**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(****MarkOne)**

 

| **x**                                                      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                       |
| **For The Quarterly Period Ended****October 4, 2009** |
|                                                       |
| **OR**                                                     |
|                                                       |
| **o**                                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**Commission File Number****33-81808**

 

**BUILDINGMATERIALS 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)

 

SeeTable of Additional Registrants Below.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x   No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  o   No  o

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large  accelerated filer  ̈                                        |   | Accelerated  filer  ̈         |
|------------------------------------------------------------------------|--------|-----------------------------------|
| Non-accelerated  filer x(Do not check if a smaller reporting  company) |   | Smaller  reporting company  ̈ |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o  No  x

 

Asof November 18, 2009, 1,015,010 shares of Class A Common Stock, $.001par value of the registrant were outstanding. There is no trading market for the common stock of the registrant.  As of November 18, 2009, the additionalregistrant had the number of shares outstanding which is shown on the tablebelow.  There is no trading market forthe common stock of the additional registrant. As of November 18, 2009, no shares of the registrant or theadditional registrant were held by non-affiliates.

 

 

 

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### **ADDITIONAL REGISTRANTS**

 
| **Exact name of registrant as  specified in its charter** | ** ** | **State or other  jurisdiction of  incorporation or organization** | ** ** | **No. of Shares  Outstanding** | ** ** | **Commission  File No./I.R.S.  Employer Identification No.** | ** ** | **Address, including zip code and  telephone number, including area  code, of registrant’s principal  executive offices** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Building  Materials  Manufacturing Corporation                                               |       | Delaware                                                                                    |       | 10                                       |       | 333-69749-01/  22-3626208                                                   |       | 1361 Alps Road  Wayne, NJ 07470  (973) 628-3000                                                                                                                                       |

 

2

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**Part I- FINANCIAL INFORMATION**

**Item1 - FINANCIAL STATEMENTS**

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**CONSOLIDATEDSTATEMENTS OF INCOME (Unaudited)**

**(Dollars in Thousands)**

 
| ** **                                            | ** ** | **Third Quarter Ended** | ** **    | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|---------------|---------------------------------|------------|
| ** **                                            | ** ** | **Oct. 4,**                  | ** **    | **Sept. 28,**                   | ** ** | **Oct. 4,** | ** ** | **Sept. 28,** | ** ** |
| ** **                                            | ** ** | **2009**                          | ** **    | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                  |       |                              |          |                            |       |   |   |   |   |
| Net  sales                                            |       | $                                 |  792,383 |                            | $          |  852,826 |   | $ |  2,149,477 |   | $ |  2,160,181 |   |
| Costs  and expenses:                                  |       |                              |          |                            |       |   |   |   |   |
|                                                  |       |                              |          |                            |       |   |   |   |   |
| Cost  of products sold                                |       | 513,971                           |          | 602,459                         |       | 1,385,442 |   | 1,543,252 |   |
| Selling,  general and administrative                  |       | 100,417                           |          | 144,617                         |       | 297,594 |   | 376,116 |   |
| Amortization  of intangible assets                    |       | 2,828                             |          | 2,846                           |       | 8,521 |   | 8,539 |   |
| Restructuring  and other expenses                     |       | 5,930                             |          | 6,606                           |       | 24,244 |   | 33,794 |   |
| Other  expense, net                                   |       | 2,262                             |          | 1,758                           |       | 3,017 |   | 3,166 |   |
| Total  costs and expenses, net                        |       | 625,408                           |          | 758,286                         |       | 1,718,818 |   | 1,964,867 |   |
| Income  before interest expense and income taxes |       | 166,975                           |          | 94,540                          |       | 430,659 |   | 195,314 |   |
| Interest  expense                                     |       | (36,766                           | )             | (39,541                         | )          | (108,958 | ) | (119,404 | ) |
| Income  before income taxes                           |       | 130,209                           |          | 54,999                          |       | 321,701 |   | 75,910 |   |
| Income  tax expense                                   |       | (46,602                           | )             | (20,326                         | )          | (116,038 | ) | (28,481 | ) |
| Net  income                                           |       | $                                 |  83,607  |                            | $          |  34,673 |   | $ |  205,663 |   | $ |  47,429 |   |

 

The accompanyingNotes to Consolidated Financial Statements are an integral part of thesestatements.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands, except per share amounts)**

 
| ** **                                                                                                                               | ** ** | **Oct. 4,** | ** **      | ** **            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-----------------|-----------------------|------------|
| ** **                                                                                                                               | ** ** | **2009**         | ** **      | **December 31,** | ** ** |
| ** **                                                                                                                               | ** ** | **(Unaudited)**  | ** **      | **2008**              | ** ** |
| **ASSETS**                                                                                                                               | ** ** | ** **       | ** **      | ** **            | ** ** |
| Current  Assets:                                                                                                                         |       |             |            |                  |       |
| Cash  and cash equivalents                                                                                                               |       | $                |  193,691   |                  | $          |  37,037 |   |
| Accounts  receivable, trade, net                                                                                                         |       | 488,910          |            | 199,233               |       |
| Accounts  receivable, other                                                                                                              |       | 10,444           |            | 10,897                |       |
| Inventories,  net                                                                                                                        |       | 139,997          |            | 348,449               |       |
| Deferred  income tax assets                                                                                                              |       | 69,320           |            | 39,324                |       |
| Other  current assets                                                                                                                    |       | 13,612           |            | 17,072                |       |
| Total  Current Assets                                                                                                                    |       | 915,974          |            | 652,012               |       |
| Property,  plant and equipment, net                                                                                                      |       | 633,563          |            | 655,269               |       |
| Goodwill                                                                                                                                 |       | 654,840          |            | 653,644               |       |
| Intangible  assets, net                                                                                                                  |       | 188,063          |            | 196,250               |       |
| Income  tax receivable from parent corporation                                                                                           |       | —           |            | 8,400                 |       |
| Other  noncurrent assets                                                                                                                 |       | 110,988          |            | 114,739               |       |
| Total  Assets                                                                                                                            |       | $                |  2,503,428 |                  | $          |  2,280,314 |   |
|                                                                                                                                     |       |             |            |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                  |       |             |            |                  |       |
| Current  Liabilities:                                                                                                                    |       |             |            |                  |       |
| Current  maturities of long-term debt                                                                                                    |       | $                |  20,339    |                  | $          |  20,596 |   |
| Accounts  payable                                                                                                                        |       | 114,687          |            | 156,030               |       |
| Payable  to related parties                                                                                                              |       | 26,979           |            | 21,153                |       |
| Loans  payable to parent corporation                                                                                                     |       | 52,840           |            | 52,840                |       |
| Accrued  liabilities                                                                                                                     |       | 231,625          |            | 134,341               |       |
| Product  warranty claims                                                                                                                 |       | 16,200           |            | 16,200                |       |
| Total  Current Liabilities                                                                                                               |       | 462,670          |            | 401,160               |       |
| Long-term  debt                                                                                                                          |       | 1,567,646        |            | 1,658,169             |       |
| Product  warranty claims                                                                                                                 |       | 47,884           |            | 28,765                |       |
| Deferred  income tax liabilities                                                                                                         |       | 105,061          |            | 73,103                |       |
| Other  liabilities                                                                                                                       |       | 197,885          |            | 198,973               |       |
| Commitments  and Contingencies — Note 13                                                                                            |       |             |            |                  |       |
| Stockholders’  Equity (Deficit):                                                                                                    |       |             |            |                  |       |
| Series A  Cumulative Redeemable Convertible Preferred Stock, $.01 par value  per share; 400,000 shares authorized; no shares issued |       | —           |            | —                |       |
| Class A  Common Stock, $.001 par value per share; 1,300,000 shares authorized;  1,015,010 shares issued and outstanding             |       | 1                |            | 1                     |       |
| Class B  Common Stock, $.001 par value per share; 100,000 shares authorized;  no shares issued                                      |       | —           |            | —                |       |
| Loans  receivable from parent corporation                                                                                                |       | (56,408          | )               | (56,348               | )          |
| Retained  earnings                                                                                                                       |       | 223,029          |            | 27,372                |       |
| Accumulated  other comprehensive loss                                                                                                    |       | (44,340          | )               | (50,881               | )          |
| Total  Stockholders’ Equity (Deficit)                                                                                               |       | 122,282          |            | (79,856               | )          |
| Total  Liabilities and Stockholders’ Equity (Deficit)                                                                               |       | $                |  2,503,428 |                  | $          |  2,280,314 |   |

 

The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

**(Dollarsin thousands)**

** **
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **Oct. 4,**                | ** ** | **Sept. 28,** | ** ** |
| ** **                                                                                   | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash and cash equivalents, beginning of period                                               |       | $                               | 37,037     |   | $ | 6,324 |   |
| Cash provided by (used in) operating activities:                                             |       |                            |       |   |   |
| Net income                                                                                   |       | 205,663                         |       | 47,429 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities: |       |                            |       |   |   |
| Depreciation                                                                                 |       | 53,057                          |       | 53,763 |   |
| Amortization of intangible and other assets                                                  |       | 11,062                          |       | 11,516 |   |
| Restructuring and other expenses                                                             |       | 27,924                          |       | 60,731 |   |
| Deferred income taxes                                                                        |       | (1,484                          | )          | 28,213 |   |
| Noncash interest charges                                                                     |       | 17,908                          |       | 6,748 |   |
| Increase in working capital items                                                            |       | (46,753                         | )          | (292,774 | ) |
| Increase in product warranty claims                                                          |       | 19,119                          |       | 2,701 |   |
| Increase in other assets                                                                     |       | (3,921                          | )          | (11,615 | ) |
| Increase (decrease) in other liabilities                                                     |       | (80                             | )          | 267 |   |
| Increase in net payable to related parties/parent corporations                               |       | 14,624                          |       | 23,224 |   |
| Other, net                                                                                   |       | (14                             | )          | (14,218 | ) |
| Net cash provided by (used in) operating  activities                                         |       | 297,105                         |       | (84,015 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash used in investing activities:                                                           |       |                            |       |   |   |
| Capital expenditures and acquisition in 2009                                                 |       | (37,730                         | )          | (28,639 | ) |
| Proceeds from sale of assets                                                                 |       | —                          |       | 21,443 |   |
| Net cash used in investing activities                                                        |       | (37,730                         | )          | (7,196 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash provided by (used in) financing activities:                                             |       |                            |       |   |   |
| Proceeds from issuance of long-term debt                                                     |       | 293,000                         |       | 830,000 |   |
| Repayments of long-term debt                                                                 |       | (379,539                        | )          | (574,002 | ) |
| Purchase of industrial development revenue bond certificates  issued by the Company          |       | —                          |       | (4,800 | ) |
| Principal repayments of capital leases                                                       |       | (5,915                          | )          | (5,262 | ) |
| Distributions to parent corporation                                                          |       | (7                              | )          | (65 | ) |
| Dividends to parent corporation                                                              |       | (10,000                         | )          | (2,500 | ) |
| Loan to parent corporation                                                                   |       | (60                             | )          | (99 | ) |
| Financing fees and expenses                                                                  |       | (200                            | )          | (576 | ) |
| Net cash provided by (used in) financing  activities                                         |       | (102,721                        | )          | 242,696 |   |
| Net change in cash and cash equivalents                                                      |       | 156,654                         |       | 151,485 |   |
| Cash and cash equivalents, end of period                                                     |       | $                               | 193,691    |   | $ | 157,809 |   |

 

The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.

 

**(Continued on the following page)**

 

5

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited) - (Continued)**

**(Dollarsin thousands)**

 
| ** **                                                                                                                                | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                | ** ** | **Oct. 4,**                | ** ** | **Sept. 28,** | ** ** |
| ** **                                                                                                                                | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Supplemental Cash Flow Information:                                                                                                       |       |                            |       |   |   |
| Effect on cash from changes in working capital  items:                                                                                    |       |                            |       |   |   |
| Increase in accounts receivable trade and accountsreceivable other                                                                        |       | $                               | (288,566   | ) | $ | (330,240 | ) |
| Decrease in income tax receivable                                                                                                         |       | —                          |       | 11,837 |   |
| (Increase) decrease in inventories, net                                                                                                   |       | 205,836                         |       | (6,850 | ) |
| (Increase) decrease in other current assets                                                                                               |       | 3,460                           |       | (4,551 | ) |
| Increase (decrease) in accounts payable                                                                                                   |       | (41,343                         | )          | 79,327 |   |
| Increase in accrued liabilities                                                                                                           |       | 97,398                          |       | 22,181 |   |
| Payments for restructuring and other expenses                                                                                             |       | (23,538                         | )          | (64,478 | ) |
| Net effect on cash from increase in working  capitalitems                                                                                 |       | $                               | (46,753    | ) | $ | (292,774 | ) |
|                                                                                                                                      |       |                            |       |   |   |
| Cash paid during the period for:                                                                                                          |       |                            |       |   |   |
| Interest (net of amount capitalized of $360 and  $415 in 2009 and 2008, respectively)                                                     |       | $                               | 100,442    |   | $ | 115,262 |   |
|                                                                                                                                      |       |                            |       |   |   |
| Income taxes (including Federal income taxes paid pursuant  to a Tax Sharing Agreement of $96,690 and $0 in 2009 and 2008, respectively*) |       | $                               | 98,892     |   | $ | 4,505 |   |

 

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* The amount paidfor income taxes in 2008 excluded an $11.8 million Federal income tax receiptrelated to Elk.

 

The accompanyingNotes to Consolidated Financial Statements are an integral part of thesestatements.

 

6

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**Note1.  Formation of the Company**

 

Building MaterialsCorporation 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 ofG Holdings Inc.  During the first quarterof 2007, BMCA acquired ElkCorp (“Elk”), a Dallas, Texas-based manufacturer ofroofing products and building materials, resulting in Elk becoming an indirectwholly-owned subsidiary of BMCA.

 

The consolidatedfinancial statements of the Company reflect, in the opinion of management, alladjustments necessary to present fairly the financial position of the Companyat October 4, 2009, and the results of its operations for the thirdquarter and nine-month periods ended and its cash flows for the nine-monthperiods ended October 4, 2009 and September 28, 2008,respectively.  All adjustments are of anormal recurring nature, except for the restructuring and other expensesrecorded in the Company’s statements of income for the nine-month periods endedOctober 4, 2009 and September 28, 2008, respectively.  See Note 3. Net sales of roofing products and specialty building products andaccessories are generally seasonal in nature. Accordingly, the results of operations and cash flows in the respectivequarterly ended periods will vary depending on the time of the year. Thesefinancial statements should be read in conjunction with the annual auditedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2008, which wasfiled with the Securities and Exchange Commission (the “SEC”) on March 31,2009 (the “2008 Form 10-K”).

 

**Note2.  New Accounting Pronouncements**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued accounting guidance onthe recognition and measurement process related to the identifiable assetsacquired, liabilities assumed, any noncontrolling interests, and goodwillacquired by an acquiring company in a business combination.  The guidance also expands the required disclosuresrelated to the nature and financial statement effects of business combinationsand became effective on a prospective basis for business combinations completedin fiscal years beginning after December 15, 2008.  The Company adopted the new accountingguidance during its first quarter beginning January 1, 2009, and theadoption did not have a material impact on the Company’s consolidated financialstatements.  The effects of the newaccounting guidance on future reporting periods depend on the nature andsignificance of the business combination.

 

In April 2009, theFASB issued accounting guidance that requires the assets acquired andliabilities assumed in a business combination that arise from contingencies berecognized at fair value if fair value can be

 

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note2.  New Accounting Pronouncements –(Continued)**

 

reasonablyestimated.  If fair value cannot bereasonably estimated, the assets or liabilities would generally be recognizedin accordance with the accounting guidance for contingencies.  Furthermore, the FASB removed the subsequentaccounting guidance for assets and liabilities arising from contingencies as aresult of the guidance issued in December 2007 for businesscombinations.  The new accountingguidance also eliminates the requirement to disclose an estimate of the rangeof possible outcomes of recognized contingencies at the acquisition date.  For unrecognized contingencies, the FASBrequires that entities include only the disclosures required by the accountingguidance for contingencies.  The Companyadopted the new accounting guidance during its second quarter ended July 5,2009, and the adoption did not have any impact on its consolidated financialstatements.  The effects of the newaccounting guidance on future reporting periods depend on the nature andsignificance of the business combination.

 

In March 2008, theFASB issued guidance which changed the disclosure requirements for derivativeinstruments and hedging activities.  Thisnew accounting guidance was intended to improve financial reporting related toderivative instruments and hedging activities by requiring enhanced disclosuresto enable investors to better understand their effects on an entity’s financialposition, financial performance, and cash flows.  The new accounting guidance became effectiveon a prospective basis for fiscal years beginning on or after November 15,2008.  The Company adopted the newaccounting guidance during its first quarter beginning January 1,2009.  Since the new accounting guidancerequires only disclosures, there was no impact on the Company’s consolidatedfinancial statements.  See Note 7for the required disclosures.

 

In April 2008, theFASB issued guidance which provides factors an entity should consider indeveloping renewal or extension assumptions used in determining the useful lifeof recognized intangible assets.  Thisnew accounting guidance applies prospectively to intangible assets that areacquired individually or with a group of other assets in business combinationsand asset acquisitions and became effective for financial statements issued forfiscal years and interim periods beginning after December 15, 2008.  The Company adopted the new accountingguidance during its first quarter beginning January 1, 2009, and theadoption did not have a material impact on its consolidated financialstatements.

 

In December 2008,the FASB issued guidance on postretirement plans, which provides additionalinformation on an employers’ disclosures surrounding plan assets of a definedbenefit pension or other postretirement plan. The new accounting guidance is effective for financial statements

 

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note2.  New Accounting Pronouncements –(Continued)**

 

issued for fiscal yearsending after December 15, 2009.  TheCompany will adopt the provisions of the new accounting guidance for its fiscalyear beginning January 1, 2010, which will have no impact on the Company’sconsolidated financial statements; however it will require additionaldisclosures in the financial statements related to the assets held by itsdefined pension and postretirement plans.

 

In April 2009, theFASB issued additional guidance related to fair value measurements.  According to the new accounting guidance, ifan entity determines that the level of activity for an asset or liability hassignificantly decreased and that a transaction is not orderly, further analysisof the transaction or quoted prices is required, and a significant adjustmentto the transaction or quoted prices may be deemed necessary to estimate thefair value in accordance with the fair value measurement accounting guidanceissued in September 2006.  The newaccounting guidance is effective on a prospective basis for interim and annualperiods ending after June 15, 2009. The Company adopted the new accounting guidance for its second quarterended July 5, 2009, and the adoption did not have any impact on itsconsolidated financial statements.

 

In April 2009, theFASB issued guidance on new required disclosures surrounding the fair value offinancial instruments.  The newaccounting guidance requires an entity to provide disclosures about fair valuemeasurements of financial instruments in interim financial information and iseffective on a prospective basis for interim and annual periods ending after June 15,2009.  The Company adopted the newaccounting guidance in its second quarter ended July 5, 2009.  Since the new accounting guidance onlyrequires additional financial statement disclosures, there was no impact on theCompany’s consolidated financial statements. See Note 8 for the required disclosures.

 

In May 2009, theFASB issued guidance on subsequent events to establish general standards ofaccounting for and disclosures of events that occur after the balance sheetdate but prior to the issuance of financial statements.  The new accounting guidance also requiresentities to disclose the date through which subsequent events were evaluated aswell as the rationale for why that date was selected.  The new accounting guidance is effective forinterim and annual periods ending after June 15, 2009, and accordingly,the Company adopted the new guidance during its second quarter ended July 5,2009.  The Company evaluated subsequentevents through the time of filing its consolidated financial statements withthe SEC on November 18, 2009, and noted there was no impact on itsconsolidated financial statements other than the disclosures in Note 14.

 

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note2.  New Accounting Pronouncements –(Continued)**

 

In June 2009, theFASB issued guidance that requires entities to provide more detailedinformation concerning transfers of financial assets, including securitizationtransactions and risks related to transferred financial assets.  The new accounting guidance eliminates theconcept of a “qualifying special-purpose entity,” changes the requirements forderecognizing financial assets, and requires additional disclosures.  The Company will adopt the new accountingguidance during its first quarter beginning January 1, 2010 and does notexpect the adoption to have a material impact on its consolidated financialstatements.

 

In June 2009, theFASB issued new accounting guidance on variable interest entities, whicheliminates the quantitative approach previously required for determining theprimary beneficiary of a variable interest entity and requires ongoingqualitative reassessments to determine whether an enterprise is the primarybeneficiary of a variable interest entity. The Company will adopt the new accounting guidance during its firstquarter beginning January 1, 2010. The Company does not expect the adoption of the new accounting guidanceto have a material impact on its consolidated financial statements.

 

In June 2009, theFASB issued the Accounting Standards Codification (“ASC”), which on July 1,2009 became the single source of authoritative nongovernmental U.S. generallyaccepted accounting principles (“GAAP”). The ASC establishes one level of authoritative GAAP and all otherliterature is considered non-authoritative. The ASC is effective for financial statements issued for interim andannual periods ending after September 15, 2009.  The Company adopted the ASC during its thirdquarter ended October 4, 2009. There was no change to the Company’s consolidated financial statementsdue to the adoption of the ASC, however, accounting references to specificaccounting literature under FASB codification in prior financial statementfilings will be replaced in this and future filings with references toaccounting guidance under ASC.

 

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note3.  Restructuring and Other Expenses**

 

The Company initiated arestructuring plan (the “2007 Restructuring Plan”), which it formulated in connectionwith the Company’s acquisition of Elk. The 2007 Restructuring Plan was created to eliminate cost redundanciesrecognized due to the acquisition of Elk and to reduce the Company’s overallcost structure.  The 2007 RestructuringPlan has been fully implemented as of December 31, 2008 and issubstantially complete as of October 4, 2009.  The Company accounts for its restructuringactivities in accordance with the accounting guidance on exit or disposal costobligations, impairments or disposal of long-lived assets and inventorymarkdowns or other costs associated with restructuring.

 

*2008 Restructuring and OtherExpenses*

 

In connection with theacquisition of Elk, the Company identified $64.1 million of restructuring andother expenses in its fiscal year ended December 31, 2008, which included$14.2 million of plant closing expenses, $3.3 million in employee severancepayments and $46.6 million in integration-related expenses.  Integration-related expenses primarilyconsisted of $26.9 million of inventory write-downs, $6.1 million ofrestructuring-related sales discounts and $13.6 million of other integrationexpenses.

 

The Company recorded$73.2 million of its overall identified restructuring and other expenses in itsstatement of income during its fiscal year ended December 31, 2008, ofwhich $6.1 million was reflected as a reduction in net sales due torestructuring-related sales discounts, $26.9 million was charged to cost ofproducts sold and $40.2 million was charged to restructuring and other expenses.

 

*Nine-Months Ended October 4,2009 Restructuring and Other Expenses*

 

In February 2009,the Company announced the temporary shutdown of two manufacturing facilities,one in Shafter, California and the other in Nashville, Tennessee as a result ofweaker market demand.  As a result ofthese actions and other charges related to the acquisition of Elk, the Companyidentified an additional $27.6 million of restructuring and other expenses inits nine months ended October 4, 2009, which included $19.0 million ofplant closing expenses, $1.5 million in employee severance payments and $7.1million in integration-related expenses. Integration-related expenses primarily consisted of $3.7 million ofinventory write-downs and $3.4 million of other integration expenses.

 

11

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note3.  Restructuring and Other Expenses –(Continued)**

 

The Company recorded $27.9million of its overall restructuring and other expenses in its statement ofincome during its nine-month period ended October 4, 2009, of which $3.7million was charged to cost of products sold and $24.2 million was charged torestructuring and other expenses.  TheCompany expects to incur future operating losses in connection with the 2007Restructuring Plan and the temporary shutdown of the Nashville and Shaftermanufacturing facilities, which will be recognized in the periods in which theyare incurred.

 

The table below detailsthe Company’s restructuring and other expense accruals and charges made againstthe accrual during its nine months ended October 4, 2009:

 
| **Restructuring  and  Other Expenses**                                | ** ** | **Plant********Closing********Expenses** | ** ** | **Employee********Severance********Payments** | ** ** | **Integration********Expenses** | ** ** | **Total** |   |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|-----------|--------|
|                                                                  |       | **(Thousands)**                          |       |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |   |
| Beginning  balance, as of December 31, 2008                      |       | $                                        | 3,452      |                                          | $          | —                          |       | $         | 5,205  |   | $ | 8,657 |   |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |   |
| Current period costs,  net                                            |       | 18,957                                   |       | 1,493                                         |       | 7,474                           |       | 27,924    |   |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |   |
| Cash payments                                                         |       | (15,151                                  | )          | (1,493                                        | )          | (6,894                          | )          | (23,538   | )      |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |   |
| Amount charged to  property, plant and equipment for asset write-down |       | (4,039                                   | )          | —                                        |       | (584                            | )          | (4,623    | )      |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |   |
| Amount charged to  write-off inventory                                |       | —                                   |       | —                                        |       | (2,182                          | )          | (2,182    | )      |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |   |
| Non-cash items                                                        |       | —                                   |       | —                                        |       | (336                            | )          | (336      | )      |
| Ending balance, as of  October 4, 2009                           |       | $                                        | 3,219      |                                          | $          | —                          |       | $         | 2,683  |   | $ | 5,902 |   |

 

12

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note4.  Comprehensive Income**

 

The table belowreconciles the Company’s net income to comprehensive income for the thirdquarter and nine-month periods ended October 4, 2009 and September 28,2008, respectively:

** **
| ** **                                                                                                                                                                                                                                                                                                             | ** ** | **Third Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                             | ** ** | **Oct. 4,**        | ** ** | **Sept. 28,**         | ** ** | **Oct. 4,** | ** ** | **Sept. 28,** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                             | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                             | ** ** | **(Thousands)**         | ** ** |
|                                                                                                                                                                                                                                                                                                                   |       |                    |       |                  |       |   |   |   |   |
| Net income                                                                                                                                                                                                                                                                                                             |       | $                       | 83,607     |                  | $          | 34,673 |   | $ | 205,663 |   | $ | 47,429 |   |
| Other comprehensive income, net of tax:                                                                                                                                                                                                                                                                                |       |                    |       |                  |       |   |   |   |   |
| Derivative fair value adjustment —interest rate swaps, net of  tax of ($1,092) and $1,559 for the three-month periods ended October 4,  2009 and September 28, 2008, respectively,and ($3,793) and $177 for the nine-monthperiods ended  October 4, 2009 and September 28, 2008, respectively |       | 1,781                   |       | (2,543                | )          | 6,189 |   | (288 | ) |
|                                                                                                                                                                                                                                                                                                                   |       |                    |       |                  |       |   |   |   |   |
| Derivative fair value adjustment-treasury locks,  net of tax of ($72) and($72) for the three-month periods endedOctober 4, 2009 and September 28,  2008, respectively, and ($216) and ($216) for the nine-month periods ended  October 4, 2009 and September 28, 2008, respectively                |       | 117                     |       | 117                   |       | 352 |   | 352 |   |
| Comprehensive income                                                                                                                                                                                                                                                                                                   |       | $                       | 85,505     |                  | $          | 32,247 |   | $ | 212,204 |   | $ | 47,493 |   |

 

**Note5.  Inventories**

 

Inventoriesconsisted of the following as of October 4, 2009 and December 31,2008, respectively:

 
| ** **                 | ** ** | **October 4,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**            | ** ** | **2008**              | ** ** |
| ** **                 | ** ** | **(Thousands)**     | ** ** |
|                       |       |                |       |                  |       |
| Finished goods             |       | $                   | 111,339    |                  | $          | 271,373 |   |
| Work-in process            |       | 8,302               |       | 41,225                |       |
| Raw materials and supplies |       | 83,886              |       | 94,381                |       |
| Total                      |       | 203,527             |       | 406,979               |       |
| Less LIFO reserve          |       | (63,530             | )          | (58,530               | )          |
| Inventories, net           |       | $                   | 139,997    |                  | $          | 348,449 |   |

 

13

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note6.  Long-Term Debt**

 

Long-term debt consistsof the following at October 4**,**2009 and December 31, 2008:

 
| ** **                                                   | ** ** | **October 4,********2009** | ** ** | **December 31,********2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **(Thousands)**                 | ** ** |
|                                                         |       |                            |       |                              |       |
| 7 3/4% Senior Notes due 2014                                 |       | $                               | 250,433    |                              | $          | 250,500 |   |
| Borrowings under the Senior SecuredRevolving Credit Facility |       | —                          |       | 76,000                            |       |
| Term Loan                                                    |       | 948,520                         |       | 955,670                           |       |
| Junior Lien Term Loan                                        |       | 325,000                         |       | 325,000                           |       |
| Obligations under capital leases                             |       | 51,537                          |       | 55,956                            |       |
| Industrial development revenue bond                          |       | 2,730                           |       | 2,820                             |       |
| Chester Loan                                                 |       | 2,634                           |       | 5,126                             |       |
| Other notes payable                                          |       | 7,131                           |       | 7,693                             |       |
| Total                                                        |       | 1,587,985                       |       | 1,678,765                         |       |
| Less current maturities                                      |       | (20,339                         | )          | (20,596                           | )          |
| Long-term debt less current maturities                       |       | $                               | 1,567,646  |                              | $          | 1,658,169 |   |

 

As of October 4,2009, the Company had total outstanding consolidated indebtedness of $1,640.8million, which included $52.8 million of demand loans to its parentcorporation.  The Company anticipatesfunding these obligations principally from its cash and cash equivalents onhand, cash flow from operations and/or borrowings under its $600.0 millionSenior Secured Revolving Credit Facility (the “Senior Secured Revolving Credit Facility”).

 

As of October 4,2009, the Company was in compliance with all covenants under the Senior SecuredRevolving Credit Facility, the $975.0 million Term Loan Facility (the “TermLoan”), the $325.0 million Junior Lien Term Loan Facility (the “Junior LienTerm Loan” and collectively with the Senior Secured Revolving Credit Facilityand the Term Loan the “Senior Secured Credit Facilities”) and the indenturegoverning its 7 3/4% Senior Notes due 2014 (the “Senior Notes”).  As of October 4, 2009, the net bookvalue of the collateral securing the Senior Secured Revolving Credit FacilityCollateral (as defined in the Senior Secured Revolving Credit Facility) and theTerm Loan Collateral (as defined in the Term Loan) was $912.7 and $1,647.1million, respectively.

 

At October 4, 2009,the Company had outstanding letters of credit of approximately $40.9 million,which included approximately $10.6 million of standby letters of credit relatedto certain obligations of G-I Holdings.

 

14

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note6.  Long-Term Debt – (Continued)**

 

On September 11,2009, the Company entered into an amendment to the Senior Secured RevolvingCredit Facility.  Such amendment did notresult in any material changes to the Senior Secured Revolving Credit Facility.

 

**Note7.  Derivative and Hedging Transactions**

 

*Hedging Strategy*

 

The Company is exposed tothe impact of variable interest rate fluctuations on certain of its debtfinancings; however, the Company limits its variable interest rate exposurethrough the use of derivative instruments, which reduce the risk of interestrate fluctuations related to the Company’s debt.  As a result of the use of derivativeinstruments, the Company has exposure to the risk that its counterparties toderivative contracts will fail to meet their contractual obligations.  In order to mitigate its counterparty creditrisk, the Company enters into derivative contracts with selected majorfinancial institutions.  The Company’spolicies and procedures for mitigating counterparty credit risk on derivativetransactions include reviewing and establishing limits for credit exposure witheach financial institution and a continuous assessment of the creditworthinessof each counterparty.  The right ofset-off that exists under certain of these derivative contracts enables theCompany, subject to each derivative contract, to net amounts due to and fromthe counterparty reducing the maximum loss from credit risk in the event ofcounterparty default.

 

*InterestRate Swap Agreements*

 

In March 2007, theCompany entered into forward-starting interest rate swap agreements (“swaps”)with an effective date of April 23, 2007 and a maturity date of April 23,2012.  These swaps were initiated inorder to hedge the variable interest rate risk associated with the Company’sTerm Loan, and they are structured that the Company receives interest based onthe three-month Eurodollar rate (“LIBOR”) and pays interest on a fixed ratebasis.  In October 2007, the Companyentered into additional interest rate swaps related to its Term Loan with aneffective date of October 23, 2007 and a maturity date of October 23,2012 under similar terms.

 

On April 23, 2009,the Company exercised its option under its Term Loan to change the interestrate for its LIBOR advances from three-month to one-month LIBOR.  The Company continued to receive three-monthLIBOR and pay fixed rate interest under its swap agreements.  The election of one-month LIBOR on its TermLoan resulted in the Company de-designating its original swap hedgingrelationship and subsequently re-designating a new swap hedging relationshipfor its Term Loan.  As a result of theelection, the Company recognized a $1.1 and $0 million gain related to swapineffectiveness as a component of interest expense during its third quarter andnine months ended

 

15

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note7.  Derivative and Hedging Transactions –(Continued)**

 

October 4, 2009,respectively.  In addition, as a resultof this election, the Company recognized $6.4 and $11.3 million of interestexpense during its third quarter and nine months ended October 4, 2009,respectively, due to the straight-line amortization of the unrealized lossesremaining in accumulated other comprehensive income/loss (“OCI”) at April 23,2009.  The remaining amount of unrealizedlosses at October 4, 2009 will be amortized over the remaining life of theoriginal swaps.

 

The Company continues toaccount for its new swap hedging relationship in accordance with the accountingguidance for derivatives and hedging, and as such its swaps are treated as cashflow hedges.  The Company swaps aremeasured each period using the hypothetical derivative method in accordancewith the accounting guidance for derivatives and hedging, which requires theCompany’s actual swaps liability to be recorded at fair value, and OCI toreflect the lesser of either the cumulative change in the fair value of theactual swap or the cumulative change in the fair value of the hypothetical swap(the “perfect swap”).  In any givenperiod, to the extent the cumulative change in the fair value of the actualswap is greater than the cumulative change in the fair value of the perfectswap, the difference would be recognized as ineffectiveness as a component ofinterest expense in the Company’s statement of income.  As of October 4, 2009, due toamortization, ineffectiveness and accrued swap interest, the Company estimatedthat during the twelve months ending September 2010, approximately $34.6million of unrealized losses will be reclassified from OCI and recognized as acomponent of interest expense in its statement of income, subject to changes inthe LIBOR rate.

 

The Company values itsinterest rate swap agreements based on fair value measurement Level 2 inputsfrom model-derived valuations whose significant inputs are quoted LIBORcontracts, Eurodollar futures and on-the-run swap markets.  The accounting guidance for fair valuemeasurements requires that the valuation of derivative assets and liabilitiesmust take into account the parties’ nonperformance risk.  The Company discounted the value of itsderivative liabilities based on the credit spread for its debt as determined bythe market trading price.  See Note 8,Fair Value Measurements.

 

*TreasuryLock Agreements*

 

In July 2007, theCompany entered into treasury lock agreements (“treasury locks”) with amaturity date of July 31, 2012, as additional hedging instruments relatedto its Term Loan.  On October 30,2007, the Company settled its open treasury lock hedging positions, whichresulted in a pre-tax fair value loss and cash settlement of approximately $4.9million, which is being amortized into its statement of income over the life ofthe Term Loan pursuant to the requirements of the accounting guidance forderivatives and hedging.  During thethird quarter ended October 4, 2009 and September 28, 2008, theCompany amortized $0.2 and $0.2

 

16

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note7.  Derivative and Hedging Transactions –****(****Continued)**

 

million, respectively, ofthe loss related to its treasury locks into interest expense in its statementsof income and during its nine-month periods ended October 4, 2009 and September 28,2008, the Company amortized $0.6 and $0.6 million, respectively.  The Company will amortize $0.8 millionannually related to this loss through July 2012.

 

The following table setsforth the classification and fair values of the Company’s derivativeinstruments at October 4, 2009:

 

**FAIR VALUE OF DERIVATIVE INSTRUMENTS**

**(Millions)**

 
| **Description**                                    | ** ** | **Balance Sheet Classification**    | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------|------------|-------------------------------------|------------|----------------|------------|
|                                               |       |                                |       |           |       |
| **Derivatives designated as hedging instruments:** |       |                                |       |           |       |
|                                               |       |                                |       |           |       |
| Fixed-income  interest rate swap agreements        |       | Other non–current  liabilities |       | $              | 71.8       |   |
|                                                    |            |                                     |            |                |            |  |

 

The amount included inOCI, net of tax, related to the Company’s derivative liability at October 4,2009 and December 31, 2008 was $37.5 and $43.7 million, respectively.

 

Thefollowing table sets forth the effect of the Company’s derivative instrumentson financial performance for the three months ended October 4, 2009:

 
| **Description**                                      |   | **Amount  of  Gain or  (Loss)  Recognized  in OCI on  Derivative  (Effective  Portion)** |   | **Location  of  Gain or (Loss)  Reclassified  from OCI Into  Income  (Effective  Portion)** |             | **Amount  of Gain  or (Loss)  Reclassified  from  Accumulated  OCI Into  Income  (Effective  Portion)** |   | **Location  of  Gain or (Loss)  Recognized in  Income on  Derivative  (Ineffective  Portion)** |   | **Amount  of Gain  or (Loss)  Recognized in  Income on  Derivative  (Ineffective  Portion)** |   |
|------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|
| ** **                                           |   | **(Millions)**                                                                           |   |
| ** **                                           |   |                                                                                     |   |                                                                                        |             |                                                                                                    |   |                                                                                           |   |                                                                                         |   |
| **Derivatives in Cash Flow  Hedging Relationships:** |   |                                                                                     |   |                                                                                        |             |                                                                                                    |   |                                                                                           |   |                                                                                         |   |
|                                                 |   |                                                                                     |   |                                                                                        |             |                                                                                                    |   |                                                                                           |   |                                                                                         |   |
| Fixed-income interest rateswap agreements            |   | $                                                                                        | 1.8    |                                                                                        | Interest Expense |                                                                                                    | $      | (15.9                                                                                          | )      | InterestExpense                                                                              |   | $ | 1.1 |   |
|                                                 |   |                                                                                     |   |                                                                                        |             |                                                                                                    |   |                                                                                           |   |                                                                                         |   |
| Treasury lock contracts                              |   | —                                                                                   |   | Interest Expense                                                                            |             | (0.2                                                                                                    | )      | —                                                                                         |   | —                                                                                       |   |
|                                                      |        |                                                                                          |        |                                                                                             |                  |                                                                                                         |        |                                                                                                |        |                                                                                              |        |  |  |  |

 

17

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note7.  Derivative and Hedging Transactions –****(****Continued)**

 

Thefollowing table sets forth the effect of the Company’s derivative instrumentson financial performance for the nine months ended October 4, 2009:

 
| **Description**                                      | ** ** | **Amount  of  Gain or  (Loss)  Recognized  in OCI on  Derivative  (Effective  Portion)** | ** ** | **Location  of  Gain or (Loss)  Reclassified  from OCI Into  Income  (Effective  Portion)** | ** **       | **Amount  of Gain  or (Loss)  Reclassified  from  Accumulated  OCI Into  Income  (Effective  Portion)** | ** ** | **Location  of  Gain or (Loss)  Recognized in  Income on  Derivative  (Ineffective  Portion)** | ** ** | **Amount  of Gain  or (Loss)  Recognized in  Income on  Derivative  (Ineffective  Portion)** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **(Millions)**                                                                           | ** ** |
| ** **                                           |       |                                                                                     |       |                                                                                        |             |                                                                                                    |       |                                                                                           |       |                                                                                         |       |
| **Derivatives in Cash Flow  Hedging Relationships:** |       |                                                                                     |       |                                                                                        |             |                                                                                                    |       |                                                                                           |       |                                                                                         |       |
|                                                 |       |                                                                                     |       |                                                                                        |             |                                                                                                    |       |                                                                                           |       |                                                                                         |       |
| Fixed-income interest rateswap agreements            |       | $                                                                                        | 6.2        |                                                                                        | Interest Expense |                                                                                                    | $          | (36.4                                                                                          | )          | InterestExpense                                                                              |       | $ | — |   |
|                                                 |       |                                                                                     |       |                                                                                        |             |                                                                                                    |       |                                                                                           |       |                                                                                         |       |
| Treasury lock contracts                              |       | —                                                                                   |       | Interest Expense                                                                            |             | (0.6                                                                                                    | )          | —                                                                                         |       | —                                                                                       |       |
|                                                      |            |                                                                                          |            |                                                                                             |                  |                                                                                                         |            |                                                                                                |            |                                                                                              |            |  |  |  |

 

As of October 4,2009, the Company did not have any derivatives not designated as hedginginstruments according to the accounting guidance on derivatives and hedging.

 

**Note8.  Fair Value Measurements**

 

Financial instrumentsconsist mainly of cash and cash equivalents, accounts receivable, accountspayable, accrued liabilities, interest rate swaps, short and long-term debt andlease obligations.  The Company’sinterest rate swaps are recorded at fair value, while other financialinstruments in the Company’s consolidated balance sheet have carrying valuesthat approximate fair value.  In theabsence of quoted market prices, considerable judgment is required indeveloping estimates of fair value.  TheCompany’s estimates are based on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments concerning the carryingvalues of assets and liabilities.  Actualresults may differ from these estimates under different assumptions orconditions.  Estimates are notnecessarily indicative of the amounts the Company could realize in a currentmarket transaction.

 

18

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note8.  Fair Value Measurements –****(****Continued)**

 

The following tabledetails the carrying and fair values of the Company’s Term Loan, Junior LienTerm Loan and Senior Notes at October 4, 2009 and December 31,2008.  Fair values are based upon quotedmarket prices as follows:

 
| ** **        | ** ** | **October 4,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **Carrying Amount**       | ** ** | **Fair Value**              | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| ** **        | ** ** | **(Thousands)**           | ** ** |
| Senior  Notes     |       | $                         | 250,433    |                        | $          | 246,250 |   | $ | 250,500 |   | $ | 155,000 |   |
| Term  Loan        |       | 948,520                   |       | 861,968                     |       | 955,670 |   | 573,402 |   |
| Junior  Lien Term |       | 325,000                   |       | 281,938                     |       | 325,000 |   | 162,500 |   |
|                   |            |                           |            |                             |            |  |  |  |  |  |  |  |  |

 

The following table setsforth information regarding the Company’s financial instruments that aremeasured at fair value as of October 4, 2009, consistent with the fairvalue hierarchy provision from the accounting guidance on fair valuemeasurements:

 
| ** **                                  | ** ** | **Total  Measured at  Fair Value** | ** ** | **Quoted  Market  Prices  In Active  Markets for  Identical  Assets/  Liabilities  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **(Millions)**                     | ** ** |
| Liabilities:                                | ** ** |                               | ** ** |                                                                                           | ** ** |                                                  | ** ** |                                             | ** ** |
| Fixed-income  interest rate swap agreements |       | $                                  | 71.8       |                                                                                           | $          | —                                                |       | $                                                | 71.8       |   | $ | — |   |
| Total  liabilities                          |       | $                                  | 71.8       |                                                                                           | $          | —                                                |       | $                                                | 71.8       |   | $ | — |   |

 

During the first quarterof 2009, the Company adopted the additional accounting guidance issued by theFASB on fair value measurements, which deferred the application of fair valuemeasurement for certain non-financial assets and non-financialliabilities.  Upon adoption, the Companydid not have any non-financial assets or liabilities that were recognized ormeasured at fair value on a recurring basis, therefore there was no impact onthe Company’s results of operations.

 

19

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note9.  Warranty Claims**

 

The Company providescertain limited warranties covering most of its residential roofing productsfor periods generally ranging from 20 to 50 years, although certain productlines provide for a lifetime limited warranty. The Company also offers certain limited warranties of varying durationcovering most of its commercial roofing products.  Most of the Company’s specialty buildingproducts and accessories carry limited warranties for periods generally rangingfrom 5 to 20 years, with lifetime limited warranties on certain products.

 

The accrual for productwarranty claims consists of the following for the third quarter and nine-monthperiods ended October 4, 2009 and September 28, 2008, respectively:

 
| ** **                        | ** ** | **Third  Quarter Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                        | ** ** | **Oct. 4,**         | ** ** | **Sept. 28,**          | ** ** | **Oct. 4,** | ** ** | **Sept. 28,** | ** ** |
| ** **                        | ** ** | **2009**                 | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                        | ** ** | **(Thousands)**          | ** ** |
|                              |       |                     |       |                   |       |   |   |   |   |
| Beginning  balance                |       | $                        | 59,868     |                   | $          | 47,028 |   | $ | 44,965 |   | $ | 44,724 |   |
| Charged  to cost of products sold |       | 11,174                   |       | 5,941                  |       | 37,129 |   | 15,840 |   |
| Payments/deductions               |       | (6,958                   | )          | (5,544                 | )          | (18,010 | ) | (13,139 | ) |
| Ending  balance                   |       | $                        | 64,084     |                   | $          | 47,425 |   | $ | 64,084 |   | $ | 47,425 |   |

 

The Company offersextended warranty contracts on sales of its commercial roofing products.  The lives of these commercial warrantiesrange from 10 to 25 years.  In addition,the Company offers enhanced warranties on certain of its residential roofingproducts.  These enhanced warranties arethe “Golden PledgeTM” and “Peace of MindTM” warranty programs.  All revenue for the sale of these warrantyprograms was deferred and amortized on a straight-line basis over the averagelife of these warranty programs, which was in accordance with the accounting guidanceprescribed for separately priced extended warranty and product maintenancecontracts.  Incremental direct costsassociated with the acquisition of the extended warranty contracts arecapitalized and amortized on a straight-line basis over the average life ofthese warranty programs.  Current costsof services performed related to claims paid under these warranty programs areexpensed as incurred.  The analysis ofthese warranty programs as of October 4, 2009 indicated that deferredrevenue is in excess of deferred costs and accordingly, no loss wasrecognized.  However, if the totalexpected costs of providing services under these warranty programs exceeddeferred revenues less deferred costs, then a loss would be recognized.

 

20

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note9.  Warranty Claims –****(****Continued)**

 

At October 4, 2009and September 28, 2008, the Company had deferred revenue of $80.0 and$75.5 million, of which $10.9 and $8.6 million is included in other currentliabilities and $69.1 and $66.9 million is included in other liabilities,respectively.  At October 4, 2009and September 28, 2008, the Company also had deferred costs of $55.9 and$54.0 million, of which $7.2 and $5.5 million is included in other currentassets and $48.7 and $48.5 million is included in other assets, respectively.

 

**Note 10. Benefit Plans**

 

*DefinedBenefit Plans*

 

The Company provides anon-contributory defined benefit retirement plan for certain hourly andsalaried employees (the “Retirement Plan”). Benefits under this plan are based on stated amounts for each year ofservice.  The Company’s funding policy isconsistent with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974.

 

The Company’s netperiodic pension cost for the Retirement Plan included the following componentsfor the third quarter and nine-month periods ended October 4, 2009 and September 28,2008, respectively:

 
| ** **                                     | ** ** | **Third  Quarter Ended** | ** ** | **Nine  Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Oct. 4,**         | ** ** | **Sept. 28,**          | ** ** | **Oct. 4,** | ** ** | **Sept. 28,** | ** ** |
| ** **                                     | ** ** | **2009**                 | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                     | ** ** | **(Thousands)**          | ** ** |
|                                           |       |                     |       |                   |       |   |   |   |   |
| Service cost                                   |       | $                        | 277        |                   | $          | 430 |   | $ | 979 |   | $ | 1,290 |   |
| Interest cost                                  |       | 646                      |       | 611                    |       | 1,931 |   | 1,832 |   |
| Expected return on plan assets                 |       | (770                     | )          | (792                   | )          | (2,354 | ) | (2,376 | ) |
| Amortization of unrecognized priorservice cost |       | 3                        |       | 3                      |       | 7 |   | 10 |   |
| Amortization of net losses fromearlier periods |       | 188                      |       | 105                    |       | 547 |   | 315 |   |
| Net periodic pension cost                      |       | $                        | 344        |                   | $          | 357 |   | $ | 1,110 |   | $ | 1,071 |   |

 

The Company madeRetirement Plan contributions of $2.9 million during the nine-month periodended October 4, 2009 and does not expect to make a pension plancontribution during the three-month period ending December 31, 2009.

 

21

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note 10. Benefit Plans – (Continued)**

 

*PostretirementMedical and Life Insurance*

 

The Company generallydoes not provide postretirement medical and life insurance benefits, althoughit subsidizes such benefits for certain employees and certain retirees.  Such subsidies were reduced or ended as of January 1,1997.  Effective March 1, 2005, theCompany amended the plan to eliminate postretirement medical benefits for allcurrent and future retirees.

 

Net periodicpostretirement benefit included the following components for the third quarterand nine-month periods ended October 4, 2009 and September 28, 2008,respectively:

 
| ** **                                     | ** ** | **Third  Quarter Ended** | ** ** | **Nine  Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Oct. 4,**         | ** ** | **Sept. 28,**          | ** ** | **Oct. 4,** | ** ** | **Sept. 28,** | ** ** |
| ** **                                     | ** ** | **2009**                 | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                     | ** ** | **(Thousands)**          | ** ** |
|                                           |       |                     |       |                   |       |   |   |   |   |
| Service cost                                   |       | $                        | 1          |                   | $          | 3 |   | $ | 6 |   | $ | 10 |   |
| Interest cost                                  |       | 29                       |       | 29                     |       | 84 |   | 87 |   |
| Amortization of unrecognized priorservice cost |       | (143                     | )          | (143                   | )          | (428 | ) | (428 | ) |
| Amortization of net gains fromearlier periods  |       | (51                      | )          | (56                    | )          | (157 | ) | (169 | ) |
| Net periodic postretirement benefit            |       | $                        | (164       | )                      | $          | (167 | ) | $ | (495 | ) | $ | (500 | ) |

 

As of October 4,2009, the Company expected to make aggregate benefit claim payments ofapproximately $0.2 million during 2009, which are related to postretirementlife insurance expenses.

 

**Note 11.  2001 Long-Term Incentive Plan**

 

Incentive units grantedunder the 2001 Long-Term Incentive Plan (the “2001 LTIP”) are valued at BookValue (as defined in the 2001 LTIP) or the value of such incentive unitsspecified at the date of grant. Increases or decreases in the Book Value of those incentive units resultin a change in the measure of compensation for the award.  Compensation expense for the Company’s incentiveunits was $8.5 and $3.6 million for the third quarter ended October 4,2009 and September 28, 2008, respectively, and $21.9 and $4.8 million forthe nine-month periods ended October 4, 2009 and September 28, 2008,respectively.  At October 4, 2009 andDecember 31, 2008, the 2001 LTIP liability amounted to $32.1 and $12.9million, respectively, and was included in accrued liabilities.

 

22

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note 11.  2001 Long-Term Incentive Plan – (Continued)**

 

Thefollowing is a summary of activity for incentive units related to the 2001LTIP:

 
| ** **                                        | ** ** | **Nine**            | ** ** | ** **            | ** ** |
|---------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **Months  Ended**   | ** ** | **Year-to-Date**      | ** ** |
| ** **                                        | ** ** | **October 4,** | ** ** | **December 31,** | ** ** |
| ** **                                        | ** ** | **2009**            | ** ** | **2008**              | ** ** |
|                                              |       |                |       |                  |       |
| Incentive  Units outstanding, beginning of period |       | 90,468              |       | 99,120                |       |
| Granted                                           |       | 725                 |       | 17,375                |       |
| Exercised                                         |       | (8,175              | )          | (18,686               | )          |
| Forfeited                                         |       | (2,910              | )          | (7,341                | )          |
| Incentive  Units outstanding, end of period       |       | 80,108              |       | 90,468                |       |
| Vested  Units outstanding, end of period          |       | 43,111              |       | 33,702                |       |

 

Theinitial value of each of the 725 incentive units granted on January 1,2009 was approximately $707.  The initialvalue of each of the 17,000 incentive units granted on January 1, 2008 wasapproximately $592 and the 375 incentive units granted on October 1, 2008was approximately $688.

 

**Note12.  Related Party Transactions**

 

TheCompany makes loans to, and borrows from, its parent corporations from time totime at prevailing market interest rates. As of October 4, 2009 and September 28, 2008, BMCA HoldingsCorporation owed the Company $56.4 and $56.3 million, including interest of$1.1 and $1.0 million, respectively, and the Company owed BMCA HoldingsCorporation $52.8 and $52.8 million, respectively, with no unpaidinterest.  Interest income on the Company’sloans to BMCA Holdings Corporation amounted to $0.6 and $0.9 million during thethird quarter ended October 4, 2009 and September 28, 2008, respectively, and$1.8 and $2.7 million during the nine-month periods ended October 4, 2009and September 28, 2008,respectively.  Interest expense on theCompany’s loans from BMCA Holdings Corporation amounted to $0.6 and $0.8million during the third quarter ended October 4, 2009 and September 28, 2008,respectively, and $1.7 and $2.6 million during the nine-month periods ended October 4,2009 and September 28, 2008,respectively.  Loans payableto/receivable from its parent corporations are due on demand and provide eachparty with the right of offset of its related obligation to the other party andare subject to limitations as outlined in the Senior Secured Credit Facilitiesand the Senior Notes.  Under the terms ofthe Senior Secured Revolving Credit

 

23

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note12.  Related Party Transactions –(Continued)**

 

Facilitiesand the indenture governing the Company’s Senior Notes at October 4, 2009,the Company could repay demand loans to its parent corporation amounting to$52.8 million, subject to certain conditions.

 

TheCompany has a management agreement (the “Management Agreement”) with ISPManagement Company, Inc., a subsidiary of International Specialty ProductsInc. (which, together with its subsidiaries, is referred to as “ISP”), anaffiliate, to provide the Company with certain management services.  Based on services provided to the Company in2009 under the Management Agreement, the aggregate amount payable to ISPManagement Company, Inc. under the Management Agreement for 2009,inclusive of the services provided to G-I Holdings, is not yet available;however, it is currently estimated to be similar to the $7.3 million paid in2008.  The Company does not expect anychanges to the Management Agreement to have a material impact on the Company’sresults of operations.

 

The Company and itssubsidiaries purchased a substantial portion of their headlap roofing granules,colored roofing granules and algae-resistant granules, on a purchase orderbasis, from ISP Minerals Inc. (“ISP Minerals”), an affiliate of BMCA and ofISP.  The amount of mineral productspurchased each year on this basis is based on current demand and is not subjectto minimum purchase requirements.  Forthe third quarter ended October 4, 2009 and September 28, 2008, theCompany and its subsidiaries purchased $17.2 and $13.7 million, respectively,of roofing granules, and for the nine-month periods ended October 4, 2009and September 28, 2008, the Company and its subsidiaries purchased $40.7 and $33.2 million,respectively, of roofing granules under this arrangement.

 

In addition to thegranules products purchased by the Company under the above-referenced purchaseorder basis, the balance of its granules purchased from ISP Minerals ispurchased under a contract expiring in 2013. The amount of mineral products purchased each year under the contract isbased on current demand and is not subject to minimum purchase requirements.  Under the contract, for the third quarterended October 4, 2009 and September 28, 2008, the Company purchased$23.4 and $24.2 million of roofing granules, respectively, and for thenine-month periods ended October 4, 2009 and September 28, 2008, theCompany purchased $55.4 and $66.1 million of roofing granules, respectively.

 

InFebruary 2009 and March 2009, after giving effect to the mostrestrictive of the aforementioned debt covenant restrictions, the Companydeclared and paid cash dividends of $5.0 and $5.0 million, respectively, to itsparent corporation.  In August 2008and October 2008, the Company declared and paid cash dividends of $2.5 and$5.0 million, respectively, to its parent corporation.

 

Includedin noncurrent assets as a tax receivable from parent corporation on the Company’sconsolidated balance sheet is $8.4 million at December 31, 2008,representing amounts paid in excess of amounts due to G-I

 

24

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note12.  Related Party Transactions –(Continued)**

 

Holdingswith respect to 2006 under the Tax Sharing Agreement.  The Company utilized the remaining receivablebalance at December 31, 2008 during its first quarter of 2009.  Included in current liabilities as a payableto related parties on the Company’s consolidated balance sheet at October 4,2009 is $1.9 million, representing a tax payable due to G-I Holdings under theTax Sharing Agreement.  These amounts areincluded in the net payable to related parties/parent corporations in theconsolidated statements of cash flows.

 

**Note 13.**  **Contingencies**

 

In connection with itsformation, the Company contractually assumed and agreed to pay the first $204.4million of liabilities of its indirect parent, G-I Holdings, forasbestos-related bodily injury claims relating to the inhalation of asbestosfiber contained in products sold by G-I Holdings or its predecessors (“AsbestosClaims”).  As of March 30, 1997, theCompany paid all of its assumed liabilities for Asbestos Claims.  G-I Holdings has agreed to indemnify theCompany against any other existing or future Asbestos Claims if assertedagainst the Company.  In January 2001,G-I Holdings filed a voluntary petition for reorganization under Chapter 11 ofthe U.S. Bankruptcy Code due to Asbestos Claims.

 

On February 2, 2001,the United States Bankruptcy Court for the District of New Jersey issued atemporary restraining order enjoining any existing or future claimant from bringingor prosecuting an Asbestos Claim against the Company.  By oral opinion on June 22, 2001, andwritten order entered February 22, 2002, the Bankruptcy Court convertedthe temporary restraints into a preliminary injunction prohibiting the bringingor 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 theDistrict of New Jersey seeking a declaratory judgment that BMCA has nosuccessor liability for Asbestos Claims against G-I Holdings and that it is notthe alter ego of G-I Holdings (the “BMCA Action”).  One of the parties to this matter, theOfficial Committee of Asbestos Claimants (the “creditors’ committee”),subsequently filed a counterclaim against the Company seeking a declarationthat BMCA has successor liability for Asbestos Claims against G-I Holdings andthat it is the alter ego of G-I Holdings. By order dated May 30, 2008, the District Court dismissed the BMCAAction without ruling on the merits of BMCA’s position that it has no successorliability for Asbestos Claims.

 

25

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note13.  Contingencies – (Continued)**

 

On or about February 8,2001, the creditors’ committee filed a complaint in the United StatesBankruptcy Court, District of New Jersey against G-I Holdings and theCompany.  The complaint requestedsubstantive consolidation of BMCA with G-I Holdings or an order directing G-IHoldings to cause BMCA to file for bankruptcy protection.

 

On July 7, 2004, theBankruptcy Court entered an order authorizing the creditors’ committee tocommence an adversary proceeding against the Company and others challenging, asa fraudulent conveyance, certain transactions entered into in connection withthe Company’s formation in 1994, in which G-I Holdings caused to be transferredto the Company all of its roofing business and assets and in which the Companyassumed certain liabilities relating to those assets, including a specifiedamount of liabilities for Asbestos Claims (the “1994 transaction”).  The Bankruptcy Court also permitted thecreditors’ committee to pursue a claim against holders of the Company’s bankand bond debt outstanding in 2000, seeking recovery from them, based on thecreditors’ committee’s theory that the 1994 transaction was a fraudulentconveyance.  The District Court enteredan order on June 21, 2006 affirming in part and vacating in part theBankruptcy Court’s July 7, 2004 order. Among other things, the District Court vacated that aspect of theBankruptcy Court’s order authorizing the creditors’ committee to pursueavoidance claims against the Company and the holders of the Company’s bank andbond debt as of 2000.

 

A Joint Plan ofReorganization of G-I Holdings was filed with the Bankruptcy Court on August 21,2008, and a First Amended Joint Plan of Reorganization of G-I Holdings wasfiled with the Bankruptcy Court on October 30, 2008.  Thereafter, additional amendments to theJoint Plan of Reorganization were filed, culminating with the Eighth AmendedJoint Plan of Reorganization (“Eighth Amended Joint Plan”), which was filed on October 5,2009.  On November 12, 2009, theBankruptcy Court and the Honorable Garrett E. Brown, Jr., Chief Judgeof the District Court for the District of New Jersey, jointly entered an OrderConfirming Eighth Amended Joint Plan of Reorganization of G-I Holdings and ACIInc. pursuant to Chapter 11 of the Bankruptcy Code.

 

26

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note13.  Contingencies – (Continued)**

 

On November 17, 2009, theEighth Amended Joint Plan became effective. With the effectiveness of the Eighth Amended Joint Plan, all of theactions described above have been resolved and all “protected parties” (asdefined in the Eighth Amended Joint Plan), including the Company and its subsidiaries,have been released from any liability with respect to Asbestos Claims.

 

*Tax Claims Against G-I Holdings*

 

On September 15,1997, G-I Holdings received a notice from the Internal Revenue Service (the “IRS”)of a deficiency in the amount of $84.4 million (after taking into account theuse of net operating losses and foreign tax credits otherwise available for usein later years) in connection with the formation in 1990 of Rhône-PoulencSurfactants and Specialties, L.P. (the “surfactants partnership”), apartnership in which G-I Holdings held an interest.  On September 21, 2001, the IRS filed aproof of claim with respect to such deficiency against G-I Holdings in the G-IHoldings’ bankruptcy.  If such proof ofclaim is sustained for years in which the Company was part of the G-I Holdingstax group, the Company and/or certain of the Company’s subsidiaries togetherwith G-I Holdings and several current and former subsidiaries of G-I Holdingscould be severally liable for those taxes and interest.  G-I Holdings has filed an objection to theproof of claim, which is the subject of an adversary proceeding pending in theUnited 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 PartialSummary Judgment, granting the government summary judgment on the issue of “adequatedisclosure” for statute of limitation purposes and denying G-I Holdings summaryjudgment on its other statute of

 

27

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note13.  Contingencies – (Continued)**

 

limitations defense(finding material issues of fact that must be tried).  If the IRS were to prevail for the years inwhich the Company and/or certain of its subsidiaries were not part of the G-IHoldings tax group, the Company nevertheless could be liable for approximately$40.0 million in taxes plus interest, although this calculation is subject touncertainty depending upon various factors including G-I Holdings’ ability tosatisfy its tax liabilities and the application of tax credits anddeductions.  In an opinion dated June 8,2007, the District Court decided that G-I Holdings cannot avail itself of the “bindingcontract” transitional relief with respect to the 1999 distribution of U.S.Treasury Bonds to G-I Holdings.  TheCompany believes that it will not be required to pay any incremental income taxto the Federal government with respect to this matter and that its ultimatedisposition will not have a material adverse effect on its business, financialposition or results of operations.

 

Fora further discussion with respect to the history of the foregoing litigation,and asbestos-related matters, see Notes 8, 9, 12, and 18 to the consolidatedfinancial statements contained in the Company’s 2008 Form 10-K.

 

*EnvironmentalLitigation*

 

TheCompany, together with other companies, is a party to a variety of proceedingsand lawsuits involving environmental matters under the U.S. ComprehensiveEnvironmental Response Compensation and Liability Act, and similar state laws,in which recovery is sought for the cost of cleanup of contaminated sites orremedial obligations are imposed, a number of which are in the early stages orhave been dormant for protracted periods. Most of these environmental claims do not seek to recover an amount ofspecific damages.  At most sites, the Company anticipatesthat liability will be apportioned among the companies found to be responsiblefor the presence of hazardous substances at the site.

 

While the Company cannotpredict whether adverse decisions or events can occur in the future, theCompany believes that the ultimate disposition of such matters will not have amaterial adverse effect on the liquidity, results of operations, cash flows orfinancial position of the Company.

 

*OtherContingencies*

 

In the ordinary course ofbusiness, the Company has several supply agreements that include minimum annualpurchase requirements.  In the eventthese purchase requirements are not met, the Company may be required to makepayments under these supply agreements. There have been no material changes to these contracts in the first ninemonths of 2009.

 

28

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note14.  Subsequent Events**

 

In October 2009, anindirect parent of BMCA formed a wholly-owned captive insurance subsidiary (the“Captive”) to provide insurance coverage to BMCA and its subsidiaries and otheraffiliated entities effective November 2009.  The Captive insures the deductible portion ofBMCA’s general insurance and residential product warranty obligations.

 

In November 2009,the Company reached an agreement in principal to settle a lawsuit pursuant towhich the defendant will be paying the Company $24.0 million during its fourthquarter ending December 31, 2009. Accordingly, the Company has not recognized the $24.0 million settlementin its accompanying consolidated financial statements at October 4, 2009.

 

On November 17,2009, the Company requested a letter of credit be issued of approximately$133.8 million under the terms of the Senior Secured Revolving Credit Facility.  This letter of credit was issued to providecredit enhancement for the obligations of G-I Holdings under the Eighth AmendedJoint Plan.

 

**Note15.  Guarantor Financial Information**

 

At October 4, 2009,all of the Company’s subsidiaries, each of which is wholly-owned by theCompany, were guarantors under the Company’s Senior Secured Credit Facilitiesand the indenture governing the Senior Notes. These guarantees are full, unconditional and joint and several.  In 2007, BMCA Acquisition Inc., the directparent of Elk, and Elk, as a result of its merger with BMCA Acquisition Sub,became co-obligors on the Senior Secured Credit Facilities.

 

Presented below iscondensed consolidating financial information for the Company, the co-obligorsubsidiary and the guarantor subsidiaries. This financial information should be read in conjunction with theconsolidated financial statements and other notes related thereto.  Separate financial statements for the Companyand the guarantor subsidiaries are not included herein, because the guaranteesare full, unconditional and joint and several.

 

29

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited) – (Continued)**

 

**Note 15.  GuarantorFinancial Information – (Continued)**

 

**CondensedConsolidating Statement of Operations**

**ThirdQuarter Ended October 4, 2009**

**(Thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Net  sales                                                                                   |       | $           | 768,317    |           | $          | 4,070            |       | $                | 19,996     |             | $          | — |   | $ | 792,383 |   |
| Intercompany  net sales                                                                      |       | —      |       | 165,834        |       | 1,189,351        |       | (1,355,185       | )          | —           |       |
| Total  net sales                                                                             |       | 768,317     |       | 169,904        |       | 1,209,347        |       | (1,355,185       | )          | 792,383          |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Costs  and expenses:                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Cost  of products sold                                                                       |       | 695,446     |       | 168,173        |       | 1,005,537        |       | (1,355,185       | )          | 513,971          |       |
| Selling,  general and administrative                                                         |       | 54,347      |       | 5,517          |       | 40,553           |       | —           |       | 100,417          |       |
| Amortization  of intangible assets                                                           |       | —      |       | 2,823          |       | 5                |       | —           |       | 2,828            |       |
| Restructuring  and other expenses                                                            |       | —      |       | 1,743          |       | 4,187            |       | —           |       | 5,930            |       |
| Other  (income) expense, net                                                                 |       | 1,825       |       | (53            | )          | 490              |       | —           |       | 2,262            |       |
| Total  costs and expenses, net                                                               |       | 751,618     |       | 178,203        |       | 1,050,772        |       | (1,355,185       | )          | 625,408          |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Income  (loss) before equity in earnings of subsidiaries, interest expense and income  taxes |       | 16,699      |       | (8,299         | )          | 158,575          |       | —           |       | 166,975          |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Equity  in earnings of subsidiaries                                                          |       | 83,797      |       | —         |       | —           |       | (83,797          | )          | —           |       |
| Interest  expense                                                                            |       | (16,990     | )          | (9,476         | )          | (10,300          | )          | —           |       | (36,766          | )          |
| Income  (loss) before income taxes                                                           |       | 83,506      |       | (17,775        | )          | 148,275          |       | (83,797          | )          | 130,209          |       |
| Income  tax (expense) benefit                                                                |       | 101         |       | 6,354          |       | (53,057          | )          | —           |       | (46,602          | )          |
| Net  income (loss)                                                                           |       | $           | 83,607     |           | $          | (11,421          | )          | $                | 95,218     |             | $          | (83,797 | ) | $ | 83,607 |   |

 

30

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) – (Continued)**

 

**Note15.  Guarantor Financial Information –(Continued)**

 

**CondensedConsolidating Statement of Operations**

**ThirdQuarter Ended September 28, 2008**

**(Thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Net  sales                                                                                   |       | $           | 825,441    |           | $          | 6,749            |       | $                | 20,636     |             | $          | — |   | $ | 852,826 |   |
| Intercompany  net sales                                                                      |       | —      |       | 226,308        |       | 1,271,483        |       | (1,497,791       | )          | —           |       |
| Total  net sales                                                                             |       | 825,441     |       | 233,057        |       | 1,292,119        |       | (1,497,791       | )          | 852,826          |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Costs  and expenses:                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Cost  of products sold                                                                       |       | 723,507     |       | 226,899        |       | 1,149,844        |       | (1,497,791       | )          | 602,459          |       |
| Selling,  general and administrative                                                         |       | 81,197      |       | 9,285          |       | 54,135           |       | —           |       | 144,617          |       |
| Amortization  of intangible assets                                                           |       | —      |       | 2,846          |       | —           |       | —           |       | 2,846            |       |
| Restructuring  and other expenses                                                            |       | —      |       | 1,324          |       | 5,282            |       | —           |       | 6,606            |       |
| Other  (income) expense, net                                                                 |       | 1,399       |       | (27            | )          | 386              |       | —           |       | 1,758            |       |
| Total  costs and expenses, net                                                               |       | 806,103     |       | 240,327        |       | 1,209,647        |       | (1,497,791       | )          | 758,286          |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Income  (loss) before equity in earnings of subsidiaries, interest expense and income  taxes |       | 19,338      |       | (7,270         | )          | 82,472           |       | —           |       | 94,540           |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Equity  in earnings of subsidiaries                                                          |       | 36,218      |       | —         |       | —           |       | (36,218          | )          | —           |       |
| Interest  expense                                                                            |       | (21,366     | )          | (7,427         | )          | (10,748          | )          | —           |       | (39,541          | )          |
| Income  (loss) before income taxes                                                           |       | 34,190      |       | (14,697        | )          | 71,724           |       | (36,218          | )          | 54,999           |       |
| Income  tax (expense) benefit                                                                |       | 483         |       | 5,058          |       | (25,867          | )          | —           |       | (20,326          | )          |
| Net  income (loss)                                                                           |       | $           | 34,673     |           | $          | (9,639           | )          | $                | 45,857     |             | $          | (36,218 | ) | $ | 34,673 |   |

 

31

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited) – (Continued)**

 

**Note 15.  GuarantorFinancial Information – (Continued)**

 

**CondensedConsolidating Statement of Operations**

**NineMonths Ended October 4, 2009**

**(Thousands)**

**(Unaudited)**

** **
| ** **                                                                                | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                      |       |        |       |           |       |             |       |             |       |             |       |
| Net sales                                                                                 |       | $           | 2,075,326  |           | $          | 15,293           |       | $                | 58,858     |             | $          | — |   | $ | 2,149,477 |   |
| Intercompany  net sales                                                                   |       | —      |       | 434,329        |       | 3,166,864        |       | (3,601,193       | )          | —           |       |
| Total net sales                                                                           |       | 2,075,326   |       | 449,622        |       | 3,225,722        |       | (3,601,193       | )          | 2,149,477        |       |
|                                                                                      |       |        |       |           |       |             |       |             |       |             |       |
| Costs and expenses:                                                                       |       |        |       |           |       |             |       |             |       |             |       |
| Cost of products sold                                                                     |       | 1,857,036   |       | 444,208        |       | 2,685,391        |       | (3,601,193       | )          | 1,385,442        |       |
| Selling, general andadministrative                                                        |       | 166,466     |       | 15,886         |       | 115,242          |       | —           |       | 297,594          |       |
| Amortization of intangible assets                                                         |       | —      |       | 8,516          |       | 5                |       | —           |       | 8,521            |       |
| Restructuring and other expenses                                                          |       | —      |       | 3,744          |       | 20,500           |       | —           |       | 24,244           |       |
| Other (income) expense, net                                                               |       | 1,764       |       | (221           | )          | 1,474            |       | —           |       | 3,017            |       |
| Total costs and expenses, net                                                             |       | 2,025,266   |       | 472,133        |       | 2,822,612        |       | (3,601,193       | )          | 1,718,818        |       |
|                                                                                      |       |        |       |           |       |             |       |             |       |             |       |
| Income (loss) before equity inearnings of subsidiaries, interest expense and income taxes |       | 50,060      |       | (22,511        | )          | 403,110          |       | —           |       | 430,659          |       |
|                                                                                      |       |        |       |           |       |             |       |             |       |             |       |
| Equity in earnings of subsidiaries                                                        |       | 207,076     |       | —         |       | —           |       | (207,076         | )          | —           |       |
| Interest expense                                                                          |       | (52,270     | )          | (25,991        | )          | (30,697          | )          | —           |       | (108,958         | )          |
| Income (loss) before income taxes                                                         |       | 204,866     |       | (48,502        | )          | 372,413          |       | (207,076         | )          | 321,701          |       |
| Income tax (expense) benefit                                                              |       | 797         |       | 17,495         |       | (134,330         | )          | —           |       | (116,038         | )          |
| Net income (loss)                                                                         |       | $           | 205,663    |           | $          | (31,007          | )          | $                | 238,083    |             | $          | (207,076 | ) | $ | 205,663 |   |

 

32

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited) – (Continued)**

 

**Note 15.  GuarantorFinancial Information – (Continued)**

 

**CondensedConsolidating Statement of Operations**

**NineMonths Ended September 28, 2008**

**(Thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                   | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Net  sales                                                                                   |       | $           | 2,073,823  |           | $          | 28,186           |       | $                | 58,172     |             | $          | — |   | $ | 2,160,181 |   |
| Intercompany  net sales                                                                      |       | —      |       | 563,601        |       | 3,217,142        |       | (3,780,743       | )          | —           |       |
| Total  net sales                                                                             |       | 2,073,823   |       | 591,787        |       | 3,275,314        |       | (3,780,743       | )          | 2,160,181        |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Costs  and expenses:                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Cost  of products sold                                                                       |       | 1,807,681   |       | 582,158        |       | 2,934,156        |       | (3,780,743       | )          | 1,543,252        |       |
| Selling,  general and administrative                                                         |       | 214,016     |       | 26,185         |       | 135,915          |       | —           |       | 376,116          |       |
| Amortization  of intangible assets                                                           |       | —      |       | 8,539          |       | —           |       | —           |       | 8,539            |       |
| Restructuring  and other expenses                                                            |       | —      |       | 3,748          |       | 30,046           |       | —           |       | 33,794           |       |
| Other  expense, net                                                                          |       | 2,082       |       | 32             |       | 1,052            |       | —           |       | 3,166            |       |
| Total  costs and expenses, net                                                               |       | 2,023,779   |       | 620,662        |       | 3,101,169        |       | (3,780,743       | )          | 1,964,867        |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Income  (loss) before equity in earnings of subsidiaries, interest expense and income  taxes |       | 50,044      |       | (28,875        | )          | 174,145          |       | —           |       | 195,314          |       |
|                                                                                         |       |        |       |           |       |             |       |             |       |             |       |
| Equity  in earnings of subsidiaries                                                          |       | 60,466      |       | —         |       | —           |       | (60,466          | )          | —           |       |
| Interest  expense                                                                            |       | (70,911     | )          | (16,626        | )          | (31,867          | )          | —           |       | (119,404         | )          |
| Income  (loss) before income taxes                                                           |       | 39,599      |       | (45,501        | )          | 142,278          |       | (60,466          | )          | 75,910           |       |
| Income  tax (expense) benefit                                                                |       | 7,830       |       | 17,072         |       | (53,383          | )          | —           |       | (28,481          | )          |
| Net  income (loss)                                                                           |       | $           | 47,429     |           | $          | (28,429          | )          | $                | 88,895     |             | $          | (60,466 | ) | $ | 47,429 |   |

 

33

----

 

**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note15.  Guarantor Financial Information –(Continued)**

 

**CondensedConsolidating Balance Sheet**

**October 4,2009**

**(Thousands)**

**(Unaudited)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                             |       |        |       |           |       |             |       |             |       |             |       |
| **ASSETS**                                       |       |        |       |           |       |             |       |             |       |             |       |
| Current  Assets:                                 |       |        |       |           |       |             |       |             |       |             |       |
| Cash  and cash equivalents                       |       | $           | 193,386    |           | $          | 88               |       | $                | 217        |             | $          | — |   | $ | 193,691 |   |
| Accounts  receivable, trade, net                 |       | 474,616     |       | 2,944          |       | 11,350           |       | —           |       | 488,910          |       |
| Accounts  receivable, other                      |       | 3,459       |       | 336            |       | 6,649            |       | —           |       | 10,444           |       |
| Inventories,  net                                |       | —      |       | 48,835         |       | 91,162           |       | —           |       | 139,997          |       |
| Deferred  income tax assets                      |       | 68,180      |       | —         |       | 1,140            |       | —           |       | 69,320           |       |
| Other  current assets                            |       | 8,092       |       | 895            |       | 4,625            |       | —           |       | 13,612           |       |
| Total  Current Assets                            |       | 747,733     |       | 53,098         |       | 115,143          |       | —           |       | 915,974          |       |
|                                             |       |        |       |           |       |             |       |             |       |             |       |
| Investment  in subsidiaries                      |       | 1,834,421   |       | —         |       | —           |       | (1,834,421       | )          | —           |       |
| Intercompany  loans including accrued interest   |       | 2,022,541   |       | (1,213,047     | )          | (809,494         | )          | —           |       | —           |       |
| Due  from/(to) subsidiaries, net                 |       | (2,641,345  | )          | 1,060,586      |       | 1,580,759        |       | —           |       | —           |       |
| Property,  plant and equipment, net              |       | —      |       | 260,716        |       | 372,847          |       | —           |       | 633,563          |       |
| Goodwill                                         |       | 59,323      |       | 589,127        |       | 6,390            |       | —           |       | 654,840          |       |
| Intangible  assets, net                          |       | —      |       | 187,734        |       | 329              |       | —           |       | 188,063          |       |
| Other  noncurrent assets                         |       | 81,118      |       | 7,054          |       | 22,816           |       | —           |       | 110,988          |       |
| Total  Assets                                    |       | $           | 2,103,791  |           | $          | 945,268          |       | $                | 1,288,790  |             | $          | (1,834,421 | ) | $ | 2,503,428 |   |
|                                             |       |        |       |           |       |             |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**    |       |        |       |           |       |             |       |             |       |             |       |
| Current  Liabilities:                            |       |        |       |           |       |             |       |             |       |             |       |
| Current  maturities of long-term debt            |       | $           | 9,485      |           | $          | 473              |       | $                | 10,381     |             | $          | — |   | $ | 20,339 |   |
| Accounts  payable                                |       | —      |       | 29,307         |       | 85,380           |       | —           |       | 114,687          |       |
| Payable  to related parties                      |       | 3,076       |       | —         |       | 23,903           |       | —           |       | 26,979           |       |
| Loans  payable to parent corporation             |       | 52,840      |       | —         |       | —           |       | —           |       | 52,840           |       |
| Accrued  liabilities                             |       | 71,273      |       | 9,837          |       | 150,515          |       | —           |       | 231,625          |       |
| Product  warranty claims                         |       | 12,600      |       | 3,600          |       | —           |       | —           |       | 16,200           |       |
| Total  Current Liabilities                       |       | 149,274     |       | 43,217         |       | 270,179          |       | —           |       | 462,670          |       |
|                                             |       |        |       |           |       |             |       |             |       |             |       |
| Long-term  debt less current maturities          |       | 1,514,468   |       | 3,345          |       | 49,833           |       | —           |       | 1,567,646        |       |
| Product  warranty claims                         |       | 42,838      |       | 4,911          |       | 135              |       | —           |       | 47,884           |       |
| Deferred  income tax liabilities                 |       | 104,484     |       | —         |       | 577              |       | —           |       | 105,061          |       |
| Other  liabilities                               |       | 170,445     |       | 8,251          |       | 19,189           |       | —           |       | 197,885          |       |
| Total  Liabilities                               |       | 1,981,509   |       | 59,724         |       | 339,913          |       | —           |       | 2,381,146        |       |
|                                             |       |        |       |           |       |             |       |             |       |             |       |
| Total  Stockholders’ Equity                 |       | 122,282     |       | 885,544        |       | 948,877          |       | (1,834,421       | )          | 122,282          |       |
| Total  Liabilities and Stockholders’ Equity |       | $           | 2,103,791  |           | $          | 945,268          |       | $                | 1,288,790  |             | $          | (1,834,421 | ) | $ | 2,503,428 |   |

 

34

----

** **

**BUILDINGMATERIALS CORPORATION OF AMERICA**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)– (Continued)**

** **

**Note 15.  GuarantorFinancial Information – (Continued)**

** **

**Condensed Consolidating Balance Sheet**

**December 31,2008**

**(Thousands)**

** **
| ** **                                                 | ** ** | **Parent********Company** | ** ** | **Co-Obligor********Subsidiary** | ** ** | **Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 |       |                      |       |                             |       |                              |       |             |       |             |       |
| **ASSETS**                                                 |       |                      |       |                             |       |                              |       |             |       |             |       |
| Current  Assets:                                           |       |                      |       |                             |       |                              |       |             |       |             |       |
| Cash  and cash equivalents                                 |       | $                         | 36,722     |                             | $          | 65                                |       | $                | 250        |             | $          | — |   | $ | 37,037 |   |
| Accounts  receivable, trade, net                           |       | 189,245                   |       | 1,491                            |       | 8,497                             |       | —           |       | 199,233          |       |
| Accounts  receivable, other                                |       | 2,298                     |       | 727                              |       | 7,872                             |       | —           |       | 10,897           |       |
| Inventories,  net                                          |       | —                    |       | 90,999                           |       | 257,450                           |       | —           |       | 348,449          |       |
| Deferred  income tax assets                                |       | 39,324                    |       | —                           |       | —                            |       | —           |       | 39,324           |       |
| Other  current assets                                      |       | 7,894                     |       | 1,329                            |       | 7,849                             |       | —           |       | 17,072           |       |
| Total  Current Assets                                      |       | 275,483                   |       | 94,611                           |       | 281,918                           |       | —           |       | 652,012          |       |
|                                                       |       |                      |       |                             |       |                              |       |             |       |             |       |
| Investment  in subsidiaries                                |       | 1,627,346                 |       | —                           |       | —                            |       | (1,627,346       | )          | —           |       |
| Intercompany  loans including accrued  interest       |       | 1,587,885                 |       | (867,963                         | )          | (719,922                          | )          | —           |       | —           |       |
| Due  from/(to) subsidiaries, net                           |       | (1,723,842                | )          | 670,948                          |       | 1,052,894                         |       | —           |       | —           |       |
| Property,  plant and equipment, net                        |       | —                    |       | 274,194                          |       | 381,075                           |       | —           |       | 655,269          |       |
| Goodwill                                                   |       | 59,323                    |       | 588,850                          |       | 5,471                             |       | —           |       | 653,644          |       |
| Intangible  assets, net                                    |       | —                    |       | 196,250                          |       | —                            |       | —           |       | 196,250          |       |
| Income  tax receivable from parent  corporation       |       | 8,400                     |       | —                           |       | —                            |       | —           |       | 8,400            |       |
| Other  noncurrent assets                                   |       | 82,842                    |       | 7,487                            |       | 24,410                            |       | —           |       | 114,739          |       |
| Total  Assets                                              |       | $                         | 1,917,437  |                             | $          | 964,377                           |       | $                | 1,025,846  |             | $          | (1,627,346 | ) | $ | 2,280,314 |   |
|                                                       |       |                      |       |                             |       |                              |       |             |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**    |       |                      |       |                             |       |                              |       |             |       |             |       |
| Current  Liabilities:                                      |       |                      |       |                             |       |                              |       |             |       |             |       |
| Current  maturities of long-term debt                      |       | $                         | 9,557      |                             | $          | 676                               |       | $                | 10,363     |             | $          | — |   | $ | 20,596 |   |
| Accounts  payable                                          |       | —                    |       | 18,400                           |       | 137,630                           |       | —           |       | 156,030          |       |
| Payable  to related parties                                |       | 1,225                     |       | —                           |       | 19,928                            |       | —           |       | 21,153           |       |
| Loans  payable to parent corporation                       |       | 52,840                    |       | —                           |       | —                            |       | —           |       | 52,840           |       |
| Accrued  liabilities                                       |       | 52,508                    |       | 12,953                           |       | 68,880                            |       | —           |       | 134,341          |       |
| Product  warranty claims                                   |       | 12,600                    |       | 3,600                            |       | —                            |       | —           |       | 16,200           |       |
| Total  Current Liabilities                                 |       | 128,730                   |       | 35,629                           |       | 236,801                           |       | —           |       | 401,160          |       |
|                                                       |       |                      |       |                             |       |                              |       |             |       |             |       |
| Long-term  debt less current maturities                    |       | 1,597,614                 |       | 3,647                            |       | 56,908                            |       | —           |       | 1,658,169        |       |
| Product  warranty claims                                   |       | 28,358                    |       | 307                              |       | 100                               |       | —           |       | 28,765           |       |
| Deferred  income tax liabilities                           |       | 73,103                    |       | —                           |       | —                            |       | —           |       | 73,103           |       |
| Other  liabilities                                         |       | 169,488                   |       | 8,242                            |       | 21,243                            |       | —           |       | 198,973          |       |
| Total  Liabilities                                         |       | 1,997,293                 |       | 47,825                           |       | 315,052                           |       | —           |       | 2,360,170        |       |
|                                                       |       |                      |       |                             |       |                              |       |             |       |             |       |
| Total  Stockholders’ Equity (Deficit)                 |       | (79,856                   | )          | 916,552                          |       | 710,794                           |       | (1,627,346       | )          | (79,856          | )          |
| Total  Liabilities and Stockholders’ Equity (Deficit) |       | $                         | 1,917,437  |                             | $          | 964,377                           |       | $                | 1,025,846  |             | $          | (1,627,346 | ) | $ | 2,280,314 |   |

 

35

----

 

**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) – (Continued)**

 

**Note15.  Guarantor Financial Information –(Continued)**

 

**CondensedConsolidating Statement of Cash Flows**

**NineMonths Ended October 4, 2009**

**(Thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
|                                                                                      |       |        |       |           |       |             |       |             |       |
| Cash  and cash equivalents, beginning of period                                           |       | $           | 36,722     |           | $          | 65               |       | $                | 250        |   | $ | 37,037 |   |
|                                                                                      |       |        |       |           |       |             |       |             |       |
| Cash  provided by operating activities:                                                   |       |        |       |           |       |             |       |             |       |
| Net  income (loss)                                                                        |       | (1,413      | )          | (31,007        | )          | 238,083          |       | 205,663          |       |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |        |       |           |       |             |       |             |       |
| Depreciation                                                                              |       | —      |       | 21,397         |       | 31,660           |       | 53,057           |       |
| Amortization  of intangible and other assets                                              |       | —      |       | 8,516          |       | 2,546            |       | 11,062           |       |
| Restructuring  and other expenses                                                         |       | —      |       | 5,388          |       | 22,536           |       | 27,924           |       |
| Deferred  income taxes                                                                    |       | (1,484      | )          | —         |       | —           |       | (1,484           | )          |
| Noncash  interest charges                                                                 |       | 16,517      |       | 636            |       | 755              |       | 17,908           |       |
| (Increase)  decrease in working capital items                                             |       | (267,965    | )          | 43,864         |       | 177,348          |       | (46,753          | )          |
| Increase  in product warranty claims                                                      |       | 14,480      |       | 4,604          |       | 35               |       | 19,119           |       |
| (Increase)  decrease in other assets                                                      |       | (3,203      | )          | 105            |       | (823             | )          | (3,921           | )          |
| Increase  (decrease) in other liabilities                                                 |       | (347        | )          | 9              |       | 258              |       | (80              | )          |
| Increase  (decrease) in net payable to related parties/parent corporations                |       | 493,495     |       | (44,553        | )          | (434,318         | )          | 14,624           |       |
| Other,  net                                                                               |       | 1           |       | 1,891          |       | (1,906           | )          | (14              | )          |
| Net  cash provided by operating activities                                                |       | 250,081     |       | 10,850         |       | 36,174           |       | 297,105          |       |
|                                                                                      |       |        |       |           |       |             |       |             |       |
| Cash  used in investing activities:                                                       |       |        |       |           |       |             |       |             |       |
| Capital  expenditures and acquisition in 2009                                             |       | —      |       | (10,321        | )          | (27,409          | )          | (37,730          | )          |
| Net  cash used in investing activities                                                    |       | —      |       | (10,321        | )          | (27,409          | )          | (37,730          | )          |
|                                                                                      |       |        |       |           |       |             |       |             |       |
| Cash  used in financing activities:                                                       |       |        |       |           |       |             |       |             |       |
| Proceeds  from issuance of long-term debt                                                 |       | 293,000     |       | —         |       | —           |       | 293,000          |       |
| Repayments  of long-term debt                                                             |       | (376,150    | )          | (506           | )          | (2,883           | )          | (379,539         | )          |
| Principal  repayments of capital leases                                                   |       | —      |       | —         |       | (5,915           | )          | (5,915           | )          |
| Distributions  to parent corporation                                                      |       | (7          | )          | —         |       | —           |       | (7               | )          |
| Dividends  to parent corporation                                                          |       | (10,000     | )          | —         |       | —           |       | (10,000          | )          |
| Loan  to parent corporation                                                               |       | (60         | )          | —         |       | —           |       | (60              | )          |
| Financing  fees and expenses                                                              |       | (200        | )          | —         |       | —           |       | (200             | )          |
| Net  cash used in financing activities                                                    |       | (93,417     | )          | (506           | )          | (8,798           | )          | (102,721         | )          |
| Net  change in cash and cash equivalents                                                  |       | 156,664     |       | 23             |       | (33              | )          | 156,654          |       |
| Cash  and cash equivalents, end of period                                                 |       | $           | 193,386    |           | $          | 88               |       | $                | 217        |   | $ | 193,691 |   |

 

36

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

**Note15.  Guarantor Financial Information –(Continued)**

 

**CondensedConsolidating Statement of Cash Flows**

**NineMonths Ended September 28, 2008**

**(Thousands)**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **Parent**  | ** ** | **Co-Obligor** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | **Company** | ** ** | **Subsidiary** | ** ** | **Subsidiaries** | ** ** | **Consolidated** | ** ** |
| ** **                                                                                           | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash  and cash equivalents, beginning of period                                                      |       | $           | —     |           | $          | 1,936            |       | $                | 4,388      |   | $ | 6,324 |   |
|                                                                                                 |       |        |       |           |       |             |       |             |       |
| Cash  provided by (used in) operating activities:                                                    |       |        |       |           |       |             |       |             |       |
| Net  income (loss)                                                                                   |       | (13,037     | )          | (28,429        | )          | 88,895           |       | 47,429           |       |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |        |       |           |       |             |       |             |       |
| Depreciation                                                                                         |       | —      |       | 20,829         |       | 32,934           |       | 53,763           |       |
| Amortization  of intangible and other assets                                                         |       | —      |       | 8,539          |       | 2,977            |       | 11,516           |       |
| Restructuring  and other expenses                                                                    |       | 4,643       |       | 15,737         |       | 40,351           |       | 60,731           |       |
| Deferred  income taxes                                                                               |       | 28,213      |       | —         |       | —           |       | 28,213           |       |
| Noncash  interest charges                                                                            |       | 5,397       |       | 888            |       | 463              |       | 6,748            |       |
| (Increase)  decrease in working capital items                                                        |       | (326,756    | )          | 28,331         |       | 5,651            |       | (292,774         | )          |
| Increase  (decrease) in product warranty claims                                                      |       | 3,153       |       | (452           | )          | —           |       | 2,701            |       |
| (Increase)  decrease in other assets                                                                 |       | (5,571      | )          | 757            |       | (6,801           | )          | (11,615          | )          |
| Increase  (decrease) in other liabilities                                                            |       | (789        | )          | 912            |       | 144              |       | 267              |       |
| Increase  (decrease) in net payable to related parties/parent corporations                           |       | 206,379     |       | (40,604        | )          | (142,551         | )          | 23,224           |       |
| Other,  net                                                                                          |       | —      |       | (124           | )          | (14,094          | )          | (14,218          | )          |
| Net  cash provided by (used in) operating activities                                                 |       | (98,368     | )          | 6,384          |       | 7,969            |       | (84,015          | )          |
|                                                                                                 |       |        |       |           |       |             |       |             |       |
| Cash provided by (used  in) investing activities:                                                    |       |        |       |           |       |             |       |             |       |
| Capital  expenditures                                                                                |       | —      |       | (7,700         | )          | (20,939          | )          | (28,639          | )          |
| Proceeds  from sale of assets                                                                        |       | —      |       | —         |       | 21,443           |       | 21,443           |       |
| Net  cash provided by (used in) investing activities                                                 |       | —      |       | (7,700         | )          | 504              |       | (7,196           | )          |
|                                                                                                 |       |        |       |           |       |             |       |             |       |
| Cash  provided by (used in) financing activities:                                                    |       |        |       |           |       |             |       |             |       |
| Proceeds  from issuance of long-term debt                                                            |       | 830,000     |       | —         |       | —           |       | 830,000          |       |
| Repayments  of long-term debt                                                                        |       | (570,895    | )          | (548           | )          | (2,559           | )          | (574,002         | )          |
| Purchase  of industrial development revenue bond certificates issued by the Company                  |       | —      |       | —         |       | (4,800           | )          | (4,800           | )          |
| Principal  repayments of capital leases                                                              |       | —      |       | —         |       | (5,262           | )          | (5,262           | )          |
| Distribution  to parent corporation                                                                  |       | (65         | )          | —         |       | —           |       | (65              | )          |
| Dividend  to parent corporation                                                                      |       | (2,500      | )          | —         |       | —           |       | (2,500           | )          |
| Loan  to parent corporation                                                                          |       | (99         | )          | —         |       | —           |       | (99              | )          |
| Financing  fees and expenses                                                                         |       | (576        | )          | —         |       | —           |       | (576             | )          |
| Net  cash provided by (used in) financing activities                                                 |       | 255,865     |       | (548           | )          | (12,621          | )          | 242,696          |       |
| Net  change in cash and cash equivalents                                                             |       | 157,497     |       | (1,864         | )          | (4,148           | )          | 151,485          |       |
| Cash  and cash equivalents, end of period                                                            |       | $           | 157,497    |           | $          | 72               |       | $                | 240        |   | $ | 157,809 |   |

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIALCONDITION AND RESULTS OF OPERATIONS               **

 

Weare a leading national manufacturer and marketer of a broad line of asphalt andpolymer-based roofing products and accessories for the residential andcommercial roofing markets.  During thefirst quarter of 2007, Building Materials Corporation of America, which werefer to as BMCA, acquired ElkCorp, which we refer to as Elk, a Dallas,Texas-based manufacturer of roofing products and building materials, resultingin Elk becoming an indirect wholly-owned subsidiary of BMCA.

 

Webelieve the Elk acquisition has strategically positioned us for growth in theroofing industry and building products market and has allowed us to build onour market leadership position and create comprehensive market-leading productofferings.  Our principal lines ofresidential roofing shingles are the Timberline® series, the Sovereign® series,Designer Lifetime Shingles and Specialty Shingles.  The Timberline series includes the TimberlinePrestique® 30 High Definition®, Timberline Natural ShadowTM, TimberlinePrestique 40, Timberline Prestique Lifetime and Timberline Prestique Grande®shingles.  Our Designer Lifetime shinglesinclude the Slateline®, Grand SlateTM, Grand Sequoia®, Grand CanyonTM, CountryMansion®, Capstone®, and Camelot® shingles. We sell specialty roofing products under the TruSlateTM product line,which offers a patented genuine slate roofing system.  We supply the major components necessary toinstall a complete roofing system from underlayments to attic ventilationproducts and accessories, under our Roof System Solution.  We have improved our sales mix of residentialroofing products by increasing our emphasis on laminated shingles and accessoryproducts (the Timberline series, Designer Lifetime Shingles and TruSlate),which are generally sold at higher prices and more attractive profit marginsthan our standard strip shingle products (the Sovereign series).  Unless otherwise indicated by the context, “we,”“us,” and “our” refer to Building Materials Corporation of America and itsconsolidated subsidiaries.

 

**CriticalAccounting Policies**

 

There have been nosignificant changes to our Critical Accounting Policies during the nine-monthperiod ended October 4, 2009.  For afurther discussion on our Critical Accounting Policies, reference is made toManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, “Critical Accounting Policies” in our annual report on Form 10-Kfor the fiscal year ended December 31, 2008, which was filed with theSecurities and Exchange Commission, which we refer to as the SEC, on March 31,2009, which we refer to as the 2008 Form 10-K.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

**Resultsof Operations**

 

Roofingproducts sales is our dominant business, typically accounting for approximately95% of our consolidated net sales.  Themain drivers of our roofing business include: the nation’s aging housing stock;existing home sales; new home construction; larger new homes; home ownershiprates; and extreme weather and energy concerns. Our roofing business is also affected by raw material costs, includingasphalt and other petroleum-based raw materials, as well as energy, andtransportation and distribution costs.

 

*ThirdQuarter 2009 Compared With*

*ThirdQuarter 2008*

 

We recorded net income of $83.6 million inthe third quarter of 2009 compared to net income of $34.7 million in the thirdquarter of 2008.  Our reported net incomein the third quarter of 2009 included $4.2 million after-tax ($6.5 millionpre-tax) restructuring and other expenses, of which $0.4 million after-tax($0.6 million pre-tax) was included in cost of products sold.  Our reported net income in the third quarterof 2008 included $10.4 million of after-tax ($16.6 million pre-tax)restructuring and other expenses, of which $1.1 million after-tax ($1.8 millionpre-tax) was included as a reduction in net sales and $5.1 million after-tax($8.2 million pre-tax) was included in cost of products sold.  Included in restructuring and other expensesfor the third quarter of 2008 and 2009 are plant closing expenses related tothe closure of several manufacturing facilities, integration-related costs andthe write-down of selected inventories. Excluding restructuring and other expenses, third quarter of 2009 net incomewas $87.8 million compared to the third quarter of 2008 net income of $45.1million.  The increase in reported netincome for the third quarter of 2009 was primarily attributable to higherincome before interest expense and income taxes and lower interest expense.

 

Net sales for the third quarter of 2009were $792.4 million compared to third quarter of 2008 net sales of $852.8million, which included $1.8 million of restructuring-related salesdiscounts.  Net sales in the thirdquarter of 2009 were positively affected by higher average selling prices ofresidential and commercial roofing products, which were more than offset by theimpact of lower unit volumes of residential and commercial roofing products.

 

Income before interest expense and incometaxes in the third quarter of 2009 was $167.0 million compared to income beforeinterest expense and income taxes of $94.5 million in the third quarter of2008.  Our reported income beforeinterest expense and income taxes in the third quarter of 2009 included $6.5million of restructuring and other expenses, of which $0.6 million was includedin cost of products sold.  Our reportedincome before interest expense and income taxes in the third quarter of 2008included $16.6 million of restructuring and other expenses, of which $1.8million was included as a reduction in net sales and $8.2 million was includedin cost of

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

productssold.  Excluding these items thirdquarter of 2009 income before interest expense and income taxes was $173.5million compared to third quarter of 2008 income before interest expense andincome taxes of $111.1 million.  Theincrease was primarily due to higher average selling prices of residential andcommercial roofing products, lower raw material costs, including asphalt,improved operating efficiencies and lower transportation costs, which werepartially offset by the impact of lower unit volumes of residential andcommercial roofing products.

 

Interest expense in the third quarter of2009 decreased to $36.8 million compared to $39.5 million in the third quarterof 2008.  The decrease in the thirdquarter of 2009 interest expense was primarily due to lower average borrowingsand a lower average interest rate.

 

*BusinessSegment Information*

 

*Net Sales. *Netsales of roofing products decreased to $766.5 million for the third quarter of2009 compared with $817.5 million for the third quarter of 2008, which included$1.8 million of restructuring-related sales discounts.  Net sales of roofing products in the thirdquarter of 2009 were positively affected by higher average selling prices of residentialand commercial roofing products, which were more than offset by the impact oflower unit volumes of residential and commercial roofing products.  Net sales of specialty building products andaccessories decreased to $25.9 million for the third quarter of 2009 comparedwith $35.3 million for the third quarter of 2008 due to continued softer newconstruction and remodeling demand.

 

*Gross Margin*.  Our gross margin was $278.4 million or 35.1%of net sales for the third quarter of 2009 compared with $250.4 million or29.4% of net sales for the third quarter of 2008.  Included in our gross margin for the thirdquarter of 2009 were $0.6 million of restructuring and other expenses, whichwas included in cost of products sold. Included in our gross margin for the third quarter of 2008 were $10.0million of restructuring and other expenses, of which $1.8 million was includedas a reduction in net sales and $8.2 million was included in cost of productssold.  The increase in our gross marginis primarily due to higher average selling prices of residential and commercialroofing products, lower raw material costs, including asphalt, and improvedoperating efficiencies, which were partially offset by the impact of lower unitvolumes of residential and commercial roofing products.

 

*Nine Months 2009 Compared With*

*NineMonths 2008*

 

We recorded net income of $205.7 millionin the first nine months of 2009 compared to net income of $47.4 million in thefirst nine months of 2008.  Our reportednet income in the first nine months of 2009 included $17.9 million after-tax($27.9 million pre-tax) restructuring and other

 

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** **

**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

expenses,of which $2.4 million after-tax ($3.7 million pre-tax) was included in cost ofproducts sold.  Our reported net incomein the first nine months of 2008 included $37.9 million after-tax ($60.7million pre-tax) restructuring and other expenses, of which $2.9 millionafter-tax ($4.6 million pre-tax) was included as a reduction in net sales and$13.9 million after-tax ($22.3 million pre-tax) was included in cost ofproducts sold.  Included in restructuringand other expenses for the first nine months of 2008 and 2009 are plant closingexpenses related to the closure of several manufacturing facilities,integration-related costs and the write-down of selected inventories.  Excluding restructuring and other expenses,the first nine months of 2009 net income was $223.6 million compared to thefirst nine months of 2008 net income of $85.3 million.  The increase in reported net income for thefirst nine months of 2009 was primarily attributable to higher income beforeinterest expense and income taxes and lower interest expense.

 

Net sales for the first nine months of2009 were $2,149.5 million compared to the first nine months of 2008 net salesof $2,160.2 million, which included $4.6 million of restructuring-related salesdiscounts.  Net sales in the first ninemonths of 2009 were positively affected by higher average selling prices ofresidential and commercial roofing products, which were more than offset by theimpact of lower unit volumes of residential and commercial roofing products andlower net sales of specialty building products and accessories.

 

Income before interest expense and incometaxes in the first nine months of 2009 was $430.7 million compared to incomebefore interest expense and income taxes of $195.3 million in the first ninemonths of 2008.  Our reported incomebefore interest expense and income taxes in the first nine months of 2009included $27.9 million of restructuring and other expenses, of which $3.7million was included in cost of products sold. Our reported income before interest expense and income taxes in thefirst nine months of 2008 included $60.7 million of restructuring and otherexpenses, of which $4.6 million was included as a reduction in net sales and$22.3 million was included in cost of products sold.  Excluding these items, the first nine monthsof 2009 income before interest expense and income taxes was $458.6 millioncompared to the first nine months of 2008 income before interest expense andincome taxes of $256.0 million.  Theincrease in the first nine months of 2009 income before interest expense andincome taxes was primarily due to higher average selling prices of residentialand commercial roofing products, lower raw material costs, including asphalt,improved operating efficiencies and lower transportation costs, which werepartially offset by the impact of lower unit volumes of residential andcommercial roofing products and lower net sales of specialty building productsand accessories.

 

Interest expense in the first nine monthsof 2009 decreased to $109.0 million compared to $119.4 million in the firstnine months of 2008.  The decrease in thefirst nine months of 2009 interest expense was primarily due to lower averageborrowings and a lower average interest rate.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

*BusinessSegment Information*

 

*Net Sales. *Netsales of roofing products increased to $2,067.7 million for the first ninemonths of 2009 compared with $2,047.7 million for the first nine months of2008, which included $4.6 million of restructuring-related salesdiscounts.  The increase in the firstnine months of 2009 net sales of roofing products was primarily due to higher average selling prices ofresidential and commercial roofing products, which were partially offset by theimpact of lower unit volumes of residential and commercial roofingproducts.  Net sales of specialty building products and accessories decreased to$81.8 million for the first nine months of 2009 compared with $112.5 millionfor the first nine months of 2008 due to continued softer new construction andremodeling demand.

 

*Gross Margin*.  Our gross margin was $764.0 million or 35.5%of net sales for the first nine months of 2009 compared with $616.9 million or28.6% of net sales for the first nine months of 2008.  Included in our gross margin for the firstnine months of 2009 were $3.7 million of restructuring and other expenses,which was included in cost of products sold. Included in our gross margin for the first nine months of 2008 were$26.9 million of restructuring and other expenses, of which $4.6 million wasincluded as a reduction in net sales and $22.3 million was included in cost ofproducts sold.  The increase in our grossmargin is primarily due to higher average selling prices of residential andcommercial roofing products, lower raw material costs, including asphalt, andimproved operating efficiencies, which were partially offset by the impact oflower unit volumes of residential and commercial roofing products and lower netsales of specialty building products and accessories.

 

**Liquidityand Financial Condition**

 

*CashFlows and Cash Position*

 

Sales of roofing productsand specialty building products and accessories in the northern regions of theUnited States generally decline in the late fall and winter months due to coldweather.  In addition, extreme weatherconditions can result in higher customer demand during our peak operatingseason depending on the extent and severity of the damage from these extremeweather conditions.  Due to the seasonaldemands of our business, together with extreme weather conditions, we generallyhave negative cash flows from operations during the first six months of ourfiscal year, which are primarily driven by our cash invested in both accountsreceivable and inventories to meet these seasonal operating demands.  Generally, in the third and fourth quartersof our fiscal year, our cash flows from operations become positive for eachquarter, as our investment in inventories and accounts receivable no longercontinues to increase, as is customary in the first six months of our fiscalyear.  Our seasonal working capitalneeds, together with our debt service obligations, capital expenditure requirementsand other contracted arrangements, adversely impact

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

our liquidity during thisperiod.  We rely on our cash and cashequivalents on hand and our $600.0 million Senior Secured Revolving CreditFacility due February 2012, which we refer to as our Senior SecuredRevolving Credit Facility (see Long-Term Debt), to support our overall cashflow requirements during these periods. We expect to continue to rely on our cash and cash equivalents on handand external financings to maintain operations over the short and long-term andto continue to have access to the financing markets, subject to the thenprevailing market terms and conditions.

 

Net cash inflow fromoperating and investing activities was $259.4 million during the first ninemonths of 2009, including $297.1 million of cash provided by operations,partially offset by the reinvestment of $37.7 million for capital programs andan acquisition.

 

Cash invested inadditional working capital totaled $46.8 million during the first nine monthsof 2009, reflecting an increase in total accounts receivable of $288.6 million,due to the seasonality of our business, a $205.8 million decrease ininventories primarily due to aggressive inventory management due to the currentuncertain industry demand including a continued weak housing environment, a$3.5 million decrease in other current assets, a $56.0 million net increase inaccounts payable and accrued liabilities and $23.5 million in payments forrestructuring and other expenses.  Thenet cash provided by operating activities also included a $14.6 million netincrease in the payable to related parties/parent corporations, primarilyattributable to $107.4 million in current Federal income taxes, which waspartially offset by $96.7 million in Federal income taxes paid, pursuant to ourTax Sharing Agreement with our parent corporation and a $3.9 million increasein amounts due to an affiliated company with respect to the purchases ofroofing granules.  In addition, net cashprovided by operating activities included $17.9 million of non-cash interestcharges, of which $11.3 million was attributable to amortization expenserelated to our swaps (see Derivative and Hedging Transactions below), anincrease of $19.1 million for product warranty claims and $27.9 million inrestructuring and other expenses (see Restructuring and Other Expenses below).

 

Net cash used infinancing activities totaled $102.7 million during the first nine months of2009, including $293.0 million of aggregate proceeds from the issuance oflong-term debt, related to the first nine months of 2009 cumulative borrowingsunder our Senior Secured Revolving Credit Facility.  Financing activities also included $379.5million in aggregate repayments of long-term debt, of which $369.0 millionrelated to the first nine months of 2009 cumulative repayments under our SeniorSecured Revolving Credit Facility, $7.2 million related to our $975.0 millionTerm Loan Facility, which we refer to as the Term Loan and $2.5 million relatedto our Chester, South Carolina loan obligation. In addition, financing activities included aggregate principal paymentsof $5.9 million on our capital leases, $10.0 million of cash dividends paid toour parent corporation and $0.2 million in financing fees and expensesprimarily related to prior debt refinancings.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

*Restructuring and Other Expenses*

 

We initiated arestructuring plan, which we refer to as the 2007 Restructuring Plan, which weformulated in connection with the acquisition of Elk.  The 2007 Restructuring Plan was created toeliminate cost redundancies recognized due to the acquisition of Elk and toreduce our overall cost structure.  The2007 Restructuring Plan has been fully implemented as of December 31, 2008and is substantially complete as of October 4, 2009.  We account for our restructuring activitiesin accordance with the accounting guidance on exit or disposal costobligations, impairments or disposal of long-lived assets and inventorymarkdowns or other costs associated with restructuring.

 

*2008 Restructuring and OtherExpenses*

 

In connection with theacquisition of Elk, we identified $64.1 million of restructuring and otherexpenses in our fiscal year ended December 31, 2008, which included $14.2million of plant closing expenses, $3.3 million in employee severance paymentsand $46.6 million in integration-related expenses.  Integration-related expenses primarilyconsisted of $26.9 million of inventory write-downs, $6.1 million ofrestructuring-related sales discounts and $13.6 million of other integrationexpenses.

 

We recorded $73.2 millionof our overall identified restructuring and other expenses in our statement ofincome during our fiscal year ended December 31, 2008, of which $6.1million was reflected as a reduction in net sales due to restructuring-relatedsales discounts, $26.9 million was charged to cost of products sold and $40.2million was charged to restructuring and other expenses.

 

*Nine-Months Ended October 4,2009 Restructuring and Other Expenses*

 

In February 2009, weannounced the temporary shutdown of two manufacturing facilities, one inShafter, California and the other in Nashville, Tennessee as a result of weakermarket demand.  As a result of theseactions and other charges related to the acquisition of Elk, we identified anadditional $27.6 million of restructuring and other expenses during our ninemonths ended October 4, 2009, which included $19.0 million of plantclosing expenses, $1.5 million in employee severance payments and $7.1 millionin integration-related expenses. Integration-related expenses primarily consisted of $3.7 million ofinventory write-downs and $3.4 million of other integration expenses.

 

We recorded $27.9 millionof our overall restructuring and other expenses in our statement of incomeduring our nine-month period ended October 4, 2009, of which $3.7 millionwas charged to cost of products sold

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

and $24.2 million wascharged to restructuring and other expenses. We expect to incur future operating losses in connection with the 2007Restructuring Plan and the temporary shutdown of the Nashville and Shaftermanufacturing facilities, which will be recognized in the periods in which theyare incurred.

 

The table below detailsour restructuring and other expense accruals and charges made against theaccrual during our nine months ended October 4, 2009:

 
| **Restructuring  and  Other Expenses**                                | ** ** | **Plant********Closing********Expenses** | ** ** | **Employee********Severance********Payments** | ** ** | **Integration********Expenses** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|-----------|------------|
| ** **                                                            | ** ** | **(Thousands)**                          | ** ** |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |       |
| Beginning  balance, as of December 31, 2008                      |       | $                                        | 3,452      |                                          | $          | —                          |       | $         | 5,205      |   | $ | 8,657 |   |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |       |
| Current period costs,  net                                            |       | 18,957                                   |       | 1,493                                         |       | 7,474                           |       | 27,924    |       |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |       |
| Cash payments                                                         |       | (15,151                                  | )          | (1,493                                        | )          | (6,894                          | )          | (23,538   | )          |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |       |
| Amount charged to  property, plant and equipment for asset write-down |       | (4,039                                   | )          | —                                        |       | (584                            | )          | (4,623    | )          |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |       |
| Amount charged to  write-off inventory                                |       | —                                   |       | —                                        |       | (2,182                          | )          | (2,182    | )          |
|                                                                  |       |                                     |       |                                          |       |                            |       |      |       |
| Non-cash items                                                        |       | —                                   |       | —                                        |       | (336                            | )          | (336      | )          |
| Ending balance, as of  October 4, 2009                           |       | $                                        | 3,219      |                                          | $          | —                          |       | $         | 2,683      |   | $ | 5,902 |   |

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

*Long-Term Debt*

 

Long-term debt consistsof the following at October 4, 2009 and December 31, 2008:

 
| ** **                                                   | ** ** | **October 4,********2009** | ** ** | **December 31,********2008** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                   | ** ** | **(Thousands)**                 | ** ** |
|                                                         |       |                            |       |                              |       |
| 7 3/4% Senior Notes due 2014                                 |       | $                               | 250,433    |                              | $          | 250,500 |   |
| Borrowings under the Senior SecuredRevolving Credit Facility |       | —                          |       | 76,000                            |       |
| Term Loan                                                    |       | 948,520                         |       | 955,670                           |       |
| Junior Lien Term Loan                                        |       | 325,000                         |       | 325,000                           |       |
| Obligations under capital leases                             |       | 51,537                          |       | 55,956                            |       |
| Industrial development revenue bond                          |       | 2,730                           |       | 2,820                             |       |
| Chester Loan                                                 |       | 2,634                           |       | 5,126                             |       |
| Other notes payable                                          |       | 7,131                           |       | 7,693                             |       |
| Total                                                        |       | 1,587,985                       |       | 1,678,765                         |       |
| Less current maturities                                      |       | (20,339                         | )          | (20,596                           | )          |
| Long-term debt less current maturities                       |       | $                               | 1,567,646  |                              | $          | 1,658,169 |   |

 

As of October 4,2009, we had total outstanding consolidated indebtedness of $1,640.8 million,which included $52.8 million of demand loans to our parent corporation.  We anticipate funding these obligationsprincipally from our cash and cash equivalents on hand, cash flow fromoperations and/or borrowings under our Senior Secured Revolving CreditFacility.

 

As of October 4,2009, we were in compliance with all covenants under the Senior Secured RevolvingCredit Facility, the Term Loan, the $325.0 million Junior Lien Term LoanFacility, which we refer to as the Junior Lien Term Loan, and collectively withthe Senior Secured Revolving Credit Facility and the Term Loan we refer to asthe Senior Secured Credit Facilities; and the indenture governing our7 3/4% Senior Notes due 2014, which we refer to as the Senior Notes.  As of October 4, 2009, the net bookvalue of the collateral securing the Senior Secured Revolving Credit FacilityCollateral (as defined in the Senior Secured Revolving Credit Facility) and theTerm Loan Collateral (as defined in the Term Loan) was $912.7 and $1,647.1million, respectively.

 

At October 4, 2009,we had outstanding letters of credit of approximately $40.9 million, whichincluded approximately $10.6 million of standby letters of credit related tocertain obligations of G-I Holdings.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

On September 11,2009, we entered into an amendment to the Senior Secured Revolving CreditFacility.  Such amendment did not resultin any material changes to the Senior Secured Revolving Credit Facility.

 

*Derivative and Hedging Transactions*

 

*Hedging Strategy*

 

We were exposed to theimpact of variable interest rate fluctuations on certain of our debtfinancings; however, we limit our variable interest rate exposure through theuse of derivative instruments, which reduce the risk of interest ratefluctuations related to our debt.  As aresult of the use of derivative instruments, we have exposure to the risk thatour counterparties to derivative contracts will fail to meet their contractualobligations.  In order to mitigate ourcounterparty credit risk, we enter into derivative contracts with selectedmajor financial institutions.  Ourpolicies and procedures for mitigating counterparty credit risk on derivativetransactions include reviewing and establishing limits for credit exposure witheach financial institution and a continuous assessment of the creditworthinessof each counterparty.  The right ofset-off that exists under certain of these derivative contracts enables us,subject to each derivative contract, to net amounts due to and from thecounterparty reducing the maximum loss from credit risk in the event ofcounterparty default.

 

*Interest Rate Swap Agreements*

 

In March 2007, weentered into forward-starting interest rate swap agreements, which we refer toas swaps, with an effective date of April 23, 2007 and a maturity date of April 23,2012.  These swaps were initiated inorder to hedge the variable interest rate risk associated with our Term Loan,and they are structured that we receive interest based on the three-month LIBORand pays interest on a fixed rate basis. In October 2007, we entered into additional interest rate swapsrelated to our Term Loan with an effective date of October 23, 2007 and amaturity date of October 23, 2012 under similar terms.

 

On April 23, 2009,we exercised our option under our Term Loan to change the interest rate for ourLIBOR advances from three-month to one-month LIBOR.  We continued to receive three-month LIBOR andpay fixed rate interest under our swap agreements.  The election of one-month LIBOR on our TermLoan resulted in de-designating our original swap hedging relationship andsubsequently re-designating a new swap hedging relationship for our Term Loan.  As a result of the election, we recognized a$1.1 and $0 million gain related to swap ineffectiveness as a component ofinterest expense during our third quarter and nine months ended October 4,2009, respectively.  In addition, as aresult of this election, we recognized $6.4 and $11.3 million of interestexpense during our third quarter and nine months ended October 4, 2009,respectively, due to the straight-line amortization of the unrealized

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

losses remaining inaccumulated other comprehensive income/loss, which we refer to as OCI, at April 23,2009.  The remaining amount of unrealizedlosses at October 4, 2009 will be amortized over the remaining life of theoriginal swaps.

 

We continue to accountfor our new swap hedging relationship in accordance with the accountingguidance for derivatives and hedging, and as such our swaps are treated as cashflow hedges.  Our swaps are measured eachperiod using the hypothetical derivative method in accordance with theaccounting guidance for derivatives and hedging, which requires our actualswaps liability to be recorded at fair value, and OCI to reflect the lesser ofeither the cumulative change in the fair value of the actual swap or thecumulative change in the fair value of the hypothetical swap, which we refer toas the perfect swap.  In any given period,to the extent the cumulative change in the fair value of the actual swap isgreater than the cumulative change in the fair value of the perfect swap, thedifference would be recognized as ineffectiveness as a component of interestexpense in our statement of income.  SeeNote 7 to Consolidated Financial Statements for tabular disclosure of the fairvalue of our derivative liability at October 4, 2009 and the effect of ourderivative instruments on our operating results for the three and nine-monthperiods ended October 4, 2009, respectively.  As of October 4, 2009, due toamortization, ineffectiveness and accrued swap interest, we estimated thatduring the twelve months ending September 2010, approximately $34.6million of unrealized losses will be reclassified from OCI and recognized as acomponent of interest expense in our statement of income, subject to changes inthe LIBOR rate.

 

We value our interestrate swap agreements based on fair value measurement Level 2 inputs frommodel-derived valuations whose significant inputs are quoted LIBOR contracts,Eurodollar futures and on-the-run swap markets. The accounting guidance for fair value measurements requires that thevaluation of derivative assets and liabilities must take into account theparties’ nonperformance risk.  Wediscounted the value of our derivative liabilities based on the credit spreadfor our debt as determined by the market trading price.  See Fair Value Measurements.

 

*Treasury Lock Agreements*

 

In July 2007, weentered into treasury lock agreements, which we refer to as treasury locks,with a maturity date of July 31, 2012, as additional hedging instrumentsrelated to our Term Loan.  On October 30,2007, we settled our open treasury lock hedging positions, which resulted in apre-tax fair value loss and cash settlement of approximately $4.9 million,which is being amortized into our statement of income over the life of the TermLoan pursuant to the requirements of the accounting guidance for derivativesand hedging.  During our third quarterended October 4, 2009 and September 28, 2008, we amortized $0.2 and$0.2 million, respectively, of the loss related to our treasury locks intointerest expense in our statements of income and

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

during our nine monthsended October 4, 2009 and September 28, 2008, we amortized $0.6 and$0.6 million, respectively.  We willamortize $0.8 million annually related to this loss through July 2012.

 

*FairValue Measurements*

 

Financial instrumentsconsist mainly of cash and cash equivalents, accounts receivable, accountspayable, accrued liabilities, interest rate swaps, short and long-term debt andlease obligations.  Our interest rateswaps are recorded at fair value, while other financial instruments in ourconsolidated balance sheet have carrying values that approximate fair value.  In the absence of quoted market prices,considerable judgment is required in developing estimates of fair value.  Our estimates are based on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments concerning the carrying values of assets and liabilities.  Actual results may differ from theseestimates under different assumptions or conditions.  Estimates are not necessarily indicative ofthe amounts we could realize in a current market transaction.  See Note 8 to Consolidated FinancialStatements for additional disclosures of our fair value instruments.

 

During the first quarterof 2009, we adopted the additional accounting guidance issued by the FASB onfair value measurements, which deferred the application of fair valuemeasurement for certain non-financial assets and non-financialliabilities.  Upon adoption, we did nothave any non-financial assets or liabilities that were recognized or measuredat fair value on a recurring basis, therefore there was no impact on ourresults of operations.

 

*IntercompanyTransactions*

 

Wemake loans to, and borrow from, our parent corporations from time to time atprevailing market interest rates.  As of October 4,2009 and September 28, 2008, BMCAHoldings Corporation owed us $56.4 and $56.3 million, including interest of$1.1 and $1.0 million, respectively, and we owed BMCA Holdings Corporation$52.8 and $52.8 million, respectively, with no unpaid interest.  Interest income on our loans to BMCA HoldingsCorporation amounted to $0.6 and $0.9 million during the third quarter ended October 4,2009 and September 28, 2008,respectively, and $1.8 and $2.7 million during the nine-month periods ended October 4,2009 and September 28, 2008,respectively.  Interest expense on ourloans from BMCA Holdings Corporation amounted to $0.6 and $0.8 million duringthe third quarter ended October 4, 2009 and September 28, 2008, respectively, and$1.7 and $2.6 million during the nine-month periods ended October 4, 2009and September 28, 2008, respectively.  Loans payable to/receivable from our parentcorporations are due on demand and provide each party with the right of offsetof its related obligation to the other party and are subject to limitations asoutlined in the Senior Secured Credit Facilities and the Senior Notes.  Under the terms of the Senior SecuredRevolving Credit Facilities and the indenture governing

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

ourSenior Notes at October 4, 2009, we could repay demand loans to our parentcorporation amounting to $52.8 million, subject to certain conditions.

 

Wehave a management agreement, which we refer to as the Management Agreement,with ISP Management Company, Inc., a subsidiary of International SpecialtyProducts Inc., which, together with its subsidiaries, is referred to as ISP, anaffiliate, to provide us with certain management services.  Based on services provided to us in 2009under the Management Agreement, the aggregate amount payable to ISP ManagementCompany, Inc. under the Management Agreement for 2009, inclusive of theservices provided to G-I Holdings, is not yet available; however, it iscurrently estimated to be similar to the $7.3 million paid in 2008.  We do not expect any changes to theManagement Agreement to have a material impact on our results of operations.

 

Weand our subsidiaries purchased a substantial portion of our headlap roofinggranules, colored roofing granules and algae-resistant granules, on a purchaseorder basis, from ISP Minerals Inc., which we refer to as ISP Minerals, anaffiliate of BMCA and of ISP.  The amountof mineral products purchased each year on this basis is based on currentdemand and is not subject to minimum purchase requirements.  For the third quarter ended October 4, 2009 and September 28,2008, we and our subsidiaries purchased $17.2 and $13.7 million, respectively,of roofing granules under this arrangement, and for the nine-month periodsended October 4, 2009 and September 28,2008, we and our subsidiaries purchased $40.7 and $33.2 million, respectively,of roofing granules under this arrangement.

 

Inaddition to the granules products we purchased under the above-referencedpurchase order basis, the balance of our granules purchased from ISP Mineralsis purchased under a contract expiring in 2013. The amount of mineral products purchased each year under the contract isbased on current demand and is not subject to minimum purchaserequirements.  Under the contract, forthe third quarter ended October 4, 2009 and September 28,2008, we purchased $23.4 and $24.2 million of roofing granules, respectively,and for the nine-month periods ended October 4, 2009 and September 28,2008, we purchased $55.4 and $66.1 million of roofing granules, respectively.

 

InFebruary 2009 and March 2009, after giving effect to the mostrestrictive of the aforementioned debt covenant restrictions, we declared andpaid cash dividends of $5.0 and $5.0 million, respectively, to our parentcorporation.  In August 2008 and October 2008,we declared and paid cash dividends of $2.5 and $5.0 million, respectively, toour parent corporation.

 

Includedin noncurrent assets as a tax receivable from parent corporation on ourconsolidated balance sheet is $8.4 million at December 31, 2008,representing amounts paid in excess of amounts due to G-I Holdings with respectto 2006 under the Tax Sharing Agreement. We utilized the remaining receivable balance at December 31, 2008during our first quarter of 2009. Included in current liabilities as a payable to related parties on ourconsolidated balance sheet at October 4, 2009 is $1.9 million,which represents a tax payable due to G-I Holdings under the Tax SharingAgreement.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

Theseamounts are included in the net payable to related parties/parent corporationsin our consolidated statements of cash flows.

 

*Contingencies*

 

See Note 13 toConsolidated Financial Statements for information regarding contingencies.

 

*EconomicOutlook*

 

We do not believe thatinflation has had a material effect on our results of operations during the firstnine months of 2009. However, we cannot assure you that our business will notbe affected by inflation in the future, or by increases in the cost of energyand asphalt purchases used in our manufacturing process principally due tofluctuating oil prices.

 

The prices of energy andcrude oil continued to increase during the third quarter of 2009, including theprice of asphalt and other petroleum-based raw materials, as compared to thesecond quarter of 2009.  For the firstnine months of 2009, energy and crude oil prices have sharply declined over thefirst nine months of 2008.  The declinein the first nine months of 2009 as compared to the first nine months of 2008was primarily due to, in our opinion, the current uncertain worldwide economicconditions, which has resulted in weaker demand.  The decline in crude oil prices in 2009caused a significant decline in the price of asphalt and other petroleum-basedraw materials.  Due to the strength ofour manufacturing operations, which allows us to use many types of asphalt,together with our ability to secure alternative sources of supply, we do notanticipate that any potential disruption in the supply of asphalt will have amaterial impact on future net sales, although no assurances can be provided inthat regard.  We will attempt to pass onfuture cost increases from suppliers as needed; however, no assurances can beprovided that these price increases will be accepted in the marketplace.

 

*ContractualObligations*

 

There have been nosignificant changes to our contractual obligations during the third quarterended October 4, 2009.  For afurther discussion on our contractual obligations related to minimum purchaseobligations reference is made to Management’s Discussion and Analysis ofFinancial Condition and Results of Operations “Contractual Obligations” in our2008 Form 10-K.

 

*New Accounting Pronouncements*

 

See Note 2 toConsolidated Financial Statements for a discussion regarding accountingstandards adopted and not yet adopted during the nine months ended October 4,2009.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS –****(Continued)**

 

*Other Matters*

 

In October 2009, ourindirect parent formed a wholly-owned captive insurance subsidiary, which werefer to as the Captive, to provide insurance coverage to us and oursubsidiaries and other affiliated entities effective November 2009.  The Captive insures the deductible portion ofour general insurance and residential product warranty obligations.

 

In November 2009, wereached an agreement in principal to settle a lawsuit pursuant to which thedefendant will be paying us $24.0 million during our fourth quarter ending December 31,2009.  Accordingly, we have notrecognized the $24.0 million settlement in our accompanying consolidatedfinancial statements at October 4, 2009.

 

On November 17,2009, we requested a letter of credit be issued of approximately $133.8 millionunder the terms of the Senior Secured Revolving Credit Facility.  This letter of credit was issued to providecredit enhancement for the obligations of G-I Holdings under the Eighth AmendedJoint Plan of Reorganization.

 

* * *

 

**Forward-lookingStatements**

 

This quarterlyreport on Form 10-Q contains both historical and forward-lookingstatements.  All statements other thanstatements of historical fact are, or may be deemed to be, forward-lookingstatements within the meaning of section 27A of the Securities Act of 1933, asamended and section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are onlypredictions and generally can be identified by use of statements that includephrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee”or other similar words or phrases. Similarly, statements that describe ourobjectives, plans or goals also are forward-looking statements.  Our operations are subject to certain risksand uncertainties that could cause actual results to differ materially fromthose contemplated by the relevant forward-looking statements.  The forward-looking statements includedherein are made only as of the date of this quarterly report on Form 10-Qand we undertake no obligation to publicly update any forward-lookingstatements to reflect subsequent events or circumstances.  We cannot assure you that projected resultsor events will be achieved.

 

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**BUILDING MATERIALS CORPORATION OF AMERICA**

 

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES**

**ABOUT MARKET RISK**

 

Reference is made toManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in the 2008 Form 10-K for a discussion of “Market-SensitiveInstruments and Risk Management.”  Therewere no material changes in such information as of October 4, 2009.  See Note 7 to the Consolidated FinancialStatements.

 

**Item 4T. CONTROLSAND PROCEDURES**

 

*DisclosureControls and Procedures*:  Our management, under thesupervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer, conducted an evaluation of the effectiveness of ourdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of the end of the period covered by this report.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that, as of the end of suchperiod, our disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by us in the reports filed, furnished or submitted under theExchange Act.  Our Chief ExecutiveOfficer and Chief Financial Officer also concluded that our disclosure controlsand procedures are effective to ensure that information required to bedisclosed in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosures.

 

*Changesin Internal Control over Financial Reporting*:  There were nosignificant changes in our internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) identified in management’s evaluation during the third quarter offiscal year 2009 that have materially affected or are reasonably likely tomaterially affect our internal control over financial reporting.

 

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**BUILDINGMATERIALS CORPORATION OF AMERICA**

 

**PART II**

 

**OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

There were no materialchanges to the legal proceedings identified in the Annual Report on Form 10-Kfor the year ended December 31, 2008, other than the Contingencies andSubsequent Events disclosures.  See Notes13 and 14 to the consolidated financial statements in Part I.

 

**Item 5.Other Information**

 

Samuel J. Heyman passed awayon November 7, 2009.  His wife,Ronnie F. Heyman, is now the beneficial owner (as defined in Rule 13d-3 ofthe Exchange Act) of 100% of the capital stock of G Holdings.   Beneficial ownership (as defined in Rule 13d-3of the Exchange Act) of 100% of the shares of our Class A Common Stockowned by BMCA Holdings Corporation, an indirect wholly-owned subsidiary of GHoldings, is attributed to Mrs. Heyman.

 

**Item 6.Exhibits**

 
| **Exhibit** |       |                                                                                                                                                                                                                                                                             |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                  |
| 10.1        |       | Amendment No. 2 to  the Revolving Credit Agreement, dated as of September 11, 2009, among  Building Materials Corporation of America, BMCA Acquisition Inc. and ELKCORP,  as borrowers and Deutsche Bank AG New York Branch, as administrative agent  for the Lenders. |
|        |       |                                                                                                                                                                                                                                                                             |
| 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 the Chief Financial Officer.                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                             |
| 32.1        |       | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer.                                                                                                                                                                                         |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, each registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|   | BUILDING MATERIALS  CORPORATION OF AMERICA    |
|--------|-----------------------------------------------|
|   | BUILDING MATERIALS  MANUFACTURING CORPORATION |
|   |                                          |
|   |                                          |
| DATE:  | November 18, 2009                        |   | BY: | /s/John F. Rebele |
|   |                                          | John F. Rebele |
|   |                                          | Senior Vice President, |
|   |                                          | Chief Financial Officer  and |
|   |                                          | Chief Administrative  Officer |
|   |                                          | (Principal Financial  Officer) |
|   |                                          |   |
|   |                                          |   |
| DATE:  | November 18, 2009                        |   | BY: | /s/ James T. Esposito |
|   |                                          | James T. Esposito |
|   |                                          | Vice President and  Controller |
|   |                                          | (Principal Accounting  Officer) |
|        |                                               |  |  |  |  |

 

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