SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (D) OF THE SECURITIES ACT OF 1934
For the quarterly report ended June 30, 2000
--------------------------------
Commission File Number: 333-76683
Formica Corporation
(Exact name of registrant as specified in its charter)
Delaware 34-1046753
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 and Chief Financial Officer
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
Title Shares Outstanding as of June 30, 2000
- ----- --------------------------------------
Common Stock, $.01 par value per share 100 Shares Outstanding
FORMICA CORPORATION
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets June 30, 2000
and December 31, 1999 1
Condensed Consolidated Statements of Operations Three-
and Six-Months Ended June 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows Six-months
ended June 30, 2000 and 1999 3
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Part I. Financial Information
Item 1: Financial Statements
FORMICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
June 30, December 31,
2000 1999
ASSETS -------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 17.6 $ 7.8
Accounts receivable, net 129.6 84.4
Inventories 160.5 119.7
Prepaid expenses and other current assets 27.3 11.5
Deferred income taxes 15.8 14.7
------ ------
Total current assets 350.8 238.1
PROPERTY, PLANT AND EQUIPMENT, net 410.4 307.3
OTHER ASSETS:
Intangible assets, net 166.9 161.1
Other noncurrent assets 13.0 11.3
------ ------
Total assets $941.1 $717.8
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 30.7 $ 28.2
Accounts payable 65.2 37.2
Accrued expenses 91.4 56.8
------ ------
Total current liabilities 187.3 122.2
LONG-TERM DEBT 459.2 362.9
DEFERRED INCOME TAXES 140.2 125.4
OTHER LIABILITIES 44.1 30.0
------ ------
Total liabilities 830.8 640.5
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 217.0 137.0
Accumulated deficit (85.5) (54.4)
Accumulated other comprehensive loss (21.3) (5.4)
------ ------
Total stockholders' equity 110.3 77.3
------ ------
Total liabilities and stockholders' equity $941.1 $717.8
====== ======
See notes to the condensed consolidated financial statements.
Page 1
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
Three-Months Ended Six-Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
------ ------- ------- ------
NET SALES $214.2 $155.4 $355.3 $294.6
COST OF PRODUCTS SOLD 156.7 111.2 258.2 209.9
INVENTORY MARKDOWN FROM RESTRUCTURING -- -- 1.9 --
------ ------- ------- ------
Gross profit 57.5 44.2 95.2 84.7
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 56.3 38.6 96.0 78.5
PROVISION FOR RESTRUCTURING 3.1 -- 7.2 --
COST OF TERMINATED ACQUISITIONS -- -- 0.4 --
------ ------- ------- ------
Operating (loss) income (1.9) 5.6 (8.4) 6.2
INTEREST EXPENSE (12.1) (8.6) (22.1) (19.0)
OTHER INCOME 1.7 0.1 2.3 1.6
------ ------- ------- ------
LOSS BEFORE PROVISION FOR INCOME TAXES (12.3) (2.9) (28.2) (11.2)
INCOME TAX PROVISION (2.0) (0.7) (2.9) (1.9)
------ ------- ------- ------
Net loss $(14.3) $ (3.6) $ (31.1) $(13.1)
====== ======= ======= ======
See notes to the condensed consolidated financial statements.
Page 2
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Six-Months Ended
June 30,
---------------------
2000 1999
------ ------
CASH PROVIDED BY (USED IN) OPERATIONS $ 17.7 $(12.0)
INVESTING ACTIVITIES:
Capital expenditures and investments, net (8.6) (10.0)
Acquisitions, net of cash acquired (175.5) (15.6)
------ ------
Net cash used in investing activities (184.1) (25.6)
FINANCING ACTIVITIES:
Proceeds from borrowings, net of financing fees 133.2 218.3
Equity contribution 80.0 --
Repayments of debt (36.3) (201.9)
------ ------
Net cash provided by financing activities 176.9 16.4
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (0.7) (3.2)
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9.8 (24.4)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 7.8 31.6
------ ------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 17.6 $ 7.2
====== ======
See notes to the condensed consolidated financial statements.
Page 3
(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, the interim financial statements reflect all
material adjustments of a normal recurring nature considered necessary for
a fair presentation of the financial position, results of operations and
cash flow. Operating results for the six-months ended June 30, 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 common stock of
Formica Corporation ("Formica" or the "Company") is not publicly traded
and the Company is a wholly-owned subsidiary of FM Holdings, Inc.
("Holdings"). Holdings is a wholly-owned subsidiary of Laminates
Acquisition Co. ("Laminates"), thereby Laminates is the ultimate parent
of Formica.
For further information, refer to the audited consolidated financial
statements and footnotes thereto 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) ACQUISITION:
On March 31, 2000, Decorative Surfaces Holding AB ("DSH") acquired
Perstorp Surface Materials AB ("PSM"), a worldwide producer of decorative
and industrial laminates, finished foils, printed paper and other
surfacing materials from Perstorp AB (Sweden) for approximately $177.5
million (including approximately $2.0 million of transaction costs),
subject to any post-closing obligations. The consideration paid to
Perstorp AB was determined through arms-length negotiations between DSH
and Perstorp AB.
The PSM acquisition and related fees and expenses were financed with
$110.0 million of term loan proceeds under a new senior credit facility
and the issuance of approximately $80.0 million of warrants, common stock
and preferred stock of Laminates and Holdings to 1) DLJ Merchant Banking
Partners II, L.P. and related funds, 2) CVC Capital Partners Limited and
3) management. The $110.0 million in term loans was provided by PSM
Funding, Inc., an affiliate of DLJ Merchant Banking Partners II, one of
the principal shareholders of Laminates.
Holdings had previously announced its intention to contribute the stock of
DSH, together with unused proceeds raised through the debt and equity
issued in connection with the PSM acquisition, to Formica once certain
conditions were satisfied. Formica was not required to pay any
consideration for that contribution, but was to assume the $110.0 million
in debt incurred to finance the acquisition. (See Note 4)
On May 26, 2000, Holdings contributed all of the stock of DSH to Formica.
DSH was a wholly-owned subsidiary of Holdings (the parent company of
Formica) whose sole asset was its investment in PSM. The acquisition was
accounted for on an as-if pooling basis because it is a combination of
entities under common control. Accordingly, Formica's historical financial
statements include PSM's financial position, results of operations and
cash flows after reflecting the acquisition and related purchase
accounting by DSH on March 31, 2000 for all periods beginning April 1,
2000. Formica has allocated the total cost of the acquisition of PSM as
follows (in millions):
Acquisition Consideration................ $175.5
Estimated Fees and Expenses.............. 2.0
------
Total Consideration...................... $177.5
======
Payment of Debt.......................... $ 76.1
Net Tangible Assets...................... 85.7
Goodwill and Other Intangible Assets..... 15.7
------
$177.5
======
The allocation of the consideration paid by DSH for the assets and
liabilities of PSM is based on preliminary estimates of the fair value of
such assets and liabilities. Due to the capital intensive nature of the
PSM business, the excess of the purchase price over the book value of net
assets acquired has been primarily allocated to property, plant and
equipment. A formal appraisal of the assets and liabilities is currently
ongoing. Accordingly, the actual allocation of such consideration may
differ from the preliminary estimates after the completion of independent
valuations and other procedures to be performed.
Page 4
As a result of the acquisition, Formica is currently reviewing all
operations within PSM (see Note 5). The Company recorded a charge of
approximately $2.2 million in the second quarter to reflect the estimated
impact following this review, primarily related to an increase in doubtful
accounts and inventory write-offs.
The following unaudited pro forma consolidated results of operations for
the three- and six-months ended June 30, 2000 and 1999 assume the
acquisition had occurred at the beginning of 1999 (in millions):
Three-months ended Six-months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Net sales $214.2 $216.0 $408.5 $ 412.3
Net loss (14.3) (2.5) (33.8) (12.7)
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 acquisition been consummated at the beginning of 1999, or
of future results.
(3) INVENTORIES:
Major classes of inventories are as follows:
June 30, December 31,
2000 1999
-------- ------------
(in millions)
Finished goods $101.5 $ 84.5
Work-in-process 17.2 11.6
Raw materials 64.8 45.1
------ ------
Total 183.5 141.2
Less, reserves 23.0 21.5
------ ------
$160.5 $119.7
====== ======
(4) LONG-TERM DEBT:
In connection with the acquisition of PSM (See Note 2), PSM Funding, Inc.
syndicated and increased the term loan facility to $140.0 million at the
time of the contribution of DSH to Formica. The additional $30.0 million
was used to reduce outstanding borrowings under Formica's existing credit
facility at the time of the contribution and to make any payments in
connection with the closing. Formica's existing credit facility was
amended and restated to include, as a separate tranche of term borrowings,
the $140.0 million term loan. The new tranche will mature in 2006 and will
require 1% annual amortization (payable quarterly) until March 31, 2005,
with all remaining amounts payable in increments of $27.6 million
quarterly thereafter until maturity. Interest on the new term loan will
be, at Formica's option, either 2.25% over the Base Rate or 3.5% over
LIBOR. Interest rates on the other tranches of the credit facility were
also increased by 0.5% in connection with this transaction.
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 is in compliance with all
financial covenants as of June 30, 2000.
(5) 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- and six-months ended June 30, 2000, the
Company spent $ 0.8 million and $ 1.0 million, respectively, of the
restructuring provision primarily relating to severance payments. The
restructuring plan will be substantially completed in the second half of
2000. The remaining balance of this restructuring provision was $1.7
million at June 30, 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 over 200 employees. As part of this restructuring, the Mt.
Bethel, Pennsylvania manufacturing facility was closed and its operations
were subsequently transferred to the Company's Odenton, Maryland
manufacturing facility. 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 resulting
from the elimination of product lines ($1.9 million) and severance and
severance related items ($1.0 million). During the three- and six-months
ended June 30, 2000, the Company spent $0.6 million and $0.9 million,
respectively, of this restructuring provision, primarily relating to
severance payments. The restructuring plan will be substantially completed
in 2000. The remaining balance of the restructuring provision was $ 5.1
million at June 30, 2000. The Company has identified an
Page 5
additional $3.0 million of charges, indirectly related to the
restructuring of the North America operations, of which $1.4 million was
incurred during the second quarter of 2000. The balance is expected to
occur over the remainder of 2000.
As of the consummation date of the PSM acquisition, management began a
process to assess the organization as well as the facilities acquired with
the purpose of formulating a structure for the combined organization. This
plan is not yet complete and a complete cost assessment will not be
finalized until the end of 2000. Reserves for organizational restructuring
in the amount of $14.5 million have been established. The remaining
balance of the restructuring provision was $14.2 million at June 30, 2000.
The preliminary organizational restructuring plan, which primarily relates
to the European operations, includes the closing of offices and a select
curtailment of operations, the optimization of the utilization of assets
and a reduction of headcount in excess of 300 employees. This
restructuring is expected to be completed in 2001. Once the approved
formal plan is implemented and underway, this could potentially result in
a change in the estimated range for the reserves established. In addition,
the Company incurred approximately $0.2 million of restructuring-related
expenses associated with the acquisition of PSM during the six-months
ended June 30, 2000.
On June 1, 2000, the Company announced plans to restructure certain of its
operations within Europe and provided a restructuring provision of $1.5
million in the second quarter of 2000. These actions are being taken in
conjunction with the integration of the PSM operations, which were
recently acquired by Formica. The plan is expected to result in a
reduction in headcount of approximately 25 employees. The restructuring
plan includes the closure of a Company warehouse in Europe with subsequent
relocation of operations to elsewhere in Europe. The restructuring
provision consists of the following: facility closure costs and assets
held for disposal ($0.5 million) and severance and severance-related items
($1.0 million). Through the quarter ended June 30, 2000, no spending has
occurred related to the provision. Under the current timetable, the
Company projects that the restructuring plan will be fully completed by
mid-year 2001. The Company has also identified an estimated additional
$0.1 million in charges and $0.2 million in capital spending, indirectly
related to the restructuring of the European distribution operations,
which the Company anticipates will occur mostly during the fourth quarter
of 2000.
Depending on the amount and timing of the Company's restructuring
activities, cash flows and results of operations could be materially
affected in a particular quarter.
(6) CONTINGENT MATTERS:
The Company is involved in various proceedings relating to environmental
matters. It is the Company's policy to accrue liabilities for remedial
investigations and clean-up activities when it is probable that such
liabilities have been incurred and when they can be reasonably estimated.
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 $3.6 million and $3.9
million at June 30, 2000 and December 31, 1999, respectively, for these
matters to recognize a reasonable estimate of the probable liability.
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.
Formica's operations are subject to federal, state, local and foreign
environmental laws and regulations governing both the environment and the
work place. The Company believes that it is currently in substantial
compliance with such laws and the regulations promulgated thereunder.
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 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.
Page 6
Formica Corporation and other manufacturers of high-pressure laminate
("HPL") have recently been named as defendants in purported class action
complaints filed in the federal and certain state courts. The complaints,
which all make similar allegations, allege that Formica and other HPL
manufacturers in the United States have engaged in a contract, combination
or conspiracy in restraint of trade in violation of state and federal
antitrust laws and seek damages of an unspecified amount. The actions are
in their earliest stages. Formica Corporation intends to defend vigorously
against the allegations of the complaints.
Formica continually evaluates its estimated legal liabilities. The
Company's estimated range of liability is primarily based on known claims.
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.
(7) COMPREHENSIVE LOSS:
Total comprehensive loss was $28.2 million and $47.0 million for the
three- and six-months ended June 30, 2000, respectively and $6.0 million
and $24.9 million for the three- and six-months ended June 30, 1999,
respectively. The difference between comprehensive loss and net loss
results from foreign currency translation adjustments.
(8) RELATED PARTY TRANSACTIONS
In order to fund normal working capital requirements, the Company has
entered into certain borrowing arrangements with Laminates Acquisition
Co., the parent of FM Holdings, Inc. These arrangements are short-term in
nature and generally bear no interest. At June 30, 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.
(9) SEGMENT INFORMATION:
The Company is principally engaged in a single line of business: the
design, manufacture and distribution of decorative surfacing products.
Substantially all revenues result from the sale of decorative surfaces and
related products through domestic and international distributors and
direct accounts. The Company's operations are managed on a geographic
basis and, therefore, reportable segments are based on geographic areas.
In the second quarter of 2000, the Company's market presence in Europe,
the Americas and Asia was increased as a result of the PSM acquisition.
Segment revenues are defined as net sales to external customers of each
segment less freight expense. All significant intercompany sales and
expenses have been eliminated in determining segment revenues and segment
profit (loss).
Three-Months Ended Six-Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
(in millions) (in millions)
Segment revenues:
United States $ 82.8 $ 87.7 $162.5 $165.2
Americas - Other 27.7 12.7 38.9 23.4
Europe 80.3 36.9 114.0 74.2
Asia 23.4 18.1 39.9 31.8
------ ------ ------ ------
Total $214.2 $155.4 $355.3 $294.6
====== ====== ====== ======
Page 7
Three-Months Ended Six-Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
(in millions) (in millions)
Segment profit (loss):
Americas $ (5.4) $ (1.9) $(16.5) $ (5.4)
Europe 0.8 3.9 3.5 7.2
Asia 2.7 3.6 4.6 4.4
------ ------ ------ ------
Total $ (1.9) $ 5.6 $ (8.4) $ 6.2
====== ====== ====== ======
Depreciation and amortization
(included in segment profit
(loss))
Americas $ 9.7 $ 8.2 $ 18.7 $ 16.3
Europe 4.8 2.2 7.0 4.5
Asia 1.4 0.9 2.4 1.7
------ ------ ------ ------
Total $ 15.9 $ 11.3 $ 28.1 $ 22.5
====== ====== ====== ======
A reconciliation of total
segment profit (loss) to
loss before provision for
income taxes is as follows:
Segment (loss) profit $ (1.9) $ 5.6 $ (8.4) $ 6.2
Interest expense (12.1) (8.6) (22.1) (19.0)
Other income 1.7 0.1 2.3 1.6
------ ------ ------ ------
Loss before
provision for
income taxes $(12.3) $ (2.9) $(28.2) $(11.2)
====== ====== ====== ======
June 30, December 31,
2000 1999
-------- -----------
(in millions)
Total assets:
United States $433.8 $451.0
Americas - Other 78.6 37.3
Europe 337.9 152.4
Asia 90.8 77.1
------ ------
Total $941.1 $717.8
====== ======
Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Formica is engaged in the design, manufacture and distribution of decorative
surfacing products. Formica was founded in 1913 and created the world's first
decorative laminate in 1927. In May 1985, a group led by management and
Shearson Lehman purchased Formica from American Cyanamid Company. In 1989,
Formica was sold to FM Acquisition Corporation in a buyout led by Dillon, Read
& Co. Inc. In January 1995, BTR Nylex Ltd., an Australian company and a
subsidiary of BTR plc, acquired Formica. In May 1998, Laminates Acquisition
Co. ("Laminates") acquired Formica (the "Acquisition").
Recent Developments
Perstorp Surface Materials Acquisition: (See Note 2 to the Condensed
Consolidated Financial Statements) On March 31, 2000, Decorative Surfaces
Holding AB ("DSH") acquired Perstorp Surface Materials AB ("PSM"), a worldwide
producer of decorative and industrial laminates, finished foils, printed paper
and other surfacing materials from Perstorp AB (Sweden) for approximately
$177.5 million (including approximately $2.0 million of transaction costs),
subject to any post-closing obligations. The consideration paid to Perstorp AB
was determined through arms-length negotiations between DSH and Perstorp AB.
The PSM acquisition and related fees and expenses were financed with $110.0
million of term loan proceeds under a new senior credit facility and the
issuance of approximately $80.0 million of warrants, common stock and
preferred stock of Laminates and Holdings to 1) DLJ Merchant Banking Partners
II, L.P. and related funds, 2) CVC Capital Partners Limited and 3) management.
The $110.0 million in term loans was provided by PSM Funding, Inc., an
affiliate of DLJ Merchant Banking Partners II, one of the principal
shareholders of Laminates.
Holdings had previously announced its intention to contribute the stock of
DSH, together with unused proceeds raised through the debt and equity issued
in connection with the PSM acquisition, to Formica once certain conditions
were satisfied. Formica was not required to pay any consideration for that
contribution, but was to assume the $110.0 million in debt incurred to finance
the acquisition. (See Note 4)
On May 26, 2000, Holdings contributed all of the stock of DSH to Formica. DSH
was a wholly-owned subsidiary of Holdings (the parent company of Formica)
whose sole asset was its investment in PSM. The acquisition was accounted for
on an as-if pooling basis because it is a combination of entities under common
control. Accordingly, Formica's historical financial statements include PSM's
financial position, results of operations and cash flows after reflecting the
acquisition and related purchase accounting by DSH on March 31, 2000 for all
periods beginning April 1, 2000. Formica has allocated the total cost of the
acquisition of PSM as follows (in millions):
Acquisition Consideration.......................... $175.5
Estimated Fees and Expenses........................ 2.0
------
Total Consideration................................ $177.5
======
Payment of Debt.................................... $ 76.1
Net Tangible Assets................................ 85.7
Goodwill and Other Intangible Assets............... 15.7
------
$177.5
======
The allocation of the consideration paid by DSH for the assets and liabilities
of PSM is based on preliminary estimates of the fair value of such assets and
liabilities. Due to the capital intensive nature of the PSM business, the
excess of the purchase price over the book value of net assets acquired has
been primarily allocated to property, plant and equipment. A formal appraisal
of the assets and liabilities is currently ongoing. Accordingly, the actual
allocation of such consideration may differ from the preliminary estimates
after the completion of independent valuations and other procedures to be
performed.
As a result of the acquisition, Formica is currently reviewing all operations
within PSM (see Note 5). The Company recorded a charge of approximately $2.2
million in the second quarter to reflect the estimated impact following this
review primarily related to an increase in doubtful accounts and inventory
write-offs.
Restructuring Charges. (See Note 5 to the Condensed Consolidated Financial
Statements) On March 1, 2000, the Company announced plans to restructure
certain operating activities in North America, which are expected to reduce
total headcount by over 200 employees. As part of this restructuring, the Mt.
Bethel, Pennsylvania manufacturing facility was closed and its operations were
subsequently transferred to the Company's Odenton, Maryland manufacturing
facility. 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 resulting from the elimination of product
lines ($1.9 million) and severance and severance related items ($1.0 million).
During the three- and six-months ended June 30, 2000, the Company spent $0.6
million and $0.9 million, respectively, of this restructuring provision,
primarily relating to severance
Page 9
payments. The restructuring plan will be substantially completed in 2000.
The remaining balance of the restructuring provision was $ 5.1 million at June
30, 2000. The Company has identified an additional $3.0 million of charges,
indirectly related to the restructuring of the North America operations, of
which $1.4 million was incurred during the second quarter of 2000. The
balance is expected to occur over the remainder of 2000.
As of the consummation date of the PSM acquisition, management began a process
to assess the organization as well as the facilities acquired with the purpose
of formulating a structure for the combined organization. This plan is not yet
complete and a complete cost assessment will not be finalized until the end of
2000. Reserves for organizational restructuring in the amount of $14.5 million
have been established. The preliminary organizational restructuring plan, which
primarily relates to the European operations, includes the closing of offices
and a select curtailment of operations, the optimization of the utilization of
assets and a reduction of headcount in excess of 300 employees. This
restructuring is expected to be completed in 2001. Once the approved formal
plan is implemented and underway, this could potentially result in a change in
the estimated range for the reserves established. In addition, the Company
incurred approximately $0.2 million of restructuring-related expenses
associated with the acquisition of PSM during the six-months ended June 30,
2000.
On June 1, 2000, the Company announced plans to restructure certain of its
operations within Europe and provided a restructuring provision of $1.5 million
in the second quarter of 2000. These actions are being taken in conjunction
with the integration of the PSM operations. The plan is expected to result in a
reduction in headcount of approximately 25 employees. The restructuring plan
includes the closure of a Company warehouse in Europe with subsequent
relocation of operations to elsewhere in Europe. The restructuring provision
consists of the following: facility closure costs and assets held for disposal
($0.5 million) and severance and severance-related items ($1.0 million).
Through the quarter ended June 30, 2000, no spending has occurred related to
the provision. Under the current timetable, the Company projects that the
restructuring plan will be fully completed by mid-year 2001. The Company has
also identified an estimated additional $0.1 million in charges and $0.2
million in capital spending, indirectly related to the restructuring of the
European distribution operations, which the Company anticipates will occur
mostly during the fourth quarter of 2000.
Depending on the amount and timing of the Company's restructuring activities,
cash flows and results of operations could be materially affected in a
particular quarter.
Litigation: (See Note 6 to the Condensed Consolidated Financial Statements)
Formica Corporation and other manufacturers of high-pressure laminate ("HPL")
have recently been named as defendants in purported class action complaints
filed in the both federal and certain state courts. The complaints, which all
make similar allegations, allege that Formica and other HPL manufacturers in
the United States have engaged in a contract, combination or conspiracy in
restraint of trade in violation of state and federal antitrust laws and seek
damages of an unspecified amount. The actions are in their earliest stages.
Formica Corporation intends to defend vigorously against the allegations of the
complaints.
Results of Operations:
SIX-MONTHS ENDED JUNE 30, 2000 COMPARED SIX-MONTHS ENDED JUNE 30, 1999
Net Sales. Net sales for 2000 were $355.3 million, compared to net sales of
$294.6 million for 1999, an increase of $60.7 million, or 20.6%. The
acquisition of PSM accounted for $68.2 million of the increase, with the base
business decreasing $7.5 million. Sales in the Americas increased to $201.4
million from $188.6 million in 1999. This increase is the result of the
acquisition of PSM, which accounted for $16.2 million, and improved pricing
levels, partially offset by lower volume. Net sales in Asia increased to $39.9
million in 2000 from $31.8 million in 1999, an increase of $8.1 million, or
25.5%, resulting primarily from the addition of the PSM business, which
accounted for $3.6 million of the increase, as well as increased volume. Net
sales in Europe increased $39.8 million to $114.0 million in 2000 from $74.2
million in 1999. The acquisition of PSM accounted for $48.4 million of the
increase, while the base business decreased $8.6 million, primarily due to the
effects of foreign exchange translations.
Gross Profit. Gross profit for 2000 was $95.2 million, compared to gross
profit of $84.7 million for 1999, an increase of $10.5 million, or 12.4%.
Gross profit as a percentage of net sales in 2000 decreased to 26.8% from
28.8% in 1999. The 2000 period includes $1.9 million related to the markdown
in inventory from the restructuring of the North America operations.
Excluding the restructuring charge, gross profit increased $12.4 million in
2000, or as a percentage of sales to 27.3%.
Gross Profit in the Americas decreased to $51.5 million in 2000 from $52.6
million in 1999. The $1.1 million decrease primarily resulted from the $2.9
million contribution from PSM, offset by the $1.9 million markdown in inventory
from the restructuring of the North America operations and increased raw
material prices. Gross profit as a percentage of net sales for the Americas
decreased to 25.6% in 2000 from 27.9% 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 increased
$11.6 million to $43.7 million in 2000 from $32.1 million in 1999, or 36.1%, of
which PSM contributed $14.5 million. The effects of foreign exchange
translation amounting to $1.4
Page 10
million and competitive pricing pressures negatively impacted gross profit
margins compared to last year. As a percentage of net sales, gross profit in
Europe and Asia decreased to 28.4% in 2000 from 30.3% in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2000 were $96.0 million compared to $78.5 million
for 1999, an increase of $17.5 million. Selling, general and administrative
expenses excluding PSM were $79.6 million for 2000 compared to $78.5 million
in 1999. Selling, general and administrative expenses, as a percent of net
sales, were 27.0% in the 2000 period compared to 26.7% in the 1999 period.
Excluding the 2000 period costs related to the acquisition of PSM of
approximately $2.5 million, selling, general and administrative expenses were
$77.1 million in the 2000 period compared to $78.5 million in 1999.
Restructuring Charges (See Note 5 to the Consolidated Condensed Consolidated
Financial Statements). On March 1, 2000, the Company announced plans to
restructure certain operating activities in North America. The Company provided
a restructuring provision of $6.0 million during the first quarter of 2000.
During the three-months ended June 30, 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 Company has
identified an additional $3.0 million of charges, indirectly related to the
restructuring of the North America operations, of which $1.4 million was
incurred during the second quarter of 2000. The balance is expected to occur
over the remainder of 2000.
As of the consummation date of the PSM acquisition, management began a process
to assess the organization as well as the facilities acquired with the purpose
of formulating a structure for the combined organization. This plan is not
yet complete and a complete cost assessment will not be finalized until the
end of 2000. Reserves for organizational restructuring in the amount of $14.5
million have been established. The preliminary organizational restructuring
plan, which primarily relates to the European operations, includes the closing
of offices and a select curtailment of operations, the optimization of the
utilization of assets and a reduction of headcount and is expected to be
completed in 2001. Once the approved formal plan is implemented and underway,
this could potentially result in a change in the estimated range for the
reserves established. In addition, the Company incurred approximately $0.2
million of restructuring-related expenses associated with the acquisition of
PSM during the six-months ended June 30, 2000.
On June 1, 2000, the Company announced plans to restructure certain of its
operations within Europe and provided a restructuring provision of $1.5 million
in the second quarter of 2000. The restructuring provision consists of the
following: facility closure costs and assets held for disposal ($0.5 million)
and severance and severance-related items ($1.0 million). Through the quarter
ended June 30, 2000, no spending has occurred related to the provision. The
Company has also identified an estimated additional $0.1 million in charges and
$0.2 million in capital spending, indirectly related to the restructuring of
the European distribution operations, which the Company anticipates will occur
mostly during the fourth quarter of 2000.
Cost of Terminated Acquisitions. During the six-month period ended June 30,
2000, the Company incurred a $0.4 million charge relating to expenses from the
cost of a terminated acquisition, primarily for legal and other professional
fees.
Operating Income (Loss). The operating loss for 2000 was $8.4 million compared
to an operating income of $6.2 million for 1999. The 2000 period includes
restructuring charges of $9.1 million, acquisition costs of $2.5 million and a
cost of terminated acquisitions of $0.4 million. After taking into account the
2000 charges, the operating income was $3.6 million in 2000 compared to
operating income of $6.2 million in 1999, for the reasons stated above.
EBITDA. EBITDA decreased to $22.0 million in 2000 compared to $30.3 million in
1999. After taking into account the 2000 period restructuring costs,
acquisition costs and cost of terminated acquisitions (described above), EBITDA,
as adjusted, was $34.0 million in 2000 compared to $30.3 million in 1999.
Interest Expense. Interest expense increased $3.1 million to $22.1 million in
2000 from $19.0 million for 1999. The increase in interest expense is due to
the additional debt incurred in 2000 for the acquisition of PSM and additional
debt incurred in the latter part of 1999, partially offset by a write-off in
the 1999 period of deferred financing fees related to the refinancing of the
bridge notes.
Income Taxes. Income tax expense increased to $2.9 million in 2000 compared
to $1.9 million in 1999. The increase in income tax expense is primarily the
result of an increase in the taxable income in certain foreign countries.
Net Loss. Net loss was $31.1 million in 2000 compared to a net loss of $13.1
million in 1999, due to the reasons described above.
Three-Months Ended June 30, 2000 Compared Three-Months Ended June 30, 1999
Net Sales. Net sales for 2000 were $214.2 million, compared to net sales of
$155.4 million for 1999, an increase of $58.8 million, or 37.8%. The
acquisition of PSM accounted for $68.2 million of the increase, with the base
business decreasing $9.4 million. Net sales in the Americas increased $10.1
million to $110.5 million in 2000 from $100.4 million in 1999, primarily due to
the acquisition of PSM, which accounted for $16.2 million, and improved
laminate pricing levels in the US, partially offset by lower volume. Net sales
in Asia increased to $23.4 million in 2000 from $18.1 million in 1999, an
increase of $5.3 million, or 29.3%, resulting primarily from the addition of
the PSM business, which accounted for $3.6 million of the increase, as well as
increased volume. Net sales in Europe increased $43.4 million to $80.3
Page 11
million in 2000 from $36.9 million in 1999. The acquisition of PSM accounted
for $48.4 million of the increase, while the base business decreased $5.0
million, primarily due to the effects of foreign exchange translations, which
accounted for $3.3 million of the decrease.
Gross Profit. Gross profit for 2000 was $57.5 million, compared to gross
profit of $44.2 million for 1999, an increase of $13.3 million, or 30.1%.
Gross profit as a percentage of net sales in 2000 decreased to 26.8% from
28.8% in 1999.
Gross Profit in the Americas increased to $28.2 million in 2000 from $27.0
million in 1999, of which PSM contributed $3.9 million. Gross profit as a
percentage of net sales for the Americas, decreased to 25.5% in 2000 from 26.9%
in 1999, principally as a result of increased raw material pricing partially
offset by improved pricing levels. Gross profit in Europe and Asia increased to
$29.3 million in 2000 from $17.2 million in 1999, of which PSM contributed
$13.5 million. The effects of foreign exchange translations amounting to $0.8
million negatively impacted gross profit margins compared to last year. As a
percentage of net sales, gross profit in Europe and Asia decreased to 28.3% in
2000 from 31.2% in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2000 were $56.3 million compared to $38.6 million
for 1999, an increase of $17.7 million. As a percent of net sales, selling,
general and administrative expenses increased to 26.3% in the 2000 period
compared to 24.8% in the 1999 period. Excluding the effects of PSM, selling,
general and administrative expenses excluding the effects of PSM were $39.9
million for 2000 compared to $38.6 million in 1999. Excluding the 2000 period
costs related to the acquisition of PSM of approximately $2.5 million, selling,
general and administrative expenses were $37.4 million in the 2000 period
compared to $38.6 million in 1999
Restructuring Charges (See Note 5 to the Condensed Consolidated Financial
Statements). During the second quarter of 2000, the Company spent $0.3 million
of the North America restructuring provision, as well as incurring an
additional $1.4 million of indirectly related restructuring charges for the
North America operations, as described above.
As of the consummation date of the PSM acquisition, management began a process
to assess the organization as well as the facilities acquired with the purpose
of formulating a structure for the combined organization. This plan is not yet
complete and a complete cost assessment will not be finalized until the end of
2000. Reserves for organizational restructuring in the amount of $14.5 million
have been established. The preliminary organizational restructuring plan, which
primarily relates to the European operations, includes the closing of offices
and a select curtailment of operations, the optimization of the utilization of
assets and a reduction of headcount and is expected to be completed in 2001.
Once the approved formal plan is implemented and underway, this could
potentially result in a change in the estimated range for the reserves
established. In addition, the Company incurred approximately $0.2 million of
restructuring-related expenses associated with the acquisition of PSM during
the three-months ended June 30, 2000.
On June 1, 2000, the Company announced plans to restructure certain of its
operations within Europe and provided a restructuring provision of $1.5 million
in the second quarter of 2000. The restructuring provision consists of the
following: facility closure costs and assets held for disposal ($0.5 million)
and severance and severance-related items ($1.0 million). Through the quarter
ended June 30, 2000, no spending has occurred related to the provision. The
Company has also identified an estimated additional $0.1 million in charges and
$0.2 million in capital spending, indirectly related to the restructuring of
the European distribution operations, which the Company anticipates will occur
mostly during the fourth quarter of 2000.
Operating Income (Loss). The operating loss for 2000 was $1.9 million
compared to an operating income of $5.6 million for 1999. The 2000 period
includes restructuring charges of $3.1 million and acquisition costs of $2.5
million. After taking into account the 2000 charges, the operating income was
$3.7 million in 2000 compared to operating income of $5.6 million in 1999,
for the reasons stated above.
EBITDA. EBITDA decreased to $15.7 million in 2000 compared to $17.0 million
in 1999. After taking into account the 2000 period restructuring and
acquisition charges (described above), EBITDA, as adjusted, was $21.3 million
in 2000 compared to $30.3 million in 1999.
Interest Expense. Interest expense increased to $12.1 million in 2000 from
$8.6 million for 1999. The increase in interest expense is due to the
additional debt incurred in 2000 for the acquisition of PSM and additional
debt incurred in the latter part of 1999.
Income Taxes. Income tax expense increased to $2.0 million in 2000 compared
to $0.7 million in 1999. The increase in income tax expense is primarily the
result of an increase in the taxable income in certain foreign countries.
Net Loss. Net loss was $14.3 million in 2000 compared to a net loss of $3.6
million in 1999, due to the reasons described above.
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
Page 12
be debt service requirements to service the acquisition-related debt described
below, capital expenditures and future acquisitions.
As of June 30, 2000, Formica had approximately $489.9 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 $163.5 million at June 30, 2000 compared to $115.9 million
at December 31, 1999, the increase primarily the result of the acquisition of
PSM. 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 senior subordinated unsecured increasing rate bridge notes (the "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% Senior Subordinated
Notes due March 1, 2009 (the "Notes") and repaid the Bridge Notes. The Notes
mature in 2009. Interest on the Notes is payable semiannually in cash. The
Notes and related indenture place certain restrictions on Formica and its
subsidiaries, including the ability to pay dividends, issue preferred stock,
repurchase capital stock, incur and pay indebtedness, sell assets and make
certain restricted investments.
The Credit Facility includes a $120.0 million revolving credit facility, an
$85 million term loan and a $140.0 million term loan. The $120.0 million
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. The $140.0 million term loan
will mature in 2006. At June 30, 2000, $54.5 million was outstanding against
the revolving credit facility. The term loan under the Credit Facility
totaled $217.6 million at June 30, 2000 and amortizes over the life of the
Credit Facility.
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, Holdings 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.
The Company is in compliance with the financial covenants as of June 30, 2000.
In conjunction with the contribution of PSM to Formica by Holdings, the
Company assumed $110.0 million in debt. PSM Funding, Inc. syndicated and
increased the term loan facility to $140.0 million at the time of the
contribution. The additional $30.0 million was used to reduce outstanding
borrowings under Formica's existing credit facility at the time of the
contribution and to make any payments in connection with the closing.
Formica's existing credit facility was amended and restated to include the
$140.0 million term loan as a separate tranche that will mature in 2006 and
will require 1% annual amortization (payable quarterly) until March 31, 2005,
with all remaining amounts payable in increments of $27.6 million quarterly
thereafter until maturity. Interest on the new term loan will be, at
Formica's option, either 2.25% over the Base Rate or 3.5% over LIBOR.
Interest rates on the other tranches of the credit facility were also
increased by 0.5% in connection with this transaction.
Formica maintains various local 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 June 30, 2000 and December 31, 1999, Formica had outstanding
approximately $26.1 million and $28.4 million, respectively, in letters of
credit under the Credit Facility to provide credit enhancement for certain of
its local credit facilities, primarily in Asia.
Page 13
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 has spent
approximately $8.6 million on capital expenditures during 2000, and anticipates
that it will spend an additional $10.0-$12.0 million during the remainder of
the year. 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 continues to evaluate acquisitions that will 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, however, that
any such additional financing will be available on acceptable terms.
Formica anticipates that its operating cash flow, together with borrowings
under the Credit Facility, will be sufficient to meet its anticipated future
operating expenses, capital expenditures and debt service obligations as they
become due. However, Formica's ability to make scheduled payments of principal
of, to pay interest on or to refinance the indebtedness and to satisfy its
other debt obligations will depend upon its future operating performance, which
will be affected by general economic, financial, competitive, legislative,
regulatory, business and other factors beyond its control.
Formica will continue from time to time to explore additional auxiliary
financing methods and other means to lower its cost of capital, which could
include stock issuance or debt financing and the application of the proceeds
therefrom to the payment of bank debt or other indebtedness.
Prior to May 1, 1998, Formica formulated a plan to restructure certain
operations and provided a restructuring provision of $6.6 million, with
approximately $2.7 million of the restructuring provision remaining at December
31, 1999. During 2000, Formica spent $1.0 million, primarily on severance
payments, of the restructuring provision. The amount of the restructuring
provision remaining at June 30, 2000 was approximately $1.7 million.
On March 1, 2000, the Company announced plans to restructure certain operating
activities in North America. The management of the Company provided a
restructuring provision of $6.0 million during the first quarter of 2000.
During the three-months ended June 30, 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 Company has
identified an additional $3.0 million of charges, indirectly related to the
restructuring of the North America operations, of which $1.4 million was
incurred during the second quarter of 2000. The balance is expected to occur
over the remainder of 2000.
As of the consummation date of the PSM acquisition, management began a process
to assess the organization as well as the facilities acquired with the purpose
of formulating a structure for the combined organization. This plan is not yet
complete and a complete cost assessment will not be finalized until the end of
2000. Reserves for organizational restructuring in the amount of $14.5 million
have been established. The preliminary organizational restructuring plan, which
primarily relates to the European operations, includes the closing of offices
and a select curtailment of operations, the optimization of the utilization of
assets and a reduction of headcount and is expected to be completed in 2001.
Once the approved formal plan is implemented and underway, this could
potentially result in a change in the estimated range for the reserves
established. In addition, the Company incurred approximately $0.2 million of
restructuring-related expenses associated with the acquisition of PSM during
the six-months ended June 30, 2000.
On June 1, 2000, the Company announced plans to restructure certain of its
operations within Europe and provided a restructuring provision of $1.5
million in the second quarter of 2000. The restructuring provision consists
of the following: facility closure costs and assets held for disposal ($0.5
million) and severance and severance-related items ($1.0 million). Through
the quarter ended June 30, 2000, no spending has occurred related to the
provision. The Company has also identified an estimated additional $0.1
million in charges and $0.2 million in capital spending, indirectly related to
the restructuring of the European distribution operations, which the Company
anticipates will occur mostly during the fourth quarter 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. (For a full discussion regarding Restructuring Charges, see Note 5 to
the Consolidated Condensed Consolidated Financial Statements). Cash flows from
operations and funds available under the Company's bank credit agreements
continue to provide the Company with liquidity and capital resources fromfor
working capital, capital expenditures and debt service requirements.
Cash provided by operations was $17.7 million for the six-months ended June 30,
2000, compared to cash used in operations of $12.0 million for the six-months
ended June 30, 1999. The increase in cash provided by operations is the result
of a decrease in accounts receivable and inventory, and increases in accounts
payable and accrued expenses. The decrease in accounts receivable and
inventories results from an effort to improve the management of working
capital. Net cash used in investing activities was $184.1 million for the
six-months ended June 30, 2000 and $25.6 million for the six-months ended June
30, 1999. The 2000 period includes $175.5
Page 14
million due to the acquisition of PSM. Net cash provided by financing
activities was $176.9 million, which included additional financing resulting
from the acquisition of PSM, for the six-months ended June 30, 2000 and $16.4
million for the six-months ended June 30, 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.
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.
Forward-Looking Information
This report (as well as other public filings, press releases and discussions
with Company management) contains and incorporates by reference certain
forward-looking statements. These statements are subject to risks,
uncertainties and other factors, which could cause actual results to differ
from those anticipated. Forward-looking statements include the information
concerning:
o our future operating performance, including sales growth and cost savings
and synergies following our acquisition by Laminates, and our acquisitions
of Fountainhead, STEL and Perstorp Surface Materials
o our belief that we have sufficient cash flows to support working capital
needs, capital expenditures and debt service requirements and
o our belief that we can reduce selling, general and administrative
expenses, as a percentage of sales, without adversely affecting our net
sales
In addition, statements that include the words "believes," "expects,"
"anticipates," intends," "estimates," "will," "should," "may," or other
similar expressions are forward-looking statements. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
What Factors Could Affect the Outcome of Our Forward-Looking Statements?
You should understand that the following important factors, in addition to
those discussed elsewhere in this
Form 10-Q, and in Formica's Form 10-K could affect the future results of
Formica and could cause those results or other outcomes to differ materially
from those expressed in our forward-looking statements.
Industry and Market Factors
o changes in economic conditions generally or in the markets served by the
Company
o fluctuations in raw material and energy prices
Page 15
o product specifier preferences and spending patterns and
o competition from other decorative surfaces producers
Operating Factors
o our ability to combine our recently acquired businesses while maintaining
current operating performance levels during the integration period(s) and
the challenges inherent in diverting our management's focus and resources
from other strategic opportunities and from operational matters
o our ability to implement our cost savings plans without adversely
impacting our net sales and
o our ability to attract, hire and retain suitable personnel
Relating to our Debt and the Notes
We have substantial debt, which could limit our cash available for other uses
and harm our competitive position. In connection with our acquisitions, we
have incurred significant indebtedness. The level of our indebtedness could
have important consequences to us, including:
o limiting our ability to obtain additional debt financing in the future for
working capital, capital expenditures or acquisitions
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 flexibility in reacting to competitive and other changes in
the industry and economic conditions generally and
o exposing us to risks inherent in interest rate fluctuations because some
of our borrowings may be at variable rates of interest, which could result
in higher interest expense in the event of increases in interest rates
You should read the section called "Risk Factors" in the Registration
Statements on Form S-1 (file no. 333-76683) that we filed with the SEC, for
additional information about risks that may cause our actual results and
experience to differ materially from those contained in forward-looking
statements.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133-"Accounting for Derivative Instruments and Hedging
Activities" was issued ("SFAS No. 133"). In June 1999, SFAS No.
137-"Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" was issued which deferred the
effective date of SFAS No. 133 to all fiscal quarters of fiscal years
beginning after June 15, 2000. In June 2000, SFAS No. 138 was issued, which
amended SFAS No. 133. These SFAS's require 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, as amended by SFAS No. 138, is not expected to
have a material impact on the Company's financial position or results of
operations.
Contingent Matters
Refer to Note 6 of the Notes to Condensed Consolidated Financial
Statements for a discussion of legal contingencies.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under Item 2--
Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Part II. Other Information
Item 1. Legal Proceedings
o See Note 6 of the Notes to Condensed Consolidated Financial
Statements for a discussion of legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
o On May 31, 2000, Formica filed a Form 8-K announcing the acquisition
of Decorative Surfaces Holding AB.
o On July 12, 2000, Formica filed a Form 8-K describing being named as
a defendant in class action lawsuits.
o On August 1, 2000, Formica filed a Form 8-K/A, the first amendment to
the May 31, 2000 Form 8-K.
The following exhibit is included herein:
(12) Computation of Ratio of Earnings to Fixed Charges Page E-1
(27) Financial Data Schedule (for electronic submission only) Page E-2
Page 16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Formica Corporation
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(Registrant)
/s/ David T. Schneider
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(David T. Schneider -
Chief Financial Officer)
August 14, 2000
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(Date)