SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (D) OF THE SECURITIES ACT OF 1934
For the quarterly report ended March 31, 2000
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Commission File Number: 333-76683
Formica Corporation
(Exact name of registrant as specified in its charter)
Delaware 34-1046753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
David T. Schneider
Vice President, Chief Financial Officer and Secretary
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
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Title Shares as of March 31, 2000
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Common Stock, $.01 par value per share 100 Shares Outstanding
FORMICA CORPORATION
Index
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets--March 31, 2000
and December 31, 1999 1
Condensed Consolidated Statements of Operations--
Three Months Ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 2000 and 1999 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Part I. Financial Information
Item 1: Financial Statements
FORMICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except share data)
March 31, December 31,
2000 1999
---------- ------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 7.3 $ 7.8
Accounts receivable, net 82.5 84.4
Inventories 119.8 119.7
Prepaid expenses and other current assets 12.7 11.5
Deferred income taxes 14.8 14.7
------ ------
Total current assets 237.1 238.1
PROPERTY, PLANT AND EQUIPMENT, net 301.0 307.3
OTHER ASSETS:
Intangible assets, net 156.7 161.1
Other noncurrent assets 11.6 11.3
------ ------
Total assets $706.4 $717.8
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 28.0 $ 28.2
Accounts payable 43.0 37.2
Accrued expenses 53.6 56.8
------ ------
Total current liabilities 124.6 122.2
LONG-TERM DEBT 369.7 362.9
DEFERRED INCOME TAXES 124.1 125.4
OTHER LIABILITIES 29.5 30.0
------ ------
Total liabilities 647.9 640.5
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - par value $.01 per share -
authorized 1,000 shares, none issued or
outstanding - -
Common stock - par value $.01 per share -
authorized 2,000 shares, issued and
outstanding 100 shares 0.1 0.1
Additional paid-in capital 137.0 137.0
Accumulated deficit (71.2) (54.4)
Accumulated other comprehensive income (7.4) (5.4)
------ ------
Total stockholders' equity 58.5 77.3
------ ------
Total liabilities and stockholders' equity $706.4 $717.8
====== ======
See notes to condensed consolidated financial statements.
Page 1
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions)
Three Months Ended
March 31,
------------------
2000 1999
------ ------
NET SALES $141.1 $139.2
COST OF PRODUCTS SOLD 101.5 98.7
INVENTORY MARKDOWN FROM RESTRUCTURING 1.9 --
------ ------
Gross profit 37.7 40.5
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 39.7 39.9
PROVISION FOR RESTRUCTURING 4.1 --
COST OF TERMINATED ACQUISITIONS 0.4 --
------ ------
Operating (loss) income (6.5) 0.6
INTEREST EXPENSE (10.0) (10.4)
OTHER INCOME 0.6 1.5
------ ------
LOSS BEFORE PROVISION FOR INCOME TAXES (15.9) (8.3)
INCOME TAX PROVISION (0.9) (1.2)
------ ------
Net loss $(16.8) $ (9.5)
====== ======
See notes to condensed consolidated financial statements.
Page 2
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Three Months Ended
March 31,
------------------
2000 1999
------ ------
CASH USED IN OPERATIONS $(3.6) $(22.1)
INVESTING ACTIVITIES:
Capital expenditures and investments, net (2.8) (19.7)
----- -----
Net cash used in investing activities (2.8) (19.7)
FINANCING ACTIVITIES:
Proceeds from borrowings, net -- 215.0
Net borrowings under lines of credit 8.4 --
Repayments of debt (1.7) (201.3)
----- -----
Net cash provided by financing activities 6.7 13.7
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (0.8) (0.6)
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS (0.5) (28.7)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 7.8 31.6
----- -----
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 7.3 $ 2.9
===== =====
See notes to condensed consolidated financial statements.
Page 3
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
Earnings per share data are not presented because the Company's common
stock is not publicly traded and the Company is a wholly-owned subsidiary
of FM Holdings, Inc.
For further information, refer to the audited consolidated financial
statements and footnotes for the year ended December 31, 1999 included in
the Company's Form 10-K filed with the Securities and Exchange Commission
(the "SEC").
(2) INVENTORIES:
Major classes of inventories are as follows:
March 31, December 31,
2000 1999
--------- ------------
(in millions)
Finished goods $ 86.0 $ 84.5
Work-in-process 13.2 11.6
Raw materials 44.7 45.1
------ ------
Total 143.9 141.2
Less-reserves 24.1 21.5
------ ------
$119.8 $119.7
====== ======
(3) CONTINGENT MATTERS:
In the ordinary course of business, the Company has been or is the subject
of or party to various pending litigation and claims. Currently, the
Company has been named as a potentially responsible party at several
Superfund sites and has reserved approximately $3.7 million and $3.9
million at March 31, 2000 and December 31, 1999, respectively, for these
matters. While it is not possible to predict with certainty the outcome of
any potential litigation or claims, the Company believes any known
contingencies, individually or in the aggregate, will not have a material
adverse impact on its financial position or results of operations.
However, depending on the amount and timing of an unfavorable resolution
of this contingency, it is possible that the Company's future cash flows
could be materially affected in a particular quarter.
There can be no assurances that Formica will not become involved in future
proceedings, litigation or investigations, that such Superfund or other
environmental liabilities will not be material or that indemnification
pursuant to certain indemnification rights will otherwise be available.
On March 31, 2000, Decorative Surfaces Holding AB ("DSH") acquired
Perstorp Surfaces Materials AB ("PSM") from Perstorp AB (a Swedish
company) and concurrently, DSH became a wholly-owned subsidiary of FM
Holdings Inc., the parent company of Formica Corporation. FM Holdings,
Inc. has informed Formica of its intention to contribute the stock of DSH
to Formica once (i) the audited financial statements of PSM necessary for
inclusion in Formica's filings with the SEC are provided to DSH and (ii)
the lenders under Formica's existing credit facility grant their consent
to the transaction. We expect that, once the contribution occurs, the
$110.0 million in assumed debt will be incorporated into Formica's
existing credit facility. We cannot assure that DSH will in fact be
contributed to Formica because we cannot assure that the conditions
precedent to the contribution of DSH to Formica will be satisfied in a
timely manner or at all.
Page 4
(4) COMPREHENSIVE INCOME (LOSS):
Total comprehensive loss was $18.8 million and $18.9 million for the three
months ended March 31, 2000 and 1999, respectively. The difference between
comprehensive loss and the net loss results from foreign currency
translation adjustments.
(5) SEGMENT INFORMATION:
The Company is principally engaged in a single line of business: the
design, manufacture and distribution of high-pressure decorative
laminates. Substantially all revenues result from the sale of decorative
laminates through domestic and international distributors and dealers. The
Company's operations are managed on a geographic basis and, therefore,
reportable segments are based on geographic areas. Segment revenues are
defined as net sales to external customers of each segment. Depreciation
and amortization expense is included in the measure of segment results.
All intercompany sales and expenses have been eliminated in determining
segment revenues and segment profit (loss).
Three Months Ended
March 31,
------------------
2000 1999
------ ------
(in millions)
Segment revenues:
United States $ 79.7 $ 77.5
North America - Other 11.2 10.7
Europe 33.7 37.3
Asia 16.5 13.7
------ ------
Total $141.1 $139.2
====== ======
Segment profit (loss):
North America $(11.1) (3.5)
Europe 2.7 3.3
Asia 1.9 0.8
------ ------
Total $ (6.5) 0.6
====== ======
Depreciation and amortization
(included in segment profit (loss))
North America $ 9.0 8.1
Europe 2.2 2.3
Asia 1.0 0.8
------ ------
Total $ 12.2 11.2
====== ======
A reconciliation of total segment
profit (loss) to loss before
provision for income taxes is
as follows:
Segment (loss) profit $ (6.5) $ 0.6
Interest expense (10.0) (10.4)
Other income 0.6 1.5
------ ------
Loss before provision for
income taxes $(15.9) $ (8.3)
====== ======
March 31, December 31,
2000 1999
--------- ------------
Total assets:
United States $446.8 $451.0
North America - Other 30.7 37.3
Europe 154.9 152.4
Asia 74.0 77.1
------ ------
Total $706.4 $717.8
====== ======
Page 5
(6) RELATED PARTY TRANSACTIONS
In order to fund normal working capital requirements, the Company has
entered into certain borrowing arrangements with Laminates Acquisition
Co., the parent of FM Holdings, Inc. These arrangements are short-term in
nature and generally bear no interest. At March 31, 2000 and December 31,
1999, there was approximately $1.0 million outstanding under these
arrangements.
DLJ Capital Funding, an affiliate of DLJ Merchant Banking, has and will
receive customary fees and reimbursement of expenses in connection with
the arrangement and syndication of the Credit Facility and as a lender
thereunder. Laminates Funding, Inc., an affiliate of DLJ Merchant Banking,
was a purchaser of a portion of the bridge notes and received customary
fees and expenses in connection therewith. Donaldson, Lufkin & Jenrette
Securities Corporation, also an affiliate of DLJ Merchant Banking, acted
as the initial purchaser of the Senior Subordinated Notes.
Formica and its subsidiaries may from time to time enter into financial
advisory or other investment banking relationships with Donaldson, Lufkin
& Jenrette Securities Corporation or one of its affiliates whereby
Donaldson, Lufkin & Jenrette Securities Corporation or its affiliates will
receive customary fees and will be entitled to reimbursement for all
related reasonable disbursements and out-of-pocket expenses. Formica
expects that any arrangement will include provisions for the
indemnification of Donaldson, Lufkin & Jenrette Securities Corporation
against a variety of liabilities, including liabilities under the federal
securities laws.
Agreements with Perstorp Surface Materials
On March 31, 2000, Formica's parent company, FM Holdings, acquired
Perstorp Surface Materials. The Company provided $5.0 million of the
financing of a deposit, which amount was repaid at closing. Holdings has
informed the Company that it will contribute Perstorp Surface Materials to
Formica once the Company receives audited financial statements and once
Formica receives the consent therefor from its lenders.
The Company has entered into a management services agreement with Perstorp
Surface Materials, as well as, agreements relating to laminate and paper
supply, and warehousing and distribution services for the interim period,
until the merger into Formica Corporation is completed.
(7) RESTRUCTURING:
Prior to May 1, 1998, the management of the Company formulated a plan to
restructure certain operations and provided a restructuring provision of
$6.6 million. During the three-months ended March 31, 2000, the Company
spent $0.2 million of the restructuring provision, primarily relating to
severance payments. The restructuring plan will be substantially completed
in 2000. The remaining balance of the restructuring provision was $2.5
million at March 31, 2000.
On March 1, 2000, the Company announced plans to restructure certain
operating activities in North America, which are expected to reduce total
headcount by approximately 235 employees. As part of this restructuring,
the Mt. Bethel, Pennsylvania manufacturing facility will be closed, and
operations will be subsequently transferred to the Company's Odenton,
Maryland manufacturing facility. The management of the Company provided a
restructuring provision of $6.0 million during the first quarter of 2000.
The restructuring provision can be broken down as follows: assets held for
disposal, facility closure and lease terminations ($3.1 million), markdown
of inventory, charged to cost of products sold, resulting from of the
elimination of product lines ($1.9 million), and severance and severance
related items ($1.0 million). During the three-months ended March 31,
2000, the Company spent $0.3 million of the restructuring provision,
primarily relating to severance payments. The restructuring plan will be
substantially completed in 2000. The remaining balance of the
restructuring provision was $5.7 million at March 31, 2000. In addition,
the Company has identified an additional $1.7 million of charges,
indirectly related to the restructuring of the North America operations,
which the Company expects will occur over the remainder of 2000. Depending
on the amount and timing of these activities, the Company's cash flows and
results of operations could be materially affected in a particular
quarter.
(8) LONG-TERM DEBT:
The Company's Credit Facility contains financial covenants requiring the
Company to maintain minimum earnings before interest, taxes, depreciation
and amortization; minimum coverage of interest expense and fixed charges;
and a maximum leverage ratio. The Company has obtained a consent to a
modification of the definition of the fixed charge coverage covenant ratio.
The Company is in compliance with the modified financial covenants as of
March 31, 2000.
Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Formica is engaged in the design, manufacture and distribution of
decorative laminates, solid surfacing, laminate flooring and other surfacing
products. Formica was founded in 1913 and created the world's first decorative
laminate in 1927. In May 1985, a group led by management and Shearson Lehman
purchased Formica from American Cyanamid Company. In 1989, Formica was sold to
FM Acquisition Corporation in a buyout led by Dillon, Read & Co. Inc. In
January 1995, BTR Nylex Ltd., an Australian company, and a subsidiary of BTR
plc, acquired Formica. In May 1998, Laminates Acquisition Co. acquired Formica.
Recent Developments
Perstorp Surface Materials. On March 31, 2000, Decorative Surfaces Holding AB
("DSH") acquired Perstorp Surface Materials AB ("PSM") from Perstorp AB (a
Swedish company) for approximately SEK 1.5 billion ($175.5 million based on the
exchange rates at closing). DSH had been established by DLJ Merchant Banking
Partners in March 2000. PSM is a worldwide producer of decorative and
industrial laminates, finished foils, printed paper and other surfacing
materials. PSM has been one of the leading brands for over forty years, and
employs approximately 1,700 individuals worldwide. On March 31, 2000, DSH
became a wholly-owned subsidiary of FM Holdings Inc., the parent company of
Formica Corporation. Concurrent with the closing of the purchase of PSM by DSH,
DSH entered into a management and services agreement with Formica Corporation
to oversee the operations and management of PSM. The purchase was funded with a
combination of equity provided by DLJ and CVC and $110.0 million in borrowings
under a new credit facility provided by DLJ. Perstorp AB has not provided DSH
with audited financial statements for PSM to date.
FM Holdings, Inc. has informed Formica of its intention to contribute the
stock of DSH to Formica once (i) the audited financial statements of PSM
necessary for inclusion in Formica's filings with the SEC are provided to DSH
and (ii) the lenders under Formica's existing credit facility grant their
consent to the transaction. The Company expects that, once the contribution
occurs, the $110.0 million in assumed debt will be incorporated into Formica's
existing credit facility. The Company cannot assure that DSH will in fact be
contributed to Formica because the Company cannot assure that the conditions
precedent to the contribution of DSH to Formica will be satisfied in a timely
manner or at all.
If PSM is contributed to the Company, it is expected that the Company's
international revenues will increase. In addition, the Company also expects to
derive certain manufacturing efficiencies at its international operations which
the Company anticipates will improve its gross margins. While the Company can
provide no assurances because its has not received audited US GAAP financials
for PSM, the Company expects an improvement in our debt leverage ratio. The
Company has entered into various agreements to provide services to PSM until
such time as it may become Formica's subsidiary.
Management believes the contribution to Formica of DSH, if effected, will
accelerate additional growth for the Company in the decorative surfaces segment
and provides the base for future synergies, savings and expansion.
Restructuring Charge On March 1, 2000, the Company announced plans to
restructure certain operating activities in North America, which are expected
to reduce total headcount by approximately 235 employees. (See "Restructuring
Charge" and footnote number 7)
Results of Operations
First Quarter of 2000 Compared to First Quarter of 1999
Net Sales. Net sales for 2000 were $141.1 million, compared to net sales
of $139.2 million for 1999, an increase of $1.9 million, or 1.4%. Net sales in
North America increased to $90.9 million in 2000 from $88.2 million in 1999, an
increase of $2.7 million, or 3.1 %. This increase is primarily due to
additional volume contributed by the solid-surface business and improved
pricing levels. Net sales in Asia increased to $16.5 million in 2000 from $13.7
million in 1999, an increase of $2.8 million, or 20.4%, resulting primarily
from the result of a stronger Asian economy, as well as increased volume. Net
sales in Europe decreased $3.6 million to $33.7 million in 2000 from $37.3
million in 1999, primarily due to the effects of foreign exchange translations.
Gross Profit. Gross profit for 2000 was $37.7 million, compared to gross
profit of $40.5 million for 1999, a decrease of $2.8 million, or 6.9%. Gross
profit as a percentage of net sales in 2000 decreased to 26.7% from 29.1% in
1999. Included in the 2000 period was $1.9 million related to the markdown in
Page 7
inventory from the restructuring of the North America operations. Excluding the
restructuring charge, gross profit decreased $0.9 million in 2000.
Gross Profit in North America decreased to $23.3 million in 2000 from
$25.6 million in 1999, or 9.0%. Gross profit as a percentage of net sales for
North America, decreased to 25.6% in 2000 from 29.0% in 1999, principally as a
result of the markdown in inventory from the restructuring of the North America
operations and increased raw material prices. Gross profit in Europe and Asia
decreased to $14.4 million in 2000 from $14.9 million in 1999, or 3.3%. As a
percentage of net sales, gross profit in Europe and Asia decreased to 28.7% in
2000 from 29.2% in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2000 were $39.7 million compared to $39.9 million
for 1999, a decrease of $0.2 million. Selling, general and administrative
expenses as a percentage of net sales decreased to 28.1% in 2000 from 28.7% in
1999.
Restructuring Charge. On March 1, 2000, the Company announced plans to
restructure certain operating activities in North America, which are expected
reduce total headcount by approximately 235 employees. As part of this
restructuring, the Mt. Bethel, Pennsylvania manufacturing facility will be
closed, and operations will be subsequently transferred to the Company's
Odenton, Maryland manufacturing facility. The management of the Company
provided a restructuring provision of $6.0 million during the first quarter of
2000. The restructuring provision can be broken down as follows: assets held
for disposal, facility closure and lease terminations ($3.1 million), markdown
of inventory, the result of the elimination of product lines ($1.9 million),
which was charged to cost of products sold, and severance and severance related
items ($1.0 million). During the three-months ended March 31, 2000, the Company
spent $0.3 million of the restructuring provision, primarily relating to
severance payments. The restructuring plan will be substantially completed in
2000. In addition, the Company has identified an additional $1.7 million of
charges, indirectly related to the restructuring of the North America
operations, which the Company expects will occur over the remainder of 2000.
The Company expects that this restructuring will generate approximately $5.0
million in cost savings for the remainder of 2000 (before taking into account
the restructuring charges described above) and approximately $8.0 million in
annual savings in future years.
Cost of Terminated Acquisitions. During the quarter ended March 31, 2000,
the Company incurred a $0.4 million charge relating to expenses from the cost
of a terminated acquisition, primarily legal and other professional fees.
Operating Income (Loss). The operating loss for 2000 was $6.5 million
compared to an operating income of $0.6 million for 1999. The 2000 period
includes a restructuring charge of $6.0 million and a cost to terminate
acquisitions of $0.4 million. After taking into account the 2000 charges, the
operating loss was $0.1 million in 2000 compared to operating income of $0.6
million in 1999, for the reasons stated above.
EBITDA. EBITDA decreased to $6.2 million in 2000 compared to $13.3 million
in 1999. After taking into account the 2000 period restructuring and cost to
terminate acquisitions charges (described above), EBITDA, as adjusted, was
$12.6 million in 2000 compared to $13.3 million in 1999.
Interest Expense. Interest expense decreased $0.4 million to $10.0 million
in 2000 from $10.4 million for 1999. This decrease in interest expense was the
result of a write-off in the 1999 period of deferred financing fees related to
the refinancing of the bridge notes, partially offset by additional debt
incurred in the latter part of 1999.
Income Taxes. Income tax expense decreased to $0.9 million in 2000
compared to $1.2 million in 1999. This decrease is the result of the $7.6
million increase in the loss before provision for income taxes in the 2000
period. The increase in the loss before provision for income taxes primarily
relates to the restructuring charge described above.
Net Loss. Net loss was $16.8 million in 2000 compared to a net loss of
$9.5 million in 1999.
Liquidity and Capital Resources
The Series B Notes mature in 2009. Interest on the Series B Notes is payable
semiannually in cash. The Series B Notes and related indenture place certain
restrictions on Formica and its subsidiaries including the ability to pay
dividends, issue preferred stock, repurchase capital stock, incur and pay
indebtedness, sell assets and make certain restricted investments. The Company
has obtained a consent to a modification of the definition of the fixed charge
coverage covenant ratio. The Company is in compliance with the modified
financial covenants as of March 31, 2000.
Formica's principal sources of liquidity are cash flows from operations,
borrowings under the Credit Facility and local credit facilities obtained by
some of Formica's foreign subsidiaries. Formica's principal uses of cash will
be debt service requirements to service the acquisition-related debt described
below, capital expenditures and acquisitions.
As of March 31, 2000, Formica had approximately $397.7 million of
indebtedness outstanding compared to $391.1 million as of December 31, 1999.
Formica's significant debt service obligations could, under certain
circumstances, have material consequences to security holders.
Page 8
Working capital was $112.5 million at March 31, 2000 compared to $115.9
million at December 31, 1999. Management believes that Formica will continue to
require working capital levels consistent with past experience and that current
levels of working capital, together with borrowing capacity available under the
Credit Facility and the continued effort by management to manage working
capital, will be sufficient to meet expected liquidity needs in the near term.
In connection with the Acquisition in 1998, Formica's parent raised
approximately $137.1 million through the issuance of common and preferred stock
to the DLJMB Funds, the institutional investors and Messrs. Langone and
Schneider. The Laminates 8% Preferred Stock has an 8% cumulative dividend that
is paid in cash when, as and if declared by the Laminates board. The Holdings
15% Senior Exchangeable Preferred Stock due 2008 has a 15% cumulative dividend
which is not payable in cash until May 2003 and is exchangeable at Holdings'
option for 15% subordinated debentures of Holdings. Dividends from Formica,
which are restricted by the provisions of the Credit Facility and the
Indenture, are the primary source of funding for payments with respect to
Holdings and Laminates securities. In addition, Formica sold $200.0 million of
Bridge Notes and, together with its subsidiaries, borrowed $80.0 million of
term loans under the Credit Facility. The Bridge Notes were refinanced in
February 1999 as noted below.
In February 1999, Formica issued $215.0 million of 10 7/8% Series A Senior
Subordinated Notes due March 1, 2009 (the "Series A Notes") and repaid the
senior subordinated unsecured increasing rate bridge notes (the "Bridge
Notes"). The Series A Notes were sold in transactions permitted by Rule 144A
and Regulation S under the 1933 Act and therefore were not registered with the
SEC.
In conjunction with the issuance of the Series A Notes, the Company was
subject to a Registration Rights Agreement that required the Company to file an
Exchange Offer Registration Statement (the "Statement") with the SEC. The
Statement allowed for the exchange of new 10 7/8% Series B Senior Subordinated
Notes due 2009 (the "Series B Notes"), which would be registered under the 1933
Act, for the existing Series A Notes. The exchange offer period expired on
October 1, 1999 with all outstanding Series A Notes being exchanged for Series
B Notes.
The Credit Facility includes a $120.0 million revolving credit facility
and an $85.0 million term loan. The revolving credit facility may be increased
by up to $25.0 million at the request of Formica, with the consent of the banks
providing the increased commitments, and will terminate on May 1, 2004. At
March 31, 2000, $70.9 million was outstanding against the revolving credit
facility. The term loan under the Credit Facility totaled $82.2 million at
March 31, 2000 and amortizes over the life of the Credit Facility.
The Series B Notes mature in 2009. Interest on the Series B Notes is
payable semiannually in cash. The Series B Notes and related indenture place
certain restrictions on Formica and its subsidiaries including the ability to
pay dividends, issue preferred stock, repurchase capital stock, incur and pay
indebtedness, sell assets and make certain restricted investments. The Company
has obtained a consent to a modification of the definition of the fixed charge
coverage covenant ratio. The Company is in compliance with the modified
financial covenants as of March 31, 2000.
Borrowings under the Credit Facility generally bear interest based on a
margin over the base rate or, at Formica's option, the reserve-adjusted LIBOR
rate. The applicable margin varies based upon Formica's ratio of consolidated
debt to EBITDA. Formica's obligations under the Credit Facility are guaranteed
by Laminates Acquisition Co., Holdings, Inc. and all existing or future
domestic subsidiaries of Formica (the "subsidiary guarantors") and are secured
by substantially all of the assets of Formica and the subsidiary guarantors,
including a pledge of capital stock of all existing and future subsidiaries of
Formica (provided that, with a single exception, no more than 65% of the voting
stock of any foreign subsidiary shall be pledged) and a pledge by FM Holdings,
Inc. of the stock of Formica and by Laminates Acquisition Co. of the stock of
FM Holdings, Inc. The Credit Facility contains customary covenants and events
of default.
If PSM is contributed to Formica by Holdings, the Company will assume
$110.0 million in debt, which will be included in the Company's credit
facility. The Company expects that the $110.0 million will be a separate
tranche that will mature in approximately eight years, with 1% amortization in
each of the first seven years. The Company also expects that the revolving
credit facility will be increased by approximately $30.0 million and that
interest rates on all borrowing under the credit facility will increase.
Formica maintains various credit facilities in foreign countries
(primarily in Asia) that provide for borrowings in local currencies. Formica
may replace the availability of these facilities (in local currencies) under
the Credit Facility and will maintain some of these credit facilities to
provide financing for its subsidiaries in these countries. Formica expects that
these facilities, together with the Credit Facility and operating cash flow in
these countries, will be sufficient to fund expected liquidity needs in these
countries.
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As of March 31, 2000 and December 31, 1999, Formica had outstanding
approximately $26.6 million and $28.4 million, respectively, in letters of
credit under the Credit Facility to provide credit enhancement for certain of
these credit facilities, primarily in Asia.
In the last several years, Formica has implemented a major capital
investment program that management believes will increase capacity, yield
substantial manufacturing savings and improve competitiveness. Formica spent
approximately $2.8 million on capital expenditures during 2000, and anticipates
that it will spend approximately an additional $12.2 million during the
remainder of the year. With that spending, Formica's primary capital investment
program will be substantially complete. Formica expects to realize significant
manufacturing cost savings, which will be phased in over the next two years, as
a result of those programs. The Credit Facility contains restrictions on its
ability to make capital expenditures. Based on present estimates, Formica
believes that the amount of capital expenditures permitted under the Credit
Facility will be adequate to complete its investment program and maintain the
properties and businesses of its current operations.
Formica is actively considering acquisitions that complement or expand its
decorative surfaces businesses or that will enable it to expand into new
markets. In connection with any future acquisitions, Formica may require
additional funding which may be provided in the form of additional debt, equity
financing or a combination thereof. There can be no assurance that any such
additional financing will be available on acceptable terms.
Formica anticipates that its operating cash flow, together with borrowings
under the Credit Facility, will be sufficient to meet its anticipated future
operating expenses, capital expenditures and debt service obligations as they
become due. However, Formica's ability to make scheduled payments of principal
of, to pay interest on or to refinance the indebtedness and to satisfy its
other debt obligations will depend upon its future operating performance, which
will be affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond its control.
Formica will continue from time to time to explore additional auxiliary
financing methods and other means to lower its cost of capital, which could
include stock issuance or debt financing and the application of the proceeds
therefrom to the payment of bank debt or other indebtedness.
Prior to May 1, 1998, Formica formulated a plan to restructure certain
operations and provided a restructuring provision of $6.6 million, with
approximately $2.7 million of the restructuring provision remaining at December
31, 1999. During 2000, Formica spent $0.2 million, primarily on severance
payments, of the restructuring provision. The amount of the restructuring
provision remaining at March 31, 2000 was approximately $2.5 million.
On March 1, 2000, the Company announced plans to restructure certain
operating activities in North America, reducing total headcount by
approximately 235 employees. As part of this restructuring, the Mt. Bethel,
Pennsylvania manufacturing facility will be closed, and operations will be
subsequently transferred to the Company's Odenton, Maryland manufacturing
facility. The management of the Company provided a restructuring provision of
$6.0 million during the first quarter of 2000. The restructuring provision can
be broken down as follows: assets held for disposal, facility closure and
leases terminations ($3.1 million), markdown of inventory, the result of the
elimination of product lines ($1.9 million), and severance and severance
related items ($1.0 million). During the three-months ended March 31, 2000, the
Company spent $0.3 million of the restructuring provision, primarily relating
to severance payments. The restructuring plan will be substantially completed
in 2000. The remaining balance of the restructuring provision was $5.7 million
at March 31, 2000. In addition, the Company has identified an additional $1.7
million of charges, indirectly related to the restructuring of the North
America operations, which the Company expects will occur over the remainder of
2000. The Company expects that this restructuring will generate approximately
$5.0 million in cost savings for the remainder of 2000 and approximately $8.0
million in annual savings in future years. Depending on the amount and timing
of these activities, the Company's cash flows and results of operations could
be materially affected in a particular quarter.
Cash used in operations was $3.6 million for the three-months ended March
31, 2000, compared to $22.1 million for the three-months ended March 31, 1999.
The decrease in cash used in operations is the result of a decrease in accounts
receivable and an increase in accounts payable. The decrease in accounts
receivable and the increase in accounts payable results from an improvement in
working capital management. Net cash used in investing activities was $2.8
million for the three-months ended March 31, 2000 and $19.7 million for the
three-months ended March 31, 1999. Net cash provided by financing activities
was $6.7 million for the three-months ended March 31, 2000 and $13.7 million
for the three-months ended March 31, 1999.
Page 10
Effect of Inflation; Seasonality
Formica does not believe that inflation has had a material impact on its
financial position or results of operations. Formica's operations are modestly
influenced by seasonal fluctuations.
Year 2000 Compliance
Formica is dependent in part on computer- and date- controlled systems for
some internal functions. Similarly, suppliers of components and services on
which Formica relies, and Formica's customers, may have year 2000 problems,
which would affect their operations and their transactions with Formica. Other
parties with whom Formica has commercial relationships, including raw materials
suppliers and service providers, such as banking and financial services, data
processing services, telecommunications services and utilities, are highly
reliant on computer-based technology and may have year 2000 problems.
In 1996 the Company, in its North American region, commenced a systems
implementation effort to address the Year 2000 Problem and other operational
issues on a worldwide basis. Formica's year 2000 compliance efforts are
directed primarily towards ensuring that it will be able to continue to perform
three critical functions: (i) make and sell its products; (ii) order and
receive raw material and supplies; and (iii) pay its employees and vendors.
Formica's effort included three phases: (1) assessment of each system to
identify any year 2000 problems, (2) renovation, repair or upgrade of any
problematic systems and (3) testing of the improved systems to ensure proper
function. The project was substantially completed by December 1999 at a total
cost of approximately $28.0 million compared to our original cost estimate of
$27.0 million. All of the year 2000 compliance costs have been funded from our
operating cash flow and have been capitalized or expensed in the period they
were incurred.
Formica's significant information technology systems include general
accounting, fixed assets, inventory control, manufacturing resource planning,
distribution resource planning, purchasing and receiving, customer billing and
payroll. Formica's significant non-information technology systems include
manufacturing equipment and transportation and distribution systems.
Formica has not experienced any disruption in its operations attributable
to year 2000 problems. However, due to the novelty and complexity of the issues
presented, and Formica's dependence on the technical skills of employees and
independent contractors and on the representations and preparedness of third
parties, could cause its efforts to be less than fully effective. Not all year
2000 problems were necessarily expected to occur during January 2000. It is
possible that the Company, its customers or vendors may have equipment with
embedded technology that indicates when maintenance is required or may shut
down the equipment if maintenance is not performed by a specific date. Although
management believes that its compliance efforts were designed appropriately to
identify and address those year 2000 issues that are subject to its reasonable
control, Formica cannot give assurance that its efforts were fully effective,
or that year 2000 issues will not have a material adverse on its business,
financial condition or results of operations. In the worst case, a protracted
failure of general business systems among Formica's customers or vendors, or in
its own plant, could cause production delays or canceled orders which would
significantly reduce its revenue for the duration of such a situation. Formica
has not developed a contingency plan which assumes significant and protracted
year 2000-related failures of major vendors, customers or systems, and does not
plan to do so.
Common European Currency
The Treaty on European Economic and Monetary Union provides for the
introduction of a single European currency, the Euro, in substitution for the
national currencies of the member states of the European Union that adopt the
Euro. In May 1998 the European Council determined: (i) the 11 member states
that met the requirement for the Monetary Union, and (ii) the currency exchange
rates amongst the currencies for the member states joining the Monetary Union.
The transitory period for the Monetary Union started on January 1, 1999.
According to Council Resolution of July 7, 1997, the introduction of the Euro
will be made in three steps: (i) a transitory period from January 1, 1999 to
December 31, 2001, in which current accounts may be opened and financial
statements may be drawn in Euros, and local currencies and Euros will coexist;
(ii) from January 1, 2002 to June 30, 2002, in which local currencies will be
exchanged for Euros; and (iii) from July 1, 2002 in which local currencies will
disappear.
Formica cannot give assurance as to the effect of the adoption of the Euro
on its payment obligations under loan agreements for borrowings in currencies
to be replaced by the Euro or on its commercial agreements in those currencies.
Page 11
Market Risk
We use financial instruments, including fixed and variable rate debt
securities, to finance operations. We use forward contracts to hedge foreign
currency exposures. Forward contracts are entered into for periods consistent
with underlying exposures and do not constitute positions independent of those
exposures. We do not enter into contracts for speculative purposes and are not
a party to any leverage instruments.
Foreign Currency Exchange Rate Risk
Our operating results are subject to significant fluctuations based upon
changes in the exchange rates of some currencies in relation to the U.S.
dollar. Although, we will continue to monitor our exposure to currency
fluctuations and, when appropriate, use financial hedging techniques in the
future to minimize the effect of these fluctuations, we cannot assure you that
exchange rate fluctuations will not harm our business in the future.
Forward-Looking Information
This report (as well as other public filings, press releases and
discussions with Company management) contains and incorporates by reference
certain forward-looking statements. These statements are subject to risks and
uncertainties. Forward-looking statements include the information concerning:
o our future operating performance, including sales growth and cost
savings and synergies following our acquisition by Laminates, our
acquisitions of Fountainhead and STEL
o our expectation that certain of our equity investors will contribute
Perstorp Surface Materials to us
o our belief that we have sufficient cash flows to support working
capital needs, capital expenditures and debt service requirements and
o our belief that we can continue to reduce selling, general and
administrative expenses without adversely affecting our net sales
In addition, statements that include the words "believes," "expects,"
"anticipates," intends," "estimates," "will," "should," "may," or other similar
expressions are forward-looking statements. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
What Factors Could Affect the Outcome of Our Forward-Looking Statements?
You should understand that the following important factors, in addition to
those discussed elsewhere in this Form 10-Q could affect the future results of
Formica and could cause those results or other outcomes to differ materially
from those expressed in our forward-looking statements.
Industry and Market Factors
o changes in economic conditions generally or in the markets served by
the Company
o fluctuations in raw material and energy prices
o product specifier preferences and spending patterns and
o competition from other decorative surfaces producers
Operating Factors
o our ability to combine our recently acquired businesses while
maintaining current operating performance levels during the
integration period(s) and the challenges inherent in diverting our
management's focus and resources from other strategic opportunities
and from operational matters
o our ability to implement our cost savings plans without adversely
impacting our net sales and
o our ability to attract, hire and retain suitable personnel
Relating to our Debt and the Notes
We have substantial debt, which could limit our cash available for other
uses and harm our competitive position. In connection with our acquisition by
Laminates, we incurred significant indebtedness. The level of our indebtedness
could have important consequences to us, including:
Page 12
o limiting cash flow available for general corporate purposes,
including acquisitions, because a substantial portion of our cash
flow from operations must be dedicated to debt service
o limiting our ability to obtain additional debt financing in the
future for working capital, capital expenditures or acquisitions
o limiting our flexibility in reacting to competitive and other changes
in the industry and economic conditions generally and
o exposing us to risks inherent in interest rate fluctuations because
some of our borrowings may be at variable rates of interest, which
could result in higher interest expense in the event of increases in
interest rates
You should read the section called "Risk Factors" in the Registration
Statements on Form S-1 (file no. 333-76683) that we filed with the SEC, for
additional information about risks that may cause our actual results and
experience to differ materially from those contained in forward-looking
statements.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133-"Accounting for Derivative Instruments and
Hedging Activities" was issued ("SFAS No. 133"). In June 1999, SFAS No.
137-"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133" was issued which deferred the
effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 requires all derivatives to be measured at
fair value and recognized as assets or liabilities on the balance sheet.
Changes in the fair value of derivatives should be recognized in either net
income or other comprehensive income, depending on the designated purpose of
the derivative. SFAS No. 133 is not expected to have a material impact on the
Company's financial position or results of operations.
Contingent Matters
Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for
a discussion of legal contingencies.
Page 13
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Formica did not file any reports on Form 8-K during the three months ended
March 31, 2000.
The following exhibit is included herein:
(27) Financial Data Schedule (for electronic submission only) Page E-1
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Formica Corporation
---------------------------------
(Registrant)
/s/ David T. Schneider
---------------------------------
(David T. Schneider -
Chief Financial Officer)
May 15, 2000
---------------------------------
(Date)
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