PROSPECTUS SUPPLEMENT Filed Pursuant to Rule
(To Prospectus dated August 25, 1999) 424(b)(3) of the Rules and
Regulations Under the Securities
Act of 1933
Registration Statement No.
333-76683
FORMICA CORPORATION
10 7/8% Series B Senior Subordinated Notes Due 2009
-------------------------------
RECENT DEVELOPMENTS
- -------------------
We have attached to this prospectus supplement, and incorporated by reference
into it, the Form 10-Q Quarterly Report of Formica Corporation for the
quarterly period ended September 30, 1999.
-------------------------------
This prospectus supplement, together with the prospectus, is to be used by
Donaldson, Lufkin & Jenrette Securities Corporation in connection with offers
and sales of the notes in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. Donaldson, Lufkin &
Jenrette Securities Corporation may act as principal or agent in such
transactions.
November 12, 1999
<PAGE>
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, 1999
--------------------------------
Commission File Number: __________
Formica Corporation
(Exact name of registrant as specified in its charter)
Delaware 34-1046753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
David T. Schneider
Vice President, Chief Financial Officer and Secretary
15 Independence Boulevard
Warren, NJ 07059
(908) 647-8700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
----- -----
Shares Outstanding as
Title of September 30, 1999
----- ---------------------
Common Stock, $.01 par value per share 100 Shares Outstanding
<PAGE>
FORMICA CORPORATION
Index
Part I. Financial Information 1
Item 1. Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets--September 30, 1999 and
December 31, 1998 1
Condensed Consolidated Statements of Operations--Three Months Ended
September 30, 1999 and 1998; Nine months ended September 30, 1999;
Four Months Ended April 30, 1998; and Five Months Ended September
30, 1998 2
Condensed Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1999; Four Months Ended April 30, 1998; and Five 3
Months Ended September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Part II. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
<PAGE>
Part I. Financial Information
Item 1: Financial Statements (Unaudited)
FORMICA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
<TABLE>
September 30, December 31,
1999 1998
----------------------------------
ASSETS (Unaudited) (Note 1)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $8.3 $31.6
Accounts receivable, net 84.7 64.9
Inventories 124.8 110.3
Prepaid expenses and other current assets 19.1 15.1
Deferred income taxes 8.1 7.9
----------------------------------
Total current assets 245.0 229.8
PROPERTY, PLANT AND EQUIPMENT, net 292.7 288.7
OTHER ASSETS:
Intangible assets, net 162.2 176.5
Other noncurrent assets 3.6 1.8
----------------------------------
Total assets $703.5 $696.8
==================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities-notes payable $18.5 $21.8
Accounts payable 40.2 40.0
Accrued expenses 54.5 53.5
Due to affiliate 1.0 -
----------------------------------
Total current liabilities 114.2 115.3
NOTES PAYABLE 328.1 295.9
DEFERRED INCOME TAXES 133.7 133.7
OTHER LIABILITIES 29.5 32.1
----------------------------------
Total liabilities 605.5 577.0
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock - par value $.01 per share - authorized 1,000
shares, none issued or outstanding - -
Common stock - par value $.01 per share - authorized 2,000 shares,
issued and outstanding 100 shares 0.1 0.1
Additional paid-in capital 137.0 137.0
Accumulated deficit (39.3) (22.3)
Accumulated other comprehensive income 0.2 5.0
----------------------------------
Total stockholder's equity 98.0 119.8
----------------------------------
Total liabilities and stockholder's equity $703.5 $696.8
==================================
See notes to condensed consolidated financial statements.
</TABLE>
Page 1
<PAGE>
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions)
<TABLE>
Nine Months Four Months Five Months
Three Months Ended Ended Ended Ended
September 30, September 30, April 30, September 30,
----------------------------------------------------------------
1999 1998 1999 1998 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $145.1 $139.5 $439.7 $178.3 $237.8
COST OF PRODUCTS SOLD 103.7 97.9 313.6 131.1 165.5
----------------------------------------------------------------
Gross profit 41.4 41.6 126.1 47.2 72.3
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 36.5 32.5 115.0 60.9 60.6
----------------------------------------------------------------
Operating income (loss) 4.9 9.1 11.1 (13.7) 11.7
INTEREST EXPENSE (9.5) (11.0) (28.5) (1.7) (16.5)
OTHER INCOME 0.8 - 2.4 0.8 0.4
----------------------------------------------------------------
LOSS BEFORE INCOME TAXES (3.8) (1.9) (15.0) (14.6) (4.4)
INCOME TAX PROVISION (0.1) (1.8) (2.0) - (1.8)
----------------------------------------------------------------
Net loss $(3.9) $(3.7) $(17.0) $(14.6) $(6.2)
================================================================
</TABLE>
See notes to condensed consolidated financial statements.
Page 2
<PAGE>
FORMICA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
<TABLE>
Nine Months Four Months Five Months
Ended Ended Ended
September 30, April 30, September 30,
1999 1998 1998
-------------------------------------------
<S> <C> <C> <C>
CASH (USED IN) PROVIDED BY OPERATIONS $(11.4) $(11.7) $0.8
INVESTING ACTIVITIES:
Capital expenditures and investments, net (32.6) (8.3) (11.1)
-------------------------------------------
Net cash used in investing activities (32.6) (8.3) (11.1)
FINANCING ACTIVITIES:
Proceeds from borrowings, net 222.9 - 288.9
Due from affiliates - 15.5 -
Dividends paid - (0.5) (254.9)
Payments of debt (201.9) (15.1) -
-------------------------------------------
Net cash provided by (used in) financing 21.0 (0.1) 34.0
activities
EFFECTS OF EXCHANGE RATE CHANGES ON CASH (0.3) (0.2) 4.6
-------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (23.3) (20.3) 28.3
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 31.6 27.2 6.9
-------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF PERIOD $8.3 $6.9 $35.2
===========================---=============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
FORMICA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in millions)
(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine-months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
The condensed consolidated statement of operations for the four-months
ended April 30, 1998 reflects the results of Formica Corporation and its
majority-owned subsidiaries (the "Company") prior to the acquisition from
BTR Nylex Ltd. on May 1, 1998. The results for the pre-acquisition period
are not necessarily comparative to the post-acquisition period because of
the changes in organizational structure, recorded asset value, cost
structure and capitalization of the Company resulting from the
acquisition. 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. During the nine-months ended September
30, 1999, the Company spent $2.7 of the restructuring provision. The
restructuring plan will be substantially completed in 1999. The remaining
balance of the restructuring provision was $3.4 at September 30, 1999.
Earnings per share data are not presented because the Company's common
stock is not publicly traded and the Company is a wholly-owned subsidiary
of FM Holdings, Inc.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information,
refer to the audited consolidated financial statements and footnotes for
the year ended December 31, 1998 included in the Company's Form S-1
Registration Statement under the Securities Act of 1933 (the "1933 Act")
declared effective by the Securities and Exchange Commission (the "SEC")
on August 25, 1999.
(2) INVENTORIES, NET:
Major classes of inventories are as follows:
September 30, December 31,
1999 1998
-----------------------------
Finished goods $86.5 $ 77.2
Work-in-process 13.0 12.2
Raw materials 46.5 42.6
-----------------------------
Total 146.0 132.0
Less-Obsolescence reserve 21.2 21.7
-----------------------------
$124.8 $110.3
=============================
Page 4
<PAGE>
(3) NOTES PAYABLE:
On February 22, 1999, the Company issued $215 of 10 7/8% Series A Senior
Subordinated Notes due March 1, 2009 (the "Series A Notes") and repaid
approximately $200 of Senior Subordinated Unsecured Increasing Rate Bridge
Notes. The Series A Notes were sold in transactions permitted by Rule 144A
and Regulation S under the 1933 Act and therefore were not registered with
the SEC.
In conjunction with the issuance of the Series A Notes, the Company was
subject to a Registration Rights Agreement that required the Company to
file an Exchange Offer Registration Statement (the "Statement") with the
SEC. The Statement allowed for the exchange of new 10 7/8% Series B Senior
Subordinated Notes due 2009 (the "Series B Notes"), which would be
registered under the 1933 Act, for the existing Series A Notes.
The exchange offer period expired on October 1, 1999 with all outstanding
Series A Notes being exchanged for Series B Notes. Interest on the Series
B Notes is payable semi-annually on March 1 and September 1 of each year.
The Series B Notes are redeemable at the option of the Company in part
beginning in 2002 and in whole in 2004 at specified redemption prices. The
Series B Notes and related indenture place certain restrictions on the
Company and its subsidiaries including the ability to pay dividends, issue
preferred stock, repurchase capital stock, incur and pay indebtedness,
sell assets and make certain restricted investments.
(4) CONTINGENT MATTERS:
The Company has been the subject of administrative proceedings, litigation
and investigations relating to environmental matters. Currently, the
Company has been named as a potentially responsible party at several
Superfund sites. The Company has reserved $4.0 at September 30, 1999 and
December 31, 1998 with respect to two Superfund sites. The Company
believes that the ultimate resolution of these matters should not have a
material adverse effect on the Company's financial position or results of
operations. However, depending on the amount and timing of an unfavorable
resolution of this contingency, it is possible that the Company's future
cash flows could be materially affected in a particular quarter.
On April 6, 1999, the Company received a subpoena from a federal grand
jury investigating possible antitrust violations in the high-pressure
decorative laminates industry. The subpoena period is from January 1, 1994
until April 1, 1999. The investigation is in its early stages and the
Company is complying with the subpoena. The Company is unable to determine
at this time the effect, if any, that this matter may have on its
financial statements.
Page 5
<PAGE>
(5) SEGMENT INFORMATION:
<TABLE>
Nine Months Four Months Five Months
Three Months Ended Ended Ended Ended
September 30, September 30, April 30, September 30,
-------------------------
1999 1998 1999 1998 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment revenues:
United States $82.3 $77.9 $247.5 $98.1 $129.9
North America - Other 11.3 11.4 34.7 13.9 19.4
Europe 32.7 33.1 106.9 48.4 60.0
Asia 18.8 17.1 50.6 17.9 28.5
-------------------------------------------------------------------
Total $145.1 $139.5 $439.7 $178.3 $237.8
===================================================================
Segment profit (loss):
North America $(1.5) $6.1 $(6.9) $(13.9) $2.3
Europe 3.5 0.7 10.7 1.3 7.7
Asia 2.9 2.3 7.3 (1.1) 1.7
-------------------------------------------------------------------
Total $4.9 $9.1 $11.1 $(13.7) $11.7
===================================================================
Depreciation and amortization
(included in segment profit
(loss))
North America $8.4 $7.8 $24.7 $6.2 $12.6
Europe 2.0 1.9 6.5 3.5 3.1
Asia 0.9 0.6 2.6 1.4 1.4
-------------------------------------------------------------------
Total $11.3 $10.3 $33.8 $11.1 $17.1
===================================================================
Expenditures for long-lived assets:
North America $4.0 $6.0 $11.1 $4.8 $7.1
Europe 2.7 3.0 5.2 1.2 3.3
Asia 0.3 0.4 0.7 2.3 0.7
-------------------------------------------------------------------
Total $7.0 $9.4 $17.0 $8.3 $11.1
===================================================================
A reconciliation of total segment
profit (loss) to loss before income
taxes is as follows -
Segment profit (loss) $4.9 $9.1 $11.1 $(13.7) $11.7
Interest expense (9.5) (11.0) (28.5) (1.7) (16.5)
Other income (expense) 0.8 - 2.4 0.8 0.4
-------------------------------------------------------------------
Loss before income taxes $(3.8) $(1.9) $(15.0) $(14.6) $(4.4)
===================================================================
</TABLE>
Page 6
<PAGE>
(5) SEGMENT INFORMATION (CONTINUED):
September 30, December 31,
1999 1998
-----------------------------
Total assets:
United States $434.2 $406.4
North America - Other 29.8 36.4
Europe 162.8 179.1
Asia 76.7 74.9
-----------------------------
Total $703.5 $696.8
=============================
Long-lived assets:
United States $145.6 $128.6
North America - Other 13.9 14.3
Europe 94.9 106.6
Asia 38.3 39.2
-----------------------------
Total $292.7 $288.7
=============================
(6) COMPREHENSIVE INCOME (LOSS):
Total comprehensive income (loss) was $3.1 and $(21.8) for the three and
nine-months ended September 30, 1999, respectively, and $4.2, $(11.7) and
$(1.6) for the three-months ended September 30, 1998, the four-months
ended April 30, 1998 and the five-months ended September 30, 1998,
respectively. The difference between comprehensive income (loss) and the
net loss results from foreign currency translation adjustments.
(7) CHANGES IN ACCOUNTING ESTIMATES
During the four-month period ended April 30, 1998 and the five-month
period ended September 30, 1998, the Company made certain changes in
accounting estimates, resulting in charges totaling $5.7 and $7.8,
respectively, due to new management plans with respect to asset carrying
and disposition policies and new information becoming available, including
information concerning customers, products and competitive conditions in
certain markets. The changes in accounting estimates for the four-month
period ended April 30, 1998 included increasing the provision for customer
rebate programs by $2.7, increasing the provision for doubtful accounts by
$1.4 and accruals for customs, property tax exposures and other items
totaling $1.6. The changes in accounting estimates for the five-month
period ended September 30, 1998 included increasing the provisions for
doubtful accounts and inventory obsolescence by $2.4 and $5.4,
respectively.
(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. Such arrangements are short-term in
nature and generally bear no interest. At September 30, 1999, there was
approximately $1.0 outstanding under these arrangements. There were no
such borrowings at December 31, 1998.
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Formica is engaged in the design, manufacture and distribution of
decorative laminates, solid surfacing, laminate flooring and other surfacing
products. Formica was founded in 1913 and created the world's first decorative
laminate in 1927. In May 1985, a group led by management and Shearson Lehman
purchased Formica from American Cyanamid Company. In 1989, Formica was sold to
FM Acquisition Corporation in a buyout led by Dillon Read & Co. In January 1995,
Formica was acquired by BTR Nylex Ltd. ("BTR"), an Australian company, and a
subsidiary of BTR plc (the "Acquisition"). In May 1998, Laminates Acquisition
Co. acquired Formica.
Results of Operations
Nine-Months Ended September 30, 1999 Compared to Nine-Months Ended September
30, 1998
Net Sales. For the first nine months, net sales have increased to $439.7
million in 1999 from $416.1 million in 1998, an increase of $23.6 million, or
5.7%. The increase was primarily due to additional product sales volume within
the United States.
Gross Profit. Gross profit for the first nine months was $126.1 million in
1999, compared to $119.5 million in 1998, an increase of $6.6 million, or 5.5%.
Adjusted for the 1998 nonrecurring charges, amounting to $5.7 million, gross
profit for the first nine months of 1999 increased $0.9 million, or 0.7%. Gross
profit as a percentage of net sales for the first nine months, excluding the
1998 nonrecurring charges, decreased to 28.7% in 1999 from 30.1% in 1998. The
decrease reflects competitive pricing pressures and product mix issues.
Selling, General and Administrative Expenses, ("SG&A"). SG&A expenses for
the first nine months of 1999 were $115.0 million compared to $121.5 million for
1998, a decrease of $6.5 million or 5.3%. Adjusted for the 1998 nonrecurring
charges, amounting to $7.8 million, SG&A increased $1.3 million, or 1.1%. The
increase results from an increase in amortization expense of $5.7 million as a
result of the 1998 Acquisition. Year to date SG&A expenses as a percentage of
net sales decreased to 26.2% for 1999 from 29.2% for 1998. The decrease in SG&A
expenses was primarily due to lower advertising and sales promotion expense and
lower compensation expense due to restructuring efforts offset by the above
noted increase in amortization expense and general inflationary increases.
Operating Income (Loss). Operating income for the first nine months was
$11.1 million for 1999 compared to an operating loss of $2.0 million for 1998.
The improvement was primarily due to the SG&A cost reductions across all
regions.
EBITDA. EBITDA increased to $47.3 million for the first nine months of 1999
compared to $40.9 million for the first nine months of 1998. The increase was
the result of cost reductions in SG&A and the favorable impact of higher sales.
Interest Expense. Interest expense increased to $28.5 million, including
amortization and write-off of deferred financing costs amounting to $2.9
million, for the first nine months of 1999 from $18.2 million for the first nine
months of 1998. The increase in interest expense was the result of the change in
the structure of ownership and debt.
Income Taxes. Income tax expense increased to $2.0 million for the first
nine months of 1999 from $1.8 million for the first nine months of 1998. The
increase is due to increased taxable earnings in 1999.
Net Loss. The net loss was $17.0 million for the first nine months of 1999
compared with $20.8 million for the first nine months of 1998. The decrease in
the net loss is principally due to the impact of the cost reductions in SG&A
offset by the increase in interest expense related to the change in the
structure of ownership and debt.
Page 8
<PAGE>
Third Quarter of 1999 Compared to Third Quarter of 1998
Net Sales. Net sales have increased to $145.1 million for the third quarter
of 1999 from $139.5 million in the third quarter of 1998, an increase of $5.6
million, or 4.0%. The increase was primarily due to additional product sales
volume within the United States and Asia.
Gross Profit. Gross profit for the third quarter of 1999 was $41.4 million
compared to $41.6 million in the third quarter of 1998, a slight decrease of
$0.2 million. Gross profit as a percentage of net sales decreased to 28.5% in
the third quarter of 1999 from 29.8% in the third quarter of 1998. The decrease
reflects competitive pricing pressures and product mix issues.
Selling, General and Administrative Expenses, ("SG&A"). SG&A expenses for
the third quarter of 1999 were $36.5 million compared to $32.5 million for the
third quarter of 1998, an increase of $4.0 million. The increase results from an
increase in amortization expense of $1.5 million (as a result of the 1998
Acquisition), general inflationary increases and the timing of expenditures
required to support future sales growth.
Operating Income (Loss). Operating income for the third quarter of 1999 was
$4.9 million compared to $9.1 million for the third quarter of 1998. The
decrease results from the decline in the gross profit percentage and the
increase in SG&A expenses from third quarter 1998 to third quarter 1999.
EBITDA. EBITDA decreased to $17.0 million for the third quarter of 1999
from $19.4 million for the third quarter of 1998. The decrease results from the
decline in the gross profit percentage and the increase in SG&A expenses from
third quarter 1998 to third quarter 1999.
Interest Expense. Interest expense decreased to $9.5 million for the third
quarter of 1999 from $11.0 million for the third quarter of 1998. The decrease
results from the timing of borrowings in the prior year.
Income Taxes. Income tax expense decreased to $0.1 million for the third
quarter of 1999 from $1.8 million for the third quarter of 1998. The decrease is
due to the timing of taxable earnings in 1998.
Net Loss. The net loss was $3.9 million for the third quarter of 1999
compared with $3.7 million for the third quarter of 1998.
Liquidity and Capital Resources
Formica's principal sources of liquidity are projected cash flows from
operations, borrowings under the Credit Facility and certain local credit
facilities obtained by certain of Formica's foreign subsidiaries. Formica's
principal uses of cash will be debt service requirements to service the
acquisition-related debt described below, capital expenditures, and
acquisitions.
In February 1999, Formica issued $215.0 million of 10 7/8% Series A Senior
Subordinated Notes due March 1, 2009 (the "Series A Notes") and repaid
approximately $200.0 million of Senior Subordinated Unsecured Increasing Rate
Bridge Notes (the "Bridge Notes"). The Series A Notes were sold in transactions
permitted by Rule 144A and Regulation S under the Securities Act of 1933 (the
"1933 Act") and therefore were not registered with the Securities and Exchange
Commission (the "SEC").
In conjunction with the issuance of the Series A Notes, Formica was
required to file an Exchange Offer Registration Statement (the "Statement") with
the SEC to allow holders of the Series A Notes to exchange their shares for new
Series B Senior Subordinated Notes (the "Series B Notes"), which are registered
under the 1933 Act. The terms of the Series B Notes are identical in all
material respects to the terms of the Series A Notes.
Page 9
<PAGE>
The SEC declared the Statement effective on August 25, 1999 and the
exchange offer period expired on October 1, 1999. Accordingly, all outstanding
Series A Notes were exchanged for Series B Notes at that time.
As of September 30, 1999, Formica had approximately $346.6 million of
indebtedness outstanding compared to $317.7 million as of December 31, 1998.
Formica's significant debt service obligations could, under certain
circumstances, have material consequences to security holders.
Formica spent approximately $17.0 million on capital expenditures in the
first nine months of 1999 and Formica anticipates that it will spend a total of
approximately $25.0 million and $15.0 million in 1999 and 2000, respectively.
With that spending, Formica's primary capital investment programs will be
complete. Formica expects to realize significant manufacturing cost savings,
which will be phased in over the next three years, as a result of those
programs. The Credit Facility contains restrictions on its ability to make
capital expenditures. Based on present estimates, Formica believes that the
amount of capital expenditures permitted to be made under the Credit Facility
will be adequate to complete its investment program and maintain the properties
and businesses of current operations.
Working capital totaled $130.8 million at September 30, 1999 compared to
$114.5 million at December 31, 1998. Management believes that Formica will
continue to require working capital consistent with past experience and that
current levels of working capital, together with borrowings available under the
Credit Facility, 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. Formica sold $200.0 million of Bridge Notes and, together
with its subsidiaries, borrowed $80.0 million of term loans under the Credit
Facility. The Bridge Notes were refinanced in February 1999 as noted above.
Formica is actively considering acquisitions that complement or expand its
decorative surfaces businesses or that will enable it to expand into new
markets. In connection with any future acquisitions, Formica may require
additional funding which may be provided in the form of additional debt, equity
financing or a combination thereof. There can be no assurance that any such
additional financing will be available on acceptable terms.
The Credit Facility also includes a $120.0 million revolving credit
facility. The revolving credit facility may be increased by up to $25.0 million
at the request of Formica, with the consent of the banks providing the increased
commitments, and will terminate on May 1, 2004. The term loans under the Credit
Facility consist of $40.0 million, $35.0 million and $10.0 million loans.
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 will vary based upon Formica's ratio of consolidated
debt to EBITDA. Formica's obligations under the Credit Facility are guaranteed
by Laminates Acquisition Co, FM Holdings, Inc. and all existing or future
domestic subsidiaries of Formica (the "subsidiary guarantors") and are secured
by substantially all of the assets of Formica and the subsidiary guarantors,
including a pledge of capital stock of all existing and future subsidiaries of
Formica (provided that, with a single exception, no more than 65% of the voting
stock of any foreign subsidiary shall be pledged) and a pledge by FM Holdings,
Inc. of the stock of Formica and by Laminates Acquisition Co. of the stock of FM
Holdings, Inc. The Credit Facility contains customary covenants and events of
default.
Page 10
<PAGE>
The Series B Notes mature in 2009. Interest on the Series B Notes is
payable semiannually in cash. The Series B Notes and related indenture place
certain restrictions on Formica and its subsidiaries including the ability to
pay dividends, issue preferred stock, repurchase capital stock, incur and pay
indebtedness, sell assets and make certain restricted investments
Formica maintains various credit facilities in foreign countries (primarily
in Asia) that provide for borrowings in local currencies. Formica may replace
certain of such facilities availability (in such local currencies) under the
Credit Facility and will maintain certain of such credit facilities to provide
financing for its subsidiaries in such countries. Formica expects that such
facilities, together with the Credit Facility and operating cash flow in such
countries, will be sufficient to fund expected liquidity needs in such
countries.
As of September 30, 1999 and December 31, 1998, Formica has secured
approximately $26.7 million and $28.2 million respectively, in letters of
credit under the Credit Facility to provide credit enhancement for certain of
such credit facilities, primarily in Asia.
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. During the
first nine months of 1999, Formica spent $2.7 million of the restructuring
provision. The restructuring plan will be substantially completed in 1999. The
remaining balance of the restructuring provision was $3.4 at September 30, 1999.
Cash used in operations was $11.4 million for the first nine months of 1999
and $10.9 million for the first nine months of 1998. The cash used in operations
is the result of increases in accounts receivable and inventory. The increases
in accounts receivable and inventory result from seasonal fluctuations in the
business and actual and projected increases in sales. Net cash used in investing
activities was $32.6 million for the first nine months of 1999 and $19.4 million
for the first nine months of 1998. Net cash provided by financing activities was
$21.0 million for the first nine months of 1999 compared to $33.9 million for
the first nine months of 1998.
Although Formica has not yet realized the full benefit of the capital
expenditures program, Formica expects to realize significant cost savings from
such programs to be phased in over the next three years.
Contingent Matters
Refer to Note 4 of the Notes to Condensed Consolidated Financial Statements
for a discussion of legal contingencies.
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 generally
not subject to seasonal fluctuations.
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Year 2000 Compliance
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus, the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the year 2000 problem.
Formica is dependent in part on computer- and date-controlled systems for
some internal functions. Similarly, suppliers of components and services on
which Formica relies, and Formica's customers, may have year 2000 problems,
which would affect their operations and their transactions with Formica. Other
parties with whom Formica has commercial relationships, including raw materials
suppliers and service providers, such as banking and financial services, data
processing services, telecommunications services and utilities, are highly
reliant on computer-based technology and may have year 2000 problems.
In 1996, Formica commenced a systems implementation effort to address the
year 2000 problem and other operational issues on a worldwide basis. Formica's
year 2000 compliance efforts are directed primarily towards ensuring that it
will be able to continue to perform three critical functions:
o Make and sell its products,
o Order and receive raw material and
supplies, and
o Pay its employees and vendors.
Formica's effort includes three phases: (1) assessment of each system to
identify any year 2000 problems, (2) renovation, repair or upgrade of any
problematic systems and (3) testing of the improved systems to ensure proper
function. Project costs incurred to assess, remediate and test its systems, and
evaluate and address the risks of its key customers and vendors, totaled
approximately $19.0 million and $25.8 million, respectively, as of December 31,
1998 and September 30, 1999. Management currently expects the project to be
substantially completed by December 1999 and expects to incur approximately
$27.0 million of costs in the aggregate broken down as follows:
o Software - $4.6 million,
o Hardware - $7.6 million,
o Consulting/Training - $8.1 million, and
o Other - $6.7 million.
All of its year 2000 compliance costs have been or are expected to be
funded from our operating cash flow and will be capitalized or expensed in the
period they are incurred.
Formica's significant information technology systems include general
accounting, fixed assets, inventory control, manufacturing resource planning,
distribution resource planning, purchasing and receiving, customer billing and
payroll. Formica's significant non-information technology systems include
manufacturing equipment and transportation and distribution systems.
The following summarizes the status of its year 2000 efforts by region:
North America Region
Formica has completed its assessment of year 2000 performance standards for
all of its information technology systems and its non-information technology
systems within its North America operations. Formica has completed the
renovation, upgrade or replacement of all of its significant information
technology systems for year 2000 performance standards. All of its significant
information technology systems have been tested and are presently operating.
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Formica has completed the renovation, upgrade or replacement of all of its
significant non-information technology systems, primarily manufacturing
equipment, that are not compliant with year 2000 performance standards. Formica
is 75% complete with the testing and implementation of the remediated
non-information technology systems. Formica expects to complete installation and
testing of the remaining non-information technology systems that are not year
2000 compliant during the fourth quarter of 1999.
Formica's review of third-party compliance risks from its key vendors and
customers is 90% complete. Formica intends to complete its review of data from
all of those vendors and customers who respond during the fourth quarter of
1999. However, even assuming that all of the non-responding parties suffer
interruptions to their operations due to Year 2000 systems failures, management
does not anticipate any resulting failures to its systems, products or supply
chain that would disrupt its operations to a material degree.
Europe and Asia Regions
Formica has completed its assessment of year 2000 performance standards for
all of its information technology systems and its non-information technology
systems for operations within its European and Asia operations. Formica has
completed the renovation, upgrade or replacement of all of its significant
information technology and non-information technology systems for year 2000
performance standards. All of its significant information and non-information
technology systems have been tested and are presently operating.
Formica's review of third-party compliance risks from its key vendors and
customers is 90% complete. Formica intends to complete its review of data from
all of those vendors and customers who respond during the fourth quarter of
1999. However, even assuming that all of the non-responding parties suffer
interruptions to their operations due to Year 2000 systems failures, management
does not anticipate any resulting failures to its systems, products or supply
chain that would disrupt its operations to a material degree.
However, the novelty and complexity of the issues presented, and Formica's
dependence on the technical skills of employees and independent contractors and
on the representations and preparedness of third parties, could cause its
efforts to be less than fully effective. Moreover, year 2000 issues present a
number of risks that are beyond Formica's control, such as the failure of
utility companies to deliver electricity, the failure of telecommunications
companies to provide voice and data services, the failure of financial
institutions to process transactions and transfer funds, the failure of vendors
to deliver materials to perform services required by Formica and the collateral
effects on Formica of the effects of year 2000 issues on the economy in general
or on its customers in particular. Additionally, in view of the mixed results
achieved by software vendors in correcting these problems, management cannot
give assurance that new systems it obtains to replace noncompliant systems will
themselves prove to be fully compliant. Although management believes that its
compliance efforts are designed appropriately to identify and address those
year 2000 issues that are subject to its reasonable control, Formica cannot
give assurance that its efforts will be fully effective, or that year 2000
issues will not have a material adverse effect on its business, financial
condition or results of operations. In the worst case, a protracted failure of
general business systems among Formica's customers or vendors, or in its own
plant, could cause production delays or canceled orders which would
significantly reduce its revenue for the duration of such a situation. Formica
has not developed a contingency plan which assumes significant and protracted
year 2000-related failures of major vendors, customers or systems, and does not
plan to do so.
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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
o the 11 member states that met the requirement for the Monetary Union,
and
o 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:
o 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;
o from January 1, 2002 to June 30, 2002, in which local currencies will
be exchanged for Euros; and
o 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
Formica uses financial instruments, including fixed and variable rate debt
securities, to finance operations. Formica uses 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. Formica does not enter into contracts for speculative
purposes and is not a party to any leverage instruments.
Foreign Currency Exchange Rate Risk
Formica's 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, it will continue to monitor its exposure to currency
fluctuations and, when appropriate, use financial hedging techniques in the
future to minimize the effect of these fluctuations, Formica cannot give
assurance that exchange rate fluctuations will not harm its business in the
future.
Forward-Looking Information
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect
Formica's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," and "project"
and similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
of many factors, including changes in economic conditions in the markets served
by Formica, increasing competition, fluctuations in raw materials and energy
prices, and other unanticipated events and conditions. It is not possible to
foresee or identify all such factors. Formica makes no commitment to update any
forward-looking statement or to disclose any facts, events, or circumstances
after the date hereof that may affect the accuracy of any forward-looking
statement.
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Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Formica did not file any reports on Form 8-K during the three months ended
September 30, 1999.
The following exhibit is included herein:
(27) Financial Data Schedule
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)
November 12, 1999
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(Date)
