As filed with the Securities and Exchange Commission on May 19, 2000.
Registration No. 333-76683
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
Post-Effective Amendment No. 1 to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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---------
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement for the same offering.
[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earliest effective registration statement for the
same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=============================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Securities to Amount to be Offering Aggregate Offering Amount of
be Registered Registered Price(1) Price(1) Registration Fee(2)
- -----------------------------------------------------------------------------------------------------------------------------
10 7/8% Series B Senior Subordinated
Notes due 2009 $215,000,000 100% $215,000,000 $59,770
=============================================================================================================================
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) Previously paid on April 21, 1999.
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The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
SUBJECT TO COMPLETION, DATED MAY 19, 2000
PROSPECTUS
FORMICA CORPORATION
10 7/8% Series B Senior Subordinated Notes due 2009
------------
The Company
o We are one of the leading brand names in the decorative surfacing products
market and are one of the largest producers of high pressure decorative
laminates in the world.
The Original Offering:
o We issued the notes in a private offering on February 22, 1999.
o We used such net proceeds to repay in full the $200 million principal
amount outstanding under the bridge notes together with accrued interest.
The remaining net proceeds were used for general corporate purposes and
initially were temporarily invested in short-term securities.
The Notes:
o Maturity: March 1, 2009
o Interest Payment: semi-annually on March 1 and September 1, commencing on
September 1, 1999.
o Optional Redemption: The notes will be redeemable on or after March 1,
2004 at the prices state herein. In addition, we may redeem up to 35% of
the notes on or prior to March 1, 2002 at a redemption price of 110.875%
of the principal amount, plus accrued interest, with the net cash proceeds
of one or more public equity offerings provided that at least 65% of the
aggregate principal amount of the notes remain outstanding after such
redemption.
o Mandatory Redemption: We also have the right to redeem, and you have the
right to require us to purchase, the notes upon the occurrence of certain
change of control events, at the prices set forth herein.
o Ranking of Notes: The notes are general unsecured obligations,
subordinated to all of our senior obligations, including any borrowings
under our bank credit facility. The notes rank senior to all subordinated
indebtedness. The notes will effectively rank junior to all liabilities of
our subsidiaries.
o As of March 31, 2000, Formica had outstanding approximately $397.7 million
of senior indebtedness, and our subsidiaries had approximately $647.9
million of outstanding liabilities, including trade payables.
This investment involves risks. See "Risk Factors" on page 10
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
This prospectus will be used by Donaldson, Lufkin & Jenrette Securities
Corporation in connection with offers and sales in market-making transactions
at negotiated prices related to prevailing market prices. There is currently no
public market for the notes. We do not intend to list the notes on any
securities exchange. Donaldson, Lufkin & Jenrette Securities Corporation has
advised us that it is currently making a market in the notes; however, it is
not obligated to do so and may stop at any time. Donaldson, Lufkin & Jenrette
Securities Corporation may act as principal or agent in any such transaction.
We will not receive the proceeds of the sale of the notes but will bear the
expenses of registration.
---------
Donaldson, Lufkin & Jenrette
The date of this Prospectus is May 19, 2000
PROSPECTUS SUMMARY
The following summarizes the more detailed information in this prospectus and
you should read the entire prospectus carefully and in its entirety.
SUMMARY DESCRIPTION OF THE NOTES
Maturity Date........................ March 1, 2009
Interest Payment Dates............... Every March 1 and September 1, beginning
September 1, 1999.
Optional Redemption.................. We may redeem any of the notes at our
option on or after March 1, 2004 at the
redemption prices set forth on page 64,
plus accrued interest. In addition, we
may redeem up to 35% of the notes on or
prior to March 1, 2002 at a redemption
price of 110.875% of the principal
amount, plus accrued interest, with the
net cash proceeds of one or more public
equity offerings provided that at least
65% of the aggregate principal amount of
the notes remain outstanding after the
redemption.
Change of Control.................... Upon the occurrence of a change of
control, as defined in the section called
"Description of Notes", you may require
us to repurchase your notes at 101% of
their principal amount, plus accrued
interest. We cannot assure you that we
will have sufficient resources to satisfy
our repurchase obligation in the event of
a change of control. (See "Risk
Factors--We may not be able to repurchase
your notes upon a change of control" and
"Description of Notes.")
Ranking.............................. The notes:
o rank junior to all of our senior
indebtedness and secured indebtedness,
including our credit facility.
o will effectively rank junior to all
liabilities of our subsidiaries.
o will rank equally with any of our
future senior subordinated indebtedness.
As of March 31, 2000, we had outstanding
approximately $397.7 million of senior
indebtedness, and our subsidiaries had
$647.9 million of liabilities, including
trade payables.
Restrictive Covenants................ The indenture governing the notes
contains restrictive covenants limiting
or prohibiting our ability and our
subsidiaries' ability to:
o incur additional indebtedness or issue
preferred stock;
o pay dividends or make distributions on,
and to redeem or repurchase, capital
stock or to repurchase subordinated
indebtedness;
o engage in transactions with affiliates;
o engage in sale and leaseback
transactions;
o create liens securing indebtedness;
o make investments and sell assets; and
o consolidate with or merge into, or sell
substantially all of our assets to,
another person.
(See "Description of Notes--Certain
Covenants.")
Use of Proceeds....................... We will not receive any proceeds from
the sale of notes offered hereby.
2
OUR COMPANY
Overview
What we do
We believe that Formica Corporation is one of the leading brand names in
the decorative surfacing products market. "Decorative surfaces" are products
that are used to finish a surface, which may be a wall, a cabinet, a countertop
or a floor, and include everything from inexpensive vinyl flooring to marble
countertops. We produce:
o high-pressure decorative laminates, our primary product:
o we design, manufacture and distribute Formica(R) brand high
pressure decorative laminates which are made of decorative
surface papers (solid colors, patterns and woodgrains) treated
with resins and laminated along with resin treated kraft papers
using a high pressure press
o because high-pressure laminate is durable, attractively
designed, easy to maintain and very versatile, it is used in a
wide range of commercial and residential surfaces, including
kitchen cabinets, countertops and work surfaces
o we believe that we are one of the largest producers of
high-pressure decorative laminates in the world, which we market
under the Formica(R)brand name
o we estimate that the total size of the world-wide market was
approximately $3.0 billion in 1999, evenly distributed between
North America, Europe and the rest of the world
o solid surfacing materials
o unlike high-pressure laminate, solid surfacing is quite thick,
which makes it more durable and permits easier repair in the
event of a scratch, since the surface can be sanded down to look
like new
o we market our solid surfacing product under the names
"Surell(R)" and "Fountainhead(R)"
o laminate flooring
o laminate flooring is applied over any dry, clean and level floor
surface
o the flooring is water-resistant and is ideally suited for
kitchens and bathrooms
o we introduced our flooring line under the Formica(R)name in 1996
We believe the Formica(R) brand name, which is recognized by many
customers without prompting, contributes significantly to the sale of our
products. For the years ended December 31, 1999 and 1998, our net sales were
$585.2 million and $549.7 million, respectively, and Adjusted EBITDA, as
defined under Selected Financial Data, was $63.0 million and $50.2 million,
respectively.
We market our products:
o through over 7,500 domestic and international independent
distributors and dealers as well as our own sales force
o to major distributors, manufacturers of finished products, and to
architects and designers who specify products for commercial and
residential interiors
Our History
Our company was founded in 1913 and created the world's first decorative
laminate in 1927. After several sales and an initial public offering, we were
sold to FM Acquisition Corporation in a buyout led by Vincent Langone, David
Schneider and Dillon Read & Co. in 1989. In January 1995, we were acquired by
BTR Nylex Ltd., an Australian company and a subsidiary of BTR plc.
In May 1998, our parent company, FM Holdings Inc. which we refer to as
"Holdings", was bought by Laminates Acquisition Co. which we refer to as
"Laminates", which was organized by DLJ Merchant Banking Partners II, L.P.,
affiliated funds and entities, three institutional investors, including CVC
European Equity Partners, L.P. and CVC European Equity Partners (Jersey) L.P.
and MMI Products L.L.C., and Messrs. Langone and Schneider.
3
As a result, we are wholly-owned by Holdings, which in turn is
wholly-owned by Laminates, which is owned by the DLJ Merchant Banking funds,
the institutional investors and the management shareholders. See Note 2 of the
accompanying consolidated financial statements for information regarding our
acquisition by Laminates.
Competitive Strengths
We possess a number of competitive strengths, including:
o global market position
o worldwide brand awareness
o established, effective distribution channels
o acclaimed design leadership
o diverse and stable customer base
For more complete information on our competitive strengths, you should
read the section called "Business--Competitive Strengths."
Recent Developments
Management Additions. In connection with the acquisition of Formica by
Laminates, Vincent Langone, our Chief Executive Officer from 1988 to 1994, and
David Schneider, our Chief Financial Officer from 1989 to 1994, returned to
assume senior management roles at Formica. During their tenure at Formica, they
consistently ran the business at significantly lower selling, general and
administrative expense spending levels than those incurred from 1995 to 1997.
They have implemented a plan to improve our results, which had deteriorated
from 1995 to 1997. (See "Business Strategy.")
A key aspect of prior management's efforts to increase our gross margins
was our decision to focus our marketing efforts on higher margin business,
primarily distributors, and to de-emphasize or eliminate sales to lower margin
accounts, primarily direct customers, including office furniture makers.
Management believes that a number of the de-emphasized and eliminated accounts
were profitable and allowed us to spread our fixed costs over more sales.
Capital Investments. We have implemented a focused capital investment
program that management believes will increase capacity, yield substantial
manufacturing savings and improve competitiveness. (See "Business--Capital
Investments.")
Fountainhead. In March 1999, we acquired the Fountainhead(R) brand solid
surfacing product of International Paper's Decorative Products Division and its
manufacturing facility located in Odenton, Maryland. (See Note 2 -
"Acquisitions" of the accompanying consolidated financial statements.)
Rhinocore. In September 1999, we acquired Rhinocore(TM) as an entry into
direct imaging computer graphics for high-pressure decorative laminates. These
digital graphic images enable the manufacture of laminates with superior
graphics for applications such as signage and photographic images of murals and
panels. Rhinocore(TM) sells at a much higher price than standard laminates.
STEL. In December 1999, we purchased STEL Industries Inc., the supplier of
our flooring product. (See Note 2 - "Acquisitions" of the accompanying
consolidated financial statements.)
Perstorp. In March 2000, an investment company, Decorative Surfaces
Holding AB, set up by DLJ Merchant Banking Partners, agreed to acquire Perstorp
Surface Materials, one of our competitors in Europe. Decorative Surfaces
Holding became a wholly-owned subsidiary of our parent company, Holdings on
March 31, 2000, the closing of the acquisition. Holdings has informed us that
they expect to contribute Decorative Surfaces Holdings to Formica upon
satisfaction of certain conditions. However, we cannot assure you that (i) the
conditions precedent to the contribution of Decorative Surfaces Holdings to us
will be satisfied or (ii) Holdings will not alter its decision to contribute
Decorative Surfaces Holdings to Formica. See "Business--Business
Strategy--Target Strategic Acquisitions--Perstorp Surface Materials."
Business Strategy
We have implemented a strategy that we believe will return us to pre-1995
levels of profitability and cash flows. We expect our operating performance to
benefit from the following factors:
4
o the return of Vincent Langone and David Schneider, who previously
managed us through two successful leveraged buyouts, as senior
management
o a reduction in selling, general and administrative expenses, and in
capital spending, which increased significantly from 1995 to 1997
o an expected increase in unit volume shipments as customer service is
improved through better management of the inventory and distribution
systems and
o the realization of substantial savings due to the manufacturing
efficiencies resulting from the significant capital investments made
since 1994
For more complete information on our business strategies, you should read
the section called "Business--Business Strategy."
Cost Savings
We have implemented a cost savings program intended to reduce operating
expenses. We devised this program after a detailed review of our financial and
operational results from 1995 to 1997, based on our management's expertise in
successfully operating the business at significantly lower selling, general and
administrative spending levels than were incurred between 1995 and 1997, yet
with stronger EBITDA results.
The majority of the savings relate to reductions in advertising and sales
promotion spending as well as other selling and administrative spending.
Implementation of the cost savings began in early 1998, and as expected,
substantially all of the savings were realized during 1999. We estimate that
there will be additional savings in the year 2000 due to other programs
initiated in our North American operations.
The following is management's estimate of the amount of annual cost
savings reflected in our results of operations for the years ended December 31,
1999 and 1998 based on results compared to management's original estimate of
total savings on each category in 1997. Not included in the table below are the
savings and efficiencies from the substantial capital improvements made since
1994. (See "Business--Capital Investments.")
Estimated Annual
Estimated Year Estimated Year Cost Savings
ended December ended December Compared to
Unaudited 31, 1999 31, 1998 1997
--------- -------------- -------------- ----------------
(in millions)
Excess Advertising & Sales Promotion/Other
Selling,General & Administrative Expenses $17.6 $10.5 $18.0
Flooring 6.8 5.5 6.0
Operating Expenses 2.7 2.0 4.0
Staff Reductions 3.5 3.0 5.0
Consultants/Legal/Other 4.2 4.0 4.0
----- ----- -----
Total Estimated Cost Savings 34.8 25.0 37.0
Additional Standalone Costs (7.4) (3.0) (7.0)
----- ----- -----
Total Estimated Net Cost Savings $27.4 $22.0 $30.0
===== ===== =====
For more complete information on our cost savings program, you should read
the section called "Business--Cost Savings."
While we believe that the advertising and promotional spending that
constituted a large part of the increased selling, general and administrative
expenses was unnecessary and generally ineffective in its focus on consumers
rather than the real decision makers like contractors and architects, we cannot
assure you that a reduction in advertising and promotional spending will not
reduce net sales. (See "Risk Factors--You may not be able to rely on
forward-looking statements" and "Risk Factors--Our cost cutting strategy may
not be successful and may reduce our sales.")
---------
Our principal executive offices are located at 15 Independence Boulevard,
Warren, New Jersey 07059, and our telephone number is 908-647-8700.
5
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
FINANCIAL AND OPERATING DATA
The following table includes:
o summary historical financial data for Formica before we were acquired
from BTR for the year ended December 31, 1994.
o summary historical financial data for Formica after we were acquired
by BTR for the eleven months ended December 31, 1995, beginning
January 27, 1995, the date when we were acquired by BTR, the years
ended December 31, 1996 and 1997, and the four months ended April 30,
1998.
o summary historical financial data for Formica for the eight months
ended December 31, 1998, the year ended December 31, 1999 and the
three months ended March 31, 1999 and 2000.
o summary pro forma financial data for the year ended December 31,
1998.
The historical data for Pre-BTR Formica for the year ended December 31,
1994 have been derived from the audited consolidated financial statements of
Pre-BTR Formica. The historical financial data for BTR-owned Formica as of and
for the eleven months ended December 31, 1995 and as of and for the years ended
December 31, 1996 and 1997 and the four months ended April 30, 1998 have been
derived from the audited consolidated financial statements of BTR-owned
Formica. The historical financial data for the eight months ended December 31,
1998, the year ended December 31, 1999 have been derived from our audited
consolidated financial statements. The historical financial data for the three
months ended March 31, 1999 and 2000 have been derived from our unaudited
consolidated financial statements. The unaudited pro forma financial data have
not been designed to represent and do not represent what our results of
operations actually would have been had the transactions described under
"Unaudited Pro Forma Condensed Consolidated Financial Statements" been
completed at the beginning of the period indicated, or to project our financial
position or results of operations at any future date or for any future period.
You should read the following table in conjunction with "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Condensed Consolidated
Financial Statements" and our consolidated financial statements and notes
thereto included elsewhere herein.
Pre-BTR
Formica BTR-owned Formica Formica Proforma
---------- ------------------------------------- -------------------------------------- --------
Eleven Four Eight Three Three
Year Months Months Months Year Months Months Year
Ended Ended Years Ended Ended Ended Ended Ended Ended Ended
December December December 31, April December December December December December
31, 31, ------------------ 30, 31, 31, 31, 31, 31,
1994 1995 1996 1997 1998 1998 1999 1999 2000 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Statement of Operational Data:
Net sales $ 489.2 $ 468.2 $ 521.6 $ 533.4 $ 178.3 $ 371.4 $ 585.2 $ 139.2 $ 141.1 $ 549.7
Cost of products sold 341.8 324.0 348.3 350.1 131.1 266.2 418.8 98.7 101.5 397.3
Inventory markdown from
restructuring(70 -- -- -- -- -- -- -- -- 1.9 --
------- -------- -------- ------- -------- -------- -------- ------- -------- --------
Gross profit 147.4 144.2 173.3 183.3 47.2 105.2 166.4 40.5 37.7 152.4
Selling, general &
administrative expenses 108.5 145.2 186.7 202.2 60.9 100.5 148.0 39.9 39.7 164.6
Cost of terminated acquisition -- -- -- -- -- 3.0 0.8 -- 0.4 3.0
Cost to terminate supply
contract -- -- -- -- -- -- 26.2 -- -- --
Provision for restructuring(7) -- -- -- -- -- -- -- -- 4.1 --
6
Pre-BTR
Formica BTR-owned Formica Formica Proforma
---------- ------------------------------------- -------------------------------------- --------
Eleven Four Eight Three Three
Year Months Months Months Year Months Months Year
Ended Ended Years Ended Ended Ended Ended Ended Ended Ended
December December December 31, April December December December December December
31, 31, ------------------ 30, 31, 31, 31, 31, 31,
1994 1995 1996 1997 1998 1998 1999 1999 2000 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Goodwill impairment charge(1) -- -- -- 484.4 -- -- -- -- -- --
Income (loss) from operations 38.9 (1.0) (13.4) (503.3) (13.7) 1.7 (8.6) 0.6 (6.5) (15.2)
Interest expense(2) (46.4) (31.7) (10.6) (3.1) (1.7) (25.7) (37.4) (10.4) (10.0) (35.5)
Other income 16.2 0.4 1.1 1.8 0.8 4.5 2.5 1.5 0.6 5.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before provision
for income taxes 8.7 (32.3) (22.9) (504.6) (14.6) (19.5) (43.5) (8.3) (15.9) (45.4)
Income tax benefit (provision) 7.0 5.8 (5.0) (0.2) -- (2.8) 11.4 (1.2) (0.9) (2.8)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)(3) $ 15.7 $ (26.5) $ (27.9) $ (504.8) $ (14.6) $ (22.3) $ (32.1) $ (9.5) $ (16.8) $ (48.2)
======== ======== ======== ======== ======= ======== ======== ======== ======== ========
Other Data:
EBITDA:
Net income (loss) $ 15.7 $ (26.5) $ (27.9) $ (504.8) $ (14.6) $ (22.3) $ (32.1) $ (9.5) $ (16.8) $ (48.2)
Interest expense 46.4 31.7 10.6 3.1 1.7 25.7 37.4 10.4 10.0 35.5
Income tax (benefit) provision (7.0) (5.8) 5.0 0.2 -- 2.8 (11.4) 1.2 0.9 2.8
Depreciation and amortization 23.9 37.3 52.1 55.7 11.1 29.3 42.9 11.2 12.2 43.6
Goodwill impairment charge -- -- -- 484.4 -- -- -- -- -- --
Non-recurring gain on license
sale (7.6) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
EBITDA(4) $ 71.4 $ 36.7 $ 39.8 $ 38.6 $ (1.8) $ 35.5 $ 36.8 $ 13.3 $ 6.3 $ 33.7
1998 Charges(5) -- -- -- -- 5.7 10.8 -- -- -- 16.5
Restructuring -- -- -- -- -- -- -- -- 6.0 --
Cost to terminated
acquisition -- -- -- -- -- -- 26.2 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA(4) $ 71.4 $ 36.7 $ 39.8 $ 38.6 $ 3.9 $ 46.3 $ 63.0 $ 13.3 $ 12.3 $ 50.2
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA Margin 14.6% 7.8% 7.6% 7.2% 2.2% 12.5% 10.8% 9.6% 8.7% 9.1%
Net cash provided by (used in):
Operating activities $ (5.6) $ (9.9) $ 1.5 $ 5.7 $ (11.7) $ 26.7 $ 0.2 $ (22.1) $ (3.6) --
7
Pre-BTR
Formica BTR-owned Formica Formica Proforma
---------- ------------------------------------- -------------------------------------- --------
Eleven Four Eight Three Three
Year Months Months Months Year Months Months Year
Ended Ended Years Ended Ended Ended Ended Ended Ended Ended
December December December 31, April December December December December December
31, 31, ------------------ 30, 31, 31, 31, 31, 31,
1994 1995 1996 1997 1998 1998 1999 1999 2000 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Investing activities (17.5) (27.5) (44.5) (46.5) (8.3) (35.5) (89.3) (19.7) (2.8) --
Financing activities 35.2 28.5 56.5 47.1 (0.1) 33.0 66.2 13.7 6.7 --
Depreciation and Amortization 23.9 37.3 52.1 55.7 11.1 29.3 42.9 11.2 12.2 43.6
Capital expenditures $ 17.5 $ 27.5 $ 44.5 $ 46.5 $ 8.3 $ 35.5 $ 25.9 $ 19.7 $ 2.8 $ 43.8
Ratio of earnings to fixed
charges(6) 1.20 -- -- -- -- -- -- -- -- --
Balance Sheet Data:
Cash equivalents $ 15.1 $ 9.8 $ 26.3 $ 27.2 $ 6.9 $ 31.6 $ 7.8 $ 2.9 $ 7.3
Working capital 123.2 57.4 64.3 66.6 48.8 118.9 115.9 119.7 112.5
Total assets 605.5 1,110.0 1,136.8 647.7 612.0 701.2 717.8 693.5 706.4
Total debt 371.9 441.1 42.2 44.8 83.9 317.7 391.1 331.4 397.7
Total liabilities 565.2 650.6 266.1 304.3 280.8 581.4 640.5 592.6 647.9
Total stockholders' equity $ 40.3 $ 459.4 $ 870.7 $ 343.4 $ 331.2 $ 119.8 $ 77.3 $ 100.9 $ 58.5
(1) During 1997, we recorded a goodwill impairment charge of $484.4 which was
determined utilizing the fair value of our assets considering, among other
things, the purchase price for the sale of Formica. The impairment charge
did not result in the reduction of property, plant and equipment.
(2) Interest expense is not net of interest income.
(3) Net income for the year ended December 31, 1994 is exclusive of an
extraordinary loss of $9.2.
(4) "EBITDA" is defined as income before extraordinary item and change in
accounting principles plus interest expense (not net of interest income),
income tax expense, depreciation and amortization expenses goodwill
impairment charge and cost of terminated supply contract. EBITDA is a key
financial measure but should not be construed as an alternative to
operating income or cash flows from operating activities (as determined in
accordance with generally accepted accounting principles). EBITDA for 1994
excludes a non-recurring gain of $7.6 on a sale of a license. "Adjusted
EBITDA" for the four months ended April 30, 1998, and the eight months
ended December 31, 1998 represents EBITDA excluding $5.7, and $10.8 of the
1998 Charges, respectively. Adjusted EBITDA for the year ended December
31, 1999 excludes the Cost To Terminate Supply Contract totaling $26.2
million. We believe that EBITDA and Adjusted EBITDA are useful supplements
to net income (loss) and other consolidated income statement data in
understanding cash flows generated from operations that are available for
taxes, debt service and capital expenditures. Adjusted EBITDA is presented
to assist in comparing normalized EBITDA between periods. However, our
method of computation may or may not be comparable to other similarly
titled measures of other companies.
(5) Includes $5.7, and $10.8 of charges reflecting adjustment of (1) reserves
for inventory obsolescence, doubtful accounts and customer incentive
rebate programs and (2) accruals for customs, property tax expenses and
other items and cost of terminated acquisition. See Notes 12 and 14 to our
consolidated financial statements.
(6) For purposes of these computations, earnings consist of income (loss)
before income taxes, plus fixed charges. Fixed charges consist of interest
on indebtedness (including amortization of debt issuance costs) plus that
portion of lease rental expense representative of interest (deemed to be
one-third of lease rental expense). For the eleven months ended December
31, 1995, the years ended December 31, 1996 and 1997, the four months
ended April 30, 1998, the eight months ended December 31, 1998, the year
ended December 31, 1999, the three months ended March 31, 1999 and 2000,
earnings were insufficient to cover fixed charges by $32.3, $23.1, $505.9,
$14.6, $19.5, $43.5, $9.5 and $16.8, respectively. On a pro forma basis,
earnings were insufficient to cover fixed charges by $45.4 for the year
ended December 31, 1998.
8
(7) Includes $1.9 million and $4.1 million of restructuring charges 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).
9
RISK FACTORS
In addition to the other matters described in this prospectus you should
carefully consider the following risk factors before accepting the exchange
offer.
Risk factors 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:
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.
For the year ended December 31, 1999 earnings would have been
insufficient to cover fixed charges by approximately $43.5 million As of March
31, 2000 we had (1) total consolidated indebtedness of approximately $397.7
million and (2) approximately $22.5 million of additional borrowings available
under the new credit facility. In addition, subject to the restrictions in the
new credit facility and the indenture, we may incur significant additional
indebtedness, which may be secured.
Restrictive covenants in our indenture and new credit facility will limit our
ability to enter into many transactions; our failure to comply with those
covenants could cause our debt obligations to be accelerated
The indenture and our credit facility contain covenants that restrict
our ability to effectuate many types of transactions. In addition, our new
credit facility also requires us to maintain specified financial ratios and
satisfy other financial condition tests. Our ability to meet those financial
ratios and tests can be affected by events beyond our control, and there can be
no assurance that we will meet those tests. A breach of any of these covenants
could result in a default under our new credit facility and/or the notes. Upon
the occurrence of an event of default under our new credit facility, the
lenders could elect to declare all amounts outstanding under our new credit
facility to be immediately due and payable and terminate all commitments to
extend further credit. If we were unable to repay those amounts, the lenders
could proceed against the collateral granted to them to secure that
indebtedness. We have pledged substantially all of our assets, other than
assets of our foreign subsidiaries, as security under our new credit facility.
We cannot assure you that, if the lenders under our new credit facility
accelerate the repayment of borrowings thereunder, we will have sufficient
assets to repay our new credit facility and our other indebtedness, including
your notes. (See "Description of Our Credit Facility.")
The notes rank junior to our senior indebtedness in bankruptcy, and senior
debtholders may force us to stop making payments to you if we are in default on
our senior indebtedness
The notes rank junior to all of our senior indebtedness and secured
indebtedness, including all indebtedness under our new credit facility, and
liabilities of subsidiaries. As a result of the subordination provisions in the
notes, if:
(1) we are insolvent or enter into a bankruptcy or similar
proceeding;
(2) we fail to make a payment when due on senior indebtedness; or
(3) any senior indebtedness is accelerated
then the holders of senior indebtedness and any other creditors of subsidiaries,
if any, must be paid in full before the holders of the notes may be paid.
10
In addition, we cannot make any cash payments to you if we have failed to
make payments to holders of senior indebtedness. Under the circumstances
described in "Description of Notes--Subordination," we cannot make any payments
for a period of up to 179 days if we have defaulted, other than failures to
make payments, on our senior indebtedness covenants.
As of March 31, 2000, we had approximately $397.7 million of senior
indebtedness. While the indenture does limit our ability to incur additional
indebtedness, it permits any or all additional indebtedness that we are allowed
to incur to be senior to the notes.
If we incur any additional debt that ranks equally with the notes, the
holders of that additional debt will be entitled to share ratably with you in
any proceeds distributed in connection with any insolvency, liquidation,
reorganization, dissolution or other winding-up of us. This may have the effect
of reducing the amount of available proceeds we may pay to you.
We are a holding company that conducts operations through our subsidiaries, and
the notes effectively rank junior to indebtedness of our subsidiaries
We conduct a portion of our operations, including nearly all of our
foreign operations, through subsidiaries, and our ability to meet our debt
service obligations will be dependent upon the receipt of dividends from our
direct and indirect subsidiaries. Because our subsidiaries have not guaranteed
the notes, the notes are structurally junior to all creditors of our
subsidiaries, except to the extent that we are recognized as a creditor of any
subsidiary, in which case our claims would still be subordinate to any secured
debt of that subsidiary and any debt of that subsidiary senior to that held by
us. As of March 31, 2000, our subsidiaries had outstanding $647.9 million of
indebtedness and other liabilities, including trade payables but excluding
intercompany obligations and guarantees of the new credit facility
While the indenture requires us to offer to repurchase your notes upon a change
of control, we may not be able to repurchase your notes in that event
Upon the occurrence of a change of control as defined in "Description of
Notes," you may require us to purchase your notes at 101% of their principal
amount, plus accrued interest. Please note that the terms of our new credit
facility limit our ability to purchase your notes upon a change of control. Any
of our future debt agreements may contain similar restrictions and provisions.
Accordingly, we may not be able to satisfy our obligations to purchase your
notes unless we are able to refinance or obtain waivers with respect to those
agreements. We cannot assure you that we will have the financial resources to
purchase your notes, particularly if a change of control event triggers a
similar repurchase requirement for, or results in the acceleration of, other
indebtedness. Our new credit facility currently provides that specified change
of control events will constitute a default and could result in the
acceleration of our indebtedness under the new credit facility.
The restrictive covenants in the indenture may not prevent us from entering
into transactions that could adversely affect the value of your notes
You should be aware that the restrictive covenants in the indenture,
including the covenant that requires us to offer to repurchase your notes in
the event of a change of control, are subject to significant exceptions. As a
result, we may still be able to enter into a variety of transactions, including
acquisitions, refinancings and recapitalizations, that could increase the
amount of our indebtedness or otherwise affect our capital structure. Those
transactions could have an adverse impact on our ability to repay your notes,
or on our credit rating and the market value of your notes. Because those
transactions will not be restricted by the indenture, you will have no right to
prevent us from entering into any of those transactions or to compel us to
repurchase your notes.
Courts could invoke fraudulent transfer statutes to limit your right to receive
payments on your notes
Federal or state fraudulent transfer laws permit a court, if it makes the
findings described below, to
o avoid all or a portion of our obligations to you;
o subordinate our obligations to you to other existing and future
indebtedness of Formica, entitling other creditors to be paid in full
before any payment is made on the notes; and
o take other action detrimental to you, including, in various
circumstances, invalidating the notes.
In that event, there would be no assurance that you would ever be repaid.
11
Under federal and state fraudulent transfer laws, in order to take any of
the actions described above, courts will typically need to find that, at the
time the notes were issued, we:
(1) issued the notes with the intent of hindering, delaying or defrauding
current or future creditors; or
(2) received less than fair consideration or reasonably equivalent value
for incurring the indebtedness represented by the notes and
(a) were insolvent or were rendered insolvent by reason of the
issuance of the notes,
(b) were engaged, or about to engage, in a business or transaction
for which our assets were unreasonably small; or
(c) intended to incur, or believed or should have believed we would
incur, debts beyond our ability to pay as our debts mature
as all of the foregoing terms are defined in or interpreted under fraudulent
transfer statutes,
Different jurisdictions define "insolvency" differently. However, we
generally would be considered insolvent at the time we incurred the
indebtedness constituting the notes if (1) the fair market value or fair
saleable value of our assets is less than the amount required to pay our total
existing debts and liabilities, including the probable liability on contingent
liabilities, as they become absolute or matured or (2) we were incurring debts
beyond our ability to pay as our debts mature. We cannot assure you as to what
standard a court would apply in order to determine whether we were "insolvent"
as of the date the notes were issued, and we cannot assure you that, regardless
of the method of valuation, a court would not determine that we were insolvent
on that date. Nor can we assure you that a court would not determine,
regardless of whether we were insolvent on the date the notes were issued, that
the payments constituted fraudulent transfers on another ground. To the extent
that proceeds from the sale of the notes are used to repay the bridge notes, a
court may find that we did not receive fair consideration or reasonably
equivalent value for the incurrence of the indebtedness represented by the
notes.
Trading Market for the Notes
There is no existing trading market for the notes, and we cannot assure
you about the future development of a market for the notes or your ability to
sell their new notes or the price at which you may be able to sell your notes.
If such market were to develop, the notes could trade at prices that may be
higher or lower than their initial offering price depending on many factors,
including prevailing interest rates, our operating results and the market for
similar securities. Although it is not obligated to do so, Donaldson, Lufkin &
Jenrette Securities Corporation intends to make a market in the notes. Any such
market-making activity may be discontinued at any time, for any reason, without
notice at the sole discretion of Donaldson, Lufkin & Jenrette Securities
Corporation. No assurance can be given as to the liquidity of or the trading
market for the notes.
Donaldson, Lufkin & Jenrette Securities Corporation may be deemed to be
our "affiliate", as defined the Securities Act, and, as a result, may be
required to deliver a prospectus in connection with its market-making
activities in the notes. In the registration rights agreement that we signed
with Donaldson, Lufkin & Jenrette Securities Corporation in connection with the
initial sale of the notes, we agreed to use our best efforts to file and
maintain a registration statement that would allow Donaldson, Lufkin & Jenrette
Securities Corporation to engage in market-making transactions in the notes. We
have agreed to bear substantially all the costs and expenses related to
registration.
Risk factors relating to our business
We intend to reduce our operating costs, including advertising and marketing
costs; that strategy may not be successful and may actually reduce our sales
Our business strategy includes the reduction of operating costs, primarily
advertising and marketing costs, and a shift in marketing focus away from
consumer-targeted marketing that we believe is ineffective. We cannot assure
you that we will be successful in reducing these costs. Additionally,
reductions in advertising and marketing expenditures could have an adverse
impact on our sales.
Our strategy of growing via acquisitions is risky, as we may have difficulty
managing a larger company and we may have difficulty financing new acquisitions
Our business strategy also includes the pursuit of an acquisition strategy
to promote our growth. For
12
example, in March 1999 we acquired International Paper's solid surfacing
business. Our failure to manage our future growth effectively could have a
material adverse effect on us. We cannot assure you that we will be able to
find suitable acquisition candidates or that we can complete acquisitions on
reasonable terms. Additionally, our ability to finance acquisitions will be
dependent on our ability to generate sufficient cash flow or obtain sufficient
capital. We cannot assure you that:
o we will be able to generate sufficient cash flow
o financing will be available on acceptable terms or
o financing will be permitted to be incurred under the terms of the
indenture, the new credit facility and any future indebtedness to fund
acquisitions.
The decorative surfacing products market is mature and cyclical, so our
business will be impacted by an economic downturn
In the United States, high-pressure decorative laminate sales have
historically correlated closely with residential and commercial construction
activity. Spending on new construction and renovation in both the residential
and commercial markets depends, in large part, upon the overall strength of
consumer and business spending, which in turn is linked to the overall health
of the economy. A decrease in overall spending for new construction or
renovation in any geographic region in which we do a substantial amount of
business could have a material adverse effect on our financial condition and
results of operations.
Our intellectual property is important to our business and may not be
sufficiently protected under the laws of the United States and other countries
Substantially all of our net sales are from sales of products bearing
proprietary trademarks, including Formica(R), the Anvil F mark, Colorcore(R),
Surell(R) and Fountainhead(R). Accordingly, our future success may depend in
part upon the goodwill associated with our trademarks and the loss of our
intellectual property rights could have a material adverse effect on our
financial condition and results of operations. We cannot assure you that the
steps taken by us to protect our proprietary rights in our intellectual
property will be adequate to prevent the misappropriation thereof in the United
States or abroad. In addition, the laws of some foreign countries do not
protect intellectual property to the same extent as do the laws of the United
States.
We are controlled by a small group of shareholders who will be able to make
important decisions about our business and capital structure; their interests
may be different than your interests as a debtholder
Circumstances may occur in which the interests of our principal
shareholders could be in conflict with the interests of the holders of the
notes. In addition, our shareholders may have an interest in pursuing
transactions that, in their judgment, enhance the value of their equity
investment in us, even though those transactions may involve risks to the
holders of the notes.
Approximately 42.0% of the outstanding shares of Laminates common stock is
held by DLJ Merchant Banking funds, 21.1% is held by CVC and 21.0% is held by
MMI, in each case without giving effect to 145,134 outstanding shares of
restricted stock issued to our management.
The DLJ Merchant Banking funds, CVC, MMI and members of our management
who chose to purchase shares of Laminate's common stock entered into a
stockholders' agreement which contains provisions that, among other things,
entitle the DLJ Merchant Banking funds to select two of the seven members of
Laminates' and our respective board of directors, each of CVC and MMI to select
one member of each board, and the DLJ Merchant Banking funds, CVC and MMI to
collectively select two other members. As a result, these shareholders control
Laminates and, through Laminates, us, and have the power to elect a majority of
the directors of Laminates and us, appoint new management and approve any
action requiring the approval of the holders of common stock of Laminates or
us, including adopting amendments to the certificate of incorporation of
Laminates and us and approving acquisitions or sales of all or substantially
all of the assets of Laminates and us. The directors elected by the DLJ
Merchant Banking funds and the institutional investors have the ability to
control decisions affecting the capital structure of Laminates and us,
including the issuance of additional capital stock, the implementation of stock
repurchase programs and the declaration of dividends.
The general partners of each of the DLJ Merchant Banking funds are
affiliates or employees of Donaldson, Lufkin & Jenrette, Inc. DLJ Capital
Funding, which is one of the lenders under the new credit
13
facility, Laminates Funding, Inc. which purchased our bridge notes, and
Donaldson, Lufkin & Jenrette Securities Corporation, which was one of the
initial purchasers of the old notes, are also affiliates of Donaldson, Lufkin &
Jenrette.
Our international presence exposes us to additional risks inherent in
international operations, including exchange rate fluctuations, repatriation of
funds and adverse economic conditions in other regions of the world
In 1999, approximately 36% of our net sales were made to purchasers
located, and all of our operating income was earned, outside of North America.
Because of our foreign operations, our business is subject to the currency
risks of doing business abroad, including exchange rate fluctuations and limits
on repatriation of funds. As a result of the current downturn in the Asian
economy, there may be a decrease in new construction and renovation in the
Asian region or an overall worldwide economic contraction, which could have a
material adverse effect on our business, financial condition and results of
operations. Further, many developing economies have a significant degree of
political and economic uncertainty. Social unrest, the absence of trained labor
pools and the uncertainty of entering into joint ventures or other partnership
arrangements with local organizations have slowed business activities in some
large developing economies. The political and economic uncertainties present in
these promising growth markets may adversely impact our ability to implement
and achieve our foreign growth objectives.
We operate in a competitive industry and many of our competitors have greater
resources than we do, which could permit them to spend more on marketing and
research and development
The decorative surfacing product market is highly competitive. Many of our
competitors are owned by larger enterprises and may have greater assets or
resources than us, which could allow them to spend more money on marketing and
research and development, which would give them a competitive advantage. For
example, Corian(R), the major competitor for our Surell(R) and Fountainhead(R)
products, is produced by DuPont, one of the largest companies in the world. Our
products compete around the world with high pressure decorative laminates
manufactured by other producers, as well as with wood, veneers, marble,
granite, solid surfacing, tile, plastics, foils, papers, vinyls, acrylics,
paint, wallpaper, wall and floor coverings, low pressure laminates and other
surfacing materials. Competition is based principally on breadth of product
line, product quality, marketing, technology, price and service. We compete in
a number of geographic markets and our success in each of these markets is
influenced by those factors. (See "Business--Competition.")
We are dependent on key personnel and our business could be adversely affected
if we lost the services of these key employees; in particular, our business
strategy is dependent upon our CEO and CFO, who have a proven track record with
our company
Our success depends, to a large extent, upon the efforts and abilities of
key managerial employees, particularly our executive officers. In particular,
our business strategy is dependent upon Messrs. Langone and Schneider's prior
experience in the industry and with Formica, and our historical results of
operations were worse in their absence. The loss of the services of any of
these key employees or the failure to retain qualified employees when needed
could have a material adverse effect on our business, financial condition or
results of operations. Competition for qualified management personnel in the
industry is intense. We do not currently maintain key man life insurance.
Our operations and assets are subject to extensive environmental laws and
regulations, which could require us to spend significant amounts of money to
clean up contaminated property
Our operations are subject to various foreign and United States
environmental laws and regulations. We have conducted environmental assessments
on a limited number of properties. Unforeseen expenditures or liabilities
relating to contamination or compliance with environmental laws could have a
material adverse effect on our financial condition or results of operation.
We have been, from time to time, the subject of administrative
proceedings, litigation and investigations relating to environmental matters.
Currently, we have been named as a potentially responsible party at several
Superfund sites and have reserved approximately $3.9 million for liabilities at
December 31, 1999 for these matters. Although we believe, based on various
factors, including, without limitation, indemnification rights that we have
with respect to some of the Superfund sites, that the liabilities associated
with Superfund sites should not have a material adverse effect on our financial
condition or results of operations, we cannot assure you that we will not
become involved in future proceedings, litigation or investigations, that the
Superfund or other environmental liabilities will not be
14
material or that indemnification under those indemnification rights will
otherwise be available. (See "Business-- Environmental Matters.")
You may not be able to rely on forward-looking statements, as our actual
results may be materially different
This prospectus (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 recent acquisition by Laminates,
our acquisitions of Fountainhead and STEL and the proposed acquisition
of Perstorp Surface Materials
o our expectation that Holdings, which acquired Perstorp Surface
Materials, will contribute it to us
o our belief that we have sufficient cash flows to support working
capital needs, capital expenditures and debt service requirements
o our belief that we can continue to reduce selling, general and
administrative expenses without adversely affecting our net sales; and
o our belief that we will incur only minimal business disruption and
financial impact as a result of the Year 2000 issue
In addition, statements that include the words "believes," "expects,"
"anticipates," "intends," "estimates," "will," "should," "may," "seeks," "pro
forma," 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 prospectus 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 us
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
o our ability to attract, hire and retain suitable personnel and
o our ability and the ability of our key business partners to replace,
modify or upgrade computer systems in ways that adequately address the
Year 2000 issue
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:
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
15
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
16
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the notes by
Donaldson, Lufkin & Jenrette Securities Corporation in market-making
transactions. We will not receive any of the proceeds from such transactions.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000.
This table should be read in conjunction with our consolidated financial
statements, including the notes thereto, included elsewhere herein,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "The Acquisition."
March 31,
2000
Historical
(in millions)
-------------
Cash and cash equivalents........................... $ 7.3
========
Long term debt, including current portion:
New credit facility revolving loans(1)............ $ 70.9
New credit facility term loan..................... 82.2
Senior subordinated notes......................... 215.0
Other debt........................................ 29.6
--------
Total debt.......................................... 397.7
Total stockholders' equity.......................... 58.5
--------
Total capitalization................................ $ 456.2
========
(1) We have a total commitment for revolver borrowings of $120.0 million
under our new credit facility. Approximately $26.6 million has been
used as of March 31, 2000, to obtain letters of credit to provide
credit enhancement for some assumed indebtedness. (See "Description of
New Credit Facility.")
17
SELECTED CONSOLIDATED FINANCIAL DATA
Historical and Proforma
The following table includes:
o summary historical financial data for Formica before we were acquired
from BTR for the year ended December 31, 1994.
o summary historical financial data for Formica after we were acquired
by BTR for the eleven months ended December 31, 1995, beginning
January 27, 1995, the date when we were acquired by BTR, the years
ended December 31, 1996 and 1997, and the four months ended April 30,
1998.
o summary historical financial data for Formica for the eight months
ended December 31, 1998, the year ended December 31, 1999 and the
three months ended March 31, 1999 and 2000.
o summary pro forma financial data for the year ended December 31, 1998.
The historical data for Pre-BTR Formica for the year ended December 31,
1994 have been derived from the audited consolidated financial statements of
Pre-BTR Formica. The historical financial data for BTR-owned Formica as of and
for the eleven months ended December 31, 1995 and as of and for the years ended
December 31, 1996 and 1997 and the four months ended April 30, 1998 have been
derived from the audited consolidated financial statements of BTR-owned
Formica. The historical financial data for the eight months ended December 31,
1998, the year ended December 31, 1999 have been derived from our audited
consolidated financial statements. The historical financial data for the three
months ended March 31, 1999 and 2000 have been derived from our unaudited
consolidated financial statements. The unaudited pro forma financial data have
not been designed to represent and do not represent what our results of
operations actually would have been had the transactions described under
"Unaudited Pro Forma Condensed Consolidated Financial Statements" been
completed at the beginning of the period indicated, or to project our financial
position or results of operations at any future date or for any future period.
You should read the following table in conjunction with "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Condensed Consolidated
Financial Statements" and our consolidated financial statements and notes
thereto included elsewhere herein.
Pre-BTR
Formica BTR-owned Formica Formica Proforma
---------- ------------------------------------- -------------------------------------- --------
Eleven Four Eight Three Three
Year Months Months Months Year Months Months Year
Ended Ended Years Ended Ended Ended Ended Ended Ended Ended
December December December 31, April December December December December December
31, 31, ------------------ 30, 31, 31, 31, 31, 31,
1994 1995 1996 1997 1998 1998 1999 1999 2000 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Statement of Operational Data:
Net sales $ 489.2 $ 468.2 $ 521.6 $ 533.4 $ 178.3 $ 371.4 $ 585.2 $ 139.2 $ 141.1 $ 549.7
Cost of products sold 341.8 324.0 348.3 350.1 131.1 266.2 418.8 98.7 101.5 397.3
Inventory markdown from
restructuring(7) -- -- -- -- -- -- -- -- 1.9 --
------- -------- -------- ------- -------- -------- -------- ------- -------- --------
Gross profit 147.4 144.2 173.3 183.3 47.2 105.2 166.4 40.5 37.7 152.4
Selling, general &
administrative expenses 108.5 145.2 186.7 202.2 60.9 100.5 148.0 39.9 39.7 164.6
Cost of terminated acquisition -- -- -- -- -- 3.0 0.8 -- 0.4 3.0
Cost to terminate supply
contract -- -- -- -- -- -- 26.2 -- -- --
18
Pre-BTR
Formica BTR-owned Formica Formica Proforma
---------- ------------------------------------- -------------------------------------- --------
Eleven Four Eight Three Three
Year Months Months Months Year Months Months Year
Ended Ended Years Ended Ended Ended Ended Ended Ended Ended
December December December 31, April December December December December December
31, 31, ------------------ 30, 31, 31, 31, 31, 31,
1994 1995 1996 1997 1998 1998 1999 1999 2000 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Provision for restructuring(7) -- -- -- -- -- -- -- -- 4.1 --
Goodwill impairment charge(1) -- -- -- 484.4 -- -- -- -- -- --
Income (loss) from operations 38.9 (1.0) (13.4) (503.3) (13.7) 1.7 (8.6) 0.6 (6.5) (15.2)
Interest expense(2) (46.4) (31.7) (10.6) (3.1) (1.7) (25.7) (37.4) (10.4) (10.0) (35.5)
Other income 16.2 0.4 1.1 1.8 0.8 4.5 2.5 1.5 0.6 5.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before provision
for income taxes 8.7 (32.3) (22.9) (504.6) (14.6) (19.5) (43.5) (8.3) (15.9) (45.4)
Income tax benefit (provision) 7.0 5.8 (5.0) (0.2) -- (2.8) 11.4 (1.2) (0.9) (2.8)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)(3) $ 15.7 $ (26.5) $ (27.9) $ (504.8) $ (14.6) $ (22.3) $ (32.1) $ (9.5) $ (16.8) $ (48.2)
======== ======== ======== ======== ======= ======== ======== ======== ======== ========
Other Data:
EBITDA:
Net income (loss) $ 15.7 $ (26.5) $ (27.9) $ (504.8) $ (14.6) $ (22.3) $ (32.1) $ (9.5) $ (16.8) $ (48.2)
Interest expense 46.4 31.7 10.6 3.1 1.7 25.7 37.4 10.4 10.0 35.5
Income tax (benefit) provision (7.0) (5.8) 5.0 0.2 -- 2.8 (11.4) 1.2 0.9 2.8
Depreciation and amortization 23.9 37.3 52.1 55.7 11.1 29.3 42.9 11.2 12.2 43.6
Goodwill impairment charge -- -- -- 484.4 -- -- -- -- -- --
Non-recurring gain on license
sale (7.6) -- -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
EBITDA(4) $ 71.4 $ 36.7 $ 39.8 $ 38.6 $ (1.8) $ 35.5 $ 36.8 $ 13.3 $ 6.3 $ 33.7
1998 Charges(5) -- -- -- -- 5.7 10.8 -- -- -- 16.5
Restructuring -- -- -- -- -- -- -- -- 6.0 --
Cost to terminated
acquisition -- -- -- -- -- -- 26.2 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA(4) $ 71.4 $ 36.7 $ 39.8 $ 38.6 $ 3.9 $ 46.3 $ 63.0 $ 13.3 $ 12.3 $ 50.2
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA Margin 14.6% 7.8% 7.6% 7.2% 2.2% 12.5% 10.8% 9.6% 8.7% 9.1%
19
Pre-BTR
Formica BTR-owned Formica Formica Proforma
---------- ------------------------------------- -------------------------------------- --------
Eleven Four Eight Three Three
Year Months Months Months Year Months Months Year
Ended Ended Years Ended Ended Ended Ended Ended Ended Ended
December December December 31, April December December December December December
31, 31, ------------------ 30, 31, 31, 31, 31, 31,
1994 1995 1996 1997 1998 1998 1999 1999 2000 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in millions)
Net cash provided by (used in):
Operating activities $ (5.6) $ (9.9) $ 1.5 $ 5.7 $ (11.7) $ 26.7 $ 0.2 $ (22.1) $ (3.6) --
Investing activities (17.5) (27.5) (44.5) (46.5) (8.3) (35.5) (89.3) (19.7) (2.8) --
Financing activities 35.2 28.5 56.5 47.1 (0.1) 33.0 66.2 13.7 6.7 --
Depreciation and Amortization 23.9 37.3 52.1 55.7 11.1 29.3 42.9 11.2 12.2 43.6
Capital expenditures $ 17.5 $ 27.5 $ 44.5 $ 46.5 $ 8.3 $ 35.5 $ 25.9 $ 19.7 $ 2.8 $ 43.8
Ratio of earnings to fixed
charges(6) 1.20 -- -- -- -- -- -- -- -- --
Balance Sheet Data:
Cash equivalents $ 15.1 $ 9.8 $ 26.3 $ 27.2 $ 6.9 $ 31.6 $ 7.8 $ 2.9 $ 7.3
Working capital 123.2 57.4 64.3 66.6 48.8 118.9 115.9 119.7 112.5
Total assets 605.5 1,110.0 1,136.8 647.7 612.0 701.2 717.8 693.5 706.4
Total debt 371.9 441.1 42.2 44.8 83.9 317.7 391.1 331.4 397.7
Total liabilities 565.2 650.6 266.1 304.3 280.8 581.4 640.5 592.6 647.9
Total stockholders' equity $ 40.3 $ 459.4 $ 870.7 $ 343.4 $ 331.2 $ 119.8 $ 77.3 $ 100.9 $ 58.5
(1) During 1997, we recorded a goodwill impairment charge of $484.4 which was
determined utilizing the fair value of our assets considering, among other
things, the purchase price for the sale of Formica. The impairment charge
did not result in the reduction of property, plant and equipment.
(2) Interest expense is not net of interest income.
(3) Net income for the year ended December 31, 1994 is exclusive of an
extraordinary loss of $9.2.
(4) "EBITDA" is defined as income before extraordinary item and change in
accounting principles plus interest expense (not net of interest income),
income tax expense, depreciation and amortization expenses goodwill
impairment charge and cost of terminated supply contract. EBITDA is a key
financial measure but should not be construed as an alternative to
operating income or cash flows from operating activities (as determined in
accordance with generally accepted accounting principles). EBITDA for 1994
excludes a non-recurring gain of $7.6 on a sale of a license. "Adjusted
EBITDA" for the four months ended April 30, 1998, and the eight months
ended December 31, 1998 represents EBITDA excluding $5.7, and $10.8 of the
1998 Charges, respectively. Adjusted EBITDA for the year ended December
31, 1999 excludes the Cost To Terminate Supply Contract totaling $26.2
million. We believe that EBITDA and Adjusted EBITDA are useful supplements
to net income (loss) and other consolidated income statement data in
understanding cash flows generated from operations that are available for
taxes, debt service and capital expenditures. Adjusted EBITDA is presented
to assist in comparing normalized EBITDA between periods. However, our
method of computation may or may not be comparable to other similarly
titled measures of other companies.
(5) Includes $5.7, and $10.8 of charges reflecting adjustment of (1) reserves
for inventory obsolescence, doubtful accounts and customer incentive
rebate programs and (2) accruals for customs, property tax expenses and
other items and cost of terminated acquisition. See Notes 12 and 14 to our
consolidated financial statements.
(6) For purposes of these computations, earnings consist of income (loss)
before income taxes, plus fixed charges. Fixed charges consist of interest
on indebtedness (including amortization of debt issuance costs) plus that
portion of lease rental expense representative of interest (deemed to be
one-third of lease rental expense). For the eleven months ended
20
December 31, 1995, the years ended December 31, 1996 and 1997, the four
months ended April 30, 1998, the eight months ended December 31, 1998, the
year ended December 31, 1999, the three months ended March 31, 1999 and
2000, earnings were insufficient to cover fixed charges by $32.3, $23.1,
$505.9, $14.6, $19.5, $43.5, $9.5 and $16.8, respectively. On a pro forma
basis, earnings were insufficient to cover fixed charges by $45.4 for the
year ended December 31, 1998.
(7) Includes $1.9 million and $4.1 million of restructuring charges 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).
Unaudited Quarterly Consolidated Financial Information:
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 1999 and 1998, which includes the
following historical consolidated financial data for Formica:
o after our acquisition by BTR for the four month period ended April 30,
1998
o after our acquisition by Laminates for the year ended December 31,
1999, the two month period ended June 30,1998 and the quarters ended
September 30 and December 31, 1998.
Year ended December 31, 1999 1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
(dollars in millions)
Net sales.................................. $ 139.2 $ 155.4 $ 145.1 $ 145.5 $ 585.2
Cost of products sold...................... 98.7 111.2 103.7 105.2 418.8
------- ------- ------- ------- --------
Gross profit............................... 40.5 44.2 41.4 40.3 166.4
Selling, general & administrative.......... 39.9 38.6 36.1 33.4 148.0
Cost of Terminated Acquisition (2)......... -- -- 0.4 0.4 0.8
Cost to Terminate Supply Contract (3)...... -- -- -- 26.2 26.2
------- ------- ------- ------- --------
Income (loss) from operations.............. 0.6 5.6 4.9 (19.7) (8.6)
Interest expense (1)....................... (10.4) (8.6) (9.5) (8.9) (37.4)
Other income............................... 1.5 0.1 0.8 0.1 2.5
------- ------- ------- ------- --------
Loss before provision for income taxes..... (8.3) (2.9) (3.8) (28.5) (43.5)
Income tax (provision) benefit (3)......... (1.2) (0.7) (0.1) 13.4 11.4
------- ------- ------- ------- --------
Net loss................................... $ (9.5) $ (3.6) $ (3.9) $ (15.1) $ (32.1)
======= ======= ======= ======= ========
Two
One month Months
1st ended ended 3rd 4th Full
Year ended December 31, 1998 Quarter April 30, June 30, Quarter Quarter Year
------- --------- -------- ------- ------- -------
(dollars in millions)
Net sales.................................. $ 131.8 $ 46.5 $ 98.3 $ 139.5 $ 133.6 $ 549.7
Cost of products sold...................... 94.0 37.1 67.6 97.9 100.7 397.3
------- --------- -------- ------- ------- -------
Gross profit (4)........................... 37.8 9.4 30.7 41.6 32.9 152.4
Selling, general & administrative (4)...... 42.9 18.0 28.1 32.5 39.9 161.4
Cost of Terminated Acquisition (2)......... -- -- -- -- 3.0 3.0
------- --------- -------- ------- ------- -------
(Loss) income from operations.............. (5.1) (8.6) 2.6 9.1 (10.0) (12.0)
Interest expense (1)....................... (1.3) (0.4) (5.5) (11.0) (9.2) (27.4)
Other income............................... 0.6 0.2 0.4 -- 4.1 5.3
------- --------- -------- ------- ------- -------
Loss before provision for income taxes..... (5.8) (8.8) (2.5) (1.9) (15.1) (34.1)
Income tax provision....................... -- -- -- (1.8) (1.0) (2.8)
------- --------- -------- ------- ------- -------
Net loss................................... $ (5.8) $ (8.8) $ (2.5) $ (3.7) $ (16.1) $ (36.9)
======= ========= ======== ======= ======= =======
(1) Interest expense is not net of interest income.
(2) We recorded charges of $0.4 million, $0.4 million and $3.0 million, for the
quarters ended December 31, 1999, September 30, 1999 and December 31, 1998,
respectively, in connection with proposed acquisitions of decorative
products businesses. We have abandoned these proposed transactions. See
Note 12 to the accompanying consolidated financial statements.
(3) During the quarter ended December 31, 1999, we acquired our exclusive
supplier of laminate flooring. Prior to the acquisition, Formica was
obligated under a contract with the supplier to purchase minimum quantities
of laminate flooring at stipulated prices. The excess of the purchase price
over the net tangible and intangible assets of the supplier totaling $26.2
million was charged to expense as the cost to terminate the supply
contract. The income tax
21
benefit for the quarter ended December 31, 1999 primarily results from the
deductible cost to terminate a supply contract. See Note 2 to the
accompanying consolidated financial statements.
(4) During the two months ended May 31, 1998 and the month ended April 30,
1998, we made certain changes in accounting estimates, resulting in charges
totaling $7.8 million and $5.7 million, respectively, due to new management
plans with respect to asset carrying and disposition policies and new
information becoming available, including information concerning customers,
products, and competitive conditions in certain markets. The changes in
accounting estimates for the two months ended May 31, 1998 include the
increasing of the provisions for doubtful accounts and inventory
obsolescence by $2.4 million and $5.4 million, respectively. The changes in
accounting estimates for the month ended April 30, 1998 include increasing
the provision for customer rebate programs by $2.7 million, increasing the
provision for doubtful accounts by $1.4 million and accruals for customs,
property tax exposures and other items totaling $1.6 million. There were no
significant changes in accounting estimates in 1999. See Note 14 to the
accompanying consolidated financial statements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are 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 Vincent Langone, David Schneider and
Dillon, Read & Company. In January 1995, Formica was bought by BTR Nylex Ltd.
In May 1998, Laminates, together with Messrs. Langone and Schneider, acquired
Formica. In connection with the acquisition, Messrs. Langone and Schneider
returned to Formica to assume senior management positions: Mr. Langone as
Chairman, President and Chief Executive Officer and Mr. Schneider as Vice
President, Chief Financial Officer and Secretary.
From 1995 to 1997, our financial results declined. Management believes
that the decline is largely attributable to the following factors:
o a large increase in selling, general and administrative expenses
from 21.0% of net sales in 1994 to 31.5% of net sales in 1997, in
each case excluding amortization, which was largely the result of
increased advertising and promotion
o a significant increase in capital expenditures, which averaged
approximately $39.5 million per year from 1995 to 1997 as compared
to $12.4 million per year from 1985 to 1994, the majority of the
productivity and efficiency benefits of which management believes
have yet to be realized
o the autonomous operation of Formica's North American, European and
Asian divisions, which prevented integration and hampered
Formica's ability to share improved manufacturing techniques,
purchasing, design and technology on a global basis
o significant management turnover, particularly in North America, which
led to a loss of strategic direction and to operational difficulties
o prior management's emphasis on gross margins and the resulting
elimination of some lower-margin accounts that had low
gross-margins but were profitable and allowed us to spread our
fixed costs over more sales and
o a change in the emphasis of Formica's design program, which began
to focus on consumers rather than on product specifiers, such as
architects and designers
We implemented a business strategy that we believe will address the
decline in the financial results of the business and significantly improve our
profitability. The principal elements of this strategy include:
o a reduction in operating expenses, which management estimates has
resulted in net annualized savings of $27.4 million, net of $7.4
million of incremental standalone costs
o the realization of significant manufacturing savings as a result of
completion of capital projects initiated under BTR management
o the increased integration of and communication between Formica's
operating units
o re-emphasis on quality and service in North America and
o the pursuit of acquisition opportunities that complement or expand
Formica's decorative surfaces business or that enable Formica to enter
new markets
We consummated several acquisitions in 1999 and may make additional
acquisitions in 2000, including a pending acquisition of Perstorp Surface
Materials AB.
Fountainhead. Our results in 1999 reflect nine months of results giving
effect to our acquisition of the Fountainhead product line, which produces
solid surfacing material. Our acquisition of Fountainhead(R) has led to
increased sales of solid surfacing material. In addition, we have recently
announced a planned consolidation of our solid surfacing manufacturing lines
which we expect to result in improvements in gross margins for those products.
Rhinocore. Our results in 1999 reflect the results giving effect to our
acquisition of Rhinocore(TM) as an
23
entry into direct imaging computer graphics for high-pressure decorative
laminates. Rhinocore(TM) sells at a much higher price than standard laminates.
STEL. Our laminate flooring line has been produced for us by STEL under a
take-or-pay contract. As a result of our acquisition of STEL, we expect to
improve the gross margins on our flooring products as a result of the
elimination of the cost of the take-or-pay contract. We do not expect any
material increase in revenues as most of the production at STEL's facility was
on behalf of 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 the complete audited financial statements of PSM
necessary for inclusion in Formica's filings with the SEC are provided to DSH.
The Company expects 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.
If PSM is contributed to us, it is expected that our international
revenues will increase. In addition, we also expect to derive certain
manufacturing efficiencies at its international operations which we anticipate
will improve our gross margins. While we can provide no assurances because we
have not received audited US GAAP financials for PSM, we expect an improvement
in our debt leverage ratio. We have entered into various agreements to provide
services to PSM until such time as it may become Formica's subsidiary. (See
"Certain Relationships and Transactions--Agreements with Perstorp Surface
Materials.")
See "Risk Factors - You may not be able to rely on forward-looking
statements, as our actual results may be materially different."
Restructuring Charge On March 1, 2000, we announced plans to restructure
certain operating activities in North America, which are expected to reduce
total headcount by approximately 235 employees. (See "Restructuring Charge")
Results of Operations
Changes in Accounting Estimates. During the four and eight month
periods ended April 30 and December 31, 1998, Formica made various changes in
accounting estimates totaling $5.7 million and $7.8 million, respectively, due
to new management plans with respect to asset carrying and disposition policies
and new information becoming available regarding customers, products and
competitive conditions in certain markets. There were no significant changes in
accounting estimates in 1999. These changes in accounting estimates resulted in
charges that impacted Formica's results of operations as follows:
Customer Incentive Rebate Program. Due to competitive pressures in certain
markets, many Formica distributors must periodically reduce their resale prices
for Formica products in order to meet prices offered by distributors for
competing manufacturers. In order to provide incentives to distributors to
compete vigorously even when competitive prices would significantly reduce or
eliminate distributor margins, Formica offers percentage rebates to
distributors on specified products based on their actual resale prices to end
customers, within pre-established parameters. During the period that Formica
was owned by BTR, the reserve for customer incentive rebates was estimated
based upon distributor sales to the end customer. Based on analyses performed
at that time, the reserve balance was determined by providing for approximately
one month of the average monthly amount of rebates based on estimates of
distributor sales in inventory.
24
Based on an analysis of inventories of Formica products held by
certain independent distributors that was performed in connection with the
acquisition, we have estimated that distributors hold, on average,
approximately two months of sales in inventory. Accordingly, in the preparation
of the April 30, 1998 financial statements, we have recorded a change in
accounting estimates to reserve an additional $2.7 million for customer
incentive rebate programs.
Accounts Receivable Reserve. A long-standing distributor of Formica has
experienced liquidity problems since the early 1990's, is in a negative equity
position and has received "going concern opinions" from its auditors. We have
carried a large receivable balance from this distributor for several years and
have also converted approximately $4.0 million of the receivable balance into
an 8 year interest bearing promissory note. Over the last 5 years, the
distributor has been unable to pay down the trade receivable and note balances,
which in the aggregate, have fluctuated between $4.5 million to $5.5 million
during this period. The aggregate balance was $4.6 million at April 30, 1998.
Accordingly, we believe additional reserves of $1.4 million were necessary as
of the April 30, 1998 balance sheet date to provide for potential losses due to
uncollectibility of the outstanding receivable and note balances for this
distributor.
During the period that Formica was owned by BTR, Formica's parent provided
lender guarantees that enabled certain distributors to obtain more favorable
credit terms than were otherwise obtainable. We have discontinued this
guarantee program subsequent to April 30, 1998 and determined that it would be
prudent to increase the reserve levels for four of our weaker distributors in
the event that the change in policy with respect to the guarantees results in
liquidity problems for the distributors. Accordingly, we have recorded a change
in accounting estimates to increase our provision for doubtful accounts by $2.4
million as of December 31, 1998.
Inventory Obsolescence Reserve. The inventory reserve reflects our new
policies and plans with respect to the frequency of new product introductions
and our desire to sell or dispose of inactive products on a more timely basis.
While the previous management's intentions resulted in a policy of providing a
reserve for 100% of the cost of any products that had not moved for 24 months,
new management believes that providing reserves for 75% of the cost of products
after one year and 100% after two years is consistent with the way we plan to
run Formica's business. Accordingly, we have recorded a change in accounting
estimates to increase our inventory obsolescence reserve by $5.4 million as of
December 31, 1998.
Accruals for Some Exposures. Based upon changes in facts and circumstances
in 1998, accruals of $1.6 million were recorded as a change in accounting
estimates in the preparation of our April 30, 1998 financial statements. The
change in accounting estimates included accruals for property taxes ($500,000),
customs ($600,000), employee relocation costs ($345,000) and vacation reserves
($216,000).
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
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
25
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.
1999 Compared to 1998
Net Sales. Net sales for 1999 were $585.2 million, compared to net sales
of $549.7 million for 1998, an increase of $35.5 million, or 6.5%. Net sales in
North America increased to $374.8 million in 1999 from $346.6 million in 1998,
an increase of $28.2 million, or 8.1%. This increase is primarily due to
additional volume contributed by the flooring product line and the addition of
the Fountainhead business. Net sales in Asia increased to $69.8 million in 1999
from $62.2 million in 1998, an increase of $7.6 million, or 12.2%, resulting
primarily from the result of a stronger Asian economy, as well as improved
volume. Net sales in Europe decreased $0.3 million to $140.6 million in 1999
from $140.9 million in 1998.
Gross Profit. Gross profit for 1999 was $166.4 million, compared to gross
profit of $152.4 million for 1998, an increase of $14.0 million, or 9.2%. Gross
profit as a percentage of net sales in 1999 increased to 28.4% from 27.7% in
1998. Adjusted for the 1998 charges described above, amounting to $5.7 million,
gross profit increased $8.3 million, or 5.2%. Gross profit, as a percentage of
net sales, excluding the 1998 nonrecurring charges, was 28.8% in 1998 compared
to 28.4% in 1999.
Gross Profit in North America increased to $102.6 million in 1999 from
$95.9 million in 1998, or 7.0%. Gross profit as a percentage of net sales for
North America, excluding the 1998 Charges amounting to
26
$3.5 million, decreased to 27.4% in 1999 from 28.7% in 1998, principally
as a result of increased raw material prices and competitive pricing pressures.
Gross profit in Europe and Asia increased to $63.8 million in 1999 from $56.5
million in 1998, or 12.9%. After adjusting for 1998 Charges amounting to $2.2
million, gross profit, as a percentage of net sales, in Europe and Asia,
increased to 30.3% in 1999 from 28.9% in 1998. This increase is primarily due
to favorable material prices and efficiency savings within Asia.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1999 were $148.0 million compared to $161.4 million
for 1998, a decrease of 8.3%. Selling, general and administrative expenses as a
percentage of net sales decreased to 25.3% in 1999 from 29.4 % in 1998. The
decrease in selling, general and administrative expenses was primarily due to
lower advertising and sales promotion expense and lower compensation expense
due to restructuring efforts, partially offset by an increase in goodwill
amortization of $2.6 million due to the acquisition from BTR. Selling, general
and administrative expenses, adjusted for the 1998 Charges amounting to $7.8
million, were $153.6 million in 1998 compared to $148.0 million in 1999, a
decrease of 3.6%.
Cost to terminate supply contract. In December 1999, we acquired STEL, our
exclusive supplier of laminate flooring. Prior to the acquisition, Formica was
obligated under a contract with STEL to purchase minimum quantities of laminate
flooring at stipulated prices. The excess of the purchase price over the net
tangible and intangible assets of STEL totaling $26.2 million was charged to
expense as a cost to terminate the supply contract.
Operating Loss. The operating loss for 1999 was $8.6 million compared to
an operating loss of $12.0 million for 1998. The 1999 period included a charge
of $26.2 million, the result of the cost of the terminated supply contract
resulting from the purchase of STEL. The 1998 period included charges of $13.5
million, due to the 1998 Charges. After taking into account the 1999 and 1998
charges, operating income increased to $17.6 million in 1999 compared to $1.5
million in 1998, for the reasons stated above.
Adjusted EBITDA. Primarily for the reasons stated above, Adjusted EBITDA
increased to $63.0 million in 1999 compared to $50.2 million in 1998, an
improvement of 25.5%.
Interest Expense. Interest expense increased to $37.4 million in 1999
from $27.4 million for 1998. The increase in interest expense was the result of
the funding of the acquisition in May 1998, as well as additional debt incurred
in 1999.
Income Taxes. In 1999, the Company realized an income tax benefit of $11.4
million primarily resulting from the deductible cost to terminate a supply
contract due to the acquisition of STEL (described above), compared to an
expense of $2.8 million in 1998.
Net Loss. Net loss was $32.1 million in 1999 compared to $36.9 million in
1998.
1998 Compared to 1997
Net Sales. Net sales for 1998 were $549.7 million, compared to net sales
of $533.4 million for 1997, an increase of $16.3 million, or 3.1%. Net sales in
North America increased to $346.6 million in 1998 from $315.0 million in 1997,
an increase of $31.6 million, or 10.0%. This increase is primarily due to
additional volume contributed by the new flooring product line. Net sales in
Europe and Asia decreased to $203.1 million in 1998 from $218.4 million in
1997, a decrease of $15.3 million, or 7.0%. Lower sales in Europe and Asia were
primarily the result of a decline in value of foreign currencies and the weaker
Asian economy.
Gross Profit. Gross profit for 1998 was $152.4 million, compared to gross
profit of $183.3 million for 1997, a decrease of $30.9 million, or 16.9%.
Adjusted for the 1998 charges described above, amounting to $5.7 million, gross
profit was down $25.2 million, or 13.7%. Gross profit as a percentage of net
sales, excluding the 1998 nonrecurring charges, decreased in 1998 to 28.8% from
34.4% in 1997.
Gross Profit in North America decreased to $95.9 million in 1998 from
$99.9 million in 1997, or 4.0%. Gross profit in North America, adjusted for
1998 charges of $3.5 million, was consistent with 1997. Gross profit as a
percentage of net sales for North America, excluding the 1998 charges,
decreased to 29.4% in 1998 from 31.7% in 1997, principally as a result of
increased raw material prices. Gross profit in Europe and Asia dropped to $56.5
million in 1998 from $83.4 million in 1997, or 32.3%. Gross profit, in Europe
and Asia, adjusted for 1998 charges amounting to $2.2 million, declined 29.6%.
As a percentage of net sales, gross profit in Europe and Asia, excluding 1998
charges, decreased to 28.9% in 1998 from 38.2% in 1997. This decrease is
primarily the result of a larger mix of low margin products in Europe and
increased raw
27
material prices magnified by a decline in purchasing power of Formica's foreign
operations due to currency impact on imported raw materials, the prices of which
are often based upon U.S. dollars.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1998 were $161.4 million compared to $202.2 million
for 1997, a decrease of 20.2%. Selling, general and administrative expenses as
a percentage of net sales decreased to 29.4% in 1998 from 37.9% in 1997. The
decrease in selling, general and administrative expenses was primarily due to
lower advertising and sales promotion expense and lower compensation expense
due to restructuring efforts. Selling, general and administrative expenses,
adjusted for the 1998 charges amounting to $7.8 million, were $153.6 million in
1998 compared to $202.2 million in 1997, a decrease of 24.0%.
Goodwill impairment charge. Formica's prior management recorded a goodwill
impairment charge of $484.4 million in the fourth quarter of 1997. Prior to
this quarter, prior management believed that the value of Formica was
consistent with the value of Formica at the time of its acquisition by BTR in
1995. Upon consideration of the proposed acquisition, prior management was made
aware of the current value and determined that the goodwill, which was created
in the 1995 acquisition, should be written off.
Operating Loss. The operating loss for 1998 was $12.0 million compared to
an operating loss of $503.3 million for 1997. The decrease was primarily due to
the goodwill impairment charge amounting to $484.4 million in 1997.
Adjusted EBITDA. Primarily for the reasons stated above, Adjusted EBITDA
increased to $50.2 million in 1998 compared to $38.6 million in 1997.
Interest Expense. Interest expense increased to $27.4 million in 1998 from
$3.1 million for 1997. The increase in interest expense was the result of the
funding of the acquisition.
Income Taxes. Income tax expense increased to $2.8 million in 1998 from
$0.2 million in 1997.
Net Loss. Net loss was $36.9 million in 1998 compared with $504.8 million
in 1997. The decrease is principally due to the goodwill impairment charge of
$484.4 million in 1997 and reduced selling, general and administrative expenses
offset by a decline in profit margin.
Liquidity and Capital Resources
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.
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
28
under the 1933 Act and therefore were not registered with the SEC.
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.
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 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. We have
obtained a consent to a modification of the definition of the fixed charge
coverage covenant ratio. We are 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 six years, with 1% amortization in
each of the first five 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.
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.
29
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.
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,
30
(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.
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.
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
31
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.
32
BUSINESS
Formica Corporation is one of the leading brand names in the decorative
surfacing products market. "Decorative surfaces" are products that are used to
finish a surface, which may be a wall, a cabinet, a countertop or a floor, and
include everything from inexpensive vinyl flooring to marble countertops. We
produce:
o high-pressure decorative laminates, our primary product
o solid surfacing materials, and
o laminate flooring
We believe the Formica(R) brand name, which is recognized by many
customers without prompting, contributes significantly to the sale of our
products. For the years ended December 31, 1999 and 1998, our net sales were
$585.2 million and $549.7 million, respectively, and Adjusted EBITDA, as
defined under Selected Financial Data, was $63.0 million and $50.2 million,
respectively.
We market our products:
o through over 7,500 domestic and international independent distributors
and dealers as well as our own sales force
o to major distributors, manufacturers of finished products, and to
architects and designers who specify products for commercial and
residential interiors
Our History
Our Company was founded in 1913 and created the world's first decorative
laminate in 1927. After several sales and an initial public offering, we were
sold to FM Acquisition Corporation in a buyout led by Vincent Langone, David
Schneider and Dillon Read & Co. in 1989. In January 1995, we were acquired by
BTR Nylex Ltd., an Australian company and a subsidiary of BTR plc.
In May 1998, our parent company, FM Holdings Inc., which we refer to as
"Holdings", was bought by Laminates Acquisition Co., which we refer to as
"Laminates", which was organized by DLJ Merchant Banking Partners II, L.P.,
affiliated funds and entities, three institutional investors, including CVC
European Equity Partners, L.P. and CVC European Equity Partners (Jersey) L.P.
and MMI Products L.L.C., and Messrs. Langone and Schneider.
As a result, we are wholly-owned by Holdings, which in turn is
wholly-owned by Laminates, which is owned by the DLJ Merchant Banking funds,
the institutional investors and the management shareholders. (See Note 2 of the
accompanying consolidated financial statements for information regarding our
acquisition by Laminates.)
Competitive Strengths
We possess a number of competitive strengths, including:
o Global Market Position
We have extensive global manufacturing capabilities and are one of the
largest producers of high-pressure laminate on a worldwide basis. We are the
largest or the second largest seller of high-pressure laminate in major
national markets including the United States, Canada, the United Kingdom,
France, Spain, Taiwan and China, where our principal manufacturing facilities
are located. The location of our manufacturing facilities and design centers
and our worldwide distribution network enable us to respond effectively to our
customers' delivery and design needs.
o Worldwide Brand Awareness
We have an extremely high level of unprompted brand awareness and are one
of the most specified brands of high-pressure laminate. The Formica(R) brand
name, which represents superior design, quality and value, significantly
contributes to our ability to attract the business of designers, architects,
distributors and direct accounts.
o Established, Effective Distribution Channels
We believe that we have one of the most extensive global distribution
capabilities in the industry. We have approximately:
33
o 1,500 distributor sales representatives in 300 locations
o sub-distributors and dealers in another 7,500 locations worldwide
The efforts of our domestic and international architectural specification
representatives, when combined with the sales force of our distributor network,
provide us with sales and marketing coverage in over 100 countries throughout
the world.
o Acclaimed Design Leadership
We have a history of technological leadership and innovation in product
design. We maintain extensive design facilities and have consistently won
design and new product development awards, including the 1996 Kitchen & Bath
Product Innovator Award, the 1997 Visual Marketing & Store Design Reader's
Choice Poll and the 1997 Green Product Award. In addition, our flooring product
was awarded the 1997, 1998 and 1999 Dealer's Choice Award-Best Laminate
Flooring Product and the 1997 Kitchen & Bath Business Product of the Year
Award. We design many of our own proprietary decorative papers and own
exclusive rights to these designs. The strength of our reputation for
innovative design is an important factor in our success in the commercial
segment of the market.
o Diverse and Stable Customer Base
We benefit from a diversified sales base:
o Geographically, we sell our products in over 100 countries and maintain
a strong market position in the major markets of North America and Europe and
are positioned for continued growth in Asia. In 1999, approximately 64% of our
net sales were made in North America, with the balance principally in Europe
and Asia
o We estimate that our net sales in 1999 were 33% for new construction
and 67% for remodeling
o We also estimate that our 1999 sales were equally balanced between
sales to commercial and residential locations
We believe that this diversification helps to mitigate the effect of
regional economic cycles and the changes in market conditions within the
commercial and residential new construction and remodeling markets.
We have approximately 3,800 employees worldwide. Production and
manufacturing operations are located in the United States, Canada, China, the
United Kingdom, France, Germany, Spain and Taiwan.
Industry Overview
The decorative surfaces market encompasses high-pressure decorative
laminates, wood, veneers, marble, granite, solid surfacing, tile, plastics,
foils, papers, vinyls, acrylics, paint, wallpaper, wall and floor coverings,
low-pressure laminates and other surfacing materials. While substitution exists
across product categories, high-pressure laminate remains one of the primary
products used in various horizontal and vertical surfacing applications,
including kitchen and bathroom countertops, where durability is a critical
consideration. High-pressure laminate products are used in a wide range of
applications with other decorative surfacing products competing at the high and
lower end of the markets. At the high end are decorative surfaces such as our
Surell(R) and Fountainhead(R) solid surfacing products, E.I. DuPont de Nemour's
("DuPont") Corian(R) solid surfacing, granite, marble, tile and natural wood.
The low end of the market includes low-pressure laminates, foil, papers, and
plastics, all of which are a low cost surfacing alternative for applications
requiring lower durability.
We estimate that the worldwide market for high-pressure laminate was
approximately $3.0 billion in 1999, evenly distributed between (1) North
America, (2) Europe and (3) the rest of the world. The end-users of
high-pressure laminate products generally fall into two market segments,
residential and commercial, each of which has in recent years accounted for
approximately 50% of the market. Both the residential and commercial new
construction market and the remodeling/renovation market drive demand for
high-pressure laminate products. The residential market is comprised of
independent contractors and manufacturers of countertops, kitchen and bathroom
cabinets and furniture. The commercial market includes fabricators, contractors
and manufacturers whose primary business is the production of interiors
(including store fixtures, furniture and wall paneling) used in airports,
institutions, hospitals, schools, retail stores, hotels and office buildings.
Principal Products and Services
Decorative laminates are used in a wide range of surfacing applications
where durability, design, construction versatility and ease of maintenance are
factors. Our principal products are high-pressure decorative
34
laminates, which accounted for approximately 83% and 86% of 1999 and 1998 net
sales, respectively, solid surfacing material, marketed under the Formica(R)
brand Surell(R) and Fountainhead(R) trade names, and laminate flooring products,
introduced in late 1996 under the Formica(R) brand name. We also manufacture and
sell resins and license our Formica(R) brand name and proprietary technology and
know-how to third parties.
High-Pressure Decorative Laminates. Our principal product,
high-pressure laminate, is marketed under the Formica(R) brand name and the
Anvil F mark. Invented in 1913 in Cincinnati by Herbert Faber and Daniel O'
Conor, Formica was originally intended to serve as an electrical insulator. It
was created as a replacement for mica which was then used for that purpose;
hence the name, "for mica." In 1927, we began lithographing images onto sheets
of their product and its decorative potential was discovered. In the 1930s, a
melamine layer was added which gave Formica(R) brand laminates their legendary
durability and ease of maintenance. World-renowned designers and architects
began to recognize the potential uses of decorative laminate and specified it
for Modernist and Art Deco interiors. Formica also has a long-established
presence in Europe, having entered the market in 1947. Formica(R) brand
products have been manufactured for many years in the United Kingdom (1947),
Spain (1947) and France (1964). As a result of its long-standing presence in
these markets, the Formica(R) brand name has exceptional customer recognition.
Formica installed its first high-pressure decorative laminates press in Taiwan
in 1982. With Taiwan as the manufacturing base, geographical expansion into
other markets throughout the years has made Formica one of the largest
producers of high-pressure decorative laminates in Asia. Formica began
operating in China with a sales office in 1990 and through a joint venture in
1992, and has owned its own manufacturing and distribution sites there since
1996.
High-pressure decorative laminate is principally used in a wide range of
commercial and residential surfacing applications where durability, design,
construction versatility and ease of maintenance are important factors.
Traditional residential applications include:
o kitchen cabinetry
o countertops and bathroom vanities
o horizontal and vertical surfaces in kitchens, bathrooms, living rooms,
family rooms, dining rooms and bedrooms
The commercial applications include:
o work surfaces
o cabinetry
o furniture
o fixtures
o panels
o partitions
o counter tops and o interior walls each of which have end-use
applications in offices, computer centers, airports, hospitals,
schools, restaurants, hotels, retail stores, ships, buses and railroad
cars
Our high-pressure laminate products compete with decorative laminates
manufactured by other producers, as well as with other surfacing materials such
as wood, veneers, marble, tile, plastics and foils. Competition is based
principally on breadth of product line, design and appearance, product quality,
functionality, marketing, technology, price and service. Over the past twenty
years, less expensive, less durable low-pressure laminates have replaced
high-pressure laminate for various applications. Nevertheless, the more durable
high-pressure laminate still dominates the market for certain surfaces such as
countertops and tables.
Our high-pressure decorative laminate offerings include both
general-purpose products and premium products, which generally have higher
profit margins.
General Purpose High-pressure Laminate. Our standard U.S. decorative line
consists of 96 solid colors, 126 abstract patterns, 32 woodgrain patterns and
114 other patterns. Surface textures can range from very high gloss smooth
surfaces to deeply textured surfaces and surfaces with other special design and
performance features. These products are generally sold in sheet form in
standard sizes that correspond to press sizes and vary from market to market.
There is substantial overlap of these colors and patterns among our three
principal regions, and we have
35
an active new product harmonization program to conform regional product lines
and reduce costs. There will continue to be regional differences in colors and
patterns to meet local style differences.
Premium High-pressure Laminate Products. Formica's premium decorative
laminate products have characteristics which make them particularly suitable
for various specialized applications and generate higher profit margins than
the standard line products. Premium decorative laminate products include our
Decometal(R), which incorporates real metal foil on a laminate core giving the
solid appearance of a metal plate or sheet, our Ligna(R) line, a multi-laminate
veneer made with phenolic-backed real wood and which replicates the grains of
exotic woods, our Design Concepts(R) and Formations(R) collections and
ColorCore(R) surfacing material, a solid "color-through" laminate, each of
which are marketed for special end-use applications, such as office furniture,
store fixtures, restaurant interiors, airports and custom-built kitchens.
Premium high-pressure decorative laminate products also include laminates for
uses requiring fire-retardant materials such as shipbuilding and office
interiors, textured laminates which are designed to look and feel like leather
or slate and laminate static-free flooring used in computer centers.
Solid Surfacing Products. Our solid surfacing products accounted for
approximately 7% and 6% of our total sales in 1999 and 1998, respectively.
These products, distributed under the Surell(R) and Fountainhead(R) (acquired
in March 1999, see "Acquisitions") names, are similar to DuPont's Corian(R)
product, are available in a selection of colors and granite-like patterns that
run throughout the entire thickness of the product. The products can be
fabricated for use in a variety of residential and commercial applications,
such as kitchen and bathroom countertops including sinks, work surfaces,
tabletops, commercial counters, vertical applications such as wall panels,
partitions and tub surrounds, or produced in sheet form for work surfaces,
countertops and other surface applications. One of the advantages of these
products is that if scratched or gouged, the damage can be easily repaired by
simply sanding down the surface to provide a new smooth surface. Solid
surfacing products are more expensive than laminates but less expensive than
other high-end materials such as marble, granite and high-end ceramic tile.
Laminate Flooring. In late 1996, we introduced the Formica(R) brand
laminate flooring product line in North America to compete in the rapidly
growing market for laminate flooring. The product is produced in a variety of
patterns and colors and is sold in both the new construction and renovation
markets. Our laminate flooring products accounted for approximately 9.8% and
7.8% of our total sales in 1999 and 1998, respectively.
Formica(R) flooring offers a virtually impermeable surface finish, which
is resistant to wear, moisture and impact. It is constructed from layers of
direct pressure laminate sandwiching a mid-density moisture-resistant
fibreboard. Due to its durable surface and rich beauty, it is ideally suited
for flooring in locations such as kitchens, bathrooms and family rooms.
Formica(R) flooring is currently offered in a variety of patterns and
colors, including wood grains, marble, granite, wood and wood tints. The wood
patterns are produced in planks, which fit together in a tongue and groove
assembly system. Formica(R) flooring is applied as a "floating" floor and can
be fitted over any sub-floor with a dry, clean and level surface. The flooring
can often be laid directly on to an existing floor covering such as linoleum or
vinyl, which provides substantial cost savings to the consumer. Formica(R)
flooring is manufactured in a dedicated facility in Algona, Washington, by STEL
Industries, Inc., which was acquired by Formica in December 1999 (See
"Acquisitions"). Prior to the acquisition, STEL was an independent
manufacturer, under a long-term exclusive "take-or-pay" supply contract with
Formica.
Design Development.
Design is an important factor in the customer selection of decorative
high-pressure decorative laminate. New laminate designs are introduced
periodically by us and our competitors. We consider ourselves an industry
leader worldwide in decorative laminate design. Our design team works to
anticipate market trends by observing leading indicators of design trends. We
have consistently won numerous design and product awards worldwide. These
awards include: the 1996 Kitchen & Bath Business' Product Innovator Award, the
1996 Gold Ink Award, the 1996 Graphic Arts Recognition Committee Award of
Excellence, the 1997 Visual Merchandising & Store Design Reader's Choice Poll
and the 1997 Green Product Award. Other awards include the Professional
Builder's ADQ Award, the Kitchen & Bath Design News' ADQ Award, the 1997
Kitchen and Bath Business' Flooring Product of the Year Award, the 1997
Printing Industries of America Award and the 1999 Design Journal's Platinum
ADEX Award, among others.
Our efforts to refine the designs of our products have resulted in such
products as the Design Concepts(R) and Formations(R) collections, Deco
Metal(R), Ligna(R), ColorCore(R), a solid "color-through" laminate, and the
Stripes(R) and Geometrica(R) collections featuring silk-screen printed
pinstripes and bands in a variety of colors.
36
During the last several years, we introduced solid opaque laminates, granite-
like solid surfacing materials and a number of other premium products.
We have a history of innovation and leadership in product design. We
believe that our reputation for innovative design is an important factor in our
success in the commercial segment of the market. Beginning in 1995, however, we
changed the emphasis of our design program by focusing on consumers, including
the Design Center Program, rather than on those architects, contractors and
designers who actually choose the product. Since our acquisition by Laminates,
we have re-oriented our design program to once again focus on those product
specifiers. Management believes that communication with the architectural and
design community is essential to our sales efforts, particularly with respect
to new product introductions.
Manufacturing Process
The high-pressure decorative laminate manufacturing process involves
several major steps: resin manufacturing, paper treating, collation, pressing,
trimming, sanding, packaging and shipping.
The resins are manufactured to exact formulations and procedures. Samples
are taken during resin manufacturing to identify any necessary production
modifications and ensure that the resin is being made to the correct
specifications.
The paper rolls of untreated kraft paper or decorative surface paper are
run through treaters where the paper is then saturated by dipping it into the
liquid resin and floated on air currents through an oven to dry it. As the
product emerges from the machines, it is automatically cut and stacked or
rewound on a core and moved into work-in-process inventory.
Orders are entered into computers and then given to workers who pull the
appropriate goods from the work-in-process inventory and transfer them to the
collation line. The barrier, core and overlay sheets are then stacked in the
order in which they will be sent to the multi-opening presses. These stacks of
unfinished laminate are placed between stainless steel plates and moved into
the press itself. The stainless steel plates can create surface textures
ranging from very high gloss to deeply textured surfaces with special designs.
Press size varies from 10 to 24 openings. Depending on the thickness of
the product, one to 16 sheets of unfinished laminate can be placed in a press
opening. Once the plates and the unfinished laminate are placed in the press,
the press applies approximately 1,400 pounds per square inch of pressure and
300o F of heat. This process takes approximately 40 to 80 minutes. The
laminates and plates are then removed from the press and the laminates are
removed from between the plates. After the sheets are separated, they are sent
through the trimming and sanding lines where the edges are removed and the
backs are sanded. The laminate is visually inspected at this point and moved
into finished goods inventory. The product is specifically packaged and then
shipped to a warehouse until it is delivered to the customer.
Business Strategy
We have implemented a strategy that we believe will return us to pre-1995
levels of profitability and cash flows. Management expects our operating
performance to benefit from the following factors:
o the return of Vincent Langone and David Schneider, who previously
managed us through two successful leveraged buyouts, as senior
management
o a reduction in selling, general and administrative expenses, and in
capital spending, which increased significantly from 1995 to 1997
o an expected increase in unit volume shipments as customer service is
improved through better management of the inventory and distribution
systems and
o the realization of substantial savings due to the manufacturing
efficiencies resulting from the significant capital investments made
since 1994
Specifically, our business strategy includes the following elements:
Reduce Operating Expenses
Management has implemented a program of reducing operating costs through
enhanced operating efficiencies, thereby improving profitability. Management
believes that from 1995 to 1997 profitability was depressed by unnecessarily
high operating expenses, including spending on consumer targeted advertising
and promotion programs that were either ineffective or related to the launch of
our flooring product. Management identified approximately $30.0 million in
estimated net annualized operating cost savings that they believed could
37
be realized without affecting our overall sales or brand franchise. The savings
relate primarily to specific areas of advertising and promotion spending and
other selling and administrative expenses, and also target other operating
expenses, including outside consultant expenses and transportation and
warehousing costs. Implementation of the cost savings strategy began in early
1998 and management believes that approximately $35.0 million in cost savings
is reflected in our results of operations for the year ended December 31, 1999
when compared to 1997. (See "Cost Savings")
Improve Manufacturing Efficiency
We believe that the $134.8 million investment in new property, plant
and equipment from 1996 to 1998, along with the approximately $61.4 million of
capital expenditures spent since the acquisition of Formica by Laminates from
BTR provide a foundation for us to realize substantial manufacturing savings to
be phased in over the next three years. Key investments include:
o an expansion of the Taiwan manufacturing and distribution facilities
o a continuous press line in the facility in Spain and
o a high efficiency treater and ready-to-use print technology in the
United States facilities
We expect that these investments will help us to more efficiently meet
customer
service requirements in these markets. (See "Capital Investments")
Re-establish Strategic Leadership
Management believes that increased integration of and communication
between our operating units will significantly improve our profitability. From
1995-1997, our North American, European and Asian divisions were operated as
separate and autonomous divisions. Management believes that significant cost
benefits will be realized from its recent implementation of a centrally
coordinated global purchasing program. In addition, management has begun to
re-emphasize our design leadership by evaluating our product line on a global
basis, addressing product line weaknesses and coordinating new product
launches. Management believes that worldwide specifications, product line
rationalization and global product launches are all opportunities for improved
profits.
Increase North American High-pressure Laminate Sales by Improving Customer
Service
Management believes that product quality and service including lead
time, availability, fill rates, delivery reliability and consistent quality are
key criteria that customers consider in selecting a high-pressure laminate
vendor. Management has begun to re-emphasize our quality and service focus in
North America by realigning our inventory stocking strategy to be responsive to
regional demand patterns.
Target Strategic Acquisitions
Management is pursuing opportunities to make acquisitions that complement
or expand our decorative surfaces businesses or enable us to enter new, but
related, markets. We intend to focus on surfacing companies whose products can
be manufactured using our extensive global manufacturing capabilities or brands
whose products may be sold through our distribution channels or that would
benefit from the Formica(R) brand name. The expansion opportunities include
domestic and international manufacturers of laminates, solid surfacing,
flooring, wood, tile, plastics and related surfacing products, as well as other
building products that would benefit from the Formica name and distribution
channel. Management is actively evaluating potential acquisition targets and
will make acquisitions that fit our acquisition strategy.
The following are the principal acquisitions we have made since our
acquisition by Laminates:
Fountainhead. In March 1999, we acquired the Fountainhead(R) brand, the solid
surfacing product of International Paper's Decorative Products Division and its
manufacturing facility located in Odenton, Maryland. This acquisition
significantly increased our solid surfacing production capability and our sales
of solid surfacing products. Fountainhead(R) is marketed in France as
Antium(R). This acquisition did not have a material effect on our results of
operations or financial condition. (See Note 2 - "Acquisitions" of the
accompanying consolidated financial statements.) The transaction has permitted
us to rationalize our product lines and allow for future growth, as we are
consolidating our Surell(R) and Fountainhead(R) brands production into one
facility.
Rhinocore. In September 1999, we acquired Rhinocore(TM) as an entry into direct
imaging computer graphics for high-pressure decorative laminate. Digital
graphic images enable the manufacture of laminates with superior graphics for
applications such as signage and photographic images of murals and panels.
Rhinocore(TM) sells at a much higher price than standard laminates.
38
STEL. In December 1999, we acquired STEL Industries, Inc., of Algona,
Washington. STEL was the independent supplier of Formica(R) brand flooring,
under a long-term exclusive "take-or-pay" supply contract with Formica. This
acquisition was funded through the utilization of available credit facilities.
As a result of this acquisition, we incurred a non-recurring charge of $26.2
million due to the termination of the supply contract. (See Note 2 -
"Acquisitions" of the accompanying consolidated financial statements.)
Perstorp Surface Materials. In March 2000, Decorative Surfaces Holdings
announced that it had agreed to acquire Perstorp Surface Materials AB, one of
our competitors in Europe. On March 31, 2000, the date of the closing of the
acquisition, Decorative Surfaces Holdings became a wholly-owned subsidiary of
our direct parent company Holdings. The purchase was funded with a combination
of equity provided by DLJ and CVC, a $5.0 million loan provided by Formica
which was repaid at the closing and $110.0 million in borrowings under a new
credit facility. To date, Perstorp AB has not provided Decorative Surfaces
Holdings with audited financial statements. Perstorp AB did inform Decorative
Surfaces Holdings that, based on its accounting records, Perstorp Surface
Materials had total assets of approximately SEK 1.5 billion ($175.5 million
based on the exchange rates at closing) at March 31, 2000 and net revenue and
EBITDA of SEK 2,003 million and SEK 172 million ($242.2 million and $20.8
million based on the average exchange rate at December 31, 1999), respectively,
for the year ended December 31, 1999, in each case determined in accordance
with Swedish GAAP. Perstorp Surface Materials is to provide audited financial
statements to Decorative Surfaces Holdings, with a reconciliation to U.S. GAAP
which are expected to be completed shortly.
Holdings has informed us of its intention to contribute the stock of
Decorative Surfaces Holdings to us once the audited financial statements are
provided to Decorative Surfaces Holdings. We expect that, once the contribution
occurs, the $110.0 million in assumed debt will be incorporated into our
existing credit facility. We entered into a management and services agreement
with Decorative Surfaces Holdings concurrent with the closing.
We cannot assure you that Decorative Surfaces Holdings will in fact be
contributed to our company.
Raw Materials
High-pressure decorative laminates are produced from a few basic raw
materials which include kraft paper, fine decorative papers and melamine and
phenolic resins. The papers are impregnated with resins and placed between
stainless steel plates in a multi-opening press and cured under pressure and
elevated temperature. The number of paper laminations per sheet of laminate
varies with the specific type of product being produced, but all have melamine
resin on the surface to create a hard, durable surface. Surface textures can
range from very high gloss smooth surfaces to deeply textured surfaces and
surfaces with other special design and performance features. In addition to
patents, we have proprietary technology and know-how in the design and
manufacture of our products.
Kraft papers are available globally from several major sources and many
smaller producers. Fine papers are supplied by many producers in North America,
Europe and Asia. Melamine, phenol and formaldehyde, the primary raw materials
for resins, are global commodity chemicals available from many suppliers. We
currently purchase these raw materials from various suppliers at market prices.
We believe that we are one of the largest purchasers of these raw
materials on a worldwide basis in the high-pressure laminate industry. We may,
from time to time, enter into one-year or longer term contracts with suppliers
when advantageous to us. We also acquire chemicals under exclusive arrangements
from producers in connection with licensing technology from those producers.
Cost Savings
We have implemented a cost savings program intended to reduce
operating expenses. We devised this program after a detailed review of our
financial and operational results from 1995 to 1997, based on our management's
expertise in successfully operating the business at significantly lower
selling, general and administrative spending levels than were incurred between
1995 and 1997, yet with stronger EBITDA results.
The majority of the savings relate to reductions in advertising and
sales promotion spending as well as other selling and administrative spending.
Implementation of the cost savings began in early 1998, and as expected,
substantially all of the savings were realized during 1999. We estimate that
there will be additional savings in the year 2000 due to other programs
initiated in our North American operations.
The following is management's estimate of the amount of annual cost
savings reflected in our results of operations for the years ended December 31,
1999 and 1998 based on results compared to management's original
39
estimate of total savings on each category in 1997. Not included in the table
below are the savings and efficiencies from the substantial capital improvements
made since 1994. (See "Capital Investments.")
Estimated
Estimated Estimated Annual Cost
Year ended Year ended Savings
December December Compared to
Unaudited 31, 1999 31, 1998 1997
--------- ---------- ---------- -----------
(in millions)
Excess Advertising & Sales
Promotion/Other Selling, General &
Administrative Expenses $17.6 $10.5 $18.0
Flooring 6.8 5.5 6.0
Operating Expenses 2.7 2.0 4.0
Staff Reductions 3.5 3.0 5.0
Consultants/Legal/Other 4.2 4.0 4.0
----- ----- -----
Total Estimated Cost Savings 34.8 25.0 37.0
Additional Standalone Costs (7.4) (3.0) (7.0)
----- ----- -----
Total Estimated Net Cost Savings $27.4 $22.0 $30.0
===== ===== =====
While we believe that the advertising and promotional spending that
constituted a large part of the increased selling, general and administrative
expenses was unnecessary and often ineffective, as described in more detail
below, we cannot assure you that a reduction in advertising and promotional
spending will not reduce net sales.
- - Excess Advertising & Sales Promotion/Other Selling & Administrative Expenses
We planned to reduce non-flooring advertising and sales promotion spending
and other selling and administrative expenses by approximately $18.0 million in
North America. A portion of the reduction reflects management's belief that
much of our advertising and promotion spending during the 1995 to 1997 period
was ineffective, which included the launch of the Formica Design Center program
in 1997. Other selling expenses include literature and wallboard placements,
sampling and regional sales expenses. Future spending on literature and
wallboards will maintain exposure after previously higher spending levels in
conjunction with the Design Center Program and significant product
introductions. Similarly, the cost of product samples has been reduced due to a
more targeted product launch strategy, the use of scrap versus virgin material
and a printed sample alternative which cuts unit sample costs by 50% compared
to laminate sample chains. Regional sales expenses have also been reduced to
levels more in line with ongoing market needs. For the years ended December 31,
1999 and 1998, we have realized $17.6 million and $10.5 million, respectively,
in savings from reduced advertising and sales promotion spending and other
selling expenses.
- - Flooring
We completed the launch of the Formica(R) brand laminate flooring product
in 1997, which included over $4.0 million in non-recurring television
advertising. Promotional spending for the launch included the one-time cost of
placing over 6,500 displays at retailers, including the majority of the higher
volume laminate flooring dealers. Although management expects that we will
benefit from the significant investment in the displays, future promotional
spending will focus on incremental display placement and add-on displays for
future flooring product introductions. For the years ended December 31, 1999
and 1998, we estimate that we realized approximately $6.8 million and $5.5
million, respectively, in savings due to the completion of the flooring product
launch.
- - Operating Expenses
We originally estimated to reduce operating expenses, including claims
expense and scrap, warehousing and transportation costs, by approximately $4.0
million. For the years ended December 31, 1999 and 1998, we believe that we
have realized $2.7 million and $2.0 million, respectively, of these savings
from reduced operating expenses.
- - Staff Reductions
Management intended to realize net annualized cost savings of
approximately $5.0 million as a result of a variety of staff reductions. For
the years ended December 31, 1999 and 1998, we estimate that we have realized
$3.5 million and $3.0 million, respectively, of these savings from already
implemented staff reductions throughout the organization.
40
- - Consultants/Legal/Other
Management has reduced the costs of outside consultants, legal advisors
and other services by approximately $4.2 million through December 31, 1999.
Management believes that there was no discernible benefit from much of the
consulting services provided to us from 1995 to 1997. In addition, we have
hired an in-house general counsel, the cost of which is reflected in our
additional standalone costs, and intend to reduce our dependence on outside
legal services.
- - Additional Standalone Costs
Additional standalone costs relate to the establishment of corporate
functions previously provided by BTR as well as additional insurance, pension
and related costs required following our separation from BTR. Our additional
standalone costs were estimated at $7.0 million per year, $7.4 million and $3.0
million, respectively, of which is reflected in the financial results for the
years ended December 31, 1999 and 1998.
Capital Investments
In the last several years, we have implemented a major capital investment
program that management believes will increase capacity, yield substantial
manufacturing savings and improve competitiveness. That investment included
$134.8 million in capital expenditures from 1996 through 1998, the majority of
which was related to specific projects expected to provide manufacturing cost
savings or capacity enhancement. With capital expenditures of $25.9 million in
1999 and a planned $15.0 million in 2000, we will have largely completed our
major capital spending program.
- - Ready-to-Use Print
We invested in a new technology called ready-to-use print. The
ready-to-use print process, also referred to as dry print, eliminates the need
to treat the decorative paper with resin by the application of a melamine
treated transparent overlay. Cost savings result as the total resin content is
reduced and the basis weight of the overlay paper is reduced. This new system
also improves decorative paper yield as it provides the ability to produce more
optimal quantities. Labor savings should also result from eliminating the
treating step for the decorative paper and reducing the labor associated with
collating. Formica continues to convert additional products to this process.
- - Taiwan Plant Expansion
We have expanded our Taiwan manufacturing plant with the addition of a
new large size press which became operational in 1998. This additional capacity
has eliminated the excess transportation expense associated with importing
substantial quantities of finished laminate from North America and Europe to
service the southeast Asia market and will also provide capacity for future
growth. In addition, we have built a new finished goods warehouse next to the
Taiwan manufacturing plant, thereby eliminating the need for the previous
warehouse, which was located 30 miles away from the factory. This has
eliminated the double handling of products, cut down lead time and saved
warehouse rental expenses.
- - Continuous Press
During 1999, Formica commissioned a continuous press line in our
facility in Spain. The continuous press will:
o simplify production flow
o improve labor productivity
o reduce press plate costs
o lower in-process scrap and
o permit the production of custom sheet lengths
- - Phenolic Treater
Prior to the acquisition of our company by Laminates, we purchased a
new high efficiency phenolic treater for our Evendale plant, which became
operational in 1999. Expected savings are primarily due to:
o reduced treating labor
o reduced utilities costs
o improved control/reduced material loss and resin usage and
41
o implementation of "Algenated Release Coating" technology. The
introduction of the "Algenated Release Coating" system, which
eliminates the need for a wax paper separator sheet between sheets of
high-pressure laminate during pressing, will reduce materials costs,
labor costs and yield losses
Marketing, Distribution and Customers
We believe our global distribution and dealer network, together with our
extensive sales force and the Formica(R) brand name and Anvil F mark, are major
marketing strengths and key elements to our success. In addition, we believe
that none of our competitors have the brand recognition of the Formica(R) brand
name.
Our products are sold through distributors of wholesale building
materials, distributors of products for the cabinet industry and directly to
original equipment manufacturers for both residential and commercial uses. In
1999, approximately 60% of our net sales were made through distributors and the
remaining 40% were made directly to original equipment manufacturers.
Our distribution network includes approximately 300 independent
distributor locations worldwide. Many distributors have sub-distributorship and
dealer networks. As a result, our brand products are represented in thousands
of locations worldwide. The effort of our domestic and international sales and
architectural specifications representatives, when combined with the sales
force of our distributor network, provide sales and marketing coverage in over
100 countries throughout the world. Our architectural sales force calls
directly on architects, designers and specifiers on a full-time basis. Our
sales representatives market our products directly to end-users and work with
distributors by monitoring distributors' inventories, calling on customers,
architects and designers with the distributor's sales representatives and
assisting distributors in the development of advertising and promotional
campaigns and materials and the introduction of products.
Generally, our distributorship sales are made by distributors that
exclusively carry our brand of high-pressure laminate. The typical distributor
also sells some or all of the following: other surfacing material, adhesives,
cabinetry, flooring material, particleboard, cabinet hardware and other related
architectural and building materials. We consider our distribution network to
be an important vehicle for the introduction of new products we may develop or
distribute in the future.
We estimate that of our net sales for the year ended December 31, 1999,
approximately one-half were derived from products used in commercial
applications and one-half from products used in residential applications. In
addition, we estimate that approximately two-thirds of our net sales in 1999
were derived from products used in remodeling or renovation projects, while
approximately one-third of our net sales in 1999 were derived from products
used in new construction.
Sales in the commercial market are heavily influenced by the
specifications of architects and designers. In addition to our regular
salesforce, a specification salesforce calls exclusively on architects and
designers.
Our order backlog is not significant due to our ability to respond
adequately to customer requests for product shipments. Generally, our products
are manufactured from raw materials in stock and are delivered to our customers
within one to thirty days from receipt of the order, depending on customer
delivery specifications.
We have no significant long-term contracts for the distribution of our
products. For the year ended December 31, 1999, no customer or affiliated group
of customers accounted for as much as 5% of our consolidated net sales.
Manufacturing Facilities
We manufacture and distribute products on a global basis with thirteen
manufacturing facilities located in the United States, Canada, the United
Kingdom, France, Spain, Germany, Taiwan and China, and a 50% interest in a
joint venture manufacturing plant in Germany that produces specialized metallic
surfaced laminate products. These multiple manufacturing locations around the
world enable us to reduce delivery times, freight costs and duties that we
would otherwise encounter.
In general, each manufacturing facility produces a standard product line
for its geographic market and produces one or more specialty products which may
be sold in its market or exported to other markets. This allocation of
production responsibility is designed to insure prompt delivery to customers of
our standard product lines and economies of scale in the production of our
premium products. In addition, certain of our specialty products have been
developed in response to regional design preferences.
Our manufacturing facilities normally operate either on a five, six or
seven day a week schedule. Periodically, we operate on an overtime basis to
satisfy customer requirements during periods of peak demand.
42
Generally, each facility is shut down from one to four weeks annually for
maintenance, refurbishment and traditional vacation periods.
Our North American operations are headquartered in Evendale, Ohio (near
Cincinnati), which is also the site of an high-pressure decorative
laminate manufacturing plant. We also manufacture high-pressure decorative
laminate in Rocklin, California (near Sacramento) and St. Jean, Quebec, Canada
(near Montreal). Solid surfacing is manufactured in Mt. Bethel, Pennsylvania
(near Allentown) and in Odenton, Maryland. High-pressure decorative laminate
samples, which are produced in large quantities for marketing purposes, are
produced at a facility in Indianapolis, Indiana. Laminate flooring is
manufactured in Algona, Washington. Certain products, such as Ligna(R), are
manufactured by third parties and sold under our brand name through our
distribution system. We have distribution centers in Evendale, Ohio; Rocklin,
California; Dallas, Texas; Ft. Lauderdale, Florida; Mt. Bethel, Pennsylvania;
Atlanta, Georgia; St. Jean, Quebec, Canada; Vancouver, British Columbia,
Canada; San Juan, Puerto Rico and Mexico City, Mexico. In March 2000, we
announced the planned closing of its' Mt. Bethel, Pennsylvania manufacturing
facility, and the subsequent transfer of manufacturing operations to the
Odenton, Maryland facility.
Our European headquarters and United Kingdom operations are based in North
Shields, United Kingdom (near Newcastle), which is also the site of an
high-pressure decorative laminate manufacturing plant. The Spanish subsidiary
is headquartered at its production facilities in Bilbao, Spain. The French
subsidiary is based in Lognes, France (near Paris), and we have an
high-pressure decorative laminate plant in Quillan, France. Distribution
centers are located in North Shields, United Kingdom; Bilbao, Spain; Paris,
France; Cologne, Germany; Milan, Italy; Rumlang, Switzerland and Eugendorf,
Austria. Our Homapal joint venture (which manufactures metallic laminates) is
based in Herzberg Am Harz, Germany. We also manufacture our own steel press
plates in La Plaine, France.
Our operations in Asia are headquartered in Taipei, Taiwan. Our largest
plant in Asia is located in Hsinfeng, which is near Taipei. We also have a
manufacturing plant in Shanghai, China and a separate marketing joint venture
in Shanghai. We have distribution centers in Taiwan, Singapore and Hong Kong,
and four distribution centers and six sales offices in China.
Competition
Our products compete around the world with high-pressure decorative
laminates, as well as with wood, veneers, marble, granite, solid surfacing,
tile, plastics, foils, papers, vinyls, acrylics, paint, wallpaper, wall and
floor coverings, low-pressure laminates and other surfacing materials. In
recent years, there has been substitution of other products for high-pressure
laminate, with increasing substitution of solid surfacing at the high end and
increasing substitution, particularly among North American manufacturers of
cabinets, inexpensive furniture and store fixtures, of low pressure laminates
at the low end. Competition is based principally on breadth of product line,
product quality, marketing, technology, price and service. We compete in a
number of geographic markets and our success in each of these markets is
influenced by those factors. Many of our competitors are owned by larger
enterprises and may have greater assets or resources than us. However, we
believe that we are one of the largest producers of high-pressure laminate on a
worldwide basis. We also believe that we are the largest or second largest
producer of high-pressure laminate in various national markets, including the
United States, Canada, the United Kingdom, France, Spain and Taiwan. In many
other national markets, we enjoy a smaller but nonetheless significant market
position. In the North American high-pressure laminate market, our principal
competitor is WilsonArt, a subsidiary of Illinois Tool Works, Inc. In the solid
surfacing market, DuPont is the strongest competitor, and Perstorp Flooring is
dominant in the laminate flooring market. Perstorp AB, one of our competitors
in the European laminate market, announced on March 1, 2000, that it has signed
an agreement covering the sale of the Perstorp Surface Materials subgroup to
Decorative Surfaces Holdings. Decorative Surfaces Holdings became a
wholly-owned subsidiary of Holdings on March 31, 2000, the closing of the
acquisition. Concurrent with the closing of the sale of Perstorp Surface
Materials to Decorative Surfaces Holdings, Decorative Surfaces Holdings entered
into a management and service agreement with Formica Corporation to oversee the
operations and management of Perstorp Surface Materials. (See "Business
Strategy--Target Strategic Acquisitions.")
Research and Development
Technical support to our business is organized on a worldwide basis. The
major part of our research program, which involves the development of new
applications for existing products, new products and process improvements, is
carried out by the research and development departments located in the United
States. Technical groups located at each plant also participate in the overall
program and work on smaller projects under
43
the direction of our research director. For the year ended December 31, 1999, we
incurred approximately $1.7 million of Research and Development expense.
International Operations
Our foreign operations are subject to the usual risks that may affect such
operations. These include, among other things, exchange controls, currency
restrictions and currency fluctuations, changes in local economic conditions,
unsettled political conditions, local laws concerning repatriation of profits
and other factors normally associated with multinational operations. Most of
the identifiable assets associated with the our foreign operations are located
in countries where we believe such risks to be minimal.
Our net sales from international operations to third parties accounted for
approximately 49%, 45% and 44% of total net sales of our products for the years
ended December 31, 1997, 1998 and 1999, respectively, and international
operations contributed $14.9 million, $12.6 million and $23.1 million of our
operating income for the years ended December 31, 1997, 1998 and 1999,
respectively. We have manufacturing subsidiaries located in the United Kingdom,
France, Spain, Canada, Taiwan and China and a 50% interest in a German joint
venture. Our principal international markets are located in Europe, Asia,
Canada and Mexico. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 13 of the accompanying
consolidated financial statements for information concerning our business by
geographic area.)
Environmental Matters
See Note 15-Commitments and Contigencies to the accompanying consolidated
financial statements for a discussion of certain environmental matters. There
can be no assurances that we 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 such
indemnification rights will otherwise be available.
Patents, Trademarks and Licenses
We own patents and possess proprietary information relating to our
products and processes. We believe that the loss of any of our patents would
not have a material adverse effect on our business.
Trademarks are important to our business and licensing activities. We have
a vigorous program of trademark enforcement to prevent the unauthorized use of
our trademarks, to strengthen the value of our trademarks and to improve our
image and customer goodwill. We believe that the Formica(R) trademark and the
Anvil F mark are our most significant trademarks. In addition to registration
in the United States, those trademarks are registered in over 100 countries. We
have granted a perpetual, royalty-free license to the Formica(R) tradename or
trademark to CSR Limited in Australia and New Zealand and to laminate producers
in India, South Africa and much of South America. The ColorCore(R), Surell(R)
and Fountainhead(R) trademarks are registered in the United States and several
other countries. The STEL(R) trademark is registered in the United States.
Additionally, we have numerous other registered trademarks, trade names and
logos, both in the United States and abroad. We believe that our material
trademarks are well protected in all of the major markets in which we do
business. However, effective trademark protection may not be available in every
country in which our products are available.
Historically, we have had a limited copyright portfolio of patterns and
designs, because the designs used in our laminates were typically owned by the
decorative paper manufacturer. In more recent years, we have increasingly
created our own proprietary designs, some of which are protected by copyright.
We believe that numerous opportunities exist to license our
internationally recognized Formica trademark and the Anvil F mark and our
proprietary technology and know-how. We have existing licensing arrangements
for our trademarks and, in some cases, our proprietary technology, with
manufacturers of adhesives.
Employees
As of December 31, 1999, we had approximately 3,800 employees. In the
United States, approximately 1,300 of our employees are covered by collective
bargaining agreements that expire in the years 2000 and 2002. Of the
approximately 2,000 employees in our international operations, a majority are
represented by a variety of local unions. We consider our employee relations to
be satisfactory.
Properties
The location and general description of the principal properties owned or
leased by us (or by our German joint venture) are set forth in the table
below:
44
Location Principal Function Square Feet
Warren, New Jersey World-wide Headquarters 15,000 Leased
Atlanta, Georgia Distribution Center 100,000 Leased
Dallas, Texas Distribution Center 82,000 Leased
Evendale, Ohio Manufacturing Plant and Subsidiary Headquarters 1,000,000 Owned
Ft. Lauderdale, Florida Distribution Center 64,000 Leased
Indianapolis, Indiana Samples Facility 54,000 Leased
Mt. Bethel, Pennsylvania Manufacturing Plant and Distribution Center 150,000 Owned
Odenton, Maryland Manufacturing Plant 362,500 Owned
Rocklin, California Manufacturing Plant 350,000 Owned
Algona, Washington Manufacturing Plant 106,000 Leased
St. Jean, Quebec, Canada Manufacturing Plant 360,000 Owned
Shanghai, China Manufacturing Plant 340,000 Owned
North Shields, England Manufacturing Plant and Subsidiary Headquarters 560,000 Owned
LaPlaine, France Manufacturing Plant 25,000 Owned
Lognes, France Distribution Center and Subsidiary Headquarters 69,000 Leased
Quillan, France Manufacturing Plant 240,000 Owned
Herzberg Am Harz, Germany Manufacturing Plant and Joint Venture Headquarters 110,000 Leased
Bilbao, Spain Manufacturing Plant and Subsidiary Headquarters 360,000 Owned
Hsinfeng, Taiwan Manufacturing Plant 150,000 Owned
Taipei, Taiwan Subsidiary Headquarters 15,000 Leased
We believe that our properties are suitable and adequate for our
present needs. We also believe that we have sufficient manufacturing and
distribution capacity for our present and foreseeable needs. Pursuant to the
new credit facility, the Rocklin, California, Evendale, Ohio and Odenton,
Maryland facilities are subject to liens as security for the obligations of
Formica and its subsidiaries thereunder. One of the Mt. Bethel, Pennsylvania
properties is subject to a lien related to an installment sale arrangement for
the facility with a local industrial development authority and the Hsingfeng,
Taiwan facility is subject to a lien pursuant to a credit agreement in Taiwan.
In March 2000, we announced the planned closing of our Mount Bethel,
Pennsylvania manufacturing facility, and the subsequent transfer of the
manufacturing operations to the Odenton, Maryland facility.
The leases for our leased properties will expire from 2000 through
2009, and the German joint venture has an annual lease that expires each
December 31, unless renewed. We are confident that we will be able to negotiate
renewals of our current leases with reasonable terms.
Legal Proceedings
See Note 15 - Commitments and Contigencies to the accompanying
consolidated financial statements for a discussion of certain litigation. Other
than as described below or in such note and as described under "Environmental
Matters," there are no legal proceedings to which we are a party, other than
ordinary routine litigation incidental to our business, which are not otherwise
material to our business or financial condition.
On April 5, 1999, we received a subpoena covering the period from
January 1, 1994 until April 1, 1999, from a federal grand jury in connection
with an investigation into possible antitrust violations in the United States
market for high-pressure laminate. We have produced documents and provided
other information in response to the subpoena, and a number of present or
former Formica employees have appeared for testimony before the grand jury or
have been interviewed by the Staff of the Antitrust Division of the U.S.
Department of Justice in connection with the investigation. We intend to
continue its cooperation with the investigation. We are unable to determine at
this time the effect, if any, that this matter may have on its financial
statements.
45
MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of Formica. Each director of Formica also
serves as a director of Holdings and Laminates.
Name Age Office
Vincent P. Langone................ 57 Director, Chairman, President and Chief Executive Officer
David T. Schneider................ 50 Vice President, Chief Financial Officer and Secretary
William Adams..................... 48 President, International Operations
Steve Kuo......................... 45 President, Asian Operations
Joseph Gonnella................... 53 President, North American Operations
Jean Pierre Clement............... 56 President, Solid Surfacing Operations
Thompson Dean..................... 40 Director
Peter T. Grauer................... 53 Director
David Y. Howe..................... 34 Director
Alexander Donald Mackenzie........ 41 Director
Vincent P. Langone has been Chairman, President and Chief Executive
Officer since May 1998. From 1995 until 1997, Mr. Langone was a principal of
Interbuild International, Inc. Mr. Langone was previously named President and
Chief Operating Officer of Formica Corporation in 1985 when Formica became
independent and privately held through a management-led leveraged buyout in
which he was a principal participant and investor. After taking Formica public
in 1987, Mr. Langone was appointed Chief Executive Officer in 1988. In 1989,
Mr. Langone organized a group of investors led by Dillon, Read & Co. and
Formica was again taken private. Under the new structure he assumed the
additional role of Chairman. Mr. Langone currently serves as a director of
Summit Bank, United Retail Group and Brand Scaffolding Services.
David T. Schneider has been Vice President, Chief Financial Officer and
Secretary since May 1998. From 1995 until 1997, Mr. Schneider was a principal
of Interbuild International, Inc. Mr. Schneider previously joined Formica
Corporation in 1986 as North American Controller following a management-led
leveraged buyout from American Cyanamid Company in 1985. He was appointed
Corporate Controller in 1987 and named Vice President and Chief Financial
Officer of Formica in 1989.
William Adams is President of Formica's International operations and
General Manager of Formica-U.K. He joined Formica Corporation in 1968. He has
held various positions in Formica involving the following functions: research
and development, yield improvement, warehousing, distribution, planning and
production.
Steve Kuo is President of Formica's Asian operations. He joined Formica
Corporation in March 1985 in sales and marketing and later served as General
Manager of North and East China. He was promoted to his present position in
December 1997.
Joseph Gonnella is President of Formica's North America operations. He
joined Formica Corporation in November 1999. Prior to joining Formica
Corporation, Mr. Gonnella was employed by Engelhard Corporation from 1992 until
1999, where he served as Senior Vice President, Strategy & Corporate
Development (1997-1999) and previously as Group Vice President & General
Manager, Environmental Technologies Group (1992-1997).
Jean Pierre Clement is President of Formica's Solid Surfacing Operations.
Mr. Clement has held various senior management positions within Formica in
France, Canada, and the United States over his 30-year tenure with Formica.
Thompson Dean has been a director of Formica since May 1998. Mr. Dean has
been the Managing Partner of DLJ Merchant Banking, Inc., since November 1996.
Previously, Mr. Dean was a Managing Director of DLJ Merchant Banking Inc. and
its predecessor since January 1992. Mr. Dean serves as a director of Commvault
Inc., Von Hoffman Corporation, Manufacturer's Services Limited, Phase Metrics,
Inc., AKI Holdings Corporation, Amatek Ltd., DeCrane Aircraft Holdings Inc.,
Mueller Group, Inc., Charles River Laboratories, Inc. and Insilco Holding Co.
Peter T. Grauer has been a director of Formica since May 1998 and a
Managing Director of DLJ Merchant Banking Inc. and its predecessor since
September 1992. Mr. Grauer serves as a director of Doane Pet
46
Care Company, Co., Total Renal Care Holdings, Inc., DecisionOne Holdings Corp.,
Bloomberg, Inc. and Thermadyne Holdings Corporation.
David Y. Howe has been a director of Formica since May 1998 and a Vice
President of Citicorp Venture Capital, Ltd. since 1993. Mr. Howe serves as a
director of Aetna Industries, Inc., American Italian Pasta Company, Insilco
Holding Co., IPC Information Systems, Inc., Pen-Tab Industries, Inc. and
several private companies.
A. Donald Mackenzie has been a director of Formica since May 1998 and a
Managing Director of CVC Capital Partners Limited since 1993. Previously, he
was a director of Citicorp Venture Capital Ltd. Mr. Mackenzie serves as a
director of Hamleys Plc and Hozelock Group Plc.
In accordance with the terms of the Investors' Agreement among the DLJ
Merchant Banking funds, the institutional investors and management shareholders
of Laminates, Formica intends to elect two additional directors who are
unaffiliated with Formica or any of DLJ Merchant Banking or the institutional
investors.
Employment Agreements
Vincent Langone and David Schneider. Messrs. Langone and Schneider have
entered into employment agreements with Laminates on the following terms,
effective as of April 30, 1998. The employment agreements have a duration of
three years from their effectiveness subject to automatic extensions for one
year periods on their second and each subsequent anniversary, absent notice of
non-renewal by either party. The employment agreements provide for initial
annual base salaries of $600,000 and $300,000, respectively, for Messrs.
Langone and Schneider, and, contingent upon Laminate's achievement of EBITDA
targets, payment of cash bonuses.
Mr. Langone was paid a $375,000 transaction fee in connection with the
acquisition of Formica by Laminates and will be paid an advisory fee in
connection with future acquisitions and/or divestitures during the term of his
employment. Mr. Schneider was paid a $125,000 transaction fee in connection
with the acquisition of Formica by Laminates.
Each of Messrs. Langone and Schneider is entitled to participate in any
benefit and incentive compensation programs, plans and practices which
Laminates makes available generally to its senior executive officers.
Upon a termination without cause, for good reason or due to non-renewal of
the employment agreement, each of Messrs. Langone and Schneider is entitled
under the agreements to the following severance benefits:
(1) unpaid accrued base salary and vacation and earned bonus
(2) two times the sum of executive's then-current annual base salary
and bonus, as calculated according to the agreement
(3) 36 months continued benefits coverage
(4) a fully vested supplemental retirement benefit under the Formica
Corporation Supplemental Executive Retirement Plan and
(5) accelerated vesting with respect to any time-based options and
time-vested equity based awards granted to or purchased by
executive
Laminates has agreed that it will "gross-up" executives for any excise
taxes to which they are subject as a result of any severance payments being
considered "golden parachute" payments by the Internal Revenue Service.
The employment agreements provide that each of Messrs. Langone and
Schneider will, during his term of employment with Formica and for a period of
two years following a termination for which he is entitled to severance, be
bound by a covenant (1) not to compete in the high-pressure laminates business
or other line of business significant to Laminates and any of its subsidiaries
as a whole and (2) not to solicit any employees of Laminates or its
subsidiaries.
For purposes of the employment agreements, good reason includes any of
these events without the express prior written consent of the executive:
o the assignment to the executive of duties materially inconsistent
with the executive's positions, duties, responsibilities, titles or
offices described above or any material reduction of those duties or
responsibilities, or other than for cause or due to disability, the
removal of the executive from or any failure to elect or reelect the
executive to his position
47
o a reduction in base salary, bonus opportunity or benefits
o our failure to obtain the specific assumption of the employment
agreement by any successor or assign or any person acquiring
substantially all of our assets
o our failure to perform in any material respect our stated duties
under the employment agreement, which is not remedied within 30 days
of notice to us by the executive
o movement of our principal offices to a location more than 35 miles
from Newark, New Jersey
o our failure to keep in effect the policy of directors' and officers'
liability insurance or
o a change of control
For purposes of the foregoing, change of control means such time as (1)
the DLJ Merchant Banking funds, the CVC entities and MMI Products, LLC and
their permitted transferees own less than 10% of the outstanding shares of our
common stock on a fully diluted basis, (2) the transfer of substantially all of
our assets has occurred, (3) we shall have been liquidated or (4) any person,
other than an institutional shareholder or permitted transferee, shall own more
of our equity securities than the institutional shareholder and its permitted
transferee own, in the aggregate, the greatest amount of our equity securities.
For purposes of the employment agreements, cause means (1) the executive's
conviction by a court of competent jurisdiction or entry of a plea of nolo
contendere for an act on the executive's part constituting a felony which
conviction or plea causes damage to our reputation or financial position or
which undermines the executive's authority or (2) a willful and gross breach of
a substantial and material obligation of the executive under the employment
agreement; provided, that no action shall give rise to cause if undertaken in
the good faith belief that the action was in our best interest.
William Adams. Mr. Adams is party to an employment agreement with Formica
Limited, an indirect subsidiary of Formica, dated March 14, 1990, as amended in
1997 and 1999. Under his employment agreement, Mr. Adams is paid an annual
salary and may participate in applicable incentive compensation schemes. The
agreement entitles Mr. Adams to participation in various benefits of Formica
Limited, including a group health plan, a pension plan and company sick pay,
and subjects Mr. Adams to a confidentiality covenant which survives his
termination of employment. Under the terms of his agreement, Mr. Adams is
entitled to twenty four (24) months notice of termination of employment, for
which Formica Limited may substitute payment. Mr. Adams is required to give
three months notice of his voluntary termination of employment.
Steve Kuo. Mr. Kuo is party to a service contract with Cyanamid Taiwan
Corporation and Formica Taiwan Corporation, an indirect subsidiary of Formica,
dated March 18, 1986. That agreement was executed following the sale of the
Formica business by American Cyanamid Corporation in 1985, and provides for the
transfer of Mr. Kuo's employment from Cyanamid Taiwan Corporation to Formica
Taiwan Corporation. Under the terms of the agreement, Mr. Kuo's employment with
Formica Taiwan Corporation is on the same terms as his employment with Cyanamid
Taiwan Corporation, with acknowledgment of Mr. Kuo's years of service at
Cyanamid Taiwan Corporation for the purpose of calculating Mr. Kuo's retirement
payments at Formica Taiwan Corporation.
Joseph Gonnella. Mr. Gonnella is party to an employment agreement with
Formica Corporation, dated November 1, 1999. Pursuant to his employment
agreement, Mr. Gonnella is paid an annual salary and may participate in
applicable incentive compensation schemes. The agreement entitles Mr. Gonnella
to participation in certain benefits of Formica Corporation, including a group
health plan, a pension plan, and company sick pay, and subjects Mr. Gonnella to
a confidentiality covenant, which survives his termination of employment.
Pursuant to the terms of his agreement, Mr. Gonnella in entitled to twenty-four
(24) months notice or termination of employment, for which Formica Corporation
may substitute payment.
Jean Pierre Clement. Mr. Clement is an employee of Formica Corporation. He
is paid an annual salary and may participate in applicable compensation
schemes. Mr. Clement is also entitled to participation in certain benefits of
Formica Corporation, including a group health plan and company sick pay. Mr.
Clement is covered by the Formica S.A. (France) pension plan.
Compensation of Directors
Currently, directors are not paid fees. Formica has not yet determined
whether the independent directors to be elected in accordance with our
investors' agreement will be paid any fees.
48
Executive Compensation
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Name and Principal Position ($) ($) ($) ($) (2) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------------
Vincent P. Langone 1999 $600,000 $600,000 -- -- -- -- $ 52,065
Director, Chairman, 1998 $400,000 -- -- -- -- -- $ 428,649 (1)
President, and C.E.O.
David T. Schneider 1999 $300,000 $300,000 -- -- -- -- $ 6,421
Vice-President, C.F.O., 1998 $200,000 -- -- -- -- -- $ 134,153 (1)
and Secretary
William Adams 1999 $194,218 $201,126 -- -- -- -- $ 1,585
President, International 1998 $198,020 $198,020 -- -- -- -- --
Operations
Steve Kuo 1999 $119,595 $ 35,389 -- -- -- -- $ 9,592
President, Asia 1998 $106,750 $ 34,747 -- -- -- -- --
Jean Pierre Clement 1999 $168,000 10,000 -- -- -- -- --
President-Solid Surfacing 1998 -- -- -- -- -- -- --
(1) Amounts principally represent payment for transaction fees--see "Employment
Agreements."
(2) Messrs. Langone and Schneider purchased 104,769 and 15,715 shares of
restricted stock respectively, at $1.00 per share on April 30, 1998. The
purchase price of those shares reflects the fair market value of those
shares, as of that date and therefore those shares are not reported as
"compensation."
Employee Retirement Plan
We maintain the Formica Corporation Employee Retirement Plan, a
non-contributory defined benefit plan for United States employees. The
retirement plan was amended and restated as of January 1, 1996, and amended
again in February 1998. Pension benefits are determined based upon a career
average pay formula. The annual pension benefit to which a salaried employee is
entitled, under the retire plan, at the normal retirement date, which is age 65
after five years of service, is an amount equal to the sum of:
(A) (1) 1.5 percent of earnings for each year of service, plus (2)
1.5 percent of earnings for each partial year of service to
date of termination, if termination is effective other than at
year end plus
(B) the accrued benefit as of June 30, 1992 determined as being the
greater of (1) the benefit accrued under the retirement plan
then in effect or (2) 1.5 percent of the five year average
annual earnings multiplied by years of service as of June 30,
1992
The retirement plan formula calculates annual pension amounts on a
single-life annuity basis.
The Internal Revenue Code of 1986, as amended, limits the annual amount
payable to an individual under a tax qualified pension plan to $130,000, as
adjusted for cost of living increases, and places limitations upon amounts
payable to some individuals. The Code also limits the amount of annual
compensation that may be taken into account by a plan to $160,000, as adjusted
for cost of living increases.
Messrs. Langone and Schneider are the only two named executive officers
who participate in our retirement plan. Estimated annual benefits payable upon
retirement under the retirement plan to Messrs. Langone and Schneider are
$79,150 and $72,691 assuming current Code limitations, no change in present
salary and continued employment to retirement at age 65. For each of Messrs.
Langone and Schneider, the amount of that benefit attributable to employment
with Formica prior to or during 1998 would be $56,138 and $33,316,
respectively, and the amount of that benefit attributable to employment with
Formica after 1998 would be $39,375 and $23,012. As discussed below, the amount
of that benefit attributable to employment with Formica after 1998 will be
applied to offset benefits to which Messrs. Langone and Schneider would be
entitled under our supplemental retirement plan. Mr. Langone was previously
employed by American Cyanamid, Formica's former parent, and, therefore, his
benefits would be reduced by any amounts payable under the American Cyanamid
retirement plan.
Supplemental Executive Retirement Plan
The following table shows the estimated annual benefits payable upon
retirement to participants in our Supplemental Executive Retirement Plan.
49
Estimated Annual Retirement Benefits
Years of Service
- -------------------------------------------------------------------------------
Final Average Compensation 5 10 15 20
- -------------------------------------------------------------------------------
$ 200,000 $ 75,000 $150,000 $225,000 $300,000
225,000 84,375 168,750 253,125 337,500
250,000 93,750 187,500 281,250 375,000
300,000 112,500 225,000 337,500 450,000
400,000 150,000 300,000 450,000 500,000
450,000 168,750 337,500 500,000 500,000
500,000 187,500 375,000 500,000 500,000
600,000 225,000 450,000 500,000 500,000
700,000 362,500 500,000 500,000 500,000
800,000 300,000 500,000 500,000 500,000
900,000 337,500 500,000 500,000 500,000
1,000,000 375,000 500,000 500,000 500,000
The unfunded Supplemental Executive Retirement Plan provides
additional annual retirement benefits equal to, for a participant who has
completed less than 25 years of service with Formica, the product of
(1) 7.5% of the highest amount obtained by averaging a participant's total
cash compensation paid for the lesser of :
(A) any 3, or
(B) all, calendar years of employment with Formica after 1997
multiplied by
(2) the participant's years of service with Formica after 1997.
The supplemental plan provides additional annual retirement benefits
equal to, for a participant who has completed at least 25 years of service with
Formica, 60% of his average earnings as determined above. The maximum annual
retirement benefit payable under the supplemental plan, prior to any offset,
shall be $500,000. No separate accounts are maintained under the supplemental
plan.
The benefit amounts set forth in the table above are subject to
reduction for social security benefits, pension benefits payable under our
employee retirement plan for which accrual is attributable to employment with
Formica after 1997 and the value of benefits under our employee savings plan.
The benefit amounts set forth in the table above are contingent upon a
participant's retirement on or after age 65, or if a participant's combined age
and service with Formica total 65, a participant's retirement on or after age
62. Notwithstanding the foregoing, a participant may be eligible for benefits
under the plan if the participant retires early on or after age 60 and has
completed 5 years of service with Formica. In that case, a participant shall be
entitled to receive the retirement benefits calculated as described above
reduced by 1/4 of 1% for each month by which the participant's early retirement
date precedes his normal retirement date.
During the year ended December 31, 1999, Messrs. Langone and Schneider
were the only two participants in the supplemental plan. Each of Messrs.
Langone and Schneider currently is credited with 2 years of service for
purposes of benefit accrual under the supplemental plan. Under their employment
agreements, upon a termination without cause, for good reason including a
change of control of Formica, or upon disability, each of Messrs. Langone and
Schneider will be entitled to fully vested benefits under the supplemental plan
paid in lump sum, adding two years to their credited years of service for
purposes of computing benefits.
Formica Limited 1998 Pension Scheme
The following table shows the estimated annual benefits payable upon
retirement to participants in the Formica Limited 1998 Pension Scheme.
51
Estimated Annual Retirement Benefits
Years of Service
- -------------------------------------------------------------------------------
Final Average Compensation 15 20 25 30
- -------------------------------------------------------------------------------
$150,000 $ 37,508 $ 50,010 $ 62,513 $ 75,015
175,000 43,759 58,450 72,931 87,518
200,000 50,010 66,680 83,350 100,020
250,000 62,513 83,350 104,188 125,025
300,000 75,015 100,020 125,025 150,030
400,000 100,020 133,360 166,700 200,040
450,000 112,523 150,300 187,538 225,045
500,000 125,025 166,700 208,375 250,050
600,000 150,030 200,040 250,050 300,060
Mr. Adams is the only named executive officer who participated in the U.K.
pension plan which is a final salary defined benefit scheme. The amount of
the pension to which any participant may be entitled under the scheme is based
upon final pensionable earnings, which is a participant's highest annual
earnings from the last five years prior to termination. For purposes of
determining pension, earnings include basic pay, shift premium and overtime pay
(excluding bonus).
The U.K. pension plan provides annual retirement benefits equal to the
product of the retirement percentage and final pensionable earnings. The
retirement percentage equals 1.667% multiplied by years of service up to a
maximum of 66.67%.
Participants may be eligible to elect to receive a portion of their
pension in a lump sum upon retirement subject to limitations by the United
Kingdom Inland Revenue. Employees are required to contribute to the funding of
the pension scheme at a rate of 5% of earnings, less a deduction of
(pound)3,328.
The benefit amounts set forth in the table above are contingent upon a
participant's retirement after age 60. If a participant retires before age 60
but no earlier than age 50, the participant shall be eligible to receive the
retirements calculated as described above reduced by 5% for every year the
participant retires early than age 60. If a participant retires earlier than
age 50, the participant shall not receive benefits under the U.K. scheme.
Employee Retirement Plan of Formica Taiwan Corporation
Mr. Kuo is the only named executive officer who participates in the
retirement plan covering Taiwanese employees. Under the Taiwanese plan, for
service following 1984, employees are entitled to lump sum retirement benefits
equal to the sum of (1) two month's average pay for each year of service up to
fifteen years of service and (2) one month's average pay for each year of
service thereafter, up to a total maximum of 45 months, subject to 20% increase
if retirement is due to disability caused in performance of duties to Formica.
Average pay shall be calculated at retirement in accordance with the Taiwanese
Labor Standards law.
A participant is eligible for those retirement benefits upon voluntary or
mandatory retirement. A person is eligible for voluntary retirement if (1) he
or she has worked with Formica Taiwan for a period of not less than fifteen
years and has reached the age of fifty-five for a male employee or fifty for a
female employee or (2) he or she has worked with Formica Taiwan for a period of
not less than twenty-five years. Formica Taiwan may require an employee to
mandatorily retire if he or she has reached the age of sixty or he or she is
mentally or physically disabled and thus incompetent to perform his or her job.
Formica S.A. (France) 1989 Pension Scheme
Mr. Clement is the only named executive officer who participated in the
French pension scheme which is a final salary defined benefit scheme. The
French scheme provides supplementary benefits based on the number of year's
service and the final salary. The amount of the pension to which any
participant may be entitled under the scheme is based upon final pensionable
earnings, which is a participant's highest annual earnings from the last five
years prior to termination. For purposes of determining pension, earnings
include basic pay, shift premium and overtime pay (excluding bonus).
Mr. Clement's pension is comprised of two parts: a government benefit and
a supplementary benefit from the Formica France Pension Plan. The French
government provides a maximum pension of 88,200FF per annum (at 60 or 65 years
old) provided the participant has 40 years of service.
51
Participants are not eligible to elect to receive their pension in a lump
sum upon retirement. Employees are not required to contribute to the funding of
the pension scheme. Formica France contributes 200,000FF per annum in total for
Mr. Clement; 20,000FF per annum to the government for the government pension
and 180,000FF per annum to the Formica France Pension Plan.
The 1998 Restricted Stock Plan
On April 30, 1998, the board of directors and shareholders of Laminates
approved and adopted the Laminates Management Restricted Stock Program. The
plan authorizes purchases by eligible employees of Laminates and its
subsidiaries, selected in the discretion of the committee referred to below, of
restricted shares of common stock of Laminates. Any shares of restricted stock
purchased under the plan are subject to forfeiture upon the participating
employee's termination of employment with Laminates or any of its subsidiaries
until those shares have vested in accordance with the terms described below.
The only employees who have participated in the plan to date are Messrs.
Langone and Schneider.
Administration. The plan is administered by a committee of our board
of directors established by the board in a manner which complies with Rule
16b-3 under the Exchange Act and Section 162(m) of the Code, to the extent
compliance is necessary, or if no committee has been established, by the board.
Number of Authorized Shares. Shares issuable under the plan may include
shares of authorized but unissued or reacquired common stock.
The number of shares which may be issued under the plan is 157,153,
subject to adjustments upon the occurrence of various events and as follows. As
of December 31, 1999, 120,484 shares have been allocated to and purchased by
Messrs. Langone and Schneider, 24,650 shares have been allocated to and
purchased by other management employees under the 1999 stock plan, and 12,019
shares are available under the plan for future purchase. Subject to various
exceptions, upon the issuance by Laminates of additional equity following the
effectiveness of the acquisition, additional shares will be available under the
plan equal to from 12.5% to 5.5% of the additional common stock issued,
depending upon the amount and timing of the issuance.
Purchase Price. Unless otherwise determined by the committee, the
price at which each share of restricted stock may be purchased under the plan
shall be the fair market value of a share of common stock on the date of
purchase.
Vesting. Each restricted share will vest in accordance with the terms
of the applicable purchase agreement between Laminates and the participating
employee. 60% of the shares currently issued under the plan will be subject to
time-based vesting and 40% of the shares issued under the plan are subject to
performance-based vesting. The time based shares vest on a five year schedule,
20% on each anniversary of purchase, and the performance based shares vest on a
five year schedule provided that EBITDA targets are met. The issued time based
shares vest upon termination of a participating employee's employment due to
death, disability, without cause or for good reason and upon a change of
control of Laminates and the issued performance based shares vest upon a change
of control of Laminates occurring within 20 months of the effectiveness of the
acquisition, and thereafter only if investment return targets are met.
Puts and Calls. The restricted stock is subject to repurchase by
Laminates upon any termination of employment by the employee and of sale by the
employee upon termination of employment other than for cause or by the employee
without good reason. The applicable purchase price is set forth in the purchase
agreement with respect to the shares.
Amendment and Termination. The board may amend, alter, suspend,
discontinue or terminate the plan or any portion thereof at any time, provided
however, that the shareholders of Laminates shall be required to approve any
amendment if the approval is necessary to comply with any tax or regulatory
requirements.
The 1999 Stock Plan
On March 18, 1999, the board of directors of Laminates approved and
adopted the Laminates 1999 Stock Plan. The plan authorizes purchases by
eligible employees of Laminates and its subsidiaries, selected in the
discretion of the committee referred to below, of shares of preferred stock,
shares of common stock, and restricted shares of common stock of Laminates. Any
shares of restricted stock purchased under the plan are subject to repurchase
by Laminates at the purchase price upon the participating employee's
termination of employment with Laminates or any of its subsidiaries until those
shares have vested in accordance with the terms described below.
52
Administration. The plan is administered by a committee of our board
of directors established by the board in a manner which complies with Rule
16b-3 under the Exchange Act and Section 162(m) of the Code, to the extent
compliance is necessary, or if no committee has been established, by the board.
Number of Authorized Shares. Shares issuable under the plan may include
shares of authorized but unissued or reacquired common stock.
The number of preferred shares which may be issued under the plan is
15,401 and the number of common shares is 55,004, including 36,669 shares of
restricted stock available for future purchase under the 1998 Restricted Stock
Plan. As of December 31, 1999, 9,681 preferred shares and 36,175 common shares,
including 24,650 restricted shares, have been purchased by management employees
other than Messrs. Langone and Schneider.
Purchase Price. Unless otherwise determined by the committee, the price at
which each share of preferred and common stock may be purchased under the plan
shall be the fair market value of a share of stock on the date of
purchase.
Vesting. Each restricted share will vest in accordance with the terms of
the applicable purchase agreement between Laminates and the participating
employee. 50% of the shares currently issued under the plan will be subject to
time-based vesting and 50% of the shares issued under the plan are subject to
performance-based vesting. The time based shares vest on a five year schedule,
20% on each anniversary of purchase, and the performance based shares vest on a
five year schedule provided that EBITDA targets are met.
Puts and Calls. The preferred and common stock is subject to repurchase by
Laminates upon any termination of employment by the employee. The applicable
purchase price is set forth in the purchase agreement with respect to the
shares.
Amendment and Termination. The board may amend, alter, suspend,
discontinue or terminate the plan or any portion thereof at any time, provided
however, that the shareholders of Laminates shall be required to approve any
amendment if the approval is necessary to comply with any tax or regulatory
requirements.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of Formica's voting securities as of December 31, 1999 by
(1) each person or group known to Formica who beneficially owns more than five
percent of voting securities of Formica, (2) each of Formica's directors, (3)
each executive officer of Formica and (4) all directors and executive officers
of Formica as a group:
Name of Beneficial Owner Percentage of Class
------------------------ -------------------
Laminates Acquisition Co. (2)
277 Park Avenue
New York, New York 10072..................... 100.0%
FM Holdings Corp.
15 Independence Boulevard
Warren, New Jersey 07059..................... 100.0%
Thompson Dean
DLJ Merchant Banking Inc.
277 Park Avenue
New York, New York 10072...................... --
Peter Grauer
DLJ Merchant Banking Inc.
277 Park Avenue
New York, New York 10072..................... --
David Y. Howe
Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043...................... --
Alexander Donald Mackenzie
CVC Capital Partners Limited
Hudson House
8-10 Tavistock Street
London WC2E 7PP............................... --
53
Vincent Langone.................................. --
David Schneider.................................. --
William Adams.................................... --
Steve Kuo........................................ --
Jean Pierre Clement.............................. --
All directors and officers as a group (9 persons) --
(1) Under the applicable rules of the Securities and Exchange Commission, each
person or entity is deemed to be a beneficial owner with the power to vote
and direct the disposition of these shares. Shares of common stock subject
to warrants are deemed outstanding for computing the percentage of the
person holding the options, but are not deemed outstanding for computing
the percentage of any other person.
(2) Includes securities held by FM Holdings, which is a wholly-owned subsidiary
of Laminates.
The following table sets forth information with respect to the beneficial
ownership of Laminates' voting securities as of December 31, 1999 by (i) each
person or group known to Formica who beneficially owns more than five percent
of Laminate's voting securities, (ii) each of Formica's directors, (iii) each
executive officer of Formica and (iv) all directors and executive officers of
Formica as a group:
Name of Beneficial Owner Shares (1) Class
------------------------ ---------- -------------
DLJ Merchant Banking Funds (2)........................ 538,236 (3) 42.0%
CVC European Equity Partners, L.P.
Hudson House
8-10 Tavistock Street
London, WC2E 7PP................................... 240,198 (4) 18.8%
CVC European Equity Partners (Jersey) L. P.
Hudson House
8-10 Tavistock Street
London, WC2E 7PP................................... 28,920 (5) 2.3%
MMI Products, L.L.C.
399 Park Avenue
New York, New York 10043......................... 269,118 (6) 21.0%
Thompson Dean
DLJ Merchant Banking Inc.
277 Park Avenue
New York, New York 10072........................... -- --
Peter Grauer
DLJ Merchant Banking Inc.
277 Park Avenue
New York, New York 10072........................... -- --
David Y. Howe
Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043........................... -- --
Alexander Donald Mackenzie
CVC Capital Partners Limited
Hudson House
8-10 Tavistock Street
London WC2E 7PP.................................... -- --
Vincent Langone....................................... 140,061 (7) 10.9%
David Schneider....................................... 27,479 (8) 2.2%
William Adams......................................... 5,200 (9) 0.4%
Steve Kuo............................................. 525(10) --
Jean Pierre Clement................................... 1,800(11) --
All directors and officers as a group (9 persons)
(7)(8)(9)(10)(11)................................... 175,065 13.6%
54
(1) Under the applicable rules of the Securities and Exchange Commission, each
person or entity is deemed to be a beneficial owner with the power to vote
and direct the disposition of these shares. Shares of common stock subject
to warrants are deemed outstanding for computing the percentage of the
person holding the options, but are not deemed outstanding for computing
the percentage of any other person.
(2) Consists of shares held directly by DLJ Merchant Banking Partners II, L.P.
and the following related investors: DLJ Merchant Banking Partners II-A,
L.P.; DLJ Offshore Partners II, C.V.; DLJ Diversified Partners, L.P.; DLJ
Diversified Partners-A, L.P.; DLJ Millennium Partners, L.P.; DLJ
Millennium Partners-A, L.P.; DLJ Merchant Banking Funding II, Inc.; DLJ
First ESC L.P.; UK Investment Plan 1997 Partners, Inc.; DLJ EAB Partners,
L.P. and DLJ ESC II L.P. The address of each is 277 Park Avenue, New York,
New York 10172, except (1) the address of Offshore is John B. Gorsiraweg
14, Willemstad, Curacao, Netherlands, Antilles and (2) the address of UK
Partners is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles,
California 90067.
(3) Includes 50,000 shares that may be acquired upon exercise of warrants.
(4) Includes 22,313 shares that may be acquired upon exercise of warrants.
(5) Includes 2,687 shares that may be acquired upon exercise of warrants.
(6) Includes 25,000 shares that may be acquired upon exercise of warrants.
(7) Includes 104,769 shares of restricted stock, of which 62,861 are time
based shares and 41,908 are performance based shares. See "Management--The
1998 Restricted Stock Plan."
(8) Includes 15,715 shares of restricted stock, of which 9,429 are time based
shares and 6,286 are performance based shares. See "Management--The 1998
Restricted Stock Plan."
(9) Includes 4,000 shares of restricted stock, of which 2,000 are time based
shares and 2,000 are performance based shares. See "Management--The 1999
Stock Plan."
(10) Includes 350 shares of restricted stock, of which 175 are time based shares
and 175 are performance based shares. See "Management --The 1999 Stock
Plan."
(11) Includes 1,200 shares of restricted stock, of which 600 are time based
shares and 600 are performance based shares. See "Management --The 1999
Stock Plan."
55
CERTAIN RELATIONSHIPS AND TRANSACTIONS
In order to fund normal working capital requirements, Formica has entered
into certain borrowing arrangements with Laminates. These arrangements are
short-term in nature and generally bear no interest. At December 31, 1999,
there was approximately $1.0 million outstanding under these arrangements. (See
Note 11 to the accompanying consolidated financial statements.)
Our shareholders are party to an agreement that determines many
important voting and other matters.
In connection with the acquisition, an Investors' Agreement was
entered into at the effective time among Laminates, the DLJ Merchant Banking
funds, the other institutional investors and the members of management who own
shares of Laminates common stock. The terms of the Investors' Agreement
restrict transfers of the shares of Laminates common stock by DLJ Merchant
Banking, the institutional investors and the management shareholders, and
provide that in various situations a selling shareholder provides Laminates and
the other shareholders with a right of first refusal prior to selling any
shares. The agreement permits the other shareholders to participate in various
sales of shares of Laminates capital stock by the DLJ Merchant Banking funds or
institutional investors, permits the DLJ Merchant Banking funds and the
institutional investors to require the management shareholders to sell shares
of Laminates capital stock in various circumstances should the DLJ Merchant
Banking funds and the institutional investors choose to sell any shares owned
by them, permits the shareholders to purchase equity securities proposed to be
issued by Formica on a preemptive basis, and provides for specified
registration rights. Similar provisions are made with respect to Holdings
preferred stock that is held by the shareholders. The Investors' Agreement also
provides that the DLJ Merchant Banking funds have the right to appoint two of
the seven members of the Board of Directors of Laminates, Holdings and Formica,
each of CVC, MMI and the management shareholders have the right to appoint one
director, and two other directors will be independent directors mutually
satisfactory to DLJ Merchant Banking and the institutional investors, and
provides that specified actions may not be taken unless approved by each of the
DLJ Merchant Banking funds, CVC and MMI. The two independent directors have not
yet been selected.
Fees we have paid to our affiliates
In the subscription agreement under which shares of Laminates capital stock
were sold, Laminates agreed to reimburse the DLJ Merchant Banking funds, the
institutional investors and the management shareholders for all costs and
expenses incurred by them in connection with their subscription for stock of
Laminates. Laminates also agreed to reimburse up to $2.0 million to the DLJ
Merchant Banking funds as reimbursement for amounts previously paid by the DLJ
Merchant Banking funds to Messrs. Langone and Schneider in connection with
consulting services provided to the DLJ Merchant Banking funds with respect to
our acquisition by Laminates.
In connection with the acquisition, Laminates paid advisory fees of
$1.0 million to each of Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the DLJ Merchant Banking funds, and MMI, $2.0 million to CVC and
$375,000 to Mr. Langone and $125,000 to Mr. Schneider for services rendered in
connection with the acquisition.
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. The aggregate amount of all fees paid to the various
DLJ entities in connection with the acquisition and the offering of the Senior
Subordinated Notes is approximately $8.5 million.
Expected future transactions with Donaldson, Lufkin & Jenrette Securities
Corporation
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, our parent company, FM Holdings, acquired Perstorp
Surface Materials. We provided $5.0 million of the financing of a deposit,
which amount was repaid at closing. Holdings has informed
56
us that it will contribute Perstorp Surface Materials to us once we receive
audited financial statements expected to be completed shortly.
We have 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.
THE ACQUISITION
In this prospectus, we refer to our "acquisition" in May 1998 to
include:
(1) the purchase by Laminates of Holdings, our parent company,
the various mergers described below, and the contribution of
the foreign affiliates' stock to us and
(2) the issuance and sale of the bridge notes, the initial
borrowings under the new credit facility, net of the
repayment made immediately after the effective time of the
acquisition, the sale by LMS I, a predecessor of Holdings, of
senior preferred stock and warrants and the sale by Laminates
of preferred stock and common stock,
The following table sets forth the estimated cash sources and uses of
funds for the acquisition and related fees and expenses:
(in millions)
Sources:
Bridge notes $200.0
New credit facility 80.0
Assumed net debt 28.8
LMS I senior preferred stock and warrants. 50.0
Laminates preferred stock 86.0
Laminates common stock 1.1
------
Total Sources $445.9
======
Uses:
Cash consideration for acquisition, including repayment
of affiliate debt $376.6
Assumed net debt 28.8
Excess cash 10.5
Estimated transaction fees and expenses, including estimated
fees and expenses incurred in connection with the offering
of the old notes 30.0
------
Total Uses $445.9
======
Laminates, our indirect parent, was organized by the DLJ Merchant Banking
funds, several institutional investors and Messrs. Langone and
Schneider in order to acquire our company. For the same purpose, Laminates
formed:
o LMS I, a Delaware corporation wholly owned by it,
o LMS II, wholly owned by LMS I,
o LMS III, wholly owned by LMS II,
o and Formica Holdco (UK) Limited, wholly owned by LMS III.
Our investors formed Laminates to act as the holding company for all of
our assets, and formed the various other new entities to act as empty shell
acquisition vehicles that, other than Holdco (UK), would then be merged into
existing Formica entities. The investors wanted to set up a capital structure
with debt and equity issued at different levels and, since most of the funding
for these debt and equity issuances was to occur immediately prior to the
effective time of the acquisition, the investors needed a shell company at each
relevant level in order to permit debt and equity issuances at that level.
Holdco (UK) was set up in order to permit a debt issuance in the United
Kingdom.
Laminates and BTR entered into an acquisition agreement dated as of
March 16, 1998. In accordance with the acquisition agreement, on May 1, 1998
Laminates acquired from BTR, for consideration of
57
approximately $405.4 million, all of the outstanding shares of Holdings and some
of our foreign affiliates. The consideration included $376.6 million of cash,
which included repayment of all indebtedness due to BTR and its affiliates, and
$28.8 million of estimated assumed net debt, net of estimated cash and cash
equivalents.
In order to finance the acquisition:
o LMS II issued and sold $200.0 million aggregate principal amount of
the bridge notes, which were repaid with the proceeds of the old
notes.
o LMS II, together with Holdco UK and Formica Limited, our indirect
subsidiary, entered into a new credit facility, which initially
provided for term loan borrowings in the aggregate principal amount
of $80.0 million and revolving loan borrowings in the aggregate
principal amount of $125.0 million. At the effective time, LMS II
borrowed $40.0 million of term loans available thereunder and $40.0
million revolving loans, which were repaid as described below, and
Holdco UK borrowed the pounds sterling equivalent of $40.0 million of
term loans. In addition, LMS II obtained approximately $30.0 million
aggregate amount of letters of credit to provide credit enhancement
for assumed indebtedness.
o The proceeds of LMS II's borrowings under the new credit facility and
from its issuance of the bridge notes were loaned by LMS II to LMS I.
o LMS I raised an additional $50.0 million from the sale of its senior
preferred stock and warrants to purchase common stock of Laminates
and loaned the proceeds, along with the proceeds of the loan received
from LMS II, to Laminates.
o Laminates used the proceeds of the loan, together with $87.1 million
in proceeds from the sale of preferred stock and common stock, to
fund the payment of the purchase price of the shares of Holdings and
the foreign affiliates.
Concurrently with the effectiveness of the acquisition:
o LMS II merged with and into Formica, and we succeeded to all of LMS
II's obligations in respect of the bridge notes and the new credit
facility,
o LMS I merged into Holdings,
o LMS III merged into Formica International, our wholly owned
subsidiary, and
o Laminates contributed to Holdings, which contributed to us, the shares
of stock of the foreign affiliates, which became our subsidiaries.
As a result of the acquisition, we are a wholly owned subsidiary of
Holdings, which in turn is a wholly owned subsidiary of Laminates.
Immediately after the effective time, Holdco UK converted the proceeds of
its borrowing of term loans under the new credit facility into U.S. dollars and
used this to purchase the stock of Formica Limited from Formica International.
Formica International then dividended the $40.0 million purchase price proceeds
to us. We then repaid the $40.0 million of revolving loan borrowings made under
the new credit facility at the effective time with the proceeds of the
dividend.
58
The following chart shows our corporate structure, but omitting most of
our subsidiaries, immediately before and immediately after the acquisition:
Corporate Organizational chart
Our Company
Acquisition Shells Before: After:
Laminates Laminates
LMSI Merger--> FM Holdings FM Holdings
LMSII
(issuer of bridge
notes and credit Merger--> Formica Formica
facility borrower)
LMSIII Merger--> Formica Formica
International International
Holdco UK
(credit facility Purchase of Holdco UK
borrower) stock\
\
--> Formica Limited Formica Limited
59
DESCRIPTION OF OUR CREDIT FACILITY
Our credit facility is provided by a syndicate of financial institutions
led by Donaldson, Lufkin & Jenrette Securities Corporation, as arranger, and
DLJ Capital Funding, as syndication agent. The new credit facility includes:
o an $85.0 million term loan facility, which provides for
>> a pound sterling-denominated facility in an amount equal to
the pound sterling equivalent, determined as of the date
the loans under that facility are made, of US$40.0 million,
>> a $35.0 million U.S. dollar-denominated facility
>> a Canadian dollar-denominated facility in an amount equal
to the Canadian dollar equivalent, determined as of the
date the loans under that facility are made, of US$10.0
million, and
o a $120.0 million revolving credit facility, which provides
for loans and under which up to $75.0 million in letters of
credit may be issued.
The term loan and revolving facilities each mature on May 1, 2004. A
substantial portion of the revolving credit facility may be made available to
our foreign subsidiaries in local currencies.
Loans under the new credit facility bear interest, at Formica's option, at
the alternate base rate or the reserve adjusted LIBOR rate plus, in each case,
an applicable margin. Formica pays commitment fees on the daily average unused
portion of the revolving credit facility. These fees are payable quarterly in
arrears and upon the maturity or termination of the revolving credit facility.
The applicable margins and commitment fees are determined based on the ratio of
consolidated total debt to consolidated EBITDA of Formica and its subsidiaries,
in each case as defined in the new credit facility.
Formica pays a letter of credit fee on the outstanding undrawn amounts of
letters of credit issued under the new credit facility at a rate per annum
equal (1) in the case of standby letters of credit, the then applicable margin
for Euro-Dollar loans and (2) in the case of documentary letters of credit,
1.25%, which shall be shared by all lender participating in the Letter of
Credit, and an additional 0.125% per annum fee to issuers of each letter of
credit.
The term loan is subject to the following amortization schedule:
Term Loan
Year Amortization (%)
1 0.0
2 2.5
3 10.0
4 20.0
5 25.0
6 42.5
The new credit facility is subject to mandatory prepayment:
o with the net cash proceeds of the sale or other disposition of any
property or assets of, or receipt of casualty proceeds by, Formica,
subject to various exceptions, including an exception for
reinvestment in the business of Formica and its subsidiaries,
o with 50% of the net cash proceeds received from the issuance of equity
securities of Formica to the extent that the leverage ratio exceeds
3.5:1,
o with the net cash proceeds received from issuances of debt securities
by Formica or any of its restricted subsidiaries, as defined in the
new credit facility, subject to various exceptions and
o with 50% of excess cash flow, as defined in the new credit facility,
for each fiscal year to the extent that the leverage ratio exceeds
3.5:1.
All mandatory prepayment amounts shall be applied first to the prepayment
of the term loan facility and thereafter to the prepayment of the revolving
credit facility.
Laminates, Holdings, and all existing or future domestic subsidiaries of
Formica are or will be guarantors of the new credit facility. Formica's
obligations under the new credit facility will be secured by
60
o all existing and after-acquired personal property of Formica
and the subsidiary guarantors, including a pledge of all of
the stock of all existing or future domestic subsidiaries of
Formica and a pledge of no more than 65% of the voting stock
of any foreign subsidiary,
o first-priority perfected liens on all material existing and
after-acquired real property fee and leasehold interests of
Formica and the subsidiary guarantors, subject to customary
permitted liens specified in the new credit facility,
o a pledge by Holdings of the stock of Formica and a pledge by Laminates
of the stock of Holdings, and
o negative pledge on all assets of Formica and its subsidiaries.
The new credit facility contains customary covenants and restrictions on
Formica's ability to engage in various activities, including, but not limited
to:
o limitations on engaging in businesses outside the building products
industry
o limitations in indebtedness
o limitations on liens
o limitations on investments
o limitations on dividends, stock redemptions and prepayments of
subordinated indebtedness
o limitations on capital expenditures
o limitations on modifications of subordinated debt instruments and
other material documents
o restrictions on our ability to enter into agreements prohibiting
>> the creation of liens on our assets
>> our subsidiaries' ability to make payments to us
o restrictions on mergers and acquisitions, sales of assets and leases o
limitations on sales of stock in our restricted subsidiaries
o limitations on sale and leaseback transactions
The new credit facility also contains financial covenants requiring
Formica to maintain:
o a minimum EBITDA
o a minimum ratio of EBITDA to cash interest expense
o a minimum ratio of EBITDA to fixed charges, including capital
expenditures, cash interest expense, scheduled debt amortization, cash
taxes and restricted payments
o a maximum leverage ratio.
The covenants described above are subject to significant limitations and
exceptions. In addition, many of the terms used in the covenants have specific
definitions in the credit facility which also include significant limitations
and exceptions. We have filed a copy of the credit facility with the SEC as an
exhibit to the registration statement of which this prospectus forms a part.
You should read the entire credit facility for information that may be
important to you.
Borrowings under the new credit facility are subject to significant
conditions, including the absence of any material adverse change. (See "Risk
Factors--We have substantial debt, which could limit our cash available for
other uses.")
If Perstorp Surface Materials is contributed to us by Holdings, we will
assume $110.0 million of debt, which will be included in our credit facility.
We expect that the $110.0 million will be a separate tranche that will mature
in approximately six years, with 1% amortization in each of the first five
years. We also expect 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. The interest rate on the new tranche of
borrowings is expected to be a margin over LIBOR that will be fixed
irrespective of our leverage ratio. We cannot assure you that the contribution
of Perstorp Surface Materials to us will occur.
61
DESCRIPTION OF NOTES
The old and new notes were issued under an indenture dated as of February
22, 1999 between Formica and Summit Bank as trustee. The following summary
highlights material terms of the indenture. Because this is a summary, it does
not contain all of the information that is included in the indenture. You
should read the entire indenture, including the definitions of many terms used
below. The indenture is by its terms subject to and governed by the Trust
Indenture Act of 1939, as amended. We have filed a copy of the indenture as an
exhibit to the registration statement of which this prospectus forms a part. In
this description of notes, "Formica" refers only to Formica Corporation and not
any of its subsidiaries.
The terms of the new notes are identical in all material respects to the
terms of the old notes, except for the transfer restrictions and registration
rights relating to the old notes. The exchange offer period expired on October
1, 1999, with all outstanding old notes exchanged for the new notes.
Many of the restrictive covenants described below apply only to Formica
and its "Restricted" Subsidiaries. As described below in the definition of
"Unrestricted Subsidiary," we may designate any of our subsidiaries as
unrestricted, and therefore not subject to the restrictive covenants, so long
as we satisfy the conditions described in that definition. As of the date of
the indenture, all of our subsidiaries are Restricted Subsidiaries.
Principal, Maturity and Interest
The notes:
o are our general obligations
o are subordinated to all our Senior Indebtedness
o are not guaranteed by any of our subsidiaries
o are initially limited in aggregate principal amount to $215.0 million
o mature on March 1, 2009
o bear interest at a rate of 10 7/8% per year
o are issued in denominations of $1,000 and in higher integral multiples
of $1,000.
We will pay interest on the notes in arrears every March 1 and September
1, beginning September 1, 1999, to holders of record on the immediately
preceding February 15 and August 15. Interest on the new notes will accrue from
the most recent date on which we paid interest on the old notes or the new
notes or, if no interest has been paid, from the date when we originally issued
the old notes. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
We will make all payments of principal, premium, interest and liquidated
damages on the notes:
o at our office or agency that we have for that purpose within the City
and State of New York
o or, at our option, we can pay interest and liquidated damages by check
that we may mail to you at your address listed in the register of note
holders
o but, for global notes, all payments will be paid by wire transfer of
immediately available funds to the account of the Depository Trust
Company or any successor.
Until we choose another office or agency, the office of the trustee in New
York will be our office for that purpose.
So long as we satisfy the covenants, we can issue additional notes in an
unlimited amount
So long as the issuance of notes does not violate any of the covenants
described below, we may issue additional notes, without limit, under the
indenture having the same terms in all respects as the notes, or in all
respects except for the payment of interest on the notes
(1) scheduled and paid prior to the date of issuance of those
notes; or
(2) payable on the first Interest Payment Date
following the date of issuance.
The notes offered hereby and any additional notes would be treated as a
single class for all purposes under the indenture.
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Subordination
The notes rank junior to all of our Senior Indebtedness. Under the
circumstances described below, you will not be entitled to receive any payments
on your notes until Senior Indebtedness of Formica has been paid in full in
cash. As a result, you may recover less of the amounts that we owe to you than
creditors who are holders of Senior Indebtedness.
Subordination in bankruptcy, insolvency or other similar circumstances
Upon
o any distribution to creditors of Formica in:
>> a liquidation or dissolution of Formica
>> a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Formica or its property
>> an assignment for the benefit of creditors
>> any marshalling of Formica's assets and liabilities
(1) holders of Senior Indebtedness will be entitled to receive payment
in full in cash or cash equivalents of all Obligations due in respect
of Senior Indebtedness, including interest after the commencement of
any such proceeding at the rate specified in the applicable Senior
Indebtedness, before the holders of notes will be entitled to receive
any payment with respect to the Subordinated Note Obligations, and
(2) until all Obligations with respect to Senior Indebtedness are paid in
full in cash or cash equivalents, any distribution to which the
holders of notes would be entitled shall be made to the holders of
Senior Indebtedness.
However, you may receive and retain Permitted Junior Securities and
payments made from the trust described under "--Legal Defeasance and Covenant
Defeasance".
Subordination upon default of Designated Senior Indebtedness
Formica also may not make any payment upon or in respect of the
Subordinated Note Obligations except in Permitted Junior Securities or from the
trust described under "--Legal Defeasance and Covenant Defeasance" if:
(1) a default in the payment of the principal of, premium, if any, or
interest on or commitment fees relating to, Designated Senior
Indebtedness occurs and is continuing beyond any applicable
period of grace; or
(2) any other default occurs and is continuing with respect to
Designated Senior Indebtedness that permits holders of the
Designated Senior Indebtedness as to which that default relates
to accelerate its maturity and the trustee receives a notice of
that default (a "Payment Blockage Notice") from Formica or the
holders of any Designated Senior Indebtedness.
Payments on the notes may and shall be resumed:
(A) in the case of a payment default, upon the date on which that
default is cured or waived; and
(B) in case of a nonpayment default, the earlier of:
the date on which that nonpayment default is cured or waived or
179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any
Designated Senior Indebtedness has been accelerated.
o No new period of payment blockage may be commenced unless and
until 360 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice.
o No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the
trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless that default shall have been
waived or cured for a period of not less than 90 days.
We must promptly notify holders of Senior Indebtedness if payment of the
notes is accelerated because of an Event of Default.
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Optional Redemption
Except as provided below, we may not redeem the notes prior to March 1,
2004. Thereafter, we may redeem the notes, in whole or in part, upon not less
than 30 nor more than 60 days' notice, in cash at the redemption prices,
expressed as percentages of principal amount, set forth below, plus accrued and
unpaid interest and liquidated damages to the redemption date, if redeemed
during the twelve-month period beginning on March 1 of the years indicated
below:
Year Percentage
2004 105.438%
2005 103.625%
2006 101.813%
2007 and thereafter 100.000%
In addition, on or before March 1, 2002, we may redeem up to 35% of the
aggregate principal amount of notes ever issued under the indenture in cash at
a redemption price of 110.875% of their principal amount, plus accrued and
unpaid interest and liquidated damages to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings; provided that
o at least 65% of the aggregate principal amount of notes ever
issued under the indenture remains outstanding immediately
after the occurrence of any redemption under this provision
and
o the redemption shall occur within 90 days of the date of the closing
of any Public Equity Offering.
Selection of notes when only a portion of the notes are being redeemed
If we are redeeming less than all of the notes at any time, the trustee
will select the notes for redemption
o if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange
o if the notes are not so listed
>> on a pro rata basis
>> by lot or
>> by any other method as the trustee shall deem fair and appropriate
provided that no notes of $1,000 or less shall be redeemed in part. If we
intend to redeem any note in part, the notice of redemption that we send to you
will state the portion of the principal amount to be redeemed, and we will
issue to you a new note in principal amount equal to the unredeemed portion
when we cancel the original note.
We will send registered holders a notice of any redemption
We will mail notice of any redemption by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
Once we have called a note for redemption, it becomes due on the
redemption date. On and after the redemption date, interest will no longer
accrue on notes or portions of them called for redemption.
Mandatory Redemption
We are not required to make mandatory redemption of, or sinking fund
payments with respect to, the notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each holder of notes will
have the right to require Formica to repurchase all or any part equal to $1,000
or an integral multiple thereof of each holder's notes under the offer
described below (the "Change of Control Offer"). The Change of Control Offer
will be made at an offer price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest and liquidated damages to the
date of repurchase (the "Change of Control Payment").
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Within 60 days following any Change of Control, Formica will, or will
cause the trustee to, mail a notice to each holder
o describing the transaction or transactions that constitute the Change
of Control
o offering to repurchase notes on the date specified in that notice,
which date shall be no earlier than 30 days and no later than 60 days
from the date that notice is mailed (the "Change of Control Payment
Date"), under the procedures required by the indenture and described
in that notice.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with the repurchase of the
notes as a result of a Change of Control. To the extent that the provisions
of any securities laws or regulations conflict with the provisions of the
indenture relating to that Change of Control Offer, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations described in the indenture by virtue thereof.
On the Change of Control Payment Date, Formica will, to the extent lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions thereof being
purchased by Formica.
The Paying Agent will promptly mail to each holder of notes so tendered
the Change of Control Payment for those notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book-entry, to each holder
a New note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each new note will be in a principal amount
of $1,000 or an integral multiple thereof.
Prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, we will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding Senior Indebtedness to permit the
repurchase of notes required by this covenant.
Formica will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the indenture are applicable. Except as
described above, the indenture does not contain provisions that permit the
holders of the notes to require that we repurchase or redeem the notes in the
event of a takeover, recapitalization or similar transaction.
Our credit facility prohibits us from purchasing any notes and also
provides that specified change of control events, which may include events not
otherwise constituting a Change of Control under the indenture, with respect to
Formica would constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Indebtedness to which we become a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when we are prohibited from purchasing notes, we could seek
the consent of our lenders to the purchase of notes or could attempt to
refinance the borrowings that contain that prohibition. If we do not obtain
such a consent or repay those borrowings, we will remain prohibited from
purchasing notes. In that case, our failure to purchase tendered notes would
constitute an Event of Default under the indenture, which would, in turn,
constitute a default under our credit facility. In those circumstances, the
subordination provisions in the indenture would likely restrict payments to the
holders of notes.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by Formica and purchases
all notes validly tendered and not withdrawn under that Change of Control
Offer.
Asset Sales
Formica will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
65
(1) Formica or that Restricted Subsidiary, as the case may be,
receives consideration at the time of that Asset Sale at
least equal to the fair market value of the assets or Equity
Interests issued or sold or otherwise disposed of;
(2) Formica delivers a resolution of its board of directors and
an Officers' Certificate to the trustee stating that the
consideration received was at least equal to fair market
value; and
(3) at least 75% of the consideration therefor received by
Formica or that Restricted Subsidiary is in the form of:
(a) cash or cash equivalents; or
(b) property or assets that are used or useful in a
Permitted Business, or the Capital Stock of any
Person engaged in a Permitted Business if, as a
result of the acquisition by Formica or any
Restricted Subsidiary thereof, that Person becomes a
Restricted Subsidiary.
In determining whether the consideration received is in the form of cash
or cash equivalents, the following will be considered cash:
o the amount of any liabilities, as shown on Formica's or that
Restricted Subsidiary's most recent balance sheet, of Formica or any
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the notes or any
guarantee thereof) that are assumed by the transferee of any such
assets under a customary novation agreement that releases Formica or
such Restricted Subsidiary from further liability
o any securities, notes or other obligations received by Formica or any
such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods, converted
by Formica or that Restricted Subsidiary into cash or cash
equivalents, but only to the extent of the cash or cash equivalents
received
o any Designated Noncash Consideration received by Formica or any of its
Restricted Subsidiaries in that Asset Sale having an aggregate fair
market value, taken together with all other Designated Noncash
Consideration received under this clause that is at that time
outstanding, not to exceed 15% of Total Assets at the time of the
receipt of that Designated Noncash Consideration, with the fair
market value of each item of Designated Noncash Consideration being
measured at the time received and without giving effect to subsequent
changes in value
In addition, the 75% limitation referred to in clause (3) above will not
apply to any Asset Sale in which the cash or cash equivalents portion of the
consideration received, including any amounts deemed cash as stated above, is
equal to or greater than what the after-tax proceeds would have been had that
Asset Sale complied with the 75% limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Formica or any such Restricted Subsidiary shall apply the Net Proceeds,
at its option, or to the extent Formica is required to apply the Net Proceeds
according to the terms of the New Credit Facility, to either:
(1) repay or purchase Senior Indebtedness or Pari Passu Indebtedness of
Formica or any Indebtedness of any Restricted Subsidiary. However, if
Formica's repays or purchases Pari Passu Indebtedness of Formica, it
must
(a) if the notes are then redeemable, equally and ratably reduce
Indebtedness under the notes or
(b) if the notes may not then be redeemed, Formica shall make an
offer in accordance with the procedures set forth below for an
Asset Sale Offer to all holders of notes to purchase the notes
that would otherwise be redeemed; or
(2) an
o investment in property
o the making of a capital expenditure
o the acquisition of assets that are used or useful in a Permitted
Business or
o the acquisition of Capital Stock of any Person primarily engaged
in a Permitted Business if:
(a) as a result of the acquisition by Formica or any
Restricted Subsidiary of that Capital Stock, the Person
becomes a Restricted Subsidiary; or
66
(b) the Investment in the Capital Stock is permitted by clause
(f) of the definition of Permitted Investments.
Pending the final application of any such Net Proceeds, Formica may
temporarily reduce Indebtedness or otherwise invest those Net Proceeds in any
manner that is not prohibited by the indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $15.0 million,
Formica will be required to make an offer to all holders of notes (an "Asset
Sale Offer") to purchase the maximum principal amount of notes that may be
purchased out of the Excess Proceeds. The Asset Sale Offer will be made at an
offer price in cash in an amount equal to 100% of the principal amount, plus
accrued and unpaid interest and liquidated damages, if any, thereon to the date
of purchase, in accordance with the procedures set forth in the indenture.
To the extent that any Excess Proceeds remain after consummation of an
Asset Sale Offer, Formica may use the Excess Proceeds for any purpose not
otherwise prohibited by the indenture. If the aggregate principal amount of
notes surrendered by holders thereof in connection with an Asset Sale Offer
exceeds the amount of Excess Proceeds, the trustee shall select the notes to be
purchased as set forth under "--Selection of notes when only a portion of the
notes are to be redeemed." Upon completion of the offer to purchase, the amount
of Excess Proceeds shall be reset at zero.
Formica will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent
those laws and regulations are applicable in connection with the repurchase of
the notes under an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the indenture
relating to that Asset Sale Offer, Formica will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the indenture by virtue thereof.
Certain Covenants
Restricted Payments
Formica will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Formica's or any of its Restricted
Subsidiaries' Equity Interests, other than dividends or
distributions payable in Equity Interests (other than
Disqualified Stock) of Formica or dividends or distributions
payable to Formica or any Wholly Owned Restricted Subsidiary
of Formica;
(2) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of Formica, any of its Restricted
Subsidiaries or any other Affiliate of Formica, other than
any such Equity Interests owned by Formica or any Restricted
Subsidiary of Formica;
(3) make any principal payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for
value, any Indebtedness of Formica that is subordinated in
right of payment to the notes, except in accordance with the
mandatory redemption or repayment provisions set forth in the
original documentation governing that Indebtedness but not
any mandatory offer to repurchase upon the occurrence of any
event; or
(4) make any Restricted Investment
We refer to all payments and other actions described in clauses (1)
through (4) above as "Restricted Payments"
However, we may make a Restricted Payment if, at the time of and after
giving effect to that Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) Formica would, immediately after giving pro forma effect
thereto as if that Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness
under the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
67
(c) that Restricted Payment, together with
o the aggregate amount of all other Restricted Payments
made by Formica and its Restricted Subsidiaries after
the date of the indenture but
o excluding Restricted Payments permitted by the
following clauses of the next paragraph:
>> (1) to the extent that the declaration of any
dividend referred to therein reduces amounts
available for Restricted Payments under this
clause (c)
>> (2) through (9)
>> (11)
>> (12)
>> (14)
>> (16)
>> (17)
>> (19)
is less than the sum, without duplication, of:
(A) 50% of the Consolidated Net Income of Formica for the period,
taken as one accounting period, commencing April 1, 1999 to
the end of Formica's most recently ended fiscal quarter for
which internal financial statements are available at the time
of that Restricted Payment or if Consolidated Net Income for
that period is a deficit, less 100% of that deficit
plus
(B) 100% of the Qualified Proceeds received by Formica on or
after the date of the indenture from contributions to
Formica's capital or from the issue or sale on or after the
date of the indenture of Equity Interests of Formica or of
Disqualified Stock or convertible debt securities of Formica
to the extent that they have been converted into such Equity
Interests other than:
o Equity Interests, Disqualified Stock or convertible debt
securities sold to a Subsidiary of Formica
o Disqualified Stock or convertible debt securities that have
been converted into Disqualified Stock
plus
(C) the amount equal to the net reduction in Investments in
Persons after the date of the indenture who are not
Restricted Subsidiaries other than Permitted Investments
resulting from:
(x) Qualified Proceeds received as a dividend, repayment of a
loan or advance or other transfer of assets, valued at
the fair market value thereof, to Formica or any
Restricted Subsidiary from those Persons;
(y) Qualified Proceeds received upon the sale or liquidation
of that Investment; and
(z) the redesignation of Unrestricted Subsidiaries (excluding
any increase in the amount available for Restricted
Payments under clause (10) or (15) below arising from the
redesignation of that Unrestricted Subsidiary) whose
assets are used or useful in, or which is engaged in, one
or more Permitted Business as Restricted Subsidiaries
(valued, proportionate to Formica's equity interest in
that Subsidiary, at the fair market value of the net
assets that Subsidiary at the time of that
redesignation); plus
(D) cash payments received by Formica on the Intercompany Note.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if on that date of declaration, that
payment would have complied with the provisions of the
indenture;
(2) (a) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness or Equity
Interests of Formica in exchange for, or out of the net cash
proceeds of the
68
substantially concurrent sale, other than to a Subsidiary of
Formica, of other Equity Interests of Formica other than any
Disqualified Stock, provided that the amount of any net cash
proceeds that are utilized for any redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded
from clause (c)(B) of the preceding paragraph;
(3) the defeasance, redemption, repurchase, retirement or other
acquisition of subordinated Indebtedness of Formica with the
net cash proceeds from an incurrence of, or in exchange for,
Permitted Refinancing Indebtedness;
(4) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of Formica, Laminates or
Holdings held by any member of Laminates', Holdings',
Formica's or any of its Restricted Subsidiaries')management
under any management equity subscription agreement or stock
option agreement and any dividend to Laminates or Holdings to
fund any repurchase, redemption, acquisition or retirement,
provided that:
(a) the aggregate price paid for all those repurchased,
redeemed, acquired or retired Equity Interests shall not
exceed:
(x) $7.5 million in any calendar year, with amounts in
any calendar year being carried over to succeeding
calendar years subject to a maximum, without giving
effect to the following clause (y), of $15.0 million
in any calendar year; plus
(y) the aggregate cash proceeds received by Formica
during that calendar year from any reissuance of
Interests by Formica, Laminates or Holdings to
members of management of Formica and its Restricted
Subsidiaries; and
(b) no Default or Event of Default shall have occurred and be
continuing immediately after that transaction;
(5) payments and transactions in connection with the Acquisition,
including any purchase price adjustment, the Acquisition
Financing, the offering, the New Credit Facility, including
commitment, syndication and arrangement fees payable
thereunder, and the application of the proceeds thereof, and
the payment of fees and expenses with respect thereto;
(6) the payment of dividends or the making of loans or advances
by Formica to Holdings not to exceed $5.0 million in any
fiscal year costs and expenses incurred by Holdings or
Laminates in its capacity as a holding company or for
services rendered by Holdings or Laminates on behalf of
Formica;
(7) payments or distributions to Holdings or Laminates under any
Tax Sharing Agreement;
(8) the payment of dividends by a Restricted Subsidiary on any
class of common stock of that Restricted Subsidiary if:
(a) that dividend is paid pro rata to all holders of that
class of common stock; and
(b) at least 51% of that class of common stock is held by
Formica or one or more of its Restricted Subsidiaries;
(9 the repurchase of any class of common stock of a Restricted
Subsidiary if
(a) that repurchase is made pro rata with respect to that of
common stock and
(b) at least 51% of that class of common stock is held by
Formica or one or more of its Restricted Subsidiaries;
(10) any other Restricted Investment made in a Permitted Business
which, together with all other Restricted Investments made
under this clause (10) since the date of the indenture, does
not exceed $25.0 million, in each case, after giving effect
to all subsequent reductions in the amount of any Restricted
Investment made under this clause (10), either as a result
of
(a) the repayment or disposition thereof for cash or
(b) the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, valued, proportionate to Formica's
equity interest in that Subsidiary at the time of that
redesignation, at the fair market value of the net assets
of that Subsidiary at the time of that redesignation,
with any subsequent reduction under clause (a) or (b) not to
exceed the amount of that Restricted Investment previously
made under this clause (10); provided that no Default or
Event of Default
69
shall have occurred and be continuing immediately after
making that Restricted Investment;
(11) the declaration and payment of dividends to holders of any
class or series of Disqualified Stock of Formica or any
Restricted Subsidiary issued on or after the date of the
indenture in accordance with the covenant described under the
caption "--Incurrence of Indebtedness Issuance of Preferred
Stock"; provided that no Default or Event of Default shall
have occurred and be continuing immediately after making that
Restricted Payment;
(12) repurchases of Equity Interests deemed to occur upon
exercise of stock options if that Equity Interests represent
a portion of the exercise price of those options;
(13) the payment of dividends or distributions on Formica's
common stock, following the first public offering of
Formica's common stock or Holdings' or Laminates' common
stock after the date of the indenture, of up to 6.0% per
annum of (a) the net proceeds received by Formica from that
public offering of its common stock or (b) the net proceeds
received by Formica from that public offering of Holdings' or
Laminates' common stock as common equity or preferred equity,
other than Disqualified Stock) other than, in each case, with
respect to public offerings with respect to Formica's common
stock or Holdings' or Laminates' common stock registered on
Form S-8; provided that no Default or Event of Default shall
have occurred and be continuing immediately after any such
payment of dividends or distributions;
(14) the cancellation or forgiveness, in whole or in part, or any
amendment to or refinancing of the Intercompany Note;
(15) any other Restricted Payment which, together with all other
Restricted Payments made under this clause (15) since the
date of the indenture, does not exceed $25.0 million, in each
case, after giving effect to all subsequent reductions in the
amount of any Restricted Investment made under this clause
(15) either as a result of
(a) the repayment or disposition thereof for cash or
(b) the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, valued, proportionate to Formica's
equity interest in that Subsidiary at the time of that
redesignation, at the fair market value of the net assets
of that Subsidiary at the time of that redesignation with
any subsequent reduction under clause (a) or (b) not to
exceed the amount of that Restricted Investment previously
made under this clause (15) provided that no Default or
Event of Default shall have occurred and be continuing
immediately after making that Restricted Payment;
(16) the pledge by Formica of the Capital Stock of an
Unrestricted Subsidiary of Formica to secure Non-Recourse
Debt of that Unrestricted Subsidiary;
(17) the purchase, redemption or other acquisition or retirement
for value of any Equity Interests of any Restricted
Subsidiary issued after the date of the indenture, provided
that the aggregate price paid for any such repurchased,
redeemed, acquired or retired Equity Interests shall not
exceed the sum of
(a) the amount of cash and Cash Equivalents received by that
Restricted Subsidiary from the issue or sale thereof and
(b) any accrued dividends thereon the payment of which would
be permitted under clause (11) above;
(18) any Investment in an Unrestricted Subsidiary that is funded
by Qualified Proceeds received by Formica on or after the
date of the indenture from contributions to Formica's
capital or from the issue and sale on or after the date of
the indenture of Equity Interests of Formica or of
Disqualified Stock or convertible debt securities to the
extent they have been converted into those Equity Interests
other than:
--Equity Interests, Disqualified Stock or convertible debt
securities sold to a Subsidiary of Formica and
--Disqualified Stock or convertible debt securities that
have been converted into Disqualified Stock
in an amount, measured at the time that Investment is made
and without giving effect to subsequent changes in value,
that does not exceed the amount of those Qualified Proceeds;
and
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(19) distributions or payments of Receivables Fees.
The board of directors of Formica may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if that designation would not cause a Default.
For purposes of making that designation, all outstanding Investments by Formica
and its Restricted Subsidiaries, except to the extent repaid in cash, in the
Subsidiary so designated will be deemed to be Restricted Payments at the time
of that designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Restricted Investments in an amount
equal to the greater of:
(a) the net book value of those Investments at the time of that
designation; and
(b) the fair market value of those Investments at the time of that
designation. That designation will only be permitted if that
Restricted Investment would be permitted at that time and if that
Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of:
(a) all non-cash Restricted Payments shall be the fair market value
on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Formica or that Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment;
and
(b) non-cash Qualified Proceeds shall be the fair market value on the date
of receipt thereof by Formica of those Qualified Proceeds. The fair
market value of any non-cash Restricted Payment shall be determined
by the board of directors of Formica whose resolution with respect
thereto shall be delivered to the trustee.
Not later than the date of making any Restricted Payment, Formica
shall deliver to the trustee an Officers' Certificate stating that that
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
o Formica will not, and will not permit any of its Restricted
Subsidiaries to incur any Indebtedness, including Acquired
Indebtedness
o Formica will not, and will not permit any of its Restricted
Subsidiaries to, issue any shares of Disqualified Stock
o Formica will not permit any of its Restricted Subsidiaries to issue
any shares of preferred stock
However, Formica or any Restricted Subsidiary may
o incur Indebtedness, including Acquired Indebtedness or
o issue shares of Disqualified Stock
if the Fixed Charge Coverage Ratio for Formica's most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which that additional
Indebtedness is incurred or that Disqualified Stock is issued would
have been at least 2.0 to 1, determined on a consolidated pro forma
basis, including a pro forma application of the net proceeds
therefrom, as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, as the case may be, at the
beginning of that four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(a) the incurrence by Formica and its Restricted Subsidiaries of
Indebtedness under the New Credit Facility and the Foreign Credit
Facilities; provided that the aggregate principal amount of all
Indebtedness (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of Formica and those
Restricted Subsidiaries thereunder) then classified as having been
incurred in reliance upon this clause (a) that remains outstanding
under the New Credit Facility and the Foreign Credit Facilities after
giving effect to those incurrence does not exceed an amount equal to
$280.0 million;
(b) the incurrence by Formica and its Restricted Subsidiaries of Existing
Indebtedness;
(c) the incurrence by Formica of Indebtedness represented by the notes and
the indenture;
(d) the incurrence by Formica and its Restricted Subsidiaries of
Indebtedness denominated in Spanish
71
pesetas, or a European common currency as a result of the
implementation of European Monetary Union and the cessation of use of
Spanish pesetas as the lawful currency of the Republic of Spain, in
an aggregate principal amount or accreted value, as applicable not to
exceed $10.0 million outstanding after giving effect to that
incurrence;
(e) the incurrence by Formica or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Expenditure Indebtedness, Capital
Lease Obligations or purchase money obligations, in each case,
incurred for the purpose of financing all or any part of the purchase
price or cost of construction or improvement of
--property, plant or equipment or
--Capital Stock of a Person that becomes a Restricted Subsidiary to
the extent of the fair market value of the property, plant or
equipment so acquired
used in the business of Formica or that Restricted Subsidiary, in an
aggregate principal amount or accreted value, as applicable, not to exceed
$30.0 million outstanding after giving effect to those incurrence;
(f) indebtedness arising from agreements of Formica or any Restricted
Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of that business, assets or
Restricted Subsidiary for the purpose of financing that acquisition;
provided that
(A) those Indebtedness is not reflected on the balance sheet of
Formica or any Restricted Subsidiary and
(B) the maximum assumable liability in respect of that
Indebtedness shall at no time exceed the gross proceeds
including non-cash proceeds actually received by
Formica and/or that Restricted Subsidiary in connection
with those disposition;
For purposes of clause (A), contingent obligations referred to in a
footnote or footnotes to financial statements and not otherwise reflected
on the balance sheet will not be deemed to be reflected on those balance
sheet. For purposes of clause (B), the fair market value of non-cash
proceeds will be measured at the time received and without giving effect
to any subsequent changes in value.
(g) the incurrence by Formica or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness, other than intercompany Indebtedness, that was
permitted by the indenture to be incurred;
(h) the incurrence by Formica or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Formica and/or any of its
Restricted Subsidiaries; provided that
(1) if Formica is the obligor on those Indebtedness, that
Indebtedness is expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes and
(2) (A) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness
being held by a Person other than Formica or a
Restricted Subsidiary thereof and
(B) any sale or other transfer of any such Indebtedness to a
Person that is not either Formica or a Restricted Subsidiary
thereof
shall be deemed, in each case, to constitute an incurrence of that
Indebtedness by Formica or that Restricted Subsidiary, as the case may
be, that was not permitted by this clause (h);
(i) the incurrence by Formica or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging
(A) interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of this indenture to be
outstanding and
(B) exchange rate risk with respect to agreements or Indebtedness of
that Person payable denominated in a currency other than U.S.
dollars,
provided that the agreements do not increase the Indebtedness of the
obligor outstanding at any time other
72
than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder;
(j) the guarantee by Formica or any of its Restricted
Subsidiaries of Indebtedness of Formica or a Restricted
Subsidiary of Formica that was permitted to be incurred by
another provision of this covenant;
(k) the incurrence by Formica or any of its Restricted
Subsidiaries of Indebtedness in connection with an
acquisition in an aggregate principal amount or accreted
value, as applicable, not to exceed $50.0 million outstanding
after giving effect to that incurrence;
(l) obligations in respect of performance and surety bonds and
completion guarantees provided by Formica or any Restricted
Subsidiary in the ordinary course of business; and
(m) the incurrence by Formica or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate
principal amount or accreted value, as applicable,
outstanding after giving effect to that incurrence, including
all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred under this
clause (m), not to exceed $40.0 million.
For purposes of determining compliance with this covenant:
o in the event that an item of Indebtedness meets the criteria
of more than one of the categories of Permitted Indebtedness
described in clauses (a) through (m) above or is entitled to
be incurred under the first paragraph of this covenant,
Formica shall, in its sole discretion, classify that item of
Indebtedness in any manner that complies with this covenant
and that item of Indebtedness will be treated as having been
incurred under only one of those clauses or under the first
paragraph hereof.
o Formica may, at any time, change the classification of an
item of Indebtedness or any portion thereof to any other
clause or to the first paragraph hereof provided that Formica
would be permitted to incur that item of Indebtedness or that
portion thereof under such other clause or the first
paragraph hereof, as the case may be, at that time of
reclassification.
o Accrual of interest, accretion or amortization of original
issue discount will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
All Indebtedness under the New Credit Facility and the Foreign Credit
Facilities outstanding on the date on which notes were first issued and
authenticated under the indenture shall be deemed to have been incurred on that
date in reliance on the first paragraph of the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock." As a result, Formica will be permitted to incur significant
additional secured indebtedness under clause (a) of the definition of
"Permitted Indebtedness." (See "Risk Factors.")
Liens
Formica will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien,
other than a Permitted Lien, that secures obligations under any Pari Passu
Indebtedness or subordinated Indebtedness of Formica on:
o any asset or property now owned or hereafter acquired by Formica or
any of its Restricted Subsidiaries,
or
o any income or profits therefrom or
o assign or convey any right to receive income therefrom,
unless the notes are equally and ratably secured with the obligations
so secured until that time as those obligations are no longer secured
by a Lien.
In any case involving a Lien securing subordinated Indebtedness of
Formica, that Lien must be subordinated to the Lien securing the notes to the
same extent that the subordinated Indebtedness is subordinated to the notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Formica will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or
73
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to
(a) (1) pay dividends or make any other distributions to Formica or
any of its Restricted Subsidiaries
(A) on its Capital Stock or
(B) with respect to any other interest or participation in, or
measured by, its profits, or
(2) pay any Indebtedness owed to Formica or any of its Restricted
Subsidiaries,
(b) make loans or advances to Formica or any of its Restricted
Subsidiaries or
(c) transfer any of its properties or assets to Formica or any of its
Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the date of the indenture;
(b) the New Credit Facility as in effect as of the date of the
indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or
refinancings thereof;
(c) the indenture and the notes;
(d) applicable law and any applicable rule, regulation or order;
(e) any agreement or instrument of a Person acquired by Formica or
any of its Restricted Subsidiaries as in effect at the time of
such acquisition, except to the extent created in contemplation
of such acquisition, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness,
that Indebtedness was permitted by the terms of the indenture to
be incurred;
(f) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature
described in clause (e) above on the property so acquired;
(h contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary under an
agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of
that Subsidiary;
(i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing that
Permitted Refinancing Indebtedness are, in the good faith
judgment of Formica's board of directors, not materially less
favorable, taken as a whole, to the holders of the notes than
those contained in the agreements governing the Indebtedness
being refinanced;
(j) secured Indebtedness otherwise permitted to be incurred under the
covenants described under "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and "--Liens" that limit the right
of the debtor to dispose of the assets securing that
Indebtedness;
(k) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(l) other Indebtedness or Disqualified Stock of Restricted
Subsidiaries permitted to be incurred subsequent to the Issuance
Date under the provisions of the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock";
(m) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of
business; and
(n) restrictions created in connection with any Receivables Facility
that, in the good faith determination of the board of directors
of Formica, are necessary or advisable to effect that
Receivables Facility.
74
Merger, Consolidation, or Sale of Assets
Formica may not
>> consolidate or merge with or into another Person, whether or not
Formica is the surviving corporation, or
>> sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more
related transactions, to another Person
unless:
(a) Formica is the surviving corporation or the Person formed by or
surviving any such consolidation or merger, if other than
Formica, or to which that sale, assignment, transfer, conveyance
or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any
state thereof or the District of Columbia;
(b) the Person formed by or surviving any such consolidation or
merger, if other than Formica, or the Person to which that sale,
assignment, transfer, conveyance or other disposition shall have
been made assumes all the obligations of Formica under the
Registration Rights Agreement, the notes and the indenture
pursuant to a supplemental indenture in a form reasonably
satisfactory to the trustee;
(c) immediately after that transaction no Default or Event of
Default exists; and
(d) Formica or the Person formed by or surviving any such
consolidation or merger, if other than Formica, or to which that
sale, assignment, transfer, conveyance or other disposition
shall have been made
(1) will, at the time of that transaction and after giving pro
forma effect thereto as if that transaction had occurred at
the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional
Indebtedness under the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described
under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or
(2) would, together with its Restricted Subsidiaries, have a
higher Fixed Charge Coverage Ratio immediately after that
transaction, after giving pro forma effect thereto as if
that transaction had occurred at the beginning of the
applicable four-quarter period, than the Fixed Charge
Coverage Ratio of Formica and its Restricted Subsidiaries
immediately prior to that transaction.
The foregoing clause (d) will not prohibit
o a merger between Formica and a Wholly Owned Subsidiary of Holdings
created for the purpose of holding the Capital Stock of Formica
o a merger between Formica and a Wholly Owned Restricted Subsidiary
o a merger between Formica and an Affiliate incorporated solely for the
purpose of reincorporating Formica in another State of the
United States
so long as, in each case, the amount of Indebtedness of Formica and its
Restricted Subsidiaries is not increased thereby.
Formica will not lease all or substantially all of its assets to any
Person.
Transactions with Affiliates
Formica will not, and will not permit any of its Restricted Subsidiaries to
o make any payment to, or
o sell, lease, transfer or otherwise dispose of any of its properties
or assets to, or
o purchase any property or assets from, or
o enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of,
any Affiliate of Formica (each of the foregoing, an "Affiliate
Transaction"), unless:
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(a) that Affiliate Transaction is on terms that are no less
favorable to Formica or that Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Formica or
that Restricted Subsidiary with an unrelated Person; and
(b) Formica delivers to the trustee, with respect to any
Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $7.5 million, either
(1) a resolution of the board of directors set forth in an
Officers' Certificate certifying that the Affiliate
Transaction complies with clause (a) above and that that
Affiliate Transaction has been approved by a majority of
the disinterested members of the board of directors or
(2) an opinion as to the fairness to the holders of that
Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking
firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions:
(a) customary directors' fees, indemnification or similar
arrangements or any employment agreement or other compensation plan
or arrangement entered into by Formica or any of its Restricted
Subsidiaries in the ordinary course of business, including ordinary
course loans to employees not to exceed (1) $5.0 million outstanding
in the aggregate at any time and (2) $2.0 million to any one
employee) and consistent with the past practice of Formica or that
Restricted Subsidiary;
(b) transactions between or among Formica and/or its Restricted
Subsidiaries;
(c) payments of customary fees by Formica or any of its
Restricted Subsidiaries to DLJ Merchant Banking and its Affiliates
made for any financial advisory, financing, underwriting or placement
services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or
divestitures which are approved by a majority of the board of
directors in good faith;
(d) any agreement as in effect on the date of the indenture or
any amendment thereto, so long as that amendment is not
disadvantageous to the holders of the notes in any material respect,
or any transaction contemplated thereby;
(e) payments and transactions in connection with
o the Acquisition and the Acquisition Financing
o the New Credit Facility, including commitment, syndication and
arrangement fees payable thereunder, and
o the offering, including underwriting discounts and commissions in
connection therewith,
o and the application of the proceeds thereof, and the payment of
the fees and expenses with respect thereto;
(f) Restricted Payments that are permitted by the provisions of the
indenture described under the caption "--Restricted Payments" and any
Permitted Investments;
(g) sales of accounts receivable, or participations therein, in connection
with any Receivables Facility; and
(h) transactions under the Intercompany Note, and any amendment or
refinancing thereof.
Sale and Leaseback Transactions
Formica will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction; provided that Formica or any
Restricted Subsidiary may enter into a sale and leaseback transaction if:
(a) Formica or that Restricted Subsidiary, as the case may be, could have
(1) incurred Indebtedness in an amount equal to the
Attributable Indebtedness relating to that sale and
leaseback transaction under the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant
described under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock" and
(2) incurred a Lien to secure that Indebtedness under the covenant
described under the caption "--
76
Liens";
(b) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, as determined in
good faith by the board of directors and set forth in an
Officers' Certificate delivered to the trustee, of the property
that is the subject of that sale and leaseback transaction; and
(c) the transfer of assets in that sale and leaseback transaction
is permitted by, and Formica applies the proceeds of that
transaction in compliance with, the covenant described under
the caption "Repurchase at the Option of Holders--Asset Sales."
No Senior Subordinated Indebtedness
Formica will not Incur any Indebtedness that is subordinate or junior
in right of payment to any Senior Indebtedness and senior in right of payment
to the notes.
Reports
Whether or not required by the rules and regulations of the SEC, so
long as any notes are outstanding, Formica will furnish to the holders of
notes:
(a) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q
and 10-K if Formica were required to file those Forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by Formica's
certified independent accountants; and
(b) all current reports that would be required to be filed with the
SEC on Form 8-K if Formica were required to file those reports,
in each case, within the time periods specified in the SEC's
rules and regulations.
However, Formica may deliver financial information with respect to its
direct or indirect parent if Formica delivers to the trustee an Officer's
Certificate certifying that the financial information is substantially
equivalent to the financial information with respect to Formica)
In addition:
o following the completion of the exchange offer contemplated by
the Registration Rights Agreement, whether or not required by
the rules and regulations of the SEC, Formica will file a copy
of all that information and reports with the SEC for public
availability within the time periods specified in the SEC's
rules and regulations, unless the SEC will not accept such a
filing, and make that information available to securities
analysts and prospective investors upon request
o or so long as any notes remain outstanding, it will furnish to
the holders and to securities analysts and prospective
investors, upon their request, the information required to be
delivered under Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
Each of the following constitutes an Event of Default:
(a) default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the notes, whether or not
prohibited by the subordination provisions of the indenture;
(b) default in payment when due of the principal of or premium, if any, on
the notes, whether or not prohibited by the subordination provisions
of the indenture;
(c) failure by Formica or any of its Restricted Subsidiaries for 30
days after receipt of notice from the trustee or holders of at
least 25% in principal amount of the notes then outstanding to
comply with the provisions described under the captions
"Repurchase at the Option of Holders--Change of Control,"
"--Asset Sales," "Certain Covenants--Restricted Payments,"
"--Incurrence of Indebtedness and Issuance of Preferred Stock"
or "Merger, Consolidation or Sale of Assets";
(d) failure by Formica for 60 days after notice from the trustee or
the holders of at least 25% in principal amount of the notes
then outstanding to comply with any of its other agreements in
the indenture or the notes;
(e) default under any mortgage, indenture or instrument under which
there may be issued or by which
77
there may be secured or evidenced any Indebtedness for money borrowed
by Formica or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by Formica or any of its Restricted
Subsidiaries), whether that Indebtedness or guarantee now exists, or
is created after the date of the indenture, which default
(1) is caused by a failure to pay Indebtedness at its stated
final maturity, after giving effect to any applicable grace
period provided in that Indebtedness (a "Payment Default")
or
(2) results in the acceleration of that Indebtedness prior to
its stated final maturity and, in each case, the principal
amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which
has been so accelerated, aggregates $10.0 million or more;
(f) failure by Formica or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $10.0 million, net of
any amounts with respect to which a reputable and creditworthy
insurance company has acknowledged liability in writing, which
judgments are not paid, discharged or stayed for a period of 60
days; and
(g) specified events of bankruptcy or insolvency with respect to
Formica or any of its Restricted Subsidiaries that is a
Significant Subsidiary.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes may
declare all the notes to be due and payable immediately. However, so long as
any Indebtedness permitted to be incurred under the New Credit Facility shall
be outstanding, that acceleration shall not be effective until the earlier of:
(a) an acceleration of any such Indebtedness under the New Credit
Facility; or
(b) five business days after receipt by Formica and the
administrative agent under the New Credit Facility of written
notice of that acceleration.
Notwithstanding the preceding paragraph, in the case of an Event of
Default arising from specified events of bankruptcy or insolvency with respect
to Formica or any Significant Subsidiary, all outstanding notes will become due
and payable without further action or notice. Holders of the notes may not
enforce the indenture or the notes except as provided in the indenture.
In the event of a declaration of acceleration of the notes because an
Event of Default has occurred and is continuing as a result of the acceleration
of any Indebtedness described in clause (e), the declaration of acceleration of
the notes shall be automatically annulled if the holders of any Indebtedness
described in clause (e) have rescinded the declaration of acceleration in
respect of that Indebtedness within 30 days of the date of that declaration and
if
(1) the annulment of the acceleration of the notes would not conflict with
any judgment or decree of a court of competent jurisdiction and
(2) all existing Events of Default, except non-payment of principal
or interest on the notes that became due solely because of the
acceleration of the notes, have been cured or waived.
The following is a brief summary of the provisions of the indenture relating to
enforcement of the indenture:
o Formica is required to deliver to the trustee annually a
statement regarding compliance with the indenture.
o Formica is also required upon becoming aware of any Default or
Event of Default to deliver to the trustee a statement
specifying that Default or Event of Default.
o The trustee may withhold from holders of the notes notice of
any continuing Default or Event of Default, except a Default or
Event of Default relating to the payment of principal or
interest, if it determines that withholding notice is in their
interest.
o Subject to specified limitations described in the indenture,
holders of a majority in principal amount of the then
outstanding notes may direct the trustee in its exercise of any
trust or power.
o The holders of a majority in aggregate principal amount of the
notes then outstanding by notice to the trustee may on behalf
of the holders of all of the notes waive any existing Default
or Event of Default and its consequences under the indenture
except a continuing Default or Event of Default in the payment
of interest on, or the principal of, the notes.
78
No Personal Liability of Member, Directors, Officers, Employees
and Stockholders
No member, director, officer, employee, incorporator or stockholder of
Formica, as such, shall have any liability for any obligations of Formica under
the notes or the indenture or for any claim based on, in respect of, or by
reason of, those obligations or their creation. Each holder of notes by
accepting a note waives and releases all that liability. The waiver and release
are part of the consideration for issuance of the notes. That waiver may not be
effective to waive liabilities under the federal securities laws. It is the
view of the SEC that the waiver is against public policy.
Legal Defeasance and Covenant Defeasance
Formica may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes, and the indenture
("Legal Defeasance") except for:
(a) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest and
liquidated damages, if any, on those notes when those payments
are due from the trust referred to below;
(b) Formica's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an office
or agency for payment and money for security payments held in
trust;
(c) the rights, powers, trusts, duties and immunities of the trustee, and
Formica's obligations in connection therewith; and
(d) the Legal Defeasance provisions of the indenture.
In addition, Formica may, at its option and at any time, elect to have
its obligations released with respect to specified covenants that are described
in the indenture ("Covenant Defeasance") and thereafter any omission to comply
with those obligations shall not constitute a Default or Event of Default with
respect to the notes. In the event Covenant Defeasance occurs, some events
described under "Events of Default and Remedies" will no longer constitute an
Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) Formica must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in
those amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest and
liquidated damages, if any, on the outstanding notes on the
stated maturity or on the applicable redemption date, as the case
may be, and Formica must specify whether the notes are being
defeased to maturity or to a particular redemption date;
(b) in the case of Legal Defeasance, Formica shall have delivered to
the trustee an opinion of counsel in the United States reasonably
acceptable to the trustee confirming that
(1) Formica has received from, or there has been published by, the
Internal Revenue Service a ruling or
(2) since the date of the indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that, and based thereon that opinion of
counsel shall confirm that, subject to customary assumptions and
exclusions, the holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of
that Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have
been the case if that Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance, Formica shall have delivered
to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that, subject to
customary assumptions and exclusions, the holders of the
outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of that Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if that Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of that deposit, other than a Default or
Event of Default resulting from the borrowing of funds to be
applied to that deposit,
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or, insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 123rd day
after the date of deposit;
(e) that Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any
material agreement or instrument, other than the indenture, to
which Formica or any of its Subsidiaries is a party or by which
Formica or any of its Subsidiaries is bound;
(f) Formica must have delivered to the trustee an opinion of counsel
to the effect that, subject to customary assumptions and
exclusions, after the 123rd day following the deposit, the trust
funds will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or any analogous New York State law
provision or any other applicable federal or New York bankruptcy,
insolvency, reorganization or similar laws affecting creditors'
rights generally;
(g) Formica must deliver to the trustee an Officers' Certificate
stating that the deposit was not made by Formica with the intent
of preferring the holders of notes over the other creditors of
Formica with the intent of defeating, hindering, delaying or
defrauding creditors of Formica or others; and
(h) Formica must deliver to the trustee an Officers' Certificate and
an opinion of counsel, which opinion may be subject to customary
assumptions and exclusions, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the
indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents. Formica may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. Formica is not required to transfer or exchange any note selected
for redemption. Also, Formica is not required to transfer or exchange any note
for a period of 15 days before a selection of notes to be redeemed. The
registered holder of a note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Generally, the indenture and the notes may be amended or supplemented with
majority consent
Except as provided in the next two paragraphs,
o the indenture and the notes may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of
the notes then outstanding and
o any
>> existing default or
>> compliance with any provision of the indenture or the notes
may be waived with the consent of the holders of a majority in principal
amount of the then outstanding notes.
Consents include those obtained in connection with a purchase of, or
tender offer or exchange offer for, notes.
The following provisions of the indenture and the notes may not be
amended, with respect to notes held by a non-consenting holder,
without unanimous consent
Without the consent of each holder affected, an amendment or waiver
may not, with respect to any notes held by a non-consenting holder:
(a) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes,
other than the provisions described under the caption "--Repurchase
at the Option of Holders";
(c) reduce the rate of or extend the time for payment of interest on any
note;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest or liquidated damages on the
notes, except a rescission of acceleration of the notes by the
holders of at least a majority in aggregate principal amount of the
notes and a waiver of the payment default that
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resulted from that acceleration;
(e) make any note payable in money other than that stated in the notes;
(f) make any change in the provisions of the indenture relating to waivers
of past Defaults;
(g) waive a redemption payment with respect to any note, other than the
provisions described under the caption "--Repurchase at the Option of
Holders"; or
(h) make any change in the foregoing amendment and waiver provisions.
The following provisions of the indenture and the notes may be amended or
supplemented with two-thirds consent
Notwithstanding the preceding paragraphs, any
(1) amendment to or waiver of the covenant described under the caption
"--Repurchase at the Option of Holders--Change of Control," and
(2) amendment to the provisions of article in the indenture which relates
to subordination
will require the consent of the holders of at least two-thirds in aggregate
principal amount of the notes then outstanding if that amendment would
materially adversely affect the rights of holders of notes.
Notwithstanding the preceding paragraphs, without the consent of any
holder of notes, Formica and the trustee may amend or supplement the indenture
or the notes:
o to cure any ambiguity, defect or inconsistency
o to provide for uncertificated notes in addition to or in place of
certificated notes
o to provide for the assumption of Formica's obligations to holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of Formica's assets
o to make any change that would provide any additional rights or
benefits to the holders of notes or that does not materially
adversely affect the legal rights under the indenture of any such
holder
o to comply with requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust indenture Act
o to provide for guarantees of the notes.
Governing Law
The indenture and the notes are governed by, and constructed in
accordance with, the laws of the State of New York, without regard to its
conflict of law principles.
Concerning the Trustee
The indenture contains limitations on the rights of the trustee,
should it become a creditor of any Company, to obtain payment of claims in some
cases, or to realize on some property received in respect of any such claim as
security or otherwise. The trustee will be permitted to engage in other
transactions. However, if it acquires any conflicting interest it must
eliminate that conflict within 90 days, apply to the SEC for permission to
continue or resign. Summit Bank, which is acting as the trustee, purchased old
notes in the initial offering.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the trustee, subject to
specified exceptions. The indenture provides that in case an Event of Default
shall occur which shall not be cured, the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to those provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of notes, unless that holder shall have offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Mr. Langone, the Chief Executive Officer of Formica, is a member of the
board of directors of Summit Bank.
Book-Entry, Delivery and Form
The certificates representing the new notes will be issued in fully
registered form, without coupons. Except as described below, the new notes will
be deposited with, or on behalf of, The Depository Trust Company,
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New York, New York, and registered in the name of Cede & Co. as DTC's nominee,
in the form of a registered global note.
The Global Note. Formica expects that under procedures established by
DTC (a) upon deposit of the global note, DTC or its custodian will credit on
its internal system interests in the global notes to the accounts of
participants who have accounts with DTC and (b) ownership of the global note
will be shown on, and the transfer of ownership thereof will be effected only
through
o records maintained by DTC or its nominee with respect to interests of
participants and
o the records of participants with respect to interests of persons other
than participants.
Ownership of beneficial interests in the global note will be limited
to participants or persons who hold interests through participants.
So long as DTC or its nominee is the registered owner or holder of the
new notes, DTC or that nominee will be considered the sole owner or holder of
the new notes represented by the global note for all purposes under the
indenture. No beneficial owner of an interest in the global note will be able
to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the indenture with respect to the new
notes.
Payments of the principal of or premium and interest on the global
note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of Formica, the trustee or any paying agent under the
indenture will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the global note or for maintaining, supervising or reviewing any
records relating to that beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of the
principal of or premium and interest on the global note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of that global note as
shown on the records of DTC or its nominee. We also expect that payments by
participants to owners of beneficial interests in the global note held through
those participants will be governed by standing instructions and customary
practice as is now the case with securities held for the accounts of customers
registered in the names of nominees for those customers. Those payments will be
the responsibility of those participants.
Transfers between participants in DTC will be effected in accordance
with DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a certificated exchange note for any reason,
including to sell new notes to persons in states which require physical
delivery of the new notes or to pledge those securities, that holder must
transfer its interest in the global note in accordance with the normal
procedures of DTC and with the procedures set forth in the indenture.
DTC has advised us that DTC will take any action permitted to be taken
by a holder of new notes, including the presentation of new notes for exchange
as described below, only at the direction of one or more Participants to whose
account at DTC interests in the global note are credited and only in respect of
that portion of the aggregate principal amount of new notes as to which that
participant or participants has or have given that direction. However, if there
is an event of default under the indenture, DTC will exchange the global note
for certificated new notes, which it will distribute to its participants.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered under the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and various other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interest in the global notes among Participants, it is
under no obligation to perform those procedures, and those procedures may be
discontinued at any time. Neither Formica nor the trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
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Certificated Notes. Interests in the global notes will be exchangeable or
transferable, as the case may be, for certificated notes if
(1) DTC
(a) notifies us that it is unwilling or unable to continue as
depositary for the global registered notes and we fail to appoint
a successor depositary or
(b) has ceased to be a clearing agency registered under the Exchange
Act,
(2) we, at our option, notify the trustee in writing that we elect to
cause the issuance of the notes in certificated form or
(3) a default or an event of default with respect to the notes has
occurred and is continuing.
In addition, you may exchange beneficial interests in the notes for
certificated notes upon request but only upon at least 20 days' prior written
notice given to the trustee by or on behalf of DTC in accordance with customary
procedures.
In all cases, certificated notes delivered in exchange for any global
notes or beneficial interest therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary in accordance with its customary procedures.
Certain Definitions
Set forth below are many defined terms used in the indenture. You
should read the indenture for the definition of any other capitalized terms
used in this description of the notes for which no definition is provided.
"Accounts Receivable Subsidiary" means an Unrestricted Subsidiary of
Formica to which Formica or any of its Restricted Subsidiaries sells any of its
accounts receivable under a Receivables Facility.
"Acquired Indebtedness" means, with respect to any specified Person:
(a) Indebtedness of any other Person existing at the time that other
Person is merged with or into or became a Subsidiary of that
specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, that other
Person merging with or into or becoming a Subsidiary of that
specified Person; and
(b) Indebtedness secured by a Lien encumbering an asset acquired by
that specified Person at the time that asset is acquired by that
specified Person.
"Acquisition" means the acquisition of Holdings and some affiliates of
Holdings by Laminates for consideration of $405.4 million plus or minus any
subsequent purchase price adjustment, the merger of LMS I, a subsidiary of
Laminates, into Holdings, the merger of LMS II, a subsidiary of LMS I, into
Formica, the merger of LMS III, a subsidiary of LMS II, into Formica
International and the contribution by Laminates to Formica of the stock of
those affiliates of Holdings.
"Acquisition Financing" means:
(a) the issuance and sale by Formica or its predecessor, LMS II of senior
subordinated increasing rate notes;
(b) the execution and delivery by Formica or its predecessor and some of
its subsidiaries of the New Credit Facility and the borrowing of
loans thereunder;
(c) the issuance and sale by Laminates of common stock and preferred stock
for consideration;
(d) the issuance and sale by LMS I of its preferred stock and
warrants to purchase Laminates common stock, the proceeds of each
of which were used to fund the purchase price for the Acquisition
and related fees and expenses; and
(e) the issuance and sale by Formica of the notes and repayment of
all amounts owed in connection with the senior subordinated
increasing rate notes.
"Affiliate" of any specified Person means any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, that specified Person. For purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of that Person, directly or indirectly,
whether through the ownership of voting securities, by contract or
83
otherwise, and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means;
(a) the sale, lease, conveyance, disposition or other transfer (a
"disposition") of any properties, assets or rights, including,
without limitation, by way of a sale and leaseback; and
(b) the issuance, sale or transfer by Formica or any of its
Restricted Subsidiaries of Equity Interests of any of Formica's
Restricted Subsidiaries, in the case of either clause (a) or (b),
whether in a single transaction or a series of related
transactions
(1) that have a fair market value in excess of $5.0 million or
(2) for net proceeds in excess of $5.0 million.
Notwithstanding the foregoing, the following items shall not be deemed
to be Asset Sales:
o dispositions in the ordinary course of business;
o a disposition of assets by Formica to a Restricted Subsidiary or by a
Restricted Subsidiary to Formica or to another Restricted Subsidiary;
o a disposition of Equity Interests by a Restricted Subsidiary to
Formica or to another Restricted Subsidiary;
o the sale and leaseback of any assets within 90 days of the acquisition
thereof; o foreclosures on assets;
o any exchange of like property under Section 1031 of the Internal
Revenue Code of 1986, as amended, for use in a Permitted Business;
o any sale of Equity Interests in, or Indebtedness or other securities
of, an Unrestricted Subsidiary;
o a Permitted Investment or a Restricted Payment that is permitted by
the covenant described under the caption "--Restricted Payments"; and
o sales of accounts receivable, or participations therein, in connection
with any Receivables Facility.
In addition, the sale, lease, conveyance or other disposition of all
or substantially all of the assets of Formica and its Subsidiaries taken as a
whole will be governed by the provisions of the indenture described under the
caption "--Change of Control" and/or the provisions described under the caption
"--Merger, Consolidation or Sale of Assets" and not by the provisions of the
Asset Sale covenant.
"Attributable Indebtedness" in respect of a sale and leaseback
transaction means, at the time of determination, the present value, discounted
at the rate of interest implicit in that transaction, determined in accordance
with GAAP, of the obligation of the lessee for net rental payments during the
remaining term of the lease included in that sale and leaseback transaction,
including any period for which that lease has been extended or may, at the
option of the lessor, be extended.
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction or any property or assets
acquired or constructed by that Person which have a useful life or more than
one year so long as:
(a) the purchase or construction price for that property or assets is
included in "addition to property, plant or equipment" in
accordance with GAAP;
(b) the acquisition or construction of that property or assets is not part
of any acquisition of a Person or line of business; and
(c) that Indebtedness is incurred within 90 days of the acquisition
or completion of construction of that property or assets.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital
lease that would at that time be required to be capitalized on a balance sheet
in accordance with GAAP.
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"Capital Stock" means:
(a) in the case of a corporation, corporate stock;
(b) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents,
however designated, of corporate stock;
(c) in the case of a partnership or limited liability company, partnership
or membership interests, whether general or limited; and
(d) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(a) Government Securities;
(b) any certificate of deposit maturing not more than 365 days after
the date of acquisition issued by, or demand deposit or time
deposit of, an Eligible Institution or any lender under the New
Credit Facility;
(c) commercial paper maturing not more than 365 days after the date
of acquisition of an issuer (other than an Affiliate of Formica)
with a rating, at the time as of which any investment therein is
made, of "A-3" or higher according to S&P or "P-2" or higher
according to Moody's or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named
rating agencies cease publishing ratings of investments;
(d) any bankers acceptances of money market deposit accounts issued by an
Eligible Institution; and
(e) any fund investing exclusively in investments of the types described
in clauses (a) through (d) above; and
(f) in the case of any Subsidiary organized or having its principal
place of business outside the United States, investments
denominated in the currency of the jurisdiction in which that
Subsidiary is organized or has its principal place of business
which are similar to the items specified in clauses (a) through
(e) above, including without limitation any deposit with a bank
that is a lender to any Restricted Subsidiary.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition
other than by way of merger or consolidation, in one or a
series of related transactions, of all or substantially all
of the assets of Formica and its Subsidiaries, taken as a
whole, to any "person" or "group" (as those terms are used in
Section 13(d) of the Exchange Act), other than the Principals
and their Related Parties;
(2) the adoption of a plan for the liquidation or dissolution of
Formica;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which
is that any "person" or "group" (as those terms are used in
Section 13(d) of the Exchange Act), other than the Principals
and their Related Parties, becomes the "beneficial owner" (as
that term is defined in Rule 13d-3 and Rule 13d-5 under the
Exchange Act), directly or indirectly through one or more
intermediaries, of 50% or more of the voting power of the
outstanding voting stock of Formica; or
(4) the first day on which a majority of the members of the board
of directors of Formica are not Continuing Members.
Please note that although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require Formica to repurchase those notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Formica and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of that Person and its Restricted
Subsidiaries for that period plus, to the extent deducted in computing
Consolidated Net Income:
(a) an amount equal to any extraordinary or non-recurring loss plus any
net loss realized
85
in connection with an Asset Sale;
(b) provision for taxes based on income or profits of that Person and its
Restricted Subsidiaries for that period;
(c) Fixed Charges of that Person for that period;
(d) depreciation, amortization, including amortization of
goodwill and other intangibles, and all other non-cash charges,
excluding any such non-cash charge, other than the 1998 Charges, to
the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash
expense that was paid in a prior period, of that Person and its
Restricted Subsidiaries for that period;
(e) net periodic post-retirement benefits;
(f) other income or expense net as set forth on the face of that Person's
statement of operations;
(g) expenses and charges of Formica related to the Acquisition
and Acquisition Financing, the New Credit Facility and the
application of the proceeds thereof which are paid, taken or
otherwise accounted for within 180 days of the completion of the
Acquisition and the Acquisition Financing; and
(h) any non-capitalized transaction costs incurred in connection
with actual, proposed or abandoned financings, acquisitions or
divestitures, including, but not limited to, financing and
refinancing fees and costs incurred in connection with the
Acquisition and Acquisition Financing,
in each case, on a consolidated basis and determined in accordance
with GAAP. Notwithstanding the preceding, the provision for taxes based on the
income or profits of, the Fixed Charges of, and the depreciation and
amortization and other non-cash charges of, a Restricted Subsidiary of a Person
shall be added to Consolidated Net Income to compute Consolidated Cash Flow
only to the extent and in the same proportion that Net Income of that
Restricted Subsidiary was included in calculating the Consolidated Net Income
of that Person.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum of, without duplication:
(a) the interest expense of that Person and its Restricted Subsidiaries
for that period, on a consolidated basis, determined in accordance
with GAAP including:
o amortization of original issue discount,
o non-cash interest payments,
o the interest component of all payments associated with Capital
Lease Obligations,
o imputed interest with respect to Attributable Debt,
o commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings,
and
o net payments, if any, under Hedging Obligations.
However, in no event shall any amortization of deferred financing costs be
included in Consolidated Interest Expense); and
(b) the consolidated capitalized interest of that Person and its
Restricted Subsidiaries for that period, whether paid or accrued; and
(c) Receivables Fees shall be deemed not to constitute Consolidated
Interest Expense.
Notwithstanding the preceding, the Consolidated Interest Expense with
respect to any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary shall be included only to the extent and in the same proportion that
the net income of that Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of that Person and its Restricted
Subsidiaries for that period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(a) the Net Income or loss of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of
86
dividends or distributions paid in cash to the referent Person or a
Restricted Subsidiary thereof;
(b) the Net Income or loss of any Restricted Subsidiary other than a
Subsidiary organized or having its principal place of business
outside the United States shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income or loss is not at the date
of determination permitted without any prior governmental approval
that has not been obtained or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary;
(c) the Net Income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of that
acquisition shall be excluded; and
(d) the cumulative effect of a change in accounting principles shall be
excluded.
"Continuing Members" means, as of any date of determination, any
member of the board of directors of Formica who:
(1) was a member of that board of directors immediately after completion
of the Acquisition and the Acquisition Financing; or
(2) was nominated for election or elected to that board of directors with
the approval of, or whose election to the board of directors was
ratified by, at least a majority of the Continuing Members who were
members of that board of directors at the time of that nomination or
election.
"CVC" means CVC European Equity Partners, L.P. and CVC European Equity
Partners (Jersey) L.P., and their respective Affiliates.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Noncash Consideration" means the fair market value of
non-cash consideration received by Formica or one of its Restricted
Subsidiaries in connection with an Asset Sale that is so designated as
Designated Noncash Consideration pursuant to an Officers' Certificate, setting
forth the basis of that valuation, executed by the principal executive officer
and the principal financial officer of Formica, less the amount of cash or Cash
Equivalents received in connection with a sale of that Designated Noncash
Consideration.
"Designated Senior Indebtedness" means
(1) any Indebtedness outstanding under the New Credit Facility; and
(2) any other Senior Indebtedness permitted under the indenture
the principal amount of which is $25.0 million or more and that
has been designated by Formica in writing to the trustee as
"Designated Senior Indebtedness."
"Disqualified Stock" means any Capital Stock that
(1) by its terms or by the terms of any security into which it is
convertible, or for which it is exchangeable, or
(2) upon the happening of any event other than any event solely
within the control of Formica,
matures or is mandatorily redeemable, under a sinking fund obligation
or otherwise, is exchangeable for Indebtedness (except to the extent
exchangeable at the option of that Person subject to the terms of any
debt instrument to which that Person is a party) or redeemable at the
option of the holder thereof, in whole or in part, on or prior to the
date on which the notes mature. However,
(1) any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right
to require Formica to repurchase that Capital Stock upon
the occurrence of a Change of Control or an Asset Sale
shall not constitute Disqualified Stock if the terms of
that Capital Stock provide that Formica may not
repurchase or redeem any such Capital Stock under those
provisions unless that repurchase or redemption complies
with the covenant described under the caption "--Certain
Covenants--Restricted Payments" and
(2) if that Capital Stock is issued to any plan for the
benefit of employees of Formica or its
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Subsidiaries or by any such plan to those employees, that Capital
Stock shall not constitute Disqualified Stock solely because it
may be required to be repurchased by Formica in order to
satisfy applicable statutory or regulatory obligations.
"DLJ Merchant Banking" means DLJ Merchant Banking Partners II, L.P. and its
Affiliates.
"Domestic Subsidiary" means a Subsidiary that is organized under the
laws of the United States or any State, district or territory thereof.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent in
foreign currency, whose short-term debt is rated "A-3" or higher according to
Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to Moody's
Investor Services, Inc. ("Moody's") or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Existing Indebtedness" means Indebtedness of Formica and its
Restricted Subsidiaries, other than Indebtedness under the New Credit Facility,
in existence on the date of the indenture, until those amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the
sum, without duplication, of:
(a) the Consolidated Interest Expense of that Person for that period; and
(b) all dividend payments on any series of preferred stock of that Person,
other than dividends
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for
any period, the ratio of:
the Consolidated Cash Flow of that Person for that period, exclusive
of amounts attributable to discontinued operations, as determined in
accordance with GAAP, or operations and businesses disposed of prior
to the Calculation Date
to
the Fixed Charges of that Person for that period, exclusive of
amounts attributable to discontinued operations, as determined in
accordance with GAAP, or operations and businesses disposed of prior
to the Calculation Date.
In the event that the referent Person or any of its Subsidiaries
incurs, assumes, guarantees or redeems any Indebtedness other than revolving
credit borrowings or issues or redeems preferred stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to that
incurrence, assumption, guarantee or redemption of Indebtedness, or that
issuance or redemption of preferred stock and the use of the proceeds
therefrom, as if the same had occurred at the beginning of the applicable
four-quarter reference period.
In addition, for purposes of making the computation referred to above,
the Acquisition and acquisitions that have been made by Formica or any of its
Subsidiaries, including all mergers or consolidations and any related financing
transactions, during the four-quarter reference period or subsequent to that
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for that reference period shall be calculated to include
the Consolidated Cash Flow of the acquired entities on a pro forma basis after
giving effect to cost savings reasonably expected to be realized in connection
with that acquisition, as determined in good faith by an officer of Formica
(regardless of whether that cost savings could then be reflected in pro forma
financial statements under GAAP, Regulation S-X promulgated by the SEC or any
other regulation or policy of the SEC) and without giving effect to clause (c)
of the proviso set forth in the definition of Consolidated Net Income.
"Foreign Credit Facilities" means any Indebtedness of a Restricted
Subsidiary organized or having its principal place of business outside the
United States. Indebtedness under the Foreign Credit Facilities outstanding on
the date on which the notes were first issued and authenticated under the
indenture shall be deemed to have been incurred on that date in reliance on the
first paragraph of the covenant described under the caption "--
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Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner (including, without limitation, letters of credit or
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the
obligations of that Person under:
(a) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
and
(b) other agreements or arrangements designed to protect that Person
against fluctuations in interest rates.
"Holder" means the registered holder of any note.
"Holdings" means FM Holdings, Inc., a Delaware corporation, the corporate
parent of Formica, or its successors.
"Incur" means to directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise
"Indebtedness" means, with respect to any Person, any indebtedness of
that Person in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or banker's acceptances or representing Capital
Lease Obligations or the balance deferred and unpaid of the purchase price of
any property or representing any Hedging Obligations, except any that balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing Indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of that Person
prepared in accordance with GAAP, as well as all Indebtedness of others secured
by a Lien on any asset of that Person (whether or not that Indebtedness is
assumed by that Person) and, to the extent not otherwise included, the
guarantee by that Person of any Indebtedness of any other Person, provided that
Indebtedness shall not include the pledge by Formica of the Capital Stock of an
Unrestricted Subsidiary of Formica to secure Non-Recourse Debt of that
Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any
date shall be:
(a) the accreted value thereof, together with any interest
thereon that is more than 30 days past due, in the case of any
Indebtedness that does not require current payments of interest; and
(b) the principal amount thereof, in the case of any other
Indebtedness provided that the principal amount of any Indebtedness
that is denominated in any currency other than United States dollars
shall be the amount thereof, as determined under the foregoing
provision, converted into United States dollars at the Spot Rate in
effect on the date that Indebtedness was incurred or, if that
indebtedness was incurred prior to the date of the indenture, the
Spot Rate in effect on the date of the indenture.
"Intercompany Note" means the note, and all obligations, including
interest, with respect thereto, issued by Holdings to Formica on the date of
the completion of the Acquisition to evidence the loan by Formica to Holdings
of some proceeds of the offering of bridge notes and borrowings under the New
Credit Facility, which proceeds partially funded the merger consideration and
costs and expenses in connection therewith.
"Investments" means, with respect to any Person, all investments by
that Person in other Persons in the forms of direct or indirect loans
(including guarantees by the referent Person of, and Liens on any assets of the
referent Person securing, Indebtedness or other obligations of other Persons),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP,
provided that an investment by Formica for consideration consisting of common
equity securities of Formica shall not be deemed to be an Investment. If
Formica or any Restricted Subsidiary of Formica sells or otherwise disposes of
any Equity Interests of any direct or indirect Restricted Subsidiary of Formica
such that,
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after giving effect to any such sale or disposition, that Person is no longer a
Subsidiary of Formica, Formica shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of that Restricted Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
under the caption "--Restricted Payments."
"Laminates" means Laminates Acquisition Co., a Delaware corporation, the
corporate parent of Holdings, or its successors.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of that asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Management Loans" means one or more loans by Formica, Laminates or
Holdings to officers and/or directors of Formica and any of its Restricted
Subsidiaries to finance the purchase by those officers and directors of common
stock of Holdings or Laminates; provided, however, that the aggregate principal
amount of all those Management Loans outstanding at any time shall not exceed
$5.0 million.
"MMI" means MMI Products, L.L.C. and its Affiliates.
"Net Income" means, with respect to any Person, the net income (loss)
of that Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(a) any gain or loss, together with any related provision for taxes on
that gain or loss, realized in connection with
(1) any Asset Sale, including, without limitation, dispositions in
sale and leaseback transactions or
(2) the extinguishment of any Indebtedness of that Person or any of
its Restricted Subsidiaries; and
(b) any extraordinary or nonrecurring gain or loss, together with any
related provision for taxes on that extraordinary or nonrecurring
gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by Formica
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of, without
duplication,
(1) the direct costs relating to that Asset Sale (including,
without limitation, legal, accounting and investment banking
fees, and sales commissions, recording fees, title transfer
fees and appraiser fees and cost of preparation of assets for
sale) and any relocation expenses incurred as a result
thereof,
(2) taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax
sharing arrangements)
(3) amounts required to be applied to the repayment of
Indebtedness (other than revolving credit Indebtedness
incurred under the New Credit Facility) secured by a Lien on
the asset or assets that were the subject of that Asset Sale
and
(4) any reserve established in accordance with GAAP or any amount
placed in escrow, in either case for adjustment in respect of
the sale price of that asset or assets until that time as
that reserve is reversed or that escrow arrangement is
terminated, in which case Net Proceeds shall include only the
amount of the reserve so reversed or the amount returned to
Formica or its Restricted Subsidiaries from that escrow
arrangement, as the case may be.
"New Credit Facility" means that certain Credit Agreement, dated as of
May 1, 1998 among Formica (formerly LMS II, Co.), some of its foreign
subsidiaries, various financial institutions party thereto, DLJ Capital
Funding, Inc., as syndication agent, Bankers Trust Company as administrative
agent and Credit Suisse First Boston, as documentation agent, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and, in each case, as amended, modified,
renewed, refunded, replaced or refinanced from time to time, including any
agreement:
(a) extending or shortening the maturity of any Indebtedness incurred
thereunder or contemplated thereby;
(b) adding or deleting borrowers or guarantors thereunder;
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(c) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder, provided that on the date that
Indebtedness is incurred it would not be prohibited by clause (i) of
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; or
(d) otherwise altering the terms and conditions thereof.
Indebtedness under the New Credit Facility outstanding on the date on
which notes are first issued and authenticated under the indenture
shall be deemed to have been incurred on that date in reliance on the
first paragraph of the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock."
"1998 Charges" means the $13.5 million of charges resulting from
changes in accounting estimates and the cost of terminated acquisition in the
four months ended April 30, 1998 and the five months ended September, 1998.
"Non-Recourse Debt" means Indebtedness:
(a) no default with respect to, which (including any rights that
the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit, upon notice, lapse of time or
both, any holder of any other Indebtedness of Formica or any of its
Restricted Subsidiaries to declare a default on that other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and
(b) as to which the lenders have been notified in writing that
they will not have any recourse to the stock (other than the stock of
an Unrestricted Subsidiary pledged by Formica to secure debt of that
Unrestricted Subsidiary) or assets of Formica or any of its
Restricted Subsidiaries;
provided that in no event shall Indebtedness of any Unrestricted
Subsidiary fail to be Non-Recourse Debt solely as a result of any
default provisions contained in a guarantee thereof by Formica or any
of its Restricted Subsidiaries if Formica or that Restricted
Subsidiary was otherwise permitted to incur that guarantee under the
indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering of the notes by Formica.
"Pari Passu Indebtedness" means Indebtedness of Formica that ranks
pari passu in right of payment to the notes.
"Permitted Business" means the building products and furnishings
industry and any business in which Formica and its Restricted Subsidiaries are
engaged on the date of the indenture or any business reasonably related,
incidental or ancillary thereto.
"Permitted Investments" means:
(a) any Investment in Formica or in a Restricted Subsidiary of
Formica;
(b) any Investment in cash or Cash Equivalents;
(c) any Investment by Formica or any Restricted Subsidiary of Formica in
a Person, if as a result of that Investment
(1) that Person becomes a Restricted Subsidiary of Formica or
(2) that Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, Formica or a Wholly
Owned Restricted Subsidiary of Formica;
(d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made under and in
compliance with the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(e) any Investment acquired solely in exchange for Equity Interests (other
than Disqualified Stock) of Formica;
(f) any Investment in a Person engaged in a Permitted Business
(other than an Investment in an Unrestricted Subsidiary)
having an aggregate fair market value, taken together with
all other
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Investments made under this clause (f) that are at that time
outstanding, not to exceed 15% of Total Assets at the time of that
Investment, with the fair market value of each Investment being
measured at the time made and without giving effect to subsequent
changes in value;
(g) investments relating to any special purpose Wholly Owned Subsidiary of
Formica organized in connection with a Receivables Facility that, in
the good faith determination of the board of directors of Formica,
are necessary or advisable to effect that Receivables Facility; and
(h) the Management Loans.
"Permitted Junior Securities" means Equity Interests in Formica or
debt securities of Formica that are subordinated to all Senior Indebtedness
(and any debt securities issued in exchange for Senior Indebtedness) to
substantially the same extent as, or to a greater extent than, the notes are
subordinated to Senior Indebtedness.
"Permitted Liens" means:
(a) Liens on property of a Person existing at the time that
Person is merged into or consolidated with Formica or any Restricted
Subsidiary, provided that those Liens were not incurred in
contemplation of that merger or consolidation and do not secure any
property or assets of Formica or any Restricted Subsidiary other than
the property or assets subject to the Liens prior to that merger or
consolidation;
(b) Liens existing on the date of the indenture;
(c) Liens securing Indebtedness consisting of Capitalized Lease
Obligations, purchase money Indebtedness, mortgage financings,
industrial revenue bonds or other monetary obligations, in each case
incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used
in the business of Formica or its Restricted Subsidiaries, or
repairs, additions or improvements to those assets, provided that
(1) those Liens secure Indebtedness in an amount not excess
of the original purchase price or the original cost of
any such assets or repair, additional or improvement
thereto (plus an amount equal to the reasonable fees and
expenses in connection with the incurrence of that
Indebtedness),
(2) those Liens do not extend to any other assets of Formica
or its Restricted Subsidiaries (and, in the case of
repair, addition or improvements to any such assets, that
Lien extends only to the assets (and improvements thereto
or thereon) repaired, added to or improved),
(3) the Incurrence of that Indebtedness is permitted by "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" and
(4) those Liens attach within 365 days of that purchase,
construction, installation, repair, addition or
improvement;
(d) Liens to secure any refinancings, renewals, extensions,
modification or replacements (collectively, "refinancing") (or
successive refinancings), in whole or in part, of any Indebtedness
secured by Liens referred to in the clauses above so long as that
Lien does not extend to any other property (other than improvements
thereto);
(e) Liens securing letters of credit entered into in the ordinary
course of business and consistent with past business practice;
(f) Liens on and pledges of the capital stock of any Unrestricted
Subsidiary securing Non-Recourse Debt of that Unrestricted
Subsidiary;
(g) Liens securing Indebtedness (including all Obligations) under the New
Credit Facility or any Foreign Credit Facility; and
(h) other Liens securing Indebtedness that is permitted by the
terms of the indenture to be outstanding having an aggregate
principal amount at any one time outstanding not to exceed $75.0
million.
"Permitted Refinancing Indebtedness" means any Indebtedness of Formica
or any of its Restricted Subsidiaries issued within 60 days after repayment of,
in exchange for, or the net proceeds of which are used to extend, refinance,
renew, replace, defease or refund other Indebtedness of Formica or any of its
Restricted
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Subsidiaries; provided that:
(a) the principal amount or accreted value, if applicable, of
that Permitted Refinancing Indebtedness does not exceed the principal
amount of or accreted value, if applicable, plus premium, if any, and
accrued interest on the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith);
(b) that Permitted Refinancing Indebtedness has a final maturity
date no earlier than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(c) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to
the notes, that Permitted Refinancing Indebtedness is subordinated in
right of payment to, the notes on terms at least as favorable, taken
as a whole, to the holders of notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Principals" means DLJ Merchant Banking, CVC and MMI.
"Public Equity Offering" means any issuance of common stock by Formica
(other than to Holdings and other than Disqualified Stock) or common stock or
preferred stock by Holdings or Laminates (other than Disqualified Stock) that
is registered under the Securities Act, other than issuances registered on Form
S-8 and issuances registered on Form S-4, excluding issuances of common stock
under employee benefit plans of Laminates, Holdings or Formica or otherwise as
compensation to employees of Formica, Laminates or Holdings.
"Qualified Proceeds" means any of the following or any combination of
the following:
(a) cash;
(b) Cash Equivalents;
(c) assets that are used or useful in a Permitted Business; and
(d) the Capital Stock of any Person engaged in a Permitted Business if, in
connection with the receipt by Formica or any Restricted Subsidiary
of Formica of that Capital Stock,
(A) that Person becomes a Restricted Subsidiary of Formica or any
Restricted Subsidiary of Formica or
(B) that Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Formica or any Restricted Subsidiary of Formica.
"Receivables Facility" means one or more receivables financing
facilities, as amended from time to time, under which Formica or any of its
Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable
Subsidiary.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold
in connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"Related Party" means, with respect to any Principal:
(a) any controlling stockholder or partner of that Principal on the date
of the indenture; or
(b) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding (directly or through one or more Subsidiaries) a 51% or more
controlling interest of which consist of the Principals and/or such
other Persons referred to in the immediately preceding clauses (a) or
(b).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Senior Indebtedness" means, with respect to any Person
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(1) all Obligations of that Person outstanding under the New
Credit Facility and all Hedging Obligations payable to a
lender or an Affiliate thereof or to a Person that was a
lender or an Affiliate thereof at the time the contract was
entered into under the New Credit Facility or any of its
Affiliates, including, without limitation, interest accruing
subsequent to the filing of, or which would have accrued but
for the filing of, a petition for bankruptcy, whether or not
that interest is an allowable claim in that bankruptcy
proceeding;
(2) any other Indebtedness, unless the instrument under which
that Indebtedness is incurred expressly provides that it is
subordinated in right of payment to any other Senior
Indebtedness of that Person and
(3) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include:
(a) any liability for federal, state, local or other taxes;
(b) any Indebtedness of that Person (other than under the New
Credit Facility) to any of its Subsidiaries or other
Affiliates;
(c) any trade payables; or
(d) any Indebtedness that is incurred in violation of the
indenture.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated under the Securities Act, as that Regulation is in effect on the
date hereof.
"Spot Rate" means, for any currency, the spot rate at which that
currency is offered for sale against United States dollars as determined by
reference to the New York foreign exchange selling rates, as published in The
Wall Street Journal on that date of determination for the immediately preceding
business day or, if that rate is not available, as determined in any publicly
available source of similar market data.
"Stated Maturity" means, with respect to any installment of interest
or principal on any series of Indebtedness, the date on which that payment of
interest or principal was scheduled to be paid in the original documentation
governing that Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any that interest or principal prior to the date
originally scheduled for the payment thereof. "Subsidiary" means, with respect
to any Person:
(a) any corporation, association or other business entity of
which more than 50% of the total voting power of shares of
Capital Stock entitled, without regard to the occurrence of
any contingency, to vote in the election of directors,
managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or
more of the other Subsidiaries of that Person (or a
combination thereof); and
(b) any partnership or limited liability company (1) the sole
general partner or the managing general partner or managing
member of which is that Person or a Subsidiary of that
Person or (2) the only general partners or managing members
of which are that Person or of one or more Subsidiaries of
that Person (or any combination thereof).
"Subordinated Note Obligations" means all Obligations with respect to
the notes, including, without limitation, principal, premium, if any, interest
and liquidated damages, if any, payable under the terms of the notes (including
upon the acceleration or redemption thereof), together with and including any
amounts received or receivable upon the exercise of rights of rescission or
other rights of action (including claims for damages) or otherwise.
"Tax Sharing Agreement" means any tax sharing agreement or arrangement
between Formica and Laminates and/or Holdings, as the same may be amended from
time to time; provided that in no event shall the amount permitted to be paid
under all those agreements and/or arrangements exceed the amount Formica would
be required to pay for income taxes were it to file a consolidated tax return
for itself and its consolidated Restricted Subsidiaries as if it were a
corporation that was a parent of a consolidated group.
"Total Assets" means the total consolidated assets of Formica and its
Restricted Subsidiaries, as shown on the most recent balance sheet (excluding
the footnotes thereto) of Formica.
"Unrestricted Subsidiary" means any Subsidiary that is designated by
the board of directors as an
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Unrestricted Subsidiary under a board resolution, but only to the extent that
Subsidiary:
(a) has no Indebtedness other than Non-Recourse Debt;
(b) is not party to any agreement, contract, arrangement or
understanding with Formica or any Restricted Subsidiary of
Formica unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to
Formica or that Restricted Subsidiary than those that might
be obtained at the time from Persons who are not Affiliates
of Formica;
(c) is a Person with respect to which neither Formica nor any of
its Restricted Subsidiaries has any direct or indirect
obligation (1) to subscribe for additional Equity Interests
(other than Investments described in clause (g) of the
definition of Permitted Investments) or (2) to maintain or
preserve that Person's financial condition or to cause that
Person to achieve any specified levels, of operating
results; and
(d) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of Formica or
any of its Restricted Subsidiaries. Any such designation by
the board of directors shall be evidenced to the trustee by
filing with the trustee a certified copy of the board
resolution giving effect to that designation and an
Officers' Certificate certifying that the designation
complied with the foregoing conditions and was permitted by
the covenant described under the caption entitled "--Certain
Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as a Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of that Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of Formica as of that date (and, if that Indebtedness is not
permitted to be incurred as of that date under the covenant described under the
caption entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," Formica shall be in default of that covenant).
The board of directors of Formica may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that the
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Formica of any outstanding Indebtedness of that Unrestricted
Subsidiary and the designation shall only be permitted if
(1) that Indebtedness is permitted under the covenant described
under the caption entitled "--Certain Covenants--Incurrence
of Indebtedness and Issuance Preferred of Stock" and
(2) no Default or Event of Default would be in existence
following that designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(a) the sum of the products obtained by multiplying (1) the
amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by
(2) the number of years (calculated to the nearest
one-twelfth) that will elapse between that date and the
making of that payment, by
(b) the then outstanding principal amount of that Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of that
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
that Person or by one or more Wholly Owned Subsidiaries of that Person. "Wholly
Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of
that Person all the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
that Person or by one or more Wholly Owned Restricted Subsidiaries of that
Person or by that Person and one or more Wholly Owned Restricted Subsidiaries
of that Person.
PLAN OF DISTRIBUTION
This prospectus is to be used by Donaldson, Lufkin & Jenrette Securities
Corporation in connection with offers and sales of the new notes in
market-making transactions effected from time to time. Donaldson, Lufkin &
Jenrette Securities Corporation may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form
of discounts and commissions, including from both counterparties when it acts
as agent for both. Such sales will be made at prevailing market prices at the
time of sale, at prices related thereto or at negotiated prices.
95
DLJ Merchant Banking, an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation, and certain of its affiliates beneficially own
approximately 42.0% of the common stock of Formica. Thompson Dean and Peter T.
Grauer, each of whom is a principal of DLJ Merchant Banking, are members of the
board of directors of Laminates, Holdings and Formica. Further, DLJ Capital
Funding, Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, acted as syndication agent in connection with the new credit
facility for which it received certain customary fees and expenses and
Laminates Funding, Inc., an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation, purchased a portion of the bridge notes, for which it
received customary fees and expenses. Donaldson, Lufkin & Jenrette Securities
Corporation has, from time to time, provided investment banking and other
financial advisory services to Formica in the past for which it has received
customary compensation, and will provide such services and financial advisory
services to Formica in the future. Donaldson, Lufkin & Jenrette Securities
Corporation acted as purchaser in connection with the initial sale of the old
notes and received an underwriting discount of approximately $3.5 million in
connection therewith. In addition, Donaldson, Lufkin & Jenrette Securities
Corporation received a advisory fee of $1.0 million in cash from Laminates
after the completion of the acquisition. (See "Certain Relationships and
Related Transactions.")
Donaldson, Lufkin & Jenrette Securities Corporation has informed Formica
that it does not intend to confirm sales of the new notes to any accounts over
which it exercises discretionary authority without the prior specific written
approval of such transactions by the customer.
Formica has been advised by Donaldson, Lufkin & Jenrette Securities
Corporation that, subject to applicable laws and regulations, Donaldson, Lufkin
& Jenrette Securities Corporation currently intends to make a market in the new
notes following completion of the exchange offer. However, Donaldson, Lufkin &
Jenrette Securities Corporation is not obligated to do so and any such
market-making may be interrupted or discontinued at any time without notice. In
addition, such market-making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act. There can be no assurance that an
active trading market will develop or be sustained. (See "Risk Factors--Trading
Market for the New Notes.")
Donaldson, Lufkin & Jenrette Securities Corporation and Formica have
entered into the Registration Rights Agreement with respect to the use by
Donaldson, Lufkin & Jenrette Securities Corporation of this prospectus. In that
agreement, Formica agreed to bear all registration expenses incurred under such
agreement, and Formica agreed to indemnify Donaldson, Lufkin & Jenrette
securities Corporation against a variety of liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Davis Polk & Wardwell, New York, New York will opine for Formica
whether the new notes are its valid and binding obligations.
CHANGE IN INDEPENDENT AUDITORS
On October 29, 1998, Formica dismissed its independent accountant,
Ernst & Young LLP. Ernst & Young's report on the financial statements for the
years ended December 31, 1997 and 1996 did not contain an adverse opinion or
disclaimer of opinion and was not modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was recommended by
the Audit Committee of the Board of Directors and approved by the full Board of
Directors on October 29, 1998. There were no disagreements with Ernst & Young
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. Please see Exhibit 16.1 to the
registration statement of which this prospectus forms a part.
Formica retained the accounting firm of Arthur Andersen LLP, on
October 29, 1998 to provide audit services for the four month period ended
April 30, 1998, the eight month period ended December 31, 1998 and the year
ended December 31, 1999. There were no consultations with Arthur Andersen LLP,
regarding the application of accounting principles to specific transactions, or
the type of audit opinion that might be rendered at the date of assignment.
EXPERTS
The consolidated balance sheets of Formica Corporation and its
subsidiaries as of December 31, 1998 and December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the four months ended April 30, 1998, the eight months ended December 31, 1998
and the year ended December 31, 1999, appearing in this prospectus and the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
96
The consolidated financial statements, including the Financial
Statement Schedule of Formica Corporation for the year ended December 31, 1997,
appearing in this Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Act with respect to our offering
of the new notes. This prospectus does not contain all the information included
in the registration statement and the exhibits and schedules thereto. You will
find additional information about us and the new notes in the registration
statement. The registration statement and the exhibits and schedules thereto
may be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the public reference facilities of the SEC's Regional Offices:
New York Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of this material may also be obtained
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC
also maintains a site on the World Wide Web (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, including Formica, that file electronically with the SEC.
Statements made in this prospectus about legal documents may not necessarily be
complete and you should read the documents which are filed as exhibits to the
registration statement or otherwise filed with the SEC.
If for any reason we are not required to comply with the reporting
requirements of the Securities Exchange Act of 1934, as amended, we are still
required under the indenture to furnish the holders of the new notes with the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act. In addition, we have agreed that, for so long as any notes
remain outstanding, we will furnish to the holders of the notes and to
securities analysts and prospective investors, upon their request, the
information required to be delivered by Rule 144A(d)(4) under the Securities
Act.
97
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements of Formica are based on the consolidated financial statements of
Formica, adjusted to give effect to the acquisition, including the issuance of
the bridge notes to finance the acquisition and the issuance of $215.0 million
of senior subordinated notes. The unaudited pro forma condensed consolidated
financial statements have not been adjusted to give effect to $30.0 million of
estimated net annual (pre-tax) cost savings, primarily selling, general and
administrative expenses reductions, that we began to implement in early 1998.
(See "Business--Cost Savings" and "Risk Factors--Our cost-cutting strategy may
not be successful and may reduce our sales.")
The unaudited pro forma condensed consolidated statement of operations
data are derived from the historical consolidated statements of operations of
BTR-owned Formica and Formica, as applicable, for the year ended December 31,
1998 and assumes that the acquisition was completed as of the beginning of the
period. The unaudited pro forma condensed consolidated financial data are also
adjusted for the issuance of the old notes. The unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements of Formica included elsewhere in this
prospectus.
The unaudited pro forma condensed consolidated financial data do not
purport to be indicative of the results that would actually have been obtained
if the acquisition and the issuance of the old notes had occurred on the dates
indicated or of the results that may be obtained in the future. The unaudited
pro forma condensed consolidated financial data are presented for comparative
purposes only. The pro forma adjustments, as described in the accompanying
data, are based on available information and various assumptions that
management believes are reasonable.
P-1
FORMICA CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(in millions)
Adjustments Pro Forma Adjustments
for the for the for issuance Pro
Historical Acquisition Acquisition of Old Notes Forma
---------- ----------- ----------- ------------ -------
Net sales.................................... $ 549.7 $ 549.7 $ 549.7
Cost of productssold......................... 397.3 397.3 397.3
------- ------- ------- ------- -------
Gross profit................................. 152.4 152.4 152.4
Selling, general and administrative expenses 161.4 $ 3.2 (b) 164.6 164.6
Cost of terminated acquisition............... 3.0 3.0 3.0
------- ------- ------- ------- -------
Operating loss............................... (12.0) (3.2) (15.2) (15.2)
Interest expense............................. 27.4 11.2 (a) 38.0 $ (26.6) (d) 35.5
(0.6)(c) 24.1 (e)
Other income, net ........................... 5.3 5.3 5.3
------- ------- ------- ------- -------
Loss before income taxes .................... (34.1) (13.8) (47.9) 2.5 (45.4)
Income tax (provision) benefit .............. (2.8) (2.8) (2.8)
------- ------- ------- ------- -------
Net income (loss) ........................... $ (36.9) $ (13.8) $ (50.7) $ 2.5 $ (48.2)
======= ======= ======= ======= =======
Other Data...................................
Adjusted EBITDA (f)(g) ...................... $ 50.2 $ 50.2 $ 50.2
Depreciation and amortization................ 40.4 43.6 43.6
Cash interest expense (h) ................... 24.8 32.8 34.4
Ratio of earnings to fixed charges (i)....... -- -- --
See notes to unaudited pro forma condensed
consolidated statements of operations.
P-2
FORMICA CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in millions)
The Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 1998 give effect to the acquisition
and the issuance of the old notes as if both were effective at the beginning of
the period:
(a) Represents the net increase in interest expense attributable to
the bridge notes and the new credit facility issued in connection
with the acquisition to the extent not reflected in the
historical results for the applicable period.
Year Ended
December 31,
1998
------------
Interest on $200.0 bridge notes (at an effective
interest rate of 10.25%)..................................... $ 6.8
Interest on $85.0 term loans under the new credit
facility (at an interest rate of LIBOR(5%) + .25%)........... 2.1
Amortization of $6.1 of deferred financing costs related
to the bridge notes (over 1 year)............................ 2.0
Amortization of $5.0 of deferred financing costs related
to the new credit facility (over 6 years).................... 0.3
-----
$11.2
=====
The bridge notes were repaid with a portion of the proceeds of
the old notes. The effective interest rate for the period during
which the bridge notes were outstanding was 10.25%.
(b) Represents net increase in depreciation and amortization related
to property plant and equipment and identified intangibles
(primarily patents and trademarks) based on the allocation of the
purchase price of the acquisition of $3.2 million for the year
ended December 31, 1998.
(c) Represents elimination of interest expense of $0.6 million for
the period ended December 31, 1998, related to loans due to
affiliates which were repaid in connection with the acquisition.
(d) Represents reversal of interest and amortization of deferred
financing costs related to the bridge notes.
Year Ended
December 31,
1998
------------
Reversal of interest on $200.0 bridge notes (at an
effective rate of 10.25%).................................... $20.5
Reversal of amortization of $6.1 of deferred financing
costs related to the bridge notes (over 1 year).............. 6.1
-----
$26.6
=====
(e) Represents interest expense and amortization of deferred financing
costs related to the notes.
Year Ended
December 31,
1998
------------
Interest on $215.0 of notes at an assumed
effective interest rate of 10.875%........................... $23.4
Amortization of $7.0 of deferred financing costs
related to the notes (over 10 years)......................... 0.7
-----
$24.1
=====
(f) "Adjusted EBITDA" is defined as income before extraordinary item
and change in accounting principles plus interest expense, income
tax expense, depreciation and amortization expenses and goodwill
impairment charge plus the 1998 Charges totaling $16.5 for the
year ended December 31, 1998. EBITDA is a key financial measure
but should not be construed as an alternative to operating income
or cash flows from operating activities (as determined in
accordance with generally accepted accounting principles). We
believe that EBITDA is a useful supplement to net income (loss)
and other consolidated income statement data in understanding
cash flows generated from operations that are available for
taxes, debt service and capital expenditures. However, our method
of computation may or may not be comparable to other similarly
titled measures of other companies.
P-3
(g) Adjusted EBITDA has not been adjusted for any of the incremental
annualized cost savings that we began implementing in 1998. We
began implementing various elements of the cost reduction program
in the first quarter of 1998 and accordingly, management believes
that the historical results for the periods ended December 31,
1999 and December 31, 1998 reflect approximately $27.4 million
and $22.0 million of the total net benefits of that cost savings
program. The savings relate primarily to specific areas of
advertising and promotion spending and also target other
operating expenses, including outside consultant expense and
transportation and warehousing costs. (See "Business--Cost
Savings" and "Risk Factors--Our cost-cutting strategy may not be
successful and may reduce our sales.")
(h) Cash interest expense represents total interest expense less
amortization of deferred financing costs.
(i) For purposes of calculating the ratio of earnings to fixed
charges, earnings consist of income before income taxes plus
fixed charges. Fixed charges consist of interest expense, which
includes the amortization of deferred financing costs, and
one-third of the rent expense from operating leases, which
management believes is a reasonable approximation of the interest
component of rent expense. For the year ended December 31, 1998,
earnings were insufficient, on a pro forma basis, to cover fixed
charges by $45.4 million.
P-4
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Arthur Andersen LLP, Independent Public Accountants F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the year ended
December 31, 1999, eight-months ended December 31, 1998,
four-months ended April 30, 1998 and year ended December 31, 1997 F-5
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, , eight-months ended
December 31, 1998, four-months ended April 30, 1998 and
year ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, eight-months ended December 31, 1998,
four-months ended April 30, 1998 and year ended December 31, 1997 F-7
Notes to Consolidated Financial Statements F-8
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 F-21
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999 F-22
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999 F-23
Notes to Consolidated Financial Statements F-24
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Formica Corporation:
We have audited the accompanying consolidated balance sheets of Formica
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 1999, the
eight-month period ended December 31, 1998 and the four-month period ended
April 30, 1998 (see Note 1). These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Formica Corporation and
subsidiaries as of December 31, 1999 and 1998, and the related results of their
operations and their cash flows for the year ended December 31, 1999, the
eight-month period ended December 31, 1998 and the four-month period ended
April 30, 1998 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The Schedule II - Valuation
and Qualifying Accounts is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Roseland, New Jersey
March 3, 2000
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Formica Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Formica Corporation for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of Formica Corporation's
operations, stockholders' equity and its cash flows for the year ended December
31, 1997 in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
White Plains, New York
May 7, 1998, except for Note 3--"Reclassifications" as
to which the date is March 3, 1999
F-3
FORMICA CORPORATION
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998
(in millions, except share data)
1999 1998
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents..................... $ 7.8 $ 31.6
Accounts receivable, less allowance for
doubtful accounts of $4.7 and $4.2,
respectively................................ 84.4 64.9
Inventories................................... 119.7 110.3
Prepaid expenses and other current assets..... 11.5 15.1
Deferred income taxes......................... 14.7 12.3
--------- ---------
Total current assets........................ 238.1 234.2
Property, Plant and Equipment, net.............. 307.3 288.7
Other Assets:
Intangible assets, net........................ 161.1 176.5
Non-current assets............................ 11.3 1.8
--------- ---------
Total assets................................ $ 717.8 $ 701.2
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt.......... $ 28.2 $ 21.8
Accounts payable.............................. 37.2 40.0
Accrued expenses and other current
liabilities................................. 56.8 53.5
--------- ---------
Total current liabilities................... 122.2 115.3
Long-Term Debt.................................. 362.9 295.9
Deferred Income Taxes........................... 125.4 138.1
Other Liabilities............................... 30.0 32.1
--------- ---------
Total liabilities........................... 640.5 581.4
Commitments and Contingencies
Stockholders' equity:
Preferred stock--par value $.01--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........................... (54.4) (22.3)
Accumulated other comprehensive (loss) income. (5.4) 5.0
--------- ---------
Total stockholders' equity.................. 77.3 119.8
--------- ---------
Total liabilities and stockholders'
equity................................. $ 717.8 $ 701.2
========= =========
The accompanying notes to the consolidated financial
statements are an integral part of these consolidated
statements.
F-4
FORMICA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
Eight | Four
Year Ended Months Ended | Months Ended Year Ended
December December | April December
31, 1999 31, 1998 | 30, 1998 31, 1997
---------- ------------ | ------------- ----------
Net Sales..................................... $ 585.2 $ 371.4 | $ 178.3 $ 533.4
Cost of Products Sold......................... 418.8 266.2 | 131.1 350.1
------- ------- | ------- -------
Gross Profit................................ 166.4 105.2 | 47.2 183.3
Selling, General and Administrative Expenses.. 148.0 100.5 | 60.9 202.2
Cost of Terminated Acquisitions............... 0.8 3.0 | -- --
Cost to Terminate Supply Contract............. 26.2 -- | -- --
Goodwill Impairment Charge.................... -- -- | -- 484.4
------- ------- | ------- -------
Operating (Loss) Income..................... (8.6) 1.7 | (13.7 (503.3)
Interest Expense.............................. (37.4) (25.7) | (1.7) (3.1)
Other Income.................................. 2.5 4.5 | 0.8 1.8
------- ------- | ------- -------
Loss Before Income Taxes...................... (43.5) (19.5) | (14.6) (504.6)
Income Tax Benefit (Provision)................ 11.4 (2.8) | -- (0.2)
------- ------- | ------- -------
Net Loss.................................... $ (32.1) $ (22.3) | $ (14.6) $(504.8)
======= ======= | ======= =======
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated statements.
F-5
FORMICA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Income (Loss) Total
------ ---------- ----------- ------------- -------
Balance at December 31, 1996.................... $ 0.1 $ 924.7 $ (54.4) $ 0.3 $ 870.7
Comprehensive loss:
Net loss...................................... -- -- (504.8) -- (504.8)
Foreign currency translation adjustments...... -- -- -- (17.7) (17.7)
----- ------- -------- ------- -------
(522.5)
Contribution of intangible
pension asset to Parent....................... -- (4.8) -- -- (4.8)
----- ------- -------- ------- -------
Balance at December 31, 1997.................... 0.1 919.9 (559.2) (17.4) 343.4
Comprehensive loss:
Net loss...................................... -- -- (14.6) -- (14.6)
Foreign currency translation adjustments...... -- -- -- 2.9 2.9
----- ------- -------- ------- -------
(11.7)
Dividend to Parent.............................. -- -- (0.5) -- (0.5)
----- ------- -------- ------- -------
Balance at April 30, 1998....................... $ 0.1 $ 919.9 $ (574.3) $ (14.5) $ 331.2
===== ======= ======== ======= =======
- --------------------------------------------------------------------------------------------------------------
Capitalization of the Company at May 1, 1998.... $ 0.1 $ 392.0 $ -- $ -- $ 392.1
Dividend to Parent.............................. -- (255.0) -- -- (255.0)
Net capitalization of the Company at
date of acquisition........................... 0.1 137.0 -- -- 137.1
Comprehensive loss:
Net loss...................................... -- -- (22.3) -- (22.3)
Foreign currency translation adjustments...... -- -- -- 5.0 5.0
-------
(17.3)
----- ------- -------- ------- -------
Balance at December 31, 1998.................... 0.1 137.0 (22.3) 5.0 119.8
Comprehensive loss:
Net loss...................................... -- -- (32.1) -- (32.1)
Foreign currency translation adjustments...... -- -- -- (10.4) (10.4)
-------
(42.5)
----- ------- -------- ------- -------
Balance at December 31, 1999.................... $ 0.1 $ 137.0 $ (54.4) $ (5.4) $ 77.3
===== ======= ======== ======= =======
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated statements.
F-6
FORMICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year Eight Months Four Year
Ended Ended Months Ended Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
-------- ------------ ------------ ---------
Operating Activities:
Net loss.................................................. $ (32.1) $ (22.3) $ (14.6) $(504.8)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 42.9 29.3 11.1 55.7
Goodwill impairment.................................... -- -- -- 484.4
Cost to terminate supply contract...................... 26.2 -- -- --
Deferred income taxes.................................. (15.1) (0.8) 1.2 --
Changes in assets and liabilities: (net of the
effects of acquisitions)..........................
Accounts receivable................................ (18.3) 8.9 (5.4) 6.3
Inventories........................................ 0.2 7.8 (2.0) (6.4)
Prepaid expenses and other current assets.......... 7.0 (7.4) 5.8 1.7
Accounts payable................................... (0.3) (2.6) 0.1 (10.4)
Accrued expenses................................... (1.9) (3.0) (18.1) (11.2)
Other, net......................................... (8.4) 16.8 10.2 (9.6)
------- ------- ------- -------
Net cash provided by (used in) operating
activities.................................... 0.2 26.7 (11.7) 5.7
Investing Activities:
Purchases of property, plant and equipment............ (25.9) (35.5) (8.3) (46.5)
Acquisitions of businesses, net of cash acquired...... (63.4) -- -- --
------- ------- ------- -------
Net cash used in investing activities........... (89.3) (35.5) (8.3) (46.5)
Financing Activities:
Proceeds from borrowings, net......................... 268.1 288.1 -- 47.1
Due from affiliates................................... -- -- 15.5 --
Dividends paid........................................ -- (255.0) (0.5) --
Payments of debt...................................... (201.9) (0.1) (15.1) --
------- ------- ------- -------
Net cash provided by (used in) financing
activities..................................... 66.2 33.0 (0.1) 47.1
Effects of Exchange Rate Changes on Cash.................. (0.9) 0.5 (0.2) (5.4)
------- ------- ------- -------
(Decrease)/Increase in Cash and Cash Equivalents.......... (23.8) 24.7 (20.3) 0.9
Cash and Cash Equivalents at Beginning of the
Period.............................................. 31.6 6.9 27.2 26.3
------- ------- ------- -------
Cash and Cash Equivalents at End of the Period............ $ 7.8 $ 31.6 $ 6.9 $ 27.2
======= ======= ======= =======
The accompanying notes to the consolidated financial statements
are an integral part of these consolidated statements.
F-7
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND NATURE OF OPERATIONS:
Formica Corporation ("Formica" or the "Company") is a wholly-owned
subsidiary of FM Holdings, Inc. ("Holdings"), which is a wholly-owned
subsidiary of Laminates Acquisition Co. ("Laminates"). Holdings and Laminates
have no operations separate from the operations of the Company and their assets
consist primarily of their direct or indirect investment in the Company.
The accompanying consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries, prior to the
acquisition from BTR Nylex Ltd. ("BTR") on May 1, 1998 (see Note 2), for the
year ended December 31, 1997 and the four-month period ended April 30, 1998.
The accounts of the Company for the eight-month period ended December 31, 1998
and the year ended December 31, 1999 reflect the acquisition. The results for
the pre-acquisition period are not necessarily comparable to the results for
the post-acquisition period because of the changes in organizational structure,
recorded asset values, cost structure and capitalization of the Company
resulting from the acquisition. 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 Holdings.
The Company is a multinational organization, principally engaged in
the design, manufacture, and distribution of high-pressure decorative
laminates. The Company's operations are primarily based in North America,
Europe and Asia.
(2) ACQUISITIONS:
Through April 30, 1998, the Company was an indirect wholly-owned
subsidiary of BTR. On May 1, 1998, Laminates acquired all of the outstanding
shares of Holdings, the Company's direct parent, from BTR, for approximately
$392.0 million of cash (including transaction costs of approximately $15.4
million) and the assumption of approximately $29.0 million of net debt. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the excess of the purchase price over the book value of the net
assets acquired of $61.0 million has been allocated primarily to intangible
assets based on appraisals of the assets.
Prior to May 1, 1998, the new management of Formica began to formulate
a plan to restructure certain operations. Included in the allocation of the
purchase price is a restructuring provision of $6.6 million primarily related
to severance of approximately 100 administrative and operating employees within
the European operations. The reduction in headcount results from the expected
efficiencies to be gained as a result of a system conversion during 1999. The
Company began to execute the restructuring in 1999, therefore, there were no
charges against this reserve through December 31, 1998. During 1999, the
Company charged approximately $3.9 million to this reserve relating to a
portion of the total cost of terminating approximately 60 employees. The amount
of the restructuring provision remaining at December 31, 1999 was approximately
$2.7 million. This amount primarily pertains to the remaining portion of the
above costs and approximately 40 additional employees yet to be terminated
within our European operations.
The acquisition was financed with $87.1 million in proceeds from the
sales of preferred and common stock by Laminates, $50.0 million in proceeds
from the sale of senior preferred stock by an affiliate (which was merged into
Holdings) and from borrowings of $280.0 million by the Company. The net
proceeds to Holdings from the sale of preferred stock and the net proceeds from
borrowings by the Company were transferred to Laminates as a dividend. After
the payments to BTR for the acquisition price, Laminates contributed the
remaining cash to the Company. See Note 8 for acquisition financing.
In March 1999, the Company acquired a manufacturer of solid surface
products. The acquisition had no material effect on the Company's financial
position or results of operations.
In December 1999, the Company acquired its exclusive supplier of
laminate flooring. Prior to the acquisition, Formica was obligated under a
contract with the supplier to purchase minimum quantities of laminate flooring
at stipulated prices. The excess of the purchase price over the net tangible
and intangible assets of the supplier totaling $26.2 million was charged to
expense as the cost to terminate the supply contract.
The following unaudited pro forma consolidated results of operations
for the years ended December 31, 1999 and 1998 assume the May 1998 and December
1999 acquisitions had occurred at the beginning of 1998:
F-8
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1999 1998
------ ------
(in millions)
Net sales............................................... $591.2 $553.3
Net loss................................................ $(20.5) $(43.2)
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the May 1998 and December 1999 acquisitions been consummated at the
beginning of 1998 or at the beginning of 1999, or of future results.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. Investments in less than majority-owned
affiliates, over which the Company has significant influence, are accounted for
using the equity method. All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
Revenues are recognized upon shipment of goods to customers.
Foreign Currencies
The Company's international operations are translated into U.S.
dollars using current exchange rates at the end of the period for the balance
sheets and a weighted-average rate for the period for the statements of
operations with currency translation adjustments reflected in accumulated other
comprehensive income (loss) in stockholders' equity. Realized gains and losses
from foreign currency transactions are reflected in the consolidated statements
of operations.
Foreign Exchange Contracts
The Company enters into forward sale and purchase contracts to manage
currency risk resulting from purchase and sale commitments denominated in
foreign currencies. These contracts are usually short-term in nature and
generally involve the exchange of two foreign currencies. Gains and losses
related to these contracts are deferred and included in the measurement of the
related purchase or sale transaction. At December 31, 1999, the Company had
$0.4 million in contracts to buy and $0.1 million in contracts to sell foreign
currencies. At December 31, 1998, the Company had $1.5 million in contracts to
buy and $0.1 million in contracts to sell foreign currencies. Net unrealized
gains or losses were not material to the consolidated financial statements at
December 31, 1999 and 1998.
Concentration of Credit Risk
Credit risk with respect to trade accounts receivable is limited due
to the large number of entities comprising the Company's customer base.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original
maturities of three months or less when purchased to be cash equivalents.
Customer Incentive Rebate Program
The Company offers percentage rebates to distributors on specified
products based on the actual resale prices to end customers, within
pre-established parameters. Customer incentive rebate expenses are accrued at
the time of the sale based upon historical rebate percentages. The accrued
expenses are then reduced through payments of rebates to the distributors after
the sales to the end customer.
Inventories
Inventories are stated at the lower of cost or market. Inventories are
valued using the first-in,
F-9
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
first-out (FIFO) method except for certain inventories in the United States
which are valued using the last-in, first-out (LIFO) method. As of December 31,
1999 and 1998, 68% and 55.0%, respectively, of inventories were valued under the
LIFO method. Inventories at LIFO approximate inventories at FIFO.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation charges
are made on a straight-line basis over the estimated useful life of the assets
as follows:
Buildings & Improvements.......... 30 to 40 years
Machinery & Equipment............. 3 to 13 years
Computer & Office Equipment....... 3 to 10 years
Leasehold improvements are amortized over the lesser of the life of
the asset or the lease term.
Intangible Assets
Intangible assets are amortized on the straight-line basis over their
estimated useful lives (3 to 20 years). The Company periodically reviews
intangible assets to evaluate whether changes have occurred that would suggest
these assets may be impaired based on the estimated net cash flows over the
remaining amortization period. If this review indicated that the remaining
estimated useful life requires revision or that the asset is not recoverable,
the carrying amount of the asset would be reduced by the estimated shortfall of
cash flows on a discounted basis. See Note 6 for the impairment charge recorded
by the Company in 1997.
Financial Instruments
At December 31, 1999 and 1998, the fair value of substantially all of
the Company's financial instruments approximated their carrying value, except
for the Senior Subordinated Notes which were trading at a price of $91.50 per
$100.00 of par value at December 31, 1999.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs included in selling, general and administrative expenses were
$1.7 million, $1.4 million, $1.1 million, and $3.3 million for the year ended
December 31, 1999, the eight-month period ended December 31, 1998, the
four-month period ended April 30, 1998, and the year ended December 31, 1997,
respectively.
Environmental Compliance and Remediation Costs
Environmental compliance costs include ongoing maintenance, monitoring
and similar expenditures. These costs are expensed as incurred. Environmental
remediation costs are accrued when environmental assessments and/or remedial
efforts are probable and the cost can be reasonably estimated. See Note
15-"Commitments and Contingencies" for information concerning environmental
matters.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs included
in selling, general and administrative expenses were $16.6 million, $10.3
million, $10.6 million, and $24.1 million for the year ended December 31, 1999,
the eight-month period ended December 31, 1998, the four-month period ended
April 30, 1998, and the year ended December 31, 1997, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under SFAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Reclassifications
Certain reclassifications have been made to prior years amounts to
conform with the current year presentation.
F-10
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recently Issued Accounting Standards
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.
(4) INVENTORIES:
Inventories consisted of the following at December 31:
1999 1998
-------- --------
(in millions)
Finished goods.................... $ 84.5 $77.2
Work-in-process................... 11.6 12.2
Raw materials..................... 45.1 42.6
------- ------
Total..................... 141.2 132.0
Less: Obsolescence reserve........ 21.5 21.7
------ ------
$119.7 $110.3
====== ======
(5) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at December 31:
1999 1998
-------- --------
(in millions)
Land.............................. $ 18.6 $ 17.7
Buildings and improvements........ 55.4 51.0
Machinery and equipment........... 269.4 237.2
------ ------
Total..................... 343.4 305.9
Less: Accumulated depreciation
and amortization.... 36.1 17.2
------ ------
$307.3 $288.7
====== ======
Depreciation expense was $24.1 million, $16.0 million, $7.9 million,
and $21.4 million for the year ended December 31, 1999, the eight-month period
ended December 31, 1998, the four-month period ended April 30, 1998, and the
year ended December 31, 1997, respectively.
Interest costs incurred in connection with major capital expenditures
are capitalized. Capitalized interest is amortized over the lives of the
related assets. Net interest costs of $1.3 million were capitalized in 1997. No
interest costs were capitalized during 1999 and 1998.
(6) INTANGIBLE ASSETS:
Intangible assets consisted of the following at December 31:
1999 1998
-------- --------
(in millions)
Trademarks........................ $140.3 $140.0
Patents........................... 19.9 19.9
Proprietary technology and other.. 32.5 29.4
------ ------
Total..................... 192.7 189.3
Less: Accumulated amortization.... 31.6 12.8
------ ------
$161.1 $176.5
====== ======
During 1997, BTR decided to dispose of its building product businesses,
including Formica by immediately offering these businesses for sale.
Accordingly, the Company recorded a goodwill
F-11
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
impairment charge of $484.4 million which was determined utilizing the fair
value of the Company's assets considering among other things, the purchase price
for the sale of Formica. The impairment charge did not result in the reduction
of property, plant, and equipment.
(7) ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31:
1999 1998
------ -------
(in millions)
Accrued salaries and benefits..... $ 19.4 $ 20.6
Restructuring reserve............. 2.7 6.6
Accrued interest.................. 8.6 3.7
Other accrued expenses............ 26.1 22.6
------ ------
Total.................... $ 56.8 $ 53.5
====== ======
(8) LONG-TERM DEBT:
Notes payable to banks and other long-term debt consisted of the
following at December 31:
1999 1998
-------- --------
(in millions)
Senior subordinated notes......... $215.0 $200.0
Credit Facilities:
Term loans................... 83.2 85.0
Revolvers.................... 60.7 --
Other............................. 32.2 32.7
------ ------
Total.................... 391.1 317.7
Less: Current maturities.......... 28.2 21.8
------ ------
$362.9 $295.9
====== ======
In connection with the acquisition (see Note 2), Formica sold $200.0
million of senior subordinated unsecured increasing rate bridge notes (the
"Bridge Notes") with interest at the greater of prime plus an additional amount
or 10% and, together with its subsidiaries, borrowed $80.0 million of term
loans under the senior loan facility (the "Credit Facility"). Borrowings under
the Credit Facility were increased to $85.0 million after the acquisition.
On February 22, 1999, the Company issued $215.0 million of 10 7/8%
Series A Subordinated Notes due March 1, 2009 (the "Series A Notes") and repaid
the Bridge Notes. The Series A Notes were sold in transactions permitted by
Rule 144A and Regulation S under the Securities Exchange Act of 1933 and
therefore were not registered with the Securities and Exchange Commission
("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. Interest on the
Series B Notes is payable semi-annually on March 1 and September 1 of each
year. The Series B Notes are redeemable at the option of the Company in part
beginning in 2002 and in whole in 2004 at specified redemption prices. The
Series B Notes and related indenture place certain restrictions on the Company
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 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 the Company and will
terminate on May 1, 2004. There was $60.7 million outstanding on December 31,
1999. There were no borrowings outstanding under the revolving credit facility
at December 31, 1998. The term loans under the Credit Facility totaled $83.2
million and $85.0 million at December 31, 1999 and 1998, respectively, which
amortize over the life of the Credit Facility.
F-12
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Borrowings under the Credit Facility generally bear interest based on
a margin over, at the Company's option, the base rate or LIBOR. The applicable
margin, until the date of delivery of the Company's December 31, 1998 financial
statements, was 2.25% over LIBOR or 1% over the base rate. Thereafter, the
applicable margin varies based upon the Company's ratio of consolidated debt to
EBITDA (as defined). The Company's obligations under the Credit Facility are
guaranteed by Laminates, Holdings, and all existing or future domestic
subsidiaries of the Company (the "subsidiary guarantors") and are secured by
substantially all of the assets of the Company and the subsidiary guarantors,
including a pledge of the capital stock of all existing and future subsidiaries
of the Company (provided that no more than 65% of the voting stock of any
foreign subsidiary shall be pledged) and a pledge by Holdings of the stock of
the Company and by Laminates of the stock of Holdings.
The 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. On December 22, 1999, the Company amended the Credit
Facility, obtaining the consent of the bank group for the acquisition of STEL
Industries, Inc. The Company was in compliance with the financial covenants at
December 31, 1999 and 1998.
The Company maintains various credit facilities in foreign countries
(primarily in Asia) that provide for borrowings in local currencies. At
December 31, 1999 and 1998, the Company had secured approximately $28.4 million
and $29.0 million, respectively, in letters of credit under the Credit Facility
to provide credit enhancements for certain credit facilities.
In addition to the above, the Company has established borrowing
arrangements with various financial institutions at interest rates ranging from
2.0% to 9.5% in order to fund the ongoing operations of the business. At
December 31, 1999 and 1998, there was approximately $32.2 million and $32.7
million, respectively, outstanding under these facilities. At December 31, 1999
and 1998, approximately $3.2 million and $4.7 million, respectively, were
available under these facilities.
The approximate aggregate debt maturities are as follows as of
December 31, 1999:
(in millions)
2000................................. $ 28.2
2001................................. 17.5
2002................................. 22.7
2003................................. 35.0
2004................................. 72.1
Thereafter........................... 215.6
------
$391.1
======
Interest expense for 1997 was inclusive of $0.5 million attributable
to affiliated companies. There was no interest expense attributed to affiliated
companies in 1999 and 1998. Cash payments for interest approximated $28.5
million, $20.6 million, $0.2 million and $3.1 million for the year ended
December 31, 1999, the eight-month period ended December 31, 1998, the
four-month period ended April 30, 1998, and the year ended December 31, 1997,
respectively.
(9) EMPLOYEE BENEFIT PLANS:
The Company sponsors defined benefit pension plans covering
substantially all United States and Canadian employees and certain employees in
other countries. The benefits provided under the defined benefit pension plans
are determined under formulas using years of service and compensation, or
formulas using years of service and a flat dollar benefit rate. The Company's
principal funding policy for the defined benefit pension plans is to maintain
the plans in accordance with the minimum funding provisions of the Employee
Retirement Income Security Act of 1974. The majority of the defined benefit
pension plans' assets are held in trust, and consist principally of equity
securities and fixed income instruments.
The majority of the defined contribution plans sponsored by the
Company are qualified under Section 401(k) of the Internal Revenue Code, with
the amount of the Company's contributions determined under a matching formula
tied to employee payroll deduction contributions. In addition, some defined
contribution plans offer discretionary Company contributions based upon a
profit based formula. Expenses related to these plans totaled approximately
$1.0 million, $1.1 million, $0.3 million and $0.7 million for the year ended
December 31, 1999, the eight-month period ended December 31, 1998, the
F-13
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
four-month period ended April 30, 1998, and the year ended December 31, 1997,
respectively.
The net cost for the Company's defined benefit pension plans was
comprised of the following components:
Four
Year Eight Months Months
Ended Ended Ended Year Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
--------- ------------ --------- ----------
(in millions)
Service cost ................... $ 3.9 $ 2.9 $ 0.6 $ 1.7
Interest cost .................. 5.8 3.0 1.2 3.5
Expected return on plan assets.. (6.1) (2.8) (1.0) (3.1)
Other........................... -- -- -- 0.1
----- ----- ----- -----
Net periodic pension cost....... $ 3.6 $ 3.1 $ 0.8 $ 2.2
===== ===== ===== =====
The net periodic pension cost attributable to international plans
included in the above table was $2.1 million, $2.0 million, $0.2 million, and
$0.8 million, for the year ended December 31, 1999, the eight-month period
ended 1998, the four-month period ended April 30, 1998, and the year ended
December 31, 1997, respectively.
The Company provides for the estimated cost of postretirement benefits
(principally medical, dental, and life insurance benefits provided to retirees
and eligible dependents). The Company does not fund its postretirement benefit
plans.
The net cost of postretirement benefits other than pensions was
comprised of the following components:
Year Eight Months Four Months
Ended Ended Ended Year Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
-------- ------------ ----------- ---------
(in millions)
Service cost ................... $0.2 $0.1 $0.0 $0.1
Interest cost .................. 0.4 0.3 0.1 0.3
---- ---- ---- ----
Net postretirement benefit cost. $0.6 $0.4 $0.1 $0.4
==== ==== ==== ====
The cost of healthcare and life insurance benefits for active
employees was $12.5 million, $7.5 million, $3.8 million, and $11.0 million for
the year ended December 31, 1999, the eight-month period ended December 31,
1998, the four-month period ended April 30, 1998, and the year ended December
31, 1997, respectively.
Summarized information about the changes in plan assets and benefit
obligations is as follows:
Other Postretirement
Pension Benefits Benefits
---------------- ------------------------
1999 1998 1999 1998
------ ------ ------ -------
(in millions)
Fair value of plan assets at January 1........... $ 83.4 $ 40.3 $ -- $ --
Actual return on plan assets..................... 6.3 4.8 -- --
Company contributions............................ 4.3 4.1 0.2 --
Participant contributions........................ 0.6 -- -- --
Transfer of plan's assets from BTR............... -- 38.4 -- --
Benefits paid from plan assets................... (3.3) (4.2) (0.2) --
------ ------ ------ ------
Fair value of plan assets at December 31......... $ 91.3 $ 83.4 $ -- $ --
====== ====== ====== ======
F-14
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Postretirement
Pension Benefits Benefits
---------------- ------------------------
1999 1998 1999 1998
------ ------ ------ -------
(in millions)
Benefit obligation at January 1.................. $ 96.2 $ 52.7 $ 5.8 $ 5.5
Service cost..................................... 3.9 2.1 0.2 0.2
Interest cost.................................... 5.8 2.0 0.4 0.1
Actuarial (gains) losses......................... (7.0) 0.9 (0.3) --
Benefits paid from plan assets................... (3.3) (1.3) (0.2) --
Transfer (to) from BTR and other................. (0.9) 39.8 -- --
------ ------ ------ ------
Benefit obligation at December 31................ $ 94.7 $ 96.2 $ 5.9 $ 5.8
====== ====== ====== ======
The fair value of international pension plan assets included in the
above table was $49.7 million and $44.6 million in 1999 and 1998, respectively.
The pension benefit obligation of international plans included in this table
was $48.4 million and $49.3 million in 1999 and 1998, respectively.
A reconciliation of the plans' funded status to the net liability
recognized at December 31 is as follows:
Other Postretirement
Pension Benefits Benefits
------------------- --------------------
1999 1998 1999 1998
-------- -------- --------- --------
(in millions)
Funded status (benefit obligation in
excess of plan assets)............... $ (3.4) $(12.8) $(5.8) $ (6.4)
Unrecognized net (gain) loss .......... (11.8) (1.4) (0.6) 0.1
------ ------ ----- ------
Net liability ............... $(15.2) $(14.2) $(6.4) $ (6.3)
====== ====== ===== ======
Reported as:
Other liabilities............ $ 15.2 $ 14.2 $ 6.4 $ 6.3
====== ====== ===== ======
For Company pension plans with benefit obligations in excess of plan
assets at December 31, 1999 and 1998, the fair value of plan assets was $50.0
million and $45.9 million, respectively, and the benefit obligation was $60.6
million and $61.7 million, respectively.
Assumptions used in determining pension plan information are:
Year Eight Four Months Year
Ended Months Ended Ended Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
-------------- ------------ ------------ -------------
Rate of future compensation increases 0.00%-4.25% 0.0%-5.0% 0.0%-5.5% 0.0%-5.5%
Discount rate 5.75%-7.25% 5.0%-7.0% 6.5%-8.0% 6.5%-8.0%
Expected long-term rate of return on plan assets 0.00%-9.00% 0.0%-9.0% 0.0%-9.5% 0.0%-9.5%
Assumptions used in determining other post-retirement plan information
are:
Year Eight Four Months
Ended Months Ended Ended Year Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
------------ ------------ ------------ -------------
Discount rate 7.00%-7.25% 5.0%-7.0% 5.0%-7.0% 7.8%
In the aggregate, average international plan assumptions do not vary
significantly from U.S. assumptions.
The health care cost trend rate for other post-retirement benefit
plans was 10.0% at December 31, 1999 and is assumed to gradually decline to
5.0% over a 5-year period. A one-percentage point change in the health care
cost trend rate would have had the following effects:
F-15
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
One Percentage Point
---------------------------
Increase Decrease
---------- ----------
(in millions)
Effect on total service and
interest cost components.............. $0.0 $0.0
==== ====
Effect on benefit obligation........... $0.2 $0.2
==== ====
(10) INCOME TAXES:
The (benefit) provision for income taxes consisted of the
following:
Year Eight Four Year
Ended Months Ended Months Ended Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
--------- ------------ ------------ --------
(in millions)
Current:
Federal....... $ -- $ -- $ -- $ (2.1)
State.........
0.1 0.1 -- (0.3)
Foreign.......
3.6 3.5 (1.2) 2.6
------- ------- ------- --------
3.7 3.6 (1.2) 0.2
Deferred:
Federal....... (14.2) -- -- (0.1)
State......... (2.1) -- -- --
Foreign....... 1.2 (0.8) 1.2 0.1
------- ------- ------- --------
(15.1) (0.8) 1.2 --
------- ------- ------- --------
$ (11.4) $ 2.8 $ -- $ 0.2
======= ======= ======= ========
Pretax income (loss) was taxed in the following jurisdictions:
Year Eight Four Year
Ended Months Ended Months Ended Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
--------- ------------- ------------ --------
(in millions)
Domestic............ $ (54.9) $ (25.6) $ (12.6) $ (518.4)
Foreign............. 11.4 6.1 (2.0) 13.8
-------- ------- ------- --------
Total pretax loss.. $ (43.5) $ (19.5) $ (14.6) $ (504.6)
======== ======= ======= ========
The 1997 domestic pretax loss includes a goodwill impairment charge of
$484.4 million (see Note 6).
The 1999 domestic pretax loss includes the cost to terminate a supply
contract of $26.2 million (see Note 2).
Deferred tax assets and liabilities are comprised of the following at
December 31:
1999 1998
------------ ----------
(in millions)
Deferred tax liabilities:
Book over tax bases of assets acquired........... $ 120.6 $ 131.1
General inventory and LIFO reserves.............. 2.0 2.7
Other, net....................................... 7.2 7.0
-------- ---------
Total deferred tax liabilities............ 129.8 140.8
-------- ---------
Deferred tax assets:
Accrued liabilities.............................. 16.7 15.0
Net operating loss and tax credit
carryforwards................................ 16.1 15.4
F-16
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1999 1998
----------- ----------
(in millions)
Other, net....................................... 2.4 --
-------- ---------
Total deferred tax assets.................. 35.2 30.4
-------- ---------
Valuation allowance......................... (16.1) (15.4)
-------- ---------
Net deferred tax liabilities................ $ 110.7 $ 125.8
======== =========
The Company does not provide deferred income taxes on undistributed
earnings of its foreign subsidiaries, as the earnings are considered
indefinitely reinvested. At December 31, 1999, the cumulative amount of
undistributed earnings on which the Company has not recognized deferred income
taxes is approximately $90.3 million. Determining the amount of unrecognized
deferred tax liability for this amount is not practicable. However, if the
undistributed earnings were remitted, any resulting federal tax would be
substantially reduced by foreign tax credits.
The reconciliation of income tax computed at the U.S. federal statutory
tax rates to the Company's tax (benefit) expense is as follows:
Year Eight Four Year
Ended Months Ended Months Ended Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
-------- ------------ ------------ --------
U.S. statutory rate................. (35.0%) (35.0%) (35.0%) (35.0%)
State income taxes.................. (4.6%) -- -- --
Intangibles amortization............ -- -- -- 35.2%
Subpart F income.................... 0.7% 2.6% 2.1% 0.1%
Tax on income of foreign
subsidiaries and rate
differential...................... 9.0% 13.8% -- (0.4%)
Change in valuation allowance....... 4.5% 32.3% 32.9% --
Other, net.......................... (0.7%) 0.7% -- 0.1%
----- ----- ---- ----
(26.1%) 14.4% 0.0% 0.0%
===== ===== ==== ====
The Company is included in the consolidated federal and state tax
returns of its ultimate parent, Laminates. Cash (paid) received for income
taxes amounted to ($3.9) million, ($1.9) million, ($1.0) million, and $4.0
million, for the year ended December 31, 1999, the eight-month period ended
December 31, 1998, the four-month period ended April 30, 1998, and the year
ended December 31, 1997, respectively. The utilization of net operating loss
carryforwards expiring in varying amounts in future periods may be limited by
Internal Revenue Service regulations. The Company has provided a full valuation
allowance against the net operating loss carryforwards due to the uncertainty
of realization.
(11) RELATED PARTY TRANSACTIONS:
In order to fund normal working capital requirements, the Company has
entered into certain borrowing arrangements with Laminates. These arrangements
are short-term in nature and generally bear no interest. At December 31, 1999,
there was approximately $1.0 million outstanding under these arrangements.
There were no such borrowings at December 31, 1998.
(12) TERMINATION OF PROPOSED ACQUISITION:
The Company recorded charges of $0.8 million and $3.0
million, during the year ended December 31, 1999 and the eight-month period
ended December 31, 1998, respectively, in connection with proposed acquisitions
of decorative products businesses. The Company has abandoned these proposed
transactions.
(13) SEGMENT REPORTING:
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. The Company measures segment results as operating
income (loss), which is defined as income (loss) before goodwill impairment
charge, the cost of the terminated supply contract, interest expense, other
income
F-17
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(expense) and income taxes. 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).
Year Eight Four Year
Ended Months Ended Months Ended Ended
December December April December
31, 1999 31, 1998 30, 1998 31, 1997
--------- ------------ ------------- --------
(in millions)
Segment revenues:
United States...... $ 327.7 $ 202.3 $ 98.1 $ 272.2
North America
- other.......... 47.1 32.3 13.9 42.8
Europe............. 140.6 92.5 48.4 146.1
Asia............... 69.8 44.3 17.9 72.3
------- ------- ------- -------
Total............ $ 585.2 $ 371.4 $ 178.3 $ 533.4
======= ======= ======= =======
Segment (loss) profit:
North America...... $ (5.5) $ (10.7) $ (13.9) $ (33.8)
Europe............. 12.9 7.6 1.3 9.0
Asia............... 10.2 4.8 (1.1) 5.9
------- ------- ------- -------
Total............ $ 17.6 $ 1.7 $ (13.7) $ (18.9)
======= ======= ======= =======
Depreciation and
amortization (included
in segment profit (loss)):
North America...... $ 30.6 $ 22.4 $ 6.2 $ 32.4
Europe............. 8.9 4.6 3.5 17.2
Asia............... 3.4 2.3 1.4 6.1
------- ------- ------- -------
Total........... $ 42.9 $ 29.3 $ 11.1 $ 55.7
======= ======= ======= =======
Expenditures for long-
lived assets:
North America...... $ 16.2 $ 20.6 $ 4.8 $ 27.6
Europe............. 7.3 11.1 1.2 11.2
Asia............... 2.4 3.8 2.3 7.7
------- ------- ------- -------
Total........... $ 25.9 $ 35.5 $ 8.3 $ 46.5
======= ======= ======= =======
Reconciliation of total
segment profit (loss) to
loss before income taxes
is as follows:
Segment profit
(loss)............ $ 17.6 $ 1.7 $ (13.7) $ (18.9)
Goodwill impairment
charge............ -- -- -- (484.4)
Cost of terminated
supply contract... (26.2) -- -- --
Interest expense... (37.4) (25.7) (1.7) (3.1)
Other income....... 2.5 4.5 0.8 1.8
------- ------- ------- -------
Loss before
income taxes... $ (43.5) $ (19.5) $ (14.6) $(504.6)
======= ======= ======= =======
December 31,
---------------------------------------------
1999 1998 1997
---------- -------- -------
(in millions)
Total assets:
United States...... $ 451.0 $ 410.8 $ 374.0
North America -
other............. 37.3 36.4 34.5
Europe............. 152.4 179.1 184.8
Asia............... 77.1 74.9 54.4
------- ------- -------
Total............ $ 717.8 $ 701.2 $ 647.7
======= ======= =======
F-18
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
(in millions)
Long-lived assets:
United States...... $ 168.8 $ 128.6 $ 151.9
North America -
other............ 13.4 14.3 15.4
Europe............. 85.4 106.6 80.7
Asia............... 39.7 39.2 32.0
------- ------- -------
Total............ $ 307.3 $ 288.7 $ 280.0
======= ======= =======
(14) CHANGES IN ACCOUNTING ESTIMATES:
During the eight and four-months periods ended December 31 and April
30, 1998, the Company made certain changes in accounting estimates, resulting
in charges totaling $7.8 million and $5.7 million, respectively, due to new
management plans with respect to asset carrying and disposition policies and
new information becoming available, including information concerning customers,
products, and competitive conditions in certain markets. The changes in
accounting estimates for the eight-month period ended December 31, 1998 include
the increasing of the provisions for doubtful accounts and inventory
obsolescence by $2.4 million and $5.4 million, respectively. The changes in
accounting estimates for the four-month period ended April 30, 1998 include
increasing the provision for customer rebate programs by $2.7 million,
increasing the provision for doubtful accounts by $1.4 million and accruals for
customs, property tax exposures and other items totaling $1.6 million. There
were no significant changes in accounting estimates in 1999.
(15) COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases machinery, such as transportation and plant
equipment, and facilities, such as administrative offices and warehouse space,
under various non-cancelable operating lease agreements.
At December 31, 1999, future minimum lease payments under operating
lease agreements that have a remaining term in excess of one year are as
follows:
(in
millions)
2000......................................... $6.8
2001......................................... 5.8
2002......................................... 4.8
2003......................................... 4.2
2004......................................... 3.8
Thereafter................................... 2.1
------
$27.5
======
Rent expense aggregated $7.2 million, $5.3 million, $2.4 million and
$7.8 million for the year ended December 31, 1999, the eight-month period ended
December 31, 1998, the four-month period ended April 30, 1998, and the year
ended December 31, 1997, respectively.
Litigation and Environmental 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 $3.9 million and $4.0 million at December
31, 1999 and 1998, 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.
On April 5, 1999, the Company received a subpoena covering the period
from January 1, 1994 until April 1, 1999, from a federal grand jury in
connection with an investigation into possible antitrust violations in the
United States market for high-pressure laminate. The Company has produced
documents and provided other information in response to the subpoena, and a
number of present or
F-19
FORMICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
former Formica employees have appeared for testimony before
the grand jury or have been interviewed by the Staff of the Antitrust Division
of the U.S. Department of Justice in connection with the investigation. The
Company intends to continue its cooperation with the investigation. The Company
is unable to determine at this time the effect, if any, that this matter may
have on its financial statements.
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.
(16) COMPREHENSIVE INCOME (LOSS):
Total comprehensive loss was ($42.5) million, ($17.3) million, ($11.7)
million and ($522.5) million for the year ended December 31, 1999, the
eight-month period ended December 31, 1998, the four-month period ended April
30, 1998, and the year ended December 31, 1997, respectively. The difference
between comprehensive income (loss) and the net loss results from foreign
currency translation adjustments.
(17) RESTRICTED STOCK PLANS:
During 1999 and 1998, the board of directors and shareholders of
Laminates approved and adopted restricted stock programs. The plans authorize
purchases by eligible employees of Laminates and its subsidiaries of restricted
shares of common stock of Laminates, at a price equal to the fair market value
of a share of common stock on the date of purchase. Any shares of restricted
stock purchased under the plan are subject to repurchase by Laminates at the
purchase price upon the participating employee's termination of employment with
Laminates or any of its subsidiaries until those shares have vested in
accordance with the terms of the plan. The number of shares authorized to be
issued under the 1998 plan is 157,153, subject to adjustments upon the
occurrence of certain events. Under the 1999 plan, 15,401 shares of preferred
stock and 18,335 shares of common stock were authorized for issuance to
management and key employees. As of December 31, 1999, 145,134 shares have been
allocated to and purchased by certain officers and other management employees
and 12,019 shares are available under the plan for future purchase. The number
of preferred shares available for future grants under both plans is 15,401 and
the number of common shares is 55,004.
(18) SUBSEQUENT EVENTS:
Acquisition by Certain Equity Investors in Formica
Perstorp, one of our competitors in the European laminate market
announced on March 1, 2000, that it has signed an agreement covering the sale
of the PSM business of Perstorp AB, a Swedish corporation, to DSH. DSH, an
investment company formed by DLJ Merchant Banking partners ("DLJ") and CVC
European Equity partners ("CVC"), will be a wholly-owned subsidiary of Holdings
if the acquisition closes as expected at the end of the first quarter 2000. DLJ
and CVC are equity investors in Formica Corporation. Formica has advanced $5.0
million to DSH in connection with this transaction. Concurrent with the closing
of the sale of PSM to DSH, DSH will enter into a management and service
agreement with Formica Corporation to oversee the operations and management of
PSM. In addition, the stockholders of Formica and of DSH have entered into
agreements whereby the acquired business will be merged into Formica upon the
occurrence of certain events.
Restructuring
On March 1, 2000, the Company announced plans to restructure certain
operating activities in North America, reducing total headcount by
approximately 200 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 Company has completed certain elements of the restructuring plan,
and expects to finalize the plan and complete the related restructuring
activities during 2000. The costs of the restructuring activities cannot be
reasonably estimated at this time, however, these costs are not expected to
have a material effect on the Company's financial position. 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.
F-20
FORMICA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(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.
F-21
FORMICA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(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 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.
F-22
FORMICA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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 --
Payments 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.
F-23
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.
F-24
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(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 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 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
====== =======
(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
F-25
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
F-26
===============================================================================
You should rely only on the information contained in this document or
that we have referred you to. We have not authorized anyone to provide
you with information that is different. We are not making an offer of
these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date
on the front of those documents.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Summary................................................ 2
Risk Factors...................................................... 10
Use of Proceeds................................................... 17
Capitalization.................................................... 17
Selected Consolidated Financial Data.............................. 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................................... 23
Business.......................................................... 33
Management........................................................ 46
Security Ownership of Certain Beneficial
Owners and Management of Laminates
Stockholders.................................................... 53
Certain Relationships and Transactions............................ 56
The Acquisition................................................... 57
Description of Our Credit Facility................................ 60
Description of Notes.............................................. 62
Plan of Distribution.............................................. 95
Legal Matters..................................................... 96
Change in Independent Auditors.................................... 96
Experts........................................................... 96
Unaudited Pro Forma Condensed Consolidated
Financial Data.................................................. P-1
Index to Financial Statements .................................... F-1
===============================================================================
===============================================================================
$215,000,000
Formica Corporation
10 7/8% Series B Senior Subordinated Notes Due
2009
----------
Prospectus
----------
Donaldson, Lufkin & Jenrette
May 19, 2000
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
Item Amount
---- ------
SEC Registration Fee .......................... $ 59,770
Printing and Engraving Costs................... 26,000
Trustee Fees .................................. 35,000
Legal Fees and Expenses........................ 120,000
Accounting Fees and Expenses................... 75,000
Miscellaneous.................................. 25,000
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Total.......................................... $340,770
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ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Exculpation. Section 102(b)(7) of the Delaware General Corporations Law
("Delaware Law") permits a corporation to include in its certificate of
incorporation a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision may not eliminate
or limit the liability of a director for any breach of the director's duty of
loyalty to the corporation or its stockholders, for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, for the payment of unlawful dividends, or for any transaction from which
the director derived an improper personal benefit.
The Formica certificate of incorporation (the "Formica Charter") limits
the personal liability of a director to Formica and its stockholders for
monetary damages for a breach of fiduciary duty as a director to the fullest
extent permitted by law.
Indemnification. Section 145 of the Delaware Law permits a corporation
to indemnify any of its directors or officers who was or is a party, or is
threatened to be made a party to any third party proceeding by reason of the
fact that such person is or was a director or officer of the corporation,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding, if such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reason to believe that such person's conduct was unlawful.
In a derivative action, i.e., one by or in the right of a corporation, the
corporation is permitted to indemnify directors and officers against expenses
(including attorneys' fees) actually and reasonably incurred by them in
connection with the defense or settlement of an action or suit if they acted in
good faith and in a manner that they reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the defendant
directors or officers are fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
The Formica Charter provides for indemnification of directors, officers,
employees or agents of Formica against liability they may incur in their
capacities as such to the fullest extent permitted under the Delaware Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On February 22, 1999 the Registrant sold $215,000,000 in aggregate
principal amount of its 10 7/8% Senior Subordinated Notes due 2009 (the old
notes), to Donaldson, Lufkin & Jenrette Securities Corporation, BT Alex. Brown
and Credit Suisse First Boston (the "initial purchasers") in a private
placement in reliance on Section 4(2) under the Securities Act, at an offering
price of $970 per $1,000 principal amount at maturity. The old notes were
immediately resold by the initial purchasers in transactions not involving a
public offering.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit
No. Document
------- --------
1.1 * Registration Rights Agreement dated as of February 22, 1999 between
Formica and Donaldson, Lufkin & Jenrette Securities Corporation, BT
Alex. Brown Incorporated and Credit Suisse First Boston as Initial Purchasers
3.1 * Certificate of Incorporation
3.2 * By laws
4.1 * Indenture, dated as of February 22, 1999 between Formica and the Trustee
5.1 * Opinion of Davis Polk & Wardwell with respect to the new notes
10.1 * Investors' Agreement dated as of April 30, 1998 among
Laminates, the DLJ Merchant Banking funds, the institutional
investors and the management shareholders
10.2 * Restricted Stock Program
10.3 * Employment Agreement of Vincent Langone
10.4 * Employment Agreement of David Schneider
10.5 * Employment Agreement of William Adams
10.6 * Employment Agreement of Steven Kuo
10.7 * Amended and Restated Credit Agreement dated as of July 20, 1998 among Formica,
certain Formica subsidiaries and a syndicate of financial institutions led by DLJ
Capital Funding, Inc.
10.8 * Supplemental Executive Retirement Plan
10.9 * Restated Formica Corporation Employee Retirement Plan dated as of
January 1, 1996, as amended
10.10 * Formica Taiwan Corporation Employee Retirement Plan dated as of
December 23, 1986
10.11 * Formica UK Corporation Employee Retirement Plan
10.12 * Laminates 1999 Stock Plan
10.13 * Laminates 1999 Stock Purchase Agreement
10.14** Employment Agreement of Joseph Gonnella
12.1 ** Computation of Ratio of Earnings to Fixed Charges
16.1 * Letter from Ernst & Young LLP regarding change in independent auditors
21.1 * Subsidiaries of Formica
23.1 * Consent of Davis Polk & Wardwell (contained in their opinion
filed as Exhibit 5.1).
23.2 ** Consent of Arthur Andersen LLP
23.3 ** Consent of Ernst & Young LLP
24.1 * Power of Attorney (Included on the signature page of the
registration statement as originally filed)
25.1 * Statement of Eligibility of Summit Bank on Form T-1.
27.1 ** Financial Data Schedule
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* Previously filed.
** Filed herewith.
(b) Financial Statement Schedules and Auditors' Reports thereon
Schedule II Valuation and Qualifying Accounts (in millions)
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Column A Column B Column C Column D Column E
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Additions
Charged Charged to
Balance at to Costs Other Balance at
Beginning of and Accounts- Deductions - End of
Description Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts $4.2 $1.7 -- ($1.2)(1) $4.7
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Year ended December 31, 1998:
Deducted from assets accounts:
Allowance for doubtful accounts $1.5 $6.0 -- ($3.3)(1) $4.2
======== ===== ======= ======== =======
Year ended December 31, 1997:
Deducted from assets accounts:
Allowance for doubtful accounts $1.4 $3.0 -- ($2.9)(1) $1.5
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1 Write-off of uncollectible accounts.
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Report of Independent Auditors on Schedule
We have audited the consolidated financial statements of Formica
Corporation for the year ended December 31, 1997, and have issued our report
thereon dated May 7, 1998 (except for Note 3 -- "Reclassifications" as to which
the date is March 3, 1999), included elsewhere in this Registration Statement.
Our audit also included the financial statement schedule for the year ended
December 31, 1997 listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
White Plains, New York
May 7, 1998
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ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the SEC pursuant to
Rule 424(b) under the Securities Act of 1933 if, in the
aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Formica pursuant to the foregoing provisions, or otherwise, Formica has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Formica of expenses
incurred or paid by a director, officer or controlling person of Formica in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, Formica will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Warren, State of New Jersey, on May 19, 2000.
FORMICA CORPORATION
By: /s/ David T. Schneider
---------------------------------
David T. Schneider
Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
* /s/ Vincent P. Langone
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Vincent P. Langone Director, Chairman, President and Chief May 19, 2000
Executive Officer
* /s/ David T. Schneider
- -----------------------------------
David T. Schneider Vice President, Chief Financial Officer May 19, 2000
and Secretary
* /s/ Thompson Dean
- -----------------------------------
Thompson Dean Director May 19, 2000
* /s/ Peter T. Grauer
- -----------------------------------
Peter T. Grauer Director May 19, 2000
* /s/ David Y. Howe
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David Y. Howe Director May 19, 2000
* /s/ Alexander Donald Mackenzie
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Alexander Donald Mackenzie Director May 19, 2000
By: /s/ David T. Schneider
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David T. Schneider
Attorney-in-fact
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