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 September 30, 2001
--------------------------------
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, Chief Financial Officer and Principal Accounting 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 X NO
--- ---
Shares Outstanding as of
Title September 30, 2001
- ----- ------------------------
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 as of September 30,
2001 and December 31, 2000 1
Condensed Consolidated Statements of Operations for the
three- and nine-months ended September 30, 2001
and 2000 2
Condensed Consolidated Statements of Cash Flows for
the nine-months ended September 30, 2001 and 2000 3
Notes to the Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure of Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes In Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Part I. Financial Information
Item 1: Financial Statements
FORMICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, December 31,
2001 2000
----------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26.3 $ 3.4
Accounts receivable, net 123.2 112.2
Inventories 147.2 157.2
Prepaid expenses and other current assets 22.9 19.1
Deferred income taxes 26.3 24.0
----------------- -----------------
Total current assets 345.9 315.9
PROPERTY, PLANT AND EQUIPMENT, net 347.2 370.3
OTHER ASSETS:
Intangible assets, net 147.6 168.6
Other noncurrent assets 17.9 24.6
----------------- -----------------
Total assets $858.6 $879.4
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $315.1 $ 29.7
Accounts payable 68.8 68.3
Accrued expenses 60.9 79.5
----------------- -----------------
Total current liabilities 444.8 177.5
LONG-TERM DEBT 217.1 440.9
DEFERRED INCOME TAXES 121.4 130.0
OTHER LIABILITIES 33.2 39.7
----------------- -----------------
Total liabilities 816.5 788.1
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 217.0 217.0
Accumulated deficit (126.3) (91.9)
Accumulated other comprehensive loss (48.7) (33.9)
----------------- -----------------
Total stockholders' equity 42.1 91.3
----------------- -----------------
Total liabilities and stockholders' equity $858.6 $879.4
================= =================
See notes to the condensed consolidated financial statements.
Page 1
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions)
Three-Months Ended Nine-Months Ended
September 30, September 30,
----------------------------- ----------------------------
2001 2000 2001 2000
--------------- ------------ ------------ --------------
NET SALES $188.4 $205.8 $576.9 $573.2
COST OF PRODUCTS SOLD 146.1 154.4 442.1 424.7
INVENTORY MARKDOWN FROM RESTRUCTURING -- -- -- 1.9
--------------- ------------ ------------ --------------
Gross profit 42.3 51.4 134.8 146.6
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 44.0 46.7 138.7 142.7
PROVISION FOR RESTRUCTURING 1.5 0.4 1.9 7.6
COST OF TERMINATED ACQUISITIONS -- -- -- 0.4
--------------- ------------ ------------ --------------
Operating (loss) income (3.2) 4.3 (5.8) (4.1)
INTEREST EXPENSE (15.7) (14.4) (42.1) (36.5)
OTHER INCOME 1.4 1.6 4.8 3.9
--------------- ------------ ------------ --------------
LOSS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES
(17.5) (8.5) (43.1) (36.7)
INCOME TAX BENEFIT (PROVISION) 2.5 (0.9) 8.7 (3.8)
--------------- ------------ ------------ --------------
Net loss $ (15.0) $ (9.4) $(34.4) $(40.5)
=============== ============ ============ ==============
See notes to the condensed consolidated financial statements.
Page 2
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Nine-Months Ended
September 30,
-----------------------------------
2001 2000
----------------- --------------
CASH (USED IN) PROVIDED BY OPERATIONS $(24.6) $ 16.0
INVESTING ACTIVITIES:
Capital expenditures and investments, net (13.4) (15.8)
Acquisitions, net of cash acquired -- (175.5)
----------------- --------------
Net cash used in investing activities (13.4) (191.3)
FINANCING ACTIVITIES:
Proceeds from borrowings, net of financing fees -- 133.2
Net borrowings under lines of credit 75.9 --
Equity contribution -- 80.0
Repayments of debt (12.4) (38.0)
----------------- --------------
Net cash provided by financing activities 63.5 175.2
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (2.6) 2.3
----------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 22.9 2.2
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 3.4 7.8
----------------- --------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $ 26.3 $ 10.0
================= ==============
See notes to the condensed consolidated financial statements.
Page 3
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, 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 flows. In addition, management is required to make estimates and
assumptions that affect the amounts reported and related disclosures.
Estimates, by their nature, are based on judgments and available
information. Operating results reported for the interim periods are not
necessarily indicative of the results that may be expected for the entire
year and any other subsequent interim periods.
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.
Certain reclassifications have been made to prior period amounts to
conform with the current period presentation. For further information,
refer to the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 2000 included in the Company's
Form 10-K filed with the Securities and Exchange Commission (the "SEC").
Prior year sales and cost of products sold have been reclassified in
accordance with the Emerging Issues Task Force Issue 00-10 "Accounting for
Shipping and Handling Fees and Costs." For the three- and nine-months
ended September 30, 2000, $6.6 million and $18.7 million, respectively,
has been reclassified from net sales to cost of products sold for the cost
of shipping and handling. The impact of these reclassifications did not
have any effect on operating income/loss, EBITDA, or net loss.
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer in accordance
with the terms of the agreement, title and risk of loss have been
transferred, collectibility is considered probable, pricing is fixed and
determinable and the customer is invoiced. Accruals are made for sales
returns and other allowances based on the Company's experience. The
Company accounts for sales incentives or customer rebates as a reduction
in revenue at the time revenue is recorded.
(2) ACQUISITION:
On March 31, 2000, Decorative Surfaces Holding AB ("DSH") acquired
Perstorp Surface Materials AB ("PSM") from Perstorp AB (Sweden) for
approximately $177.5 million (including approximately $2.0 million of
transaction costs). DSH was a wholly owned subsidiary of Holdings (the
parent company of Formica) whose sole asset was its investment in PSM. On
May 26, 2000, Holdings contributed all of the stock of DSH to Formica. The
acquisition was accounted for on an as-if pooling basis because it was a
combination of entities under common control. Accordingly, Formica's
results of operations reflect the acquisition and related purchase
accounting by DSH on March 31, 2000 for all periods beginning April 1,
2000 and thereafter.
The following unaudited pro forma consolidated results of operations for
the nine-months ended September 30, 2001 and 2000 assume the acquisition
had occurred at the beginning of 2000:
Nine-months ended
September 30, September 30,
2001 2000
------------- -------------
(in millions)
(actual) (pro forma)
Net sales $576.9 $628.3
Net loss 34.4 43.6
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 2000, or
of future results.
Page 4
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) INVENTORIES:
Major classes of inventories are as follows:
September 30, December 31,
2001 2000
---------------- -----------------
(in millions)
Finished goods $ 78.7 $ 88.2
Work-in-process 17.3 14.4
Raw materials 51.2 54.6
---------------- -----------------
Total $ 147.2 $157.2
================ =================
(4) LONG-TERM DEBT:
As of September 30, 2001, Formica had $532.2 million of indebtedness
outstanding compared to $470.6 million as of December 31, 2000. The
increase of $61.6 million was primarily the result of additional
borrowings under the Company's revolving credit facility during the
nine-months ended September 30, 2001. The Company's existing credit
facility contains financial covenants requiring the Company to maintain
minimum EBITDA, minimum coverage of interest expense and fixed charges and
a maximum leverage ratio. As reported in the June 30, 2001 Form 10-Q, the
Company was not in compliance with certain financial covenants contained
in the Company's Credit Agreement. The Company requested and received a
waiver to the loan covenants.
The waiver, dated August 13, 2001, to the Credit Agreement contains
additional covenants which restrict, among other things, the Company's
ability to incur additional debt, make certain acquisitions and
investments and increase the Company's reporting obligations to the
lenders.
The Company has incurred additional interest expense, on both a cash and
non-cash basis, during the waiver period. The existing cash interest
spread was increased by 1.00% per annum and non-cash or paid-in-kind
interest of 3.00% per annum applied. The Company also paid the bank
lenders a waiver fee of .375% of the facility.
On November 9, 2001, the Company received a waiver extension expiring on
February 9, 2002. This extension was requested due to further uncertainty
caused by the events of September 11, 2001 and allows the Company more
time to continue discussions with its banks to reach a longer-term
solution regarding non-compliance with covenants. The waiver extension, in
addition to the conditions imposed in connection with the initial waiver,
contains the following:
o Funding of $8.4 million into a collateral account with the Agent Bank
which represents cash interest and principal due under the bank
facility between November 9, 2001 and December 31, 2001.
o The non-cash or paid-in-kind interest rate was increased to 5.50%
from 3.00% per annum.
o Provision of certain additional domestic and foreign collateral.
The waiver and waiver extension are not a permanent solution to the
Company's covenant non-compliance and the Company is continuing
discussions with its banks and equity investors to agree upon a
longer-term solution that will enable the Company to meet its long-term
liquidity needs.
While the Company anticipates obtaining an amendment to the covenants in
early 2002, there can be no assurance that the Company will be successful
or that the result of these negotiations will not have an adverse impact
on the Company. If the Company is unsuccessful in its negotiations with
its bank lenders, the lenders will have the right to demand repayment of
their loans when the waiver expires. There can be no assurance that the
Company's bank lenders will agree to extend the waiver beyond February 9,
2002.
As a result of the waiver expiration date, $274.8 million of debt has been
classified as current maturities of long-term debt. The Company's
compliance with debt covenants is dependent upon its future economic
performance, which may be affected by economic, financial, competitive,
regulatory and other factors beyond the Company's control.
In the event that an amendment or a waiver to the Credit Agreement is not
obtained, the bank lenders have the right to accelerate payment on the
credit facility. This acceleration would also constitute an event of
default under the Subordinated Notes, therefore, the Subordinated Notes
would then be classified as current. This event would have a material
adverse effect on the Company.
Page 5
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 included as part of its purchase accounting. The remaining
balance of this restructuring provision, related to severance payments, is
$0.2 million at September 30, 2001 and will be substantially completed in
2001.
On March 1, 2000, the Company's management committed to a formal plan to
restructure certain operating activities in North America and provided for
a restructuring provision of $6.0 million of which approximately $0.6
million was remaining at December 31, 2000, consisting of $0.3 million of
facility closing costs and $0.3 million of severance and severance-related
items. During the nine-months ended September 30, 2001, the Company
utilized $0.3 million of its restructuring reserve for facility closing
costs. The Company's management evaluated the restructuring reserve
balance and determined that approximately $0.3 million of the reserve
balance for severance-related costs was not needed. The change in estimate
was attributable to lower than anticipated severance-related costs.
Accordingly, the $0.3 million was reversed and included in income as an
offset to the original provision for restructuring. In addition, the
Company incurred $0.2 million of restructuring-related expenses for the
North America operations during the nine-months ended September 30, 2001.
Additionally, during the third quarter of 2001, the Company incurred $1.3
million in charges related to a workforce reduction in the North American
operations of over 120 salaried positions.
On June 1, 2000, the Company's management committed to a formal plan to
restructure certain of its operations within Europe and provided for a
restructuring provision of $1.5 million of which approximately $1.0
million was remaining at December 31, 2000, consisting of $0.6 million of
severance and severance-related items and $0.4 million of facility closure
costs. During the three- and nine-months ended September 30, 2001, the
Company utilized $0.1 million and $0.6 million of its restructuring
reserve, including translation effects, for severance and severance
related items and facility closure costs. The remaining reserve balance at
September 30, 2001 was $0.4 million consisting primarily of
severance-related items. In addition, the Company incurred $0.4 million of
restructuring-related expenses for the European distribution operations as
a result of the integration of the PSM operations during the nine-months
ended September 30, 2001. Under the current timetable, the Company
projects that the restructuring plan will be substantially completed
during the fourth quarter of 2001.
As a result of the PSM acquisition, management committed to a formal plan
to restructure certain operating activities primarily in Europe with the
purpose of formulating a structure for the combined organization. Balance
sheet reserves of $12.7 million for organizational restructuring were
established as part of purchase accounting, of which approximately $7.8
million was remaining at December 31, 2000, consisting primarily of
severance related items. During the three- and nine-months ended September
30, 2001, the Company utilized $0.5 million and $4.0 million of the
reserve including translation effects on severance-related items and
facility closure costs. The remaining balance of the restructuring
provision was $3.8 million at September 30, 2001 consisting of
severance-related items and facility closure costs. The restructuring plan
is expected to be substantially completed by the end of 2001.
The table below is a summary of the information contained in the above
paragraphs.
Page 6
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additional
Restructuring
Related
Expenses for Utilization Restructuring
Restructuring the nine- for the nine- Reserve
Reserve months ended months ended Balance at
Balance at December September September September 30,
2001 Restructuring Charges: 31, 2000 30, 2001 30, 2001 2001
---------------------------- -------- -------- -------- ----
(in millions)
North America Restructuring:
Asset disposal, lease termination & facility closure $ 0.3 $ 0.0 $(0.3) $ 0.0
Severance 0.3 (0.3) - 0.0
----- ----- ----- -----
Total Restructuring Reserve $ 0.6 $(0.3) $(0.3) $ 0.0
----- ----- ----- -----
Additional restructuring-related expenses (Note 1) - $ 1.8 $(1.8) -
----- ----- ----- -----
Europe Restructuring:
Severance $ 0.6 - $(0.2) $ 0.4
Facility closing costs 0.4 - (0.4) 0.0
----- ----- ----- -----
Total Restructuring Reserve $ 1.0 - $(0.6) $ 0.4
----- ----- ----- -----
Additional restructuring-related expenses (Note 1) - $ 0.4 $(0.4) -
----- ----- ----- -----
Restructuring charges related to the PSM Acquisition:
Severance $ 5.5 - $(2.7) $ 2.8
Facility closing costs 2.3 - (1.3) 1.0
----- ----- ----- -----
Total Restructuring Reserve $ 7.8 - $(4.0) $ 3.8
----- ----- ----- -----
Total Restructuring Activity $ 9.4 $ 1.9 $(7.1) $4.2
----- ----- ----- -----
Note 1: Represents additional restructuring-related expenses, which have
been expensed as incurred. These amounts were not included in the
establishment of the original restructuring reserve because they were
indeterminable at the date management approved the exit plan or the costs
did not qualify as an exit cost for the reserve under EITF 94-3. The $1.8
million costs in North America consisted primarily of additional
severance, asset disposal and facility closure costs and the $0.4 million
costs in Europe consisted of additional costs for the restructuring of
the distribution operations as a result of the integration of PSM
operations.
(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 with respect to
several Superfund sites and has reserved approximately $3.5 million and
$3.8 million at September 30, 2001 and December 31, 2000, 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, results of operations
or cash flows.
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 laminates ("HPL"). The Company
produced documents and provided other information in response to the
subpoena, and a number of present or former Formica employees 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. On May 1, 2001, the Company was informed by the
Staff of the Antitrust Division of the U.S. Department of Justice that the
investigation had been closed.
Page 7
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Major manufacturers of HPL, including the Company, have been named as
defendants in purported class action complaints filed in federal and
certain state courts. The complaints, which all make similar allegations,
allege that HPL manufacturers in the United States engaged in a contract,
combination or conspiracy in restraint of trade in violation of federal
antitrust laws and state laws and seek damages of an unspecified amount.
In an Order dated December 6, 2000 and in subsequent Orders, the federal
Judicial Panel on Multidistrict Litigation consolidated federal actions
for pretrial purposes under the caption In re: High Pressure Laminates
Antitrust Litigation, No. 00-MD-1368 (the "Federal Action"). Twenty-nine
actions have been filed in fifteen state courts (the "State Actions"). The
Federal Action has been brought purportedly on behalf of direct purchasers
of high-pressure laminates, and the State Actions have been brought
principally on behalf of indirect purchasers. The Company intends to
defend vigorously against the allegations of the complaints. The Company
is unable to determine at this time if this matter will have any adverse
effect on its financial position, results of operations or cash flows.
Formica is involved in other pending litigation in the usual course of
business. In the opinion of management, such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Formica continually evaluates its estimated
legal liabilities as a matter of policy. The Company's estimated range of
liability is based on known claims. There can be no assurances that
Formica will not become involved in future proceedings, litigation or
investigations, that such liabilities will not be material or that
indemnification pursuant to certain indemnification rights will be
available.
(7) COMPREHENSIVE LOSS:
The difference between comprehensive loss and net loss results from
foreign currency translation adjustments.
Three-months ended Nine-months ended
-------------------------------------- -------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------------ ------------------ ----------------- -----------------
(in millions) (in millions)
Net loss $ (15.0) $ (9.4) $ (34.4) $ (40.5)
Foreign currency translation 5.3 (16.9) (14.8) (32.8)
------------------ ------------------ ----------------- -----------------
Comprehensive loss $ ( 9.7) $ (26.3) $ (49.2) $ (73.3)
================== ================== ================= =================
(8) 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
September 30, 2001 and December 31, 2000, there was approximately $0.9
million outstanding under these arrangements.
DLJ Capital Funding, Inc., an affiliate of DLJ Merchant Banking Partners
II L.P. and its affiliates (DLJ Merchant Banking) ("DLJ"), 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. The waiver precludes DLJ from receiving any fees in connection
with the arrangement and syndication of the Credit Facility but allows for
the reimbursement of expenses.
Formica and its subsidiaries may from time to time enter into financial
advisory or other investment banking relationships with Credit Suisse
First Boston Corporation (an affiliate of DLJ Merchant Banking) ("CSFB")
or one of its affiliates whereby CSFB 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 CSFB
against a variety of liabilities, including liabilities under the federal
securities laws.
(9) CHANGES IN ACCOUNTING ESTIMATES:
Effective January 1, 2001, the Company made certain changes in accounting
estimates relating to its depreciable asset lives which resulted in an
increase in depreciation expense charges totaling approximately $0.5
million and $1.4 million for the three- and nine-month period ended
September 30, 2001. The annual impact of this change for 2001 is expected
to result in increased depreciation expenses of approximately $1.8
million. The change in accounting estimates resulted from a review by
management of certain assets depreciable lives.
Page 8
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) 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.
The Company's market presence in Europe, the Americas (the United States,
Canada, Mexico and Brazil) and Asia was increased as a result of the PSM
acquisition. The Company measures segment results as operating income
(loss), which is defined as income (loss) before interest expense, other
income (expense) and income taxes. Depreciation and amortization expense
is included in the measure of segment results. Segment revenues are
defined as net sales to external customers of each segment. All
intercompany sales and expenses have been eliminated in determining
segment revenues and segment profit (loss).
Three-Months Ended Nine-Months Ended
September 30, September 30,
------------------------------- ----------------------------
2001 2000 2001 2000
------------------ ----------- -------------- ------------
(in millions) (in millions)
Segment revenues:
United States $ 81.5 $ 82.9 $ 240.8 $ 251.6
Americas - Other 19.0 27.2 63.3 67.2
Europe 65.8 70.5 210.0 188.6
Asia 22.1 25.2 62.8 65.8
------------------ ----------- -------------- ------------
Total $ 188.4 $ 205.8 $ 576.9 $ 573.2
================== =========== ============== ============
Segment profit (loss):
Americas $ (7.2) $ (2.7) $ (18.9) $ (19.2)
Europe 0.3 3.7 4.1 7.2
Asia 3.7 3.3 9.0 7.9
------------------ ----------- -------------- ------------
Total $ (3.2) $ 4.3 $ (5.8) $ (4.1)
================== =========== ============== ============
Depreciation and amortization (included in segment profit
(loss))
Americas $ 9.7 $ 10.2 $ 29.1 $ 28.9
Europe 4.1 4.1 13.5 11.1
Asia 1.1 1.0 3.3 3.4
------------------ ----------- -------------- ------------
Total $ 14.9 $ 15.3 $ 45.9 $ 43.4
================== =========== ============== ============
A reconciliation of total segment loss to loss before
provision for income taxes is as follows:
Segment loss $ (3.2) $ 4.3 $ (5.8) $ (4.1)
Interest expense (15.7) (14.4) (42.1) (36.5)
Other income 1.4 1.6 4.8 3.9
------------------ ----------- -------------- ------------
Loss before provision for income taxes $ (17.5) $ (8.5) $ (43.1) $ (36.7)
================== =========== ============== ============
September 30, December 31,
2001 2000
------------------ -----------------
(in millions)
Total assets:
United States $ 397.4 $ 418.7
Americas - Other 66.9 76.6
Europe 312.5 301.3
Asia 81.8 82.8
----------------- ----------------
Total $ 858.6 $ 879.4
================= ================
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Overview
The Company 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 & Company. 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.
On March 31, 2000, Decorative Surfaces Holding AB ("DSH") acquired Perstorp
Surface Materials AB ("PSM") from Perstorp AB (Sweden). DSH was a wholly owned
subsidiary of Holdings (the parent company of Formica) whose sole asset was its
investment in PSM. On May 26, 2000, Holdings contributed all of the stock of
DSH to Formica. Accordingly, Formica's results of operations reflect the
acquisition and related purchase accounting by DSH on March 31, 2000 for all
periods beginning April 1, 2000 and thereafter.
Recent Developments
Financial Covenants Compliance: As reported in the June 30, 2001 Form 10-Q, the
Company was not in compliance with certain financial covenants contained in the
Company's Credit Agreement. The Company requested and received a waiver to the
loan covenants.
The waiver, dated August 13, 2001, to the Credit Agreement contains additional
covenants which restrict, among other things, the Company's ability to incur
additional debt, make certain acquisitions and investments and increase the
Company's reporting obligations to the lenders.
The Company has incurred additional interest expense, on both a cash and
non-cash basis, during the waiver period. The existing cash interest spread was
increased by 1.00% per annum and non-cash or paid-in-kind interest of 3.00% per
annum applied. The Company also paid the bank lenders a waiver fee of .375% of
the facility.
On November 9, 2001, the Company received a waiver extension expiring on
February 9, 2002. This extension was requested due to further uncertainty
caused by the events of September 11, 2001 and allows the Company more time to
continue discussions with its banks to reach a longer-term solution regarding
non-compliance with covenants. The waiver extension, in addition to the
conditions imposed in connection with the initial waiver, contains the
following:
o Funding of $8.4 million into a collateral account with the Agent Bank
which represents cash interest and principal due under the bank facility
between November 9, 2001 and December 31, 2001.
o The non-cash or paid-in-kind interest rate was increased to 5.50% from
3.00% per annum.
o Provision of certain additional domestic and foreign collateral.
The waiver and waiver extension are not a permanent solution to the Company's
covenant non-compliance and the Company is continuing discussions with its
banks and equity investors to agree upon a longer-term solution that will
enable the Company to meet its long-term liquidity needs.
While the Company anticipates obtaining an amendment to the covenants in early
2002, there can be no assurance that the Company will be successful or that the
result of these negotiations will not have an adverse impact on the Company. If
the Company is unsuccessful in its negotiations with its bank lenders, the
lenders will have the right to demand repayment of their loans when the waiver
expires. There can be no assurance that the Company's bank lenders will agree
to extend the waiver beyond February 9, 2002.
As a result of the waiver expiration date, $274.8 million of debt has been
classified as current maturities of long-term debt. The Company's compliance
with debt covenants is dependent upon its future economic performance, which
may be affected by economic, financial, competitive, regulatory and other
factors beyond the Company's control.
In the event that an amendment or a waiver to the Credit Agreement is not
obtained, the bank lenders have the right to accelerate payment on the credit
facility. This acceleration would also constitute an event of default under the
Subordinated Notes, therefore, the Subordinated Notes would then be classified
as current. This event would have a material adverse effect on the Company.
Page 10
Results of Operations:
The table below compares the Company's components for EBITDA and Adjusted
EBITDA for the three- and nine-months ended September 30, 2001 compared to the
2000 period. Management believes that the presentation of Adjusted EBITDA is
meaningful to the readers of the Company's financial statements, as it presents
a more normalized level of EBITDA.
Three-months ended Nine-months ended
September 30, September 30,
------------------------------ -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- --------------
(in millions) (in millions)
Net loss $ (15.0) $ (9.4) $ (34.4) $ (40.5)
Add back:
Depreciation and amortization 14.9 15.3 45.9 43.4
Interest expense (excluding interest income) 15.7 14.4 42.1 36.5
Income tax (benefit)/expense (2.5) 0.9 (8.7) 3.8
------------- ------------- ------------- --------------
EBITDA 13.1 21.2 44.9 43.2
Adjustments to EBITDA
Restructuring related expenses 1.5 0.4 1.9 9.5
Acquisition related expenses -- 0.3 0.3 2.8
Cost of terminated acquisition -- -- -- 0.4
------------- ------------- ------------- --------------
Adjusted EBITDA $ 14.6 $ 21.9 $ 47.1 $ 55.9
============= ============= ============= ==============
Nine-Months Ended September 30, 2001 Compared To Nine-Months Ended September
30, 2000
Net Sales: Net sales for 2001 were $576.9 million, compared to net sales
of $573.2 million for 2000, an increase of $3.7 million, or 0.6%. This increase
is primarily due to the inclusion of PSM sales in 2001 for the full nine-month
period, partially offset by lower volume and a $26.6 million unfavorable
foreign exchange impact on sales. Net sales in the Americas decreased to $304.1
million in 2001 from $318.8 million in 2000, a decrease of $14.7 million. This
decrease is primarily due to lower laminate volumes, which are the result of
the continuing effect of the economic slowdown and customer de-stocking
activity, partially offset by the inclusion of PSM sales in the 2001 period.
Net sales in Europe increased $21.4 million to $210.0 million in 2001 from
$188.6 million in 2000. This increase is primarily due to the inclusion of PSM
sales and higher selling prices, offset by lower volumes and the unfavorable
effects of a stronger U.S. dollar. Net sales in Asia decreased slightly to
$62.8 million in 2001 from $ 65.8 million in 2000. This decrease is primarily
due to the lower volumes as well as the unfavorable impact of foreign exchange
translations.
Gross Profit: Gross profit for 2001 was $134.8 million, compared to gross
profit of $146.6 million for 2000, a decrease of $11.8 million. Gross profit as
a percentage of net sales in 2001 decreased to 23.4 % from 25.6% in 2000. The
2000 period includes $1.9 million related to the markdown in inventory from the
restructuring of the North American operations and excludes the impact of PSM
for the first quarter of 2000.
Gross Profit in the Americas decreased $9.0 million to $67.7 million in 2001
from $76.7 million in 2000, largely reflecting the impact of lower laminate and
flooring volumes. The 2000 period includes a $1.9 million charge related to the
markdown of inventory from the restructuring of the North American operations.
Gross profit, as a percentage of net sales for the Americas, decreased to 22.3%
in 2001 compared to 24.1% in 2000, principally as a result of lower volumes,
higher energy and other costs. Gross profit in Europe and Asia decreased $2.8
million to $67.1 million in 2001 from $69.9 million in 2000. As a percentage of
net sales, gross profit in Europe and Asia decreased to 24.6% in 2001 from
27.5% in 2000, primarily the result of lower volume, unfavorable mix and the
impact of foreign exchange translations as well as higher raw material and
energy costs.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for 2001 were $138.7 million compared to $142.7 million
for 2000, a decrease of $4.0 million. Selling, general and administrative
expenses, as a percent of net sales, were 24.0 % in the 2001 period compared to
24.9% in the 2000 period. The decrease is the result of a decrease in
discretionary spending and lower warehousing, selling and administrative
expenses along with the impact of the restructuring programs started in 2000,
in both North America and Europe, partially offset by the inclusion of PSM for
the full nine-month period of 2001.
Restructuring Charge: (See Note 5 to the Condensed Consolidated Financial
Statements) The provision for restructuring for 2001 totaled $1.9 million
compared to $7.6 million in 2000. During the nine-months ended September 30,
2001, the Company incurred $1.8 million of restructuring-related expenses for
the North American
Page 11
operations offset by approximately $0.3 million relating to the reversal of the
North American restructuring reserve balance accruals due to lower than
anticipated severance-related costs. The $1.8 million included $1.3 million
resulting from a workforce reduction in North American operations of over 120
salaried positions. During the 2001 period the Company incurred an additional
$0.4 million of restructuring-related expenses for the European distribution
operations. In the 2000 period, the Company provided for a restructuring
provision of $7.9 million, inclusive of a $1.9 million markdown of inventory
discussed above for the North American operations. The 2000 period also
included a restructuring provision of $1.5 million for the European
distribution operations and $0.1 million related to the restructuring of PSM.
Cost of Terminated Acquisitions: During the nine-month period ended
September 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 Loss: The operating loss for 2001 was $5.8 million compared to a
loss of $4.1 million for 2000, resulting primarily from the decline in gross
margins. Included in the 2001 period are restructuring charges of $1.9 million.
The 2000 period includes a restructuring charge of $9.5 million and the cost of
a terminated acquisition of $0.4 million. Excluding the 2001 and 2000 charges,
the operating loss was $3.9 million in 2001 compared to operating income of
$5.8 million in 2000, for the reasons stated above.
EBITDA: EBITDA increased to $44.9 million in 2001 compared to $43.2
million in 2000. Excluding the 2001 and 2000 periods restructuring costs and
cost of terminated acquisitions (described above), and PSM-related acquisition
expenses, EBITDA, as adjusted, was $47.1 million in 2001 compared to $55.9
million in 2000.
Interest Expense: Interest expense increased $5.6 million to $42.1 million
in 2001 from $36.5 million in 2000. The increase in interest expense is
primarily due to the additional debt incurred in the second quarter of 2000 for
the acquisition of PSM, additional borrowings in 2001 on the revolving credit
facility, interest and fees incurred during the waiver period, partially offset
by a decrease in effective interest rates.
Income Taxes: In the 2001 period, the Company recognized an income tax
benefit of $8.7 million compared to an income tax expense of $3.8 million in
2000. The income tax benefit reflects the anticipated realization of net
operating loss carryforwards due to the fact that the Company is in a net
deferred tax liability position in the United States and certain foreign tax
jurisdictions.
Net Loss: The 2001 net loss was $34.4 million compared to $40.5 million in
2000, due to the reasons described above.
Three-Months Ended September 30, 2001 Compared To Three-Months Ended September
30, 2000
Net Sales: Net sales for 2001 were $188.4 million, compared to net sales
of $205.8 million for 2000, a decrease of $17.4 million, or 8.5%. This decrease
is primarily due to lower volume, which was exacerbated late in the quarter
from a drop-off in shipments related to the post-September 11, 2001 slowdown
and a $6.7 million unfavorable foreign exchange impact on sales. Net sales in
the Americas decreased $9.6 million to $100.5 million in 2001 from $110.1
million in 2000. This decrease is primarily due to lower laminate volumes,
which are the result of the continued sluggish U.S. economy and the impact on
shipments resulting from the events of September 11, 2001. Net sales in Europe
decreased $4.8 million to $65.8 million in 2001 from $70.5 million in 2000.
This decrease is primarily due to lower volumes, stemming from the slowdown in
the European economies, as well as the unfavorable effects of foreign exchange
translations. Net sales in Asia decreased $3.0 million to $22.1 million in 2001
from $25.2 million in 2000. This decrease is primarily the result of the
unfavorable impact of foreign exchange translations versus the U.S. dollar and
sluggish volume.
Gross Profit: Gross profit for 2001 was $42.3 million, compared to gross
profit of $51.4 million for 2000, a decrease of $9.1 million. Gross profit as a
percentage of net sales in 2001 decreased to 22.5 % from 25.0% in 2000.
Gross Profit in the Americas decreased $3.4 million to $21.8 million in 2001
from $25.2 million in 2000. Gross profit as a percentage of net sales for the
Americas decreased to 21.7% in 2001 compared to 22.9% in 2000, principally the
result of lower volumes and a decline in prices and margins in flooring and in
South American operations, partially offset by slightly higher selling prices.
Gross profit in Europe and Asia decreased $5.7 million to $20.5 million in 2001
from $26.2 million in 2000. As a percentage of net sales, gross profit in
Europe and Asia decreased to 23.3% in 2001 from 27.4% in 2000, primarily the
result of lower laminate and foils volumes, unfavorable mix and the unfavorable
impact of foreign exchange translations.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for 2001 were $44.0 million compared to $46.7 million
for 2000, a decrease of $2.7 million. The net decrease is the result of a
decrease in warehousing and selling expenses, lower overall discretionary
spending and the impact of the restructuring programs started in 2000. However,
selling, general and administrative expenses, as a percent of net sales, were
23.4% in the 2001 period compared to 22.7% in the 2000 period, principally due
to the decline in sales.
Page 12
Restructuring Charge: (See Note 5 to the Condensed Consolidated Financial
Statements) The provision for restructuring for the three-months ended
September 30, 2001 was $1.5 million compared to $0.4 million in 2000. This $1.5
million consisted of $1.3 million of restructuring-related expenses for the
North American operations resulting from the reduction of the North American
workforce of over 120 salaried positions and $0.2 million of additional charges
related to the restructuring of the North American operations. In the 2000
period, the Company incurred restructuring-related charges of $0.2 million
related to the North American operations, $0.1 million for the European
distribution operations and $0.1 million related to the restructuring of PSM.
Operating Income/Loss: The operating loss for 2001 was $3.2 million
compared to operating income of $4.3 million for 2000. Included in the 2001
period are restructuring charges of $1.5 million. The 2000 period includes a
restructuring charge of $0.4 million and $0.3 million of acquisition-related
expenses. Excluding the 2001 and 2000 charges, the operating loss was $1.7
million in 2001 compared to operating income of $5.0 million in 2000, for the
reasons stated above.
EBITDA: EBITDA decreased to $13.1 million in 2001 compared to $21.2
million in 2000. Excluding the 2001 and 2000 periods restructuring costs
(described above) and PSM-related acquisition expenses, EBITDA, as adjusted,
was $14.6 million in 2001 compared to $21.9 million in 2000.
Interest Expense: Interest expense increased $1.3 million to $15.7 million
in 2001 from $14.4 million for 2000. The increase in interest expense is
primarily due to the added interest incurred during the waiver period and
higher debt outstanding in the third quarter of 2001, which included additional
borrowing on the revolving credit facility, partially offset by a decrease in
effective interest rates.
Income Taxes: In the 2001 period, the Company recognized an income tax
benefit of $2.5 million compared to an income tax expense of $0.9 million in
2000. The income tax benefit reflects the anticipated realization of net
operating loss carryforwards due to the fact that the Company is in a net
deferred tax liability position in the United States and certain foreign tax
jurisdictions.
Net Loss: The 2001 net loss was $15.0 million compared to $9.4 million in
2000, due to the reasons described above.
Liquidity and Capital Resources
Formica's principal sources of liquidity are cash flows from operations and
local credit facilities obtained by some of Formica's foreign subsidiaries.
Formica's principal uses of cash will be for debt service requirements and
capital expenditures.
As of September 30, 2001, Formica had $532.2 million of indebtedness
outstanding compared to $470.6 million as of December 31, 2000. Formica's
significant debt service obligations could, under certain circumstances, have
material consequences to security holders.
In connection with our acquisition by Laminates 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 governing the Notes described below, are the primary
source of funding for payments with respect to Holdings and Laminates
securities.
Notes
In February 1999, Formica issued $215.0 million of 10 7/8% Senior Subordinated
Notes which 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.
Credit Facility
The Credit Facility includes a $120.0 million revolving credit facility, an
$85.0 million term loan and a $140.0 million term loan. The $120.0 million
revolving credit facility contains a provision whereby it 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
September 30, 2001, $91.8 million was outstanding against the revolving credit
facility, including paid-in-kind
Page 13
interest. In addition, as of September 30, 2001, Formica had outstanding
approximately $28.5 million in letters of credit under the Credit Facility to
provide credit enhancement and support for certain of its credit facilities.
The $85.0 million and $140.0 million term loans will mature in 2004 and 2006,
respectively. The term loans outstanding under the Credit Facility totaled
$200.4 million, including paid-in-kind interest at September 30, 2001 and
amortize over the life of the Credit Facility. As of September 30, 2001, the
Company had a balance of $0.1 million remaining to borrow under the Credit
Facility, which was not available pursuant to the terms of the waiver. The
paid-in-kind interest does not reduce the amounts available under 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 LIBO 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 Holdings of the stock of Formica
and by Laminates of the stock of Holdings.
The Credit Facility contains financial covenants requiring the Company to
maintain minimum EBITDA, minimum coverage of interest expense and fixed charges
and a maximum leverage ratio. As reported in the June 30, 2001 Form 10-Q, the
Company was not in compliance with certain financial covenants contained in the
Company's Credit Agreement. The Company requested and received a waiver to the
loan covenants.
The waiver, dated August 13, 2001, to the Credit Agreement contains additional
covenants which restrict, among other things, the Company's ability to incur
additional debt, make certain acquisitions and investments and increase the
Company's reporting obligations to the lenders.
The Company has incurred additional interest expense, on both a cash and
non-cash basis, during the waiver period. The existing cash interest spread was
increased by 1.00% per annum and non-cash or paid-in-kind interest of 3.00% per
annum applied. The Company also paid the bank lenders a waiver fee of .375% of
the facility.
On November 9, 2001, the Company received a waiver extension expiring on
February 9, 2002. This extension was requested due to further uncertainty
caused by the events of September 11, 2001 and allows the Company more time to
continue discussions with its banks to reach a longer-term solution regarding
non-compliance with covenants. The waiver extension, in addition to the
conditions imposed in connection with the initial waiver, contains the
following:
o Funding of $8.4 million into a collateral account with the Agent Bank
which represents cash interest and principal due under the bank facility
between November 9, 2001 and December 31, 2001.
o The non-cash or paid-in-kind interest rate was increased to 5.50% from
3.00% per annum.
o Provision of certain additional domestic and foreign collateral.
The waiver and waiver extension are not a permanent solution to the Company's
covenant non-compliance and the Company is continuing discussions with its
banks and equity investors to agree upon a longer-term solution that will
enable the Company to meet its long-term liquidity needs.
While the Company anticipates obtaining an amendment to the covenants in early
2002, there can be no assurance that the Company will be successful or that the
result of these negotiations will not have an adverse impact on the Company. If
the Company is unsuccessful in its negotiations with its bank lenders, the
lenders will have the right to demand repayment of their loans when the waiver
expires. There can be no assurance that the Company's bank lenders will agree
to extend the waiver beyond February 9, 2002.
As a result of the waiver expiration date, $274.8 million of debt has been
classified as current maturities of long-term debt. The Company's compliance
with debt covenants is dependent upon its future economic performance, which
may be affected by economic, financial, competitive, regulatory and other
factors beyond the Company's control.
In the event that an amendment or a waiver to the Credit Agreement is not
obtained, the bank lenders have the right to accelerate payment on the credit
facility. This acceleration would also constitute an event of default under the
Subordinated Notes, therefore, the Subordinated Notes would then be classified
as current. This event would have a material adverse effect on the Company.
Local Credit Facilities
Formica maintains various local credit facilities in foreign countries
(primarily in Asia) that provide for borrowings in local currencies of which
approximately $25.0 million was outstanding as of September 30, 2001. Formica
expects that these facilities and operating cash flows will be sufficient to
fund near-term expected liquidity needs in these countries.
Page 14
Working Capital
Working capital, excluding the effects of the debt reclass of $274.8 million,
was $175.9 million at September 30, 2001 compared to $138.4 million at December
31, 2000. Inclusive of the effects of the debt reclass, working capital was a
negative $98.9 million at September 30, 2001 compared to $138.4 million at
December 31, 2000. The decrease in working capital resulted from $274.8 million
of long-term debt re-classified in the current quarter as current maturities as
described above, as well as lower inventories, offset by higher accounts
receivable and lower accrued expenses and other current liabilities at
September 30, 2001. Management believes that Formica will continue to require
working capital levels, subject to quarterly fluctuations consistent with past
experience, and continues its efforts to reduce working capital requirements.
Capital Expenditures
Formica has spent approximately $13.4 million on capital expenditures during
the nine-months ended September 30, 2001, and anticipates that it will spend
approximately an additional $3.0 million to $4.0 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 maintain the properties and businesses of its current operations.
Source of Funds
Formica and its equity investors continue to negotiate with Formica's banks to
reach a long-term solution to the debt structure of the Company. While the
Company anticipates obtaining an amendment to its bank facility in early 2002,
there can be no assurance that the Company will be successful or that the
results of these negotiations will not have an adverse impact on the Company.
The Company believes that, with cash on hand and operating cash flow, it will
have adequate financial resources to support anticipated near term future
operating expenses, capital expenditures and debt service obligations as they
become due through the waiver period. The Company further believes that,
through careful management of working capital needs, it will have adequate
resources to support such needs throughout 2002, assuming that the waiver
expires in February and the credit facility lenders do not accelerate amounts
due thereunder. If these assumptions prove incorrect, or if the Company's
results of operations or working capital needs differ significantly from
current expectations, then there can be no assurance that the Company will have
significant financial resources to satisfy these cash needs.
Cash used in operations was $24.6 million for the nine-months ended September
30, 2001, compared to cash provided by operations of $16.0 million for the
nine-months ended September 30, 2000. The increase in cash used by operations
is due to an increase in accounts receivable and a decrease in accrued expenses
and other liabilities, offset by a reduction in inventories. Net cash used in
investing activities was $13.4 million and $191.3 million for the nine-months
ended September 30, 2001 and 2000, respectively. The 2000 period included
$177.5 million for the acquisition of PSM. Net cash provided by financing
activities was $63.5 million and $175.2 million for the nine-months ended
September 30, 2001 and 2000, respectively, which included additional net
borrowings under our credit facility discussed above.
Default of Loan Covenants
As reported in the June 30, 2001 Form 10-Q, the Company was not in compliance
with certain financial covenants contained in the Company's Credit Agreement.
The Company requested and received a waiver to the loan covenants.
The waiver, dated August 13, 2001, to the Credit Agreement contains additional
covenants which restrict, among other things, the Company's ability to incur
additional debt, make certain acquisitions and investments and increase the
Company's reporting obligations to the lenders.
The Company has incurred additional interest expense, on both a cash and
non-cash basis, during the waiver period. The existing cash interest spread was
increased by 1.00% per annum and non-cash or paid-in-kind interest of 3.00% per
annum applied. The Company also paid the bank lenders a waiver fee of .375% of
the facility.
On November 9, 2001, the Company received a waiver extension expiring on
February 9, 2002. This extension was requested due to further uncertainty
caused by the events of September 11, 2001 and allows the Company more time to
continue discussions with its banks to reach a longer-term solution regarding
non-compliance with covenants. The waiver extension, in addition to the
conditions imposed in connection with the initial waiver, contains the
following:
o Funding of $8.4 million into a collateral account with the Agent Bank
which represents cash interest and principal due under the bank facility
between November 9, 2001 and December 31, 2001.
o The non-cash or paid-in-kind interest rate was increased to 5.50% from
3.00% per annum.
Page 15
o Provision of certain additional domestic and foreign collateral.
The waiver and waiver extension are not a permanent solution to the Company's
covenant non-compliance and the Company is continuing discussions with its
banks and equity investors to agree upon a longer-term solution that will
enable the Company to meet its long-term liquidity needs.
While the Company anticipates obtaining an amendment to the covenants in early
2002, there can be no assurance that the Company will be successful or that the
result of these negotiations will not have an adverse impact on the Company. If
the Company is unsuccessful in its negotiations with its bank lenders, the
lenders will have the right to demand repayment of their loans when the waiver
expires. There can be no assurance that the Company's bank lenders will agree
to extend the waiver beyond February 9, 2002.
As a result of the waiver expiration date, $274.8 million of debt has been
classified as current maturities of long-term debt. The Company's compliance
with debt covenants is dependent upon its future economic performance, which
may be affected by economic, financial, competitive, regulatory and other
factors beyond the Company's control.
In the event that an amendment or a waiver to the Credit Agreement is not
obtained, the bank lenders have the right to accelerate payment on the credit
facility. This acceleration would also constitute an event of default under the
Subordinated Notes, therefore, the Subordinated Notes would then be classified
as current. This event would have a material adverse effect on the Company.
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 on a regional basis.
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 after 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.
However, the Company has not experienced nor does it anticipate any problems
resulting from the adoption of the Euro.
Market Risk
Interest Rate Risk
The Company utilizes both fixed and variable rate debt obligations to finance
its operations. At September 30, 2001, approximately 60% of the Company's total
debt was at variable interest rates. A one-half percentage point increase in
interest would increase the annual amount of interest paid by approximately
$1.6 million. Although the Company will continue to monitor its exposure to
interest rate fluctuations, the Company cannot assure that interest rate
fluctuations will not harm its business in the future.
Foreign Currency Exchange Rate Risk
The Company is exposed to market risk from changes in foreign currency exchange
rates, including fluctuations in the functional currencies of its foreign
operations. The functional currency of operations outside the United States is
the respective local currency. Foreign currency translation effects are
included in accumulated other comprehensive loss in stockholders' equity. Our
operating results are thus subject to significant fluctuations based upon
changes in the exchange rates of other currencies in relation to the U.S.
dollar. Forward contracts are entered into for periods consistent with
underlying exposures and do not constitute positions independent of those
exposures. We have analyzed the foreign exchange impact on our forward
contracts and have determined that it is de minimus through September 30, 2001.
Formica does not enter into contracts for speculative purposes and is not a
party to any leverage instruments. Although we will continue to monitor our
exposure to currency fluctuations, we cannot assure that exchange rate
fluctuations will not harm our business in the future.
Page 16
Forward-Looking Information
This report (as well as other public filings, press releases and discussions
with Company management) contains and incorporates by reference certain
forward-looking statements. These statements are subject to risks and
uncertainties 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 acquisitions of Fountainhead, STEL and
Perstorp Surface Materials and our related restructurings and capital
investment program and
o our belief that we have sufficient cash flows to support working capital
needs, capital expenditures and debt service requirements
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, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
What Factors Could Affect the Outcome of Our Forward-Looking Statements?
You should understand that the following important factors, in addition to
those discussed elsewhere in this Form 10-Q could affect the future results of
Formica and could cause those results or other outcomes to differ materially
from those expressed in our forward-looking statements.
Industry and Market Factors
o changes in economic conditions generally or in the markets served by the
Company
o fluctuations in raw material and energy prices
o product specifier preferences and spending patterns and
o competition from other decorative surfaces producers
Operating Factors
o our ability to combine our recently acquired businesses while maintaining
current operating performance levels during the integration period(s) and
the challenges inherent in diverting our management's focus and resources
from other strategic opportunities and from operational matters
o our ability to implement our cost savings plans without adversely
impacting our net sales and
o our ability to attract, hire and retain suitable personnel
Relating to our Debt and the Notes
We have substantial debt, which could limit our cash available for other uses
and harm our competitive position. In connection with our acquisitions, we
incurred significant indebtedness. The level of our indebtedness could have
important consequences to us, including:
o imposing restrictive covenants that restrict our ability to make
investments or incur additional debt, a breach of which would permit
acceleration by the bank lenders
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.
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Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 144
In August 2001, the FASB issued Statements of Financial Accounting Standards
No. 144, "Accounting for the Impairment of Long-Lived Assets" (SFAS No. 144).
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144
requires that an impairment loss shall be recognized only if the carrying
amount of a long-lived asset is not recoverable and exceeds fair value. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001.
The Company has not fully assessed the potential impact of the adoption of SFAS
No. 144.
Statement of Financial Accounting Standards (SFAS) No. 143
In June 2001, the FASB issued Statements of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143
addresses the financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligation of lessees. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2001.
The Company has not fully assessed the potential impact of the adoption of SFAS
No. 143 but does not expect the adoption to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
Statements of Financial Accounting Standards (SFAS) No. 141 and No. 142
In June 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (SFAS No. 141), and No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). SFAS No. 141 changes the accounting for
business combinations, requiring that all business combinations be accounted
for using the purchase method and that intangible assets be recognized as
assets apart from goodwill if they arise from contractual or other legal
rights, or if they are separable or capable of being separated from the
acquired entity and sold, transferred, licensed, rented, or exchanged. SFAS No.
141 is effective for all business combinations initiated after June 30, 2001.
SFAS No. 142 specifies the financial accounting and reporting for acquired
goodwill and other intangible assets. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001.
SFAS No. 142 requires that the useful lives of intangible assets acquired on or
before June 30, 2001 be reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives shall be tested for impairment as well. Goodwill recognized on
or before June 30, 2001, shall be assigned to one or more reporting units and
shall be tested for impairment as of the beginning of the fiscal year in which
SFAS No. 142 is initially applied in its entirety.
The Company has not fully assessed the potential impact of the adoption of SFAS
No. 142, which is effective for the Company as of January 1, 2002. The
reassessment of intangible assets must be completed during the first quarter of
2002 and the assignment of goodwill to reporting units, along with completion
of the first step of the transitional goodwill impairment tests, must be
completed during the first six months of 2002. A portion of the intangible
assets and goodwill recognized prior to July 1, 2001 will no longer be
amortized effective January 1, 2002. Total amortization of intangible assets
and goodwill for the year ended December 31, 2000 was $23.4 million.
Statement of Financial Accounting Standard (SFAS) No. 133
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. The Company
adopted SFAS No. 133, and the corresponding amendments of SFAS No. 138 on
January 1, 2001, and such adoption did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
Contingent Matters
Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for
a discussion of legal contingencies.
Page 18
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 2. Changes In Securities And Use Of Proceeds
o None to report.
Item 3. Defaults Upon Senior Securities
o See Note 4 of the Notes to Condensed Consolidated Financial Statements for
a discussion of defaults upon senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
o None to report.
Item 5. Other Information
o On October 1, 2001, Messrs. Thompson Dean and Dermot Dunphy were appointed
to the Board of Directors of Formica Corporation. Mr. Dean replaces Mr.
Peter T. Grauer and Mr. Dunphy becomes an additional member of the board.
Item 6. Exhibits and Reports on Form 8-K
o Formica did not file any reports on Form 8-K during the three-months ended
September 30, 2001.
The following exhibits are included herein:
(10.15) Waiver and First Amendment (dated August 13, 2001)
(10.16) Waiver Extension and Second Amendment
(dated November 9, 2001)
(12) Computation of Ratio of Earnings to Fixed Charges
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Formica Corporation
-----------------------------
(Registrant)
/s/ David T. Schneider
-----------------------------
(David T. Schneider -
Chief Financial Officer and
Principal Accounting Officer)
November 14, 2001
-----------------------------
(Date)
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