities, integration related costs and the write-down of certain inventories. Excluding these items, second quarter of 2007 net income was $2.2 million, which included the results of operations of Elk. The decrease in net income for the second quarter of 2007 was primarily attributable 41 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) to approximately $29.6 million of higher interest expense primarily due to the acquisition of Elk and lower income before interest expense and income taxes. Net sales for the second quarter of 2007 were $663.3 million compared to second quarter of 2006 net sales of $535.9 million. Net sales for the second quarter of 2007 included $194.8 million of net sales related to Elk. Excluding net sales of Elk, our net sales for the second quarter of 2007 were $468.5 million. The decrease in second quarter of 2007 net sales was primarily due to lower net sales of residential roofing products primarily driven by lower unit volumes resulting from softer market demand. We had a loss before interest expense and income taxes in the second quarter of 2007 of $14.7 million compared to income before interest expense and income taxes of $48.7 million in the second quarter of 2006. Our loss before interest expense and income taxes in the second quarter of 2007 included $65.8 million of restructuring and other expenses, of which $10.8 million was included in cost of products sold. Excluding these items, the second quarter of 2007 income before interest expense and income taxes was $51.1 million, which included $22.1 million of income before interest expense and income taxes resulting from Elk's operations. Excluding the impact of Elk operations, income before interest expense and income taxes for the second quarter of 2007 was $29.0 million. The decrease in the second quarter of 2007 income before interest expense and income taxes was primarily due to a decrease in net sales of residential roofing products and higher raw material costs, partially offset by lower selling, general and administrative expenses mostly due to lower volume related distribution costs. Interest expense in the second quarter of 2007 increased to $45.7 million as compared to $16.1 million in the second quarter of 2006. The increase in second quarter of 2007 interest expense was primarily due to higher average borrowings due to the acquisition of Elk and a slightly higher average interest rate. BUSINESS SEGMENT INFORMATION Net Sales. Net sales of roofing products for the second quarter of 2007 were $626.4 million compared to $512.5 million for the second quarter of 2006. Net sales of roofing products for the second quarter of 2007 included $180.6 million of net sales of roofing products related to Elk. Excluding net sales of roofing products of Elk, we had net sales of roofing products of $445.8 million in the second quarter of 2007. The decrease in net sales of roofing products was primarily driven by lower unit volumes. Net sales of specialty building products and 42 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) accessories were $36.9 million for the second quarter of 2007 as compared with $23.4 million for the second quarter of 2006. Net sales of specialty building products and accessories for the second quarter of 2007 included $14.3 million of net sales of specialty building products and accessories related to Elk. Excluding net sales of specialty business products and accessories of Elk, we had net sales of specialty business products and accessories of $22.6 million in the second quarter of 2007. Gross Margin. Our overall gross margin was $177.3 million or 26.7% of net sales for the second quarter of 2007. Included in our overall gross margin was $10.8 million of restructuring and other expenses, which were included in cost of products sold and $57.5 million of gross margin related to Elk. Excluding these items, our overall gross margin would have been $130.6 million or 27.9% of net sales compared with $166.8 million or 31.1% of net sales for the second quarter of 2006. The decrease in our overall gross margin is primarily attributable to a decrease in net sales driven by lower unit volumes and higher raw material costs. Income (loss) before Interest Expense and Income Taxes. We had a loss before interest expense and income taxes in the second quarter of 2007 of $14.7 million or 2.2% of net sales, compared to income before interest expense and income taxes of $48.7 million or 9.1% of net sales for the second quarter of 2006. Our loss before interest expense and income taxes in the second quarter of 2007 included $65.8 million of restructuring and other expenses, of which $10.8 million was included in cost of products sold. Excluding these items, the second quarter of 2007 income before interest expense and income taxes was $51.1 million or 7.7% of net sales, which includes $22.1 million of income before interest expense and income taxes resulting from Elk's operations. Excluding the impact of Elk operations, income before interest expense and income taxes for the second quarter of 2007 was $29.0 million or 6.2% of net sales. The decrease in the second quarter of 2007 income before interest expense and income taxes was primarily due to a decrease in net sales of residential roofing products and higher raw material costs, partially offset by lower selling, general and administrative expenses mostly due to lower volume related distribution costs. Six Months 2007 Compared With Six Months 2006 We recorded a net loss of $59.8 million in the first six months of 2007 compared to net income of $30.6 million in the first six months of 2006. Our net loss in the first six months of 2007 included $46.7 million of after-tax ($65.8 million pre-tax) restructuring and other expenses, of which $7.7 million after tax ($10.8 million pre-tax) was included in cost of products sold related to the integration of Elk operations and $16.5 million of after-tax ($23.2 million pre-tax) debt restructuring costs also related to the 43 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) acquisition. Included in restructuring and other expenses are plant closure related expenses related to the closure of these facilities along with the write-down of certain plant assets of the closed facilities, integration-related costs and the write-down of certain inventories. Excluding these items, the first six months of 2007 net income was $3.4 million, which included Elk's operations from the date of acquisition. The decrease in net income for the first six months of 2007 was primarily attributable to approximately $64.4 million of higher interest expense primarily due to the acquisition of Elk and lower income before interest expense and income taxes. Net sales for the first six months of 2007 were $1,193.3 million compared to the first six months of 2006 net sales of $1,040.9 million. Net sales for the first six months of 2007 included $287.9 million of net sales related to Elk from the date of acquisition. Excluding net sales of Elk, our net sales for the first six months of 2007 were $905.4 million. The decrease in the first six months of 2007 net sales was primarily due to lower net sales of both residential and commercial roofing products. The decrease in net sales of residential roofing products was primarily driven by lower unit volumes resulting from the softer market demand, while the decrease in commercial roofing products was primarily driven by lower unit volumes, partially offset by a higher average selling price. Income before interest expense and income taxes in the first six months of 2007 was $10.8 million compared to $79.9 million in the first six months of 2006. Our income before interest expense and income taxes in the first six months of 2007 included $65.8 million of restructuring and other expenses, of which $10.8 million was included in cost of products sold. Excluding these items, the first six months of 2007 income before interest expense and income taxes was $76.6 million, which includes $28.5 million of income before interest expense and income taxes resulting from Elk's operations from the date of acquisition. Excluding the impact of Elk operations, income before interest expense and income taxes for the first six months of 2007 was $48.1 million. The decrease in the first six months of 2007 income before interest expense and income taxes was primarily due to a decrease in net sales of both residential and commercial roofing products and higher raw material costs, partially offset by lower selling, general and administrative expenses mostly due to lower volume related distribution costs. Interest expense in the first six months of 2007 increased to $95.0 million as compared to $30.6 million in the first six months of 2006. Interest expense in the first six months of 2007 included $23.2 million of debt restructuring costs and an additional $2.6 million of interest expense of Elk from the date of acquisition. Included in debt restructuring costs are the tender premiums and write-off of the remaining deferred financing fees and discounts associated with the then outstanding 2007 and 2008 senior notes of BMCA and all of the then outstanding senior notes of Elk, all of which were redeemed in the first quarter of 2007. Excluding the impact of 44 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) the debt restructuring costs and the additional Elk interest, interest expense for the first six months of 2007 was $69.2 million. The increase in the first six months of 2007 interest expense was primarily due to higher average borrowings, due to the acquisition of Elk and a slightly higher average interest rate. BUSINESS SEGMENT INFORMATION Net Sales. Net sales of roofing products for the first six months of 2007 were $1,135.3 million compared to $1,002.0 million for the first six months of 2006. Net sales of roofing products for the first six months of 2007 include $269.0 million of net sales of roofing products related to Elk from the date of acquisition. Excluding net sales of roofing products of Elk, we had net sales of roofing products of $866.3 million in the first six months of 2007. The decrease in net sales of residential roofing products was primarily driven by lower unit volumes and a slightly lower average selling price, while the decrease in commercial roofing products was primarily driven by lower unit volumes, partially offset by a higher average selling price. Net sales of specialty building products and accessories were $58.0 million for the first six months of 2007 as compared with $38.9 million for the first six months of 2006. Net sales of specialty building products and accessories for the first six months of 2007 included $18.9 million of net sales of specialty building products and accessories related to Elk from the date of acquisition. Excluding net sales of specialty business products and accessories of Elk, we had net sales of specialty business products and accessories of $39.1 million in the first six months of 2007. Gross Margin. Our overall gross margin was $314.4 million or 26.3% of net sales for the first six months of 2007. Included in our overall gross margin was $10.8 million of restructuring and other expenses, which were included in cost of products sold and $81.9 million of gross margin related to Elk. Excluding these items, our overall gross margin would have been $243.3 million or 26.9% of net sales compared with $312.3 million or 30.0% of net sales for the first six months of 2006. The decrease in our overall gross margin is primarily attributable to a decrease in net sales driven by lower unit volumes and higher raw material costs. Income before Interest Expense and Income Taxes. Income before interest expense and income taxes in the first six months of 2007 was $10.8 million or 0.9% of net sales, compared to income before interest expense and income taxes of $79.9 million or 7.7% of net sales in the first six months of 2006. Our income before interest expense and income taxes in the first six months of 2007 included $65.8 million of restructuring and other expenses, of which $10.8 million was included in cost of products sold. Excluding these items, the first six months of 2007 income before interest expense and income taxes was $76.6 million or 6.4% of net sales, which includes $28.5 million of 45 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) income before interest expense and income taxes resulting from Elk's operations from the date of acquisition. Excluding the impact of Elk operations, income before interest expense and income taxes for the first six months of 2007 was $48.1 million or 5.3% of net sales. The decrease in the first six months of 2007 income before interest expense and income taxes was primarily due to a decrease in net sales of both residential and commercial roofing products and higher raw material costs, partially offset by lower selling, general and administrative expenses mostly due to lower volume related distribution costs. 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 $600.0 million Senior Secured Revolving Credit Facility due February 2012, which we refer to as our Senior Secured Revolving Credit Facility (see Long-Term Debt), 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 from operating and investing activities was $1,092.6 million during the first six months of 2007, including $945.6 million related to the acquisition of Elk, net of $0.1 million of cash acquired, the reinvestment of $55.5 million for capital programs and an acquisition of land and buildings in Fresno, California and $91.5 million of cash used in operations. 46 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 $116.1 million during the first six months of 2007, reflecting an increase in total accounts receivable of $177.8 million, due to the seasonality of our business, a $45.6 million decrease in inventories to meet our anticipated operating demands and due to the decline in the housing market, a $4.1 million increase in other current assets, a $25.6 million increase in accounts payable and accrued liabilities and an increase in net payments of $5.4 million for restructuring and other expenses. The net cash used in operating activities also included an $8.1 million net increase in the payable to related parties/parent corporations, due to an $8.1 million increase in amounts due under our long-term granule supply agreement with an affiliated company. In addition, net cash used in operating activities included $65.8 million in restructuring and other expenses, which primarily included a $41.9 million write-down of property, plant and equipment. Net cash provided by financing activities totaled $1,136.6 million during the first six months of 2007, including $2,188.7 million of aggregate proceeds from the issuance of long-term debt, related to 2007 year to date cumulative borrowings of $862.8 million under our new $600.0 million Senior Secured Revolving Credit Facility and our old $450.0 million Senior Secured Revolving Credit Facility, which we refer to as our Old Senior Secured Revolving Credit Facility. In addition, proceeds from the issuance of long-term debt included $975.0 million under our new $975.0 million Term Loan Facility, which we refer to as the Term Loan, $325.0 million under our new $325.0 million Junior Lien Term Loan Facility, which we refer to as the Junior Lien Term Loan and $25.9 million of borrowings under the old Elk Revolving Credit Facility, see (Long-Term Debt). Financing activities also included $1,018.0 million in aggregate repayments of long-term debt, of which $538.8 million related to first quarter of 2007 cumulative repayments under our Senior Secured Revolving Credit Facility and our Old Senior Secured Revolving Credit Facility, $28.6 million related to repayments under the old Elk Revolving Credit Facility and $4.9 million related to repayments under the Term Loan. In addition, repayments of long-term debt included $97.5 million related to our outstanding 8% Senior Notes due 2007, which we refer to as the 2007 Notes, $150.1 million related to our outstanding 8% Senior Notes due 2008, which we refer to as the 2008 Notes, $25.0 million related to the then outstanding Elk 6.28% Senior Notes due 2007, $60.0 million related to the then outstanding Elk 6.99% Senior Notes due 2009, $60.0 million related to the then outstanding Elk 7.49% Senior Notes due 2012 and $50.0 million related to the then outstanding Elk 6.28% Senior Notes due 2014. In addition, financing activities also included $33.8 million in financing fees and expenses, related to debt restructuring costs, including the tender premiums and write-off of the remaining deferred financing fees and discounts associated with the aforementioned senior notes and the Old Senior Secured Revolving Credit Facility. 47 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Acquisitions On February 9, 2007, BMCA Acquisition Sub Inc., which we refer to as BMCA Acquisition Sub, and BMCA Acquisition Inc., which together with BMCA Acquisition Sub, we collectively refer to as the Purchasers, both wholly-owned subsidiaries of BMCA, entered into a merger agreement with Elk, which we refer to as the Merger Agreement. On February 22, 2007, an equity tender offer closed and, as a result thereof (and the purchase of shares from one of its affilates), BMCA Acquisition Sub owned approximately 90% of Elk's shares at a purchase price of $43.50 per share. In accordance with the Merger Agreement, the remaining Elk shares were converted in a second step merger into the right to receive $43.50 per share in cash. On March 26, 2007, BMCA completed the merger, pursuant to which BMCA Acquisition Sub was merged with and into Elk, which then became an indirect wholly-owned subsidiary of BMCA. The acquisition of the Elk shares was completed at a purchase price of approximately $945.6 million, net of $0.1 million of cash acquired and net of $195.0 million of the then outstanding Elk senior notes which were repaid in March 2007. We financed the purchase of Elk, and refinanced certain of BMCA's then outstanding debt and repaid all of Elk's then outstanding senior notes of $195.0 million with the proceeds from our new senior secured credit facilities. Our new senior secured credit facilities consist of a $600.0 million Senior Secured Revolving Credit Facility, a $975.0 million Term Loan and a $325.0 million Junior Lien Term Loan facility maturing on September 15, 2014. See Long-Term Debt. We believe the acquisition of Elk will strategically position us for future growth in the roofing industry and other building product markets. The acquisition is expected to provide us with an increased market leadership position, create comprehensive market-leading product offerings, generate natural cost savings from synergies, including plant rationalization and re-alignment of distribution networks, raw material procurement, administrative and logistical efficiencies, and leverage the organizational strengths of both BMCA and Elk. The Elk acquisition was accounted for under the purchase method of accounting as prescribed by Statement of Financial Accounting Standards, which we refer to as SFAS, No. 141 "Business Combinations," which we refer to as SFAS No. 141, which requires the total purchase price to be allocated to the fair value of assets acquired and liabilities assumed based on their fair values at the acquisition date, with amounts exceeding their fair value being 48 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) recorded as goodwill. The allocation process will require an analysis of plant, property and equipment, inventories, customer lists and relationships, contractual commitments and brand strategies, among others to identify and record the fair value of assets acquired and liabilities assumed. In connection with the acquisition, we used an economic life of 5 to 40 years for land improvements, 10 to 40 years for buildings and building improvements, 3 to 30 years for machinery and equipment, which includes furniture and fixtures, and 5 to 14 years for intangible assets. In valuing acquired assets and assumed liabilities, fair values will be based on, but not limited to: future expected discounted cash flows for trade names and customer relationships, current replacement costs for similar capacity and obsolescence for certain fixed assets and inventory; and comparable market rates for contractual obligations, including real estate and liabilities. We will utilize an independent valuation of the assets and liabilities acquired from Elk and expect this valuation to be completed by the end of 2007. At July 1, 2007, we recorded $612.9 million of goodwill and $15.9 million of intangible assets, net of amortization since the date of acquisition, related to the acquisition of Elk based on our best estimate at such date. Once the independent valuation is completed, changes to the amounts recorded at July 1, 2007 will be recorded and material adjustments to goodwill may result. The operating results of the Elk acquisition are included in our results of operations from the date of acquisition. The following unaudited pro-forma consolidated results of operations assume the acquisition of Elk was completed as of January 1st for each of the three month and six month periods presented below:
SECOND QUARTER ENDED SIX MONTHS ENDED ------------------------ ------------------------ JULY 1, JULY 2, JULY 1, JULY 2, 2007 2006 2007 2006 ---------- ---------- ---------- ---------- (MILLIONS) Net sales ....................... $ 663.3 $ 777.7 $ 1,267.0 $ 1,525.8 ---------- ---------- ---------- ---------- Income (loss) before interest and income taxes ................... (13.5) 74.2 (15.7) 126.1 ---------- ---------- ---------- ---------- Net income (loss) ............... $ (42.0) $ 23.8 $ (87.3) $ 33.4 ========== ========== ========== ==========
The unaudited pro-forma consolidated results of operations for the three-month and six-month periods ended July 1, 2007 include $65.8 million pre-tax ($46.7 million after-tax) of restructuring and other expenses, of which $10.8 million pre-tax ($7.7 million after-tax) was included in cost of products sold, related to the acquisition of Elk. In addition, the unaudited 49 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) pro-forma consolidated results of operations for the six-month period ended July 1, 2007 above includes $13.6 million of merger-related expenses of Elk and $23.2 million of debt restructuring costs of both BMCA and Elk related to the acquisition of Elk. Our pro-forma results include a reduction in compensation expense related to Elk employees who were terminated due to the acquisition of Elk of $1.3 and $2.5 million for the three-month periods ended July 1, 2007 and July 2, 2006, respectively and $3.6 and $4.9 million for the six month periods ended July 1, 2007 and July 2, 2006, respectively. In addition, our pro-forma results for the three-month period ended July 2, 2006 and the six-month periods ended July 1, 2007 and July 2, 2006 include additional interest expense associated with variable rate debt instruments based on LIBOR plus a specified fixed margin, due to the acquisition of Elk. A 1/8% change in these variable interest rates would result in a plus or minus $0.5 million in interest expense for the three-month period ended July 2, 2006 and a plus or minus $0.3 and $1.0 million in interest expense for the six-month periods ended July 1, 2007 and July 2, 2006, respectively. Pro-forma data may not be indicative of the results that would have been achieved had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. On March 2, 2007, we acquired two parcels of land and buildings located in Fresno, California. 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 land and buildings. The operating results of the Fresno land and buildings are included in our results of operations from the date of acquisition. During the second quarter of 2007, we initiated the implementation of a restructuring plan, which we refer to as the 2007 Restructuring Plan, which was formulated upon the acquisition of Elk on February 22, 2007. See Restructuring and Other Expenses below. In connection with the acquisition of Elk, we have currently identified $69.7 million in purchase accounting adjustments, which primarily relate to the establishment of a change of control accrual, employee severance payments and integration-related expenses, which include inventory-related valuation write-downs, lease termination expenses and other integration-related expenses. Furthermore, we plan to utilize our independent valuation of property, plant and equipment and intangible assets acquired from Elk to complete our purchase price allocation by the end of 2007. We 50 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) account for our purchase accounting adjustments in accordance with the guidance in FASB Emerging Issues Task Force, which we refer to as EITF, No. 95-3 "Recognition of Liabilities in Connection with a Purchase Business Combination," which we refer to as EITF No. 95-3. We have incurred $60.8 million of the aforementioned purchase accounting adjustments as of July 1, 2007, of which $54.6 million was incurred in the second quarter of 2007 and $6.2 million was incurred in the first quarter of 2007(see table below), as adjustments to goodwill and is included in the purchase price of Elk. We expect to accrue the remaining $8.9 million of identified purchase accounting adjustments as incurred and effectively utilize our accrual by our first quarter ending 2008. Our employee severance payments included the termination of approximately 100 Elk employees, including certain management level positions, in the manufacturing and selling and administrative functional areas.
DISCON- EMPLOYEE TINUED CHANGE INTEGRATION SEVERANCE OPERATIONS OF PURCHASE ACCOUNTING ACCRUALS EXPENSES PAYMENTS EXPENSES CONTROL TOTAL - ---------------------------- -------- -------- -------- -------- -------- (THOUSANDS) Beginning Balance, as of December 31, 2006...................... $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk .................... 5,785 -- 415 -- 6,200 -------- -------- -------- -------- -------- Balance, as of April 1, 2007 ........... 5,785 -- 415 -- 6,200 Additional accrued costs incurred due to the acquisition of Elk ................ 19,624 2,400 -- -- 22,024 Accrued costs incurred related to change in control escrow account ............. -- -- -- 32,574 32,574 Cash Payments .......................... (224) (1,773) -- -- (1,997) Amount charged to directly write-off inventory ............................. (4,071) -- -- -- (4,071) Non-cash items ......................... -- -- -- (8,889) (8,889) -------- -------- -------- -------- -------- Ending Balance, as of July 1, 2007 ..... $ 21,114 $ 627 $ 415 $ 23,685 $ 45,841 ======== ======== ======== ======== ========
On June 1, 2006, we acquired a manufacturing facility located in Gainesville, Texas. The purchase price was allocated to the fair value of the identifiable assets acquired, which consisted entirely of property, plant and equipment. Restructuring and Other Expenses During the second quarter of 2007, we initiated our 2007 Restructuring Plan, which was formulated upon the acquisition of Elk on February 22, 2007. The 2007 Restructuring Plan was created to eliminate cost redundancies recognized due to the acquisition of Elk, to reduce our current cost 51 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) structure and is expected to be fully implemented by the end of our first quarter of 2008. We account for our restructuring activities in accordance with the guidance of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which we refer to as SFAS No. 146 and SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets," which we refer to as SFAS No. 144. In connection with the acquisition of Elk, we have identified $89.2 million in restructuring and other expenses, of which $41.9 million relates to property, plant and equipment write-downs at certain of our manufacturing facilities and $18.0 million of plant closing expenses. The plants included in restructuring and other expenses reflected above were Erie, Pennsylvania, Stockton, California, Millis, Massachusetts and Hollister, California. Restructuring and other expenses also include $2.0 million in employee severance payments and $27.3 million in integration-related expenses, which primarily consist of $12.2 million of inventory-related valuation write-downs, $1.4 million of lease termination expenses and $13.7 million of other integration expenses. We recorded $65.8 million of the aforementioned restructuring and other expenses as of July 1, 2007, all of which was recorded in the second quarter of 2007 (see table below), of which $10.8 million was charged to cost of products sold and $55.0 million was charged to restructuring and other expenses in our statement of operations. We expect to incur the remaining $23.4 million of identified restructuring and other expenses and effectively utilize our accrual by our first quarter ending 2008. Our employee severance payments included the termination of approximately 50 BMCA employees, including certain management positions, in the manufacturing and selling and administrative functional areas. 52 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
PP&E PLANT EMPLOYEE RESTRUCTURING AND WRITE- CLOSING SEVERANCE INTEGRATION OTHER EXPENSES DOWN EXPENSES PAYMENTS EXPENSES TOTAL - ----------------- -------- -------- -------- -------- -------- (THOUSANDS) Beginning Balance, as of December 31, 2006 ............ $ -- $ -- $ -- $ -- $ -- Accrued costs incurred due to the acquisition of Elk ....... -- -- -- -- -- -------- -------- -------- -------- -------- Balance, as of April 1, 2007... -- -- -- -- -- Additional accrued costs incurred due to the acquisition of Elk ........... 41,919 7,234 2,000 14,640 65,793 Cash Payments ................. -- (2,784) (800) (1,800) (5,384) Amount charged to property, plant and equipment for asset write-down ........ (41,919) -- -- -- (41,919) -------- -------- -------- -------- -------- Ending Balance, as of July 1, 2007 ................. $ -- $ 4,450 $ 1,200 $ 12,840 $ 18,490 ======== ======== ======== ======== ========
Long-Term Debt On February 22, 2007, BMCA and the Purchasers entered into senior secured credit facilities consisting of a new $975 million Term Loan, a new $600 million Senior Secured Revolving Credit Facility and a $325 million bridge loan facility, which we refer to as the Bridge Loan, which was replaced by a $325 million Junior Lien Term Loan, which we collectively refer to as the Credit Facilities. The initial borrowings under these Credit Facilities were used (i) to pay for shares tendered by Elk shareholders in an equity tender offer, (ii) to repay amounts outstanding under BMCA's Old Senior Secured Revolving Credit Facility, (iii) to make payments in connection with the completion by BMCA and Building Materials Manufacturing Corporation, which we refer to as BMMC, of the tender offer and consent solicitation for their 2007 Notes, (iv) to make payments in connection with the completion by BMCA of its previously announced tender offer and consent solicitation for its outstanding 2008 Notes, (v) to pay for transaction fees and expenses incurred in connection with each of the foregoing transactions and (vi) to repay all of the existing Elk senior note debt. 53 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) The Senior Secured Revolving Credit Facility has a maturity date of February 22, 2012. All amounts outstanding under the Senior Secured Revolving Credit Facility are secured by a first priority perfected security interest in all receivables, inventory, precious metals, deposit accounts and other current assets of BMCA and its domestic subsidiaries and all proceeds thereof, which we refer to as the Senior Secured Revolving Credit Facility Collateral. Availability under the Senior Secured Revolving Credit Facility is based upon eligible accounts receivable, inventory and precious metals used in the production of inventory, as defined, and includes a sub-limit for letters of credit of $150 million. Loans under the Senior Secured Revolving Credit Facility will bear interest at a variable rate based upon either the Base Rate or the Eurodollar Rate as defined in the Senior Secured Revolving Credit Facility, at the borrower's option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate or Eurodollar Rate and also based on an availability based pricing grid. The Senior Secured Revolving Credit Facility requires us to pay unused commitment fees. The Senior Secured Revolving Credit Facility provides for optional reductions in the overall $600 million commitment, under certain conditions. In addition, the Senior Secured Revolving Credit Facility provides for optional and mandatory pre-payments of borrowings outstanding under the Senior Secured Revolving Credit Facility, subject to certain conditions. The Senior Secured Revolving Credit Facility also provides the borrowers with the ability to increase the size of the facility by up to $350 million, depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Senior Secured Revolving Credit Facility, the borrowers are subject to an interest coverage ratio financial covenant when liquidity falls below a specified threshold. In addition, the borrowers are also required to comply with other customary covenants and various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the Senior Secured Revolving Credit Facility could be accelerated by the holders of that indebtedness. On March 12, 2007, the Senior Secured Revolving Credit Facility was amended, which did not result in any material changes to the facility. The Term Loan will mature on February 22, 2014. All amounts outstanding under the Term Loan are secured by (i) a first priority perfected security interest in substantially all of the assets and properties of BMCA and its domestic subsidiaries, other than the Senior Secured Revolving Credit Facility Collateral, which we refer to as the Term Loan Collateral, and (ii) a second priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. 54 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Amounts due under the Term Loan will bear interest at a variable rate based upon either the Base Rate or Eurodollar Rate, as defined in the Term Loan, at the borrower's option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate and Eurodollar Rate, if applicable. The Term Loan requires us to pay unused commitment fees. In addition, the Term Loan provides for optional and mandatory pre-payments under certain conditions. The Term Loan also provides the borrowers with the ability to increase the size of the facility by up to $250 million (less any increase in the Senior Secured Revolving Credit Facility in excess of $100 million), depending on the ability to obtain commitments from lenders and meeting specified conditions. Under the terms of the Term Loan, the borrowers are subject to an interest coverage ratio financial covenant, as defined, and a leverage ratio financial covenant, as defined, each of which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. In addition, the borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations, and making certain investments. In the event of a change of control of BMCA, as defined, the Term Loan could be accelerated by the holders of that indebtedness. On March 15, 2007, the Term Loan was amended, which did not result in any material changes to the facility. The Bridge Loan would have converted into a term loan maturing on February 22, 2015, however it was amended and restated on March 15, 2007, and redesignated as the Junior Lien Term Loan. The Junior Lien Term Loan matures on September 15, 2014. All amounts outstanding under the Junior Lien Term Loan are secured by (i) a second priority perfected security interest in the Term Loan Collateral and (ii) a third priority perfected security interest in the Senior Secured Revolving Credit Facility Collateral. Loans under the Junior Lien Term Loan will bear interest at a variable rate based upon either the Base Rate or Eurodollar Rate, as defined in the Junior Lien Term Loan at the borrower's option, plus a specified margin in each case. These interest rates will be recalculated periodically based on changes in the Base Rate or Eurodollar Rate, as applicable. The Junior Lien Term Loan provides for optional and mandatory prepayments under certain conditions. 55 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Under the terms of the Junior Lien Term Loan, the borrowers are subject to a leverage ratio financial covenant, as defined, which will need to be complied with starting as of the end of BMCA's second fiscal quarter in 2008. The borrowers are also required to comply with various restrictive covenants, including with respect to incurring additional indebtedness or guarantees, creating liens or other encumbrances, making capital expenditures, making restricted payments, including dividends and distributions to BMCA's parent corporations and making certain investments. In the event of a change of control of BMCA, as defined, the Junior Lien Term Loan could be accelerated by the holders of that indebtedness. On February 22, 2007, BMCA repurchased approximately $97.5 million, or 97.5%, of the aggregate principal amount outstanding of the 2007 Notes and $150.1 million, or 96.9%, of the aggregate principal amount outstanding of the 2008 Notes. In connection with the completion of the tender offer for the 2007 Notes and the 2008 Notes in February 2007, substantially all of the covenants included in the indentures governing the 2007 Notes and 2008 Notes were eliminated. On March 26, 2007, we repurchased all of Elk's then outstanding $25.0 million in aggregate principal amount of 4.69% Senior Notes due 2007, $60.0 million in aggregate principal amount of 6.99% Senior Notes due 2009, $60.0 million in aggregate principal amount of 7.49% Senior Notes due 2012 and $50.0 million in aggregate principal amount of 6.28% Senior Notes due 2014. As of July 1, 2007, we had total outstanding consolidated indebtedness of $2,016.0 million, which amount includes $52.8 million of demand loans to our parent corporation and $16.3 million which matures prior to the end of the second quarter of 2008. Our total outstanding consolidated indebtedness also includes $384.0 million of borrowings outstanding under our $600.0 million Senior Secured Revolving Credit Facility. 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 1, 2007, we were in compliance with all covenants under the Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and the indentures governing the remaining 2007 Notes, the remaining 2008 Notes and the 7 3/4% Senior Notes due 2014, which we refer to as the 2014 Notes, which together we collectively refer to as the Senior Notes. As of July 1, 2007, the book value of the collateral securing the Senior Notes, the Term Loan, the Junior Lien Term Loan and the Senior Secured Revolving Credit Facility was approximately $2,587.9 million. 56 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) At July 1, 2007, we had outstanding letters of credit of approximately $51.3 million, which includes approximately $10.5 million of standby letters of credit related to certain obligations of G-I Holdings. On January 3, 2006, we purchased and retired $6.3 million of industrial revenue bond certificates issued by us in 1990 with respect to the Fontana, California Industrial Revenue Development Bond, resulting in us becoming the primary holder of such bond. Fixed Income Interest Rate Swaps In March 2007, we began entering into forward-starting Eurodollar rate (LIBOR) based pay fixed income interest rate swaps related to our Term Loan with an effective date of April 23, 2007 and a maturity date of April 23, 2012. If forward interest rates increase during the term of the Term Loan agreement, the swaps become assets on BMCA's consolidated balance sheet and BMCA will receive interest payments on BMCA's quarterly interest payment date for its Term Loan. If forward interest rates decline, the swaps become a liability on BMCA's consolidated balance sheet and BMCA will be obligated to make payments on its quarterly interest payment date for its Term Loan. According to SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which we refer to as SFAS No. 133, BMCA's hedging activity is treated as cash flow hedges. At July 1, 2007, we had no ineffectiveness in our hedging transactions. Therefore, for the quarter ended July 1, 2007, we, based on the change in the LIBOR rate, reflected in other noncurrent assets the cumulative changes in the fair value of the derivative instrument when compared to cumulative changes in the present value of the expected future interest cash flows that are attributable to changes in the benchmark LIBOR swap rate. BMCA's offset to the related asset was reflected in other comprehensive income, net of tax. The current period activity therefore marks the swaps instrument to market or fair value and adjusts other comprehensive income, net of tax to the cumulative effect change. On each LIBOR reset date, we will test our fixed income interest rate swaps to determine if the swaps contain any ineffectiveness. If BMCA's fixed income swaps contain any ineffectiveness as of any subsequent test date, we will reflect the effective portion of the offset to our related asset or liability as a component of other comprehensive income and the ineffective portion will be recorded through our results of operations. At July 1, 2007, based on changes in the closing LIBOR rate as of July 1, 2007, we recorded a fair value gain on our fixed income interest rate swaps of $13.3 million to other noncurrent assets, while the offset was recorded to other comprehensive income, net of tax of $5.0 million. The Company also recorded $0.6 million in interest income related to its fixed income interest rate swaps. 57 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Intercompany Transactions We make loans to, and borrow from, our parent corporations from time to time at prevailing market rates. As of July 1, 2007 and July 2, 2006, BMCA Holdings Corporation owed us $56.1 and $55.9 million, including interest of $0.8 and $0.6 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 $1.2 and $1.2 million during the second quarter ended July 1, 2007 and July 2, 2006, respectively and $2.5 and $2.4 million during the six month period ended July 1, 2007 and July 2, 2006, respectively. Interest expense on our loans from BMCA Holdings Corporation amounted to $1.2 and $1.2 million during the second quarter ended July 1, 2007 and July 2, 2006, respectively and $2.4 and $2.3 million during the six month period ended July 1, 2007 and July 2, 2006, 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 Senior Secured Revolving Credit Facility, the Term Loan, the Junior Lien Term Loan and our Senior Notes. Under the terms of the Senior Secured Revolving Credit Facility and the indentures governing our Senior Notes at July 1, 2007, 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 1, 2007 and July 2, 2006. In addition, for the six months ended July 1, 2007 and July 2, 2006, no loans were owed or other lending activities were entered into by us to other affiliates. We also have a management agreement with ISP Management Company, Inc., a subsidiary of International Specialty Products Inc. (which, together with its subsidiaries, we refer to as ISP,) an affiliate, which we refer to as the ISP Management Agreement, to provide us with certain management services. The aggregate amount payable to ISP Management Company, Inc. under the ISP Management Agreement, inclusive of the services provided to G-I Holdings, has not yet been finalized; however, based on services provided to date in 2007 and after adjusting for inflationary factors, it is estimated to be similar to the $6.1 million paid in 2006. We do not expect any changes to the ISP Management Agreement to have a material impact on our results of operations. We purchase a substantial portion of our colored roofing granules and algae-resistant granules under a long-term requirements contract with ISP Minerals Inc., which we refer to as Minerals, an affiliate of ours and ISP. The amount of mineral products purchased each year under the Minerals contract is based on current demand and is not subject to minimum purchase requirements. For the second quarter ended July 1, 2007 and the year ended December 31, 2006, we purchased $52.1 and $102.3 million, respectively, of mineral products from Minerals under this contract. 58 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Included in current assets as a tax receivable from parent corporation is $9.1 and $9.1 million at July 1, 2007 and December 31, 2006, respectively, representing amounts paid in excess of amounts due to G-I Holdings under the 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. Income Taxes We adopted Financial Accounting Standards Board, which we refer to as, FASB, Interpretation No. 48, which we refer to as FIN 48, as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1 (see below) and, as a result of the adoption, we reviewed certain tax positions and did not need to recognize any material adjustment to our accruals for uncertain tax positions. At January 1, 2007 and July 1, 2007, we had approximately $13.1 and $15.1 million, respectively, of unrecognized tax benefits, all of which would affect our effective tax rate if recognized. For years prior to 2007, we and our subsidiaries were subject to United States federal income tax as well as the income tax of multiple state jurisdictions. We have substantially concluded all United States federal income tax matters for years through 2004. The tax years 2005 and 2006 remain open to examination by the Internal Revenue Service (IRS). Substantially all material state and local matters have been concluded for tax years through 2001. The tax years 2002 through 2006 remain open to examination by the major state taxing jurisdictions to which we are subject. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007 and July 1, 2007, we had $1.7 and $2.2 million, respectively of accrued interest and $2.1 million, respectively of accrued penalties. Our effective tax rate changed from 35.8% at the end of the first quarter of 2007 to 29.0% at the end of the first six months of 2007 primarily due to the impact of the estimated annual restructuring and other expense charges to be taken in 2007, of which $65.8 million was included in our income before interest expense and income taxes for the six month period ended July 1, 2007. In addition, the change in the effective tax rate was due to incremental state taxes, resulting from the application of the provisions of FIN 48. 59 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Contingencies See Note 13 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 2007. 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 second quarter of 2007, the cost of asphalt continued to be high relative to historical levels, which reflects in large part high crude oil prices. Due to the strength of our manufacturing operations, which allows us to use many types of asphalt, together with our ability to secure alternative sources of supply, we do not anticipate that any future disruption in the supply of asphalt will have a material impact on future net sales, although no assurances can be provided in that regard. To mitigate these and other petroleum-based cost increases, we announced a price increase in the second quarter of 2007. 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 There have been no significant changes to our contractual obligations during the second quarter ended July 1, 2007. For further discussion on our Contractual Obligations related to minimum purchase obligations reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations "Contractual Obligations" in our 2006 Form 10-K and in our 2007 first quarter Form 10-Q, which we refer to as the 2007 first quarter Form 10-Q, which was filed with the SEC on May 16, 2007. New Accounting Pronouncements In July 2006, the FASB, issued FIN 48 "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. A reporting entity must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial 60 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) New Accounting Pronouncements statements. FIN 48 became effective for fiscal years beginning after December 15, 2006. In May 2007, the FASB issued FASB Staff Position, which we refer to as FSP, FIN 48-1 "Definition of Settlement in FASB Interpretation No. 48," which we refer to as FSP FIN 48-1, which amended FIN 48 to provide guidance on how a reporting entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under FSP FIN 48-1, a tax position will be considered effectively settled and any previously unrecognized tax benefits should be recognized based on the terms of settlement if (a) the taxing authority has completed its examination, including all appeals, (b) the reporting entity does not intend to appeal or litigate any aspect of the tax position and (c) based on the taxing authority's policies and practices, the reporting entity considers it remote that the taxing authority will re-examine the tax position. We adopted FIN 48 as of January 1, 2007 in a manner that is consistent with the provisions of FSP FIN 48-1, and as a result of the adoption, we reviewed certain tax positions and did not recognize any material adjustment to our accruals for uncertain tax positions. See Income Taxes. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which we refer to as SFAS No. 157, which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We will adopt the provisions of SFAS No. 157 beginning in our first quarter of 2008 and, therefore, have not yet determined the effect, if any, the adoption of SFAS No. 157 will have on our results of operations or financial position. In September 2006, the FASB issued FASB Staff Position, which we refer to as FSP, AUG AIR-1 "Accounting for Planned Major Maintenance Activities" which we refer to as FSP AUG AIR-1, prohibits the use of the accrue-in-advance method of accounting in annual and interim financial reporting periods for planned major maintenance activities. FSP AUG AIR-1 previously allowed companies the right to recognize planned major maintenance costs by accruing a liability over several reporting periods before the maintenance was performed. FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and deferral methods of accounting as acceptable, however it mandates that companies apply the same method of accounting in both interim and annual financial reporting periods and that the method be retrospectively applied if applicable. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FSP AUG AIR-1 in our first quarter of 2007. FSP AUG AIR-1 has not had a material effect on our consolidated financial statements. 61 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) allowed companies the right to recognize planned major maintenance costs by accruing a liability over several reporting periods before the maintenance was performed. FSP AUG AIR-1 still allows the direct expense, built-in-overhaul and deferral methods of accounting as acceptable, however it mandates that companies apply the same method of accounting in both interim and annual financial reporting periods and that the method be retrospectively applied if applicable. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FSP AUG AIR-1 in our first quarter of 2007. FSP AUG AIR-1 did not have a material effect on our consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115," which we refer to as SFAS No. 159. SFAS No. 159 permits entities to elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the "fair value option," will enable some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently, and it is simpler than using the complex hedge-accounting provisions of SFAS No. 133 to achieve similar results. SFAS No. 159 applies to all entities and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election. SFAS No. 159 is expected to expand the use of fair value measurements for financial instruments. SFAS No. 159 is effective as of the beginning of a company's first fiscal year that begins after November 15, 2007. Retrospective application is not permitted. We will adopt the provisions of SFAS No. 159 beginning in our first quarter of 2008 and therefore, have not yet determined the effect, if any, the adoption of SFAS No. 159 will have on our results of operations or financial position. * * * 62 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 of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are only predictions and generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "intend," "plan," "foresee" or other 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. See also the "Risk Factors" in our 2006 Form 10-K and the risks identified in Part II of our 2007 first quarter Form 10-Q. 63 BUILDING MATERIALS CORPORATION OF AMERICA 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 2006 Form 10-K for a discussion of "Market-Sensitive Instruments and Risk Management." Beginning in March 2007, BMCA entered into fixed income interest rate swaps to hedge against fluctuations in the variable interest rate of our $975.0 million Term Loan. See Note 6 to Consolidated Financial Statements. 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. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. 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 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 64 BUILDING MATERIALS CORPORATION OF AMERICA PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of July 1, 2007, approximately 1,900 alleged asbestos-related bodily injury claims relating to the inhalation of asbestos fiber were pending against Building Materials Corporation of America. See Note 13 to Consolidated Financial Statements in Part I. ITEM 5. OTHER INFORMATION EMPLOYMENT AGREEMENT WITH RICHARD A. NOWAK - ------------------------------------------ On August 9, 2007, the Company entered into an employment agreement with Richard A. Nowak. Mr. Nowak was appointed to the position of Executive Vice President - Chief Operating Officer of the Company on August 9, 2007. Prior to this position, Mr. Nowak held the position of President and Chief Operating Officer of ElkCorp for more than five years. The terms for Mr. Nowak's employment are generally as follows, subject in all respects to the terms and conditions of the employment agreement, which is being filed as Exhibit 10.1. Mr. Nowak's employment term will continue through and including June 30, 2009, after which the Company will enter into a consulting agreement with Mr. Nowak, which will continue through and including June 30, 2010. Mr. Nowak is entitled to a signing bonus of $1,000,000 (subject to normal payroll practices), payable in one lump sum within 30 days after his execution of the employment agreement. As Executive Vice President and Chief Operating Officer, Mr. Nowak will receive an annual base salary of $504,400. On July 1st of each year, Mr. Nowak will receive a salary increase equal to four percent (4%) of his annual base salary at that time. Mr. Nowak will also be eligible for a discretionary bonus payable on or about June 30, 2008 in the amount of $450,000, provided that he achieves certain objectives set forth in the Synergy Plan. In addition, Mr. Nowak will receive interim stay bonuses. On the first payroll period following February 1, 2008, June 30, 2008 and June 30, 2009, he will receive one-time payments of $400,000, $900,000 and $400,000, respectively (subject to normal payroll practices) in exchange for remaining an employee through those dates. Mr. Nowak will receive employee benefits similar to those provided to other senior executives at his level. Mr. Nowak is eligible to receive long term incentive units under the 2001 BMCA Long Term Incentive Unit Plan, as amended. Upon his execution of the employment agreement, the Company granted Mr. Nowak 5,000 long term incentive units, 35% of which vest on June 30, 2008 and 65% of which vest on June 30, 2009. 65 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 5. OTHER INFORMATION - (CONTINUED) If, during the term of his employment, Mr. Nowak's employment is terminated for any reason, including death, disability or for cause, he shall be eligible to receive severance payments based on the timing of his termination. If Mr. Nowak is terminated between August 9, 2007 and January 31, 2008, he will receive $1,654,840, representing 1.1 times his current annual compensation including the sign-on bonus. If Mr. Nowak is terminated between February 1, 2008 and June 30, 2008, he will receive $1,311,440, representing 2.6 times his then current annual compensation (excluding bonuses). If Mr. Nowak is terminated between July 1, 2008 and January 31, 2009, he will receive $419,660, representing 0.80 times his then current annual compensation (excluding bonuses). Mr. Nowak will not be eligible for severance pay if he is terminated after January 31, 2009. If, during the term of his employment, Mr. Nowak voluntarily terminates his employment, then he shall not be entitled to any continuing salary payments, severance, benefits or other payments with the exception of his eligibility for COBRA continuation coverage. After the termination of his employment agreement, for the period from July 1, 2009 through and including June 30, 2010, Mr. Nowak will provide consulting services to the Company for which the Company will pay him a consulting fee equal to $20,000 per month. As required by the terms of his employment agreement, Mr. Nowak has signed the Company's Agreement Regarding Confidentiality and Competition pursuant to which, among other things, he agrees not to compete with the Company and its affiliates in the roofing business by accepting employment with or providing consulting services to any manufacturer that competes with the Company or any of its affiliates during the term of his employment and for a two-year period commencing July 1, 2009 and ending on June 30, 2011, in consideration of which the Company would pay Nowak $180,000 at the rate of $7,500 per month. EMPLOYMENT AGREEMENT WITH MATTI KIIK - ------------------------------------ On August 9, 2007, the Company entered into an employment agreement with Matti Kiik. Mr. Kiik was appointed to the position of Senior Vice President - - Chief Technology Officer of the Company on August 9, 2007. Prior to this position, Mr. Kiik held the position of Senior Vice President of Research and Development of ElkCorp for more than five years. The terms for Mr. Kiik's employment are generally as follows, subject in all respects to the terms and conditions of the employment agreement, which is being filed as Exhibit 10.2. Mr. Kiik's employment term will continue through and including June 30, 2010, after which the Company will enter into a consulting agreement with Mr. Kiik, which will continue through and including June 30, 2012. Mr. Kiik is entitled to a signing bonus of $300,000 (subject to normal payroll practices), payable in one lump sum within 30 days after his execution of the employment agreement. As Senior Vice President - Chief Technology Officer, Mr. Kiik will receive an annual base salary of $275,000. On July 1st of each year, Mr. Kiik will receive a salary increase equal to three percent (3%) of his annual base salary at that time. Mr. Kiik will also be eligible for a discretionary bonus payable on or about June 30, 2008 in the amount of $250,000, provided that he achieves all objectives set forth in the Synergy Plan. In addition, Mr. Kiik will receive interim stay bonuses. On the first payroll period following June 30, 2008, June 30, 2009 and June 30, 2010, he will receive one-time payments of $250,000, $250,000 and $100,000, respectively (subject to normal payroll practices) in exchange for remaining an employee through those dates. Mr. Kiik will receive employee benefits similar to those provided to other senior executives at his level. 66 BUILDING MATERIALS CORPORATION OF AMERICA ITEM 5. OTHER INFORMATION - (CONTINUED) Mr. Kiik is eligible to receive long term incentive units under the 2001 BMCA Long Term Incentive Unit Plan, as amended. Upon his execution of the employment agreement, the Company granted Mr. Kiik 3,000 long term incentive units, which vest as follows: 25% vest on June 30, 2008, 25% vest on June 30, 2009, and 50% vest on June 30, 2010. If, during the term of his employment, Mr. Kiik's employment is terminated by the Company for any reason, including death, disability or for cause, he shall be eligible to receive severance payments based on the timing of his termination. If Mr. Kiik is terminated between August 9, 2007 and June 30, 2008, he will receive $550,000, representing two times his current annual base compensation (excluding bonuses). If Mr. Kiik is terminated between July 1, 2008 and June 30, 2009, he will receive $283,250, representing one times his then current annual compensation (excluding bonuses). Mr. Kiik will not be eligible for severance pay if he is terminated on or after July 1, 2009. If, during the term of his employment, Mr. Kiik voluntarily terminates his employment, then he shall not be entitled to any continuing salary payments, severance, benefits or other payments with the exception of his eligibility for COBRA continuation coverage. After the termination of his employment agreement, for the period from July 1, 2010 through and including June 30, 2012, Mr. Kiik will provide consulting services to the Company for which the Company will pay him a consulting fee equal to $8,333.33 per month. As required by the terms of his employment agreement, Mr. Kiik has signed the Company's Agreement Regarding Confidentiality and Competition pursuant to which, among other things, he agrees not to compete with the Company and its affiliates in the roofing business by accepting employment with or providing consulting services to any manufacturer that competes with the Company or any of its affiliates during the term of his employment and for a two-year period commencing July 1, 2010 and ending on June 30 2012, in consideration of which the Company will pay Mr. Kiik $100,000 at the rate of $4,166.67 per month. ITEM 6. EXHIBITS Exhibit Number Description 10.1 Employment Agreement, dated August 9, 2007, between Richard A. Nowak and GAF Materials Corporation. 10.2 Employment Agreement, dated August 9, 2007, between Matti Kiik and GAF Materials Corporation. 31.1 Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Executive Officer. 31.2 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer. 32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. 67 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 15, 2007 BY: /s/John F. Rebele ----------------- ---------------------- John F. Rebele Senior Vice President, Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer) DATE: August 15, 2007 BY: /s/James T. Esposito ----------------- -------------------- James T. Esposito Vice President and Controller (Principal Accounting Officer) 68 EX-31 2 mm08-1407_10qe311.txt EX.31.1 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Robert B. Tafaro, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Building Materials Corporation of America; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 15, 2007 /s/ ROBERT B. TAFARO ----------------------------------- Name: Robert B. Tafaro Title: Chief Executive Officer and President EX-31 3 mm08-1407_10qe312.txt EX.31.2 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, John F. Rebele, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Building Materials Corporation of America; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 15, 2007 /s/ JOHN F. REBELE ---------------------- Name: John F. Rebele Title: Senior Vice President, Chief Financial Officer and Chief Administrative Officer EX-32 4 mm08-1407_10qe321.txt EX.32.1 Exhibit 32.1 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Building Materials Corporation of America (the "Company") for the quarterly period ended July 1, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Robert B. Tafaro, as Chief Executive Officer and President of the Company, and John F. Rebele, as Senior Vice President, Chief Financial Officer and Chief Administrative Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert B. Tafaro - -------------------------------------- Name: Robert B. Tafaro Title: Chief Executive Officer and President Date: August 15, 2007 /s/ John F. Rebele - -------------------------------------- Name: John F. Rebele Title: Senior Vice President, Chief Financial Officer and Chief Administrative Officer Date: August 15, 2007 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-10 5 mm08-1407_10qe101.txt EX.10.1 EXHIBIT 10.1 ------------ EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made as of August 9, 2007, by and between GAF Materials Corporation (the "Company") and Richard A. Nowak (the "Employee"). W I T N E S S E T H: WHEREAS, Employee and the Company desire to enter into this Agreement, on the terms and conditions set forth below, to provide for the employment of Employee for the term herein specified; and WHEREAS, Employee has been employed by the Company since the consummation of its merger with ElkCorp; and WHEREAS, Employee was a key employee while employed by ElkCorp and Company, as the new employer, desires to retain Employee as a key employee under the terms and conditions set forth in this Agreement; and WHEREAS, the Company views the continued employment of Employee for the duration contemplated herein to be an essential component of the future success of the merged business; and WHEREAS, the Company, through it's merger with ElkCorp, is a successor to Elcor Corporation with respect to the June 1, 2001 Executive Officer Change in Control Agreement ("CIC Agreement") entered into by and between Elcor Corporation and Employee; and WHEREAS, the Company and Employee agree that this Employment Agreement supersedes and replaces the terms and conditions of the CIC Agreement except as expressly stated in this Agreement, and the CIC Agreement shall be null and void; and WHEREAS, this Employment Agreement provides for a term of employment that extends beyond the term of the CIC Agreement; and WHEREAS, in exchange for Employee's execution of this Agreement, Company shall provide Employee with continued employment under the terms and conditions set forth in this Agreement and shall provide Employee with access to confidential and proprietary Company information; and WHEREAS, Employee's execution of the Agreement Regarding Confidentiality and Competition attached as Exhibit A and the Agreement to Arbitrate Employment Disputes attached as Exhibit B is a condition precedent to the effectiveness of this Agreement; and NOW, THEREFORE, in consideration of the above-stated premises, the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1 1. CIC Agreement. The Company and Employee agree that the CIC Agreement shall be null and void except as expressly set forth in this Employment Agreement and that the Employment Agreement fully supersedes and replaces the CIC Agreement except as expressly set forth herein. Further, the Company agrees to indemnify and hold harmless Employee from and against any claim, cause of action, liability or other damage arising out of or relating to any claim by the Internal Revenue Service that this Employment Agreement, including the indemnification obligation set forth in this Paragraph 1, results in payments or distributions to Employee by the Company to or for the benefit of Employee that would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties incurred by Employee with respect to such excise tax. 2. Employment. During the term of this Agreement, the Company shall employ Employee and Employee agrees to be employed by the Company as its Executive Vice President - Chief Operating Officer, subject to the terms and conditions set forth in this Agreement. 3. Term Of Agreement. The term of this Agreement shall commence on the date Employee executes this Agreement and shall continue until the close of business on June 30, 2009, unless earlier terminated as provided in Paragraph 11 (the "Term of Employment"). 4. Duties. During the Term of Employment, Employee shall report to the President and Chief Executive Officer of the Company. Employee shall be based in Dallas, Texas and shall perform his duties primarily in Dallas, Texas and at such other locations, for travel and meetings, as may be reasonably requested by the Company in the normal course of business. The Employee shall fulfill all the reasonable management and leadership duties of the senior managerial position of Executive Vice President - Chief Operating Officer and shall be responsible generally for: (i) developing, driving, and overseeing the growth, integration and strategic initiatives for residential roofing, including achievement of objectives pursuant to the Synergy Plan; (ii) providing strategic advice to senior management regarding the foregoing; (iii) developing the talent of residential roofing manufacturing Directors; and (iv) performing other duties as may be requested of him which befit an individual of Employee's position, skills, credentials, and experience. The Employee agrees to devote all his business energy, attention, skill and working time as reasonably expected for an employee of his personnel grade and level to performing his duties and to promoting the Company's interests and he shall at all times perform his duties and obligations loyally, conscientiously and to the best of his abilities in a professional and workmanlike manner and according to the highest standards of the industry. 5. Compensation. As compensation for the services rendered by the Employee during the Term of Employment, the Company agrees to pay to the Employee, and the Employee agrees to accept, a fixed base salary of $504,400.00 per annum, payable in accordance with the Company's normal payroll practices. On July 1 of each year during the Term, Employee shall receive a salary increase equal to 4% of his annual base salary at that time. 6. Sign-On Bonus: The Company shall pay Employee a sign on bonus equal to $1,000,000.00 (subject to normal payroll practices), payable 30 days after his execution of this Employment Agreement. 2 7. Interim Stay Bonuses: On the first payroll period after February 1, 2008, Employee shall receive a one-time payment of $400,000.00 (subject to normal payroll practices) in exchange for remaining an employee through said date. On the first payroll period after June 30, 2008, Employee will be entitled to an additional one-time payment of $900,000.00, (subject to normal payroll practices) in exchange for remaining an employee through June 30, 2008. On the first payroll period after June 30, 2009, Employee will be entitled to an additional one-time payment of $400,000.00, (subject to normal payroll practices) in exchange for remaining an employee through June 30, 2009. 8. Discretionary Bonus. Employee shall be eligible for a discretionary bonus payable on or about June 30, 2008 in the amount of $450,000.00, provided he achieves the SGA, Manufacturing and Logistics objectives set forth in the Synergy Plan. Employee shall not be eligible for any other bonuses (e.g., EIC Bonus) for performance during the period between now and June 30.2008, except as expressly set forth in this Agreement. 9. Long Term Incentive Units. Upon Employee's execution of this Agreement, the Company shall grant Employee 5,000 long term incentive units pursuant to the 2001 BMCA Long Term Incentive Plan, as amended. 35% of these 5,000 units shall vest on June 30, 2008 and the remaining 65% shall vest on June 30, 2009. Except as expressly set forth in this Paragraph 9, Employee's rights and obligations regarding these units shall be governed by the applicable Long Term Incentive Plan. 10. Benefits. Employee's benefits shall be the same benefits as would otherwise be required under the CIC Agreement. 11. Termination Of Employment. The Employee's employment pursuant to this Agreement shall automatically be terminated upon the "Death" or "Disability" (as defined in the CIC Agreement) of the Employee and shall be immediately terminated at any time by the Company for "Cause" (as defined in the CIC Agreement). If Employee's employment is terminated as provided in this Paragraph 11, the Company shall have no further liability or obligation to Employee under this Agreement except as expressly stated in this Employment Agreement. 12. Severance Pay. (a) During the Term of Employment, if the Company terminates Employee's employment for reasons other than those set forth in Paragraph 11 of this Agreement, the Company shall continue to pay Employee his base salary (as set forth in Paragraph 5) for the period remaining in the Term of Employment. Employee shall also be entitled to payment of Severance Pay under paragraph 12(c). During the Term of Employment, if the Company terminates Employee's employment for the reasons set forth in Paragraph 11, then the Company shall have no obligation to continue to pay Employee his base salary (as set forth in Paragraph 5) or other payments, benefits or consideration under this Employment Agreement for the period remaining in the Term of Employment, but Employee shall be entitled to payment of Severance Pay under paragraph 12(c). 3 (b) If Employee voluntarily terminates his employment with the Company during the Term of Employment, then beginning on the date of such termination of employment, Employee shall not be entitled to any continuing salary payments, benefits or other payments whatsoever under this Agreement, except for eligibility for COBRA continuation coverage as governed by the Consolidated Omnibus Budget Reconciliation Act. (c) During the Term of Employment, if the Company terminates Employee's employment for any reason, including death, disability, or for cause, he shall receive severance pay as follows: (i) For the period commencing the date of execution of Employment Agreement to January 31, 2008: Employee shall receive severance pay equal to $1,654,840.00 representing 1.1 times his current annual compensation including sign-on bonus if his employment is terminated for any reason other than voluntary resignation during this period. (ii) For the period February 1, 2008 through June 30, 2008: Employee shall receive $1,311,440.00 representing 2.6 times his then current annual compensation excluding bonuses if his employment is terminated for any reason other than voluntary resignation during this period. (iii) For the period July 1, 2008 through January 31, 2009: Employee shall receive $419,660.00 representing 0.80 times his then current annual compensation excluding bonuses if his employment is terminated for any reason other than voluntary resignation during this period. (iv) After January 31, 2009, Employee shall no longer be eligible for any severance pay or severance benefits. The severance payments set forth in this Paragraph 12(c) shall be in lieu of the Normal Severance Pay and Enhanced Severance Pay otherwise provided in GAFMC's Severance Pay Plan for Full-Time Salaried Employees. Employee's receipt of severance pay as set forth in this Paragraph 12(c) shall be subject to Employee's execution (without revocation) of the Company's standard Separation Agreement and General Release and subject to GAFMC's Severance Pay Plan for Full-Time Salaried Employees in all other respects, including execution of a general release in the form provided by the Company. (d) The severance pay provisions set forth in this Paragraph 12 fully supersede any other agreements or understandings regarding severance pay and except as expressly set forth in this Agreement, Employee shall not be entitled to any other severance or post-termination pay. 13. General Release. In consideration for the payments, benefits, and other consideration provided for herein, Employee, on behalf of himself, his heirs, executors, administrators, successors and assigns, hereby forever releases and discharges GAFMC, ElkCorp, its and their respective parent companies, successors, assigns, subsidiaries, affiliates, directors, officers, shareholders, representatives, attorneys, insurers, agents and employees (hereinafter "Releasees") from any and all causes of action, claims, losses, damages, costs and/or expenses (including attorney's fees) and/or other 4 liabilities (collectively, "Liabilities"), known or unknown, asserted or unasserted, which Employee has or may have, from the beginning of time to the date of the execution of this Agreement, including, but not limited to, Liabilities arising under the laws, regulations, or ordinances of any and all countries, including the United States and any and all states or localities prohibiting discrimination in employment on the basis of sex, sexual orientation, race, age, religion, national origin, mental or physical disability, or any other form of unlawful discrimination, including but not limited to, Title VII of The Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Family and Medical Leave Act; the Americans with Disabilities Act; any accrued benefit under any other GAFMC employee welfare benefit plan as that term is defined by Section 3(1) of the Employment Retirement Income Security Act; any provision of the Constitution of the United States, the States of New Jersey and Texas, or any other state or country; any provision of any other law, common or statutory, of the United States, New Jersey, Texas or any other state or country, including New Jersey's Law Against Discrimination ("LAD") and New Jersey's Conscientious Employee Protection Act ("CEPA") and Texas' Labor Code and/or the Texas Human Rights Act; any contract of employment, expressed or implied; as well as any and all claims alleging wrongful termination, or any other tortious or wrongful conduct or omission, in any way relating to or arising out of Employee's hiring by GAFMC, his employment with GAFMC or his separation of employment. Excepted from this release is any claim or right which cannot be waived by law, including claims arising after the effective date of this Agreement. The Parties intend Employee's release as set forth in this Paragraph 13 to be general and comprehensive in nature and to release all claims and potential claims by Employee to the maximum extent permitted by law. 14. Confidentiality and Non-Competition. Nowak will sign the Company's Agreement Regarding Confidentiality and Competition under which, among other things, he agrees not to compete with the Company and its affiliates in the roofing business by accepting employment with or providing consulting services to any manufacturer that competes with the Company or any of its affiliates during the Term of Employment and for a two-year period commencing July 1, 2009 through June 30, 2011, in consideration of which the Company shall pay Nowak $180,000.00 at the rate of $7,500.00 per month. Nowak's execution of the Company's Agreement Regarding Confidentiality and Competition is a condition precedent to the effectiveness of this Employment Agreement. 15. Consulting Agreement. The Company agrees to enter a Consulting Agreement with Employee after the expiration of the Term of this Employment Agreement on the terms and conditions generally outlined herein: (i) From July 1, 2009 through June 30, 2010 (the "Consulting Term"), Employee would provide consulting services to Company, provided that both Employee and the Company would have the right to terminate the Consulting Term at any time, for any reason upon not less than 90 days prior written notice to the other party. (ii) During the Consulting Term, Employee would not be required to travel outside the city limits of Dallas, Texas without reasonable prior notice and Employee's prior consent, and would be available to provide consulting services including continuing to assist in integration issues, ensuring the smooth and orderly 5 transition on his duties and responsibilities to his successor, develop and mentor his successor, consult on other matters regarding the continued growth and development of the business. During the Consulting Term, Employee would be reimbursed for all reasonable business expenses incurred in connection with performing his consulting services. (iii) Company shall pay Employee a consulting fee equal to $20,000.00 per month (for which Company will issue an IRS Form 1099). (iv) The Company shall use its standard Consulting Agreement. 16. Entire Agreement. This Agreement, including all attached exhibits, contains the entire agreement of the parties with respect to the subject matter hereof and Employee has not relied upon any representations or statements not set forth herein. This Agreement fully supersedes any and all prior agreements or understandings, if any, except as expressly provided in this Agreement, pertaining to Employee's employment or termination thereof. No other promise or agreement shall be binding unless in writing and signed by the Parties hereto. 17. Assignment. This Agreement may be transferred or assigned by the Company without the prior written consent of the Employee, provided that any such assignment shall not release the Company from its obligations hereunder. The Employee acknowledges that his services are personal in nature and that this Agreement may not be transferred or assigned by Employee in whole or in part. 18. Caption/Headings. The caption headings in this Employment Agreement are for convenience and reference only, are not intended to be a part of this Employment Agreement and shall not be construed to define, modify, alter or describe the scope or intent of any of the terms, covenants, or conditions of this Employment Agreement. 19. Amendment Or Alteration; Governing Law; Severability. No amendment or alteration of the terms of this Agreement shall be valid unless made in writing and signed by both of the parties. This Agreement shall be governed by the internal laws of the State of New Jersey, without regard to such State's principles of conflicts of laws. The holding of any provision of this Agreement to be illegal, invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 6 20. Notices. All notices hereunder shall be in writing and shall be personally delivered or sent by reputable overnight courier, all costs prepaid, to the parties at the respective notice addresses identified below, or as such addresses may be changed in writing pursuant to this Paragraph 20. Notice Addresses: GAF Materials Corporation Richard A. Nowak 1361 Alps Road 310 Oak Trail Building 2 Lewisville, TX 75077 Wayne, NJ 07470 Attn: Robert Tafaro President and CEO 21. Disputes. Employee and the Company agree to make a diligent, good faith attempt to resolve any and all disputes that may arise over the terms of this Agreement or any other disputes that may arise between the Company and Employee relating to the Employee's hiring, employment and separation of employment, or events occurring thereafter relating to his employment. Unresolved disputes shall be subject to the Agreement to Arbitrate Disputes signed as a condition precedent to this Employment Agreement. Excepted from this Paragraph 21 are any disputes arising from a violation by Employee of his obligations pursuant to the Agreement Regarding Confidentiality and Competition or any other dispute for which the Company seeks a court injunction against Employee. IN WITNESS WHEREOF, the Parties have signed this Agreement on the dates set forth. WITNESSED: GAF Materials Corporation By: /Robert B. Tafaro/ - ------------------------------------ ------------------------- Name: Robert Tafaro Title: President and CEO Date: Date: August 13, 2007 ------------------------------- ------------------ /Deanna Kaye Orr/ /Richard A. Nowak/ - ------------------------------------ ------------------ Richard A. Nowak Date: August 9, 2007 Date: August 9, 2007 ------------------------------- ------------------ 7 EXHIBIT A AGREEMENT TO ARBITRATE DISPUTES I recognize that certain events may ultimately lead to my leaving GAF Materials Corporation, ElkCorp and/or its and their respective subsidiaries or affiliates (collectively the "Company") and, at that time, disputes may arise between the Company and me relating to my hiring, employment or separation of employment by the Company or events occurring thereafter relating to my employment. I understand and agree that by entering into this Agreement to Arbitrate Disputes ("Agreement"), I anticipate gaining the benefits of a speedy, simple, and impartial dispute resolution procedure. The mutual promises by the Company and me to arbitrate, rather than to litigate claims, and my employment or continued employment by the Company pursuant to the August 2007 Employment Agreement are consideration for this Agreement. CLAIMS COVERED BY THIS AGREEMENT - -------------------------------- The Company and I mutually agree to the resolution, by final and binding arbitration, of all claims relating to my employment by the Company that the Company may have against me, or that I may have against the Company and/or its shareholders, officers, directors, employees or agents, following the termination of my employment. Such claims include, without limitation, claims for wages or salary, severance or other compensation; claims for breach of any contract or covenant (express or implied); claims for violation of any whistle-blower protections, claims under New Jersey's Conscientious Employee Protection Act ("CEPA"); tort claims; claims for any type of discrimination (race, gender, sexual harassment, sexual orientation, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where any employee benefit or pension plan specifies a different procedure for resolving claims); and claims for violation of any federal statute (Age Discrimination in Employment Act, the Americans with Disabilities Act, Civil Rights Act of 1964, Civil Rights Act of 1991, Employee Retirement Income Security Act of 1974, Family Medical Leave Act of 1993, Older Worker Benefit Protection Act, Pregnancy Discrimination Act of 1978)), state, or other governmental law, statute, regulation, or ordinance, claims under New Jersey's Law Against Discrimination, Texas' Labor Code and/or the Texas Human Rights Act (collectively referred to as "Claims"); but excluding claims for worker's compensation, unemployment benefits, claims which are filed with any state and/or federal agencies, or lawsuits seeking requests for injunctive or equitable relief in connection with the enforcement of any agreements between the Company and me which seek to prohibit me from disclosing the Company's confidential or proprietary information and/or prohibit me from competing with the Company or to compel arbitration of the Claims. ARBITRATION PROCEDURES - ---------------------- Written notice of any Claims must be given no later than the applicable statute of limitations for the cause of action alleged. Written notice to the Company shall be sent to the Company's General Counsel in Wayne, New Jersey. Written notice to the Employee shall be sent to his last known address. 8 The Company and I agree that any arbitration shall be in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") in effect at the time of the hearing (a current copy of those rules is available through the Law Department). The arbitration shall be before one neutral arbitrator selected from the Regional Employment Dispute Resolution Roster. The arbitration shall take place in the city nearest to my last place of employment with the Company. All fees and expenses of the arbitrator shall be borne by the Company. The arbitrator shall determine my rights and obligations and those of the Company according to the applicable substantive laws. Notwithstanding the foregoing, in rendering the award, the arbitrator will have no authority to award punitive damages in excess of Twenty-Five Thousand ($25,000) Dollars unless such a limitation is prohibited by applicable law. The Company and I shall each bear the expenses of our own counsel, experts, witnesses, preparation, and presentation of proofs, unless otherwise awarded by the arbitrator; however, any such award shall not exceed Twenty-Five Thousand ($25,000) Dollars unless such a limitation is prohibited by applicable law. Judgment on the award rendered in arbitration may be entered in any court having jurisdiction. KNOWING AND VOLUNTARY WAIVER OF RIGHTS - -------------------------------------- BY SIGNING THIS AGREEMENT, I UNDERSTAND THAT CERTAIN EVENTS MAY LEAD TO MY LEAVING THE COMPANY AND THAT I AM WAIVING MY RIGHTS TO COMMENCE THEREAFTER A LAWSUIT IN ANY COURT REGARDING ANY CLAIMS WHICH I MAY HAVE AGAINST THE COMPANY AND/OR ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS RELATING TO MY EMPLOYMENT BY THE COMPANY. I HAVE THE RIGHT TO CONSULT AN ATTORNEY BEFORE SIGNING THIS AGREEMENT. ANY QUESTIONS REGARDING THIS AGREEMENT SHOULD BE DIRECTED TO THE COMPANY'S LAW DEPARTMENT. 9 GENERAL - ------- The provisions of this Agreement are severable, the invalidity or unenforceability of any provision shall not affect application of any other provision. When possible, consistent with the purpose of this Agreement, any invalid provision of this Agreement may be reformed, and as reformed, enforced. This Agreement can be revoked or modified only by written agreement signed by me and the Company. The construction, interpretation and performance of this Agreement shall be governed by the laws of the state where I am employed and any action to enforce any rights hereunder may only be commenced and prosecuted in a court of competent jurisdiction in that state. This Agreement supersedes all prior agreements dealing with any of the subject matter of this Agreement. /Richard A. Nowak/ /Robert B. Tafaro/ - -------------------------------- ------------------------------- Richard A. Nowak GAF Materials Corporation August 9, 2007 Robert Tafaro - ----------------------------------- ------------------------------- Date Print Name President and CEO ------------------------------- Title August 13, 2007 ------------------------------- Date 10 EXHIBIT B AGREEMENT REGARDING CONFIDENTIALITY AND COMPETITION In consideration of my employment pursuant to the August 2007 Employment Agreement and my access to and receipt of Confidential Information as described below, or such other good and valuable consideration by GAF Materials Corporation, ElkCorp, GAF-ELK Corporation and its and their respective subsidiaries and affiliates (collectively "GAFMC"), I agree to the terms and conditions in this Agreement. 1. Confidential Information. I will not, without GAFMC's prior written permission, directly or indirectly utilize for any purpose other than performance of my employment duties to GAFMC, or disclose to anyone outside of GAFMC, either during or after my employment with GAFMC, any information provided to or obtained by me in the course of my employment with GAFMC, trade secrets or other confidential information of GAFMC, or any information received by GAFMC in confidence from or about third parties, as long as such matters remain trade secrets or confidential. Trade secrets and other confidential information shall include any information or material which is not generally known to the public, and which (a) is generated or collected by or utilized in the operations of GAFMC and relates to the actual or anticipated business or research or development of GAFMC or GAFMC's actual or prospective vendors, customers or clients; or (b) is suggested by or results from any task assigned to me by GAFMC or work performed by me for or on behalf of GAFMC or any customer or client of GAFMC. Confidential information shall not be considered generally known to the public if revealed improperly to the public by me or others without GAFMC's express written consent and/or in violation of an obligation of confidentiality to GAFMC. Examples of confidential information include, but are not limited to, customer and supplier identification and contacts, business relationships, contract provisions, pricing, margins, business plans, marketing plans, financial data, business and customer strategies, techniques, technical know-how, formulae, research, development, technological and production information, processes, designs, architecture, prototypes, models, software, solutions, discussion guides, personal or performance information about employees, research and development, patent applications and plans or proposals related to the foregoing. The confidentiality obligations herein shall not prohibit me from divulging confidential information or trade secrets by order of court or agency of competent jurisdiction or as required by law; however, I shall promptly inform GAFMC of any such situations and shall take reasonable steps to prevent disclosure of confidential information or trade secrets until GAFMC has been informed of such required disclosure and has had a reasonable opportunity to seek a protective order. 2. Non-Competition. GAFMC does not intend to interfere with any former employee's employment opportunities unless there is a conflict with GAFMC's legitimate business interests. In order to help protect those interests, during the Term of Employment set forth in the Employment Agreement by and between me and GAFMC and for twenty-four (24) months (the "Restricted Period") after the expiration of such Term of Employment, I agree not to become engaged, directly or indirectly, as an employee, consultant, or otherwise for any Competitive Organization in any management, executive, sales and marketing, research and development or operations position. I may accept such an engagement with a Competitive Organization if: (i) it is diversified and has well-established, pre-existing, separate and distinct divisions, (ii) I am involved only in that 11 part of the business which is not a Competitive Organization, and (iii) prior to my accepting such an engagement, in any capacity, the Competitive Organization provides GAFMC with written assurances, satisfactory to GAFMC, that I will not, and the Competitive Organization will not cause me to, render services directly or indirectly in connection with any Competitive Product. The running of the Restricted Period shall be stopped or tolled for any period of time following the termination of my GAFMC employment during which I compete with GAFMC in violation of this paragraph 2. (ii) "Competitive Product" means: any product(s) or service(s) offered by GAFMC at the time my employment relationship terminates or with which I had substantial involvement at any time during the twenty-four (24) months immediately preceding my last day of employment by GAFMC; and (iii)"Competitive Organization" means: any person(s), organization(s),or entity(ies)which is/are a distributor, manufacturer or formulator of a Competitive Product. 3. Conduct Regarding GAFMC Employees. For twelve (12) months after termination, I will not, directly or indirectly, attempt to hire, engage the services of, or employ in any manner any person who is then an GAFMC executive, management, sales and marketing, operations, engineering, or research and development employee. 4. Assignment of Developments. I hereby assign to GAFMC my entire right, title and interest in any idea, formula, invention, discovery, design, drawing, process, method, technique, device, improvement, computer program and related documentation, technical and non-technical data, work of authorship and patent and patent applications (all hereinafter called "Developments"), which I may solely or jointly conceive, write or acquire in whole or in part during the period I am employed by GAFMC, and for six (6) months thereafter, which relate in any way to the actual or anticipated business or technology or research or development of GAFMC for which I had access or responsibility during my employment at GAFMC, or which are suggested by or result from any task assigned to me or work performed by me for or on behalf of GAFMC, whether or not such Developments are made, conceived, written or acquired during normal hours of work or using GAFMC's facilities, and whether or not such Developments are patentable, copyrightable or susceptible to other forms of protection. This assignment does not apply to any Development for which no equipment, supplies, facilities or trade secret, proprietary or confidential information of GAF was used, and which was developed entirely on my own time unless (a) the development relates (i) to the actual or anticipated business of GAFMC, for which I had access or responsibility during my employment at GAFMC, or (ii) to GAFMC's actual or demonstrably anticipated research or development, for which I had access or responsibility during my employment at GAFMC or (b) the Development results from any work performed by me for GAFMC. I agree all rights in any Developments created during my employment at GAFMC belong to GAFMC. 5. Remedies. Any breach or threatened breach of this Agreement will irreparably injure GAFMC, and money damages will not be an adequate remedy. Accordingly, GAFMC may obtain and enforce an injunction prohibiting me from violating or threatening to violate this Agreement. This is not GAFMC's only remedy, it is in addition to any other remedy available. 12 6. Choice of Law and Forum: Submission to Jurisdiction. The construction, interpretation and performance of this Agreement shall be governed by, and in accordance with, the laws of the State of New Jersey, and any action or proceeding arising from or related to this Agreement shall be commenced, prosecuted and maintained only in the State of New Jersey. I hereby consent to the personal jurisdiction of the state and federal courts located in New Jersey with respect to all actions and proceedings of the type described in the immediately preceding sentence. 7. Advice. I have the right to consult an attorney before signing this Agreement. 8. General. Each of the provisions of this Agreement shall be binding on me after my employment terminates, regardless of the reason(s) for termination. This Agreement supersedes all prior agreements dealing with any of the subject matter of this Agreement and can be revoked or modified only by a written agreement signed by me and GAFMC. The provisions of this agreement are severable, and the invalidity or unenforceability of any provision shall not affect application of any other provision. When possible, consistent with the purpose of this Agreement, any invalid provision of this Agreement may be reformed, and as reformed, enforced. GAFMC may assign its rights under this Agreement. /Richard A. Nowak/ /Robert B. Tafaro/ - -------------------------------- ------------------------------- Richard A. Nowak GAF Materials Corporation August 9, 2007 By: Robert Tafaro - ----------------------------------- --------------------------- Date Title: President and CEO ------------------------ August 13, 2007 ------------------------------- Date 13 EX-10 6 mm08-1407_10qe102.txt EX.10.2 EXHIBIT 10.2 ------------ EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made as of August 9, 2007, by and between GAF Materials Corporation (the "Company") and Matti Kiik (the "Employee"). W I T N E S S E T H: WHEREAS, Employee and the Company desire to enter into this Agreement, on the terms and conditions set forth below, to provide for the employment of Employee for the term herein specified; and WHEREAS, Employee has been employed by the Company since the consummation of its merger with ElkCorp; and WHEREAS, Employee was a key employee while employed by ElkCorp and Company, as the new employer, desires to retain Employee as a key employee under the terms and conditions set forth in this Agreement; and WHEREAS, the Company views the continued employment of Employee for the duration contemplated herein to be an essential component of the future success of the merged business; and WHEREAS, the Company, through it's merger with ElkCorp, is a successor to Elcor Corporation with respect to the June 1, 2001 Executive Officer Change in Control Agreement ("CIC Agreement") entered into by and between Elcor Corporation and Employee; and WHEREAS, the Company and Employee agree that this Employment Agreement supersedes and replaces the terms and conditions of the CIC Agreement except as expressly stated in this Agreement, and the CIC Agreement shall be null and void; and WHEREAS, this Employment Agreement provides for a term of employment that extends beyond the term of the CIC Agreement; and WHEREAS, in exchange for Employee's execution of this Agreement, Company shall provide Employee with continued employment under the terms and conditions set forth in this Agreement and shall provide Employee with access to confidential and proprietary Company information; and WHEREAS, Employee's execution of the Agreement Regarding Confidentiality and Competition attached as Exhibit A and the Agreement to Arbitrate Employment Disputes attached as Exhibit B is a condition precedent to the effectiveness of this Agreement; and NOW, THEREFORE, in consideration of the above-stated premises, the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. CIC Agreement. The Company and Employee agree that the CIC Agreement shall be null and void except as expressly set forth in this Employment Agreement and that the Employment Agreement fully supersedes and 1 replaces the CIC Agreement except as expressly set forth herein. Further, the Company agrees to indemnify and hold harmless Employee from and against any claim, cause of action, liability or other damage arising out of or relating to any claim by the Internal Revenue Service that this Employment Agreement, including the indemnification obligation set forth in this Paragraph 1, results in payments or distributions to Employee by the Company to or for the benefit of Employee that would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties incurred by Employee with respect to such excise tax. 2. Employment. During the term of this Agreement, the Company shall employ Employee and Employee agrees to be employed by the Company as its Senior Vice President - Chief Technology Officer, subject to the terms and conditions set forth in this Agreement. 3. Term Of Agreement. The term of this Agreement shall commence on the date Employee executes this Agreement and shall continue until the close of business on June 30, 2010, unless earlier terminated as provided in Paragraph 11 (the "Term of Employment"). 4. Duties. During the Term of Employment, Employee shall report to the President and Chief Executive Officer of the Company. Employee shall be based in Dallas, Texas and shall perform his duties primarily in Dallas, Texas and at such other locations, for travel and meetings, as may be reasonably requested by the Company in the normal course of business. The Employee shall fulfill all the reasonable management and leadership duties of the senior managerial position of Senior Vice President - Chief Technology Officer and shall be responsible generally for: (i) developing, driving, and overseeing the growth, integration and strategic initiatives in the technology area for the residential roofing business, including achievement of objectives pursuant to the Synergy Plan; (ii) providing strategic advice to senior management regarding the foregoing; (iii) contributing to the strategic direction of the residential roofing business by identifying the role of specific technologies to drive increased competitiveness, developing the talent of residential roofing research and development managerial personnel; and (iv) performing other duties as may be requested of him which befit an individual of Employee's position, skills, credentials, and experience. The Employee agrees to devote all his business energy, attention, skill and working time as reasonably expected for an employee of his personnel grade and level to performing his duties and to promoting the Company's interests and he shall at all times perform his duties and obligations loyally, conscientiously and to the best of his abilities in a professional and workmanlike manner and according to the highest standards of the industry. Should Richard Nowak's employment cease during Employee's Term of Employment, Employee shall report to the CEO/President for the balance of Employee's Term of Employment. 5. Compensation. As compensation for the services rendered by the Employee during the Term of Employment, the Company agrees to pay to the Employee, and the Employee agrees to accept, a fixed base salary of $275,000.00 per annum, payable in accordance with the Company's normal payroll practices. On July 1 of each year during the Term, Employee shall receive a salary increase equal to 3% of his annual base salary at that time. 2 6. Sign-On Bonus: The Company shall pay Employee a sign on bonus equal to $300,000.00 (subject to normal payroll practices), payable 30 days after his execution of this Employment Agreement. 7. Interim Stay Bonuses: On the first payroll period after June 30, 2008, Employee shall receive a one-time payment of $250,000.00 (subject to normal payroll practices) in exchange for remaining an employee through said date. On the first payroll period after June 30, 2009, Employee will be entitled to an additional one-time payment of $250,000.00, (subject to normal payroll practices) in exchange for remaining an employee through June 30, 2009. On the first payroll period after June 30, 2010, Employee will be entitled to an additional one-time payment of $100,000.00, (subject to normal payroll practices) in exchange for remaining an employee through June 30, 2010. 8. Discretionary Bonus. Employee shall be eligible for a discretionary bonus payable on or about June 30, 2008 in the amount of $250,000.00, provided all objectives set forth in the Synergy Plan are achieved. Employee shall not be eligible for any other bonuses (e.g., EIC Bonus) for performance during the period between now and June 30, 2008, except as expressly set forth in this Agreement. 9. Long Term Incentive Units. Upon Employee's execution of this Agreement, the Company shall grant Employee 3,000 long term incentive units pursuant to the 2001 BMCA Long Term Incentive Plan, as amended. 25% of these 3,000 units shall vest on June 30, 2008, 25% of such 3,000 units will vest on June 30, 2009, and the remaining 50% shall vest on June 30, 2010. Except as expressly set forth in this Paragraph 9, Employee's rights and obligations regarding these units shall be governed by the applicable Long Term Incentive Plan. 10. Benefits. Employee's benefits shall be the same benefits as would otherwise be required under the CIC Agreement. 11. Termination Of Employment. The Employee's employment pursuant to this Agreement shall automatically be terminated upon the "Death" or "Disability" (as defined in the CIC Agreement) of the Employee and shall be immediately terminated at any time by the Company for "Cause" (as defined in the CIC Agreement). If Employee's employment is terminated as provided in this Paragraph 11, the Company shall have no further liability or obligation to Employee under this Agreement except as expressly stated in this Employment Agreement. 12. Severance Pay. (a) During the Term of Employment, if the Company terminates Employee's employment for reasons other than those set forth in Paragraph 11 of this Agreement, the Company shall continue to pay Employee his base salary (as set forth in Paragraph 5) for the period remaining in the Term of Employment. Employee shall also be entitled to payment of Severance Pay under paragraph 12(c). During the Term of Employment, if the Company terminates Employee's employment for the reasons set forth in Paragraph 11, then the Company shall have no obligation to continue to pay Employee his base salary (as set forth in Paragraph 5) or other payments, benefits or consideration under this Employment 3 Agreement for the period remaining in the Term of Employment, but Employee shall be entitled to payment of Severance Pay under paragraph 12(c). (b) If Employee voluntarily terminates his employment with the Company during the Term of Employment, then beginning on the date of such termination of employment, Employee shall not be entitled to any continuing salary payments, benefits or other payments whatsoever under this Agreement, except for eligibility for COBRA continuation coverage as governed by the Consolidated Omnibus Budget Reconciliation Act. (c) During the Term of Employment, if the Company terminates Employee's employment for any reason, including death, disability, or for cause, he shall receive severance pay as follows: (i) For the period commencing the date of execution of Employment Agreement to June 30, 2008: Employee shall receive severance pay equal to $550,000.00 representing 2 times his current annual base compensation excluding bonuses if his employment is terminated for any reason other than voluntary resignation during this period. (ii) For the period July 1, 2008 through June 30, 2009: Employee shall receive $283,250.00 representing 1 times his then current annual compensation excluding bonuses if his employment is terminated for any reason other than voluntary resignation during this period. (iii) After July 1, 2009, Employee shall no longer be eligible for any severance pay or severance benefits. The severance payments set forth in this Paragraph 12(c) shall be in lieu of the Normal Severance Pay and Enhanced Severance Pay otherwise provided in GAFMC's Severance Pay Plan for Full-Time Salaried Employees. Employee's receipt of severance pay as set forth in this Paragraph 12(c) shall be subject to Employee's execution (without revocation) of the Company's standard Separation Agreement and General Release and subject to GAFMC's Severance Pay Plan for Full-Time Salaried Employees in all other respects, including execution of a general release in the form provided by the Company. (d) The severance pay provisions set forth in this Paragraph 12 fully supersede any other agreements or understandings regarding severance pay and except as expressly set forth in this Agreement, Employee shall not be entitled to any other severance or post-termination pay. 13. General Release. In consideration for the payments, benefits, and other consideration provided for herein, Employee, on behalf of himself, his heirs, executors, administrators, successors and assigns, hereby forever releases and discharges GAFMC, ElkCorp, its and their respective parent companies, successors, assigns, subsidiaries, affiliates, directors, officers, shareholders, representatives, attorneys, insurers, agents and employees (hereinafter "Releasees") from any and all causes of action, claims, losses, damages, costs and/or expenses (including attorney's fees) and/or other liabilities (collectively, "Liabilities"), known or unknown, asserted or unasserted, which Employee has or may have, from the beginning of time to the 4 date of the execution of this Agreement, including, but not limited to, Liabilities arising under the laws, regulations, or ordinances of any and all countries, including the United States and any and all states or localities prohibiting discrimination in employment on the basis of sex, sexual orientation, race, age, religion, national origin, mental or physical disability, or any other form of unlawful discrimination, including but not limited to, Title VII of The Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Family and Medical Leave Act; the Americans with Disabilities Act; any accrued benefit under any other GAFMC employee welfare benefit plan as that term is defined by Section 3(1) of the Employment Retirement Income Security Act; any provision of the Constitution of the United States, the States of New Jersey and Texas, or any other state or country; any provision of any other law, common or statutory, of the United States, New Jersey, Texas or any other state or country, including New Jersey's Law Against Discrimination ("LAD") and New Jersey's Conscientious Employee Protection Act ("CEPA") and Texas' Labor Code and/or the Texas Human Rights Act; any contract of employment, expressed or implied; as well as any and all claims alleging wrongful termination, or any other tortious or wrongful conduct or omission, in any way relating to or arising out of Employee's hiring by GAFMC, his employment with GAFMC or his separation of employment. Excepted from this release is any claim or right which cannot be waived by law, including claims arising after the effective date of this Agreement. The Parties intend Employee's release as set forth in this Paragraph 13 to be general and comprehensive in nature and to release all claims and potential claims by Employee to the maximum extent permitted by law. 14. Confidentiality and Non-Competition. Employee will sign the Company's Agreement Regarding Confidentiality and Competition under which, among other things, he agrees not to compete with the Company and its affiliates in the roofing business by accepting employment with or providing consulting services to any manufacturer that competes with the Company or any of its affiliates during the Term of Employment and for a two-year period commencing July 1, 2010 through June 30, 2012, in consideration of which the Company shall pay Employee $100,000.00 at the rate of $4,166.67 per month. Employee's execution of the Company's Agreement Regarding Confidentiality and Competition is a condition precedent to the effectiveness of this Employment Agreement. 15. Consulting Agreement. The Company agrees to enter a Consulting Agreement with Employee after the expiration of the Term of this Employment Agreement on the terms and conditions generally outlined herein: (i) From July 1, 2010 through June 30, 2012 (the "Consulting Term"), Employee would provide consulting services to Company, provided that both Employee and the Company would have the right to terminate the Consulting Term at any time, for any reason upon not less than 90 days prior written notice to the other party. (ii) During the Consulting Term, Employee would not be required to travel outside the city limits of Dallas, Texas without reasonable prior notice and Employee's prior consent, and would be available to provide consulting services including continuing to assist in integration issues, ensuring the smooth and orderly transition on his duties and responsibilities to his successor, develop and mentor his successor, consult on other matters regarding the continued growth and 5 development of the business. During the Consulting Term, Employee would be reimbursed for all reasonable business expenses incurred in connection with performing his consulting services. (iii) Company shall pay Employee a consulting fee equal to $8,333.33 per month (for which Company will issue an IRS Form 1099). (iv) The Company shall use its standard Consulting Agreement. 16. Entire Agreement. This Agreement, including all attached exhibits, contains the entire agreement of the parties with respect to the subject matter hereof and Employee has not relied upon any representations or statements not set forth herein. This Agreement fully supersedes any and all prior agreements or understandings, if any, except as expressly provided in this Agreement, pertaining to Employee's employment or termination thereof. No other promise or agreement shall be binding unless in writing and signed by the Parties hereto. 17. Assignment. This Agreement may be transferred or assigned by the Company without the prior written consent of the Employee, provided that any such assignment shall not release the Company from its obligations hereunder. The Employee acknowledges that his services are personal in nature and that this Agreement may not be transferred or assigned by Employee in whole or in part. 18. Caption/Headings. The caption headings in this Employment Agreement are for convenience and reference only, are not intended to be a part of this Employment Agreement and shall not be construed to define, modify, alter or describe the scope or intent of any of the terms, covenants, or conditions of this Employment Agreement. 19. Amendment Or Alteration; Governing Law; Severability. No amendment or alteration of the terms of this Agreement shall be valid unless made in writing and signed by both of the parties. This Agreement shall be governed by the internal laws of the State of New Jersey, without regard to such State's principles of conflicts of laws. The holding of any provision of this Agreement to be illegal, invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect. 6 20. Notices. All notices hereunder shall be in writing and shall be personally delivered or sent by reputable overnight courier, all costs prepaid, to the parties at the respective notice addresses identified below, or as such addresses may be changed in writing pursuant to this Paragraph 20. Notice Addresses: GAF Materials Corporation Matti Kiik 1361 Alps Road 2500 Springwood Lane Building 2 Richardson, TX 75082 Wayne, NJ 07470 Attn: Robert Tafaro President and CEO 21. Disputes. Employee and the Company agree to make a diligent, good faith attempt to resolve any and all disputes that may arise over the terms of this Agreement or any other disputes that may arise between the Company and Employee relating to the Employee's hiring, employment and separation of employment, or events occurring thereafter relating to his employment. Unresolved disputes shall be subject to the Agreement to Arbitrate Disputes signed as a condition precedent to this Employment Agreement. Excepted from this Paragraph 21 are any disputes arising from a violation by Employee of his obligations pursuant to the Agreement Regarding Confidentiality and Competition or any other dispute for which the Company seeks a court injunction against Employee. IN WITNESS WHEREOF, the Parties have signed this Agreement on the dates set forth. WITNESSED: GAF Materials Corporation By: /Robert B. Tafaro/ - ------------------------------------ ------------------------- Name: Robert Tafaro Title: President and CEO Date: Date: August 13, 2007 ------------------------------- ------------------ WITNESSED: /Deanna Kaye Orr/ /Matti Kiik/ - ------------------------- ------------------------- Matti Kiik Date: August 9, 2007 Date: August 9, 2007 ------------------------------- ------------------ 7 EXHIBIT A AGREEMENT TO ARBITRATE DISPUTES I recognize that certain events may ultimately lead to my leaving GAF Materials Corporation, ElkCorp and/or its and their respective subsidiaries or affiliates (collectively the "Company") and, at that time, disputes may arise between the Company and me relating to my hiring, employment or separation of employment by the Company or events occurring thereafter relating to my employment. I understand and agree that by entering into this Agreement to Arbitrate Disputes ("Agreement"), I anticipate gaining the benefits of a speedy, simple, and impartial dispute resolution procedure. The mutual promises by the Company and me to arbitrate, rather than to litigate claims, and my employment or continued employment by the Company pursuant to the August 2007 Employment Agreement are consideration for this Agreement. CLAIMS COVERED BY THIS AGREEMENT - -------------------------------- The Company and I mutually agree to the resolution, by final and binding arbitration, of all claims relating to my employment by the Company that the Company may have against me, or that I may have against the Company and/or its shareholders, officers, directors, employees or agents, following the termination of my employment. Such claims include, without limitation, claims for wages or salary, severance or other compensation; claims for breach of any contract or covenant (express or implied); claims for violation of any whistle-blower protections, claims under New Jersey's Conscientious Employee Protection Act ("CEPA"); tort claims; claims for any type of discrimination (race, gender, sexual harassment, sexual orientation, religion, national origin, age, marital status, or medical condition, handicap or disability); claims for benefits (except where any employee benefit or pension plan specifies a different procedure for resolving claims); and claims for violation of any federal statute (Age Discrimination in Employment Act, the Americans with Disabilities Act, Civil Rights Act of 1964, Civil Rights Act of 1991, Employee Retirement Income Security Act of 1974, Family Medical Leave Act of 1993, Older Worker Benefit Protection Act, Pregnancy Discrimination Act of 1978)), state, or other governmental law, statute, regulation, or ordinance, claims under New Jersey's Law Against Discrimination, Texas' Labor Code and/or the Texas Human Rights Act (collectively referred to as "Claims"); but excluding claims for worker's compensation, unemployment benefits, claims which are filed with any state and/or federal agencies, or lawsuits seeking requests for injunctive or equitable relief in connection with the enforcement of any agreements between the Company and me which seek to prohibit me from disclosing the Company's confidential or proprietary information and/or prohibit me from competing with the Company or to compel arbitration of the Claims. ARBITRATION PROCEDURES - ---------------------- Written notice of any Claims must be given no later than the applicable statute of limitations for the cause of action alleged. Written notice to the Company 8 shall be sent to the Company's General Counsel in Wayne, New Jersey. Written notice to the Employee shall be sent to his last known address. The Company and I agree that any arbitration shall be in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") in effect at the time of the hearing (a current copy of those rules is available through the Law Department). The arbitration shall be before one neutral arbitrator selected from the Regional Employment Dispute Resolution Roster. The arbitration shall take place in the city nearest to my last place of employment with the Company. All fees and expenses of the arbitrator shall be borne by the Company. The arbitrator shall determine my rights and obligations and those of the Company according to the applicable substantive laws. Notwithstanding the foregoing, in rendering the award, the arbitrator will have no authority to award punitive damages in excess of Twenty-Five Thousand ($25,000) Dollars unless such a limitation is prohibited by applicable law. The Company and I shall each bear the expenses of our own counsel, experts, witnesses, preparation, and presentation of proofs, unless otherwise awarded by the arbitrator; however, any such award shall not exceed Twenty-Five Thousand ($25,000) Dollars unless such a limitation is prohibited by applicable law. Judgment on the award rendered in arbitration may be entered in any court having jurisdiction. KNOWING AND VOLUNTARY WAIVER OF RIGHTS - -------------------------------------- BY SIGNING THIS AGREEMENT, I UNDERSTAND THAT CERTAIN EVENTS MAY LEAD TO MY LEAVING THE COMPANY AND THAT I AM WAIVING MY RIGHTS TO COMMENCE THEREAFTER A LAWSUIT IN ANY COURT REGARDING ANY CLAIMS WHICH I MAY HAVE AGAINST THE COMPANY AND/OR ITS SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS RELATING TO MY EMPLOYMENT BY THE COMPANY. I HAVE THE RIGHT TO CONSULT AN ATTORNEY BEFORE SIGNING THIS AGREEMENT. ANY QUESTIONS REGARDING THIS AGREEMENT SHOULD BE DIRECTED TO THE COMPANY'S LAW DEPARTMENT. 9 GENERAL - ------- The provisions of this Agreement are severable, the invalidity or unenforceability of any provision shall not affect application of any other provision. When possible, consistent with the purpose of this Agreement, any invalid provision of this Agreement may be reformed, and as reformed, enforced. This Agreement can be revoked or modified only by written agreement signed by me and the Company. The construction, interpretation and performance of this Agreement shall be governed by the laws of the state where I am employed and any action to enforce any rights hereunder may only be commenced and prosecuted in a court of competent jurisdiction in that state. This Agreement supersedes all prior agreements dealing with any of the subject matter of this Agreement. /Matti Kiik/ /Robert B. Tafaro/ - -------------------------------- ------------------------------- Matti Kiik GAF Materials Corporation August 9, 2007 Robert Tafaro - ----------------------------------- ------------------------------- Date Print Name President and CEO ------------------------------- Title August 13, 2007 ------------------------------- Date 10 EXHIBIT B AGREEMENT REGARDING CONFIDENTIALITY AND COMPETITION In consideration of my employment pursuant to the August 2007 Employment Agreement and my access to and receipt of Confidential Information as described below, or such other good and valuable consideration by GAF Materials Corporation, ElkCorp, GAF-ELK Corporation and its and their respective subsidiaries and affiliates (collectively "GAFMC"), I agree to the terms and conditions in this Agreement. 1. Confidential Information. I will not, without GAFMC's prior written permission, directly or indirectly utilize for any purpose other than performance of my employment duties to GAFMC, or disclose to anyone outside of GAFMC, either during or after my employment with GAFMC, any information provided to or obtained by me in the course of my employment with GAFMC, trade secrets or other confidential information of GAFMC, or any information received by GAFMC in confidence from or about third parties, as long as such matters remain trade secrets or confidential. Trade secrets and other confidential information shall include any information or material which is not generally known to the public, and which (a) is generated or collected by or utilized in the operations of GAFMC and relates to the actual or anticipated business or research or development of GAFMC or GAFMC's actual or prospective vendors, customers or clients; or (b) is suggested by or results from any task assigned to me by GAFMC or work performed by me for or on behalf of GAFMC or any customer or client of GAFMC. Confidential information shall not be considered generally known to the public if revealed improperly to the public by me or others without GAFMC's express written consent and/or in violation of an obligation of confidentiality to GAFMC. Examples of confidential information include, but are not limited to, customer and supplier identification and contacts, business relationships, contract provisions, pricing, margins, business plans, marketing plans, financial data, business and customer strategies, techniques, technical know-how, formulae, research, development, technological and production information, processes, designs, architecture, prototypes, models, software, solutions, discussion guides, personal or performance information about employees, research and development, patent applications and plans or proposals related to the foregoing. The confidentiality obligations herein shall not prohibit me from divulging confidential information or trade secrets by order of court or agency of competent jurisdiction or as required by law; however, I shall promptly inform GAFMC of any such situations and shall take reasonable steps to prevent disclosure of confidential information or trade secrets until GAFMC has been informed of such required disclosure and has had a reasonable opportunity to seek a protective order. 2. Non-Competition. GAFMC does not intend to interfere with any former employee's employment opportunities unless there is a conflict with GAFMC's legitimate business interests. In order to help protect those interests, during the Term of Employment set forth in the Employment Agreement by and between me and GAFMC and for twenty-four (24) months (the "Restricted Period") after the expiration of such Term of Employment, I agree not to become engaged, directly or indirectly, as an employee, consultant, or otherwise for any Competitive Organization in any management, executive, sales and marketing, research and development or operations position. I may accept such an engagement with a Competitive Organization if: (i) it is diversified and has well-established, pre-existing, separate and distinct divisions, (ii) I am involved only in that 11 part of the business which is not a Competitive Organization, and (iii) prior to my accepting such an engagement, in any capacity, the Competitive Organization provides GAFMC with written assurances, satisfactory to GAFMC, that I will not, and the Competitive Organization will not cause me to, render services directly or indirectly in connection with any Competitive Product. The running of the Restricted Period shall be stopped or tolled for any period of time following the termination of my GAFMC employment during which I compete with GAFMC in violation of this paragraph 2. (ii) "Competitive Product" means: any product(s) or service(s) offered by GAFMC at the time my employment relationship terminates or with which I had substantial involvement at any time during the twenty-four (24) months immediately preceding my last day of employment by GAFMC; and (iii)"Competitive Organization" means: any person(s), organization(s),or entity(ies)which is/are a distributor, manufacturer or formulator of a Competitive Product. 3. Conduct Regarding GAFMC Employees. For twelve (12) months after termination, I will not, directly or indirectly, attempt to hire, engage the services of, or employ in any manner any person who is then an GAFMC executive, management, sales and marketing, operations, engineering, or research and development employee. 4. Assignment of Developments. I hereby assign to GAFMC my entire right, title and interest in any idea, formula, invention, discovery, design, drawing, process, method, technique, device, improvement, computer program and related documentation, technical and non-technical data, work of authorship and patent and patent applications (all hereinafter called "Developments"), which I may solely or jointly conceive, write or acquire in whole or in part during the period I am employed by GAFMC, and for six (6) months thereafter, which relate in any way to the actual or anticipated business or technology or research or development of GAFMC for which I had access or responsibility during my employment at GAFMC, or which are suggested by or result from any task assigned to me or work performed by me for or on behalf of GAFMC, whether or not such Developments are made, conceived, written or acquired during normal hours of work or using GAFMC's facilities, and whether or not such Developments are patentable, copyrightable or susceptible to other forms of protection. This assignment does not apply to any Development for which no equipment, supplies, facilities or trade secret, proprietary or confidential information of GAF was used, and which was developed entirely on my own time unless (a) the development relates (i) to the actual or anticipated business of GAFMC, for which I had access or responsibility during my employment at GAFMC, or (ii) to GAFMC's actual or demonstrably anticipated research or development, for which I had access or responsibility during my employment at GAFMC or (b) the Development results from any work performed by me for GAFMC. I agree all rights in any Developments created during my employment at GAFMC belong to GAFMC. 5. Remedies. Any breach or threatened breach of this Agreement will irreparably injure GAFMC, and money damages will not be an adequate remedy. Accordingly, GAFMC may obtain and enforce an injunction prohibiting me from violating or threatening to violate this Agreement. This is not GAFMC's only remedy, it is in addition to any other remedy available. 12 6. Choice of Law and Forum: Submission to Jurisdiction. The construction, interpretation and performance of this Agreement shall be governed by, and in accordance with, the laws of the State of New Jersey, and any action or proceeding arising from or related to this Agreement shall be commenced, prosecuted and maintained only in the State of New Jersey. I hereby consent to the personal jurisdiction of the state and federal courts located in New Jersey with respect to all actions and proceedings of the type described in the immediately preceding sentence. 7. Advice. I have the right to consult an attorney before signing this Agreement. 8. General. Each of the provisions of this Agreement shall be binding on me after my employment terminates, regardless of the reason(s) for termination. This Agreement supersedes all prior agreements dealing with any of the subject matter of this Agreement and can be revoked or modified only by a written agreement signed by me and GAFMC. The provisions of this agreement are severable, and the invalidity or unenforceability of any provision shall not affect application of any other provision. When possible, consistent with the purpose of this Agreement, any invalid provision of this Agreement may be reformed, and as reformed, enforced. GAFMC may assign its rights under this Agreement. /Matti Kiik/ /Robert B. Tafaro/ - -------------------------------- ------------------------------ Matti Kiik GAF Materials Corporation August 9, 2007 By: Robert Tafaro - ----------------------------- --------------------------- Date President and CEO ------------------------------ Title: August 13, 2007 ------------------------------ Date 13 -----END PRIVACY-ENHANCED MESSAGE-----